PAGE 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------------
FORM 10-K405
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or l5(d) of THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996.
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 incorporation (I.R.S. Employer
or organization) Identification No.)
Three Commercial Place, Norfolk, Virginia 23510-2191
- -------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (757) 629-2682
-------------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS SO REGISTERED. EACH CLASS REGISTERED ON NEW YORK
STOCK EXCHANGE:
Norfolk and Western Railway Company 4.85% Subordinated Income
Debentures, due November 15, 2015; Guarantee of Norfolk Southern
Railway Company with respect to $1,865,900 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).
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K405 or any amendment to this Form 10-K405. (X)
PAGE 2
The aggregate market value of the voting stock held by
nonaffiliates as of February 28, 1997: $37,958,415
The number of shares outstanding of each of the registrant's
classes of Common Stock, as of February 28, 1997: 16,668,997
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement (to be
dated April 15, 1997) 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 17
4. Submission of Matters to a Vote of Security
Holders 17
Executive Officers of the Registrant 18
Part II 5. Market for Registrant's Common Stock and
Related Stockholder Matters 24
6. Selected Financial Data 25
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 26
8. Financial Statements and Supplementary Data 39
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 66
Part III 10. Directors and Executive Officers of the
Registrant 66
11. Executive Compensation 66
12. Security Ownership of Certain Beneficial
Owners and Management 66
13. Certain Relationships and Related
Transactions 66
Part IV 14. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K 67
Index to Consolidated Financial Statement
Schedule 67
Power of Attorney 70
Signatures 70
Exhibit Index 74
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 (Norfolk and Western) became subsidiaries of Norfolk Southern
Corporation (NS), a transportation holding company. Effective
December 31, 1990, NS transferred all the common stock of Norfolk and
Western to Southern, and Southern's name was changed to Norfolk
Southern Railway Company. Accordingly, all the common stock of
Norfolk and Western, 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 December 31,
1996, 1,197,027 shares of Norfolk Southern Railway's $2.60 Cumulative
Preferred Stock, Series A (Series A Stock), of which 1,096,907 shares
were held by other than subsidiaries. The Series A Stock is entitled
to one vote per share, is nonconvertible, and is traded on the New
York Stock Exchange.
PROPOSED ACQUISITION OF CONRAIL BY NS - On October 24, 1996,
in response to the October 15, 1996, announcement that Conrail Inc.
(Conrail) had entered into a merger agreement with CSX Corporation, NS
commenced an all-cash tender offer for all the Common Stock and Series
A ESOP Convertible Junior Preferred Stock of Conrail (collectively,
Shares), including in each case the associated Common Stock Purchase
Rights. See Note 16 to the Consolidated Financial Statements on page
61 for additional details.
On February 11, 1997, NS acquired 8.2 million Shares of
Conrail stock (approximately 9.9 percent of the then outstanding
Conrail Common Stock), representing the approximate maximum number NS
could buy without triggering Conrail's anti-takeover defenses, at a
cost of $115 per Share, or $943 million in the aggregate. The
purchase was financed through issuance of commercial paper backed by a
portion of the revolving debt capacity under the credit facility
obtained in connection with the proposed acquisition of Conrail.
These Shares have been placed in a voting trust and under certain
circumstances might have to be sold at a loss.
PAGE 5
On February 12, 1997, NS commenced a second tender offer for
the remaining Conrail Shares and has notified Conrail of its intention
to conduct a proxy contest in connection with Conrail's 1997 Annual
Meeting of shareholders, currently scheduled for December 19, 1997,
seeking, among other things, to remove certain of the current members
of the Conrail Board and to elect a new slate of nominees designated
by NS.
Pursuant to an amendment to the merger agreement between
CSX and Conrail announced on March 7, 1997, CSX has offered to purchase
all Shares for $115 per Share in cash and CSX is permitted to enter
into negotiations with other parties, including NS, concerning the
acquisition of the securities or assets, or concessions relating to
the assets or operations, of Conrail. NS and CSX are negotiating
a comprehensive resolution of the issues confronting the eastern
railroads based on the proposal submitted by NS to both CSX and
Conrail on February 24, 1997. Such a resolution could involve a
joint acquisition of Shares by NS and CSX. However, unless and
until such negotiations are successfully concluded, NS intends to
continue in effect its tender offer for all Shares not owned
by NS.
For additional information concerning NS' pending tender
offer for Shares not owned by NS, reference is made to NS' Tender
Offer Statement on Schedule 14D-1, together with the exhibits
thereto, initially filed with the Securities and Exchange Commission
on February 12, 1997, as amended.
PREFERRED STOCK PURCHASE PROGRAM - In June 1989, NS
announced its intention to purchase up to 250,000 shares of Norfolk
Southern Railway's Series A Stock during the subsequent two-year
period. Since then, NS extended the stock purchase program through
1996. As of December 31, 1996, NS had purchased 176,608 shares of
Series A Stock at a total cost of $6.7 million. Consequently, as of
December 31, 1996, NS held 94.8 percent of the voting stock of
Norfolk Southern Railway.
OPERATIONS - As of December 31, 1996, NS Rail operated
approximately 14,300 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, 12,094 miles are
owned with the balance operated under lease or trackage rights; most
of this total are main line track. In addition, it operates 10,800
miles of passing, industrial, yard and side tracks.
NS Rail has major leased lines between Cincinnati, Ohio,
and Chattanooga, Tennessee, and in the State of North Carolina.
The Cincinnati-Chattanooga lease, covering about 335 miles,
expires in 2026, and is subject to an option to extend the lease for
an additional 25 years, at terms to be agreed upon.
The North Carolina leases, covering approximately
330 miles, expired by their terms at the end of 1994. Although a
lease extension agreement was approved by the boards of both NS and
PAGE 6
the North Carolina Railroad Company (NCRR) and by the shareholders of
NCRR, the U.S. District Court in Raleigh ruled that there was no
quorum at the stockholders' meeting, and enjoined the parties from
performing under the extension agreement. NCRR has suits pending
against NS and various subsidiaries in federal court in Raleigh to
enforce rights under the expired leases and at the STB to seek the
establishment of terms and conditions of NS Rail's continued use,
including interim and long-term compensation. Also, certain NCRR
stockholders earlier had filed four separate, and still pending,
derivative actions challenging the adequacy of the rental terms in
the extension agreement. NS Rail is presently operating over the
leased lines under the requirements of federal law, and will continue
to do so until the matter has been resolved through agreement or a
decision by the STB establishing reasonable conditions or permitting
discontinuance of such operations. Whatever the ultimate resolution
of the litigation, it is not expected to have a material effect on NS
Rail's consolidated financial statements.
NS Rail's lines carry raw materials, intermediate products
and finished goods primarily in the Southeast and Midwest and to and
from the rest of the United States and parts of Canada. These lines
also transport overseas freight through several Atlantic and Gulf
Coast ports. Atlantic ports served by NS Rail include: Norfolk,
Virginia; Morehead City, North Carolina; Charleston, South Carolina;
Savannah and Brunswick, Georgia; and Jacksonville, Florida. Gulf
Coast ports served include: Mobile, Alabama, and New Orleans,
Louisiana.
NS Rail's lines reach most of the larger industrial and
trading centers of the Southeast and Midwest, with the exception of
those in central and southern Florida. Atlanta, Birmingham, New
Orleans, Memphis, St. Louis, Kansas City (Missouri), Chicago,
Detroit, Cincinnati, Buffalo, Norfolk, Charleston, Savannah and
Jacksonville are among the leading centers originating and
terminating freight traffic on the system. In addition, a haulage
arrangement with the Florida East Coast Railway allows NS Rail to
provide single-line service to and from south Florida, including the
port cities of Miami, West Palm Beach and Fort Lauderdale. The
system's lines also reach many individual industries, mines (in
western Virginia, eastern Kentucky and southern West Virginia) and
businesses located in smaller communities in its service area. The
traffic corridors carrying the heaviest volumes of freight include
those from the Appalachian coal fields of Virginia, West Virginia and
Kentucky to Norfolk and Sandusky, Ohio; Buffalo to Chicago and Kansas
City; Chicago to Jacksonville (via Cincinnati, Chattanooga and
Atlanta); and Washington, D.C./Hagerstown, Maryland, to New Orleans
(via Atlanta and Birmingham).
Buffalo, Chicago, Hagerstown, Jacksonville, Kansas City,
Memphis, New Orleans and St. Louis are major gateways for
interterritorial system traffic.
NS Rail and other railroads have entered into service
interruption agreements, effective December 30, 1994, providing
indemnities to parties affected by a strike over specified industry
PAGE 7
issues. If NS Rail were so affected, it could receive daily
indemnities from non-affected parties; if parties other than NS Rail
were affected, it could be required to pay indemnities to those
parties. If NS Rail were required to pay the maximum amount of
indemnities required of it under these agreements--an event
considered unlikely at this time--such liability should not exceed
approximately $85 million.
OPERATING REVENUES - NS Rail's total railway operating
revenues were $4.1 billion in 1996. Revenue, shipments and revenue
yield by principal railway operating revenue sources for the past five
years are set forth in the following table:
Year Ended December 31,
Principal Sources of -------------------------------------------------
Railway Operating
Revenues 1996 1995 1994 1993 1992
- -------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands,
revenue yield in dollars per shipments)
COAL
Revenues $1,304.7 $1,267.8 $1,290.2 $1,239.2 $1,324.1
% of total
revenues 31.8% 31.6% 32.9% 33.3% 35.7%
Shipments 1,309.6 1,266.8 1,274.2 1,208.7 1,291.9
% of total
shipments 28.8% 28.5% 29.6% 30.0% 32.7%
Revenue Yield $ 996 $ 1,001 $ 1,013 $ 1,025 $ 1,025
CHEMICALS
Revenues $ 555.9 $ 536.5 $ 534.7 $ 499.0 $ 498.9
% of total
revenues 13.6% 13.4% 13.7% 13.4% 13.4%
Shipments 378.6 368.3 370.7 341.6 327.4
% of total
shipments 8.3% 8.3% 8.6% 8.5% 8.3%
Revenue Yield $ 1,468 $ 1,457 $ 1,442 $ 1,461 $ 1,524
PAPER/FOREST
Revenues $ 513.0 $ 537.3 $ 521.8 $ 522.2 $ 517.2
% of total
revenues 12.5% 13.4% 13.3% 14.0% 13.9%
Shipments 438.2 459.1 464.2 466.3 465.4
% of total
shipments 9.6% 10.3% 10.8% 11.6% 11.8%
Revenue Yield $ 1,171 $ 1,170 $ 1,124 $ 1,120 $ 1,111
AUTOMOTIVE
Revenues $ 488.7 $ 449.1 $ 429.0 $ 425.8 $ 391.6
% of total
revenues 11.9% 11.2% 11.0% 11.4% 10.6%
Shipments 354.3 328.4 317.2 317.8 287.7
% of total
shipments 7.8% 7.4% 7.3% 7.9% 7.3%
Revenue Yield $ 1,379 $ 1,368 $ 1,352 $ 1,340 $ 1,361
AGRICULTURE
Revenues $ 393.3 $ 393.7 $ 379.5 $ 357.0 $ 344.4
% of total
revenues 9.6% 9.8% 9.7% 9.6% 9.3%
Shipments 376.3 391.1 382.5 359.1 352.4
% of total
shipments 8.3% 8.8% 8.9% 8.9% 8.9%
Revenue Yield $ 1,045 $ 1,007 $ 992 $ 994 $ 977
PAGE 8
Year Ended December 31,
Principal Sources of -------------------------------------------------
Railway Operating
Revenues 1996 1995 1994 1993 1992
- -------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands,
revenue yield in dollars per shipments)
METALS/CONSTRUCTION
Revenues $ 358.0 $ 353.1 $ 334.2 $ 310.9 $ 289.4
% of total
revenues 8.7% 8.8% 8.5% 8.3% 7.8%
Shipments 364.9 372.3 371.3 339.6 312.8
% of total
shipments 8.0% 8.3% 8.6% 8.4% 7.9%
Revenue Yield $ 981 $ 948 $ 900 $ 915 $ 925
INTERMODAL
(Trailers, Containers
and RoadRailers)
Revenues $ 487.4 $ 474.3 $ 428.7 $ 373.5 $ 343.5
% of total
revenues 11.9% 11.8% 10.9% 10.0% 9.3%
Shipments 1,331.0 1,262.6 1,127.3 994.7 916.2
% of total
shipments 29.2% 28.4% 26.2% 24.7% 23.1%
Revenue Yield $ 366 $ 376 $ 380 $ 376 $ 375
-------- -------- -------- -------- --------
Total Railway
Operating
Revenues $4,101.0 $4,011.8 $3,918.1 $3,727.6 $3,709.1
Total Railway
Shipments 4,552.9 4,448.6 4,307.4 4,027.8 3,953.8
Note: Revenues previously reported as "other railway revenues"
(principally switching and demurrage) have been allocated to
revenues reported for each commodity group.
Shipments include general merchandise and coal rail carloads,
intermodal rail and RoadRailer(RT) units.
COAL TRAFFIC - Coal, coke and iron ore--most of which is
bituminous coal--is NS Rail's principal commodity group. NS Rail
originated 116.8 million tons of coal, coke and iron ore in 1996 and
handled a total of 130.2 million tons. Originated tonnage increased
2 percent from 114.2 million tons in 1995, and total tons handled
increased 4 percent from 125.1 million tons in 1995. Revenues from
coal, coke and iron ore account for about 32 percent of NS Rail's
total operating revenues.
The following table shows total coal, coke and iron ore
tonnage originated on line, received from connections and handled for
the past five years:
Tons of Coal, Coke and Iron Ore (Millions)
------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Originated 116.8 114.2 114.8 111.9 117.9
Received 13.4 10.9 11.1 6.1 6.5
----- ----- ----- ----- -----
Handled 130.2 125.1 125.9 118.0 124.4
PAGE 9
Of the 116.8 million tons of coal, coke and iron ore
originated on NS Rail's lines in 1996, the approximate breakdown by
origin state was as follows:
Origin State Millions of Tons
------------ ----------------
West Virginia 40.7
Virginia 35.4
Kentucky 26.8
Alabama 5.4
Illinois 5.1
Tennessee 1.8
Indiana 0.9
Ohio 0.5
New York 0.2
-----
Total 116.8
=====
Of this originated coal, coke and iron ore, approximately
26.9 million tons moved for export, principally through NS Rail's pier
facilities at Norfolk (Lamberts Point), Virginia; 19.7 million tons
moved to domestic and Canadian steel industries; 62.3 million tons of
steam coal moved to electric utilities; and 7.9 million tons moved to
other industrial and miscellaneous users.
