PAGE 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K405
(X)ANNUAL REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998.
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; 1-5462
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 (757) 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:
Norfolk and Western Railway Company 4.85% Subordinated Income
Debentures, due November 15, 2015; Guarantee of Norfolk Southern
Railway Company with respect to $1,754,900 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 $4,466,000 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).
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-K405 or any amendment to this Form 10-K405. (X)
PAGE 2
The aggregate market value of the voting stock held by
nonaffiliates as of February 26, 1999: $42,674,368.
The number of shares outstanding of each of the registrant's
classes of Common Stock, as of February 26, 1999: 16,668,997.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement (to
be dated April 15, 1999), 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 16
4. Submission of Matters to a Vote of Security
Holders 16
Executive Officers of the Registrant 17
Part II 5. Market for Registrant's Common Stock and
Related Stockholder Matters 24
6. Selected Financial Data 25
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 26
7A. Quantitative and Qualitative Disclosures
About Market Risk 42
8. Financial Statements and Supplementary Data 43
9. Changes in and Disagreements with
Accountants on Accounting
and Financial Disclosure 70
Part III 10. Directors and Executive Officers of the
Registrant 71
11. Executive Compensation 71
12. Security Ownership of Certain Beneficial
Owners and Management 71
13. Certain Relationships and Related
Transactions 71
Part IV 14. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K 72
Index to Consolidated Financial Statement
Schedule 72
Power of Attorney 75
Signatures 75
Exhibit Index 79
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 (N&W) became subsidiaries of Norfolk Southern Corporation
(NS), a transportation holding company. Effective Dec. 31, 1990, NS
transferred all the common stock of N&W to Southern, and Southern's
name was changed to Norfolk Southern Railway Company. Effective
Sept. 1, 1998, N&W was merged with and into Norfolk Southern Railway.
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 Dec. 31, 1998,
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
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. In June 1989, NS announced its intention to
purchase up to 250,000 shares of Norfolk Southern Railway's Series A
Stock during the subsequent two-year period. Subsequently, NS
extended the stock purchase program through 1996. As of Dec. 31,
1996, NS had purchased 176,608 shares of Series A Stock at a total
cost of $6.7 million. As of Dec. 31, 1998, NS held a total of
176,703 shares; consequently, as of the same date, NS held
94.8 percent of the voting stock of Norfolk Southern Railway.
JOINT ACQUISITION OF CONRAIL INC. BY NS - During 1997, NS
and CSX Corporation (CSX) completed the acquisition of Conrail Inc.,
the owner of Consolidated Rail Corporation, the major freight railroad
in the Northeast. Norfolk Southern Railway will begin providing rail
freight services on portions of Conrail's route system after the
Closing Date, which NS and CSX have agreed will be June 1, 1999 (see
"Joint Acquisition of Conrail by NS" on page 36 and Note 2 on
page 52). Implementation of the Conrail transaction will expand
NS Rail's service area considerably, adding approximately 7,200
route-miles of railroad through an operating agreement, and giving it
access to most of the major ports on the East Coast, to New York City
and the Northeast, and to the Midwest. In addition, NS Rail's
equipment fleet will be augmented by approximately 1,100 locomotives,
27,200 freight cars, and 1,200 intermodal containers that Norfolk
Southern Railway will lease from a Conrail subsidiary on the Closing
Date.
PAGE 5
OPERATIONS - As of Dec. 31, 1998, NS Rail operated
approximately 14,400 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 in the Province of Ontario, Canada. Of this total, 12,115 miles
are owned with the balance operated under lease or trackage rights;
most of this total is main line track. In addition, NS Rail operates
10,780 miles of passing, industrial, yard and side tracks.
NS Rail has major leased lines between Cincinnati, Ohio, and
Chattanooga, Tennessee, and in the State of North Carolina.
The Cincinnati-Chattanooga lease, covering about 335 miles,
expires in 2026, and is subject to an option to extend the lease for
an additional 25 years, at terms to be agreed upon.
The North Carolina leases, covering approximately 330 miles,
expired by their terms at the end of 1994. Although a lease extension
agreement was approved by the boards of both NS and the North Carolina
Railroad Company (NCRR), the U.S. District Court in Raleigh ruled that
there was no quorum at the stockholders' meeting where the agreement
had been approved and enjoined the parties from performing under the
extension agreement. NCRR has suits pending against NS and various
subsidiaries in federal court in Raleigh to enforce rights under the
expired leases and at the STB to seek the establishment of terms and
conditions of NS Rail's continued use and the compensation therefor.
NS Rail presently is operating over the leased lines under the
requirements of federal law, and will continue to do so until the
matter has been resolved through agreement or a decision by the STB
establishing reasonable conditions or permitting discontinuance of
such operations. Whatever the ultimate resolution of the litigation,
it is not expected to have a material effect on NS Rail's consolidated
financial statements.
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 include: Norfolk, Virginia;
Morehead City, North Carolina; Charleston, South Carolina; Savannah
and Brunswick, Georgia; and Jacksonville, Florida. Gulf Coast ports
served include: Mobile, Alabama, and New Orleans, Louisiana.
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, a haulage arrangement with the
Florida East Coast Railway allows NS Rail to provide single-line
service to and from south Florida, including the port cities of Miami,
West Palm Beach and Fort Lauderdale. The system's lines also reach
many individual 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
PAGE 6
the heaviest volumes of freight include those from the Appalachian
coal fields of Virginia, West Virginia and Kentucky to Norfolk and
Sandusky, Ohio; Buffalo to Chicago and Kansas City; Chicago to
Jacksonville (via Cincinnati, Chattanooga and Atlanta); and
Washington, D.C./Hagerstown, Maryland, 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.
NS Rail and other railroads have entered into service
interruption agreements, effective Dec. 30, 1994, providing
indemnities to parties affected by a strike over specified industry
issues. If NS Rail was so affected, it could receive daily
indemnities from non-affected parties; if parties other than NS Rail
were affected, it could be required to pay indemnities to those
parties. If NS Rail were required to pay the maximum amount of
indemnities required of it under these agreements -- an event
considered unlikely at this time -- such liability should not exceed
approximately $85 million.
RAILWAY OPERATING REVENUES - NS Rail's total railway
operating revenues were $4.2 billion in 1998. Revenue, shipments and
revenue yield by principal railway operating revenue sources for the
past five years are set forth in the following table:
Year Ended December 31,
Principal Sources --------------------------------------------
of Railway
Operating Revenues 1998 1997 1996 1995 1994
- ------------------ ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipment)
COAL
Revenues $1,252 $1,301 $1,305 $1,268 $1,290
% of total
revenues 30% 31% 32% 32% 33%
Shipments 1,310 1,324 1,310 1,267 1,274
% of total
shipments 27% 28% 29% 29% 30%
Revenue Yield $ 956 $ 983 $ 996 $1,001 $1,013
CHEMICALS
Revenues $ 574 $ 585 $ 560 $ 541 $ 538
% of total
revenues 13% 14% 14% 14% 14%
Shipments 401 405 385 374 376
% of total
shipments 8% 8% 8% 8% 9%
Revenue Yield $1,431 $1,446 $1,456 $1,447 $1,433
AUTOMOTIVE
Revenues $ 566 $ 492 $ 489 $ 449 $ 429
% of total
revenues 13% 11% 12% 11% 11%
Shipments 487 361 354 328 317
% of total
shipments 10% 8% 8% 7% 7%
Revenue Yield $1,162 $1,364 $1,379 $1,368 $1,352
PAGE 7
Year Ended December 31,
Principal Sources --------------------------------------------
of Railway
Operating Revenues 1998 1997 1996 1995 1994
- ------------------ ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipment)
PAPER/CLAY/FOREST
Revenues $ 534 $ 539 $ 513 $ 537 $ 522
% of total
revenues 13% 13% 12% 13% 13%
Shipments 445 457 438 459 464
% of total
shipments 9% 9% 10% 10% 11%
Revenue Yield $1,200 $1,178 $1,171 $1,170 $1,124
AGRI./CONSUMER PROD./GOVT.
Revenues $ 383 $ 391 $ 393 $ 394 $ 380
% of total
revenues 9% 9% 9% 10% 10%
Shipments 355 366 376 391 383
% of total
shipments 8% 8% 8% 9% 9%
Revenue Yield $1,079 $1,065 $1,045 $1,007 $ 992
METALS/CONSTRUCTION
Revenues $ 373 $ 368 $ 354 $ 349 $ 330
% of total
revenues 9% 9% 9% 8% 8%
Shipments 372 374 359 367 366
% of total
shipments 8% 8% 8% 8% 8%
Revenue Yield $1,003 $ 985 $ 986 $ 951 $ 902
INTERMODAL
(Trailers, Containers,
and RoadRailers)
Revenues $ 539 $ 547 $ 487 $ 474 $ 429
% of total
revenues 13% 13% 12% 12% 11%
Shipments 1,443 1,472 1,331 1,263 1,127
% of total
shipments 30% 31% 29% 29% 26%
Revenue Yield $ 374 $ 372 $ 366 $ 376 $ 380
Total Railway
Operating Revenues $4,221 $4,223 $4,101 $4,012 $3,918
Total Railway
Shipments 4,813 4,759 4,553 4,449 4,307
Railway Revenue
Yield $ 877 $ 887 $ 901 $ 902 $ 910
Note: Revenues previously reported as "other railway
revenues" (principally switching and demurrage) have been
allocated to revenues reported for each commodity group.
Shipments include general merchandise and coal
rail carloads, and intermodal rail and RoadRailer(RT) units.
PAGE 8
COAL TRAFFIC - Coal, coke, and iron ore -- most of which is
bituminous coal -- is NS Rail's principal commodity group. NS Rail
originated 119 million tons of coal, coke, and iron ore in 1998 and
handled a total of 134 million tons. Originated tonnage and total
tons handled remained stable compared with 1997. Revenues from coal,
coke and iron ore account for about 30 percent of NS Rail's total
railway operating revenues.
The following table shows total coal, coke, and iron ore
tonnage originated on line, received from connections, and handled for
the past five years:
Tons of Coal, Coke, and Iron Ore (Millions)
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Originated 119 119 117 114 115
Received 15 15 13 11 11
--- --- --- --- ---
Handled 134 134 130 125 126
=== === === === ===
Of the 119 million tons of coal, coke, and iron ore
originated on NS Rail's lines in 1998, the approximate breakdown by
origin state was as follows:
Origin State Millions of Tons
------------ ----------------
West Virginia 41
Virginia 34
Kentucky 27
Indiana 7
Alabama 5
Illinois 3
Tennessee 1
Other 1
---
Total 119
===
Of the 134 million tons handled, approximately 25 million
moved for export, principally through NS Rail's pier facilities at
Norfolk (Lamberts Point), Virginia; 18 million moved to domestic and
Canadian steel industries; 83 million of steam coal moved to electric
utilities; and 8 million moved to other industrial and miscellaneous
users.
NS Rail moved 6 million tons of originated coal, coke, and
iron ore to various docks on the Ohio River, and 5 million tons to
various Lake Erie ports. Other than coal for export, virtually all
coal handled by NS Rail was terminated in states situated east of the
Mississippi River.
Total coal handled through all system ports in 1998 was
39 million tons. Of this total, 69 percent, or 27 million tons
(including coastwise traffic), moved through Lamberts Point, a
16 percent decrease, compared with the 32 million tons handled in
1997.
PAGE 9
The quantities of NS Rail export coal handled through
Lamberts Point for the past five years were as follows:
Export Coal through Lamberts Point
(Millions of tons)
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
24 28 26 25 24
See the discussion of coal traffic, by type of coal, in
Part II, Item 7, "Management's Discussion and Analysis."
MERCHANDISE TRAFFIC - The merchandise traffic group consists
of intermodal and general merchandise, which consists of five major
commodity groupings: chemicals; automotive; paper, clay, and forest
products; agriculture, consumer products, and government; and metals
and construction. Total merchandise revenues in 1998 were
$3.0 billion, a 2 percent increase, compared with 1997. Merchandise
carloads and intermodal units handled in 1998 were 3.50 million,
compared with 3.43 million handled in 1997, an increase of 2 percent.
In 1998, 113 million tons of merchandise freight, or
approximately 67 percent of total merchandise tonnage handled by
NS Rail, originated on line. The balance of merchandise traffic was
received from connecting carriers, 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.
Revenues in only two of the six market groups comprising
merchandise traffic improved in 1998. The only large gain was in the
automotive group, up $74 million.
See the discussion of general merchandise rail traffic by
commodity group and intermodal rail traffic in Part II, Item 7,
"Management's Discussion and Analysis."
OPERATING STATISTICS - The following table sets forth
certain statistics relating to NS Rail's operations for the past five
years:
Year Ended December 31,
---------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Revenue ton miles
(billions) 133 136 130 127 122
Freight train miles
traveled (millions) 53.0 49.7 49.4 48.5 46.0
Revenue per ton mile $0.0316 $0.0311 $0.0316 $0.0317 $0.0320
Revenue tons per train 2,517 2,732 2,625 2,611 2,655
Revenue ton miles
per man-hour worked 2,635 2,905 2,764 2,679 2,579
Percentage ratio of
railway operating
expenses to railway
operating revenues 75.3% 71.3% 71.6% 73.5% 73.2%
PAGE 10
FREIGHT RATES - In 1998, NS Rail continued its reliance on
private contracts and exempt price quotes as the predominant pricing
mechanism. Thus, a major portion of NS Rail's freight business is not
currently 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 1998, NS Rail was found by the STB to be "revenue
adequate" based on results for the year 1997. A railroad is "revenue
adequate" under the applicable law when its return on net investment
exceeds the rail industry's composite cost of capital.
The revenue adequacy measure is one of several factors
considered by the STB when it is called upon to rule on the
reasonableness of regulated rates.
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,
North Carolina. Commuter trains are operated on the NS Rail line
between Manassas and Alexandria under contract with two transportation
commissions of the Commonwealth of Virginia. Both of these services
are under contracts providing for reimbursement of related expenses
incurred by NS Rail. NS Rail also leases the Chicago to Manhattan,
Illinois, line to the Commuter Rail Division of the Regional
Transportation Authority of Northeast Illinois.
After the Closing Date (see "Joint Acquisition of Conrail by
NS" on page 36), Norfolk Southern Railway will operate that portion of
Conrail's routes and assets allocated to Conrail's wholly owned
subsidiary, Pennsylvania Lines LLC. As a result, Norfolk Southern
Railway will provide freight service over lines with significant
ongoing Amtrak and commuter passenger operations, and will conduct
freight operations over some trackage owned by Amtrak or by commuter
entities.
PAGE 11
RAILWAY PROPERTY:
EQUIPMENT - As of December 31, 1998, 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 2,094 0 2,094 6,798,350
Switching 110 0 110 162,300
Auxiliary units 60 0 60 0
------ ------ ------ ---------
Total locomotives 2,264 0 2,264 6,960,650
====== ====== ====== =========
Freight Cars: (Tons)
Hopper 20,668 1,302 21,970 2,306,456
Box 19,047 758 19,805 1,559,164
Covered Hopper 12,154 2,231 14,385 1,568,234
Gondola 28,236 1,053 29,289 3,150,884
Flat 4,250 858 5,108 383,605
Caboose 197 0 197 0
Other 797 0 797 63,964
------ ------ ------ ---------
Total freight cars 85,349 6,202 91,551 9,032,307
====== ====== ====== =========
Other:
Work equipment 6,275 3 6,278
Vehicles 3,546 0 3,546
Highway trailers
and containers 1,901 2,548 4,449
Miscellaneous 1,495 1,798 3,293
------ ------ ------
Total other 13,217 4,349 17,566
====== ====== ======
* Includes equipment leased to outside parties and equipment subject
to equipment trusts, condition sale agreements, and capitalized
leases.
PAGE 12
The following table indicates the number and year of
purchase for locomotives and freight cars owned at Dec. 31, 1998:
Year Built
-------------------------------------------------------
1988- 1982- 1981 &
1998 1997 1996 1995 1994 1993 1987 Before Total
---- ---- ---- ---- ---- ---- ---- ------ -----
Locomotives:
Number of
units 116 120 119 125 25 288 396 1,075 2,264
Percent of
fleet 5 5 5 6 1 13 17 48 100%
Freight cars:
Number
of units 1,105 531 787 1,036 780 6,365 2,599 72,146 85,349
Percent
of fleet 1 1 1 1 1 7 3 85 100%
The average age of the freight car fleet at Dec. 31, 1998,
was 23.6 years. During 1998, 938 freight cars were retired. As of
Dec. 31, 1998, the average age of the locomotive fleet was 15.4 years.
