PAGE 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------------
FORM 10-K405
(X)ANNUAL REPORT PURSUANT TO SECTION 13 or l5(d) of THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995.
OR
( )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 (I.R.S. Employer
incorporation or organization) Identification No.)
Three Commercial Place, Norfolk, Virginia 23510-2191
----------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (804) 629-2682
--------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS SO REGISTERED. EACH CLASS REGISTERED ON NEW YORK
STOCK EXCHANGE:
Southern Railway Company Memphis Division First Mortgage 5% Gold Bonds,
due July 1, 1996; Norfolk and Western Railway Company First
Consolidated Mortgage 4% Bonds, due October 1, 1996; Guarantee of
Norfolk Southern Railway Company with respect to $23,877,300 principal
amount of Norfolk and Western Railway Company First Consolidated
Mortgage 4% Bonds due October 1, 1996; Norfolk and Western Railway
Company 4.85% Subordinated Income Debentures, due November 15, 2015;
Guarantee of Norfolk Southern Railway Company with respect to
$1,865,900 principal amount of Norfolk and Western Railway Company
4.85% Subordinated Income Debentures due November 15, 2015; The
Virginian Railway Company 6% Subordinated Income Debentures, due
August 1, 2008; Guarantee of Norfolk Southern Railway Company with
respect to $5,043,000 principal amount of The Virginian Railway Company
6% Subordinated Income Debentures due August 1, 2008; Norfolk Southern
Railway Company $2.60 Cumulative Preferred Stock, Series A (No Par
Value, $50 Stated Value).
<PAGE> PAGE 2
Securities registered pursuant to Section 12(g) of the Act: NONE
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. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K405 or any amendment to this
Form 10-K405. (X)
The aggregate market value of the voting stock held by
nonaffiliates as of February 29, 1996: $39,831,413
The number of shares outstanding of each of the registrant's
classes of Common Stock, as of February 29, 1996: 16,668,997
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement (to be
dated April 18, 1995) to be filed electronically pursuant to
Regulation 14A not later than 120 days after the end of the fiscal
year are incorporated by reference in Part III.
<PAGE> PAGE 3
TABLE OF CONTENTS
Item Page
---- ----
Part I 1. Business 4
2. Properties 4
3. Legal Proceedings 17
4. Submission of Matters to a Vote of Security
Holders 17
Executive Officers of the Registrant 18
Part II 5. Market for Registrant's Common Stock and
Related Stockholder Matters 24
6. Selected Financial Data 25
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 26
8. Financial Statements and Supplementary Data 38
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 65
Part III 10. Directors and Executive Officers of the
Registrant 65
11. Executive Compensation 65
12. Security Ownership of Certain Beneficial
Owners and Management 65
13. Certain Relationships and Related
Transactions 65
Part IV 14. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K 66
Index to Consolidated Financial Statement
Schedule 66
Power of Attorney 69
Signatures 69
Exhibit Index 73
<PAGE> PAGE 4
PART I
Item 1. Business.
- ------ --------
and
Item 2. Properties.
- ------ ----------
GENERAL - Norfolk Southern Railway Company (Norfolk
Southern Railway) was incorporated in 1894 under the name Southern
Railway Company (Southern) in the Commonwealth of Virginia and,
together with its consolidated subsidiaries (collectively, NS Rail),
is primarily engaged in the transportation of freight by rail.
On June 1, l982, Southern and Norfolk and Western Railway
Company (Norfolk and Western) became subsidiaries of Norfolk Southern
Corporation (NS), a transportation holding company. Effective
December 31, 1990, NS transferred all the common stock of Norfolk and
Western to Southern, and Southern's name was changed to Norfolk
Southern Railway Company. Accordingly, all the common stock of
Norfolk and Western, which is its only voting security, is owned by
Norfolk Southern Railway, and all the common stock of Norfolk
Southern Railway (16,668,997 shares) is owned directly by NS. NS
common stock is publicly held and listed on the New York Stock
Exchange.
There remain issued and outstanding as of
February 29, 1996, 1,197,027 shares of Norfolk Southern Railway's
$2.60 Cumulative Preferred Stock, Series A (Series A Stock), of which
1,096,907 shares (including 74 shares not entitled to vote) were held
by other than subsidiaries. The Series A Stock is entitled to one
vote per share, is nonconvertible, and is traded on the New York
Stock Exchange.
STOCK PURCHASE PROGRAM - On June 2, 1989, NS announced that
it intended to purchase up to 250,000 shares of Norfolk Southern
Railway's Series A Stock during the subsequent two-year period. In
May 1991, NS extended the previously announced stock purchase program
through 1993. In March 1994, NS announced that it would continue
purchasing up to 250,000 shares of the Series A Stock through 1996.
As of February 29, 1996, NS had purchased 131,128 shares of preferred
stock at a total cost of approximately $4.8 million. Consequently,
as of February 29, 1996, NS held 94.6 percent of the voting stock of
Norfolk Southern Railway.
OPERATIONS - As of December 3l, l995, NS Rail operated more
than 14,500 miles of road in the states of Alabama, Florida, Georgia,
Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan,
Mississippi, Missouri, New York, North Carolina, Ohio, Pennsylvania,
South Carolina, Tennessee, Virginia and West Virginia, and the
Province of Ontario, Canada. Of this total, 12,208 miles are owned,
with the balance operated under lease or trackage rights; most of
this total are main line. In addition, NS Rail operates
approximately 11,000 miles of passing, industrial, yard and side
tracks.
<PAGE> PAGE 5
NS Rail has major leased lines between Cincinnati, Ohio,
and Chattanooga, Tennessee, and in the State of North Carolina.
The Cincinnati-Chattanooga lease, covering about 335 miles,
expires in 2026, and is subject to an option to extend the lease for
an additional 25 years, at terms to be agreed upon.
The North Carolina leases, covering approximately
330 miles, expired by their terms at the end of 1994. Following
extensive negotiations, the terms of renewal contained in a Lease
Extension Agreement were approved by the respective parties' boards
of directors in August 1995, and, subject to a court challenge as to
the presence of the required quorum of private stockholders ("Quorum
Challenge"), by the stockholders of North Carolina Railroad Company
(NCRR) at their meeting in December. Also, certain NCRR stockholders
earlier had filed four separate, and still-pending, derivative
actions challenging the adequacy of the new rental terms, which
provide for an annual rental of $8.0 million in 1995, with
adjustments for inflation in each of the succeeding years of the
lease. Pending resolution of the Quorum Challenge, NS Rail continues
to operate over NCRR lines under the rental terms contained in the
Lease Extension Agreement. If the Quorum Challenge is successful,
and if the NCRR is unable to obtain stockholder approval of the Lease
Extension Agreement at a subsequent meeting, NS Rail could be
required to operate over these NCRR lines under conditions prescribed
by regulatory authority, or they might operate over one or more
alternate routes. Whatever the ultimate resolution of this matter,
it is not expected to have a material effect on NS Rail's
consolidated financial position.
NS Rail's lines carry raw materials, intermediate products
and finished goods primarily in the Southeast and Midwest and to and
from the rest of the United States and parts of Canada. These lines
also transport overseas freight through several Atlantic and Gulf
Coast ports. Atlantic ports served by NS Rail include: Norfolk,
Va.; Morehead City, N.C.; Charleston, S.C.; Savannah and Brunswick,
Ga.; and Jacksonville, Fl. Gulf Coast ports served include: Mobile,
Al., and New Orleans, La.
NS Rail's lines reach most of the larger industrial and
trading centers of the Southeast and Midwest, with the exception of
those in central and southern Florida. Atlanta, Birmingham,
New Orleans, Memphis, St. Louis, Kansas City (Missouri), Chicago,
Detroit, Cincinnati, Buffalo, Norfolk, Charleston, Savannah and
Jacksonville are among the leading centers originating and
terminating freight traffic on the system. In addition, a haulage
arrangement with the Florida East Coast Railway allows NS Rail to
provide single-line service to and from south Florida, including the
port cities of Miami, West Palm Beach and Fort Lauderdale. The
system's lines also reach many individual industries, mines (in
western Virginia, eastern Kentucky and southern West Virginia) and
businesses located in smaller communities in its service area. The
traffic corridors carrying the heaviest volumes of freight include
those from the Appalachian coal fields of Virginia, West Virginia and
Kentucky to Norfolk and Sandusky, Oh.; Buffalo to Chicago and Kansas
City; Chicago to Jacksonville (via Cincinnati, Chattanooga and
Atlanta); and Washington, D.C./Hagerstown, Md., to New Orleans (via
Atlanta and Birmingham).
<PAGE> PAGE 6
Buffalo, Chicago, Hagerstown, Jacksonville, Kansas City,
Memphis, New Orleans and St. Louis are major gateways for
interterritorial system traffic.
NS Rail and other railroads have entered into service
interruption agreements, effective December 30, 1994, providing
indemnities to parties affected by a strike over specified industry
issues. If NS Rail were so affected, it could receive daily
indemnities from non-affected parties; if parties other than NS Rail
were affected, NS Rail could be required to pay indemnities to those
parties. If NS Rail were required to pay the maximum amount of
indemnities required of it under these agreements--an event
considered unlikely at this time--such liability should not exceed
approximately $85 million.
RAILWAY OPERATING REVENUES - NS Rail's railway operating
revenues totaled $4.0 billion in 1995. These revenues were received
for transporting 280.6 million tons, of which 219.4 million tons
originated on line, 242.7 million tons terminated on line (including
187.1 million tons of local traffic--originating and terminating on
line) and approximately 5.6 million tons were overhead traffic
(neither originating nor terminating on line).
<TABLE>
Revenue and revenue ton mile (one ton of freight moved one
mile) contributions by principal railway operating revenue sources
for the period 1991 through 1995 are set forth in the following
table:
<CAPTION>
Year Ended December 31,
Principal Sources of ------------------------------------------------
Railway Operating
Revenues 1995 1994 1993 1992 1991
- ------------------------- ---- ---- ---- ---- ----
(Revenues in Millions, and Revenue Ton Miles in Billions)
<S> <C> <C> <C> <C> <C>
COAL
Revenues............... $1,240.3 $1,262.5 $1,213.3 $1,296.0 $1,330.3
% of total railway
operating revenues.... 30.9% 32.2% 32.5% 34.9% 37.0%
Revenue ton miles...... 43.1 43.8 41.4 41.9 42.7
% of total revenue
ton miles............. 33.9% 35.8% 37.1% 38.9% 41.2%
PAPER/FOREST
Revenues............... $ 519.8 $ 505.4 $ 502.7 $ 499.5 $ 476.1
% of total railway
operating revenues.... 13.0% 12.9% 13.5% 13.5% 13.2%
Revenue ton miles...... 15.5 15.3 15.1 14.7 13.6
% of total revenue
ton miles............. 12.2% 12.5% 13.5% 13.7% 13.1%
CHEMICALS
Revenues............... $ 513.5 $ 512.2 $ 472.9 $ 471.7 $ 449.7
% of total railway
operating revenues.... 12.8% 13.1% 12.7% 12.7% 12.5%
Revenue ton miles...... 16.7 16.7 14.7 14.3 13.6
% of total revenue
ton miles............. 13.1% 13.7% 13.2% 13.3% 13.1%
</TABLE>
<PAGE> PAGE 7
<TABLE>
<CAPTION>
Year Ended December 31,
Principal Sources of ------------------------------------------------
Railway Operating
Revenues 1995 1994 1993 1992 1991
- ------------------------- ---- ---- ---- ---- ----
(Revenues in Millions, and Revenue Ton Miles in Billions)
<S> <C> <C> <C> <C> <C>
AUTOMOTIVE
Revenues............... $ 454.1 $ 432.1 $ 429.5 $ 401.5 $ 325.9
% of total railway
operating revenues.... 11.3% 11.0% 11.5% 10.8% 9.1%
Revenue ton miles...... 4.3 4.2 4.2 3.7 3.0
% of total revenue
ton miles............. 3.4% 3.4% 3.8% 3.4% 2.9%
AGRICULTURE
Revenues............... $ 359.0 $ 347.5 $ 319.7 $ 301.4 $ 293.6
% of total railway
operating revenues.... 8.9% 8.9% 8.6% 8.1% 8.2%
Revenue ton miles...... 16.7 15.6 13.6 12.6 12.2
% of total revenue
ton miles............. 13.1% 12.8% 12.2% 11.7% 11.8%
METALS/CONSTRUCTION
Revenues............... $ 339.5 $ 321.4 $ 296.1 $ 276.3 $ 274.0
% of total railway
operating revenues.... 8.5% 8.2% 7.9% 7.5% 7.6%
Revenue ton miles...... 11.3 10.4 9.6 8.5 8.2
% of total revenue
ton miles............. 8.9% 8.5% 8.6% 7.9% 7.9%
INTERMODAL
(Trailers and Containers)
Revenues............... $ 470.5 $ 425.6 $ 371.9 $ 341.0 $ 324.6
% of total railway
operating revenues.... 11.7% 10.9% 10.0% 9.2% 9.0%
Revenue ton miles...... 19.5 16.3 13.0 11.9 10.4
% of total revenue
ton miles............. 15.4% 13.3% 11.6% 11.1% 10.0%
-------- -------- -------- -------- --------
Total Freight Revenues... $3,896.7 $3,806.7 $3,606.1 $3,587.4 $3,474.2
Total Revenue Ton Miles.. 127.1 122.3 111.6 107.6 103.7
OTHER RAILWAY OPERATING
Revenues, principally
switching and
demurrage............. $ 115.1 $ 111.4 $ 121.5 $ 121.7 $ 123.8
% of total railway
operating revenues.... 2.9% 2.8% 3.3% 3.3% 3.4%
-------- -------- -------- -------- --------
Total Railway Operating
Revenues............... $4,011.8 $3,918.1 $3,727.6 $3,709.1 $3,598.0
Note: Revenue ton miles (RTMs) for 1991 and 1992 have been restated
from a one-month delayed basis to current-month basis.
</TABLE>
<PAGE> PAGE 8
COAL TRAFFIC - Coal, coke and iron ore--most of which is
bituminous coal--is NS Rail's principal commodity group. NS Rail
originated 114.2 million tons of coal, coke and iron ore in 1995 and
handled a total of 125.1 million tons. Originated tonnage increased
0.4 percent from 114.7 million tons in 1994, and total tons handled
decreased 0.6 percent from 125.9 million tons in 1994. Revenues from
coal, coke and iron ore, which accounted for 31 percent of NS Rail's
total railway operating revenues and 34 percent of total revenue ton
miles in 1995, were $1.24 billion, a decrease of 2 percent from
$1.26 billion in 1994.
<TABLE>
The following table shows total coal tonnage originated on-
line, received from connections and handled for the five years ended
December 31, 1995:
<CAPTION>
Tons of Coal (Millions)
--------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Originated 111.2 112.0 109.7 115.5 116.8
Received 10.8 11.1 5.9 6.3 6.5
----- ----- ----- ----- -----
Handled 122.0 123.1 115.6 121.8 123.3
</TABLE>
Of the 111.2 million tons of coal originating on NS Rail in
1995, the approximate breakdown by origin state is as follows:
41.2 million tons from West Virginia, 34.4 million tons from
Virginia, 23.1 million tons from Kentucky, 7.1 million tons from Illinois,
3.6 million tons from Alabama, 1.6 million tons from Tennessee, and
0.2 million tons from Indiana. Of this NS Rail-origin coal,
approximately 25.7 million tons moved for export, principally through
NS Rail's pier facilities at Norfolk (Lamberts Point), Va.;
18.6 million tons moved to domestic and Canadian steel industries;
58.7 million tons of steam coal moved to electric utilities; and
8.2 million tons moved to other industrial and miscellaneous users.
NS Rail moved 9.4 million tons of originated coal to various docks on
the Ohio River for further movement by barge and 3.3 million tons to
various Lake Erie ports. Other than coal for export, virtually all
coal handled by NS Rail was terminated in states situated east of the
Mississippi River.
Total coal tonnage handled through all system ports in 1995
was 41.7 million. Of this total, 69 percent moved through the pier
facilities at Lamberts Point. In 1995, total tonnage handled at
Lamberts Point, including coastwise traffic, was 28.9 million tons, a
4 percent increase from the 27.8 million tons handled in 1994.
