PAGE 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------------
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or l5(d) of THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ --------------
Commission file numbers 1-743; 1-3744; 1-4793; 1-546-2
NORFOLK SOUTHERN RAILWAY COMPANY
- ------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 53-6002016
- ----------------------------------------------- ----------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Three Commercial Place, Norfolk, Virginia 23510-2191
- ----------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (804) 629-2682
--------------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS SO REGISTERED. EACH CLASS REGISTERED ON NEW YORK
STOCK EXCHANGE:
Southern Railway Company First Consolidated Mortgage 5% Gold Bonds, due
July 1, 1994; Southern Railway Company Memphis Division First Mortgage
5% Gold Bonds, due July 1, 1996; Norfolk and Western Railway Company
First Consolidated Mortgage 4% Bonds, due October 1, 1996; Guarantee of
Norfolk Southern Railway Company with respect to $23,877,300 principal
amount of Norfolk and Western Railway Company First Consolidated
Mortgage 4% Bonds due October 1, 1996; Norfolk and Western Railway
Company 4.85% Subordinated Income Debentures, due November 15, 2015;
Guarantee of Norfolk Southern Railway Company with respect to $1,865,900
principal amount of Norfolk and Western Railway Company 4.85%
Subordinated Income Debentures due November 15, 2015; The Virginian
Railway Company 6% Subordinated Income Debentures, due August 1, 2008;
Guarantee of Norfolk Southern Railway Company with respect to $5,043,000
principal amount of The Virginian Railway Company 6% Subordinated Income
Debentures due August 1, 2008; Norfolk Southern Railway Company $2.60
Cumulative Preferred Stock, Series A (No Par Value, $50 Stated Value).
PAGE 2
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by
nonaffiliates as of February 28, 1994: $43,312,260
The number of shares outstanding of each of the registrant's
classes of Common Stock, as of February 28, 1994: 16,668,997
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement (to be
dated April 19, 1994) to be filed electronically pursuant to
Regulation 14A not later than 120 days after the end of the fiscal
year are incorporated by reference in Part III.
PAGE 3
TABLE OF CONTENTS
Item Page
---- ----
Part I 1. Business...................................... 4
2. Properties.................................... 4
3. Legal Proceedings............................. 21
4. Submission of Matters to a Vote of Security
Holders..................................... 23
Executive Officers of the Registrant.......... 23
Part II 5. Market for Registrant's Common Stock and
Related Stockholder Matters................... 29
6. Selected Financial Data....................... 30
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 31
8. Financial Statements and Supplementary Data... 31
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........ 32
Part III 10. Directors and Executive Officers of the
Registrant.................................... 33
11. Executive Compensation........................ 33
12. Security Ownership of Certain Beneficial
Owners and Management......................... 33
13. Certain Relationships and Related
Transactions.................................. 33
Part IV 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................... 34
Index to Consolidated Financial Statement
Schedules..................................... 34
Power of Attorney............................................ 37
Signatures................................................... 37
Exhibit Index................................................ 84
PAGE 4
PART I
Item 1. Business.
- ------ --------
and
Item 2. Properties.
- ------ ----------
GENERAL. Norfolk Southern Railway Company (Norfolk
Southern Railway) was incorporated in 1894 under the name Southern
Railway Company (Southern) in the Commonwealth of Virginia and,
together with its consolidated subsidiaries (collectively, NS Rail),
is primarily engaged in the transportation of freight by rail.
On June 1, l982, Southern and Norfolk and Western Railway
Company (NW) became subsidiaries of Norfolk Southern Corporation
(NS), a transportation holding company. Effective December 31, 1990,
NS transferred all the common stock of NW to Southern, and Southern's
name was changed to Norfolk Southern Railway Company. Accordingly,
all the common stock of NW, which is its only voting security, is
owned by Norfolk Southern Railway, and all the common stock of
Norfolk Southern Railway (16,668,997 shares) is owned directly by NS.
NS common stock is publicly held and listed on the New York Stock
Exchange.
There remain issued and outstanding as of February 28,
1994, 1,197,027 shares of Norfolk Southern Railway's $2.60 Cumulative
Preferred Stock, Series A (Series A Stock), of which 1,096,907 shares
(including 74 shares not entitled to vote) were held by other than
subsidiaries. The Series A Stock is entitled to one vote per share,
is nonconvertible, and is traded on the New York Stock Exchange.
STOCK PURCHASE PROGRAM. On June 2, 1989, NS announced
that it intended to purchase up to 250,000 shares of Norfolk Southern
Railway's Series A Stock during the subsequent two-year period. In
May 1991, NS extended the previously announced stock purchase program
through 1993. In March 1994, NS announced that it would continue
purchasing up to 250,000 shares of the Series A Stock through 1996.
As of February 28, 1994, NS had purchased 77,626 shares of preferred
stock at a total cost of approximately $2.67 million. Consequently,
as of February 28, 1994, NS held 94.3 percent of the voting stock of
Norfolk Southern Railway.
OPERATIONS. As of December 3l, l993, NS Rail operated
14,589 miles of road in the states of Alabama, Florida, Georgia,
Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan,
Mississippi, Missouri, New York, North Carolina, Ohio, Pennsylvania,
South Carolina, Tennessee, Virginia and West Virginia, and the
Province of Ontario, Canada. Of this total, 12,761 miles are owned,
677 miles are leased and 1,151 miles are operated under trackage
PAGE 5
rights. Of the operated mileage, 11,870 miles are main line and
2,719 miles are branch line. In addition, NS Rail operates
approximately 11,266 miles of passing, industrial, yard and side
tracks.
NS Rail has major leased lines in North Carolina and
between Cincinnati, Oh., and Chattanooga, Tn. The North Carolina
leases, covering approximately 300 miles, expire at the end of 1994,
and NS Rail is discussing possible renewals with the lessor. If these
leases are not renewed, NS Rail could be required to continue using
the lines subject to conditions prescribed by the Interstate Commerce
Commission (ICC) or might find it necessary ultimately to operate over
an alternate route or routes. It is not expected that the resolution
of this matter, whether resulting in renewal of the leases, continued
use of the leased lines under prescribed conditions or operation over
one or more alternate routes, will have a material effect on NS Rail's
consolidated financial position. The Cincinnati-Chattanooga lease,
also covering about 335 miles, expires in 2026, subject to an option
to extend the lease for an additional 25 years at terms to be agreed
upon.
NS Rail's lines carry raw materials, intermediate products
and finished goods primarily in the Southeast and Midwest and to and
from the rest of the United States and parts of Canada. These lines
also transport overseas freight through several Atlantic and Gulf
Coast ports. Atlantic ports served by NS Rail include: Norfolk,
Va.; Morehead City, N.C.; Charleston, S.C.; Savannah and Brunswick,
Ga.; and Jacksonville, Fl. Gulf Coast ports served include: Mobile,
Al., and New Orleans, La.
NS Rail's lines reach most of the larger industrial and
trading centers of the Southeast and Midwest, with the exception of
those in central and southern Florida. Atlanta, Birmingham, New
Orleans, Memphis, St. Louis, Kansas City (Missouri), Chicago,
Detroit, Cincinnati, Buffalo, Norfolk, Charleston, Savannah and
Jacksonville are among the leading centers originating and
terminating freight traffic on the system. In addition to serving
other established centers, its lines reach many industries, mines (in
western Virginia, eastern Kentucky and southern West Virginia) and
businesses located in smaller communities in its service area. The
traffic corridors carrying the heaviest volumes of freight include
those from the Appalachian coal fields of Virginia, West Virginia and
Kentucky to Norfolk and Sandusky, Oh.; Buffalo to Chicago and Kansas
City; Chicago to Jacksonville (via Cincinnati, Chattanooga and
Atlanta); and Washington, D.C./Hagerstown, Md., to New Orleans (via
Atlanta and Birmingham).
Buffalo, Chicago, Hagerstown, Jacksonville, Kansas City,
Memphis, New Orleans and St. Louis are major gateways for
interterritorial system traffic.
PAGE 6
REVENUES. NS Rail's railway operating revenues were
$3.7 billion in 1993. These revenues were received for the
transportation of 262.3 million tons of revenue freight of which
approximately 210.4 million tons originated on line, approximately
222.8 million tons terminated on line (including 177.1 million tons of
local traffic -- originating and terminating on line) and
approximately 6.2 million tons was overhead traffic (neither
originating nor terminating on line).
Revenue and revenue ton mile (one ton of freight moved one
mile) contributions by principal railway operating revenue sources for
the period 1989 through 1993 are set forth in the following table:
Year Ended December 31,
Principal Railway -------------------------------------------------
Operating Revenue Sources 1993 1992 1991 1990 1989
- ------------------------- ---- ---- ---- ---- ----
(Revenues in Millions and Revenue Ton Miles in Billions)
COAL
Revenues............... $1,213.3 $1,296.0 $1,330.3 $1,408.8 $1,299.0
% of total railway
operating revenues.... 32.5% 34.9% 37.0% 37.7% 35.6%
Revenue ton miles...... 41.4 41.9 42.7 46.0 41.8
PAPER/FOREST
Revenues............... $ 502.7 $ 499.5 $ 476.1 $ 486.5 $ 481.1
% of total railway
operating revenues.... 13.5% 13.5% 13.2% 13.0% 13.2%
Revenue ton miles...... 15.1 14.7 13.6 13.3 13.8
CHEMICALS
Revenues............... $ 472.9 $ 471.7 $ 449.7 $ 443.9 $ 436.9
% of total railway
operating revenues.... 12.7% 12.7% 12.5% 11.9% 12.0%
Revenue ton miles...... 14.7 14.3 13.6 12.8 12.2
AUTOMOTIVE
Revenues............... $ 429.5 $ 401.5 $ 325.9 $ 367.9 $ 407.2
% of total railway
operating revenues.... 11.5% 10.8% 9.1% 9.9% 11.1%
Revenue ton miles...... 4.2 3.7 3.0 3.7 4.1
AGRICULTURE
Revenues............... $ 319.7 $ 301.4 $ 293.6 $ 299.6 $ 286.8
% of total railway
operating revenues.... 8.6% 8.1% 8.2% 8.0% 7.8%
Revenue ton miles...... 13.6 12.6 12.2 11.3 12.1
METALS/CONSTRUCTION
Revenues............... $ 296.1 $ 276.3 $ 274.0 $ 305.6 $ 317.9
% of total railway
operating revenues.... 7.9% 7.5% 7.6% 8.2% 8.7%
Revenue ton miles...... 9.6 8.5 8.2 9.1 9.2
PAGE 7
Principal Year Ended December 31,
Railway Operating -------------------------------------------------------
Revenue Sources (cont'd) 1993 1992 1991 1990 1989
- ------------------------ ---- ---- ---- ---- ----
(Revenues in Millions and Revenue Ton Miles in Billions)
INTERMODAL
(Trailers and Containers)
Revenues............... $ 371.9 $ 341.0 $ 324.6 $ 300.1 $ 309.9
% of total railway
operating revenues.... 10.0% 9.2% 9.0% 8.0% 8.5%
Revenue ton miles...... 13.0 11.9 10.4 10.1 9.9
-------- -------- -------- -------- --------
Total Freight Revenues... $3,606.1 $3,587.4 $3,474.2 $3,612.4 $3,538.8
Total Revenue Ton Miles.. 111.6 107.6 103.7 106.3 103.1
OTHER RAILWAY OPERATING
Revenues............... $ 121.5 $ 121.7 $ 123.8 $ 122.7 $ 114.1
% of total railway
operating revenues.... 3.3% 3.3% 3.4% 3.3% 3.1%
-------- -------- -------- -------- --------
Total Railway Operating
Revenues............... $3,727.6 $3,709.1 $3,598.0 $3,735.1 $3,652.9
Note: Revenue ton miles (RTMs) for 1989 and 1990 have been restated from
"shortest distance" miles to "actual route" miles. RTMs for 1990
through 1992 have been restated from a one-month-delay basis to
a current-month basis.
COAL TRAFFIC - The commodity group moving in largest
tonnage volume over NS Rail is coal, coke and iron ore, most of which
is bituminous coal. NS Rail originated 112.1 million tons of coal,
coke and iron ore in 1993 and handled a total of 118.0 million tons.
Originated tonnage decreased 5 percent from 118.0 million tons in
1992, and total tons handled decreased 5 percent from 124.4 million
tons. Revenues from coal, coke and iron ore, which accounted for
33 percent of NS Rail's total railway operating revenues and
37 percent of total revenue ton miles in 1993, were $1.21 billion, a
decrease of 6 percent from $1.30 billion in 1992.
The following table shows total coal tonnage originated on
NS Rail, received from connections and handled for the five years
ended December 31, 1993:
Tons of Coal (Millions)
---------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Originated 109.8 115.5 116.8 126.6 116.2
Received 5.9 6.3 6.5 6.8 4.2
----- ----- ----- ----- -----
Handled 115.7 121.8 123.3 133.4 120.4
Note: Coal tonnage for 1989 and 1990 has been restated
from a settled basis to a movement basis.
PAGE 8
Of the 109.8 million tons of coal originating on NS Rail in
1993, the approximate breakdown is as follows: 37.9 million tons from
West Virginia, 37.6 million tons came from Virginia, 22.9 million tons
from Kentucky, 7.6 million tons from Alabama, 1.7 million tons from
Tennessee, 1.1 million tons from Illinois, and 1.0 million tons from
Indiana. Of this NS Rail-origin coal, approximately 25.3 million tons
moved for export, principally through NS Rail's pier facilities at
Norfolk (Lamberts Point), Virginia; 20.1 million tons moved to domestic
and Canadian steel industries; 55.6 million tons of steam coal moved to
electric utilities; and 8.8 million tons moved to other industrial and
miscellaneous users. NS Rail moved 9.7 million tons of originated coal
to various docks on the Ohio River for further movement by barge and
5.1 million tons to various Lake Erie ports. Other than coal moving
for export, virtually all coal tonnage handled by NS Rail was
terminated in states situated east of the Mississippi River.
Total NS Rail coal tonnage handled through all system ports
in 1993 was 42.4 million. Of this total, 65 percent moved through the
pier facilities at Lamberts Point. In 1993, total tonnage handled at
Lamberts Point, including coastwise traffic, was 27.6 million tons, a
20 percent decrease from the 34.7 million tons handled in 1992.
The quantities of NS Rail coal handled for export only
through Lamberts Point for the five years ended December 31, 1993,
were as follows:
Export Coal through Lamberts Point
(Millions of tons)
--------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Originated 24.6 30.8 34.3 35.1 30.9
Handled 24.9 31.2 34.6 35.4 31.4
The recession in Europe and high stockpiles of coal
overseas continued to affect NS Rail's export coal shipments in 1993,
as did the UMWA strike at several mines served by NS Rail. Domestic
coal was essentially flat, compared with 1992, although the market for
utility coals increased slightly because of the hot weather in our
service region and continued spot tonnage purchases. Increased
shipments to steel producers were attributed to strike-related
problems encountered by suppliers served by other carriers; the
industrial market stayed even with the previous year.
MERCHANDISE RAIL TRAFFIC - The merchandise traffic group
consists of Intermodal and five major commodity groupings (Paper/
Forest; Chemicals; Automotive; Agriculture; and Metals/Construction).
Total NS Rail merchandise revenues increased in 1993 to $2.39 billion,
a 4 percent increase over 1992. Merchandise carloads handled in 1993
were 2.82 million, compared with 2.66 million handled in 1992, an
increase of 6 percent.
PAGE 9
In 1993, 97.8 million tons of merchandise freight, or
approximately 68 percent of total merchandise tonnage handled by NS
Rail, originated on line. The balance of NS Rail's merchandise
traffic was received from connecting carriers (mostly railroads, with
some intermodal, water and highway as well), usually at
interterritorial gateways. The principal interchange points for NS
Rail-received traffic included Chicago, Memphis, New Orleans,
Cincinnati, Kansas City, Detroit, Hagerstown, St. Louis/East St.
Louis, and Louisville.
The economy improved in 1993, but the pace of recovery was
still below the average of post-war recoveries. All merchandise
commodity groups showed improvement over 1992. The biggest gains were
in Intermodal, up $30.9 million; Automotive, up $28.0 million; Metals/
Construction, up $19.8 million and Agriculture, up $18.3 million.
There were smaller gains in Paper/Forest and Chemicals.
PAPER/FOREST traffic (including paper, paperboard, wood
pulp, pulpwood, wood chips, lumber, kaolin clay and waste paper)
accounted for 13 percent of NS Rail's total operating revenues and
13 percent of total revenue ton miles during 1993. Compared with
1992, Paper/Forest revenues increased 1 percent and revenue ton miles
increased 3 percent.
Weak domestic and overseas demand for paper depressed
NS Rail shipments for much of the year. Lumber, however, posted a
4 percent gain in revenue due to a strong recovery in housing
construction. Moderate growth, somewhat higher than industry
production, is expected over the next few years due to growth in
market share.
CHEMICALS traffic (including petroleum products, plastics,
fertilizers, nonmetallic minerals, sulfur, chloral-alkali chemicals,
rubber, miscellaneous chemicals and waste/hazardous chemicals)
accounted for 13 percent of NS Rail's total operating revenues and
13 percent of total revenue ton miles during 1993. Compared with
1992, NS Rail's total revenue for chemicals was up 0.3 percent and
revenue ton miles increased 3 percent. The lower gain in revenue was
due to a change in the mix of traffic.
Gains in general chemicals and plastics were offset by
weakness in movements of export fertilizer due to sluggish conditions
overseas. Stronger growth is expected in 1994 and beyond, paced by
additional rail-truck distribution facilities for bulk chemicals.
While environmental concerns could adversely affect production of
pesticides and chlorine, increased environmental awareness is likely
to have a positive impact on movements of recyclables, hazardous
wastes and alternative fuels such as ethanol.
PAGE 10
AUTOMOTIVE traffic (including motor vehicles, vehicle
parts, miscellaneous transportation and ordnance, and tires) accounted
for 11 percent of NS Rail's total operating revenues and 4 percent of
revenue ton miles during 1993. Compared with 1992, NS Rail Automotive
revenues increased 7 percent and revenue ton miles increased
14 percent.
The gain was due to strong demand for vehicles produced at
plants served by NS Rail. NS Rail's largest customer, Ford Motor
Company, produced the top-selling automobile and truck in 1993. In
addition, NS Rail benefited from a full year of production at the
Ford/Nissan plant located near Avon Lake, Oh. Successful marketing
efforts, such as an innovative program with GM for just-in-time
movement of auto parts, also contributed to the gain.
Further growth in Automotive is expected in 1994 and
beyond, as U.S. automotive production is anticipated to increase for
the next few years. Within this growing market, NS Rail will pursue
innovative marketing programs and aggressive industrial development.