During 1998, 52 locomotives, the average age of which was 20.6 years,
were retired. The average age of retired locomotives decreased in
1998 due to: (1) a disproportionate share of early retirements due to
casualties and service failures, and (2) retention of older units in
anticipation of the Closing Date. Since 1988, about 27,000 coal cars
have been rebodied. As a result, the remaining serviceability of the
freight car fleet is greater than may be inferred from the high
percentage of freight cars built in earlier years.
Ongoing freight car and locomotive maintenance programs are
intended to ensure the highest standards of safety, reliability,
customer satisfaction, and equipment marketability. In past years,
the freight car bad order ratio reflected the storage of certain types
of cars which were not in high demand. The ratio has declined more
recently as a result of a disposition program for underutilized,
unserviceable and over-age revenue cars. In this connection, an
orderly disposition of 17,000 freight cars, begun in October 1994, was
completed in 1997. The locomotive bad order ratio rose in 1997,
particularly in the early months of the year as older units required
additional servicing and some new units were out-of-service related to
warranty work. By year-end 1997, the locomotive bad order ratio had
returned to a more historic level.
Annual Average Bad Order Ratio
----------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Freight Cars (excluding
cabooses):
NS Rail 4.1% 4.6% 4.8% 5.8% 6.7%
Locomotives:
NS Rail 4.3% 5.0% 4.5% 4.7% 4.7%
PAGE 13
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) ranges from 100 to 140 pounds per yard. Of the 22,382 miles
of track maintained as of Dec. 31, 1998, 15,955 were laid with welded
rail.
The density of traffic on running tracks (main line trackage
plus passing tracks) during 1998 was as follows:
Gross tons of
freight carried
per track mile Track miles of Percent
(Millions) running tracks* of total
--------------- --------------- --------
0-4 4,334 27
5-19 5,050 31
20 and over 6,709 42
------ ---
16,093 100
====== ===
* Excludes trackage rights.
The following table summarizes certain information about
track roadway additions and replacements during the past five years:
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Track miles of rail installed 429 451 401 403 480
Miles of track surfaced 4,715 4,703 4,686 4,668 4,760
New crossties installed
(millions) 2.0 2.2 1.9 2.0 1.7
MICROWAVE SYSTEM - The NS Rail microwave system, consisting
of 7,610 radio path miles, 417 active stations, and 4 passive repeater
stations, provides communications between most operating locations.
The microwave 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.
TRAFFIC CONTROL - Of a total of 12,784 road miles operated
by NS Rail, excluding trackage rights over foreign lines, 5,400 road
miles are governed by centralized traffic control systems (of which
560 miles are controlled by data radio from 43 microwave site
locations) and 2,500 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 system locations to the central computer
complex in Atlanta, Georgia. 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
PAGE 14
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, these facilities afford substantial
capacity for, and are 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.
NS Rail has under way a project to review, and modify as
necessary, computer and other systems for Year-2000 compliance. See
discussion of Year-2000 compliance efforts on page 37 in Part II,
Item 7, "Management's Discussion and Analysis."
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 - Certain railroad equipment is subject to the
prior lien of equipment financing obligations amounting to
approximately $725 million as of Dec. 31, 1998, and $598 million at
Dec. 31, 1997.
CAPITAL EXPENDITURES - Capital expenditures for road,
equipment and other property for the past five years were as follows
(including capitalized leases):
Capital Expenditures
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In millions of dollars)
Railway property:
Road $ 583 $ 580 $ 428 $ 379 $ 383
Equipment 419 304 326 333 235
Other property -- -- -- 1 22
------ ------ ------ ------ ------
Total $1,002 $ 884 $ 754 $ 713 $ 640
====== ====== ====== ====== ======
/TABLE>
Capital spending and maintenance programs are and have been
designed to assure the ability to provide safe, efficient, and
reliable transportation services. For 1999, NS Rail has budgeted
approximately $1 billion of capital spending, of which $300 million
are initial outlays for facilities and equipment related to the
Conrail transaction. Capital spending is expected to remain at
historically high levels, as projects related to the operation of
Conrail's routes and assets will continue after the Closing Date.
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. See the discussion of
"Environmental Matters" on page 40 in Part II, Item 7, "Management's
Discussion and Analysis," and in Note 16 to the Consolidated Financial
Statements on page 66.
PAGE 15
EMPLOYEES - NS Rail employed an average of 24,185 employees
in 1998, compared with an average of 23,323 in 1997 (including Norfolk
Southern Corporation's employees whose primary duties relate to rail
operations). The approximate average cost per employee during 1998
was $49,700 in wages and $17,600 in employee benefits.
Approximately 85 percent of NS Rail's employees are
represented by labor unions under collective bargaining agreements
with 15 different labor organizations. The agreements currently in
force will remain in effect through Dec. 31, 1999, and thereafter
until new agreements are reached or until the Railway Labor Act's
procedures are exhausted.
GOVERNMENT REGULATION - In addition to environmental,
safety, securities and other regulations generally applicable to all
businesses, NS Rail is subject to regulation by the STB, which
succeeded the ICC on Jan. 1, 1996. The STB has jurisdiction over some
rates, routes, conditions of service, and the extension or abandonment
of rail lines. The STB 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 railroads, begun
over a decade ago by the ICC under the Staggers Rail Act of 1980, has
continued under the STB and additional rail business could be exempted
from regulation in the future. Significant exemptions 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 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 transportation contracts.
Efforts will be made in 1999 to re-subject the rail industry
to unwarranted federal economic regulation. The Staggers Rail Act of
1980, which substantially reduced such regulation, encouraged and
enabled rail carriers to innovate and to compete for business, thereby
contributing to the economic health of the nation and to the
revitalization of the industry. Accordingly, NS Rail and other rail
carriers vigorously will oppose these counterproductive efforts to
re-impose or to authorize re-imposing such economic regulation.
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.
PAGE 16
NS Rail's primary rail competitor is the CSX system; both
operate throughout much of the same territory, and implementation of
the Conrail transaction should extend the area in which they compete.
Other railroads also operate in parts of the territory. NS Rail also
competes with motor carriers, water carriers and with shippers who
have the additional option of handling their own goods in private
carriage.
Certain cooperative strategies between railroads and between
railroads and motor carriers enable carriers to compete more
effectively in specific markets.
Item 3. Legal Proceedings.
- ------ -----------------
None.
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 1998.
PAGE 17
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, 1999, relating to
these officers:
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
David R. Goode, 58, Present position since September
President and 1992. Also, Chairman, President,
Chief Executive Officer and Chief Executive Officer of
Norfolk Southern Corporation
since September 1992.
L. I. Prillaman, 55, Present position since August 1,
Vice President and 1998. Also, Vice Chairman and
Chief Marketing Officer Chief Marketing Officer of
Norfolk Southern Corporation
since August 1, 1998. Served as
Vice President and Chief Traffic
Officer of Norfolk Southern
Railway and Executive Vice
President-Marketing of Norfolk
Southern Corporation from October
1995 to August 1998, and prior
thereto was Vice President-
Properties.
Stephen C. Tobias, 54, Present position since August 1,
Vice President and 1998. Also, Vice Chairman and
Chief Operating Officer Chief Operating Officer of
Norfolk Southern Corporation
since August 1, 1998. Served as
Vice President of Norfolk
Southern Railway from October
1993 to August 1998, Executive
Vice President-Operations of
Norfolk Southern Corporation from
July 1994 to August 1998, and
prior thereto was Senior Vice
President-Operations.
PAGE 18
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
Henry C. Wolf, 56, Present position since August 1,
Vice President and 1998. Also, Vice Chairman and
Chief Financial Officer Chief Financial Officer of
Norfolk Southern Corporation
since August 1, 1998, and prior
thereto was Vice President-
Finance of Norfolk Southern
Railway and Executive Vice
President-Finance of Norfolk
Southern Corporation.
Paul N. Austin, 55, Present position since September 22,
Vice President- 1998. Also, Vice President-Human
Human Resources Resources and Assistant to
Chairman of Norfolk Southern
Corporation since September 22,
1998. Served as Vice President-
Personnel and Assistant to
Chairman of Norfolk Southern
Corporation from September 1,
1998, to September 21, 1998, Vice
President-Personnel of Norfolk
Southern Railway and Norfolk
Southern Corporation from June
1994 to September 1998, and prior
thereto was Assistant Vice
President-Personnel.
James C. Bishop, Jr., 62, Present position since March 1996.
Vice President- Also, Executive Vice President-
Law Law of Norfolk Southern
Corporation since March 1996, and
prior thereto was Vice President-
Law.
R. Alan Brogan, 58, Present position since April 1,
Vice President- 1998. Also, Executive Vice
Corporate President-Corporate of Norfolk
Southern Corporation since
April 1, 1998, and prior thereto
was Vice President-Transportation
Logistics of Norfolk Southern
Railway and Executive Vice
President-Transportation
Logistics of Norfolk Southern
Corporation.
David A. Cox, 63, Present position since December
Vice President- 1995. Also, Vice President-
Properties Properties of Norfolk Southern
Corporation since December 1995,
and prior thereto was Assistant
Vice President-Industrial
Development.
PAGE 19
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
Timothy P. Dwyer, 49, Present position since August 23,
Vice President- 1998. Also, Vice President-
Marketing Services Marketing Services of Norfolk
Southern Corporation since
August 23, 1998. Served as
Senior Vice President-Operations
of Conrail from June 1998 to
August 1998, Senior Vice
President-Unit Train Service
Group of Conrail from November
1994 to June 1998, and prior
thereto was Vice President-Unit
Train Service Group of Conrail.
Thomas L. Finkbiner, 46, Present position since August 1993.
Vice President- Also, Vice President-Intermodal
Intermodal of Norfolk Southern Corporation
since August 1993.
Nancy S. Fleischman, 51, Present position since August 1997.
Vice President Also, Vice President of Norfolk
Southern Corporation since August
1997, and prior thereto was
Assistant Vice President-
Strategic Planning.
Robert C. Fort, 54, Present position since December
Vice President- 1996. Also, Vice President-
Public Relations Public Relations of Norfolk
Southern Corporation since
December 1996, and prior thereto
was Assistant Vice President-
Public Relations.
John W. Fox, Jr., 51, Present position since October
Vice President- 1995. Also, Vice President-Coal
Coal Marketing Marketing of Norfolk Southern
Corporation since October 1995,
and prior thereto was Assistant
Vice President-Coal Marketing.
Lewis D. Hale, Jr., 52, Present position since August 1,
Vice President- 1998. Also, Vice President-
Transportation Transportation of Norfolk
Southern Corporation since
August 1, 1998. Served as
Assistant Vice President-
Mechanical from December 1995 to
August 1998, and prior thereto
was General Manager Western
Region.
PAGE 20
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
James A. Hixon, 45, Present position since June 1993.
Vice President- Also, Vice President-Taxation of
Taxation Norfolk Southern Corporation
since June 1993.
Thomas C. Hostutler, 62, Present position since August 16,
Vice President- 1998. Also, Vice President-
Internal Audit Internal Audit of Norfolk
Southern Corporation since
August 16, 1998, and prior
thereto was Senior Assistant Vice
President-Corporate Accounting.
H. Craig Lewis, 54, Present position since August 1,
Vice President- 1998. Also, Vice President-
Corporate Affairs Corporate Affairs of Norfolk
Southern Corporation since
August 1, 1998. Served as
Regional Vice President from
August 1997 to August 1998, and
prior thereto was a partner in
a Pennsylvania law firm.
Jon L. Manetta, 60, Present position since August 1,
Senior Vice President- 1998. Also, Senior Vice
Operations President-Operations of Norfolk
Southern Corporation since
August 1, 1998. Served as Vice
President-Transportation &
Mechanical of Norfolk Southern
Railway and Norfolk Southern
Corporation from December 1995 to
August 1998, Vice President-
Transportation from June 1994 to
December 1995, and prior thereto
was Assistant Vice President-
Transportation.
Mark D. Manion, 46, Present position since August 1,
Vice President- 1998. Also, Vice President-
Mechanical Mechanical of Norfolk Southern
Corporation since August 1, 1998.
Served as General Manager Western
Region from December 1995 to
August 1998, Assistant Vice
President-Transportation from
July 1994 to December 1995, and
prior thereto was Division
Superintendent, Lake Division.
PAGE 21
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
Harold C. Mauney, Jr., 60, Present position since August 1997.
Vice President- Also, Vice President-Public
Public Affairs Affairs of Norfolk Southern
Corporation since August 1997.
Served as Vice President-
Operations Planning and Budget of
Norfolk Southern Railway and
Norfolk Southern Corporation from
December 1996 to August 1997, and
prior thereto was Vice President-
Quality Management.
Donald W. Mayberry, 55, Present position since December
Vice President- 1995. Also, Vice President-
Research and Tests Research and Tests of Norfolk
Southern Corporation since
December 1995, and prior thereto
was Vice President-Mechanical.
James W. McClellan, 59, Present position since August 1,
Senior Vice President- 1998. Also, Senior Vice
Planning President-Planning of Norfolk
Southern Corporation since
August 1, 1998, and prior thereto
was Vice President-Strategic
Planning.
Kathryn B. McQuade, 42, Present position since August 16,
Vice President- 1998. Also, Vice President-
Financial Planning Financial Planning of Norfolk
Southern Corporation since
August 16, 1998, and prior
thereto was Vice President-
Internal Audit.
Charles W. Moorman, 47, Present position since October
Vice President- 1993. Also, Vice President-
Information Technology Information Technology of Norfolk
Southern Corporation since
October 1993.
Phillip R. Ogden, 58, Present position since August 1,
Senior Vice President- 1998. Also, Senior Vice
Engineering President-Engineering of Norfolk
Southern Corporation since
August 1, 1998, and prior thereto
was Vice President-Engineering.
John P. Rathbone, 47, Present position since December
Vice President and 1992. Also, Vice President and
Controller Controller of Norfolk Southern
Corporation since December 1992.
PAGE 22
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
William J. Romig, 54, Present position since December
Vice President 1992. Also, Vice President and
Treasurer of Norfolk Southern
Corporation since December 1992.
John M. Samuels, 55, Present position since January
Vice President- 1998. Also, Vice President-
Operations Planning Operations Planning and Budget of
and Budget Norfolk Southern Corporation
since January 1998. Previously
served as Vice President-
Operating Assets of Conrail from
January 1996 to January 1998,
Vice President-Mechanical of
Conrail from November 1994 to
January 1996, and prior thereto
was Vice President-Engineering of
Conrail.
Donald W. Seale, 46, Present position since August 1993.
Vice President- Also, Vice President-Merchandise
Merchandise Marketing Marketing of Norfolk Southern
Corporation since August 1993.
Robert S. Spenski, 64, Present position since June 1994.
Vice President- Also, Vice President-Labor
Labor Relations Relations of Norfolk Southern
Corporation since June 1994, and
prior thereto was Senior
Assistant Vice President-Labor
Relations.
Rashe W. Stephens, Jr., 57, Present position since December
Vice President- 1996. Also, Vice President-
Quality Management Quality Management of Norfolk
Southern Corporation since
December 1996, and prior thereto
was Assistant Vice President-
Public Affairs.
Charles J. Wehrmeister, 49, Present position since August 1,
Vice President- 1998. Also, Vice President-
Safety and Environmental Safety and Environmental of
Norfolk Southern Corporation
since August 1, 1998. Served as
Assistant Vice President-Safety
and Environmental from January
1995 to August 1998, and prior
thereto was Division
Superintendent, Virginia
Division.
PAGE 23
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
William C. Wooldridge, 56, Present position since February
Vice President 1997. Also, Vice President-Law
of Norfolk Southern Corporation
since March 1996, and prior
thereto was General Counsel-
Corporate.
Sandra T. Pierce, 44, Present position since June 1995.
