SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
of the Securities Act of 1934
Date of Report (Date of earliest event reported):
April 23, 1997
NORFOLK SOUTHERN CORPORATION
(exact name of registrant as specified in its charter)
Virginia 1-8339 52-1188014
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
Three Commercial Place, Norfolk, Virginia 23510-2191
(Address of principal executive offices)
Registrant's telephone number, including area code (757) 629-2680
No Change
(Former name or former address, if changed since last report.)
</PAGE>
<PAGE>
Item 5. Other Events.
On April 23, 1997, Registrant issued a press release
announcing its earnings and results of operations for the
three-month period ended March 31, 1997. Promptly thereafter,
Registrant convened its regular quarterly meeting with financial
analysts in the City of New York ("Analysts Meeting"). At the
Analysts Meeting, certain of Registrant's senior executive
officers discussed first-quarter earnings and operating
performance and certain additional matters relating to the
proposed joint acquisition by Registrant and CSX Corporation
("CSX") of all remaining shares of Conrail Inc. ("Conrail"). A
copy of Registrant's press release announcing first-quarter
earnings is filed as Exhibit 99.1 under Item 7(c).
At the Analysts Meeting, Registrant also released certain
financial information for the three-month period ended March 31,
1997. Copies of the unaudited interim Consolidated Statements of
Income, Consolidated Balance Sheets, Consolidated Statements of
Cash Flows, and explanatory notes are filed as Exhibit 99.2 under
Item 7(c).
Also at the Analysts Meeting, certain of Registrant's senior
executive officers made presentations in which they discussed
Registrant's proposed acquisition (with CSX) of all
still-outstanding shares of Conrail and, subject to necessary
regulatory approval, Registrant's proposed operation of a
significant portion of the routes and assets of Conrail. The
presentations included a prepared statement read at that meeting
by Henry C. Wolf (Executive Vice President-Finance of
Registrant). A copy of Mr. Wolf's statement is filed as Exhibit
99.3 under Item 7(c).
Any and all estimates of cost savings, synergies, projected
earnings per share and pro forma financial information included
in the Exhibits hereto are "forward-looking" and inherently
subject to significant uncertainties and contingencies, many of
which are beyond Registrant's control, including: (a) future
economic conditions in the markets in which Registrant and
Conrail operate; (b) financial market conditions; (c) inflation
rates; (d) changing competition and the effects of new and
increased competition in the areas served by Registrant and
Conrail; (e) changes in the economic regulatory climate in the
United States railroad industry; (f) Registrant's ability to
eliminate or reduce duplicative administrative and other
functions and facilities following the transaction involving
Conrail; (g) labor uncertainties and Registrant's ability to
implement anticipated labor savings; (h) unanticipated
environmental and other situations relating to Conrail assets;
(i) Registrant's ability to integrate certain Conrail assets,
including its information technology systems, within Registrant's
systems; and (j) adverse changes in applicable laws, regulations
or rules governing environmental, tax or accounting matters.
There can be no assurance that the estimated savings, revenue
increases, synergies, projected earnings per share and pro forma
financial information will be achieved; actual savings, revenue
increases, synergies, earnings per share and pro forma financial
information may vary materially from those estimated. The
inclusion of such estimates herein should not be regarded as an
indication or affirmation that Registrant or any other party
considers such estimates an accurate prediction of future events.
Item 7(c). Exhibits.
99.1 - Copy of press release issued by Registrant on
April 23, 1997.
99.2 - Copies of unaudited interim Consolidated
Statements of Income, Consolidated Balance
Sheets, Consolidated Statements of Cash
Flows, and explanatory notes for the
three-month period ended March 31, 1997.
99.3 - Copy of prepared statement given at the
Analysts Meeting on April 23, 1997, by Henry
C. Wolf.
Signatures
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly authorized.
