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 September 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 October 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 Nine Months Ended
September 30, 1994 and 1993 3
Consolidated Balance Sheets
September 30, 1994 and December 31, 1993 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1994 and 1993 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
Part II. Other Information:
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Index to Exhibits 19
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 Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
-------- -------- -------- --------
RAILWAY OPERATING REVENUES:
Coal $ 325.0 $ 300.2 $ 952.4 $ 906.6
Merchandise 622.7 584.2 1,880.7 1,788.2
Other 28.1 29.9 82.8 93.4
-------- -------- -------- --------
Total railway operating revenues 975.8 914.3 2,915.9 2,788.2
-------- -------- -------- --------
RAILWAY OPERATING EXPENSES:
Compensation and benefits
(Notes 7 and 8) 340.4 349.3 1,033.5 1,050.3
Materials, services and rents 162.7 160.8 493.7 483.4
Depreciation 90.3 87.0 269.3 258.6
Diesel fuel 47.3 40.0 139.7 130.6
Casualties and other claims 36.4 30.6 103.0 90.8
Other 32.5 33.2 109.0 100.5
-------- -------- -------- --------
Total railway operating expenses 709.6 700.9 2,148.2 2,114.2
-------- -------- -------- --------
Income from operations 266.2 213.4 767.7 674.0
Other income (expense):
Interest income 9.2 3.4 23.4 11.5
Interest expense on debt (8.4) (7.5) (21.5) (25.4)
Other-net (3.5) 4.6 11.2 41.1
-------- -------- -------- --------
Total other income (expense) (2.7) 0.5 13.1 27.2
-------- -------- -------- --------
Income before income taxes
and cumulative effect of
accounting changes 263.5 213.9 780.8 701.2
Income taxes (Note 6):
Provision on pretax earnings 98.8 85.9 286.5 264.6
Adjustment of net deferred
tax liability for federal
rate increase -- 51.6 -- 51.6
-------- -------- -------- --------
Total income taxes 98.8 137.5 286.5 316.2
-------- -------- -------- --------
Income before accounting
changes 164.7 76.4 494.3 385.0
Cumulative effect 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 $ 164.7 $ 76.4 $ 494.3 $ 632.8
======== ======== ======== ========
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)
September 30, December 31,
1994 1993
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 121.2 $ 2.3
Short-term investments 181.6 149.7
Accounts receivable - net 538.1 522.9
Materials and supplies 61.6 65.9
Deferred income taxes 96.6 88.8
Other current assets (Note 4) 53.8 282.2
--------- ---------
Total current assets 1,052.9 1,111.8
Due from NS - net (Note 3) 481.8 207.6
Investments and advances (Note 5) 609.7 160.1
Properties less accumulated depreciation 8,384.9 8,260.3
Other assets 52.9 20.6
--------- ---------
TOTAL ASSETS $10,582.2 $ 9,760.4
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 27.2 $ 27.2
Accounts payable 506.9 461.7
Income and other taxes 121.3 141.3
Other current liabilities 120.8 114.7
Current maturities of long-term debt 65.0 107.5
--------- ---------
Total current liabilities 841.2 852.4
Long-term debt 486.2 497.4
Other liabilities 912.0 945.3
Minority interests 1.9 2.2
Deferred income taxes (Notes 3 and 5) 2,611.3 2,278.2
--------- ---------
TOTAL LIABILITIES 4,852.6 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 4,732.1 4,448.4
Unrealized gain on marketable securities,
net of tax (Note 5) 261.0 --
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 5,729.6 5,184.9
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,582.2 $ 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)
Nine Months Ended
September 30,
--------------------
1994 1993
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 494.3 $ 632.8
Reconciliation of net income to net cash
provided by operating activities:
Net cumulative effects of changes in
accounting principles -- (247.8)
Special charge payments (30.2) (27.6)
Depreciation 269.9 259.2
Deferred income taxes 69.9 88.0
Nonoperating gains and losses on properties (4.9) (30.6)
Changes in assets and liabilities affecting
operations:
Accounts receivable (15.2) (22.0)
Materials and supplies 4.3 6.9
Other current assets 23.4 31.1
Current liabilities other than debt 14.2 34.0
Other - net 81.5 20.8
------- -------
Net cash provided by operating activities 907.2 744.8
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (425.7) (474.0)
Property sales and other transactions 4.9 76.1
Investment purchases (36.2) (61.4)
Investment sales and other transactions 239.8 2.6
Advances and notes with NS (274.2) 50.0
Short-term investments - net (32.3) (25.6)
------- -------
Net cash used for investing activities (523.7) (432.3)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (210.5) (205.3)
Long-term debt proceeds 41.4 --
Repayments of long-term debt (95.5) (66.5)
------- -------
Net cash used for financing activities (264.6) (271.8)
------- -------
Net increase in cash and cash equivalents 118.9 40.7
CASH AND CASH EQUIVALENTS:*
At beginning of year 2.3 11.5
------- -------
At end of period $ 121.2 $ 52.2
======= =======
- ----------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 34.8 $ 33.1
Income taxes $ 179.6 $ 228.9
* 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 September 30, 1994, and the results of operations and cash flows
for the nine months ended September 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. A further update is included in Part II, Item 1 - Legal
Proceedings, of this Form 10-Q.
