Exhibit 99.3
REPORT OF MANAGEMENT
The Stockholders
Conrail Inc.
Management is responsible for the preparation, integrity and objectivity of the
Company's consolidated financial statements. The consolidated financial
statements are prepared in conformity with accounting principles generally
accepted in the United States of America and include amounts based on
management's best estimates and judgment.
The Company maintains a system of internal accounting controls and procedures,
which is continually reviewed and supported by written policies and guidelines
and supplemented by internal audit services. The system provides reasonable
assurance that assets are safeguarded against loss from unauthorized use and
that the books and records reflect the transactions of the Company and are
reliable for the preparation of financial statements. The concept of reasonable
assurance recognizes that the cost of a system of internal accounting controls
should not exceed the benefits derived and also recognizes that the evaluation
of these factors necessarily requires estimates and judgments by management.
The Company's consolidated financial statements are audited by its independent
accountants. Their audit is conducted in accordance with auditing standards
generally accepted in the United States of America and includes a study and
evaluation of the Company's system of internal accounting controls to determine
the nature, timing and extent of the auditing procedures required for expressing
an opinion on the Company's financial statements.
The Company's Board of Directors, which is comprised of an equal number of
directors from Norfolk Southern Corporation ("NSC") and CSX Corporation ("CSX"),
pursues its oversight responsibilities for the consolidated financial statements
and corporate conduct through periodic meetings with and written reports from
the Company's management.
Gregory R. Weber
President and Chief
Executive Officer
Patrick F. Rogers
Assistant Vice President-
Accounting and Tax
January 28, 2003
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Conrail Inc.:
We have audited the accompanying consolidated balance sheets of Conrail Inc. and
subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. These standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Conrail Inc. and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP Ernst & Young LLP
Norfolk, Virginia Jacksonville, Florida
January 28, 2003
-2-
CONRAIL INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
------------------------
($ In Millions) 2002 2001 2000
------ ------ -----
Revenues - NSC/CSX (Note 2) $ 813 $ 823 $ 886
Revenues - Third parties 80 80 99
------ ------ -----
Total operating revenues 893 903 985
------ ------ -----
Operating expenses (Note 3)
Compensation and benefits 151 158 195
Fuel 6 7 10
Material, services and rents 125 143 162
Depreciation and amortization 322 325 331
Casualties and insurance 2 (13) 33
Other 17 19 18
------ ------ -----
Total operating expenses 623 639 749
------ ------ -----
Income from operations 270 264 236
Interest expense (104) (109) (124)
Other income, net (Note 10) 94 103 155
------ ------ -----
Income before income taxes 260 258 267
Income taxes (Note 7) 80 84 97
------ ------ -----
Net income $ 180 $ 174 $ 170
====== ====== =====
See accompanying notes to the consolidated financial statements.
-3-
CONRAIL INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------
($ In Millions) 2002 2001
------ ------
ASSETS
Current assets
Cash and cash equivalents $ 23 $ 34
Accounts receivable, net 35 32
Due from NSR/CSXT (Note 2) 158 172
Notes receivable from NSC/CSX (Note 2) - 515
Material and supplies 8 9
Deferred tax assets (Note 7) 65 76
Other current assets 11 8
------ ------
Total current assets 300 846
Property and equipment, net (Note 4) 6,382 6,688
Notes receivable from NSC/CSX (Note 2) 892 -
Other assets 583 548
------ ------
Total assets $8,157 $8,082
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt (Note 6) 57 60
Accounts payable 33 41
Due to NSC/CSX (Note 2) 9 12
Wages and employee benefits 31 37
Casualty reserves 69 101
Accrued and other current liabilities (Note 5) 130 157
------ ------
Total current liabilities 329 408
Long-term debt (Note 6) 1,123 1,156
Casualty reserves 119 134
Deferred income taxes (Note 7) 1,822 1,833
Other liabilities 538 446
------ ------
Total liabilities 3,931 3,977
------ ------
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 3 and 9)
Common stock ($1 par value; 100 shares
authorized, issued and outstanding) - -
Additional paid-in capital 2,221 2,221
Retained earnings 2,134 1,954
Accumulated other comprehensive loss (129) (70)
------ ------
Total stockholders' equity 4,226 4,105
------ ------
Total liabilities and stockholders' equity $8,157 $8,082
====== ======
See accompanying notes to the consolidated financial statements.
