<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 SEPT. 30, 2000
( ) 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 last practicable date:
Class Outstanding as of Oct. 31, 2000
----- --------------------------------
Common Stock (par value $1.00) 383,623,754 (excluding 21,627,902
shares held by registrant's
consolidated subsidiaries)
<PAGE> PAGE 2
TABLE OF CONTENTS
-----------------
Page
----
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Statements of Income
Three Months and Nine Months Ended
Sept. 30, 2000 and 1999 3
Consolidated Balance Sheets
Sept. 30, 2000, and Dec. 31, 1999 4
Consolidated Statements of Cash Flows
Nine Months Ended Sept. 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information:
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
<PAGE> PAGE 3
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Railway operating revenues:
Coal $ 361 $ 369 $ 1,081 $ 949
General merchandise 869 864 2,713 2,210
Intermodal 287 267 796 565
------ ------ ------ ------
TOTAL RAILWAY OPERATING
REVENUES 1,517 1,500 4,590 3,724
------ ------ ------ ------
Railway operating expenses:
Compensation and benefits
(Note 4) 507 574 1,678 1,355
Materials, services and rents 342 354 1,033 837
Conrail rents and services
(Note 5) 119 141 364 192
Depreciation 126 121 377 352
Diesel fuel 118 74 339 159
Casualties and other claims 33 36 99 100
Other 61 54 183 148
------ ------ ------ ------
TOTAL RAILWAY OPERATING
EXPENSES 1,306 1,354 4,073 3,143
------ ------ ------ ------
Income from railway
operations 211 146 517 581
Equity in earnings of Conrail
(Note 5) -- -- -- 49
Other income - net 81 24 154 72
Interest expense on debt (136) (134) (415) (393)
------ ------ ------ ------
Income before income taxes 156 36 256 309
Provision for income taxes 57 17 89 101
------ ------ ------ ------
NET INCOME $ 99 $ 19 $ 167 $ 208
====== ====== ====== ======
Per share amounts (Note 8):
Net income, basic and diluted $ 0.26 $ 0.05 $ 0.44 $ 0.55
Dividends 0.20 0.20 0.60 0.60
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE> PAGE 4
Item 1. Financial Statements. (continued)
------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
(Unaudited)
<CAPTION>
Sept. 30, Dec. 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 151 $ 37
Short-term investments 1 14
Accounts receivable, net (Note 3) 469 857
Due from Conrail (Note 5) 27 77
Materials and supplies 116 100
Deferred income taxes 169 134
Other current assets 70 152
-------- --------
Total current assets 1,003 1,371
Investment in Conrail (Note 5) 6,146 6,132
Properties less accumulated depreciation 11,013 10,956
Other assets 927 791
-------- --------
TOTAL ASSETS $19,089 $19,250
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 962 $ 818
Income and other taxes 247 163
Notes and accounts payable to Conrail (Note 5) 148 184
Other current liabilities 336 256
Current maturities of long-term debt 296 503
-------- --------
Total current liabilities 1,989 1,924
Long-term debt (Note 6) 7,352 7,556
Other liabilities 1,091 1,101
Minority interests 49 50
Deferred income taxes 2,720 2,687
-------- --------
TOTAL LIABILITIES 13,201 13,318
-------- --------
Stockholders' equity:
Common stock $1.00 per share par value,
1,350,000,000 shares authorized;
issued 405,178,238 shares and
404,309,672 shares, respectively 405 404
Additional paid-in capital 385 372
Accumulated other comprehensive income (Note 9) (6) (11)
Retained income 5,124 5,187
Less treasury stock at cost, 21,627,902 shares (20) (20)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 5,888 5,932
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $19,089 $19,250
======== ========
See accompanying notes to Consolidated Financial Statements.