From 1994 to 1997, operations will begin at three new or expanded
automotive assembly plants located on NS Rail--the second Toyota Plant
at Georgetown, Ky., in 1994; BMW at Greer, S.C., in 1995; and Mercedes-
Benz at Tuscaloosa, Al., in 1997. The retooling of GM's Wentzville,
Mo., and Doraville, Ga., plants for van production should also
increase traffic.
AGRICULTURE traffic (including grains and soybeans, feed
and feed ingredients, sweeteners, beverages, consumer products, and
various other agricultural and food commodities) accounted for
9 percent of NS Rail's total operating revenues and 12 percent of
total revenue ton miles during 1993. Compared with 1992, agricultural
revenues increased 6 percent and revenue ton miles increased
8 percent.
In the early part of the year, NS Rail benefited from a
record harvest, that continued well into 1993. During the summer, the
flood in the Midwest diverted traffic to rail that formerly moved by
barge. In the fall, good crop conditions in NS Rail's sourcing areas
and poor conditions elsewhere produced strong NS Rail traffic gains.
Although the special conditions present during 1993 are not
likely to recur in 1994, a small increase in agriculture revenue is
expected, driven by growth in poultry production in the Southeast, a
prime NS Rail feed grain market.
METALS/CONSTRUCTION traffic (including aluminum ore, iron
and steel, aluminum products, scrap metal, machinery, sand and gravel,
cement, brick, miscellaneous construction, and nonhazardous waste)
accounted for 8 percent of NS Rail's total operating revenues and
9 percent of total revenue ton miles during 1993. Compared with 1992,
NS Rail's total revenues for Metals/Construction were up 7 percent and
revenue ton miles were up 13 percent.
PAGE 11
Most of the revenue gain was in shipments of iron and
steel, where strong industry production and new plants located on
NS Rail's lines boosted revenue $10 million. Shipments of
construction commodities were also strong due to a recovery in
housing.
Further gains are expected over the next few years.
NS Rail has initiatives under way intended to win back truck business
in aluminum, and several new movements of municipal solid waste are
expected.
INTERMODAL traffic (including trailers, containers, and
Triple Crown) accounted for 10 percent of NS Rail's total operating
revenues and 12 percent of total revenue ton miles during 1993.
Compared with 1992, intermodal revenues increased 9 percent, and
revenue ton miles increased 9 percent.
Intermodal growth in 1993 was led by a 21 percent increase
in services provided to Triple Crown Services Company (a partnership
between subsidiaries of NS and Consolidated Rail Corporation which
provides RoadRailer (Registered Trademark) (RT) and domestic container
services) due to strong automotive shipments and expansion of service
to the Northeast. Container revenues were up 6 percent, a smaller
increase than previous years due to less international traffic caused
by the continuing recession in Europe and Japan. Trailer revenue was
up 11 percent, boosted by gains from haulage arrangements with
truckload carriers.
Strong growth is expected in 1994 and for the next several
years. Container traffic is expected to improve as recoveries
overseas produce steady growth in international shipments. Trailer
business also is expected to grow, as leading truckload carriers, such
as Schneider National and J.B. Hunt, use rail for the long-haul
portion of their shipments.
PAGE 12
RAIL OPERATING STATISTICS. The following table sets forth
certain statistics relating to NS Rail's operations during the
periods indicated:
Year Ended December 31,
-----------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Rail revenue ton
miles (billions) 111.6 107.6 103.7 106.3 103.1
Freight train miles
traveled (millions) 43.3 41.1 37.8 36.8 39.2
Revenue tons per carload 65.1 66.0 66.7 68.7 66.8
Revenue per ton mile $0.0323 $0.0333 $0.0335 $0.0340 $0.0343
Revenue tons per train 2,577 2,618 2,743 2,884 2,629
Revenue ton miles
per man-hour worked 2,304 2,184 2,023 1,955 1,835
Percentage ratio of
railway operating
expenses to railway
operating revenues 75.3 75.0 77.9* 78.0 77.0
Note: Revenue ton miles (RTMs) for 1988 through 1990 have been
restated from a "shortest route" basis to an "actual route"
basis. RTMs for 1990 through 1992 have been restated from a
one-month-delay basis to a current-month basis.
* Excluding the special charge in 1991 which increased railway
operating expenses by $483 million (see Note 14 of Notes to
Consolidated Financial Statements on page 72).
FREIGHT RATES. In the pricing of freight services,
NS Rail continued in 1993 to increase its reliance on private
contracts which, coupled with traffic that has been exempted from
regulation by the ICC (e.g., boxcar and intermodal traffic),
presently account for over 80 percent of freight operating revenues.
Thus, a major portion of NS Rail's freight business is not
economically regulated by the government. In general, market forces
have been substituted for government regulation and now are the
primary determinant of rail service prices.
In 1993, the ICC found NS Rail "revenue adequate" based on
results for the year 1992. A railroad is "revenue adequate" under
the Interstate Commerce Act when its return on net investment exceeds
the rail industry's cost of capital. The condition of "revenue
adequacy" determines whether a railroad can take advantage of a
provision in the Interstate Commerce Act allowing freedom to increase
regulated rates by a specific percentage. However, with the
decreasing importance of regulated tariff traffic to NS Rail, the
ICC's "revenue adequacy" findings have less impact than formerly.
PAGE 13
PASSENGER OPERATIONS. Regularly scheduled passenger
operations on NS Rail's lines consist of Amtrak trains operating
between Alexandria and New Orleans, and between Charlotte and
Selma, N.C. Former Amtrak operations between East St. Louis and
Centralia, Il., were discontinued by Amtrak November 3, 1993.
Commuter trains continued operations on the NS Rail line between
Manassas and Alexandria under contract with two transportation
commissions of the Commonwealth of Virginia, providing for
reimbursement of related expenses incurred by NS Rail. During 1993,
a lease of the Chicago to Manhattan, Il., line to the Commuter Rail
Division of the Regional Transportation Authority of Northeast
Illinois replaced a purchase of service agreement by which NS Rail
had provided commuter rail service for the Authority.
OTHER RAILWAY OPERATIONS. Revenues from switching,
demurrage and miscellaneous services amounted to $121.5 million, or
approximately 3 percent of total railway operating revenues, during
1993 and $121.7 million, or approximately 3 percent of total railway
operating revenues, in 1992.
PAGE 14
RAILWAY PROPERTY.
EQUIPMENT - As of December 31, 1993, NS Rail owned or
leased the following units of equipment:
Number of Units
--------------------------- Capacity
Owned * Leased Total of Equipment
----- ------ ----- ------------
Type of Equipment
- -----------------
Locomotives: (Horsepower)
Multiple purpose 1,810 -- 1,810 5,311,200
Switching 163 -- 163 240,250
Auxiliary units 80 -- 80 --
------- ------ ------- -----------
Total locomotives 2,053 -- 2,053 5,551,450
======= ====== ======= ===========
Freight Cars: (Tons)
Hopper 40,638 129 40,767 4,030,445
Box 23,213 2 23,215 1,664,481
Covered Hopper 15,636 554 16,190 1,603,126
Gondola 15,780 50 15,830 1,474,009
Flat 4,683 6 4,689 295,259
Caboose 375 -- 375 --
Other 2,018 830 2,848 312,827
------- ------ ------- -----------
Total freight cars 102,343 1,571 103,914 9,380,147
------- ------ ------- -----------
Other:
Work equipment 6,956 5 6,961
Vehicles 3,900 -- 3,900
Highway trailers 3,393 -- 3,393
Miscellaneous 1,068 -- 1,068
------- ------ -------
Total other 15,317 5 15,322
======= ====== =======
* Includes equipment leased to outside parties and equipment subject
to equipment trusts, conditional sale agreements and capitalized
leases.
PAGE 15
The following table indicates the number and age of
locomotives and freight cars owned or leased by NS Rail at
December 31, 1993:
Year Built
-----------------------------------------------------------------
1983- 1977- 1976 &
1993 1992 1991 1990 1989 1988 1982 Before Total
---- ---- ---- ---- ---- ---- ---- ------ -----
Locomotives:
Number of
units 31 55 53 46 80 338 607 843 2,053
Percent of
fleet 1.5 2.7 2.6 2.2 3.9 16.5 29.5 41.1 100.0
Freight cars:
Number of
units 787 502 557 1,737 2,066 2,106 20,826 75,333 103,914
Percent of
fleet 0.8 0.5 0.5 1.7 2.0 2.0 20.0 72.5 100.0
The average age of the freight car fleet at December 31,
1993, was 20.8 years. During 1993, NS Rail retired 5,576 freight
cars. As of December 31, 1993, the average age of the locomotive
fleet was 14.6 years. During 1993, NS Rail retired 37 locomotives,
the average age of which was 24.7 years. Since 1989, NS Rail has
rebodied over 14,000 coal cars. As a result, the remaining
serviceability of the freight car fleet is greater than is indicated
by the percentage of freight cars built in earlier years.
NS Rail continues freight car and locomotive maintenance
programs to ensure the highest standards of safety, reliability,
customer satisfaction and equipment marketability. In recent years,
as illustrated in the table below, the bad order ratio has risen or
remained fairly stable primarily due to the storage of certain types
of cars which are not in high demand. Funds were not spent to repair
certain types of cars for which present and future customers' needs
could be adequately met without such repair programs. Also, NS Rail's
own standards of what constitutes a "serviceable" car have risen, and
NS continues a rational disposition program for underutilized,
unserviceable and overage cars.
Annual Average
--------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Freight Cars (excluding cabooses):
NS Rail 7.3% 7.6% 6.5% 6.4% 6.3%
All Class I railroads 7.1 7.5 7.3 7.7 8.4
Locomotives:
NS Rail 4.3 4.4 4.3 4.2 4.3
Note: Since 1992, the locomotive bad order ratio has been calculated
excluding stored locomotives. Years prior to 1992 have been
restated to conform to this presentation.
PAGE 16
TRACKAGE - All NS Rail trackage is standard gauge, and
the rail in approximately 95 percent of the main line trackage
(including first, second, third and branch main tracks, all excluding
trackage rights) is heavyweight rail ranging from 90 to 155 pounds
per yard. Of the 23,512 miles of track maintained by NS Rail as of
December 31, 1993, 15,621 miles were laid with welded rail.
The density of traffic on NS Rail running track (main line
trackage plus passing track) during 1993 was as follows:
Gross tons of
freight carried
per track mile Track miles Percent
(Millions) of running tracks* of total
--------------- ----------------- --------
0-4 5,614 34
5-19 5,404 32
20 and over 5,751 34
------ ---
16,769 100
*Excludes trackage rights
The following table summarizes certain information about
NS Rail's track roadway additions and replacements during the last
five years:
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Track miles of rail installed 574 660 679 743 718
Crossties installed (millions) 1.6 1.9 1.9 1.9 2.0
Miles of track surfaced 5,048 5,690 5,646 5,844 5,708
MICROWAVE SYSTEM - The NS Rail microwave system, consisting
of 6,584 radio path miles, 374 active stations and 7 passive repeater
stations, provides communication services between Norfolk, Buffalo,
Detroit, Fort Wayne, Chicago, Kansas City, St. Louis, Washington,
D.C., Atlanta, New Orleans, Jacksonville, Memphis, Cincinnati and most
operating locations between these cities. The microwave system
provides approximately 2,152,600 individual voice channel miles of
circuits, and NS Rail began a conversion of the system from analog to
digital technology in 1993. Conversion is under way on all microwave
facilities between St. Louis, Mo., and Danville, Ky.; the process is
also under way between Roanoke and Norfolk, Va. The microwave
communication system is used principally for voice communications, VHF
radio control circuits, data and facsimile transmissions, traffic
control operations, AEI data transmissions, and relay of intelligence
from defective equipment detectors. Extension of microwave
communications to low density or operations support facilities is
accomplished via microwave interface to buried fiber-optic or copper
cables.
PAGE 17
TRAFFIC CONTROL - Of a total of 13,438 road miles operated
by NS Rail, excluding trackage rights over foreign lines, 5,274 road
miles are governed by centralized traffic control systems and 2,734
road miles are equipped for automatic block system operation.
COMPUTERS - Data processing facilities connect the yards,
terminals, transportation offices, rolling stock repair points, sales
offices and other key locations on NS Rail to the central computer
complex in Atlanta, Ga. System operating and traffic data are
compiled and stored to provide customers with information on their
shipments throughout the system. Data processing facilities are
capable of providing current information on the location of every
train and each car on line, as well as related waybill and other train
and car movement data. Additionally, this facility affords
substantial capacity for, and is utilized to assist management in the
performance of, a wide variety of functions and services, including
payroll, car and revenue accounting, billing, material management
activities and controls, and special studies.
OTHER - NS Rail has extensive facilities for support of
railroad operations, including freight depots, car construction shops,
maintenance shops, office buildings, and signals and communications
facilities.
ENCUMBRANCES. Most of NS Rail's properties are subject to
liens securing as of December 31, 1993, and 1992, approximately
$74.8 million and $146.6 million of mortgage debt, respectively. In
addition, certain of the rolling stock is subject to the prior lien
of equipment financing obligations amounting to approximately
$521.8 million as of December 31, 1993, and $558.2 million as of
December 31, 1992.
CAPITAL EXPENDITURES. During the five calendar years
ended December 31, 1993, capital expenditures for road, equipment and
other property were as follows:
Capital Expenditures
------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(In millions of dollars)
Railway property
Road $411.0 $425.1 $392.8 $389.4 $337.4
Equipment 218.1 187.8 193.1 203.3 267.5
Other property 0.1 4.2 77.2 9.4 6.5
------ ------ ------ ------ ------
Total $629.2 $617.1 $663.1* $602.1* $611.4
====== ====== ====== ====== ======
* Includes noncash property acquisitions of $10.6 million in 1991
and $27.2 million in 1990.
PAGE 18
NS Rail's capital spending and maintenance programs are and
have been designed to assure the Corporation's ability to provide
safe, efficient and reliable transportation services. For 1994,
NS Rail is planning $627 million of capital spending and anticipates
new equipment financing of approximately $72 million. Looking further
ahead, capital spending is likely to increase moderately over the next
few years. The proposed construction of a $100 million coal ground
storage facility in Isle of Wight County, Va., may affect capital
spending in future years. However, because of delays in the
permitting process and reduced demand for export coal, any significant
spending on this project is not expected until after 1994. In
addition to boosting capacity, this new facility should further
increase the efficiency of coal transportation service and reduce the
need for new coal hopper cars. A substantial portion of future
capital spending is expected to be funded through internally generated
cash, although debt financing will continue as the primary funding
source for equipment acquisitions.
ENVIRONMENTAL MATTERS. Compliance with federal, state and
local laws and regulations relating to the protection of the
environment is a principal NS Rail goal. To date, such compliance has
not affected materially NS Rail's capital additions, earnings,
liquidity or competitive position.
Costs for environmental protection for 1993 were
approximately $32.9 million, of which $28.9 million were operating
expenses and $4.0 million were capitalized. Such NS Rail expenditures
historically have been associated with the cleanup of real estate used
for operating and nonoperating purposes, solid/hazardous waste
handling and disposal, water pollution control, asbestos removal
projects and removal/remediation work related to underground tanks.
To promote achievement of NS Rail's environmental
objectives and to assure continuous improvement in its programs,
environmental engineers perform ongoing analyses of all identified
sites, and--after consulting with counsel--any necessary adjustments
to initial liability estimates are recorded (and expensed or
capitalized, as appropriate). Evaluations of other sites are ongoing.
NS Rail also has established an Environmental Policy Council, composed
of senior managers, to prescribe and direct its environmental
initiatives and undertake environmental awareness programs through
which NS Rail employees will receive training.
Norfolk Southern Railway and certain subsidiaries have
received notices from the Environmental Protection Agency that they
are potentially responsible parties under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) which
generally imposes joint and several liability for cleanup costs.
State agencies also have notified Norfolk Southern Railway and certain
subsidiaries that they may be potentially responsible for
environmental damages, and in several instances they have agreed
voluntarily to initiate cleanup.
PAGE 19
For CERCLA sites and all other known environmental
incidents where loss or liability is probable, NS Rail has recorded an
estimated liability. The amount of that liability, which includes
estimated costs of remediation (and any associated restoration) on a
site-by-site basis, is expected to be paid over several years.
Although the estimated liability usually is expensed in the year it is
recorded, certain expenditures relating to real estate development
projects have been capitalized. Claims, if any, against third parties
for recovery of remediation costs incurred by NS Rail are reflected as
receivables in the balance sheet and not netted against the associated
NS Rail liability.
Estimates of a company's potential financial exposure even
for known environmental claims or incidents are necessarily imprecise
because of the widely varying costs of available remediation
techniques, the difficulty of determining in advance the nature and
extent of contamination and each potential participant's share of an
estimated loss, and evolving statutory and regulatory standards
governing liability.
The risk of incurring environmental liability--for acts
and omissions, both past and current--is inherent in railroad
operations. Moreover, some of the commodities, particularly those
classified as hazardous materials, in NS Rail's traffic mix can pose
special risks, which NS Rail works diligently to minimize. In
addition, NS Rail has land holdings that may be leased (and operated
by others) or held for sale. Because certain conditions may exist on
these properties for which NS Rail ultimately may bear some financial
responsibility, there can be no assurance that NS Rail will not incur
liabilities or costs, the amount and materiality of which, to a single
accounting period or in the aggregate, cannot be estimated reliably
now, related to environmental problems that are latent or
undiscovered.
However, based on its assessments of the facts and
circumstances now known and after consulting with its legal counsel,
Management believes that it has recorded appropriate estimates of
liability for those environmental matters of which NS Rail is aware.
At year end, a grand jury investigation was under way
regarding possible violations of certain environmental statutes in
1989 at Moberly Yard, Moberly, Mo. A more detailed report of this
incident, including information concerning its resolution since year
end, is set forth under the heading "Item 3. Legal Proceedings."
EMPLOYEES. NS Rail employed an average of 25,531
employees in 1993, compared with an average of 25,650 in 1992
(including Norfolk Southern Corporation's employees whose primary
duties relate to rail operations). The approximate average cost per
rail-related employee during 1993 was $40,383 in wages and $20,497 in
employee benefits. Approximately 82 percent of these employees are
represented by various labor organizations.
PAGE 20
GOVERNMENT REGULATION. In addition to environmental,
safety, securities and other regulations generally applicable to all
businesses, NS Rail is subject to regulation by the ICC, various
state regulatory agencies and the Department of Transportation. The
ICC has jurisdiction over many rates, routes, conditions of service,
and the extension or abandonment of rail lines. The ICC also has
jurisdiction over the consolidation, merger or acquisition of control
of and by rail common carriers. The Department of Transportation
regulates certain track and mechanical equipment standards.
The relaxation of economic regulation of the railroads by
the ICC, started over a decade ago under the Staggers Rail Act of
l980, has continued. The ICC has recently authorized the partial
deregulation of the charges railroads pay for the use of rail cars.
