PAGE 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 1-8339
NORFOLK SOUTHERN CORPORATION
- -------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 52-1188014
- ---------------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Three Commercial Place
Norfolk, Virginia 23510-2191
- ---------------------------------------- -------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (757) 629-2680
------------------
No Change
- -------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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. (X) Yes ( ) No
The number of shares outstanding of each of the registrant's classes of
Common Stock, as of the latest practicable date:
Class Outstanding as of October 31, 1998
----- ----------------------------------
Common Stock (par value $1.00) 379,210,597 (excluding
21,627,902 shares held by
registrant's consolidated
subsidiaries)
<PAGE> PAGE 2
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
INDEX
-----
Page
----
Part I. Financial Information:
Item 1. Consolidated Statements of Income
Three Months and Nine Months Ended
September 30, 1998 and 1997 3-4
Consolidated Balance Sheets
September 30, 1998, and December 31, 1997 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 6-7
Notes to Consolidated Financial Statements 8-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-27
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
Index to Exhibits 30
<PAGE> PAGE 3
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Railway operating revenues:
Coal $ 321 $ 325 $ 960 $ 977
General merchandise 597 581 1,824 1,781
Intermodal 130 142 409 403
------ ------ ------ ------
Total railway operating
revenues 1,048 1,048 3,193 3,161
------ ------ ------ ------
Railway operating expenses:
Compensation and benefits 370 351 1,131 1,065
Materials, services and rents 206 173 602 518
Depreciation 112 107 328 314
Diesel fuel 41 51 134 169
Casualties and other claims 21 31 73 85
Other 40 38 123 111
------ ------ ------ ------
Total railway operating
expenses 790 751 2,391 2,262
------ ------ ------ ------
Income from railway
operations 258 297 802 899
Equity in earnings of Conrail
(Note 3) 53 42 135 65
Other income - net 19 25 91 77
Interest expense on debt (Note 3) (129) (132) (384) (256)
Charge for credit facility costs
(Note 3) -- -- -- (77)
------ ------ ------ ------
Income from continuing
operations before income
taxes 201 232 644 708
Provision for income taxes 50 63 174 228
------ ------ ------ ------
Income from continuing
operations 151 169 470 480
------ ------ ------ ------
Discontinued operations (Note 4):
Income (loss) from motor
carrier operations, net of
taxes -- 10 (1) 17
Gain on sale of motor carrier,
net of taxes 7 -- 105 --
------ ------ ------ ------
Income from discontinued
operations 7 10 104 17
------ ------ ------ ------
Net income $ 158 $ 179 $ 574 $ 497
====== ====== ====== ======
</TABLE>
<PAGE> PAGE 4
Item 1. Financial Statements.
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Per share amounts (Note 6):
Income from continuing
operations, basic $ 0.40 $ 0.44 $ 1.24 $ 1.27
Income from continuing
operations, diluted 0.40 0.44 1.23 1.26
Net income, basic 0.42 0.47 1.52 1.32
Net income, diluted 0.42 0.47 1.51 1.31
Dividends 0.20 0.20 0.60 0.60
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 5
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 107 $ 34
Short-term investments 84 125
Accounts receivable - net 544 552
Materials and supplies 57 58
Deferred income taxes 124 114
Other current assets 87 119
Net assets of discontinued operations (Note 4) -- 101
------- -------
Total current assets 1,003 1,103
Investment in Conrail (Note 3) 6,151 5,888
Other investments 378 333
Properties less accumulated depreciation 10,328 9,904
Other assets 156 122
------- -------
Total assets $18,016 $17,350
======= =======
Liabilities and stockholders' equity
Current liabilities:
Short-term debt $ -- $ 27
Accounts payable 613 624
Income and other taxes 166 169
Other current liabilities (Note 3) 290 212
Current maturities of long-term debt (Note 5) 67 61
------- -------
Total current liabilities 1,136 1,093
Long-term debt (Note 5) 7,508 7,398
Other liabilities (Note 3) 1,008 885
Minority interests 49 49
Deferred income taxes 2,473 2,480
------- -------
Total liabilities 12,174 11,905
------- -------
Stockholders' equity:
Common stock $1.00 per share par value 401 399
Additional paid-in capital 288 241
Retained income 5,173 4,826
Less treasury stock at cost,
21,627,902 shares and 21,757,902 shares,
respectively (20) (21)
------- -------
Total stockholders' equity 5,842 5,445
------- -------
Total liabilities and stockholders'
equity $18,016 $17,350
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 6
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 574 $ 497
Reconciliation of net income to net cash
provided by operating activities:
Depreciation 337 322
Deferred income taxes 51 48
Equity in earnings of Conrail (Note 3) (135) (65)
Charge for credit facility costs (Note 3) -- 77
Nonoperating gains and losses on properties
and investments (41) (27)
Income from discontinued operations (104) (17)
Changes in assets and liabilities affecting
operations:
Accounts receivable 9 (45)
Materials and supplies -- 3
Other current assets 34 40
Current liabilities other than debt 67 132
Other - net (31) (36)
------ ------
Net cash provided by continuing
operations 761 929
Net cash used for discontinued
operations (2) (12)
------ ------
Net cash provided by operating activities 759 917
Cash flows from investing activities:
Property additions (Note 5) (685) (678)
Property sales and other transactions 59 56
Investment in Conrail (Note 3) (38) (5,728)
Investments, including short-term (108) (166)
Investment sales and other transactions 108 144
Proceeds from sale of motor carrier (Note 4) 207 --
------ ------
Net cash used for investing activities (457) (6,372)
Cash flows from financing activities:
Dividends (227) (226)
Common stock issued - net 29 22
Commercial paper proceeds 129 1,540
Credit facility costs paid (Note 3) -- (72)
Proceeds from long-term borrowings (Note 5) 4 4,242
Debt repayments (164) (229)
------ ------
Net cash provided by (used for)
financing activities (229) 5,277
------ ------
Net increase (decrease) in cash and
cash equivalents 73 (178)
Cash and cash equivalents:*
At beginning of year 34 207
------ ------
At end of period $ 107 $ 29
====== ======
</TABLE>
<PAGE> PAGE 7
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------ ------
<S> <C> <C>
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest (net of amounts capitalized) $ 323 $ 159
Income taxes $ 78 $ 155
* Cash equivalents are highly liquid investments purchased
three months or less from maturity.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 8
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. In the opinion of Management, the accompanying unaudited interim
financial statements contain all adjustments (consisting of
normal recurring accruals) necessary to present fairly the
Corporation's financial position as of September 30, 1998, and
results of operations and cash flows for the nine months ended
September 30, 1998 and 1997.
