PAGE ONE
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, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file numbers 1-743; 1-3744; 1-4793; 1,546-2
NORFOLK SOUTHERN RAILWAY COMPANY
- -------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 53-6002016
- ---------------------------------------- -------------------------------
(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 (804) 629-2682
----------------------
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 October 31, 1996
----- ----------------------------------
Common Stock (par value $1.00) 16,668,997
<PAGE> PAGE 2
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NS RAIL)
INDEX
-----
Page
----
Part I. Financial Information:
Item 1. Consolidated Statements of Income
Three Months and Nine Months Ended
September 30, 1996 and 1995 3
Consolidated Balance Sheets
September 30, 1996, and December 31, 1995 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
Part II. Other Information:
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 RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Income
(In millions of dollars)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
RAILWAY OPERATING REVENUES (Note 5):
Coal $ 327.5 $ 325.7 $ 979.8 $ 950.6
Merchandise 570.3 553.7 1,737.5 1,710.0
Intermodal 122.3 116.6 357.5 351.0
-------- -------- -------- --------
Railway operating revenues 1,020.1 996.0 3,074.8 3,011.6
-------- -------- -------- --------
RAILWAY OPERATING EXPENSES:
Compensation and benefits 341.3 359.7 1,069.9 1,091.6
Materials, services and rents 156.1 148.1 468.9 476.0
Depreciation 101.0 96.9 300.5 284.9
Diesel fuel 53.7 45.2 165.8 140.9
Casualties and other claims 28.2 30.5 93.8 91.5
Other 39.5 37.7 113.8 114.1
-------- -------- -------- --------
Railway operating expenses 719.8 718.1 2,212.7 2,199.0
-------- -------- -------- --------
Income from railway operations 300.3 277.9 862.1 812.6
Other income (expense):
Interest income 6.5 9.5 22.7 25.4
Interest expense on debt (8.3) (8.7) (25.3) (24.9)
Other - net 3.1 2.7 (1.5) 4.1
-------- -------- -------- --------
Other income (expense) 1.3 3.5 (4.1) 4.6
-------- -------- -------- --------
Income before income taxes 301.6 281.4 858.0 817.2
Provision for income taxes 92.8 87.5 295.5 289.7
-------- -------- -------- --------
NET INCOME $ 208.8 $ 193.9 $ 562.5 $ 527.5
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 4
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets
(In millions of dollars)
(Unaudited)
<CAPTION>
September 30, December 31,
1996 1995
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 166.9 $ 49.3
Short-term investments 122.6 180.7
Accounts receivable - net 593.0 542.1
Materials and supplies 55.9 59.8
Deferred income taxes 106.0 98.8
Other current assets 93.7 92.1
--------- ---------
Total current assets 1,138.1 1,022.8
Due from NS - net (Note 3) 46.9 186.8
Investments 898.2 771.0
Properties less accumulated depreciation 8,938.8 8,750.4
Other assets 19.6 21.3
--------- ---------
TOTAL ASSETS $11,041.6 $10,752.3
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 27.2 $ 27.2
Accounts payable 568.3 567.2
Income and other taxes 170.7 179.4
Other current liabilities 115.4 124.3
Current maturities of long-term debt (Note 4) 77.1 79.7
--------- ---------
Total current liabilities 958.7 977.8
Long-term debt (Note 4) 554.5 494.7
Other liabilities 887.5 870.8
Minority interests 2.2 2.3
Deferred income taxes (Note 3) 2,856.8 2,761.3
--------- ---------
TOTAL LIABILITIES 5,259.7 5,106.9
--------- ---------
Stockholders' equity:
Serial preferred stock $50 stated value 54.8 54.8
Common stock $10 stated value 166.7 166.7
Other capital 525.5 525.5
Unrealized gain on marketable securities 413.2 337.3
Retained income 4,621.7 4,561.1
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 5,781.9 5,645.4
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,041.6 $10,752.3
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 5
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
(In millions of dollars)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 562.5 $ 527.5
Reconciliation of net income to net cash
provided by operating activities:
Special charge payments (12.6) (9.6)
Depreciation 301.4 285.5
Deferred income taxes 41.0 23.6
Nonoperating gains on property sales (11.2) (6.1)
Changes in assets and liabilities