Corporate Secretary Also, Assistant Corporate
Secretary of Norfolk Southern
Corporation since June 1995, and
prior thereto was Assistant
Corporate Secretary-Planning.
Ronald E. Sink, 56, Present position since September
Treasurer 1987.
PAGE 24
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.
PREFERRED STOCK INFORMATION
- ---------------------------
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 Dec. 31, 1998, 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, Sept. 15, and Dec. 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 its intention to purchase up to
250,000 shares of the outstanding Series A Stock during the subsequent
two-year period. Subsequently, NS extended the stock purchase program
through 1996. As of Dec. 31, 1996, NS had purchased 176,608 shares of
Series A Stock at a total cost of $6.7 million; as of the same date,
NS held a total of 176,703 shares.
PAGE 25
Item 6. Selected Financial Data.
- ------ -----------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Five-Year Financial Review
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
($ in millions)
RESULTS OF OPERATIONS:
Railway operating
revenues $ 4,221 $ 4,223 $ 4,101 $ 4,012 $ 3,918
Railway operating
expenses 3,178 3,010 2,936 2,949 2,869
------- ------- ------- ------- -------
Income from
railway operations 1,043 1,213 1,165 1,063 1,049
Other income (expense)
- net 90 (49) 39 44 46
Interest expense
on debt (25) (30) (34) (33) (28)
------- ------- ------- ------- -------
Income before
income taxes 1,108 1,134 1,170 1,074 1,067
Provision for income
taxes 383 380 401 372 385
------- ------- ------- ------- -------
Net income $ 725 $ 754 $ 769 $ 702 $ 682
======= ======= ======= ======= =======
FINANCIAL POSITION:
Total assets $12,017 $11,827 $11,053 $10,752 $10,289
Total long-term debt,
including current
maturities $ 760 $ 606 $ 598 $ 574 $ 540
Stockholders' equity $ 6,137 $ 6,392 $ 5,772 $ 5,645 $ 5,441
OTHER:
Capital expenditures $ 1,002 $ 884 $ 754 $ 713 $ 640
Number of stockholders
at year-end 2,317 2,519 2,763 3,025 3,281
Average number
of employees (1) 24,185 23,323 23,361 24,488 24,710
(1) The employee count includes NS' employees whose primary duties
relate to rail operations.
PAGE 26
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
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 44 and the five-year financial review on page 25.
SUMMARIZED RESULTS OF OPERATIONS
1998 Compared with 1997
- -----------------------
Net income in 1998 was $725 million, a decrease of 4%, compared
with 1997. The decline was principally due to a 14% decline in income
from railway operations, somewhat offset by higher nonoperating income
(see Note 3 on page 55).
1997 Compared with 1996
- -----------------------
Net income in 1997 was $754 million, a decrease of 2%. The
decline was primarily due to a first-quarter charge of $77 million
($50 million after taxes) for costs related to a credit agreement that
provided financing for the proposed acquisition of all Conrail stock
(see Note 2 on page 52). Excluding the effect of the charge for credit
facility costs, net income was up 5% over 1996's record results. The
improvement was largely attributable to a 4% increase in income from
railway operations.
RAILWAY OPERATING REVENUES AND EXPENSES
(Shown as a graph in the Annual Report to Stockholders)
($ in millions) 1998 1997 1996 1995 1994
--------------- ---- ---- ---- ---- ----
Revenues $4,221 $4,223 $4,101 $4,012 $3,918
Expenses 3,178 3,010 2,936 2,949 2,869
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
- --------------------------
Railway operating revenues were $4.2 billion in 1998, compared
with $4.2 billion in 1997 and $4.1 billion in 1996. The following
table presents a three-year comparison of revenues by market group.
PAGE 27
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
RAILWAY OPERATING REVENUES BY MARKET GROUP
($ in millions) 1998 1997 1996
--------------- ---- ---- ----
Coal $1,252 $1,301 $1,305
General merchandise:
Chemicals 574 585 560
Automotive 566 492 489
Paper/clay/forest 534 539 513
Agriculture/consumer/
government 383 391 393
Metals/construction 373 368 354
------ ------ ------
General merchandise 2,430 2,375 2,309
Intermodal 539 547 487
------ ------ ------
Total $4,221 $4,223 $4,101
====== ====== ======
In 1998, revenue increases in the automotive and metals and
construction groups were offset by revenue decreases in the remaining
market groups. As shown in the following table, volume gains were more
than offset by lower revenue per unit. However, almost all the volume
increase and revenue per unit decrease reflect the effects of the new
mixing centers (see discussion under the "Automotive" caption, below).
Revenues for the remaining market groups declined $76 million,
$58 million of which resulted from lower traffic volume and
$18 million of which resulted from lower revenue per unit. In 1997,
revenues increased or remained steady for all market groups, and
volume gains produced all the revenue improvement.
RAILWAY OPERATING REVENUE VARIANCE ANALYSIS
Increases (Decreases)
($ in millions) 1998 vs. 1997 1997 vs. 1996
--------------- ------------- -------------
Volume $ 114 $ 130
Revenue per unit (116) (8)
----- -----
Total $ (2) $ 122
===== =====
Following the Closing Date of the Conrail transaction (see "Joint
Acquisition of Conrail by NS" on page 36), total railway operating
revenues are expected to increase by about one-half: coal revenues are
expected to increase by about one-third; general merchandise revenues
are expected to increase by about one-half; and intermodal revenues
are expected to increase by about two-thirds.
COAL tonnage was unchanged in 1998, but revenues decreased 4%; an
increase in utility tonnage, especially shorter-haul (lower average
revenue) traffic, offset decreases in longer-haul (higher average
revenue) export and domestic metallurgical traffic. Coal revenues
represented 30% of total railway operating revenues in 1998, and 89%
of coal shipments originated on NS Rail's lines. In 1997, coal tonnage
increased 3%, primarily due to increased export and utility tonnage;
however, revenues decreased slightly as a result of shorter hauls.
PAGE 28
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
TOTAL COAL, COKE, AND IRON ORE TONNAGE
(In millions of tons) 1998 1997 1996
--------------------- ---- ---- ----
Utility 83 76 75
Export 25 29 27
Steel 18 21 20
Other 8 8 8
--- --- ---
Total 134 134 130
=== === ===
Utility coal traffic increased 9% in 1998, due to rising
electricity production in NS Rail's service area, the return of some
traffic to rail, and increased business from several customers.
In 1997, utility coal traffic increased 2%. Several of NS Rail's
utility customers shifted more generation to coal-fired plants, as
some nuclear power plants experienced downtime. New business resulting
from innovative marketing efforts also contributed to the increase.
The near-term outlook for utility coal remains positive. U.S.
demand for electricity continues to increase at a rate greater than
generation capacity is being added, and coal-fired generation
continues to be the cheapest marginal source of electricity. Increased
price competition resulting from utility deregulation could cause
utilities to seek to reduce costs and increase plant utilization.
These factors, coupled with excess capacity at certain low-cost, coal-
fired generating plants, could provide an opportunity for utility coal
volume growth. However, competitive pressures on utilities to reduce
costs also could put price pressure on generation source fuels,
including NS Rail-delivered coal.
Moreover, many of the mines served by NS Rail produce coals that
satisfy both the Phase I and Phase II requirements of the Clean Air
Act Amendments. In addition, an increasing bank of sulfur dioxide
allowances held by many NS Rail-served utilities should continue to
provide a market for other NS Rail-served mines for nearly a decade.
However, several recently adopted or proposed environmental
regulations could increase the cost of coal-fired generation.
After the Closing Date, NS Rail will gain direct access to 27
utility plants and to mines with an abundant supply of low-cost, high-
quality steam coal located on Conrail lines.
Export coal tonnage decreased 14% in 1998, due to weak economies
in Asia and a strong U.S. dollar. The dollar gained 20% or more
compared with the currencies of countries (such as Australia, South
Africa, and Indonesia) that provide the primary competition for U.S.
export coal. A significant decline in Asian demand for coal created
supplies that competed at deeply discounted prices with U.S. export
coal in Europe and South America. Steam coal exports declined to 0.4
million tons in 1998, compared with 1.7 million tons in 1997. U.S. low-
sulfur coals were not price-competitive due to the strength of the
dollar. In addition, natural gas has displaced much of the coal-fired
generation in Europe.
In 1997, export coal tonnage increased 7%, reaching the highest
level since 1992. Higher metallurgical coal demand from NS Rail-served
producers caused growth in shipments to Japan. Increased metallurgical
coal exports to Holland and Romania and increased shipments to Brazil
early in the year also contributed to the improvement.
The same factors that led to the decrease in 1998 volume are
expected to continue in 1999. The Asian recession in steel production
showed signs of moving into Europe in late 1998. In addition,
competition from Australian coal is expected to intensify, and U.S.
PAGE 29
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
coal exports may drop further if demand decreases for blast furnace
raw materials in Western Europe. Finally, the recent Kyoto Protocol
on climate change, if adopted, could put added downward pressure,
worldwide, on coal-fired power demand.
Conrail and its coal-producing customers are well established in
the export steam coal market, which might help NS Rail achieve greater
levels of participation. Furthermore, current NS Rail and Conrail coal
exporters should benefit from being able to ship their coal single-
line through both Baltimore, Md., and Norfolk, Va.
Steel coal domestic traffic declined 14% in 1998, due to plant
closures, reduced blast furnace operations, and the continuation of
aggressive producer pricing of higher volatile metallurgical coals not
located on NS Rail's lines.
In 1997, steel coal domestic traffic increased 5%, due to growth
in coke and iron ore shipments that more than offset decreased
metallurgical coal shipments.
Steel coal domestic traffic is expected to be adversely affected
by competition in domestic and foreign steel markets. Producers in
weak markets such as Russia, Japan, and Brazil are exporting much of
their steel at low prices to the United States and Canada.
Furthermore, with the reduction in blast-furnace capacity, coke
production in the United States continues to decline. Advanced
technologies that allow production of steel using little or no coke
could cause this market to decline slowly in the long term. However,
alternative uses for steel coal are increasing, and NS Rail continues
to pursue opportunities for the movement of noncoking coal used in
alternative iron-making technologies.
With its access to the Northeast after the Closing Date, NS Rail
expects to increase its participation in shipments of raw materials
for the steel industry by gaining single-line access to most domestic
integrated steel plants and merchant coke plants.
Other coal traffic, primarily steam coal shipped to manufacturing
plants, was largely unchanged in 1998 and 1997.
GENERAL MERCHANDISE traffic volume increased 5%, and revenues
increased 2%, in 1998, driven by higher automotive revenues. In 1997,
both general merchandise traffic volume and revenues increased 3%, as
all market groups, except the agriculture, consumer products, and
government group, posted revenue gains.
Chemicals traffic volume decreased 1%, and revenues decreased 2%,
in 1998, the first decline since 1989. The weak economies in Asia and
softness in certain domestic markets adversely affected shipments of
products for the vinyl, polyester, and pulp markets. In addition,
nationwide rail service problems, particularly early in the year,
caused some customers to divert traffic to truck and barge. However,
several NS Rail-served facilities with new and expanded plant capacity
increased shipments of plastics and petroleum products, somewhat
offsetting these negative effects. NS Rail also increased traffic
through its Thoroughbred Bulk Transfer (TBT) facilities that handle
chemicals and bulk commodities to customers not located on its lines.
In 1997, chemicals traffic volume increased 5%, and revenues
increased 4%, as fertilizer and plastics markets strengthened. In
addition, the harsh winter resulted in increased movements of liquid
petroleum gas, and industrial chemicals remained strong throughout the
year.
The chemicals market group is expected to rebound in 1999,
supported by plant expansions, expected increases in U.S. chemical
production, and extended market reach made possible by new TBT
facilities.
After the Closing Date, NS Rail will gain a competitive route to
northern New Jersey, where Conrail currently originates or terminates
annually about 40,000 carloads of chemicals.
PAGE 30
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Automotive carloads increased 35%, and revenues increased 15%, in
1998, exceeding the record levels achieved in 1997. Finished vehicles
led the growth, as carloads increased 54%, and revenues increased 19%,
primarily due to new business through the Ford mixing centers. Full
production volume at the Mercedes-Benz plant in Vance, Ala., and the
Toyota minivan line at Georgetown, Ky., also contributed to the
increases. Vehicle parts traffic volume and revenues remained steady
despite the effects of the mid-year strike at General Motors.
A substantial portion of the 1998 increase in carloads resulted
from the nature of the mixing centers. Previously, carloads of
vehicles went from plant to distribution center, where vehicles were
classified and loaded onto trucks for transport to dealers. Now,
carloads of vehicles, mostly in unit-train service, go from plant to
the mixing centers, where vehicles are sorted by destination and
loaded onto other trains in a mix suitable for direct transport to
dealers. As a result, carload counts have been increased: each vehicle
that is handled through the centers arrives on one carload and departs
on another carload. This hub-and-spoke method of distribution is
intended to improve Ford's delivery logistics and reduce its inventory
costs and order-to-delivery times.
In 1997, automotive traffic volume increased 2%, and revenues
rose 1%. A 12% increase in auto parts traffic volume more than offset
a 3% decline in vehicles traffic that resulted from industrywide
railcar shortages, rail traffic congestion, unexpected downtime at
certain plants, and modest sales for some of the models transported by
NS Rail.
The automotive market group is expected to continue to experience
growth in 1999, supported by the Ford mixing centers, a new Toyota
truck assembly plant at Princeton, Ind., two new just-in-time rail
parts distribution facilities, and the introduction of a new BMW sport
utility vehicle to be produced at Greer, S.C.
After the Closing Date, NS Rail will gain direct access to 15
assembly plants, and NS Rail will serve 32 of the 58 rail-served
assembly plants in the U.S. NS Rail's network of auto distribution
terminals will increase from 26 to 38.
Paper, clay, and forest products traffic volume decreased 3%, and
revenues declined 1%, in 1998. Traffic volume increases in the first
three quarters were offset by a sudden and pronounced weakness in the
paper industry in the fourth quarter, adversely affecting shipments of
paper, wood fiber, and kaolin clay. Decreased domestic and foreign
demand resulted in both widespread paper mill downtime late in the
year and indefinite closure of several NS Rail-served paper mills.
Shipments of lumber and wood products partially offset the effects of
these declines, posting record carloads and revenues due to continued
strong demand from the housing construction industry.
In 1997, paper, clay, and forest products traffic volume rose 4%,
and revenues increased 5%. Shipments of wood chips increased, as did
lumber traffic, supported by demand for southern yellow pine to
replace timber from Pacific Northwest sources. Kaolin clay traffic
also increased, and shipments of paper products were up slightly.
The paper industry is expected to continue to experience reduced
demand in 1999, due to the weak economies in Asia and consolidation
within the industry. Moreover, growth in lumber is expected to slow,
as housing starts are forecast to decline from the record levels of
1998.
After the Closing Date, NS Rail will have direct access to 33
paper mills and 26 lumber reload centers located on Conrail lines.
Agriculture, consumer products, and government traffic volume
declined 3%, and revenues decreased 2%, in 1998. Weak export and
soybean meal markets adversely affected shipments. Sweeteners volume
and revenues declined, as a strong beet sugar crop negatively affected
PAGE 31
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
cane sugar shipments out of the South. Increased revenues from grain,
soybeans, and feed ingredients from the longer-haul Southeast feed
and corn processing markets somewhat offset the effects of the declines.
In 1997, agriculture, consumer products, and government traffic
volume decreased 3%, and revenues decreased 1%. Most of the decline
resulted from decreases in the bulk agriculture commodities. Weak
export markets, declines in corn shipments to processors, and an
unfavorable soybean market resulting from higher prices led to traffic
declines that began early in the year.
Moderate growth is expected in 1999; low prices and an abundant
supply should continue to increase domestic consumption of corn for
feed and processing. In addition, moderating worldwide competition
should lead to a small recovery in the U.S. export market.
After the Closing Date, NS Rail expects to increase its direct-
line accessed grain elevator capacity by about 10%.
Metals and construction traffic volume was unchanged, and
revenues increased 1%, in 1998. The strong performance in the metals
market during 1997 was repeated in the first half of 1998, due to
improved efficiency at integrated mills and the continued growth of
new mini-mills and steel processors in NS Rail's service territory.
