Independent Auditors' Report
The Stockholders and Board of Directors
Conrail Inc.:
We have audited the accompanying consolidated balance sheet of Conrail Inc. and
subsidiaries as of December 31, 1999, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The accompanying consolidated financial
statements of Conrail Inc. and subsidiaries as of December 31, 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for the two years then ended were audited by other auditors whose report thereon
dated January 19, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
These 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Conrail Inc.
and subsidiaries as of December 31, 1999, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/KPMG LLP /s/ERNST & YOUNG LLP
KPMG LLP Ernst & Young LLP
Norfolk, Virginia Richmond, Virginia
February 11, 2000
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
Conrail Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Conrail Inc.
and subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 19, 1999
CONRAIL INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
-----------------------
($ In Millions) 1999 1998 1997
------ ------ ------
Revenues - NSC/CSX (Note 2) $ 549 $ - $ -
Revenues - Third parties 1,625 3,863 3,765
----- ----- -----
Total operating revenues 2,174 3,863 3,765
----- ----- -----
Operating expenses (Note 3)
Compensation and benefits 645 1,489 1,448
Fuel 63 163 198
Material, services and rents 590 909 952
Depreciation and amortization 328 310 293
Casualties and insurance 228 230 143
Other 192 247 188
ESOP termination charge - - 221
----- ------ ------
Total operating expenses 2,046 3,348 3,443
------ ------ ------
Income from operations 128 515 322
Interest expense (150) (153) (170)
Other income, net (Note 10) 67 72 83
------ ------ ------
Income before income taxes 45 434 235
Income taxes (Note 7) 19 167 228
------ ---- ----
Net income $ 26 $ 267 $ 7
====== ====== ======
See accompanying notes to the consolidated financial statements.
CONRAIL INC.
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------
($ In Millions) 1999 1998
------ ------
ASSETS
Current assets
Cash and cash equivalents $ 22 $ 138
Accounts receivable 51 580
Due from NSC/CSX (Note 2) 196 -
Notes receivable from NSC/CSX (Note 2) 216 -
Material and supplies 29 92
Deferred tax assets (Note 7) 149 182
Other current assets 6 13
------ -----
Total current assets 669 1,005
Property and equipment, net (Note 4) 7,143 7,151
Other assets 571 888
------ -----
Total assets $8,383 $9,044
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt (Note 6) 319 113
Accounts payable 59 130
Due to NSC/CSX (Note 2) 159 -
Wages and employee benefits 43 403
Casualty reserves 136 139
Accrued and other current liabilities (Note 5) 147 422
------ ------
Total current liabilities 863 1,207
Long-term debt (Note 6) 1,302 1,609
Casualty reserves 311 215
Deferred income taxes (Note 7) 1,817 1,787
Other liabilities 271 426
------ ------
Total liabilities 4,564 5,244
------ ------
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 2, 8, and 9)
Common stock ($1 par value; 100 shares
authorized, issued and outstanding) - -
Additional paid-in capital 2,229 2,291
Unearned ESOP compensation (20) (75)
Retained earnings 1,610 1,584
------ ------
Total stockholders' equity 3,819 3,800
------ ------
Total liabilities and stockholders' equity $8,383 $9,044
====== ======
See accompanying notes to the consolidated financial statements.
CONRAIL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Series A Unearned Additional Employee
Preferred ESOP Common Paid-in Benefits Retained Treasury
($ In Millions Except Per Share Data) Stock Compensation Stock Capital Trust Earnings Stock
----------- -------------- ------- --------- -------- -------- --------
Balance, January 1, 1997 $ 211 $(222) $ 88 $2,404 $ (384) $1,357 $(347)
Amortization 2
Net income 7
Common dividends, $.475 per share (Note 9) (40)
Preferred dividends, $.541 per share (Note 9) (3)
Employee benefits trust transactions, net (3) 20
Effects of Conrail acquisition, net
(Notes 2) (209) (82) 594 90 (393)
Employee benefits trust reclassification 274
(Note 9)
Allocation of unearned ESOP 65
Other (2) 11 3 (2)
------ ------ ---- ----- ----- ------ -----
Balance, December 31, 1997 - (155) 6 3,006 - 1,324 (742)
Net income 267
Common dividends (7)
Common shares reclassified as unissued
(Note 9) (6) (736) 742
Allocation of unearned ESOP compensation 80
Other 21
------ ----- ----- ------- ----- ----- -----
Balance, December 31, 1998 - (75) - 2,291 - 1,584 -
Net income 26
Transfer of portion of prepaid pension
assets to NSC and CSX (Note 8) (54)
Allocation of unearned ESOP compensation 55
Other (8)
------ ----- ----- ------ ------ ------
Balance, December 31, 1999 $ - $ (20) $ - $2,229 $ - $1,610 $ -
====== ====== ==== ====== ====== ====== =====
See accompanying notes to the consolidated financial statements.
