145
Exhibit 99, Page 1 of 26
CONRAIL INC.
2001 ANNUAL REPORT TO STOCKHOLDERS
146
Exhibit 99, Page 2 of 26
REPORT OF MANAGEMENT
The Stockholders
Conrail Inc.
Management is responsible for the preparation, integrity and objectivity
of the Company's consolidated financial statements. The consolidated
financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America and include amounts
based on management's best estimates and judgment.
The Company maintains a system of internal accounting controls and
procedures, which is continually reviewed and supported by written
policies and guidelines and supplemented by internal audit services.
The system provides reasonable assurance that assets are safeguarded
against loss from unauthorized use and that the books and records reflect
the transactions of the Company and are reliable for the preparation of
financial statements. The concept of reasonable assurance recognizes
that the cost of a system of internal accounting controls should not
exceed the benefits derived and also recognizes that the evaluation of
these factors necessarily requires estimates and judgments by management.
The Company's consolidated financial statements are audited by its
independent accountants. Their audit is conducted in accordance with
auditing standards generally accepted in the United States of America
and includes a study and evaluation of the Company's system of
internal accounting controls to determine the nature, timing and extent
of the auditing procedures required for expressing an opinion on the
Company's financial statements.
The Company's Board of Directors, which is comprised of an equal number
of directors from Norfolk Southern Corporation ("NSC") and CSX
Corporation ("CSX"), pursues its oversight responsibilities for the
consolidated financial statements and corporate conduct through
periodic meetings with and written reports from the Company's management.
/s/ Gregory R. Weber
Gregory R. Weber
President and Chief
Executive Officer
/s/ Patrick F. Rogers
Patrick F. Rogers
Assistant Vice President-
Accounting and Tax
January 21, 2002
147
Exhibit 99, Page 3 of 26
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Conrail Inc.:
We have audited the accompanying consolidated balance sheets of Conrail
Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 2001.
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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 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 Conrail Inc. and subsidiaries as of December 31, 2001 and 2000,
and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2001,
in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP /s/ Ernst & Young LLP
KPMG LLP Ernst & Young LLP
Norfolk, Virginia Jacksonville, Florida
January 21, 2002
148
Exhibit 99, Page 4 of 26
CONRAIL INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
($ In Millions) 2001 2000 1999
- -------------- ---- ---- ----
Revenues - NSC/CSX (Note 2) $ 823 $ 886 $ 549
Revenues - Third parties 80 99 1,625
------ ------ ------
Total operating revenues 903 985 2,174
------ ------ ------
Operating expenses (Note 3)
Compensation and benefits 158 195 645
Fuel 7 10 63
Material, services and rents 143 162 590
Depreciation and amortization 325 331 328
Casualties and insurance (13) 33 228
Other 19 18 192
------ ------ ------
Total operating expenses 639 749 2,046
------ ------ ------
Income from operations 264 236 128
Interest expense (109) (124) (150)
Other income, net (Note 10) 103 155 67
------ ------ ------
Income before income taxes 258 267 45
Income taxes (Note 7) 84 97 19
------ ------ ------
Net income $ 174 $ 170 $ 26
====== ====== ======
See accompanying notes to the consolidated financial statements.
149
Exhibit 99, Page 5 of 26
CONRAIL INC.
CONSOLIDATED BALANCE SHEETS
December 31,
($ In Millions) 2001 2000
- -------------- ---- ----
ASSETS
Current assets
Cash and cash equivalents $ 34 $ 50
Accounts receivable 32 33
Due from NSC/CSX (Note 2) 172 232
Notes receivable from NSC/CSX (Note 2) 515 91
Material and supplies 9 9
Deferred tax assets (Note 7) 76 96
Other current assets 8 9
------ ------
Total current assets 846 520
Property and equipment, net (Note 4) 6,688 6,996
Other assets 548 544
------ ------
Total assets $ 8,082 $ 8,060
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt (Note 6) 60 61
Accounts payable 41 68
Due to NSC/CSX (Note 2) 12 31
Wages and employee benefits 37 42
Casualty reserves 101 127
Accrued and other current liabilities (Note 5) 157 106
------ ------
Total current liabilities 408 435
Long-term debt (Note 6) 1,156 1,229
Casualty reserves 134 189
Deferred income taxes (Note 7) 1,833 1,938
Other liabilities 446 287
------ ------
Total liabilities 3,977 4,078
------ ------
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 3, 8 and 9)
Common stock ($1 par value; 100 shares
authorized, issued and outstanding) -- --
Additional paid-in capital 2,221 2,222
Unearned ESOP compensation -- (20)
Retained earnings 1,954 1,780
Accumulated other comprehensive loss (70) --
------ ------
Total stockholders' equity 4,105 3,982
------ ------
Total liabilities and stockholders' equity $ 8,082 $ 8,060
====== ======
See accompanying notes to the consolidated financial statements.