However, the domestic metals market weakened in the second half of
1998, due to an increase in the supply of lower-priced, imported
steel. Construction traffic and revenues increased, due to increased
highway and housing construction activity in the Southeast.
In 1997, both traffic and revenues in metals and construction
increased 4%. Construction traffic benefited from increased highway
building activity in the Southeast. Metals traffic increased due to
gains in domestic sheet steel movements resulting from record steel
production and increased pipe shipments.
The metals and construction market group is expected to grow
moderately in 1999. Production at new industries locating on NS Rail's
lines is expected to mitigate traffic losses attributable to imports
of steel and scrap metal. Traffic is expected to continue to benefit
from increased highway construction activity.
After the Closing Date, NS Rail will have direct access to 43
steel production facilities and 38 metal distribution centers located
on Conrail lines.
INTERMODAL traffic volume decreased 2%, and revenues decreased
1%, in 1998. The decline, which was the first in 12 years, resulted
from a service network redesign that was implemented in August. The
redesign is expected to improve on-time performance and eliminate
complexity, thereby positioning NS Rail to achieve the traffic volume
anticipated from the Conrail transaction. As a result, trailer traffic
volume declined 16%, but this decrease was largely offset by increases
in both container traffic volume and revenues (respectively, 2% and
5%) and Triple Crown Services Company (TCSC) traffic volume and
revenues (respectively, 5% and 9%).
In 1997, intermodal traffic volume increased 11%, and revenues
increased 12%, each setting a record. Capacity expansions on major
terminals and trains, combined with a healthy domestic and
international economy, enabled NS Rail to achieve the third year of
double-digit growth in four years. Volume increases were balanced, and
NS Rail outperformed the market in all intermodal traffic segments.
Container traffic volume increased 12%, supported by new steamship
business under contract.
Intermodal revenues are expected to increase in 1999, supported
by the redesigned service network, expanded terminal capacity, and
extension of NS Rail's double-stack services.
After the Closing Date, NS Rail will gain direct-line access to
the Northeast consumer markets and most major East Coast ports.
PAGE 32
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Railway Operating Expenses
- --------------------------
Railway operating expenses increased 6% in 1998, while
carloadings increased 1%. The expense increase was mostly attributable
to Conrail-related integration expenses, and additional expenses,
including start-up costs, related to the Ford mixing centers. Railway
operating expenses increased only 3% in 1997, despite a 5% increase in
traffic volume.
As a result, the railway operating ratio, which measures the
percentage of railway revenues consumed by railway expenses, was 75.3%
in 1998, compared with the record-low 71.3% in 1997 and 71.6% in 1996.
NS Rail's railway operating ratio continues to be the best among the
major railroads in the United States.
In addition to reflecting Conrail-related integration expenses,
the railway operating ratio in 1998 was also adversely affected by a
change in traffic mix related to growth in automotive traffic coupled
with the change in coal traffic mix. Automotive traffic includes some
of NS Rail's most time-sensitive and resource-intensive business,
requiring more trains, increased handling costs, and higher equipment
rents.
The railway operating ratio is expected to be even higher in
1999, due to expenses associated with the portion of Conrail's routes
and assets that NS Rail will operate, as well as additional
integration expenses, prior to and after the Closing Date, and because
the Closing Date is later than previously anticipated.
RAILWAY OPERATING RATIO
(Shown as a graph in the Annual Report to Stockholders)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
75.3% 71.3% 71.6% 73.5% 73.2%
The following table shows the changes in railway operating
expenses summarized by major classifications.
RAILWAY OPERATING EXPENSES
Increases (Decreases)
($ in millions) 1998 vs. 1997 1997 vs. 1996
--------------- -------------- --------------
Compensation and benefits $ 87 $ 5
Materials, services, and
rents 118 61
Depreciation 18 13
Diesel fuel (53) (6)
Casualties and other claims (28) --
Other 26 1
---- ----
Total $168 $ 74
==== ====
Compensation and benefits, which represents about half of total
railway operating expenses, increased 6% in 1998, and only slightly in
1997.
In 1998, higher wages and salaries -- results of additional
staffing in anticipation of the Closing Date and union wage increases,
including the effect of an increase in the BLE bonus fund -- were
offset somewhat by lower accruals for pension benefits, due to
favorable investment returns on pension plan assets. Also contributing
to the increase were new FRA train inspection requirements and a
higher Railroad Unemployment Tax rate.
PAGE 33
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
In 1997, higher wages resulting from union wage increases and
additional train and engine employees were offset by lower fringe
benefit and incentive compensation costs. The decline in fringe
benefit costs was due largely to favorable investment experience on
pension plan assets. To a large extent, productivity improvements and
train efficiencies offset the effects of the higher traffic volume.
Materials, services, and rents includes items used for the
maintenance of the railroads' lines, structures, and equipment; the
costs of services purchased from outside contractors, including the
net costs of operating joint (or leased) facilities with other
railroads; and the net cost of equipment rentals. This category of
expenses increased 17% in 1998 and 10% in 1997.
The 1998 increase was principally due to Conrail-related
integration costs and higher-than-anticipated mixing center costs
associated with the increase in automotive traffic. Higher equipment
rents and locomotive repair expenses also contributed to the increase.
The 1997 increase resulted primarily from higher volume-related
intermodal expenses, as well as from higher equipment rents, partially
a result of a change in the mix of received versus forwarded traffic.
Higher locomotive repair expenses and costs for contract programmers
to make computer processes Year-2000 compliant (see "Year-2000
Compliance" discussion under "Other Matters," below) also contributed
to the increase.
Equipment rents, which represent the cost to NS Rail of using
equipment (mostly freight cars) owned by other railroads or private
owners, less the rent paid to NS Rail for the use of its equipment,
were up 18% in 1998 and 11% in 1997. The 1998 increase was due to: (1)
rents for equipment needed to support the increase in automotive
traffic; (2) reduced rents received from the leasing of owned
locomotives; and (3) increased lease expenses for equipment obtained
to meet anticipated demand after the Closing Date. These increases
were somewhat offset by higher receipts on NS Rail-owned freight cars
and auto racks.
The 1997 increase was due to a 5% increase in overall traffic and
a shift in traffic mix. Carloadings in other railroads' and privately
owned freight cars were up 7%, due to growth in traffic received from
other railroads. Trailer and container loadings, moving mostly on
privately owned flatcars, were up 11%. These increased costs were
mitigated somewhat by higher receipts from short-term leases of
locomotives to various railroads.
Locomotive repair costs increased in 1998 and 1997 due to the
higher traffic levels and an increase in the average number of
locomotives in service, reflecting retention of older units.
Depreciation expense (see Note 1, "Properties," on page 51 for
NS Rail's depreciation policy) was up 4% in 1998 and 3% in 1997.
Increases in both years were due to property additions, reflecting
recent substantial levels of capital spending.
Diesel fuel costs declined 23% in 1998 and 3% in 1997. The 1998
decrease was due to a 26% drop in the average price per gallon, which
was the lowest since 1988, somewhat offset by a 3% increase in
consumption. The 1997 decrease was due to the net effect of a 5% drop
in the average price per gallon and a 3% increase in consumption.
Casualties and other claims expenses (including the estimates of
costs related to personal injury, property damage, and environmental
matters) decreased 23% in 1998 and were unchanged in 1997. The 1998
decline was due to cost recoveries from third parties and lower
accruals for environmental remediation costs and to reduced personal
injury expenses. In 1997, a reduction in personal injury expenses was
offset by higher freight damage costs.
PAGE 34
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
The largest component of casualties and other claims expense is
personal injury costs. Although NS Rail experienced an increase in the
number of reportable employee injuries in 1998, the number of claims
declined, compared with 1997. Costs associated with employee and third-
party injuries were lower in 1998, continuing the favorable trend
experienced in recent years. However, these improvements were
partially offset by an increase in costs related to so-called
"occupational" injuries. Within the past decade, there has been a
dramatic increase in the number of these types of claims. In 1998,
almost two-thirds of the total employee injury cases settled and one-
third of settlement payments made were related to occupational claims.
These claims do not generally relate to a specific accident or event,
but rather result from a claimed exposure over time to some condition
of employment. As a result, many of these claims are asserted by
employees who have retired or who no longer work for NS Rail. NS Rail
continues to work actively to eliminate all accidents and exposure
risks and to control associated costs.
The rail industry remains uniquely susceptible to litigation
involving job-related 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, which covers employee claims for job-related injuries,
promotes an adversarial claim environment and produces results that
are unpredictable and inconsistent, at a far greater cost to the rail
industry than the no-fault workers' compensation system to which
nonrail competitors and other employers are universally subject. The
railroads have been unsuccessful so far in efforts to persuade
Congress to replace FELA with a no-fault workers' compensation system.
NS Rail maintains substantial amounts of commercial insurance for
potential third-party liability and property damage losses. However,
it also retains reasonable levels of risk through self-insurance. In
1998, in recognition of ever-increasing jury awards, NS Rail elected
to increase the limit of liability insurance maintained, which did not
result in a significant increase in premium expense.
Other expenses increased 17% in 1998 and 1% in 1997. The 1998
increase was principally due to: (1) a licensing fee charged by NS for
use of certain intangible assets (see Note 2 on page 52); (2) higher
property and other taxes, due to the effects of favorable adjustments
in prior years resulting from settlements with taxing authorities; and
(3) increased travel expenses, mostly attributable to planning for the
Conrail transaction.
Income Taxes
- -------------
Income tax expense in 1998 was $383 million, for an effective
rate of 35%, compared with an effective rate of 34%, in both 1997 and
1996.
The effective rates in all three years were below the statutory
federal and state rates -- results of investments in corporate-owned
life insurance and favorable adjustments upon filing the prior year
tax returns. In addition, 1998 benefited from favorable adjustments
resulting from settlement of federal income tax years 1993-1994. 1997
benefited from favorable adjustments of accrued liabilities for state
income taxes; 1996 benefited from favorable adjustments resulting from
settlement of federal income tax years 1990-1992.
PAGE 35
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Cash provided by operating activities, NS Rail's principal source
of liquidity, decreased $30 million, or 2%, in 1998, but increased
$211 million, or 17%, in 1997. Since consolidation in 1982, cash
provided by operating activities has been sufficient to fund dividend
requirements, debt repayments, and a significant portion of capital
spending. The 1998 decrease was primarily due to lower income from
railway operations, somewhat offset by decreased income tax payments.
The 1997 increase was principally due to lower income tax payments and
improved income from railway operations.
Cash used for investing activities increased slightly in 1998 and
44% in 1997. Property additions account for most of the spending in
this category.
The following tables show capital spending, track, and equipment
statistics for the past five years. Capital expenditures include
amounts relating to capitalized leases, which are excluded from the
Consolidated Statements of Cash Flows (see Note 8, "Capital Lease
Obligations," on page 59).
CAPITAL EXPENDITURES
(Also shown as a graph in the Annual Report to Stockholders)
($ in millions) 1998 1997 1996 1995 1994
--------------- ---- ---- ---- ---- ----
Road $ 583 $ 580 $ 428 $ 379 $ 383
Equipment 419 304 326 333 235
Other property -- -- -- 1 22
------ ------ ------ ------ ------
Total $1,002 $ 884 $ 754 $ 713 $ 640
====== ====== ====== ====== ======
Capital expenditures increased 13% in 1998 and 17% in 1997. The
increase in 1998 was due to significant outlays for roadway projects
and equipment in anticipation of the Closing Date. The increase in
1997 was due to higher roadway additions that included construction
costs for four Ford mixing centers.
TRACK STRUCTURE STATISTICS (CAPITAL AND MAINTENANCE)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Track miles of
rail installed 429 451 401 403 480
Miles of track
surfaced 4,715 4,703 4,686 4,668 4,760
New crossties
installed
(millions) 2.0 2.2 1.9 2.0 1.7
AVERAGE AGE OF RAILWAY EQUIPMENT
(In years) 1998 1997 1996 1995 1994
---------- ---- ---- ---- ---- ----
Freight cars 23.6 23.0 22.3 22.0 21.9
Locomotives 15.4 15.3 15.4 15.7 15.8
Retired
locomotives 20.6 23.3 24.4 22.6 23.6
PAGE 36
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
The 1998 decrease in the average age of retired locomotives
resulted from: (1) a disproportionate share of early retirements due
to casualties and service failures; and (2) retention of older units
in anticipation of the Closing Date.
Since 1988, NS Rail has rebodied about 27,000 coal cars, and
plans to continue that program. This work, performed at NS Rail's
Roanoke Car Shop, converts hopper cars into high-capacity steel
gondolas or hoppers. As a result, the remaining service life of the
freight car fleet is greater than may be inferred from the increasing
average age shown in the corresponding table.
NS Rail began an orderly disposition of approximately 17,000
freight cars in October 1994. This was completed in 1997, and
"Property sales and other transactions" in the 1997 and 1996
Consolidated Statements of Cash Flows includes proceeds from such
dispositions.
For 1999, NS Rail has budgeted approximately $1 billion of
capital expenditures, of which $300 million is related to Conrail
properties to be operated by Norfolk Southern Railway Company after
the Closing Date. Some of the Conrail-related projects may be
constructed by Conrail, which would reduce NS Rail's capital spending.
Approximately $650 million of the total projected spending is for
roadway projects, including nearly $400 million for rail and bridge
program work. Also included are projects to improve signaling and
communications; track improvements, such as installation of second
main lines and passing sidings to increase line capacity and upgrade
service; and new and expanded intermodal and auto distribution
terminals.
Equipment purchases of almost $390 million include 138 six-axle,
high-adhesion locomotives; multi-level automobile racks; high-cubic
capacity, 60-foot boxcars for automotive parts; and covered coil cars
to handle steel traffic. Also included in equipment spending is $87
million to support ongoing programs to improve equipment utilization,
including the coal car rebody program and rebuilding of multi-level
automobile racks, high-cubic capacity boxcars, covered hopper cars,
and open-top coil cars.
Capital expenditures are expected to remain at historically high
levels, as projects related to the operation of Conrail's routes and
assets will continue after the Closing Date.
Cash used for financing activities decreased 24% in 1998, but
increased 48% in 1997. "Advances to NS" account for most of the cash
used for financing activities and have increased significantly as a
result of NS' requirements (see Note 2 on page 52).
JOINT ACQUISITION OF CONRAIL BY NS
NS and CSX, through a jointly owned entity, control Conrail (see
Note 2 on page 52). Norfolk Southern Railway Company (NSR) will begin
providing rail freight services on portions of Conrail's route system
after the Closing Date, which NS and CSX have agreed will be June 1,
1999. Selection of that date permits additional programming and
testing of information technology and other systems necessary for safe
and efficient integration of operations -- matters as to which the
parties must give assurances required under the STB's order approving
the transaction.
NSR has negotiated (or has out for ratification) all but two of
the labor implementing agreements necessary for closing. Arbitration
awards (which set forth the implementing agreement provisions) have
been received in the remaining two cases.
NS Rail plans to implement its own information technology systems
on the portion of Conrail's routes and assets NSR will operate. While
some systems will be operational on the Closing Date, others --
particularly the transportation systems -- will be integrated
PAGE 37
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
geographically over a period of several months after the Closing Date.
Accordingly, some of Conrail's systems are being modified to be
compatible with NS Rail's systems. Most of this programming is
completed, and testing has begun. Moreover, in the Shared Assets
Areas, many of Conrail's existing systems will continue to be used and,
therefore, must be able to work with both NS Rail's and CSXT's systems
and be made Year-2000 compliant (see also the discussion on page 38
concerning Conrail's Year-2000 compliance efforts).
In anticipation of the Closing Date, NS Rail has accumulated
resources to enable it to operate its portion of Conrail's routes and
assets. This has included maintaining or increasing its work force
(particularly hiring and training additional train crews and
management employees), acquiring or leasing equipment based on
projected requirements, and beginning expansions to its facilities.
These actions have resulted in increased operating expenses in 1998,
and expenses of this type are anticipated to continue even after the
Closing Date.