NS Rail moved 8.7 million tons of originated coal, coke and
iron ore to various docks on the Ohio River and 3.6 million tons to
various Lake Erie ports. Other than coal for export, virtually all
coal handled by NS Rail was terminated in states situated east of the
Mississippi River.
Total coal handled through all system ports in 1996 was
41.7 million tons. Of this total, 71 percent moved through the pier
facilities at Lamberts Point. In 1996, total tonnage handled at
Lamberts Point, including coastwise traffic, was 29.5 million tons, a
2 percent increase from the 28.9 million tons handled in 1995.
The quantities of NS Rail export coal handled through
Lamberts Point for the past five years were as follows:
Export Coal through Lamberts Point
(Millions of tons)
------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Originated 26.3 25.4 23.9 24.6 30.8
Handled 26.4 25.5 24.1 24.9 31.2
See the discussion of coal traffic, by type of coal, in
Part II, Item 7, "Management's Discussion and Analysis," on page 26.
PAGE 10
MERCHANDISE RAIL TRAFFIC - The merchandise traffic group
consists of Intermodal and five major commodity groupings
(Paper/Forest; Chemicals; Automotive; Agriculture; and
Metals/Construction). Total NS Rail merchandise revenues in 1996 were
$2.8 billion, a 2 percent increase over 1995. Merchandise carloads
handled in 1996 were 3.24 million, compared with 3.18 million handled
in 1995, an increase of 2 percent.
In 1996, 106.2 million tons of merchandise freight, or
approximately 68 percent of total rail 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 truck, water and highway as well), usually at interterritorial
gateways. The principal interchange points for NS Rail-served
received traffic included Chicago, Memphis, New Orleans, Cincinnati,
Kansas City, Detroit, Hagerstown, St. Louis/East St. Louis, and
Louisville.
Revenues in four of the six market groups comprising
merchandise traffic improved in 1996 over 1995. The biggest gains
were in Automotive, up $39.6 million; Chemicals, up $19.4 million; and
Intermodal, up $13.1 million.
See the discussion of merchandise rail traffic by commodity
group in Part II, Item 7, "Management's Discussion and Analysis," on
page 26.
OPERATING STATISTICS - The following table sets forth
certain statistics relating to NS Rail's operations for the past five
years:
Year Ended December 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Revenue ton miles
(billions) 129.8 126.6 122.3 111.6 107.6
Freight train miles
traveled (millions) 49.4 48.5 46.0 43.3 41.1
Revenue per ton mile $0.0316 $0.0317 $0.0320 $0.0334 $0.0345
Revenue tons per train 2,625 2,611 2,655 2,577 2,618
Revenue ton miles
per man-hour worked 2,764 2,679 2,579 2,304 2,184
Percentage ratio of
railway operating
expenses to railway
operating revenues 71.6 73.5 73.2 75.3 75.0
FREIGHT RATES - In 1996, NS Rail continued its reliance on
private contracts and exempt price quotes as the predominant pricing
mechanism. Thus, a major portion of NS Rail's freight business is
not 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.
PAGE 11
In 1996, NS Rail was found by the STB to be "revenue
adequate" based on results for the year 1995. A railroad is "revenue
adequate" under the applicable law when its return on net investment
exceeds the rail industry's composite cost of capital.
The revenue adequacy measure is one of several factors
considered by the STB when it is called upon to rule on the
reasonableness of regulated rates.
PASSENGER OPERATIONS - Regularly scheduled passenger
operations on NS Rail's railroads' lines consist of Amtrak trains
operating between Alexandria and New Orleans, and between Charlotte
and Selma, North Carolina. Former Amtrak operations between East St.
Louis and Centralia, Illinois, 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 rental and for reimbursement of related expenses incurred by NS
Rail. During 1993, a lease of the Chicago to Manhattan, Illinois,
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 12
RAILWAY PROPERTY:
EQUIPMENT - As of December 31, 1996, 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 1,974 0 1,974 6,149,850
Switching 119 0 119 174,450
Auxiliary units 65 0 65 0
-------- ------ -------- -----------
Total locomotives 2,158 0 2,158 6,324,300
======== ====== ======== ===========
Freight Cars: (Tons)
Hopper 24,933 41 24,974 2,643,019
Box 19,976 428 20,404 1,584,306
Covered Hopper 12,489 2,272 14,761 1,549,737
Gondola 24,170 105 24,275 2,584,134
Flat 4,078 819 4,897 352,762
Caboose 231 0 231 0
Other 1,111 4 1,115 88,728
-------- ------ -------- -----------
Total freight cars 86,988 3,669 90,657 8,802,686
======== ====== ======== ===========
Other:
Work equipment 6,959 5 6,964
Vehicles 3,698 0 3,698
Highway trailers
and containers 2,348 3,181 5,529
Miscellaneous 1,518 1,199 2,717
-------- ------ --------
Total other 14,523 4,385 18,908
======== ====== ========
* Includes equipment leased to outside parties and equipment
subject to equipment trusts and capitalized leases.
PAGE 13
The following table indicates the number and year of purchase
for locomotives and freight cars owned by NS Rail at December 31, 1996:
Year Built
----------------------------------------------------------
1986- 1980- 1979 &
1996 1995 1994 1993 1992 1991 1985 Before Total
---- ---- ---- ---- ---- ---- ---- ------ -----
Locomotives:
Number of
units 120 125 25 31 55 452 426 924 2,158
Percent of
fleet 5.6 5.8 1.2 1.4 2.6 21.0 19.7 42.7 100.0
Freight cars:
Number of
units 871 932 778 930 579 4,918 10,210 67,770 86,988
Percent of
fleet 1.0 1.1 0.9 1.1 0.7 5.7 11.7 77.8 100.0
The average age of the freight car fleet at December 31,
1996, was 22.3 years. During 1996, 7,485 freight cars were retired.
As of December 31, 1996, the average age of the locomotive fleet was
15.4 years. During 1996, 105 locomotives, the average age of which
was 24.4 years, were retired. Since 1988, more than 23,000 coal cars
have been rebodied. As a result, the remaining serviceability of the
freight car fleet is greater than may be inferred from the high
percentage of freight cars built in earlier years.
Ongoing freight car and locomotive maintenance programs are
intended to ensure the highest standards of safety, reliability,
customer satisfaction and equipment marketability. In past years,
the bad order ratio reflected the storage of certain types of cars
which were not in high demand. The ratio has declined more recently
as a result of a disposition program for underutilized, unserviceable
and over-age revenue cars. In this connection, an orderly
disposition of 17,000 freight cars, begun in October 1994, was
substantially complete at the end of 1996.
Annual Average Bad Order Ratio
---------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Freight Cars (excluding cabooses):
NS Rail 4.8% 5.8% 6.7% 7.3% 7.6%
All Class I railroads 5.0* 6.0* 7.3 7.1 7.5
Locomotives:
NS Rail 4.5 4.7 4.7 4.3 4.4
* In 1996 and 1995, the industry bad order ratio was as of June 1.
Prior years' industry ratios were based on a monthly average.
PAGE 14
TRACKAGE - All NS Rail trackage is standard gauge, and the
rail in approximately 95 percent of the main line trackage (including
first, second, third and branch main tracks, all excluding trackage
rights) ranges from 100 to 140 pounds per yard. Of the 22,369 miles
of track maintained as of December 31, 1996, 15,877 were laid with
welded rail.
The density of traffic on running tracks (main line trackage
plus passing tracks) during 1996 was as follows:
Gross tons of
freight carried
per track mile Track miles Percent
(Millions) of running tracks* of total
---------------- ----------------- --------
0-4 4,837 30
5-19 4,682 29
20 and over 6,529 41
------ ---
16,048 100
* Excludes trackage rights.
The following table summarizes certain information about
track roadway additions and replacements during the past five years:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Track miles of rail installed 401 403 480 574 660
Miles of track surfaced 4,686 4,668 4,760 5,048 5,690
New crossties
installed (millions) 1.9 2.0 1.7 1.6 1.9
MICROWAVE SYSTEM - The NS Rail microwave system, consisting
of 6,960 radio path miles, 398 active stations and 5 passive repeater
stations, provides communications between most operating locations.
The microwave system is used principally for voice communications,
VHF radio control circuits, data and facsimile transmissions, traffic
control operations, AEI data transmissions and relay of intelligence
from defective equipment detectors.
TRAFFIC CONTROL - Of a total of 12,762 road miles operated
by NS Rail, excluding trackage rights over foreign lines, 5,400 road
miles are governed by centralized traffic control systems (of which
230 miles are controlled by data radio from 14 microwave site
locations) and 2,600 road miles are equipped for automatic block
system operation.
COMPUTERS - Data processing facilities connect the yards,
terminals, transportation offices, rolling stock repair points, sales
offices and other key system locations to the central computer complex
in Atlanta, Ga. 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
PAGE 15
information on the location of every train and each car on line, as
well as related waybill and other train and car movement data.
Additionally, these facilities afford substantial capacity for, and
are utilized to assist management in the performance of, a wide
variety of functions and services, including payroll, car and revenue
accounting, billing, material management activities and controls, and
special studies.
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 equipment is subject to the
prior lien of equipment financing obligations amounting to
$589.9 million as of December 31, 1996, and $540.4 million as of
December 31, 1995. In addition, a portion of NS Rail's properties is
subject to liens securing as of December 31, 1996, and 1995,
approximately $1.5 million and $27.5 million of mortgage debt,
respectively.
CAPITAL EXPENDITURES - Capital expenditures for road,
equipment and other property for the past five years were as follows:
Capital Expenditures
------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In millions of dollars)
Railway property
Road $428.4 $379.5 $382.3 $411.0 $425.1
Equipment 325.6 332.6 235.0 218.1 187.8
Other property -- 1.2 22.3 0.1 4.2
------ ------ ------ ------ ------
Total $754.0 $713.3 $639.6 $629.2 $617.1
====== ====== ====== ====== ======
Capital spending and maintenance programs are and have been
designed to assure the ability to provide safe, efficient and
reliable transportation services. For 1997, NS Rail is planning
$781 million of capital spending. Looking further ahead, total
capital spending is expected to be similar to 1995 and 1996 levels.
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.
Acquisition by NS of all or part of Conrail (see page 4)
could cause a change in the planned capital spending for NS Rail.
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 26, and in
Note 16 to the Consolidated Financial Statements on page 61.
PAGE 16
EMPLOYEES - NS Rail employed an average of 23,361 employees in
1996, compared with an average of 24,488 in 1995 (including Norfolk
Southern Corporation's employees whose primary duties relate to rail
operations). The approximate average cost per employee during 1996 was
$46,423 in wages and $18,943 in employee benefits. Approximately
81 percent of these employees are represented by various labor
organizations. As of the end of 1996, NS Rail had negotiated labor
agreements with all of its unions, except the American Train Dispatchers,
which represents about 200 employees. The accords with the 12 other
union organizations, which include compensation settlements in line with
other major industries, will not be due for change until after January 1,
2000.
GOVERNMENT REGULATION - In addition to environmental,
safety, securities and other regulations generally applicable to all
businesses, NS Rail is subject to regulation by the STB, which
succeeded the ICC on January 1, 1996. The STB has jurisdiction over
some rates, routes, conditions of service, and the extension or
abandonment of rail lines. The STB also has jurisdiction over the
consolidation, merger or acquisition of control of and by rail common
carriers. The Department of Transportation regulates certain track
and mechanical equipment standards.
The relaxation of economic regulation of railroads, begun
over a decade ago by the ICC under the Staggers Rail Act of 1980, is
expected to continue under the STB. Thus it appears that additional
rail business will be exempted from regulation in the future.
Significant exemptions are TOFC/COFC (i.e., "piggyback") business,
rail boxcar traffic, lumber, manufactured steel, automobiles and
certain bulk commodities such as sand, gravel, pulpwood and wood chips
for paper manufacturing. Transportation contracts on regulated
shipments, which no longer require regulatory approval, effectively
remove those shipments from regulation as well. Over 80 percent of
NS Rail's freight revenues come from either exempt traffic or traffic
moving under transportation contracts.
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, both operate
throughout much of the same territory. 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. Consummation of the
proposed merger agreement between Conrail and CSX (see page 4) could
result in a serious imbalance in rail competition in the East--an
outcome NS is resisting vigorously on a number of fronts and that the
negotiations with CSX could prevent.
PAGE 17
Certain 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 1996.
PAGE 18
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, 1997,
relating to these officers:
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- ------------------------------------
David R. Goode, 56, Present position since September
President and Chief 1992. Also, Chairman, President
Executive Officer and Chief Executive Officer of
Norfolk Southern Corporation
since September 1992, and prior
thereto as President. Served as
Vice President of Norfolk
Southern Railway from February to
September 1992, and prior thereto
was Vice President-
Administration.
Paul N. Austin, 53, Present position since June 1994.
Vice President-Personnel Also, Vice President-Personnel of
Norfolk Southern Corporation
since June 1994. Served as
Assistant Vice President-
Personnel of Norfolk Southern
Corporation from February 1993 to
June 1994, and prior thereto was
Director Compensation.
William B. Bales, 62, Present position since October
Vice President 1995. Also, Senior Vice
President-International of
Norfolk Southern Corporation
since October 1995. Served as
Vice President-Coal Marketing of
Norfolk Southern Railway and
Norfolk Southern Corporation
from August 1993 to October
1995, and prior thereto was Vice
President-Coal and Ore Traffic.
James C. Bishop, Jr., 60, Present position since March 1,
Vice President-Law 1996. Also, Executive Vice
President-Law of Norfolk
Southern Corporation since
March 1, 1996, and prior thereto
was Vice President-Law.
PAGE 19
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- ------------------------------------
R. Alan Brogan, 56, Present position since December
Vice President- 1992. Also, Executive Vice
Transportation Logistics President-Transportation
Logistics of Norfolk Southern
Corporation since December 1992,
and prior thereto was Vice
President-Quality Management.
David A. Cox, 60, Present position since December
Vice President-Properties 1995. Also, Vice President-
Properties of Norfolk Southern
Corporation since December 1995,
and prior thereto was Assistant
Vice President-Industrial
Development.
Thomas L. Finkbiner, 44, Present position since August 1993.
Vice President-Intermodal Also, Vice President-Intermodal
of Norfolk Southern Corporation
since August 1993. Served as
Senior Assistant Vice President-
International and Intermodal of
Norfolk Southern Corporation
from April to August 1993, and
prior thereto was Assistant Vice
President-International and
Intermodal.
Robert C. Fort, 52, Present position since December
Vice President- 1996. Also, Vice President-
Public Relations Public Relations of Norfolk
Southern Corporation since
December 1996, and prior thereto
was Assistant Vice President-
Public Relations.