</TABLE>
<PAGE> PAGE 5
Item 1. Financial Statements. (continued)
------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
<CAPTION>
Nine Months Ended
Sept. 30,
----------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 167 $ 208
Reconciliation of net income to net cash
provided by operating activities:
Depreciation 387 363
Deferred income taxes 2 52
Equity in earnings of Conrail (Note 5) (13) (23)
Gains and losses on properties and investments (141) (28)
Changes in assets and liabilities affecting
operations:
Accounts receivable (Note 3) 388 (371)
Materials and supplies (16) (16)
Other current assets and due from Conrail 130 39
Current liabilities other than debt 303 345
Other - net (Note 4) 16 (3)
----- -----
Net cash provided by operating activities 1,223 566
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (508) (712)
Property sales and other transactions 116 73
Investments, including short-term (64) (105)
Investment sales and other transactions 43 180
----- -----
Net cash used for investing activities (413) (564)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (230) (228)
Common stock issued - net 1 18
Proceeds from borrowings 875 848
Debt repayments (1,342) (604)
----- -----
Net cash provided by (used for) financing
activities (696) 34
------ ------
Net increase in cash and cash equivalents 114 36
CASH AND CASH EQUIVALENTS:
At beginning of year 37 5
----- -----
At end of period $ 151 $ 41
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 335 $ 312
Income taxes $ 6 $ 17
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE> PAGE 6
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 Sept. 30, 2000, and its
results of operations and cash flows for the nine months ended
Sept. 30, 2000 and 1999.
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: (a) the financial statements and notes included in the
Corporation's latest Annual Report on Form 10-K and in any
subsequent Quarterly Reports on Form 10-Q, and (b) any Current
Reports on Form 8-K.
2. Commitments and Contingencies
There have been no significant changes since year-end 1999 in the
matters discussed in NOTE 16, COMMITMENTS AND CONTINGENCIES,
appearing in the NS Annual Report on Form 10-K for 1999, Notes to
Consolidated Financial Statements, beginning on page 76.
3. Sale of Accounts Receivable
Effective May 2000, NS sold, through a bankruptcy-remote special
purpose subsidiary, an undivided ownership interest in a pool of
accounts receivable totaling approximately $700 million. New
receivables are added to the pool as collections reduce
previously sold accounts receivable. NS services and collects
the sold receivables on behalf of the purchaser, who has a
priority collection interest in the entire pool of receivables.
NS has retained the credit risk related to collection to the
extent the pool of receivables exceeds the amount sold.
At Sept. 30, 2000, accounts receivable of $416 million had been
sold under this arrangement and accordingly, are not included in
"Accounts receivable, net" on the balance sheet. The fees
associated with the sale are included in "Other income - net."
NS maintains an allowance for doubtful accounts for all
receivables, including receivables sold. The allowance totaled
$6 million at Sept. 30, 2000, and $5 million at Dec. 31, 1999.
4. Workforce Reduction Charge
"Compensation and benefits" expenses for the first nine months of
2000 include a first-quarter $101 million workforce reduction
charge, which lowered net income by $62 million, or 16 cents per
diluted share. Most of the charge resulted from a voluntary
early retirement program, which was accepted by 919 of 1,180
eligible employees. The retirements were effective March 1,
2000, and most of the related benefits will be paid from the
<PAGE> PAGE 7
Item 1. Financial Statements. (continued)
------ --------------------
Corporation's overfunded pension plan. As a result, there was a
noncash reduction to NS' pension plan asset. Reductions in union
personnel were achieved primarily through furloughs, and some of
these employees are entitled to postemployment benefits. The
charge includes an accrual for these amounts for the period until
these employees return to work as a result of normal attrition.
5. Investment in Conrail and Operations Over Its Lines
Overview
--------
Through a jointly owned entity, NS and CSX Corporation (CSX) own
the stock of Conrail Inc. (Conrail), whose primary subsidiary is
Consolidated Rail Corporation (CRC). NS has a 58 percent
economic and 50 percent voting interest in the jointly owned
entity, and CSX has the remainder of the economic and voting
interests. From May 23, 1997, the date NS and CSX completed
their acquisition of Conrail stock, until June 1, 1999 (the
"Closing Date"), Conrail's operations continued substantially
unchanged while NS and CSX awaited regulatory approvals and
prepared for the integration of the respective Conrail routes and
assets to be leased to their railroad subsidiaries, Norfolk
Southern Railway Company (NSR) and CSX Transportation, Inc.
(CSXT). From time to time, NS and CSX, as the indirect owners of
Conrail, may need to make capital contributions, loans or
advances to Conrail.
Commencement of Operations
--------------------------
On the Closing Date, NSR began operating the routes and assets of
Pennsylvania Lines LLC (PRR), a wholly owned subsidiary of CRC,
under various leasing and operating arrangements. Costs
necessary to operate and maintain the PRR assets, including
leasehold improvements, are borne by NSR. CSXT operates the
routes and assets of another CRC subsidiary under comparable
terms. Certain other Conrail routes and assets (the "Shared
Assets Areas") continue to be operated by CRC for the joint and
exclusive benefit of NSR and CSXT. In addition to a fee paid for
access, NSR and CSXT pay, based on usage, the costs incurred by
CRC to operate the Shared Assets Areas.