Certain transactions and classes of traffic already have been
exempted from ICC regulation. Those most significant for NS Rail are
TOFC/COFC (i.e., "piggyback") business, rail boxcar traffic, lumber,
manufactured steel, automobiles and certain bulk commodities such as
sand, gravel, pulpwood and wood chips for paper manufacturing.
Transportation contracts on regulated shipments, after approval by
the ICC, effectively remove those shipments from regulation as well.
Over 80 percent of NS Rail's freight revenues come from either exempt
traffic or traffic moving under ICC approved transportation
contracts.
COMPETITION. There is continuing strong competition among
rail, water and highway carriers. Price is usually only one factor
of importance as shippers and receivers choose a transport mode and
specific hauling company. Inventory carrying costs, service
reliability, ease of handling, and the desire to avoid loss and
damage during transit are increasingly important considerations,
especially for higher valued finished goods, machinery, and consumer
products. Even for raw materials, semi-finished goods, and work-in-
process, users are increasingly sensitive to transport arrangements
which minimize problems at successive production stages.
NS Rail's primary rail competitor is the CSX system, which
operates throughout much of the same territory served by NS Rail.
Other railroads also operate in parts of the territory. NS Rail also
competes with motor carriers and water carriers, and with shippers
who have the additional option of handling their own goods in private
carriage. Increasingly, cooperative strategies between railroads
(such as the Triple Crown Services Company partnership between NS and
Conrail subsidiaries, see page 11) and between railroads and motor
carriers enable carriers to compete more effectively in specific
markets.
PAGE 21
Item 3. Legal Proceedings
- ------ -----------------
New Orleans, Louisiana - Tank Car Fire. A number of
lawsuits have been filed as a result of a tank car fire which occurred
in New Orleans, La., on September 9, 1987, and resulted in the
evacuation of many residents of the surrounding area. Plaintiffs
allege that they were injured and sustained other economic loss when a
chemical called butadiene leaked from a tank car under the control of
either CSX Transportation, Inc., or New Orleans Terminal Company (a
subsidiary of Norfolk Southern Railway) or both. In addition to the
rail defendants, defendants in one or more of the suits include the
City of New Orleans, the owner of the tank car (General American
Transportation Corporation), the loader of the tank car (GATX
Terminals Corporation), and the shipper (Mitsui & Co. (USA Inc.)).
The suits, which are pending in the Civil District Court for the
parish of Orleans, seek damages ranging from $10,000 to
$20,000,000,000. Management, after consulting with its legal counsel,
is of the opinion that ultimate liability will not materially affect
the consolidated financial position of NS Rail. This matter has been
reported previously by NS Rail in Part II, Item 1, of its Form 10-Q
Reports for the quarters ending September 30, 1987, and March 31,
1990; and in Part I, Item 3, of its Form 10-K Annual Reports for 1987,
1988, 1989, 1990, 1991 and 1992.
Moberly, Missouri - Burial of Paint and Solvent. On or
about May 16 and May 23, 1991, respectively, certain employees and NW
were served with subpoenas duces tecum requiring production of various
documents and information, all related to a federal grand jury's
investigation of possible violations of certain environmental statutes
in 1989 at Moberly Yard, Moberly, Mo. A search warrant also was
served on NW at Moberly, and various company records were seized. A
second subpoena duces tecum was served on September 19, 1991,
concerning the relationship between NS and NW. The investigation
resulted from employees' having buried containers of paint and one
container of solvent.
NW management first learned of the incident in June 1990
from the Missouri Department of Natural Resources ("DNR"). Promptly
thereafter, NW initiated appropriate remediation efforts and notified
the National Response Center. The burial of paint and solvent
violated long-standing NW policy and instructions.
NW cooperated fully with the DNR; at year end 1993, the
grand jury's investigation was continuing. The paint and paint cans
(along with the single drum which contained a solvent and appears not
to have leaked) and any associated contaminated dirt have been
excavated and properly disposed of under the DNR's direction.
PAGE 22
On February 23, 1994, NW settled this matter with the
federal and state governments by pleading guilty to a single violation
of the federal Resource Conservation and Recovery Act and by making or
committing to make penalty and restitution payments of up to
$4,400,000. Of that amount, $1.7 million is to purchase equipment for
state environmental enforcement purposes and, in line with NW's
suggestion, $1.0 million is for the Katy Trail State Park which was
damaged severely in the 1993 Missouri River flood. In addition, NW
made certain commitments with respect to an organization-wide
environmental awareness program.
Management believes the February 23 settlements conclude
this matter and expects to make no further reports about it. This
matter has been reported previously by NS Rail in Part II, Item 1, of
its Form 10-Q Report for the quarter ending June 30, 1991, and in
Part I, Item 3, of its Form 10-K Annual Reports for 1991 and 1992.
PAGE 23
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security
holders during the fourth quarter of 1993.
Executive Officers of the Registrant.
- ------------------------------------
Norfolk Southern Railway's officers are elected annually
by the Board of Directors at its first meeting held after the annual
meeting of stockholders, and they hold office until their successors
are elected. There are no family relationships among the officers,
nor any arrangement or understanding between any officer and any
other person pursuant to which the officer was selected. The
following table sets forth certain information, as of March 1, 1994,
relating to these officers:
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- --------------------------------------
David R. Goode, 53, Present position since September 1992.
President and Chief Also, Chairman, President and Chief
Executive Officer Executive Officer of Norfolk
Southern Corporation since September
1992, President from October 1991 to
September 1992, and Executive Vice
President-Administration from
January to October 1991. Served as
Vice President-Administration of
Norfolk Southern Railway from
January 1991 to February 1992, Vice
President from February to September
1992, and prior thereto as Vice
President-Taxation of Norfolk
Southern Railway and NS.
William B. Bales, 59, Vice Present position since August 1993.
President-Coal Marketing Also, Vice President-Coal
Marketing of Norfolk Southern
Corporation since August 1993.
Served prior thereto as Vice
President-Coal and Ore Traffic of
Norfolk Southern Railway and NS.
PAGE 24
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- --------------------------------------
R. Alan Brogan, 53, Vice Present position since December 1992.
President-Transportation Also, Executive Vice President-
Logistics Transportation Logistics of
Norfolk Southern Corporation since
December 1992, Vice President-
Quality Management from April 1991
to December 1992, Vice President-
Material Management and Property
Services from July 1990 to April
1991, and prior thereto as Vice
President of Material Management.
Served as Vice President-Quality
Management of Norfolk Southern
Railway from June 1991 to December
1992, and prior thereto as Vice
President-Material Management.
Thomas L. Finkbiner, 41, Vice Present position since August 1993.
President-Intermodal Also, Vice President-Intermodal
of Norfolk Southern Corporation
since August 1993. Served as Senior
Assistant Vice President-
International and Intermodal of NS
from April to August 1993, and prior
thereto as Assistant Vice President-
International and Intermodal.
James A. Hixon, 40, Vice Present position since June 1993.
President-Taxation Also, Vice President-Taxation of
Norfolk Southern Corporation since
June 1993. Served as Assistant Vice
President-Tax Counsel of NS from
January 1991 to June 1993, and prior
thereto as General Tax Attorney.
Harold C. Mauney, Jr., 55, Present position since December 1992.
Vice President-Quality Also, Vice President-Quality
Management Management of Norfolk Southern
Corporation since December 1992.
Served as Assistant Vice President-
Quality Management of NS from April
1991 to December 1992, and prior
thereto as General Manager-
Intermodal Transportation Services.
Donald W. Mayberry, 50, Vice Present position since October 1987.
President-Mechanical Also, Vice President-Mechanical of
Norfolk Southern Corporation
since October 1987.
PAGE 25
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- --------------------------------------
James W. McClellan, 54, Vice Present position since October 1993.
President-Strategic Planning Also, Vice President-Strategic
Planning of Norfolk Southern
Corporation since October 1993.
Served as Assistant Vice President-
Corporate Planning of NS from March
1992 to October 1993, and prior
thereto as Director-Corporate
Development.
Kathryn B. McQuade, 37, Vice Present position since December 1992.
President-Internal Audit Also, Vice President-Internal
Audit of Norfolk Southern
Corporation since December 1992.
Served as Director-Income Tax
Administration of NS from May 1991
to December 1992, and prior thereto
as Director-Federal Income Tax
Administration.
Charles W. Moorman, 42, Vice Present position since October 1993.
President-Information Also, Vice President-Information
Technology Technology of Norfolk Southern
Corporation since October 1993.
Served as Vice President-Employee
Relations of Norfolk Southern Railway
and NS from December 1992 to October
1993, Vice President-Personnel and
Labor Relations from February to
December 1992, Assistant Vice
President-Stations, Terminals and
Transportation Planning of NS from
March 1991 to February 1992, Senior
Director Transportation Planning from
March 1990 to March 1991, and prior
thereto as Director, Transportation
Planning.
Phillip R. Ogden, 53, Vice Present position since December 1992.
President-Engineering Also, Vice President-Engineering
of Norfolk Southern Corporation
since December 1992. Served as
Assistant Vice President-Maintenance
of NS from November 1990 to December
1992, Chief Engineer-Line
Maintenance North from February 1989
to November 1990, and prior thereto
as Chief Engineer-Program
Maintenance.
PAGE 26
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- --------------------------------------
L. I. Prillaman, Jr., 50, Present position since December 1992.
Vice President-Properties Also, Vice President-Properties
of Norfolk Southern Corporation
since December 1992. Served prior
thereto as Vice President and
Controller of Norfolk Southern
Railway and NS.
John P. Rathbone, 42, Vice Present position since December 1992.
President and Controller Also, Vice President and
Controller of Norfolk Southern
Corporation since December 1992.
Served as Assistant Vice President-
Internal Audit of NS from January
1990 to December 1992, and prior
thereto as Director-Internal Audit.
William J. Romig, 49, Present position since December 1992.
Vice President Also, Vice President and
Treasurer of Norfolk Southern
Corporation since December 1992.
Served prior thereto as Assistant
Vice President-Finance of NS.
Paul R. Rudder, 61, Vice Present position since March 1990.
President-Operations Also, Executive Vice President-
Operations of Norfolk Southern
Corporation since March 1990.
Served as Vice President of Norfolk
Southern Railway and Senior Vice
President-Operations of NS from
October 1989 to March 1990, and
prior thereto as Vice President-
Engineering of Norfolk Southern
Railway and NS.
Donald W. Seale, 41, Vice Present position since August 1993.
President-Merchandise Also, Vice President-Merchandise
Marketing Marketing of Norfolk Southern
Corporation since August 1993.
Served as Assistant Vice President-
Sales and Service of NS from May
1992 to August 1993, Director-
Metals, Waste and Construction from
March 1990 to May 1992, and prior
thereto as Director-Marketing
Development.
PAGE 27
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- --------------------------------------
John S. Shannon, 63, Vice Present position since May 1984.
President-Law Also, Executive Vice President-
Law of Norfolk Southern Corporation
since June 1982.
Thomas C. Sheller, 63, Vice Present position since February 1992.
President-Administration Also, Executive Vice President-
Administration of Norfolk Southern
Corporation since October 1991.
Served prior thereto as Vice
President-Personnel and Labor
Relations of Norfolk Southern
Railway and NS.
Powell F. Sigmon, 54, Vice Present position since October 1993.
President-Safety, Environ- Also, Vice President Safety,
mental and Research Environmental and Research
Development Development of Norfolk Southern
Corporation since October 1993.
Served as Assistant Vice President-
Mechanical (Car) of NS from January
1991 to October 1993, and prior
thereto as General Manager-
Mechanical Facilities.
Stephen C. Tobias, 49, Present position since October 1993.
Vice President Also, Senior Vice President-
Operations of Norfolk Southern
Corporation since October 1993.
Served as Vice President-Strategic
Planning of Norfolk Southern
Railway and NS from December 1992
to October 1993, Vice President-
Transportation from October 1989 to
December 1992, and prior thereto as
General Manager-Western Lines.
John R. Turbyfill, 62, Vice Present position since June 1993.
President Also, Vice Chairman of Norfolk
Southern Corporation since June
1993. Served prior thereto as
Executive Vice President-Finance of
NS since June 1982, and Vice
President-Finance of Norfolk
Southern Railway since March 1984.
PAGE 28
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- --------------------------------------
D. Henry Watts, 62, Vice Present position since July 1986.
President and Chief Also, Executive Vice President-
Traffic Officer Marketing of Norfolk Southern
Corporation since July 1986.
Henry C. Wolf, 51, Vice Present position since June 1993.
President-Finance Also, Executive Vice President-
Finance of Norfolk Southern
Corporation since June 1993.
Served as Vice President-Taxation
of Norfolk Southern Railway and NS
from January 1991 to June 1993, and
prior thereto as Assistant Vice
President-Tax Counsel.
Dezora M. Martin, 46, Present position since October 1993.
Corporate Secretary Served prior thereto as
Assistant Corporate Secretary of
Norfolk Southern Railway and NS.
Ronald E. Sink, 51, Present position since September
Treasurer 1987.
PAGE 29
PART II
Item 5. Market for the Registrant's Common Stock and Related
- ------ ----------------------------------------------------
Stockholder Matters.
-------------------
COMMON STOCK
- ------------
Since June 1, 1982, NS has owned all the common stock of
Norfolk Southern Railway Company. The common stock is not publicly
traded.
SERIAL PREFERRED STOCK
- ----------------------
There are 10,000,000 shares of no par value serial
preferred stock authorized. This stock may be issued in series from
time to time at the discretion of the Board of Directors with any
series having such voting and other powers, designations, dividends
and other preferences as deemed appropriate at the time of issuance.
The $2.60 Cumulative Preferred Stock, Series A (Series A
Stock), of which 1,197,027 shares were issued and 1,096,907 shares
were held other than by subsidiaries as of February 28, 1994, has no
par value but has a $50 per share stated value. As indicated in the
title, the stock pays a dividend of $2.60 per share annually, payable
quarterly on March 15, June 15, September 15 and December 15.
Dividends on this stock are cumulative and in preference to dividends
on all other classes of stock. Except for any shares held by Norfolk
Southern Railway Company subsidiaries and/or in a fiduciary capacity,
each share is entitled to one vote per share on all matters, voting
as a single class with holders of other stock. Should dividends
become delinquent for six quarters, this class of stock, voting as a
class, may elect two directors so long as any default in dividend
payments continues. The stock is redeemable at the option of Norfolk
Southern Railway Company at $50 per share plus accrued dividends. On
liquidation, the stock is entitled to $50 per share plus accrued
dividends before any amounts are paid on any other class of stock.
In June 1989, NS announced that it intended to purchase up
to 250,000 shares of the outstanding Series A Stock during the
subsequent two-year period. In May 1991, NS extended the previously
announced stock purchase program through 1993. In March 1994, NS
announced that it would continue purchasing up to 250,000 shares of
the Series A Stock through 1996. As of February 28, 1994, NS had
purchased 77,626 shares of Series A Stock at a total cost of
$2,671,986; as of the same date, NS held a total of 77,721 shares.
PAGE 30
Item 6. Selected Financial Data.
- ------ -----------------------
NORFOLK SOUTHERN RAILWAY COMPANY
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
FIVE-YEAR FINANCIAL REVIEW
1993 1992 1991(1) 1990 1989
-------- -------- -------- -------- --------
(In millions of dollars)
RESULTS OF OPERATIONS:
Railway operating revenues $3,727.6 $3,709.1 $3,598.0 $3,735.1 $3,652.9
Railway operating expenses 2,805.9 2,781.7 3,287.2 2,913.9 2,813.0
-------- -------- -------- -------- --------
Income from railway
operations 921.7 927.4 310.8 821.2 839.9
Other income - net 57.6 49.5 70.2 172.4 160.4
Interest expense on debt 32.3 44.6 48.4 52.6 43.9
-------- -------- -------- -------- --------
Income before income
taxes 947.0 932.3 332.6 941.0 956.4
Provision for income taxes 412.8 325.8 102.0 331.2 325.0
-------- -------- -------- -------- --------
Income before accounting
changes 534.2 606.5 230.6 609.8 631.4
Cumulative effect of
accounting changes 247.8 -- -- -- --
-------- -------- -------- -------- --------
Net income $ 782.0 $ 606.5 $ 230.6 $ 609.8 $ 631.4
======== ======== ======== ======== ========
FINANCIAL POSITION:
Total assets $9,873.0 $9,675.5 $9,358.0 $9,273.8 $9,625.9
Total long-term debt,
including current
maturities $ 604.9 $ 714.5 $ 735.0 $ 712.1 $ 771.0
Stockholders' equity $5,184.9 $4,784.3 $4,449.5 $4,433.3 $4,874.6
OTHER:
Capital expenditures (2) $ 629.2 $ 617.1 $ 663.1 $ 602.1 $ 611.4
Number of stockholders
at year end 3,517 3,725 3,952 4,168 4,433
Average number
of employees (3) 25,531 25,650 27,366 28,697 29,667
Business Combination
- --------------------
On December 31, 1990, NS, the parent company of Norfolk Southern Railway
Company, transferred all the common stock of its other major railroad
subsidiary, NW, to Norfolk Southern Railway Company, principally to
combine railroad operations under a common railroad parent. The 1990 and
prior year's financial information above reflects the combined companies.
- ----------------------------------------------------------------------------
(1) Included in 1991 results is a special charge, primarily comprised of
costs for labor force reductions. This charge increased railway
operating expenses by $483 million and reduced net income by
$303 million (see Note 14 on page 72).
(2) Includes noncash property acquisitions of $10.6 million in 1991 (see
Note 6 on page 64) and $27.2 million in 1990.
(3) The employee count includes Norfolk Southern Corporation's employees
whose primary duties relate to rail operations.
PAGE 31
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
------------------------------------
See pages 39-50 for "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Item 8. Financial Statements and Supplementary Data.
- ------ --------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
QUARTERLY FINANCIAL DATA
(Unaudited)
Three Months Ended
-----------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In millions of dollars except per share amounts)
1993 *
----
Railway operating revenues $910.8 $963.2 $914.3 $939.3
Income from railway operations 207.4 253.2 213.4 247.7
Income before accounting changes 147.5 161.1 76.4 149.2
Net income 395.3 161.1 76.4 149.2
Dividends per serial preferred share $ 0.65 $ 0.65 $ 0.65 $ 0.65
1992
----
Railway operating revenues $903.7 $922.3 $933.7 $949.4
Income from railway operations 231.8 224.6 229.4 241.6
Net income 155.6 143.2 145.4 162.3
Dividends per serial preferred share $ 0.65 $ 0.65 $ 0.65 $ 0.65
* 1993's results include implementation of required accounting changes that
resulted in a $247.8 million increase in first quarter net income (see
Note 1 on page 56). Additionally, 1993's results include the effect of
a 1% increase in the federal income tax rate which resulted in a
$60.8 million decrease in net income, principally reflected in the third
quarter (see Note 3 on page 59).
PAGE 32
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ --------------------------------------------
The Index to Financial Statements follows, and the Index to
Financial Statement Schedules appears in Item 14 on page 34.