Although Management believes that the disclosures presented are
adequate to make the information not misleading, these
consolidated financial statements should be read in conjunction
with the financial statements and notes included in the
Corporation's latest Annual Report on Form 10-K and subsequent
Quarterly Reports on Form 10-Q.
2. Commitments and Contingencies
There have been no significant changes since year-end 1997 in the
matters discussed in Note 17, COMMITMENTS AND CONTINGENCIES,
appearing in the NS Annual Report on Form 10-K for 1997, Notes to
Consolidated Financial Statements, beginning on page 78.
3. Joint Acquisition of Conrail
BACKGROUND AND OVERVIEW
On April 8, 1997, NS and CSX Corporation (CSX) agreed to jointly
acquire Conrail Inc. (Conrail), the owner of Consolidated Rail
Corporation, the major Class I railroad in the Northeast that
operates approximately 10,800 route miles.
On May 23, 1997, NS and CSX, through a jointly owned entity,
completed the acquisition of tendered Conrail stock which they
placed in a voting trust pending the issuance and effectiveness
of the Surface Transportation Board's (STB) written decision
approving their joint application to control Conrail. NS has a
58 percent economic and 50 percent voting interest in the jointly
owned entity.
On June 17, 1997, NS and CSX executed the Transaction Agreement,
dated as of June 10, 1997, which generally outlines the methods
of governing and operating Conrail and its subsidiaries when they
became subject to NS' and CSX's joint control.
On August 22, 1998, the STB's written decision approving the
control application became effective (the "Control Date"). As a
result, NS and CSX: (1) have dissolved the voting trust, and
(2) are authorized, among other things, to implement the
Transactions contemplated in the Transaction Agreement. A new
Conrail Board of Directors was elected which consists of an equal
number of NS-appointed and CSX-appointed directors.
<PAGE> PAGE 9
Item 1. Financial Statements. (continued)
- ------ --------------------
3. Joint Acquisition of Conrail (continued)
It is expected that Conrail's operations will continue
substantially unchanged until NS and CSX commence operating the
respective properties that will be leased to them, which now is
anticipated to occur in the first quarter of 1999 (the "Closing
Date"). NS personnel are making plans on the basis of a March 1
Closing Date. However, closing continues to be subject to a
number of contingencies, including attainment of necessary labor
implementing agreements and a determination that all necessary
systems are in place and that implementation can be accomplished
safely and with a minimum of service disruptions, any one of
which might postpone the Closing Date and the realization of
benefits NS expects to derive from the Transaction. After the
Closing Date, NS and CSX will provide substantially all rail
freight services on Conrail's route system, be assigned the
responsibility to perform all customer freight contracts, and
employ the majority of Conrail's work force. From time to time,
NS and CSX, as the indirect owners of Conrail, may be required to
fund Conrail's cash requirements through capital contributions,
loans, or advances.
THE TRANSACTION AGREEMENT AND OPERATING AGREEMENTS
The Transaction Agreement provides, among other things, that
after the Closing Date, the railroads of NS and CSX (Norfolk
Southern Railway Co. [NSR] and CSX Transportation, Inc. [CSXT],
respectively) will: (1) separately operate, pursuant to
operating and lease agreements with two limited liability
companies (Pennsylvania Lines LLC [PRR] and New York Central
Lines LLC [NYC]) that will be wholly owned by Conrail, portions
of the routes and assets now owned and operated by Conrail (the
"Allocated Assets"), and (2) jointly have access to other Conrail
properties that will continue to be owned and operated by Conrail
(the "Shared Assets Areas"). Conrail will continue to provide
certain system support operations for the benefit of itself, NSR,
and CSXT. All pre-existing Conrail obligations, including
environmental liabilities, will remain Conrail (or, in some
cases, PRR or NYC) obligations.
The Operating Agreement between NSR and PRR, which governs all
non-equipment assets to be used by NSR, will have an initial
25-year term, renewable at the option of NSR for two 10-year terms;
payments under that agreement will be fair market rental values
that are subject to adjustment every six years to reflect changes
in such values. NSR also will lease from PRR a number of
equipment assets at fair market rentals. NS' payments to PRR
under the Operating Agreement and lease agreements will be
significant in amount. In addition, all costs necessary to
operate the PRR assets will be borne by NSR.
CSXT will enter into an Operating Agreement and lease agreements
with NYC that contain terms and conditions identical to those in
the comparable agreements between NSR and PRR, and it will bear
all costs necessary to operate the NYC assets.
<PAGE> PAGE 10
Item 1. Financial Statements. (continued)
- ------ --------------------
3. Joint Acquisition of Conrail (continued)
NSR will also pay a portion of the costs (CSXT will pay the
remainder) to operate over the Shared Assets Areas, which will be
based on fair value and percentage usage.
Many employees of Conrail will be employed by NS or NSR, and, in
some cases, relocated at NS' or NSR's cost. Some Conrail
employees not hired by either NS or CSX will remain at Conrail
and perform services in the Shared Assets Areas or carry out
general corporate functions. Other Conrail employees will be
separated from service, after a transition period, and will be
entitled to contractually or STB-imposed severance benefits. The
Transaction Agreement provides that: (1) separation costs
related to Conrail's nonunion employees are to be borne by
Conrail, and (2) separation costs related to Conrail's union
employees are to be borne primarily by either NSR or CSXT.
NS will direct the appointment of the directors of PRR, and CSX
will direct the appointment of the directors of NYC. It is
expected that the directors of PRR and NYC will have control over
the daily operations of these companies, but certain key
decisions, including all modifications and changes to the
Operating Agreements, must be made by the Conrail board. By
virtue of their indirect ownership of Conrail, NS and CSX will
each have an indirect economic interest of 58 percent and 42
percent, respectively, in both PRR and NYC.
