<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 MARCH 31, 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 April 30, 2000
----- --------------------------------
Common Stock (par value $1.00) 383,107,727 (excluding 21,627,902
shares held by registrant's
consolidated subsidiaries)
<PAGE> Page 2
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
INDEX
-----
Page
----
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Statements of Income
Three Months Ended March 31, 2000 and 1999 3
Consolidated Balance Sheets
March 31, 2000, and December 31, 1999 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Part II. Other Information:
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Index to Exhibits 22
<PAGE> Page 3
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
---- ----
<S> <C> <C>
Railway operating revenues:
Coal $ 343 $ 282
General merchandise 910 623
Intermodal 242 125
------ ------
TOTAL RAILWAY OPERATING REVENUES 1,495 1,030
Railway operating expenses:
Compensation and benefits (Note 3) 655 368
Materials, services and rents 358 196
Conrail rents and services (Note 4) 121 --
Depreciation 125 114
Diesel fuel 115 37
Casualties and other claims 32 35
Other 61 43
------ ------
TOTAL RAILWAY OPERATING EXPENSES 1,467 793
------ ------
Income from railway operations 28 237
Equity in earnings of Conrail (Note 4) -- 27
Other income - net 28 22
Interest expense on debt (140) (128)
------ ------
Income (loss) before income taxes (84) 158
Provision (benefit) for income taxes (36) 46
------ ------
NET INCOME (LOSS) $ (48) $ 112
====== ======
Per share amounts (Note 6):
Net income (loss), basic and diluted $(0.12) $0.30
Dividends 0.20 0.20
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE> Page 4
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
(Unaudited)
<CAPTION>
March 31, December 31,
2000 1999
-------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 60 $ 37
Short-term investments 12 14
Accounts receivable, net of allowance for
doubtful accounts of $6 million and
$5 million, respectively 855 857
Due from Conrail (Note 4) 10 77
Materials and supplies 120 100
Deferred income taxes 151 134
Other current assets 140 152
-------- --------
Total current assets 1,348 1,371
-------- --------
Investment in Conrail (Note 4) 6,143 6,132
Properties less accumulated depreciation 10,978 10,956
Other assets 742 791
-------- --------
TOTAL ASSETS $ 19,211 $ 19,250
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 876 $ 818
Income and other taxes 169 163
Notes and accounts payable to Conrail
(Note 4) 216 184
Other current liabilities 328 256
Current maturities of long-term debt 503 503
-------- --------
Total current liabilities 2,092 1,924
-------- --------
Long-term debt 7,493 7,556
Other liabilities 1,099 1,101
Minority interests 49 50
Deferred income taxes 2,662 2,687
-------- --------
TOTAL LIABILITIES 13,395 13,318
-------- --------
(continued)
<PAGE> Page 5
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
($ in millions)
(Unaudited)
March 31, December 31,
2000 1999
-------- -----------
Stockholders' equity:
Common stock $1.00 per share par value,
1,350,000,000 shares authorized;
issued 404,678,198 shares and
404,309,672 shares, respectively 405 404
Additional paid-in capital 377 372
Accumulated other comprehensive income
(Note 7) (9) (11)
Retained income 5,063 5,187
Less treasury stock at cost, 21,627,902
shares (20) (20)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 5,816 5,932
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 19,211 $ 19,250
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE> Page 6
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (48) $ 112
Reconciliation of net income (loss) to net cash
provided by operating activities:
Depreciation 129 118
Deferred income taxes (34) 11
Equity in earnings of Conrail (Note 4) (11) (27)
Nonoperating gains on property sales (20) (5)
Changes in assets and liabilities affecting
operations:
Accounts receivable 3 (50)
Materials and supplies (20) 4
Other current assets and due from Conrail 89 (1)
Current liabilities other than debt 165 64
Other - net (Note 3) 39 2
------- -------
Net cash provided by operating
activities 292 228
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (170) (266)
Property sales and other transactions 30 13
Investments, including short-term (21) (48)
Investment sales and other transactions 35 45
------- -------
Net cash used for investing
activities (126) (256)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (77) (76)
Common stock issued - net -- 4
Proceeds from borrowings 68 193
Debt repayments (134) (12)
------- -------
Net cash provided by (used for)
financing activities (143) 109
Net increase in cash and cash
equivalents 23 81
CASH AND CASH EQUIVALENTS:*
At beginning of year 37 5
------- -------
At end of period $ 60 $ 86
======= =======
(continued)
<PAGE> Page 7
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
($ in millions)
(Unaudited)
Three Months Ended
March 31,
------------------
2000 1999
---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 74 $ 68
Income taxes $ (2) $ --
* Cash equivalents represent all highly liquid investments
purchased three months or less from maturity.