The financial statements and related documents for Norfolk
Southern Railway Company and Subsidiaries are as follows:
Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 1993, 1992 and 1991 51
Consolidated Balance Sheets
As of December 31, 1993 and 1992 52
Consolidated Statements of Cash Flows
Years ended December 31, 1993, 1992 and 1991 53-54
Consolidated Statements of Changes in
Stockholders' Equity Years ended
December 31, 1993, 1992 and 1991 55
Notes to Consolidated Financial Statements 56-75
Independent Auditors' Report 76
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------ -----------------------------------------------------------
and Financial Disclosure.
------------------------
None.
PAGE 33
PART III
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
Item 11. Executive Compensation.
- ------- ----------------------
Item 12. Security Ownership of Certain Beneficial Owners
- ------- -----------------------------------------------
and Management.
--------------
and
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
In accordance with General Instruction G(3), the
information called for by Part III is incorporated herein by
reference from Norfolk Southern Railway's definitive Proxy Statement,
to be dated April 19, 1994, for the Norfolk Southern Railway Annual
Meeting of Stockholders to be held on May 24, 1994, which definitive
Proxy Statement will be filed electronically with the Commission
pursuant to Regulation 14A. The information regarding executive
officers called for by Item 401 of Regulation S-K is included in
Part I beginning on page 23 under "Executive Officers of the
Registrant."
PAGE 34
PART IV
Item l4. Exhibits, Financial Statement Schedules, and Reports on
- ------- -------------------------------------------------------
Form 8-K.
--------
(a) The following documents are filed as part of this report:
1. Financial Statement Schedules:
The following consolidated financial statement schedules
should be read in connection with the consolidated
financial statements:
Index to Consolidated Financial Statement Schedules Page
--------------------------------------------------- ----
Schedule I - Marketable Securities-Other Investments 77
Schedule V - Property, Plant and Equipment 78
Schedule VI - Accumulated Depreciation, Depletion
and Amortization of Property, Plant and Equipment 79
Schedule VII - Guarantees of Securities of Other
Issuers 80
Schedule VIII - Valuation and Qualifying Accounts 81
Schedule IX - Short-Term Borrowings 82
Schedule X - Supplementary Income Statement
Information 83
Schedules other than those listed above are omitted for
reasons that they are not required, are not applicable or
the information is included in the consolidated financial
statements or related notes.
2. Exhibits
Exhibit
Number Description
- ------- -------------------------------------------------
3 Articles of Incorporation and Bylaws -
3(a) The amended Restated Articles of Incorporation
of Norfolk Southern Railway Company are
incorporated herein by reference from Exhibit 3(a)
of Norfolk Southern Railway's 1990 Annual Report
on Form 10-K.
3(b) The Bylaws of Norfolk Southern Railway Company,
as last amended March 3, 1993, are incorporated
herein by reference from Exhibit 3(b) of Norfolk
Southern Railway's 1992 Annual Report on Form 10-K.
PAGE 35
Item l4. Exhibits, Financial Statement Schedules, and Reports on
- ------- -------------------------------------------------------
Form 8-K. (continued)
--------
Exhibit
Number Description
- ------- -------------------------------------------------
4 Instruments Defining the Rights of Security
Holders, Including Indentures -
In accordance with Item 601(b)(4)(iii) of
Regulation S-K, copies of instruments of Norfolk
Southern Railway and its subsidiaries with respect
to the rights of holders of long-term debt are
not filed herewith, or incorporated by reference,
but will be furnished to the Commission upon request.
10 Material Contracts -
(a) The Agreement of Merger and Reorganization
dated as of July 31, 1980, among Southern Railway
Company (name changed to Norfolk Southern Railway
Company by Certificate of Amendment issued by the
State Corporation Commission of Virginia as of
December 31, 1990), Southern Railroad Company of
Virginia, NWS Enterprises, Inc. (name changed to
Norfolk Southern Corporation by Certificate of
Amendment issued by the State Corporation
Commission of Virginia on November 2, 1981),
Norfolk and Western Railway Company, and Norfolk
and Western Railroad Company of Virginia, and the
related Plans of Merger (Exhibits B and C to the
Agreement) are incorporated herein by reference
from Appendix A to NW's and Southern's definitive
Proxy Statements dated October 1, 1980, for NW's
and Southern's Special Meetings of Stockholders
held on November 7, 1980.
(b) The lease between The Cincinnati, New Orleans
and Texas Pacific Railway Company, a subsidiary
of Norfolk Southern Railway, as lessee, and the
Trustees of the Cincinnati Southern Railway, as
lessor, dated as of October 11, 1881, is
incorporated herein by reference from Exhibit 5
of Southern's 1980 Annual Report on Form 10-K.
The Supplementary Agreement to the lease, dated
as of January 1, 1987, is incorporated herein by
reference from Exhibit 10(b) of Southern's 1987
Annual Report on Form 10-K.
PAGE 36
Item l4. Exhibits, Financial Statement Schedules, and Reports on
- ------- -------------------------------------------------------
Form 8-K. (continued)
--------
Exhibit
Number Description
- ------- -------------------------------------------------
(c) The lease between The North Carolina Railroad
Company, as lessor, and Norfolk Southern Railway,
as lessee, dated as of January 1, 1896, is
incorporated herein by reference from Exhibit 6 of
Southern's 1980 Annual Report on Form 10-K.
(d) The lease between Atlantic and North Carolina
Railroad Company (The North Carolina Railroad
Company, successor by merger, September 29, 1989),
as lessor, and Atlantic and East Carolina Railway
Company, a subsidiary of Norfolk Southern Railway,
as lessee, dated as of April 20, 1939, is
incorporated herein by reference from Exhibit 7 of
Southern's 1980 Annual Report on Form 10-K.
21 Subsidiaries of the Registrant.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed for the three months
ended December 31, 1993.
(c) Exhibits.
The Exhibits required by Item 601 of Regulation S-K as
listed in Item 14(a)2 are filed herewith or incorporated
herein by reference.
(d) Financial Statement Schedules.
Financial statement schedules and separate financial
statements specified by this Item are included in
Item 14(a)1 or are otherwise not required or are not
applicable.
PAGE 37
POWER OF ATTORNEY
-----------------
Each person whose signature appears below under "SIGNATURES"
hereby authorizes Henry C. Wolf and John S. Shannon, or either of
them, to execute in the name of each such person, and to file, any
amendment to this report and hereby appoints Henry C. Wolf and
John S. Shannon, or either of them, as attorneys-in-fact to sign on
his behalf, individually and in each capacity stated below, and to
file, any and all amendments to this report.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Norfolk Southern Railway Company has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 22nd day of March,
1994.
NORFOLK SOUTHERN RAILWAY COMPANY
By /s/ David R. Goode
-----------------------------------------
(David R. Goode, President and Chief
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below on this 22nd day of March,
1994, by the following persons on behalf of Norfolk Southern Railway
Company and in the capacities indicated.
Signature Title
--------- -----
/s/ David R. Goode
- -------------------------- President and Chief Executive
(David R. Goode) Officer and Director
(Principal Executive Officer)
/s/ John P. Rathbone
- -------------------------- Vice President and Controller
(John P. Rathbone) (Principal Accounting Officer)
/s/ Henry C. Wolf
- -------------------------- Vice President-Finance
(Henry C. Wolf) (Principal Financial Officer)
PAGE 38
Signature Title
--------- -----
/s/ Paul R. Rudder
- -------------------------- Director
(Paul R. Rudder)
/s/ John S. Shannon
- -------------------------- Director
(John S. Shannon)
/s/ Thomas C. Sheller
- -------------------------- Director
(Thomas C. Sheller)
/s/ John R. Turbyfill
- -------------------------- Director
(John R. Turbyfill)
/s/ D. Henry Watts
- -------------------------- Director
(D. Henry Watts)
PAGE 39
(ITEM 7)
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes beginning on page 51 and
the Five-Year Financial Review on page 30. The Condensed Summary provides
a brief overview of results of operations, and the text beginning under
"Results of Operations" is a more detailed analytical discussion.
CONDENSED SUMMARY OF RESULTS OF OPERATIONS
1993 Compared with 1992
- -----------------------
Net income was $782.0 million in 1993, a substantial increase over the
$606.5 million reported in 1992. Results for 1993 were significantly
affected by required accounting changes (see Note 1 on page 56) and by an
increase in the federal income tax rate (see Note 3 on page 59).
Excluding the impact of the accounting changes and the federal tax rate
increase related to prior years, 1993 earnings would have been $585.8
million, a $20.7 million decrease from 1992. Total railway operating
revenues increased less than 1%, compared with 1992, as gains in
merchandise traffic were substantially offset by lower coal traffic
levels. Total railway operating expenses increased 1%, compared with
1992. Nonoperating income reflected in the Consolidated Statements of
Income as "Other income-net" rose $8.1 million due to gains from property
sales (see Note 4 on page 63).
1992 Compared with 1991
- -----------------------
Net income was $606.5 million in 1992, a significant increase over the
$230.6 million reported in 1991. Earnings in 1991 were adversely affected
by a $483 million special charge (see Note 14 on page 72). Excluding the
impact of the special charge in 1991, 1992 earnings increased by $72.9
million, or 14%, compared with 1991. Railway operating revenues were up
3%, compared with 1991, despite a decline in coal traffic. Railway
operating expenses were down 1%, compared with 1991 (excluding the
special charge). Nonoperating income declined $20.7 million, reflecting
lower interest income on less cash available to invest, lower interest
rates and reduced gains from stock sales (see Note 4 on page 63).
PAGE 40
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis
of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Railway Operating Revenues
- --------------------------
Railway operating revenues were $3.73 billion in 1993, compared with
$3.71 billion in 1992 and $3.60 billion in 1991. The following table
presents a three-year comparison of revenues by market group.
RAILWAY OPERATING REVENUES BY MARKET GROUP
(In millions of dollars)
1993 1992 1991
-------- -------- --------
Coal $1,213.3 $1,296.0 $1,330.3
Paper/forest 502.7 499.5 476.1
Chemicals 472.9 471.7 449.7
Automotive 429.5 401.5 325.9
Agriculture 319.7 301.4 293.6
Metals/construction 296.1 276.3 274.0
Intermodal 371.9 341.0 324.6
-------- -------- --------
Freight revenues 3,606.1 3,587.4 3,474.2
Other, principally switching
and demurrage 121.5 121.7 123.8
-------- -------- --------
Total $3,727.6 $3,709.1 $3,598.0
======== ======== ========
Most NS Rail traffic, particularly coal traffic, moves under
contractually negotiated rates as opposed to the typically higher
regulated tariff rates. In 1993, 91% of NS Rail origin coal moved under
contract, compared with 88% in 1992 and 90% in 1991.
RAILWAY REVENUE VARIANCE ANALYSIS
Increases (Decreases)
(In millions of dollars)
1993 vs. 1992 1992 vs. 1991
------------- -------------
Traffic volume (carloads) $ 67.0 $100.6
Revenue per unit/mix (48.5) 10.5
------ ------
Total $ 18.5 $111.1
====== ======
Traffic volume increased for all market groups except coal. The
reduction in the revenue per unit/mix was due to the decline in coal
traffic and to new business that was short-haul and lowered overall
average revenue.
PAGE 41
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis
of Financial Condition and Results of Operations
COAL (which includes coke and iron ore) traffic volume in 1993
decreased 6%, and revenues, which represented 33% of total railway
operating revenues, were down 6% from 1992. Coal accounted for about 97%
of this market group's volume, and 95% of coal shipments originated on NS
Rail's lines. As shown in the following table, small tonnage gains in
utility and steel coal were more than offset by declines in export coal,
down 22%, compared with 1992.
ORIGINATED COAL TONNAGE
(In millions of tons)
1993 1992 1991
---- ---- ----
Export 25.3 32.3 35.3
Utility 55.6 55.3 56.4
Steel 20.1 19.1 16.6
Other 8.8 8.8 8.5
----- ----- -----
Total 109.8 115.5 116.8
===== ===== =====
The export coal market continues to be weak. The recession in Europe
deepened as the year progressed. Additionally, stockpiles remain at high
levels in the United Kingdom, and two Italian coal-fired generating
stations that closed in 1992 remained closed for all of 1993. The UMWA
strike, which was settled in December 1993, also had an adverse effect on
the export market, as some U.S. producers deferred export shipments to
take advantage of higher domestic spot market prices. Although the strike
was not widespread at mines served by NS Rail, it idled four operations
that are heavily oriented toward export shipments.
NS Rail's export coal business is expected to remain somewhat
depressed in 1994. Expanded coal output and export capacity by foreign
producers may make this market very competitive, especially for steam
coal. Export coal opportunities for NS Rail are expected to continue to
be greatest in Europe, and moderate growth is expected over the next five-
year period.
In contrast to the export market, domestic coal remained steady.
Extended periods of warmer-than-usual temperatures in the Southeast
resulted in increased business for a number of utility customers. NS Rail
was able to provide coal service to some whose customary carriers were
adversely affected by flooding in the Midwest and the UMWA strike. NS
Rail continued to do well in domestic steel markets, especially in the
Midwest. While total volumes in the domestic steel market remained
relatively flat, compared with 1992, NS Rail was able to increase its
market share.
The outlook for domestic NS Rail coal traffic remains promising. New
movements of western coal to an eastern utility began late in 1993 and
are expected to reach 3 million tons in 1994 and to grow to nearly 7
million tons annually in the next few years. Changes in emissions
regulations for sulfur dioxide included in the Clean Air Act Amendments
of 1990 may increase NS Rail utility traffic.
Coal volume in 1992 decreased 2%, compared with 1991, and revenues
were down 3% from 1991. Traffic volume in 1991 represented NS Rail's
second best year since the 1982 consolidation. As shown in the table on
the previous page, NS Rail had mixed results in 1992 in the four basic
coal market segments it serves. The largest decline in coal tonnage was
in export coal, down 8%, compared with 1991. Beginning in 1992, the
European economies slumped badly, reducing demand for U.S. coal in both
steel and electricity production. Domestic utility tonnages showed the
second greatest decline, 2% below 1991, reflecting weakness in the
overall economy and unusually mild weather in NS Rail's service region.
On the positive side, coal traffic to domestic steel companies in 1992
showed improvement. Compared with 1991, tonnage increased 15%, and NS
Rail increased its market share.
PAGE 42
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis
of Financial Condition and Results of Operations
MERCHANDISE TRAFFIC volume in 1993 increased 6%, and revenues
increased by $101.4 million, or 4%, compared with 1992. Merchandise
carloads handled in 1993 were 2.8 million, compared with 2.7 million in
1992. Despite the slow economic recovery, all six market groups
comprising merchandise traffic showed revenue improvement over 1992. The
largest gains were in intermodal, up $30.9 million, or 9%; automotive, up
$28.0 million, or 7%; and metals/construction, up $19.8 million, or 7%.
PAPER/FOREST traffic was about even with 1992, and revenues increased
1%. Weak domestic and overseas demand for paper depressed NS Rail's
shipments for much of the year. Lumber, however, posted a solid 4%
revenue gain due to a strong recovery in housing construction. Moderate
growth, somewhat higher than industry production, is expected over the
next few years due to growth in market share.
CHEMICALS traffic rose 4% over 1992; however, revenues increased less
than 1% due to a change in the mix of the traffic. There were solid gains
in general chemicals and plastics, but this was offset by weakness in
movements of export fertilizer due to sluggish conditions overseas.
Stronger growth is expected in 1994 and beyond, paced by additional rail-
truck distribution facilities for bulk chemicals. While environmental
concerns could adversely affect production of pesticides and chlorine,
increased environmental awareness is likely to have a positive impact on
movements of recyclables, hazardous wastes and alternative fuels such as
ethanol.
AUTOMOTIVE traffic rose 8% and revenues increased 7%, compared with
1992. The gain was due to strong demand for vehicles produced at plants
served by NS Rail. NS Rail's largest customer, Ford Motor Company,
produced the top-selling automobile and truck in 1993. In addition, NS
Rail benefited from a full year of production at the Ford/Nissan plant
located near Avon Lake, Oh. Successful marketing efforts, such as an
innovative program with GM for just-in-time movement of auto parts, also
contributed to the higher traffic levels. Further growth in automotive
traffic is expected in 1994 and beyond, as U.S. automotive production is
anticipated to increase for the next few years. From 1994 to 1997,
operations will begin at three new or expanded automotive assembly plants
located on NS Rail's lines: the second Toyota plant at Georgetown, Ky.,
in 1994; BMW at Greer, S.C., in 1995; and Mercedes-Benz at Tuscaloosa,
Al., in 1997. The retooling of GM's Wentzville, Mo., and Doraville, Ga.,
plants for van production should also increase traffic.
AGRICULTURE traffic rose 4%, and revenues increased 6%, compared with
1992. In the early part of the year, NS Rail benefited from a record
harvest that continued well into 1993. During the summer, the flood in
the Midwest diverted traffic to rail that formerly moved by barge. In the
fall, good crop conditions in NS Rail's sourcing areas and poor
conditions elsewhere produced strong NS Rail traffic gains. Although the
special conditions present during 1993 are not likely to recur in 1994, a
small increase in agriculture revenues is expected, driven by growth in
poultry production in the Southeast, a prime NS Rail feed grain market.
METALS/CONSTRUCTION traffic rose 9%, and revenues increased 7%,
compared with 1992. Most of the revenue gain was in shipments of iron and
steel; strong industry production and new plants located on NS Rail's
lines boosted revenue $10 million. Shipments of construction commodities
were also strong due to a recovery in housing. Further gains are expected
over the next few years, as NS Rail has initiatives under way intended to
win back truck business in aluminum, and several new movements of
municipal solid waste are expected.
PAGE 43
NORFOLK-SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis
of Financial Condition and Results of Operations
INTERMODAL traffic rose 9%, and revenues increased 9%, compared with
1992. Intermodal revenue growth in 1993 was led by a 21% increase in
services provided to Triple Crown Services Company (a partnership between
subsidiaries of NS and Consolidated Rail Corporation) due to strong
automotive shipments and expansion of service to the Northeast. Container
revenues were up 6%, a smaller increase than previous years, reflecting
reduced international traffic caused by the continuing recessions in
Europe and Japan. Trailer revenues were up 11%, boosted by gains from
haulage arrangements with truckload carriers. Strong growth in intermodal
traffic is expected in 1994 and for the next several years. Container
traffic is expected to improve as recoveries overseas produce steady
growth in international shipments. Trailer business also is expected to
grow, as leading truckload carriers, such as Schneider National and J.B.
Hunt, use rail for the long-haul portion of their shipments.
During 1992, all six merchandise market groups showed improvement over
1991. Traffic volume increased 6%, and revenues increased $147.5 million,
or 7%. The largest revenue increases were in the automotive group, up
$75.6 million, or 23%, over a weak 1991. The intermodal group was up
$16.4 million, or 5%, over 1991, and the paper/forest and chemicals
groups each reported 5% revenue gains.