-4-
CONRAIL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
$ in Millions
Accumulated
Additional Unearned Other
Paid-In ESOP Retained Comprehensive
Capital Compensation Earnings Loss Total
-------------- ---------------- ------------ ----------------- ----------
Balance, January 1, 2000 $2,229 $(20) $1,610 $ - $3,819
Net Income - - 170 - 170
Other (7) - - - (7)
-------------- ---------------- ------------ ----------------- ----------
Balance, December 31, 2000 2,222 (20) 1,780 - 3,982
Comprehensive income - 2001
Net Income - - 174 - 174
Minimum pension liability, net of
$45 million income taxes (Note 8) - - - (70) (70)
----------
Total comprehensive income 104
----------
Allocation of unearned ESOP compensation (1) 20 - - 19
-------------- ---------------- ------------ ----------------- ----------
Balance, December 31, 2001 2,221 - 1,954 (70) 4,105
Comprehensive income - 2002
Net Income - - 180 - 180
Minimum pension liability, net of
$39 million income taxes (Note 8) - - - (59) (59)
----------
Total comprehensive income 121
----------
-------------- ---------------- ------------ ----------------- ----------
Balance, December 31, 2002 $2,221 $ - $2,134 ($129) $4,226
============== ================ ============ ================= ==========
See accompanying notes to the consolidated financial statements.
-5-
CONRAIL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------
($ In Millions) 2002 2001 2000
------ ------ ------
Cash flows from operating activities
Net income $ 180 $ 174 $ 170
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 322 325 331
Deferred income taxes (9) (18) 101
Gains from sales of property (3) (2) (70)
Pension credit (17) (19) (12)
Dividends from affiliated companies - - 55
Changes in:
Accounts receivable (3) 1 18
Accounts and wages payable (14) (32) 8
Due from NSR/CSXT 14 60 (36)
Due to NSC/CSX (3) (19) (128)
Other (44) 32 (75)
------ ------ ------
Net cash provided by operating activities 423 502 362
------ ------ ------
Cash flows from investing activities
Property and equipment acquisitions (23) (47) (220)
Notes receivable from NSC/CSX (377) (424) 125
Proceeds from disposal of property and equipment 14 14 86
Other 11 - (7)
------ ------ ------
Net cash used in investing activities (375) (457) (16)
------ ------ ------
Cash flows from financing activities
Payment of long-term debt (59) (61) (318)
------ ------ ------
Net cash used in financing activities (59) (61) (318)
------ ------ ------
Increase(decrease) in cash and cash equivalents (11) (16) 28
Cash and cash equivalents
Beginning of year 34 50 22
------ ------ ------
End of year $ 23 $ 34 $ 50
====== ====== ======
See accompanying notes to the consolidated financial statements.
-6-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
Conrail Inc. ("Conrail") is a holding company whose principal subsidiary is
Consolidated Rail Corporation ("CRC"), the major freight railroad in the
Northeast. Norfolk Southern Corporation ("NSC") and CSX Corporation ("CSX"),
the major railroads in the Southeast, jointly control Conrail through their
ownership interests in CRR Holdings LLC ("CRR"), whose primary subsidiary is
Green Acquisition Corporation ("Green Acquisition"), which owns Conrail. NSC
and CSX have equity interests in CRR of 58% and 42%, respectively, and voting
interests of 50% each. Under operating and lease agreements, NSC and CSX
operate a substantial portion of the Conrail properties through their
railroad subsidiaries, Norfolk Southern Railway Company ("NSR") and CSX
Transportation, Inc. ("CSXT")(Note 2).
Principles of Consolidation
The consolidated financial statements include Conrail and majority-owned
subsidiaries. Investments in 20% to 50% owned companies are accounted for by
the equity method.
