PAGE ONE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------------
FORM 10-K405
(X)ANNUAL REPORT PURSUANT TO SECTION 13 or l5(d) of THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994.
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file numbers 1-743; 1-3744; 1-4793; 1-546-2
NORFOLK SOUTHERN RAILWAY COMPANY
-----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 53-6002016
--------------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Three Commercial Place, Norfolk, Virginia 23510-2191
--------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (804) 629-2682
-------------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS SO REGISTERED. EACH CLASS REGISTERED ON NEW YORK
STOCK EXCHANGE:
Southern Railway Company Memphis Division First Mortgage 5% Gold Bonds,
due July 1, 1996; Norfolk and Western Railway Company First
Consolidated Mortgage 4% Bonds, due October 1, 1996; Guarantee of
Norfolk Southern Railway Company with respect to $23,877,300 principal
amount of Norfolk and Western Railway Company First Consolidated
Mortgage 4% Bonds due October 1, 1996; Norfolk and Western Railway
Company 4.85% Subordinated Income Debentures, due November 15, 2015;
Guarantee of Norfolk Southern Railway Company with respect to
$1,865,900 principal amount of Norfolk and Western Railway Company
4.85% Subordinated Income Debentures due November 15, 2015; The
Virginian Railway Company 6% Subordinated Income Debentures, due
August 1, 2008; Guarantee of Norfolk Southern Railway Company with
respect to $5,043,000 principal amount of The Virginian Railway Company
6% Subordinated Income Debentures due August 1, 2008; Norfolk Southern
Railway Company $2.60 Cumulative Preferred Stock, Series A (No Par
Value, $50 Stated Value).
PAGE 2
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein and will
not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K405 or any amendment to this Form 10-K405. (X)
The aggregate market value of the voting stock held by
nonaffiliates as of February 28, 1995: $38,068,422
The number of shares outstanding of each of the registrant's
classes of Common Stock, as of February 28, 1995: 16,668,997
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement (to be
dated April 18, 1995) to be filed electronically pursuant to
Regulation 14A not later than 120 days after the end of the fiscal
year are incorporated by reference in Part III.
PAGE 3
TABLE OF CONTENTS
Item Page
---- ----
Part I 1. Business 4
2. Properties 4
3. Legal Proceedings 16
4. Submission of Matters to a Vote of Security
Holders 16
Executive Officers of the Registrant 17
Part II 5. Market for Registrant's Common Stock and
Related Stockholder Matters 23
6. Selected Financial Data 24
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 25
8. Financial Statements and Supplementary Data 37
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 63
Part III 10. Directors and Executive Officers of the
Registrant 63
11. Executive Compensation 63
12. Security Ownership of Certain Beneficial
Owners and Management 63
13. Certain Relationships and Related
Transactions 63
Part IV 14. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K 64
Index to Consolidated Financial Statement
Schedule 64
Power of Attorney 66
Signatures 66
Exhibit Index 70
PAGE 4
PART I
Item 1. Business.
------ --------
and
Item 2. Properties.
------ ----------
GENERAL - Norfolk Southern Railway Company (Norfolk
Southern Railway) was incorporated in 1894 under the name Southern
Railway Company (Southern) in the Commonwealth of Virginia and,
together with its consolidated subsidiaries (collectively, NS Rail),
is primarily engaged in the transportation of freight by rail.
On June 1, l982, Southern and Norfolk and Western Railway
Company (NW) became subsidiaries of Norfolk Southern Corporation
(NS), a transportation holding company. Effective December 31, 1990,
NS transferred all the common stock of NW to Southern, and Southern's
name was changed to Norfolk Southern Railway Company. Accordingly,
all the common stock of NW, which is its only voting security, is
owned by Norfolk Southern Railway, and all the common stock of
Norfolk Southern Railway (16,668,997 shares) is owned directly by NS.
NS common stock is publicly held and listed on the New York Stock
Exchange.
There remain issued and outstanding as of February 28,
1995, 1,197,027 shares of Norfolk Southern Railway's $2.60 Cumulative
Preferred Stock, Series A (Series A Stock), of which 1,096,907 shares
(including 74 shares not entitled to vote) were held by other than
subsidiaries. The Series A Stock is entitled to one vote per share,
is nonconvertible, and is traded on the New York Stock Exchange.
STOCK PURCHASE PROGRAM - On June 2, 1989, NS announced that
it intended to purchase up to 250,000 shares of Norfolk Southern
Railway's Series A Stock during the subsequent two-year period. In
May 1991, NS extended the previously announced stock purchase program
through 1993. In March 1994, NS announced that it would continue
purchasing up to 250,000 shares of the Series A Stock through 1996.
As of February 28, 1995, NS had purchased 104,727 shares of preferred
stock at a total cost of approximately $3.71 million. Consequently,
as of February 28, 1995, NS held 94.4 percent of the voting stock of
Norfolk Southern Railway.
OPERATIONS - As of December 3l, l994, NS Rail operated
14,652 miles of road in the states of Alabama, Florida, Georgia,
Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan,
Mississippi, Missouri, New York, North Carolina, Ohio, Pennsylvania,
South Carolina, Tennessee, Virginia and West Virginia, and the
Province of Ontario, Canada. Of this total, 12,780 miles are owned,
677 miles are leased and 1,195 miles are operated under trackage
rights; also, of this total, 11,991 miles are main line and
2,661 miles are branch line. In addition, NS Rail operates
approximately 10,907 miles of passing, industrial, yard and side
tracks.
PAGE 5
NS Rail has major leased lines in North Carolina and
between Cincinnati, Oh., and Chattanooga, Tn. The North Carolina
leases, covering approximately 300 miles, expired by their terms at
the end of 1994. However, NS Rail expects these leases to be renewed
or extended and has reached tentative understandings for such renewal
or extension. The tentative arrangements call for payment of an
annual rental of $8 million in 1995, with inflation adjustments in
succeeding years. Pending the approval of a form of lease extension
agreement by the parties, NS Rail continues to operate over these
lines under the terms of the expired leases. If these leases
ultimately are not renewed or extended, NS Rail could be required to
continue using the lines subject to conditions prescribed by the
Interstate Commerce Commission (ICC) or might find it necessary to
operate over an alternate route or routes. It is not expected that
the resolution of this matter (whether resulting in renewal or
extension of the leases, continued use of the leased lines under
prescribed conditions or operation over one or more alternate routes)
will have a material effect on NS Rail's consolidated financial
position.
The Cincinnati-Chattanooga lease, covering about 335 miles,
expires in 2026, subject to an option to extend the lease for an
additional 25 years at terms to be agreed upon.
NS Rail's lines carry raw materials, intermediate products
and finished goods primarily in the Southeast and Midwest and to and
from the rest of the United States and parts of Canada. These lines
also transport overseas freight through several Atlantic and Gulf
Coast ports. Atlantic ports served by NS Rail include: Norfolk,
Va.; Morehead City, N.C.; Charleston, S.C.; Savannah and Brunswick,
Ga.; and Jacksonville, Fl. Gulf Coast ports served include: Mobile,
Al., and New Orleans, La.
NS Rail's lines reach most of the larger industrial and
trading centers of the Southeast and Midwest, with the exception of
those in central and southern Florida. Atlanta, Birmingham, New
Orleans, Memphis, St. Louis, Kansas City (Missouri), Chicago,
Detroit, Cincinnati, Buffalo, Norfolk, Charleston, Savannah and
Jacksonville are among the leading centers originating and
terminating freight traffic on the system. In addition to serving
other established centers, the system's lines reach many industries,
mines (in western Virginia, eastern Kentucky and southern West
Virginia) and businesses located in smaller communities in its
service area. The traffic corridors carrying the heaviest volumes of
freight include those from the Appalachian coal fields of Virginia,
West Virginia and Kentucky to Norfolk and Sandusky, Oh.; Buffalo to
Chicago and Kansas City; Chicago to Jacksonville (via Cincinnati,
Chattanooga and Atlanta); and Washington, D.C./Hagerstown, Md., to
New Orleans (via Atlanta and Birmingham).
Buffalo, Chicago, Hagerstown, Jacksonville, Kansas City,
Memphis, New Orleans and St. Louis are major gateways for
interterritorial system traffic.
NS Rail and other railroads have entered into service
interruption agreements, effective December 30, 1994, providing
indemnities to parties affected by a strike over specified industry
issues. If NS Rail were so affected, it could receive daily
PAGE 6
indemnities from non-affected parties; if parties other than NS Rail
were affected, NS Rail could be required to pay indemnities to those
parties. If NS Rail were required to pay the maximum amount of
indemnities required of it under these agreements--an event
considered unlikely at this time--such liability should not exceed
approximately $85 million.
Revenue and revenue ton mile (one ton of freight moved one
mile) contributions by principal railway operating revenue sources
for the period 1990 through 1994 are set forth in the following
table:
Year Ended December 31,
Principal Sources of -------------------------------------------------
Railway Operating
Revenues 1994 1993 1992 1991 1990
------------------------- ---- ---- ---- ---- ----
(Revenues in Millions, and Revenue Ton Miles in Billions)
COAL
Revenues............... $1,262.5 $1,213.3 $1,296.0 $1,330.3 $1,408.8
% of total railway
operating revenues.... 32.2% 32.5% 34.9% 37.0% 37.7%
Revenue ton miles...... 43.8 41.4 41.9 42.7 46.0
% of total revenue
ton miles............. 35.8% 37.1% 38.9% 41.2% 43.3%
CHEMICALS
Revenues............... $ 512.2 $ 472.9 $ 471.7 $ 449.7 $ 443.9
% of total railway
operating revenues.... 13.1% 12.7% 12.7% 12.5% 11.9%
Revenue ton miles...... 16.7 14.7 14.3 13.6 12.8
% of total revenue
ton miles............. 13.7% 13.2% 13.3% 13.1% 12.0%
PAPER/FOREST
Revenues............... $ 505.4 $ 502.7 $ 499.5 $ 476.1 $ 486.5
% of total railway
operating revenues.... 12.9% 13.5% 13.5% 13.2% 13.0%
Revenue ton miles...... 15.3 15.1 14.7 13.6 13.3
% of total revenue
ton miles............. 12.5% 13.5% 13.7% 13.1% 12.5%
AUTOMOTIVE
Revenues............... $ 432.1 $ 429.5 $ 401.5 $ 325.9 $ 367.9
% of total railway
operating revenues.... 11.0% 11.5% 10.8% 9.1% 9.9%
Revenue ton miles...... 4.2 4.2 3.7 3.0 3.7
% of total revenue
ton miles............. 3.4% 3.8% 3.4% 2.9% 3.5%
AGRICULTURE
Revenues............... $ 347.5 $ 319.7 $ 301.4 $ 293.6 $ 299.6
% of total railway
operating revenues.... 8.9% 8.6% 8.1% 8.2% 8.0%
Revenue ton miles...... 15.6 13.6 12.6 12.2 11.3
% of total revenue
ton miles............. 12.8% 12.2% 11.7% 11.8% 10.6%
PAGE 7
Year Ended December 31,
Principal Sources of -------------------------------------------------
Railway Operating
Revenues 1994 1993 1992 1991 1990
------------------------- ---- ---- ---- ---- ----
(Revenues in Millions, and Revenue Ton Miles in Billions)
METALS/CONSTRUCTION
Revenues............... $ 321.4 $ 296.1 $ 276.3 $ 274.0 $ 305.6
% of total railway
operating revenues.... 8.2% 7.9% 7.5% 7.6% 8.2%
Revenue ton miles...... 10.4 9.6 8.5 8.2 9.1
% of total revenue
ton miles............. 8.5% 8.6% 7.9% 7.9% 8.6%
INTERMODAL
(Trailers and Containers)
Revenues............... $ 425.6 $ 371.9 $ 341.0 $ 324.6 $ 300.1
% of total railway
operating revenues.... 10.9% 10.0% 9.2% 9.0% 8.0%
Revenue ton miles...... 16.3 13.0 11.9 10.4 10.1
% of total revenue
ton miles............. 13.3% 11.6% 11.1% 10.0% 9.5%
-------- -------- -------- -------- --------
Total Freight Revenues... $3,806.7 $3,606.1 $3,587.4 $3,474.2 $3,612.4
Total Revenue Ton Miles.. 122.3 111.6 107.6 103.7 106.3
OTHER RAILWAY OPERATING
Revenues, principally
switching and
demurrage............. $ 111.4 $ 121.5 $ 121.7 $ 123.8 $ 122.7
% of total railway
operating revenues.... 2.8% 3.3% 3.3% 3.4% 3.3%
-------- -------- -------- -------- --------
Total Railway Operating
Revenues............... $3,918.1 $3,727.6 $3,709.1 $3,598.0 $3,735.1
Note: Revenue ton miles (RTMs) for 1990 have been restated from "shortest
distance" miles to "actual route" miles. RTMs for 1990 through
1992 have been restated from a "one-month-delayed" basis to a
"current-month" basis.
COAL TRAFFIC - Ranked by tons handled, coal, coke and iron
ore--most of which is bituminous coal--is NS Rail's principal
commodity group. NS Rail originated 114.7 million tons of coal, coke
and iron ore in 1994 and handled a total of 125.9 million tons.
Originated tonnage increased 2.3 percent from 112.1 million tons in
1993, and total tons handled increased 6.7 percent from 118.0 million
tons in 1993. Revenues from coal, coke and iron ore, which accounted
for 32 percent of NS Rail's total railway operating revenues and
36 percent of total revenue ton miles in 1994, were $1.26 billion, an
increase of 4 percent from $1.21 billion in 1993.
PAGE 8
The following table shows total coal tonnage originated
on-line, received from connections and handled for the five years
ended December 31, 1994:
Tons of Coal (Millions)
---------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Originated 112.0 109.7 115.5 116.8 126.6
Received 11.1 5.9 6.3 6.5 6.8
----- ----- ----- ----- -----
Handled 123.1 115.6 121.8 123.3 133.4
Note: Coal tonnage for 1990 has been restated from a "settled"
basis to a "movement" basis.
Of the 112.0 million tons of coal originating on NS Rail in
1994, the approximate breakdown is as follows: 41.2 million tons
from West Virginia, 36.5 million tons from Virginia, 23.6 million
tons from Kentucky, 5.7 million tons from Alabama, 3.0 million tons
from Illinois, 1.5 million tons from Tennessee, and 0.5 million
tons from Indiana. Of this NS Rail-origin coal, approximately
25.0 million tons moved for export, principally through NS Rail's
pier facilities at Norfolk (Lamberts Point), Virginia; 18.3 million
tons moved to domestic and Canadian steel industries; 59.8 million
tons of steam coal moved to electric utilities; and 8.9 million
tons moved to other industrial and miscellaneous users. NS Rail
moved 10.4 million tons of originated coal to various docks on
the Ohio River for further movement by barge and 5.2 million tons
to various Lake Erie ports. Other than coal for export, virtually
all coal handled by NS Rail was terminated in states situated east of
the Mississippi River.
Total NS Rail coal tonnage handled through all system ports
in 1994 was 43.6 million. Of this total, 64 percent moved through
the pier facilities at Lamberts Point. In 1994, total tonnage
handled at Lamberts Point, including coastwise traffic, was
27.8 million tons, a 0.7 percent increase from the 27.6 million tons
handled in 1993.
For the five years ended December 31, 1994, the quantities
of NS Rail coal handled only for export through Lamberts Point were
as follows:
Export Coal through Lamberts Point
(Millions of tons)
-------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Originated 23.9 24.6 30.8 34.3 35.1
Handled 24.1 24.9 31.2 34.6 35.4
See the discussion of coal traffic, by type of coal, in
Part II, Item 7, "Management's Discussion and Analysis," on page 25.
PAGE 9
MERCHANDISE RAIL TRAFFIC - The merchandise traffic group
consists of Intermodal and five major commodity groupings (Chemicals;
Paper/Forest; Automotive; Agriculture; and Metals/Construction).
Total NS Rail merchandise revenues increased in 1994 to $2.54 billion,
a 6 percent increase over 1993. Merchandise carloads handled in 1994
were 3.03 million, compared with 2.82 million handled in 1993, an
increase of 8 percent.
In 1994, 106.4 million tons of merchandise freight, or
approximately 68 percent of total merchandise tonnage handled by NS
Rail, originated on line. The balance of NS Rail's merchandise
traffic was received from connecting carriers (mostly railroads, with
some intermodal, water and highway as well), usually at
interterritorial gateways. The principal interchange points for NS
Rail-received traffic included Chicago, Memphis, New Orleans,
Cincinnati, Kansas City, Detroit, Hagerstown, St. Louis/East St.