The growth in the automotive group was the result of a national rise
in automobile production, especially increased production of popular
models at plants which NS Rail serves. All segments of intermodal traffic
showed growth during 1992. Triple Crown(RT), the fastest growing segment,
which accounted for 24% of the intermodal traffic, began a new domestic
container service in the eastern part of the NS Rail system, in addition
to its RoadRailer(RT) business. Paper/forest revenues improved as the
result of increased housing starts and greater paper production. Chemical
revenues were higher because of a general recovery in chemical production
over the recessionary levels of 1991.
Railway Operating Expenses
- --------------------------
Railway operating expenses increased 1% in 1993, compared with 1992,
and decreased 15% in 1992, compared with 1991. Included in 1991's
expenses was a $483.0 million special charge discussed below. Excluding
the 1991 special charge, railway operating expenses decreased 1% in 1992,
compared with 1991.
SPECIAL CHARGE IN 1991 (see Note 14 on page 72): By the end of 1991,
after several years of negotiations and a brief nationwide strike, new
rail labor agreements were in place that allowed NS Rail to begin
operating trains with reduced crew sizes. The agreements also provide for
future crew size reductions. To achieve the reductions in employment and
other labor savings permitted by the new agreement, NS Rail recorded a
special charge that included $450 million to cover the cost of future
separation payments, protective payments and amounts to buy out
productivity funds.
The special charge, which totalled $483 million, also included a $33
million write-down of certain properties to be sold or abandoned.
PAGE 44
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following table compares, on a year-to-year basis, railway
operating expenses summarized by major classifications. The special
charge also is summarized, as well as comparative railway operating
expenses, excluding the special charge.
RAILWAY OPERATING EXPENSES
Increases (Decreases)
(In millions of dollars)
Excluding
Special
Charge
--------
1993 1992 vs. Special 1992
vs. 1991 As Charge vs.
1992 Reported in 1991 1991
------ -------- -------- --------
Compensation and benefits $ 14.6 $(483.2) $ 450 $(33.2)
Materials, services and rents 3.3 52.9 52.9
Depreciation 15.8 (19.6) 33 13.4
Diesel fuel (3.2) (10.3) (10.3)
Casualties and other claims (2.2) (34.8) (34.8)
Other (4.1) (10.5) (10.5)
------ ------- ----- ------
Total $ 24.2 $(505.5) $ 483 $(22.5)
====== ======= ===== ======
The narrative expense analysis presented in the following paragraphs
focuses on the major factors contributing to changes in railway operating
expenses, excluding the effects of the 1991 special charge discussed
above and in Note 14 on page 72.
COMPENSATION AND BENEFITS, which includes salaries, wages and fringe
benefits, represents about half of total railway operating expenses and
increased 1% in 1993, compared with 1992, and declined 2% in 1992,
compared with 1991. The higher expenses in 1993 were mainly due to
accruals for postretirement and postemployment benefits which were
previously accounted for on a pay-as-you-go basis (see "Required
Accounting Changes" in Note 1 on page 56) and higher costs for stock-
based compensation plans. A voluntary early retirement program was
completed in 1993, which resulted in a $42.4 million charge in
compensation and benefits expense (see Note 12 on page 68). Also in 1993,
a $46 million credit was recorded in compensation and benefits,
reflecting a partial reversal of the 1991 special charge (see Note 14 on
page 72). Labor expenses were favorably affected by a lower average train
crew size, which was 2.6 in 1993, a moderate decline compared with 1992.
The lower expenses in 1992, compared with 1991, were mainly due to
savings associated with reduced train crew sizes. The average train crew
size in 1992 was 2.7 compared with 3.5 in 1991.
MATERIALS, SERVICES AND RENTS consists of items used for maintenance
of road (rail line and related structures) and equipment (locomotives and
freight cars); equipment rents representing the cost to NS Rail of using
freight equipment owned by other railroads or private owners, less the
rent paid to NS Rail for the use of its equipment; and the cost of
services purchased from outside contractors, including the net costs of
operating joint (or leased) facilities with other railroads. This
category was up less than 1%, compared with 1992, but was up 9% in 1992,
compared with 1991. The increase in 1992 largely was a result of that
year's greatly expanded equipment maintenance program. Also contributing
to the 1992 increase were higher roadway maintenance activity, increased
gross ton miles and accruals related to a lease with Canadian National
Railway.
PAGE 45
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis
of Financial Condition and Results of Operations
DEPRECIATION expense (see Note 1 "Properties" on page 56 for NS Rail's
depreciation policy) was up 5% in 1993, compared with 1992, and up 4% in
1992, compared with 1991. The increases in both periods were due to
property additions, reflecting substantial levels of capital spending
during the three-year period ended December 31, 1993.
DIESEL FUEL costs declined 2% in 1993, compared with 1992, and
declined 5% in 1992, compared with 1991. NS Rail consumes substantial
quantities of diesel fuel; therefore, changes in price per gallon or
consumption have a significant impact on the cost of providing
transportation services. The lower costs in 1993 were due to a lower
price per gallon, offset in part by a 2% increase in consumption related
to the 3% increase in gross ton miles. Expenses declined in 1992,
compared with 1991, mainly due to a lower price per gallon offset
partially by increased consumption.
CASUALTIES AND OTHER CLAIMS (which includes insurance costs, estimates
of costs related to personal injury, property damage and environmental-
related costs) declined 2% in 1993, compared with 1992, and decreased 22%
in 1992, compared with 1991. By far the largest component, personal
injury expenses, which relate primarily to the cost of on-the-job
employee injuries, has shown favorable trends since 1990, reflecting both
success in reducing accidental employee injuries and effective claims
handling. Unfortunately, the favorable trend in accidental injury claims
has been more than offset by increased costs of nonaccidental
"occupational" claims.
The rail industry remains uniquely susceptible to both accidental
injury and occupational claims because of an outmoded law, the Federal
Employers' Liability Act (FELA), originally passed in 1908 and applicable
only to railroads. This law provides the sole basis for compensating
railroad employees who sustain job-related injuries. Under the FELA,
claimants unable to reach an agreement with the railroad concerning
compensation may file a civil suit to recover damages. In most cases, a
jury must then determine whether the claimant is entitled to any damages
and, if so, the amount. The system produces results that are
unpredictable, inconsistent and frequently unfair, at a cost to the rail
industry that is two or three times greater than the no-fault workers'
compensation systems to which nonrail competitors are universally
subject. The railroads have been unsuccessful so far in efforts to
persuade Congress to replace the FELA with a no-fault workers'
compensation act.
OTHER expenses decreased 3% in 1993, compared with 1992, and 7% in
1992, compared with 1991. These decreases were largely the result of
favorable settlements of issues related to property and other state
taxes.
The NS Rail operating ratio (the percentage of operating revenues
consumed by operating expenses) continues to be the best among the major
railroads in the United States. NS Rail will continue to pursue cost-
containment efforts to assure that its rail subsidiaries are operated
efficiently. The operating ratios for past six years were as follows:
RAILWAY OPERATING RATIO
(Excluding Special Charge in 1991)
1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ----
75.3% 75.0% 77.9% 78.0% 77.0% 73.9%
Other Income-Net
- ----------------
Nonoperating income increased $8.1 million, or 16%, in 1993, compared
with 1992, but decreased $20.7 million, or 29%, in 1992, compared with
1991 (see Note 4 on page 63). The 1993 increase arose from gains on
property sales, partially offset by declines in interest income and
rental income (see also Note 2 "Noncash Dividend" on page 58). The 1992
decline was a result of an absence of stock sales in 1992, coupled with a
decline in interest income due to lower cash and short-term investments
balances and lower rates.
PAGE 46
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Interest Expense on Debt
- ------------------------
Interest expense on debt decreased 28% in 1993, compared with 1992,
and 8% in 1992, compared with 1991, due principally to lower levels of
equipment debt and lower interest rates.
Income Taxes
- ------------
Income tax expense in 1993 was $412.8 million for an effective rate of
43.6%, compared with an effective rate of 34.9% in 1992 and 34.6% in
1991, excluding the special charge. Income tax expense in 1993 was
accrued under SFAS 109, rather than under the prior accounting rules (see
Note 1 on page 56). Absent the federal income tax rate increase imposed
by the Revenue Reconciliation Act of 1993, income tax expense in 1993
would have been $352.0 million for an effective rate of 37.2%. Current
income tax expense increased from $249.0 million in 1992 to $319.9
million in 1993, primarily due to tax payments made in anticipation of
Revenue Agent Reports for the 1988-1989 federal income tax audit.
Deferred tax expense for 1993, compared with 1992, decreased primarily
for the same reason.
Current and deferred tax expenses for 1991 were affected significantly
by the special charge. Much of the tax benefit resulting from this charge
was not deductible in 1991 and therefore was recorded as a deferred tax
benefit. Excluding the payment discussed above and the federal tax rate
increase, the portion of the special charge that reversed in 1993 and
1992, combined with property-related adjustments, including depreciation,
were the principal causes for the increase in deferred tax expense over
the 1991 level.
As a result of changes in tax law that limit or defer the timing of
deductions and recent tax rate increases, NS Rail expects current taxes
to remain high in relation to pretax earnings (see Note 3 on page 59 for
the components of income tax expense).
Required Accounting Changes
- ---------------------------
Effective January 1, 1993, NS Rail adopted required accounting for
postretirement benefits other than pensions, postemployment benefits and
income taxes (see Note 1 on page 56 for a discussion of these accounting
changes). The net cumulative effect of these noncash adjustments
increased 1993's net income by $247.8 million. The balance sheet effects
of these accrual adjustments are reflected primarily in "Other
liabilities" for the postretirement and postemployment benefits and in
"Deferred income taxes" for the income tax accounting change.
Impact of New Accounting Pronouncements
- ---------------------------------------
In May 1993, the Financial Accounting Standards Board issued a new
standard, "Accounting for Certain Investments in Debt and Equity
Securities," which addresses the accounting and reporting for investments
in equity securities that have readily determinable fair values and for
all investments in debt securities. This standard will require NS Rail to
increase the recorded carrying value for its investment in NS stock to
fair value, with a corresponding increase, net of taxes, as a separate
component of stockholders' equity (see Note 1 "New Statement of Financial
Accounting Standards" on page 56 for further details.)
PAGE 47
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis
of Financial Condition and Results of Operations
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION refers to the assets, liabilities and stockholders'
equity of an organization, including the value of those individual
elements in relation to each other. Generally, financial condition is
evaluated at a point in time using an organization's balance sheet (see
page 52). LIQUIDITY refers to the ability of an organization to generate
adequate amounts of cash, principally from operating results or through
borrowing power (based on net income or financial condition), to meet its
short-term and long-term cash requirements. CAPITAL RESOURCES refers to
the ability of an organization to attract investors through the sale of
either debt or equity (stock) securities.
($ in millions) 1993 1992 1991 1990 1989
------ ------ ------ ------ ------
Cash and short-term
investments $152.0 $ 64.0 $137.3 $291.3 $363.8
Current assets to
current liabilities 1.3 1.2 1.1 1.1 1.6
Working capital $264.9 $145.4 $ 73.5 $ 61.3 $620.1
Debt to total
capitalization 12.6% 13.4% 14.6% 14.3% 13.7%
Return on average
stockholders' equity 12.0%* 13.1% 11.6%** 13.1% 13.0%
* Excluding the cumulative effects of required accounting changes and
the prior years' effects of the federal income tax rate increase.
** Excluding special charge
CASH PROVIDED BY OPERATING ACTIVITIES, which is NS Rail's principal
source of liquidity, declined 9% in 1993, compared with 1992, but was up
32% in 1992, compared with 1991. These fluctuations were primarily due to
the timing of income tax payments. In 1993, tax payments were $146.0
million higher than in 1992 due to payments related to the 1988-1989
federal income tax audit, higher 1993 earnings and the fact that 1992's
tax payments were low. In 1992, tax payments were $70.8 million less than
1991 primarily due to the higher tax payments in 1991 related to the
federal income tax audit for 1986 and 1987, and to estimated tax payments
in 1991 utilized in 1992. In addition, net income in 1992, excluding the
special charge in 1991, was up $72.9 million, and depreciation increased
$13.4 million.
Implementation of the labor portion of the 1991 special charge also
contributed to the fluctuations in cash provided by operations. In 1993,
only $36.1 million was used for labor costs related to the special
charge, compared with $134.7 million in 1992 and $108.0 million in 1991.
The decline in 1993 was partly due to the failure to reach agreement on
terms for certain further labor savings. This situation also led to a
partial reversal of the 1991 special charge (see discussion in Note 14).
Looking ahead, the labor portion of the special charge is expected to
continue to require the use of cash to achieve productivity gains
permitted by the agreements, although at a level somewhat lower than
previously anticipated. NS Rail regards this cash outflow as an
investment because, in view of the high cost of labor and fringe
benefits, these payments are expected to produce significant future labor
savings. It is estimated that NS Rail's labor-related payments will be
reduced by about $150 million per year upon full implementation of the
new labor agreements.
Since consolidation, cash provided by operating activities has been
sufficient to fund dividend requirements, debt repayments and a
significant portion of capital spending (see Consolidated Statements of
Cash Flows on page 53).
PAGE 48
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis
of Financial Condition and Results of Operations
CASH USED FOR INVESTING ACTIVITIES declined 22% in 1993, compared with
1992, but was up 6% in 1992, compared with 1991. Repayment received from
NS on short-term advances (see Note 2 on page 58) and higher proceeds
from property sales were primarily responsible for the improvement in
1993. An absence of investment sales caused the 1992 over 1991 increase.
Although the high level of property sales that occurred in 1993 is not
expected to continue, efforts to hold down capital spending will be
ongoing as NS Rail seeks to maximize utilization of all its assets. In
this connection, NS Rail continues to review its route network to
identify areas where efficiency can be enhanced by coordinated agreements
with other railroads, or through sale or abandonment.
The following table summarizes capital spending over the last five
years, as well as track maintenance statistics and the average ages of
railway equipment.
($ in millions) 1993 1992 1991 1990 1989
------ ------ ------ ------ ------
Capital expenditures $629.2 $617.1 $663.1 $602.1 $611.4
Track miles of rail installed 574 660 679 743 718
Miles of track surfaced 5,048 5,690 5,646 5,844 5,708
New crossties installed
(millions) 1.6 1.9 1.9 1.9 2.0
Freight car fleet (years) 20.8 20.4 19.7 19.4 19.0
Locomotive fleet (years) 14.6 14.0 13.7 14.3 14.1
The average age of locomotives retired during 1993 was 24.7 years. In
recent years, NS Rail has rebodied over 14,000 coal cars and plans to
continue that program at the rate of about 3,000 cars per year for the
next several years. This process, performed at NS Rail's Roanoke Car
Shop, converts hopper cars into high-capacity steel gondolas or hoppers.
As a result, the remaining serviceability of the freight car fleet is
greater than indicated by the increasing average age of the freight car
fleet.
Construction of two surge silos at the coal transloading facility in
Norfolk was completed in 1993. The silos, which have a total capacity of
8,150 tons, allow for continuous dumping which reduces operating costs
and loading time.
For 1994, NS Rail is planning $627 million of capital spending. NS
Rail anticipates new equipment financing of approximately $72 million in
1994. Rail capital spending is likely to increase moderately over the
next few years. The proposed construction of a $100 million coal ground
storage facility in Isle of Wight County, Va., may affect capital
spending in future years. However because of delays in the permitting
process and reduced demand for export coal, any significant spending on
this project is not expected until after 1994. In addition to adding
capacity, this new facility should further increase the efficiency of
coal transportation service and reduce the need for new coal hopper cars.
A substantial portion of future capital spending is expected to be funded
through internally generated cash, although debt financing will continue
as the primary funding source for equipment acquisitions.
Investments and advances (see Note 5 on page 63) decreased $110.1
million in 1993, compared with 1992. This decline reflects a $220 million
reclassification to "Other current assets" for the cash surrender value
of certain corporate owned life insurance (COLI) which is expected to be
borrowed in April 1994, and accounts for the increase in working capital.
Absent this reclassification, "Investments" would have increased almost
$110 million, principally reflecting premium payments on COLI, which
increase the cash surrender value of the underlying insurance policies.
PAGE 49
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis
of Financial Condition and Results of Operations
CASH USED FOR FINANCING ACTIVITIES increased 16% in 1993, compared
with 1992, and 45% in 1992, compared with 1991. These increases were
principally a result of lower borrowing. Debt activity over the past five
years was as follows:
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(In millions of dollars)
New debt $38.5 $63.3 $123.8 $62.2 $122.1
Debt repaid 99.9 84.2 93.8 93.7 104.2
Debt requirements for 1994 are expected to remain moderate partly
because another source of cash, borrowing on the cash surrender value of
COLI, will satisfy some of 1994's cash requirements (see Note 5 on
page 63).
ENVIRONMENTAL MATTERS
NS Rail is subject to various jurisdictions' environmental laws and
regulations. NS Rail and certain subsidiaries have received notices from
the Environmental Protection Agency that they are potentially responsible
parties under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), which generally imposes joint and several
liability for cleanup costs. State agencies also have notified NS Rail
and certain subsidiaries that they may be potentially responsible for
environmental damages, and in several instances they have agreed
voluntarily to initiate cleanup.
For CERCLA sites and all other known environmental incidents where
loss or liability is probable, NS Rail has recorded an estimated
liability. The amount of that liability, which includes estimated costs
of remediation (and any associated restoration) on a site-by-site basis,
is expected to be paid over several years. Claims, if any, against third
parties for recovery of remediation costs incurred by NS Rail are
reflected as receivables in the balance sheet and are not netted against
the associated NS Rail liability. Environmental engineers perform ongoing
analyses of all identified sites, and--after consulting with counsel--any
necessary adjustments to initial liability estimates are recorded. NS
also established an Environmental Policy Council, composed of senior
managers, to prescribe and direct its environmental initiatives.
Estimates of a company's potential financial exposure even for known
environmental claims or incidents are necessarily imprecise because of
the widely varying costs of available remediation techniques, the
difficulty of determining in advance the nature and extent of
contamination and each potential participant's share of an estimated
loss, and evolving statutory and regulatory standards governing
liability.
The risk of incurring environmental liability--for acts and omissions,
both past and current--is inherent in railroad operations. Moreover, some
of the commodities, particularly those classified as hazardous materials,
in NS Rail's traffic mix can pose special risks that NS Rail and its
subsidiaries work diligently to minimize. In addition, several NS Rail
subsidiaries have land holdings that may be leased (and operated by
others) or held for sale. Because certain conditions may exist on these
properties for which NS Rail ultimately may bear some financial
responsibility, there can be no assurance that NS Rail will not incur
liabilities or costs, the amount and materiality of which, to a single
accounting period or in the aggregate, cannot be estimated reliably now,
related to environmental problems that are latent or undiscovered.
However, based on its assessments of the facts and circumstances now
known and after consulting with its legal counsel, Management believes
that it has recorded appropriate estimates of liability for those
environmental matters of which the Company is aware.