Cash Equivalents
Cash equivalents consist of commercial paper, certificates of deposit and
other liquid securities purchased with a maturity of three months or less,
and are stated at cost which approximates market value.
Material and Supplies
Material and supplies consist of maintenance material valued at the lower of
cost or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using
the composite straight-line method over estimated service lives.
Expenditures, including those on leased assets that extend an asset's useful
life or increase its utility, are capitalized. Maintenance expense is
recognized when repairs are performed. The cost (net of salvage) of
depreciable property retired or replaced in the ordinary course of business
is charged to accumulated depreciation and no gain or loss is recognized. In
2002, the overall depreciation rate averaged 3.6% for all roadway and
equipment.
The Company is finalizing a study to update the estimated useful lives of its
roadway and equipment property and the associated accumulated depreciation
reserves. Based on this review, the Company anticipates a pretax increase in
overall depreciation expense in the range of $20-$25 million in 2003.
-7-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In August 2001, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset
Retirement Obligations." This standard which is effective for the
Corporation's fiscal year beginning January 1, 2003, addresses the accounting
and reporting of legal obligations associated with the retirement of tangible
long-lived assets. The Company is currently evaluating the impact the new
rules may have on its consolidated financial statements.
Asset Impairment
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Expected future cash flows from the use and disposition of
long-lived assets are compared to the current carrying amounts to determine
the potential impairment loss.
The adoption of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which was effective January 1, 2002, did not have a
material effect on the Company's consolidated financial statements.
Revenue Recognition
The Company's major sources of revenues are from NSC and CSX, primarily in
the form of rental revenues and operating fees, which are recognized when
earned (Note 2). Conrail also has third party revenues, which are recognized
when earned, related to the operations of Indiana Harbor Belt Railroad
Company, a 51% owned terminal railroad subsidiary.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. Management reviews its estimates, including those related to the
recoverability and useful lives of assets as well as liabilities for
litigation, environmental remediation, casualty claims, income taxes and
pension and postretirement benefits. Changes in facts and circumstances may
result in revised estimates.
2. Related Parties Transactions
-8-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Background
On May 23, 1997, NSC and CSX completed their joint acquisition of Conrail
stock. On June 17, 1997, NSC and CSX executed an agreement that generally
outlines the methods of governing and operating Conrail and its subsidiaries
("Transaction Agreement"). On July 23, 1998, the Surface Transportation Board
("STB") issued a written opinion that permitted NSC and CSX to exercise
operating control of Conrail beginning August 22, 1998. On June 1, 1999, NSC
and CSX began to operate over certain Conrail lines.
Operations by NSR and CSXT
The majority of CRC's routes and assets are segregated into separate
subsidiaries of CRC, Pennsylvania Lines LLC ("PRR") and New York Central
Lines LLC ("NYC"). PRR and NYC have separate but identical operating and
lease agreements with NSR and CSXT, respectively, (the "Operating
Agreements") which govern substantially all nonequipment assets to be used by
NSR and CSXT and have initial 25-year terms, renewable at the options of NSR
and CSXT for two 5-year terms. Payments made under the Operating Agreements
are based on appraised values that are subject to adjustment every six years.
NSR and CSXT have also leased or subleased certain equipment assets at
rentals based on appraised values for varying term lengths from PRR and NYC,
respectively, as well as from CRC.
NSC and CSX also have agreements with CRC governing other Conrail properties
that continue to be owned and operated by Conrail ("the Shared Assets
Areas"). NSR and CSXT pay CRC a fee for joint and exclusive access to the
Shared Assets Areas. In addition, NSR and CSXT pay, based on usage, the costs
incurred by CRC to operate the Shared Assets Areas plus a profit factor.
Payments made by NSR to Conrail under the Shared Assets agreements were $115
million and $168 million during 2002 and 2001, respectively, of which $23
million and $27 million, were minimum rents. Payments made by CSXT to Conrail
under the Shared Assets agreements were $92 million and $140 million during
2002 and 2001, respectively, of which $17 million and $19 million, were
minimum rents.