affecting operations:
Accounts receivable (50.9) (10.1)
Materials and supplies 3.9 (2.2)
Other current assets 28.7 33.2
Current liabilities other than debt (5.5) 79.9
Other - net 49.2 41.7
------- -------
Net cash provided by operating activities 906.5 963.4
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (Note 4) (462.0) (478.2)
Property sales and other transactions 60.3 62.4
Investment purchases (54.9) (53.0)
Investment sales and other transactions 14.7 18.7
Advances due from NS (211.6) (247.5)
Short-term investments - net 56.2 28.3
------- -------
Net cash used for investing activities (597.3) (669.3)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (150.3) (219.3)
Proceeds from long-term borrowings (Note 4) 9.6 7.6
Debt repayments (50.9) (58.0)
------- -------
Net cash used for financing activities (191.6) (269.7)
------- -------
Net increase in cash and cash equivalents 117.6 24.4
CASH AND CASH EQUIVALENTS:*
At beginning of year 49.3 33.8
------- -------
At end of period $ 166.9 $ 58.2
======= =======
- --------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 52.0 $ 37.8
Income taxes $ 267.1 $ 207.0
* Cash equivalents are highly liquid investments purchased three months
or less from maturity.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 6
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All Tables in millions of dollars)
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 financial
position as of September 30, 1996, and the results of operations and
cash flows for the nine months ended September 30, 1996 and 1995.
While 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 Company's latest
Annual Report on Form 10-K.
2. Contingencies
There have been no significant changes since year-end 1995 in the
matters as discussed in Note 17, CONTINGENCIES, appearing in the
NS Rail Annual Report on Form 10-K for 1995, Notes to Consolidated
Financial Statements, beginning on page 61.
3. Related Parties
GENERAL
-------
Norfolk Southern Corporation (NS) is the parent holding company of
NS Rail. The costs of functions performed by NS are allocated to
NS Rail. Rail operations are coordinated at the holding company
level by the NS Executive Vice President-Operations.
NON-CASH DIVIDEND
-----------------
In September 1996, NS Rail declared and issued to NS a non-cash
dividend of $351.5 million, which was settled by reduction of
NS Rail's interest-bearing advances due from NS. Non-cash
dividends are excluded from the Consolidated Statements of Cash
Flows.
<PAGE> PAGE 7
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All Tables in millions of dollars)
3. Related Parties (continued)
<TABLE>
INTERCOMPANY ACCOUNTS
---------------------
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -------------------
Average Average
Interest Interest
Balance Rate Balance Rate
------- -------- ------- --------
<S> <C> <C> <C> <C>
Due from NS:
Advances $ 276.5 2.1% $ 407.1 3.4%
Due to NS:
Notes and advances 229.6 6.1% 220.3 6.6%
------- -------
Due from NS - net $ 46.9 $ 186.8
======= =======
</TABLE>
Interest is applied to certain advances at the average NS yield on
short-term investments and to the notes at specified rates.
INTERCOMPANY FEDERAL INCOME TAX ACCOUNTS
----------------------------------------
In accordance with the NS Tax Allocation Agreement, intercompany
federal income tax accounts are recorded between companies in the NS
consolidated group. At September 30, 1996, and December 31, 1995,
NS Rail had intercompany federal income tax payables (which are
included in "Deferred income taxes" in the Consolidated Balance
Sheets) of $292.6 million and $254.7 million, respectively.
CASH REQUIRED FOR NS STOCK PURCHASE PROGRAM AND NS DEBT
-------------------------------------------------------
In January 1996, the NS Board of Directors authorized the purchase
and retirement of up to 30 million shares of NS Common Stock. NS
completed its purchases (45 million shares) under a 1989
authorization on March 8, 1996, and completed in 1989 an initial
program for 20 million shares which began in 1987. Purchases under
the programs have been made with internally generated cash and
through issuances of debt by NS. Since the first purchases in
December 1987 through September 30, 1996, NS has purchased and
retired 68,416,000 shares of its common stock at a cost of
$3.2 billion (see also Note 8).
