UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2001
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file numbers 1-743; 1-3744; 1-4793; 1-546-2
NORFOLK SOUTHERN RAILWAY COMPANY
- -------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 53-6002016
- ----------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Three Commercial Place
Norfolk, Virginia 23510-2191
- ----------------------------------- ---------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (757) 629-2680
-----------------------
No Change
- -------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. (X) Yes
( ) No
The number of shares outstanding of each of the registrant's classes
of Common Stock, as of the last practicable date:
Class Outstanding as of April 30, 2001
----- --------------------------------
Common Stock (par value $1.00) 16,668,997
2
TABLE OF CONTENTS
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Page
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Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Statements of Income
Three Months Ended March 31, 2001 and 2000 3
Consolidated Balance Sheets
March 31, 2001, and December 31, 2000 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 14
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
3
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Income
($ in millions)
(Unaudited)
Three Months Ended
March 31,
------------------
2001 2000
---- ----
Railway operating revenues:
Coal $ 393 $ 347
General merchandise 871 915
Intermodal 238 210
------ ------
TOTAL RAILWAY OPERATING REVENUES 1,502 1,472
------ ------
Railway operating expenses:
Compensation and benefits (Notes 3 and 4) 394 651
Materials, services and rents (Note 4) 486 344
Conrail rents and services (Note 4) 117 131
Depreciation 123 121
Diesel fuel 117 115
Casualties and other claims 37 32
Other 76 84
------ ------
TOTAL RAILWAY OPERATING EXPENSES 1,350 1,478
------ ------
Income (loss) from railway operations 152 (6)
Other income (expense) - net (45) (33)
Interest expense on debt (8) (10)
------ ------
Income (loss) before income taxes 99 (49)
Provision (benefit) for income taxes 37 (19)
------ ------
NET INCOME (LOSS) $ 62 $ (30)
====== ======
See accompanying notes to Consolidated Financial Statements.
4
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets
($ in millions)
(Unaudited)
March 31, 2001 Dec. 31, 2000
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 27 $ --
Short-term investments -- 1
Accounts receivable, net (Note 4) 147 146
Due from Conrail (Note 4) 20 31
Materials and supplies 90 89
Deferred income taxes 161 173
Other current assets 67 125
-------- --------
Total current assets 512 565
Investments (Note 6) 584 486
Properties less accumulated depreciation 10,637 10,483
Other assets 529 483
-------- --------
TOTAL ASSETS $12,262 $12,017
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 834 $ 902
Income and other taxes 216 221
Due to NS - net (Note 4) 47 26
Notes and accounts payable to Conrail (Note 4) 219 155
Other current liabilities 151 159
Current maturities of long-term debt 89 80
-------- --------
Total current liabilities 1,556 1,543
Long-term debt 842 691
Other liabilities 1,045 1,061
Minority interests 3 3
Deferred income taxes 3,603 3,613
-------- --------
TOTAL LIABILITIES 7,049 6,911
-------- --------
Stockholders' equity:
Serial preferred stock 55 55
Common stock 167 167
Additional paid-in capital 695 695
Accumulated other comprehensive income (Note 6) 203 157
Retained income 4,093 4,032
-------- --------
TOTAL STOCKHOLDERS' EQUITY 5,213 5,106
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,262 $12,017
======== ========
See accompanying notes to Consolidated Financial Statements.
5
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
Three Months Ended
March 31,
----------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 62 $ (30)
Reconciliation of net income (loss) to net cash
provided by operating activities:
Depreciation 123 121
Deferred income taxes (39) (28)
Nonoperating gains on properties and investments (7) (3)
Changes in assets and liabilities affecting operations:
Accounts receivable (1) (105)
Materials and supplies (1) (19)
Other current assets and due from Conrail 69 88
Income tax liabilities 23 10
Other short-term liabilities (106) 105
Other - net (52) 49
----- -----
Net cash provided by operating activities 71 188
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (273) (168)
Property sales and other transactions 2 30
Investments, including short-term (33) (20)
Investment sales and other transactions 2 32
----- -----
Net cash used for investing activities (302) (126)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (1) (1)
Advances to NS -- (37)
Advances and repayments from NS 21 28
Proceeds from borrowings 258 68
Debt repayments (20) (86)
----- -----
Net cash provided by (used for)
financing activities 258 (28)
----- -----
Net increase in cash and cash equivalents 27 34
CASH AND CASH EQUIVALENTS:
At beginning of year -- --
----- -----
At end of period $ 27 $ 34
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 34 $ 52
Income taxes $ 60 $ (1)
See accompanying notes to Consolidated Financial Statements.