150
Exhibit 99, Page 6 of 26
CONRAIL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional Unearned Other
Paid-In ESOP Retained Comprehensive
($ in Millions) Capital Compensation Earnings Loss Total
- -------------- ---------- ------------ -------- ------------- -----
Balance, January 1, 1999 $ 2,291 $ (75) $ 1,584 $ -- $ 3,800
Net Income 26 26
Transfer of portion of prepaid pension
assets to NSC and CSX (Note 8) (54) (54)
Allocation of unearned ESOP compensation 55 55
Other (8) (8)
-------- ------ -------- -------- -------
Balance, December 31, 1999 2,229 (20) 1,610 -- 3,819
Net Income 170 170
Other (7) (7)
-------- ------ -------- -------- -------
Balance, December 31, 2000 2,222 (20) 1,780 -- 3,982
Comprehensive income - 2001
Net Income 174 174
Minimum pension liability, net of
$45 million income taxes (Note 8) (70) (70)
-------
Total comprehensive income 104
Allocation of unearned ESOP compensation (1) 20 19
-------- ------ --------- --------- -------
Balance, December 31, 2001 $ 2,221 $ -- $ 1,954 $ (70) $ 4,105
======== ====== ========= ========= =======
See accompanying notes to the consolidated financial statements.
151
Exhibit 99, Page 7 of 26
CONRAIL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
($ In Millions) 2001 2000 1999
- -------------- ---- ---- ----
Cash flows from operating activities
Net income $ 174 $ 170 $ 26
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 325 331 328
Deferred income taxes (18) 101 48
Gains from sales of property (2) (70) (6)
Pension credit (19) (12) (45)
Dividends from affiliated companies -- 55 --
Changes in:
Accounts receivable 1 18 529
Accounts and wages payable (32) 8 (431)
Due from NSC/CSX 60 (36) (196)
Due to NSC/CSX (19) (128) 159
Other 32 (75) (16)
----- ----- -----
Net cash provided by operating
activities 502 362 396
----- ----- -----
Cash flows from investing activities
Property and equipment acquisitions (47) (220) (176)
Notes receivable from NSC/CSX (424) 125 (216)
Proceeds from disposals of properties 14 86 6
Other -- (7) (14)
----- ----- -----
Net cash used in investing
activities (457) (16) (400)
----- ----- -----
Cash flows from financing activities
Payment of long-term debt (61) (318) (112)
----- ----- -----
Net cash used in financing
activities (61) (318) (112)
----- ----- -----
Increase(decrease) in cash and cash equivalents (16) 28 (116)
Cash and cash equivalents
Beginning of year 50 22 138
----- ----- -----
End of year $ 34 $ 50 $ 22
===== ===== =====
See accompanying notes to the consolidated financial statements.
152
Exhibit 99, Page 8 of 26
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 ("Green
Acquisition"), 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.
153
Exhibit 99, Page 9 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 consist of maintenance material valued at
the lower of cost or market.
Property and Equipment
Property and equipment are recorded at cost. Expenditures,
including those on leased assets, that extend an asset's useful life
or increase its utility are capitalized. Maintenance expense is
recognized when repairs are performed. Depreciation is provided using
the composite straight-line method over estimated service lives. In 2001,
the overall depreciation rate averaged 3.5% for all roadway and 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. Conrail continues to have third party
revenues, which are recognized when earned, related to the operations
of Indiana Harbor Belt Railroad Company, a 51% owned terminal
railroad subsidiary.
154
Exhibit 99, Page 10 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. Management reviews its estimates, including
those related to the recoverability and useful lives of assets as well
as liabilities for litigation, environmental remediation, casualty
claims, income taxes, pension and postretirement benefits. Changes in
facts and circumstances may result in revised estimates.
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.