<PAGE> PAGE 8
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All Tables in millions of dollars)
4. Capital Lease Obligations
During the first nine months of 1996 and 1995, NS Rail entered into
capital leases covering new locomotives. The related capital lease
obligations totaling $107.8 million in 1996 and $104.5 million in
1995 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 between 6.20 percent and 6.75 percent for
those entered into in 1996, and between 8.23 percent and
8.60 percent for those entered into in 1995. All were converted to
variable rate obligations using interest rate swap agreements. The
interest rates on these obligations are based on the six-month
London Interbank Offered Rate and are reset every six months with
realized gains or losses accounted for as an adjustment of interest
expense over the terms of the leases. As a result, NS Rail is
exposed to the market risk associated with fluctuations in interest
rates. To date, the effects of the rate fluctuations have been
favorable. Counterparties to the interest rate swap agreements are
major financial institutions believed by Management to be credit-
worthy. NS Rail's use of interest rate swaps has been limited to
those discussed above.
5. Reclassification of Railway Revenues
Beginning in 1996, revenues previously reported as "Other railway
revenues" (principally switching and demurrage) are included in each
of the respective commodity groups. 1995 revenues have been
reclassified to conform with the current presentation.
<PAGE> PAGE 9
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All Tables in millions of dollars)
<TABLE>
6. Norfolk and Western Railway Company and Subsidiaries (NW)--
Summarized Consolidated Financial Information
SUMMARIZED CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Railway operating revenues $ 471.6 $ 469.7 $1,455.6 $1,435.1
Railway operating expenses 332.7 354.5 1,040.0 1,080.0
------- ------- -------- --------
Income from operations 138.9 115.2 415.6 355.1
Other - net 14.3 10.7 37.2 27.7
------- ------- -------- --------
Income before
income taxes 153.2 125.9 452.8 382.8
Provision for income taxes 49.5 36.9 158.3 133.3
------- ------- -------- --------
Net income $ 103.7 $ 89.0 $ 294.5 $ 249.5
======= ======= ======== ========
</TABLE>
<TABLE>
SUMMARIZED CONSOLIDATED BALANCE SHEETS
--------------------------------------
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets $ 354.3 $ 298.3
Noncurrent assets 5,527.2 4,778.2
-------- --------
Total assets $5,881.5 $5,076.5
======== ========
Liabilities and stockholder's equity
Current liabilities $ 222.8 $ 246.2
Noncurrent liabilities 1,812.9 1,603.9
Stockholder's equity 3,845.8 3,226.4
-------- --------
Total liabilities and
stockholder's equity $5,881.5 $5,076.5
======== ========
</TABLE>
<PAGE> PAGE 10
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All Tables in millions of dollars)
6. Norfolk and Western Railway Company and Subsidiaries (NW)--
Summarized Consolidated Financial Information (continued)
On August 1, 1996, NS Rail transferred 5,294,931 shares of NS stock
to NW as a contribution to capital. The transfer was recorded at
historical cost, and in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," unrealized appreciation was recognized
which increased "Noncurrent assets" $478.2 million, "Noncurrent
liabilities" $167.4 million, and "Stockholder's equity"
$310.8 million.
7. Lease Commitments
On July 29, 1996, implementation of the Lease Extension Agreement
between NS Rail and North Carolina Railroad Company (NCRR) was
enjoined by a federal court, which ruled that a quorum of private
stockholders was not present at the NCRR stockholders' meeting at
which the Agreement was approved. In light of the Federal Court's
injunction of NCRR from entering into the lease extension agreement
which had been negotiated between NCRR and NS Rail, NCRR has elected
to file, against NS Rail and affiliated companies, a lawsuit in
state court to resolve contractual and environmental issues and an
action in the Surface Transportation Board (STB) to determine
appropriate compensation for NS Rail's continued use of the line.
Pending resolution of the STB proceedings, NS Rail will continue to
discharge its common carrier obligations by operating over the lines
of NCRR. Final resolution of these matters is not expected to have
a material effect on NS Rail's consolidated financial position or
results of operations.