Louis, and Louisville.
Revenues in all six market groups comprising merchandise
traffic improved over 1993, with four of the six increasing by 8% or
more. The biggest gains were in Intermodal, up $53.7 million;
Chemicals, up $39.3 million; Agriculture, up $27.8 million; and
Metals/Construction, up $25.3 million.
See the discussion of merchandise rail traffic by commodity
group in Part II, Item 7, "Management's Discussion and Analysis," on
page 25.
RAIL OPERATING STATISTICS - The following table sets forth
certain statistics relating to NS Rail's operations during the
periods indicated:
Year Ended December 31,
-------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Rail revenue ton
miles (billions) 122.3 111.6 107.6 103.7 106.3
Freight train miles
traveled (millions) 46.0 43.3 41.1 37.8 36.8
Revenue tons per carload 65.6 65.1 66.0 66.7 68.7
Revenue per ton mile $0.0311 $0.0323 $0.0333 $0.0335 $0.0340
Revenue tons per train 2,655 2,577 2,618 2,743 2,884
Revenue ton miles
per man-hour worked 2,579 2,304 2,184 2,023 1,955
Percentage ratio of
railway operating
expenses to railway
operating revenues 73.2 75.3 75.0 77.9* 78.0
Note: Revenue ton miles (RTMs) for 1990 have been restated from a
"shortest route" basis to an "actual route" basis. RTMs for 1990
through 1992 have been restated from a "one-month-delay" basis to
a "current-month" basis.
* Excluding a special charge in 1991 which increased railway operating
expenses by $483 million.
PAGE 10
FREIGHT RATES - In 1994 NS Rail continued its reliance on
private contracts and exempt price quotes as its predominant pricing
mechanisms. Thus, a major portion of NS Rail's freight business is
not economically regulated by the government. In general, market
forces have been substituted for government regulation and now are
the primary determinant of rail service prices. Proposals pending in
Congress in early 1995 would further reduce rate regulation of
railroads.
In 1994, the ICC found NS Rail "revenue inadequate" based
on results for the year 1993. A railroad is "revenue inadequate"
under the Interstate Commerce Act when its return on net investment
does not exceed the rail industry's composite cost of capital. The
absence of "revenue adequacy" lets a railroad use a provision in the
Interstate Commerce Act allowing increases in regulated rates by a
specific percentage. However, with the decreasing importance of
regulated tariff traffic to NS Rail, the ICC's "revenue adequacy"
findings have less impact than formerly.
PASSENGER OPERATIONS - Regularly scheduled passenger
operations on NS Rail's lines consist of Amtrak trains operating
between Alexandria and New Orleans, and between Charlotte and
Selma, N.C. Former Amtrak operations between East St. Louis and
Centralia, Il., were discontinued by Amtrak on November 3, 1993.
Commuter trains continued operations on the NS Rail line between
Manassas and Alexandria under contract with two transportation
commissions of the Commonwealth of Virginia, providing for
reimbursement of related expenses incurred by NS Rail. During 1993,
a lease of the Chicago to Manhattan, Il., line to the Commuter Rail
Division of the Regional Transportation Authority of Northeast
Illinois replaced an agreement under which NS Rail had provided
commuter rail service for the Authority.
PAGE 11
RAILWAY PROPERTY:
EQUIPMENT - As of December 31, 1994, NS Rail owned or
leased the following units of equipment:
Number of Units
-------------------------------- Capacity
Owned* Leased Total of Equipment
----- ------ ----- ------------
Type of Equipment
-----------------
Locomotives: (Horsepower)
Multiple purpose 1,833 6 1,839 5,424,950
Switching 155 -- 155 228,550
Auxiliary units 67 -- 67 --
-------- ------- -------- ----------
Total locomotives 2,055 6 2,061 5,653,500
======== ======= ======== ==========
Freight Cars: (Tons)
Hopper 36,499 -- 36,499 3,607,549
Box 23,153 232 23,385 1,765,937
Covered Hopper 15,466 685 16,151 1,593,735
Gondola 18,478 50 18,528 1,754,900
Flat 4,336 53 4,389 306,750
Caboose 333 -- 333 --
Other 1,684 774 2,458 165,272
-------- ------- -------- ----------
Total freight cars 99,949 1,794 101,743 9,194,143
======== ======= ======== ==========
Other:
Work equipment 6,640 5 6,645
Vehicles 3,955 -- 3,955
Highway trailers 3,225 1,997 5,222
Miscellaneous 1,471 -- 1,471
-------- ------- --------
Total other 15,291 2,002 17,293
======== ======= ========
* Includes equipment leased to outside parties and equipment
subject to equipment trusts, conditional sale agreements and
capitalized leases.
PAGE 12
The following table indicates the number and age of locomo-
tives and freight cars owned by NS Rail at December 31,
1994:
Year Built
----------------------------------------------------------------
1984- 1978- 1977 &
1994 1993 1992 1991 1990 1989 1983 Before Total
---- ---- ---- ---- ---- ---- ---- ------ -----
Locomotives:
Number of
units 25 31 55 53 46 413 535 897 2,055
Percent of
fleet 1.2 1.5 2.7 2.6 2.2 20.1 26.0 43.7 100.0
Freight cars:
Number of
units 788 931 581 557 1,729 2,875 17,097 75,391 99,949
Percent of
fleet 0.8 0.9 0.6 0.6 1.7 2.9 17.1 75.4 100.0
The average age of the freight car fleet at December 31,
1994, was 21.9 years. During 1994, NS Rail retired 3,333 freight
cars. As of December 31, 1994, the average age of the locomotive
fleet was 15.8 years. During 1994, NS Rail retired 24 locomotives,
the average age of which was 23.6 years. Since 1988, NS Rail has
rebodied more than 17,200 coal cars. As a result, the remaining
serviceability of the freight car fleet is greater than is indicated
by the percentage of freight cars built in earlier years.
NS Rail continues freight car and locomotive maintenance
programs to ensure the highest standards of safety, reliability,
customer satisfaction and equipment marketability. In recent years,
as illustrated in the table below, the bad order ratio has risen or
remained fairly stable primarily due to the storage of certain types
of cars which are not in high demand. Funds were not spent to repair
certain types of cars for which present and future customers' needs
could be adequately met without such repair programs. Also, NS
Rail's own standards of what constitutes a "serviceable" car have
risen, and NS continues a rational disposition program for
underutilized, unserviceable and overage cars.
Annual Average
-------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Freight Cars (excluding cabooses):
NS Rail 6.7% 7.3% 7.6% 6.5% 6.4%
All Class I railroads 7.3 7.1 7.5 7.3 7.7
Locomotives:
NS Rail 4.7 4.3 4.4 4.3 4.2
Note: Since 1992, the locomotive bad order ratio has been calculated
excluding stored locomotives. Years prior to 1992 have been
restated to conform to this presentation.
PAGE 13
TRACKAGE - All NS Rail trackage is standard gauge, and the
rail in approximately 96 percent of the main line trackage (including
first, second, third and branch main tracks, all excluding trackage
rights) is heavyweight rail ranging from 90 to 155 pounds per yard.
Of the 23,172 miles of track maintained by NS Rail as of December 31,
1994, 15,712 miles were laid with welded rail.
The density of traffic on NS Rail running track (main line
trackage plus passing track) during 1994 was as follows:
Gross tons of
freight carried
per track mile Track miles Percent
(Millions) of running tracks* of total
--------------- ----------------- --------
0-4 5,478 32
5-19 5,289 32
20 and over 5,993 36
------ ---
16,760 100
* Excludes trackage rights.
The following table summarizes certain information about NS
Rail's track roadway additions and replacements during the last five
years:
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Track miles of rail installed 480 574 660 679 743
Crossties installed (millions) 1.7 1.6 1.9 1.9 1.9
Miles of track surfaced 4,760 5,048 5,690 5,646 5,844
MICROWAVE SYSTEM - The NS Rail microwave system, consisting
of 6,584 radio path miles, 374 active stations and 7 passive repeater
stations, provides communications for Norfolk, Buffalo, Detroit, Fort
Wayne, Chicago, Kansas City, St. Louis, Washington, D.C., Atlanta,
New Orleans, Jacksonville, Memphis, Cincinnati and most operating
locations between these cities. The microwave system provides
approximately 2,168,990 individual voice channel miles of circuits.
The microwave system is used principally for voice communications,
VHF radio control circuits, data and facsimile transmissions, traffic
control operations, AEI data transmissions and relay of intelligence
from defective equipment detectors. Extension of microwave
communications to low density or operations support facilities is
accomplished via microwave interface to buried fiber-optic or copper
cables.
PAGE 14
TRAFFIC CONTROL - Of a total of 13,457 road miles operated
by NS Rail, excluding trackage rights over foreign lines, 5,274 road
miles are governed by centralized traffic control systems (of which
81 miles are controlled by data radio from seven microwave site
locations) and 2,734 road miles are equipped for automatic block
system operation.
COMPUTERS - Data processing facilities connect the yards,
terminals, transportation offices, rolling stock repair points, sales
offices and other key locations on NS Rail to the central computer
complex in Atlanta, Ga. System operating and traffic data are
compiled and stored to provide customers with information on their
shipments throughout the system. Data processing facilities are
capable of providing current information on the location of every
train and each car on line, as well as related waybill and other
train and car movement data. Additionally, this facility affords
substantial capacity for, and is utilized to assist management in the
performance of, a wide variety of functions and services, including
payroll, car and revenue accounting, billing, material management
activities and controls, and special studies.
OTHER - NS Rail has extensive facilities for support of
railroad operations, including freight depots, car construction
shops, maintenance shops, office buildings, and signals and
communications facilities.
ENCUMBRANCES - Certain rail rolling stock is subject to the
prior lien of equipment financing obligations amounting to
approximately $497.2 million as of December 31, 1994, and
$521.8 million as of December 31, 1993. In addition, a significant
portion of NS Rail's properties are subject to liens securing as of
December 31, 1994, and 1993, approximately $33.9 million and $74.8
million of mortgage debt, respectively.
CAPITAL EXPENDITURES - During the five calendar years ended
December 31, 1994, capital expenditures for road, equipment and other
property were as follows:
Capital Expenditures
------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(In millions of dollars)
Railway property
Road $382.3 $411.0 $425.1 $392.8 $389.4
Equipment 235.0 218.1 187.8 193.1 203.3
Other property 22.3 0.1 4.2 77.2 9.4
------ ------ ------ ------ ------
Total $639.6 $629.2 $617.1 $663.1 $602.1
====== ====== ====== ====== ======
PAGE 15
NS Rail's capital spending and maintenance programs are and
have been designed to assure the Company's ability to provide safe,
efficient and reliable transportation services. For 1995, NS Rail is
planning $686 million of capital spending, and anticipates new
equipment financing of approximately $110 million. Looking further
ahead, capital spending is expected to remain in the $600 to
$700 million range for the next few years. A substantial portion of
future capital spending is expected to be funded through internally
generated cash, although debt financing will continue as the primary
funding source for equipment acquisitions.
ENVIRONMENTAL MATTERS - Compliance with federal, state and
local laws and regulations relating to the protection of the
environment is a principal NS Rail goal. To date, such compliance
has not affected materially NS Rail's capital additions, earnings,
liquidity or competitive position.
See the discussion of "Environmental Matters" in Part II,
Item 7, "Management's Discussion and Analysis," on page 34, and in
Note 17 to the Consolidated Financial Statements on page 59.
EMPLOYEES - NS Rail employed an average of 24,710 employees
in 1994, compared with an average of 25,531 in 1993 (including
Norfolk Southern Corporation's employees whose primary duties relate
to rail operations). The approximate average cost per rail-related
employee during 1994 was $41,528 in wages and $18,344 in employee
benefits. Approximately 82 percent of these employees are
represented by various labor organizations.
GOVERNMENT REGULATION - In addition to environmental,
safety, securities and other regulations generally applicable to all
businesses, NS Rail is subject to regulation by the ICC, various
state regulatory agencies and the Department of Transportation. The
ICC has jurisdiction over many rates, routes, conditions of service,
and the extension or abandonment of rail lines. The ICC also has
jurisdiction over the consolidation, merger or acquisition of control
of and by rail common carriers. The Department of Transportation
regulates certain track and mechanical equipment standards.
The relaxation of economic regulation of the railroads by
the ICC, started over a decade ago under the Staggers Rail Act of
l980, has continued. The ICC has recently authorized the partial
deregulation of the charges railroads pay for the use of rail cars.
NS Rail is expected to benefit from the deprescription of car hire
because it owns older cars of types which are in high demand. These
cars will likely bring higher rentals under deprescription than under
regulated rates.
PAGE 16
Certain revenue transactions and classes of traffic already
have been exempted from ICC regulation. Those most significant for
NS Rail are TOFC/COFC (i.e., "piggyback") business, rail boxcar
traffic, lumber, manufactured steel, automobiles and certain bulk
commodities such as sand, gravel, pulpwood and wood chips for paper
manufacturing. Transportation contracts on regulated shipments,
after approval by the ICC, effectively remove those shipments from
regulation as well. Over 80 percent of NS Rail's freight revenues
come from either exempt traffic or traffic moving under ICC approved
transportation contracts.
In early 1995, Congress had under consideration proposals
for additional reductions in economic regulation of railroads,
including proposals for "sunsetting" the ICC and transferring
its remaining functions to another agency.
COMPETITION - There is continuing strong competition among
rail, water and highway carriers. Price is usually only one factor
of importance as shippers and receivers choose a transport mode and
specific hauling company. Inventory carrying costs, service
reliability, ease of handling, and the desire to avoid loss and
damage during transit are increasingly important considerations,
especially for higher valued finished goods, machinery and consumer
products. Even for raw materials, semi-finished goods and work-in-
process, users are increasingly sensitive to transport arrangements
which minimize problems at successive production stages.
NS Rail's primary competitor is the CSX system, which
operates throughout much of the same territory served by NS Rail.
Other railroads also operate in parts of the territory. NS Rail also
competes with motor carriers and water carriers, and with shippers
who have the additional option of handling their own goods in private
carriage. Increasingly, cooperative strategies between railroads and
between railroads and motor carriers enable carriers to compete more
effectively in specific markets. A subsidiary of NS, which is not
part of NS Rail, entered into such a strategy with a Conrail
subsidiary forming a partnership in 1993 which offered intermodal
service using RoadRailer(Registered Trademark) equipment. NS Rail
provides some of the rail line-haul for this partnership.
Item 3. Legal Proceedings.
------ -----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
------ ---------------------------------------------------
There were no matters submitted to a vote of security
holders during the fourth quarter of 1994.
PAGE 17
Executive Officers of the Registrant.
------------------------------------
Norfolk Southern Railway's officers are elected annually by
the Board of Directors at its first meeting held after the annual
meeting of stockholders, and they hold office until their successors
are elected. There are no family relationships among the officers,
nor any arrangement or understanding between any officer and any
other person pursuant to which the officer was selected. The
following table sets forth certain information, as of March 1, 1995,
relating to these officers:
Business Experience during
Name, Age, Present Position past 5 Years
--------------------------- --------------------------------------
David R. Goode, 54, Present position since September 1992.
President and Chief Also, Chairman, President and Chief
Executive Officer Executive Officer of Norfolk
Southern Corporation since September
1992, President from October 1991 to
September 1992, and Executive Vice
President-Administration from
January to October 1991. Served as
Vice President-Administration of
Norfolk Southern Railway from
January 1991 to February 1992, Vice
President from February to September
1992, and prior thereto as Vice
President-Taxation of Norfolk
Southern Railway and NS.
Paul N. Austin, 51, Vice Present position since June 1994.
President-Personnel Also, Vice President-Personnel of
Norfolk Southern Corporation
since June 1994. Served as
Assistant Vice President-
Personnel of NS from February
1993 to June 1994, and prior
thereto as Director Compensation.
William B. Bales, 60, Vice Present position since August 1993.
President-Coal Marketing Also, Vice President-Coal
Marketing of Norfolk Southern
Corporation since August 1993.
Served prior thereto as Vice
President-Coal and Ore Traffic of
Norfolk Southern Railway and NS.
PAGE 18
Business Experience during
Name, Age, Present Position past 5 Years
--------------------------- --------------------------------------
R. Alan Brogan, 54, Vice Present position since December 1992.
President-Transportation Also, Executive Vice President-
Logistics Transportation Logistics of
Norfolk Southern Corporation since
December 1992, Vice President-
Quality Management from April 1991
to December 1992, Vice President-
Material Management and Property
Services from July 1990 to April
1991, and prior thereto as Vice
President of Material Management.