155
Exhibit 99, Page 11 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 to Conrail under the Shared Assets agreements were
$168 million and $117 million during 2001 and 2000, respectively, of which
$27 million and $17 million, were minimum rents. Payments made by CSXT to
Conrail under the Shared Assets agreements were $140 million and $107 million
during 2001 and 2000, respectively, of which $19 million and $12 million,
were minimum rents.
Payments from NSR under the Operating Agreements to PRR amounted to
$331 million and $346 million during 2001 and 2000, respectively. Payments
from CSXT under the Operating Agreements to NYC amounted to $241 million
and $249 million during 2001 and 2000, respectively. In addition, costs
necessary to operate and maintain the related assets under these
agreements, including leasehold improvements, are borne by NSR and CSXT.
Future minimum lease payments to be received from NSR/CSXT are
as follows:
NSR NSR CSX CSX
($ in millions) To PRR To CRC To NYC To CRC Total
2002 $ 327 $ 27 $ 240 $ 19 $ 613
2003 326 30 235 21 612
2004 331 32 239 23 625
2005 318 34 231 24 607
2006 303 34 221 24 582
2007 and Beyond 4,701 618 3,425 449 9,193
----- --- ----- --- ------
Total $6,306 $775 $4,591 $560 $12,232
===== === ===== === ======
156
Exhibit 99, Page 12 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Related Party Balances and Transactions
"Due from NSC/CSX" at December 31, 2001 and 2000, is primarily
comprised of amounts due for the above-described operating and
rental activities.
PRR and NYC have interest-bearing notes receivable, payable on demand
from NSC and CSX of $301 million and $214 million, respectively, at
December 31, 2001, included in the "Notes receivable from NSC/CSX" line
item on the balance sheet. The notes receivable balances due from
NSC and CSX were $51 million and $40 million, respectively, at
December 31, 2000. The interest rates on the notes receivable from
NSC and CSX are variable and were both 2.45% at December 31, 2001.
Interest income related to the PRR and NYC notes receivable was $13 million
in 2001, $10 million in 2000 and $4 million in 1999.
"Due to NSC/CSX" includes amounts related to service provider
agreements with both NSC and CSX to provide such services as accounting
and administrative processing, personal injury and environmental case
handling and other miscellaneous services ("Service Provider Agreements").
Additionally, "Due to NSC/CSX" includes amounts payable for rentals of
locomotive and other equipment rentals; rental of various facilities
CRC has occupied subsequent to May 31, 1999; and completion of various
1999 capital projects. Also in 2000, CRC paid NSC and CSX $42 million
and $24 million, respectively, for CRC's vacation liability related to
the portion of its workforce that became NSC and CSX employees subsequent
to May 31, 1999.
157
Exhibit 99, Page 13 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the "Due to NSC and CSX" activity for the services
described above follows:
Payments Payments
to NSC to CSX
($ in millions) 2001 2000 2001 2000
- -------------- ---- ---- ---- ----
Service Provider Agreements $ 6 $ 9 $ - $ 2
Material purchases 31 35 - -
Rentals of locomotives and
other equipment 8 8 5 4
Rental of facilities - - 1 5
Capital project activities 17 86 3 122
Vacation liability - 42 - 24
-- --- --- ---
Total payments $62 $180 $ 9 $157
== === === ===
2001 2000 2001 2000
---- ---- ---- ----
Due to "NSC and CSX" at
December 31 $ 9 $ 29 $ 3 $ 2
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. Through December 31, 2001 there have been
no transactions under these arrangements.
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.
158
Exhibit 99, Page 14 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Transition, Acquisition-Related and Other Items
During the fourth quarter of 2001, the Company received cash proceeds
totaling $42 million from several London-based insurance carriers as
settlement for current and future exposures related to personal injury,
occupational, environmental and other claims. The Company ecognized a
pretax gain of $14 million, which is included in the Casualties and
insurance" line item of the income statement for 2001.
During the second quarter of 2001, the Company received a $50 million
cash payment for transferring to a third party certain of its rights to
license, manage and market signboard advertising on the Company's property
for 25 years. The payment is being recognized into other income on a
straight-line basis over the 25 year contract period.
During 2001, accrued termination payments totaling $15 million were
made to 107 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 pension plan. During 2000 and
1999 accrued termination payments of $50 million and $77 million were
made, respectively. The remaining amount of this liability is expected
to be paid out within the next year.