John W. Fox, Jr., 49, Present position since October
Vice President- 1995. Also, Assistant Vice
Coal Marketing President-Coal Marketing of
Norfolk Southern Corporation
from August 1993 to October
1995, and prior thereto was
General Manager Eastern Region.
Thomas J. Golian, 63, Present position since October
Vice President 1995. Also, Executive Assistant
to the Chairman, President and
CEO of Norfolk Southern
Corporation from April 1993 to
October 1995, and prior thereto
was Special Assistant to the
President.
PAGE 20
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- ------------------------------------
James A. Hixon, 43, Present position since June 1993.
Vice President-Taxation Also, Vice President-Taxation of
Norfolk Southern Corporation
since June 1993, and prior
thereto was Assistant Vice
President-Tax Counsel.
Jon L. Manetta, 58, Present position since December
Vice President- 1995. Also, Vice President-
Transportation & Mechanical Transportation & Mechanical of
Norfolk Southern Corporation
since December 1995. Served as
Vice President-Transportation of
Norfolk Southern Railway and
Norfolk Southern Corporation
from June 1994 to December 1995,
Assistant Vice President-
Transportation from October 1993
to June 1994, Assistant Vice
President-Strategic Planning
from January to October 1993,
and prior thereto was Director
Joint Facilities and Budget.
Harold C. Mauney, Jr., 58, Present position since December
Vice President-Operations 1996. Also, Vice President-
Planning and Budget Operations Planning and Budget
of Norfolk Southern Corporation
since December 1996, and prior
thereto was Vice President-
Quality Management.
Donald W. Mayberry, 53, Present position since December
Vice President- 1995. Also, Vice President-
Research and Tests Research and Tests of Norfolk
Southern Corporation since
December 1995, and prior thereto
was Vice President-Mechanical.
James W. McClellan, 57, Present position since October
Vice President- 1993. Also, Vice President-
Strategic Planning Strategic Planning of Norfolk
Southern Corporation since
October 1993, and prior thereto
was Assistant Vice President-
Corporate Planning.
PAGE 21
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- ------------------------------------
Kathryn B. McQuade, 40, Present position since December
Vice President- 1992. Also, Vice President-
Internal Audit Internal Audit of Norfolk
Southern Corporation since
December 1992, and prior thereto
was Director-Income Tax
Administration.
Charles W. Moorman, 45, Present position since October
Vice President- 1993. Also, Vice President-
Information Technology Information of Norfolk Southern
Corporation since October 1993.
Served as Vice President-
Employee Relations of Norfolk
Southern Railway and Norfolk
Southern Corporation from
December 1992 to October 1993,
and prior thereto was Vice
President-Personnel and Labor
Relations.
Phillip R. Ogden, 56, Present position since December
Vice President-Engineering 1992. Also, Vice President-
Engineering of Norfolk Southern
Corporation since December 1992,
and prior thereto was Assistant
Vice President-Maintenance.
L. I. Prillaman, Jr., 53, Present position since October
Vice President and 1995. Also, Executive Vice
Chief Traffic Officer President-Marketing of Norfolk
Southern Corporation since
October 1995. Served as Vice
President-Properties of Norfolk
Southern Railway and Norfolk
Southern Corporation from
December 1992 to October 1995,
and prior thereto was Vice
President and Controller.
John P. Rathbone, 45, Present position since December
Vice President and 1992. Also, Vice President and
Controller Controller of Norfolk Southern
Corporation since December 1992,
and prior thereto was Assistant
Vice President-Internal Audit.
William J. Romig, 52, Present position since December
Vice President 1992. Also, Vice President and
Treasurer of Norfolk Southern
Corporation since December 1992,
and prior thereto was Assistant
Vice President-Finance.
PAGE 22
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- ------------------------------------
Donald W. Seale, 44, Present position since August 1993.
Vice President- Also, Vice President-Merchandise
Merchandise Marketing Marketing of Norfolk Southern
Corporation since August 1993.
Served as Assistant Vice
President-Sales and Service of
Norfolk Southern Corporation
from May 1992 to August 1993,
and prior thereto was Director-
Metals, Waste and Construction.
Robert S. Spenski, 62, Present position since June 1994.
Vice President- Also, Vice President-Labor
Labor Relations Relations of Norfolk Southern
Corporation since June 1994, and
prior thereto was Senior
Assistant Vice President-Labor
Relations.
Rashe W. Stephens, Jr., 55, Present position since December
Vice President- 1996. Also, Vice President-
Quality Management Quality Management of Norfolk
Southern Corporation since
December 1996. Served as
Assistant Vice President-Public
Affairs of Norfolk Southern
Corporation from February 1993
to December 1996, and prior
thereto was Director, EEO and
Manpower Planning.
Stephen C. Tobias, 52, Present position since October
Vice President 1993. Also, Executive Vice
President-Operations of Norfolk
Southern Corporation since July
1994, and Senior Vice President-
Operations from October 1993 to
July 1994. Served as Vice
President-Strategic Planning of
Norfolk Southern Railway and
Norfolk Southern Corporation
from December 1992 to October
1993, and prior thereto was Vice
President-Transportation.
Henry C. Wolf, 54, Present position since June 1993.
Vice President-Finance Also, Executive Vice President-
Finance of Norfolk Southern
Corporation since June 1993, and
prior thereto was Vice President-
Taxation.
PAGE 23
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- ------------------------------------
Sandra T. Pierce, 42, Present position since June 1995.
Corporate Secretary Also, Assistant Corporate
Secretary of Norfolk Southern
Corporation since June 1995.
Served as Assistant Corporate
Secretary-Planning of Norfolk
Southern Corporation from
October 1993 to June 1995, and
prior thereto was Assistant to
Corporate Secretary.
Ronald E. Sink, 54, Present position since September
Treasurer 1987.
PAGE 24
PART II
Item 5. Market for the Registrant's Common Stock and Related
- ------ ----------------------------------------------------
Stockholder Matters.
-------------------
COMMON STOCK
- ------------
Since June 1, 1982, NS has owned all the common stock of
Norfolk Southern Railway Company. The common stock is not publicly
traded.
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 as
deemed appropriate at the time of issuance.
The $2.60 Cumulative Preferred Stock, Series A (Series A
Stock), of which 1,197,027 shares were issued and 1,096,907 shares were
held other than by subsidiaries as of December 31, 1996, 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's
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 Series A Stock is redeemable
at the option of Norfolk Southern Railway Company at $50 per share plus
accrued dividends. On liquidation, the stock is entitled to $50 per share
plus accrued dividends before any amounts are paid on any other class of
stock.
In June 1989, NS announced its intention to purchase up to
250,000 shares of the outstanding Series A Stock during the subsequent
two-year period. Since then, NS extended the stock purchase program
through 1996. As of December 31, 1996, NS had purchased 176,608 shares of
Series A Stock at a total cost of $6.7 million; as of the same date, NS
held a total of 176,703 shares.
PAGE 25
Item 6. Selected Financial Data.
- ------ -----------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Five-Year Financial Review
1996 1995 1994 1993<F1> 1992
--------- --------- --------- --------- ---------
($ in millions)
RESULTS OF OPERATIONS:
Railway operating
revenues $ 4,101.0 $ 4,011.8 $ 3,918.1 $ 3,727.6 $ 3,709.1
Railway operating
expenses 2,936.3 2,948.5 2,869.2 2,805.9 2,781.7
--------- --------- --------- --------- ---------
Income from
railway operations 1,164.7 1,063.3 1,048.9 921.7 927.4
Other income - net 39.1 43.3 46.6 57.6 49.5
Interest expense on debt 33.9 33.0 28.3 32.3 44.6
--------- --------- --------- --------- ---------
Income before
income taxes 1,169.9 1,073.6 1,067.2 947.0 932.3
Provision for
income taxes 401.4 371.9 385.2 412.8 325.8
--------- --------- --------- --------- ---------
Income before
accounting changes 768.5 701.7 682.0 534.2 606.5
Cumulative effect of
accounting changes -- -- -- 247.8 --
--------- --------- --------- --------- ---------
Net income $ 768.5 $ 701.7 $ 682.0 $ 782.0 $ 606.5
========= ========= ========= ========= =========
FINANCIAL POSITION:
Total assets $11,053.3 $10,752.3 $10,289.2 $ 9,760.4 $ 9,675.5
Total long-term debt,
including current
maturities $ 597.9 $ 574.4 $ 539.8 $ 604.9 $ 714.5
Stockholders' equity $ 5,771.8 $ 5,645.4 $ 5,440.5 $ 5,184.9 $ 4,784.3
OTHER:
Capital expenditures $ 754.0 $ 713.3 $ 639.6 $ 629.2 $ 617.1
Number of stockholders
at year-end 2,763 3,025 3,281 3,517 3,725
Average number of
employees <F2> 23,361 24,488 24,710 25,531 25,650
<FN>
<F1> 1993 results include a $60.8 million increase in the provision for
income taxes reflecting a 1% increase in the federal income tax
rate. The cumulative effect of accounting changes increased 1993
earnings by $247.8 million. The change in accounting for income
taxes increased net income by $470.4 million, with a corresponding
reduction in deferred taxes. The changes in accounting for
postretirement and postemployment benefits decreased net income by
$222.6 million.
<F2> The employee count includes Norfolk Southern Corporation's employees
whose primary duties relate to rail operations.
</FN>
PAGE 26
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion and analysis (which--with the exception of
"Proposed Acquisition of Conrail"--is identical to what is contained in
the Corporation's 1996 Annual Report to Stockholders) should be read in
conjunction with the Consolidated Financial Statements and Notes
beginning on page 40 and the Five-Year Financial Review on page 25.
SUMMARIZED RESULTS OF OPERATIONS
1996 Compared with 1995
- -----------------------
Net income in 1996 was $768.5 million, an increase of 10%. However,
results in 1995 were affected by a $33.6 million early retirement charge,
which reduced net income by $20.4 million.
Absent the effects of that charge, 1996 net income was up 6%. The
improvement was due to increased income from railway operations of
$67.8 million, or 6%, reflecting higher operating revenues, up 2%, and
generally flat operating expenses, up less than 1% (excluding the early
retirement charge).
1995 Compared with 1994
- -----------------------
Net income in 1995 was $701.7 million, up 3%. Excluding the 1995
early retirement charge, net income rose 6%. These results were driven
primarily by improved income from railway operations, up $48.0 million,
or 5% (excluding the early retirement charge). Railway operating revenues
increased 2%, while railway operating expenses, excluding the early
retirement charge, were up 2%. Interest expense on debt was up
$4.7 million, largely due to a lower level of capitalized interest.
RAILWAY OPERATING REVENUES AND EXPENSES
(Shown as a Graph in the Annual Report to Stockholders)
($ in millions)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Revenues $4,101.0 $4,011.8 $3,918.1 $3,727.6 $3,709.1
Expenses 2,936.3 2,948.5 2,869.2 2,805.9 2,781.7
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
- --------------------------
Railway operating revenues were $4.1 billion in 1996, compared with
$4.0 billion in 1995 and $3.9 billion in 1994. The $89.2 million
improvement in 1996, compared with 1995, was the result of improvements
in all market groups except paper/forest and agriculture. The
$93.7 million improvement in 1995, compared with 1994, was primarily
attributable to increases in the intermodal, automotive and
metals/construction market groups.
PAGE 27
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
The following table presents a three-year comparison of revenues by
market group.
RAILWAY OPERATING REVENUES BY MARKET GROUP
(Also Shown as a Graph in the Annual Report to Stockholders)
($ in millions)
1996 1995 1994
-------- -------- --------
Coal $1,304.7 $1,267.8 $1,290.2
Chemicals 555.9 536.5 534.7
Paper/forest 513.0 537.3 521.8
Automotive 488.7 449.1 429.0
Agriculture 393.3 393.7 379.5
Metals/construction 358.0 353.1 334.2
Intermodal 487.4 474.3 428.7
-------- -------- --------
Total $4,101.0 $4,011.8 $3,918.1
======== ======== ========
Note: Revenues previously reported as "Other railway
revenues" (principally switching and demurrage) have
been reclassified into each of the commodity groups.
In 1996, increases in coal, automotive, intermodal and chemicals
traffic offset decreases in the remaining market groups. For 1995
improvements in automotive, agriculture, metals/construction and
intermodal traffic offset declines in the other groups. The traffic
volume gains in both years accounted for most of the revenue improvement
as shown in the table below. Average revenue per unit rose in both 1996
and 1995 due to moderate rate increases.
RAILWAY OPERATING REVENUE VARIANCE ANALYSIS
Increases (Decreases)
($ in millions)
1996 vs. 1995 1995 vs. 1994
------------- -------------
Traffic volume $72.6 $62.6
Revenue per unit 16.6 31.1
----- -----
Total $89.2 $93.7
===== =====
PAGE 28
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
COAL traffic volume increased 4%, and revenues increased 3% in 1996,
primarily due to increased utility and export coal tonnage. Coal revenues
represented almost 32% of total railway operating revenues in 1996, and
90% of coal shipments originated on NS Rail's lines. Coal traffic volume
declined 1%, and revenues were down 2% in 1995, compared with 1994, as
coal tonnage by type remained relatively stable.
TOTAL COAL, COKE AND IRON ORE TONNAGE
(In millions of tons)
1996 1995 1994
----- ----- -----
Utility 74.7 70.3 71.6
Export 27.0 25.8 25.2
Steel 20.6 22.1 21.6
Other 7.9 6.9 7.5
----- ----- -----
Total 130.2 125.1 125.9
===== ===== =====
Note: Certain prior year amounts have been
reclassified to conform to the current year
presentation.
Utility coal traffic increased 6% in 1996, compared with 1995.
Several utility customers in the NS Rail service region shifted more
generation to coal-fired plants, as many nuclear power plants experienced
downtime. In addition, NS Rail gained market share at several
Southeastern utilities.
In 1995, utility coal traffic decreased slightly due to moderate
weather throughout much of the NS Rail service region during the first
half of the year and to sustained periods of maximum generation from
several Southeastern nuclear power plants. Partially mitigating these
declines were increased shipments of both NS Rail- and foreign-line-
originated, low-sulfur coal related to utilities' compliance with Phase I
of the Clean Air Act Amendments, which took effect on January 1, 1995.
The near-term outlook for utility coal is positive, as a significant
number of the mines served by NS Rail produce coals that satisfy both
Phase I and the more stringent Phase II requirements, which take effect
on January 1, 2000. However, adoption of tighter restrictions on nitrous
oxide particulate emissions, as proposed by the Environmental Protection
Agency, could impose added cost burdens on some coal-fired plants.