NSR and CSXT now provide substantially all rail freight services
on Conrail's route system, are responsible for performing most
services incident to customer rail transportation contracts, and
employ the majority of Conrail's former workforce. As a result,
on the Closing Date, both NS' railroad route miles and its
railroad employees increased by approximately 50 percent.
Investment in Conrail
---------------------
NS applies the equity method of accounting to its investment in
Conrail. NS is amortizing the excess of the purchase price over
Conrail's net equity using the principles of purchase accounting,
based primarily on the estimated remaining useful lives of
Conrail's property and equipment, including the related deferred
<PAGE> PAGE 8
Item 1. Financial Statements. (continued)
------ --------------------
tax effect of the differences in tax and accounting bases for
certain assets. At Sept. 30, 2000, the difference between NS'
investment in Conrail and its share of Conrail's underlying net
equity was $3.9 billion.
NS' investment in Conrail includes $187 million ($115 million
after taxes) of costs that will be paid by NSR. These costs
consist principally of: (1) contractual obligations to Conrail
employees imposed by the Surface Transportation Board when it
approved the transaction and (2) costs to relocate Conrail
employees. Most of these costs are expected to be paid in the
two years following the Closing Date; $44 million is classified
on NS' balance sheet as "Current liabilities." However, certain
contractual obligations by their terms will be paid out over a
longer period and are classified as "Other liabilities" on NS'
balance sheet. Through Sept. 30, 2000, NS has paid $64 million
of these costs.
Effective June 1, 1999, NS' Consolidated Financial Statements
include the consolidated financial position and results of Triple
Crown Services Company (TCS), a partnership in which subsidiaries
of NS and PRR are partners.
Related-Party Transactions
--------------------------
NS provides certain general and administrative support functions
to Conrail, the fees for which are billed in accordance with
several service-provider arrangements.
"Conrail rents and services," a line added to the income
statements beginning June 1, 1999, includes: (1) expenses for
amounts due to PRR and CRC for use by NSR of operating properties
and equipment, operation of the Shared Assets Areas and continued
operation of certain facilities during the transition period; and
(2) NS' equity in the earnings (or loss) of Conrail, net of
amortization.
"Notes and accounts payable to Conrail" includes $68 million at
Sept. 30, 2000, and $123 million, at Dec. 31, 1999, of interest-
bearing loans made to NS by a PRR subsidiary, payable on demand.
The interest rate for these loans is variable and was 6.2 percent
at Sept. 30, 2000. Also included is $80 million at Sept. 30,
2000, and $61 million, at Dec. 31, 1999, due to PRR and CRC
related to expenses included in "Conrail rents and services," as
discussed above.
Summary Financial Information - Conrail
---------------------------------------
The following historical cost basis financial information should
be read in conjunction with Conrail's audited financial
statements, included as Exhibit 99 with NS' 1999 Annual Report on
Form 10-K.
<PAGE> PAGE 9
Item 1. Financial Statements. (continued)
------ --------------------
Conrail's results of operations in the first nine months of 2000
reflect its new structure and operations. Conrail's current
major sources of operating revenues are operating fees and rents
from NSR and CSXT and, consequently, the composition of its
operating expenses has changed. Results in 1999 reflect freight
line-haul operations prior to the Closing Date.
<TABLE>
Summarized Consolidated Statements of Income - Conrail
------------------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
(Unaudited)
<S> <C> <C> <C> <C>
Operating revenues $ 243 $ 259 $ 748 $1,912
Operating expenses 178 323 571 1,891
------ ------ ------ ------
Operating income (loss) 65 (64) 177 21
Other income (expense)
- net (6) (21) 33 (66)
------ ------ ------ ------
Income (loss) before
income taxes 59 (85) 210 (45)
Provision for income
taxes 24 (36) 79 (9)
------ ------ ------ ------
Net income (loss) $ 35 $ (49) $ 131 $ (36)
====== ====== ====== ======
Note: Conrail's results for the first nine months of 2000
included a gain from the sale of property in the first quarter
that had been written up to fair market value in the allocation
of NS' investment in Conrail. Accordingly, the gain related to
that fair-value write-up, totaling $16 million after taxes, was
excluded in determining NS' equity in Conrail's net income.