Also during 2001, the Company made final settlement of a long-term
liability related to the non-union Employee Stock Ownership (ESOP)
termination, which has not required use of the Company's cash for
settlement. The liability, the balance of which was $20 million at
December 31, 2000, was settled as the remaining cash proceeds held
by the ESOP as a result of selling its ESOP preferred stock in
conjunction with the joint acqusition, were allocated to eligible
participants.
During the first quarter of 2000, the Company completed a significant
property sale and recognized a gain of $61 million on the sale ($37 million
after income taxes), which is included in "Other income, net" (Note 10).
159
Exhibit 99, Page 15 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During 1999, the Company recorded net expenses of $138 million
($85 million after income 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.
In 1997, the Company recorded a long-term liability of $110 million 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,
was paid in 1998 from the Employee Benefits Trust ("EBT"). In 2001,
additional payments of $9 million were made primarily from the Company's
pension plan. The remaining amount will be paid out at the discretion of
the executives participating in this program.
4. Property and Equipment
December 31,
2001 2000
---- ----
(In millions)
Roadway $ 7,496 $ 7,500
Equipment 1,519 1,573
Less: Accumulated depreciation (2,570) (2,340)
------ ------
6,445 6,733
------ ------
Capital leases (primarily equipment) 616 645
Accumulated amortization (373) (382)
------ ------
243 263
------ ------
$ 6,688 $ 6,996
====== ======
Substantially all assets are leased to NSR or CSXT (Note 2).
160
Exhibit 99, Page 16 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Accrued and Other Current Liabilities
December 31,
2001 2000
---- ----
(In Millions)
Operating leases $ 45 $ 38
Property and corporate taxes 37 36
Income taxes payable 27 (21)
Other 48 53
----- -----
$ 157 $ 106
===== =====
6. Long-Term Debt and Leases
Long-term debt
Long-term debt outstanding, including the weighted average interest
rates at December 31, 2001, is composed of the following:
December 31,
2001 2000
---- ----
(In Millions)
Capital leases $ 208 $ 262
Debentures payable,7.88%,due 2043 250 250
Debentures payable,9.75%,due 2020 550 550
Equipment and other obligations,6.92% 208 228
------ ------
1,216 1,290
Less current portion (60) (61)
------ ------
$ 1,156 $ 1,229
Interest payments were $113 million in 2001, $121 million in 2000
and $149 million in 1999.
Equipment and other obligations mature in 2002 through 2043 and are
collateralized by assets with a net book value of $230 million at
December 31, 2001. Maturities of long-term debt other than capital
leases are $19 million in 2002, $20 million in 2003, $21 million in
2004, $20 million in 2005, $21 million in 2006 and $907 million in
total from 2007 through 2043.
161
Exhibit 99, Page 17 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 $243 million at
December 31, 2001.
Minimum commitments, exclusive of executory costs borne by the
Company, are:
Capital Operating
Leases Leases
------- ---------
(In Millions)
2002 $ 56 $ 62
2003 52 53
2004 53 53
2005 38 56
2006 24 54
2007 - 2025 56 358
----- -----
Total $ 279 $ 636
=====
Less interest portion (71)
-----
Present value $ 208
=====
Operating lease rent expense was $70 million in 2001, $75 million in
2000 and $120 million in 1999.
7. Income Taxes
The provisions for income taxes are composed of the following:
2001 2000 1999
---- ---- ----
(In Millions)
Current
Federal $ 77 $ (5) $ (30)
State 25 1 1
----- ----- -----
102 (4) (29)
----- ----- -----
Deferred
Federal (22) 81 52
State 4 20 (4)
----- ----- -----
(18) 101 48
----- ----- -----
$ 84 $ 97 $ 19
===== ===== =====
162
Exhibit 99, Page 18 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Reconciliation of the U.S. statutory tax rates with the effective tax
rates is as follows:
2001 2000 1999
---- ---- ----
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 4.2 4.2 4.2
Nondeductible transition
and acquisition-related costs - - 23.9
Settlement of state tax issues (3.5) - -
Other (3.1) (2.9) (20.9)
---- ---- -----
Effective tax rate 32.6% 36.3% 42.2%
==== ==== =====
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 1995.