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
---------------------
September 30, 1994 December 31, 1993
------------------ -----------------
Average Average
Balance Rate Balance Rate
------- -------- ------- --------
Due from NS:
Advances $ 621.4 3.8% $ 320.2 2.4%
Due to NS:
Notes 139.6 6.2% 112.6 4.0%
------- -------
Due from NS - net $ 481.8 $ 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 September 30, 1994, and December 31, 1993,
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)
NS Rail had intercompany federal income tax payables (which are
included in Deferred income taxes in the Consolidated Balance Sheets)
of $261.0 million and $175.1 million, respectively.
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 September 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 September 30, 1994, NS had
outstanding $500 million of long-term debt under this registration.
Since the first purchases in December 1987 through September 30, 1994,
NS has purchased and retired 56,708,500 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 $104.8 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 transferred). 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.
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
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
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 September 30, 1994, as follows:
Gross
Unrealized
Cost Holding Gains Fair Value
------ ------------- ----------
Short-term securities,
principally U.S. Treasury
securities $182.0 $ (0.4) $181.6
Equity securities -
7.3 million shares
of NS stock 20.6 430.9 451.5
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 September 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
September 30, 1994, net of related deferred taxes of $169.5 million, is
reflected as a separate component of Stockholders' equity in the
Consolidated Balance Sheet at September 30, 1994.
Total gross unrealized holding gains from the implementation date of
January 1, 1994, through September 30, 1994, declined $64.8 million.
The reduced gains primarily reflect the change in NS stock price from
$70-1/2 per share at December 31, 1993, to $62-1/4 per share at
September 30, 1994. Stockholders' equity for the nine months decreased
$39.5 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
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)
expenses $336.3 million ($208.4 million after-tax), and $22.8 million
($14.2 million after-tax), respectively.
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. Federal Income Tax Rate Increase in 1993
Tax legislation enacted in August 1993 increased the federal corporate
income tax rate from 34 percent to 35 percent, retroactive to
January 1, 1993. SFAS 109 (see Note 5) requires full recognition of
such a change in the period of enactment. The effect on NS Rail was
to reduce net income for the third quarter and nine months ended
September 30, 1993, by $58.2 million. The provision for income taxes
includes $51.6 million related to deferred tax assets and liabilities
reflected in the balance sheet, and $6.6 million related to 1993's
pretax earnings.
7. Special Charge Reversal in 1993
Based on NS Rail's success in eliminating reserve board positions and
other 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.
8. Early Retirement Program
Third-quarter 1993 compensation and benefits expense included a
$42.4 million charge for a program for salaried employees. The
principal benefit for those who participated in the program was
enhanced pension benefits.