<PAGE> PAGE 9
<TABLE>
For the five years ended December 31, 1995, the quantities
of NS Rail coal handled only for export through Lamberts Point were
as follows:
<CAPTION>
Export Coal through Lamberts Point
(Millions of tons)
--------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Originated 25.4 23.9 24.6 30.8 34.3
Handled 25.5 24.1 24.9 31.2 34.6
</TABLE>
See the discussion of coal traffic, by type of coal, in
Part II, Item 7, "Management's Discussion and Analysis," on page 26.
MERCHANDISE RAIL TRAFFIC - The merchandise traffic group
consists of Intermodal and five major commodity groupings
(Paper/Forest; Chemicals; Automotive; Agriculture; and
Metals/Construction). Total NS Rail merchandise revenues increased in
1995 to $2.66 billion, a 4 percent increase over 1994. Merchandise
carloads handled in 1995 were 3.18 million, compared with 3.03 million
handled in 1994, an increase of 5 percent.
In 1995, 105.2 million tons of merchandise freight, or
approximately 68 percent of total merchandise tonnage handled by NS
Rail, originated on line. The balance of NS Rail's merchandise traffic
was received from connecting carriers (mostly railroads, with some
truck, water and highway as well), usually at interterritorial
gateways. The principal interchange points for NS Rail-received
traffic included Chicago, Memphis, New Orleans, Cincinnati, Kansas
City, Detroit, Hagerstown, St. Louis/East St. Louis, and Louisville.
Revenues in all six market groups comprising merchandise
traffic improved in 1995 over 1994, and in 1994 over 1993. The biggest
gains in 1995 were in Intermodal, up $44.9 million; Automotive, up
$22.0 million; and Metals/Construction, up $18.1 million.
See the discussion of merchandise rail traffic by commodity
group in Part II, Item 7, "Management's Discussion and Analysis," on
page 26.
<PAGE> PAGE 10
<TABLE>
RAIL OPERATING STATISTICS - The following table sets forth
certain statistics relating to NS Rail's operations during the
periods indicated:
<CAPTION>
Year Ended December 31,
-----------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Rail revenue ton
miles (billions) 127.1 122.3 111.6 107.6 103.7
Freight train miles
traveled (millions) 48.5 46.0 43.3 41.1 37.8
Revenue per ton mile $0.0307 $0.0311 $0.0323 $0.0333 $0.0335
Revenue tons per train 2,622 2,655 2,577 2,618 2,743
Revenue ton miles
per man-hour worked 2,690 2,579 2,304 2,184 2,023
Percentage ratio of
railway operating
expenses to railway
operating revenues 73.5 73.2 75.3 75.0 77.9*
* Excluding a special charge in 1991 which increased railway operating
expenses by $483 million.
</TABLE>
FREIGHT RATES - In 1995, NS Rail continued its reliance on
private contracts and exempt price quotes as its predominant pricing
mechanisms. Thus, a major portion of NS Rail's freight business is not
economically regulated by the government. In general, market forces
have been substituted for government regulation and now are the primary
determinant of rail service prices. This situation is not expected to
change in 1996 after the January 1 termination of the ICC and transfer
of its functions to a new agency, the Surface Transportation Board (STB).
In 1995, the ICC found NS Rail "revenue inadequate" based
on results for the year 1994. A railroad is "revenue inadequate"
under the Interstate Commerce Act when its return on net investment
does not exceed the rail industry's composite cost of capital. The
revenue adequacy measure is used by the STB as one of the factors in
its determination of reasonableness of regulated rates.
PASSENGER OPERATIONS - Regularly scheduled passenger
operations on NS Rail's lines consist of Amtrak trains operating
between Alexandria and New Orleans, and between Charlotte and
Selma, N.C. Former Amtrak operations between East St. Louis and
Centralia, Il., were discontinued by Amtrak on November 3, 1993.
Commuter trains continued operations on the NS Rail line between
Manassas and Alexandria under contract with two transportation
commissions of the Commonwealth of Virginia, providing for
reimbursement of related expenses incurred by NS Rail. During 1993,
a lease of the Chicago to Manhattan, Il., line to the Commuter Rail
Division of the Regional Transportation Authority of Northeast
Illinois replaced an agreement under which NS Rail had provided
commuter rail service for the Authority.
<PAGE> PAGE 11
RAILWAY PROPERTY:
<TABLE>
EQUIPMENT - As of December 31, 1995, NS Rail owned or
leased the following units of equipment:
<CAPTION>
Number of Units
------------------------------- Capacity
Owned* Leased Total of Equipment
----- ------ ----- ------------
Type of Equipment
- -----------------
<S> <C> <C> <C> <C>
Locomotives: (Horsepower)
Multiple purpose 1,908 0 1,908 5,799,700
Switching 143 0 143 210,000
Auxiliary units 62 0 62 0
-------- ------- -------- ----------
Total locomotives 2,113 0 2,113 6,009,700
======== ======= ======== ==========
Freight Cars: (Tons)
Hopper 29,780 41 29,821 2,943,996
Box 22,918 376 23,294 1,772,693
Covered Hopper 13,757 1,174 14,931 1,482,080
Gondola 21,388 105 21,493 2,259,854
Flat 4,234 825 5,059 360,061
Caboose 261 0 261 0
Other 1,435 4 1,439 112,720
-------- ------- -------- ----------
Total freight cars 93,773 2,525 96,298 8,931,404
======== ======= ======== ==========
Other:
Work equipment 6,963 5 6,968
Vehicles 3,825 0 3,825
Highway trailers 2,182 1,986 4,168
Miscellaneous 1,624 0 1,624
-------- ------- --------
Total other 14,594 1,991 16,585
======== ======= ========
* Includes equipment leased to outside parties and equipment subject
to equipment trusts, conditional sale agreements and capitalized
leases.
</TABLE>
<PAGE> PAGE 12
<TABLE>
The following table indicates the number and age of
locomotives and freight cars owned by NS Rail at December 31, 1995:
<CAPTION>
Year Built
---------------------------------------------------------------
1985- 1979- 1978 &
1995 1994 1993 1992 1991 1990 1984 Before Total
---- ---- ---- ---- ---- ---- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Locomotives:
Number of
units 125 25 31 55 53 398 432 994 2,113
Percent of
fleet 5.9 1.2 1.5 2.6 2.5 18.8 20.4 47.1 100.0
Freight cars:
Number of
units 931 845 935 580 556 4,600 14,253 71,073 93,773
Percent of
fleet 1.0 0.9 1.0 0.6 0.6 4.9 15.2 75.8 100.0
</TABLE>
The average age of the freight car fleet at December 31,
1995, was 22.0 years. During 1995, NS Rail retired 7,247 freight
cars. As of December 31, 1995, the average age of the locomotive
fleet was 15.7 years. During 1995, NS Rail retired 67 locomotives,
the average age of which was 22.6 years. Since 1988, NS Rail has
rebodied more than 20,500 coal cars. As a result, the remaining
serviceability of the freight car fleet is greater than is inferable
from the high percentage of freight cars built in earlier years.
NS Rail continues freight car and locomotive maintenance
programs to ensure the highest standards of safety, reliability,
customer satisfaction and equipment marketability. In recent years,
the bad order ratio reflects the storage of certain types of cars
which are not in high demand. Funds were not spent to repair certain
types of cars for which present and future customers' needs could be
adequately met without such repair programs. Also, NS Rail's own
standards of what constitutes a "serviceable" car have risen, and
NS Rail continues its disposition program for underutilized,
unserviceable and overage cars. In this connection, NS Rail began an
orderly disposition of up to 17,000 freight cars in October 1994.
Through the end of 1995, 7,272 of these cars had been sold.
<TABLE>
<CAPTION>
Annual Average*
--------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Freight Cars (excluding cabooses):
NS Rail 5.8% 6.7% 7.3% 7.6% 6.5%
All Class I railroads 6.0* 7.3 7.1 7.5 7.3
Locomotives:
NS Rail 4.7 4.7 4.3 4.4 4.3
* In 1995, the industry bad order ratio was as of June 1, 1995.
Prior years' industry ratios were based on a monthly average.
</TABLE>
<PAGE> PAGE 13
TRACKAGE - All NS Rail trackage is standard gauge, and the
rail in approximately 95 percent of the main line trackage (including
first, second, third and branch main tracks, all excluding trackage
rights) is heavyweight rail ranging from 100 to 140 pounds per yard.
Of the 22,514 miles of track maintained by NS Rail as of
December 31, 1995, 15,787 miles were laid with welded rail.
<TABLE>
The density of traffic on NS Rail running track (main line
trackage plus passing track) during 1995 was as follows:
<CAPTION>
Gross tons of
freight carried
per track mile Track miles Percent
(Millions) of running tracks* of total
--------------- ----------------- --------
<S> <C> <C>
0-4 4,966 31
5-19 4,822 30
20 and over 6,387 39
------ ---
16,175 100
* Excludes trackage rights.
</TABLE>
<TABLE>
The following table summarizes certain information about
NS Rail's track roadway additions and replacements during the last
five years:
<CAPTION>
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Track miles of rail installed 403 480 574 660 679
Miles of track surfaced 4,668 4,760 5,048 5,690 5,646
New crossties installed (millions) 2.0 1.7 1.6 1.9 1.9
</TABLE>
MICROWAVE SYSTEM - The NS Rail microwave system, consisting
of 6,600 radio path miles, 376 active stations and 5 passive repeater
stations, provides communications for Norfolk, Buffalo, Detroit,
Fort Wayne, Chicago, Kansas City, St. Louis, Washington, D.C.,
Atlanta, New Orleans, Jacksonville, Memphis, Cincinnati and most
operating locations between these cities. The microwave system
provides service for approximately 17,200 individual telephone
circuits. The microwave system is used principally for voice
communications, VHF radio control circuits, data and facsimile
transmissions, traffic control operations, AEI data transmissions and
relay of intelligence from defective equipment detectors. Extension
of microwave communications to low density or operations support
facilities is accomplished via microwave interface to buried fiber-
optic or copper cables.
<PAGE> PAGE 14
TRAFFIC CONTROL - Of a total of 12,885 road miles operated
by NS Rail, excluding trackage rights over foreign lines, 5,400 road
miles are governed by centralized traffic control systems (of which
100 miles are controlled by data radio from seven microwave site
locations) and 2,800 road miles are equipped for automatic block
system operation.
COMPUTERS - Data processing facilities connect the yards,
terminals, transportation offices, rolling stock repair points, sales
offices and other key locations on NS Rail to the central computer
complex in Atlanta, Ga. System operating and traffic data are
compiled and stored to provide customers with information on their
shipments throughout the system. Data processing facilities are
capable of providing current information on the location of every
train and each car on line, as well as related waybill and other
train and car movement data. Additionally, this facility affords
substantial capacity for, and is utilized to assist management in the
performance of, a wide variety of functions and services, including
payroll, car and revenue accounting, billing, material management
activities and controls, and special studies.
OTHER - NS Rail has extensive facilities for support of
railroad operations, including freight depots, car construction
shops, maintenance shops, office buildings, and signals and
communications facilities.
ENCUMBRANCES - Certain rail rolling stock is subject to the
prior lien of equipment financing obligations amounting to
approximately $540.4 million as of December 31, 1995, and
$497.2 million as of December 31, 1994. In addition, a significant
portion of NS Rail's properties are subject to liens securing as of
December 31, 1995, and 1994, approximately $27.5 million and
$33.9 million of mortgage debt, respectively.
<TABLE>
CAPITAL EXPENDITURES - During the five calendar years ended
December 31, 1995, capital expenditures for road, equipment and other
property were as follows:
<CAPTION>
Capital Expenditures
------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
Railway property
Road $379.5 $382.3 $411.0 $425.1 $392.8
Equipment 332.6 235.0 218.1 187.8 193.1
Other property 1.2 22.3 0.1 4.2 77.2
------ ------ ------ ------ ------
Tota1 $713.3 $639.6 $629.2 $617.1 $663.1
====== ====== ====== ====== ======
</TABLE>
<PAGE> PAGE 15
NS Rail's capital spending and maintenance programs are and
have been designed to assure the Company's ability to provide safe,
efficient and reliable transportation services. For 1996, NS Rail is
planning $667 million of capital spending. NS Rail anticipates that
a portion of its locomotive acquisitions in 1996 will be financed
using capitalized leases similar to the 1995 leases (see note 8 on
page 51). In 1996, equipment financing needs may be somewhat lower
than in 1995, as proceeds from the sale of freight cars will be used
for some equipment acquisitions. Looking further ahead, total
capital spending is expected to continue to be similar to the 1995
level. A substantial portion of future capital spending is expected
to be funded through internally generated cash, although debt
financing will continue as the primary funding source for equipment
acquisitions.
ENVIRONMENTAL MATTERS - Compliance with federal, state and
local laws and regulations relating to the protection of the
environment is a principal NS Rail goal. To date, such compliance
has not affected materially NS Rail's capital additions, earnings,
liquidity or competitive position.
See the discussion of "Environmental Matters" in Part II,
Item 7, "Management's Discussion and Analysis," on page 26, and in
Note 17 to the Consolidated Financial Statements on page 61.
EMPLOYEES - NS Rail employed an average of 24,488 employees in
1995, compared with an average of 24,710 in 1994 (including Norfolk
Southern Corporation's employees whose primary duties relate to rail
operations). The approximate average cost per rail-related employee
during 1995 was $43,965 in wages and $18,813 in employee benefits.
Approximately 81 percent of these employees are represented by various
labor organizations. A tentative settlement was reached with the United
Transportation Union, which represents the largest number of employees in
the railroad industry. The settlement requires ratification by the
members before acceptance. The negotiation of this settlement
demonstrated that national handling produces the quickest path to
agreement. Negotiations with the other unions are progressing.
GOVERNMENT REGULATION - In addition to environmental,
safety, securities and other regulations generally applicable to all
businesses, NS Rail is subject to regulation by the Surface
Transportation Board (STB), which succeeded the ICC on January 1,
1996. The STB has jurisdiction over some rates, routes, conditions
of service, and the extension or abandonment of rail lines. The STB
also has jurisdiction over the consolidation, merger or acquisition
of control of and by rail common carriers. The Department of
Transportation regulates certain track and mechanical equipment
standards.
<PAGE> PAGE 16
The relaxation of economic regulation of railroads, begun
over a decade ago by the ICC under the Staggers Rail Act of 1980, is
expected to continue under the STB. Thus it appears that additional
rail business will be exempted from regulation in the future.
Significant exemptions for NS Rail are TOFC/COFC (i.e., "piggyback")
business, rail boxcar traffic, lumber, manufactured steel, automobiles
and certain bulk commodities such as sand, gravel, pulpwood and wood
chips for paper manufacturing. Transportation contracts on regulated
shipments, which no longer require regulatory approval, effectively
remove those shipments from regulation as well. Over 80 percent of NS
Rail's freight revenues come from either exempt traffic or traffic
moving under transportation contracts.
COMPETITION - There is continuing strong competition among
rail, water and highway carriers. Price is usually only one factor
of importance as shippers and receivers choose a transport mode and
specific hauling company. Inventory carrying costs, service
reliability, ease of handling, and the desire to avoid loss and
damage during transit are increasingly important considerations,
especially for higher valued finished goods, machinery and consumer
products. Even for raw materials, semi-finished goods and work-in-
process, users are increasingly sensitive to transport arrangements
which minimize problems at successive production stages.
NS Rail's primary competitor is the CSX system, which
operates throughout much of the same territory served by NS Rail.
Other railroads also operate in parts of the territory. NS Rail also
competes with motor carriers and water carriers, and with shippers
who have the additional option of handling their own goods in private
carriage. Increasingly, cooperative strategies between railroads and
between railroads and motor carriers enable carriers to compete more
effectively in specific markets. A subsidiary of NS, which is not
part of NS Rail, entered into such a strategy with a Conrail
subsidiary forming a partnership in 1993 which offered intermodal
service using RoadRailer(Registered Trademark) equipment. NS Rail
provides some of the rail line-haul for this partnership.
<PAGE> PAGE 17
Item 3. Legal Proceedings.
- ------ -----------------
North Carolina - Fiber Optic Cable. In October 1995, two
individuals, on behalf of themselves and all others similarly
situated, instituted an action in the United States District Count
for the Western District of North Carolina against Sprint
Communications Company, L. P. and Norfolk Southern Railway Company.
Plaintiffs allege they sustained RICO and trespass damages in the
amount of $100 million (trebled) as a result of the defendants'
installing, pursuant to an agreement, fiber optic cable on property
in which the plaintiffs further allege the Railway's only property
right was an easement for railway operations. Management, after
consulting with its legal counsel, is of the opinion that the Railway
has meritorious defenses to both the RICO and trespass claims and
that ultimate liability, should there be any, will not materially
affect the consolidated financial position of NSR.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security
holders during the fourth quarter of 1995.
