PAGE 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1994
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 (IRS Employer Identification No.)
incorporation or organization)
Three Commercial Place
Norfolk, Virginia 23510-2191
- ---------------------------------------- --------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (804) 629-2682
----------------------
No Change
- --------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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. X Yes No
----- -----
The number of shares outstanding of each of the registrant's classes of
Common Stock, as of the last practicable date:
Class Outstanding as of July 31, 1994
----- -------------------------------
Common Stock (par value $1.00) 16,668,997
PAGE 2
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NS RAIL)
INDEX
Page
----
Part I. Financial Information:
Item 1. Consolidated Statements of Income
Three Months and Six Months Ended
June 30, 1994 and 1993 3
Consolidated Balance Sheets
June 30, 1994 and December 31, 1993 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1994 and 1993 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
PartII. Other Information:
Item 4. Submission of Matters to a Vote of
Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
PAGE 3
PART I. FINANCIAL INFORMATION
------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Income
(In millions of dollars)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
-------- -------- -------- --------
RAILWAY OPERATING REVENUES:
Coal $ 322.5 $ 314.8 $ 627.4 $ 606.4
Merchandise 648.6 616.9 1,258.0 1,204.1
Other 26.7 31.5 54.7 63.5
-------- -------- -------- --------
Total railway operating
revenues 997.8 963.2 1,940.1 1,874.0
-------- -------- -------- --------
RAILWAY OPERATING EXPENSES:
Compensation and benefits 341.7 350.7 693.1 701.0
Materials, services and rents 167.6 164.7 331.0 322.6
Depreciation 90.3 86.4 179.0 171.6
Diesel fuel 46.7 45.8 92.4 90.6
Casualties and other claims 37.5 29.8 66.6 60.2
Other 39.0 32.6 76.5 67.4
-------- -------- -------- --------
Total railway operating
expenses 722.8 710.0 1,438.6 1,413.4
-------- -------- -------- --------
Income from operations 275.0 253.2 501.5 460.6
Other income (expense):
Interest income 8.1 3.3 14.2 8.1
Interest expense on debt (6.4) (7.8) (13.1) (17.9)
Other-net 5.6 5.5 14.7 36.5
-------- -------- -------- --------
Total other income (expense) 7.3 1.0 15.8 26.7
-------- -------- -------- --------
Income before income taxes
and cumulative effects of
accounting changes 282.3 254.2 517.3 487.3
Provision for income taxes 104.9 93.1 187.7 178.7
-------- -------- -------- --------
Income before accounting
changes 177.4 161.1 329.6 308.6
Cumulative effects on years prior to
1993 of changes in accounting
principles (Note 5) for:
Income taxes -- -- -- 470.4
Postretirement benefits other than
pensions; and postemployment
benefits - net of taxes -- -- -- (222.6)
-------- -------- -------- --------
NET INCOME $ 177.4 $ 161.1 $ 329.6 $ 556.4
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
PAGE 4
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets
(In millions of dollars)
(Unaudited)
June 30, December 31,
1994 1993
-------------- ------------
ASSETS
Current assets:
Cash and cash equivalents (Note 4) $ 287.1 $ 2.3
Short-term investments (Note 5) 139.7 149.7
Accounts receivable - net 551.0 522.9
Materials and supplies 68.5 65.9
Deferred income taxes 96.7 88.8
Other current assets (Note 4) 62.4 282.2
--------- ---------
Total current assets 1,205.4 1,111.8
Due from NS - net (Note 3) 307.5 207.6
Investments and advances (Notes 4 and 5) 607.1 160.1
Properties less accumulated depreciation 8,318.6 8,260.3
Other assets 20.3 20.6
--------- ---------
TOTAL ASSETS $10,458.9 $ 9,760.4
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 27.2 $ 27.2
Accounts payable 498.7 461.7
Income and other taxes 192.6 141.3
Other current liabilities 130.6 114.7
Current maturities of long-term debt 107.5 107.5
--------- ---------
Total current liabilities 956.6 852.4
Long-term debt (Note 3) 470.6 497.4
Other liabilities 912.5 945.3
Minority interests 1.9 2.2
Deferred income taxes - net (Notes 3 and 5) 2,479.0 2,278.2
--------- ---------
TOTAL LIABILITIES 4,820.6 4,575.5
--------- ---------
Stockholders' equity:
Serial preferred stock $50 stated value 54.8 54.8
Common stock $10 stated value 166.7 166.7
Other capital 515.0 515.0
Retained income 4,637.0 4,448.4
Unrealized gain on marketable
securities, net of tax (Note 5) 264.8 --
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 5,638.3 5,184.9
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $10,458.9 $ 9,760.4
========= =========
See accompanying notes to consolidated financial statements.