Utilities in the Southeast, NS Rail's largest steam coal market, are
expected to increase their demand for Central Appalachian coal. Utility
deregulation is likely to affect the structure and development of that
market. Specifically, it is widely anticipated that U.S. utilities will
have greater flexibility in selling electricity to, and buying it from,
other regional markets. At present, however, transmission line capacity
is somewhat strained on the lines leading to and from the Southeastern
U.S., and resistance by environmentalists and the high cost of adding new
line capacity could deter its development. Less certain is the outlook
for demand for Central Appalachian coal from utilities in the Midwest, as
the delivered cost of Western coal tends to be lower. However, NS Rail
expects to participate in the movement of any Western coal that displaces
NS Rail-originated deliveries.
Export coal traffic increased 5% in 1996, compared with 1995, as
NS Rail benefited from increased steam coal exports to Italy and greater
metallurgical shipments to Germany, a result of reduced subsidies to
German coal producers that enhanced the competitiveness of U.S. coal.
Increased exports of U.S. coal to Brazil also contributed to the
improvement.
PAGE 29
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Export coal traffic increased 2% in 1995, benefiting from the
continued recovery of European steel production. Demand from other parts
of the world also improved. Brazil, Belgium, France, Romania and Japan
took increased amounts of NS Rail coal. In addition, NS Rail began
handling metallurgical coal for steel production in Mexico. Congestion
and high barge rates on the Mississippi River caused an increase in
movements over NS Rail's coal piers in Norfolk, Va.
Metallurgical coal exports are expected to experience slight to
modest growth through the year 2000, as continued reductions in European
government subsidies to coal producers should benefit NS Rail-served
exporters. A gradual decline is projected in the long term, as new steel-
making technologies replace those requiring coking coal. Demand for
export steam coal is expected to increase, and NS Rail is working to
increase its participation in this market.
Steel coal domestic traffic was down 7%, as aggressive producer
pricing of higher volatile metallurgical coals not located on NS Rail's
lines resulted in a loss of traffic. In 1995, traffic was up 2% due to
completion of extended coke oven work at one facility and continued
strong demand for domestic coke for making steel. Advanced technologies
that allow production of steel with little or no coke could cause this
market to decline slowly over the long term. However, NS Rail could
participate in the movement of non-coking coal used by technologies such
as pulverized coal injection.
Other coal traffic, primarily steam coal shipped to manufacturing
plants, increased 14% in 1996, compared with 1995, reflecting gains from
other modes of transportation and more seasonal weather conditions in
1996. Traffic volume declined 8% in 1995, compared with 1994, resulting
from lower demand for in-plant use of electricity due to mild weather. In
addition, some industries have switched to natural gas as a fuel source.
This market is expected to remain stable in coming years, as growth
through innovative packaged delivery services offsets losses from natural
gas conversions.
MERCHANDISE traffic volume in 1996 decreased slightly, compared with
1995, as increases in automotive, intermodal and chemicals traffic were
more than offset by declines in the remaining commodity groups. However,
increased average revenues for most commodity groups resulted in a 2%
improvement in revenues. In 1995, merchandise traffic volume increased
5%, driven by increases in intermodal, automotive and agriculture
traffic. Merchandise revenues in 1995 increased 4%, compared with 1994.
CHEMICALS traffic and revenues grew 3% and 4%, respectively, for
1996. Fertilizer and plastics markets strengthened during 1996, which
resulted in increased traffic and revenues for these two groups. In
addition, the harsh winter resulted in greater movements of liquid
petroleum gas, and industrial chemicals remained strong throughout the
year. These 1996 results compared favorably with relatively flat carloads
and revenues in 1995, as increases for general chemicals were
overshadowed by weakness in the plastics and fertilizer markets. The
chemicals market group is expected to continue to show moderate growth
through 1997, as NS Rail expands its Thoroughbred Bulk Distribution
facilities and chemicals production nationwide is expected to increase.
PAPER/FOREST traffic and revenues each declined 5% in 1996, due to
the overall downturn in the paper and forest products industry. Early in
1995, the paper industry enjoyed record price levels and associated
volumes, but growth slowed and inventories of paper products swelled in
late 1995 and into 1996. To correct the inventory problems, many large
paper producers operated mills well below capacity and shut down mills to
balance capacity with demand. This compares to a 1% decrease in volume
and a 3% increase in revenues for 1995. Paper and pulpwood products
traffic in 1995 was about even with 1994, while lumber traffic suffered
from weak housing starts. These markets are expected to begin a slight
turnaround by mid-1997.
PAGE 30
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
AUTOMOTIVE traffic rose 8%, and revenues increased 9%, both the
highest in this group's history. Auto parts provided the majority of the
growth as volume increased 21%, while vehicle traffic increased 3%. NS
Rail opened two just-in-time (JIT) rail centers at Hagerstown, Md., and
near Buffalo, N.Y., in 1996 for distribution of vehicle parts for GM.
Also, GM awarded NS Rail another JIT rail center to be constructed in
1997 near Dayton, Ohio. These three centers are expected to handle over
23,000 carloads annually by 1998. 1996 also marked the first time in
several years that all NS Rail-served assembly plants were on-line. GM's
Wentzville, Mo., assembly plant returned to production early in the year
after a two-year retooling, and GM's Doraville, Ga., plant returned
midyear from a one-year retooling. In 1996, BMW's new plant at Greer,
S.C., reached full production. In 1995, automotive traffic increased 4%,
and revenues were up 5%. Strong production at selected plants that
produce popular cars and trucks mitigated the effects of several plants'
being shut down or operated at reduced capacity.
Good market growth is expected in 1997, supported by the new JIT
rail centers, full production levels at existing plants, the start of
production at the new Mercedes plant in Tuscaloosa, Ala., and the
expansion of Toyota's plant in Georgetown, Ky. Supporting long-term
growth, Ford awarded NS Rail a 12-year contract in 1996 to handle
approximately 3 million new vehicles annually through four mixing centers
to be built in 1997. When operational in 1998, NS Rail expects to
increase its motor vehicle business with Ford by 60%. In addition,
Toyota's new Princeton, Ind., truck plant may add to 1998-1999 traffic.
For the automotive industry as a whole, annual production increases are
forecast through 2002, as transplants bring production to North America,
exports continue to rise and the Mexican and Canadian economies improve.
AGRICULTURE traffic declined 4% and revenues were flat in 1996.
Despite strong demand for feed grains in the Southeast, grain traffic
suffered, as poor crops and strong export demand left NS Rail receivers
competing for limited supplies. Slight average revenue growth occurred,
resulting primarily from longer hauls, as receivers reached farther west
for grain supplies. In 1995, agriculture traffic rose 2%, and revenues
increased 4%, due to higher grain shipments from the Midwest to the
Southeast poultry industry.
Moderate growth is expected in 1997, as 1996 crops should provide
abundant supplies throughout the year, and demand from the poultry market
for feed grain continues to grow. Also for 1997, a full year of new
business is expected from two feed mills which were ramping up production
in 1996, and from a new major grain elevator located on a line purchased
during 1996 from Conrail.
METALS/CONSTRUCTION traffic declined 2%, but revenues were up 1% for
1996. Construction carloads fell behind in early 1996 due to inclement
weather and were flat the rest of the year; however, higher average
revenues more than offset the volume decline. In the metals market, NS
Rail's shipments remained strong due to a healthy domestic steel market,
which has added capacity through improved efficiency at integrated mills
and new mini-mills. In 1995, metals/construction traffic was up slightly,
and revenues increased 6%, as increases in the steel and aluminum markets
were somewhat offset by reduced demand for construction products.
Moderate growth is expected for 1997. New steel production
facilities in Decatur, Ala., and Memphis, Tenn., are expected to
contribute to growth in late 1997. Although construction starts are
expected to decrease in 1997 versus 1996, projects already begun, such as
at the Chesapeake Bay Bridge Tunnel, the opening of new cement terminals
and the expansion of various on-line plants, are expected to produce
moderate growth for construction in 1997 and beyond.
PAGE 31
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
INTERMODAL traffic volume increased 5% and revenues increased 3%,
both reaching record levels in 1996, driven by increased domestic
container and Triple Crown Services Company (TCSC) volume.
EMP, the container equipment-sharing arrangement with Union Pacific
and Conrail, contributed significantly to domestic growth. International
container volume declined only slightly, despite an industry slowdown
that began in the spring and lasted until the fall. NS Rail's overall
market share improved slightly due to new international business and the
continued domestic container and TCSC growth.
Intermodal volume rose 12%, and revenues increased 11% in 1995.
Although intermodal traffic levels nationwide declined in 1995, NS Rail
intermodal achieved record levels of volume, revenues and profitability,
led by container shipments in both domestic and international service.
During 1995, a seven-year agreement with Hanjin Shipping Company was
signed under which NS Rail will handle nearly all of Hanjin's
international container business in NS Rail's territory east of the
Mississippi River.
EMP contributed significantly to domestic growth. Almost all the
increase in international container business was attributable to new
services, thereby increasing NS Rail's market share. Domestic business
also was augmented by growth in the trucking segment, as both truckload
and less-than-truckload companies increased their use of NS Rail
intermodal. Additionally, intermodal marketing companies increased their
business on NS Rail.
NS Rail's intermodal volume is expected to remain strong, resulting
from continued domestic container and TCSC volume growth and the recovery
in the international market. Higher wages in the trucking industry may
encourage shippers to use NS Rail's intermodal and TCSC networks. In
addition, growth of steamship companies' use of Suez Canal services may
have a positive impact on international container shipments into and out
of Southeast ports.
Railway Operating Expenses
- --------------------------
Railway operating expenses in 1996 decreased slightly; however,
1995's expenses included a $33.6 million charge for an early retirement
program (see Note 12). Excluding that early retirement charge, railway
operating expenses increased 1%, despite a 2% increase in traffic volume.
Railway operating expenses in 1995 were up 3% (up 2%, excluding the early
retirement charge) on a 3% increase in traffic volume.
As a result, the NS Rail railway operating ratio, which measures the
percentage of railway revenues consumed by expenses, was a record 71.6 in
1996, compared with 73.5 (72.7 excluding the early retirement charge) in
1995 and 73.2 in 1994. NS Rail's railway operating ratio continues to be
the best among the major railroads in the United States.
RAILWAY OPERATING RATIO
(Shown as a Graph in the Annual Report to Stockholders)
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
71.6% 73.5% 73.2% 75.3% 75.0%
PAGE 32
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
The following table shows the changes in railway operating expenses
summarized by major classifications.
RAILWAY OPERATING EXPENSES
Increases (Decreases)
($ in millions)
1996 vs. 1995 1995 vs. 1994
------------- -------------
Compensation and benefits $(81.3)* $108.9 *
Materials, services and rents 6.3 (45.4)
Depreciation 20.1 22.3
Diesel fuel 43.6 1.5
Casualties and other claims 2.1 (13.7)
Other (3.0) 5.7
------ ------
Total $(12.2) $ 79.3
====== ======
*Includes the $33.6 million early retirement charge in 1995.
COMPENSATION AND BENEFITS, which represents about half of total
railway operating expenses, decreased 5% in 1996 and increased 8% in
1995. Excluding the 1995 early retirement charge, compensation and
benefits expenses were down 3% in 1996 and up 5% in 1995.
The 1996 decrease (excluding the effect of the 1995 early retirement
charge) was principally attributable to: (1) reduced employment resulting
from the 1995 early retirement program and productivity improvements due
to ongoing reductions in train crew sizes and train efficiencies and
(2) lower costs for fringe benefits, principally medical costs for salaried
employees. These decreases were somewhat offset by increases attributable
to higher volume and increased wage rates resulting from new labor
agreements.
The 1995 increase was primarily a result of: (1) higher wages;
(2) increased performance-based compensation accruals, particularly those
linked to the market price of NS stock, which rose nearly $19 per share
in 1995; and (3) higher health care costs for agreement employees.
As of the end of 1996, NS Rail had negotiated labor agreements with
all of its unions, except the American Train Dispatchers which represents
about 200 employees. The accords with the 12 other union organizations,
which include compensation settlements in line with other major
industries, will not be due for change until after January 1, 2000.
MATERIALS, SERVICES AND RENTS includes items used for the
maintenance of the railroads' lines, structures and equipment; the costs
of services purchased from outside contractors, including the net costs
of operating joint (or leased) facilities with other railroads; and the
net cost of equipment rentals. This category of expenses increased 1% in
1996 and decreased 7% in 1995.
The increase in 1996 resulted from higher intermodal expenses due to
increased volume, as well as higher equipment rent costs, that more than
offset lower locomotive and car repair costs.
Equipment rents, which represent the cost to NS Rail of using
equipment (mostly freight cars) owned by other railroads or private
owners, less the rent paid to NS Rail for the use of its equipment, were
up 10% in 1996. This increase was due to a variety of factors, including
increased intermodal container traffic, lower receipts from short-term
leases of locomotives to various railroads and increased freight car
leases to meet customer requirements. These increased costs were somewhat
offset by lower net costs for multilevel equipment.
PAGE 33
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Locomotive repair costs continued to be reduced as a result of the
replacement of older units with newer ones. NS Rail expects to acquire
120 new locomotives in 1997. Freight car repair costs continued to
benefit from the effects of initiatives launched in 1995 to improve asset
utilization that resulted in the re-engineering of maintenance practices,
facilitating the closure of two repair facilities in 1995 and the
disposition of 17,000 excess freight cars, which was substantially
completed in 1996.
The decrease in "Materials, services and rents" in 1995 reflected
initial results from the initiatives to improve asset utilization, as
well as reduced locomotive repair costs and lower net equipment rental
expense. The reduction in equipment rents in 1995 was due to the short-
term leasing of certain older locomotives to other railroads and the
deregulation of car-hire rates among railroads, which began in 1994.
These favorable results were somewhat offset by increased expenses
related to the 12% growth in intermodal traffic.
DEPRECIATION expense (see Note 1, "Properties," for NS Rail's
depreciation policy) was up 5% in 1996 and 6% in 1995. Both increases
were due to property additions, reflecting substantial levels of capital
spending over the last several years.
DIESEL FUEL costs rose 23% in 1996, but were up less than 1% in
1995. The increase in 1996 was due to a 20% increase in the average price
per gallon, as prices reached levels unseen since 1991 during and
following the Persian Gulf Crisis. Consumption was up 3% on a similar
increase in carloadings. The 1995 increase was primarily due to a small
increase in the average price per gallon.
CASUALTIES AND OTHER CLAIMS (including estimates of costs related to
personal injury, property damage and environmental matters) increased 2%
in 1996, but declined 10% in 1995. In 1996, higher accruals for
environmental remediation costs more than offset reduced accruals for
personal injury liabilities and the effects of a nonrecurring liability
insurance premium refund. The 1995 decrease was primarily attributable to
environmental costs in 1994 associated with a tankcar leak.