<PAGE> PAGE 18
Executive Officers of the Registrant.
- ------------------------------------
Norfolk Southern Railway's officers are elected annually by
the Board of Directors at its first meeting held after the annual
meeting of stockholders, and they hold office until their successors
are elected. There are no family relationships among the officers,
nor any arrangement or understanding between any officer and any
other person pursuant to which the officer was selected. The
following table sets forth certain information, as of March 1, 1996,
relating to these officers:
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- ------------------------------------
David R. Goode, 55, Present position since September
President and Chief 1992. Also, Chairman, President
Executive Officer and Chief Executive Officer of
Norfolk Southern Corporation
since September 1992, President
from October 1991 to September
1992, and prior thereto as
Executive Vice President-
Administration. Served as Vice
President of Norfolk Southern
Railway from February to
September 1992, and prior thereto
was Vice President-Administration.
Paul N. Austin, 52, Present position since June 1994.
Vice President-Personnel Also, Vice President-Personnel of
Norfolk Southern Corporation
since June 1994. Served as
Assistant Vice President-
Personnel of NS from February
1993 to June 1994, and prior
thereto was Director Compensation.
William B. Bales, 61, Present position since October
Vice President 1995. Also, Senior Vice
President-International of
Norfolk Southern Corporation
since October 1995. Served as
Vice President-Coal Marketing of
Norfolk Southern Railway and NS
from August 1993 to October
1995, and prior thereto was Vice
President-Coal and Ore Traffic.
<PAGE> PAGE 19
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- ------------------------------------
James C. Bishop, Jr., 59, Present position since March 1,
Vice President-Law 1996. Also, Executive Vice
President-Law of Norfolk
Southern Corporation since
March 1, 1996, and prior thereto
was Vice President-Law.
R. Alan Brogan, 55, Present position since December
Vice President- 1992. Also, Executive Vice
Transportation Logistics President-Transportation
Logistics of Norfolk Southern
Corporation since December 1992,
Vice President-Quality
Management from April 1991 to
December 1992, and prior thereto
as Vice President-Material
Management and Property
Services. Served as Vice
President-Quality Management of
Norfolk Southern Railway from
June 1991 to December 1992, and
prior thereto was Vice President-
Material Management.
David A. Cox, 59, Present position since December
Vice President-Properties 1995. Also, Vice President-
Properties of Norfolk Southern
Corporation since December 1995,
and prior thereto was Assistant
Vice President-Industrial
Development.
Thomas L. Finkbiner, 43, Present position since August
Vice President-Intermodal 1993. Also, Vice President-
Intermodal of Norfolk Southern
Corporation since August 1993.
Served as Senior Assistant
Vice President-International
and Intermodal of NS from April
to August 1993, and prior
thereto was Assistant Vice
President-International and
Intermodal.
John W. Fox, Jr., 48, Present position since October
Vice President- 1995. Also, Assistant Vice
Coal Marketing President-Coal Marketing of
Norfolk Southern Corporation
from August 1993 to October
1995, and prior thereto was
General Manager Eastern Region.
<PAGE> PAGE 20
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- ------------------------------------
Thomas J. Golian, 62, Present position since October
Vice President 1995. Also, Executive Assistant
to the Chairman, President and
CEO of Norfolk Southern
Corporation from April 1993 to
October 1995, and prior thereto
was Special Assistant to the
President.
James A. Hixon, 42, Present position since June 1993.
Vice President-Taxation Also, Vice President-Taxation of
Norfolk Southern Corporation
since June 1993, and prior
thereto was Assistant Vice
President-Tax Counsel.
Jon L. Manetta, 57, Present position since December
Vice President- 1995. Also, Vice President-
Transportation & Mechanical Transportation & Mechanical of
Norfolk Southern Corporation
since December 1995. Served as
Vice President-Transportation of
Norfolk Southern Railway and
Norfolk Southern Corporation
from June 1994 to December 1995,
Assistant Vice President-
Transportation from October 1993
to June 1994, Assistant Vice
President-Strategic Planning
from January to October 1993,
Director Joint Facilities and
Budget from March 1992 to
January 1993, and prior thereto
was Assistant Terminal
Superintendent-Transportation.
Harold C. Mauney, Jr., 57, Present position since December
Vice President-Quality 1992. Also, Vice President-
Management Quality Management of Norfolk
Southern Corporation since
December 1992. Served as
Assistant Vice President-Quality
Management of NS from April 1991
to December 1992, and prior
thereto was General Manager-
Intermodal Transportation
Services.
<PAGE> PAGE 21
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- ------------------------------------
Donald W. Mayberry, 52, Present position since December
Vice President- 1995. Also, Vice President-
Research and Tests Research and Tests of Norfolk
Southern Corporation since
December 1995, and prior thereto
was Vice President-Mechanical.
James W. McClellan, 56, Present position since October
Vice President- 1993. Also, Vice President-
Strategic Planning Strategic Planning of Norfolk
Southern Corporation since
October 1993. Served as
Assistant Vice President-
Corporate Planning of NS from
March 1992 to October 1993, and
prior thereto was Director-
Corporate Development.
Kathryn B. McQuade, 39, Present position since December
Vice President- 1992. Also, Vice President-
Internal Audit Internal Audit of Norfolk
Southern Corporation since
December 1992. Served as
Director-Income Tax
Administration of NS from May
1991 to December 1992, and prior
thereto was Director-Federal
Income Tax Administration.
Charles W. Moorman, 44, Present position since October
Vice President- 1993. Also, Vice President-
Information Technology Information of Norfolk Southern
Corporation since October 1993.
Served as Vice President-
Employee Relations of Norfolk
Southern Railway and NS from
December 1992 to October 1993,
Vice President-Personnel and
Labor Relations from February to
December 1992, Assistant Vice
President-Stations, Terminals
and Transportation Planning of
NS from March 1991 to February
1992, and prior thereto was
Senior Director Transportation
Planning.
Phillip R. Ogden, 55, Present position since December
Vice President-Engineering 1992. Also, Vice President-
Engineering of Norfolk Southern
Corporation since December 1992,
and prior thereto was Assistant
Vice President-Maintenance.
<PAGE> PAGE 22
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- ------------------------------------
L. I. Prillaman, Jr., 52, Present position since October
Vice President and 1995. Also, Executive Vice
Chief Traffic Officer President-Marketing of Norfolk
Southern Corporation since
October 1995. Served as Vice
President-Properties of Norfolk
Southern Railway and NS from
December 1992 to October 1995,
and prior thereto was Vice
President and Controller.
John P. Rathbone, 44, Present position since December
Vice President and 1992. Also, Vice President and
Controller Controller of Norfolk Southern
Corporation since December 1992,
and prior thereto was Assistant
Vice President-Internal Audit.
William J. Romig, 51, Present position since December
Vice President 1992. Also, Vice President and
Treasurer of Norfolk Southern
Corporation since December 1992
and prior thereto was Assistant
Vice President-Finance.
Donald W. Seale, 43, Present position since August 1993.
Vice President- Also, Vice President-Merchandise
Merchandise Marketing Marketing of Norfolk Southern
Corporation since August 1993.
Served as Assistant Vice
President-Sales and Service of
NS from May 1992 to August 1993,
and prior thereto was Director-
Metals, Waste and Construction.
Robert S. Spenski, 61, Present position since June 1994.
Vice President- Also, Vice President-Labor
Labor Relations Relations of Norfolk Southern
Corporation since June 1994, and
prior thereto was Senior
Assistant Vice President-Labor
Relations.
<PAGE> PAGE 23
Business Experience during
Name, Age, Present Position past 5 Years
- --------------------------- ------------------------------------
Stephen C. Tobias, 51, Present position since October
Vice President 1993. Also, Executive Vice
President-Operations of Norfolk
Southern Corporation since July
1994, and Senior Vice President-
Operations from October 1993 to
July 1994. Served as Vice
President-Strategic Planning of
Norfolk Southern Railway and NS
from December 1992 to October
1993, and prior thereto was Vice
President-Transportation.
D. Henry Watts, 64, Present position since October
Vice President 1995. Also, Vice Chairman of
Norfolk Southern Corporation
since October 1995. Served
prior thereto as Executive Vice
President-Marketing of Norfolk
Southern Corporation, and Vice
President and Chief Traffic
Officer of Norfolk Southern
Railway.
Henry C. Wolf, 53, Present position since June 1993.
Vice President-Finance Also, Executive Vice President-
Finance of Norfolk Southern
Corporation since June 1993.
Served prior thereto as Vice
President-Taxation of Norfolk
Southern Railway and NS.
Sandra T. Pierce, 41, Present position since June 1995.
Corporate Secretary Also, Assistant Corporate
Secretary of Norfolk Southern
Corporation since June 1995.
Served prior thereto as
Assistant Corporate Secretary-
Planning of NS.
Ronald E. Sink, 53, Present position since September
Treasurer 1987.
<PAGE> PAGE 24
PART II
Item 5. Market for the Registrant's Common Stock and Related
- ------ ----------------------------------------------------
Stockholder Matters.
-------------------
COMMON STOCK
- ------------
Since June 1, 1982, NS has owned all the common stock of
Norfolk Southern Railway Company. The common stock is not publicly
traded.
SERIAL PREFERRED STOCK
- ----------------------
There are 10,000,000 shares of no par value serial preferred
stock authorized. This stock may be issued in series from time to time at
the discretion of the Board of Directors with any series having such
voting and other powers, designations, dividends and other preferences as
deemed appropriate at the time of issuance.
The $2.60 Cumulative Preferred Stock, Series A (Series A
Stock), of which 1,197,027 shares were issued and 1,096,907 shares were
held other than by subsidiaries as of February 29, 1996, has no par value
but has a $50 per share stated value. As indicated in the title, the
stock pays a dividend of $2.60 per share annually, payable quarterly on
March 15, June 15, September 15 and December 15. Dividends on this stock
are cumulative and in preference to dividends on all other classes of
stock. Except for any shares held by Norfolk Southern Railway Company
subsidiaries and/or in a fiduciary capacity, each share is entitled to
one vote per share on all matters, voting as a single class with holders
of other stock. Should dividends become delinquent for six quarters, this
class of stock, voting as a class, may elect two directors so long as any
default in dividend payments continues. The stock is redeemable at the
option of Norfolk Southern Railway Company at $50 per share plus accrued
dividends. On liquidation, the stock is entitled to $50 per share plus
accrued dividends before any amounts are paid on any other class of
stock.
In June 1989, Norfolk Southern Corporation (NS) announced that
it intended to purchase up to 250,000 shares of the outstanding Series A
Stock during the subsequent two-year period. In May 1991, NS extended the
previously announced stock purchase program through 1993. In March 1994,
NS announced that it would continue purchasing up to 250,000 shares of
the Series A Stock through 1996. As of February 29, 1996, NS had
purchased 131,128 shares of Series A Stock at a total cost of $4,778,767;
as of the same date, NS held a total of 131,223 shares.
<PAGE> PAGE 25
Item 6. Selected Financial Data.
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Five-Year Financial Review
<CAPTION>
1995 1994 1993(1) 1992 1991(2)
--------- --------- --------- --------- ---------
($ in millions)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Railway operating revenues $ 4,011.8 $ 3,918.1 $ 3,727.6 $ 3,709.1 $ 3,598.0
Railway operating expenses 2,948.5 2,869.2 2,805.9 2,781.7 3,287.2
--------- --------- --------- --------- ---------
Income from
railway operations 1,063.3 1,048.9 921.7 927.4 310.8
Other income - net 43.3 46.6 57.6 49.5 70.2
Interest expense on debt 33.0 28.3 32.3 44.6 48.4
--------- --------- --------- --------- ---------
Income before income taxes 1,073.6 1,067.2 947.0 932.3 332.6
Provision for income taxes 371.9 385.2 412.8 325.8 102.0
--------- --------- --------- --------- ---------
Income before
accounting changes 701.7 682.0 534.2 606.5 230.6
Cumulative effect of
accounting changes -- -- 247.8 -- --
--------- --------- --------- --------- ---------
Net income $ 701.7 $ 682.0 $ 782.0 $ 606.5 $ 230.6
========= ========= ========= ========= =========
FINANCIAL POSITION:
Total assets $10,752.3 $10,289.2 $ 9,760.4 $ 9,675.5 $ 9,358.0
Total long-term debt,
including current
maturities $ 574.4 $ 539.8 $ 604.9 $ 714.5 $ 735.0
Stockholders' equity $ 5,645.4 $ 5,440.5 $ 5,184.9 $ 4,784.3 $ 4,449.5
OTHER:
Capital expenditures $ 713.3 $ 639.6 $ 629.2 $ 617.1 $ 663.1
Number of stockholders
at year-end 3,025 3,281 3,517 3,725 3,952
Average number of
employees (3) 24,488 24,710 25,531 25,650 27,366
(1) 1993 results include a $60.8 million increase in the provision for
income taxes reflecting a 1% increase in the federal income tax rate
(see Note 4). The cumulative effect of accounting changes (see Note 1)
increased 1993 earnings by $247.8 million.
(2) 1991 railway operating expenses include a $483 million special charge,
primarily comprised of costs for labor force reductions. This charge
reduced net income by $303 million.
(3) The employee count includes Norfolk Southern Corporation's employees
whose primary duties relate to rail operations.
</TABLE>
<PAGE> PAGE 26
Item 7. 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
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes beginning on page 39 and
the Five-Year Financial Review on page 25.
SUMMARIZED RESULTS OF OPERATIONS
1995 Compared with 1994
- -----------------------
Net income in 1995 was a record $701.7 million, up 3% over 1994
earnings of $682.0 million. Excluding a $20.4 million after-tax charge
for an early retirement program in 1995, net income would have been
$722.1 million, up 6%. These results were driven primarily by improved
income from railway operations, up $48.0 million, or 5% (excluding the
early retirement charge). Railway operating revenues increased
$93.7 million, or 2%, while railway operating expenses, excluding the
early retirement charge, were up $45.7 million, or 2%. Nonoperating
income of $43.3 million was about even with last year (see Note 3).
Interest expense on debt was up $4.7 million, largely due to a lower
level of capitalized interest.
1994 Compared with 1993
- -----------------------
Net income was $682.0 million in 1994, compared with $782.0 million
in 1993. However, 1993 net income was increased by $247.8 million,
related to the implementation of required accounting changes (see Note
1), and reduced by $51.6 million for the prior years' effect of a federal
income tax rate increase (see Note 4). Excluding the effects of the 1993
accounting changes and the tax rate increase, 1993 net income was
$585.8 million, and 1994 net income was up 16%.
Income from railway operations produced most of the improvement,
increasing $127.2 million, or 14%. These results reflected a 5% increase
in railway operating revenues (largely due to higher traffic volume)
combined with only a 2% increase in railway operating expenses.
Nonoperating income was $46.6 million, compared with $57.6 million in
1993, principally a result of reduced gains on sales of property.
<TABLE>
RAILWAY OPERATING REVENUES AND EXPENSES
(Shown as a Graph in the Annual Report to Stockholders)
($ in millions)
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $4,011.8 $3,918.1 $3,727.6 $3,709.1 $3,598.0
Expenses 2,948.5 2,869.2 2,805.9 2,781.7 3,287.2
</TABLE>
<PAGE> PAGE 27
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
- --------------------------
Railway operating revenues were $4.01 billion in 1995, compared with
$3.92 billion in 1994 and $3.73 billion in 1993. The $93.7 million
improvement in 1995, compared with 1994, was largely attributable to
increases in the intermodal ($44.9 million), automotive ($22.0 million)
and metals/construction ($18.1 million) market groups. The $190.5 million
improvement in 1994, compared with 1993, was primarily attributable to
increases in the intermodal, coal and chemicals market groups.
<TABLE>
The following table presents a three-year comparison of revenues by
market group.