CONRAIL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
---------------------------------
($ In Millions) 1999 1998 1997
----- ----- ------
Cash flows from operating activities
Net income $ 26 $ 267 $ 7
Adjustments to reconcile net income to
net cash provided by operating activities:
Transition and acquisition-related
charges (Note 3) 368 159
ESOP termination charge 221
Depreciation and amortization 328 310 293
Deferred income taxes 48 (30) 89
Gains from sales of property (6) (21) (23)
Pension credit (45) (63) (61)
Changes in (net of effect of transition
and acquisition-related items):
Accounts receivable 529 33 7
Accounts and wages payable (431) (33) 42
Deferred tax assets 33 (67) 178
Due from NSC/CSX (196)
Due to NSC/CSX 159
Other (49) (37) (28)
------ ----- ------
Net cash provided by operating
activities 396 727 884
------ ----- ------
Cash flows from investing activities
Property and equipment acquisitions (176) (537) (439)
Notes receivable from NSC/CSX (216)
Proceeds from disposals of properties 6 19 25
Other (14) (32) (31)
------ ----- ----
Net cash used in investing activities (400) (550) (445)
------ ----- -----
Cash flows from financing activities
Payment of long-term debt (112) (119) (238)
Payment of debt consent fees (10)
Net proceeds from (repayments of)
short-term borrowings (99)
Dividends on common stock and preferred stock (7) (43)
Proceeds from stock options and other 8
----- ----- -----
Net cash used in financing
activities (112) (136) (372)
------ ----- -----
Increase(decrease) in cash and cash equivalents (116) 41 67
Cash and cash equivalents
Beginning of year 138 97 30
------ ----- -----
End of year $ 22 $ 138 $ 97
===== ===== =====
See accompanying notes to the consolidated financial statements.
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
Conrail Inc. ("Conrail") is a holding company whose principal subsidiary is
Consolidated Rail Corporation ("CRC"), the major freight railroad in the
Northeast. Norfolk Southern Corporation ("NSC") and CSX Corporation
("CSX"), the major railroads in the Southeast, jointly control Conrail
through their ownership interests in CRR Holdings LLC ("CRR"), whose
primary subsidiary is Green Acquisition Corporation, which owns Conrail.
NSC and CSX have equity interests in CRR of 58% and 42%, respectively, and
voting interests of 50% each. From May 23, 1997, the date NSC and CSX
completed their acquisition of Conrail stock, until June 1, 1999, Conrail's
operations continued substantially unchanged while NSC and CSX awaited
regulatory approvals and prepared for the integration of their respective
Conrail routes and assets to be leased to their railroad subsidiaries,
Norfolk Southern Railway Company ("NSR") and CSX Transportation, Inc.
("CSXT"). The operations of CRC substantially changed beginning June 1,
1999, when NSC and CSX began operating a portion of the Conrail properties
under operating agreements (the "Closing Date") (Note 2).
Beginning June 1, 1999, Conrail's major sources of operating revenues are
operating fees and lease rentals from NSC and CSX. The composition of CRC's
operating expenses also reflects this change in operations. As a result,
Conrail's 1999 results reflect the freight railroad operations of CRC
through May 31, 1999, and reflect Conrail's new structure and operations
that commenced on the Closing Date (Note 2).
Principles of Consolidation
The consolidated financial statements include Conrail and majority-owned
subsidiaries. Investments in 20% to 50% owned companies are accounted for
by the equity method.
Cash Equivalents
Cash equivalents consist of commercial paper, certificates of deposit and
other liquid securities purchased with a maturity of three months or less,
and are stated at cost which approximates market value.
Material and Supplies
Material and supplies prior to June 1, 1999, (Note 2) consist mainly of
fuel oil and items for maintenance of property and equipment, and were
valued at the lower of cost, principally weighted average, or market.
Material and supplies beginning June 1, 1999, consist of maintenance
material valued at the lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost. Additions to properties,
including those under lease, are capitalized. Maintenance expense is
recognized when repairs are performed. Depreciation is provided using the
composite straight-line method over estimated service lives. In 1999, the
overall depreciation rate averaged 3.0% for roadway and 5.8% for equipment.