PAGE 10
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Norfolk and Western Railway Company and Subsidiaries (NW)--Summarized
Consolidated Financial Information
SUMMARIZED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1994 1993 1994 1993
-------- -------- -------- --------
(In millions of dollars)
(Unaudited)
Railway operating revenues $ 454.3 $ 447.7 $1,375.3 $1,390.6
Railway operating expenses 340.0 361.0 1,040.2 1,063.9
-------- -------- -------- --------
Income from operations 114.3 86.7 335.1 326.7
Other-net 1.1 3.7 21.8 32.9
-------- -------- -------- --------
Income before income
taxes and cumulative
effects of accounting
changes 115.4 90.4 356.9 359.6
Income taxes:
Provision on pretax earnings 40.2 36.3 126.9 135.2
Adjustment of net deferred
tax liability for federal
rate increase -- 23.7 -- 23.7
-------- -------- -------- --------
Total income taxes 40.2 60.0 126.9 158.9
-------- -------- -------- --------
Income before accounting
changes 75.2 30.4 230.0 200.7
-------- -------- -------- --------
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 $ 75.2 $ 30.4 $ 230.0 $ 292.3
======== ======== ======== ========
PAGE 11
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Norfolk and Western Railway Company and Subsidiaries (NW)--Summarized
Consolidated Financial Information (continued)
SUMMARIZED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1994 1993
------------- ------------
(Unaudited)
Assets
Current assets $ 416.9 $ 322.5
Noncurrent assets 4,305.9 4,128.9
-------- --------
Total assets $4,722.8 $4,451.4
======== ========
Liabilities and stockholder's equity
Current liabilities $ 201.3 $ 200.4
Noncurrent liabilities 1,584.4 1,482.7
Stockholder's equity 2,937.1 2,768.3
-------- --------
Total liabilities and
stockholder's equity $4,722.8 $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 nine
months of 1994, which was principally comprised of unrealized gain on
its investments in NS stock, decreased Short-term investments (current
assets) by $0.3 million, and increased Investments (noncurrent assets)
by $47.9 million, Deferred taxes (noncurrent liabilities) by
$17.8 million, and Stockholder's equity by $29.8 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 nine months ended
September 30, 1993, Consolidated Statement of Income for the cumulative
effects of these changes.
10. Reclassifications
Certain reclassifications of related party balances have been made in
the December 31, 1993, Consolidated Balance Sheet to conform to the
1994 presentation.
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
RESULTS OF OPERATIONS
Net Income
- ----------
Net income increased $88.3 million, or 116 percent, in the third quarter of
1994 when compared with third quarter 1993. Last year's results included a
$58.2 million increase in income taxes due to a retroactive change in the
federal corporate income tax rate which became effective during that
quarter (see Note 6). Excluding the effect of the Adjustment of net
deferred tax liability for federal rate increase in 1993, third-quarter net
income was up $36.7 million, or 29 percent, over last year.
Net income for the nine months ended September 30, 1994, was up
$57.7 million, or 13 percent, over the same period last year, excluding the
1993 cumulative effect of accounting changes (see Note 5) and the Adjustment
of net deferred tax liability for federal rate increase (see Note 6).
Railway Operating Revenues
- --------------------------
Railway operating revenues increased $61.5 million, or 7 percent, in the
third quarter, and $127.7 million, or 5 percent, for the nine months ended
September 30, 1994, when compared with the same periods last year. The
changes in operating revenues were due to:
Third Quarter First Nine Months
1994 vs. 1993 1994 vs. 1993
Increase (Decrease) Increase (Decrease)
------------------- -------------------
(In millions of dollars)
Traffic volume (carloads) $ 73.6 $ 177.5
Revenue per unit/mix (10.3) (39.2)
Other (1.8) (10.6)
------- --------
$ 61.5 $ 127.7
======= ========
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
The principal revenue commodity groups and the changes from prior year were
as follows:
Third Quarter First Nine Months
1994 vs. 1993 1994 vs. 1993
Increase (Decrease) Increase (Decrease)
------------------- -------------------
(In millions of dollars)
Coal $ 24.8 $ 45.8
Merchandise:
Intermodal 12.9 34.8
Chemicals 11.3 28.4
Metals/construction 7.4 15.3
Agriculture 3.4 20.2
Automotive 2.6 (6.4)
Paper/forest 0.9 0.2
Other, principally switching
and demurrage (1.8) (10.6)
------- --------
$ 61.5 $ 127.7
======= ========
Coal
- ----
Coal revenues were up 8 percent for the third quarter and 5 percent for the
nine months, when compared with last year. These improvements resulted
primarily from increased utility coal traffic, up 15 percent for the third
quarter and 20 percent year-to-date, compared with 1993. This compares
very favorably with the national increase in electricity generation of less
than 1 percent for the quarter and 2 percent year-to-date. The growth
principally was due to the rebuilding of utility stockpiles and to new
business. Export coal traffic was up slightly for the quarter, improving
over the first and second quarters' declines related to the weak European
economy. Somewhat offsetting these improvements were reductions in
domestic metallurgical coal shipments due to depressed domestic coke use
caused by changes in steel-making technology. For the remainder of the
year, total coal traffic is expected to exceed last year's levels slightly.