The largest component of "Casualties and other claims" is personal
injury expense. NS Rail continued to benefit from a reduction in the
number of reportable injuries in 1996; however, as in prior years, much
of that benefit was offset by an increase in the cost of third-party
injury claims and by the continuing costs associated with the handling of
non-accidental "occupational" claims. NS Rail continues to work actively
to reduce the risk of all accidents.
The rail industry remains uniquely susceptible to litigation
involving job-related accidental injury and occupational claims because
of an outmoded law, the Federal Employers' Liability Act (FELA),
originally passed in 1908 and applicable only to railroads. This law,
which covers employees' claims for on-the-job injuries, promotes an
adversarial claim settlement environment and produces results that are
unpredictable and inconsistent, at far greater cost to the rail industry
than the no-fault workers' compensation system to which non-rail
competitors are universally subject. The railroads have been unsuccessful
so far in efforts to persuade Congress to replace FELA with a no-fault
workers' compensation system.
OTHER expenses were down 2% in 1996, but were up 4% in 1995. The
1995 increase was due to higher sales, use and franchise taxes.
NS Rail expects to complete work to make its software year-2000
compliant by the end of 1998. It is anticipated that the total cost of
conversion will not be material to NS Rail's financial statements.
Income Taxes
- ------------
Income tax expense in 1996 was $401.4 million for an effective rate
of 34.3%, compared with an effective rate of 34.6% in 1995 and 36.1% in
1994.
The effective rates in 1996 and 1995 were below the statutory
federal and state rates as a result of investments in corporate-owned
life insurance and coal-seam gas properties and from favorable
adjustments upon filing the prior year tax returns. In addition, 1996
benefited from favorable adjustments resulting from settlement of
PAGE 34
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
federal income tax years 1990-1992. The effective rate in 1994 also
was below the statutory federal and state rates due to favorable
adjustments resulting from settlement of federal income tax years
1988 and 1989, an adjustment to the valuation allowance for deferred
tax assets and a favorable adjustment upon filing the 1993 tax return.
Deferred tax expense was an unusually high portion 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.
Accounting Changes and New Accounting Pronouncements
- ----------------------------------------------------
As discussed in Note 1 under "Required Accounting Changes,"
effective January 1, 1996, NS Rail adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121),
which had no material effect on NS Rail's financial statements.
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 but increased "Investments" and
"Stockholders' equity" in the Consolidated Balance Sheets (see also
Note 14).
On October 10, 1996, the AICPA issued Statement of Position 96-1,
"Environmental Remediation Liabilities" (SOP 96-1), which is effective
for fiscal years beginning after December 15, 1996. SOP 96-1 provides
guidance with respect to recognition and measurement of environmental
remediation liabilities and disclosure of such liabilities in financial
statements. SOP 96-1 is not expected to have a material effect on
NS Rail's financial statements.
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 41).
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 42). CAPITAL RESOURCES
refers to the ability of an organization to raise funds through the sale
of either debt or equity (stock) securities.
($ in millions) 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Cash and short-term
investments $315.5 $230.0 $180.9 $152.0 $ 64.0
Current assets to
current liabilities 1.2 1.0 1.1 1.3 1.2
Debt to total
capitalization 9.8% 9.6% 9.4% 10.9% 13.4%
Return on average
stockholders' equity 13.5% 13.0%* 12.8% 12.0%* 13.1%
* Excluding unusual items: In 1995, the early retirement
charge; and, in 1993, the cumulative effects of required
accounting changes and the prior years' effect of the federal
income tax rate increase.
PAGE 35
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Cash provided by operating activities, NS Rail's principal source of
liquidity, decreased $49.9 million, or 4%, in 1996 and increased
$96.4 million, or 8%, in 1995. Since the consolidation in 1982, cash
provided by operating activities has been sufficient to fund dividend
requirements, debt repayments and a significant portion of capital
spending. The decrease in 1996 was largely attributable to lump-sum wage
payments associated with labor contract settlements and higher income tax
payments related to the settlement of federal income tax years 1990-1992.
The improvement in 1995 was primarily a result of increased income from
operations (excluding the early retirement charge, a non-cash item) and
improved billing and collection of receivables.
Cash used for investing activities decreased 7% in 1996 and was up
56% in 1995. Property additions account for most of the spending in this
category. In 1994, large borrowings on corporate-owned life insurance
offset much of the use of cash for property additions in that year.
The following tables show capital spending, track and equipment
statistics for the past five years.
CAPITAL EXPENDITURES
--------------------
(Also Shown as a Graph in the Annual Report to Stockholders)
($ in millions) 1996* 1995* 1994 1993 1992
------ ------ ------ ------ ------
Road $428.4 $379.5 $382.3 $411.0 $425.1
Equipment 325.6 332.6 235.0 218.1 187.8
Other property -- 1.2 22.3 0.1 4.2
------ ------ ------ ------ ------
Total $754.0 $713.3 $639.6 $629.2 $617.1
====== ====== ====== ====== ======
* Includes non-cash equipment expenditures of $107.8 million
in 1996 and $104.5 million in 1995 (see Note 8 on page 51).
TRACK STRUCTURE STATISTICS (CAPITAL AND MAINTENANCE)
----------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Track miles of
rail installed 401 403 480 574 660
Miles of track
surfaced 4,686 4,668 4,760 5,048 5,690
New crossties
installed
(millions) 1.9 2.0 1.7 1.6 1.9
AVERAGE AGE OF RAILWAY EQUIPMENT
--------------------------------
(Years) 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Freight cars 22.3 22.0 21.9 21.3 20.9
Locomotives 15.4 15.7 15.8 15.1 14.5
Retired
locomotives 24.4 22.6 23.6 24.7 24.0
PAGE 36
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Since 1988, NS Rail has rebodied about 23,000 coal cars and plans to
continue that program, although at a slower rate, in 1997. This work,
performed at NS Rail's Roanoke Car Shop, converts hopper cars into high-
capacity steel gondolas or hoppers. As a result, the remaining service
life of the freight car fleet is greater than may be inferred from the
increasing average age shown in the table above.
Efforts to hold down capital spending while increasing business are
ongoing as NS Rail seeks to maximize utilization of its assets. In this
connection, NS Rail began an orderly disposition of approximately 17,000
freight cars in October 1994. This was substantially completed in 1996
with total proceeds of $92 million included in "Property sales and other
transactions" in the 1996 and 1995 Consolidated Statements of Cash Flows.
In 1996, this line item also reflected proceeds from large land sales
(see Note 3).
For 1997, NS Rail is planning $781 million of capital spending.
Barring unforeseen events, total capital spending is expected to continue
to be similar to 1995 and 1996 levels.
Cash used for financing activities decreased 18% in 1996 and 14% in
1995. The higher uses in 1995 and 1994 were due to significant advances
made to NS. In addition, 1994 debt repayments were high due to the
maturity of a large mortgage.
Hedging Activities
- ------------------
As discussed under "Capital Leases" in Note 8, NS Rail has made
limited use of interest rate swaps in connection with certain equipment
financings.
PROPOSED ACQUISITION OF CONRAIL BY NS
As discussed in Note 16, NS commenced an all-cash tender offer for
all Shares of Conrail Inc. (Conrail), on October 24, 1996, in response to
the October 15, 1996, announcement that Conrail had entered into a merger
agreement with CSX.
On February 11, 1997, NS acquired 8.2 million shares of Conrail
stock (approximately 9.9%), representing the approximate maximum number
of Shares NS can buy without triggering Conrail's current anti-takeover
defenses, at a cost of $115 per Share, or $943 million in the aggregate.
The purchase was financed with commercial paper backed by a portion of
the debt commitments secured for the transaction. These Shares have
been placed in a voting trust and under certain circumstances might
have to be sold at a loss.
On February 12, 1997, NS commenced a second tender offer for the
remaining Shares and has notified Conrail of its intention to conduct
a proxy contest in connection with Conrail's 1997 Annual Meeting
of shareholders, currently scheduled for December 19, 1997, seeking,
among other things, to remove certain of the current members of the
Conrail Board and to elect a new slate of nominees designated by NS.
Pursuant to an amendment to the merger agreement between CSX
and Conrail announced on March 7, 1997, CSX has offered to purchase
all Shares for $115 per Share in cash and CSX is permitted to enter
into negotiations with other parties, including NS, concerning the
acquisition of the securities or assets, or concessions relating to
the assets or operations, of Conrail. NS and CSX are negotiating
a comprehensive resolution of the issues confronting the eastern
railroads based on the proposal submitted by NS to both CSX and
Conrail on February 24, 1997. Such a resolution could involve a
joint acquisition of Shares by NS and CSX. However, unless and
until such negotiations are successfully concluded, NS intends to
continue in effect its tender offer for all Shares not owned
by NS.
PAGE 37
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
For additional information concerning NS' pending tender
offer for Shares not owned by NS, reference is made to NS' Tender
Offer Statement on Schedule 14D-1, together with the exhibits
thereto, initially filed with the Securities and Exchange Commission
on February 12, 1997, as amended.
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 clean-up costs incurred by
NS Rail are reflected as receivables in the balance sheet and are not
netted against the associated NS Rail liability. Environmental engineers
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 oversee and interpret its
environmental policy.
Operating expenses for environmental protection totaled
approximately $25 million in 1996 and are anticipated to increase
somewhat in 1997. Capital expenditures for environmental projects
amounted to approximately $6 million in 1996 and are expected to be at
the same level in 1997. As of December 31, 1996, NS Rail's balance sheet
included a reserve for environmental exposures in the amount of
$53 million (of which $12 million is accounted for as a current
liability), which is NS Rail's estimate of the probable costs based
on available information at 111 identified locations. On that date,
nine sites accounted for $19 million of the reserve, and no individual
site was considered to be material. NS Rail anticipates that much of
this liability will be paid out over five years; however, some costs
will be paid out over a longer period.
At many of the 111 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 clean-up costs.
At one such site, the EPA alleged in 1995 that The Alabama Great
Southern Railroad Company (AGS), a subsidiary of NS Rail, is responsible,
along with several other entities believed to be financially solvent, for
past and future clean-up and monitoring costs at the Bayou Bonfouca NPL
Superfund site located in Slidell, La. The EPA bases its claim of NS
Rail's responsibility primarily on the alleged activities in the 1880s of
a company not at the time owned or controlled by an NS Rail subsidiary,
but acquired in 1916. Liability has been contested. Because the amount of
liability that the EPA may assert against NS Rail or AGS is not known,
the materiality of such amount to NS Rail's financial position, results
of operation or liquidity in a particular quarter or year cannot be
assessed at this time. The EPA has indicated that it has expended or
expects to expend a total of approximately $130 million at the site.
With respect to known environmental sites (whether identified by
NS Rail or by the EPA or comparable state authorities), estimates of
NS Rail's ultimate potential financial exposure for a given site or in
the aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available clean-up techniques, the
likely development of new clean-up technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it) and evolving statutory and regulatory
standards governing liability.
PAGE 38
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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 and its subsidiaries work diligently to minimize. In addition,
NS Rail owns, or has owned in the past, land holdings used 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 the probable costs based on available information
for those environmental matters of which the Corporation 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 cost in preparing financial statements. This approach
disregards the effects of inflation on the replacement cost of property.
NS Rail, a capital-intensive company, has approximately $13 billion
invested in such assets. The replacement cost of these assets, as well as
the related depreciation expense, would be substantially greater than the
amounts reported on the basis of historical cost.
TRENDS
- - Utility Deregulation--The potential deregulation of the electrical
utility industry is expected to increase competition among electric
power generators; deregulation in time would permit wholesalers and
possibly retailers of electric power to sell or purchase increasing
quantities of power to or from far-distant generators. The effects of
deregulation on NS Rail and on its patrons cannot be predicted with
certainty; however, NS Rail serves a number of efficient power
producers and is working diligently to assure that its customers remain
competitive in this evolving environment.
- - FELA--NS Rail and the rail industry are continuing their efforts to
replace the FELA with no-fault workers' compensation laws comparable to
those covering employees in other industries.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Annual Report contain
forward-looking statements that are based on current expectations,
estimates and projections. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed in such forward-looking statements.
PAGE 39
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Quarterly Financial Data (Unaudited)
Three Months Ended
-----------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
($ in millions, except per share amounts)
1996
----
Railway operating
revenues $1,016.7 $1,038.0 $1,020.1 $1,026.2
Income from railway
operations 261.8 300.0 300.3 302.6
Net income 163.1 190.6 208.8 206.0
Dividends per serial
preferred share $ 0.65 $ 0.65 $ 0.65 $ 0.65
1995
----
Railway operating
revenues $ 999.2 $1,016.4 $ 996.0 $1,000.2
Income from railway
operations 250.4 284.3 277.9 250.7
Net income 153.3 180.3 193.9 174.2
Dividends per serial
preferred share $ 0.65 $ 0.65 $ 0.65 $ 0.65
Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 1996, 1995 and 1994 40
Consolidated Balance Sheets
As of December 31, 1996 and 1995 41
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994 42
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994 43
Notes to Consolidated Financial Statements 44
Independent Auditors' Report 65
The Index to Consolidated Financial Statement Schedule appears
in Item 14 on page 67.
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 Income
Years ended December 31,
1996 1995 1994
-------- -------- --------
($ in millions)
Railway operating revenues $4,101.0 $4,011.8 $3,918.1
Railway operating expenses:
Compensation and benefits
(Note 12) 1,398.7 1,480.0 1,371.1
Materials, services and rents 629.5 623.2 668.6
Depreciation 403.0 382.9 360.6
Diesel fuel 233.4 189.8 188.3
Casualties and other claims 123.4 121.3 135.0
Other 148.3 151.3 145.6
-------- -------- --------
Railway operating
expenses 2,936.3 2,948.5 2,869.2
-------- -------- --------
Income from
railway operations 1,164.7 1,063.3 1,048.9
Other income - net (Note 3) 39.1 43.3 46.6
Interest expense on debt
(Note 6) 33.9 33.0 28.3
-------- -------- --------
Income before
income taxes 1,169.9 1,073.6 1,067.2
Provision for income
taxes (Note 4) 401.4 371.9 385.2
-------- -------- --------
Net income $ 768.5 $ 701.7 $ 682.0
======== ======== ========
See accompanying notes to consolidated financial statements.