PAGE 5
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
(In millions of dollars)
(Unaudited)
Six Months Ended
June 30,
---------------------
1994 1993
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 329.6 $ 556.4
Reconciliation of net income to net cash
provided by operating activities:
Net cumulative effects of changes in
accounting principles -- (247.8)
Special charge payments (28.0) (20.1)
Depreciation 179.4 172.0
Deferred income taxes 20.9 20.8
Nonoperating gains and losses on properties (4.0) (27.9)
Changes in assets and liabilities affecting
operations:
Accounts receivable (28.1) (30.4)
Materials and supplies (2.6) (6.2)
Other current assets 14.8 22.3
Current liabilities other than debt 87.1 20.3
Other - net (5.0) 15.9
------- -------
Net cash provided by operating activities 564.1 475.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (253.6) (300.6)
Property sales and other transactions 19.9 45.8
Investment purchases (27.5) (40.2)
Investment sales and other transactions 239.4 1.5
Advances and notes with NS (99.9) 66.7
Short-term investments - net 10.4 (24.4)
------- -------
Net cash used for investing activities (111.3) (251.2)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (140.9) (134.1)
Repayments of long-term debt (27.1) (37.4)
------- -------
Net cash used for financing activities (168.0) (171.5)
------- -------
Net increase in cash and cash equivalents 284.8 52.6
CASH AND CASH EQUIVALENTS:*
At beginning of year 2.3 11.5
------- -------
At end of period $ 287.1 $ 64.1
======= =======
- -----------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 18.5 $ 21.1
Income taxes $ 103.2 $ 148.5
* Cash equivalents are highly liquid investments purchased three months or
less from maturity.
See accompanying notes to consolidated financial statements.
PAGE 6
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of Management, the accompanying unaudited interim
financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position
as of June 30, 1994, and the results of operations and cash flows for
the six months ended June 30, 1994 and 1993.
While Management believes that the disclosures presented are adequate
to make the information not misleading, these consolidated financial
statements should be read in conjunction with the financial statements
and notes included in the Corporation's latest Annual Report on
Form 10-K.
2. Contingencies
There have been no significant changes since year end 1993 in matters
discussed in NOTE 16, CONTINGENCIES, appearing in the NS Rail Annual
Report on Form 10-K for 1993, Notes to Consolidated Financial
Statements, beginning on page 74. An update of the status of certain
legal proceedings was included in Part I, Item 3 - Legal Proceedings,
of the NS Rail Annual Report on Form 10-K for 1993, and in Part II,
Item 1 - Legal Proceedings, of the Form 10-Q for the first quarter of
1994.
3. Related Parties
GENERAL
-------
Norfolk Southern Corporation (NS) is the parent holding company of NS
Rail. The costs of functions performed by NS are allocated to its rail
operating subsidiaries. Rail operations are coordinated at the holding
company level by the NS Executive Vice President-Operations.
INTERCOMPANY ACCOUNTS
---------------------
June 30, 1994 December 31, 1993
----------------- -----------------
Average Average
Balance Rate Balance Rate
------- ------- ------- -------
Due from NS:
Advances $ 444.8 3.2% $ 320.2 2.4%
Due to NS:
Notes 137.3 6.0% 112.6 4.0%
------- -------
Due from NS - net $ 307.5 $ 207.6
======= =======
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 both June 30, 1994 and December 31, 1993, NS
Rail had intercompany federal income tax payables (which are included
in "Deferred income taxes" in the Consolidated Balance Sheets) of
$175.1 million.