6
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NS RAIL)
(A Majority-Owned Subsidiary of Norfolk Southern Corporation [NS])
Notes to Consolidated Financial Statements
1. In the opinion of Management, the accompanying unaudited interim
financial statements contain all adjustments (consisting of
normal recurring accruals) necessary to present fairly the
Company's financial position as of March 31, 2001, and its
results of operations and cash flows for the three months ended
March 31, 2001 and 2000.
Although Management believes that the disclosures presented are
adequate to make the information not misleading, these
Consolidated Financial Statements should be read in conjunction
with: (a) the financial statements and notes included in the
Company's latest Annual Report on Form 10-K and (b) any Current
Reports on Form 8-K.
2. Commitments and Contingencies
There have been no significant changes since year-end 2000 in the
matters as discussed in NOTE 15, COMMITMENTS AND CONTINGENCIES,
appearing in the NS Rail Annual Report on Form 10-K for 2000,
Notes to Consolidated Financial Statements, beginning on page 61.
3. Workforce Reduction Costs in 2000
First-quarter 2000 "Compensation and benefits" expenses include
$101 million of costs related to actions taken to reduce the size
of the work force, which reduced net income by $62 million.
These costs resulted principally from a voluntary early
retirement program, accepted by 919 of 1,180 eligible employees.
The retirements were effective March 1, 2000, and most of the
related benefits will be paid from the overfunded pension plan.
The resulting noncash reduction to NS Rail's pension plan asset
is included in "Other - net" in the Consolidated Statements of
Cash Flows. In addition, an accrual was made for certain
postemployment benefits due to some union employees who were
furloughed.
4. Related Parties
General
-------
NS is the parent holding company of NSR. Rail operations are
coordinated at the holding company level by the NS Vice Chairman
and Chief Operating Officer. Effective June 1, 2000, NS charges
NS Rail a fee for management services it performs for NS Rail
(which totaled $144 million and included a $9 million mark-up in
the first quarter of 2001). Previously, the costs of functions
performed by NS were charged to NS Rail. As a result, costs that
were previously included in "Compensation and benefits" are
reflected in "Materials, services and rents." In addition, NS
charges NS Rail a revenue-based licensing fee (which totaled $21
million in each of the first quarters of 2001 and 2000) for use
of certain intangible assets owned by NS.
NS Rail owns 21,363,974 shares of NS common stock.
Operations Over Conrail's Lines
-------------------------------
Overview -- NS and CSX Corporation (CSX) jointly own Conrail Inc.
(Conrail), whose primary subsidiary is Consolidated Rail
Corporation (CRC), the major freight railroad in the Northeast.
NS has a 58 percent economic and 50 percent voting interest in
the jointly owned entity, and CSX has the remainder of the
economic and voting interests.
7
Item 1. Financial Statements. (continued)
- ------ --------------------
Operations of Conrail's Lines -- NSR operates as a part of its
rail system the routes and assets of Pennsylvania Lines LLC
(PRR), a wholly owned subsidiary of CRC, pursuant to operating
and lease agreements. Costs necessary to operate and maintain
the PRR assets, including leasehold improvements, are borne by
NSR. CSX Transportation, Inc. (CSXT) operates the routes and
assets of another CRC subsidiary under comparable terms. Certain
other Conrail routes and assets (the "Shared Assets Areas")
continue to be operated by CRC for the joint and exclusive
benefit of NSR and CRXT. In addition to a fee paid for such
access, NSR and CSXT pay, based on usage, the costs incurred by
CRC to operate the Shared Assets Areas.
NS Rail's Consolidated Balance Sheets include $105 million at
March 31, 2001, and $113 million at Dec. 31, 2000, of liabilities
related to the Conrail transaction, principally for contractual
obligations to Conrail employees imposed by the STB when it
approved the transaction. Through March 31, 2001, NS Rail has
paid $62 million of these costs.