The cost (net of salvage) of depreciable property retired or replaced in
the ordinary course of business is charged to accumulated depreciation and
no gain or loss is recognized.
Asset Impairment
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Expected future cash flows from the use and disposition of
long-lived assets are compared to the current carrying amounts to determine
the potential impairment loss.
Revenue Recognition
Revenue prior to June 1, 1999 was recognized proportionally as a shipment
moved on the Conrail system from origin to destination. Beginning June 1,
1999, the Company's major sources of revenues are from NSC and CSX,
primarily in the form of rental revenues and operating fees which are
recognized when earned.
New Accounting Standards
There were no new accounting standards issued during 1999 which the Company
believes will have a material impact on its consolidated financial
position, results of operations or cash flows.
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 and
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.
Reclassifications
Certain prior year data have been reclassified to conform to the 1999
presentation.
2. Related Parties Transactions
Background
On May 23, 1997, NSC and CSX completed their joint acquisition of Conrail
stock. On June 17, 1997, NSC and CSX executed an agreement which generally
outlines the methods of governing and operating Conrail and its
subsidiaries ("Transaction Agreement"). On July 23, 1998, the Surface
Transportation Board ("STB") issued a written opinion that permitted NSC
and CSX to exercise operating control of Conrail beginning August 22, 1998.
On June 1, 1999, NSC and CSX began to operate over certain Conrail lines.
Commencement of Operations by NSR and CSXT
On June 1,1999, the majority of CRC's routes and assets were segregated
into separate subsidiaries of CRC, Pennsylvania Lines LLC ("PRR") and New
York Central Lines LLC ("NYC"). PRR and NYC entered into separate but
identical operating and lease agreements with NSR and CSXT, respectively,
(the "Operating Agreements" ) which govern substantially all nonequipment
assets to be used by NSR and CSXT and have initial 25-year terms, renewable
at the options of NSR and CSXT for two 5-year terms. Payments made under
the Operating Agreements are based on appraised values that are subject to
adjustment every six years to reflect changes in such values. NSR and CSXT
have also leased or subleased certain equipment assets at rentals based on
appraised values for varying term lengths from PRR and NYC, respectively,
as well as from CRC.
NSC and CSX have also entered into agreements with CRC governing other
Conrail properties that continue to be owned and operated by Conrail ("the
Shared Assets Areas"). NSR and CSXT pay CRC a fee for joint and exclusive
access to the Shared Assets Areas. In addition, NSR and CSXT pay, based on
usage, the costs incurred by CRC to operate the Shared Assets Areas plus a
profit factor.
Payments made by NSR and CSXT to Conrail under the Shared Assets agreements
were $45 million and $43 million, respectively, of which $7 million and $5
million, were minimum rents.
Payments from NSR and CSXT under the Operating Agreements and lease
agreements to PRR and NYC amounted to $167 million and $124 million,
respectively. In addition, costs necessary to operate and maintain the
related assets under these agreements, including leasehold improvements,
will be borne by NSR and CSXT.
Future minimum lease payments to be received from NSR/CSXT are as follows:
$ in Millions
-------------
NSR NSR CSX CSX
--- --- --- ---
To PRR To CRC To NYC To CRC Total
------ ------ ------ ------ -----
2000 $ 320 $ 22 $ 231 $ 16 $ 589
2001 307 24 223 17 571
2002 318 27 229 19 593
2003 327 30 235 21 613
2004 330 32 238 23 623
2005 and Beyond 5,389 687 3,902 497 10,475
-------------------------------------------------------------
Total $6,991 $822 $5,058 $593 $13,464
-------------------------------------------------------------
Related Party Balances and Transactions
"Due from NSC/CSX" at December 31, 1999, is primarily comprised of
amounts due for the above-described operating and rental activities. Also
included in "Due from NSC/CSX" are amounts paid by Conrail for
separation payments to CRC's agreement employees that will be reimbursed by
NSC and CSX as required by the Transaction Agreement. As of December 31,
1999, the accrued balances due from NSC and CSX were $91 million and $105
million, respectively.
PRR and NYC have interest-bearing notes receivable, payable on demand from
NSC and CSX of $123 million and $93 million, respectively, at December 31,
1999 included in the "Notes receivable from NSC/CSX" line item on the
balance sheet. The interest rates on the notes receivable from NSC and CSX
are variable and both 5.6% at December 31, 1999.