Served as Vice President-Quality
Management of Norfolk Southern
Railway from June 1991 to December
1992, and prior thereto as Vice
President-Material Management.
Thomas L. Finkbiner, 42, Vice Present position since August 1993.
President-Intermodal Also, Vice President-Intermodal
of Norfolk Southern Corporation
since August 1993. Served as Senior
Assistant Vice President-
International and Intermodal of NS
from April to August 1993, and prior
thereto as Assistant Vice President-
International and Intermodal.
James A. Hixon, 41, Vice Present position since June 1993.
President-Taxation Also, Vice President-Taxation of
Norfolk Southern Corporation since
June 1993. Served as Assistant Vice
President-Tax Counsel of NS from
January 1991 to June 1993, and prior
thereto as General Tax Attorney.
Jon L. Manetta, 57, Vice Present position since June 1994.
President-Transportation Also, Vice President-
Transportation of Norfolk
Southern Corporation since June
1994. Served as Assistant Vice
President-Transportation of NS
from October 1993 to June 1994.
Served as Assistant Vice
President-Strategic Planning of
NS from January 1993 to October
1993, Director Joint Facilities
and Budget from March 1992 to
January 1993, Assistant Terminal
Superintendent-Transportation
from January 1991 to March 1992,
and prior thereto as Assistant
Superintendent-St. Louis
Terminal.
PAGE 19
Business Experience during
Name, Age, Present Position past 5 Years
--------------------------- --------------------------------------
Harold C. Mauney, Jr., 56, Present position since December 1992.
Vice President-Quality Also, Vice President-Quality
Management Management of Norfolk Southern
Corporation since December 1992.
Served as Assistant Vice President-
Quality Management of NS from April
1991 to December 1992, and prior
thereto as General Manager-
Intermodal Transportation Services.
Donald W. Mayberry, 51, Vice Present position since October 1987.
President-Mechanical Also, Vice President-Mechanical of
Norfolk Southern Corporation
since October 1987.
James W. McClellan, 55, Vice Present position since October 1993.
President-Strategic Planning Also, Vice President-Strategic
Planning of Norfolk Southern
Corporation since October 1993.
Served as Assistant Vice President-
Corporate Planning of NS from March
1992 to October 1993, and prior
thereto as Director-Corporate
Development.
Kathryn B. McQuade, 38, Vice Present position since December 1992.
President-Internal Audit Also, Vice President-Internal
Audit of Norfolk Southern
Corporation since December 1992.
Served as Director-Income Tax
Administration of NS from May 1991
to December 1992, and prior thereto
as Director-Federal Income Tax
Administration.
Charles W. Moorman, 43, Vice Present position since October 1993.
President-Information Also, Vice President-Information
Technology Technology of Norfolk Southern
Corporation since October 1993.
Served as Vice President-Employee
Relations of Norfolk Southern Railway
and NS from December 1992 to October
1993, Vice President-Personnel and
Labor Relations from February to
December 1992, Assistant Vice
President-Stations, Terminals and
Transportation Planning of NS from
March 1991 to February 1992, Senior
Director Transportation Planning from
March 1990 to March 1991, and prior
thereto as Director, Transportation
Planning.
PAGE 20
Business Experience during
Name, Age, Present Position past 5 Years
--------------------------- --------------------------------------
Phillip R. Ogden, 54, Vice Present position since December 1992.
President-Engineering Also, Vice President-Engineering
of Norfolk Southern Corporation
since December 1992. Served as
Assistant Vice President-Maintenance
of NS from November 1990 to December
1992, and prior thereto as Chief
Engineer-Line Maintenance North.
L. I. Prillaman, Jr., 51, Present position since December 1992.
Vice President-Properties Also, Vice President-Properties
of Norfolk Southern Corporation
since December 1992. Served prior
thereto as Vice President and
Controller of Norfolk Southern
Railway and NS.
John P. Rathbone, 43, Vice Present position since December 1992.
President and Controller Also, Vice President and
Controller of Norfolk Southern
Corporation since December 1992 and
prior thereto as Assistant Vice
President-Internal Audit.
William J. Romig, 50, Present position since December 1992.
Vice President Also, Vice President and
Treasurer of Norfolk Southern
Corporation since December 1992 and
prior thereto as Assistant Vice
President-Finance.
Donald W. Seale, 42, Vice Present position since August 1993.
President-Merchandise Also, Vice President-Merchandise
Marketing Marketing of Norfolk Southern
Corporation since August 1993.
Served as Assistant Vice President-
Sales and Service of NS from May
1992 to August 1993, Director-
Metals, Waste and Construction from
March 1990 to May 1992, and prior
thereto as Director-Marketing
Development.
John S. Shannon, 64, Vice Present position since May 1984.
President-Law Also, Executive Vice President-
Law of Norfolk Southern Corporation
since June 1982.
PAGE 21
Business Experience during
Name, Age, Present Position past 5 Years
--------------------------- --------------------------------------
Powell F. Sigmon, 55, Vice Present position since January 1995.
President-Research and Also, Vice President-Research and
Tests Tests of Norfolk Southern
Corporation since January 1995.
Served as Vice President-Safety,
Environmental and Research
Development from October 1993 to
January 1995, Assistant Vice
President-Mechanical (Car) of NS
from January 1991 to October 1993,
and prior thereto as General Manager-
Mechanical Facilities.
Robert S. Spenski, 60, Vice Present position since June 1994.
President-Labor Relations Also, Vice President-Labor
Relations of Norfolk Southern
Corporation since June 1994, and
prior thereto as Senior Assistant
Vice President-Labor Relations.
Stephen C. Tobias, 50, Present position since October 1993.
Vice President Also, Senior Vice President-
Operations of Norfolk Southern
Corporation since October 1993.
Served as Vice President-Strategic
Planning of Norfolk Southern
Railway and NS from December 1992
to October 1993, and prior thereto
as Vice President-Transportation.
John R. Turbyfill, 63, Vice Present position since June 1993.
President Also, Vice Chairman of Norfolk
Southern Corporation since June
1993. Served prior thereto as
Executive Vice President-Finance of
NS since June 1982, and Vice
President-Finance of Norfolk
Southern Railway since March 1984.
D. Henry Watts, 63, Vice Present position since July 1986.
President and Chief Also, Executive Vice President-
Traffic Officer Marketing of Norfolk Southern
Corporation since July 1986.
PAGE 22
Business Experience during
Name, Age, Present Position past 5 Years
--------------------------- --------------------------------------
Henry C. Wolf, 52, Vice Present position since June 1993.
President-Finance Also, Executive Vice President-
Finance of Norfolk Southern
Corporation since June 1993.
Served as Vice President-Taxation
of Norfolk Southern Railway and NS
from January 1991 to June 1993, and
prior thereto as Assistant Vice
President-Tax Counsel.
Dezora M. Martin, 47, Present position since October 1993.
Corporate Secretary Served prior thereto as
Assistant Corporate Secretary of
Norfolk Southern Railway and NS.
Ronald E. Sink, 52, Present position since September
Treasurer 1987.
PAGE 23
PART II
Item 5. Market for the Registrant's Common Stock and Related
------ ----------------------------------------------------
Stockholder Matters.
-------------------
COMMON STOCK
------------
Since June 1, 1982, NS has owned all the common stock of
Norfolk Southern Railway Company. The common stock is not publicly
traded.
SERIAL PREFERRED STOCK
----------------------
There are 10,000,000 shares of no par value serial
preferred stock authorized. This stock may be issued in series from
time to time at the discretion of the Board of Directors with any
series having such voting and other powers, designations, dividends
and other preferences deemed appropriate at the time of issuance.
The $2.60 Cumulative Preferred Stock, Series A (Series A
Stock), of which 1,197,027 shares were issued and 1,096,907 shares
were held other than by subsidiaries as of February 28, 1995, has no
par value but has a $50 per share stated value. As indicated in the
title, the stock pays a dividend of $2.60 per share annually, payable
quarterly on March 15, June 15, September 15 and December 15.
Dividends on this stock are cumulative and in preference to dividends
on all other classes of stock. Except for any shares held by Norfolk
Southern Railway Company subsidiaries and/or in a fiduciary capacity,
each share is entitled to one vote per share on all matters, voting
as a single class with holders of other stock. Should dividends
become delinquent for six quarters, this class of stock, voting as a
class, may elect two directors so long as any default in dividend
payments continues. The stock is redeemable at the option of Norfolk
Southern Railway Company at $50 per share plus accrued dividends. On
liquidation, the stock is entitled to $50 per share plus accrued
dividends before any amounts are paid on any other class of stock.
In June 1989, NS announced that it intended to purchase up
to 250,000 shares of the outstanding Series A Stock during the
subsequent two-year period. In May 1991, NS extended the previously
announced stock purchase program through 1993. In March 1994, NS
announced that it would continue purchasing up to 250,000 shares of
the Series A Stock through 1996. As of February 28, 1995, NS had
purchased 104,727 shares of Series A Stock at a total cost of
$3,708,463; as of the same date, NS held a total of 104,822 shares.
PAGE 24
Item 6. Selected Financial Data.
------ -----------------------
NORFOLK SOUTHERN RAILWAY COMPANY
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
FIVE-YEAR FINANCIAL REVIEW
1994 1993(1) 1992 1991(2) 1990
-------- -------- -------- -------- --------
(In millions of dollars)
RESULTS OF OPERATIONS:
Railway operating revenues $ 3,918.1 $3,727.6 $3,709.1 $3,598.0 $3,735.1
Railway operating expenses 2,869.2 2,805.9 2,781.7 3,287.2 2,913.9
--------- -------- -------- -------- --------
Income from railway
operations 1,048.9 921.7 927.4 310.8 821.2
Other income - net 46.6 57.6 49.5 70.2 172.4
Interest expense on debt 28.3 32.3 44.6 48.4 52.6
--------- -------- -------- -------- --------
Income before income
taxes 1,067.2 947.0 932.3 332.6 941.0
Provision for income taxes 385.2 412.8 325.8 102.0 331.2
--------- -------- -------- -------- --------
Income before accounting
changes 682.0 534.2 606.5 230.6 609.8
Cumulative effect of
accounting changes -- 247.8 -- -- --
--------- -------- -------- -------- --------
Net income $ 682.0 $ 782.0 $ 606.5 $ 230.6 $ 609.8
========= ======== ======== ======== ========
FINANCIAL POSITION:
Total assets $10,289.2 $9,873.0 $9,675.5 $9,358.0 $9,273.8
Total long-term debt,
including current
maturities $ 539.8 $ 604.9 $ 714.5 $ 735.0 $ 712.1
Stockholders' equity $ 5,440.5 $5,184.9 $4,784.3 $4,449.5 $4,433.3
OTHER:
Capital expenditures $ 639.6 $ 629.2 $ 617.1 $ 663.1 $ 602.1
Number of stockholders
at year end 3,281 3,517 3,725 3,952 4,168
Average number
of employees (3) 24,710 25,531 25,650 27,366 28,697
Business Combination
--------------------
On December 31, 1990, NS, the parent company of Norfolk Southern Railway
Company, transferred all the common stock of its other major railroad
subsidiary, NW, to Norfolk Southern Railway Company, principally to
combine railroad operations under a common railroad parent. The 1990
financial information above reflects the combined companies.
--------------------------------------------------------------------------
(1) 1993's results include a $60.8 million increase in the provision for
income taxes reflecting a 1% increase in the federal income tax rate
retroactive to January 1, 1993 (see Note 4 on page 46). The
cumulative effect of accounting changes (see Note 1 on page 43)
increased 1993's earnings by $247.8 million.
(2) Included in 1991 results is a special charge, primarily comprised of
costs for labor force reductions. This charge increased railway
operating expenses by $483 million and reduced net income by
$303 million.
(3) The employee count includes Norfolk Southern Corporation's employees
whose primary duties relate to rail operations.
PAGE 25
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes beginning on page 37 and
the Five-Year Financial Review on page 24. The Condensed Summary provides
a brief overview of results of operations, and the text beginning under
"Results of Operations" is a more detailed analyses.
CONDENSED SUMMARY OF RESULTS OF OPERATIONS
1994 Compared with 1993
-----------------------
Net income was $682.0 million in 1994, compared with $782.0 million
in 1993. However, net income in 1993 was increased by $247.8 million
related to the implementation of required accounting changes (see Note 1
on page 43) and reduced by $51.6 million for the prior years' effect of a
federal income tax rate increase (see Note 4 on page 46). Excluding the
effect of the 1993 accounting changes and the tax rate increase related
to prior years, 1994's net income was 16% above the $585.8 million in
1993, setting a record for NS Rail.
Income from railway operations rose $127.2 million, or 14%, compared
with 1993, producing most of the improvement. These results reflected a
5% increase in railway operating revenues (largely due to higher traffic
volume) combined with only a 2% increase in railway operating expenses.
Nonoperating income was $46.6 million, compared with $57.6 million in
1993 (see Note 3 on page 46), principally a result of reduced gains on
sales of property.
1993 Compared with 1992
-----------------------
Net income was $782.0 million in 1993, compared with $606.5 million
in 1992. However, as discussed previously, results for 1993 were
significantly affected by required accounting changes and by an increase
in the federal income tax rate. Excluding the effect of the accounting
changes and the tax rate increase related to prior years, 1993's earnings
would have been $585.8 million, a $20.7 million decrease from 1992.
Railway operating revenues increased less than 1%, compared with 1992, as
gains in merchandise traffic were substantially offset by lower coal
traffic levels. Railway operating expenses increased 1%, compared with
1992. Nonoperating income in 1993 rose $8.1 million, compared with 1992,
due to gains from sales of property (see Note 3 on page 46).
RAILWAY OPERATING REVENUES AND EXPENSES
(Shown as a Graph in the Annual Report to Stockholders)
(In millions of dollars)
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
Revenues $3,918.1 $3,727.6 $3,709.1 $3,598.0 $3,735.1
Expenses 2,869.2 2,805.9 2,781.7 3,287.2* 2,913.9
* Includes special charge.
PAGE 26
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
RESULTS OF OPERATIONS
Railway Operating Revenues
--------------------------
Railway operating revenues were $3.92 billion in 1994, compared with
$3.73 billion in 1993 and $3.71 billion in 1992. The following table
presents a three-year comparison of revenues by market group.
RAILWAY OPERATING REVENUES BY MARKET GROUP
(In millions of dollars)
1994 1993 1992
-------- -------- --------
Coal $1,262.5 $1,213.3 $1,296.0
Chemicals 512.2 472.9 471.7
Paper/forest 505.4 502.7 499.5
Automotive 432.1 429.5 401.5
Agriculture 347.5 319.7 301.4
Metals/construction 321.4 296.1 276.3
Intermodal 425.6 371.9 341.0
-------- -------- --------
Freight revenues 3,806.7 3,606.1 3,587.4
Other, principally switching
and demurrage 111.4 121.5 121.7
-------- -------- --------
Total $3,918.1 $3,727.6 $3,709.1
======== ======== ========
Traffic volume increased or remained steady for all market groups in
1994 and increased for all market groups except coal in 1993. The revenue
per unit/mix variance in both years was attributable to shorter haul
business and increased double-stack business, both of which have lower
average rates.
RAILWAY OPERATING REVENUE VARIANCE ANALYSIS
Increases (Decreases)
(In millions of dollars)
1994 vs. 1993 1993 vs. 1992
------------- -------------
Traffic volume (carloads) $ 251.7 $ 67.0
Revenue per unit/mix (61.2) (48.5)
------- -------
Total $ 190.5 $ 18.5
======= =======
Some of the fastest growing market segments are in shorter haul,
repetitive movements. This type of traffic complements NS Rail's efforts
to improve asset utilization and demonstrates that efficient operations
can generate profit opportunities in nontraditional markets.
COAL (including coke and iron ore) traffic volume in 1994 increased
5%, and revenues, which represented 32% of total railway operating
revenues, were up 4% from 1993. Coal accounted for about 98% of this
market group's volume, and 91% of coal shipments originated on NS Rail's
lines. As shown in the following table, the decline in steel coal was
more than offset by a significant increase in utility coal, up 16%,
compared with 1993.
PAGE 27
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
TOTAL COAL TONNAGE
(In millions of tons)
1994 1993 1992
----- ----- -----
Utility 70.2 60.6 61.0
Export 25.2 25.7 32.6
Steel 18.8 20.5 19.4
Other 8.9 8.8 8.8
----- ----- -----
Total 123.1 115.6 121.8
===== ===== =====
Utility coal traffic was up early in the year as a result of bitter
weather and the resulting depletion of plant stockpiles. The pace at
which 1994 outperformed 1993 slowed as the weather normalized, power
generation demand lessened and coal inventories grew. New movements of
western coal into Georgia also contributed to the 1994 increase. NS Rail
handled five million tons of western coal in 1994, and this volume is
expected to increase in 1995.