NORFOLK SOUTHERN CORPORATION
(Registrant)
By: /s/ Dezora M. Martin
(signature)
Dezora M. Martin
Assistant Secretary
Date: April 23, 1997
</PAGE>
<PAGE>
E-1
EXHIBIT INDEX
Exhibit
Number
System Description
99.1 Copy of press release issued
by Registrant on April 23, 1997.
99.2 Copies of unaudited interim Consolidated
Statements of Income, Consolidated Balance
Sheets, Consolidated Statements of Cash
Flows, and explanatory notes for the
three-month period ended March 31, 1997.
99.3 Copy of prepared statement
given at the Analysts
Meeting on April 23, 1997, by
Henry C. Wolf.
FOR IMMEDIATE RELEASE
April 23, 1997
NORFOLK SOUTHERN POSTS RECORD OPERATING REVENUES
AND STRONG FIRST-QUARTER EARNINGS
NEW YORK, N.Y. Norfolk Southern Corporation's first-quarter net
income was $177.5 million before, and $127.8 million after, a
one-time charge of $77.2 million ($49.7 million after tax) to
write off the costs of establishing and maintaining a $13 billion
credit facility related to its tender offer for all shares of
Conrail. Earnings per share were $1.42 before, and $1.02 after,
the charge. Following NS' agreement with CSX Corporation
concerning the joint acquisition of Conrail, NS has terminated
all but $1.65 billion of that credit facility. Excluding the
one-time charge, net income and earnings per share both set
first-quarter records.
Railway operating revenues for the first quarter were $1.05
billion, up 3 percent from 1996 and an all-time record for any
quarter. Motor carrier operating revenues also increased by 3
percent to $203.7 million. Total transportation operating
revenues set a first-quarter record of $1.25 billion, up 3
percent from 1996.
"Our solid first-quarter performance in the midst of our
intensive effort to achieve balanced rail restructuring in the
East is especially gratifying," said David R. Goode, chairman,
president and chief executive officer. "Traffic and revenue
gains were broad-based, with increases in every industry group
except agriculture. Aside from unusual items, this was the
seventeenth consecutive quarter of year-to-year improvement in
earnings per share."
First-quarter railway operating expenses of $764.5 million
were 1 percent higher than 1996. Motor carrier operating
expenses of $199.6 million were about even. Total transportation
operating expenses of $964.1 million were up 1 percent.
Income from operations of $285.6 million, up 9 percent, and
railway operating income of $281.5 million, up 7 percent, both
were first-quarter records.
Norfolk Southern also set a new first-quarter record railway
operating ratio of 73.1 compared to 74.2 last year. The railway
operating ratio is the percentage of revenues that go into
operating the railroad.
# # #
Media Contact: Robert Fort, Norfolk, 757/629-2710
World Wide Web site http://www.nscorp.com
</PAGE>
<PAGE>
<TABLE>
[Qualified by reference to Exhibit 99.2]
Norfolk Southern Corporation and Subsidiaries
Financial Highlights First Quarter 1997 (See Note A)
(Unaudited)
($ millions except per share amounts)
<CAPTION>
Percent
First Quarter Change
--------------------- Favorable
1997 1996 (Unfavorable)
--------- --------- -------------
<S> <C> <C> <C>
Total Transportation
Operating Revenues $1,249.7 $1,215.0 3%
Total Transportation
Operating Expenses 964.1 954.0 (1%)
Income from Operations 285.6 261.0 9%
Nonoperating Income (Expense)
(Note B) (9.9) 5.8 --
Net Income (Note B) $ 177.5 $ 168.1 6%
Earnings per Share (Note B) $ 1.42 $ 1.31 8%
Railway Operating Ratio (%) 73.1 74.2
Notes:
(A) NS wishes to furnish financial information comparable with
that reported in other periods and to highlight the
information on which the accompanying press release draws.
Accordingly, as more particularly detailed in any notes
hereto, and in the accompanying press release, these
Financial Highlights may not reflect the effects of
certain unusual or infrequent transactions, or changes
in accounting, that significantly affect net income and
earnings per share as reported in the financial statements.