CRC has entered into service provider agreements with both NSC and CSX, for
such services as accounting and administrative processing, personal injury
and environmental case handling and other miscellaneous services ("Service
Provider Agreements"). Payments made to NSC under these Service Provider
Agreements were $5 million and are included within the various line items
of operating expenses for 1999. In addition, CRC paid a subsidiary of CSX
$5 million during 1999, for rental of various facilities which it occupied
subsequent to May 31, 1999.
"Due to NSC/CSX" includes $64 million and $29 million, to NSC and CSX,
respectively, for the services described above for 1999.
"Due to NSC/CSX" also includes $42 million and $24 million payable to NSC
and CSX, respectively, for CRC's vacation liability related to the portion
of its work force that became NSC and CSX employees subsequent to May 31,
1999.
From time to time, NSC and CSX, as the indirect owners of Conrail, may need
to provide some of Conrail's cash requirements through capital
contributions, loans, or advances, none of which took place as of December
31, 1999.
Prior to the Closing Date, the Company interchanged freight with both NSC
and CSX for transport to destinations both within and outside of Conrail's
service region. The Company shares ownership interests with either one or
both railroads in various transportation-related entities, all of which are
immaterial to the Company's operating results and financial position.
3. Transition, Acquisition-Related and Other Items
During 1999, the Company recorded net expenses of $138 million ($85 million
after taxes) for adjustments to certain litigation and environmental
reserves related to settlements and completion of site reviews, and in
accordance with the Transaction Agreement, for the method of settlement of
certain casualty liabilities based on an actuarial study and for the
assumption of a lease obligation by a subsidiary of CSX. The effects of
these adjustments are reflected in the "Casualties and insurance" and
"Other" operating expense line items of the income statement for 1999.
During the third quarter of 1998, the Company recorded charges totaling
$302 million ($187 million after income taxes), primarily for severance
benefits of $170 million covering certain non-union employees, and $132
million of other costs, such as the effect of changing to an actuarial
method of valuing certain components of the Company's casualty reserves,
primarily included in the "Compensation and benefits" and "Casualties and
insurance" operating expense line items of the 1998 income statement,
respectively.
The charge for non-union separation benefits represents termination
payments made to approximately 1,300 non-union employees whose
non-executive positions were eliminated as a result of the joint
acquisition of Conrail. Most of these termination payments have been made
in the form of supplemental retirement benefits from the Company's
overfunded pension plan. During 1999 and 1998, termination payments of $77
million and $9 million were made, respectively.
During 1998 and 1997, the Company recorded charges totaling $66 million
($41 million after income taxes) and $49 million ($31 million after income
taxes), respectively, representing amounts paid to certain non-union
employees as incentive to continue their employment with the Company
through August 22, 1998, the effective date of the STB approval of the
joint acquisition of Conrail, and the subsequent transition period.
During 1997, the Company recorded a charge of $221 million (no related
income tax effect) for the termination of its Non-union Employee Stock
Ownership Plan ("ESOP") as a result of the repayment of the ESOP note
payable of $291 million and related accrued interest to the Company. The
Company recorded a long-term liability of $221 million related to the ESOP
termination charge, which has not required use of the Company's cash for
settlement. Such liability, the balance of which is $20 million at December
31, 1999, is being reduced as the cash proceeds, held by the ESOP as a
result of selling its ESOP preferred stock in the joint tender offer, are
allocated to eligible ESOP participants.
During 1997, the Company recorded a charge of $110 million ($103 million
after income taxes) in connection with employment "change in control"
agreements with certain executives, which became operative as a result of
the joint acquisition of Conrail. A portion of the benefits under these
agreements, $68 million, has been paid in 1998 from the Employee Benefits
Trust ("EBT"). These costs are included in the "Compensation and benefits"
line item of the income statement for 1997.
Also, as a result of the joint acquisition of Conrail, all outstanding
performance shares and all outstanding unvested stock options, restricted
shares and phantom shares vested during 1997. The Company paid all of the
amounts due employees under these arrangements and recorded a $63 million
charge ($39 million after income taxes). These costs are included in the
"Compensation and benefits" line item of the income statement for 1997.
4. Property and Equipment
December 31,
--------------------
1999 1998
----- -----
(In Millions)
Roadway $ 7,410 $ 7,255
Equipment 1,573 1,593
Less: Accumulated depreciation (2,154) (2,029)
------- -------
6,829 6,819
------- -------
Capital leases (primarily equipment) 696 793
Accumulated amortization (382) (461)
------- -------
314 332
------- -------
$ 7,143 $ 7,151
======= =======
Substantially all assets are leased to NSR or CSXT (Note 2).