Merchandise
- -----------
Third-quarter merchandise traffic produced revenue gains in all commodity
groups. And, for the year-to-date, all commodity groups except automotive
posted gains over 1993. Intermodal, NS Rail's fastest growing group, was
up 14 percent in the third quarter and 13 percent year-to-date, compared
with last year on traffic volume increases of 14 percent and 11 percent for
the quarter and nine months, respectively. The chemicals group, boosted by
strong movements of fertilizer, produced revenue increases of 10 percent
for the quarter and 8 percent year-to-date, compared with 1993. Increased
revenues also were reported in the metals/construction group, up 10 percent
for the quarter and 7 percent year-to-date, compared with 1993.
A 12 percent quarterly gain in steel business as a result of broad market
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
strength (steel is having its best year since 1973), coupled with increased
car supply and new traffic to Mexico, contributed to these improvements.
Automotive results in 1994 have been disappointing, although the third
quarter showed a small improvement over last year. Retooling downtimes at
certain plants served by NS Rail have been largely responsible for the
declines. However, traffic at automotive assembly plants unaffected by
retooling continues to do well. Over the next few years, growth and market
share may improve steadily, as retooling is completed and new plants, such
as the BMW and Mercedes-Benz facilities, come on line. The near-term outlook
for the other merchandise commodity groups is for continued strength, as
growth is anticipated in most markets, particularly intermodal and
metals/construction.
Railway Operating Expenses
- --------------------------
Despite increased traffic, railway operating expenses increased only
$8.7 million, or 1 percent, in the third quarter of 1994 and $34.0 million,
or 2 percent, for the nine-month period, when compared with 1993. The
largest increase for the quarter was in Diesel fuel, up $7.3 million, or
18 percent, due to higher consumption associated with an 8 percent increase
in carloads and to a 6 percent increase in the average price per gallon.
Also increasing were Casualties and other claims, up $5.8 million, or
19 percent, as a result of higher estimated claim settlement costs, and
Depreciation, up $3.3 million, or 4 percent, due to increased investment in
plant and equipment. Compensation and benefits expense declined slightly,
despite increased business levels, largely due to lower fringe benefit
costs and lower expenses related to stock-based compensation.
Included in third-quarter 1993 compensation and benefits expense were two
large items described in Notes 7 and 8. The first produced a credit and
was related to the 1991 special charge, which included a reserve for costs
necessary to achieve the productivity gains associated with the then new
crew-consist agreements. During 1993, agreement on terms for certain
further labor savings could not be reached. This, taken with the early
success in reducing excess employees, resulted in a $46 million surplus in
the crew consist reserve which was recorded as a credit to compensation and
benefits expense. The second item resulted from a voluntary early
retirement program completed in September 1993. The program's total cost
was $42.4 million and, in 1994, produced savings of about $12 million.
The small increase in year-to-date railway operating expenses was the net
result of increases in most expense categories which were partly offset by
declines in Compensation and benefits. The largest increase was in
Casualties and other claims, up $12.2 million, or 13 percent, due to higher
estimated claim settlement costs and to environmental clean-up costs
associated with a tank car leak. Other expenses rose $8.5 million, or
8 percent, due in part to higher relocation expenses related to new job
assignments following last year's early retirement program, and to a
variety of smaller factors. Diesel fuel costs were up $9.1 million,
or 7 percent, largely due to increased consumption driven by a 7 percent
rise in carloadings. Compensation and benefits expenses declined
$16.8 million, or 2 percent, principally as a result of lower employment
PAGE 15
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
taxes associated with the expiration in June 1993 of the Railroad Retirement
Repayment Tax and reduced accruals for postretirement benefits resulting
from a change in the benefit plan's creditable service period. Last year's
early retirement program also had a favorable impact on Compensation and
benefits expenses in 1994.