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<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 March 31, 2000, and
results of operations and cash flows for the three months ended
March 31, 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 (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. Workforce Reduction Charge
"Compensation and benefits" expenses include a $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 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.
4. Investment in Conrail and Operations Over Its Lines
Overview
--------
NS and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail),
whose primary subsidiary is Consolidated Rail Corporation (CRC).
From May 23, 1997, the date NS and CSX completed their
acquisition of Conrail stock, until June 1, 1999, 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.
<PAGE> Page 9
Item 1. Financial Statements. (continued)
- ------ --------------------
Commencement of Operations
--------------------------
On June 1, 1999 (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 the joint and exclusive 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
tax effect of the differences in tax and accounting bases for
certain assets. At March 31, 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; $51 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 March 31, 2000, NS has paid $42 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.
<PAGE> Page 10
Item 1. Financial Statements. (continued)
- ------ --------------------
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 a transition period; and
(2) NS' equity in the earnings (or loss) of Conrail, net of
amortization.
"Notes and accounts payable to Conrail" includes $120 million of
interest-bearing loans made to NS by a PRR subsidiary, payable on
demand. The interest rate for these loans is variable and was
6.3% at March 31, 2000. Also included is $96 million due to PRR
and CRC related to expenses included in "Conrail rents and
services," as discussed above.
Summary Financial Information - Conrail
---------------------------------------
The following summary financial information should be read in
conjunction with Conrail's audited financial statements, included
as Exhibit 99 with NS' 1999 Annual Report on Form 10-K.
Conrail's results of operations in the first quarter of 2000
reflect its new structure and operations. Conrail's major
sources of operating revenues are now payments from NSR and CSXT
and, consequently, the composition of its operating expenses has
changed. First-quarter 1999 results of operations include
freight line-haul revenues and related expenses.
<TABLE>
Summarized Consolidated Statements of Income - Conrail
------------------------------------------------------
<CAPTION>
Three Months Ended
March 31,
($ in millions) 2000 1999
--------------- ---- ----
<S> <C> <C>
Operating revenues $ 259 $ 916
Operating expenses 199 770
------ ------
Operating income 60 146
Other income (expense) - net 44 (22)
------ ------
Income before income taxes 104 124
Provision for income taxes 39 48
------ ------
Net income $ 65 $ 76
====== ======
</TABLE>
<PAGE> Page 11
Item 1. Financial Statements. (continued)
- ------ --------------------
Note: Conrail's results in 2000 include a gain from the sale of
property 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 $16 million after
taxes, was excluded in determining NS' equity in Conrail's net
income.
<TABLE>
Summarized Consolidated Balance Sheets - Conrail
------------------------------------------------
<CAPTION>
March 31, Dec. 31,
($ in millions) 2000 1999
--------------- ---- ----
<S> <C> <C>
Assets:
Current assets $ 705 $ 669
Noncurrent assets 7,662 7,714
------ ------
Total assets $8,367 $8,383
====== ======
Liabilities and
stockholders' equity:
Current liabilities $ 825 $ 863
Noncurrent liabilities 3,658 3,701
Stockholders' equity 3,884 3,819
------ ------
Total liabilities and
stockholders' equity $8,367 $8,383
====== ======
</TABLE>
5. Lease Commitment
In March 2000, NSR entered into a lease for 79 locomotives, and
committed to lease an additional 61 locomotives to be delivered
in the second quarter. The lease has a maximum term of eight years
and includes purchase options. If NSR does not purchase the
locomotives at the end of the lease term, it is liable for the
difference between the then fair-value of the locomotives and a
specified residual value. NS does not expect that any payments
under this provision would be material to its financial statements.
<PAGE> Page 12
Item 1. Financial Statements. (continued)
- ------ --------------------
6. Earnings Per Share
<TABLE>
The following table sets forth the reconciliation of the number
of weighted-average shares outstanding used in the calculations
of basic and diluted earnings per share:
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
---- ----
(In millions)
<S> <C> <C>
Weighted-average shares outstanding 383 380
Dilutive effect of outstanding options and
performance share units (as determined
by the application of the treasury stock
method) -- 2
--- ---
Diluted weighted-average shares outstanding 383 382
=== ===
</TABLE>
The dilutive effect of outstanding options and performance share
units for the first quarter of 2000 excludes 0.2 million shares
due to their anti-dilutive effect as a result of the first-
quarter net loss.