Conrail's results in 1999 included after-tax expenses of
$51 million in the third quarter and $117 million in the second
quarter, principally to increase certain components of its
casualty reserves based on a then recently completed actuarial
valuation and to adjust certain litigation and environmental
reserves related to settlements and completion of site reviews.
These items were considered in the fair-value allocation of NS'
investment in Conrail, and, accordingly, were excluded in
determining NS' equity in Conrail's net income.
</TABLE>
<PAGE> PAGE 10
Item 1. Financial Statements. (continued)
------ --------------------
<TABLE>
Summarized Consolidated Balance Sheets - Conrail
------------------------------------------------
<CAPTION>
Sept. 30, Dec. 31,
2000 1999
---- ----
($ in millions)
(Unaudited)
<S> <C> <C>
Assets:
Current assets $ 559 $ 669
Noncurrent assets 7,569 7,714
------ ------
Total assets $8,128 $8,383
====== ======
Liabilities and
stockholders' equity:
Current liabilities $ 576 $ 863
Noncurrent liabilities 3,602 3,701
Stockholders' equity 3,950 3,819
------ ------
Total liabilities and
stockholders' equity $8,128 $8,383
====== ======
6. Long-Term Debt
In May 2000, NS received net proceeds of $594 million from
issuing $300 million of 8.375 percent, 5-year term Senior Notes
and $300 million of 8.625 percent, 10-year term Senior Notes.
The notes were issued using the remainder of the capacity under
NS' November 1998 $1 billion shelf registration.
NS has not issued any securities under the $1 billion shelf
registration that became effective in October 2000.
7. Lease Commitment
In March and June 2000, NSR entered into operating leases for a
total of 140 locomotives, which have a maximum term of eight
years and include purchase options. If NSR does not purchase the
locomotives at the end of the lease terms, it is liable for the
difference between the then fair-value of the locomotives and a
specified residual value. NS does not expect to be required to
make any payments under this provision.
</TABLE>
<PAGE> PAGE 11
Item 1. Financial Statements. (continued)
------ --------------------
8. Earnings Per Share
<TABLE>
The following table sets forth the reconciliation of the number
of weighted-average shares outstanding used in the calculations
of basic and diluted earnings per share:
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C>
Weighted-average shares
outstanding 383.5 380.5 383.2 380.2
Dilutive effect of
outstanding options and
performance share units
(as determined by the
application of the
treasury stock method) 0.2 1.5 0.3 1.9
----- ----- ----- -----
Diluted weighted-average
shares outstanding 383.7 382.0 383.5 382.1
===== ===== ===== =====
</TABLE>
The calculations for 2000 exclude options on 28 million shares in
each of the first and third quarters and on 20 million shares in
the second quarter because their exercise price exceeded the
average market price of Common Stock for the period. There are
no adjustments to "Net income" for the diluted earnings per share
computations.
9. Comprehensive Income
<TABLE>
NS' total comprehensive income was as follows:
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C>
Net income $ 99 $ 19 $ 167 $ 208
Other comprehensive
income (loss) 3 (2) 5 (4)
----- ----- ----- -----
Total comprehensive
income $ 102 $ 17 $ 172 $ 204
===== ===== ===== =====
</TABLE>
For NS, "Other comprehensive income" reflects the unrealized
gains and losses on certain investments in debt and equity
securities.
<PAGE> PAGE 12
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
OPERATIONS OVER CONRAIL'S LINES
On June 1, 1999 (the "Closing Date"), NS' railroad subsidiary, Norfolk
Southern Railway Company (NSR), began operating a substantial portion of
Conrail's properties (NSR's new "Northern Region") under various
agreements with Pennsylvania Lines LLC (PRR), a wholly owned subsidiary of
Consolidated Rail Corporation (CRC) (see Note 5). As a result, both the
railroad route miles operated by NSR and the number of its railroad
employees increased approximately 50 percent on that date. Results for
the first nine months of 1999 reflect only four months of operations on
the Northern Region.
Difficulties encountered in assimilating the Northern Region into NSR's
existing system during 1999 resulted in system congestion, an increase in
cars on line, increased terminal dwell time and reduced system velocity.