NS Rail provides certain general and administrative support
functions to Conrail, the fees for which are billed in accordance
with several service-provider arrangements. Any unpaid balance
is included in "Due from Conrail."
"Conrail rents and services" includes expenses for amounts due to
PRR and CRC for use by NSR of operating properties and equipment
and operation of the Shared Assets Areas.
"Notes and accounts payable to Conrail" includes $130 million at
March 31, 2001, and $51 million, at Dec. 31, 2000, of interest-
bearing loans made to NS Rail by a PRR subsidiary, payable on
demand. The interest rate for these loans is variable and was
4.8 percent at March 31, 2001. Also included is $89 million at
March 31, 2001, and $104 million, at Dec. 31, 2000, due to PRR
and CRC related to expenses included in "Conrail rents and
services," as discussed above.
Sales of Accounts Receivable
----------------------------
From Dec. 1, 1999, through April 30, 2000, NS Rail sold certain
of its rail accounts receivable, on a nonrecourse basis, to NS.
Based on the terms of the sale agreement, these sales were
accounted for as secured borrowings. The discount is included in
"Other income (expense) - net" in the Consolidated Statements of
Income.
Effective May 2000, NS and NS Rail sold, without recourse, to a
bankruptcy-remote special-purpose NS subsidiary, a pool of
accounts receivable totaling approximately $700 million. The
pool consisted of receivables NS earlier had purchased from NS
Rail (as described above), and certain additional NS Rail
receivables. NS Rail services and collects all of the sold
receivables on behalf of the buyers; however, no servicing asset
or liability has been recognized because the benefits of
servicing are estimated to be just adequate to compensate NS Rail
for its responsibilities. Payments collected from sold
receivables are remitted to the special-purpose NS subsidiary,
which, in turn, reinvests the amounts by purchasing new
receivables from NS Rail. NS Rail has no retained interest in
the sold receivables.
Under the terms of the new sale agreement, the receivables are
treated as sold and, accordingly, $629 million at March 31, 2001,
and $607 million at Dec. 31, 2000, of sold receivables are not
included on the NS Rail Consolidated Balance Sheets. Fees
associated with the sale, which are based on historical dilution
and prevailing interest rates, are included in "Other income
(expense) - net."
8
Item 1. Financial Statements. (continued)
- ------ --------------------
Intercompany Accounts
---------------------
March 31, 2001 Dec. 31, 2000
-------------- -------------
Average Average
Interest Interest
Balance Rate Balance Rate
------- -------- ------- --------
($ in millions)
Due from NS:
Advances $ 243 5% $ 261 6%
Due to NS:
Notes (290) 7% (287) 8%
----- -----
Due to NS - net $ (47) $ (26)
===== =====
Interest is applied to certain advances at the average NS yield
on short-term investments and to the notes at specified rates.
NS Rail's first quarter results include interest income of $3
million in 2001 and $2 million in 2000 and interest expense of $4
million in 2001 and $39 million in 2000 (which includes the
discount on the sales of accounts receivable accounted for as
secured borrowing, as discussed under the heading "Sales of
Accounts Receivable," above) related to these intercompany
accounts. These amounts are included in "Other income (expense)
- net."
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 $834 million
at March 31, 2001, and $819 million at Dec. 31, 2000.
5. Derivative Financial Instruments
Required Accounting Change
--------------------------
On Jan. 1, 2001, NS Rail adopted Statement of Financial Accounting
Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." The
Statements establish accounting and reporting standards for
derivative instruments and hedging activities, requiring that all
derivatives be recognized in the financial statements as either
assets or liabilities and that they be measured at fair value. NS
Rail recognized a $5 million asset related to interest rate swaps and
recorded a $5 million increase in long-term debt as of
Jan. 1, 2001, as a result of adopting provisions of SFAS 133 and 138.