Payments from NSR under the Operating Agreements to PRR amounted to $339
million and $331 million during 2002 and 2001, respectively. Payments from
CSXT under the Operating Agreements to NYC amounted to $248 million and $241
million during 2002 and 2001, respectively. In addition, costs necessary to
operate and maintain the related assets under these agreements, including
leasehold improvements, are borne by NSR and CSXT.
-9-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum lease payments to be received from NSR/CSXT are as follows:
$ in Millions
NSR NSR CSXT CSXT
--- --- ---- ----
To PRR To CRC To NYC To CRC Total
------ ------ ------ ------ -----
2003 $ 333 $ 30 $ 230 $ 21 $ 614
2004 332 32 230 23 617
2005 320 33 221 24 598
2006 306 34 210 24 574
2007 294 34 203 24 555
2008 and Beyond 4,414 585 2,909 402 8,310
-------------------------------------------------
Total $5,999 $748 $4,003 $518 $11,268
-------------------------------------------------
Related Party Balances and Transactions
"Due from NSR/CSXT" at December 31, 2002 and 2001, is primarily comprised of
amounts due for the above-described operating and rental activities.
PRR and NYC have interest-bearing notes receivable due from NSC and CSX.
Previously, these notes were payable on demand and classified as current.
However during the first quarter of 2002, they were exchanged for new
longer-term notes. As of December 31, 2002, the notes receivable due from NSC
and CSX included in noncurrent assets were $513 million and $379 million,
respectively. At December 31, 2001, the notes receivable balances from NSC
and CSX under the previous demand note totaled $301 million and $214 million,
respectively. The interest rates on the notes receivable from NSC and CSX are
variable and were both 1.82% at December 31, 2002. Interest income related to
the PRR and NYC notes receivable was $18 million in 2002, $13 million in 2001
and $10 million in 2000.
"Due to NSC/CSX" includes amounts payable for property and equipment rentals,
as well as amounts related to service provider agreements with both NSC and
CSX to provide certain general and administrative support to CRC.
A summary of the "Due to NSC and CSX" activity for the services described
above follows:
-10-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$ in Millions
Payments Payments
to NSC to CSX
----------------- ---------------
2002 2001 2002 2001
Service Provider Agreements $ 5 $ 6 $ - $ -
Material purchases 20 31 - -
Rental of locomotives, equipment and facilities 5 8 4 6
Capital Project activities - 17 - 3
----------------- ---------------
Total payments $30 $62 $ 4 $ 9
----------------- ---------------
2002 2001 2002 2001
----------------- ---------------
Due to "NSC and CSX" at December 31 $ 7 $ 9 $ 2 $ 3
From time to time, NSC and CSX, as the indirect owners of Conrail, may need
to provide some of Conrail's cash requirements through capital contributions,
loans or advances. Through December 31, 2002 there have been no transactions
under these arrangements.
3. Transition, Acquisition-Related and Other Items
During the first quarter of 2002 and the fourth quarter of 2001, the Company
received cash proceeds totaling $4 million and $42 million respectively, from
several London-based insurance carriers as settlement for current and future
exposures related to personal injury, occupational, environmental and other
claims. The Company recognized pretax gains of $4 million and $14 million,
respectively, which is included in the "Casualties and insurance" line item
of the income statement for 2002 and 2001.
During 2002, accrued termination payments totaling $1 million were made to 6
non-union employees whose non-executive positions were eliminated as a result
of the joint acquisition of Conrail. Most of these termination payments have
been made in the form of supplemental retirement benefits from the Company's
pension plan. During 2001 and 2000 accrued termination payments of $15
million and $50 million respectively, were made. The remaining amount of this
liability is less than $1 million and is expected to be paid out within the
next year.
During the second quarter of 2001, the Company received a $50 million cash
payment for transferring to a third party certain of its rights
-11-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to license, manage and market signboard advertising on the Company's property
for 25 years. The payment is being recognized into other income on a
straight-line basis over the 25 year contract period.