These service issues and actions taken to address them increased operating
expenses. Moreover, revenues were lower than expected as some customers
diverted traffic to other modes of transportation. Although system
fluidity has improved, income from railway operations is expected to
continue to be affected adversely until these revenue and expense issues
have been resolved fully.
RESULTS OF OPERATIONS
Net Income
----------
Net income was $99 million in the third quarter of 2000, up $80 million,
or 421 percent, compared with the same period last year. Results in 2000
included a $46 million after-tax gain from the sale of timber rights.
Excluding the effects of that gain, third-quarter net income was up
$34 million, or 179 percent, principally due to increased income from
railway operations.
For the first nine months of 2000, net income was $167 million, compared
with $208 million in 1999. Results in 2000 included a first-quarter
pretax charge of $101 million ($62 million after taxes) for pension
expense associated with an early retirement program and protective
benefits related to other actions taken to reduce the size of the
workforce. Excluding the effects of the workforce reduction charge, net
income would have been $229 million, up $21 million, or 10 percent,
compared with last year, reflecting higher income from railway operations
and higher nonoperating income.
Railway Operating Revenues
--------------------------
Third-quarter railway operating revenues were $1.5 billion in 2000, up
$17 million, or 1 percent, compared with last year. For the first nine
months of 2000, railway operating revenues were $4.6 billion, compared
<PAGE> PAGE 13
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
with $3.7 billion in 1999. As shown in the following table, the increases
were attributable to higher traffic volume, which, for the year-to-date,
was largely the result of a full period this year of Northern Region
operations. The year-to-date revenue per unit/mix component includes:
(1) a $97 million positive variance for intermodal traffic, about half of
which resulted from the consolidation of Triple Crown Services Company's
(TCS) revenues, beginning June 1, 1999 (see Note 5), and (2) a $48 million
negative variance for coal, reflecting an increase in the proportion of
shorter-haul traffic.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
2000 vs. 1999 2000 vs. 1999
Increase (Decrease) Increase (Decrease)
------------------- -------------------
($ in millions)
<S> <C> <C>
Traffic volume (carloads) $ 16 $ 811
Revenue per unit/mix 1 55
------ ------
$ 17 $ 866
====== ======
</TABLE>
<TABLE>
Revenues and carloads for the commodity groups were as follows:
<CAPTION>
Revenues
-----------------------------------------
Third Quarter Nine Months
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C>
Coal $ 361 $ 369 $1,081 $ 949
General merchandise:
Automotive 207 190 694 537
Chemicals 188 189 567 461
Metals/construction 170 181 526 401
Paper/clay/forest 156 159 469 426
Agr./consumer prod./govt. 148 145 457 385
------ ------ ------ ------
General merchandise 869 864 2,713 2,210
Intermodal 287 267 796 565
------ ------ ------ ------
Total $1,517 $1,500 $4,590 $ 3,724
====== ====== ====== ======
</TABLE>
<PAGE> PAGE 14
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
<TABLE>
<CAPTION>
Carloads
-----------------------------------------
Third Quarter Nine Months
2000 1999 2000 1999
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Coal 425 438 1,282 1,078
General merchandise:
Automotive 158 155 530 446
Chemicals 114 111 343 282
Metals/construction 194 187 591 404
Paper/clay/forest 122 126 374 341
Agr./consumer prod./govt. 129 132 392 354
----- ----- ----- -----
General merchandise 717 711 2,230 1,827
Intermodal 590 565 1,653 1,337
----- ----- ----- -----
Total 1,732 1,714 5,165 4,242
===== ===== ===== =====
</TABLE>
Coal
----
Third-quarter coal revenues were $361 million, down $8 million, or
2 percent, compared with last year. For the first nine months, coal
revenues were $1.1 billion, versus $949 million last year. Total tonnage
handled decreased 1 million tons in the quarter, as the effects of reduced
utility coal shipments were offset somewhat by increased export and
metallurgical coal volume. For the first nine months, total tonnage
handled increased 21 million tons, most of which was utility coal traffic,
reflecting a full period this year of Northern Region traffic.
Fourth-quarter coal revenues are expected to be slightly lower than the
comparable period of 1999.
General Merchandise
-------------------
Third-quarter general merchandise revenues were $869 million, up
$5 million, or 1 percent, compared with last year, as the effects of the
return of business diverted last year were largely offset by softening
economic conditions. Automotive revenues posted the only notable
increase, up $17 million, or 9 percent, principally due to recaptured
business. Metals and construction revenues decreased $11 million, or
6 percent, reflecting adverse market conditions. For the first nine
months, general merchandise revenues were $2.7 billion, versus
$2.2 billion last year, and reflected a full period this year of
Northern Region operations.