Conrail acquired equipment and incurred related long-term debt under
various capital leases of $79 million in 1997.
5. Accrued and Other Current Liabilities
December 31,
--------------------
1999 1998
---- ----
(In Millions)
Freight settlements due others $ 3 $ 42
Equipment rents (primarily car hire) 6 78
Unearned freight revenue - 59
Property and corporate taxes 97 33
Other 41 210
---- ----
$147 $422
==== ====
6. Long-Term Debt and Leases
Long-term debt outstanding, including the weighted average interest rates
at December 31, 1999, is composed of the following:
December 31,
----------------------
1999 1998
------ ------
(In Millions)
Capital leases $ 331 $ 391
Medium-term notes payable,
6.27%, due 1999 - 30
Notes payable, 9.75%, due 2000 250 250
Debentures payable, 7.88%, due 2043 250 250
Debentures payable, 9.75%, due 2020 550 544
Equipment and other obligations, 6.87% 240 257
------ ------
1,621 1,722
Less current portion (319) (113)
------ ------
$1,302 $1,609
====== ======
Interest payments were $149 million in 1999, $153 million in 1998 and $163
million in 1997.
Leases
The Company's noncancelable long-term leases generally include options to
purchase at fair value and to extend the terms. Capital leases have been
discounted at rates ranging from 3.09% to 14.26% and are collateralized by
assets with a net book value of $285 million at December 31, 1999. Minimum
commitments, exclusive of executory costs borne by the Company, are:
Capital Operating
Leases Leases
-------- ----------
(In Millions)
2000 $ 74 $ 72
2001 68 61
2002 56 55
2003 51 51
2004 56 53
2005 - 2018 139 474
----- ---
Total 444 $766
====
Less interest portion (113)
-----
Present value $ 331
=====
Equipment and other obligations mature in 2000 through 2043 and are
collateralized by assets with a net book value of $229 million at December
31, 1999. Maturities of long-term debt other than capital leases are $268
million in 2000, $19 million in 2001, $18 million in 2002, $19 million in
2003, $19 million in 2004 and $947 million in total from 2005 through 2043.
Operating lease rent expense was $120 million in 1999, $121 million in 1998
and $122 million in 1997.
7. Income Taxes
The provisions for income taxes are composed of the following:
1999 1998 1997
---- ---- -----
(In Millions)
Current
Federal $(30) $173 $122
State 1 24 17
---- --- ---
(29) 197 139
---- ---- ----
Deferred
Federal 52 (27) 61
State (4) (3) 28
---- ---- ----
48 (30) 89
---- ---- ----
$ 19 $167 $228
==== ==== ====
The nondeductibility of the ESOP termination charge and certain transition
and acquisition-related compensation costs for federal and state income tax
purposes, has resulted in a significant difference between the Company's
statutory and effective tax rates for 1997 (Note 4).
A tax law was enacted during the third quarter of 1997 by a state in which
CRC operates which changed the Company's method of computing taxes and
resulted in a tax rate increase. Income tax expense for 1997 was increased
by $22 million representing the effects of adjusting deferred income taxes
for the rate increase as required by SFAS 109, "Accounting for Income
Taxes" ("SFAS 109").
Reconciliations of the U.S. statutory tax rates with the effective tax
rates are as follows:
1999 1998 1997
---- ---- ----
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit (4.2) 3.2 3.2
ESOP termination charge 36.3
Nondeductible transition
and acquisition-related
costs 23.9 14.9
Effect of state tax increase
on deferred taxes 9.3
Other (20.9) .3 (1.7)
----- ------ -----
Effective tax rate 42.2% 38.5% 97.0%
===== ====== =====
The Company has reached final settlements with the Internal Revenue Service
("IRS") related to all of the audits of the Company's consolidated federal
income tax returns through fiscal year 1992. The Company's consolidated
federal income tax returns for fiscal years 1993 through 1995 are currently
being examined by the IRS. Federal and state income tax payments were $38
million in 1999, $196 million in 1998 and $120 million in 1997.