RAILWAY OPERATING REVENUES BY MARKET GROUP
($ in millions)
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Coal $1,240.3 $1,262.5 $1,213.3
Paper/forest 519.8 505.4 502.7
Chemicals 513.5 512.2 472.9
Automotive 454.1 432.1 429.5
Agriculture 359.0 347.5 319.7
Metals/construction 339.5 321.4 296.1
Intermodal 470.5 425.6 371.9
-------- -------- --------
Freight revenues 3,896.7 3,806.7 3,606.1
Other, principally switching
and demurrage 115.1 111.4 121.5
-------- -------- --------
Total $4,011.8 $3,918.1 $3,727.6
======== ======== ========
</TABLE>
Traffic volume changes in 1995 were mixed, with improvements in
automotive, agriculture, metals/construction and intermodal partially
offset by declines in the other three market groups. Traffic volume
increased or remained steady for all market groups in 1994. These volume
gains accounted for most of the revenue improvement in 1995 and all the
improvement in 1994 as illustrated by the following table.
<TABLE>
RAILWAY OPERATING REVENUE VARIANCE ANALYSIS
Increases (Decreases)
($ in millions)
<CAPTION>
1995 vs. 1994 1994 vs. 1993
------------- -------------
<S> <C> <C>
Traffic volume $ 62.6 $195.1
Revenue per unit 31.1 (4.6)
------ ------
Total $ 93.7 $190.5
====== ======
</TABLE>
Average revenue per unit rose in 1995 due to moderate rate
increases. The revenue per unit variance in 1994 was principally
attributable to growth in shorter haul and double-stack business,
both of which generally have lower average rates.
<PAGE> PAGE 28
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
COAL traffic volume declined 1%, and revenues were down 2%, from
1994. In 1995, coal revenues represented 31% of total railway operating
revenues, and 91% of coal shipments originated on NS Rail's lines. As
shown in the following table, coal tonnage by type remained stable in
1995, compared with 1994. However, utility coal tonnage in 1994 increased
significantly.
<TABLE>
TOTAL COAL TONNAGE
(In millions of tons)
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Utility 69.1 70.2 60.6
Export 25.8 25.2 25.7
Steel 18.9 18.8 20.5
Other 8.2 8.9 8.8
----- ----- -----
Total 122.0 123.1 115.6
===== ===== =====
</TABLE>
Utility coal traffic had been expected to grow in 1995, but instead
decreased slightly due to moderate weather throughout much of the NS Rail
service region during the first half of the year and to sustained periods
of maximum generation from several southeastern nuclear power plants. The
mild weather pattern actually began in third-quarter 1994, causing a
number of NS Rail's utility customers to start 1995 with high coal
inventories. However, inventories began to normalize, as seasonal weather
returned to the service region in midsummer, and nuclear plants began to
power down for refueling and repairs in third-quarter 1995. Compliance
with Phase I of the Clean Air Act Amendments, which took effect on
January 1, 1995, increased shipments of both NS Rail- and foreign-line-
originated, low-sulfur coal. A significant proportion of the mines served
by NS Rail produce coal which satisfies both Phase I and the more
stringent Phase II requirements, which take effect January 1, 2000.
In 1994, utility coal traffic was up early in the year as a result
of bitter weather and the resulting depletion of coal stockpiles. The
pace at which 1994 outperformed 1993 slowed as the weather normalized.
New movements of western coal into Georgia also contributed to the 1994
increase.
The near-term outlook for utility coal is favorable, as most NS Rail-
served utilities began 1996 with normal or somewhat low inventory levels.
The long-term outlook is less certain due to the deregulation and ongoing
restructuring of the utility industry, although low-sulfur coal traffic
should increase, with the approach of the Phase II deadline of the Clean
Air Act.
Export coal traffic in 1995 benefited from the continued recovery of
the European steel-producing economy. Demand from other parts of the
world also improved. Brazil, Belgium, France, Romania and Japan took
increased amounts of NS Rail coal. In addition, NS Rail began handling
metallurgical coal for steel production in Mexico. Congestion and high
barge rates on the Mississippi River caused an increase in movements to
NS Rail's coal piers in Norfolk, Va.
Export coal traffic at the beginning of 1994 reflected the poor
demand also seen in 1993. Shipments remained somewhat depressed as a
result of the weak European economy and strong competition from other
producing countries. Economic recovery in Europe and Japan improved
demand for steel and electricity, and the coal supply-demand situation
tightened during 1994. As a result, delivery times were longer and prices
rose during 1994.
A recent softening in world demand for steel could limit near-term
growth in export metallurgical coal shipments. However, demand for export
steam coal is increasing, and NS Rail is working to increase
participation in this market.
<PAGE> PAGE 29
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Steel coal domestic traffic was up slightly in 1995 due to
completion of extended coke oven work at one facility and continued
strong demand for domestic coke for making steel. In 1994, traffic was
reduced by the closing of one coke battery. Advanced technologies that
allow production of steel with little or no coke could cause this market
to decline slowly over the long term. However, NS Rail could participate
in the movement of non-coking coal used by technologies such as
pulverized coal injection.
Other coal consists of traffic for industries which burn coal to
generate energy used in manufacturing processes and often for the
production of electricity for in-plant use and outside sales. Lower
demand for electricity due to mild weather, as discussed above, continued
to affect this market in 1995. In addition, some industries switched to
natural gas as a fuel source. This market is expected to remain stable in
coming years, as growth through innovative packaged delivery services
offsets some additional loss to natural gas.
MERCHANDISE traffic volume rose 5%, and revenues increased by $112.2
million, or 4%, compared with 1994. Merchandise traffic volume in 1994
increased 8%, and revenues increased by $151.4 million, or 6%, compared
with 1993. All six market groups comprising merchandise traffic reported
increased revenues in 1995 over 1994 and in 1994 over 1993.
PAPER/FOREST traffic declined 1%; however, revenues were up 3%,
compared with 1994. Paper and pulpwood products traffic was even with
1994, while lumber traffic suffered from weak housing starts in 1995. For
1994, paper/forest volume and revenues were about even with 1993,
reflecting weak paper production, severe winter weather and floods in
south Georgia. Some of the weakness in paper was offset by a gain in
lumber traffic due, in part, to the opening of five new lumber
distribution centers in 1994. Moderate growth is expected for 1996 based
on the anticipated completion of several woodchip mills and an
improvement in housing starts.
CHEMICALS traffic and revenues showed little change compared with
1994. Increases for general chemicals were overshadowed by weakness in
the plastics and fertilizer markets. However, 1994 showed a 9% traffic
increase and an 8% revenue increase, compared with 1993. The demand for
chemicals increased in 1994, and shipments of fertilizer and plastics
were stronger than in prior years. A resumption of moderate growth is
expected for 1996, if the fertilizer and plastics markets strengthen and
demand for liquefied petroleum gas grows.
AUTOMOTIVE traffic rose 3%, and revenues--their highest in NS Rail's
history--increased 5% over 1994. This growth occurred even though some
plants served by NS Rail were shut down or operating at reduced capacity.
These effects were mitigated by strong production at selected plants that
produce popular cars and trucks. In 1994, automotive traffic had remained
steady, and revenues increased 1%, compared with 1993, due to retooling
downtime at four plants. Moderate growth is expected to continue in 1996,
as plant retoolings are completed and new plants come on line. The GM
plant at Wentzville, Mo., should resume production early in 1996 after
remaining down for two years. NS Rail also should see more traffic from
the expanded Toyota plant at Georgetown, Ky.; from BMW's new facility at
Greer, S.C.; and in 1997, from the Mercedes plant under construction in
Tuscaloosa, Ala.
AGRICULTURE traffic rose 2%, and revenues increased 3%, compared
with a strong 1994. This growth was driven by a 6% increase in grain and
soybean traffic, a result of higher shipments from the Midwest to the
Southeast primarily for the poultry industry.
Agriculture traffic in 1994 rose 7%, and revenues increased 9%. This
performance reflected record corn and soybean harvests and improved car
utilization through greater use of 50- and 100-car unit trains. This
market group is expected to continue to grow as poultry consumption
increases, with a commensurate rise in demand for feed grain. Industrial
development efforts may bring several new feed mills on line.
<PAGE> PAGE 30
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
METALS/CONSTRUCTION traffic rose slightly, and revenues were up 6%.
Most of the revenue increase was in the steel and aluminum markets,
driven by strong demand, improved pricing and traffic from a new steel
mini-mill in Butler, Ind. These results were partially offset by reduced
demand for construction products, reflecting postponement of some highway
projects and general weakness in residential construction.
Metals/construction traffic in 1994 was strong, with both volume and
revenues increasing 9%, compared with 1993. Most of the revenue gain was
in shipments of steel due to exceptionally strong industry demand.
Increased housing starts and new projects, such as at the Chesapeake Bay
Bridge Tunnel, may improve construction traffic in 1996. Moderate growth
is expected for metals.
INTERMODAL volume rose 12%, and revenues increased 11%. Although
intermodal traffic levels nationwide declined in 1995, NS Rail Intermodal
achieved record levels of volume, revenue and profitability, led by
container shipments in both domestic and international service. During
1995, a seven-year agreement with Hanjin Shipping Company was signed
under which NS Rail will handle nearly all of Hanjin's international
container business in NS Rail's territory east of the Mississippi River.
EMP, the container equipment-sharing arrangement with Union Pacific and
Conrail, contributed significantly to domestic growth. Almost all the
increase in international container business was attributable to new
services, thereby increasing NS Rail's market share. Domestic business
was augmented by growth in the trucking segment, as both truckload and
less-than-truckload companies increased their use of NS Rail intermodal.
Additionally, intermodal marketing companies increased their business on
NS Rail. Service and facility improvements are expected to result in a
further market share increase in 1996.
Intermodal traffic in 1994 rose 13%, and revenues increased 14%,
compared with 1993. As was the case in 1995, the 1994 growth in
intermodal was led by an increase in container business. The export
container segment improved, as the economies in Europe recovered and
countries in the Asia/Pacific region experienced rapid growth in
production. Revenues from domestic container movements also improved, as
NS Rail increased its market share. Much of this growth was related to
aggressive facility and transit-time improvements, including expanding or
upgrading five terminal facilities.
Railway Operating Expenses
- --------------------------
Railway operating expenses in 1995 totaled $2.95 billion, an
increase of $79.3 million. However, 1995 expenses included a $33.6
million charge for an early retirement program (see Note 12). Excluding
the early retirement charge, 1995 railway operating expenses were up only
$45.7 million, or 2%, on a 3% increase in traffic volume. Similarly,
railway operating expenses in 1994 were $2.87 billion, a 2% increase,
compared with 1993, despite a 7% increase in traffic volume.
As a result, the NS Rail railway operating ratio, which measures the
percentage of revenues consumed by expenses, was a record 72.7 in 1995
(excluding the early retirement charge) and continues to be the best
among the major railroads in the United States.
<TABLE>
RAILWAY OPERATING RATIO
(Shown as a Graph in the Annual Report to Stockholders)
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<C> <C> <C> <C> <C>
73.5% 73.2% 75.3% 75.0% 77.9%*
* Excludes special charge.
</TABLE>
<PAGE> PAGE 31
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
<TABLE>
The following table shows the changes in railway operating expenses
summarized by major classifications.
RAILWAY OPERATING EXPENSES
Increases (Decreases)
($ in millions)
<CAPTION>
1995 vs. 1994 1994 vs. 1993
------------- -------------
<S> <C> <C>
Compensation and benefits $108.9* $(17.7)
Materials, services and rents (45.4) 27.0
Depreciation 22.3 12.7
Diesel fuel 1.5 9.0
Casualties and other claims (13.7) 16.5
Other 5.7 15.8
------ ------
Total $ 79.3 $ 63.3
====== ======
* Includes $33.6 million early retirement charge.
</TABLE>
COMPENSATION AND BENEFITS, which represents about half of total
railway operating expenses, increased 8% in 1995 and declined 1% in 1994.
The 1995 increase was principally a result of: (1) the early
retirement charge of $33.6 million; (2) higher wages; (3) increased
performance-based compensation accruals, particularly those linked to the
NS stock price, which rose nearly $19 per share in 1995; and (4) higher
health care costs for agreement employees.
The 1994 decline was principally due to (1) lower accruals for
performance-based compensation plans as a result of a lower stock price;
(2) reduced accruals for postretirement benefits resulting from a change
in the benefit plan's creditable service period (see Note 13); (3) the
expiration of the Railroad Retirement Repayment Tax in June 1993; (4) the
effect of the early retirement program in 1993 (see Note 12); and
(5) productivity improvements as a result of continuing reductions in
train crew sizes.
MATERIALS, SERVICES AND RENTS consists of items used for the
maintenance of the railroad's lines, structures and equipment; the cost
of services purchased from outside contractors, including the net costs
of operating joint (or leased) facilities with other railroads; and the
net cost of equipment rentals. This category decreased 7% in 1995 but
increased 4% in 1994.
The 1995 decrease of $45.4 million reflected initiatives to improve
asset utilization that resulted in (1) the re-engineering of rail-line
and freight-car maintenance practices that reduced repair and maintenance
expenses and facilitated the closure of two repair facilities; (2)
reduced locomotive repair costs due to older locomotives' being replaced
with new units; (3) disposition of excess freight cars (see "Cash used
for investing activities" on page 34), resulting in a reduction in the
number of freight cars to be maintained; and (4) short-term leasing of
certain older locomotives to other railroads, which reduced net equipment
rental expense. Also contributing to the improvement was a decline in
equipment rental expenses, resulting from the partial deprescription
(deregulation by the ICC) of car-hire rates among railroads, which began
in 1994. These favorable results were somewhat offset by increased
expenses related to the 12% growth in intermodal traffic.
The 1994 increase of $27.0 million was principally due to higher
joint-facility and leased-road costs and to increased locomotive repair
costs, resulting mostly from higher traffic volume. However, a decrease
in other railroads' use of NS Rail's facilities also contributed to the
increase in joint-facilities expense. Partially offsetting these
increases was a decline in equipment rent expenses resulting from the
partial deprescription of car-hire rates.
<PAGE> PAGE 32
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
DEPRECIATION expense (see Note 1 "Properties" for NS Rail's
depreciation policy) was up 6% in 1995 and 4% in 1994. The increases in
both periods were due to property additions, reflecting substantial
levels of capital spending over the last several years.
DIESEL FUEL costs rose 1% in 1995 and 5% in 1994. The 1995 increase
was primarily due to a small increase in the average price paid for
diesel fuel. Because even fuel-efficient locomotives consume substantial
quantities of diesel fuel, a slight price increase translates into large
cost increases. The increase in 1994 diesel fuel costs was entirely
driven by higher consumption, a result of a 7% increase in carloadings.
On average, fuel prices in 1994 were slightly lower than in 1993.
CASUALTIES AND OTHER CLAIMS (including estimates of costs related to
personal injury, property damage and environmental matters) decreased 10%
in 1995 but increased 14% in 1994 over 1993. Both of these fluctuations
primarily were attributable to environmental clean-up costs in 1994
associated with a tankcar leak.
The largest component of "Casualties and other claims" is personal
injury expense. Although there has been a favorable trend in the number
of accidental injuries since 1990, much of the financial benefit from
this decline unfortunately has been offset by higher costs related to non-
accidental "occupational" claims and by an increase in the cost of third-
party injury claims arising from accidents at grade crossings. NS Rail is
actively involved in efforts to reduce the risk of all accidents and is
placing particular emphasis on programs involving grade-crossing safety.
The rail industry remains uniquely susceptible to job-related
accidental injury and occupational claims because of an outmoded law, the
Federal Employers' Liability Act (FELA), originally passed in 1908 and
applicable only to railroads. This law, which covers employees' claims
for on-the-job injuries, produces results that are unpredictable and
inconsistent, at a far greater cost to the rail industry than the no-
fault workers' compensation system to which non-rail competitors are
universally subject. The railroads have been unsuccessful so far in
efforts to persuade Congress to replace the FELA with a no-fault workers'
compensation system.
OTHER expenses increased 4% in 1995, and increased 12% in 1994. The
1995 increase was due to higher sales, use and franchise taxes. The 1994
increase was due to favorable property tax settlements in 1993 and to
higher relocation expenses in 1994 related to new job assignments
following the early retirement program in 1993.
Income Taxes
- ------------
Income tax expense in 1995 was $371.9 million for an effective rate
of 34.6%, compared with an effective rate of 36.1% in 1994 and 43.6% in
1993. Absent the federal income tax rate increase in 1993 (see Note 4),
income tax expense that year would have been $352.0 million for an
effective rate of 37.2%.