8. Subsequent Events
PROPOSED ACQUISITION OF CONRAIL INC. BY NS
------------------------------------------
On October 23, 1996, NS announced its intention to commence an
all-cash tender offer for Conrail Inc., a Pennsylvania corporation
(Conrail). On October 24, 1996, Atlantic Acquisition Corporation, a
Pennsylvania corporation and a wholly owned subsidiary of NS,
offered to purchase all outstanding shares of (i) common stock, par
value $1.00 per share, and (ii) Series A ESOP Convertible Junior
Preferred Stock, without par value (collectively, the Shares), of
Conrail including, in each case, the associated Common Stock
Purchase Rights, at a price of $100 per share, net to the seller in
cash, without interest, or approximately $9.1 billion in the
aggregate. NS intends ultimately to effect a merger in which all
remaining Conrail shareholders also will receive the same cash price
paid in the tender offer. Shares tendered in the offer or acquired
in any subsequent merger would be held in a voting trust pending
<PAGE> PAGE 11
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All Tables in millions of dollars)
8. Subsequent Events (continued)
PROPOSED ACQUISITION OF CONRAIL INC. BY NS (continued)
------------------------------------------
regulatory approval by the STB. The offer followed the
October 15 announcement that Conrail had entered into a merger
agreement with CSX Corporation (CSX), whereby Conrail stockholders
would receive $92.50 cash per share for up to 40 percent of their
Shares and receive CSX common stock for the balance of their Shares.
Based on the October 15, 1996, closing price of CSX common stock in
NYSE composite trading (the Closing Price), the aggregate value of
the CSX transaction was approximately $8.1 billion. On November 5,
1996, Conrail's Board of Directors unanimously reaffirmed its
conclusion that the merger with CSX is in Conrail's best interest
and rejected NS' offer. On November 6, 1996, CSX and Conrail
announced that they had amended the terms of their merger agreement.
Under the revised terms, CSX raised the cash portion of its offer to
$110 per Share and left unchanged the ratio pursuant to which
certain Conrail stockholders would receive shares of CSX common
stock - an offer valued at approximately $8.4 billion in the
aggregate based on the November 6, 1996, Closing Price of CSX common
stock. On November 8, 1996, NS announced that it had increased to
$110 per share, or approximately $10.0 billion in the aggregate, its
all-cash offer. On November 13, Conrail reaffirmed its commitment to
the merger with CSX and recommended that its stockholders not tender
into the increased NS offer.
NS' tender offer is conditioned upon, among other things, the
receipt by NS of an informal written opinion from the staff of the
STB that the use of the voting trust is consistent with the policies
of the STB, NS having obtained sufficient financing for the tender
offer and subsequent merger, the valid tender of a majority of
Conrail's shares on a fully diluted basis, Subchapter 25F of
Pennsylvania's Business Corporation Law not being applicable to the
offer, Conrail's Rights Agreement (or poison pill) having been
redeemed or otherwise made inapplicable to NS' tender offer, the
merger agreement between CSX and Conrail having been terminated in
accordance with its terms or otherwise, and other conditions. The
full terms and conditions of the tender offer and certain other
disclosures, to all of which the foregoing summary is subject, are
set forth in documents filed on October 24 and November 8 with the
Securities and Exchange Commission.
NS' STOCK PURCHASE PROGRAM
--------------------------
On October 23, 1996, NS announced that the share purchase program
authorized by the Board of Directors in January 1996 had been
suspended.
<PAGE> PAGE 12
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations.
-------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Net Income
- ----------
"Net income" for the third quarter of 1996 was a record $208.8 million,
up $14.9 million, or 8 percent, compared with $193.9 million in last
year's third quarter. "Net income" for the nine months ended
September 30, 1996, was a record $562.5 million, a $35.0 million, or
7 percent, increase. Increased "Income from railway operations," up
8 percent for the third quarter and 6 percent for the first nine months,
was principally responsible for both improvements. A lower effective
income tax rate (see "Income Taxes") also contributed to the year-to-
date improvement.
<TABLE>
Railway Operating Revenues
- --------------------------
Third-quarter "Railway operating revenues" were a record $1.02 billion,
a $24.1 million, or 2 percent, increase over the same period last year.