Also during 2001, the Company made final settlement of a long-term liability
related to the non-union Employee Stock Ownership (ESOP) termination, which
did not require use of the Company's cash for settlement. The liability, the
balance of which was $20 million at December 31, 2000, was settled as the
remaining cash proceeds held by the ESOP as a result of selling its ESOP
preferred stock in conjunction with the joint acquisition, were allocated to
eligible participants.
During the first quarter of 2000, the Company completed a significant
property sale and recognized a gain of $61 million on the sale ($37 million
after income taxes), which is included in "Other income, net" (Note 10).
The Company has a long-term liability in connection with employment "change
in control" agreements with certain current and former executives, which
became operative as a result of the joint acquisition of Conrail. In 2002 and
2001, payments of $1 million and $9 million respectively, were made primarily
from the Company's pension plan. The remaining amount, $24 million at
December 31, 2002, will be paid out at the discretion of the participants in
the program.
4. Property and Equipment
December 31,
---------------
2002 2001
------ ------
(In Millions)
Roadway $ 7,476 $ 7,496
Equipment 1,511 1,519
Less: Accumulated depreciation (2,828) (2,570)
------- -------
6,159 6,445
------- -------
Capital leases (primarily equipment) 496 616
Accumulated amortization (273) (373)
------- -------
223 243
------- -------
$ 6,382 $ 6,688
======= =======
Substantially all assets are leased to NSR or CSXT (Note 2).
-12-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Accrued and Other Current Liabilities
December 31,
---------------
2002 2001
------ ------
(In Millions)
Operating leases $ 47 $ 45
Property and corporate taxes 43 37
Income taxes payable 4 27
Other 36 48
---- ----
$130 $157
==== ====
6. Long-Term Debt and Leases
Long-term debt
Long-term debt outstanding, including the weighted average interest rates at
December 31, 2002, is composed of the following:
December 31,
------------
2002 2001
------ -------
(In Millions)
Capital leases $ 192 $ 208
Debentures payable,7.88%,due 2043 250 250
Debentures payable,9.75%,due 2020 550 550
Equipment and other obligations,6.95% 188 208
------ -------
1,180 1,216
Less current portion (57) (60)
------ -------
$1,123 $1,156
====== =======
Interest payments were $105 million in 2002, $113 million in 2001 and $121
million in 2000.
Equipment and other obligations mature in 2003 through 2043 and are
collateralized by assets with a net book value of $222 million at December
31, 2002. Maturities of long-term debt other than capital leases are $20
million in 2003, $21 million in 2004, $20 million in 2005, $21 million in
2006, $43 million in 2007 and $863 million in total from 2008 through 2043.
Leases
The Company's noncancelable long-term leases generally include options to
purchase at fair value and to extend the terms. Certain lease obligations are
payable in Japanese yen, which require the maintenance of yen-denominated
deposits sufficient to satisfy the yen-denominated obligation. These deposits
are included in the "Other assets" line item of the balance sheet and totaled
$45 million and $35 million at December 31, 2002 and December 31, 2001,
respectively. Capital leases have been discounted at rates ranging from 3.09%
to 14.26% and are collateralized by assets with a net book value of $223
million at December 31, 2002.
-13-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Minimum commitments, exclusive of executory costs borne by the Company, are:
Capital Operating
Leases Leases
------- ---------
(In Millions)
2003 $ 51 $ 56
2004 53 56
2005 38 55
2006 24 54
2007 28 53
2008 - 2025 52 289
----- ----
Total 246 $563
====
Less interest portion (54)
-----
Present value $ 192
=====
Operating lease rent expense was $62 million in 2002, $70 million in 2001
and $75 million in 2000.