The Closing Date marks the point at which NSR actually can begin
to operate certain of the assets and routes of Conrail, thereby
permitting NS Rail to begin to realize many of the anticipated
transaction benefits. Realization of these benefits is dependent upon,
among other things: (1) successful integration of NS Rail's portion of
Conrail's system into its railroad system; (2) successful operations
within the Shared Assets Areas; and (3) successful coordination of
NS Rail's (and CSXT's) operations with the Shared Assets Areas'
operations. In addition, increased rail competition in the Northeast
could affect the extent of benefits realized. A failure by NS Rail or
CSXT to integrate successfully their respective portions of Conrail,
including information technology systems, could have a substantial
impact on NS Rail's financial position, results of operations, or
liquidity.
OTHER MATTERS
Year-2000 Compliance
- --------------------
General -- In October 1995, NS Rail initiated a project to review
and modify, as necessary, its computer applications, hardware, and
other equipment to make them Year-2000 compliant. NS Rail has engaged
outside consultants and independent contractors to assist with its
Year-2000 project. The progress of the project is reviewed regularly
by NS Rail's senior management and by the Audit Committee of NS' Board
of Directors. The project is organized into three principal areas:
mainframe systems, nonmainframe systems, and enterprise systems
(operations and embedded processors), and for each such system
involves: inventory, assessment, remediation, testing, and
implementation. NS Rail expects to have all business-critical systems
remediated, tested, and implemented by mid-1999.
State of readiness -- For mainframe systems (data center
infrastructure, purchased or leased software, and mainframe
applications), remediation and unit testing for business-critical
systems are in the final stages. Systems testing and implementation
began in February 1999, and both are expected to be substantially
completed in June 1999 but require use of the same resources
needed for testing related to the Conrail transaction (see
"Joint Acquisition of Conrail by NS," above).
For most business-critical nonmainframe and enterprise systems,
assessment has been completed. Remediation of some systems has begun,
and completion for all business-critical systems is expected by April
1999. Testing and implementation will follow with expected completion
for business-critical systems by mid-year 1999.
NS Rail also has initiated formal communications with third
parties having a substantial relationship to its business (including
other railroads, significant suppliers, larger customers, and
financial institutions) to determine the extent to which NS Rail
PAGE 38
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
may be vulnerable to any such third party's failure to achieve
Year-2000 compliance. Thus far, NS Rail has no information that
indicates that a significant third party may be unable to provide
goods or services or to request NS Rail's services because of
Year-2000 issues.
Cost -- NS Rail has allocated existing information technology
resources and has incurred incremental costs, mostly for contract
programmers and consultants, in connection with its Year-2000
compliance project. Since the project began, Management estimates that
up to 10% of NS Rail's in-house programming resources have been used
for Year-2000 compliance efforts. The effects of deferring other
information technology projects to accommodate the Year-2000 effort
have been minor. Incremental costs incurred through Dec. 31, 1998,
which were expensed, are immaterial to NS Rail's results of
operations. Total incremental costs are expected to be approximately
$25 million.
Contingency plans -- In all areas, the project includes extensive
testing to ensure that remediation successfully addresses Year-2000
compliance. Rather than adopting contingency plans, NS Rail has
established a series of initiatives to focus on business-critical
systems to ensure continued operations in the event of a Year-2000
problem. If contingency plans for business-critical systems are
warranted, they will be developed as needed.
Conrail -- As a part of its preparations to integrate its
railroad system with a portion of Conrail's system, NS Rail is working
with Conrail and CSXT to ensure that certain Conrail computer
applications, hardware, and other equipment are Year-2000 compliant.
Conrail's core transportation system is being made Year-2000
compliant, with a projected completion date for all programming and
testing of September 1999. Conrail's other information technology
systems are expected to be replaced by NS Rail and CSXT systems within
six months after the Closing Date, or by Dec. 1, 1999. A delay in
replacing these systems, which are not Year-2000 compliant, could
result in their failure. Conrail also has under way a project to
inventory, assess, and remediate all of its business-critical
enterprise systems that will continue to operate after the Closing
Date. This Conrail project is scheduled for completion in June 1999.
Risks -- Failure to achieve Year-2000 compliance -- by NS Rail,
other railroads, its principal suppliers and customers, and certain
financial institutions with which it has relationships -- could
negatively affect NS Rail's ability to conduct business for an
extended period. Unanticipated delays in either the Conrail systems
integration effort or the Year-2000 project could adversely affect
NS Rail's ability to complete the other. Management believes that
NS Rail will be successful in its Year-2000 compliance effort;
however, there can be no assurance that all NS Rail information
technology systems and components will be fully Year-2000 compliant.
In addition, other companies on which NS Rail systems and operations
rely may or may not be fully compliant on a timely basis, and any such
failure could have a material adverse effect on NS Rail's financial
position, results of operations, or liquidity.
Market Risks and Hedging Activities
- -----------------------------------
NS Rail does not engage in the trading of derivatives. NS Rail
manages its overall exposure to fluctuations in interest rates by
issuing both fixed- and floating-rate debt instruments and by entering
into interest-rate hedging transactions to achieve a targeted mix
within its debt portfolio.
PAGE 39
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Of NS Rail's total debt outstanding (see Note 8 on page 59), all
is fixed-rate debt, except for $348 million of capital leases. A 1%
increase in interest rates would increase NS Rail's total annual
interest expense related to all its variable debt by approximately
$3 million. Management considers it unlikely that interest rate
fluctuations applicable to these instruments will result in a material
adverse effect on NS Rail's financial position, results of operations,
or liquidity.
The capital leases, which carry an average fixed rate of 7.1%,
were effectively converted to variable rate obligations using interest
rate swap agreements. On Dec. 31, 1998, the average pay rate under
these agreements was 6.1%, and the average receive rate was 7.1%.
During 1998, the effect of the swaps was to reduce interest expense by
$3 million. A portion of the lease obligations is payable in Japanese
yen. NS Rail hedged the associated exchange rate risk at the inception
of each lease with a yen deposit in Japan sufficient to fund the yen-
denominated obligation. As a result, NS Rail is exposed to financial
market risk relative to Japan. Counterparties to the interest rate
swaps and Japanese banks holding yen deposits are major financial
institutions believed by Management to be creditworthy.
Accounting Change and New Accounting Pronouncements
- ---------------------------------------------------
As discussed in Note 1 under "Required Accounting Changes" on
page 51, NS Rail adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income," and SFAS No. 132,
"Employers' Disclosures About Pension and Other Postretirement
Benefits," in 1998.
During 1998, SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," and AICPA Statement of Position 98-1
(SOP 98-1), "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," were issued. NS Rail expects to adopt
SFAS 133 effective Jan. 1, 2000, and SOP 98-1 effective Jan. 1, 1999.
Neither adoption is expected to have a material effect on NS Rail's
consolidated financial statements.
Lawsuits
- --------
Norfolk Southern Railway Company and certain subsidiaries are
defendants in numerous lawsuits relating principally to railroad
operations.
On Sept. 8, 1997, a state court jury in New Orleans returned a
verdict awarding $175 million in punitive damages against The Alabama
Great Southern Railroad Company (AGS), a subsidiary of Norfolk
Southern Railway Company, all of the common stock of which is owned by
NS. The verdict was returned in a class action suit involving some
8,000 individuals who claim to have been damaged as the result of an
explosion and fire that occurred in New Orleans on Sept. 9, 1987, when
a chemical called butadiene leaked from a tankcar.
The jury verdict awarded a total of nearly $3.2 billion in
punitive damages against four other defendants in the same case: two
rail carriers, the owner of the car, and the shipper. Previously, the
jury had awarded nearly $2 million in compensatory damages to 20
individuals. Shortly after the trial, the Supreme Court of Louisiana
ruled that, under the Louisiana Class Action Statute, the trial court
cannot enter a judgment for punitive damages until all compensatory
damages have been determined. In view of the number of individual
plaintiffs claiming compensatory damages, this process could take
years.
As of Feb. 19, 1999, the trial court had not ruled on motions
filed by defendants seeking relief from the jury's verdicts. The trial
court has, however, ordered that another case involving 20 plaintiffs
PAGE 40
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
be set for trial on March 22, 1999. The defendants are challenging
in the Louisiana Supreme Court the trial court's action in
setting additional cases for trial prior to a final determination
of the validity of the original trial.
Management will continue to monitor the progress of this
litigation, and will, if necessary, pursue appropriate appeals.
Management believes that the jury verdicts are both grossly excessive
and without factual or legal justification.
While the final outcome of this matter and other lawsuits cannot
be predicted with certainty, it is the opinion of Management, based on
known facts and circumstances, that the amount of NS Rail's ultimate
liability is unlikely to have a material adverse effect on NS Rail's
financial position, results of operations, or liquidity.
Environmental Matters
- ---------------------
NS Rail is subject to various jurisdictions' environmental laws
and regulations. It is NS Rail's policy to record a liability where
such liability or loss is probable and its amount can be estimated
reasonably. Claims, if any, against third parties for recovery of
clean-up costs incurred by NS Rail are reflected as receivables (when
collection is probable) in the balance sheet and are not netted
against the associated NS Rail liability. Environmental engineers
regularly participate in ongoing evaluations of all identified sites
and in determining any necessary adjustments to initial liability
estimates. NS Rail also has established an Environmental Policy
Council, composed of senior managers, to oversee and interpret its
environmental policy.
Operating expenses for environmental matters totaled
approximately $4 million in 1998, $21 million in 1997, and $25 million
in 1996, and capital expenditures totaled approximately $7 million in
1998 and $6 million in both 1997 and 1996. Operating expenses were
substantially lower in 1998 compared with recent years, principally
due to a combination of increased recoveries from third parties of
amounts paid by NS Rail in prior years for environmental clean-up and
remediation, and favorable development experience on identified sites.
Operating expenses in 1999 are expected to return to a level more
consistent with that experienced prior to 1998. Capital expenditures
in 1999 are expected to be somewhat higher than in 1998.
As of Dec. 31, 1998, NS Rail's balance sheet included a reserve
for environmental exposures in the amount of $56 million (of which
$12 million is accounted for as a current liability), which is
NS Rail's estimate of the probable clean-up and remediation costs
based on available information at 132 identified locations. On that
date, 15 sites accounted for $23 million of the reserve, and no
individual site was considered to be material. NS Rail anticipates
that much of this liability will be paid out over five years; however,
some costs will be paid out over a longer period.
At some of the 132 locations, certain NS Rail subsidiaries,
usually in conjunction with a number of other parties, have been
identified as potentially responsible parties by the Environmental
Protection Agency (EPA) or similar state authorities under the
Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, or comparable state statutes, which often impose joint and
several liability for clean-up costs.
At one such site, the EPA alleged in 1995 that AGS and certain
other potentially responsible parties (PRP) were responsible for past
and future clean-up and monitoring costs at the Bayou Bonfouca NPL
Superfund site located in Slidell, La. The EPA indicated that it has
expended $140 million at the site and expects to expend still more in
connection with its groundwater "pump and treat" program. Because all
other solvent PRP had settled or been dismissed, and because of an
PAGE 41
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
unfavorable district court ruling in February 1999, NS Rail agreed
to settle all claims by the EPA and Louisiana for $13 million, thereby
avoiding litigation and possible appeal costs.
With respect to known environmental sites (whether identified by
NS Rail or by the EPA or comparable state authorities), estimates of
NS Rail's ultimate potential financial exposure for a given site or in
the aggregate for all such sites are necessarily imprecise because of
the widely varying costs of currently available clean-up techniques,
the likely development of new clean-up technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it), and evolving statutory and
regulatory standards governing liability.
The risk of incurring environmental liability -- for acts and
omissions, past, present, and future -- is inherent in the railroad
business. Some of the commodities in NS Rail's traffic mix,
particularly those classified as hazardous materials, can pose special
risks that NS Rail and its subsidiaries work diligently to minimize.
In addition, several NS Rail subsidiaries own, or have owned, land
used as operating property, or which is leased or may have been leased
and operated by others, or held for sale.
Because environmental problems may exist on these properties that
are latent or undisclosed, there can be no assurance that NS Rail will
not incur environmentally related liabilities or costs with respect to
one or more of them, the amount and materiality of which cannot be
estimated reliably at this time. Moreover, lawsuits and claims
involving these and other now-unidentified environmental sites and
matters are likely to arise from time to time. The resulting
liabilities could have a significant effect on financial condition,
results of operations, or liquidity in a particular year or quarter.
However, based on its assessments of the facts and circumstances
now known, Management believes that it has recorded the probable costs
for dealing with those environmental matters of which the Corporation
is aware. Further, Management believes that it is unlikely that any
identified matters, either individually or in the aggregate, will have
a material adverse effect on NS Rail's financial position, results of
operations, or liquidity.
Labor Agreements
- ----------------
Approximately 85% of NS Rail's employees are represented by labor
unions under collective bargaining agreements with 15 different labor
organizations. The agreements currently in force will remain in effect
through Dec. 31, 1999, and thereafter until new agreements are reached
or the Railway Labor Act's procedures are exhausted.
Inflation
- ---------
Generally accepted accounting principles require the use of
historical cost in preparing financial statements. This approach
disregards the effects of inflation on the replacement cost of
property. NS Rail, a capital-intensive company, has most of its
capital invested in such assets. The replacement cost of these assets,
as well as the related depreciation expense, would be substantially
greater than the amounts reported on the basis of historical cost.
PAGE 42
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Trends
- ------
- Federal economic regulation -- Efforts may be made in 1999 to re-
subject the rail industry to unwarranted federal economic regulation.
The Staggers Rail Act of 1980, which substantially reduced such
regulation, encouraged and enabled rail carriers to innovate and to
compete for business, thereby contributing to the economic health of
the nation and to the revitalization of the industry. Accordingly,
NS Rail and other rail carriers vigorously will oppose these
counterproductive efforts to re-impose or to authorize re-imposing
such economic regulation.
- Reduction of "greenhouse" gases -- In December 1997,
international environmental officials meeting in Kyoto, Japan, agreed
to reduce substantially the emission of so-called "greenhouse" gases
by 2010. Agreement on such reductions was reached on the basis of
questionable scientific evidence and in spite of the fact that the
burden of the reduction regimen will be borne disproportionally by
developed nations such as the United States. NS Rail, the rail
industry, and a wide variety of other affected constituencies in the
United States expect to assure that, prior to a Senate vote on the
proposed treaty, the public and governmental authorities have
available to them additional scientific information and data
concerning other effects that are likely to result from implementation.
- Utility deregulation -- Deregulation of the electrical utility
industry is expected to increase competition among electric power
generators; deregulation over time would permit wholesalers and
possibly retailers of electric power to sell or purchase increasing
quantities of power to or from far-distant parties. The effects of
deregulation on NS Rail and on its customers cannot be predicted with
certainty; however, NS Rail serves a number of efficient power
producers and is working diligently to assure that its customers
remain competitive in this evolving environment.
Forward-Looking Statements
- --------------------------
This Management's Discussion and Analysis of Financial Condition
and Results of Operations and other sections of this Annual Report
contain forward-looking statements that are based on current
expectations, estimates, and projections. Such forward-looking
statements reflect Management's good-faith evaluation of information
currently available. However, because such statements are based upon,
and therefore can be influenced by, a number of external variables
over which Management has no, or incomplete, control, they are not,
and should not be read as being, guarantees of future performance or
of actual future results; nor will they necessarily prove to be
accurate indications of the times at or by which any such performance
or result will be achieved. Accordingly, actual outcomes and results
may differ materially from those expressed in such forward-looking
statements. This caveat has particular importance in the context of
all such statements that relate to Year-2000 compliance and to the
realization and the timing of benefits expected to result from
consummation of the Conrail transaction.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- ------- ----------------------------------------------------------
The information required by this item is included in
Part II, Item 7, "Management's Discussion and Analysis of Financial
Conditions and Results of Operations," on page 38 under the heading
"Market Risks and Hedging Activities."
PAGE 43
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)
------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
($ in millions, except per share amounts)
1998
----
Railway operating revenues $1,066 $1,079 $1,048 $1,028
Income from railway operations 251 294 258 240
Net income 168 206 167 184
Dividends per serial preferred
share $ 0.65 $ 0.65 $ 0.65 $ 0.65
1997
----
Railway operating revenues $1,046 $1,067 $1,048 $1,062
Income from railway operations 281 321 297 314
Net income 128 200 206 220
Dividends per serial preferred
share $ 0.65 $ 0.65 $ 0.65 $ 0.65
Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 1998, 1997, and 1996 44
Consolidated Balance Sheets
As of December 31, 1998 and 1997 45
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996 47
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996 49
Notes to Consolidated Financial Statements 50
Independent Auditors' Report 69
The Index to Consolidated Financial Statement Schedule appears
in Item 14 on page 72.