There are no adjustments to "Net income" for the diluted earnings
per share computations.
7. Comprehensive Income
<TABLE>
NS' total comprehensive income was as follows:
<CAPTION>
Three Months Ended
March 31,
------------------
2000 1999
---- ----
($ in millions)
<S> <C> <C>
Net income (loss) $ (48) $ 112
Other comprehensive income (loss) 2 (1)
----- -----
Total comprehensive income (loss) $ (46) $ 111
===== =====
</TABLE>
For NS, "Other comprehensive income" reflects the unrealized
gains and losses on certain investments in debt and equity
securities.
<PAGE> Page 13
Item 1. Financial Statements. (continued)
- ------ --------------------
8. Subsequent Event
On May 1, 2000, NS sold certain of its railroad accounts
receivable and received $460 million of proceeds, which were used
to repay senior debt maturing on and interest due May 1, 2000.
Subsequent sales will occur as receivables are generated, and NSR
will service the accounts on behalf of the purchasers.
<PAGE> Page 14
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 4). As a
result, both railroad route miles operated by NSR and the number of
its railroad employees increased approximately 50 percent on that
date. Results for the first quarter of 1999 reflect the operation of
the former NS railroad system, which did not include the Northern
Region.
Difficulties encountered in the assimilation of the Northern Region
into NSR's existing system resulted in system congestion, an increase
in cars on line, increased terminal dwell time and reduced system
velocity. These service issues and the 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 adversely affected
until these revenue and expense issues have been resolved fully.
RESULTS OF OPERATIONS
Net Income
- ----------
First-quarter 2000 results were a net loss of $48 million, compared
with net income of $112 million in the first quarter of 1999. The
loss reflected a $62 million after-tax charge for pension expense
associated with an early retirement program and protective benefits
related to other actions taken to reduce the workforce (see Note 3).
Excluding the effects of the workforce reduction charge, net income
would have been $14 million, down $98 million, or 88 percent, compared
with last year. The decline was principally due to reduced income from
railway operations that resulted from higher diesel fuel costs, expenses
related to efforts to improve service (primarily locomotive and
freight car costs) and a lower proportion of export coal traffic.
Railway Operating Revenues
- --------------------------
<TABLE>
First-quarter railway operating revenues were $1,495 million in 2000,
and were $1,030 million in 1999. As shown in the following table, the
increase was attributable to higher traffic volume, largely the result
of the commencement of operations in the Northern Region. The revenue
per unit/mix component includes: (1) a $59 million positive variance
for intermodal traffic, reflecting the consolidation of Triple Crown
Services Company's (TCS) revenues, beginning June 1, 1999, and the
<PAGE> Page 15
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Northern Region traffic, and (2) a $53 million negative variance for
coal, reflecting an increase in the proportion of shorter-haul
traffic, coupled with a decline in the proportion of export coal
traffic.
<CAPTION>
First Quarter
2000 vs. 1999
Increase (Decrease)
------------------
($ in millions)
<S> <C>
Traffic volume (carloads) $ 462
Revenue per unit/mix 3
-----
$ 465
=====
</TABLE>
<TABLE>
Revenues and carloads for the commodity groups were as follows (prior
year data has been reclassified to conform to the current
presentation):
<CAPTION>
Revenues Carloads
2000 1999 2000 1999
---- ---- ---- ----
($ in millions) (in thousands)
<S> <C> <C> <C> <C>
Coal $ 343 $ 282 422 301
General merchandise:
Automotive 240 160 183 136
Chemicals 184 125 114 78
Metals/construction 174 94 191 90
Agri./consumer prod./govt. 159 116 134 105
Paper/clay/forest 153 128 126 103
------ ------ ----- -----
General merchandise 910 623 748 512
Intermodal 242 125 508 346
------ ------ ----- -----
Total $1,495 $1,030 1,678 1,159
====== ====== ===== =====
</TABLE>
Coal
- ----
Coal revenues were $343 million in the first quarter, versus
$282 million last year. Total tonnage handled increased 12 million
tons, 9 million tons of which was utility coal traffic. The effects
of Northern Region traffic were somewhat offset by lower export
tonnage out of Norfolk, Va., and by reduced utility demand in the
Southeast. Domestic metallurgical coal, coke and iron ore traffic
volume benefited from increased domestic steel production and new
business.
Coal revenues in the second quarter are expected to continue to
reflect an increase related to the addition of Northern Region
traffic, which commenced last June. For the second half of the year,
coal revenues are expected to be slightly higher than in the
comparable period of 1999.