The Company's consolidated federal income tax returns for April 30,
1996, December 31, 1996 and May 23, 1997, are currently being examined
by the IRS. Federal and state income tax payments were $86 million in
2001, $3 million in 2000 and $38 million in 1999.
Significant components of the Company's deferred income tax
liabilities (assets) are as follows:
December 31,
2001 2000
---- ----
(In Millions)
Current assets $ 57 $ 29
Current liabilities (125) (117)
Miscellaneous (8) (8)
----- -----
Current deferred tax asset, net $ (76) $ (96)
===== =====
Noncurrent liabilities:
Property and equipment 2,008 2,049
Other long-term assets (primarily prepaid
pension asset) 127 93
Other (mostly equipment obligations) 64 117
----- -----
2,199 2,259
----- -----
163
Exhibit 99, Page 19 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Noncurrent assets:
Nondeductible reserves and other liabilities (245) (204)
Tax benefit transfer receivable (36) (36)
Other (mostly equity investments) (85) (81)
----- -----
(366) (321)
----- -----
Deferred income tax liabilities, net $1,833 $1,938
===== =====
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 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.
164
Exhibit 99, Page 20 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2001, and a statement of the funded status as
of December 31 of both years:
Other Postretirement
Pension Benefits Benefits
---------------- --------------------
(In Millions) 2001 2000 2001 2000
- ------------ ---- ---- ---- ----
Change in benefit obligation
- ----------------------------
Net benefit obligation
at beginning of year $ 687 $ 739 $ 37 $ 44
Service cost 2 4 - -
Interest cost 45 51 3 3
Plan participant's contributions - - 5 6
Plan amendments - - - (1)
Actuarial (gains) losses 16 5 - (5)
Benefits paid (88) (112) (9) (10)
----- ----- ----- -----
Net benefit obligation
at end of year $ 662 $ 687 $ 36 $ 37
Change in plan assets
- ---------------------
Fair value of plan assets
at beginning of year $ 720 $ 791 $ 8 $ 8
Actual return on plan assets (20) 40 1 1
Employer contributions 1 1 3 3
Plan participant's contributions - - 5 6
Benefits paid (88) (112) (9) (10)
----- ----- ----- -----
Fair value of plan assets
at end of year $ 613 $ 720 $ 8 $ 8
Funded status at
end of year $ (49) $ 33 $ (28) $ (29)
Unrecognized transition asset - (2) - -
Unrecognized prior service cost 8 9 (1) (1)
Unrecognized actuarial
(gains)losses 111 8 (11) (12)
----- ----- ----- -----
Net amount recognized at
year end $ 70 $ 48 $ (40) $ (42)
===== ===== ===== =====
165
Exhibit 99, Page 21 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following amounts have been recognized in the balance sheets as
of December 31:
Other Postretirement
Pension Benefits Benefits
---------------- --------------------
(In Millions) 2001 2000 2001 2000
- ------------ ---- ---- ---- ----
Prepaid pension cost $ 110 $ 92 $ - $ -
Accrued benefit cost (163) (44) (40) (42)
Intangible asset 8 - - -
Accumulated other comprehensive loss 115 - - -
----- ----- ----- -----
$ 70 $ 48 $ (40) $ (42)
===== ===== ===== =====
All of the Company's plans for postretirement benefits other than
pensions have no plan assets except for the retiree life insurance plan,
which had $8 million of assets in both 2001 and 2000. The aggregate
benefit obligation for the postretirement plans other than pensions was
$36 million and $37 million at December 31, 2001 and 2000, respectively.
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $656 million, $655 million and
$605 million, respectively, as of December 31, 2001 and $45 million,
$45 million and $0, respectively as of December 31, 2000. As required by
Statement of Financial Accounting Standard No. 87 "Employers' Accounting
for Pensions", the Company recorded an additional minimum liability of
$123 million at December 31, 2001. The additional liability was partially
offset by an intangible asset to the extent of previously unrecognized
prior service costs of $8 million at December 31, 2001. The remaining
amount is recorded as a component of stockholders' equity, net of related
tax benefits as "Accumulated Other Comprehensive Loss".
166
Exhibit 99, Page 22 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The assumptions used in the measurement of the Company's benefit
obligation are as follows:
Other Postretirement
Pension Benefits Benefits
---------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Discount rate 7.25% 7.50% 7.25% 7.50%
Expected return on plan assets 9.00% 9.00% 8.00% 8.00%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
A 6.5% annual rate of increase in the per capita cost of covered
health care benefits was assumed for 2002, 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
the accumulated postretirement benefit obligation is $1 million and
$(1) million, respectively.