Financial Highlights are provided solely to complement the
content of the accompanying press release.
(B) Nonoperating income (expense) excludes a one-time charge
of $77.2 million, $49.7 million after-tax, or $0.40 per
share, for costs incurred to establish and maintain a
$13 billion credit facility to acquire all of Conrail.
As a result of the agreement with CSX concerning the
division of Conrail, all but $1.65 billion of that
facility has been terminated. Including the credit
facility charge, net income was $127.8 million, 24 percent
below 1996, and earnings per share were $1.02, 22 percent
below 1996.
</TABLE>
<TABLE>
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
($ in millions except per share amounts)
<CAPTION>
Three Months Ended
March 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Transportation operating revenues:
Railway:
Coal $ 326.1 $ 323.8
General merchandise 594.2 574.1
Intermodal 125.7 118.8
--------- ---------
Total railway 1,046.0 1,016.7
Motor carrier 203.7 198.3
--------- ---------
Total transportation
operating revenues 1,249.7 1,215.0
--------- ---------
Transportation operating expenses:
Railway:
Compensation and benefits 361.9 377.3
Materials, services and rents 169.4 151.9
Depreciation 102.9 100.3
Diesel fuel 62.7 55.4
Casualties and other claims 29.0 34.7
Other 38.6 35.2
--------- ---------
Total railway 764.5 754.8
Motor carrier 199.6 199.2
--------- ---------
Total transportation
operating expenses 964.1 954.0
--------- ---------
Income from operations 285.6 261.0
Other income (expense):
Interest income 6.3 5.8
Interest expense on debt (38.4) (27.6)
Charge for credit facility
costs (note 2) (77.2) --
Other - net 22.2 27.6
--------- ---------
Total other income (expense) (87.1) 5.8
--------- ---------
Income before income taxes 198.5 266.8
Provision for income taxes:
Current 63.2 84.8
Deferred 7.5 13.9
--------- ---------
Total income taxes 70.7 98.7
--------- ---------
Net income (note 2) $ 127.8 $ 168.1
========= =========
Earnings per share (note 2) $ 1.02 $ 1.31
Average number of
shares outstanding (000's) 125,255 128,215
</TABLE>
<TABLE>
Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
($ in millions)
<CAPTION>
March 31, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 139.5 $ 209.2
Short-term investments 185.7 194.2
Accounts receivable - net 748.7 704.3
Materials and supplies 64.8 63.0
Deferred income taxes 139.5 158.9
Other current assets 108.8 127.2
---------- ----------
Total current assets 1,387.0 1,456.8
Investments (note 1) 1,266.1 274.7
Properties less
accumulated depreciation 9,677.6 9,529.1
Other assets (note 2) 101.6 155.8
---------- ----------
Total assets $ 12,432.3 $ 11,416.4
========== ==========
Liabilities and stockholders' equity
Current liabilities:
Short-term debt $ 27.2 $ 44.0
Accounts payable 679.0 708.9
Income and other taxes 217.7 178.7
Other current liabilities 161.9 202.7
Current maturities
of long-term debt 56.0 56.0
---------- ----------
Total current liabilities 1,141.8 1,190.3
Long-term debt (notes 3 and 4) 2,843.6 1,800.3
Other liabilities 959.7 987.1
Minority interests 49.7 49.5
Deferred income taxes 2,392.5 2,411.6
---------- ----------
Total liabilities 7,387.3 6,438.8
---------- ----------
Stockholders' equity:
Common stock $1.00 per share
par value 132.7 132.4
Other capital 488.1 462.1
Retained income 4,444.8 4,403.7
---------- ----------
5,065.6 4,998.2
Less treasury stock at cost,
7,252,634 shares (20.6) (20.6)
---------- ----------
Total stockholders' equity 5,045.0 4,977.6
---------- ----------
Total liabilities and
stockholders' equity $ 12,432.3 $ 11,416.4
========== ==========
</TABLE>
<TABLE>
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
($ in millions)
<CAPTION>
Three Months Ended March 31,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 127.8 $ 168.1
Reconciliation of net income
to net cash provided by
operating activities:
Charge for credit facility
costs (note 2) 77.2 --