PAGE 44
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Income
Years ended December 31,
1998 1997 1996
---- ---- ----
($ in millions)
RAILWAY OPERATING REVENUES $ 4,221 $ 4,223 $ 4,101
RAILWAY OPERATING EXPENSES:
Compensation and benefits 1,492 1,405 1,400
Materials, services, and rents 808 690 629
Depreciation 434 416 403
Diesel fuel 174 227 233
Casualties and other claims 95 123 123
Other 175 149 148
------- ------- -------
Railway operating expenses 3,178 3,010 2,936
------- ------- -------
Income from railway operations 1,043 1,213 1,165
Charge for credit facility costs
(Note 2) -- (77) --
Other income - net (Note 3) 90 28 39
Interest expense on debt (Note 6) (25) (30) (34)
------- ------- -------
Income before income taxes 1,108 1,134 1,170
Provision for income taxes (Note 4) 383 380 401
------- ------- -------
NET INCOME $ 725 $ 754 $ 769
======= ======= =======
See accompanying notes to consolidated financial statements.
PAGE 45
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets
As of December 31,
1998 1997
---- ----
($ in millions)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 7
Short-term investments (Note 14) 44 120
Accounts receivable net of allowance for
doubtful accounts of $4 million and
$3 million, respectively 508 539
Materials and supplies 59 58
Deferred income taxes (Note 4) 110 100
Other current assets 130 117
------- -------
Total current assets 851 941
Due from NS - net (Note 2) 43 447
Investments (Notes 5 and 14) 990 930
Properties less accumulated depreciation
(Note 6) 9,985 9,447
Other assets 148 62
------- -------
TOTAL ASSETS $12,017 $11,827
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note 7) $ 577 $ 586
Income and other taxes 139 149
Other current liabilities (Note 7) 73 98
Current maturities of long-term debt
(Note 8) 141 59
Short-term debt (Note 8) -- 27
------- -------
Total current liabilities 930 919
Long-term debt (Note 8) 619 547
Other liabilities (Note 10) 909 846
Minority interests 2 2
Deferred income taxes (Note 4) 3,420 3,121
------- -------
TOTAL LIABILITIES 5,880 5,435
------- -------
(continued)
PAGE 46
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets
(continued)
As of December 31,
1998 1997
---- ----
($ in millions)
Stockholders' equity:
Serial preferred stock (Note 11) 55 55
Common stock (Note 11) 167 167
Additional paid-in capital 548 525
Accumulated other comprehensive income
(Note 12) 414 414
Retained income 4,953 5,231
------- -------
TOTAL STOCKHOLDERS' EQUITY 6,137 6,392
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $12,017 $11,827
======= =======
See accompanying notes to consolidated financial statements.
PAGE 47
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
Years ended December 31,
1998 1997 1996
---- ---- ----
($ in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 725 $ 754 $ 769
Reconciliation of net income to net
cash provided by operating activities:
Depreciation 435 417 404
Deferred income taxes 100 70 89
Charge for credit facility costs -- 77 --
Nonoperating gains on properties
and investments (31) (9) (26)
Changes in assets and liabilities
affecting operations:
Accounts receivable 31 (23) (4)
Materials and supplies (1) 3 (1)
Other current assets (15) (8) (13)
Income tax liabilities 208 180 15
Other short-term liabilities (11) (1) (20)
Other - net (54) (43) (7)
------ ------ ------
Net cash provided by
operating activities 1,387 1,417 1,206
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (898) (838) (646)
Property sales and other transactions 54 54 96
Investments, including short-term (97) (175) (192)
Investment sales and other transactions 143 165 190
------ ------ ------
Net cash used for investing
activities (798) (794) (552)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (Note 2) (3) (3) (289)
Credit facility costs paid (Note 2) -- (72) (5)
Advances to NS (Note 2) (603) (760) (302)
Advances and repayments from NS
(Note 2) 6 101 140
Proceeds from long-term borrowings 67 2 10
Long-term debt repayments (63) (56) (85)
------ ------ ------
Net cash used for financing
activities (596) (788) (531)
------ ------ ------
Net increase (decrease)
in cash and cash
equivalents (7) (165) 123
CASH AND CASH EQUIVALENTS:
At beginning of year 7 172 49
------ ------ ------
At end of year $ -- $ 7 $ 172
====== ====== ======
(continued)
PAGE 48
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
(continued)
Years ended December 31,
1998 1997 1996
---- ---- ----
($ in millions)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest (net of amounts
capitalized) $ 61 $ 60 $ 67
Income taxes $ 74 $ 169 $ 297
See accompanying notes to consolidated financial statements.
PAGE 49
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Changes in Stockholders' Equity
Accumu-
lated
Addi- Other
Serial tional Compre-
Preferred Common Paid-In hensive Retained
Stock Stock Capital Income Income Total
-------- ------ ------- -------- -------- -----
($ in millions)
BALANCE DECEMBER 31,
1995 $ 55 $ 167 $ 525 $ 337 $4,561 $5,645
Comprehensive
income - 1996
Net income 769 769
Other comprehen-
sive income
(Note 12) 61 61
------
Total compre-
hensive income 830
Serial preferred stock,
$2.60 per share cash
dividend (3) (3)
Common stock, $17.14
per share cash
dividend (286) (286)
Noncash dividends on
common stock (Note 2) (414) (414)
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1996 55 167 525 398 4,627 5,772
Comprehensive
income - 1997
Net income 754 754
Other comprehensive
income (Note 12) 16 16
------
Total compre-
hensive income 770
Serial preferred stock,
$2.60 per share
cash dividend (3) (3)
Noncash dividends on
common stock (Note 2) (147) (147)
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1997 55 167 525 414 5,231 6,392
Comprehensive
income - 1998
Net income 725 725
Other comprehensive
income (Note 12) -- --
------
Total compre-
hensive income 725
Serial preferred stock,
$2.60 per share cash
dividend (3) (3)
Noncash dividends on
common stock (Note 2) (1,000) (1,000)
Capital contribution
(Note 2) 23 23
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1998 $ 55 $ 167 $ 548 $ 414 $4,953 $6,137
====== ====== ====== ====== ====== ======
See accompanying notes to consolidated financial statements.
PAGE 50
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
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
Description of Business
- -----------------------
Norfolk Southern Railway Company (NSR), together with its
consolidated subsidiaries (collectively NS Rail), is engaged
principally in the transportation of freight by rail, currently
operating approximately 14,400 route miles, primarily in the Southeast
and Midwest. After the Closing Date (see Note 2), operations will
extend into the Northeast. The consolidated financial statements
include Norfolk Southern Railway Company and its majority-owned and
controlled subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
NS Rail transports raw materials, intermediate products, and
finished goods classified in the following market groups: coal; paper,
clay, and forest products; chemicals; automotive; agriculture,
consumer products, and government; metals and construction; and
intermodal. Except for coal, all groups are approximately equal in
size based on revenues; coal accounts for about 30% of total railway
operating revenues. Ultimate points of origination or destination for
some of the freight (particularly coal bound for export and intermodal
containers) are outside of the United States.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires Management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash Equivalents
- ----------------
"Cash equivalents" are highly liquid investments purchased three
months or less from maturity.
Investments
- -----------
Marketable equity and debt securities are reported at amortized
cost or fair value, depending upon their classification as securities
"held-to-maturity," "trading," or "available-for-sale." On Dec. 31,
1998 and 1997, all "Short-term investments," consisting primarily of
United States government and federal agency securities and all
marketable equity securities consisting principally of NS Common
Stock, were designated as "available-for-sale." Accordingly,
unrealized gains and losses, net of taxes, are recognized in
"Accumulated Other Comprehensive Income" (see Note 12).
Materials and Supplies
- ----------------------
"Materials and supplies," consisting 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."
PAGE 51
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Properties
- ----------
"Properties" are stated principally at cost and are depreciated
using group depreciation. Rail is depreciated primarily on the basis
of use measured by gross ton-miles. The effect of this method is to
depreciate 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 17%. In 1998, the
overall depreciation rate averaged 2.8% for roadway and 4.0% for
equipment. NS Rail capitalizes interest on major capital projects
during the period of their construction. Additions to properties,
including those under lease, are capitalized. Maintenance expense is
recognized when repairs are performed. When properties other than land
and nonrail assets are sold or retired in the ordinary course of
business, the cost of the assets, net of sale proceeds or salvage, is
charged to accumulated depreciation rather than recognized through
income. Gains and losses on disposal of land and nonrail assets are
included in "Other Income - Net" (see Note 3).
NS Rail reviews the carrying amount of properties whenever events
or changes in circumstances indicate that such carrying amount may not
be recoverable based on future undiscounted cash flows or estimated
net realizable value. Assets that are deemed impaired as a result of
such review are recorded at the lower of carrying amount or fair
value.
Revenue Recognition
- -------------------
Revenue is recognized proportionally as a shipment moves from
origin to destination.
Derivatives
- -----------
NS Rail does not engage in the trading of derivatives. NS Rail
has entered into a limited number of derivative agreements to hedge
interest rate exposures on certain components of its debt portfolio.
All of these derivative instruments are designated as hedges, have
high correlation with the underlying exposure, and are highly
effective in offsetting underlying price movements. Accordingly,
payments made or received under interest rate swap agreements are
recorded in the income statement with the corresponding interest
expense.
Required Accounting Changes
- ---------------------------
Effective Jan. 1, 1998, NS Rail adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). This statement requires presentation of comprehensive income
(net income plus all other changes to net assets from nonowner
sources) and its components in the financial statements. NS Rail
presents comprehensive income in its Consolidated Statements of
Changes in Stockholders' Equity and has reclassified prior years'
amounts to conform to the new presentation. Adoption of SFAS 130 had
no impact on total stockholders' equity or net income (see Note 12).
NS Rail adopted Statement of Financial Accounting Standards
No. 132 (SFAS 132), "Employers' Disclosures about Pension and Other
Postretirement Benefits," in its 1998 Annual Report. SFAS 132 revises
disclosures about pension and other postretirement benefit plans, but
does not change the measurement or recognition of liabilities
associated with such plans (see Note 13).
Reclassifications
- -----------------
Certain amounts in the financial statements and notes thereto
have been reclassified to conform to the 1998 presentation.
PAGE 52
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. RELATED PARTIES
General
- -------
Norfolk Southern Corporation (NS) is the parent holding company
of NSR. The costs of functions performed by NS are charged to NS Rail.
In addition, effective Nov. 1, 1998, NS charges NS Rail a revenue-
based licensing fee (which totaled $10 million) for use of certain
intangible assets owned by NS. Rail operations are coordinated at the
holding company level by the NS Vice Chairman and Chief Operating
Officer.
Joint Acquisition of Conrail by NS
- ----------------------------------
Background and Overview -- On April 8, 1997, NS and CSX
Corporation (CSX) agreed jointly to acquire Conrail Inc. (Conrail),
the owner of Consolidated Rail Corporation, the major freight railroad
in the Northeast.
On May 23, 1997, NS and CSX, through a jointly owned entity,
completed the acquisition of tendered Conrail stock which they placed
in a voting trust pending the issuance and effectiveness of the
Surface Transportation Board's (STB) written decision approving their
joint application to control Conrail. NS has a 58% economic and 50%
voting interest in the jointly owned entity, and CSX has the remainder
of the economic and voting interests.
On June 17, 1997, NS and CSX executed the Transaction Agreement,
dated as of June 10, 1997, which generally outlined the methods of
governing and operating Conrail and its subsidiaries when they became
subject to NS' and CSX's joint control.
On Aug. 22, 1998, the STB's written decision approving the
control application became effective (the "Control Date"). As a
result, NS and CSX: (1) dissolved the voting trust; and (2) are
authorized, among other things, to implement the transactions
contemplated in the Transaction Agreement. A new Conrail Board of
Directors was elected which consists of an equal number of
NS-appointed and CSX-appointed directors.
It is expected that Conrail's operations will continue
substantially unchanged until NSR and CSX Transportation, Inc. (CSXT)
commence operating the respective Conrail properties that will be
leased to them, an event that NS and CSX have agreed will occur on
June 1, 1999 (the "Closing Date"). A failure by NSR or CSXT to
integrate successfully their respective portions of Conrail, including
information technology systems, could have a substantial impact on
NS Rail's financial position, results of operations, and liquidity.
After the Closing Date, NSR and CSXT will provide substantially
all rail freight services on Conrail's route system, perform or be
responsible for performance of most services incident to customer
freight contracts, and employ the majority of Conrail's work force.
Until the Closing Date, NS Rail will continue to have
transactions in the normal course of business with Conrail's railroad
subsidiary.
The Transaction Agreement and Operating Agreements
- --------------------------------------------------
The Transaction Agreement provides, among other things, that
after the Closing Date, NSR and CSXT will: (1) separately operate,
pursuant to operating and lease agreements with two limited liability
companies (Pennsylvania Lines LLC [PRR] and New York Central Lines LLC
[NYC]) that will be wholly owned by Conrail, portions of the routes
and assets now owned and operated by Conrail (the "Allocated Assets");
and (2) have joint and exclusive access to other Conrail properties
that will continue to be owned and operated by Conrail (the "Shared
Assets Areas"). Conrail will continue to provide certain system
support operations for the benefit of itself, NSR, and CSXT. All
pre-existing Conrail obligations, including environmental liabilities,
will remain obligations of Conrail (or, in some cases, of PRR or NYC).
PAGE 53
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. RELATED PARTIES (continued)
The Operating Agreement between NSR and PRR, which governs all
nonequipment assets to be used by NSR, will have an initial 25-year
term, renewable at the option of NSR for two 10-year terms; payments
under that agreement will be fair market rental values that are
subject to adjustment every six years to reflect changes in such
values. NSR also will lease from PRR a number of equipment assets at
fair market rentals. NSR's payments to PRR under the Operating
Agreement and equipment lease agreements will be significant in
amount. In addition, all costs necessary to operate the PRR assets
will be borne by NSR.
CSXT will enter into an Operating Agreement and lease agreements
with NYC that contain terms and conditions identical to those in the
comparable agreements between NSR and PRR, and it will bear all costs
necessary to operate the NYC assets.
NSR also will pay a portion of the costs (CSXT will pay the
remainder) to operate over the Shared Assets Areas, which will be
based on fair value and percentage usage.
Many employees of Conrail will be employed by NS or NSR, and, in
some cases, relocated at NS' or NSR's cost. Some Conrail employees not
hired by either NSR or CSXT will remain at Conrail and perform
services in the Shared Assets Areas or carry out general corporate
functions. Other Conrail employees were or will be separated from
service, after a transition period, and will be entitled to
contractual or STB-imposed severance benefits. The Transaction
Agreement provides that: (1) separation costs related to Conrail's
nonunion employees are to be borne by Conrail; and (2) separation
costs related to Conrail's union employees are to be borne primarily
by either NSR or CSXT.
NS will direct the appointment of the directors of PRR, and CSX
will direct the appointment of the directors of NYC. It is expected
that the directors of PRR and NYC will have control over the daily
operations of these companies, but certain key decisions, including
all modifications and changes to either Operating Agreement, must be
made by the Conrail board. By virtue of their indirect ownership of
Conrail, NS and CSX will each have an indirect economic interest of
58% and 42%, respectively, in both PRR and NYC.
Integration Expenses and Other Costs
- ------------------------------------
Results for 1998 included Conrail-related integration costs,
which are included in railway operating expenses. Results for 1997
included a first-quarter pretax charge of $77 million for credit
facility costs incurred in conjunction with certain now-terminated
commitments to provide financing for NS' then-proposed acquisition of
all Conrail stock.