ACCOUNTING TREATMENT
<TABLE>
Investment in Conrail
---------------------
NS is applying the equity method of accounting to its investment
in Conrail in accordance with APB No. 18, "The Equity Method of
Accounting for Investments in Common Stock." In August 1998, the
effective date of the STB decision, NS' investment in Conrail
exceeded its 58 percent of Conrail's net equity by $4.1 billion.
This excess has been allocated to the fair values of Conrail's
assets and liabilities, using the principles of purchase
accounting, as follows:
<S> <C>
Property, equipment, and
investments in railroads $ 6,514
Other assets, principally pension and
other employee benefit plans and trusts 274
Debt revaluation and other liabilities (85)
Deferred taxes (2,579)
-------
Total $ 4,124
=======
</TABLE>
NS is amortizing the excess of its investment in Conrail over its
58 percent interest in Conrail's net equity based principally on
the estimated remaining useful lives of Conrail's property and
<PAGE> PAGE 11
Item 1. Financial Statements. (continued)
- ------ --------------------
3. Joint Acquisition of Conrail (continued)
equipment, net of the related deferred tax effect of the
differences in tax and accounting bases for certain assets. At
September 30, 1998, the difference between NS' investment in
Conrail and its share of Conrail's underlying net equity was
$4.1 billion, and the related amortization amounted to
$18 million quarterly. NS' investment in Conrail includes
$165 million ($101 million after taxes) of costs that will be
paid by NS. These costs consist principally of: (1) contractual
obligations to Conrail employees imposed by the STB when it
approved the Transaction, and (2) costs to relocate Conrail
employees. Most of NS' costs are expected to be paid in the two
years following the Closing Date, and $60 million of such are
classified on NS' balance sheet as "Current liabilities."
However, certain contractual obligations by their terms will be
paid out over a longer period. Conrail's underlying net equity
reflects liabilities recognized by Conrail primarily for
separations of nonunion employees and change-in-control
obligations. In 1997 and 1998, Conrail recorded $550 million of
after-tax charges for these liabilities (see "Conrail Summary
Financial Information," below).
These liabilities are based on preliminary estimates of
separation, relocation, and other labor-related contractual
obligations to Conrail employees. These liability estimates,
along with the fair value allocation, may be modified as more
information becomes available, as Management's integration plans
evolve, and as labor implementing agreements are negotiated.
Severance and relocation plans are expected to be finalized
shortly after the Closing Date. As a consequence, amounts
ultimately included in the allocation could differ from the
original estimate; however, any such differences are not now
expected to be material to NS' financial position, results of
operations, or liquidity. As definitive plans are determined and
communicated, costs, if any, for severing or relocating NS
employees and for disposing of NS facilities will be charged to
operating expense.
Income and Pro Forma Effects
----------------------------
Since May 23, 1997 (the date on which NS and CSX completed their
joint acquisition of Conrail stock), NS' financial statements
have reflected its 58 percent economic interest in Conrail, using
the equity method of accounting. NS' Consolidated Statements of
Income for the three months and nine months ended September 30,
1998 and 1997, include several Conrail-related items. Increasing
NS' income over these periods is its equity in the earnings of
Conrail, net of amortization, adjusted for the effects of certain
<PAGE> PAGE 12
Item 1. Financial Statements. (continued)
- ------ --------------------
3. Joint Acquisition of Conrail (continued)
transactions related to the acquisition and control of Conrail by
NS and CSX. Decreasing NS' income over the same periods are
principally: (1) interest expense on debt issued to finance NS'
share of the joint acquisition of Conrail stock, (2) credit
facility costs, including a $77 million charge expensed in the
first quarter of 1997 related to a previous attempt to acquire
100 percent of Conrail, and (3) integration expenses to date
(which have been included in "Railway operating expenses").
Had NS acquired its investment in Conrail on January 1, 1997, NS'
net income and diluted earnings per share for the nine-month
period ended September 30, 1997, would have been $447 million and
$1.18, respectively. These pro forma results reflect only the
application of the equity method of accounting and specific
financing costs, as previously discussed. They do not reflect
any costs of operating PRR's assets, or any synergies expected to
result from NS' operation of PRR's assets and having access to
the Shared Assets Areas. Accordingly, such results do not
include or otherwise take into account any potential increase in
NS' revenue or operating income, estimated cost savings, effects
of increased competition in the Northeast, or future integration
costs. The effects of the foregoing will be substantial. As a
result, this unaudited pro forma information is not, and is not
intended to be, indicative of the results of operations after the
Closing Date. Following Closing and commencement of operations
over lines leased from PRR and in the Shared Assets Areas, NS
will begin to report rail operating revenues and expenses
associated with these leased assets in its financial statements.
SUMMARY FINANCIAL INFORMATION - CONRAIL
The following summary financial information was provided by
Conrail's Management and should be read in conjunction with
Conrail's audited financial statements included as an exhibit to
NS' Annual Report on Form 10-K for 1997 filed with the Securities
and Exchange Commission.
<PAGE> PAGE 13
Item 1. Financial Statements. (continued)
- ------ --------------------
3. Joint Acquisition of Conrail (continued)
<TABLE>
Summarized Consolidated Statements Of Income - Conrail
------------------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
($ in millions)
(Unaudited)
<S> <C> <C> <C> <C>
Operating revenues $ 976 $ 944 $ 2,886 $ 2,787
Operating expenses 1,058 726 2,602 2,684
------- ------- ------- -------
Operating income (82) 218 284 103
Other-net (23) (21) (66) (59)
------- ------- ------- -------
Income (loss)
before income taxes (105) 197 218 44
Provision (benefit) for
income taxes (40) 96 83 155
------- ------- ------- -------
Net income (loss) $ (65) $ 101 $ 135 $ (111)
======= ======= ======= =======
</TABLE>
This Conrail financial information includes the effects of the
following transactions that related to the acquisition and
control of Conrail by NS and CSX, and accordingly, were excluded
in determining NS' equity in Conrail's net income. Conrail's
operating expenses for 1998 include a $187 million after-tax
charge for the following: (1) $105 million for estimated
nonunion severance obligations, and (2) $82 million of other
charges and reserves. Conrail's operating expenses for 1997
included the following: (1) a $221 million (no related tax
effect) charge in conjunction with the termination of the Conrail
ESOP, and (2) a $142 million after-tax charge for Transaction-
related stock compensation costs and change-in-control benefits.