Depreciation 107.8 105.6
Deferred income taxes 7.5 13.9
Nonoperating gains and losses
on properties and investments (10.4) (15.9)
Changes in assets and liabilities
affecting operations:
Accounts receivable (44.4) (31.1)
Materials and supplies (1.8) (2.3)
Other current assets 7.2 12.1
Current liabilities
other than debt 18.7 67.7
Other - net (18.2) 2.4
-------- --------
Net cash provided by
operating activities 271.4 320.5
Cash flows from investing activities:
Property additions (note 4) (229.5) (163.0)
Property sales and other transactions 17.5 24.0
Investments (note 1) (984.9) (23.6)
Investment sales and
other transactions 1.8 12.7
Short-term investments - net 7.5 9.0
-------- --------
Net cash used for
investing activities (1,187.6) (140.9)
Cash flows from financing activities:
Dividends (75.1) (71.9)
Common stock issued - net 9.7 11.2
Purchase and retirement
of common stock -- (108.6)
Commercial paper proceeds (note 3) 993.1 --
Credit facility costs paid (70.9) --
Proceeds from long-term
borrowings (note 4) 1.2 5.6
Debt repayments (11.5) (11.8)
-------- --------
Net cash provided by
(used for) financing
activities 846.5 (175.5)
-------- --------
Net increase (decrease)
in cash and cash
equivalents (69.7) 4.1
Cash and cash equivalents:
At beginning of year 209.2 67.7
-------- --------
At end of period $ 139.5 $ 71.8
======== ========
Supplemental disclosures of
cash-flow information
Cash paid during the period for:
Interest (net of
amounts capitalized) $ 52.2 $ 43.1
Income taxes $ 4.3 $ 2.7
Cash equivalents represent all highly liquid investments
purchased three months or less from maturity.
</TABLE>
Norfolk Southern Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(1) Conrail acquisition - On February 11, 1997, NS purchased
8.2 million Conrail Inc. (Conrail) shares, representing
approximately 9.9 percent of Conrail's then outstanding
common shares, acquired pursuant to NS' prior tender
offer at $115 per share.
On April 8, 1997, CSX Corporation (CSX) and NS reached
agreement on a joint acquisition and division of the
routes and assets of Conrail. The two companies will
form a jointly owned entity to acquire all outstanding
shares of Conrail, not currently held by NS or CSX,
for $115 per share pursuant to a tender offer expiring
May 23, 1997. NS will contribute $5.9 billion for its
58 percent share of the acquisition cost and CSX will
contribute $4.3 billion for its 42 percent share
(including amounts previously paid by NS and CSX to
acquire Conrail shares). The shares will be placed in a
joint voting trust pending Surface Transportation
Board approval of the proposed transaction.
(2) Charge for credit facility costs - Following NS'
April 8, 1997, agreement with CSX, NS has terminated
all but $1.65 billion of the loan commitments available
under a $13.0 billion credit agreement dated February 10,
1997, as amended. The February credit agreement would
have provided financing for NS' then-proposed acquisition
of all shares of Conrail. NS has begun negotiating a new
credit agreement to provide a bank facility of up to
$7.0 billion.
NS recorded a $77.2 million pretax charge in the first
quarter of 1997 for the direct costs, principally loan
commitment fees, of having secured and maintained
certain now-terminated commitments under the February
credit agreement. This charge reduced first quarter
net income by $49.7 million, or $0.40 per share.
Excluding the charge, net income and earnings per share
would have been $177.5 million and $1.42, respectively.
(3) Commercial paper debt - During the first quarter of
1997, NS issued $1.0 billion of commercial paper debt to
finance its purchase of 8.2 million shares of Conrail
stock. The debt has been classified as long-term because
NS has the ability to convert this obligation into longer
term debt. NS intends to refinance the commercial paper
either by issuing additional commercial paper or by
replacing commercial paper notes with long-term debt.