The below statutory rate in 1995 results from investments in
corporate-owned life insurance and adjustment of intercompany tax
liabilities for affiliates no longer in the NS consolidated group. The
below statutory rate in 1994 was due to favorable adjustments resulting
from settlement of federal income tax years 1988 and 1989 and a favorable
adjustment upon filing the 1993 tax returns. Deferred tax expense was an
unusually high proportion of total tax expense in 1994. A corresponding
reduction is reflected in 1994 current tax expense for the effects of
expenditures that affect book and tax accounts in different years,
primarily in the areas of compensation and property. In 1993, current tax
expense increased and deferred tax expense decreased because of tax
payments made in anticipation of Revenue Agent Reports for the 1988-1989
federal tax audit (see Note 4 for the components of income tax expense).
<PAGE> PAGE 33
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Accounting Changes and New Accounting Pronouncements
- ----------------------------------------------------
1994 - Effective January 1, 1994, NS Rail adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). The principal
result was a significant write-up of NS Rail's investment in NS stock.
This non-cash adjustment had no income statement effect and increased
"Investments" and "Stockholders' equity" in the December 31, 1994,
Consolidated Balance Sheet by $417.5 million and $253.1 million,
respectively (see Note 1).
1993 - Effective January 1, 1993, NS Rail adopted required
accounting for postretirement benefits other than pensions,
postemployment benefits and income taxes (see Note 1 for a discussion of
these accounting changes). The net cumulative effect of these non-cash
adjustments increased 1993 net income by $247.8 million.
NEW ACCOUNTING PRONOUNCEMENTS - In March 1995, the Financial
Accounting Standards Board (FASB) issued Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" (SFAS 121). This standard establishes the accounting and
reporting requirements for recognizing and measuring impairment of long-
lived assets to be either held and used or held for disposal. SFAS 121 is
effective for years beginning after December 15, 1995. NS Rail does not
expect SFAS 121 to have a material effect on its financial statements.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). This standard defines a fair-value-
based method of accounting for stock-based compensation plans. However,
the standard also allows measurement of compensation cost using the
intrinsic-value-based method of accounting prescribed in Accounting
Principles Board Opinion No. 25 (APB 25). Companies that choose to retain
APB 25 for measurement will be required to provide pro forma footnote
disclosures effective for 1996 financial statements. NS Rail expects to
continue recording stock-based compensation costs attributable to the NS
Long-Term Incentive Plan based on APB 25 and, beginning in 1996, to
provide the pro forma disclosures required under SFAS 123.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL CONDITION refers to the assets, liabilities and
stockholders' equity of an organization (see Consolidated Balance Sheets
on page 40). LIQUIDITY refers to the ability of an organization to
generate adequate amounts of cash, principally from operating results or
through borrowing power, to meet its short-term and long-term cash
requirements (see Consolidated Statements of Cash Flows on page 41).
CAPITAL RESOURCES refers to the ability of an organization to raise funds
through the sale of either debt or equity (stock) securities.
<TABLE>
<CAPTION>
($ in millions) 1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cash and short-term
investments $230.0 $180.9 $152.0 $ 64.0 $137.3
Current assets to
current liabilities 1.0 1.1 1.3 1.2 1.1
Debt to total
capitalization 9.6% 9.4% 10.9% 13.4% 14.6%
Return on average
stockholders' equity 13.0%* 12.8% 12.0%* 13.1% 11.6%*
* Excluding unusual items: In 1995, the early retirement charge; in 1993,
the cumulative effects of required accounting changes and the prior
years' effect of the federal income tax rate increase; and in 1991,
the special charge.
</TABLE>
<PAGE> PAGE 34
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES, which is NS Rail's principal
source of liquidity, increased $96.4 million, or 8%, in 1995, compared
with 1994 and $289.4 million, or 33%, in 1994, compared with 1993. Since
the NS consolidation in 1982, cash provided by operating activities has
been sufficient to fund dividend requirements, debt repayments and a
significant portion of capital spending. The improvement in 1995 was
primarily a result of increased income from operations (excluding the
early retirement charge, a non-cash item) and improved billing and
collection of receivables. The 1994 increase was largely attributable to
increased income from operations and to lower income tax payments.
Implementation of the labor portion of the 1991 special charge also
contributed to the fluctuations in cash provided by operations. In 1995,
1994 and 1993, $29.3 million, $41.9 million and $36.1 million,
respectively, were for such labor costs. In 1993, failure to reach
agreement on terms for certain further savings led to a partial reversal
of the 1991 special charge (see Note 15). Looking ahead, the labor
portion of the special charge is expected to require approximately
$30 million in 1996 to achieve productivity gains permitted by the
agreements. NS Rail regards this cash outflow as an investment because,
in view of the high cost of labor and fringe benefits, these payments
produce significant future savings. In 1995, it is estimated that
NS Rail's expenses were reduced by $160 million as a result of these
programs and, upon full implementation, there should be additional
savings of about $10 million per year.
CASH USED FOR INVESTING ACTIVITIES increased 13% in 1995, compared
with 1994, and was up 45% in 1994, compared with 1993. The higher uses in
1995 and 1994 were due to significant advances made to NS. The other
significant use of cash was for property additions, largely for railway
projects. The following tables show capital spending, track and equipment
statistics for the past five years.
<TABLE>
CAPITAL EXPENDITURES
--------------------
(Also Shown as a Graph in the Annual Report to Stockholders)
<CAPTION>
($ in millions) 1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Road $ 379.5 $ 382.3 $ 411.0 $ 425.1 $ 392.8
Equipment 332.6 235.0 218.1 187.8 193.1
Other property 1.2 22.3 0.1 4.2 77.2
------- ------- ------- ------- -------
Total $ 713.3 $ 639.6 $ 629.2 $ 617.1 $ 663.1
======= ======= ======= ======= =======
</TABLE>
<TABLE>
TRACK STRUCTURE STATISTICS (CAPITAL AND MAINTENANCE)
----------------------------------------------------
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Track miles of
rail installed 403 480 574 660 679
Miles of track
surfaced 4,668 4,760 5,048 5,690 5,646
New crossties
installed
(millions) 2.0 1.7 1.6 1.9 1.9
</TABLE>
<PAGE> PAGE 35
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
<TABLE>
AVERAGE AGES OF RAILWAY EQUIPMENT (IN YEARS)
--------------------------------------------
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Freight cars 22.0 21.9 21.3 20.9 20.2
Locomotives 15.7 15.8 15.1 14.5 14.2
Retired
locomotives 22.6 23.6 24.7 24.0 27.1
</TABLE>
Since 1988, NS Rail has rebodied more than 20,500 coal cars and
plans to continue that program at the rate of about 3,200 cars per year
for the next several years. This work, performed at NS Rail's Roanoke Car
Shop, converts hopper cars into high-capacity steel gondolas or hoppers.
As a result, the remaining service life of the freight car fleet is
greater than is inferable from the increasing average age shown in the
table above.
Efforts to hold down capital spending while increasing business are
ongoing as NS Rail seeks to maximize utilization of its assets. In this
connection, NS Rail began an orderly disposition of up to 17,000 freight
cars in October 1994. Through the end of 1995, 7,272 of these cars were
sold, with proceeds of $42 million included in "Property sales and other
transactions" in the Consolidated Statements of Cash Flows. In 1993, this
line item reflected proceeds from large land sales (see Note 3).
For 1996, NS Rail is planning $667 million of capital spending. NS
Rail anticipates that a portion of its locomotive acquisitions will be
financed using capitalized leases similar to the 1995 leases (see Note
8). In 1996, equipment financing needs are expected to be somewhat lower
than in 1995, as proceeds from the sale of freight cars may be used for
some locomotive acquisitions. Barring unforeseen events, total capital
spending is expected to continue to be similar to the 1995 level.
In 1994, large borrowings on corporate-owned life insurance,
reflected in "Investment sales and other transactions" in the
Consolidated Statements of Cash Flows, offset much of the use of cash for
intercompany advances and property additions that year.
CASH USED FOR FINANCING ACTIVITIES increased 2% in 1995, compared
with 1994, and was 2% greater in 1994, compared with 1993. The increase
in 1995 was primarily attributable to a higher rate of dividends paid on
common stock; 1994 had included the maturity of a large mortgage (see
Note 8 for debt maturities).
Hedging Activities
- ------------------
NS Rail has entered into hedging transactions relating to diesel
fuel purchases and interest rate swaps. No agreements related to the
diesel fuel hedges were settled from 1993 through 1995, and outstanding
agreements at December 31, 1995, were less than $5 million. As discussed
under "Capital Leases" in Note 8, NS Rail has made limited use of
interest rate swaps in connection with certain equipment financings.
ENVIRONMENTAL MATTERS
NS Rail is subject to various jurisdictions' environmental laws and
regulations. It is NS Rail's policy to record a liability where such
liability or loss is probable and can be reasonably estimated. Claims, if
any, against third parties for recovery of clean-up costs incurred by NS
Rail are reflected as receivables in the balance sheet and are not netted
against the associated NS Rail liability. Environmental engineers
participate in ongoing evaluations of all identified sites, and--after
consulting with counsel--any necessary adjustments to initial liability
estimates are made. NS Rail also has established an Environmental Policy
Council, composed of senior managers, to oversee and interpret its
environmental policy.
<PAGE> PAGE 36
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Operating expenses for environmental protection totaled
approximately $13 million in 1995 and are anticipated to increase
somewhat in 1996. Capital expenditures for environmental projects
amounted to approximately $8 million in 1995 and are expected to be at
the same level in 1996. As of December 31, 1995, NS Rail's balance sheet
included a reserve for environmental exposures in the amount of $44
million (of which $12 million is accounted for as a current liability),
which is NS Rail's present best estimate of ultimate liability at 96
identified locations. On that date, eight sites accounted for $16 million
of the reserve, and no individual site was considered to be material.
NS Rail anticipates that much of this liability will be paid out over
five years; however, some costs will be paid out over a longer period.
At many of the 96 locations, NS Rail and/or certain of its
subsidiaries, usually in conjunction with a number of other parties, have
been identified as potentially responsible parties by the Environmental
Protection Agency (EPA) or similar state authorities under the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, or comparable state statutes, which often impose joint and several
liability for clean-up costs.
At one such site, the EPA alleged in 1995 that The Alabama Great
Southern Railroad Company ("AGS"), a subsidiary of NS Rail, is
responsible, along with several other entities believed to be financially
solvent, for past and future clean-up and monitoring costs at the Bayou
Bonfouca NPL Superfund site located in Slidell, La. The site was owned
by the parent of an AGS predecessor from 1882 until 1902. Bridge timbers
used in the 1882 construction of the predecessor's bridge across Lake
Pontchartrain were treated at the site. On March 20, 1996, NS Rail
learned that the United States filed suit on March 11 to recover
$100 million and other unspecified amounts from AGS and from some
of--but not from all--the entities it earlier identified as
potentially responsible parties. AGS believes it never owned,
operated or had any other culpable connection to the site and
denies responsibility; however, because the amount of liability,
if any, that ultimately may be assessed against NS Rail or AGS cannot
be estimated reliably at this time, the materiality of such
amount to NS Rail's financial position, results of operation or
liquidity in a particular quarter or year cannot be evaluated.
With respect to known environmental sites (whether identified by NS
Rail or by the EPA or comparable state authorities), estimates of NS
Rail's ultimate potential financial exposure for a given site or in the
aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available clean-up techniques, the
likely development of new clean-up technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it) and evolving statutory and regulatory
standards governing liability.
The risk of incurring environmental liability--for acts and
omissions, past, present and future--is inherent in the railroad
business. Some of the commodities, particularly those classified as
hazardous materials, in NS Rail's traffic mix can pose special risks that
NS Rail works diligently to minimize. In addition, NS Rail owns or has
owned in the past land holdings used as operating property, or which are
leased or may have been leased and operated by others, or held for sale.
Because certain conditions may exist on these properties related to
environmental problems that are latent or undisclosed, there can be no
assurance that NS Rail will not incur liabilities or costs with respect
to one or more of them, the amount and materiality of which cannot be
estimated reliably now. Moreover, lawsuits and claims involving these and
other now-unidentified environmental sites and matters are likely to
arise from time to time. The resulting liabilities could have a
significant effect on financial condition, results of operations or
liquidity in a particular year or quarter.
However, based on its assessments of the facts and circumstances now
known and, after consulting with its legal counsel, Management believes
that it has recorded appropriate estimates of liability for those
environmental matters of which NS Rail is aware. Further, Management
believes that it is unlikely that any identified matters, either
individually or in aggregate, will have a material adverse effect on NS
Rail's financial position, results of operations or liquidity.
<PAGE> PAGE 37
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
INFLATION
Generally accepted accounting principles require the use of
historical cost in preparing financial statements. This approach
disregards the effects of inflation on the replacement cost of property.
NS Rail, a capital-intensive company, has approximately $12.8 billion
invested in such assets. The replacement cost of these assets, as well as
the related depreciation expense, would be substantially greater than the
amounts reported on the basis of historical cost.
INDUSTRY TRENDS
- -A tentative settlement was reached with the United Transportation
Union, which represents the largest number of employees in the railroad
industry. The settlement requires ratification by the members before
acceptance. The negotiation of this settlement demonstrated that
national handling produces the quickest path to agreement. Negotiations
with the other unions are progressing.
- -NS Rail and other railroads are continuing to seek opportunities to
share traffic routes and facilities, furthering the goals of providing
seamless service to customers and maximizing efficiency of the
respective railroads.
- -NS Rail is closely monitoring recent merger and consolidation
activities within the railroad industry in light of its own long-term
strategic objectives to protect the interests of its stockholders.
- -NS Rail and the rail industry are continuing their efforts to replace
the FELA with no-fault workers' compensation laws comparable to those
covering employees in other industries.
<PAGE> PAGE 38
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Quarterly Financial Data (Unaudited)
<CAPTION>
Three Months Ended
-----------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
($ in millions, except per share amounts)
1995
----
<S> <C> <C> <C> <C>
Railway operating revenues $999.2 $1,016.4 $996.0 $1,000.2
Income from railway operations 250.4 284.3 277.9 250.7
Net income 153.3 180.3 193.9 174.2
Dividends per serial preferred share $ 0.65 $ 0.65 $ 0.65 $ 0.65
1994
----
<S> <C> <C> <C> <C>
Railway operating revenues $942.3 $ 997.8 $975.8 $1,002.2
Income from railway operations 226.5 275.0 266.2 281.2
Net income 152.2 177.4 164.7 187.7
Dividends per serial preferred share $ 0.65 $ 0.65 $ 0.65 $ 0.65
</TABLE>
Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 1995, 1994 and 1993 39
Consolidated Balance Sheets
As of December 31, 1995 and 1994 40
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993 41
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1995, 1994 and 1993 42
Notes to Consolidated Financial Statements 43
Independent Auditors' Report 64
The Index to Consolidated Financial Statement Schedule appears
in Item 14 on page 66.