Changes in fair value are recorded as adjustments to the assets or
liabilities being hedged, in "Other comprehensive income," or in
current earnings, depending on whether the derivative is designated
and qualifies for hedge accounting and the type of hedge transaction
represented. For qualifying fair-value hedge transactions (those in
which the particular risk being hedged is the exposure to changes in
the fair value of an asset or a liability, or an identified portion
thereof), changes in the fair values of derivative instruments are
reflected as adjustments to the carrying amounts of the hedged assets
or liabilities. Changes in fair values of the derivative instruments
that do not offset changes in the fair values of the hedged assets or
liabilities are reflected in current earnings. For qualifying cash-
flow hedge transactions (those in which the particular risk being
hedged is the exposure to the variability of cash flows related to
variable rate
9
Item 1. Financial Statements. (continued)
- ------ --------------------
assets, liabilities, or forecasted transactions), changes in the fair
values of derivative instruments are reported in "Other comprehensive
income" to the extent they offset changes in the cash flows related
to the variable asset, liability, or forecasted transaction. Any
difference is reported in current period earnings. Gains and losses
on derivative instruments that are reported in "Other comprehensive
income" are reclassified in earnings in the periods in which earnings
are impacted by the hedged item.
Market Risks and Hedging Activities
-----------------------------------
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 on a limited
basis. NS Rail had $273 million, or 28.9 percent, and $301 million,
or 31.5 percent, of its fixed-rate debt portfolio hedged at
March 31, 2001 and March 31, 2000, respectively, using interest rate
swaps that qualify for and are designated as fair-value hedge
transactions. These swaps have been effective in hedging the changes
in fair value of the related debt, and accordingly, there has been no
impact on earnings resulting from these derivative transactions.
At March 31, 2001, "Other assets" on NS Rail's Consolidated Balance
Sheet included a $10 million asset related to interest-rate swaps and
"Long-term debt" included a corresponding $10 million increase. Fair
values were determined based upon the present value of expected
future cash flows discounted at the appropriate implied spot rate
from the swap rate yield curve. Fair value adjustments are noncash
transactions, and accordingly, were excluded from the Consolidated
Statement of Cash Flows.
During April 2001, NS Rail began a program, as approved by the NS
Board of Directors, to hedge a portion of its diesel fuel
consumption. The program is designed to assist in the management of
aggregate risk exposure to fuel price fluctuations through the use of
one or more types of derivative instruments. During April 2001, NS
Rail began to implement the program by entering into swap and call
option transactions. NS Rail's management has identified these
transactions as cash-flow hedges and expects them to qualify for
hedge accounting treatment.
6. Comprehensive Income
NS Rail's total comprehensive income was as follows:
Three Months Ended
March 31,
------------------
2001 2000
---- ----
($ in millions)
Net income (loss) $ 62 $ (30)
Other comprehensive income (loss) 46 (84)
----- -----
Total comprehensive
income (loss) $ 108 $(114)
===== =====
For NS Rail, "Other comprehensive income (loss)" is the unrealized
gains and losses on certain investments in debt and equity securities,
principally NS common stock.
10
Item 2. 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
RESULTS OF OPERATIONS
Net Income
- ----------
Net income was $62 million in the first quarter of 2001, compared with
a net loss of $30 million in the first quarter of last year. Results
in 2000 included $62 million of after-tax costs related to actions
taken to reduce the size of the work force (see Note 3). Excluding
the effects of last year's work-force reduction costs, net income
increased $30 million, or 94 percent, principally due to higher income
from railway operations.
Railway Operating Revenues
- --------------------------
First-quarter railway operating revenues were $1.5 billion in 2001, up
$30 million, or 2 percent, compared with last year. As shown in the
following table, the increase was attributable to a favorable revenue
per unit/mix variance.