(4) Capital lease obligations - During the first quarters
of 1997 and 1996, an NS Rail subsidiary entered into
capital leases covering new locomotives. The related
capital lease obligations totaling $44.7 million in
1997 and $74.4 million in 1996 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 stated interest rates but 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.
These unaudited interim financial statements should be read in
conjunction with the financial statements and notes thereto
included in the Corporation's most recent Annual Report to
Stockholders and quarterly report to the Securities and Exchange
Commission.
Remarks by
Henry C. Wolf
Executive Vice President-Finance
Norfolk Southern Corporation
Financial Analysts Meeting
Chase Manhattan Bank-New York
April 23, 1997
OPENING REMARKS
Good morning. Thank you for joining us today.
As you may have expected, Norfolk Southern's first quarter
earnings reflect a charge for the cost of establishing and
maintaining a $13 billion credit facility to acquire all shares
of Conrail. As a result of our agreement with CSX, all but about
$1.7 billion of this facility was terminated, necessitating a
write-off for accounting purposes. This charge, which amounted
to $77.2 million, reduced net income by $49.7 million, or $0.40
cents per share. Costs incurred to acquire the Conrail lines as
set forth in our agreement with CSX will be capitalized and
included in our purchase price. I will discuss the Conrail
acquisition in greater detail later in the presentation.
Excluding the one-time credit facility charge, we improved
earnings from a year ago, achieving a new first quarter record
for net income and earnings per share. Let's begin with a review
of our first quarter results.
RAILWAY OPERATING REVENUES
First quarter railway operating revenues were $1.05 billion,
3 percent above last year and an all-time quarterly record. Ike
Prillaman will provide you with details of our railway revenues
in a few minutes.
MOTOR CARRIER OPERATING REVENUES
First quarter motor carrier operating revenues were $203.7
million, 3 percent above last year. The higher revenues were
derived from increased business in the High Value Products
Division, which continues to show improvement.
As information, we have made a change in the presentation of
motor carrier revenues in 1997 from a net to gross basis. Under
this change, both revenues and expenses are increased by amounts
previously subtracted in arriving at net revenues. Motor carrier
operating income will not be affected by this change in
presentation which is in keeping with the recent industry
practice.
Motor carrier revenues and expenses for prior years have
been reclassified to conform with the 1997 presentation.
TRANSPORTATION OPERATING REVENUES
Total transportation operating revenues in the first quarter
were $1.25 billion, 3 percent above last year.
TRANSPORTATION OPERATING EXPENSES
Total transportation operating expenses in the first quarter
were $964.1 million, 1 percent above last year.
RAILWAY OPERATING EXPENSE ANALYSIS
Railway operating expenses for the first quarter were $764.5
million, 1 percent higher than 1996.
The largest increase was in materials, services and rents,
up $17.5 million, or 12 percent, principally reflecting higher
equipment rents due to: (1) a change in the mix of received and
forwarded traffic; (2) new freight car leases, mainly covered
hoppers and some box cars; and (3) the absence this year of
income from leased locomotives.
Purchased services were also higher as a result of handling
charges, such as loading and unloading, and drayage, related to
the large increases in automotive and intermodal traffic.
Diesel Fuel expense increased $7.3 million, or 13 percent.
This was due almost entirely to higher price per gallon, as fuel
prices averaged $0.70 cents per gallon this year, 11 percent
higher than the average of $0.63 cents per gallon in 1996. As
the quarter progressed, we did see fuel prices decline and are
hopeful that the trend continues.
Partially offsetting higher expenses was a $15.4 million, or
4 percent decline in compensation and benefits expense, derived
from lower accruals for stock-based compensation, and favorable
experience in employee benefit costs.
RAILWAY OPERATING RATIO
The 3 percent increase in railway operating revenues,
combined with only a 1 percent increase in railway operating
expenses produced a railway operating ratio of 73.1 percent.