<PAGE> PAGE 14
Item 1. Financial Statements. (continued)
- ------ --------------------
3. Joint Acquisition of Conrail (continued)
<TABLE>
Summarized Consolidated Balance Sheets - Conrail
------------------------------------------------
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
($ in millions)
(Unaudited)
<S> <C> <C>
Assets
Current assets $ 889 $ 954
Noncurrent assets 7,832 7,530
-------- --------
Total assets $ 8,721 $ 8,484
======== ========
Liabilities and stockholders' equity
Current liabilities $ 1,262 $ 1,208
Noncurrent liabilities 3,954 4,111
Stockholders' equity 3,505 3,165
-------- --------
Total liabilities and
stockholders' equity $ 8,721 $ 8,484
======== ========
</TABLE>
4. Discontinued Operations - Motor Carrier
On January 12, 1998, NS announced an agreement to sell all the
common stock of its motor carrier subsidiary, North American Van
Lines, Inc. (NAVL). Accordingly, NAVL's results of operations,
financial position, and cash flows are presented as "Discontinued
operations" in the accompanying financial statements.
On March 28, 1998, NS closed the sale of NAVL for $200 million in
cash and recorded an $83 million pretax ($98 million, or $0.26
per share, after-tax) gain. In the third quarter of 1998, NS
recorded an additional $7 million (or $0.02 per share) gain
resulting from negotiation of a purchase price adjustment. The
total gain on sale was $105 million, or $0.28 per share. The
higher after-tax gain was the result of differences between book
and tax bases and the realization of deferred tax benefits.
NAVL's revenues were $207 million in the first quarter of 1998,
$279 million in the third quarter of 1997, and $720 million for
the first nine months of 1997. These amounts are not included in
revenues in the accompanying income statements. Loss from motor
carrier operations was $1 million in the first quarter of 1998;
income from these operations was $10 million, or $0.03 per share,
in the third quarter of 1997, and $17 million, or $0.05 per
share, for the first nine months of 1997.
<PAGE> PAGE 15
Item 1. Financial Statements. (continued)
- ------ --------------------
5. Capital Lease Obligations
During 1998 and 1997, a rail subsidiary of NS entered into
capital leases covering new locomotives. The related capital
lease obligations, totaling $127 million in 1998 and $64 million
in 1997, 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 of between 6.36 percent
and 6.70 percent for the leases entered into in 1998, and
6.83 percent and 7.40 percent for those entered into in 1997.
All were effectively 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 realized gains or losses
accounted for as an adjustment of interest expense over the terms
of the leases. As a result, NS is exposed to the market risk
associated with fluctuations in interest rates. To date, the
effects of the rate fluctuations have been favorable and not
material. Counterparties to the interest rate swap agreements
are major financial institutions believed by Management to be
creditworthy.
6. Earnings Per Share
<TABLE>
The following table sets forth the reconciliation of the number
of weighted-average shares outstanding used in the calculations
of basic and diluted earnings per share.
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
(In millions)
<S> <C> <C> <C> <C>
Weighted-average shares
outstanding 379.0 377.0 378.6 376.4
Dilutive effect of
outstanding options and
performance share units
(as determined by the
application of the
treasury stock method) 2.1 4.2 2.6 3.5
----- ----- ----- -----
Diluted weighted-average
shares outstanding 381.1 381.2 381.2 379.9
===== ===== ===== =====
</TABLE>
There are no adjustments to "Net income" or "Income from continuing
operations" for the diluted earnings per share computations.
<PAGE> PAGE 16
Item 1. Financial Statements. (continued)
- ------ --------------------
7. Tax Benefit Leases
In January 1995, the United States Tax Court issued a preliminary
decision that disallowed some of the tax benefits a subsidiary of
NS purchased from a third party in 1981 pursuant to a safe harbor
lease agreement. The Tax Court finalized this decision in
February 1997, and the Fourth Circuit Court of Appeals affirmed
it. A petition for rehearing and request that the case be heard
by the full court was filed and denied. A petition has been
filed requesting that the U.S. Supreme Court consider the case,
but there can be no assurance that the petition will be granted.
Management continues to believe that NS ultimately should incur
no loss as a result of this decision because the lease agreement
provides for full indemnification if any such disallowance is
sustained.
8. Comprehensive Income
<TABLE>
Effective January 1, 1998, NS adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income."
This Statement requires that all items that are recognized under
accounting standards as components of comprehensive income be
reported in an annual financial statement displayed with the same
prominence as other annual financial statements. Condensed
financial statements of interim periods are to include a total
for comprehensive income. NS' total comprehensive income was as
follows:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
($ in millions)
<S> <C> <C> <C> <C>
Net income $ 158 $ 179 $ 574 $ 497
Other comprehensive income (1) 2 -- 3
----- ----- ----- -----
Total comprehensive
income $ 157 $ 181 $ 574 $ 500
===== ===== ===== =====
</TABLE>
For NS, "Other comprehensive income" is the unrealized gains and
losses on certain investments in debt and equity securities.
Accumulated other comprehensive income included in "Retained
income" was $5 million as of September 30, 1998, and $5 million
as of December 31, 1997.
<PAGE> PAGE 17
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Net Income
- ----------
Net income for the third quarter of 1998 was $158 million, a
decrease of $21 million, or 12 percent, compared with the third
quarter of 1997. Net income for the first nine months of 1998 was
$574 million, an increase of $77 million, or 15 percent. This
increase was attributable to a $105 million after-tax gain from the
sale of NS' motor carrier subsidiary, North American Van Lines, Inc.
(NAVL), which is included in "Income from discontinued operations"
(see Note 4). Income from continuing operations was $151 million in
the third quarter, down $18 million, or 11 percent, and was
$470 million for the first nine months, down $10 million, or
2 percent, compared with the same periods last year. Included in
both years' results were several Conrail-related items, primarily
interest expense on the $5.8 billion of debt incurred to finance the
acquisition of Conrail stock, integration costs included in railway
operating expenses, NS' equity in the earnings of Conrail, and the
first-quarter 1997 pretax charge of $77 million for credit facility
costs. These items reduced third-quarter 1998 and 1997 net income
and income from continuing operations by $35 million and $25
million, respectively, and for the first nine months, by $122
million and $87 million. Absent the Conrail-related items, income
from continuing operations would have been $186 million in the third
quarter, down $8 million, or 4 percent, and would have been
$592 million for the first nine months, up $25 million, or
4 percent. The improvement for the first nine months was
principally due to nonoperating items that more than offset lower
income from railway operations.