Significant components of the Company's deferred income tax liabilities
(assets) are as follows:
December 31,
-------------------
1999 1998
------ ------
(In Millions)
Current assets $ (8) $ (22)
Current liabilities (133) (152)
Miscellaneous (8) (8)
------ ----
Current deferred tax asset, net $ (149) $ (182)
====== ======
Noncurrent liabilities:
Property and equipment 1,977 1,897
Other long-term assets (primarily prepaid
pension asset) 89 106
Other (mostly equipment obligations) 88 91
------ ----
2,154 2,094
------ ------
Noncurrent assets:
Nondeductible reserves and other
liabilities (221) (239)
Tax benefit transfer receivable (36) (36)
Miscellaneous (80) (32)
------ ------
(337) (307)
------ -----
Deferred income tax liabilities, net $1,817 $1,787
====== ======
8. Pension and Postretirement Benefits
The Company and its subsidiaries sponsor several qualified and nonqualified
pension plans and other postretirement benefit plans for its employees.
During 1999, the Company transferred approximately $350 million and $260
million of pension assets to NSC and CSX, respectively. NSC and CSX also
assumed certain pension obligations related to former Conrail employees.
The net effect on Conrail's financial statements as detailed in the table
below, was to reduce pension assets by $89 million. This transfer resulted
in a $35 million reduction of deferred tax liabilities and is reflected
as a capital distribution of $54 million.
The Company's pension plan was amended during 1998 to include certain
enhanced benefits for qualifying Conrail employees. The effect of the
amendment was to increase the Conrail plan's projected benefit obligation
by $59 million. The Company's pension plan was also amended during 1998 to
allow for payment of non-union supplemental retirement benefits to the
extent consistent with applicable Internal Revenue Service Tax Code
provisions. Both of these liabilities are accrued as offsets to the prepaid
pension asset which is included in "Other assets" in the balance sheet
(Note 3).
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period
ending December 31, 1999, and a statement of the funded status as of
December 31 of both years:
Other Postretirement
Pension Benefits Benefits
----------------- ----------------
(In Millions) 1999 1998 1999 1998
------ ------ ---- ----
Change in benefit
obligation
Net benefit obligation
at beginning of year $834 $707 $ 56 $ 57
Pension obligation
transferred to NSC and CSX (89) - - -
Service cost 10 13 - -
Interest cost 50 53 3 4
Plan amendments - 59 - -
Curtailment (gains)losses (15) - (4) -
Actuarial (gains)losses (97) 68 (7) 1
Incorporation of special
pension benefit reserves 176 - - -
Gross benefits paid (130) (66) (4) (6)
---- ---- ---- ----
Net benefit obligation
at end of year $739 $834 $ 44 $ 56
Change in plan assets
Fair value of plan assets
at beginning of year $1,441 $1,308 $ 9 $ 10
Pension assets
transferred to NSC and CSX (610) - - -
Actual return on plan
assets 88 211 - -
Gross benefit payments (128) (78) (1) (1)
------ ------ ---- ----
Fair value of plan assets
at end of year $ 791 $1,441 $ 8 $ 9
Funded status at
end of year $ 52 $ 607 $(36) $(47)
Unrecognized transition
asset (3) (54) - -
Unrecognized prior
service cost 10 88 - -
Unrecognized actuarial
(gains)losses (26) (371) (8) -
----- ----- ----- ----
Net amount recognized at
year end $ 33 $ 270 $(44) $(47)
===== ===== ===== ====
The following amounts have been recognized in the balance sheets as of
December 31:
Other Postretirement
Pension Benefits Benefits
(In Millions) 1999 1998 1999 1998
---- ---- ---- ----
Prepaid pension cost $ 74 $278 - -
Accrued benefit cost (41) (8) $(44) $(47)
All of the Company's plans for postretirement benefits other than pensions
have no plan assets except for the retiree life insurance plan which has $8
million and $9 million of assets in 1999 and 1998, respectively. The
aggregate benefit obligation for the postretirement plans other than
pensions is $44 million and $56 million at December 31 1999 and 1998,
respectively.
The projected benefit obligations and accumulated benefit obligations for
pension plans with accumulated benefit obligations in excess of plan assets
were $54 million and $38 million, respectively, in 1999; and $10 million
and $9 million, respectively, in 1998. The plans had no assets in either
1999 or 1998.
The assumptions used in the measurement of the Company's benefit obligation
are as follows:
Other Postretirement
Pension Benefits Benefits
1999 1998 1999 1998
---- ---- ---- ----
Discount rate 7.75% 6.50% 7.75% 6.50%
Expected return on
plan assets 9.00% 9.00% 9.00% 8.00%
Rate of compensation
increase 5.00% 5.00% 5.00% 5.00%
A 7% annual rate of increase in the per capita cost of covered health care
benefits was assumed for 2000, gradually decreasing to 6% by the year 2007.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The effect of a one percentage
point increase and (decrease) in the assumed health care cost trend rate on
accumulated postretirement benefit obligation is $1 million and $(1)
million, respectively, and would have an immaterial effect on the net
periodic postretirement benefit cost for 1999.