This represents a new first quarter record, surpassing last
year's first quarter record of 74.2 percent by more than one
percentage point.
INCOME FROM OPERATIONS
First quarter income from operations was $285.6 million, a
first quarter record, and 9 percent above last year.
Income from railway operations was $281.5 million, also a
first quarter record, and 7 percent higher than 1996.
North American Van Lines continued to show improvement,
particularly in the High Value Products division. In what is
typically the weakest quarter for trucking companies, motor
carrier operating income was $4.1 million, compared with a loss
of $0.9 million in 1996. The improvement in this year's results
was principally attributable to a favorable settlement of
litigation.
TOTAL OTHER INCOME (EXPENSE)
Total other income and expense for the first quarter was an
expense of $87.1 million, compared with income of $5.8 million
last year.
By far the most significant item was a one-time $77.2
million charge to write-off costs incurred to establish and
maintain a $13 billion credit facility in connection with our
tender offer for all shares of Conrail. As a result of our
agreement with CSX on a joint acquisition of Conrail and a
division of its routes and assets, such a large credit facility
was no longer necessary. We are now in the process of
negotiating a smaller facility to assist in the financing of
Norfolk Southern's portion of the Conrail acquisition.
Interest income increased 9 percent, reflecting some growth
in cash investments stemming from the suspension of our share
purchase program.
Interest expense increased by 39 percent reflecting the cost
of borrowings to acquire 8.2 million shares of Conrail stock in
mid February, and $200 million of medium-term notes issued in
September of last year.
Other-net was 20 percent below last year, principally as a
result of smaller gains from property dispositions, partly offset
by dividend income of $3.9 million from Conrail shares purchased
in February, and a $7.4 million gain from the partial redemption
of a partnership interest whose principal asset is a Washington
office building.
INCOME BEFORE INCOME TAXES
First quarter income before income taxes was $198.5 million.
Excluding the one-time credit facility charge, income before
income taxes was $275.7 million, 3 percent higher than 1996.
PROVISION FOR INCOME TAXES
The first quarter provision for income taxes was $70.7
million. Excluding the tax benefit from the one-time credit
facility charge, the provision for income taxes was $98.2
million, or 1 percent lower than 1996.
The first quarter effective tax rate was 35.6 percent,
compared with last year's effective rate of 37 percent. The
effective rate in 1997 reflects benefits from our investments in
qualified gas properties, and favorable experience in accruals
for state income taxes.
NET INCOME
First quarter net income was $127.8 million. Excluding the
one-time credit facility charge, net income was $177.5 million, 6
percent higher than last year, and a first quarter record.
EARNINGS PER SHARE
Earnings per share for the first quarter were $1.02.
Excluding the one-time credit facility charge, earnings per share
were $1.42, 8 percent higher than 1996, and also a first quarter
record.
[MR. WOLF'S REMARKS RESUMED FOLLOWING CONCLUSION OF MR.
PRILLAMAN'S DISCUSSION OF NS' TRAFFIC RESULTS.]
CONRAIL MAP
Now let's talk about Norfolk Southern and our joint
acquisition of Conrail with CSX.
- Norfolk Southern and CSX have agreed to divide
Conrail's principal routes which form an "X" crossing in Ohio,
with each company operating two of the four legs of the "X".
- Under our Agreement with CSX, Norfolk Southern
will operate legs of the "X" between Chicago and Cleveland, and
the Conrail line between Cleveland and northern New Jersey via
Pittsburgh and Harrisburg. In addition, Norfolk Southern will
operate Conrail lines serving the metropolitan New York area.
- Norfolk Southern will operate most Conrail lines
in Michigan, Maryland, Delaware and Pennsylvania.
- Norfolk Southern and CSX will jointly operate
Conrail assets in major terminal areas such as Detroit and parts
of New Jersey. The two companies will also share access to
certain lines in Philadelphia, Indianapolis and to the rail lines
serving the Monongahela coal fields in southwestern Pennsylvania.