"Railway operating revenues" for the first nine months were
$3.07 billion, also a record, up $63.2 million, or 2 percent, compared
with the same period last year. The increases in operating revenues
were due to:
<CAPTION>
Third Quarter First Nine Months
1996 vs. 1995 1996 vs. 1995
Increase (Decrease) Increase (Decrease)
------------------ ------------------
(In millions of dollars)
<S> <C> <C>
Traffic volume (carloads) $ 40.6 $ 40.5
Revenue per unit (16.5) 22.7
------ ------
$ 24.1 $ 63.2
====== ======
</TABLE>
<PAGE> PAGE 13
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 (see
Note 5 on page 8 for a discussion of revenue reclassifications):
<CAPTION>
Revenues
-------------------------------------------
Third Quarter Nine Months
1996 1995 1996 1995
--------- --------- --------- ---------
($ in millions)
<S> <C> <C> <C> <C>
Coal $ 327.5 $ 325.7 $ 979.8 $ 950.6
Chemicals 140.0 127.9 419.3 402.5
Paper/forest 130.1 137.3 388.5 409.1
Automotive 112.2 99.1 364.2 337.6
Agriculture 94.4 98.7 293.1 293.4
Metals/construction 93.6 90.7 272.4 267.4
-------- -------- -------- --------
General merchandise 570.3 553.7 1,737.5 1,710.0
Intermodal 122.3 116.6 357.5 351.0
-------- -------- -------- --------
Total $1,020.1 $ 996.0 $3,074.8 $3,011.6
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Carloads
-------------------------------------------
Third Quarter Nine Months
1996 1995 1996 1995
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Coal 333.4 319.9 987.5 951.9
Chemicals 95.6 87.5 282.5 274.8
Paper/forest 111.6 116.0 329.8 349.9
Automotive 83.5 70.9 263.1 245.3
Agriculture 91.6 96.9 275.5 292.0
Metals/construction 96.3 95.5 277.8 283.2
-------- -------- -------- --------
General merchandise 478.6 466.8 1,428.7 1,445.2
Intermodal 334.1 313.9 976.5 938.1
-------- -------- -------- --------
Total 1,146.1 1,100.6 3,392.7 3,335.2
======== ======== ======== ========
</TABLE>
<PAGE> PAGE 14
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Coal
- ----
Third-quarter coal revenues were $1.8 million, or 1 percent, above
third-quarter 1995, and were $29.2 million, or 3 percent, higher for the
first nine months. Increased traffic volume was responsible for these
improvements, as carloads were 4 percent ahead of both last year's third
quarter and first nine months. Lower average revenue per car, largely
the result of an increased proportion of utility traffic, offset most of
the revenue increase generated by the improved third-quarter traffic
volume. Domestic utility coal led the volume gains, a result of
downtime at certain nuclear power plants and increased generation at
several NS Rail-served utilities. Third-quarter export coal traffic
volumes declined compared with a strong third quarter last year, partly
due to vessel timing.
Domestic utility coal traffic is projected to remain strong in the
fourth quarter due to expected continued downtime at nuclear power
plants and increased winter demand. Fourth-quarter export coal volume
is expected to benefit as the vessel timing, which unfavorably affected
the third quarter, reverses in the fourth quarter.
General Merchandise
- -------------------
Third-quarter general merchandise revenues increased $16.6 million, or
3 percent, over last year, and were $27.5 million, or 2 percent, above
the first nine months of 1995. Increased automotive and chemicals
traffic volume was principally responsible for both improvements.
Automotive led the growth, climbing $13.1 million, or 13 percent, for
the quarter, and $26.6 million, or 8 percent, for the first nine months.
NS Rail's automotive revenues continued to benefit from a combination of
increased production at selected plants that produce popular cars and
trucks; production at the GM assembly plant in Wentzville, Mo., which
was down two years for retooling; and BMW production at the new
Greer, S.C., plant. Fourth-quarter automotive revenues are expected to
continue to benefit from these factors.
Revenues in the chemicals group were up $12.1 million, or 9 percent, for
the quarter, and $16.8 million, or 4 percent, for the first nine months,
largely a result of increased traffic volume in fertilizers and
plastics. Chemical revenues are expected to remain ahead of last year,
benefiting from increased demand.
Revenues from metals/construction traffic were up $2.9 million, or
3 percent, for the quarter, and $5.0 million, or 2 percent, for the
first nine months. Higher average revenue per car was principally
responsible for the improvements in both periods.
<PAGE> PAGE 15
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Paper/forest revenues decreased $7.2 million, or 5 percent, for the
quarter, and were $20.6 million, or 5 percent, lower for the first nine
months. Declines in NS Rail's paper/forest traffic continue to reflect
the overall softness in the U.S. paper industry.