The components of the Company's net periodic benefit cost for the plans are
as follows:
Other Postretirement
Pension Benefits Benefits
(In Millions) 1999 1998 1997 1999 1998 1997
---- ----- ---- ---- ---- ----
Service cost $ 10 $ 13 $ 8 $ - $- $-
Interest cost 53 53 50 4 4 4
Expected return
on assets (94) (109) (98) (1) (1) (1)
Curtailment (gain)
loss 19 - - (4) - -
Amortization of:
Transition asset (11) (18) (18) - - -
Prior service cost 4 4 3 - - -
Actuarial gain (8) (5) (6) - (1) (1)
---- ---- ---- --- -- --
$(27) $(62) $(61) $(1) $2 $2
==== ===== ==== === == ==
Savings Plans
The Company and certain subsidiaries provide 401(k) savings plans for union
and non-union employees. Under the Company's current non-union savings
plan, 50% of employee contributions are matched for the first 6% of a
participating employee's base pay and 25% of employee contributions are
matched in excess of 10% of a participating employee's base pay. Savings
plan expense related to the current non-union savings plan was $1 million
in 1999. There is no Company match provision under the union employee plan
except for certain unions which negotiated a Company match as part of their
contract provisions.
In connection with the close of the NSC-CSX joint tender offer for Conrail,
the Company's Non-union ESOP was terminated with the repayment of the ESOP
note payable of $291 million and related accrued interest during 1997,
resulting in a charge of $221 million (no related income tax effect) (Notes
2 and 3). Under the Non-union ESOP, 100% of employee contributions were
matched in the form of ESOP preferred stock for the first 6% of a
participating employee's base pay. Savings plan expense related to the ESOP
plan was $1 million in 1997. The Company had no non-union savings plan in
1998.
In connection with the formation of the Non-union ESOP in 1990, the Company
issued 9,979,562 of the authorized 10 million shares of its ESOP stock to
the Non-union ESOP in exchange for a 20 year promissory note from the
Non-union ESOP in the principal amount of approximately $290 million. In
addition, unearned ESOP compensation in the same amount was recognized as a
charge to stockholders' equity coincident with the Non-union ESOP's
issuance of its promissory note to the Company. The debt of the Non-union
ESOP was recorded by the Company and offset against the promissory note
from the Non-union ESOP. The Company received debt service payments from
the Non-union ESOP of $11 million in 1997.
Prior to the close of the joint tender offer (Notes 2 and 3), unearned ESOP
compensation was charged to expense as shares of ESOP stock were allocated
to participants. An amount equivalent to the preferred dividends declared
on the ESOP stock had partially offset compensation and interest expense
related to the Non-union ESOP through the close of the joint tender offer.
Interest expense incurred by the Non-union ESOP on its debt to the Company
was $9 million in 1997. Compensation expense related to the Non-union ESOP
was $2 million in 1997.
Prior to its acquisition, the Company made dividend payments at a rate of
7.51% on the ESOP stock and additional contributions in an aggregate amount
sufficient to enable the Non-union ESOP to make the required interest and
principal payments on its note to the Company. Preferred dividends declared
and paid were $3 million in 1997.
9. Stockholders' equity
Common Stock
On May 23, 1997, the NSC-CSX joint tender offer for the remaining
outstanding shares of Conrail's common and preferred stock was concluded,
and on June 2, 1997, Conrail became the surviving corporation in a merger
with Green Merger Corp. and remained the only subsidiary of Green
Acquisition Corp., an entity jointly-owned by NSC and CSX. As a result, the
remaining outstanding capital stock of Conrail was acquired by NSC and CSX
and Green Acquisition was issued 100 shares of Conrail's common stock. Any
per share data included in this report is based on Conrail's outstanding
common stock before the effects of the joint acquisition of the Company.
Employee Benefits Trust
In 1995, the Company established the Conrail Employee Benefits Trust (the
"Trust"). The Trust was intended to fund certain employee benefits and
other forms of compensation. As a result of the joint tender offer (See
Note 2) for the Company's common stock, the Trust received cash proceeds
for the common stock it held at that time. Due to the Trust holding cash
instead of the Company's common stock, the balance of the Trust at December
31, 1997, was reclassified from the stockholders' equity section of the
Company's balance sheet to the "Other assets" line item.