ORGANIZATIONAL STRUCTURE-CONRAIL ACQUISITION
- Norfolk Southern and CSX will form a joint
acquisition company, to hold all Conrail shares, including the
remaining Conrail shares outstanding that will be acquired for
$115 per share under our joint tender offer.
- The joint acquisition company will be equally
controlled by Norfolk Southern and CSX. Following receipt of STB
approval each company will control and operate the Conrail lines
and assets allocated to it under our Agreement.
- Norfolk Southern will contribute its Conrail
stock and cash valued in total at $5.9 billion to the joint
acquisition company for its 58 percent share of the acquisition,
and CSX will contribute its Conrail stock and cash valued in
total at $4.3 billion for its 42 percent share.
- Upon closing the Joint Tender Offer, all shares
of Conrail will be placed in a joint voting trust pending STB
approval.
- The percentage shares owned by Norfolk Southern
and CSX, 58 percent and 42 percent, respectively, were determined
based on an analysis of the line revenues and generally
correspond with the line segment mileage.
- It is expected that the assets to be operated by
Norfolk Southern and CSX will be owned by separate Conrail
subsidiaries controlled by Norfolk Southern and CSX,
respectively. The assets will be operated by Norfolk Southern
and CSX by means of operating, lease or other agreements or
arrangements with the controlled Conrail subsidiaries.
- Under our agreement with CSX, certain Conrail
assets are to be shared and certain Conrail liabilities are to be
pooled.
- We expect that the Conrail corporate structure
will be maintained and Conrail's existing debt will remain the
obligation of Conrail. The Norfolk Southern and CSX cash
contributions and lease or other payments to Conrail are
anticipated to provide cash flows sufficient to meet Conrail's
debt service and any remaining Conrail operating requirements.
NS + CONRAIL MAP
As David Goode indicated, it is important for us to focus on
the strategic opportunity for growth that this transaction offers
us. First and foremost, that means revenue growth. The Conrail
lines that will be operated by Norfolk Southern will extend our
market reach to new and important markets. It will allow us to
expand our single line service and focus on markets that may not
have been fully developed.
Before I present our view of the Conrail transaction, I want
to point out that our analysis includes estimates of synergies in
the form of incremental revenues and cost savings. The estimates
are based upon the best available information at this time. The
actual revenue increases, cost savings, synergies, and their
impact on earnings and earnings per share may vary materially
from those estimates. In addition, our analysis may be subject
to revision as we develop our more detailed plan for Conrail that
will be filed with the STB.
PROJECTED TRANSACTION BENEFITS-NET REVENUE SYNERGIES 1998-2000
The projections that we are presenting assume STB approval
will be received in early 1998, and that we begin achieving
synergies commencing in the second quarter of 1998. We are
hopeful that the STB will give expedited treatment to the
proposed transaction since, unlike the western mergers, the
proposed division of Conrail will create competition in the East,
and will not just resolve two-for-one problems.
Once STB approval has been obtained, we expect that this
transaction will initially increase our railway operating
revenues by more than 50 percent, based on our analysis of
revenues generated in the past. As we develop the North-South
markets for intermodal and conventional traffic, and increase our
role in the East-West markets between the Midwest and Northeast,
we are projecting incremental growth in railway revenues to be
about $132 million in 1998, $316 million in 1999 and $511 million
in the year 2000.
The projected incremental revenues are net of estimated
losses due to enhanced competition. As information, all
projections are shown in current dollars inflated at 3 percent
per year.
PROJECTED TRANSACTION BENEFITS-OPERATING EXPENSE SYNERGIES
1998-2000
Once STB approval has been obtained, we will have an
opportunity to begin realizing operating expense synergies. This
means that we will focus on making Conrail revenue streams as
profitable as Norfolk Southern's. This will be accomplished
through an immediate, and definitive series of actions such as:
- Reducing expenses for G&A
- Improving Conrail's operating cost structure and
cost control disciplines
- Improved asset utilization on both Conrail and
Norfolk Southern
- Improved safety and service levels
- Increased through train service which will
eliminate significant interchange handling, and
- More efficient purchasing of material and
equipment
These actions are expected to produce operating expense
savings of about $47 million in 1998, $180 million in 1999 and
$307 million in the year 2000.