PAGE 50
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis
of Financial Condition and Results of Operations
INFLATION
Generally accepted accounting principles require the use of historical
costs in preparing financial statements. This approach disregards the
effects of inflation on the replacement cost of property and equipment.
NS Rail, a capital-intensive company, has approximately $12.1 billion
invested in such assets. The replacement costs of these assets, as well
as the related depreciation expense, would be substantially greater than
the amounts reported on the basis of historical costs.
RAIL INDUSTRY TRENDS
NS Rail and other railroads are continuing to seek opportunities to share
traffic routes and facilities, furthering the goals of providing seamless
service to customers, making railroads more competitive with trucks and
maximizing efficiency of the respective railroads.
NS Rail is responding to concerns regarding the emission of coal dust
from in-transit coal trains. Testing is under way of various methods of
controlling such emissions. However, at this time final results of the
testing and estimated costs that may be incurred to implement the
conclusions resulting therefrom are not available.
NS Rail and the rail industry are continuing their efforts to replace the
FELA with a no-fault workers' compensation system, which we strongly
believe to be fairer both to the rail industry and to its employees.
PAGE 51
(ITEM 8)
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Income
Years ended December 31,
-------------------------------
1993 1992 1991
---- ---- ----
(In millions of dollars)
Railway operating revenues:
Freight $3,606.1 $3,587.4 $3,474.2
Other 121.5 121.7 123.8
-------- -------- --------
Railway operating revenues 3,727.6 3,709.1 3,598.0
-------- -------- --------
Railway operating expenses:
Compensation and benefits
(Notes 12 and 14) 1,388.8 1,374.2 1,407.4
Materials, services and rents 641.6 638.3 585.4
Depreciation 347.9 332.1 318.7
Diesel fuel 179.3 182.5 192.8
Casualties and other claims 118.5 120.7 155.5
Other 129.8 133.9 144.4
Special charge (Note 14) -- -- 483.0
-------- -------- --------
Railway operating expenses 2,805.9 2,781.7 3,287.2
-------- -------- --------
Income from railway
operations 921.7 927.4 310.8
Other income - net (Note 4) 57.6 49.5 70.2
Interest expense on debt (Note 6) 32.3 44.6 48.4
-------- -------- --------
Income before income taxes 947.0 932.3 332.6
Provision for income taxes (Note 3):
Income taxes 361.2 325.8 102.0
Adjustment of net deferred tax
liability for federal
rate increase 51.6 -- --
-------- -------- --------
Total income taxes 412.8 325.8 102.0
-------- -------- --------
Income before
accounting changes 534.2 606.5 230.6
Cumulative effect on years prior to 1993
of changes in accounting principles
(Note 1) for:
Income taxes 470.4 -- --
Postretirement benefits other than
pensions; and postemployment
benefits-net of taxes (222.6) -- --
-------- -------- --------
Net income $ 782.0 $ 606.5 $ 230.6
======== ======== ========
See accompanying notes to consolidated financial statements.
PAGE 52
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets
As of December 31,
-------------------
1993 1992
-------- --------
(In millions of dollars)
Assets
Current assets:
Cash and cash equivalents $ 2.3 $ 11.5
Short-term investments at cost which
approximates market 149.7 52.5
Accounts receivable net of allowance for
doubtful accounts of $9.2 million
and $10.0 million, respectively 522.9 497.2
Due from NS (Note 2) 118.1 215.1
Materials and supplies 65.9 71.8
Deferred income taxes (Note 3) 88.8 84.2
Other current assets (Note 5) 282.2 53.1
-------- --------
Total current assets 1,229.9 985.4
Investments and advances (Notes 2 and 5) 362.2 472.3
Properties less accumulated depreciation (Note 6) 8,260.3 8,194.3
Other assets 20.6 23.5
-------- --------
Total assets $9,873.0 $9,675.5
======== ========
Liabilities and stockholders' equity
Current liabilities:
Short-term debt (Note 8) $ 27.2 $ 27.2
Accounts payable (Note 7) 461.7 473.7
Income and other taxes 141.3 168.0
Due to NS (Note 2) 112.6 --
Other current liabilities (Note 7) 114.7 94.5
Current maturities of long-term debt (Note 8) 107.5 76.6
-------- --------
Total current liabilities 965.0 840.0
Long-term debt (Note 8) 497.4 637.9
Other liabilities (Note 10) 945.3 651.7
Minority interests 2.2 3.4
Deferred income taxes (Note 3) 2,278.2 2,758.2
-------- --------
Total liabilities 4,688.1 4,891.2
-------- --------
Stockholders' equity:
Serial preferred stock (Note 11) 54.8 54.9
Common stock (Note 11) 166.7 166.7
Other capital 515.0 515.0
Retained income 4,448.4 4,047.7
-------- --------
Total stockholders' equity 5,184.9 4,784.3
-------- --------
Total liabilities and stockholders' equity $9,873.0 $9,675.5
======== ========
See accompanying notes to consolidated financial statements.
PAGE 53
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
Years ended December 31,
---------------------------
1993 1992 1991
------- ------- -------
(In millions of dollars)
Cash flows from operating activities:
Net income $ 782.0 $ 606.5 $ 230.6
Reconciliation of net income to net
cash provided by operating activities:
Net cumulative effect of changes
in accounting principles (247.8) -- --
Special charge -- -- 483.0
Special charge payments (36.1) (134.7) (108.0)
Depreciation 348.7 333.1 319.7
Deferred income taxes 92.9 76.8 (168.0)
Nonoperating gains and losses
on properties and investments (31.9) (13.9) (20.4)
Changes in assets and liabilities
affecting operations:
Accounts receivable (25.9) (2.0) 125.5
Materials and supplies 5.9 (8.4) 11.5
Other current assets (8.0) (3.2) --
Current liabilities other than
debt and amounts due to NS (23.4) (3.7) (189.5)
Other - net 8.6 96.8 30.8
------- ------- -------
Net cash provided by
operating activities 865.0 947.3 715.2
Cash flows from investing activities:
Property additions (629.2) (617.1) (652.5)
Property sales and other transactions 80.3 43.9 32.0
Investment purchases (86.3) (70.5) (76.1)
Investment sales and other transactions 3.0 4.8 133.7
Long-term advances to NS 5.0 5.0 21.0
Short-term advances due from NS (Note 2) 97.0 (94.1) (125.7)
Short-term investments - net (6.0) 43.0 20.1
------- ------- -------
Net cash used for
investing activities (536.2) (685.0) (647.5)
Cash flows from financing activities:
Dividends (Note 2) (276.6) (271.7) (231.6)
Long-term debt proceeds 38.5 63.3 123.8
Long-term debt repayments (99.9) (84.2) (93.8)
------- ------- -------
Net cash used for
financing activities (338.0) (292.6) (201.6)
Net decrease in cash
and cash equivalents (9.2) (30.3) (133.9)
Cash and cash equivalents:
At beginning of year 11.5 41.8 175.7
------- ------- -------
At end of year $ 2.3 $ 11.5 $ 41.8
======= ======= =======
(Continued)
PAGE 54
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows (continued)
Years ended December 31,
---------------------------
1993 1992 1991
------- ------- -------
(In millions of dollars)
Supplemental disclosures of
cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized) $ 58.4 $ 51.8 $ 72.3
Income taxes $ 337.1 $ 191.1 $ 261.9
See accompanying notes to consolidated financial statements.
PAGE 55
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Changes in Stockholders' Equity
Serial
Preferred Common Other Retained
Stock Stock Capital Income Total
--------- -------- --------- ---------- ---------
(In millions of dollars)
Balance December 31, 1990 $ 54.9 $ 166.7 $ 497.8 $3,713.9 $4,433.3
Net income - 1991 230.6 230.6
Cash dividends:
Serial preferred stock,
$2.60 per share (2.9) (2.9)
Common stock,
$13.72 per share (228.7) (228.7)
Reduction in minority
interest 2.0 2.0
Contribution from
NS (Note 2) 15.2 15.2
------ ------- ------- -------- --------
Balance December 31, 1991 54.9 166.7 515.0 3,712.9 4,449.5
Net income - 1992 606.5 606.5
Cash dividends:
Serial preferred stock,
$2.60 per share (2.9) (2.9)
Common stock,
$16.13 per share (268.8) (268.8)
------ ------- ------- -------- --------
Balance December 31, 1992 54.9 166.7 515.0 4,047.7 4,784.3
Net income - 1993 782.0 782.0
Cash dividends:
Serial preferred stock,
$2.60 per share (2.9) (2.9)
Common stock,
$16.42 per share (273.7) (273.7)
Noncash dividends on
common stock (Note 2) (104.7) (104.7)
Other (0.1) (0.1)
------ ------- ------- -------- --------
Balance December 31, 1993 $ 54.8 $ 166.7 $ 515.0 $4,448.4 $5,184.9
====== ======= ======= ======== ========
See accompanying notes to consolidated financial statements.
PAGE 56
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
The following notes are an integral part of the consolidated financial
statements.
1. Summary of Significant Accounting Policies
Principles of Consolidation
- ---------------------------
The consolidated financial statements include Norfolk Southern Railway
Company, Norfolk and Western Railway Company (NW) and their majority-
owned and controlled subsidiaries (collectively, NS Rail). All
significant intercompany balances and transactions have been eliminated
in consolidation (see Note 15 for NW's summarized consolidated financial
information).
Cash Equivalents
- ----------------
Cash equivalents are highly liquid investments purchased three months
or less from maturity. The carrying value approximates fair value because
of the short maturity of these investments.
Materials and Supplies
- ----------------------
Materials and supplies, which consist mainly of fuel oil and items for
maintenance of property and equipment, are stated at average cost. The
cost of materials and supplies expected to be used in capital additions
or improvements is included in properties.
Properties
- ----------
Properties are stated principally at cost and are depreciated using
group depreciation. Rail is primarily depreciated on the basis of use
measured by gross ton miles. The effect of this method is to write off
these assets over 42 years on average. Other properties are depreciated
generally using the straight-line method over estimated service lives at
annual rates that range from 1% to 20%. The overall depreciation rate
averaged 2.6% for roadway and 4.0% for equipment. NS Rail capitalizes
interest on major capital projects during the period of their
construction. Maintenance expense is recognized when repairs are
performed. When properties other than land are sold or retired in the
ordinary course of business, the cost of the assets less the sale
proceeds or salvage is charged to accumulated depreciation rather than
recognized through income. Gains and losses on disposal of land, which is
a nondepreciable asset, are included in other income.
Revenue Recognition
- -------------------
Revenue is recognized proportionally as a shipment moves from origin
to destination.
Balance Sheet Classification
- ----------------------------
Beginning with 1991, the balance sheet classification of certain
revenue-related balances appears on an actual (net) basis rather than an
estimated (gross) basis due to the earlier availability of certain
settlement data with other railroads. This modification, which had no
income statement effect, resulted in large offsetting declines in
accounts receivable and accounts payable as illustrated in the Statement
of Cash Flows for 1991.
PAGE 57
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Required Accounting Changes
- ---------------------------
Effective January 1, 1993, NS Rail adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (SFAS 106), and Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" (SFAS 112). SFAS 106 requires NS Rail to accrue the cost of
specified health care and death benefits over an employee's active
service period rather than, as was the previously prevailing practice,
accounting for such expenses on a pay-as-you-go basis. SFAS 112 requires
corporations to recognize the cost of benefits payable to former or
inactive employees after employment but before retirement on an accrual
basis. For NS Rail, such postemployment benefits consist principally of
benefit obligations related to participants in the long-term disability
plan. NS Rail recognized the effects of these changes in accounting on
the immediate recognition basis. The cumulative effects on years prior to
1993 of adopting SFAS 106 and 112 increased pretax expenses $336.3
million ($208.4 million after-tax), and $22.8 million ($14.2 million
after-tax), respectively (see Note 13). The impact on 1993 expenses is
not material. The pro forma effects of applying SFAS 106 and SFAS 112 on
individual prior years is not presented, as the effect on each separate
year also is not material.
Also effective January 1, 1993, NS Rail adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109).
SFAS 109 requires a change from the deferred method of accounting for
income taxes to the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Under the deferred method, which applied for 1992 and prior years,
deferred income taxes were recognized for income and expense items that
were reported in different years for financial reporting purposes and
income tax purposes using the tax rate applicable for the year of the
calculation, and deferred taxes were not adjusted for subsequent changes
in tax rates. The cumulative effect on years prior to 1993 of adopting
SFAS 109 increased net income by $470.4 million (see also Note 3).
New Statement of Financial Accounting Standards
- -----------------------------------------------
"Accounting for Certain Investments in Debt and Equity Securities"
(SFAS 115) was issued in May 1993. This standard, which is effective for
1994, addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all
investments in debt securities. Investments are to be categorized as one
of the following types of securities: "held-to-maturity," "trading" or
"available-for-sale." The carrying value and timing of gain/loss
realization is dependent upon the categorization of the investment. For
NS Rail, the only significant effect will be a change in the carrying
value of its investments in NS stock. As described in Note 5, NS Rail
owns approximately 7.3 million shares of NS stock, the fair market value
of which far exceeds the original cost. Under SFAS 115, NS Rail will
report this investment at fair value with the unrealized gain reported,
net of taxes, as a separate component of stockholders' equity.
PAGE 58
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
2. Related Parties
General
- -------
NS is the parent holding company of NS Rail. The costs of functions
performed by NS are allocated among its rail operating subsidiaries. Rail
operations are coordinated at the holding company level by the NS
Executive Vice President-Operations.
Noncash Dividend
- ----------------
On April 1, 1993, NS Rail declared and issued to NS a $104.7 million
noncash dividend representing the net assets of several nonrailroad
subsidiaries. These subsidiaries, principally involved in real estate,
produce a small amount of rental income which will no longer be part of
NS Rail's results. Noncash dividends are excluded from the Consolidated
Statements of Cash Flows.
Assets Acquired
- ---------------
During 1991, NS Rail acquired $66.6 million of assets from a related
party (see Note 6).
Intercompany Accounts
- ---------------------
December 31,
---------------------
1993 1992
------- -------
(In millions of dollars)
Due from NS:
Short-term advances $ 118.1 $ 215.1
Long-term advances included
in investments and advances $ 202.1 $ 207.1
Due to NS:
Short-term note $ 112.6 $ --
During 1993, NW issued a demand note for $112.6 million to an NS
subsidiary for the purchase of a portfolio of short-term investments.
This noncash transaction was excluded from the Consolidated Statement of
Cash Flows.
Interest is applied to short-term advances at the average NS yield on
short-term investments.
Intercompany Federal Income Tax Accounts
- ----------------------------------------
In accordance with the NS Tax Allocation Agreement, intercompany
federal income tax accounts are recorded between companies in the NS
consolidated group. At December 31, 1993 and 1992, NS Rail had
intercompany federal income tax payables (which are included in "Deferred
income taxes" in the Consolidated Balance Sheets) of $175.1 million and
$139.5 million, respectively.
PAGE 59
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
2. Related Parties (continued)
Cash Required for NS Stock Purchase Program and NS Debt
- -------------------------------------------------------
Since 1987, the NS Board of Directors has authorized the purchase and
retirement of up to 65 million shares of NS common stock. Purchases under
the programs initially were made with internally generated cash.
Beginning in May 1990, NS financed some purchases with proceeds from the
sale of commercial paper notes. As of December 31, 1993 and 1992, NS had
recorded $521.8 million and $520.5 million, respectively, of notes under
this program. In March 1991, NS issued $250 million of long-term notes
and, in February 1992, NS issued an additional $250 million of long-term
notes in part to repay a portion of the commercial paper notes, as well
as to fund additional stock purchases.
On January 29, 1992, NS announced that, primarily related to issues
surrounding the 1991 special charge (see Note 14), the purchase program
would continue, but at a slower pace and over a longer authorized period,
with actual purchases dependent on market conditions, the economy, cash
needs and alternative investment opportunities. Since the first purchases
in December 1987 and through December 31, 1993, NS has purchased and
retired 53,615,800 shares of its common stock under these programs at a
cost of $2.2 billion.
Consistent with the earlier cash purchases, a significant portion of
the funding for future NS stock purchases, either in the form of direct
cash or cash used for debt service, will come from NS Rail through
intercompany advances or dividends to NS. Cash required to service NS
debt issued to fund labor costs related to the special charge (see Note
14) also will come principally from NS Rail. Included in interest income
is $6.7 million, $7.7 million and $8.8 million in 1993, 1992 and 1991,
respectively, related to amounts due from NS.
Transfers of Investment from NS
- -------------------------------
In August 1991, NS transferred its $15.2 million equity interest in a
railroad equipment leasing subsidiary to Norfolk Southern Railway
Company. This transfer was recorded at historical cost and reflected as a
contribution to capital.
3. Income Taxes
Federal Income Tax Rate Increase
- --------------------------------
In August 1993, Congress enacted the Revenue Reconciliation Act of
1993, which increased the federal corporate income tax rate from 34% to
35%, retroactive to January 1, 1993. The tax rate increase had two
components which, as required by SFAS 109, were recognized in 1993's
earnings.
PAGE 60
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
3. Income Taxes (continued)
The first component relates to the increased income tax rate's effect
on 1993's earnings, which increased the provision for income taxes and
reduced net income by $9.2 million. The second component increased the
provision for the net deferred tax liability in the Consolidated Balance
Sheet, which reduced net income by $51.6 million.
Provision for Income Taxes
- --------------------------
1993 1992 1991
------- ------- -------
(In millions of dollars)
Current:
Federal $ 279.6 $ 217.9 $ 239.5
State 40.3 31.1 30.5
------- ------- -------
Total current taxes 319.9 249.0 270.0
Deferred:
Federal 26.4 66.6 (149.0)
State 14.9 10.2 (19.0)
Adjustment of net deferred tax
liability for federal rate increase 51.6 -- --
------- ------- -------
Total deferred taxes (benefit) 92.9 76.8 (168.0)
------- ------- -------
Provision for income taxes $ 412.8 $ 325.8 $ 102.0
======= ======= =======
Inclusion in Consolidated Return
- --------------------------------
NS Rail is included in the consolidated federal income tax return of
NS. The provision for current income taxes in the Consolidated Statements
of Income reflects NS Rail's portion of NS' consolidated tax provision.
Tax expense or tax benefit is recorded on a separate company basis
whether or not such benefit would be currently available on a separate
company basis.