7. Income Taxes
The provisions for income taxes are composed of the following:
2002 2001 2000
---- ---- -----
(In Millions)
Current
Federal $ 81 $ 77 $ (5)
State 8 25 1
---- ---- ----
89 102 (4)
---- ---- ----
Deferred
Federal (20) (22) 81
State 11 4 20
---- ---- ----
(9) (18) 101
---- ---- ----
$ 80 $ 84 $ 97
==== ==== ====
Reconciliation of the U.S. statutory tax rates with the effective tax rates
is as follows:
2002 2001 2000
---- ---- ----
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 4.2 4.2 4.2
Settlement of IRS audit (5.6) - -
Settlement of state tax issues - (3.5) -
Other (2.8) (3.1) (2.9)
---- ---- ----
Effective tax rate 30.8% 32.6% 36.3%
==== ==== ====
-14-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has reached final settlements with the Internal Revenue Service
("IRS") related to all of the audits of the Company's consolidated federal
income tax returns through the fiscal year May 23,1997. As a result of the
settlement Conrail received tax refunds of $24 million and reduced tax
expense by $14 million during 2002. Federal and state income tax payments
were $113 million in 2002, $86 million in 2001 and $3 million in 2000.
Significant components of the Company's deferred income tax liabilities
(assets) are as follows:
December 31,
-------------------------
2002 2001
------ ------
(In Millions)
Current assets $ (5) $ 57
Current liabilities (60) (125)
Miscellaneous - (8)
------ ------
Current deferred tax asset, net $ (65) $ (76)
====== ======
Noncurrent liabilities:
Property and equipment 2,000 2,008
Other 112 191
------ -----
2,112 2,199
------ ------
Noncurrent assets:
Nondeductible reserves and other
liabilities (290) (366)
------ ------
Deferred income tax liabilities, net $1,822 $1,833
====== ======
The Company has reviewed its deferred income tax assets and believes a
valuation allowance is not necessary.
8. Pension and Postretirement Benefits
The Company and its subsidiaries sponsor several qualified and nonqualified
pension plans and other postretirement benefit plans for its employees.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets over the two-year period ending
December 31, 2002, and a statement of the funded status as of December 31 of
both years:
-15-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Postretirement
Pension Benefits Benefits
---------------- --------------------
(In Millions) 2002 2001 2002 2001
----- ----- ---- ----
Change in benefit
obligation
Net benefit obligation
at beginning of year $ 662 $ 687 $ 36 $ 37
Service cost 1 2 - -
Interest cost 44 45 3 3
Plan participant's
contributions - - 6 5
Actuarial losses 5 16 2 -
Benefits paid (66) (88) (10) (9)
----- ----- ----- -----
Net benefit obligation
at end of year $ 646 $ 662 $ 37 $ 36
Change in plan assets
Fair value of plan assets
at beginning of year $ 613 $ 720 $ 8 $ 8
Actual return on plan
assets (28) (20) 1 1
Employer contributions 3 1 2 3
Plan participant's
contributions - - 6 5
Benefits paid (66) (88) (10) (9)
----- ----- ----- -----
Fair value of plan assets
at end of year $ 522 $ 613 $ 7 $ 8
Funded status at
end of year $(124) $ (49) $ (30) $ (28)
Unrecognized prior
service cost 8 8 (1) (1)
Unrecognized actuarial
(gains)losses 206 111 (9) (11)
----- ----- ----- -----
Net amount recognized at
year end $ 90 $ 70 $ (40) $ (40)
===== ===== ===== =====
-16-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following amounts have been recognized in the balance sheets as of December
31:
Other Postretirement
Pension Benefits Benefits
----------------- --------------------
(In Millions) 2002 2001 2002 2001
---- ---- ---- ----
Prepaid pension cost $ 126 $ 110 - -
Accrued benefit cost (257) (163) $ (40) $ (40)
Intangible asset 8 8 - -
Accumulated other
comprehensive loss 213 115 - -
----- ----- ----- -----
$ 90 $ 70 $ (40) $ (40)
===== ===== ===== =====
All of the Company's plans for postretirement benefits other than pensions have
no plan assets except for the retiree life insurance plan, which has $7 million
and $8 million of assets in 2002 and 2001, respectively. The aggregate benefit
obligation for the postretirement plans other than pensions was $37 million and
$36 million at December 31, 2002 and 2001, respectively.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $639 million, $635 million and $514 million,
respectively, as of December 31, 2002 and $656 million, $655 million and $605
million, respectively as of December 31, 2001. As required by Statement of
Financial Accounting Standard No. 87 "Employers'Accounting for Pensions", the
Company has recorded an additional minimum liability of $220 million and $123
million at December 31, 2002 and December 31, 2001, respectively. The additional
liability was partially offset by an intangible asset to the extent of
previously unrecognized prior service costs of $7 million and $8 million at
December 31, 2002 and December 31, 2001, respectively. The remaining amounts are
recorded as a component of stockholders' equity, net of related tax benefits as
"Accumulated Other Comprehensive Loss".