<PAGE> Page 16
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
General Merchandise
- -------------------
General merchandise revenues were $910 million in the first quarter,
versus $623 million last year, reflecting principally the addition of
Northern Region traffic. Continued strong automotive demand,
increased metals and construction business, and recovery of some of
the traffic diverted last year also contributed to increased revenues.
The addition of the Northern Region last June will continue to have a
favorable effect on the year-over-year comparison of general
merchandise revenues in the second quarter. For the second half of
the year, general merchandise revenues are expected to be somewhat
higher than in the comparable period of 1999, reflecting additional
business and higher rates.
Intermodal
- ----------
Intermodal revenues were $242 million in the first quarter, versus
$125 million last year, primarily due to the addition of Northern
Region traffic and the consolidation of TCS' revenues. Higher traffic
volume also resulted from increased demand and the recovery of
diverted traffic.
Intermodal revenues for the second quarter will continue to reflect
the addition of the Northern Region and the consolidation of TCS. For
the second half of the year, intermodal revenues are expected to be
somewhat higher than last year, as the effects of the loss of APL
business late in 1999 are expected to be offset by new business.
Railway Operating Expenses
- --------------------------
First-quarter railway operating expenses were $1,467 million, and
included the $101 million charge related to the workforce reduction
efforts (see Note 3). Excluding the charge, railway operating
expenses increased $573 million, or 72 percent, compared with the
first quarter of 1999. The increase principally resulted from the
commencement of operations in the Northern Region and higher diesel
fuel prices.
"Compensation and benefits" expense increased $287 million, including
the effects of the $101 million workforce reduction charge. Excluding
the charge, compensation and benefits expense increased $186 million,
or 51 percent. The increases principally resulted from the almost
50 percent increase in the railroad workforce on the Closing Date, and
higher wage rates and medical costs for union employees. Medical
costs in 1999 benefited from premium refunds attributable to a surplus
in the national union welfare benefit plan. Partially offsetting
these increases were pension income that was $22 million higher than
first-quarter 1999, lower incentive compensation and lower nonunion
salaries in March following the voluntary early retirement program.
"Materials, services and rents" increased $162 million, or 83 percent,
primarily due to Northern Region operations, the effects of
consolidating TCS and higher locomotive rents.
<PAGE> Page 17
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
"Conrail rents and services" amounted to $121 million, and included
$131 million of expenses for use of PRR's assets and CRC's operation
of the Shared Assets Areas. Also included is NS' equity in Conrail's
earnings, net of amortization related to the difference between NS'
investment in Conrail and its underlying equity. NS' equity in
Conrail's earnings included $13 million related to a gain from the
sale of property (see Note 4).
"Diesel fuel" expense increased $78 million, or 211 percent, due to a
sharp rise in the price per gallon and to increased consumption
related to Northern Region operations. The price per gallon for the
quarter more than doubled -- from an average of 40 cents last year to
more than 85 cents this year. This rise in price was responsible for
approximately $60 million of the $78 million increase.
"Other" expense increased $18 million, or 42 percent, principally due
to higher property and other taxes related to operations in the
Northern Region.
"Casualties and other claims" expense decreased $3 million, or
9 percent, as costs related to the commencement of Northern Region
operations were more than offset by higher expenses last year related
to a settlement associated with a Superfund site and damages to
automobiles being transported in a train that derailed.
The railway operating ratio was 98.1 percent in the first quarter.
Excluding the workforce reduction charge, the operating ratio would
have been 91.4 percent, versus 77.0 percent in the first quarter of
1999. The increase was attributable to the change in traffic
mix (more resource-intensive traffic, such as automotive and
intermodal), the new traffic in the Northern Region and higher fuel
prices. The second-quarter 2000 railway operating ratio is expected to
be more nearly comparable to that of 1999, and for the remainder of the
year, the ratio is expected to improve, compared with 1999's ratio,
which was adversely effected by system congestion and related traffic
diversions after the Closing Date.
Other Income - Net
- ------------------
"Other income - net" was $6 million higher in the first quarter of
2000, compared with last year, as higher gains on property sales more
than offset the effects of higher interest expense.
Provision for Income Taxes
- --------------------------
The first-quarter effective income tax rate was 42.9 percent, compared
with 29.1 percent last year. Excluding NS' equity in Conrail's after-
tax earnings, the effective rate was 37.9 percent, versus 35.1 percent
last year, which benefited from favorable adjustments to state tax
accruals.