The favorable outlook for utility coal reflects increasing demand
for low-sulfur coal as utilities seek to comply with Clean Air Act
Amendments. A high proportion of the mines served by NS Rail produce low-
sulfur coal. The January 1, 1995, Phase I deadline under the Clean Air
Act has already caused an increase in NS Rail's low-sulfur coal
handlings. This trend is expected to accelerate as the Phase II deadline
of January 1, 2000, approaches.
Export coal traffic at the beginning of 1994 continued to reflect
the poor demand seen in 1993. Shipments remained depressed as a result of
the weak European economy and strong competition from other producing
countries. Excess world capacity pushed coal prices lower in early 1994.
However, by mid-1994, U.S. coal supplies for the export market had been
reduced due to a strong domestic market and mine closings. Economic
recovery in Europe and Japan improved demand for steel and electricity,
and within a short time the coal supply-demand situation tightened. By
the end of 1994, delivery times were longer and prices had risen.
Continued economic growth in the Far East and Europe is expected to
increase demand for U.S. coal, especially steam coal. Reduced mining
subsidies in Europe, primarily in Germany, may reduce European coal
production. On the other hand, overseas demand for coal used in
steelmaking is expected to be flat in the short term and to decline over
the longer term as new technologies slowly diminish the need for this
type of coal. On balance, U.S. coal exports are expected to increase, but
at rates below those seen in previous economic recoveries.
During 1994, NS Rail completed modifications to the two shiploaders
at Pier 6 in Norfolk, Va., enabling large vessels to be loaded more
quickly.
Steel coal domestic traffic was reduced by the closing of one coke
battery and extended maintenance at another battery. These batteries
produce coke for making steel; however, because advancing technologies
allow for production of steel with little or no coke, this domestic
market is expected to decline slowly.
Coal traffic volume in 1993 decreased 6%, compared with
1992, and revenues also were down 6%. The export coal market was weak
for all of 1993. Additionally, stockpiles were at high levels in the
United Kingdom, and two Italian generating stations were closed all
year. A UMWA strike, settled in December 1993, although not
widespread at mines served by NS Rail, idled four operations heavily
oriented toward export shipments. In contrast to the export market,
domestic coal remained steady in 1993, compared with 1992, as
extended periods of warmer-than-usual summer temperatures in the
Southeast resulted in increased business for a number of utility
PAGE 28
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
customers. NS Rail also did well in 1993 in the domestic steel
market. While total volumes in this market remained flat, compared
with 1992, NS Rail was able to increase its market share.
MERCHANDISE traffic volume in 1994 increased 8%, and revenues
increased 6%, compared with 1993. Merchandise carloads handled in 1994
were 3.0 million, compared with 2.8 million in 1993. Revenues in all six
market groups comprising merchandise traffic improved over 1993, with
four of the six increasing 8% or more.
CHEMICALS traffic rose 9% over 1993, and revenues increased 8%. A
strong economy strengthened the demand for chemicals, and shipments of
fertilizer and plastics were stronger in 1994 than in recent years. NS
Rail is continuing its expansion of rail-truck bulk distribution
facilities to handle a variety of dry and liquid products. One new
Thoroughbred Bulk Transfer facility opened in 1994, and construction
started on five more. These facilities should play an important part in
fostering the growth of chemicals traffic in 1995 and beyond.
PAPER/FOREST traffic and revenues were both about even with 1993,
reflecting weak production, severe winter weather and floods in south
Georgia. Some of the weakness in paper was offset by an 8% gain in lumber
traffic, in part, due to the opening of five new lumber distribution
centers. These centers facilitate combined rail-truck movements of lumber
and wood products to retail outlets. A resumption of moderate growth is
expected as paper market conditions improve and distribution center
traffic increases.
AUTOMOTIVE traffic remained steady in 1994, compared with 1993, and
revenues increased to their highest level in NS Rail's history. NS Rail's
revenues from automotive traffic have grown 32% since 1991, although only
1% of this growth occurred in 1994. Traffic volume in 1994 was adversely
affected by retooling at four plants located on NS Rail's lines. These
plants are scheduled to resume production between early 1995 and mid-
1996. During 1994, NS Rail implemented a number of train coordination
projects with Conrail and Florida East Coast Railway to improve transit
times for the growing network of automotive assembly plants. Over the
next few years, growth in NS Rail's automotive traffic is expected to
resume as the plant retoolings are completed and new plants come on line.
Production began at Toyota's second Georgetown, Ky., plant in March 1994
and at BMW's new facility in Greer, S.C., in September 1994. Mercedes'
plant in Alabama is expected to come on line in 1997.
AGRICULTURE traffic rose 7%, and revenues increased 9%. Early in the
year, favorable harvest conditions in NS Rail sourcing areas and poor
conditions elsewhere boosted traffic. Later in the year, NS Rail traffic
levels also were very strong, reflecting record corn and soybean harvests
and aggressive programs to increase car utilization through greater use
of 50- and 100-car unit trains. Agriculture has become a growth market
for NS Rail, with revenues increasing 21% during the last five years.
This group is expected to continue to grow as poultry consumption, with
the commensurate rise in demand for feed grain, increases. In 1995, three
new feed mills are expected to open along NS Rail's lines. NS Rail is
continuing efforts to locate new poultry processing facilities on its
lines. Growth also is expected from short-haul movements diverted from
truck due to improved train service.
METALS/CONSTRUCTION traffic and revenues both rose 9%. Most of the
revenue gain was in shipments of steel, as this industry had its best
year since 1973. Business also increased because of new steel plants and
from aluminum traffic diverted from truck. Late in 1994, NS Rail began
sheet-steel movements to Mexico under a new six-year contract.
Construction markets were strong, with output up 5%. Movements of sand
and gravel were up 13% due to increased highway repair and construction
activity. Growth prospects for metals/construction appear good. Business
is expected to benefit from new steel plants on NS Rail's lines, new
municipal solid waste movements and the increased business to Mexico.
PAGE 29
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
INTERMODAL traffic rose 13%, and revenues increased 14%, compared
with 1993. Intermodal is NS Rail's fastest growing line of business,
achieving record levels of volume, revenue and profitability in 1994.
Intermodal growth in 1994 was led by an increase in trailer-on-flatcar
(TOFC) business and, in particular, the less-than-truckload segment.
Notably, these customers, generally major trucking companies, tend to use
their own trailers rather than NS Rail's trailers. During 1994, these
trucking companies switched substantial amounts of business from highway
to rail. This trend is expected to continue in 1995 and beyond, although
at a rate lower than that experienced in 1994. Containers-on-flatcar
(COFC) business also improved in 1994. The export container segment,
NS Rail's largest COFC market, improved as the economies in Europe
recovered, and the countries in the Asia/Pacific region experienced
rapid growth in production. Revenues from domestic COFC movements
also improved, as NS Rail increased its market share. Much of this
growth was related to aggressive facility and transit-time improvements,
including expanding or upgrading five terminal facilities. Current
capacity, combined with three planned terminal expansions, will
accommodate an expected growth in COFC and double-stack business.
During 1993, all six merchandise market groups showed improvement
over 1992. Traffic volume increased 6%, and revenues increased 4%. The
largest revenue increases were in the intermodal group, up $30.9 million,
or 9%, the automotive group, up $28.0 million, or 7%, and
metals/construction, up $19.8 million, or 7%.
The 1993 growth in intermodal was led by a 21% increase in services
provided to Triple Crown Services Company (a partnership between
subsidiaries of NS and Consolidated Rail Corporation) due to strong
automotive shipments and expansion of service to the Northeast. COFC
revenues were up 6% compared with 1992, a smaller increase than in
previous years due to recessions in Europe and Japan. TOFC revenues were
up 11%, boosted by gains from haulage arrangements with truckload
carriers. The 1993 growth in automotive traffic was primarily due to
strong demand for vehicles produced at plants served by NS Rail. In
addition, NS Rail benefited from a full year of production at the
Ford/Nissan plant located near Avon Lake, Ohio. Successful marketing
efforts, such as the program with GM for just-in-time movement of auto
parts, also contributed to the higher traffic levels in 1993. The
improvement in the metals/construction group in 1993, compared with 1992,
was largely a result of increased iron and steel shipments related to
strong industry production and new plants located on NS Rail's lines.
Shipments of construction commodities also were strong due to a recovery
in housing.
Railway Operating Expenses
--------------------------
Railway operating expenses in 1994 totaled $2.87 billion, only 2%
higher than 1993, despite a 7% increase in traffic volume. Railway
operating expenses in 1993 were $2.81 billion, a 1% increase compared
with 1992.
The 1994 NS Rail railway operating ratio continued to be the best
among the major railroads in the United States and improved by more than
two full points compared with 1993.
RAILWAY OPERATING RATIO
(Shown as a Graph in the Annual Report to Stockholders)
(railway operating expenses divided by railway operating revenues)
1994 1993 1992 1991 1990
----- ----- ----- ----- -----
73.2% 75.3% 75.0% 77.9%* 78.0%
* Excludes special charge.
PAGE 30
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
The following table shows the changes in railway operating expenses
summarized by major classifications.
RAILWAY OPERATING EXPENSES
Increases (Decreases)
(In millions of dollars)
1994 vs. 1993 1993 vs. 1992
------------- -------------
Compensation and benefits $ (17.7) $ 14.6
Materials, services and rents 27.0 3.3
Depreciation 12.7 15.8
Diesel fuel 9.0 (3.2)
Casualties and other claims 16.5 (2.2)
Other 15.8 (4.1)
------- -------
Total $ 63.3 $ 24.2
======= =======
COMPENSATION AND BENEFITS represents about half of total railway
operating expenses and declined 1% in 1994, compared with 1993, but
increased 1% in 1993, compared with 1992.
The 1994 decline was principally a result of (1) lower accruals for
stock-based compensation plans as a result of a lower NS stock price; (2)
reduced accruals for postretirement benefits resulting from a change in
the benefit plan's creditable service period (see Note 13 on page 55);
(3) the expiration of the Railroad Retirement Repayment Tax in June 1993;
(4) the early retirement program in 1993 (see Note 12 on page 53); and
(5) productivity improvements as a result of continuing reductions in
train crew sizes.
The slightly higher expenses in 1993, compared with 1992, were
mainly due to accruals for postretirement and postemployment benefits
that, prior to 1993, were accounted for on a pay-as-you-go basis (see
"Required Accounting Changes" in Note 1 on page 43) and to higher costs
for stock-based compensation plans. A voluntary early retirement program
was completed in 1993, which resulted in a $42.4 million charge in
compensation and benefits expense (see Note 12 on page 53). Also in 1993,
a $46 million credit was recorded in compensation and benefits,
reflecting a partial reversal of the 1991 special charge (see Note 15 on
page 57).
MATERIALS, SERVICES AND RENTS consists of items used for maintenance
of road (rail line and related structures) and equipment (locomotives and
freight cars); equipment rents representing the cost to NS Rail of using
freight equipment owned by other railroads or private owners, less the
rent paid to NS Rail for the use of its equipment; and the cost of
services purchased from outside contractors, including the net costs of
operating joint (or leased) facilities with other railroads. This
category increased 4% in 1994, compared with 1993, and less than 1% in
1993, compared with 1992. The 1994 increase was principally due to higher
joint-facility and leased-road costs and to increased locomotive repair
costs resulting mostly from higher traffic volume. However, a decrease in
usage by other railroads of NS Rail's facilities also contributed to the
increase in joint facilities expense. The cost of leasing lines of road
is expected to increase in the future as a result of tentative
understandings reached with respect to certain North Carolina leases (see
Note 9 on page 51). Partly offsetting these increases was a decline in
equipment rent expenses resulting from the partial deprescription
(deregulation by the ICC) of car hire rates among railroads. NS Rail
expects additional future benefits as deprescription is fully
implemented.
DEPRECIATION expense (see Note 1, "Properties", on page 43, for NS
Rail's depreciation policy) was up 4% in 1994, compared with 1993, and 5%
in 1993, compared with 1992. The increases in both periods were due to
property additions, reflecting substantial levels of capital spending
during the three-year period ended December 31, 1994.
PAGE 31
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Diesel fuel costs increased 5% in 1994, compared with 1993, but
declined 2% in 1993, compared with 1992. The 1994 increase was entirely
due to higher consumption, driven by a 7% increase in carloadings. On
average, 1994's prices were slightly lower than 1993's. NS Rail uses
substantial quantities of diesel fuel; therefore, changes in price or
consumption have a significant impact on the cost of providing
transportation services. Diesel fuel expenses declined in 1993, compared
with 1992, mainly due to a lower price offset partially by increased
consumption.
CASUALTIES AND OTHER CLAIMS (including insurance costs, estimates of
costs related to personal injury, property damage and environmental
matters) increased 14% in 1994, compared with 1993, but decreased 2% in
1993, compared with 1992. The 1994 increase was primarily attributable to
environmental cleanup costs associated with a tankcar leak (see also
"Environmental Matters" on page 34) and to higher personal injury claim
settlement costs. By far the largest component, personal injury expenses,
which relates primarily to the cost of on-the-job employee injuries, has
shown a favorable trend in the number of incidents since 1990, reflecting
success in reducing accidental employee injuries. Unfortunately, the
favorable trend in the number of accidental injuries has been more than
offset by increased claim costs and higher costs related to non-
accidental "occupational" claims.
The rail industry remains uniquely susceptible to both accidental
injury and occupational claims because of an outmoded law, the Federal
Employers' Liability Act (FELA), originally passed in 1908 and applicable
only to railroads. This law provides the sole basis for compensating
railroad employees who sustain job-related injuries. The system produces
results that are unpredictable, inconsistent and frequently unfair, at a
cost to the rail industry that is two or three times greater than that
under the no-fault workers' compensation systems to which non-rail
competitors are universally subject. The railroads have been unsuccessful
so far in efforts to persuade Congress to replace the FELA with a no-
fault workers' compensation act.
OTHER expenses increased 12% in 1994, compared with 1993, and
declined 3% in 1993, compared with 1992. The increase over 1993 was due
to favorable property tax settlements in 1993 and to higher relocation
expenses in 1994 related to new job assignments following 1993's early
retirement program. The 1993 decline was largely the result of favorable
settlements of issues related to property and other taxes.
Other Income - Net
------------------
Nonoperating income decreased $11.0 million, or 19%, in 1994,
compared with 1993, but increased $8.1 million, or 16%, in 1993, compared
with 1992 (see Note 3 on page 46). These fluctuations principally arose
because of large gains on sales of property in 1993. Some of the decline
in 1994 was offset by an increase in interest income (see Note 3 on
page 46). Interest income in 1995 is expected to decrease, reflecting in
part the $400.1 million dividend to NS (see Note 2 on page 44).
Interest Expense on Debt
------------------------
Interest expense on debt declined 12% in 1994, compared with 1993,
and 28% in 1993, compared with 1992, due principally to lower levels of
equipment debt and fluctuations in the amount of capitalized interest
(see Note 6 on page 49).
Income Taxes
------------
Income tax expense in 1994 was $385.2 million for an effective rate
of 36.1%, compared with an effective rate of 43.6% in 1993 and 34.9% in
1992. Income tax expense in 1994 and 1993 was accrued under Statement of
Financial Accounting Standards No. 109, rather than under the prior
accounting rules (see "Required Accounting Changes" in Note 1 on
page 43). Absent the federal income tax rate increase imposed by the
Revenue Reconciliation Act of 1993, income tax expense in 1993 would have
been $352.0 million for an effective rate of 37.2%.
PAGE 32
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
The effective rate in 1994 benefited from favorable adjustments
resulting from settlement of the consolidated federal income tax years
1988 and 1989 and from a favorable adjustment upon filing the 1993 tax
return. Deferred tax expense was an unusually high proportion of total
tax expense in 1994. A corresponding reduction is reflected in 1994's
current tax expense for the effects of expenditures that affect book and
tax accounts in different years, primarily in the areas of compensation
and property.
Current income tax expense in 1993 was a higher proportion of total
taxes, primarily because of tax payments made in anticipation of Revenue
Agent Reports for the 1988-1989 federal income tax audit. Deferred tax
expense for 1993, compared with 1992, decreased primarily for the same
reason (see Note 4 on page 46 for the components of income tax expense).
Required Accounting Changes
---------------------------
Effective January 1, 1994, NS Rail adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (SFAS 115). The principal result was a significant
write-up of NS Rail's investment in NS stock. This non-cash adjustment
had no income statement effect and increased "Investments" and
"Stockholders' equity" in the December 31, 1994, Consolidated Balance
Sheet by $417.5 million and $253.1 million, respectively (see Note 1 on
page 43).