Railway Operating Revenues
- --------------------------
<TABLE>
Third-quarter railway operating revenues were $1,048 million,
unchanged from last year, and for the first nine months were
$3,193 million, up $32 million, or 1 percent. As shown in the table
below, the year-to-date improvement was due to higher traffic volume
that more than offset lower revenue per unit.
<CAPTION>
Third Quarter First Nine Months
1998 vs. 1997 1998 vs. 1997
Increase (Decrease) Increase (Decrease)
------------------- -------------------
($ in millions)
<S> <C> <C>
Traffic volume $ 26 $ 113
Revenue per unit (26) (81)
----- -----
$ -- $ 32
===== =====
</TABLE>
<PAGE> PAGE 18
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
<TABLE>
Revenues and carloads for the commodity groups were as follows:
<CAPTION>
Revenues
----------------------------------------
Third Quarter Nine Months
1998 1997 1998 1997
---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C>
Coal $ 321 $ 325 $ 960 $ 977
Chemicals 145 144 436 441
Automotive 129 112 412 368
Paper/clay/forest 133 138 409 407
Metals/construction 97 93 286 277
Agr./govt./consumer 93 94 281 288
------ ------ ------ ------
General merchandise 597 581 1,824 1,781
Intermodal 130 142 409 403
------ ------ ------ ------
Total $1,048 $1,048 $3,193 $3,161
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Carloads
----------------------------------------
Third Quarter Nine Months
1998 1997 1998 1997
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Coal 336 333 994 988
Chemicals 100 101 304 304
Automotive 111 81 354 270
Paper/clay/forest 111 116 344 345
Metals/construction 99 96 284 282
Agr./govt./consumer 86 87 261 267
------ ------ ------ ------
General merchandise 507 481 1,547 1,468
Intermodal 350 380 1,092 1,095
------ ------ ------ ------
Total 1,193 1,194 3,633 3,551
====== ====== ====== ======
</TABLE>
<PAGE> PAGE 19
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Coal
- ----
Third-quarter coal revenues were 1 percent below last year and were
2 percent lower for the first nine months, despite increased
shipments, reflecting a change in the mix of traffic. Utility coal
shipments (especially shorter-haul business) increased while export
and domestic metallurgical coal shipments decreased. Although total
carloads increased only 1 percent in both periods, total tonnage
handled increased 3 percent in the third quarter and 2 percent for
the first nine months. Utility tonnage increased 14 percent in the
quarter and 12 percent for the first nine months. Traffic in both
periods benefited from new shorter-haul (lower average revenues)
business and increased coal-fired electricity generation in NS'
service territory. Export tonnage decreased 17 percent in the third
quarter and 11 percent for the first nine months, principally due to
lower demand resulting from the strong dollar. Domestic
metallurgical tonnage declined 14 percent in the quarter and 13
percent for the first nine months, primarily due to the closure, as
anticipated, of two large coking plants and decreased demand for
domestic steel.
Fourth-quarter coal revenues are expected to be below those of last
year, due to continued softness in the export and domestic
metallurgical coal markets.
General Merchandise
- -------------------
Third-quarter general merchandise revenues were 3 percent above last
year and were 2 percent higher for the first nine months. In both
periods, the increases were principally due to higher automotive
revenues, up 15 percent for the quarter and 12 percent for the first
nine months, mostly due to mixing center traffic. Increased
automotive parts traffic through NS' just-in-time rail facilities
also contributed to the improvements. Automotive revenues were
lower than expected, however, largely due to industrywide equipment
shortages and truck diversions. The number of vehicles handled
through the new mixing centers fell short of projections, hampered
by the equipment shortages, Western service problems, and truck
diversions. As these issues are resolved, the centers should begin
to realize the expected volume levels. Metals/construction revenues
increased 4 percent in the third quarter and 3 percent for the first
nine months. Although steel production had been at record levels in
the first quarter, it declined in the third quarter due to lower-
priced imports. However, this was mitigated by increased shipments
in the third quarter resulting from new mini-mill facilities and
highway construction activity. Paper/clay/forest revenues decreased
4 percent in the third quarter, but increased slightly for the first
nine months. The decrease for the quarter was due to softness in
world markets for paper, kaolin clay, and wood products.
Fourth-quarter general merchandise revenues are expected to continue
to be slightly ahead of last year, supported by growing automotive
mixing center traffic and continued progress in resolving equipment
shortages and overcoming Western rail service problems.
<PAGE> PAGE 20
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Intermodal
- ----------
Third-quarter intermodal revenues were 8 percent below last year,
but were 1 percent higher for the first nine months. The decline in
the quarter was principally due to decreased trailer traffic volume,
a result of the redesign of NS' intermodal services begun in August.
For the first nine months, increased container and RoadRailer (RT)
revenues more than offset the effects of lower trailer traffic
volume.
In August, NS implemented a redesign of its intermodal services in
anticipation of the closing of the Conrail Transaction (see "Joint
Acquisition of Conrail," below and Note 3). The redesign is
expected to improve on-time performance and eliminate complexity,
thereby positioning NS to achieve the volume goals anticipated in
the Conrail Transaction.
Fourth-quarter intermodal revenues are expected to be below those of
last year, principally due to the network redesign.
Railway Operating Expenses
- --------------------------
Third-quarter railway operating expenses were $790 million, up
$39 million, or 5 percent, compared with last year. For the first
nine months, railway operating expenses were $2,391 million, up
$129 million, or 6 percent. The increases were principally the
result of Conrail integration costs, higher wage rates, and costs
associated with the automotive mixing centers.
The largest increases were in "Materials, services and rents," up
19 percent in the third quarter and 16 percent for the first nine
months. The principal reasons for the increases were: (1) Conrail-
related integration expenses, (2) higher equipment rents and mixing
center costs associated with increased automotive traffic volume,
and (3) the absence this year of rents from locomotives and freight
cars that had been leased to other railroads in 1997. Higher
locomotive repair costs also contributed to the increase in the
first nine months, but were not significant in the quarter.