Treasury Stock
As a result of the acquisition of Conrail, the Company's common stock
repurchase program was terminated in the fourth quarter of 1996. The
activity for 1997 is related to the repurchase of common stock in connection
with the repayment of $90 million of the Trust promissory loan described
above. The remaining shares of treasury stock at December 31, 1997, were
recorded as canceled and retired during 1998.
The activity and status of treasury stock follow:
1998 1997
--------- ---------
Shares, beginning of year 6,320,249 5,523,455
Acquired
Effects of Conrail
acquisition (6,320,249) 796,794
---------- ---------
Shares, end of year - 6,320,249
========== =========
Stock Plans
The Company has applied APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for the Conrail plans.
Accordingly, no compensation cost was recognized for the Conrail fixed
stock option plans prior to Conrail's acquisition. However, in connection
with the acquisition of Conrail, all outstanding performance shares and all
outstanding unvested stock options, restricted shares and phantom shares
vested during 1997 (Note 3).
Undistributed Earnings of Equity Investees
"Retained earnings" includes undistributed earnings of equity investees of
$188 million, $173 million and $151 million at December 31, 1999, 1998 and
1997, respectively.
10. Other Income, Net
1999 1998 1997
---- ---- ----
(In Millions)
Interest income $19 $ 7 $13
Rental income 37 42 41
Property sales 6 21 23
Other, net 5 2 6
--- --- --
$67 $72 $83
=== === ===
11. Commitments and Contingencies
Environmental
The Company is subject to various federal, state and local laws and
regulations regarding environmental matters. CRC is a party to various
proceedings brought by both regulatory agencies and private parties under
federal, state and local laws, including Superfund laws, and has also
received inquiries from governmental agencies with respect to other
potential environmental issues. At December 31, 1999, CRC has received,
together with other companies, notices of its involvement as a potentially
responsible party or requests for information under the Superfund laws with
respect to cleanup and/or removal costs due to its status as an alleged
transporter, generator or property owner at 28 locations. However, based on
currently available information, the Company believes CRC may have some
potential responsibility at only 25 of these sites. Due to the number of
parties involved at many of these sites, the wide range of costs of
possible remediation alternatives, the changing technology and the length
of time over which these matters develop, it is often not possible to
estimate CRC's liability for the costs associated with the assessment and
remediation of contaminated sites.
Although the Company's operating results and liquidity could be
significantly affected in any quarterly or annual reporting period if CRC
were held principally liable in certain of these actions, at December 31,
1999, the Company had accrued $94 million, an amount it believes is
sufficient to cover the probable liability and remediation costs that will
be incurred at Superfund sites and other sites based on known information
and using various estimating techniques. The Company anticipates that much
of this liability will be paid out over five years; however some costs will
be paid out over a longer period. The Company believes the ultimate
liability for these matters will not materially affect its consolidated
financial condition.
The Company spent $9 million in 1999, $10 million in 1998 and $9 million in
1997 for environmental remediation and related costs. In addition, the
Company's capital expenditures for environmental control and abatement
projects were approximately $1 million in 1999, $8 million in 1998 and $7
million in 1997.
Other
The Company is involved in various legal actions, principally relating to
occupational health claims, personal injuries, casualties, property damage
and damage to lading. The Company has recorded liabilities in amounts it
believes are sufficient to cover the expected payments for such actions.
CRC had 2,315 employees at December 31, 1999, approximately 78% of whom are
represented by 16 different labor organizations and are covered by 16
separate collective bargaining agreements. The Company was not engaged in
any collective bargaining at December 31, 1999.
CRC currently guarantees the principal and interest payments in the amount
of $39 million on Equipment Trust Certificates for Locomotive Management
Services, a general partnership of which CRC holds a fifty percent
interest.
12. Fair Values of Financial Instruments
The fair values of "Cash and cash equivalents," "Accounts receivable,"
"Notes receivable from NSC/CSX" and "Accounts payable" approximate carrying
values because of the short maturity of these financial instruments.
Using current market prices when available, or a valuation based on the
yield to maturity of comparable debt instruments having similar
characteristics, credit rating and maturity, the total fair value of the
Company's long-term debt, including the current portion, but excluding
capital leases, is $1,367 million and $1,637 million at December 31, 1999
and 1998, respectively, compared with carrying values of $1,290 million and
$1,331 million at December 31, 1999 and 1998, respectively.