PAGE 7
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Related Parties (continued)
CASH REQUIRED FOR NS SHARE 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 NS commercial paper notes. As of June 30, 1994, and
December 31, 1993, NS had recorded $519.1 million and $521.8 million,
respectively, of notes under this program. Additionally, under a
registration statement filed with the Securities and Exchange
Commission covering the issuance of unsecured debt securities in an
aggregate principal amount of up to $750 million, NS has issued long-
term debt in part to repay portions of the commercial paper notes and
to fund additional share purchases. As of June 30, 1994, NS had
outstanding $500 million of long-term debt under this registration.
Since the first purchases in December 1987 through June 30, 1994, NS
has purchased and retired 55,579,300 shares of its common stock under
these programs. Future purchases are dependent on market conditions,
the economy, cash needs and alternative investment opportunities.
Consistent with earlier 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, which
may also be issued for general corporate purposes, also will come
principally from NS Rail.
TRANSFER OF SUBSIDIARY IN 1993
------------------------------
In April 1993, NS Rail transferred to NS its $104.7 million equity
interest in a subsidiary company. This company, along with its wholly
owned subsidiaries, consists primarily of nonrail real estate assets
(although some rail assets were also involved). The transfer was
accounted for as a reduction of NS Rail's retained earnings,
representing the book value of the net assets of the companies
transferred. A noncash transaction, its effects were excluded from
the 1993 Consolidated Statement of Cash Flows.
4. Investments
The planned borrowing of the cash surrender value of certain corporate
owned life insurance (COLI) policies, amounting to approximately
$220 million, resulted in this amount's being reclassified in the
December 31, 1993, Consolidated Balance Sheet from Investments to
Other current assets. The borrowing, which was completed in
May 1994, resulted in the decline in Other current assets with a
corresponding increase in Cash and Short-term investments.
5. Required Accounting Changes
1994
----
Effective January 1, 1994, NS Rail adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). SFAS 115 requires corporations
PAGE 8
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Required Accounting Changes (continued)
to change the method of reporting for investments in debt and certain
equity securities from lower of cost or market to classifying and
accounting for such investments in one of three categories: "trading,"
"available for sale" or "held to maturity." The carrying value and
timing of gain/loss realization is dependent upon the categorization of
the investment.
Under SFAS 115, NS Rail increased the reported carrying value of
certain short-term and long-term investments classified as "available
for sale" at June 30, 1994, as follows:
Gross
Unrealized
Cost Holding Gains Fair Value
---- ------------- ----------
Short-term securities,
principally U.S. Treasury
securities $139.3 $ 0.4 $139.7
Equity securities -
7.3 million shares
of NS stock 20.6 436.3 456.9
This reporting change, which had no income statement effect, was
responsible for the large increase in "Investments and advances" in the
Consolidated Balance Sheet at June 30, 1994. Carrying value
adjustments, which are noncash transactions, are not included in the
Consolidated Statement of Cash Flows. The total unrealized holding
gain on NS Rail's investments classified as "available for sale" at
June 30, 1994, net of related deferred taxes of $171.9 million, is
reflected as a separate component of stockholders' equity in the
Consolidated Balance Sheet at June 30, 1994.
Total gross unrealized holding gains from the implementation date of
January 1, 1994, through June 30, 1994, declined $57.5 million. The
reduced gains primarily reflect the change in NS stock price from
$70-1/2/share at December 31, 1993, to $63/share at June 30, 1994.
Stockholders' equity for the six months decreased $35.0 million as a
result.
1993
----
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). The cumulative effects for years prior to 1993
of adopting SFAS 106 and SFAS 112 increased first quarter 1993 pretax
expenses $336.3 million ($208.4 million after-tax), and $22.8 million
($14.2 million after-tax), respectively.
PAGE 9
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Required Accounting Changes (continued)
Also effective January 1, 1993, NS Rail adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109).
SFAS 109 required a change from the deferred method of accounting for
income taxes to the asset and liability method of accounting for income
taxes. The cumulative effect on years prior to 1993 of adopting
SFAS 109 increased first quarter 1993 net income by $470.4 million.