"Compensation and benefits" expense increased 5 percent in the third
quarter and 6 percent for the first nine months. The increases
resulted from: (1) Conrail-related integration costs, (2) higher
wage rates, including an increase in the maximum potential BLE bonus
from 5 percent to 10 percent of wages, and (3) new FRA train inspection
requirements that increased labor expenses by more than $1 million
per month. These increases were mitigated by reduced stock-based
compensation costs and lower pension expense.
<PAGE> PAGE 21
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
"Other" expenses increased 5 percent in the third quarter and
11 percent for the first nine months, largely due to the effects of
favorable adjustments last year for property and sales and use
taxes.
"Diesel fuel" expenses decreased 20 percent in the third quarter and
21 percent for the first nine months; the favorable effects of a
lower price per gallon were partially offset by higher consumption.
"Casualties and other claims" expenses decreased 32 percent in the
third quarter and 14 percent for the first nine months, due to
favorable experience in environmental claims combined with lower
personal injury expense.
The railway operating ratio was 75.4 percent in the third quarter,
compared with 71.6 percent last year. Excluding Conrail-related
integration costs, the railway operating ratio in the third quarter
would have been 72.1 percent. For the first nine months, the
railway operating ratio was 74.9 percent, compared with 71.6 percent
last year. Excluding Conrail-related integration costs, the year-to-
date railway operating ratio would have been 72.2 percent. The
railway operating ratio in 1998 has been adversely affected by a
change in traffic mix related to growth in automotive traffic
coupled with the change in the coal traffic mix. Automotive traffic
includes some of NS' most time-sensitive and resource-intensive
business, requiring more trains, increased handling costs (such as
loading and unloading charges), and higher equipment rents.
Equity in Earnings of Conrail
- -----------------------------
Conrail's net income, adjusted for the effects of certain charges
related to the acquisition and control of Conrail by NS and CSX, was
$122 million in the third quarter and $322 million for the first
nine months (see "Joint Acquisition of Conrail," below). NS' portion, or
58 percent, of Conrail's adjusted net income, net of amortization of
the difference between NS' investment in Conrail and the underlying
equity in net assets, was $53 million for the quarter and
$135 million for the first nine months of 1998. Comparable data for
the first nine months of 1997 reflected NS' 58 percent economic
interest in Conrail beginning May 23 and its less-than-10-percent
ownership of Conrail stock from February 10 until May 23, 1997.
Other Income - Net
- ------------------
"Other income - net" was $6 million lower in the third quarter, but
was $14 million higher for the first nine months. The decrease for
the quarter was due to a variety of small items, while the increase
for the first nine months was principally due to higher gains on
dispositions of property and investments.
<PAGE> PAGE 22
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Interest Expense on Debt
- ------------------------
"Interest expense on debt" decreased slightly in the third quarter,
but increased significantly for the first nine months, a result of
interest expense on the $5.8 billion of debt issued, to finance NS'
portion of the cost of the Conrail acquisition.
Income Taxes
- ------------
The effective income tax rate for the third quarter was
24.9 percent, compared with 27.2 percent in 1997. For the first
nine months, the effective rate was 27.0 percent, compared with
32.2 percent last year. Excluding NS' equity in Conrail's earnings
from pretax income for both periods, the effective rate in this
third quarter was 33.8 percent, compared with 33.2 percent last
year, and for the first nine months was 34.2 percent, compared with
35.5 percent last year. In both years, the effective rate for the
quarter benefited from favorable adjustments of accrued liabilities
for state income taxes. The lower effective rate for the first nine
months resulted from favorable adjustments to income tax expenses
upon settlement of the 1993 and 1994 federal income tax audits.
Discontinued Operations
- -----------------------
"Income from discontinued operations" for the third quarter includes
$7 million of additional after-tax gain from the sale of NAVL,
resulting from negotiation of a purchase price adjustment, making
the total after-tax gain $105 million. Prior to the sale, which was
consummated on March 28, 1998 (see Note 4), motor carrier operations
in 1998 produced a $1 million loss; in 1997, these operations
produced income of $10 million in the third quarter and $17 million
for the first nine months.
<TABLE>
FINANCIAL CONDITION AND LIQUIDITY
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
($ in millions)
<S> <C> <C>
Cash and short-term
investments $ 191 $ 159
Working capital $ (133) $ 10
Current assets to current
liabilities 0.9 1.0
Debt to total capitalization 56.5% 57.9%
</TABLE>
<PAGE> PAGE 23
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES is NS' principal source of
liquidity and was sufficient to cover the majority of the cash
outflows for dividends, debt repayments, and capital spending (see
Consolidated Statements of Cash Flows on page 6). The cash source
arising from the change in "Accounts receivable" for the first nine
months of 1998, compared with the same period in 1997, was
principally the result of a decrease in rail freight receivables
this year. The decrease in the cash source arising from the change
in "Current liabilities other than debt" was primarily due to
interest payments related to the term notes issued in May 1997 to
finance a portion of NS' share of the Conrail acquisition. The
working capital deficit at September 30, 1998, compared with a small
surplus at December 31, 1997, was attributable to accrued interest,
due in the fourth quarter, on those notes. NS expects to issue
additional commercial paper to fund some of those interest payments.
CASH USED FOR INVESTING ACTIVITIES for the first nine months of 1998
reflected the $207 million of proceeds ($200 million in the first
quarter and $7 million in the third quarter) from the sale of NAVL
(see Note 4). The "Investment in Conrail" for the first nine months
of 1998 included payments for previously untendered Conrail shares
and direct costs associated with the acquisition of its stock.
NS expects to make whatever investments in plant, equipment, and
facilities prove necessary to integrate Conrail operations into its
system. Additional significant capital spending in the early years
following the Closing Date will be necessary to achieve a safe and
efficient integration. For instance, new connections are required
to integrate NS and Conrail routes; and new terminals, improvements
to existing terminals, new sidings, and improvements to existing
Conrail routes are required to handle anticipated increases in
traffic. As integration plans continue to evolve, NS' ability to
assess system needs will be enhanced, with the result that the
timing and amount of expenditures may differ from earlier estimates.