Effective January 1, 1993, NS Rail adopted required accounting for
postretirement benefits other than pensions, postemployment benefits and
income taxes (see Note 1 on page 43 for a discussion of these accounting
changes). The net cumulative effect of these non-cash adjustments
increased 1993's net income by $247.8 million.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION refers to the assets, liabilities and
stockholders' equity of an organization (see Consolidated Balance Sheets
on page 39). LIQUIDITY refers to the ability of an organization to
generate adequate amounts of cash, principally from operating results or
through borrowing power, to meet its short-term and long-term cash
requirements (see Consolidated Statements of Cash Flows on page 40).
CAPITAL RESOURCES refers to the ability of an organization to raise funds
through the sale of either debt or equity (stock) securities.
($ in millions) 1994 1993 1992 1991 1990
------ ------ ------ ------ ------
Cash and short-term
investments $180.9 $152.0 $ 64.0 $137.3 $291.3
Current assets to
current liabilities 1.1 1.3 1.2 1.1 1.1
Working capital $113.6 $259.4 $145.4 $ 73.5 $ 61.3
Debt to total capitalization 9.4% 10.9% 13.4% 14.6% 14.3%
Return on average
stockholders' equity 12.8% 12.0%* 13.1% 11.6%** 13.1%
* Excluding the cumulative effects of required accounting changes and
the prior years' effect of the federal income tax rate increase.
** Excluding special charge.
PAGE 33
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES, which is NS Rail's principal
source of liquidity, increased $289.4 million, or 33%, in 1994, compared
with 1993, but declined $82.3 million, or 9%, in 1993, compared with
1992. Since the 1982 consolidation, cash provided by operating activities
has been sufficient to fund dividend requirements, debt repayments and a
significant portion of capital spending (see Consolidated Statements of
Cash Flows on page 40). The improvement in 1994 was primarily a result of
increased income from operations, which was $127.2 million higher than
1993, and to lower income tax payments. The 1993 decline was largely
attributable to the timing of tax payments, which were $146.0 million
higher than in 1992 due to payments related to the 1988-1989 federal
income tax audit, higher 1993 earnings and the fact that 1992's tax
payments had been low.
Implementation of the labor portion of the 1991 special charge also
contributed to the fluctuations in cash provided by operations. In 1994,
1993 and 1992, $41.9 million, $36.1 million and $134.7 million,
respectively, were used for labor costs related to the special charge.
The lower payments in 1994 and 1993 were partly due to the failure to
reach agreement on terms for certain further labor savings. This
situation also led to a partial reversal of the 1991 special charge (see
Note 15 on page 57). Looking ahead, the labor portion of the special
charge is expected to require $30 million in each of the next two years
to achieve productivity gains permitted by the agreements. NS Rail
regards this cash outflow as an investment because, in view of the high
cost of labor and fringe benefits, these payments produce significant
future labor savings. In 1994, it is estimated that NS Rail's expenses
were reduced by $130 million as a result of these programs, and upon full
implementation of the labor agreements, there will be additional savings
of about $20 million per year.
CASH USED FOR INVESTING ACTIVITIES increased 45% in 1994, compared
with 1993, but declined 22% in 1993, compared with 1992. The higher use
in 1994 was due to significant advances made to NS which were then
dividended to NS at the end of the year (see Note 2 on page 44).
The other significant use of cash was for property additions,
totaling $639.6 million, largely for railway projects. Efforts to
maintain a reasonable level of capital spending while increasing business
are ongoing as NS Rail seeks to maximize utilization of its assets. In
this connection, NS Rail continues to review its route network to
identify areas where efficiency can be enhanced by coordinated agreements
with other railroads, or through sales or abandonments.
Large borrowings on corporate owned life insurance, reflected in
"Investment sales and other transactions" in the Consolidated Statements
of Cash Flows (see Note 5 on page 49), partially offset the use of cash
for intercompany advances and property additions in 1994.
In 1993, a combination of repayments on advances to NS and higher
proceeds from sales of property was responsible for the improvement
compared with 1992.
CAPITAL EXPENDITURES
(Shown as a Graph in the Annual Report to Stockholders)
(In millions of dollars)
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
Road $382.3 $411.0 $425.1 $392.8 $389.4
Equipment 235.0 218.1 187.8 193.1 203.3
Other property 22.3 0.1 4.2 77.2 9.4
------ ------ ------ ------ ------
Total $639.6 $629.2 $617.1 $663.1 $602.1
====== ====== ====== ====== ======
The preceding chart shows capital spending over the past five years,
and the following table summarizes track maintenance statistics and the
average ages of railway equipment.
PAGE 34
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
Track miles of rail installed 480 574 660 679 743
Miles of track surfaced 4,760 5,048 5,690 5,646 5,844
New crossties installed
(millions) 1.7 1.6 1.9 1.9 1.9
Freight car fleet (years) 21.9 21.3 20.9 20.2 19.9
Locomotive fleet (years) 15.8 15.1 14.5 14.2 14.8
The average age of locomotives retired during 1994 was 23.6 years.
Since 1988, NS Rail has rebodied more than 17,200 coal cars and plans to
continue that program at the rate of about 3,500 cars per year for the
next several years. This work, performed at NS Rail's Roanoke Car Shop,
converts hopper cars into high-capacity steel gondolas or hoppers. As a
result, the remaining serviceability of the freight car fleet is greater
than indicated by the increasing average age shown above.
For 1995, NS Rail is planning $686 million of capital spending and
anticipates new equipment financing of approximately $110 million.
Barring unforeseen events, total capital spending is expected to remain
in the $600 to $700 million range for the next few years. A substantial
portion of future capital spending is expected to be funded through
internally generated cash, although debt financing will continue as the
primary funding source for equipment acquisitions.
CASH USED FOR FINANCING ACTIVITIES increased 2% in 1994, compared
with 1993, and 16% in 1993, compared with 1992. These increases were
principally due to higher debt repayments and lower borrowings. Debt
activity over the past five years was as follows:
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
(In millions of dollars)
New debt $ 41.4 $ 38.5 $ 63.3 $123.8 $ 62.2
Debt repaid 108.3 99.9 84.2 93.8 93.7
Debt requirements for 1995 are expected to increase related to the
planned acquisition of 125 locomotives.
Hedging Activities
------------------
NS Rail has entered into hedging transactions relating to diesel
fuel purchases. No agreements related to the hedges were settled from
1992 through 1994, and outstanding agreements at December 31, 1994, were
less than $5 million.
ENVIRONMENTAL MATTERS
NS Rail is subject to various jurisdictions' environmental
laws and regulations. It is NS Rail's policy to record a liability
where such liability or loss is probable and can be reasonably
estimated. Claims, if any, against third parties for recovery of
cleanup costs incurred by NS Rail are reflected as receivables in the
balance sheet and are not netted against the associated NS Rail
liability. Environmental engineers participate in ongoing evaluations
of all identified sites, and--after consulting with counsel--any
necessary adjustments to initial liability estimates are made. NS
also has established an Environmental Policy Council, composed of
senior managers, to prescribe and direct its environmental
initiatives.
PAGE 35
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Operating expenses for environmental protection totaled
approximately $20 million in 1994 and are anticipated to decrease in
1995. Expenses in 1994 included $10.5 million associated with emergency
response and cleanup resulting from release of arsenic acid from a
tankcar leased by the shipper from a third party. Capital expenditures
for environmental projects amounted to approximately $4 million in 1994
and are expected to be approximately $4 million in 1995. As of December
31, 1994, NS Rail's balance sheet included a reserve for environmental
exposures in the amount of $50 million (of which $13 million is accounted
for as a current liability), which is NS Rail's best estimate of ultimate
liability at 80 identified locations. On that date, eight sites accounted
for $23 million of the reserve, and no individual site was considered to
be material. NS Rail anticipates that the majority of this liability will
be paid out over five years; however, some costs will be paid out over a
longer period.
At many of the 80 locations, NS Rail and/or certain of its
subsidiaries, usually in conjunction with a number of other parties, have
been identified as potentially responsible parties by the Environmental
Protection Agency (EPA) or similar state authorities under the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, or comparable state statutes, which often impose joint and several
liability for cleanup costs.
With respect to known environmental sites (whether identified by NS
Rail or by the EPA or comparable state authorities), estimates of NS
Rail's ultimate potential financial exposure for a given site or in the
aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available cleanup techniques, the
likely development of new cleanup technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it) and evolving statutory and regulatory
standards governing liability.
The risk of incurring environmental liability--for acts and
omissions, past, present and future--is inherent in the railroad
business. Some of the commodities, particularly those classified as
hazardous materials, in NS Rail's traffic mix can pose special risks that
NS Rail works diligently to minimize. In addition, NS Rail has land
holdings that serve as operating property, or which are leased or may
have been leased and operated by others, or held for sale. Because
certain conditions may exist on these properties related to environmental
problems that are latent or undisclosed, there can be no assurance that
NS Rail will not incur liabilities or costs with respect to one or more
of them, the amount and materiality of which cannot be estimated reliably
now. Moreover, lawsuits and claims involving these and other now-
unidentified environmental sites and matters are likely to arise from
time to time. The resulting liabilities could have a significant effect
on financial condition, results of operations or liquidity in a
particular year or quarter.
However, based on its assessments of the facts and circumstances now
known and, after consulting with its legal counsel, Management believes
that it has recorded appropriate estimates of liability for those
environmental matters of which NS Rail is aware. Further, Management
believes that it is unlikely that any identified matters, either
individually or in aggregate, will have a material adverse effect on NS
Rail's financial position, results of operations or liquidity.
INFLATION
Generally accepted accounting principles require the use of
historical costs in preparing financial statements. This approach
disregards the effects of inflation on the replacement cost of property
and equipment. NS Rail, a capital-intensive company, has approximately
$12 billion invested in such assets. The replacement costs of these
assets, as well as the related depreciation expense, would be
substantially greater than the amounts reported on the basis of
historical costs.
PAGE 36
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
RAIL INDUSTRY TRENDS
- Negotiations at the national level on agreements with the major
labor organizations were under way during 1994, but no new
agreements have been concluded. The outcome of these negotiations
is uncertain at this time.
- The Interstate Commerce Commission (ICC) may be abolished or its
role substantially redefined. Whether and to what extent the ICC's
traditional regulatory functions will be carried out at the
federal level--and if so, by what agency or agencies--remain
unclear and are a source of uncertainty.
- NS Rail and other railroads are continuing to seek opportunities
to share traffic routes and facilities, furthering the goals of
providing seamless service to customers and maximizing efficiency
of the respective railroads.
- NS Rail and the rail industry are continuing their efforts to
replace the FELA with no-fault workers' compensation laws
comparable to those covering employees in other industries.
- There have been some recent merger and consolidation overtures
within the railroad industry. NS Rail is closely monitoring this
activity in light of its own long-term strategic objectives to
protect the interests of its stockholders.
PAGE 37
Item 8. Financial Statements and Supplementary Data.
------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Quarterly Financial Data
(Unaudited)
Three Months Ended
------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In millions of dollars except per share amounts)
1994
----
Railway operating revenues $ 942.3 $ 997.8 $ 975.8 $1,002.2
Income from railway operations 226.5 275.0 266.2 281.2
Net income 152.2 177.4 164.7 187.7
Dividends per serial preferred share $ 0.65 $ 0.65 $ 0.65 $ 0.65
1993*
----
Railway operating revenues $ 910.8 $ 963.2 $ 914.3 $ 939.3
Income from railway operations 207.4 253.2 213.4 247.7
Income before accounting changes 147.5 161.1 76.4 149.2
Net income 395.3 161.1 76.4 149.2
Dividends per serial preferred share $ 0.65 $ 0.65 $ 0.65 $ 0.65
* 1993's results include implementation of required accounting changes
that resulted in a $247.8 million increase in first quarter net
income (see Note 1 on page 43). Additionally, 1993's results
include the effect of a 1% increase in the federal income tax
rate which resulted in a $60.8 million decrease in net income,
principally reflected in the third quarter (see Note 4 on page 46).
Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 1994, 1993 and 1992 38
Consolidated Balance Sheets
As of December 31, 1994 and 1993 39
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1993 and 1992 40-41
Consolidated Statements of Changes in
Stockholders' Equity Years ended
December 31, 1994, 1993 and 1992 42
Notes to Consolidated Financial Statements 43-61
Independent Auditors' Report 62
The Index to Consolidated Financial Statement Schedule appears
in Item 14 on page 64.
PAGE 38
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Income
Years ended December 31,
--------------------------------
1994 1993 1992
---- ---- ----
(In millions of dollars)
Railway operating revenues $3,918.1 $3,727.6 $3,709.1
Railway operating expenses:
Compensation and benefits
(Notes 12, 13 and 15) 1,371.1 1,388.8 1,374.2
Materials, services and rents 668.6 641.6 638.3
Depreciation 360.6 347.9 332.1
Diesel fuel 188.3 179.3 182.5
Casualties and other claims 135.0 118.5 120.7
Other 145.6 129.8 133.9
-------- -------- --------
Railway operating expenses 2,869.2 2,805.9 2,781.7
-------- -------- --------
Income from railway operations 1,048.9 921.7 927.4
Other income - net (Note 3) 46.6 57.6 49.5
Interest expense on debt (Note 6) 28.3 32.3 44.6
-------- -------- --------
Income before income taxes 1,067.2 947.0 932.3
Provision for income taxes (Note 4):
Income taxes 385.2 361.2 325.8
Adjustment of net deferred tax
liability for federal rate increase -- 51.6 --
-------- -------- --------
Total income taxes 385.2 412.8 325.8
-------- -------- --------
Income before accounting changes 682.0 534.2 606.5
Cumulative effect on years prior to 1993
of changes in accounting principles
(Note 1) for:
Income taxes -- 470.4 --
Postretirement benefits other than
pensions; and postemployment
benefits-net of taxes -- (222.6) --
-------- -------- --------
Net income $ 682.0 $ 782.0 $ 606.5
======== ======== ========
See accompanying notes to consolidated financial statements.
PAGE 39
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets
As of December 31,
---------------------
1994 1993
---- ----
(In millions of dollars)
Assets
Current assets:
Cash and cash equivalents $ 33.8 $ 2.3
Short-term investments (Note 14) 147.1 149.7
Accounts receivable net of allowance
for doubtful accounts of $5.4 million
and $9.2 million, respectively 552.7 522.9
Materials and supplies 58.5 65.9
Deferred income taxes (Note 4) 91.1 88.8
Other current assets (Note 5) 89.8 282.2
--------- --------
Total current assets 973.0 1,111.8
Due from NS (Note 2) 201.7 207.6
Investments (Notes 5 and 14) 598.4 160.1
Properties less accumulated depreciation (Note 6) 8,493.4 8,260.3
Other assets 22.7 20.6
--------- --------
Total assets $10,289.2 $ 9,760.4
========= =========
Liabilities and stockholders' equity
Current liabilities:
Short-term debt (Note 8) $ 27.2 $ 27.2
Accounts payable (Note 7) 529.3 461.7
Income and other taxes 119.1 141.3
Other current liabilities (Note 7) 118.0 114.7
Current maturities of long-term debt (Note 8) 65.8 107.5
--------- --------
Total current liabilities 859.4 852.4
Long-term debt (Note 8) 474.0 497.4
Other liabilities (Note 10) 868.2 945.3
Minority interests 2.1 2.2
Deferred income taxes (Note 4) 2,645.0 2,278.2
--------- --------
Total liabilities 4,848.7 4,575.5
--------- --------
Stockholders' equity:
Serial preferred stock (Note 11) 54.8 54.8
Common stock (Note 11) 166.7 166.7
Other capital 515.0 515.0
Unrealized gain on marketable securities (Note 1) 253.1 --
Retained income 4,450.9 4,448.4
--------- --------
Total stockholders' equity 5,440.5 5,184.9
--------- --------
Total liabilities and stockholders' equity $10,289.2 $ 9,760.4
========= =========
See accompanying notes to consolidated financial statements.