PAGE 61
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
3. Income Taxes (continued)
Reconciliation of Statutory Rate to Effective Rate
- --------------------------------------------------
Total income taxes as reflected in the Consolidated Statements of
Income differ from the amounts computed by applying the statutory federal
corporate tax rate as follows:
1993 1992 1991
------------- ------------- -------------
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
(In millions of dollars)
Federal income tax
at statutory rate $331.5 35.0 $317.0 34.0 $113.1 34.0
State income taxes,
net of federal
tax benefit 35.8 3.8 27.2 2.9 7.6 2.3
Corporate owned
life insurance (8.7) (0.9) (9.0) (1.0) (9.3) (2.8)
Dividend and
equity income (5.0) (0.5) (4.7) (0.5) (8.1) (2.4)
Prior year
adjustments 1.4 0.1 (7.2) (0.8) (1.2) (0.4)
Other - net 6.2 0.6 2.5 0.3 (0.1) --
------ ---- ------ ---- ------ ----
361.2 38.1 325.8 34.9 102.0 30.7
Adjustment of net
deferred tax lia-
bility for federal
rate increase 51.6 5.5 -- -- -- --
------ ---- ------ ---- ------ ----
Provision for
income taxes $412.8 43.6 $325.8 34.9 $102.0 30.7
====== ==== ====== ==== ====== ====
Deferred Income Tax Expense
- ---------------------------
Some income and expense items are reported differently for financial
reporting and income tax purposes. Provisions for deferred income taxes
were made in recognition of these differences in accordance with APB
Opinion No. 11 for years prior to 1993, and SFAS 109 for 1993 (see Note 1
for an explanation of this required accounting change).
For 1993, the components of deferred income tax expense were as
follows: (1) $51.6 million in adjustments to deferred tax assets and
liabilities for the enacted tax rate increase; (2) $1.4 million decrease
in the valuation allowance for deferred tax
PAGE 62
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
3. Income Taxes (continued)
assets, and (3) $42.7 million net for all other deferred tax expense
items, for a total of $92.9 million. The significant components of
deferred income tax expense for 1992 and 1991 were as follows:
1992 1991
------- -------
(In millions of dollars)
Employee separation costs $ 48.9 $(127.0)
Property-related adjustments,
principally depreciation 41.4 (8.3)
Tax benefit leases (7.2) (6.0)
Casualty and other claims (5.0) (12.4)
Employee benefits (2.8) (14.9)
Property and other taxes (1.4) 3.8
Other items - net 2.9 (3.2)
------- -------
Total deferred income
tax expense (benefit) $ 76.8 $(168.0)
======= =======
Deferred Tax Assets and Liabilities
- -----------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1993, were as follows:
1993
---------
(In millions of dollars)
Deferred tax assets:
Reserves, including casualty and other claims $ 167.7
Employee benefits 153.7
Postretirement benefits other than pension
and postemployment benefits 147.5
Taxes, including state and property 153.2
Other 2.9
---------
Total gross deferred tax assets 625.0
Less valuation allowance (2.0)
---------
Net deferred tax assets 623.0
Deferred tax liabilities:
Property (2,588.3)
Other (49.0)
---------
Total gross deferred tax liabilities (2,637.3)
Intercompany federal tax payable-net (175.1)
---------
Net deferred tax liability (2,189.4)
Net current deferred tax assets 88.8
---------
Net long-term deferred tax liability $(2,278.2)
=========
PAGE 63
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
3. Income Taxes (continued)
Except for amounts for which a valuation allowance is provided,
Management believes the other deferred tax assets will be realized. The
valuation allowance for deferred tax assets as of January 1, 1993, was
$3.4 million. The net change in the total valuation allowance for the
year ended December 31, 1993, was a decrease of $1.4 million.
Internal Revenue Service (IRS) Reviews
- --------------------------------------
Consolidated federal income tax returns have been examined and Revenue
Agent Reports have been received for all years up to and including 1989.
The consolidated federal income tax returns for 1990 through 1992 are
being audited by the IRS. Management believes that adequate provision has
been made for any additional taxes and interest thereon that might arise
as a result of these examinations.
4. Other Income - Net
1993 1992 1991
------- ------- -------
(In millions of dollars)
Interest income (Note 2) $ 15.7 $ 19.4 $ 35.5
Rental income 18.6 22.5 21.7
Gains from sale of properties 31.9 13.9 12.9
Gains from sale of stock -- -- 9.1
Dividends from NS 13.5 13.1 11.6
Corporate owned life insurance - net 10.8 12.3 12.0
Other interest expense (26.7) (22.3) (23.9)
Other - net (6.2) (9.4) (8.7)
------- ------- -------
Total $ 57.6 $ 49.5 $ 70.2
======= ======= =======
5. Investments and Advances
December 31,
-----------------
1993 1992
------- -------
(In millions of dollars)
Long-term portion of corporate owned
life insurance at net cash surrender value $ 118.5 $ 254.2
Long-term advances to NS 202.1 207.1
Marketable equity securities
at lower of cost or market 20.6 20.6
Other 21.0 (9.6)
------- -------
Total $ 362.2 $ 472.3
======= =======
Corporate Owned Life Insurance
- ------------------------------
The cash surrender value of certain corporate owned life insurance,
amounting to approximately $220 million, which is expected to be borrowed
in April 1994, has been reclassified in the Consolidated Balance Sheet
from "Investments and advances" to "Other current assets."
PAGE 64
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
5. Investments and Advances (continued)
Fair Values
- -----------
At December 31, 1993, the fair value of investments approximated $904
million. The fair values of marketable securities were based on quoted
market prices. At December 31, 1993 and 1992, the market value of
marketable equity securities, which consist principally of 7,252,634
shares of NS common stock, was $511.9 million and $444.6 million,
respectively. The fair values of stock in nonmarketable securities were
estimated based on the underlying net assets. For the remaining
investments and advances, consisting principally of corporate owned life
insurance and long-term advances to NS, the carrying value approximates
fair value.
6. Properties
December 31,
-----------------------
1993 1992
--------- ---------
(In millions of dollars)
Transportation property:
Road $ 7,691.0 $ 7,434.6
Equipment 4,331.1 4,247.4
Other property 66.1 239.5
--------- ---------
12,088.2 11,921.5
Less - Accumulated depreciation 3,827.9 3,727.2
--------- ---------
Net properties $ 8,260.3 $ 8,194.3
========= =========
Noncash Property Transactions Excluded from the Consolidated Statements
- -----------------------------------------------------------------------
of Cash Flows
- -------------
Additions to "Other property" in 1991 included $66.6 million for
assets acquired from a real estate partnership in which an NS Rail
subsidiary owned an equity interest. Of this transaction, $10.6 million
was noncash and related to amounts invested in or advanced to that
partnership which previously had been classified in "Investments and
advances."
Capitalized Interest
- --------------------
Total interest cost incurred on long-term debt for 1993, 1992 and 1991
was $53.9 million, $62.5 million and $66.0 million, respectively, of
which $21.6 million, $17.9 million and $17.6 million was capitalized.
PAGE 65
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
7. Current Liabilities
December 31,
--------------------
1993 1992
------- -------
(In millions of dollars)
Accounts payable:
Accounts and wages payable $ 190.6 $ 213.1
Casualty and other claims 145.8 144.9
Vacation liability 67.6 69.1
Equipment rents payable - net 53.9 42.7
Other 3.8 3.9
------- -------
Total $ 461.7 $ 473.7
======= =======
Other current liabilities:
Prepaid amounts on forwarded traffic $ 75.4 $ 74.0
Interest payable 14.9 19.4
Nonpension postretirement
obligation (Note 13) 20.0 --
Postemployment obligation 4.0 --
Other 0.4 1.1
------- -------
Total $ 114.7 $ 94.5
======= =======
8. Debt
Short-Term Debt
- ---------------
Short-term debt consists of $27.2 million of notes assumed in
connection with the 1990 acquisition of a coal terminal facility.
PAGE 66
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
8. Debt (continued)
Long-Term Debt
- --------------
December 31,
-----------------
1993 1992
------- -------
(In millions of dollars)
Equipment obligations at an
average rate of 8.2% maturing to 2008 $ 521.8 $ 558.2
Mortgage bonds at an average
rate of 4.6% maturing to 2003 74.4 96.3
Other debt at an average rate
of 5.4% maturing to 2015 6.6 56.5
Capitalized leases at an average
rate of 9.7% maturing to 1995 2.1 3.5
------- -------
Total long-term debt 604.9 714.5
------- -------
Less: Current maturities 107.5 76.6
------- -------
Long-term debt less current maturities $ 497.4 $ 637.9
======= =======
Long-term debt matures as follows:
1995 $ 63.3
1996 70.5
1997 37.4
1998 37.6
1999 and subsequent years 288.6
-------
Total $ 497.4
=======
A substantial portion of NS Rail's properties and certain investments
in affiliated companies are pledged as collateral for much of the secured
debt.
Fair Values
- -----------
The carrying value of short-term debt approximates fair value. The
fair value of long-term debt, including current maturities, approximated
$670 million at December 31, 1993. The fair values of debt were estimated
based on quoted market prices or discounted cash flows using current
interest rates for debt with similar terms, company rating and remaining
maturity.
PAGE 67
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
9. Lease Commitments
NS Rail is committed under long-term lease agreements, which expire on
various dates through 2067, for equipment, lines of road and other
property. Future minimum operating lease payments under long-term leases
at December 31, 1993, were as follows:
Operating Lease
Commitments
---------------
(In millions of dollars)
1994 $ 33.4
1995 33.0
1996 30.3
1997 29.2
1998 25.8
1999 and subsequent years 494.3
-------
Total $ 646.0
=======
Operating Lease Expense
- -----------------------
1993 1992 1991
------- ------- -------
(In millions of dollars)
Minimum rents $ 33.5 $ 29.2 $ 25.6
Contingent rents 36.1 42.5 46.6
------- ------- -------
Total $ 69.6 $ 71.7 $ 72.2
======= ======= =======
Among NS Rail's leased properties are approximately 300 miles of road
in North Carolina. The leases expire in 1994, and NS Rail is discussing
renewals with the lessor (see also page 5).
10. Other Liabilities
December 31,
1993 1992
------- -------
(In millions of dollars)
Casualty and other claims $ 277.7 $ 277.4
Net pension obligation (Note 12) 98.3 58.4
Nonpension postretirement
obligation (Note 13) 286.1 --
Other liabilities 283.2 315.9
------- -------
Total $ 945.3 $ 651.7
======= =======
PAGE 68
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
11. Stock
Preferred
- ---------
There are 10,000,000 shares of no par value serial preferred stock
authorized. This stock may be issued in series from time to time at the
discretion of the Board of Directors with any series having such voting
and other powers, dividends and other preferences as deemed appropriate
at the time of issuance. At December 31, 1993 and 1992, 1,197,027 and
1,197,131 shares of $2.60 Cumulative Preferred Stock, Series A (Series A
Stock) were issued, and 1,096,907 and 1,097,011 shares were held other
than by subsidiaries. The Series A Stock has a $50 per share stated
value. The Series A Stock is callable at any time at $50 per share plus
accrued dividends and has one vote per share on all matters, voting as a
single class with holders of other stock.
On June 2, 1989, NS announced that it intended to purchase up to
250,000 shares of the outstanding Series A Stock during the subsequent
two-year period. In May 1991, NS extended the previously announced stock
purchase program through 1993. In March 1994, NS announced that it would
continue purchasing up to 250,000 shares of the Series A Stock through
1996. NS had purchased 77,626 shares at a total cost of approximately
$2.7 million as of December 31, 1993. NS purchased the shares in regular
brokerage transactions on the open market at prevailing prices. At year
end 1993 and 1992, NS held 77,721 shares and 75,721 shares, respectively.
Preference
- ----------
There are 10,000,000 shares of no par value serial preference stock
authorized. None of these shares has been issued.
Common
- ------
There are 50,000,000 shares of no par value common stock with a stated
value of $10 per share authorized. NS owns all 16,668,997 shares issued
and outstanding at December 31, 1993 and 1992.
12. Pension Plans
NS Rail's defined benefit pension plans, which principally cover
salaried employees, are part of NS' retirement plans. Pension benefits
are based primarily on years of creditable service with NS and its
participating subsidiary companies and compensation rates near
retirement. Contributions to the plans are made on the basis of not less
than the minimum funding standards set forth in the Employee Retirement
Income Security Act of 1974, as amended. Assets in the plans consist
mainly of common stocks. The following data relate principally to NS
Rail's portion of the combined NS plans, since no separate NS Rail data
are available.
PAGE 69
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
12. Pension Plans (continued)
Pension Cost (Benefit) Components
- ---------------------------------
1993 1992 1991
------- ------- -------
(In millions of dollars)
Service cost-benefits
earned during the year $ 10.7 $ 10.8 $ 9.8
Interest cost on projected
benefit obligation 58.6 57.5 57.5
Actual return on
assets in plans (105.6) (68.6) (208.7)
Net amortization and deferral 27.9 (7.0) 138.8
------- ------- -------
Net pension benefit $ (8.4) $ (7.3) $ (2.6)
======= ======= =======
Pension cost is determined based on an actuarial valuation which
reflects appropriate assumptions as of the beginning of each year. The
funded status of the plans is determined using appropriate assumptions as
of each year end. A summary of the major assumptions follows:
1993 1992 1991
---- ---- ----
Discount rate for determining
funded status 7.25% 8.25% 8%
Future salary increases 6% 6% 6%
Return on assets in plans 9% 9% 9%
The funded status of the plans and the amounts reflected in the
accompanying balance sheets were as follows:
December 31,
1993 1992
------- -------
(In millions of dollars)
Actuarial present value of benefit obligations:
Vested benefits $ 754.9 $ 644.2
Nonvested benefits -- 0.1
------- -------
Accumulated benefit obligation 754.9 644.3
Effect of expected future salary increases 108.7 96.2
------- -------
Projected benefit obligation 863.6 740.5
Fair value of assets in plans 923.4 891.3
------- -------
Funded status 59.8 150.8
Unrecognized initial net asset (51.1) (60.1)
Unrecognized gain (116.1) (159.4)
Unrecognized prior service cost 9.1 10.3
------- -------
Net pension liability
included in the balance sheets $ (98.3) $ (58.4)
======= =======
PAGE 70
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
12. Pension Plans (continued)
Early Retirement Program
- ------------------------
During 1993, NS Rail completed a voluntary early retirement program
for salaried employees that resulted in a $42.4 million charge in
compensation and benefits expense. The principal benefit for those who
participated in the program was enhanced pension benefits which are
reflected in the accumulated benefit obligation at December 31, 1993.
Transfer of Pension Plan Assets
- -------------------------------
During 1991, the NS Retirement Plan was amended to establish a Section
401(h) account for the purpose of transferring a portion of pension plan
assets in excess of the projected actuarial liability to fund current-
year medical payments for retirees. In December 1993, 1992 and 1991,
$13.0 million, $15.0 million and $14.5 million, respectively, were
transferred from this account to reimburse NS for such payments. NS
contributed equal amounts to a Voluntary Employee Beneficiary Association
account in those years to fund future benefit costs for retirees (see
Note 13).
401(k) Plan
- -----------
NS Rail provides a 401(k) savings plan for salaried employees. Under
the plan, NS Rail matches a portion of the employee contributions,
subject to applicable limitations. NS Rail's expenses under this plan
were $5.1 million, $4.7 million and $4.4 million in 1993, 1992 and 1991,
respectively.
13. Postretirement Benefits Other Than Pensions
NS Rail provides specified health care and death benefits to eligible
retired employees, principally salaried employees. Under the present
plans, which may be amended or terminated at NS Rail's option, a defined
percentage of health care expenses is covered, reduced by any
deductibles, co-payments, Medicare payments and, in some cases, coverage
provided by other group insurance policies. The cost of such health care
coverage to a retiree may be determined, in part, by the retiree's years
of creditable service with NS Rail prior to retirement. Death benefits
are determined based on various factors, including, in some cases, salary
at time of retirement. NS Rail continues to fund benefit costs
principally on a pay-as-you-go basis. However, in 1991, NS Rail
established a Voluntary Employee Beneficiary Association (VEBA) account
to fund a portion of the cost of future health care benefits for retirees
(see "Transfer of Pension Plan Assets" in Note 12).
PAGE 71
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
13. Postretirement Benefits Other Than Pensions (continued)
The following table sets forth these plans' total accumulated
postretirement benefit obligation reconciled with the accrued
postretirement benefit obligation:
December 31, 1993
---------------------
Health Care Death
Benefits Benefits
----------- --------
(In millions of dollars)
Accumulated postretirement benefit
obligation:
Retirees $ 169.2 $ 83.3
Fully eligible active plan participants 25.4 8.4
Other active plan participants 116.8 16.3
------- -------
Total 311.4 108.0
Plan assets at fair value 44.5 --
------- -------
Funded status (266.9) (108.0)
Unrecognized loss 51.3 17.5
------- -------
Accrued postretirement benefit obligation $(215.6) $ (90.5)
======= =======
A summary of the postretirement benefit cost follows:
1993
---------------------
Health Care Death
Benefits Benefits
----------- --------
(In millions of dollars)
Service cost-benefits attributable to service
during the year $ 5.8 $ 0.6
Interest cost on accumulated postretirement
benefit obligation 20.4 6.6
Actual return on plan assets (1.9) --
Net amortization and deferral (0.7) --
------- -------
Net periodic postretirement benefit cost $ 23.6 $ 7.2
======= =======
For measurement purposes, a 12% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1993; the
rate was assumed to decrease gradually to an ultimate rate of 6% for 2005
and remain at that level thereafter. The health care cost trend rate has
a significant effect on the amounts reported in the financial statements.
To illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1993, by about $53
million and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost for the year 1993 by about $4.7
million.
PAGE 72
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
13. Postretirement Benefits Other Than Pensions (continued)
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25%. A 6% salary increase
assumption was used for death benefits based on salary at the time of
retirement.
The VEBA trust holding the plan assets is not expected to be subject
to federal income taxes as the assets are invested entirely in trust-
owned life insurance. The long-term rate of return on plan assets, as
determined by the growth in cash surrender value of the life insurance
policies, is expected to be 9%.
Under collective bargaining agreements, NS Rail and certain
subsidiaries participate in a multi-employer benefit plan, which provides
certain postretirement health care and life insurance benefits to
eligible union employees. Premiums under this plan are expensed as
incurred and amounted to $6.4 million, $6.2 million and $6.2 million in
1993, 1992 and 1991, respectively.
14. Special Charge in 1991 and Subsequent Partial Reversal in 1993
Included in 1991 results was a $483 million special charge for labor
force reductions and asset write-downs. The special charge reduced net
income by $303 million. The principal components of the special charge
were as follows:
Labor
- -----
Significant new labor agreements were reached late in 1991 following a
Presidential Emergency Board's recommendations that railroads be
permitted to modify long-standing unproductive work rules. The principal
feature of the new agreements concerned a change in crew consist (the
required number of crew members on a train) from four to two members to
be implemented over a five-year period across most of NS Rail's system.
Surplus employees whose positions were eliminated as a result of the
restructured crew size are entitled to protective pay and may be offered
voluntary separation incentives. Related to crew-consist changes,
separate agreements were reached concerning the buy out of certain
productivity funds (payments to train service employees whenever a train
operates with a reduced crew). The labor portion of the special charge
amounted to $450 million and represented the estimated costs of achieving
the productivity gains provided by these new agreements.