Revenues in the agriculture group were down $4.3 million, or 4 percent,
in the third quarter, and were roughly flat for the first nine months.
The third-quarter decline was the result of lower traffic volume due to
very low supplies of grain following last year's poor harvest.
Fourth-quarter agriculture revenues are projected to be ahead of last
year, a result of an improvement in this year's harvest.
Intermodal
- ----------
Third-quarter intermodal revenues increased $5.7 million, or 5 percent,
compared with last year, and were $6.5 million, or 2 percent, higher for
the first nine months. Traffic volume was up 6 percent and 4 percent
for the quarter and nine months, respectively, due to the continued
conversion of domestic freight from trailers to efficient double-stack
containers. NS Rail's intermodal traffic is expected to continue this
positive growth trend in the fourth quarter.
Railway Operating Expenses
- --------------------------
"Railway operating expenses" increased $1.7 million in the third quarter
of 1996, and $13.7 million, or 1 percent, for the first nine months,
compared with the same periods last year.
The largest increase was in "Diesel fuel," which was up $8.5 million, or
19 percent, for the quarter, and $24.9 million, or 18 percent, for the
first nine months. The increases were primarily due to increased price
per gallon, up 15 percent and 14 percent for the quarter and nine
months, respectively.
"Materials, services and rents" increased $8.0 million, or 5 percent,
for the third quarter, but decreased $7.1 million, or 1 percent, for the
first nine months. The third-quarter increase was primarily due to
higher equipment rents related largely to growth in intermodal traffic
and the absence of rental income on locomotives leased to UP in 1995.
Hurricane Fran, which disrupted some operations during September, also
contributed to the increase. The decrease for the first nine months was
principally the result of lower locomotive and freight car maintenance
costs.
"Depreciation" increased $4.1 million, or 4 percent, for the quarter,
and $15.6 million, or 5 percent, for the first nine months due to
additional investment in depreciable assets.
<PAGE> PAGE 16
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
The largest decrease was in "Compensation and benefits," which was
$18.4 million, or 5 percent, and $21.7 million, or 2 percent, below last
year's third quarter and first nine months, respectively. The
reductions were primarily attributable to lower fringe benefit costs,
principally medical benefits, and an adjustment to capitalized labor
costs, chiefly associated with wages payable in connection with the
recently ratified labor agreements. "Compensation and benefits" also
continues to reflect the positive effects of last year's early
retirement program and reduced employment.
"Casualties and other claims" decreased $2.3 million, or 8 percent, in
the third quarter, but increased $2.3 million, or 3 percent, for the
first nine months. The third-quarter decrease was largely the result of
a nonrecurring liability insurance refund somewhat offset by higher
accruals for environmental remediation. The year-to-date increase was
due to the higher environmental expenses, which more than offset the
insurance refund and favorable personal injury experience.
Other Income (Expense)
- ----------------------
"Interest income" was $3.0 million, or 32 percent, lower for the
quarter, and $2.7 million, or 11 percent, lower for the first nine
months. The declines were due to a combination of lower interest rates
and lower invested balances in 1996.
"Other-net" increased $0.4 million for the quarter, but decreased
$5.6 million for the first nine months. The unfavorable year-to-date
comparison was largely the result of favorable adjustments last year to
interest expense on possible tax deficiencies.
Income Taxes
- ------------
The effective income tax rate for the third quarter was 30.8 percent,
compared with third-quarter 1995's effective rate of 31.1 percent. Both
years reflect favorable adjustments related to the filing of the prior
year's tax return. For the first nine months, the effective rate was
34.4 percent versus 35.5 percent for 1995. The lower effective rate in
1996 resulted from favorable adjustments for settlement of federal
income tax years 1990 through 1992 and continued benefits from
Section 29 income tax credits attributable to investments in certain gas
properties.
<PAGE> PAGE 17
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
<TABLE>
FINANCIAL CONDITION AND LIQUIDITY
<CAPTION>
September 30, December 31,
1996 1995
------------ -----------
(Dollars in millions)
<S> <C> <C>
Cash and short-term investments $289.5 $230.0
Debt to total capitalization 10.2% 9.6%
</TABLE>
CASH PROVIDED BY OPERATING ACTIVITIES is NS Rail's principal source of
liquidity and was sufficient to cover cash outflows for dividends, debt
repayments and capital spending (see Consolidated Statements of Cash
Flows on page 5). The decline in cash provided by operations, compared
with the first nine months of 1995, was attributable to tax and interest
payments made as a result of the federal income tax settlement in 1996
(see "Income Taxes") and an increase in accounts receivable of
$50.9 million.