NS' $6.2 billion investment in Conrail includes $165 million
($101 million after taxes) of costs that are expected to be borne by
NS Rail. These costs consist principally of: (1) contractual
obligations to Conrail employees imposed by the STB when it approved
the transaction; and (2) costs to relocate Conrail employees. Most of
these costs are expected to be paid in the two years following the
Closing Date; however, certain contractual obligations by their terms
will be paid out over a longer period. These costs are based on
preliminary estimates of separation, relocation, and other labor-
related contractual obligations to Conrail employees. These liability
estimates may be modified as more information becomes available, as
Management's integration plans evolve, and as labor implementing
agreements are negotiated. Severance and relocation plans are expected
to be finalized shortly after the Closing Date. As a consequence,
final cost amounts could differ from the original estimate; however,
any such differences are not now expected to be material. As
definitive plans are determined and communicated, costs, if any, for
severing or relocating NS Rail employees and for disposing of NS Rail
facilities will be charged to operating expense.
PAGE 54
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. RELATED PARTIES (continued)
Intercompany Accounts
- ---------------------
December 31,
1998 1997
---- ----
Average Average
Interest Interest
($ in millions) Balance Rate Balance Rate
--------------- ------- -------- ------- --------
Due from NS:
Advances $354 5% $752 5%
Due to NS:
Notes 311 7% 305 7%
---- ----
Due (to)
from NS
- net $ 43 $447
==== ====
Interest is applied to certain advances at the average NS yield
on short-term investments and to the notes at specified rates.
"Interest income" includes interest on amounts due from NS of $48
million in 1998, $15 million in 1997, and $14 million in 1996.
"Other interest expense" includes interest on amounts due to NS
of $23 million in 1998, $17 million in 1997, and $14 million in 1996.
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. NS Rail had long-term intercompany federal income
tax payables (which are included in "Deferred income taxes" in the
Consolidated Balance Sheets) of $633 million at Dec. 31, 1998, and
$443 million at Dec. 31, 1997.
Noncash Dividends
- -----------------
NSR declared and issued to NS noncash dividends of $1.0 billion
in 1998, $147 million in 1997, and $414 million in 1996, which were
settled by reduction of NSR's interest-bearing advances due from NS.
Noncash dividends are excluded from the Consolidated Statements
of Cash Flows.
Capital Contribution
- --------------------
In 1998, NS Rail recognized a capital contribution for benefits
it received related to tax credits generated by a nonrail subsidiary
of NS.
Cash Required for NS Debt and NS Stock Purchase Program
- -------------------------------------------------------
To finance the cost of the Conrail transaction, NS issued and
sold commercial paper and $4.3 billion of unsecured notes. A
significant portion of the funding for the interest and repayments on
this and other NS debt is expected to be provided by NS Rail.
NS is subject to various financial covenants with respect to its
debt and under its credit agreement, including a minimum net worth
requirement and certain restrictions on issuance of further debt. As a
major NS subsidiary, NS Rail is subject to certain of those covenants.
PAGE 55
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. RELATED PARTIES (continued)
Since 1987, the NS Board of Directors has authorized the purchase
and retirement of up to 285 million shares of NS Common Stock. Since
the first purchases in December 1987 and through Oct. 22, 1996, NS had
purchased and retired 205.6 million shares of its Common Stock under
these programs at a cost of $3.2 billion.
On Oct. 23, 1996, NS announced that the stock purchase program
had been suspended. Future purchase decisions are dependent on the
economy, cash needs, and alternative investment opportunities. As in
the past, a significant portion of the funding for any future NS
Common Stock purchases, either in the form of direct cash or cash used
for debt service, is expected to be provided by NS Rail.
3. OTHER INCOME - NET
($ in millions) 1998 1997 1996
--------------- ---- ---- ----
Interest income
(Note 2) $ 58 $31 $ 30
Rental income 24 22 18
Gains from sales of
properties and
investments 31 9 26
Dividends from NS 17 17 16
Corporate-owned life
insurance - net 11 7 6
Other interest expense
(Note 2) (45) (45) (44)
Taxes on nonoperating
property (2) (2) (4)
Other - net (4) (11) (9)
---- ---- ----
Total $ 90 $ 28 $ 39
==== ==== ====
4. INCOME TAXES
Provision for Income Taxes
- --------------------------
($ in millions) 1998 1997 1996
--------------- ---- ---- ----
Current:
Federal $269 $279 $278
State 14 31 34
---- ---- ----
Total current taxes 283 310 312
---- ---- ----
Deferred:
Federal 87 75 73
State 13 (5) 16
---- ---- ----
Total deferred taxes 100 70 89
---- ---- ----
Provision for income
taxes $383 $380 $401
==== ==== ====
PAGE 56
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
4. INCOME TAXES (continued)
Reconciliation of Statutory Rate to Effective Rate
- --------------------------------------------------
Total income taxes as reflected in the Consolidated Statements of
Income differ from the amounts computed by applying the statutory
federal corporate tax rate as follows:
1998 1997 1996
---- ---- ----
($ in millions) Amount % Amount % Amount %
--------------- ------ --- ------ --- ------ ---
Federal income tax
at statutory rate $ 388 35 $ 397 35 $ 410 35
State income taxes,
net of federal tax
benefit 18 2 17 2 33 2
Corporate-owned
life insurance (12) (1) (10) (1) (16) (1)
Other - net (11) (1) (24) (2) (26) (2)
----- -- ----- -- ----- --
Provision for
income taxes $ 383 35 $ 380 34 $ 401 34
===== == ===== == ===== ==
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.
Tax Benefit Leases
- ------------------
In January 1995, the United States Tax Court issued a preliminary
decision that disallowed some of the tax benefits a predecessor of NSR
purchased from a third party pursuant to a safe harbor lease agreement
in 1981. The Tax Court finalized this decision in February 1997, and
all avenues of appeal have been exhausted. NS Rail has requested
payment and filed suit to collect from the third party in accordance
with indemnification provisions of the lease agreement, and Management
believes that this receivable will be collected.
Deferred Tax Assets and Liabilities
- -----------------------------------
Certain items are reported in different periods for financial
reporting and income tax purposes. Deferred tax assets and liabilities
were recorded in recognition of these differences. Management believes
the deferred tax assets will be realized.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows:
PAGE 57
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
4. INCOME TAXES (continued)
December 31,
($ in millions) 1998 1997
--------------- ---- ----
Deferred tax assets:
Reserves, including casualty
and other claims $ 158 $ 143
Employee benefits 124 130
Retiree health and death
benefit obligation 126 132
Taxes, including state
and property 157 159
Other -- 1
------- -------
Deferred tax assets 565 565
------- -------
Deferred tax liabilities:
Property (2,975) (2,883)
Unrealized holding gains (237) (229)
Other (30) (31)
------- -------
Deferred tax
liabilities (3,242) (3,143)
Intercompany federal
tax payable - net (633) (443)
------- -------
Net deferred tax
liability (3,310) (3,021)
Net current deferred
tax assets 110 100
------- -------
Net long-term deferred
tax liability $(3,420) $(3,121)
======= =======
Internal Revenue Service (IRS) Reviews
- --------------------------------------
Consolidated federal income tax returns have been examined and
Revenue Agent Reports have been received for all years up to and
including 1994. The consolidated federal income tax returns for 1995
and 1996 are being audited by the IRS. Management believes that
adequate provision has been made for any additional taxes and interest
thereon that might arise as a result of IRS examinations.
5. INVESTMENTS
December 31,
($ in millions) 1998 1997
--------------- ---- ----
Marketable equity
securities at
fair value (Note 14) $ 687 $ 664
Corporate-owned life
insurance at net cash
surrender value 282 249
Other 21 17
------- -------
Total $ 990 $ 930
======= =======
PAGE 58
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
6. PROPERTIES
December 31,
($ in millions) 1998 1997
--------------- ---- ----
Railway property:
Road $ 9,228 $ 8,819
Equipment 5,117 4,832
Other property 77 77
------- -------
14,422 13,728
Less: Accumulated
depreciation 4,437 4,281
------- -------
Net properties $ 9,985 $ 9,447
======= =======
Capitalized Interest
- --------------------
Total interest cost incurred on debt in 1998, 1997, and 1996 was
$46 million, $47 million, and $46 million, respectively, of which
$21 million, $17 million, and $12 million was capitalized.
7. CURRENT LIABILITIES
December 31,
($ in millions) 1998 1997
--------------- ---- ----
Accounts payable:
Accounts and wages
payable $ 260 $ 245
Casualty and other
claims 143 171
Vacation liability 80 80
Equipment rents
payable - net 72 67
Other 22 23
------ ------
Total $ 577 $ 586
====== ======
Other current liabilities:
Liabilities for
forwarded traffic $ 27 $ 31
Retiree health and
death benefit
obligation (Note 13) 24 23
Interest payable 13 35
Other 9 9
------ ------
Total $ 73 $ 98
====== ======
PAGE 59
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
8. DEBT
Long-Term Debt
- --------------
December 31,
($ in millions) 1998 1997
--------------- ---- ----
Equipment obligations at
an average rate of
7.4% maturing to 2013 $ 377 $ 353
Capitalized leases at an
average rate of 6.1%
maturing to 2015 349 246
Other debt at an average
rate of 5.4% maturing
to 2015 34 7
------- -------
Total long-term debt 760 606
------- -------
Less: Current
maturities 141 59
------- -------
Long-term debt
less current
maturities $ 619 $ 547
======= =======
Long-term debt matures
as follows:
2000 $ 72
2001 67
2002 63
2003 65
2004 and subsequent
years 352
-------
Total $ 619
=======
The equipment obligations and the capitalized leases are secured
by liens on the underlying equipment.
Capital Lease Obligations
- -------------------------
During 1998, 1997, and 1996, NS Rail entered into capital leases
covering new locomotives. The related capital lease obligations,
totaling $127 million in 1998, $64 million in 1997, and $108 million
in 1996, were reflected in the Consolidated Balance Sheets as debt,
and, because they were noncash transactions, were excluded from the
Consolidated Statements of Cash Flows. The lease obligations carry an
average stated interest rate of 6.5% for those entered into in 1998,
7.0% for those entered into in 1997, and 6.5% for those entered into
in 1996. All were effectively converted to variable rate obligations
using interest rate swap agreements. The interest rates on these
obligations are based on the six-month London Interbank Offered Rate
and are reset every six months with changes in interest rates
accounted for as an adjustment of interest expense over the terms of
the leases. As of Dec. 31, 1998, the average interest rate on these
locomotive leases was 6.1%. As a result, NS Rail is exposed to the
market risk associated with fluctuations in interest rates. To date,
the effects of the rate fluctuations have been favorable and not
material. Counterparties to the interest rate swap agreements are
major financial institutions believed by Management to be
creditworthy.
PAGE 60
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
8. DEBT (continued)
Short-Term Debt
- ---------------
Short-term debt at Dec. 31, 1997, consists of $27 million of
notes assumed in connection with the 1990 acquisition of a coal
terminal facility. NS Rail remarketed these bonds in 1998, and they
are now classified as long-term debt.
9. LEASE COMMITMENTS
NS Rail is committed under long-term lease agreements, which
expire on various dates through 2067, for equipment, lines of road,
and other property. Future minimum lease payments are as follows
(these amounts do not include payments under the Operating Agreement
and lease agreements with PRR -- see Note 2).
Operating Capital
($ in millions) Leases Leases
--------------- --------- --------
1999 $ 76 $ 47
2000 69 47
2001 44 47
2002 37 47
2003 36 46
2004 and subsequent years 605 232
------ ------
Total $ 867 466
======
Less imputed interest on
capital leases at an
average rate of 7.1% 117
------
Present value of minimum
lease payments included
in debt $ 349
======
Operating Lease Expense
- -----------------------
($ in millions) 1998 1997 1996
--------------- ---- ---- ----
Minimum rents $ 75 $ 68 $ 65
Contingent rents 40 43 38
----- ----- -----
Total $115 $111 $103
===== ===== =====
PAGE 61
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
10. OTHER LIABILITIES
December 31,
($ in millions) 1998 1997
--------------- ---- ----
Casualty and other claims $ 271 $ 252
Retiree health and death
benefit obligation
(Note 13) 264 277
Pension benefit liability
(Note 13) 72 57
Other 302 260
------ ------
Total $ 909 $ 846
====== ======
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. On Dec. 31, 1998 and 1997,
1,197,027 shares of $2.60 Cumulative Preferred Stock, Series A
(Series A Stock) were issued, and 1,096,907 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.
In June 1989, NS announced its intention to purchase up to
250,000 shares of the outstanding Series A Stock during the subsequent
two-year period. Subsequently, NS extended the stock purchase program
through 1996. NS had purchased 176,608 shares at a total cost of
approximately $6.7 million as of Dec. 31, 1996. NS purchased the
shares in regular brokerage transactions on the open market at
prevailing prices. At year-end 1998 and 1997, NS held 176,703 shares.
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 owned all 16,668,997
shares issued and outstanding at Dec. 31, 1998 and 1997.
PAGE 62
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
"Accumulated other comprehensive income" reported in
"Stockholders' equity" included unrealized gains, net of taxes, on
securities of $428 million at Dec. 31, 1998, $414 million at Dec. 31,
1997, and $398 million at Dec. 31, 1996, and minimum pension liability
of $14 million at Dec. 31, 1998. "Other comprehensive income" reported
in the Consolidated Statements of Changes in Stockholders' Equity
consisted of the following:
($ in millions) 1998 1997 1996
--------------- ---- ---- ----
Unrealized gains on
securities $ 22 $ 25 $ 62
Minimum pension liability (23) -- --
Income taxes 1 (9) (1)
----- ----- -----
Other comprehensive
income $ -- $ 16 $ 61
===== ===== =====
"Unrealized gains on securities" included reclassification
adjustments for gains realized in income from the sale of the
securities of $2 million in 1998, and less than $1 million in 1997 and
1996.
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
NS Rail provides defined pension benefits, principally for
salaried employees, through participation in NS' funded and unfunded
retirement plans. NS Rail also provides specified health care and
death benefits to eligible retired employees and their dependents by
participating in welfare benefit plans sponsored by NS. Under the
present plans, which may be amended or terminated at NS' option, a
defined percentage of health care expenses is covered, reduced by any
deductibles, co-payments, Medicare payments, and, in some cases,
coverage provided under other group insurance policies. The following
data relate to the combined NS plans:
PAGE 63
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
Pension Benefits Other Benefits
($ in millions) 1998 1997 1998 1997
--------------- ---- ---- ---- ----
CHANGE IN BENEFIT
OBLIGATIONS
Benefit obligation at
beginning of year $ 956 $ 892 $ 360 $ 329
Service cost 13 11 10 9
Interest cost 67 66 24 25
Amendment 40 -- -- --
Actuarial (gains) losses 61 62 (9) 18
Benefits paid (74) (75) (23) (21)
------ ------ ------ ------
Benefit obligation at
end of year 1,063 956 362 360
------ ------ ------ ------
CHANGE IN PLAN ASSETS
Fair value of plan
assets at beginning
of year 1,360 1,158 111 86
Actual return on plan
assets 253 273 28 25
Employer contribution 5 4 23 21
Benefits paid (74) (75) (23) (21)
------ ------ ------ ------
Fair value of plan
assets at end of
year 1,544 1,360 139 111
------ ------ ------ ------
Funded status 481 404 (223) (249)
Unrecognized initial net
asset (16) (23) -- --
Unrecognized (gain)
loss (517) (442) (57) (30)
Unrecognized prior
service cost (benefit) 44 4 (12) (25)
------ ------ ------ ------
Net amount recognized $ (8) $ (57) $ (292) $ (304)
====== ====== ====== ======
Amounts recognized in
the Consolidated
Balance Sheets
consist of:
Prepaid benefit cost $ 41 $ -- $ -- $ --
Accrued benefit
liability (72) (57) (292) (304)
Accumulated other
comprehensive income 23 -- -- --
------ ------ ------ ------
Net amount recognized $ (8) $ (57) $ (292) $ (304)
====== ====== ====== ======
Of the pension plans included above, the nonqualified pension
plans were the only plans with an accumulated benefit obligation in
excess of plan assets. These plans' accumulated benefit obligations
were $72 million at Dec. 31, 1998, and $62 million at Dec. 31, 1997.
These plans' projected benefit obligations were $77 million at Dec.
31, 1998, and $66 million at Dec. 31, 1997. Because of the nature of
such plans, there are no plan assets in the nonqualified plans.