Property
- --------
The property portion of the special charge, which amounted to $33
million, was for marginally productive railroad property that was
scheduled for sale or abandonment.
Special Charge Reversal
- -----------------------
Based on NS Rail's success in eliminating reserve board positions in
1992 and 1993, and on events occurring in the third quarter of 1993, the
accrual included in the 1991 special charge related to labor was reduced
by $46 million and was reflected as a credit in compensation and benefits
expenses. The principal factor contributing to the reversal was that, in
1993, agreement on terms for certain further labor savings could not be
reached. Accordingly, it became apparent that a surplus existed in the
labor portion of the provision established in the 1991 special charge.
PAGE 73
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
15. Norfolk and Western Railway Company and Subsidiaries (NW)--
Summarized Consolidated Financial Information
NW is operated as an integral part of NS Rail. Revenues are allocated
to NW based on actual traffic movements as determined by revenue ton
miles within market groups. Expenses are allocated to NW based on
criteria considered appropriate for the type of expense. The costs of
functions performed by NS, the parent holding company of NS Rail, are
also allocated to its rail operating subsidiaries.
Summarized Consolidated Statements of Income
- --------------------------------------------
Years Ended December 31,
------------------------------
1993 1992 1991*
-------- -------- --------
(In millions of dollars)
Railway operating revenues $1,853.6 $1,925.0 $1,862.4
Railway operating expenses 1,414.5 1,402.7 1,609.5
-------- -------- --------
Income from railway operations 439.1 522.3 252.9
Other-net 36.5 24.4 31.1
-------- -------- --------
Income before income taxes and
cumulative effects of
accounting changes 475.6 546.7 284.0
Provision for income taxes:
Income taxes 181.1 194.8 97.4
Adjustment of net deferred tax
liability for federal rate increase 23.7 -- --
-------- -------- --------
Total income taxes 204.8 194.8 97.4
-------- -------- --------
Income before accounting changes 270.8 351.9 186.6
Cumulative effects on years
prior to 1993 of changes in
accounting principles for:
Income taxes 207.3 -- --
Postretirement benefits
other than pensions;
and postemployment
benefits - net of taxes (115.7) -- --
-------- -------- --------
Net income $ 362.4 $ 351.9 $ 186.6
======== ======== ========
* Included in 1991 results is a $212 million special charge for labor
force reductions and asset write-downs. The special charge reduced
NW's net income by $133 million (see Note 14, "Special Charge").
PAGE 74
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
15. Norfolk and Western Railway Company and Subsidiaries (NW)--
Summarized Consolidated Financial Information (continued)
Summarized Consolidated Balance Sheets
- --------------------------------------
As of December 31,
-------------------
1993 1992
-------- --------
(In millions of dollars)
Assets
Current assets $ 703.1 $ 602.3
Noncurrent assets 3,860.9 3,743.5
-------- --------
Total assets $4,564.0 $4,345.8
======== ========
Liabilities and Stockholder's Equity
Current liabilities 313.0 274.7
Noncurrent liabilities 1,482.7 1,522.1
Stockholder's equity 2,768.3 2,549.0
-------- --------
Total liabilities and
stockholder's equity $4,564.0 $4,345.8
======== ========
16. Contingencies
Lawsuits
- --------
Norfolk Southern Railway Company and certain subsidiaries are
defendants in numerous lawsuits relating principally to railroad
operations. While the final outcome of these lawsuits cannot be predicted
with certainty, it is the opinion of Management, after consulting with
its legal counsel, that ultimate liability will not materially affect the
consolidated financial position of NS Rail.
Debt Guarantees
- ---------------
As of December 31, 1993, NS Rail and certain subsidiaries are
contingently liable as guarantors with respect to $37 million of
indebtedness of related entities.
PAGE 75
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
16. Contingencies (continued)
Environmental Matters
- ---------------------
NS Rail is subject to various jurisdictions' environmental laws and
regulations. NS Rail and certain subsidiaries have received notices from
the Environmental Protection Agency that they are potentially responsible
parties under the Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), which generally imposes joint and several
liability for cleanup costs. State agencies also have notified NS Rail
and certain subsidiaries that they may be potentially responsible for
environmental damages, and in several instances they have agreed
voluntarily to initiate cleanup.
For CERCLA sites and all other known environmental incidents where
loss or liability is probable, NS Rail has recorded an estimated
liability. The amount of that liability, which includes estimated costs
of remediation (and any associated restoration) on a site-by-site basis,
is expected to be paid over several years. Claims, if any, against third
parties for recovery of remediation costs incurred by NS Rail are
reflected as receivables in the balance sheet and are not netted against
the associated NS Rail liability. Environmental engineers perform ongoing
analyses of all identified sites, and--after consulting with counsel--any
necessary adjustments to initial liability estimates are recorded. NS
Rail also has established an Environmental Policy Council, composed of
senior managers, to prescribe and direct its environmental initiatives.
Estimates of a company's potential financial exposure even for known
environmental claims or incidents are necessarily imprecise because of
the widely varying costs of available remediation techniques, the
difficulty of determining in advance the nature and extent of
contamination and each potential participant's share of an estimated
loss, and evolving statutory and regulatory standards governing
liability.
The risk of incurring environmental liability--for acts and omissions,
both past and current--is inherent in railroad operations. Moreover, some
of the commodities, particularly those classified as hazardous materials,
in NS Rail's traffic mix can pose special risks that NS Rail and its
subsidiaries work diligently to minimize. In addition, several NS Rail
subsidiaries have land holdings that may be leased (and operated by
others) or held for sale. Because certain conditions may exist on these
properties for which NS Rail ultimately may bear some financial
responsibility, there can be no assurance that NS Rail will not incur
liabilities or costs, the amount of and materiality of which, to a single
accounting period or in the aggregate, cannot be estimated reliably now,
related to environmental problems that are latent or undiscovered.
However, based on its assessments of the facts and circumstances now
known and after consulting with its legal counsel, Management believes
that it has recorded appropriate estimates of liability for those
environmental matters of which the Company is aware.
PAGE 76
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Norfolk Southern Railway Company:
We have audited the consolidated financial statements of Norfolk Southern
Railway Company and subsidiaries (a majority-owned subsidiary of Norfolk
Southern Corporation) as listed in Item 8. In connection with our audits
of the consolidated financial statements, we also have audited the
consolidated financial statement schedules as listed in Item 14(a)1.
These consolidated financial statements and consolidated financial
statement schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements and consolidated financial statement schedules based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Norfolk Southern Railway Company and subsidiaries as of December 31, 1993
and 1992, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1993, in
conformity with generally accepted accounting principles. Also in our
opinion, the related consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in Note 1, the Company changed its methods of accounting in
1993 by adopting the provisions of the Financial Accounting Standards
Board's Statement 109, Accounting for Income Taxes; Statement 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions;
and Statement 112, Employers' Accounting for Postemployment Benefits.
/s/ KPMG Peat Marwick
Norfolk, Virginia
January 25, 1994, except as to Note 11, which is as of March 3, 1994
PAGE 77
SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
Schedule I
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Marketable Securities - Other Investments
December 31, 1993
(In millions of dollars)
Amount at which
each portfolio
Market of equity security
Name of value of issues & each other
issuer and Cost each issue security issue
title of of each at balance carried in the
each issue issue sheet date balance sheet
---------- ------- ---------- -------------------
Cash Equivalents and
Short-Term Investments:
U.S. Gov't Securities $ 28.6 $ 28.6 (1) $ 28.6
Other Gov't Securities 47.3 47.3 (1) 47.3
All Other 103.1 103.1 (1) 103.1
------- ------- -------
Total Cash Equivalents
and Short-Term
Investments $ 179.0 $ 179.0 $ 179.0 (2)
======= ======= =======
Long-Term Investments
and Advances:
NS Common Stock
(7,252,634 shares) $ 20.6 $ 511.3 $ 20.6
Advances to NS 202.1 202.1
Corporate Owned Life
Insurance (3) 118.5 118.5
All other 21.0 21.0
------- -------
Total Long-Term
Investments and
Advances $ 362.2 $ 362.2
======= =======
(1) Cost of each issue approximates market value.
(2) Total Cash Equivalents and Short-Term Investments is more than the
sum of "Cash and cash equivalents" and "Short-term investments" in
the balance sheets principally due to checks issued and outstanding.
(3) Corporate Owned Life Insurance represents $725.7 million of cash
surrender value net of $607.2 million of policy loans.
PAGE 78
Schedule V
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Property, Plant and Equipment
Years Ended December 31, 1991, 1992 and 1993
(In millions of dollars)
Col. A Col. B Col. C Col. D Col. E Col. F
------ ------ ------ ------ ------ ------
Balance Other Balance
beginning Additions Retire- changes add at end
Classification of year at Cost ments or (deduct) of year
- -------------- --------- --------- ------- ----------- -------
Year 1991:
Road $ 6,984.0 $392.8 $179.2 $ (2.2) (1) $ 7,195.4
Equipment 4,110.9 193.1 149.6 33.2 (1) 4,187.6
Other property 157.4 77.2 (0.5) -- 235.1
--------- ------ ------ ------- ---------
Total $11,252.3 $663.1 (2) $328.3 $ 31.0 $11,618.1
========= ====== ====== ======= =========
Year 1992:
Road $ 7,195.4 $425.1 $186.5 $ 0.6 (3) $ 7,434.6
Equipment 4,187.6 187.8 128.0 -- 4,247.4
Other property 235.1 4.2 (0.2) -- 239.5
--------- ------ ------ ------- ---------
Total $11,618.1 $617.1 $314.3 $ 0.6 $11,921.5
========= ====== ====== ======= =========
Year 1993:
Road $ 7,434.6 $411.0 $138.9 $ (15.7) (4) $ 7,691.0
Equipment 4,247.4 218.1 146.5 12.1 (4) 4,331.1
Other property 239.5 0.1 4.0 (169.5) (4) 66.1
--------- ------ ------ ------- ---------
Total $11,921.5 $629.2 (4) $289.4 $(173.1) $12,088.2
========= ====== ====== ======= =========
(1) Transfer of a railroad equipment leasing subsidiary from NS to
Norfolk Southern Railway, $33.2 million; decrease in track work
in progress, $2.2 million.
(2) Includes noncash property acquisitions of $10.6 million in 1991
(see Note 6 of Notes to Consolidated Financial Statements on page 64).
(3) Increase in track work in progress, $0.6 million.
(4) Transfer of nonrailroad subsidiaries from Norfolk Southern Railway
to NS (see Note 2 of Notes to Consolidated Financial Statements on
page 58), $185.8 million; increase in track work in progress,
$0.6 million; transfer of highway revenue equipment from North
American Van Lines, Inc. (NAVL) to Norfolk Southern Railway,
$12.1 million.
PAGE 79
Schedule VI
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Accumulated Depreciation, Depletion and Amortization
of Property, Plant and Equipment
Years Ended December 31, 1991, 1992 and 1993
(In millions of dollars)
Col. A Col. B Col. C Col. D Col. E Col. F
------ ------ ------ ------ ------ ------
Balance Add chrg. Other Balance
beginning to costs Retire- changes add at end
Classification of year or expense (1) ments or (deduct) of year
- -------------- --------- ---------- ------- ----------- -------
Year 1991:
Road $1,784.1 $162.3 $166.2 $ 151.3 (2) $1,931.5
Equipment 1,799.8 156.4 120.1 (107.3) (2) 1,728.8
Other property 19.9 1.0 0.2 -- 20.7
-------- ------ ------ ------- --------
Total $3,603.8 $319.7 $286.5 $ 44.0 $3,681.0
======== ====== ====== ======= ========
Year 1992:
Road $1,931.5 $172.4 $171.4 $ 30.7 (3) $1,963.2
Equipment 1,728.8 159.7 114.0 (30.7) (3) 1,743.8
Other property 20.7 1.0 1.5 -- 20.2
-------- ------ ------ ------- --------
Total $3,681.0 $333.1 $286.9 $ -- $3,727.2
======== ====== ====== ======= ========
Year 1993:
Road $1,963.2 $180.8 $128.0 $ (5.6) (4) $2,010.4
Equipment 1,743.8 167.1 113.1 9.6 (4) 1,807.4
Other property 20.2 0.8 2.3 (8.6) (4) 10.1
-------- ------ ------ ------- --------
Total $3,727.2 $348.7 $243.4 $ (4.6) $3,827.9
======== ====== ====== ======= ========
(1) See Note 1 of Notes to Consolidated Financial Statements on page 56
for methods and average rates used to compute depreciation.
(2) Transfer of excess reserves from Equipment to Road as a result of
depreciation studies, $115.6 million; transfer of a railroad equipment
leasing subsidiary from NS to Norfolk Southern Railway, $11.2 million;
the special charge (see Note 14 of Notes to Consolidated Financial
Statements on page 72) increased accumulated depreciation to reflect
the impaired value of certain fixed assets, $32.8 million;
reclassification of shop machinery depreciation from Equipment
to Road, $2.9 million.
(3) Transfer of excess reserves from Equipment to Road as a result of
depreciation studies, $28.0 million; reclassification of shop
machinery depreciation from Equipment to Road, $2.7 million.
(4) Transfer of nonrailroad subsidiaries from Norfolk Southern Railway
to NS, $16.7 million (see Note 2 of Notes to Consolidated Financial
Statements on page 58); reclassification of shop machinery depreciation
from Equipment to Road, $2.5 million; transfer of reserve related
to highway revenue equipment transferred from NAVL to Norfolk Southern
Railway, $12.1 million.
PAGE 80
Schedule VII
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Guarantees of Securities of Other Issuers
December 31, 1993
(In millions of dollars)
Total Amount in
Name of issuer of amount treasury of
securities guaranteed guaranteed issuer of
by person for which Title of issue of each class and securities
statement is filed of securities guaranteed outstanding(1) guaranteed
- ---------------------- ---------------------------- ----------- -----------
Terminal Railroad Refunding and Improvement $ 7.8 (2) $ 0.1 (4)
Association of Mortgage 4% Bonds, Series
St. Louis "C," due 7/1/2019.
Triple Crown Services Triple Crown Services $ 29.2 (3) $ --
Company Equipment Trust Certificates,
Series 1993
(1) None of these securities is owned by NS Rail.
(2) Nature of guarantee: Principal and annual interest of $0.3 million.
There were no defaults by the issuer of securities.
(3) Nature of guarantee: Principal and annual interest at 5.82%.
There were no defaults by the issuer of securities.
(4) The amount shown is not included in "Total Amount Guaranteed and
Outstanding."
PAGE 81
Schedule VIII
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1991, 1992 and 1993
(In millions of dollars)
Additions charged to
--------------------
Beginning Other Ending
Year ended December 31, 1991 Balance Expenses Accounts Deductions Balance
- ---------------------------- --------- -------- -------- ---------- -------
Valuation accounts deducted
from balance sheet assets -
Reserves for adjustments of
investment in affiliated
and other companies $ 0.3 $ -- $ -- $ -- $ 0.3
Casualty and other claims
included in other
liabilities $216.9 $127.0 $ 3.4 (1) $102.1 (2) $245.2
Current portion of casualty
and other claims included
in accounts payable $175.5 $ 7.4 $116.8 (1) $133.0 (3) $166.7
Year ended December 31, 1992
- ----------------------------
Valuation accounts deducted
from balance sheet assets -
Reserves for adjustments of
investment in affiliated
and other companies $ 0.3 $ -- $ -- $ -- $ 0.3
Casualty and other claims
included in other
liabilities $245.2 $105.0 $ 3.9 (1) $ 76.7 (2) $277.4
Current portion of casualty
and other claims included
in accounts payable $166.7 $ 3.6 $117.5 (1) $142.9 (3) $144.9
Year ended December 31, 1993
- ----------------------------
Valuation accounts deducted
from balance sheet assets -
Reserves for adjustments of
investment in affiliated
and other companies $ 0.3 $ -- $ -- $ 0.3 $ --
Valuation allowance (included
net in deferred tax
liability) for deferred tax
assets $ -- $ 2.0 $ -- $ -- $ 2.0
Casualty and other claims
included in other
liabilities $277.4 $100.0 $ 2.9 (1) $102.6 (2) $277.7
Current portion of casualty
and other claims included
in accounts payable $144.9 $ 9.1 $125.0 (1) $133.2 (3) $145.8
(1) Includes revenue overcharges provided through charges to operating
revenues and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
PAGE 82
Schedule IX
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Short-Term Borrowings
Years Ended December 31, 1991, 1992 and 1993
(In millions of dollars)
Col. A Col. B Col. C Col. D Col. E Col. F
------ ------ ------ ------ ------ ------
Maximum Weighted
Weighted Amount Average Average
Balance Average Outstanding Amount Interest
Category of at end Interest During Outstanding Rate
Borrowing of year Rate Year During Year During Year
- ------------- --------- -------- ----------- ----------- -----------
1991:
Revenue Refunding
Bonds $ 27.2 6.1% $ 27.2 $ 27.2 4.2%
1992:
Revenue Refunding
Bonds $ 27.2 4.4% $ 27.2 $ 27.2 2.6%
1993:
Revenue Refunding
Bonds $ 27.2 3.4% $ 27.2 $ 27.2 2.3%
The average amount outstanding was determined based on the daily
outstanding amounts.
The weighted average interest rate during the year was computed based
on the number of days actual rates were outstanding.
PAGE 83
Schedule X
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Supplementary Income Statement Information
Years Ended December 31, 1993, 1992 and 1991
(In millions of dollars)
Charged to Expenses
--------------------------------
Item 1993 1992 1991
- ---- ---- ---- ----
Maintenance and repairs expense,
included in:
Railway operating expenses:
Compensation and benefits $ 422.0 $ 401.6 $ 389.9
Material, services and rents 330.7 340.8 306.4
Casualties and other claims 58.3 63.5 68.2
Other 18.2 17.7 16.8
------- ------- -------
Total maintenance and
repairs expense $ 829.2 $ 823.6 $ 781.3
======= ======= =======
Depreciation expense, included in:
Railway operating expenses $ 347.9 $ 332.1 $ 318.7
Other income - net 0.8 1.0 1.0
------- ------- -------
Total depreciation expense $ 348.7 $ 333.1 $ 319.7
======= ======= =======
Taxes other than payroll and
income taxes, principally
included in other railway
operating expenses:
Property taxes $ 47.4 $ 54.8 $ 59.6
Other taxes 22.9 23.3 29.1
------- ------- -------
Total taxes other than
payroll and income taxes $ 70.3 $ 78.1 $ 88.7
======= ======= =======
All other "supplementary income statement" items have been omitted as
the required information is either not applicable or the amounts do
not exceed 1 percent of consolidated operating revenues.
PAGE 84
EXHIBIT INDEX
-------------
Electronic
Submission
Exhibit
Number Description Page Number
- ---------- -------------------------------------------- -----------
21
Subsidiaries of Norfolk Southern Railway. 85