General merchandise revenues are expected to be somewhat higher in the
fourth quarter, compared with last year, reflecting additional business
and higher rates.
<PAGE> PAGE 15
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Intermodal
----------
Third-quarter intermodal revenues were $287 million, up $20 million, or
7 percent, compared with last year, reflecting higher container traffic
volume and higher revenue per unit. For the first nine months, intermodal
revenues were $796 million, versus $565 million last year, primarily due
to a full period this year of Northern Region operations and the
consolidation of TCS' revenues.
Fourth-quarter intermodal revenues are expected to be higher than last
year, as the effects of the loss of APL business late in 1999 should
continue to be offset by new business.
Railway Operating Expenses
--------------------------
Third-quarter railway operating expenses were $1.3 billion in 2000, down
$48 million, or 4 percent, compared with last year, despite a sharp rise
in diesel fuel expenses. For the first nine months of 2000, railway
operating expenses were $4.1 billion, compared with $3.1 billion in 1999.
Expenses in 2000 reflected both a full period of Northern Region
operations and sharply higher diesel fuel prices. In addition, they
included the $101 million first-quarter charge related to the workforce
reduction efforts.
"Compensation and benefits" expense decreased $67 million, or 12 percent,
in the third quarter, but, including the effects of the workforce
reduction charge, increased $323 million, or 24 percent, for the first
nine months. Excluding that charge, year-to-date compensation and
benefits expense increased $222 million, or 16 percent. The decline for
the quarter resulted from the absence of $49 million of accruals made last
year for a special incentive program for union employees and pension
income that was $15 million higher. Cost savings attributable to reduced
employment, estimated at $27 million, were almost entirely offset by a
$25 million increase in wages and health and welfare benefits for union
employees. The year-to-date increase was primarily the result of the
addition of Northern Region operations together with higher wage and
fringe benefit costs for union employees. These increases were partially
offset by the effects of reduced employment, the special incentive program
last year, and pension income that was $57 million higher. Pension income
in the fourth quarter of 2000 is expected to be comparable to that of 1999.
"Materials, services and rents" decreased $12 million, or 3 percent, in
the third quarter, but increased $196 million, or 23 percent, for the
first nine months. The decline for the quarter was primarily due to
reduced maintenance expenses and lower equipment rents. The year-to-date
increase was principally due to the addition of Northern Region
operations, including higher maintenance expenses, equipment rents, and
intermodal handling costs, and the effects of consolidating TCS. These
increases were partially offset by the absence of certain costs, mostly to
provide alternate transportation, related to the difficulties encountered
last year in the commencement of Northern Region operations.
<PAGE> PAGE 16
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
"Conrail rents and services" declined $22 million, or 16 percent, in the
third quarter, principally due to the absence of significant wind-down
costs Conrail incurred in 1999. "Conrail rents and services" amounted to
$364 million for the first nine months. NS' equity in Conrail's earnings
for the first nine months included $13 million in the first quarter
related to a gain from the sale of property (see Note 5).
"Diesel fuel" expense increased $44 million, or 59 percent, in the third
quarter, and $180 million, or 113 percent, for the first nine months.
Both increases reflected sharply higher average prices per gallon, up
56 percent for the quarter and 72 percent for the first nine months, and
increased consumption.
"Other" expense increased $7 million, or 13 percent, in the third quarter,
and $35 million, or 24 percent, for the first nine months, principally due
to higher property and other taxes.
The railway operating ratio was 86.1 percent in the third quarter,
compared with 90.3 percent (87.0 percent excluding the special incentive
program) last year. For the first nine months, the ratio was 88.7 percent;
excluding the first-quarter workforce reduction charge, the ratio would
have been 86.5 percent, compared with 84.4 percent (83.1 percent excluding
the special incentive program) last year. The fourth-quarter ratio is
expected to improve, compared with 1999's fourth-quarter ratio of 90.7
percent. In light of the changes in its business, NS continues to review
its operations for opportunities to reduce its costs.