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 Balance Sheets
As of December 31,
1996 1995
--------- ---------
($ in millions)
Assets
Current assets:
Cash and cash equivalents $ 172.1 $ 49.3
Short-term investments (Note 14) 143.4 180.7
Accounts receivable net of allowance
for doubtful accounts of $3.6 million
and $2.8 million, respectively 545.7 542.1
Materials and supplies 61.2 59.8
Deferred income taxes (Note 4) 95.3 98.8
Other current assets 119.8 92.1
--------- ---------
Total current assets 1,137.5 1,022.8
Due from NS - net (Note 2) -- 186.8
Investments (Notes 5 and 14) 870.7 771.0
Properties less accumulated
depreciation (Note 6) 9,014.9 8,750.4
Other assets 30.2 21.3
--------- ---------
Total assets $11,053.3 $10,752.3
========= =========
Liabilities and stockholders' equity
Current liabilities:
Short-term debt (Note 8) $ 27.2 $ 27.2
Accounts payable (Note 7) 549.8 567.2
Income and other taxes 158.3 179.4
Due to NS - net (Note 2) 64.9 --
Other current liabilities (Note 7) 109.0 124.3
Current maturities of
long-term debt (Note 8) 54.3 79.7
--------- ---------
Total current liabilities 963.5 977.8
Long-term debt (Note 8) 543.6 494.7
Other liabilities (Note 10) 886.0 870.8
Minority interests 2.4 2.3
Deferred income taxes (Note 4) 2,886.0 2,761.3
--------- ---------
Total liabilities 5,281.5 5,106.9
--------- ---------
Stockholders' equity:
Serial preferred stock (Note 11) 54.8 54.8
Common stock (Note 11) 166.7 166.7
Other capital 525.5 525.5
Unrealized gain on marketable
securities (Note 14) 397.8 337.3
Retained income 4,627.0 4,561.1
--------- ---------
Total stockholders' equity 5,771.8 5,645.4
--------- ---------
Total liabilities and
stockholders' equity $11,053.3 $10,752.3
========= =========
See accompanying notes to consolidated financial statements.
PAGE 42
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
Years ended December 31,
1996 1995 1994
--------- --------- ---------
($ in millions)
Cash flows from operating activities:
Net income $ 768.5 $ 701.7 $ 682.0
Reconciliation of net income to net cash
provided by operating activities:
Special charge payments (18.0) (29.3) (41.9)
Depreciation 404.2 383.8 361.3
Deferred income taxes 89.4 43.2 114.2
Nonoperating gains on property sales (25.5) (8.7) (7.8)
Changes in assets and liabilities
affecting operations:
Accounts receivable (3.6) 10.6 (29.8)
Materials and supplies (1.4) (1.3) 7.4
Other current assets (13.5) (2.3) (12.5)
Current liabilities other than debt (33.6) 104.5 6.7
Other - net 34.4 48.6 74.8
-------- -------- --------
Net cash provided by
operating activities 1,200.9 1,250.8 1,154.4
Cash flows from investing activities:
Property additions (646.2) (608.8) (639.6)
Property sales and other transactions 96.0 80.4 52.9
Investment purchases (59.7) (65.6) (45.9)
Investment sales and other transactions 22.0 29.4 249.2
Short-term investments - net 36.1 (31.3) 1.0
-------- -------- --------
Net cash used for
investing activities (551.8) (595.9) (382.4)
Cash flows from financing activities:
Dividends (Note 2) (288.6) (291.5) (279.4)
Due to/from NS - net (Note 2) (162.3) (285.1) (394.2)
Proceeds from long-term borrowings 9.6 7.6 41.4
Long-term debt repayments (85.0) (70.4) (108.3)
-------- -------- --------
Net cash used for
financing activities (526.3) (639.4) (740.5)
-------- -------- --------
Net increase in cash
and cash equivalents 122.8 15.5 31.5
Cash and cash equivalents:
At beginning of year 49.3 33.8 2.3
-------- -------- --------
At end of year $ 172.1 $ 49.3 $ 33.8
======== ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized) $ 66.7 $ 48.9 $ 49.1
Income taxes $ 351.3 $ 272.5 $ 252.2
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)
Consolidated Statements of Changes in Stockholders' Equity
Unrealized
Serial Gain on
Preferred Common Other Marketable Retained
Stock Stock Capital Securities Income Total
--------- ------- ------- ---------- -------- --------
($ in millions)
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)
Non-cash
dividends on
common stock
(Note 2) (400.1) (400.1)
Unrealized
gain on
investments 253.1 253.1
----- ------ ------ ------ -------- --------
Balance
December 31, 1994 54.8 166.7 515.0 253.1 4,450.9 5,440.5
Net income - 1995 701.7 701.7
Cash dividends:
Serial preferred
stock, $2.60
per share (2.9) (2.9)
Common stock,
$17.31 per
share (288.6) (288.6)
Non-cash
dividends on
common stock
(Note 2) (300.0) (300.0)
Contribution
from NS
(Note 2) 10.5 10.5
Unrealized
gain on
investments
(Note 14) 84.2 84.2
----- ------ ------ ------ -------- --------
Balance
December 31, 1995 54.8 166.7 525.5 337.3 4,561.1 5,645.4
Net income - 1996 768.5 768.5
Cash dividends:
Serial preferred
stock, $2.60
per share (2.9) (2.9)
Common stock,
$17.14 per
share (285.7) (285.7)
Non-cash
dividends on
common stock
(Note 2) (414.0) (414.0)
Unrealized
gain on
investments
(Note 14) 60.5 60.5
----- ------ ------ ------ -------- --------
Balance
December 31, 1996 $54.8 $166.7 $525.5 $397.8 $4,627.0 $5,771.8
===== ====== ====== ====== ======== ========
See accompanying notes to consolidated financial statements.
PAGE 44
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 (which--with the exception of Note 17--are identical
to those contained in the Corporation's 1996 Annual Report to
Stockholders) are an integral part of the consolidated financial
statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
- -----------------------
Norfolk Southern Railway Company, together with its consolidated
subsidiaries (collectively, NS Rail), is engaged principally in the
transportation of freight by rail, primarily in the Southeast and
Midwest. The consolidated financial statements include Norfolk Southern
Railway Company, Norfolk and Western Railway Company and their majority-
owned and controlled subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation (see Note 15 for
the Norfolk and Western Railway Company and Subsidiaries (NW) summarized
consolidated financial information).
Rail freight consists of raw materials, intermediate products and
finished goods classified in the following market groups: coal,
chemicals, paper/forest, automotive, agriculture, metals/construction and
intermodal. All groups are approximately equal in size based on revenues
except for coal, which accounts for almost one third of total railway
operating revenues. Ultimate destinations for some of the freight and a
portion of the coal shipped are outside the United States.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents
- ----------------
"Cash equivalents" are highly liquid investments purchased three
months or less from maturity.
Investments
- -----------
Marketable equity and debt securities are reported at amortized cost
or fair value depending upon their classification as held-to-maturity,
trading or available-for-sale securities. At December 31, 1996 and 1995,
all "Short-term investments," consisting primarily of United States
government and federal agency securities and all marketable equity
securities consisting principally of NS stock, were designated as
available for sale. Accordingly, unrealized gains and losses, net of
taxes, are recognized in "Stockholders' equity" (see also Note 14).
Materials and Supplies
- ----------------------
"Materials and supplies," consisting mainly of fuel oil and items
for maintenance of property and equipment, are stated at average cost.
The cost of materials and supplies expected to be used in capital
additions or improvements is included in "Properties."
PAGE 45
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Properties
- ----------
"Properties" are stated principally at cost and are depreciated
using group depreciation. Rail is primarily depreciated on the basis of
use measured by gross ton miles. The effect of this method is to
depreciate these assets over 42 years on average. Other properties are
depreciated generally using the straight-line method over estimated
service lives at annual rates that range from 1% to 20%. In 1996, the
overall depreciation rate averaged 2.8% for roadway and 4.0% for
equipment. NS Rail capitalizes interest on major capital projects during
the period of their construction. Maintenance expense is recognized when
repairs are performed. When properties, other than land and non-rail
assets, are sold or retired in the ordinary course of business, the cost
of the assets, net of sale proceeds or salvage, is charged to accumulated
depreciation rather than recognized through income. Gains and losses on
disposal of land and non-rail assets are included in other income (see
Note 3).
Revenue Recognition
- -------------------
Revenue is recognized proportionally as a shipment moves from origin
to destination.
Required Accounting Changes
- ---------------------------
1996 - Effective January 1, 1996, NS Rail adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS
121). SFAS 121 establishes the accounting and reporting requirements for
recognizing and measuring impairment of long-lived assets either to be
held and used or to be held for disposal. SFAS 121 did not have a
material effect on NS Rail's financial statements.
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," net of the related
deferred taxes, is reflected as a separate component of "Stockholders'
equity" in the Consolidated Balance Sheets (see also Note 14).
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.
Non-cash Dividends
- ------------------
In 1996, 1995 and 1994, NS Rail declared and issued to NS non-cash
dividends of $414.0 million, $300.0 million and $400.1 million,
respectively, which were settled by reduction of NS Rail's interest-
bearing advances due from NS.
Non-cash dividends are excluded from the Consolidated Statements of
Cash Flows.
PAGE 46
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. RELATED PARTIES (continued)
Intercompany Accounts
- ---------------------
December 31,
-------------------------------------
1996 1995
----------------- ------------------
Average Average
Interest Interest
Balance Rate Balance Rate
-------- -------- -------- --------
($ in millions)
Due from NS:
Advances $155.6 4.1% $407.1 3.4%
Due to NS:
Notes 220.5 6.1% 220.3 6.6%
------ ------
Due (to) from
NS - net $(64.9) $186.8
====== ======
During 1995, NW issued notes for $75.5 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 $13.9 million, $17.8 million and $15.6 million in
1996, 1995 and 1994, respectively, related to amounts due from NS.
Transfer of Investment from NS
- ------------------------------
In December 1995, NS transferred its $10.5 million equity interest
in a nonoperating subsidiary to Norfolk Southern Railway Company. This
transfer was recorded at historical cost and was reflected as a
contribution to capital.
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, 1996 and 1995, NS Rail had long-term
intercompany federal income tax payables (which are included in "Deferred
income taxes" in the Consolidated Balance Sheets) of $292.5 million and
$254.7 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 95 million shares of NS common stock. Purchases
under the programs have been made with internally generated cash, and
with proceeds from the sale of NS commercial paper notes and from the
issuance of NS long-term debt.
Since the first purchases in December 1987 and through October 22,
1996, NS had purchased and retired 68,545,000 shares of its common stock
under these programs at a cost of $3.2 billion.
PAGE 47
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. RELATED PARTIES (continued)
On October 23, 1996, NS announced that the stock purchase program
had been suspended (see also Note 16). Future purchase decisions are
dependent on the outcome of the proposed Conrail acquisition, the
economy, cash needs and alternative investment opportunities.
Consistent with the earlier purchases, a significant portion of the
funding for future NS stock purchases, either in the form of direct cash
or cash used for debt service, will come from NS Rail through
intercompany advances or dividends to NS. In addition, some of the costs
associated with the proposed Conrail acquisition (see Note 16, "Proposed
Acquisition of Conrail by NS" and "NS Debt Commitments") are likely to be
funded by NS Rail.
3. OTHER INCOME - NET
1996 1995 1994
------ ------ ------
($ in millions)
Interest income (Note 2) $ 29.9 $ 36.3 $ 34.4
Rental income 18.2 18.5 18.0
Dividends from NS 16.2 15.1 13.9
Gains from sales of properties 25.5 8.7 7.8
Corporate-owned life
insurance - net 6.0 7.4 7.9
Other interest expense (44.1) (32.2) (24.9)
Taxes on nonoperating
property (3.7) (2.4) (3.7)
Other - net (8.9) (8.1) (6.8)
------ ------ ------
Total $ 39.1 $ 43.3 $ 46.6
====== ====== ======
4. INCOME TAXES
Provision for Income Taxes
- --------------------------
1996 1995 1994
------ ------ ------
($ in millions)
Current:
Federal $277.7 $286.3 $236.0
State 34.3 42.4 35.0
------ ------ ------
Total current taxes 312.0 328.7 271.0
------ ------ ------
Deferred:
Federal 72.7 35.1 95.2
State 16.7 8.1 19.0
------ ------ ------
Total deferred taxes 89.4 43.2 114.2
------ ------ ------
Provision for income taxes $401.4 $371.9 $385.2
====== ====== ======
PAGE 48
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
4. INCOME TAXES (continued)
Reconciliation of Statutory Rate to Effective Rate
- --------------------------------------------------
Total income taxes as reflected in the Consolidated Statements of
Income differ from the amounts computed by applying the statutory federal
corporate tax rate as follows:
1996 1995 1994
-------------- -------------- --------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
($ in millions)
Federal income
tax at statutory
rate $409.5 35.0 $375.8 35.0 $373.5 35.0
State income
taxes, net of
federal tax
benefit 33.1 2.8 32.7 3.0 35.1 3.3
Corporate-owned
life insurance (15.5) (1.3) (17.1) (1.6) (10.6) (1.0)
Other - net (25.7) (2.2) (19.5) (1.8) (12.8) (1.2)
------ ---- ------ ---- ------ ----
Provision for
income
taxes $401.4 34.3 $371.9 34.6 $385.2 36.1
====== ==== ====== ==== ====== ====
Inclusion in Consolidated Return
- --------------------------------
NS Rail is included in the consolidated federal income tax return of
NS. The provision for current income taxes in the Consolidated Statements
of Income reflects NS Rail's portion of NS' consolidated tax provision.
Tax expense or tax benefit is recorded on a separate company basis.
Deferred Tax Assets and Liabilities
- -----------------------------------
Certain items are reported in different periods for financial
reporting and income tax purposes. Deferred tax assets and liabilities
were recorded in recognition of these differences.
PAGE 49
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
4. INCOME TAXES (continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities were as follows:
December 31,
1996 1995
--------- ---------
($ in millions)
Deferred tax assets:
Reserves, including casualty
and other claims $ 148.3 $ 161.6
Employee benefits 147.7 158.7
Retiree health and death
benefit obligation 137.2 138.1
Taxes, including state
and property 163.1 157.1
Other 1.1 1.2
--------- ---------
Total gross deferred tax assets 597.4 616.7
Less valuation allowance (0.6) (0.5)
--------- ---------
Net deferred tax assets 596.8 616.2
--------- ---------
Deferred tax liabilities:
Property (2,839.0) (2,760.3)
Unrealized holding gains (220.0) (219.0)
Other (36.0) (44.7)
--------- ---------
Total gross deferred
tax liabilities (3,095.0) (3,024.0)
Intercompany federal
tax payable - net (292.5) (254.7)
--------- ---------
Net deferred tax liability (2,790.7) (2,662.5)
Net current deferred
tax assets 95.3 98.8
--------- ---------
Net long-term deferred
tax liability $(2,886.0) $(2,761.3)
========= =========
Except for amounts for which a valuation allowance is provided,
Management believes the deferred tax assets will be realized. The net
change in the total valuation allowance was a $0.1 million increase for
1996, a $0.1 million decrease for 1995 and a $1.4 million decrease for
1994.