PAGE 40
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
Years ended December 31,
----------------------------
1994 1993 1992
---- ---- ----
(In millions of dollars)
Cash flows from operating activities:
Net income $ 682.0 $ 782.0 $ 606.5
Reconciliation of net income to net cash
provided by operating activities:
Net cumulative effect of changes
in accounting principles -- (247.8) --
Special charge payments (41.9) (36.1) (134.7)
Depreciation 361.3 348.7 333.1
Deferred income taxes 114.2 92.9 76.8
Nonoperating gains on property sales (7.8) (31.9) (13.9)
Changes in assets and liabilities
affecting operations:
Accounts receivable (29.8) (25.9) (2.0)
Materials and supplies 7.4 5.9 (8.4)
Other current assets (12.5) (8.0) (3.2)
Current liabilities other than debt 6.7 (23.4) (3.7)
Other - net 74.8 8.6 96.8
------- ------- -------
Net cash provided by
operating activities 1,154.4 865.0 947.3
Cash flows from investing activities:
Property additions (639.6) (629.2) (617.1)
Property sales and other transactions 52.9 80.3 43.9
Investment purchases (45.9) (86.3) (70.5)
Investment sales and other transactions 249.2 8.0 9.8
Advances due from NS (Note 2) (394.2) 97.0 (94.1)
Short-term investments - net 1.0 (6.0) 43.0
------- ------- -------
Net cash used for investing activities (776.6) (536.2) (685.0)
Cash flows from financing activities:
Dividends (Note 2) (279.4) (276.6) (271.7)
Long-term debt proceeds 41.4 38.5 63.3
Long-term debt repayments (108.3) (99.9) (84.2)
------- ------- -------
Net cash used for financing activities (346.3) (338.0) (292.6)
------- ------- -------
Net increase (decrease) in cash
and cash equivalents 31.5 (9.2) (30.3)
Cash and cash equivalents:
At beginning of year 2.3 11.5 41.8
------- ------- -------
At end of year $ 33.8 $ 2.3 $ 11.5
======= ======= =======
(continued)
PAGE 41
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows (continued)
Years ended December 31,
----------------------------
1994 1993 1992
---- ---- ----
(In millions of dollars)
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized) $ 49.1 $ 58.4 $ 51.8
Income taxes $ 252.2 $ 337.1 $ 191.1
See accompanying notes to consolidated financial statements.
PAGE 42
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Changes in Stockholders' Equity
Unrealized
Serial Gain on
Preferred Common Other Marketable Retained
Stock Stock Capital Securities Income Total
--------- ------ ------- ---------- -------- -----
(In millions of dollars)
Balance December 31, 1991 $ 54.9 $166.7 $515.0 $ -- $3,712.9 $4,449.5
Net income - 1992 606.5 606.5
Cash dividends:
Serial preferred stock,
$2.60 per share (2.9) (2.9)
Common stock,
$16.13 per share (268.8) (268.8)
------ ------ ------ ------ -------- --------
Balance December 31, 1992 54.9 166.7 515.0 -- 4,047.7 4,784.3
Net income - 1993 782.0 782.0
Cash dividends:
Serial preferred stock,
$2.60 per share (2.9) (2.9)
Common stock,
$16.42 per share (273.7) (273.7)
Noncash dividends on
common stock (Note 2) (104.7) (104.7)
Other (0.1) (0.1)
------ ------ ------ ------ -------- --------
Balance December 31, 1993 54.8 166.7 515.0 -- 4,448.4 5,184.9
Net income - 1994 682.0 682.0
Cash dividends:
Serial preferred stock,
$2.60 per share (2.9) (2.9)
Common stock,
$16.59 per share (276.5) (276.5)
Noncash dividends on
common stock (Note 2) (400.1) (400.1)
Unrealized gain on
investments (Note 1) 253.1 253.1
------ ------ ------ ------ -------- --------
Balance December 31, 1994 $ 54.8 $166.7 $515.0 $253.1 $4,450.9 $5,440.5
====== ====== ====== ====== ======== ========
See accompanying notes to consolidated financial statements.
PAGE 43
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
The following notes are an integral part of the consolidated financial
statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include Norfolk Southern
Railway Company, Norfolk and Western Railway Company (NW) and their
majority-owned and controlled subsidiaries (collectively, NS Rail). All
significant intercompany balances and transactions have been eliminated
in consolidation (see Note 16 for NW's summarized consolidated financial
information).
Cash Equivalents
----------------
"Cash equivalents" are highly liquid investments purchased three
months or less from maturity.
Investments
-----------
"Investments" are reported at amortized cost or fair value depending
upon their classification as held-to-maturity, trading or available-for-
sale securities in accordance with SFAS No. 115 (see "Required Accounting
Changes").
Materials and Supplies
----------------------
"Materials and supplies," consisting mainly of fuel oil and items
for maintenance of property and equipment, are stated at average cost.
The cost of materials and supplies expected to be used in capital
additions or improvements is included in "Properties."
Properties
----------
"Properties" are stated principally at cost and are depreciated
using group depreciation. Rail is primarily depreciated on the basis of
use measured by gross ton-miles. The effect of this method is to write
off these assets over 42 years on average. Other properties are
depreciated generally using the straight-line method over estimated
service lives at annual rates that range from 1% to 20%. In 1994, the
overall depreciation rate averaged 2.7% for roadway and 4.0% for
equipment. NS Rail capitalizes interest on major capital projects during
the period of their construction. Maintenance expense is recognized when
repairs are performed. When properties other than land are sold or
retired in the ordinary course of business, the cost of the assets, net
of sale proceeds or salvage, is charged to accumulated depreciation
rather than recognized through income. Gains and losses on disposal of
land, a nondepreciable asset, are included in other income (see Note 3).
Revenue Recognition
-------------------
Revenue is recognized proportionally as a shipment moves from origin
to destination.
PAGE 44
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Required Accounting Changes
---------------------------
1994 - Effective January 1, 1994, NS Rail adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115), which addresses
the accounting and reporting for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities. The implementation of SFAS 115 increased "Investments," the
deferred tax liability and "Stockholders' equity" at December 31, 1994,
and had no impact on earnings. The total unrealized holding gain on NS
Rail's investments classified as "available for sale" at December 31,
1994, net of related deferred taxes is reflected as a separate component
of "Stockholders' equity" in the Consolidated Balance Sheet at December
31, 1994 (see also Note 14).
1993 - Effective January 1, 1993, NS Rail adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106), and Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" (SFAS 112). SFAS 106 requires accrual of the
cost of specified health care and death benefits over an employee's
creditable service period rather than, as was the previously prevailing
practice, accounting for such expenses on a pay-as-you-go basis. SFAS 112
requires recognition of the cost of benefits payable to former or
inactive employees after employment but before retirement on an accrual
basis. For NS Rail, such postemployment benefits consist principally of
benefit obligations under the long-term disability plan. NS Rail
recognized the effects of these changes in accounting on the immediate
recognition basis. The cumulative effect on years prior to 1993 of
adopting SFAS 106 and 112 increased pretax expenses $336.3 million
($208.4 million after-tax), and $22.8 million ($14.2 million after-tax),
respectively (see also Note 13).
Also effective January 1, 1993, NS Rail adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109). SFAS 109 requires a liability approach for measuring deferred
tax assets and liabilities based on differences between the financial
statement and tax bases of assets and liabilities at each balance sheet
date using enacted tax rates in effect when those differences are
expected to reverse. Under SFAS 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Under the deferred method, which
applied for 1992 and prior years, deferred income taxes were recognized
for income and expense items that were reported in different years for
financial reporting purposes and income tax purposes using the tax rate
applicable for the year of the calculation, and deferred taxes were not
adjusted for subsequent changes in tax rates. The cumulative effect on
years prior to 1993 of adopting SFAS 109 increased net income $470.4
million (see also Note 4).
Reclassifications
-----------------
Certain reclassifications of related party balances have been made
in the December 31, 1993, Consolidated Balance Sheet to conform to the
1994 presentation.
2. RELATED PARTIES
General
-------
NS is the parent holding company of NS Rail. The costs of functions
performed by NS are allocated to NS Rail. Rail operations are coordinated
at the holding company level by the NS Executive Vice President-
Operations.
PAGE 45
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
2. RELATED PARTIES (continued)
Non-cash Dividends
------------------
In December 1994, NS Rail declared and issued to NS a non-cash
dividend of $400.1 million which was settled by reduction of NS Rail's
interest-bearing advances due from NS.
On April 1, 1993, NS Rail declared and issued to NS a $104.7 million
non-cash dividend representing the net assets of several non-railroad
subsidiaries. These subsidiaries, principally involved in real estate,
produce a small amount of rental income which are no longer part of NS
Rail's results.
Non-cash dividends are excluded from the Consolidated Statements of
Cash Flows.
Intercompany Accounts
---------------------
December 31,
---------------------------------------
1994 1993
----------------- -----------------
Average Average
Interest Interest
Balance Rate Balance Rate
------- -------- ------- --------
(In millions of dollars)
Due from NS:
Advances $ 336.3 2.6% $ 320.2 2.4%
Due to NS:
Notes 134.6 5.7% 112.6 4.0%
------- -------
Due from NS-net $ 201.7 $ 207.6
======= =======
During 1993, NW issued a note for $112.6 million to an NS subsidiary
for the purchase of a portfolio of short-term investments. This non-cash
transaction was excluded from the Consolidated Statement of Cash Flows.
Interest is applied to certain advances at the average NS yield on
short-term investments and to the notes at specified rates. Included in
interest income is $15.6 million, $6.7 million and $7.7 million in 1994,
1993 and 1992, respectively, related to amounts due from NS.
Intercompany Federal Income Tax Accounts
----------------------------------------
In accordance with the NS Tax Allocation Agreement, intercompany
federal income tax accounts are recorded between companies in the NS
consolidated group. At December 31, 1994 and 1993, NS Rail had
intercompany federal income tax payables (which are included in "Deferred
income taxes" in the Consolidated Balance Sheets) of $261.0 million and
$175.1 million, respectively.
Cash Required for NS Stock Purchase Program and NS Debt
-------------------------------------------------------
Since 1987, the NS Board of Directors has authorized the purchase
and retirement of up to 65 million shares of NS common stock. Purchases
under the programs initially were made with internally generated cash.
Beginning in May 1990, NS financed some purchases with proceeds from the
sale of commercial paper notes. As of December 31, 1994 and 1993, NS had
recorded $517.3 million and $521.8 million, respectively, of notes under
this program. In March 1991, NS issued $250 million of long-term notes
and, in February 1992, NS issued an additional $250 million of long-term
notes in part to repay a portion of the commercial paper notes, as well
as to fund additional stock purchases.
PAGE 46
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
2. RELATED PARTIES (continued)
Since the first purchases in December 1987 and through December 31,
1994, NS has purchased and retired 59,160,800 shares of its common stock
under these programs at a cost of $2.5 billion. Future purchases are
dependent on market conditions, the economy, cash needs and alternative
investment opportunities.
Consistent with the earlier cash purchases, a significant portion of
the funding for future NS stock purchases, either in the form of direct
cash or cash used for debt service, will come from NS Rail through
intercompany advances or dividends to NS.
3. OTHER INCOME - NET
1994 1993 1992
------- ------- -------
(In millions of dollars)
Interest income (Note 2) $ 34.4 $ 15.7 $ 19.4
Rental income 18.0 18.6 22.5
Gains from sales of property 7.8 31.9 13.9
Dividends from NS 13.9 13.5 13.1
Corporate-owned life insurance - net 7.9 10.8 12.3
Other interest expense (24.9) (26.7) (22.3)
Taxes on nonoperating property (3.7) (4.2) (6.9)
Other - net (6.8) (2.0) (2.5)
------ ------ ------
Total $ 46.6 $ 57.6 $ 49.5
====== ====== ======
4. INCOME TAXES
Provision for Income Taxes
--------------------------
1994 1993 1992
------ ------ ------
(In millions of dollars)
Current:
Federal $236.0 $279.6 $217.9
State 35.0 40.3 31.1
------ ------ ------
Total current taxes 271.0 319.9 249.0
------ ------ ------
Deferred:
Federal 95.2 26.4 66.6
State 19.0 14.9 10.2
Adjustment of net deferred tax
liability for federal rate increase -- 51.6 --
------ ------ ------
Total deferred taxes 114.2 92.9 76.8
------ ------ ------
Provision for income taxes $385.2 $412.8 $325.8
====== ====== ======
PAGE 47
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
4. INCOME TAXES (continued)
1993 Federal Income Tax Rate Increase
-------------------------------------
In August 1993, Congress enacted the Revenue Reconciliation Act of
1993, which increased the federal corporate income tax rate from 34% to
35%, retroactive to January 1, 1993. The tax rate increase had two
components which, as required by SFAS 109, were recognized in 1993's
earnings.
The first component relates to the increased income tax rate's
effect on 1993's earnings, which increased the provision for income taxes
and reduced net income by $9.2 million. The second component increased
the provision for the net deferred tax liability in the 1993 Consolidated
Balance Sheet, which reduced net income by $51.6 million.
Reconciliation of Statutory Rate to Effective Rate
--------------------------------------------------
Total income taxes as reflected in the Consolidated Statements of
Income differ from the amounts computed by applying the statutory federal
corporate tax rate as follows:
1994 1993 1992
-------------- -------------- --------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
(In millions of dollars)
Federal income tax at
statutory rate $373.5 35.0 $331.5 35.0 $317.0 34.0
State income taxes, net
of federal tax benefit 35.1 3.3 35.8 3.8 27.2 2.9
Corporate-owned
life insurance (10.6) (1.0) (8.7) (0.9) (9.0) (1.0)
Dividend and equity income (4.7) (0.4) (5.0) (0.5) (4.7) (0.5)
Other - net (8.1) (0.8) 7.6 0.7 (4.7) (0.5)
------ ---- ------ ---- ------ ----
385.2 36.1 361.2 38.1 325.8 34.9
Adjustment of net deferred
tax liability for federal
rate increase -- -- 51.6 5.5 -- --
------ ---- ------ ---- ------ ----
Provision for
income taxes $385.2 36.1 $412.8 43.6 $325.8 34.9
====== ==== ====== ==== ====== ====
Inclusion in Consolidated Return
--------------------------------
NS Rail is included in the consolidated federal income tax return of
NS. The provision for current income taxes in the Consolidated Statements
of Income reflects NS Rail's portion of NS' consolidated tax provision.
Tax expense or tax benefit is recorded on a separate company basis
whether or not such benefit would be currently available on a separate
company basis.
PAGE 48
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
4. INCOME TAXES (continued)
Deferred Income Tax Expense
---------------------------
Some income and expense items are reported differently for financial
reporting and income tax purposes. Provisions for deferred income taxes
were made in recognition of these differences in accordance with SFAS 109
for 1994 and 1993 (see Note 1) and with APB Opinion No. 11 for 1992.
The components of deferred income tax expense for 1992 were as
follows: employee separation costs, $48.9 million; property-related
adjustments, principally depreciation, $41.4 million; casualty and other
claims, $(5.0) million; tax benefit leases, $(7.2) million; employee
benefits, $(2.8) million; and other items-net, $1.5 million--a total of
$76.8 million.
Deferred Tax Assets and Liabilities
-----------------------------------
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1994 and 1993, were as follows:
December 31,
---------------------
1994 1993
--------- ---------
(In millions of dollars)
Deferred tax assets:
Reserves, including casualty and other claims $ 163.7 $ 167.7
Employee benefits 144.7 153.7
Postretirement benefits other than pension
and postemployment benefits 132.1 147.5
Taxes, including state and property 154.5 153.2
Other 1.4 2.9
--------- ---------
Total gross deferred tax assets 596.4 625.0
Less valuation allowance (0.6) (2.0)
--------- ---------
Net deferred tax assets 595.8 623.0
--------- ---------
Deferred tax liabilities:
Property (2,679.8) (2,588.3)
Unrealized holding gains (164.4) --
Other (44.5) (49.0)
--------- ---------
Total gross deferred tax liabilities (2,888.7) (2,637.3)
Intercompany federal tax payable-net (261.0) (175.1)
--------- ---------
Net deferred tax liability (2,553.9) (2,189.4)
Net current deferred tax assets 91.1 88.8
--------- ---------
Net long-term deferred tax liability $(2,645.0) $(2,278.2)
========= =========
Except for amounts for which a valuation allowance is provided,
Management believes deferred tax assets will be realized. The valuation
allowance for deferred tax assets as of January 1, 1993, was $3.4
million. The net change in the total valuation allowance was a $1.4
million decrease for both 1994 and 1993.
PAGE 49
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
4. INCOME TAXES (continued)
Internal Revenue Service (IRS) Reviews
--------------------------------------
Consolidated federal income tax returns have been examined and
Revenue Agent Reports have been received for all years up to and
including 1989. The consolidated federal income tax returns for 1990
through 1992 are being audited by the IRS. Management believes that
adequate provision has been made for any additional taxes and interest
thereon that might arise as a result of these examinations.