Other Income - Net
------------------
"Other income - net" increased $57 million in the third quarter and
$82 million for the first nine months, compared with last year. The
increases reflected a $73 million gain in the third quarter from the sale
of timber rights and a $28 million gain in the second quarter from the
sale of gas and oil royalty and working interests. "Other income - net"
included expenses of $8 million for the quarter and $16 million year-to-
date related to the sale of accounts receivable, which commenced May 1,
2000 (see Note 3).
Provision for Income Taxes
--------------------------
The effective income tax rate was 36.5 percent for the third quarter,
compared with 47.2 percent last year, and was 34.8 percent for the first
nine months versus 32.7 percent last year. Excluding NS' equity in
Conrail's after-tax earnings, the effective rates for the quarter and
first nine months were 37.3 percent and 36.6 percent, respectively, in
2000, versus 31.5 percent and 35.3 percent, respectively, in 1999.
The lower third-quarter rate last year reflected tax credits that had a
magnified effect on the rate calculation due to the lower pretax income.
<PAGE> PAGE 17
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
<TABLE>
FINANCIAL CONDITION AND LIQUIDITY
<CAPTION>
Sept. 30, Dec. 31,
2000 1999
---- ----
($ in millions)
<S> <C> <C>
Cash and short-term investments $ 152 $ 51
Working capital deficit $ 986 $ 553
Current assets to current liabilities 0.5 0.7
Debt-to-total capitalization 56.7% 58.0%
</TABLE>
CASH PROVIDED BY OPERATING ACTIVITIES, NS' principal source of liquidity,
increased $657 million in the first nine months of 2000, compared with
last year, reflecting accounts receivable sold during the period (see
Note 3). Absent this infusion of cash, operating cash flow was $241
million higher, reflecting favorable changes in working capital, including
the lack of bonus payments this year. The large increase in the working
capital deficit (and corresponding decrease in the ratio of current assets
to current liabilities) at Sept. 30, 2000, versus at Dec. 31, 1999,
reflected the use of accounts receivable sale proceeds to reduce long-term
debt and higher accruals for interest payments that are due semiannually
in May and November. NS currently has in place a $2.0 billion credit
facility to support $1.1 billion of commercial paper outstanding at
Sept. 30, 2000. As a result, NS currently has the capability to issue
commercial paper to meet its more immediate working capital needs.
Moreover, NS currently has not issued any securities under the $1 billion
shelf registration that became effective in October 2000.
CASH USED FOR INVESTING ACTIVITIES declined significantly, principally due
to lower capital spending, reflecting the acquisition of locomotives in
2000 under an operating lease. Locomotives were purchased in 1999 using
proceeds from the sale of equipment trust certificates.
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES reflects slightly higher
proceeds from borrowings in 2000, coupled with significantly higher debt
repayments. NS issued $600 million of debt in May 2000, using the
remainder of the capacity under its November 1998 $1 billion shelf
registration, and used the proceeds to retire additional commercial paper
and pay down its indebtedness to PRR.
CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY
Conrail's results of operations in 2000 reflect its new structure and
operations that commenced on the Closing Date (see Note 5). Conrail's
major sources of revenues are now operating fees and rents from NSR and
CSXT and, consequently, the composition of its operating expenses has
changed. Results in 1999 reflect freight line-haul operations prior to
the Closing Date.
Conrail's third-quarter net income was $35 million in 2000, compared with
a net loss of $49 million in 1999. For the first nine months, net income
was $131 million in 2000, compared with a net loss of $36 million in 1999.
Results in 1999 included after-tax expenses of $51 million in the
<PAGE> PAGE 18
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
third quarter and $117 million in the second quarter, principally to
increase certain components of its casualty reserves based on a then
recently completed actuarial valuation and to adjust certain litigation
and environmental reserves related to settlements and completion of site
reviews. Excluding the effects of these expenses, Conrail's net income
would have been up $33 million in the quarter and about even for the first
nine months. The increase for the quarter was largely the result of the
absence of significant wind-down costs incurred in 1999. Conrail's year-
to-date 2000 results included a $61 million gain ($37 million after taxes)
in the first quarter from a property sale.
Conrail's third-quarter operating revenues were $243 million, down
$16 million, or 6 percent, and its operating expenses were $178 million,
down $64 million, or 26 percent (excluding the expenses discussed above).
The reduction in expenses reflected the wind-down of costs as Conrail made
the transition to its current structure after the Closing Date. Conrail's
operating revenues were $748 million for the first nine months of 2000,
versus $1.9 billion last year, and its operating expenses were $571
million, versus $1.6 billion (excluding the expenses discussed above).