First Quarter
2001 vs. 2000
Increase (Decrease)
------------------
($ in millions)
Traffic volume (carloads) $ (21)
Revenue per unit/mix 51
------
$ 30
======
Revenues and carloads for the commodity groups were as follows (prior
year data has been reclassified to conform to the current
presentation):
Revenues Carloads
--------------------- -------------------
First Quarter First Quarter
2001 2000 2001 2000
---- ---- ---- ----
($ in millions) (in thousands)
Coal $ 393 $ 347 439 422
General merchandise:
Automotive 214 241 152 183
Chemicals 188 185 107 114
Metals/construction 165 175 166 191
Paper/clay/forest 154 155 117 126
Agr./consumer prod./govt. 150 159 130 134
------ ------ ----- -----
General merchandise 871 915 672 748
Intermodal 238 210 543 508
------ ------ ----- -----
Total $1,502 $1,472 1,654 1,678
====== ====== ===== =====
11
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Coal
- ----
Coal revenues increased $46 million, or 13 percent, in the first quarter,
compared with the first quarter of last year. Total tonnage handled
increased 6 percent, due to higher utility coal volume that was somewhat
offset by lower volume for export coal and domestic metallurgical coal,
coke and iron ore. Utility coal volume benefited from increased demand
for electricity and diminished utility stockpiles, coupled with high
natural gas prices and a lack of excess nuclear generation capacity. The
decline in export tonnage resulted, in part, from the strong domestic
utility demand, which drew tonnage that would otherwise be bound for
export. Coal revenue per unit increased 9 percent, reflecting higher
rates, longer length-of-haul and improved loading efficiency that resulted
in more tons per car.
In the near term, coal revenues are expected to continue to benefit from
increased demand for electricity and depleted utility stockpiles.
General Merchandise
- -------------------
General merchandise revenues decreased $44 million, or 5 percent, in the
first quarter, compared with the same period last year. Traffic volume
(carloads) declined 10 percent, as all commodity groups posted decreases.
Automotive traffic volume was 17 percent lower, reflecting reduced
production in the face of a slowing economy. Metals and construction
traffic volume declined 13 percent, principally due to the effects of the
automotive slowdown and continued weakness in the steel industry. Paper,
clay and forest products traffic volume decreased 7 percent, largely due
to production cutbacks. Chemicals traffic volume was 6 percent lower,
reflecting reduced demand. General merchandise revenue per unit
increased, a result of improvements for all commodity groups except the
agriculture, consumer products and government group. The improvements
reflected higher rates and favorable changes in the mix of traffic within
some of the groups.
General merchandise revenues are expected to continue to post year-over-
year declines, absent a turnaround in the economic climate.
Intermodal
- ----------
First-quarter intermodal revenues increased $28 million, or 13 percent,
compared with the first quarter of last year, due to higher traffic volume
and increased revenue per unit. Traffic volume benefited from new
domestic container business and strong international shipments early in
the quarter. However, the effects of a slowing economy tempered these
gains. Premium business and Triple Crown Services volumes were flat,
reflecting weak economic conditions.
Intermodal revenues are expected to continue to show growth, supported by
new business and facility improvements; however, continued softness in the
economy could temper this positive outlook.
Railway Operating Expenses
- --------------------------
Railway operating expenses were $1.35 billion in the first quarter of
2001, down $128 million, or 9 percent, compared with the same period of
last year. Expenses in 2000 included $101 million of work-force reduction
costs (see Note 3); excluding these costs, 2001 expenses were down $27
million, or 2 percent. The decline was largely due to lower expenses that
resulted from the reduced size of the work force.
"Compensation and benefits" expense decreased $156 million, or 28 percent,
excluding the effects of the work-force reduction costs in the first
quarter of 2000. The decline was primarily due to the effects of the
management fee charged by NS (see Note 4), and lower wages that resulted
from last year's work-force reductions. These decreases were somewhat
offset by higher wage rates and benefit costs for union employees and a
lower pension credit.
12
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
"Materials, services and rents" increased $142 million, or 41 percent, in
the first quarter of 2001, principally due to the effects of the
management fee. Higher intermodal volume-related purchased services and
higher materials expenses were largely offset by lower equipment rents.
"Conrail rents and services" decreased $14 million, or 11 percent,
reflecting lower costs in the Shared Asset Areas and lower expenses for
the rental of Conrail equipment.
"Diesel fuel" expenses increased $2 million, or 2 percent, due to a 7
percent rise in the average price per gallon that was partially offset by
a 5 percent decline in consumption.
"Casualties and other claims" expenses increased $5 million, or 16 percent,
principally due to adverse claims development.
"Other" expense decreased $8 million, or 10 percent, primarily due to the
effects of the management fee charged by NS.