<PAGE> PAGE 39
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Income
<CAPTION>
Years ended December 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
($ in millions)
<S> <C> <C> <C>
Railway operating revenues $4,011.8 $3,918.1 $3,727.6
Railway operating expenses:
Compensation and benefits
(Notes 12, 13 and 15) 1,480.0 1,371.1 1,388.8
Materials, services and rents 623.2 668.6 641.6
Depreciation 382.9 360.6 347.9
Diesel fuel 189.8 188.3 179.3
Casualties and other claims 121.3 135.0 118.5
Other 151.3 145.6 129.8
-------- -------- --------
Railway operating expenses 2,948.5 2,869.2 2,805.9
-------- -------- --------
Income from railway operations 1,063.3 1,048.9 921.7
Other income - net (Note 3) 43.3 46.6 57.6
Interest expense on debt (Note 6) 33.0 28.3 32.3
-------- -------- --------
Income before income taxes 1,073.6 1,067.2 947.0
Provision for income taxes (Note 4):
Income taxes 371.9 385.2 361.2
Adjustment of net deferred tax
liability for federal rate increase -- -- 51.6
-------- -------- --------
Total income taxes 371.9 385.2 412.8
-------- -------- --------
Income before accounting changes 701.7 682.0 534.2
Cumulative effect on years prior to 1993
of changes in accounting principles
(Note 1) for:
Income taxes -- -- 470.4
Postretirement benefits other than
pensions; and postemployment
benefits-net of taxes -- -- (222.6)
-------- -------- --------
Net income $ 701.7 $ 682.0 $ 782.0
======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 40
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets
<CAPTION>
As of December 31,
1995 1994
---------- ----------
($ in millions)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 49.3 $ 33.8
Short-term investments (Note 14) 180.7 147.1
Accounts receivable net of allowance for
doubtful accounts of $2.8 million and
$5.4 million, respectively 542.1 552.7
Materials and supplies 59.8 58.5
Deferred income taxes (Note 4) 98.8 91.1
Other current assets 92.1 89.8
--------- ---------
Total current assets 1,022.8 973.0
Due from NS - net (Note 2) 186.8 201.7
Investments (Notes 5 and 14) 771.0 598.4
Properties less accumulated depreciation (Note 6) 8,750.4 8,493.4
Other assets 21.3 22.7
--------- ---------
Total assets $10,752.3 $10,289.2
========= =========
Liabilities and stockholders' equity
Current liabilities:
Short-term debt (Note 8) $ 27.2 $ 27.2
Accounts payable (Note 7) 567.2 529.3
Income and other taxes 179.4 119.1
Other current liabilities (Note 7) 124.3 118.0
Current maturities of long-term debt (Note 8) 79.7 65.8
--------- ---------
Total current liabilities 977.8 859.4
Long-term debt (Note 8) 494.7 474.0
Other liabilities (Note 10) 870.8 868.2
Minority interests 2.3 2.1
Deferred income taxes (Note 4) 2,761.3 2,645.0
--------- ---------
Total liabilities 5,106.9 4,848.7
--------- ---------
Stockholders' equity:
Serial preferred stock (Note 11) 54.8 54.8
Common stock (Note 11) 166.7 166.7
Other capital 525.5 515.0
Unrealized gain on marketable securities (Note 14) 337.3 253.1
Retained income 4,561.1 4,450.9
--------- ---------
Total stockholders' equity 5,645.4 5,440.5
--------- ---------
Total liabilities and stockholders' equity $10,752.3 $10,289.2
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 41
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
<CAPTION>
Years ended December 31,
1995 1994 1993
-------- -------- --------
($ in millions)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 701.7 $ 682.0 $ 782.0
Reconciliation of net income to net cash
provided by operating activities:
Net cumulative effect of changes in
accounting principles -- -- (247.8)
Special charge payments (29.3) (41.9) (36.1)
Depreciation 383.8 361.3 348.7
Deferred income taxes 43.2 114.2 92.9
Nonoperating gains on property sales (8.7) (7.8) (31.9)
Changes in assets and liabilities
affecting operations:
Accounts receivable 10.6 (29.8) (25.9)
Materials and supplies (1.3) 7.4 5.9
Other current assets (2.3) (12.5) (8.0)
Current liabilities other than debt 104.5 6.7 (23.4)
Other - net 48.6 74.8 8.6
------- ------- -------
Net cash provided by operating activities 1,250.8 1,154.4 865.0
Cash flows from investing activities:
Property additions (608.8) (639.6) (629.2)
Property sales and other transactions 80.4 52.9 80.3
Investment purchases (65.6) (45.9) (86.3)
Investment sales and other transactions 29.4 249.2 8.0
Due from NS - net (Note 2) (285.1) (394.2) 97.0
Short-term investments - net (31.3) 1.0 (6.0)
------- ------- -------
Net cash used for investing activities (881.0) (776.6) (536.2)
Cash flows from financing activities:
Dividends (Note 2) (291.5) (279.4) (276.6)
Proceeds from long-term borrowings 7.6 41.4 38.5
Long-term debt repayments (70.4) (108.3) (99.9)
------- ------- -------
Net cash used for financing activities (354.3) (346.3) (338.0)
------- ------- -------
Net increase (decrease) in
cash and cash equivalents 15.5 31.5 (9.2)
Cash and cash equivalents:
At beginning of year 33.8 2.3 11.5
------- ------- -------
At end of year $ 49.3 $ 33.8 $ 2.3
======= ======= =======
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized) $ 48.9 $ 49.1 $ 58.4
Income taxes $ 272.5 $ 252.2 $ 337.1
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 42
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
Unrealized
Serial Gain on
Preferred Common Other Marketable Retained
Stock Stock Capital Securities Income Total
--------- ------ ------- ---------- -------- --------
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 $54.9 $166.7 $515.0 $ -- $4,047.7 $4,784.3
Net income - 1993 782.0 782.0
Cash dividends:
Serial preferred stock,
$2.60 per share (2.9) (2.9)
Common stock,
$16.42 per share (273.7) (273.7)
Non-cash dividends on
common stock (Note 2) (104.7) (104.7)
Other (0.1) (0.1)
----- ------ ------ ------ -------- --------
Balance December 31, 1993 54.8 166.7 515.0 -- 4,448.4 5,184.9
Net income - 1994 682.0 682.0
Cash dividends:
Serial preferred stock,
$2.60 per share (2.9) (2.9)
Common stock,
$16.59 per share (276.5) (276.5)
Non-cash dividends on
common stock (Note 2) (400.1) (400.1)
Unrealized gain on
investments (Note 14) 253.1 253.1
----- ------ ------ ------ -------- --------
Balance December 31, 1994 54.8 166.7 515.0 253.1 4,450.9 5,440.5
Net income - 1995 701.7 701.7
Cash dividends:
Serial preferred stock,
$2.60 per share (2.9) (2.9)
Common stock,
$17.31 per share (288.6) (288.6)
Non-cash dividends on
common stock (Note 2) (300.0) (300.0)
Contribution from NS
(Note 2) 10.5 10.5
Unrealized gain on
investments (Note 14) 84.2 84.2
----- ------ ------ ------ -------- --------
Balance December 31, 1995 $54.8 $166.7 $525.5 $337.3 $4,561.1 $5,645.4
===== ====== ====== ====== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 43
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
The following notes are an integral part of the consolidated financial
statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
- -----------------------
Norfolk Southern Railway Company, together with its consolidated
subsidiaries (collectively, NS Rail), is engaged principally in the
transportation of freight by rail, primarily in the Southeast and
Midwest. The consolidated financial statements include Norfolk Southern
Railway Company, Norfolk and Western Railway Company and their majority-
owned and controlled subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation (see Note 16 for
the Norfolk and Western Railway Company and Subsidiaries (NW) summarized
consolidated financial information).
Rail freight consists of raw materials, intermediate products and
finished goods classified in the following market groups: coal,
paper/forest, chemicals, automotive, agriculture, metals/construction and
intermodal. All groups are approximately equal in size based on revenues
except for coal, which accounts for about one third of railway revenues.
Ultimate destinations for some of the freight and a portion of the coal
shipped are outside the United States.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents
- ----------------
"Cash equivalents" are highly liquid investments purchased three
months or less from maturity.
Investments
- -----------
"Investments" are reported at amortized cost or fair value depending
upon their classification as held-to-maturity, trading or available-for-
sale securities in accordance with SFAS No. 115 (see "Required Accounting
Changes").
Materials and Supplies
- ----------------------
"Materials and supplies," consisting mainly of fuel oil and items
for maintenance of property and equipment, are stated at average cost.
The cost of materials and supplies expected to be used in capital
additions or improvements is included in "Properties."
<PAGE> PAGE 44
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Properties
- ----------
"Properties" are stated principally at cost and are depreciated
using group depreciation. Rail is primarily depreciated on the basis of
use measured by gross ton miles. The effect of this method is to write
off these assets over 42 years on average. Other properties are
depreciated generally using the straight-line method over estimated
service lives at annual rates that range from 1% to 20%. In 1995, the
overall depreciation rate averaged 2.7% for roadway and 4.0% for
equipment. NS Rail capitalizes interest on major capital projects during
the period of their construction. Maintenance expense is recognized when
repairs are performed. When properties, other than land and non-rail
assets, are sold or retired in the ordinary course of business, the cost
of the assets, net of sale proceeds or salvage, is charged to accumulated
depreciation rather than recognized through income. Gains and losses on
disposal of land and non-rail assets are included in other income (see
Note 3).
Revenue Recognition
- -------------------
Revenue is recognized proportionally as a shipment moves from origin
to destination.
Required Accounting Changes
- ---------------------------
1994 - Effective January 1, 1994, NS Rail adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115), which addresses
the accounting and reporting for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities. The implementation of SFAS 115 increased "Investments," the
deferred tax liability and "Stockholders' equity" at December 31, 1994,
and had no impact on earnings. The total unrealized holding gain on NS
Rail's investments classified as "available for sale," net of the related
deferred taxes, is reflected as a separate component of "Stockholders'
equity" in the Consolidated Balance Sheets (see also Note 14).
1993 - Effective January 1, 1993, NS Rail adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106), and Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" (SFAS 112). SFAS 106 requires accrual of the
cost of specified health care and death benefits over an employee's
creditable service period rather than, as was the previously prevailing
practice, accounting for such expenses on a pay-as-you-go basis. SFAS 112
requires recognition of the cost of benefits payable to former or
inactive employees after employment but before retirement on an accrual
basis. For NS Rail, such postemployment benefits consist principally of
obligations under the long-term disability plan. NS Rail recognized the
effects of these changes in accounting on the immediate recognition
basis. The cumulative effect on years prior to 1993 of adopting SFAS 106
and 112 increased pretax expenses $336.3 million ($208.4 million after-
tax), and $22.8 million ($14.2 million after-tax), respectively (see also
Note 13).
Also effective January 1, 1993, NS Rail adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109). SFAS 109 requires a liability approach for measuring deferred
tax assets and liabilities based on differences between the financial
statement and tax bases of assets and liabilities at each balance sheet
date using enacted tax rates in effect when those differences are
expected to reverse. The cumulative effect on years prior to 1993 of
adopting SFAS 109 increased net income $470.4 million (see also Note 4).
<PAGE> PAGE 45
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. RELATED PARTIES
General
- -------
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 Dividends
- ------------------
In December 1995 and 1994, NS Rail declared and issued to NS non-
cash dividends of $300.0 million and $400.1 million, respectively, which
were settled by reduction of NS Rail's interest-bearing advances due from
NS.
On April 1, 1993, NS Rail declared and issued to NS a $104.7 million
non-cash dividend representing the net assets of several non-railroad
subsidiaries. These subsidiaries, principally involved in real estate,
produce a small amount of rental income which are no longer part of NS
Rail's results.
Non-cash dividends are excluded from the Consolidated Statements of
Cash Flows.
<TABLE>
Intercompany Accounts
- ---------------------
<CAPTION>
December 31,
-------------------------------------------
1995 1994
------------------ ------------------
Average Average
Interest Interest
Balance Rate Balance Rate
------- -------- ------- --------
($ in millions)
<S> <C> <C> <C> <C>
Due from NS:
Advances $ 407.1 3.4% $ 336.3 2.6%
Due to NS:
Notes 220.3 6.6% 134.6 5.7%
------- -------
Due from NS-net $ 186.8 $ 201.7
======= =======
</TABLE>
During 1995 and 1993, NW issued notes for $75.5 million and
$112.6 million, respectively, to an NS subsidiary for the purchase of a
portfolio of short-term investments. These non-cash transactions were
excluded from the Consolidated Statement of Cash Flows.
Interest is applied to certain advances at the average NS yield on
short-term investments and to the notes at specified rates. Included in
interest income is $17.8 million, $15.6 million and $6.7 million in 1995,
1994 and 1993, respectively, related to amounts due from NS.
Transfer of Investment from NS
- ------------------------------
In December 1995, NS transferred its $10.5 million equity interest
in a nonoperating subsidiary to Norfolk Southern Railway Company. This
transfer was recorded at historical cost and was reflected as a
contribution to capital.
<PAGE> PAGE 46
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. RELATED PARTIES (continued)
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 December 31, 1995 and 1994, NS Rail had
intercompany federal income tax payables (which are included in "Deferred
income taxes" in the Consolidated Balance Sheets) of $254.7 million and
$261.0 million, respectively.
Cash Required for NS Stock Purchase Program and NS Debt
- -------------------------------------------------------
Since 1987, the NS Board of Directors has authorized the purchase
and retirement of up to 65 million shares of NS common stock. Purchases
under the programs have been made with internally generated cash and with
proceeds from the sale of NS commercial paper notes and from the issuance
of NS long-term debt.
Since the first purchases in December 1987 and through December 31,
1995, NS has purchased and retired 63,932,000 shares of its common stock
under these programs at a cost of $2.9 billion. On January 23, 1996, the
NS Board authorized a new program to acquire up to 30 million additional
shares of common stock. Future purchases are dependent on market
conditions, the economy, cash needs and alternative investment
opportunities.
Consistent with the earlier purchases, a significant portion of the
funding for future NS stock purchases, either in the form of direct cash
or cash used for debt service, will come from NS Rail through
intercompany advances or dividends to NS.
<TABLE>
3. OTHER INCOME - NET
<CAPTION>
1995 1994 1993
------ ------ ------
($ in millions)
<S> <C> <C> <C>
Interest income (Note 2) $ 36.3 $ 34.4 $ 15.7
Rental income 18.5 18.0 18.6
Dividends from NS 15.1 13.9 13.5
Gains from sales of properties 8.7 7.8 31.9
Corporate-owned life insurance - net 7.4 7.9 10.8
Other interest expense (32.2) (24.9) (26.7)
Taxes on nonoperating property (2.4) (3.7) (4.2)
Other - net (8.1) (6.8) (2.0)
------ ------ ------
Total $ 43.3 $ 46.6 $ 57.6
====== ====== ======
</TABLE>
<PAGE> PAGE 47
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
4. INCOME TAXES
<TABLE>
Provision for Income Taxes
- --------------------------
<CAPTION>
1995 1994 1993
-------- -------- --------
($ in millions)
<S> <C> <C> <C>
Current:
Federal $ 286.3 $ 236.0 $ 279.6
State 42.4 35.0 40.3
------- ------- -------
Total current taxes 328.7 271.0 319.9
------- ------- -------
Deferred:
Federal 35.1 95.2 26.4
State 8.1 19.0 14.9
Adjustment of net deferred tax
liability for federal rate increase -- -- 51.6
------- ------- -------
Total deferred taxes 43.2 114.2 92.9
------- ------- -------
Provision for income taxes $ 371.9 $ 385.2 $ 412.8
======= ======= =======
</TABLE>
1993 Federal Income Tax Rate Increase
- -------------------------------------
In August 1993, Congress enacted the Revenue Reconciliation Act of
1993, which increased the federal corporate income tax rate from 34% to
35%, retroactive to January 1, 1993. The tax rate increase had two
components that, as required by SFAS 109, were recognized in 1993
earnings.
The first component relates to the increased income tax rate's
effect on 1993 earnings, which increased the provision for income taxes
and reduced net income by $9.2 million. The second component increased
the provision for the net deferred tax liability in the Consolidated
Balance Sheet, which reduced that year's net income by $51.6 million.
<PAGE> PAGE 48
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
4. INCOME TAXES (continued)
<TABLE>
Reconciliation of Statutory Rate to Effective Rate
- --------------------------------------------------
Total income taxes as reflected in the Consolidated Statements of
Income differ from the amounts computed by applying the statutory federal
corporate tax rate as follows:
<CAPTION>
1995 1994 1993
--------------- --------------- ---------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Federal income tax
at statutory rate $ 375.8 35.0 $ 373.5 35.0 $ 331.5 35.0
State income taxes,
net of federal
tax benefit 32.7 3.0 35.1 3.3 35.8 3.8
Corporate-owned
life insurance (17.1) (1.6) (10.6) (1.0) (8.7) (0.9)
Dividend and
equity income (5.1) (0.5) (4.7) (0.4) (5.0) (0.5)
Other - net (14.4) (1.3) (8.1) (0.8) 7.6 0.7
------- ---- ------- ---- ------- ----
371.9 34.6 385.2 36.1 361.2 38.1
Adjustment of net
deferred tax lia-
bility for federal
rate increase -- -- -- -- 51.6 5.5
------- ---- ------- ---- ------- ----
Provision for
income taxes $ 371.9 34.6 $ 385.2 36.1 $ 412.8 43.6
======= ==== ======= ==== ======= ====
</TABLE>
Inclusion in Consolidated Return
- --------------------------------
NS Rail is included in the consolidated federal income tax return of
NS. The provision for current income taxes in the Consolidated Statements
of Income reflects NS Rail's portion of NS' consolidated tax provision.
Tax expense or tax benefit is recorded on a separate company basis
whether or not such benefit would be currently available on a separate
company basis.
Deferred Tax Assets and Liabilities
- -----------------------------------
Certain items are reported in different periods for financial
reporting and income tax purposes. Deferred tax assets and liabilities
were recorded in recognition of these differences in accordance with
SFAS 109.