PAGE 64
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
After the Closing Date, when Conrail employees are hired by NS,
should any pension obligation be assumed by NS that was earned under
the Conrail plan, such obligation will be transferred to the NS plans,
along with pension assets.
NS amended its qualified pension plans, effective after the
Closing Date, to conform certain provisions of its plan with the
Conrail plan and to provide prior service credit to Conrail employees
for benefits under the NS plan. The amendment, as it relates to NS
employees, increased the pension benefit obligation at Dec. 31, 1998,
by $40 million. The amendment, as it will relate to former Conrail
employees hired by NS, will result in a further increase to the
pension benefit obligation.
Pension and other postretirement benefit costs are determined
based on actuarial valuations that reflect appropriate assumptions as
of the beginning of each year. The funded status of the plans is
determined using appropriate assumptions as of each year-end. A
summary of the major assumptions follows:
1998 1997 1996
---- ---- ----
Funded status:
Discount rate 6.75% 7.25% 7.75%
Future salary
increases 5% 5.25% 5.25%
Pension cost:
Discount rate 7.25% 7.75% 7.25%
Return on assets
in plans 9% 9% 9%
Future salary
increases 5.25% 5.25% 6%
Pension and Other Postretirement Benefit Costs
----------------------------------------------
($ in millions) 1998 1997 1996
--------------- ---- ---- ----
PENSION BENEFITS
Service cost $ 13 $ 11 $ 12
Interest cost 67 66 67
Expected return on plan
assets (106) (90) (83)
Amortization of prior
service cost 1 1 1
Amortization of initial
net asset (7) (6) (7)
Recognized net actuarial
(gain) loss (12) (7) 2
----- ----- -----
Net cost (benefit) $ (44) $ (25) $ (8)
===== ===== =====
OTHER POSTRETIREMENT
BENEFITS
Service cost $ 10 $ 9 $ 10
Interest cost 24 25 24
Expected return on
plan assets (9) (7) (6)
Amortization of prior
service cost (12) (12) (12)
Recognized net actuarial
(gain) loss (2) -- --
----- ----- -----
Net cost $ 11 $ 15 $ 16
===== ===== =====
PAGE 65
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
For measurement purposes, increases in the per capita cost of
covered health care benefits were assumed to be 8.0% for 1999 and 9.8%
for 1998. The rate was assumed to decrease gradually to an ultimate
rate of 5.0% for 2003 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on
the amounts reported in the financial statements. To illustrate, a
one-percentage-point change in assumed health care cost trend would
have the following effects:
One percentage point
($ in millions) Increase Decrease
--------------- -------- --------
Increase (decrease) in:
Total service and interest
cost components $ 4 $ (3)
Postretirement benefit
obligation $ 28 $(24)
Under collective bargaining agreements, NS Rail participates in a
multi-employer benefit plan, which provides certain postretirement
health care and life insurance benefits to eligible agreement
employees. Premiums under this plan are expensed as incurred and
amounted to $5 million in 1998 and $4 million in each of 1997 and
1996.
401(k) Plans
- ------------
NS Rail provides 401(k) savings plans for employees. Under the
plans, NS Rail matches a portion of employee contributions, subject to
applicable limitations. NS Rail's expenses under these plans were $10
million in 1998, $9 million in 1997, and $8 million in 1996.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of "Cash and cash equivalents," "Accounts
receivable," "Short-term debt," and "Accounts payable" approximate
carrying values because of the short maturity of these financial
instruments. The fair value of corporate-owned life insurance
approximates carrying value. The carrying amounts and estimated fair
values of other financial instruments, excluding investments accounted
for under the equity method in accordance with APB No. 18, consisted
of the following at December 31:
1998 1997
---- ----
Carrying Fair Carrying Fair
($ in millions) Amount Value Amount Value
--------------- -------- ----- -------- -----
Investments $ 777 $ 782 $ 832 $ 837
Long-term debt 760 779 606 628
Interest rate
swaps -- 20 -- 10
Quoted market prices were used to determine the fair value of
marketable securities, all of which were classified as "available-for-
sale." Underlying net assets were used to estimate the fair value of
other investments. 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. The fair value of interest rate swaps were estimated based
on discounted cash flows, reflecting the difference between estimated
future variable-rate payments and future fixed-rate receipts.
PAGE 66
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
14. FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
Carrying amounts of marketable securities, which consist almost
entirely of shares of NS Common Stock, reflect unrealized holding
gains of $666 million on Dec. 31, 1998, and $643 million on Dec. 31,
1997. Sales of "available-for-sale" securities were immaterial for
years ended Dec. 31, 1998 and 1997.
15. MERGER OF NORFOLK AND WESTERN RAILWAY
Effective Sept. 1, 1998, Norfolk and Western Railway Company
("N&W") was merged with and into its parent Norfolk Southern Railway
Company. Pursuant to the terms of the related Agreement and Plan of
Merger, Norfolk Southern Railway Company is the surviving company and
formally succeeded to all N&W's assets and liabilities, including its
obligations in respect of the following debt securities registered
pursuant to Section 12(b) of the Securities Exchange Act (the "N&W
Debt Securities"): (1) $1,754,900.00 of 4.85% Subordinated Income
Debentures of N&W due November 15, 2015; and (2) $4,466,000.00 of 6%
Subordinated Income Debentures of The Virginian Railway Company due
August 1, 2008.
The N&W Debt Securities continue to be listed on the New York
Stock Exchange.
16. COMMITMENTS AND CONTINGENCIES
Lawsuits
- --------
NSR 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, based on known facts and circumstances, that
the amount of NS Rail's ultimate liability is unlikely to have a
material adverse effect on NS Rail's financial position, results of
operations, or liquidity.
Environmental Matters
- ---------------------
NS Rail is subject to various jurisdictions' environmental laws
and regulations. It is NS Rail's policy to record a liability where
such liability or loss is probable and its amount can be estimated
reasonably. Claims, if any, against third parties for recovery of
clean-up 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 regularly participate in ongoing
evaluations of all identified sites and in determining any necessary
adjustments to initial liability estimates. NS Rail also has
established an Environmental Policy Council, composed of senior
managers, to oversee and interpret its environmental policy.
As of Dec. 31, 1998, NS Rail's balance sheet included a reserve
for environmental exposures in the amount of $56 million (of which
$12 million is accounted for as a current liability), which is
NS Rail's estimate of the probable clean-up and remediation costs
based on available information at 132 identified locations. On that
date, 15 sites accounted for $23 million of the reserve, and no
individual site was considered to be material. NS Rail anticipates
that much of this liability will be paid out over five years; however,
some costs will be paid out over a longer period.
At some of the 132 locations, certain NS Rail subsidiaries,
usually in conjunction with a number of other parties, have been
identified as potentially responsible parties by the Environmental
Protection Agency (EPA) or similar state authorities under the
PAGE 67
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
16. COMMITMENTS AND CONTINGENCIES (continued)
Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, or comparable state statutes, which often impose joint and
several liability for clean-up costs.
With respect to known environmental sites (whether identified by
NS Rail or by the EPA or comparable state authorities), estimates of
NS Rail's ultimate potential financial exposure for a given site or in
the aggregate for all such sites are necessarily imprecise because of
the widely varying costs of currently available clean-up techniques,
the likely development of new clean-up technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it), and evolving statutory and
regulatory standards governing liability.
The risk of incurring environmental liability -- for acts and
omissions, past, present, and future -- is inherent in the railroad
business. Some of the commodities in NS Rail's traffic mix,
particularly those classified as hazardous materials, can pose special
risks that NS Rail and its subsidiaries work diligently to minimize.
In addition, several NS Rail subsidiaries own, or have owned, land
used as operating property, or which is leased or may have been leased
and operated by others, or held for sale. Because environmental
problems may exist on these properties that are latent or undisclosed,
there can be no assurance that NS Rail will not incur environmentally
related liabilities or costs with respect to one or more of them, the
amount and materiality of which cannot be estimated reliably at this
time. Moreover, lawsuits and claims involving these and other
now-unidentified environmental sites and matters are likely to arise
from time to time. The resulting liabilities could have a significant
effect on financial condition, results of operations, or liquidity in
a particular year or quarter.
However, based on its assessments of the facts and circumstances
now known, Management believes that it has recorded the probable costs
for dealing with those environmental matters of which the Corporation
is aware. Further, Management believes that it is unlikely that any
identified matters, either individually or in the aggregate, will have
a material adverse effect on NS Rail's financial position, results of
operations, or liquidity.
Change-in-Control Arrangements
- ------------------------------
NS has compensation agreements with officers and certain key
employees that become operative only upon a change in control -- as
defined in those agreements -- of that corporation. The agreements
provide generally for payments based on compensation at the time of a
covered individual's involuntary or other specified termination and
for certain other benefits.
Debt Guarantees
- ---------------
As of Dec. 31, 1998, NS Rail and certain of its subsidiaries are
contingently liable as guarantors with respect to $113 million of
indebtedness of related entities.
PAGE 68
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
16. COMMITMENTS AND CONTINGENCIES (continued)
Year-2000 Compliance
- --------------------
NS Rail has under way a project to review and modify, as
necessary, its computer applications, hardware, and other equipment to
make them Year-2000 compliant. NS Rail has also initiated formal
communications with third parties having a substantial relationship to
its business, including other railroads, significant suppliers, larger
customers, and financial institutions, to determine the extent to
which NS Rail may be vulnerable to such third parties' failures to
achieve Year-2000 compliance.
Failure to achieve Year-2000 compliance -- by NS Rail, or by any
such third party, including Conrail and CSXT -- could negatively
affect NS Rail's ability to conduct business for an extended period.
There can be no assurance that all NS Rail information technology
systems and components will be fully Year-2000 compliant; in addition,
other companies on which NS Rail's systems and operations rely may or
may not be fully compliant on a timely basis, and any such failure
could have a material adverse effect on NS Rail's financial position,
results of operations, or liquidity.
PAGE 69
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 as listed in the index in
Item 8. In connection with our audits of the consolidated financial
statements, we also have audited the consolidated financial statement
schedule listed in Item 14(a)2. These consolidated financial
statements and this consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and this
consolidated financial statement schedule 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, 1998 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended December
31, 1998, in conformity with generally accepted accounting principles.
Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth herein.
/s/ KPMG LLP
Norfolk, Virginia
January 26, 1999
PAGE 70
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------ -----------------------------------------------------------
and Financial Disclosure.
------------------------
None.
PAGE 71
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 15, 1999, for the Norfolk Southern Railway Annual Meeting of
Stockholders to be held on May 25, 1999, 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 hereof under
"Executive Officers of the Registrant."
PAGE 72
PART IV
Item l4. Exhibits, Financial Statement Schedule, and Reports on
- ------- ------------------------------------------------------
Form 8-K.
--------
(a) The following documents are filed as part of this report:
1. Index to Consolidated Financial Statements: Page
------------------------------------------ ----
Consolidated Statements of Income
Years ended December 31, 1998, 1997, and 1996 44
Consolidated Balance Sheets
As of December 31, 1998, and 1997 45
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996 47
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996 49
Notes to Consolidated Financial Statements 50
Independent Auditors' Report 69
2. Financial Statement Schedule:
The following consolidated financial statement
schedule should be read in connection with the
consolidated financial statements:
Index to Consolidated Financial Statement Schedule Page
-------------------------------------------------- ----
Schedule II - Valuation and Qualifying Accounts 77
Schedules other than the one listed above are
omitted either because they are not required or
are inapplicable, or because the information is
included in the consolidated financial statements
or related notes.
PAGE 73
Item l4. Exhibits, Financial Statement Schedule, and Reports on
- ------- ------------------------------------------------------
Form 8-K. (continued)
--------
3. Exhibits
Exhibit
Number Description
- ------- ------------------------------------------------------
3 Articles of Incorporation and Bylaws -
3(i) 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(ii) 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.
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 Transaction Agreement, dated as of June 10,
1997, by and among CSX, CSX Transportation, Inc.,
NS, Registrant, Conrail Inc., Consolidated Rail
Corporation and CRR Holdings LLC, with certain
schedules thereto, is incorporated herein by
reference from Exhibit 10 to Norfolk Southern
Railway Company's Form 8-K filed electronically on
June 30, 1997.
(b) The Supplementary Agreement, entered into as of
January 1, 1987, between the Trustees of the
Cincinnati Southern Railway and The Cincinnati,
New Orleans and Texas Pacific Railway Company (the
latter a wholly owned subsidiary of Norfolk
Southern Railway) - extending and amending a
Lease, dated as of October 11, 1881 (both the
Lease and Supplementary Agreement, formerly
incorporated by reference from Exhibit 10(b) to
Southern's 1987 Annual Report on Form 10-K) - is
incorporated herein by reference from
Exhibit 10(a) to Norfolk Southern Railway's 1994
Annual Report on Form 10-K.
PAGE 74
Item l4. Exhibits, Financial Statement Schedule, and Reports on
- ------- ------------------------------------------------------
Form 8-K. (continued)
--------
Exhibit
Number Description
- ------- ------------------------------------------------------
21 Subsidiaries of the Registrant
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months
ended December 31, 1998.
(c) Exhibits
The Exhibits required by Item 601 of Regulation S-K as
listed in Item 14(a)3 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)2 or are otherwise not required or are not
applicable.
PAGE 75
POWER OF ATTORNEY
-----------------
Each person whose signature appears below under "SIGNATURES"
hereby authorizes Henry C. Wolf and James C. Bishop, Jr., 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
James C. Bishop, Jr., 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 19th day of March, 1999.
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 19th day of March,
1999, 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
(Henry C. Wolf) and Chief Financial Officer
and Director
(Principal Financial Officer)
PAGE 76
Signature Title
- --------- -----
/s/ James C. Bishop, Jr.
- -------------------------- Director
(James C. Bishop, Jr.)
/s/ Jon L. Manetta
- -------------------------- Director
(Jon L. Manetta)
/s/ L. I. Prillaman
- -------------------------- Director
(L. I. Prillaman)
/s/ Stephen C. Tobias
- -------------------------- Director
(Stephen C. Tobias)
PAGE 77
Schedule II
Page 1 of 2
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1996, 1997 and 1998
(In millions of dollars)
Additions charged to
--------------------
Begin Ending
ning Other Deduc-
Balance Expenses Accounts tions Balance
------- -------- -------- ------ -------
Year ended December 31,
- ----------------------
1996
----
Valuation allowance
(included net in
deferred tax liabil-
ity) for deferred
tax assets $ 1 $ -- $ -- $ -- $ 1
Casualty and other
claims included in
other liabilities $ 257 $ 115 $ 4(1) $ 129(2) $ 247
Current portion of
casualty and other
claims included
in accounts payable $ 164 $ 16 $ 154(1) $ 169(3) $ 165
Year ended December 31,
- ----------------------
1997
----
Valuation allowance
(included net in
deferred tax liabil-
ity) for deferred
tax assets $ 1 $ -- $ -- $ -- $ 1
Casualty and other
claims included in
other liabilities $ 247 $ 108 $ 2(1) $ 105(2) $ 252
Current portion of
casualty and other
claims included
in accounts payable $ 165 $ 14 $ 170(1) $ 178(3) $ 171
(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.
(continued)
PAGE 78
Schedule II
Page 2 of 2
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1996, 1997 and 1998
(In millions of dollars)
(continued)
Additions charged to
--------------------
Begin Ending
ning Other Deduc-
Balance Expenses Accounts tions Balance
------- -------- -------- ------ -------
Year ended December 31,
- ----------------------
1998
----
Valuation allowance
(included net in
deferred tax liabil-
ity) for deferred
tax assets $ 1 $ -- $ -- $ -- $ 1
Casualty and other
claims included in
other liabilities $ 252 $ 86 $ 22(1) $ 89(2) $ 271
Current portion of
casualty and other
claims included
in accounts payable $ 171 $ 11 $ 149(1) $ 188(3) $ 143
(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 79
EXHIBIT INDEX
-------------
Electronic
Submission
Exhibit
Number Description Page
- ---------- ------------------------------------------------------ ----
21 Subsidiaries of Norfolk Southern Railway 80
27 Financial Data Schedule (Required to be
electronically submitted for use by the
Securities and Exchange Commission only
and not deemed part of this filing) 81