The effect as a result of implementing the accounting changes was to
increase first quarter 1993 net income by $247.8 million.
6. Norfolk and Western Railway Company and Subsidiaries (NW)--Summarized
Consolidated Financial Information
SUMMARIZED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1994 1993 1994 1993
-------- -------- -------- --------
(In millions of dollars)
(Unaudited)
Railway operating revenues $ 465.1 $ 488.8 $ 921.0 $ 942.9
Railway operating expenses 345.5 356.4 700.2 702.9
------- ------- ------- -------
Income from operations 119.6 132.4 220.8 240.0
Other-net 7.3 4.0 20.7 29.2
------- ------- ------- -------
Income before income
taxes and cumulative
effects of accounting
changes 126.9 136.4 241.5 269.2
Provision for income taxes 48.9 50.0 86.7 98.9
------- ------- ------- -------
Income before
accounting changes 78.0 86.4 154.8 170.3
------- ------- ------- -------
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 $ 78.0 $ 86.4 $ 154.8 $ 261.9
======= ======= ======= =======
PAGE 10
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Norfolk and Western Railway Company and Subsidiaries (NW)--Summarized
Consolidated Financial Information (continued)
SUMMARIZED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1994 1993
------------ ------------
(Unaudited)
Assets
Current assets $ 482.4 $ 428.5
Noncurrent assets 4,161.6 4,022.9
--------- ---------
Total assets $ 4,644.0 $ 4,451.4
========= =========
Liabilities and stockholder's equity
Current liabilities $ 242.4 $ 200.4
Noncurrent liabilities 1,507.8 1,482.7
Stockholder's equity 2,893.8 2,768.3
--------- ---------
Total liabilities and
stockholder's equity $ 4,644.0 $ 4,451.4
========= =========
Effective January 1, 1994, NW adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). See Note 5 for a discussion of
this new accounting pronouncement. The effect on NW for the first six
months of 1994, which was principally comprised of unrealized gain on
its investments in NS stock, increased Investments (noncurrent assets)
by $48.6 million, Short-term investments (current assets) by
$0.4 million, Deferred taxes (noncurrent liabilities) by
$18.3 million, and Stockholder's equity by $30.7 million.
Effective January 1, 1993, NW adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (SFAS 106), Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109),
and Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" (SFAS 112). See Note 5 for a
discussion of these pronouncements. See NW's six months ended June 30,
1993, Consolidated Statement of Income for the cumulative effects of
these changes.
7. Reclassifications
Certain reclassifications of related party balances have been made in
the December 31, 1993, balance sheet to conform to the 1994
presentation.
PAGE 11
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
Net Income
- ----------
Net income increased $16.3 million, or 10 percent, in the second quarter of
1994, compared with the same period last year.
Net income for the six months ended June 30, 1994, was up $21.0 million, or
7 percent, over the same period last year, excluding cumulative accounting
adjustments which increased 1993 net income (see Note 5).
Railway Operating Revenues
- --------------------------
Railway operating revenues increased $34.6 million, or 4 percent, in the
second quarter, and $66.1 million, or 4 percent, for the six months ended
June 30, 1994, compared with the same periods last year. The increases in
operating revenues were due to:
Second Quarter First Six Months
1994 vs. 1993 1994 vs. 1993
Increase (Decrease) Increase (Decrease)
------------------- -------------------
(In millions of dollars)
Traffic volume (carloads) $ 65.2 $ 103.7
Revenue per unit/mix (25.8) (28.8)
Other (4.8) (8.8)
-------- --------
$ 34.6 $ 66.1
======== ========
The principal revenue commodity groups and changes from prior year were as
follows:
Second Quarter First Six Months
1994 vs. 1993 1994 vs. 1993
Increase (Decrease) Increase (Decrease)
------------------- -------------------
(In millions of dollars)
Coal $ 7.7 $ 21.0
Merchandise:
Automotive (9.4) (9.0)
Intermodal 13.6 21.7
Metals/construction 7.1 7.9
Paper/forest 3.4 (0.7)
Agriculture 7.4 16.8
Chemicals 9.6 17.2
Other, principally switching
and demurrage (4.8) (8.8)
-------- --------
$ 34.6 $ 66.1
======== ========
PAGE 12
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
- ----
The improvement in the coal commodity group resulted primarily from gains
in the domestic utility market, as utility coal traffic volume increased
20 percent in the second quarter and 21 percent for the first six months of
1994, compared with 1993. The growth principally was due to the rebuilding
of utility stockpiles, which remain below normal levels at many generating
plants served by NS Rail, and to new business. Utility coal traffic for
the remainder of 1994 is anticipated to remain ahead of last year, as
abnormally hot weather in the NS Rail service region, a growing U.S.