The assumptions used in the measurement of the Company's benefit obligation are
as follows:
Other Postretirement
Pension Benefits Benefits
---------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
Discount rate 6.75% 7.25% 6.75% 7.25%
Expected return on
plan assets 9.00% 9.00% 8.00% 8.00%
Rate of compensation
increase 5.00% 5.00% 5.00% 5.00%
A 10% annual rate of increase in the per capita cost of covered health care
benefits was assumed for 2003, gradually decreasing to 5% by the
-17-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
year 2007.
Assumed health care cost trend rates affect amounts reported for the health care
plans. The effect of a one percentage point increase and (decrease) in the
assumed health care cost trend rate on the accumulated postretirement benefit
obligation is $1 million and $(1) million, respectively.
The components of the Company's net periodic benefit cost for the plans are as
follows:
Other Postretirement
Pension Benefits Benefits
----------------- --------------------
(In Millions) 2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Service cost $ 1 $ 2 $ 4 $ - $ - $ -
Interest cost 44 45 51 3 3 3
Expected return
on assets (62) (66) (70) (1) (1) (1)
Amortization of:
Transition asset - (1) (1) - - -
Prior service cost 1 1 1 - - -
Actuarial (gain)loss (1) (1) 1 (1) (1)
---- ---- ---- ---- ---- ----
$(17) $(20) $(14) $ 2 $ 1 $ 1
==== ==== ==== ==== ==== ====
Savings Plans
The Company and certain subsidiaries provide 401(k) savings plans for union and
non-union employees. Under the Company's current non-union savings plan, 50% of
employee contributions are matched for the first 6% of a participating
employee's base pay and 25% of employee contributions are matched in excess of
10% of a participating employee's base pay. Savings plan expense related to the
current non-union savings plan was $1 million in each of the years 2002, 2001
and 2000. There is no Company match provision under the union employee plan
except for certain unions, which negotiated a Company match as part of their
contract provisions.
Incentive Compensation Plans
The Company has an incentive compensation plan for all non-union employees in
which employees receive targeted cash awards upon attainment of certain
performance criteria established by the Company's Board of Directors.
Compensation expense under this plan was $3 million in 2002, $2 million in 2001
and $5 million in 2000.
The Company also has a long-term incentive plan under which phantom stock
options are granted to officers and other key non-union employees. The option
price for the phantom shares is equal to the blended fair market value of NSC
and CSX common stock at the date of grant. Options will vest one year after
grant date and the option term may not exceed ten years. Upon exercise, eligible
participants will
-18-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
receive cash payments equal to the appreciation on the composite NSC and
CSX common stock fair values. Compensation expense for this plan was less
than $1 million in 2002 and 2000 and $2 million in 2001.
9. Stockholders' equity
Common Stock
On May 23, 1997, the NSC/CSX joint tender offer for the remaining
outstanding shares of Conrail's common and preferred stock was concluded,
and on June 2, 1997, Conrail became the surviving corporation in a merger
with Green Merger Corp. and remained the only subsidiary of Green
Acquisition, an entity jointly-owned by NSC and CSX. As a result, the
remaining outstanding capital stock of Conrail was acquired by NSC and CSX
and Green Acquisition was issued 100 shares of Conrail's common stock.
Undistributed Earnings of Equity Investees
"Retained earnings" includes undistributed earnings of equity investees of
$199 million, $180 million and $157 million at December 31, 2002, 2001 and
2000, respectively.