The components of the Company's net periodic benefit cost for the
plans are as follows:
Other Postretirement
Pension Benefits Benefits
---------------- --------------------
(In Millions) 2001 2000 1999 2001 2000 1999
- ------------ ---- ---- ---- ---- ---- ----
Service cost $ 2 $ 4 $ 10 $ - $ - $ -
Interest cost 45 51 53 3 3 4
Expected return on assets (66) (70) (94) (1) (1) (1)
Curtailment (gain) loss - - 19 - - (4)
Amortization of:
Transition asset (1) (1) (11) - - -
Prior service cost 1 1 4 - - -
Actuarial (gain)loss (1) 1 (8) (1) (1) -
----- ----- ----- ----- ----- -----
$ (20) $ (14) $ (27) $ 1 $ 1 $ (1)
===== ===== ===== ===== ===== =====
167
Exhibit 99, Page 23 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 2001, 2000 and 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.
Incentive Compensation Plans
The Company has an incentive compensation plan for all non-union
employees in which employees receive targeted cash awards upon attainment
of certain performance criteria established by the Company's Board of
Directors. Compensation expense under this plan was $2 million in 2001,
$5 million in 2000 and $0 in 1999.
The Company also has a long-term incentive plan under which the
Company grants phantom stock options to officers and other key non-union
employees. The option price for the phantom shares are equal to the blended
fair market value of NSC and CSX common stock at the date of grant. Options
will vest one year after grant date and the option term may not exceed ten
years. Upon exercise, eligible participants will receive cash payments equal
to the appreciation on the composite NSC and CSX common stock fair values.
Compensation expense for this plan was $2 million in 2001 and $0 in both
2000 and 1999.
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, 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.
168
Exhibit 99, Page 24 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Undistributed Earnings of Equity Investees
"Retained earnings" includes undistributed earnings of equity
investees of $180 million, $157 million and $188 million at
December 31, 2001, 2000 and 1999, respectively.
10. Other Income, Net
2001 2000 1999
---- ---- ----
(In Millions)
Interest income $ 21 $ 21 $ 19
Rental income 47 45 37
Property sales 2 70 6
Equity earnings of affiliates 24 24 15
Other, net 9 (5) (10)
------ ------ ------
$ 103 $ 155 $ 67
====== ====== ======
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, 2001, 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 39 locations. However, based
on currently available information, the Company believes CRC may have some
potential responsibility at only 36 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.
169
Exhibit 99, Page 25 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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,
2001, the Company had accrued $70 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 $10 million in 2001 and $9 million each in 2000
and 1999 for environmental remediation and related costs. In addition,
the Company's capital expenditures for environmental control and abatement
projects were approximately $1 million each in 2000 and 1999.
Casualty
The Company is involved in various legal actions, principally relating
to occupational health claims, personal injuries, casualties, property
damage and damage to lading. The casualty claim liability is determined
actuarially, based upon claims filed and an estimate of claims incurred but
not yet reported. During 2001, the Company experienced favorable claims
development and, based on the actuarial studies, recorded a net reduction
of expense of approximately $12 million, which is included in the
"Casualties and insurance" line item of the income statement. While the
ultimate amounts of claims incurred are dependent upon future developments,
in management's opinion, the recorded liability is adequate to cover
expected probable payments. The Company is generally self-insured for
casualty claims. Claims in excess of self-insurance levels are insured up
to excess coverage limits.
Labor
CRC had 1,544 employees at December 31, 2001; approximately 90% of
whom are represented by 12 different labor organizations and are covered by
16 separate collective bargaining agreements. The Company was engaged in
collective bargaining at December 31, 2001 with labor organizations
representing approximately 79% of its labor force.
170
Exhibit 99, Page 26 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Guarantees
CRC currently guarantees the principal and interest payments in the
amount of $33 million on Equipment Trust Certificates for Locomotive
Management Services, a general partnership of which CRC holds a fifty
percent non-controlling 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 $1,204 million and $1,150 million at December 31, 2001
and 2000, respectively, compared with carrying values of $1,008 million and
$1,028 million at December 31, 2001 and 2000, respectively.