economy, and the need for low-sulfur coal to meet Clean Air Act
requirements are expected to spur demand. The year-to-date gains in
utility coal traffic were offset partially by weakness in export and
metallurgical shipments in both the second quarter and first six months.
Export demand continued to be depressed due to the weak European economy
and intense price competition from foreign producers, while the demand for
metallurgical coal suffered from reduced coking activity by domestic steel
producers at certain facilities located on NS Rail's lines. Looking ahead,
demand for export coal is expected to pick up gradually as an anticipated
recovery in the European economy materializes. However, the extent of any
gains will be influenced significantly by global coal prices, technological
changes and European energy policy.
MERCHANDISE
- -----------
All merchandise commodity groups, except for automotive (and paper/forest
year-to-date) showed improvement over last year. The intermodal group
produced the largest revenue increases, as revenues climbed 15 percent and
12 percent, respectively, for the second quarter and the six-month periods,
compared to the same periods in 1993. Second quarter and year-to-date
intermodal traffic volume was up 12 percent and 9 percent, respectively,
compared with last year. The agriculture commodity group also produced
strong gains, with revenue increases of 9 percent for the quarter and
11 percent year-to-date, compared with 1993. A strong midwestern grain and
soybean harvest, coupled with increased activity to on-line poultry
producers, was responsible for the improvements. Chemicals performed well
for both the quarter and year-to-date, with revenues and carloads up
8 percent and 10 percent for the quarter and 7 percent and 8 percent year-
to-date, respectively, over 1993. Increased shipments of fertilizer
principally were responsible for the gains. Rounding out the second
quarter improvements, metals/construction revenues rose 9 percent on a
15 percent increase in carloads, primarily resulting from strong regional
growth in highway projects and other construction, while paper/forest
revenues and traffic volume were up 3 percent and 2 percent, respectively.
Automotive results in 1994 have been disappointing, largely due to
retooling downtimes at plants served by NS Rail. Automotive revenues and
traffic volume declined 8 percent and 7 percent in the second quarter and
4 percent year-to-date, compared with 1993. Automotive traffic is expected
to recover slowly, however, as new plants currently under construction come
on line and retoolings at existing plants on NS Rail's lines are completed.
PAGE 13
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
Railway Operating Expenses
- --------------------------
Railway operating expenses increased $12.8 million, or 2 percent, in the
second quarter of 1994, and $25.2 million, or 2 percent, for the first
half, compared with last year. The principal increases for the quarter
were in casualties and other claims, up $7.7 million, or 26 percent,
primarily due to a $5.0 million accrual for estimated environmental clean-
up costs associated with a tank car leak which occurred during the quarter;
other expenses which were $6.4 million, or 20 percent higher than second
quarter 1993, which had benefited from a favorable property tax settlement;
and depreciation, which was up $3.9 million, or 5 percent, due to increased
investments in plant and equipment. Smaller increases were recorded in
materials, services and rents, and in diesel fuel, which, respectively,
were up $2.9 million, and $0.9 million, or 2 percent, primarily reflecting
higher traffic volume, as carloadings for the quarter were 7 percent above
1993 levels. Partially offsetting these increases was a $9.0 million, or
3 percent, reduction in compensation and benefits expenses, principally due
to lower employment taxes associated with the expiration in June 1993 of
the Railroad Retirement Repayment Tax and to reduced accruals for
postretirement benefits resulting from a change in the benefit plan's
creditable service period.