CASH USED FOR INVESTING ACTIVITIES was affected principally by capital
spending for property additions, which included $33 million and
$30 million in 1996 and 1995, respectively, related to locomotives under
capital leases (see Note 4). "Investment purchases" consisted primarily
of premium payments related to corporate-owned life insurance (COLI),
while "Investment sales and other transactions" principally reflected
borrowing on COLI. The increase in "Investments" in the Consolidated
Balance Sheet at September 30, 1996, was principally due to higher
unrealized gains on NS Rail's investments in NS stock. Carrying value
adjustments are non-cash transactions and are not included in the
Consolidated Statements of Cash Flows. The decrease in "Advances due
from NS," compared with last year, was the result of NS receiving
proceeds during the third quarter from its issuance of $200 million of
medium-term notes.
CASH USED FOR FINANCING ACTIVITIES comprised "Dividends," "Proceeds from
long-term borrowings," which represented amounts received in connection
with capital lease transactions (see Note 4), and "Debt repayments."
The decrease in "Dividends," compared to last year, was the result of
the declaration in the third quarter of 1996 of a non-cash dividend (see
Note 3).
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, NS Rail adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121).
This standard establishes the accounting and reporting requirements for
recognizing and measuring impairment of long-lived assets to be either
held and used or held for disposal. SFAS 121 did not have a material
effect on NS Rail's financial statements.
<PAGE> PAGE 18
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
On October 10, 1996, the AICPA issued Statement of Position 96-1,
"Environmental Remediation Liabilities" (SOP 96-1), which is effective
for fiscal years beginning after December 15, 1996. SOP 96-1 provides
guidance with respect to recognition and measurement of environmental
remediation liabilities and disclosure of such liabilities in financial
statements. The impact to NS Rail of adopting SOP 96-1 is not expected
to have a material effect on the Corporation's financial position or
results of operations.
ENVIRONMENTAL MATTERS
During 1995, the EPA alleged that The Alabama Great Southern Railroad
Company ("AGS"), a subsidiary of NS Rail, was responsible, along with
several other entities believed to be financially solvent, for past and
future cleanup and monitoring costs at the Bayou Bonfouca NPL Superfund
site located in Slidell, Louisiana. The site was owned by the parent of
an AGS predecessor from 1882 until 1902. Some of the bridge timbers
used in the 1882 construction of the predecessor's bridge across Lake
Pontchartrain were treated at the site. The United States and the State
of Louisiana filed suit to recover all costs incurred (estimated in the
complaint at around $100 million) and unspecified amounts to be
incurred. Defendants in that suit include AGS and all other entities
the EPA earlier identified as potentially responsible parties. AGS
believes it never owned, operated or had any other culpable connection
to the site and denies responsibility. AGS has now entered into
settlement negotiations with the Justice Department in an effort to
avoid litigation costs. At this juncture, a settlement with the Justice
Department and Louisiana is expected to be at a level immaterial to NS
Rail's financial statements.