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES in the first nine
months of 1997 included proceeds from the sale of commercial paper
and term notes to finance NS' portion of the acquisition of Conrail
stock. "Debt repayments" included reductions in outstanding
commercial paper of $110 million in 1998 and $181 million in 1997.
JOINT ACQUISITION OF CONRAIL
NS and CSX, through a jointly owned entity, control Conrail (see
Note 3). NS will begin providing rail freight services on portions
of Conrail's route system after the Closing Date. Closing now is
expected to occur in the first quarter of 1999. NS personnel are
making plans on the basis of a March 1 Closing Date. However,
closing continues to be subject to a number of contingencies,
including attainment of necessary labor implementing agreements and
<PAGE> PAGE 24
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
a determination that all necessary systems are in place and that
implementation can be accomplished safely and with a minimum of
service disruptions, any one of which might postpone the Closing
Date and the realization of benefits NS expects to derive from the
Transaction.
NS has completed or has out for ratification labor implementing
agreements with all but four of the organizations that represent
Conrail's unionized work force. Binding arbitration has been invoked
with the remaining organizations with which pre-closing agreements
are being sought.
NS plans to implement its own information technology systems in the
portion of Conrail's routes and assets it will operate. While some
systems will be operational on the Closing Date, others --
particularly the transportation systems -- will be integrated
geographically over a period of several months after the Closing
Date. Accordingly, some of Conrail's systems are being modified to
be compatible with NS' systems. Most of this programming is
completed, and testing has begun. Moreover, in the Shared Assets
Areas, many of Conrail's existing systems will continue to be used
and, therefore, must be able to work with both NS' and CSX's systems
and be made Year-2000 compliant (see also the discussion on page 26
concerning Conrail's Year-2000 compliance).
The Closing Date marks the point at which NSR actually can begin to
operate certain of the assets and routes of Conrail, thereby
permitting NS to begin to realize many of the anticipated benefits
of the Transaction. Realization of these benefits is dependent
upon, among other things: (1) the successful integration of NS'
portion of Conrail's system into its railroad system, (2) successful
coordination of operations within the Shared Assets Areas, and
(3) successful coordination of NSR's (and CSXT's) operations with
the Shared Assets Areas' operations. A failure by NS or CSX to
integrate successfully their respective portions of Conrail,
including information technology systems, could have a substantial
impact on NS' financial position, results of operations, or
liquidity.
CONRAIL'S RESULTS OF OPERATIONS
Conrail incurred a net loss of $65 million for the third quarter of
1998 as compared with net income of $101 million for the third
quarter of 1997. Net income for the first nine months of 1998 was
$135 million as compared with a net loss of $111 million in the
first nine months of 1997. The results for the third quarter and
first nine months of 1998 included a charge of $302 million ($187
million after income taxes), primarily for severance benefits
covering certain nonunion employees as well as adjustments for
certain other assets and liabilities. The first nine months of 1997
included a $221 million ESOP termination charge (no related income
<PAGE> PAGE 25
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
tax effect) and $173 million ($142 million after income taxes) of
merger-related stock compensation and executive severance costs.
Without the above-mentioned charges, Conrail's net income would have
been $122 million for the third quarter of 1998, and $322 million
and $252 million for the first nine months of 1998 and 1997,
respectively.
Conrail operating revenues increased $32 million, or 3 percent, and
$99 million, or 4 percent, for the three and nine months ended
September 30, 1998, respectively, compared with the same periods in
1997. Traffic volume increases of 4 percent and 5 percent,
respectively, were primarily responsible for the revenue
improvements.
Conrail operating expenses, excluding the aforementioned charges,
increased $30 million for the third quarter, and $10 million for the
first nine months of 1998, as compared with the same periods in
1997. Increases in merger-related costs, such as information
technology expenses and employee retention bonuses, as well as the
effects of higher traffic volume in 1998 were primarily responsible
for the increases, which were partially offset by lower fuel prices
and reductions in both the number and costs associated with employee
injuries.
YEAR-2000 COMPLIANCE
General
- -------
In October 1995, NS initiated a project to review and modify, as
necessary, its computer applications, hardware, and other equipment
to make them Year-2000 compliant. NS has engaged outside consultants
and independent contractors to assist with its Year-2000 project.
The progress of the project is reviewed regularly by NS' senior
management and by the Board's Audit Committee. The project is organized
with respect to NS' three principal technology areas: mainframe systems,
nonmainframe systems, and enterprise applications (operations and embedded
processors), and for each such system involves: inventory,
assessment, remediation, testing, and implementation. NS expects to
have all business-critical systems remediated, tested, and
implemented by mid-1999.
State of Readiness
- ------------------
For mainframe systems (data center infrastructure, purchased or
leased software, and mainframe applications), remediation and unit
testing for business-critical systems are in the final stages, and
test plans for systems testing are being developed. Systems testing
is now expected to begin in November 1998 and to be completed in May
1999, but requires use of the same resources needed for testing
related to the Conrail Transaction (see "Joint Acquisition of
Conrail," above). Implementation for systems successfully tested is
expected to begin in November 1998 and to be completed by June 1999.
<PAGE> PAGE 26
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
For nonmainframe and enterprise systems, assessment is underway and
is now expected to be completed by December 1998 for most systems.
Remediation of some systems has begun, and completion for all
systems is expected by April 1999. Testing and implementation will
follow with expected completion for business-critical systems by mid-year
1999.
NS also has initiated formal communications with third parties
having a substantial relationship to its business, including other
railroads, significant suppliers, larger customers, and financial
institutions, to determine the extent to which NS may be vulnerable
to such third parties' failures to achieve Year-2000 compliance.
Thus far, NS has no information that indicates that a significant
third party may be unable to provide goods or services or to request
NS' services because of Year-2000 issues.
Cost
- ----
NS has allocated existing information technology resources and has
incurred incremental costs, mostly for contract programmers and
consultants, in connection with its Year-2000 compliance project.
Since the project began, Management estimates that up to 10 percent
of NS' in-house programming resources have been used for Year-2000
compliance efforts. The effects of deferring other information
technology projects to accommodate the Year-2000 effort have been
minor. Incremental costs incurred through September 30, 1998, which
were expensed, are immaterial to NS' results of operations. Total
costs are expected to be approximately $25 million.