The railway operating ratio was 89.9 percent in the first quarter of 2001,
compared with 93.5 percent in the same period of 2000 (excluding the work-
force reduction costs, which added 6.9 percentage points to the ratio).
The improvement reflected the difference in the mix of traffic (a higher
proportion of coal traffic), coupled with expense reductions.
Other Income (Expense) - Net
- ----------------------------
"Other income (expense) - net" was an expense of $45 million in the first
quarter of 2001, compared with an expense of $33 million in the first
quarter of 2000. The increase principally resulted from the sales of
accounts receivable (see Note 4), but was somewhat offset by a $13 million
non-recurring settlement.
CASH PROVIDED BY OPERATING ACTIVITIES, NS Rail's principal source of
liquidity, decreased significantly in the first quarter of 2001, compared
with the same period last year, despite an increase in operating income.
The decline resulted from: (1) higher tax payments, including the
settlement of federal tax years 1995 and 1996; (2) the timing of payments
to Conrail, coupled with the absence of significant one-time receipts that
occurred in 2000; (3) the timing of payroll payments and (4) a litigation
settlement payment. In addition, last year reflected the absence of bonus
payments. NS Rail's working capital deficit was $1.0 billion at March 31,
2001. A working capital deficit is not unusual for NS Rail; it is
expected that NS Rail will continue to generate sufficient cash to meet
its ongoing obligations. In addition, NS currently has the capability to
issue commercial paper, the proceeds of which could be advanced to NS
Rail, if necessary, to meet its more immediate working capital needs.
CASH USED FOR INVESTING ACTIVITIES increased significantly in the first
quarter of 2001, compared with last year. The increase resulted from a
63 percent rise in property additions, a result of the purchase of
locomotives versus no such purchase in the first quarter of 2000.
CASH PROVIDED BY FINANCING ACTIVITIES in the first quarter of 2001
included $174 million of proceeds from the sale of equipment trust
certificates. In addition, it reflected a net increase in indebtedness to
PRR, compared with a net decrease in the first quarter of 2000.
LABOR AGREEMENTS
Substantially all of NS Rail's employees are covered by collective
bargaining agreements with 15 different labor unions. These agreements
remain in effect until changed pursuant to the Railway Labor Act.
Moratorium provisions in these agreements permitted NS Rail and the unions
to propose such changes in late 1999; negotiations at the national level
commenced shortly thereafter. The outcome of these negotiations is
uncertain at this time. However, an agreement was reached with the
13
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Brotherhood of Locomotive Engineers, which represents about 5,000
locomotive engineers on NS Rail. In addition, tentative national
agreements (subject to ratification) have been reached with the United
Transportation Union, which represents about 7,500 train service employees
on NS Rail, and with the Brotherhood of Maintenance of Way Employees,
which represents about 4,500 employees on NS Rail.
REQUIRED ACCOUNTING CHANGE
Effective Jan. 1, 2001, NS Rail adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities and Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities." The adoption of these statements did not have a significant
impact on NS Rail for the first quarter of 2001 (see Note 5).
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains 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 any such statements that relate to the
addition of new business and the ability to reduce expenses.
14
Item 3. Quantitative and Qualitative Disclosures about Market Risks.
- ------ -----------------------------------------------------------
There has been no material change to the disclosures made
under the heading "Market Risks and Hedging Activities" on
page 32 of the Company's 2000 Annual Report on Form 10-K.
Additional information required by this item is included in
Part I, Item I, "Financial Statements" in Note 5 on page 8.
15
PART II. OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K.
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(b) Report on Form 8-K
A report on form 8-K was filed Jan. 23, 2001, advising
of the declaration of a quarterly dividend by the
Registrant's parent, Norfolk Southern Corporation (NSC)
and outlining certain restructuring initiatives, and
attaching as an exhibit the related press release issued
by NSC.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NORFOLK SOUTHERN RAILWAY COMPANY
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(Registrant)
Date: May 9, 2001 /s/ Reginald J. Chaney
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Reginald J. Chaney
Corporate Secretary (Signature)
Date: May 9, 2001 /s/ John P. Rathbone
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John P. Rathbone
Vice President and Controller
(Principal Accounting Officer) (Signature)