Tax Benefit Leases
------------------
In January 1995, the United States Tax Court issued a preliminary
decision that would disallow some of the tax benefits an NS Rail
subsidiary purchased from a third party pursuant to a safe harbor lease
agreement in 1981. Management continues to believe that NS Rail should
realize no loss from this decision because the lease agreement provides
for full indemnification if any such disallowance is sustained.
5. INVESTMENTS
December 31,
--------------------
1994 1993
------- -------
(In millions of dollars)
Marketable equity securities at fair value
in 1994, at cost in 1993 (see Note 14) $ 439.7 $ 20.6
Long-term portion of corporate-owned
life insurance at net cash surrender value 140.1 118.5
Other 18.6 21.0
------- -------
Total $ 598.4 $ 160.1
======= =======
Corporate-Owned Life Insurance
------------------------------
The planned borrowing of $220 million of cash surrender value on
certain corporate-owned life insurance policies resulted in this amount
being reclassified in the December 31, 1993, Consolidated Balance Sheet
from "Investments" to "Other current assets." The borrowing, which was
completed in May 1994, resulted in the decline in "Other current assets."
6. PROPERTIES
December 31,
------------------------
1994 1993
--------- ---------
(In millions of dollars)
Transportation property:
Road $ 7,934.4 $ 7,691.0
Equipment 4,440.0 4,331.1
Other property 84.5 66.1
--------- ---------
12,458.9 12,088.2
Less - Accumulated depreciation 3,965.5 3,827.9
--------- ---------
Net properties $ 8,493.4 $ 8,260.3
========= =========
PAGE 50
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
6. PROPERTIES (continued)
Capitalized Interest
--------------------
Total interest cost incurred on long-term debt for 1994, 1993 and
1992 was $46.1 million, $53.9 million and $62.5 million, respectively, of
which $17.8 million, $21.6 million and $17.9 million was capitalized.
7. CURRENT LIABILITIES
December 31,
----------------------
1994 1993
------- -------
(In millions of dollars)
Accounts payable:
Accounts and wages payable $ 217.2 $ 180.9
Casualty and other claims 164.1 155.5
Vacation liability 71.0 67.6
Equipment rents payable - net 67.0 53.9
Other 10.0 3.8
------- -------
Total $ 529.3 $ 461.7
======= =======
Other current liabilities:
Prepaid amounts on forwarded traffic $ 72.8 $ 75.4
Interest payable 20.0 14.9
Retiree health and death
benefit obligation (Note 13) 21.5 20.0
Other 3.7 4.4
------- -------
Total $ 118.0 $ 114.7
======= =======
8. DEBT
Short-Term Debt
---------------
Short-term debt consists of $27.2 million of notes assumed in
connection with the 1990 acquisition of a coal terminal facility. The
weighted average interest rate on these notes was 2.6% in 1994 and 2.3%
in 1993.
PAGE 51
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
8. DEBT (continued)
Long-Term Debt
--------------
December 31,
----------------------
1994 1993
------- -------
(In millions of dollars)
Equipment obligations at an
average rate of 8.1% maturing to 2009 $ 497.2 $ 521.8
Mortgage bonds at an average
rate of 4.1% maturing to 2003 33.9 74.4
Other debt at an average rate
of 5.5% maturing to 2015 6.7 6.6
Capitalized leases at an average
rate of 8.1% maturing to 2000 2.0 2.1
------- -------
Total long-term debt 539.8 604.9
------- -------
Less: Current maturities 65.8 107.5
------- -------
Long-term debt less current maturities $ 474.0 $ 497.4
======= =======
Long-term debt matures as follows:
1996 $ 73.3
1997 40.4
1998 40.5
1999 111.2
2000 and subsequent years 208.6
-------
Total $ 474.0
=======
A substantial portion of NS Rail's properties and certain
investments in affiliated companies are pledged as collateral for much of
the debt.
9. LEASE COMMITMENTS
NS Rail is committed under long-term lease agreements, which expire
on various dates through 2067, for equipment, lines of road and other
property. Future minimum operating lease payments are as follows:
Operating Lease
Commitments
---------------
(In millions of dollars)
1995 $ 44.9
1996 43.3
1997 39.2
1998 36.8
1999 31.5
2000 and subsequent years 560.9
-------
Total $ 756.6
=======
PAGE 52
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
9. LEASE COMMITMENTS (continued)
NS Rail has reached tentative understandings for leases on
approximately 300 miles of road in North Carolina. These leases call for
payment of an annual rental of $8 million in 1995, with inflation
adjustments in succeeding years. These estimated payments are included in
the future minimum operating lease commitments above.
Operating Lease Expense
-----------------------
1994 1993 1992
------ ------ ------
(In millions of dollars)
Minimum rents $ 46.7 $ 33.5 $ 29.2
Contingent rents 45.4 36.1 42.5
------ ------ ------
Total $ 92.1 $ 69.6 $ 71.7
====== ====== ======
10. OTHER LIABILITIES
December 31,
----------------------
1994 1993
------- -------
(In millions of dollars)
Casualty and other claims $ 264.2 $ 277.7
Net pension obligation (Note 12) 84.8 98.3
Retiree health and death
benefit obligation (Note 13) 277.9 286.1
Other liabilities 241.3 283.2
------- -------
Total $ 868.2 $ 945.3
======= =======
11. STOCK
Preferred
---------
There are 10,000,000 shares of no par value serial preferred stock
authorized. This stock may be issued in series from time to time at the
discretion of the Board of Directors with any series having such voting
and other powers, dividends and other preferences as deemed appropriate
at the time of issuance. At December 31, 1994 and 1993, 1,197,027 shares
of $2.60 Cumulative Preferred Stock, Series A (Series A Stock) were
issued, and 1,096,907 shares were held other than by subsidiaries. The
Series A Stock has a $50 per share stated value. The Series A Stock is
callable at any time at $50 per share plus accrued dividends and has one
vote per share on all matters, voting as a single class with holders of
other stock.
On June 2, 1989, NS announced that it intended to purchase up to
250,000 shares of the outstanding Series A Stock during the subsequent
two-year period. In May 1991, NS extended the previously announced stock
purchase program through 1993. In March 1994, NS announced that it would
continue purchasing up to 250,000 shares of the Series A Stock through
1996. NS had purchased 93,927 shares at a total cost of approximately
$3.3 million as of December 31, 1994. NS purchased the shares in regular
brokerage transactions on the open market at prevailing prices. At year
end 1994 and 1993, NS held 94,022 shares and 77,721 shares, respectively.
PAGE 53
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
11. STOCK (continued)
Preference
----------
There are 10,000,000 shares of no par value serial preference stock
authorized. None of these shares has been issued.
Common
------
There are 50,000,000 shares of no par value common stock with a
stated value of $10 per share authorized. NS owns all 16,668,997 shares
issued and outstanding at December 31, 1994 and 1993.
12. PENSION PLANS
NS Rail's defined benefit pension plans, which principally cover
salaried employees, are part of NS' retirement plans. Pension benefits
are based primarily on years of creditable service with NS and its
participating subsidiary companies and compensation rates near
retirement. Contributions to the plans are made on the basis of not less
than the minimum funding standards set forth in the Employee Retirement
Income Security Act of 1974, as amended. Assets in the plans consist
mainly of common stocks. The following data relate principally to NS
Rail's portion of the combined NS plans, since no separate NS Rail data
are available.
Pension Cost (Benefit) Components
---------------------------------
1994 1993 1992
------- ------- -------
(In millions of dollars)
Service cost-benefits
earned during the year $ 10.2 $ 10.7 $ 10.8
Interest cost on projected
benefit obligation 59.9 58.6 57.5
Actual return on assets in plan (16.6) (105.6) (68.6)
Net amortization and deferral (62.9) 27.9 (7.0)
------- ------- -------
Net pension benefit $ (9.4) $ (8.4) $ (7.3)
======= ======= =======
Pension cost is determined based on an actuarial valuation that
reflects appropriate assumptions as of the beginning of each year. The
funded status of the plans is determined using appropriate assumptions as
of each year end. A summary of the major assumptions follows:
1994 1993 1992
----- ----- -----
Discount rate for determining
funded status 8.50% 7.25% 8.25%
Future salary increases 6% 6% 6%
Return on assets in plans 9% 9% 9%
PAGE 54
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
12. PENSION PLANS (continued)
The funded status of the plans and the amounts reflected in the
accompanying balance sheets were as follows:
December 31,
--------------------------------------
1994 1993
------------------ ------------------
Funded Unfunded Funded Unfunded
Plans Plans Plans Plans
-------- -------- -------- --------
(In millions of dollars)
Actuarial present value of
benefit obligations:
Vested benefits $ 626.5 $ 40.6 $ 709.4 $ 45.5
Non-vested benefits -- -- -- --
------- ------- ------- -------
Accumulated benefit
obligation 626.5 40.6 709.4 45.5
Effect of expected future
salary increases 92.1 9.0 104.0 4.7
------- ------- ------- -------
Projected benefit obligation 718.6 49.6 813.4 50.2
Fair value of assets in plans 871.4 -- 923.4 --
------- ------- ------- -------
Funded status 152.8 (49.6) 110.0 (50.2)
Unrecognized initial net asset (43.7) -- (51.1) --
Unrecognized gain (loss) (162.3) 10.1 (131.4) 15.3
Unrecognized prior service cost 3.6 4.3 8.3 0.8
------- ------- ------- -------
Net pension liability
included in the
balance sheets $ (49.6) $ (35.2) $ (64.2) $ (34.1)
======= ======= ======= =======
Early Retirement Program in 1993
--------------------------------
During 1993, NS Rail completed a voluntary early retirement program
for salaried employees that resulted in a $42.4 million charge in
"Compensation and benefits" expense. The principal benefit for those who
participated in the program was enhanced pension benefits, which are
reflected in the accumulated benefit obligation.
Transfer of Pension Plan Assets
-------------------------------
During 1991, the NS Retirement Plan was amended to establish a
Section 401(h) account for the purpose of transferring a portion of
pension plan assets in excess of the projected actuarial liability to
fund current-year medical payments for retirees. No transfer was made in
1994. Since 1991, $42.5 million has been transferred from the pension
plan to reimburse NS for retirees' medical payments. NS contributed equal
amounts to a Voluntary Employee Beneficiary Association trust in those
years to fund future benefit costs for retirees (see Note 13).
401(k) Plan
-----------
NS Rail provides a 401(k) savings plan for salaried employees. Under
the plan, NS Rail matches a portion of the employee contributions,
subject to applicable limitations. NS Rail's expenses under this plan
were $5.0 million, $5.1 million and $4.7 million in 1994, 1993 and 1992,
respectively.
PAGE 55
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
NS Rail provides specified health care and death benefits to
eligible retired employees and their dependents, principally salaried
employees. Under the present plans, which may be amended or terminated at
NS Rail's option, a defined percentage of health care expenses is
covered, reduced by any deductibles, co-payments, Medicare payments and,
in some cases, coverage provided by other group insurance policies. The
cost of such health care coverage to a retiree may be determined, in
part, by the retiree's years of creditable service with NS Rail prior to
retirement. Death benefits are determined based on various factors,
including, in some cases, salary at time of retirement.
NS Rail continues to fund benefit costs principally on a pay-as-you-
go basis. However, in 1991, NS Rail established a Voluntary Employee
Beneficiary Association (VEBA) account to fund a portion of the cost of
future health care benefits for retirees. Although no 401(h) transfer
occurred in 1994 (see Note 12), NS Rail made a corporate contribution of
$10 million to the VEBA.
Effective January 1, 1994, NS Rail amended the attribution period
for postretirement health care benefits. The amendment provides for
benefits to be determined ratably over a 10-year period based on
creditable service commencing at age 45, or from date of hire if
employment began after age 45. The amendment reduced the accumulated
postretirement health care benefit obligation by $80 million and 1994's
net periodic postretirement benefit cost by $13 million.
The following table sets forth these plans' total accumulated
postretirement benefit obligation, reconciled with the accrued
postretirement benefit obligation:
December 31,
---------------------------------------------
1994 1993
---------------------- ---------------------
Health Care Death Health Care Death
Benefits Benefits Benefits Benefits
----------- -------- ----------- --------
(In millions of dollars)
Accumulated postretirement
benefit obligation:
Retirees $ 159.8 $ 76.6 $ 169.2 $ 83.3
Fully eligible active
plan participants 11.7 4.5 25.4 8.4
Other active plan
participants 32.0 11.0 116.8 16.3
------- ------- ------- -------
Total 203.5 92.1 311.4 108.0
Plan assets at fair value 54.5 -- 44.5 --
------- ------- ------- -------
Funded status (149.0) (92.1) (266.9) (108.0)
Unrecognized loss (gain) 11.1 (4.1) 51.3 17.5
Unrecognized prior
service cost (benefit) (65.3) -- -- --
------- ------- ------- -------
Accrued postretirement
benefit obligation $(203.2) $ (96.2) $(215.6) $ (90.5)
======= ======= ======= =======
PAGE 56
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued)
A summary of the postretirement benefit cost follows:
1994 1993
---------------------- ---------------------
Health Care Death Health Care Death
Benefits Benefits Benefits Benefits
----------- -------- ----------- --------
(In millions of dollars)
Service cost-benefits
attributable to service
during the year $ 12.3 $ 0.8 $ 5.8 $ 0.6
Interest cost on accumulated
postretirement benefit
obligation 16.2 7.6 20.4 6.6
Actual return on plan assets -- -- (1.9) --
Net amortization and deferral (14.5) 0.6 (0.7) --
------- ------- ------- -------
Net periodic postretire-
ment benefit cost $ 14.0 $ 9.0 $ 23.6 $ 7.2
======= ======= ======= =======
For measurement purposes, a 12% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1994; the
rate in 1995 will be 11.5% and is assumed to decrease gradually to an
ultimate rate of 6% for 2005 and remain at that level thereafter. The
health care cost trend rate has a significant effect on the amounts
reported in the financial statements. To illustrate, increasing the
assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation as of
December 31, 1994, by about $22 million and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost
for the year 1994 by about $4.1 million.
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation, the salary increase
assumption and the long-term rate of return on plan assets are the same
as those used for the pension plans (see table of rate assumptions in
Note 12).
The VEBA trust holding the plan assets is not expected to be subject
to federal income taxes as the assets are invested entirely in trust-
owned life insurance.
Under collective bargaining agreements, NS Rail and certain
subsidiaries participate in a multi-employer benefit plan, which provides
certain postretirement health care and life insurance benefits to
eligible union employees. Premiums under this plan are expensed as
incurred and amounted to $4.8 million, $5.3 million and $5.6 million in
1994, 1993 and 1992, respectively.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of "Cash and cash equivalents," "Accounts
receivable," "Short-term debt" and "Accounts payable" approximate
carrying values because of the short maturity of these financial
instruments.
The fair value of "Investments" approximated $658 million and $702
million as of December 31, 1994 and 1993, respectively. Quoted market
prices were used to determine the fair value of marketable securities
which, beginning in 1994 (see Note 1, "Required Accounting Changes"),
were recorded at fair value. Carrying value adjustments, which are non-
cash transactions, are not included in the Consolidated Statement of Cash
Flows. Underlying net assets were used to estimate the fair value of non-
marketable investments. For the remaining investments, consisting
principally of corporate-owned life insurance, the carrying value
PAGE 57
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
14. FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
approximates fair value (see Note 5 for carrying values of "Investments").
Under SFAS 115, NS Rail increased the reported carrying value of
certain short-term and long-term investments classified as "available for
sale" at December 31, 1994, as follows:
Gross
Unrealized Holding
Cost Gain (Loss) Fair Value
------ ------------------ ----------
(In millions of dollars)
Short-term securities, principally
U.S. Treasury securities $201.7 $ (1.6) $200.1
Equity securities-7.3 million shares
of NS stock 20.6 419.1 439.7
Total unrealized holding gains from the implementation date of
January 1, 1994, through December 31, 1994, declined $77.0 million. The
reduced gains primarily reflect the change in NS stock price from $70-1/2
per share at December 31, 1993, to $60-5/8 per share at December 31,
1994. Stockholders' equity for the twelve months decreased $46.9 million
as a result.
The fair value of "Long-term debt," including current maturities,
approximated $543 million at December 31, 1994, and $670 million at
December 31, 1993. The fair values of debt were estimated based on quoted
market prices or discounted cash flows using current interest rates for
debt with similar terms, company rating and remaining maturity (see Note
8 for carrying values of "Long-term debt").