Contingency Plans
- -----------------
In all areas, the project includes extensive testing to ensure that
remediation successfully addresses Year-2000 compliance. Although
NS presently has no specific Year-2000 contingency plan in place,
once assessments are completed for all systems, contingency plans
for business-critical systems will be developed where warranted.
Conrail
- -------
As a part of its preparations for the integration of its railroad
system with a portion of Conrail's system, NS is working with
Conrail and CSX to ensure that Conrail's computer applications,
hardware, and other equipment are Year-2000 compliant. Conrail's
core transportation system is being made Year-2000 compliant, with a
projected completion date for all programming and testing of
September 1999. Conrail's other information technology systems will
be replaced by NS and CSX systems after the Closing Date, and such
replacement is expected to be accomplished six months after the
Closing Date. A delay in replacing these systems, which are not
Year-2000 compliant, could result in their failure. Conrail also
has underway a project to inventory, assess, and remediate all of
its business-critical enterprise systems that will continue to
operate after the Closing Date. This Conrail project is scheduled
for completion in June 1999.
<PAGE> PAGE 27
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Risks
- -----
Failure to achieve Year-2000 compliance -- by NS, other railroads,
its principal suppliers and customers, and certain financial
institutions with which it has relationships -- could negatively
affect NS' ability to conduct business for an extended period.
Management believes that NS will be successful in its Year-2000
compliance effort; however, there can be no assurance that all NS
information technology systems and components will be fully
Year-2000 compliant; in addition, other companies on which NS'
systems and operations rely may or may not be fully compliant on a
timely basis, and any such failure could have a material adverse
effect on NS' financial position, results of operations, or
liquidity.
MARKET RISK RELATIVE TO JAPAN
As disclosed in NS' 1997 Annual Report on Form 10-K, some of NS'
capital lease obligations are payable in Japanese yen, and NS hedged
the associated exchange rate risk at the inception of each lease with
a yen deposit in Japan sufficient to fund the yen-denominated
obligation. One of the banks holding yen deposits was placed under
special public management, essentially temporary nationalization, in
accordance with a new law in Japan addressing the revitalization of
its financial system. The government, through the Bank of Japan, has
indicated its intention to fully protect all of the bank's
liabilities, including deposits.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Quarterly Report
contain forward-looking statements that are based on current
expectations, estimates, and projections. Such forward-looking
statements reflect Management's good-faith evaluation of information
currently available. However, because such statements are based
upon, and therefore can be influenced by, a number of external
variables over which Management has no, or incomplete, control, they
are not, and should not be read as being, guarantees of future
performance or of actual future results; nor will they necessarily
prove to be accurate indications of the times at or by which any
such performance or result will be achieved. Accordingly, actual
outcomes and results may differ materially from those expressed in
such forward-looking statements. This caveat has particular
importance in the context of all such statements that relate to the
amount, realization, and timing of benefits expected to result from
consummation of the Conrail Transaction. Moreover, some sections of
this report contain statements that expressly refer to or are
conditioned on the realization or satisfaction of certain described
contingencies; all such statements should be evaluated in the
context in which they appear and in light of both the stated related
assumptions or contingencies and of the more general caveat set
forth under this caption.
<PAGE> PAGE 28
PART II. OTHER INFORMATION
----------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits:
Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on July 29, 1998,
reporting that on July 23, 1998, the Surface
Transportation Board (STB) had issued its written
decision, to become effective August 22, 1998,
approving the joint application of NS and CSX
Corporation (CSX) to control Conrail Inc.
A report on Form 8-K was filed on August 24, 1998,
reporting that the decision of the STB had become
effective on August 22, 1998, and, accordingly, that
the voting trust that held the Conrail stock purchased
by NS and CSX had been terminated, the persons serving
as directors of Conrail had resigned, and new directors
had been elected.
A report on Form 8-K was filed on September 2, 1998,
reporting that effective September 1, 1998, Norfolk and
Western Railway Company was merged with and into its
parent Norfolk Southern Railway Company, NS' wholly
owned rail subsidiary.
<PAGE> PAGE 29
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 thereunto duly authorized.
NORFOLK SOUTHERN CORPORATION
----------------------------------
(Registrant)
Date: November 13, 1998 /s/ Dezora M. Martin
----------------- ----------------------------------
Dezora M. Martin
Corporate Secretary (Signature)
Date: November 13, 1998 /s/ John P. Rathbone
----------------- ----------------------------------
John P. Rathbone
Vice President and Controller
(Principal Accounting Officer)
(Signature)
<PAGE> PAGE 30
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Index to Exhibits
-----------------
Electronic
Submission
Exhibit
Number Description Page Number
- ----------- ----------------------------------------- -----------
27 Financial Data Schedule 31
(This exhibit is required to be
submitted electronically pursuant to the
rules and regulations of the Securities
and Exchange Commission and shall not be
deemed filed for purposes of Section 11
of the Securities Act of 1933 or
Section 18 of the Securities Exchange
Act of 1934).
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997 <F1>
<CASH> $ 107 $ 29
<SECURITIES> 84 157
<RECEIVABLES> 548 607
<ALLOWANCES> 4 4
<INVENTORY> 57 58
<CURRENT-ASSETS> 1,003 1,149
<PP&E> 14,866 14,234
<DEPRECIATION> 4,538 4,388
<TOTAL-ASSETS> 18,016 17,293
<CURRENT-LIABILITIES> 1,136 1,148
<BONDS> 7,508 7,460
0 0
0 0
<COMMON> 401 399
<OTHER-SE> 5,441 4,896
<TOTAL-LIABILITY-AND-EQUITY> 18,016 17,293
<SALES> 0 0
<TOTAL-REVENUES> 3,193 3,161
<CGS> 0 0
<TOTAL-COSTS> 2,391 2,262
<OTHER-EXPENSES> (226) (65)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 384 256
<INCOME-PRETAX> 644 708
<INCOME-TAX> 174 228
<INCOME-CONTINUING> 470 480
<DISCONTINUED> 104 17
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 574 497
<EPS-PRIMARY> 1.52 1.32
<EPS-DILUTED> 1.51 1.31
<FN>
<F1> Financial data schedules for 1997 are restated to reflect
discontinued operations and the effect of adoption of Statement
of Financial Accounting Standards No. 128, "Earnings per
Share."
</TABLE>