<PAGE> Page 18
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
<TABLE>
FINANCIAL CONDITION AND LIQUIDITY
<CAPTION>
March 31, Dec. 31,
2000 1999
-------- -------
($ in millions)
<S> <C> <C>
Cash and short-term investments $ 72 $ 51
Working capital deficit $ 744 $ 553
Current assets to current liabilities 0.6 0.7
Debt-to-total capitalization 58.3% 58.0%
</TABLE>
CASH PROVIDED BY OPERATING ACTIVITIES, NS' principal source of
liquidity, increased $64 million, or 28 percent, in the first quarter
of 2000, compared with last year. Despite the decline in operating
income (excluding the noncash workforce reduction charge), operating
cash flow improved, primarily due to the lack of bonus payments and
other favorable changes in working capital. NS' working capital
deficit of $744 million included $400 million of maturing senior notes
that were paid May 1. NS sold certain of its railroad accounts
receivable on May 1, 2000, and used the proceeds, which amounted to
$460 million, to retire the notes and pay interest due May 1 (see
Note 8).
CASH USED FOR INVESTING ACTIVITIES declined significantly, principally
due to lower property additions, reflecting the leasing of
locomotives in 2000 (see Note 5). Locomotives were purchased in 1999
using proceeds from the sale of equipment trust certificates.
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES reflects less
proceeds from borrowings in 2000, coupled with higher debt repayments.
NS has issued only $400 million of debt under its November 1998 $1 billion
shelf registration and expects to issue debt under that registration,
using the proceeds in part to retire commercial paper. In addition, NS
expects to pay down its indebtedness to PRR.
CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION and LIQUIDITY
Conrail's results of operations in the first quarter of 2000 reflect
its new structure and operations (see Note 4). Conrail's major
sources of revenues are now from operating fees and rents from NSR and
CSXT and, consequently, the composition of its operating expenses has
changed. First-quarter 1999 results of operations include freight
line-haul revenues and related expenses.
Conrail's first-quarter net income was $65 million in 2000, compared
with $76 million in 1999. Results in 2000 included $61 million of
gain ($37 million after taxes) from a large property sale.
Conrail's first-quarter operating revenues were $259 million in 2000,
and were $916 million in 1999. Conrail's first-quarter operating
expenses were $199 million in 2000, and were $770 million in 1999.
Both of the declines in 2000 were attributable to the change in its
operations.
<PAGE> Page 19
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Conrail's cash used for operating activities was $112 million in the
first quarter of 2000, versus cash provided by operating activities of
$170 million in the first quarter of 1999. The net use of cash for
operating activities in first-quarter 2000 resulted from substantial
payments of one-time items owed to NSR and CSXT. In addition, there
was a net increase in NSR and CSXT accounts receivable. The remaining
decline in cash provided by operations in 2000 reflected lower
operating income, a result of Conrail's new structure and operations.
Conrail's working capital deficit was $120 million at March 31, 2000,
which included $250 million of long-term debt due in June. Conrail
expects to require NSR and CSXT to repay some of its borrowings in the
second quarter to provide funds needed to retire its maturing debt.
Conrail is expected to have sufficient cash flow to meet its ongoing
obligations.
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 all 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.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits:
Financial Data Schedule.
(b) Reports on Form 8-K:
None.
<PAGE> Page 21
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: May 10, 2000 /s/ Dezora M. Martin
------------------- --------------------------------------
Dezora M. Martin
Corporate Secretary (Signature)
Date: May 10, 2000 /s/ John P. Rathbone
------------------- --------------------------------------
John P. Rathbone
Senior Vice President and Controller
(Principal Accounting Officer) (Signature)
<PAGE> Page 22
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
-----------------
Electronic
Submission
Exhibit
Number Description Page
- ---------- -----------------------------------------------------
27 Financial Data Schedule 23
(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 23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> $ 60
<SECURITIES> 12
<RECEIVABLES> 861
<ALLOWANCES> 6
<INVENTORY> 120
<CURRENT-ASSETS> 1,348
<PP&E> 15,989
<DEPRECIATION> 5,011
<TOTAL-ASSETS> 19,211
<CURRENT-LIABILITIES> 2,092
<BONDS> 7,493
0
0
<COMMON> 405
<OTHER-SE> 5,411
<TOTAL-LIABILITY-AND-EQUITY> 19,211
<SALES> 0
<TOTAL-REVENUES> 1,495
<CGS> 0
<TOTAL-COSTS> 1,467
<OTHER-EXPENSES> (28)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140
<INCOME-PRETAX> (84)
<INCOME-TAX> (36)
<INCOME-CONTINUING> (48)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