Internal Revenue Service (IRS) Reviews
- --------------------------------------
Consolidated federal income tax returns have been examined and
Revenue Agent Reports have been received for all years up to and
including 1992. The consolidated federal income tax returns for 1993 and
1994 are being audited by the IRS. Management believes that adequate
provision has been made for any additional taxes and interest thereon
that might arise as a result of these examinations.
PAGE 50
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
4. INCOME TAXES (continued)
Tax Benefit Leases
- ------------------
In January 1995, the United States Tax Court issued a preliminary
decision that would disallow some of the tax benefits a subsidiary of NS
Rail purchased from a third party pursuant to a safe harbor lease
agreement in 1981. Management continues to believe that NS Rail
ultimately should incur no loss from this decision, because the lease
agreement provides for full indemnification if any such disallowance is
sustained.
5. INVESTMENTS
December 31,
1996 1995
------ ------
($ in millions)
Marketable equity securities at
fair value (Note 14) $639.0 $576.2
Corporate-owned life insurance at
net cash surrender value 213.2 176.6
Other 18.5 18.2
------ ------
Total $870.7 $771.0
====== ======
6. PROPERTIES
December 31,
1996 1995
--------- ---------
($ in millions)
Transportation property:
Road $ 8,405.0 $ 8,151.7
Equipment 4,664.7 4,586.8
Other property 79.3 84.2
--------- ---------
13,149.0 12,822.7
Less: Accumulated depreciation 4,134.1 4,072.3
--------- ---------
Net properties $ 9,014.9 $ 8,750.4
========= =========
Capitalized Interest
- --------------------
Total interest cost incurred on debt in 1996, 1995 and 1994 was
$45.8 million, $47.0 million and $46.1 million, respectively, of which
$11.9 million, $14.0 million and $17.8 million was capitalized.
PAGE 51
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
7. CURRENT LIABILITIES
December 31,
1996 1995
------ ------
($ in millions)
Accounts payable:
Accounts and wages payable $227.4 $255.3
Casualty and other claims 165.4 163.6
Vacation liability 75.0 72.5
Equipment rents payable - net 60.9 62.0
Other 21.1 13.8
------ ------
Total $549.8 $567.2
====== ======
Other current liabilities:
Prepaid amounts on
forwarded traffic $ 62.7 $ 69.7
Interest payable 14.4 23.7
Retiree health and death
benefit obligation (Note 13) 23.2 24.5
Other 8.7 6.4
------ ------
Total $109.0 $124.3
====== ======
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.
Capital Lease Obligations
- -------------------------
During 1996 and 1995, NS Rail entered into capital leases covering
new locomotives. The related capital lease obligations totaling
$107.8 million in 1996 and $104.5 million in 1995 were reflected in the
Consolidated Balance Sheets as debt and, because they were non-cash
transactions, were excluded from the Consolidated Statements of Cash
Flows. The lease obligations carry an average stated interest rate of
6.5% for those entered into in 1996 and 8.4% for those entered into in
1995. All were converted to variable rate obligations using interest rate
swap agreements. The interest rates on these obligations are based on the
six-month London Interbank Offered Rate and are reset every six months
with changes in interest rates accounted for as an adjustment of interest
expense over the terms of the leases. As a result, NS Rail is exposed to
the market risk associated with fluctuations in interest rates. To date,
while such rate fluctuations have been nominal, their effects have been
favorable. Counterparties to the interest rate swap agreements are major
financial institutions believed by Management to be credit-worthy.
NS Rail's use of interest rate swaps has been limited to those
discussed above.
PAGE 52
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
8. DEBT (continued)
Long-Term Debt
- --------------
December 31,
1996 1995
------ ------
($ in millions)
Equipment obligations at an
average rate of 7.8%
maturing to 2009 $392.9 $439.5
Capitalized leases at an average
rate of 5.9% maturing to 2015 197.0 100.9
Other debt at an average rate
of 5.4% maturing to 2015 8.0 34.0
------ ------
Total long-term debt 597.9 574.4
------ ------
Less: Current maturities 54.3 79.7
------ ------
Long-term debt
less current maturities $543.6 $494.7
====== ======
Long-term debt matures as follows:
1998 $ 55.5
1999 127.2
2000 57.7
2001 51.8
2002 and subsequent years 251.4
------
Total $543.6
======
A substantial portion of NS Rail's properties and certain
investments in affiliated companies are pledged as collateral for much of
the debt.
PAGE 53
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
9. LEASE COMMITMENTS
NS Rail is committed under long-term lease agreements, which expire
on various dates through 2067, for equipment, lines of road and other
property. Future minimum lease payments are as follows:
Operating Leases Capital Leases
---------------- --------------
($ in millions)
1997 $ 53.6 $ 28.6
1998 49.3 28.6
1999 37.4 28.6
2000 31.9 28.5
2001 30.3 28.0
2002 and subsequent years 637.0 143.1
------ ------
Total $839.5 285.4
======
Less imputed interest on
capital leases at an average
rate of 7.4% 88.4
------
Present value of minimum
lease payments included
in debt $197.0
======
Operating Lease Expense
- -----------------------
1996 1995 1994
------ ------ ------
($ in millions)
Minimum rents $ 64.7 $ 58.9 $ 46.7
Contingent rents 38.3 36.0 45.4
------ ------ ------
Total $103.0 $ 94.9 $ 92.1
====== ====== ======
PAGE 54
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
10. OTHER LIABILITIES
December 31,
1996 1995
------ ------
($ in millions)
Casualty and other claims $247.3 $257.3
Net pension obligation (Note 12) 81.9 93.9
Retiree health and death
benefit obligation (Note 13) 283.2 283.5
Other 273.6 236.1
------ ------
Total $886.0 $870.8
====== ======
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, 1996 and 1995, 1,197,027 shares
of $2.60 Cumulative Preferred Stock, Series A (Series A Stock) were
issued, and 1,096,907 shares were held other than by subsidiaries. The
Series A Stock has a $50 per share stated value. The Series A Stock is
callable at any time at $50 per share plus accrued dividends and has one
vote per share on all matters, voting as a single class with holders of
other stock.
In June 1989, NS announced its intention to purchase up to 250,000
shares of the outstanding Series A Stock during the subsequent two-year
period. Since then, NS extended the stock purchase program through 1996.
NS had purchased 176,608 shares at a total cost of approximately
$6.7 million as of December 31, 1996. NS purchased the shares in regular
brokerage transactions on the open market at prevailing prices. At year
end 1996 and 1995, NS held 176,703 shares and 122,923 shares,
respectively.
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 $10 per share authorized. NS owns all 16,668,997 shares
issued and outstanding at December 31, 1996 and 1995.
PAGE 55
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
12. PENSION PLANS
NS Rail's defined benefit pension plans, which principally cover
salaried employees, are part of NS' retirement plans. Pension benefits
are based primarily on years of creditable service with NS and its
participating subsidiary companies and compensation rates near
retirement. Contributions to the plans are made on the basis of not less
than the minimum funding standards set forth in the Employee Retirement
Income Security Act of 1974, as amended. Assets in the plans consist
mainly of common stocks. The following data relate principally to
NS Rail's portion of the combined NS plans.
Pension Cost (Benefit) Components
- ---------------------------------
1996 1995 1994
------- ------- -------
($ in millions)
Service cost-benefits
earned during the year $ 12.3 $ 9.6 $ 10.2
Interest cost on projected
benefit obligation 67.1 65.1 59.9
Actual return on
assets in plan (170.3) (257.0) (16.6)
Net amortization
and deferral 83.4 172.1 (62.9)
------- ------- -------
Net pension benefit (7.5) (10.2) (9.4)
Cost of early
retirement benefits -- 23.4 --
------- ------- -------
Total $ (7.5) $ 13.2 $ (9.4)
======= ======= =======
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:
1996 1995 1994
----- ----- -----
Discount rate for determining
funded status 7.75% 7.25% 8.50%
Future salary increases 5.25% 6% 6%
Return on assets in plans 9% 9% 9%
PAGE 56
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,
----------------------------------------------
1996 1995
--------------------- ---------------------
Funded Unfunded Funded Unfunded
Plans Plans Plans Plans
-------- -------- -------- --------
($ in millions)
Actuarial present
value of benefit
obligations:
Vested benefits $ 758.6 $ 58.8 $ 788.2 $ 50.8
Non-vested
benefits 1.2 -- 0.1 --
-------- -------- -------- --------
Accumulated
benefit
obligation 759.8 58.8 788.3 50.8
Effect of expected
future salary
increases 68.1 5.6 115.3 11.5
-------- -------- -------- --------
Projected
benefit
obligation 827.9 64.4 903.6 62.3
Fair value of
assets in plans 1,157.7 -- 1,060.6 --
-------- -------- -------- --------
Funded status 329.8 (64.4) 157.0 (62.3)
Unrecognized initial
net asset (30.2) -- (36.9) --
Unrecognized
(gain) loss (343.3) 20.9 (179.2) 20.9
Unrecognized prior
service cost 2.1 3.2 2.8 3.8
-------- -------- -------- --------
Net pension lia-
bility included
in the balance
sheets $ (41.6) $ (40.3) $ (56.3) $ (37.6)
======== ======== ======== ========
Early Retirement Program in 1995
- --------------------------------
During 1995, NS completed a voluntary early retirement program for
certain salaried employees. The principal benefit for those who
participated in this program was enhanced pension benefits, which are
reflected in the accumulated benefit obligation. The charge for the
272 employees who accepted the offer is included in "Compensation and
benefits" expense and totaled $33.6 million (including $8.3 million
related to postretirement benefits other than pensions).
PAGE 57
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
12. PENSION PLANS (continued)
401(k) Plans
- ------------
NS Rail provides 401(k) savings plans for employees. Under the
plans, NS Rail matches a portion of employee contributions, subject to
applicable limitations. NS Rail's expenses under these plans were
$8.0 million, $6.9 million and $5.0 million in 1996, 1995 and 1994,
respectively.
13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
NS Rail provides specified health care and death benefits to
eligible retired employees and their dependents by participating in
welfare benefit plans sponsored by NS. Under the present plans, which may
be amended or terminated at NS' option, a defined percentage of health
care expenses is covered, reduced by any deductibles, co-payments,
Medicare payments and, in some cases, coverage provided 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 and its participating subsidiary companies 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 established a Voluntary Employee
Beneficiary Association (VEBA) account to fund a portion of the cost of
future health care benefits for its retirees and those of its
participating subsidiary companies. The last corporate contribution to
the VEBA was $10 million in 1994.
Effective January 1, 1994, NS amended the attribution period for
postretirement health care benefits. The amendment generally 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 $80 million, which will
be amortized as a reduction in annual cost on a pro rata basis over a
six-year period.
A summary of the postretirement benefit cost follows:
1996 1995 1994
------ ------ ------
($ in millions)
Service cost-benefits
attributable to service
during the year $ 10.0 $ 9.1 $ 13.1
Interest cost on accumu-
lated postretirement
benefit obligation 24.1 27.2 23.8
Actual return on
plan assets (13.7) (17.5) --
Net amortization
and deferral (4.0) 1.9 (13.9)
------ ------ ------
Net postretirement
benefit cost 16.4 20.7 23.0
Cost of early retire-
ment benefits -- 8.3 --
------ ------ ------
Total $ 16.4 $ 29.0 $ 23.0
====== ====== ======
PAGE 58
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued)
The following table sets forth these plans' total accumulated
postretirement benefit obligation, reconciled with the accrued
postretirement benefit obligation:
December 31,
---------------------------------------------
1996 1995
------------------- -------------------
Health Health
Care Death Care Death
Benefits Benefits Benefits Benefits
-------- -------- -------- --------
($ in millions)
Accumulated post-
retirement benefit
obligation:
Retirees $ 162.8 $ 82.3 $ 216.1 $ 82.8
Fully eligible
active plan
participants 20.6 7.0 21.4 7.8
Other active plan
participants 41.8 11.9 47.3 12.6
------- ------- ------- -------
Total 225.2 101.2 284.8 103.2
Plan assets
at fair value 85.8 -- 72.1 --
------- ------- ------- -------
Funded status (139.4) (101.2) (212.7) (103.2)
Unrecognized
loss (gain) (26.7) (2.3) 52.2 4.7
Unrecognized
prior service
cost (benefit) (36.8) -- (49.0) --
------- ------- ------- -------
Accrued post-
retirement
benefit
obligation $(202.9) $(103.5) $(209.5) $ (98.5)
======= ======= ======= =======
For measurement purposes, a 10.4% increase in the per capita cost of
covered health care benefits was assumed for 1997. The rate was assumed
to decrease gradually to an ultimate rate of 5.5% and remain at that
level for 2005 and thereafter. The health care cost trend rate has a
significant effect on the amounts reported in the financial statements.
To illustrate, increasing the assumed trend rates by one percentage point
in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1996, by about $25 million and the
aggregate of the service and interest cost components of net
postretirement benefit cost for the year 1996 by about $4 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).
PAGE 59
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued)
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 multiemployer 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 $3.6 million, $3.7 million and $4.8 million in
1996, 1995 and 1994, respectively.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of "Cash and cash equivalents," "Short-term
investments," "Accounts receivable," "Short-term debt" and "Accounts
payable" approximate carrying values because of the short maturity of
these financial instruments.
The fair value of long-term "Investments" approximated $943 million
and $837 million at December 31, 1996 and 1995, respectively (see Note 5
for carrying values of "Investments"). The fair value of corporate-owned
life insurance approximates carrying value. Quoted market prices were
used to determine the fair value of marketable securities which,
beginning in 1994 (see Note 1, "Required Accounting Changes"), were
recorded at fair value. Carrying value adjustments, which are non-cash
transactions, are not included in the Consolidated Statement of Cash
Flows. Underlying net assets were used to estimate the fair value of
other investments.
Under SFAS 115, NS Rail increased the reported carrying value of
short-term and long-term investments classified as "available for sale"
as follows:
December 31,
-----------------------------------------------
1996 1995
---------------------- ----------------------
Short- Short-
term Equity term Equity
Securities Securities Securities Securities
---------- ---------- ---------- ----------
($ in millions)
Cost $335.0 $ 20.6 $242.2 $ 20.6
Gross unrealized
holding gain
(loss) (0.6) 618.4 0.7 555.6
------ ------ ------ ------
Fair value $334.4 $639.0 $242.9 $576.2
====== ====== ====== ======
The short-term securities are principally U.S. Treasury securities.