15. PARTIAL REVERSAL OF SPECIAL CHARGE IN 1993
Included in 1991 results was a $483 million special charge for labor
force reductions and asset write-downs. However, based on NS Rail's
success in eliminating reserve board positions in 1992 and 1993, and on
events occurring in the third quarter of 1993, the accrual included in
the 1991 special charge related to labor was reduced by $46 million which
was reflected as a credit in "Compensation and benefits" expenses. The
principal factor contributing to the reversal was the failure in 1993 to
reach agreement on terms for certain further labor savings. Accordingly,
it became apparent that a surplus existed in the labor portion of the
provision established in the 1991 special charge.
16. NORFOLK AND WESTERN RAILWAY COMPANY AND SUBSIDIARIES (NW)--SUMMARIZED
CONSOLIDATED FINANCIAL INFORMATION
NW is operated as an integral part of NS Rail. Revenues are
allocated to NW based on actual traffic movements as determined by
revenue ton miles within market groups. Expenses are allocated to NW
based on appropriate criteria for the type of expense. The costs of
functions performed by NS, the parent holding company of NS Rail, are
also allocated to its rail operating subsidiaries.
PAGE 58
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
16. NORFOLK AND WESTERN RAILWAY COMPANY AND SUBSIDIARIES (NW)--SUMMARIZED
CONSOLIDATED FINANCIAL INFORMATION (continued)
Summarized Consolidated Statements of Income
--------------------------------------------
Years Ended December 31,
--------------------------------
1994 1993 1992
-------- -------- --------
(In millions of dollars)
Railway operating revenues $1,858.1 $1,853.6 $1,925.0
Railway operating expenses 1,382.7 1,414.5 1,402.7
-------- -------- --------
Income from
railway operations 475.4 439.1 522.3
Other-net 25.8 36.5 24.4
-------- -------- --------
Income before income
taxes 501.2 475.6 546.7
Provision for income taxes:
Income taxes 175.1 181.1 194.8
Adjustment of net deferred tax
liability for federal rate increase -- 23.7 --
-------- -------- --------
Total income taxes 175.1 204.8 194.8
-------- -------- --------
Income before accounting changes 326.1 270.8 351.9
Cumulative effects on years
prior to 1993 of changes in
accounting principles for:
Income taxes -- 207.3 --
Postretirement benefits
other than pensions;
and postemployment
benefits - net of taxes -- (115.7) --
-------- -------- --------
Net income $ 326.1 $ 362.4 $ 351.9
======== ======== ========
PAGE 59
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
16. NORFOLK AND WESTERN RAILWAY COMPANY AND SUBSIDIARIES (NW)--SUMMARIZED
CONSOLIDATED FINANCIAL INFORMATION (continued)
Summarized Consolidated Balance Sheets
--------------------------------------
As of December 31,
---------------------
1994 1993
-------- --------
(In millions of dollars)
Assets
Current assets $ 330.0 $ 322.5
Noncurrent assets 4,439.6 4,128.9
-------- --------
Total assets $4,769.6 $4,451.4
======== ========
Liabilities and stockholder's equity
Current liabilities 178.6 200.4
Noncurrent liabilities 1,590.0 1,482.7
Stockholder's equity 3,001.0 2,768.3
-------- --------
Total liabilities and stockholder's equity $4,769.6 $4,451.4
======== ========
Effective January 1, 1994, NW adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" (SFAS 115). See Note 1 for a discussion of
this new accounting pronouncement. The effect on NW, which was
principally comprised of unrealized gain on its investments in NS stock,
decreased "Short-term investments" (current assets) by $1.3 million, and
increased "Investments" (noncurrent assets) by $46.4 million, "Deferred
taxes" (noncurrent liabilities) by $16.9 million, and "Stockholder's
equity" by $28.2 million as of December 31, 1994.
Effective January 1, 1993, NW adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions"; SFAS 109,
"Accounting for Income Taxes"; and SFAS 112, "Employers' Accounting for
Postemployment Benefits." See Note 1 for a discussion of these
pronouncements (see NW's Consolidated Statement of Income for the
cumulative effects of these changes).
17. CONTINGENCIES
Lawsuits
--------
Norfolk Southern Railway Company and certain subsidiaries are
defendants in numerous lawsuits relating principally to railroad
operations. While the final outcome of these lawsuits cannot be predicted
with certainty, it is the opinion of Management, after consulting with
its legal counsel, that the amount of NS Rail's ultimate liability will
not materially affect NS Rail's consolidated financial position.
Debt Guarantees
---------------
As of December 31, 1994, NS Rail and certain subsidiaries were
contingently liable as guarantors with respect to $72.5 million of
indebtedness of related entities.
PAGE 60
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
17. CONTINGENCIES (continued)
Change-in-Control Arrangements
------------------------------
NS has compensation agreements with officers and certain key
employees, which become operative only upon a change in control of the
Corporation, as defined in those agreements. The agreements provide
generally for payments based on compensation at the time of a covered
individual's involuntary or other specified termination and for certain
other benefits.
Environmental Matters
---------------------
NS Rail is subject to various jurisdictions' environmental laws and
regulations. It is NS Rail's policy to record a liability where such
liability or loss is probable and can be reasonably estimated. Claims, if
any, against third parties for recovery of cleanup costs incurred by NS
Rail are reflected as receivables in the balance sheet and are not netted
against the associated NS Rail liability. Environmental engineers
participate in ongoing evaluations of all identified sites, and--after
consulting with counsel--any necessary adjustments to initial liability
estimates are made. NS Rail also has established an Environmental Policy
Council, composed of senior managers, to prescribe and direct its
environmental initiatives.
Operating expenses for environmental protection totaled
approximately $20 million in 1994 and are anticipated to decrease in
1995. Expenses in 1994 included $10.5 million associated with emergency
response and cleanup resulting from release of arsenic acid from a
tankcar leased by the shipper from a third party. Capital expenditures
for environmental projects amounted to approximately $4 million in 1994
and are expected to be approximately $4 million in 1995. As of December
31, 1994, NS Rail's balance sheet included a reserve for environmental
exposures in the amount of $50 million (of which $13 million is accounted
for as a current liability), which is NS Rail's best estimate of ultimate
liability at 80 identified locations. On that date, eight sites accounted
for $23 million of the reserve, and no individual site was considered to
be material. NS Rail anticipates that the majority of this liability will
be paid out over five years; however, some costs will be paid out over a
longer period.
At many of the 80 locations, NS Rail and/or certain of its
subsidiaries, usually in conjunction with a number of other parties, have
been identified as potentially responsible parties by the Environmental
Protection Agency (EPA) or similar state authorities under the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, or comparable state statutes, which often impose joint and several
liability for cleanup costs.
With respect to known environmental sites (whether identified by NS
Rail or by the EPA or comparable state authorities), estimates of NS
Rail's ultimate potential financial exposure for a given site or in the
aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available cleanup techniques, the
likely development of new cleanup technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it) and evolving statutory and regulatory
standards governing liability.
The risk of incurring environmental liability--for acts and
omissions, past, present and future--is inherent in the railroad
business. Some of the commodities, particularly those classified as
hazardous materials, in NS Rail's traffic mix can pose special risks that
NS Rail works diligently to minimize. In addition, NS Rail has land
holdings that serve as operating property, or which are leased or may
have been leased and operated by others, or held for sale. Because
certain conditions may exist on these properties related to environmental
problems that are latent or undisclosed, there can be no assurance that
NS Rail will not incur liabilities or costs with respect to one or more
of them, the amount and materiality of which cannot be estimated reliably
now. Moreover, lawsuits and claims involving these and other now-
unidentified environmental sites and matters are likely to arise from
PAGE 61
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
17. CONTINGENCIES (continued)
time to time. The resulting liabilities could have a significant
effect on financial condition, results of operations or liquidity
in a particular year or quarter.
However, based on its assessments of the facts and circumstances now
known and, after consulting with its legal counsel, Management believes
that it has recorded appropriate estimates of liability for those
environmental matters of which NS Rail is aware. Further, Management
believes that it is unlikely that any identified matters, either
individually or in aggregate, will have a material adverse effect on NS
Rail's financial position, results of operations or liquidity.
PAGE 62
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Norfolk Southern Railway Company:
We have audited the consolidated financial statements of Norfolk Southern
Railway Company as listed in Item 8. In connection with our audits of the
consolidated financial statements, we have also audited the consolidated
financial statement schedule listed in Item 14(a)2. These consolidated
financial statements and this consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and this
consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Norfolk Southern Railway Company and subsidiaries as of December 31, 1994
and 1993, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1994, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 1, the Company changed its methods of accounting in
1994 by adopting the provisions of the Financial Accounting Standards
Board's Statement 115, Accounting for Certain Investments in Debt and
Equity Securities, and in 1993 by adopting the provisions of the
Financial Accounting Standards Board's Statement 109, Accounting for
Income Taxes; Statement 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions; and Statement 112, Employers' Accounting
for Postemployment Benefits.
/s/ KPMG Peat Marwick LLP
Norfolk, Virginia
January 24, 1995
PAGE 63
Item 9. Changes in and Disagreements with Accountants on Accounting
------ -----------------------------------------------------------
and Financial Disclosure.
------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
------- --------------------------------------------------
Item 11. Executive Compensation.
------- ----------------------
Item 12. Security Ownership of Certain Beneficial Owners
------- -----------------------------------------------
and Management.
--------------
and
Item 13. Certain Relationships and Related Transactions.
------- ----------------------------------------------
In accordance with General Instruction G(3), the
information called for by Part III is incorporated herein by
reference from Norfolk Southern Railway's definitive Proxy Statement,
to be dated April 18, 1995, for the Norfolk Southern Railway Annual
Meeting of Stockholders to be held on May 23, 1995, which definitive
Proxy Statement will be filed electronically with the Commission
pursuant to Regulation 14A. The information regarding executive
officers called for by Item 401 of Regulation S-K is included in
Part I hereof beginning on page 17 under "Executive Officers of the
Registrant."
PAGE 64
PART IV
Item l4. Exhibits, Financial Statement Schedule, and Reports on
------- -------------------------------------------------------
Form 8-K.
--------
(a) The following documents are filed as part of this report:
1. Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 1994, 1993 and 1992 38
Consolidated Balance Sheets
As of December 31, 1994 and 1993 39
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1993 and 1992 40 - 41
Consolidated Statements of Changes in
Stockholders' Equity Years ended
December 31, 1994, 1993 and 1992 42
Notes to Consolidated Financial Statements 43 - 61
Independent Auditors' Report 62
2. Financial Statement Schedule:
The following consolidated financial statement schedule
should be read in connection with the consolidated
financial statements:
Index to Consolidated Financial Statement Schedule Page
-------------------------------------------------- ----
Schedule II - Valuation and Qualifying Accounts 68
Schedules other than the one listed above are omitted either
because they are not required or are inapplicable, or
because the information is included in the consolidated
financial statements or related notes.
3. Exhibits
Exhibit
Number Description
------- -------------------------------------------------
3 Articles of Incorporation and Bylaws -
3(i) The amended Restated Articles of Incorporation
of Norfolk Southern Railway Company are
incorporated herein by reference from Exhibit 3(a)
of Norfolk Southern Railway's 1990 Annual Report
on Form 10-K.
PAGE 65
Item l4. Exhibits, Financial Statement Schedule, and Reports on
------- -------------------------------------------------------
Form 8-K. (continued)
--------
Exhibit
Number Description
------- -------------------------------------------------
3(ii) The Bylaws of Norfolk Southern Railway Company,
as last amended March 3, 1993, are incorporated
herein by reference from Exhibit 3(b) of Norfolk
Southern Railway's 1992 Annual Report on Form 10-K.
4 Instruments Defining the Rights of Security
Holders, Including Indentures -
In accordance with Item 601(b)(4)(iii) of
Regulation S-K, copies of instruments of Norfolk
Southern Railway and its subsidiaries with respect
to the rights of holders of long-term debt are
not filed herewith, or incorporated by reference,
but will be furnished to the Commission upon request.
10 Material Contracts -
(a) The Supplementary Agreement, entered into as of
January 1, 1987, between the Trustees of the
Cincinnati Southern Railway and The Cincinnati,
New Orleans and Texas Pacific Railway Company
(the latter a wholly owned subsidiary of Norfolk
Southern Railway) - extending and amending a
Lease, dated as of October 11, 1881 (both the
Lease and Supplementary Agreement, formerly
incorporated by reference from Exhibit 10(b)
of Southern's 1987 Annual Report on Form 10-K) -
is filed herewith electronically.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed for the three months
ended December 31, 1994.
(c) Exhibits.
The Exhibits required by Item 601 of Regulation S-K
as listed in Item 14(a)3 are filed herewith or
incorporated herein by reference.
(d) Financial Statement Schedules.
Financial statement schedules and separate financial
statements specified by this Item are included in
Item 14(a)2 or are otherwise not required or are not
applicable.
PAGE 66
POWER OF ATTORNEY
-----------------
Each person whose signature appears below under
"SIGNATURES" hereby authorizes Henry C. Wolf and John S. Shannon, or
either of them, to execute in the name of each such person, and to
file, any amendment to this report and hereby appoints Henry C. Wolf
and John S. Shannon, or either of them, as attorneys-in-fact to sign
on his behalf, individually and in each capacity stated below, and to
file, any and all amendments to this report.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Norfolk Southern Railway Company has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 21st day of March,
1995.
NORFOLK SOUTHERN RAILWAY COMPANY
By /s/ David R. Goode
-----------------------------------------
(David R. Goode, President and Chief
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below on this 21st day of March,
1995, by the following persons on behalf of Norfolk Southern Railway
Company and in the capacities indicated.
Signature Title
--------- -----
/s/ David R. Goode
-------------------------- President and Chief Executive
(David R. Goode) Officer and Director
(Principal Executive Officer)
/s/ John P. Rathbone
-------------------------- Vice President and Controller
(John P. Rathbone) (Principal Accounting Officer)
/s/ Henry C. Wolf
-------------------------- Vice President-Finance
(Henry C. Wolf) (Principal Financial Officer)
PAGE 67
Signature Title
--------- -----
/s/ John S. Shannon
-------------------------- Director
(John S. Shannon)
/s/ Stephen C. Tobias
-------------------------- Director
(Stephen C. Tobias)
/s/ John R. Turbyfill
-------------------------- Director
(John R. Turbyfill)
/s/ D. Henry Watts
-------------------------- Director
(D. Henry Watts)
/s/ Henry C. Wolf
-------------------------- Director
(Henry C. Wolf)
PAGE 68
Schedule II
Page 1 of 2
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1992, 1993 and 1994
(In millions of dollars)
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
Year ended December 31, 1992
----------------------------
Valuation accounts deducted
from balance sheet assets -
Reserves for adjustments of
investment in affiliated
and other companies $ 0.3 $ -- $ -- $ -- $ 0.3
Casualty and other claims
included in other
liabilities $245.2 $105.0 $ 3.9 (1) $ 76.7 (2) $277.4
Current portion of casualty
and other claims included
in accounts payable $180.2 $ 16.2 $117.5 (1) $157.6 (3) $156.3
Year ended December 31, 1993
----------------------------
Valuation accounts deducted
from balance sheet assets -
Reserves for adjustments of
investment in affiliated
and other companies $ 0.3 $ -- $ -- $ 0.3 $ --
Valuation allowance (included
net in deferred tax
liability) for deferred tax
assets $ -- $ 2.0 $ -- $ -- $ 2.0
Casualty and other claims
included in other
liabilities $277.4 $100.0 $ 2.9 (1) $102.6 (2) $277.7
Current portion of casualty
and other claims included
in accounts payable $156.3 $ 16.4 $125.0 (1) $142.2 (3) $155.5
(1) Includes revenue overcharges provided through charges to operating
revenues and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
PAGE 69
Schedule II
Page 2 of 2
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1992, 1993 and 1994
(In millions of dollars)
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
Year ended December 31, 1994
----------------------------
Valuation allowance (included
net in deferred tax
liability) for deferred tax
assets $ 2.0 $ -- $ -- $ 1.4 $ 0.6
Casualty and other claims
included in other
liabilities $277.7 $105.3 $ 2.5 (1) $121.3 (2) $264.2
Current portion of casualty
and other claims included
in accounts payable $155.5 $ 26.8 $163.7 (1) $181.9 (3) $164.1
(1) Includes revenue overcharges provided through charges to operating
revenues and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
PAGE 70
EXHIBIT INDEX
-------------
Electronic
Submission
Exhibit Page
Number Description Number
---------- ------------------------------------------- ------
21 Subsidiaries of Norfolk Southern Railway. 71
27 Financial Data Schedule (Required to be
electronically submitted for use by the
Securities and Exchange Commission only
and not deemed part of this filing). 72