The declines in year-to-date revenues and expenses were primarily
attributable to the change in its operations.
Conrail's cash provided by operating activities was $85 million for the
first nine months of 2000, compared with $369 million in 1999. The
decline was principally attributable to lower operating income, a result
of Conrail's new structure and operations, and substantial payments in the
first quarter of one-time items owed to NSR and CSXT. In the third
quarter of 2000, Conrail reached an expected settlement with the
Commonwealth of Pennsylvania for remediation and other costs related to
Closing Date environmental sites at the Hollidaysburg and Juniata shops.
Conrail's working capital deficit was $17 million at Sept. 30, 2000,
compared with $194 million at Dec. 31, 1999. The reduction was
attributable to the repayment of debt that matured in May. Conrail is
expected to have sufficient cash flow to meet its ongoing obligations.
LABOR AGREEMENTS
Approximately 85 percent of NS' railroad employees are represented by
labor unions under collective bargaining agreements with 14 different labor
organizations. Moratorium provisions of the agreements currently in force
expired Dec. 31, 1999; however, the agreements remain in effect until
amendments are agreed to or until the Railway Labor Act's procedures are
exhausted. In late 1999, negotiations began at the national level on
agreements with major labor organizations. An agreement was reached with
the Brotherhood of Locomotive Engineers which represents NS' locomotive
engineers. In addition, a tentative national agreement has been reached
with the United Transportation Union, which represents NS' trainmen,
switchmen, conductors, and, in some cases, yardmasters. That settlement
requires ratification by the members before acceptance. Negotiations with
the other unions are continuing on a national basis, the outcome of which
is uncertain at this time.
<PAGE> PAGE 19
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
PROPOSED MERGER GUIDELINES
The Surface Transportation Board (STB) has now issued proposed merger
guidelines which, if adopted as proposed, would increase the substantive
and evidentiary standards that applicants will have to satisfy.
Prior to the STB's release of its proposed guidelines, Canadian National
Railway Company and Burlington Northern Sante Fe Corporation announced the
cancellation of their earlier proposal to combine their companies under
common control.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus concerning Issue No. 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent." The consensus
presents indicators to consider in establishing the accounting for
revenue. Based on the application of this consensus, which is effective
in the fourth quarter, NS expects to reclassify to railway operating
expenses certain charges that previously have been reported net in railway
operating revenues. This change in reporting will have no effect on
income from railway operations.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," replacing SFAS No. 125 of the same name. SFAS No. 140
revises the standards for accounting for securitizations and other
transfers of financial assets and requires certain disclosures, but
carries over most of the provisions of SFAS No. 125. NS expects to adopt
the disclosure provisions of SFAS No. 140 in its Annual Report for the
year 2000. NS does not expect the provisions of SFAS No. 140 to have a
material effect on its financial statements.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains 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 any such statements that relate to the
resolution of the service issues, the recapture of diverted business,
the addition of new business, and the ability to reduce expenses.
<PAGE> PAGE 20
PART II. OTHER INFORMATION
---------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
------ -----------------------------------------------------------
There has been no material change to the disclosures
made under the heading "Market Risks and Hedging Activities"
on page 43 of the Corporation's 1999 Annual Report on Form
10-K.
<PAGE> PAGE 21
Item 6. Exhibits and Reports on Form 8-K.
------ --------------------------------
(a) Exhibits:
Financial Data Schedule.
(b) Report on Form 8-K:
A report on Form 8-K was filed on Sept. 26, 2000,
advising that the Board of Directors of Norfolk
Southern Corporation approved the adoption of a
stockholder rights plan, and attaching as exhibits the
Rights Agreement (with exhibits thereto) and the
related press release.
<PAGE> PAGE 22
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 10, 2000 /s/ Dezora M. Martin
------------------- --------------------------------------
Dezora M. Martin
Corporate Secretary (Signature)
Date: November 10, 2000 /s/ John P. Rathbone
------------------- --------------------------------------
John P. Rathbone
Senior Vice President and Controller
(Principal Accounting Officer) (Signature)
<PAGE> PAGE 23
EXHIBIT INDEX
-------------
Electronic
Submission
Exhibit
Number Description Page
---------- -----------------------------------------------------
27 Financial Data Schedule 24
(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.)
<PAGE> PAGE 24