10. Other Income, Net
2002 2001 2000
---- ---- ----
(In Millions)
Interest income $ 23 $ 21 $ 21
Rental income 45 47 45
Property sales 3 2 70
Equity in earnings of affiliates 20 24 24
Other, net 3 9 (5)
---- ---- ----
$ 94 $103 $155
==== ==== ====
11. Commitments and Contingencies
Environmental
The Company is subject to various federal, state and local laws and
regulations regarding environmental matters. CRC is a party to various
proceedings brought by both regulatory agencies and private parties under
federal, state and local laws, including Superfund laws, and has also
received inquiries from governmental agencies with respect to other
-19-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
potential environmental issues. At December 31, 2002, CRC has received,
together with other companies, notices of its involvement as a potentially
responsible party or requests for information under the Superfund laws with
respect to cleanup and/or removal costs due to its status as an alleged
transporter, generator or property owner at 35 locations. Due to the number
of parties involved at many of these sites, the wide range of costs of
possible remediation alternatives, the changing technology and the length
of time over which these matters develop, it is often not possible to
estimate CRC's liability for the costs associated with the assessment and
remediation of contaminated sites.
Although the Company's operating results and liquidity could be
significantly affected in any quarterly or annual reporting period if CRC
were held principally liable in certain of these actions, at December 31,
2002, the Company had accrued $66 million, an amount it believes is
sufficient to cover the probable liability and remediation costs that will
be incurred at Superfund sites and other sites based on known information
and using various estimating techniques. The Company anticipates that much
of this liability will be paid out over five years; however some costs will
be paid out over a longer period. The Company believes the ultimate
liability for these matters will not materially affect its consolidated
financial condition.
The Company spent $6 million in 2002, $10 million in 2001 and $9 million in
2000 for environmental remediation and related costs. In addition, the
Company's capital expenditures for environmental control and abatement
projects were less than $1 million in both 2002 and 2001 and approximately
$1 million in 2000.
Casualty
The Company is involved in various legal actions, principally relating to
occupational health claims, personal injuries, casualties and property
damage. The casualty claim liability is determined actuarially, based upon
claims filed and an estimate of claims incurred but not yet reported. The
Company is generally self-insured for casualty claims. Claims in excess of
self-insurance levels are insured up to excess coverage limits. While the
ultimate amounts of claims incurred are dependent upon future developments,
in management's opinion, the recorded liability is adequate to cover
expected probable payments.
During both 2002 and 2001, the Company, based on favorable claims
development, recognized actuarial determined gains of approximately $16
million and $12 million respectively, which is included in the "Casualties
and insurance" line item of the income statement.
Labor
CRC had 1,415 employees at December 31, 2002; approximately 89% of whom are
represented by 11 different labor organizations and are covered by
-20-
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16 separate collective bargaining agreements. The Company was engaged in
collective bargaining at December 31, 2002 with labor organizations
representing approximately 54% of its labor force.
Guarantees
CRC currently guarantees the principal and interest payments in the amount
of $30 million on Equipment Trust Certificates for Locomotive Management
Services, a general partnership of which CRC holds a fifty percent
non-controlling interest. In addition, CRC is also contingently liable as
guarantor with respect to $7 million of indebtedness for an affiliate
company, Triple Crown Services. No liability has been recorded related to
these guarantees.
Also the Company may be contingently liable under indemnification
provisions related to the sale of tax benefits. This liability is recorded
in the "Other liability" line item of the balance sheet and totaled $13
million at both December 31, 2002, and December 31, 2001.
12. Fair Values of Financial Instruments
The fair values of "Cash and cash equivalents," "Accounts receivable,"
"Notes receivable from NSC/CSX" and "Accounts payable" approximate the
carrying values of these financial instruments at December 31, 2002 and
2001.
Using current market prices when available, or a valuation based on the
yield to maturity of comparable debt instruments having similar
characteristics, credit rating and maturity, the total fair value of the
Company's long-term debt, including the current portion, but excluding
capital leases, is $1,254 million and $1,204 million at December 31, 2002
and 2001, respectively, compared with carrying values of $988 million and
$1,008 million at December 31, 2002 and 2001.
-21-