NS + CONRAIL TRANSACTION SYNERGIES SUMMARY 1998-2000
As a result of operating savings and contribution from
incremental revenues, we project total synergies of about $71
million in 1998, $236 million in 1999 and $399 million in 2000.
NS + CONRAIL PROJECTED ACCRETION (DILUTION) IN EPS 1997-2000
It is anticipated that synergies from the acquisition of 58
percent of Conrail lines will result in earnings per share
dilution of about 2 percent in 1997 and 3 percent in 1998. By
1999, accretion in earnings per share of 6 percent are
anticipated, climbing to 15 percent in 2000.
While it becomes more difficult to predict future earnings
the further out we look, we expect that earnings accretion in the
years beyond 2000 should exceed 17 percent. On a cash basis, the
acquisition will be accretive to earnings per share beginning in
1998.
Our comparisons for accretion and dilution are made on the
assumption that Norfolk Southern would have resumed its
aggressive share purchase program at the end of 1997 at a rate of
six million shares per year.
PROJECTED RANGE OF GOODWILL
The Conrail acquisition is estimated to produce goodwill as
high as $1.2 billion. However, it is conceivable that there will
be no goodwill. This wide range of values is due to many
significant and complex factors which are not resolved at this
point in the process. These factors include:
- The appraised value of operating assets, including the
allocation of those values to depreciable and non-depreciable
assets which will impact the amount of additional depreciation.
- The fair value of other assets, including benefit plan
assets such as the pension plan, ESOP and Employee Benefit Trust.
- The amount of severance and other termination
benefits.
- Adjustments made to reflect liabilities at fair value,
including claim reserves.
Whether the excess of purchase price over the book value of
Conrail's net assets is assigned to assets or goodwill is really
not significant because the effect on net income is approximately
the same, since railroad assets are typically long-lived and
goodwill is amortized over periods up to 40 years.
PROJECTED ADDITIONAL CAPITAL SPENDING - CONRAIL LINES
Norfolk Southern plans to upgrade Conrail lines to meet both
our operating expectations and those of our customers,
principally by increasing both line and terminal capacity.
Additional major spending initiatives will be made in the first
two years, and will total approximately $195 million in 1998 and
$205 million in 1999. In 2000, additional capital spending is
expected to be $127 million.
Capital spending synergies are expected to be at least $20
million annually. These include such items as savings resulting
from purchasing materials and equipment constructed to our
specifications, and economies of scale; equipment constructed in
our own facilities; and reduced requirements for redundant
computer systems and systems capacity.
PROJECTED CUMULATIVE REDUCTION IN DEBT 1998-2000
To finance the remaining portion of the acquisition, Norfolk
Southern will access public and private debt markets by issuing
commercial paper and term debt. This new debt will bring the
total borrowings, including the almost $1 billion paid in
February, related to the Conrail acquisition, to $5.9 billion.
Norfolk Southern plans to aggressively begin repaying debt.
Through enhanced cash flows resulting from the acquired lines,
and prudent cash management, it is anticipated that over $1
billion of debt will be retired by the end of the year 2000.
PROJECTED DEBT TO TOTAL CAPITALIZATION 1998-2000
Norfolk Southern traditionally has had the lowest debt to
total capitalization and the strongest balance sheet in the
railroad industry.
It is anticipated that the additional $5 billion in debt
from our current level will bring our debt to total
capitalization to about 60 percent. This will allow us to remain
solidly investment grade.
Strong earnings growth and aggressive debt retirements are
expected to allow Norfolk Southern to reduce its debt to total
capitalization to about 50 percent by the end of the year 2000.
In closing, let me reemphasize that the financial
projections that I have just given you are based on estimates and
may change as matters progress.
Thank you.