Other Income (Expense)
- ----------------------
Other income (expense) was down $3.2 million and $14.1 million,
respectively, compared with third quarter and year-to-date 1993. The
decrease was attributable to the Other-net category which declined
$8.1 million for the quarter and $29.9 million year-to-date largely
due to lower property gains. Interest income was up $5.8 million,
or 171 percent, for the quarter and $11.9 million, or 103 percent,
year-to-date. These improvements were due to an increase in invested
cash which resulted from the corporate owned life insurance borrowing
(see Note 4) and interest on short-term advances due from NS. Interest
expense on debt was up $0.9 million, or 12 percent, for the third
quarter but declined $3.9 million, or 15 percent, year-to-date. The
quarterly increase was due to an adjustment of capitalized interest,
whereas the year-to-date decline reflects decreasing levels of debt.
Provision for Income Taxes
- --------------------------
The provision for income taxes in the third quarter totaled $98.8 million,
for an effective tax rate of 37.5 percent, compared with an effective tax
rate of 64.3 percent in 1993. For the first nine months of 1994, income
taxes were $286.5 million for an effective tax rate of 36.7 percent,
compared with an effective tax rate of 45.1 percent in 1993. The unusually
high effective rates in 1993 primarily were related to the retroactive
1 percent increase in the federal corporate income tax rate (see Note 6).
Excluding the retroactive increase, third-quarter and year-to-date 1993
effective tax rates would have been 37.1 percent and 36.8 percent,
respectively.
FINANCIAL CONDITION AND LIQUIDITY
September 30, 1994 December 31, 1993
------------------ -----------------
(In millions of dollars)
Cash and short-term investments $302.8 $152.0
Working capital $211.7 $259.4
Current ratio 1.3 1.3
Debt to total capitalization 9.2 % 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 Net cash provided by operating activities
compared with the first nine months of 1993 primarily was due to higher
income from operations and lower income tax payments.
PAGE 16
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 FLOWS FROM INVESTING ACTIVITIES were affected principally by capital
spending for property additions, advances to NS, 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 in
Investment sales and other transactions in the Consolidated Statements of
Cash Flows and for the increase in Cash and short-term investments in the
table on page 15.
CASH FLOWS FROM FINANCING ACTIVITIES reflect primarily uses of cash, as
total debt issued amounted to only $41.4 million for the nine months
ended September 30, 1994. A portion of the proceeds from this debt
issuance had not been spent as of the end of the quarter and is reflected
in Other assets in the Consolidated Balance Sheet.
As described in Note 3, NS has issued a significant amount of long-term
debt in recent years which will be serviced primarily with funds from
NS Rail, NS' principal subsidiary.
OTHER
Lease renewal negotiations continue with respect to 300 miles of leased
road in North Carolina. These leases are scheduled to expire at the end
of 1994. If the leases are not renewed, NS Rail's railroads could be
required to continue using the lines subject to conditions prescribed by
the ICC, or they 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.
PAGE 17
PART II - OTHER INFORMATION
---------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
Item 1. 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 legal
counsel, is of the opinion that NS Rail's ultimate liability in this matter
will not materially affect the consolidated financial position of NS Rail.
Accordingly, unless circumstances result in a reassessment of NS Rail's
financial exposure that is material--not currently anticipated--Management
expects to make no further report about this matter, which 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, 1992 and 1993.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended
September 30, 1994.
PAGE 18
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: November 10, 1994 /s/ Dezora M. Martin
------------------- ------------------------------------------
Dezora M. Martin
Corporate Secretary (Signature)
Date: November 10, 1994 /s/ John P. Rathbone
------------------- ------------------------------------------
John P. Rathbone
Vice President and Controller
(Principal Accounting Officer) (Signature)
PAGE 19
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
INDEX TO EXHIBITS
-----------------
Electronic
Submission
Exhibit
Number Description Page
- ----------- ------------------------------------------- ----
27 Financial Data Schedule (This exhibit is
required to be submitted electronically
pursuant to the rules and regulations of
the Securities and Exchange Commission
and shall not be deemed filed for purposes
of Section 11 of the Securities Act of 1933
or Section 18 of the Securities Exchange
Act of 1934.) 20