Equity securities consist almost entirely of 7,252,634 shares of NS
Common Stock.
The change in the unrealized holding gain was $61.5 million for 1996
and $138.8 million for 1995. These changes primarily reflect changes in
the NS stock price. As a result, stockholder's equity increased
$60.5 million in 1996 and $84.2 million in 1995.
The fair value of "Long-term debt," including current maturities,
approximated $627 million at December 31, 1996, and $606 million at
December 31, 1995. The fair values of debt were estimated based on quoted
market prices or discounted cash flows using current interest rates for
debt with similar terms, company rating and remaining maturity (see Note
8 for carrying values of "Long-term debt"). The fair value of interest
rate swaps is immaterial.
PAGE 60
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
15. NW--SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION
NW is operated as an integral part of NS Rail. Revenues are
allocated to NW based on actual traffic movements as determined by
revenue ton miles within market groups. Expenses are allocated to NW
based on appropriate criteria for the type of expense. The costs of
functions performed by NS, the parent holding company of NS Rail, are
also allocated to its rail operating subsidiaries.
NORFOLK AND WESTERN RAILWAY COMPANY AND SUBSIDIARIES
Summarized Consolidated Statements of Income
Years ended December 31,
-----------------------------------
1996 1995 1994
---------- ---------- ----------
($ in millions)
Railway operating
revenues $1,958.6 $1,911.3 $1,858.1
Railway operating
expenses 1,351.6 1,402.6 1,382.7
-------- -------- --------
Income from railway
operations 607.0 508.7 475.4
Other - net 49.8 38.8 25.8
-------- -------- --------
Income before
income taxes 656.8 547.5 501.2
Provision for income taxes 228.4 186.8 175.1
-------- -------- --------
Net income $ 428.4 $ 360.7 $ 326.1
======== ======== ========
NORFOLK AND WESTERN RAILWAY COMPANY AND SUBSIDIARIES
Summarized Consolidated Balance Sheets
As of December 31,
--------------------------
1996 1995
---------- ----------
($ in millions)
Assets
Current assets $ 353.4 $ 298.3
Noncurrent assets 5,631.2 4,778.2
-------- --------
Total assets $5,984.6 $5,076.5
======== ========
Liabilities and Stockholder's Equity
Current liabilities $ 205.7 $ 246.2
Noncurrent liabilities 1,812.5 1,603.9
Stockholder's equity 3,966.4 3,226.4
-------- --------
Total liabilities and
stockholder's equity $5,984.6 $5,076.5
======== ========
PAGE 61
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
15. NW--SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION (continued)
On August 1, 1996, NS Rail transferred 5,294,931 shares of NS stock
to NW as a contribution to capital. The transfer was recorded at
historical cost, and in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," unrealized appreciation was recognized which increased
"Noncurrent assets" $478.2 million, "Noncurrent liabilities"
$167.4 million, and "Stockholder's equity" $310.8 million.
16. COMMITMENTS AND CONTINGENCIES
Proposed Acquisition of Conrail by NS
- -------------------------------------
On October 23, 1996, NS announced its intention to commence an all-
cash tender offer for all shares of Conrail Inc. (Conrail), a
Pennsylvania corporation. On October 24, 1996, Atlantic Acquisition
Corporation, a Pennsylvania corporation and a wholly owned subsidiary of
NS, offered to purchase all outstanding shares of Conrail's common stock
and Series A ESOP Convertible Junior Preferred Stock (collectively, the
Shares), including, in each case, the associated Common Stock Purchase
Rights, at a price of $100 per Share--approximately $9.1 billion in the
aggregate. Shares tendered in the offer or acquired in any subsequent
merger would be held in a voting trust pending regulatory approval by the
STB. The offer followed the October 15 announcement that Conrail had
entered into a merger agreement with CSX Corporation (CSX), whereby
Conrail stockholders would receive $92.50 in cash per Share for up to
40 percent of their Shares and receive CSX common stock for the balance of
their Shares. On November 6, 1996, CSX and Conrail announced that CSX had
raised the cash portion of its offer to $110 per Share and left unchanged
the ratio pursuant to which certain Conrail stockholders would receive
shares of CSX common stock. On November 8, 1996, NS announced that it had
increased its all-cash offer to $110 per Share--approximately
$10.0 billion in the aggregate. On December 19, 1996, CSX and Conrail
announced that CSX was adding preferred stock (convertible into CSX
common stock) to its offer--a feature said to be worth $16 per Share.
On December 20, NS increased its all-cash offer to $115 per Share--
approximately $11 billion in the aggregate--and on January 13, 1997,
NS announced that it would offer to purchase up to 8.2 million Shares
(approximately 9.9%), the approximate maximum number of Shares NS can
buy without triggering Conrail's current anti-takeover defenses, for
$115 per Share, if Conrail stockholders disapproved at a special
meeting certain management recommendations designed to facilitate
the merger with CSX.
At that special meeting on January 17, 1997, Conrail stockholders
did disapprove those recommendations. Accordingly, on January 22, 1997,
NS amended its pending all-cash tender offer by reducing the number of
Shares sought to 8.2 million; on February 11, 1997, it acquired
8.2 million Shares for a total of $943 million, pursuant to that amended
offer. These Shares have been placed in a voting trust and under certain
circumstances might have to be sold at a loss. The Conrail board
repeatedly has affirmed its commitment to a merger with CSX.
On February 12, 1997, NS commenced a second tender offer for the
remaining Shares. NS' second tender offer is conditioned upon, among
other things, the valid tender of at least Shares sufficient, with
those already owned by NS, to constitute at least a majority of the
Shares on a fully diluted basis, Subchapter 25F of Pennsylvania's
Business Corporation Law not being applicable to the offer, Conrail's
Rights Agreement (or poison pill) having been redeemed or otherwise made
inapplicable to NS' tender offer, the merger agreement between CSX and
Conrail having been terminated in accordance with its terms or otherwise,
and other conditions. NS has received a favorable opinion from the STB
regarding the use of a voting trust and has obtained sufficient financing
commitments (see "NS Debt Commitments").
PAGE 62
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
16. COMMITMENTS AND CONTINGENCIES (continued)
The STB has proposed a schedule for handling Conrail control
applications which could result in an STB decision in late 1997 or early
1998. If the STB does not approve NS' application or if NS deems any
conditions imposed by the STB too onerous, NS would have the right and
obligation to sell all Shares held in the voting trust. Such a
disposition could result in a significant loss.
Through December 31, 1996, NS had incurred $76 million of costs
associated with the proposed acquisition.
See also Note 17.
NS Debt Commitments
- -------------------
In connection with the proposed acquisition of Conrail, NS has
secured debt commitments sufficient for the tender offer and subsequent
merger. The commitments expire on August 1, 1997, except for a portion of
a revolving credit facility expiring on August 1, 1998. The total
commitment fees will approximate $200 million if the entire facility is
used. At December 31, 1996, NS had incurred $57 million of commitment
fees.
In connection with the purchase of the 8.2 million Shares, NS
arranged for commercial paper debt in an aggregate amount not to exceed
$1.0 billion. All or part of this amount could be refinanced either by
issuing additional commercial paper or through drawing on the debt
commitment that has been arranged in connection with the all-cash
$115 per share tender offer for all Shares.
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.
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 clean-up costs incurred by
NS Rail are reflected as receivables in the balance sheet and are not
netted against the associated NS Rail liability. Environmental engineers
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 oversee and interpret its
environmental policy.
As of December 31, 1996, NS Rail's balance sheet included a reserve
for environmental exposures in the amount of $53 million (of which
$12 million is accounted for as a current liability), which is NS Rail's
estimate of the probable costs at 111 identified locations based on
available information. On that date, nine sites accounted for $19 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 111 locations, Norfolk Southern Railway 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 clean-up costs.
PAGE 63
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
16. COMMITMENTS AND CONTINGENCIES (continued)
With respect to known environmental sites (whether identified by
NS Rail or by the EPA or comparable state authorities), estimates of
NS Rail's ultimate potential financial exposure for a given site or in
the aggregate for all such sites are necessarily imprecise because of
the widely varying costs of currently available clean-up techniques, the
likely development of new clean-up technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it) and evolving statutory and regulatory
standards governing liability.
The risk of incurring environmental liability--for acts and
omissions, past, present and future--is inherent in the railroad
business. Some of the commodities, particularly those classified as
hazardous materials, in NS Rail's traffic mix can pose special risks that
NS Rail and its subsidiaries work diligently to minimize. In addition,
NS Rail owns, or has owned in the past, land holdings used 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 the probable costs based on available information
for those environmental matters of which the Corporation 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.
Change-in-Control Arrangements
- ------------------------------
Norfolk Southern 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.
Capital Expenditure Commitment
- ------------------------------
In connection with a long-term transportation contract entered into
during 1996, NS Rail has committed to construct and operate four motor
vehicle distribution centers. These facilities are scheduled for
completion in 1998.
Debt Guarantees
- ---------------
As of December 31, 1996, NS Rail and certain of its subsidiaries are
contingently liable as guarantors with respect to $48.7 million of
indebtedness of related entities.
PAGE 64
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
17. EVENTS SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS'
REPORT-CONRAIL DEVELOPMENTS (UNAUDITED)
Pursuant to an amendment to the merger agreement between CSX
and Conrail announced on March 7, 1997, CSX has offered to purchase
all Shares for $115 per Share in cash and CSX is permitted to enter
into negotiations with other parties, including NS, concerning the
acquisition of the securities or assets, or concessions relating to
the assets or operations, of Conrail. NS and CSX are negotiating
a comprehensive resolution of the issues confronting the eastern
railroads based on the proposal submitted by NS to both CSX and
Conrail on February 24, 1997. Such a resolution could involve a
joint acquisition of Shares by NS and CSX. However, unless and
until such negotiations are successfully concluded, NS intends to
continue in effect its tender offer for all Shares not owned
by NS.
PAGE 65
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Norfolk Southern Railway Company:
We have audited the consolidated financial statements of Norfolk Southern
Railway Company and subsidiaries as listed in the index in Item 8. In
connection with our audits of the consolidated financial statements, we
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, 1996
and 1995, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth herein.
/s/ KPMG Peat Marwick LLP
Norfolk, Virginia
January 28, 1997, except as to the second and third paragraphs of
Note 16, which are as of February 12, 1997
PAGE 66
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 15, 1997, for the Norfolk Southern Railway Annual
Meeting of Stockholders to be held on May 27, 1997, 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 18 under "Executive Officers of the
Registrant."
PAGE 67
PART IV
Item l4. Exhibits, Financial Statement Schedule, and Reports on
- ------- ------------------------------------------------------
Form 8-K.
--------
(a) The following documents are filed as part of this report:
1. Index to Consolidated Financial Statements: Page
------------------------------------------ ----
Consolidated Statements of Income
Years ended December 31, 1996, 1995 and 1994 40
Consolidated Balance Sheets
As of December 31, 1996 and 1995 41
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994 42
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994 43
Notes to Consolidated Financial Statements 44
Independent Auditors' Report 65
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 72
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 68
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)
to Southern's 1987 Annual Report on Form 10-K) -
is incorporated herein by reference from
Exhibit 10(a) to Norfolk Southern Railway's
1994 Annual Report on Form 10-K.
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, 1996.
(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.
PAGE 69
Item l4. Exhibits, Financial Statement Schedule, and Reports on
- ------- ------------------------------------------------------
Form 8-K. (continued)
--------
Exhibit
Number Description
- ------- -------------------------------------------------
(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 70
POWER OF ATTORNEY
-----------------
Each person whose signature appears below under
"SIGNATURES" hereby authorizes Henry C. Wolf and
James C. Bishop, Jr., or either of them, to execute in the name of
each such person, and to file, any amendment to this report and
hereby appoints Henry C. Wolf and James C. Bishop, Jr., or either of
them, as attorneys-in-fact to sign on his behalf, individually and in
each capacity stated below, and to file, any and all amendments to
this report.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Norfolk Southern Railway Company has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 17th day of March,
1997.
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 17th day of March,
1997, 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 71
Signature Title
--------- -----
/s/ James C. Bishop, Jr.
- -------------------------- Director
(James C. Bishop, Jr.)
/s/ Jon L. Manetta
- -------------------------- Director
(Jon L. Manetta)
/s/ L. I. Prillaman
- -------------------------- Director
(L. I. Prillaman)
/s/ Stephen C. Tobias
- -------------------------- Director
(Stephen C. Tobias)
/s/ Henry C. Wolf
- -------------------------- Director
(Henry C. Wolf)
PAGE 72
Schedule II
Page 1 of 2
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1994, 1995 and 1996
(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<F1> $121.3<F2> $264.2
Current portion of
casualty and other
claims included in
accounts payable $155.5 $ 26.8 $163.7<F1> $181.9<F3> $164.1
Year ended December 31, 1995
- ----------------------------
Valuation allowance
(included net in
deferred tax liability)
for deferred tax assets $ 0.6 $ -- $ -- $ 0.1 $ 0.5
Casualty and other claims
included in other
liabilities $264.2 $ 99.5 $ 3.1<F1> $109.5<F2> $257.3
Current portion of
casualty and other
claims included in
accounts payable $164.1 $ 21.1 $163.5<F1> $185.1<F3> $163.6
<FN>
<F1> Includes revenue overcharges provided through charges to operating
revenues and transfers from other accounts.
<F2> Payments and reclassifications to/from accounts payable.
<F3> Payments and reclassifications to/from other liabilities.
</FN>
(continued)
PAGE 73
Schedule II
Page 2 of 2
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1994, 1995 and 1996
(In millions of dollars)
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
Year ended December 31, 1996
- ----------------------------
Valuation allowance
(included net in
deferred tax liability)
for deferred tax assets $ 0.5 $ 0.1 $ -- $ -- $ 0.6
Casualty and other claims
included in other
liabilities $257.3 $115.1 $ 4.0<F1> $129.1<F2> $247.3
Current portion of
casualty and other
claims included in
accounts payable $163.6 $ 15.6 $154.5<F1> $168.3<F3> $165.4
<FN>
<F1> Includes revenue overcharges provided through charges to operating
revenues and transfers from other accounts.
<F2> Payments and reclassifications to/from accounts payable.
<F3> Payments and reclassifications to/from other liabilities.
</FN>
PAGE 74
EXHIBIT INDEX
-------------
Electronic
Submission
Exhibit Page
Number Description Number
- ---------- ------------------------------------------- ------
21 Subsidiaries of Norfolk Southern Railway. 75
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). 76