Year-to-date railway operating expenses were up due to increases in all
expense categories other than compensation and benefits, which declined
$7.9 million, or 1 percent, compared with last year. Leading the year-to-
date increases was a $9.1 million, or 14 percent, rise in other expenses,
due to a combination of the effect of the favorable property tax settlement
in 1993, and higher relocation expenses in the first quarter of 1994
related to new job assignments following the early retirement program
offered last fall. Materials, services and rents was up $8.4 million, or
3 percent, primarily reflecting higher traffic volume. Depreciation expense
increased $7.4 million, or 4 percent, due to a greater capital base, while
casualties and other claims increased $6.4 million, or 11 percent,
primarily due to the accrual for environmental clean-up costs which
occurred in the second quarter. Diesel fuel expenses were up $1.8 million,
or 2 percent, as a result of increased consumption related to higher
traffic volume.
The year-to-date decrease in compensation and benefits expense of
$7.9 million, or 1 percent, compared with last year, was due to the
elimination of the Railroad Retirement Repayment Tax after second quarter
1993, and to reduced postretirement benefits costs.
Although it appears that the July flooding in the Southeast will not have a
significant impact on revenues, some NS Rail facilities and equipment have
sustained damage, particularly in the state of Georgia. The total damage
costs are uncertain, but costs to repair or replace railway facilities and
equipment (much of which may be capitalized) are estimated at $20 million
which will not have a material effect on NS Rail's results of operations.
PAGE 14
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
Other Income (Expense)
- ----------------------
Other income (expense) was up $6.3 million from second quarter 1993, but
was $10.9 million lower for the first six months compared with last year.
The improvement for the quarter was principally due to increased interest
income resulting from invested cash balances and short-term advances due
from NS, while year-to-date 1993 included a large property sale reflected
in Other-net.
FINANCIAL CONDITION AND LIQUIDITY
June 30, 1994 December 31, 1993
------------- -----------------
(Dollars in millions)
Cash and short-term investments $426.8 $152.0
Working capital $248.8 $259.4
Current ratio 1.3 1.3
Debt to total capitalization 9.7% 10.9%
CASH FLOWS FROM OPERATING ACTIVITIES are NS Rail's principal source of
liquidity and were sufficient to cover cash outflows for dividends, debt
repayments and capital spending (see Consolidated Statements of Cash Flows
on page 5). The increase in cash provided by operating activities compared
with the first half of 1993 was primarily due to lower income tax payments,
combined with higher income from operations.
CASH FLOWS FROM INVESTING ACTIVITIES were affected principally by capital
spending for property additions and a large COLI borrowing (see Note 4).
Approximately $220.0 million of COLI cash surrender value, which was
reflected in Other current assets in the December 31, 1993, Consolidated
Balance Sheet, was borrowed in second quarter 1994 and is principally
responsible for the source of cash which resulted in a large decrease in
Net cash used for investing activities in 1994, compared with last year.
As described in Note 3, NS has issued a significant amount of long-term
debt in recent years. The servicing of this debt is expected to be
primarily from NS Rail's funds, as it is NS' principal subsidiary.
PAGE 15
PART II - OTHER INFORMATION
---------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Registrant's annual meeting of stockholders was held on May 24,
1994, at which meeting two directors were elected to the class whose term
will expire in 1997.
The two nominees for directors, who were uncontested, were elected
by the following vote:
THREE-YEAR TERM
--------------------------------------------------------------------
FOR AUTHORITY WITHHELD
--- ------------------
John S. Shannon 17,511,885 votes 7,031 votes
John R. Turbyfill 17,510,919 votes 7,997 votes
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months
ended June 30, 1994.
PAGE 16
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORFOLK SOUTHERN RAILWAY COMPANY
------------------------------------------
(Registrant)
Date: August 11, 1994 /s/ Dezora M. Martin
------------------- ------------------------------------------
Dezora M. Martin
Corporate Secretary (Signature)
Date: August 11, 1994 /s/ John P. Rathbone
------------------- ------------------------------------------
John P. Rathbone
Vice President and Controller
(Principal Accounting Officer) (Signature)