PROPOSED ACQUISITION OF CONRAIL INC. BY NS
On October 23, 1996, NS announced its intention to commence an all-cash
tender offer for Conrail Inc., a Pennsylvania corporation (Conrail). On
October 24, 1996, Atlantic Acquisition Corporation, a Pennsylvania
corporation and a wholly owned subsidiary of NS, offered to purchase all
outstanding shares of (i) common stock, par value $1.00 per share, and
(ii) Series A ESOP Convertible Junior Preferred Stock, without par value
(collectively, the Shares), of Conrail including, in each case,
the associated Common Stock Purchase Rights, at a price of $100 per
share, net to the seller in cash, without interest, or approximately
$9.1 billion in the aggregate. NS intends ultimately to effect a merger
in which all remaining Conrail shareholders also will receive the same
cash price paid in the tender offer. Shares tendered in the offer or
acquired in any subsequent merger would be held in a voting trust
pending regulatory approval by the STB. The offer followed the
October 15 announcement that Conrail had entered into a merger agreement
with CSX Corporation (CSX), whereby Conrail stockholders would receive
$92.50 cash per share for up to 40 percent of their Shares and receive
CSX common stock for the balance of their Shares. Based on the
October 15, 1996, closing price of CSX common stock in NYSE composite
<PAGE> PAGE 19
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
trading (the Closing Price), the aggregate value of the CSX transaction
was approximately $8.1 billion. On November 5, 1996, Conrail's Board
of Directors unanimously reaffirmed its conclusion that the merger with
CSX is in Conrail's best interest and rejected NS' offer. On November 6,
1996, CSX and Conrail announced that they had amended the terms of their
merger agreement. Under the revised terms, CSX raised the cash portion
of its offer to $110 per Share and left unchanged the ratio pursuant to
which certain Conrail stockholders would receive shares of CSX common
stock - an offer valued at approximately $8.4 billion in the aggregate
based on the November 6, 1996, Closing Price of CSX common stock. On
November 8, 1996, NS announced that it had increased to $110 per share,
or approximately $10.0 billion in the aggregate, its all-cash offer. On
November 13, Conrail reaffirmed its commitment to the merger with CSX and
recommended that its stockholders not tender into the increased NS offer.
NS' tender offer is conditioned upon, among other things, the receipt
by NS of an informal written opinion from the staff of the STB that the
use of the voting trust is consistent with the policies of the STB, NS
having obtained sufficient financing for the tender offer and subsequent
merger, the valid tender of a majority of Conrail's shares on a fully
diluted basis, Subchapter 25F of Pennsylvania's Business Corporation Law
not being applicable to the offer, Conrail's Rights Agreement (or poison
pill) having been redeemed or otherwise made inapplicable to NS' tender
offer, the merger agreement between CSX and Conrail having been
terminated in accordance with its terms or otherwise, and other
conditions. The full terms and conditions of the tender offer and
certain other disclosures, to all of which the foregoing summary is
subject, are set forth in documents filed on October 24 and November 8
with the Securities and Exchange Commission.
NS expects future cash flows of the merged entity to be sufficient to
service and retire the acquisition and related debt.
The STB has 15 months after accepting NS' application to acquire control
of Conrail to decide whether or not to approve the application or impose
conditions. If the STB does not approve or if NS deems the conditions
imposed by the STB too onerous, NS would have the right to and could be
required to sell all Conrail shares held in the voting trust. Such a
disposition could result in a significant loss in and over the period of
disposition.
NS' STOCK PURCHASE PROGRAM
On October 23, 1996, NS announced that the share purchase program
authorized by the Board of Directors in January 1996 had been suspended.
<PAGE> PAGE 20
PART II - OTHER INFORMATION
---------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits
Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months
ended September 30, 1996.
<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 RAILWAY COMPANY
------------------------------------------
(Registrant)
Date: November 13, 1996 /s/ Dezora M. Martin
------------------- ------------------------------------------
Dezora M. Martin
Assistant Corporate Secretary (Signature)
Date: November 13, 1996 /s/ John P. Rathbone
------------------- ------------------------------------------
John P. Rathbone
Vice President and Controller
(Principal Accounting Officer) (Signature)
<PAGE> PAGE 22
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
INDEX TO EXHIBITS
-----------------
Electronic
Submission
Exhibit
Number Description Page Number
- ----------- ----------------------------------------- -----------
27 Financial Data Schedule (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). 23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> $ 167
<SECURITIES> 123
<RECEIVABLES> 596
<ALLOWANCES> 3
<INVENTORY> 56
<CURRENT-ASSETS> 1,138
<PP&E> 13,046
<DEPRECIATION> 4,107
<TOTAL-ASSETS> 11,042
<CURRENT-LIABILITIES> 959
<BONDS> 555
<COMMON> 167
0
55
<OTHER-SE> 5,560
<TOTAL-LIABILITY-AND-EQUITY> 11,042
<SALES> 0
<TOTAL-REVENUES> 3,075
<CGS> 0
<TOTAL-COSTS> 2,213
<OTHER-EXPENSES> (21)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 858
<INCOME-TAX> 295
<INCOME-CONTINUING> 563
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 563
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