<PAGE> PAGE 49
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
4. INCOME TAXES (continued)
<TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities were as follows:
<CAPTION>
December 31,
-------------------------
1995 1994
---------- ----------
($ in millions)
<S> <C> <C>
Deferred tax assets:
Reserves, including casualty
and other claims $ 161.6 $ 163.7
Employee benefits 158.7 144.7
Postretirement benefits other than
pension and postemployment benefits 138.1 132.1
Taxes, including state and property 157.1 154.5
Other 1.2 1.4
--------- ---------
Total gross deferred tax assets 616.7 596.4
Less valuation allowance (0.5) (0.6)
--------- ---------
Net deferred tax assets 616.2 595.8
--------- ---------
Deferred tax liabilities:
Property (2,760.3) (2,679.8)
Unrealized holding gains (219.0) (164.4)
Other (44.7) (44.5)
--------- ---------
Total gross deferred tax liabilities (3,024.0) (2,888.7)
Intercompany federal tax payable-net (254.7) (261.0)
--------- ---------
Net deferred tax liability (2,662.5) (2,553.9)
Net current deferred tax assets 98.8 91.1
--------- ---------
Net long-term deferred
tax liability $(2,761.3) $(2,645.0)
========= =========
</TABLE>
Except for amounts for which a valuation allowance is provided,
Management believes the deferred tax assets will be realized. The
valuation allowance for deferred tax assets as of January 1, 1993, was
$3.4 million. The net change in the total valuation allowance was a
$0.1 million decrease for 1995, a $1.4 million decrease for 1994 and
a $1.4 million decrease for 1993.
Internal Revenue Service (IRS) Reviews
- --------------------------------------
Consolidated federal income tax returns have been examined and
Revenue Agent Reports have been received for all years up to and
including 1989. The consolidated federal income tax returns for 1990
through 1992 are being audited by the IRS. Management believes that
adequate provision has been made for any additional taxes and interest
thereon that might arise as a result of these examinations.
<PAGE> PAGE 50
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
4. INCOME TAXES (continued)
Tax Benefit Leases
- ------------------
In January 1995, the United States Tax Court issued a preliminary
decision that would disallow some of the tax benefits a subsidiary of NS
Rail purchased from a third party pursuant to a safe harbor lease
agreement in 1981. Management continues to believe that NS Rail
ultimately should incur no loss from this decision, because the lease
agreement provides for full indemnification if any such disallowance is
sustained.
<TABLE>
5. INVESTMENTS
<CAPTION>
December 31,
-----------------------
1995 1994
-------- --------
($ in millions)
<S> <C> <C>
Marketable equity securities at
fair value (Note 14) $ 576.2 $ 439.7
Corporate-owned life insurance at net
cash surrender value 176.6 140.1
Other 18.2 18.6
------- -------
Total $ 771.0 $ 598.4
======= =======
</TABLE>
<TABLE>
6. PROPERTIES
<CAPTION>
December 31,
-------------------------
1995 1994
---------- ----------
($ in millions)
<S> <C> <C>
Transportation property:
Road $ 8,151.7 $ 7,934.4
Equipment 4,586.8 4,440.0
Other property 84.2 84.5
--------- ---------
12,822.7 12,458.9
Less: Accumulated depreciation 4,072.3 3,965.5
--------- ---------
Net properties $ 8,750.4 $ 8,493.4
========= =========
</TABLE>
Capitalized Interest
- --------------------
Total interest cost incurred on debt in 1995, 1994 and 1993 was
$47.0 million, $46.1 million and $53.9 million, respectively, of which
$14.0 million, $17.8 million and $21.6 million was capitalized.
<PAGE> PAGE 51
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
7. CURRENT LIABILITIES
<CAPTION>
December 31,
-----------------------
1995 1994
-------- --------
($ in millions)
<S> <C> <C>
Accounts payable:
Accounts and wages payable $ 255.3 $ 217.2
Casualty and other claims 163.6 164.1
Vacation liability 72.5 71.0
Equipment rents payable - net 62.0 67.0
Other 13.8 10.0
------- -------
Total $ 567.2 $ 529.3
======= =======
Other current liabilities:
Prepaid amounts on forwarded traffic $ 69.7 $ 72.8
Interest payable 23.7 20.0
Retiree health and death
benefit obligation (Note 13) 24.5 21.5
Other 6.4 3.7
------- -------
Total $ 124.3 $ 118.0
======= =======
</TABLE>
8. DEBT
Short-Term Debt
- ---------------
Short-term debt consists of $27.2 million of notes assumed in
connection with the 1990 acquisition of a coal terminal facility.
Capital Leases
- --------------
During the first quarter of 1995, NS Rail entered into capital
leases covering new locomotives. The related capital lease obligations
totaling $104.5 million were reflected in the Consolidated Balance Sheet
as debt and, because they were non-cash transactions, were excluded from
the Consolidated Statement of Cash Flows. The lease obligations carry an
average stated interest rate of 8.4% but were converted to variable rate
obligations using interest rate swap agreements. The interest rates on
these obligations are based on the six-month London Interbank Offered
Rate and are reset every six months with changes in interest rates
accounted for as an adjustment of interest expense. As a result, NS Rail
is exposed to the market risk associated with fluctuations in interest
rates. To date, while such rate fluctuations have been nominal, their
effects have been favorable. Counterparties to the interest rate swap
agreements are major financial institutions believed by Management to be
credit-worthy. NS Rail's use of interest rate swaps has been limited to
those discussed above.
<PAGE> PAGE 52
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
8. DEBT (continued)
<TABLE>
Long-Term Debt
- --------------
<CAPTION>
December 31,
------------------
1995 1994
-------- --------
($ in millions)
<S> <C> <C>
Equipment obligations at an
average rate of 7.9% maturing to 2009 $ 439.5 $ 497.2
Capitalized leases at an average
rate of 6.5% maturing to 2015 100.9 2.0
Mortgage bonds at an average
rate of 4.2% maturing to 2003 27.5 33.9
Other debt at an average rate
of 5.9% maturing to 2015 6.5 6.7
------- -------
Total long-term debt 574.4 539.8
------- -------
Less: Current maturities 79.7 65.8
------- -------
Long-term debt less current maturities $ 494.7 $ 474.0
======= =======
<S> <C>
Long-term debt matures as follows:
1997 $ 47.4
1998 48.0
1999 119.4
2000 49.3
2001 and subsequent years 230.6
-------
Total $ 494.7
=======
</TABLE>
A substantial portion of NS Rail's properties and certain
investments in affiliated companies are pledged as collateral for much of
the debt.
<PAGE> PAGE 53
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
9. LEASE COMMITMENTS
<TABLE>
NS Rail is committed under long-term lease agreements, which expire
on various dates through 2067, for equipment, lines of road and other
property. Future minimum lease payments are as follows:
<CAPTION>
Operating Leases Capital Leases
---------------- --------------
($ in millions)
<S> <C> <C>
1996 $ 48.2 $ 15.0
1997 47.6 14.9
1998 42.5 14.9
1999 31.7 14.9
2000 30.6 14.8
2001 and subsequent years 577.8 80.5
------- -------
Total $ 778.4 155.0
=======
Less imputed interest on
capital leases at an average
rate of 8.4% 54.1
-------
Present value of minimum
lease payments included
in debt $ 100.9
=======
</TABLE>
<TABLE>
Operating Lease Expense
- -----------------------
<CAPTION>
1995 1994 1993
------ ------ ------
($ in millions)
<S> <C> <C> <C>
Minimum rents $ 58.9 $ 46.7 $ 33.5
Contingent rents 36.0 45.4 36.1
------ ------ ------
Total $ 94.9 $ 92.1 $ 69.6
====== ====== ======
</TABLE>
<TABLE>
10. OTHER LIABILITIES
<CAPTION>
December 31,
-----------------------
1995 1994
-------- --------
($ in millions)
<S> <C> <C>
Casualty and other claims $ 257.3 $ 264.2
Net pension obligation (Note 12) 93.9 84.8
Retiree health and death
benefit obligation (Note 13) 283.5 277.9
Other 236.1 241.3
------- -------
Total $ 870.8 $ 868.2
======= =======
</TABLE>
<PAGE> PAGE 54
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
11. STOCK
Preferred
- ---------
There are 10,000,000 shares of no par value serial preferred stock
authorized. This stock may be issued in series from time to time at the
discretion of the Board of Directors with any series having such voting
and other powers, dividends and other preferences as deemed appropriate
at the time of issuance. At December 31, 1995 and 1994, 1,197,027 shares
of $2.60 Cumulative Preferred Stock, Series A (Series A Stock) were
issued, and 1,096,907 shares were held other than by subsidiaries. The
Series A Stock has a $50 per share stated value. The Series A Stock is
callable at any time at $50 per share plus accrued dividends and has one
vote per share on all matters, voting as a single class with holders of
other stock.
In June 1989, NS announced that it intended to purchase up to
250,000 shares of the outstanding Series A Stock during the subsequent
two-year period. In May 1991, NS extended the previously announced stock
purchase program through 1993. In March 1994, NS announced that it would
continue purchasing up to 250,000 shares of the Series A Stock through
1996. NS had purchased 122,828 shares at a total cost of approximately
$4.4 million as of December 31, 1995. NS purchased the shares in regular
brokerage transactions on the open market at prevailing prices. At year
end 1995 and 1994, NS held 122,923 shares and 94,022 shares,
respectively.
Preference
- ----------
There are 10,000,000 shares of no par value serial preference stock
authorized. None of these shares has been issued.
Common
- ------
There are 50,000,000 shares of no par value common stock with a
stated value of $10 per share authorized. NS owns all 16,668,997 shares
issued and outstanding at December 31, 1995 and 1994.
12. PENSION PLANS
NS Rail's defined benefit pension plans, which principally cover
salaried employees, are part of NS' retirement plans. Pension benefits
are based primarily on years of creditable service with NS and its
participating subsidiary companies and compensation rates near
retirement. Contributions to the plans are made on the basis of not less
than the minimum funding standards set forth in the Employee Retirement
Income Security Act of 1974, as amended. Assets in the plans consist
mainly of common stocks. The following data relate principally to NS
Rail's portion of the combined NS plans, since no separate NS Rail data
are available.
<PAGE> PAGE 55
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
12. PENSION PLANS (continued)
<TABLE>
Pension Cost (Benefit) Components
- ---------------------------------
<CAPTION>
1995 1994 1993
-------- -------- --------
($ in millions)
<S> <C> <C> <C>
Service cost-benefits
earned during the year $ 9.6 $ 10.2 $ 10.7
Interest cost on projected
benefit obligation 65.1 59.9 58.6
Actual return on assets in plan (257.0) (16.6) (105.6)
Net amortization and deferral 172.1 (62.9) 27.9
------- ------- -------
Net pension benefit (10.2) (9.4) (8.4)
Cost of early retirement benefits 23.4 -- 38.7
------- ------- -------
Total $ 13.2 $ (9.4) $ 30.3
======= ======= =======
</TABLE>
<TABLE>
Pension cost is determined based on an actuarial valuation that
reflects appropriate assumptions as of the beginning of each year. The
funded status of the plans is determined using appropriate assumptions as
of each year-end. A summary of the major assumptions follows:
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Discount rate for determining
funded status 7.25% 8.50% 7.25%
Future salary increases 6% 6% 6%
Return on assets in plans 9% 9% 9%
</TABLE>
<PAGE> PAGE 56
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
12. PENSION PLANS (continued)
<TABLE>
The funded status of the plans and the amounts reflected in the
accompanying balance sheets were as follows:
<CAPTION>
December 31,
--------------------------------------
1995 1994
------------------ ------------------
Funded Unfunded Funded Unfunded
Plans Plans Plans Plans
-------- -------- -------- --------
($ in millions)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefits $ 788.2 $ 50.8 $ 626.5 $ 40.6
Non-vested benefits 0.1 -- -- --
-------- ------- ------- -------
Accumulated benefit
obligation 788.3 50.8 626.5 40.6
Effect of expected future
salary increases 115.3 11.5 92.1 9.0
-------- ------- ------- -------
Projected benefit
obligation 903.6 62.3 718.6 49.6
Fair value of assets in plans 1,060.6 -- 871.4 --
-------- ------- ------- -------
Funded status 157.0 (62.3) 152.8 (49.6)
Unrecognized initial
net asset (36.9) -- (43.7) --
Unrecognized (gain) loss (179.2) 20.9 (162.3) 10.1
Unrecognized prior
service cost 2.8 3.8 3.6 4.3
-------- ------- ------- -------
Net pension liability
included in the
balance sheets $ (56.3) $ (37.6) $ (49.6) $ (35.2)
======== ======= ======= =======
</TABLE>
Early Retirement Programs
- -------------------------
During 1995 and 1993, NS completed voluntary early retirement
programs for salaried employees. The principal benefit for those who
participated in these programs was enhanced pension benefits, which are
reflected in the accumulated benefit obligation. The charge for these
programs is included in "Compensation and benefits" expense and was
$33.6 million in 1995 (including $8.3 million related to postretirement
benefits other than pensions) and $42.4 million in 1993. The 1995 program
was accepted by 265 employees; the 1993 program, by 378 employees.
401(k) Plans
- ------------
NS Rail provides 401(k) savings plans for employees. Under the
plans, NS Rail matches a portion of the employee contributions, subject
to applicable limitations. NS Rail's expenses under these plans were
$6.9 million, $5.0 million and $5.1 million in 1995, 1994 and 1993,
respectively.
<PAGE> PAGE 57
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
NS Rail provides specified health care and death benefits to
eligible retired employees and their dependents. Under the present plans,
which may be amended or terminated at NS Rail's option, a defined
percentage of health care expenses is covered, reduced by any
deductibles, co-payments, Medicare payments and, in some cases, coverage
provided by other group insurance policies. The cost of such health care
coverage to a retiree may be determined, in part, by the retiree's years
of creditable service with NS Rail prior to retirement. Death benefits
are determined based on various factors, including, in some cases, salary
at time of retirement.
NS Rail continues to fund benefit costs principally on a pay-as-you-
go basis. However, in 1991, NS Rail established a Voluntary Employee
Beneficiary Association (VEBA) account to fund a portion of the cost of
future health care benefits for retirees. NS Rail last made a corporate
contribution of $10 million in 1994 to the VEBA.
Effective January 1, 1994, NS Rail amended the attribution period
for postretirement health care benefits. The amendment generally provides
for benefits to be determined ratably over a 10-year period based on
creditable service commencing at age 45, or from date of hire if
employment began after age 45. The amendment reduced the accumulated
postretirement health care benefit obligation by $80 million, which will
be amortized as a reduction in annual cost on a pro rata basis over a six-
year period.
<TABLE>
A summary of the postretirement benefit cost follows:
<CAPTION>
1995 1994 1993
------- ------- -------
($ in millions)
<S> <C> <C> <C>
Service cost-benefits attributable to
service during the year $ 9.1 $ 13.1 $ 6.4
Interest cost on accumulated postretirement
benefit obligation 27.2 23.8 27.0
Actual return on plan assets (17.5) -- (1.9)
Net amortization and deferral 1.9 (13.9) (0.7)
------ ------ ------
Net postretirement
benefit cost 20.7 23.0 30.8
Cost of early retirement benefits 8.3 -- --
------ ------ ------
Total $ 29.0 $ 23.0 $ 30.8
====== ====== ======
</TABLE>
<PAGE> PAGE 58
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued)
<TABLE>
The following table sets forth these plans' total accumulated
postretirement benefit obligation, reconciled with the accrued
postretirement benefit obligation:
<CAPTION>
December 31,
----------------------------------------------
1995 1994
--------------------- ---------------------
Health Care Death Health Care Death
Benefits Benefits Benefits Benefits
----------- -------- ----------- --------
($ in millions)
<S> <C> <C> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $ 216.1 $ 82.8 $ 159.8 $ 76.6
Fully eligible active
plan participants 21.4 7.8 11.7 4.5
Other active plan
participants 47.3 12.6 32.0 11.0
------- ------- ------- -------
Total 284.8 103.2 203.5 92.1
Plan assets at fair value 72.1 -- 54.5 --
------- ------- ------- -------
Funded status (212.7) (103.2) (149.0) (92.1)
Unrecognized loss (gain) 52.2 4.7 11.1 (4.1)
Unrecognized prior
service cost (benefit) (49.0) -- (65.3) --
------- ------- ------- -------
Accrued postretirement
benefit obligation $(209.5) $ (98.5) $(203.2) $ (96.2)
======= ======= ======= =======
</TABLE>
For measurement purposes, an 11% increase in the per capita cost of
covered health care benefits was assumed for 1996. The rate was assumed
to decrease gradually to an ultimate rate of 5.5% and remain at that
level for 2005 and thereafter. The health care cost trend rate has a
significant effect on the amounts reported in the financial statements.
To illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995, by about
$33 million and the aggregate of the service and interest cost components
of net postretirement benefit cost for the year 1995 by about $4 million.
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation, the salary increase
assumption and the long-term rate of return on plan assets are the same
as those used for the pension plans (see table of rate assumptions in
Note 12).
The VEBA trust holding the plan assets is not expected to be subject
to federal income taxes, as the assets are invested entirely in trust-
owned life insurance.
Under collective bargaining agreements, NS Rail and certain
subsidiaries participate in a multiemployer benefit plan, which provides
certain postretirement health care and life insurance benefits to
eligible union employees. Premiums under this plan are expensed as
incurred and amounted to $3.7 million, $4.8 million and $5.3 million in
1995, 1994 and 1993, respectively.
<PAGE> PAGE 59
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of "Cash and cash equivalents," "Short-term
investments," "Accounts receivable," "Short-term debt" and "Accounts
payable" approximate carrying values because of the short maturity of
these financial instruments. "Short-term investments," which are
designated as "available for sale," are reported at fair value in
accordance with SFAS 115 (see Note 1).
The fair value of long-term "Investments" approximated $837 million
and $658 million at December 31, 1995 and 1994, respectively. Quoted
market prices were used to determine the fair value of marketable
securities which, beginning in 1994 (see Note 1, "Required Accounting
Changes"), were recorded at fair value. Carrying value adjustments, which
are non-cash transactions, are not included in the Consolidated Statement
of Cash Flows. Underlying net assets were used to estimate the fair value
of non-marketable investments. For the remaining investments, consisting
principally of corporate-owned life insurance, the carrying value
approximates fair value (see Note 5 for carrying values of "Investments").
<TABLE>
Under SFAS 115, NS Rail increased the reported carrying value of
short-term and long-term investments classified as "available for sale"
as follows:
<CAPTION>
December 31, 1995 December 31, 1994
---------------------- ----------------------
Short-term Equity Short-term Equity
Securities Securities Securities Securities
---------- ---------- ---------- ----------
($ in millions)
<S> <C> <C> <C> <C>
Cost $ 242.2 $ 20.6 $ 201.7 $ 20.6
Gross unrealized
holding gain (loss) 0.7 555.6 (1.6) 419.1
------- ------- ------- -------
Fair value $ 242.9 $ 576.2 $ 200.1 $ 439.7
======= ======= ======= =======
</TABLE>
The short-term securities are principally U.S. Treasury securities.
Equity securities consist almost entirely of 7,252,634 shares of NS
Common Stock.
The change in the unrealized holding gain (loss) was $138.8 million
for 1995 and $(77.0) million for 1994. These changes primarily reflect
changes in the NS stock price. As a result, stockholder's equity
increased $84.2 million in 1995 and decreased $46.9 million in 1994.
The fair value of "Long-term debt," including current maturities,
approximated $606 million at December 31, 1995, and $543 million at
December 31, 1994. The fair values of debt were estimated based on quoted
market prices or discounted cash flows using current interest rates for
debt with similar terms, company rating and remaining maturity (see Note
8 for carrying values of "Long-term debt").
15. PARTIAL REVERSAL OF SPECIAL CHARGE IN 1993
Included in 1991 results was a $483 million special charge for labor
force reductions and asset write-downs. However, based on NS Rail's
success in eliminating reserve board positions in 1992 and 1993, and on
events occurring in the third quarter of 1993, the accrual included in
the 1991 special charge related to labor was reduced by $46 million,
which was reflected as a credit in "Compensation and benefits" expenses.
The principal factor contributing to the reversal was the failure in 1993
to reach agreement on terms for certain further labor savings.
Accordingly, it became apparent that a surplus existed in the labor
portion of the provision established in the 1991 special charge.
<PAGE> PAGE 60
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
16. NW--SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION
NW is operated as an integral part of NS Rail. Revenues are
allocated to NW based on actual traffic movements as determined by
revenue ton miles within market groups. Expenses are allocated to NW
based on appropriate criteria for the type of expense. The costs of
functions performed by NS, the parent holding company of NS Rail, are
also allocated to its rail operating subsidiaries.
<TABLE>
NORFOLK AND WESTERN RAILWAY COMPANY AND SUBSIDIARIES
Summarized Consolidated Statements of Income
<CAPTION>
Years ended December 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
($ in millions)
<S> <C> <C> <C>
Railway operating revenues $ 1,911.3 $ 1,858.1 $ 1,853.6
Railway operating expenses 1,402.6 1,382.7 1,414.5
--------- --------- ---------
Income from railway operations 508.7 475.4 439.1
Other-net 38.8 25.8 36.5
--------- --------- ---------
Income before income taxes 547.5 501.2 475.6
Provision for income taxes:
Income taxes 186.8 175.1 181.1
Adjustment of net deferred tax
liability for federal rate increase -- -- 23.7
--------- --------- ---------
Total income taxes 186.8 175.1 204.8
--------- --------- ---------
Income before
accounting changes 360.7 326.1 270.8
Cumulative effects on years
prior to 1993 of changes in
accounting principles for:
Income taxes -- -- 207.3
Postretirement benefits
other than pensions;
and postemployment
benefits - net of taxes -- -- (115.7)
--------- --------- ---------
Net income $ 360.7 $ 326.1 $ 362.4
========= ========= =========
</TABLE>
<PAGE> PAGE 61
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
16. NW--SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION (continued)
<TABLE>
NORFOLK AND WESTERN RAILWAY COMPANY AND SUBSIDIARIES
Summarized Consolidated Balance Sheets
<CAPTION>
As of December 31,
-----------------------
1995 1994
-------- --------
($ in millions)
<S> <C> <C>
Assets
Current assets $ 298.3 $ 330.0
Noncurrent assets 4,778.2 4,439.6
-------- --------
Total assets $5,076.5 $4,769.6
======== ========
Liabilities and Stockholder's Equity
Current liabilities 246.2 178.6
Noncurrent liabilities 1,603.9 1,590.0
Stockholder's equity 3,226.4 3,001.0
-------- --------
Total liabilities and stockholder's equity $5,076.5 $4,769.6
======== ========
</TABLE>
Effective January 1, 1994, NW adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" (SFAS 115). See Note 1 for a discussion of
this new accounting pronouncement. The effect on NW, principally due to
the changing market value of its investment in NS stock, was a change in
the unrealized holding gain (loss) of $18.9 million for 1995 and
$(13.9) million for 1994. As a result, stockholder's equity increased
$11.8 million in 1995 and decreased $8.7 million in 1994.
Effective January 1, 1993, NW adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions"; SFAS 109,
"Accounting for Income Taxes," and SFAS 112, "Employers' Accounting for
Postemployment Benefits." See Note 1 for a discussion of these
pronouncements (see NW's Consolidated Statement of Income for the
cumulative effects of these changes).
17. CONTINGENCIES
Lawsuits
- --------
Norfolk Southern Railway Company and certain subsidiaries are
defendants in numerous lawsuits relating principally to railroad
operations. While the final outcome of these lawsuits cannot be predicted
with certainty, it is the opinion of Management, after consulting with
its legal counsel, that the amount of NS Rail's ultimate liability will
not materially affect NS Rail's consolidated financial position.
Debt Guarantees
- ---------------
As of December 31, 1995, NS Rail and certain subsidiaries are
contingently liable as guarantors with respect to $66 million of
indebtedness of related entities.
<PAGE> PAGE 62
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
17. CONTINGENCIES (continued)
Change-in-Control Arrangements
- ------------------------------
Norfolk Southern has compensation agreements with officers and
certain key employees, which become operative only upon a change in
control of NS, as defined in those agreements. The agreements provide
generally for payments based on compensation at the time of a covered
individual's involuntary or other specified termination and for certain
other benefits.
Environmental Matters
- ---------------------
NS Rail is subject to various jurisdictions' environmental laws and
regulations. It is NS Rail's policy to record a liability where such
liability or loss is probable and can be reasonably estimated. Claims, if
any, against third parties for recovery of clean-up costs incurred by NS
Rail are reflected as receivables in the balance sheet and are not netted
against the associated NS Rail liability. Environmental engineers
participate in ongoing evaluations of all identified sites, and--after
consulting with counsel--any necessary adjustments to initial liability
estimates are made. NS Rail also has established an Environmental Policy
Council, composed of senior managers, to oversee and interpret its
environmental policy.
As of December 31, 1995, NS Rail's balance sheet included a reserve
for environmental exposures in the amount of $44 million (of which
$12 million is accounted for as a current liability), which is NS Rail's
present best estimate of ultimate liability at 96 identified locations.
On that date, eight sites accounted for $16 million of the reserve, and
no individual site was considered to be material. NS Rail anticipates
that the majority of this liability will be paid out over five years;
however, some costs will be paid out over a longer period.
At many of the 96 locations, NS Rail and/or certain of its
subsidiaries, usually in conjunction with a number of other parties, have
been identified as potentially responsible parties by the Environmental
Protection Agency (EPA) or similar state authorities under the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, or comparable state statutes, which often impose joint and several
liability for clean-up costs.
With respect to known environmental sites (whether identified by NS
Rail or by the EPA or comparable state authorities), estimates of NS
Rail's ultimate potential financial exposure for a given site or in the
aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available clean-up techniques, the
likely development of new clean-up technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it) and evolving statutory and regulatory
standards governing liability.
The risk of incurring environmental liability--for acts and
omissions, past, present and future--is inherent in the railroad
business. Some of the commodities, particularly those classified as
hazardous materials, in NS Rail's traffic mix can pose special risks that
NS Rail works diligently to minimize. In addition, NS Rail owns, or has
owned in the past, land holdings used as operating property, or which are
leased or may have been leased and operated by others, or held for sale.
Because certain conditions may exist on these properties related to
environmental problems that are latent or undisclosed, there can be no
assurance that NS Rail will not incur liabilities or costs with respect
to one or more of them, the amount and materiality of which cannot be
estimated reliably now. Moreover, lawsuits and claims involving these and
other now-unidentified environmental sites and matters are likely to
arise from time to time. The resulting liabilities could have a
significant effect on financial condition, results of operations or
liquidity in a particular year or quarter.
<PAGE> PAGE 63
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
17. CONTINGENCIES (continued)
However, based on its assessments of the facts and circumstances now
known and, after consulting with its legal counsel, Management believes
that it has recorded appropriate estimates of liability for those
environmental matters of which NS Rail is aware. Further, Management
believes that it is unlikely that any identified matters, either
individually or in aggregate, will have a material adverse effect on NS
Rail's financial position, results of operations or liquidity.
<PAGE> PAGE 64
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Norfolk Southern Railway Company:
We have audited the consolidated financial statements of Norfolk Southern
Railway Company as listed in Item 8. In connection with our audits of the
consolidated financial statements, we have also audited the consolidated
financial statement schedule listed in Item 14(a)2. These consolidated
financial statements and this consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and this
consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Norfolk Southern Railway Company and subsidiaries as of December 31, 1995
and 1994, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 1, the Company changed its methods of accounting in
1994 by adopting the provisions of the Financial Accounting Standards
Board's Statement 115, Accounting for Certain Investments in Debt and
Equity Securities, and in 1993 by adopting the provisions of the
Financial Accounting Standards Board's Statement 109, Accounting for
Income Taxes; Statement 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions; and Statement 112, Employers' Accounting
for Postemployment Benefits.
/s/ KPMG Peat Marwick LLP
Norfolk, Virginia
January 23, 1996
<PAGE> PAGE 65
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------ -----------------------------------------------------------
and Financial Disclosure.
------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
Item 11. Executive Compensation.
- ------- ----------------------
Item 12. Security Ownership of Certain Beneficial Owners
- ------- -----------------------------------------------
and Management.
--------------
and
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
In accordance with General Instruction G(3), the
information called for by Part III is incorporated herein by
reference from Norfolk Southern Railway's definitive Proxy Statement,
to be dated April 16, 1996, for the Norfolk Southern Railway Annual
Meeting of Stockholders to be held on May 28, 1996, which definitive
Proxy Statement will be filed electronically with the Commission
pursuant to Regulation 14A. The information regarding executive
officers called for by Item 401 of Regulation S-K is included in
Part I hereof beginning on page 18 under "Executive Officers of the
Registrant."
<PAGE> PAGE 66
PART IV
Item l4. Exhibits, Financial Statement Schedule, and Reports on
- ------- ------------------------------------------------------
Form 8-K.
--------
(a) The following documents are filed as part of this report:
1. Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 1995, 1994 and 1993 39
Consolidated Balance Sheets
As of December 31, 1995 and 1994 40
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993 41
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1995, 1994 and 1993 42
Notes to Consolidated Financial Statements 43
Independent Auditors' Report 64
2. Financial Statement Schedule:
The following consolidated financial statement schedule
should be read in connection with the consolidated
financial statements:
Index to Consolidated Financial Statement Schedule Page
-------------------------------------------------- ----
Schedule II - Valuation and Qualifying Accounts 71
Schedules other than the one listed above are omitted either
because they are not required or are inapplicable, or
because the information is included in the consolidated
financial statements or related notes.
3. Exhibits
Exhibit
Number Description
- ------- -------------------------------------------------
3 Articles of Incorporation and Bylaws -
3(i) The amended Restated Articles of Incorporation
of Norfolk Southern Railway Company are
incorporated herein by reference from Exhibit 3(a)
of Norfolk Southern Railway's 1990 Annual Report
on Form 10-K.
<PAGE> PAGE 67
Item l4. Exhibits, Financial Statement Schedule, and Reports on
- ------- ------------------------------------------------------
Form 8-K. (continued)
--------
Exhibit
Number Description
- ------- ------------------------------------------------------
3(ii) The Bylaws of Norfolk Southern Railway Company,
as last amended March 3, 1993, are incorporated
herein by reference from Exhibit 3(b) of Norfolk
Southern Railway's 1992 Annual Report on Form 10-K.
4 Instruments Defining the Rights of Security Holders,
Including Indentures -
In accordance with Item 601(b)(4)(iii) of
Regulation S-K, copies of instruments of Norfolk
Southern Railway and its subsidiaries with respect
to the rights of holders of long-term debt are
not filed herewith, or incorporated by reference,
but will be furnished to the Commission upon request.
10 Material Contracts -
(a) The Supplementary Agreement, entered into as of
January 1, 1987, between the Trustees of the
Cincinnati Southern Railway and The Cincinnati,
New Orleans and Texas Pacific Railway Company
(the latter a wholly owned subsidiary of
Norfolk Southern Railway) - extending and
amending a Lease, dated as of October 11, 1881
(both the Lease and Supplementary Agreement,
formerly incorporated by reference from
Exhibit 10(b) to Southern's 1987 Annual Report
on Form 10-K) - is incorporated herein by
reference from Exhibit 10(a) to Norfolk Southern
Railway's 1994 Annual Report on Form 10-K.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed for the three months
ended December 31, 1995.
(c) Exhibits.
The Exhibits required by Item 601 of Regulation S-K
as listed in Item 14(a)3 are filed herewith or
incorporated herein by reference.
<PAGE> PAGE 68
Item l4. Exhibits, Financial Statement Schedule, and Reports on
- ------- ------------------------------------------------------
Form 8-K. (continued)
--------
Exhibit
Number Description
- ------- ------------------------------------------------------
(d) Financial Statement Schedules.
Financial statement schedules and separate financial
statements specified by this Item are included in
Item 14(a)2 or are otherwise not required or are not
applicable.
<PAGE> PAGE 69
POWER OF ATTORNEY
-----------------
Each person whose signature appears below under "SIGNATURES"
hereby authorizes Henry C. Wolf and James C. Bishop, Jr., or either
of them, to execute in the name of each such person, and to file, any
amendment to this report and hereby appoints Henry C. Wolf and
James C. Bishop, Jr., or either of them, as attorneys-in-fact to
sign on his behalf, individually and in each capacity stated below,
and to file, any and all amendments to this report.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Norfolk Southern Railway Company has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on this 15th day of March, 1996.
NORFOLK SOUTHERN RAILWAY COMPANY
By /s/ David R. Goode
-----------------------------------------
(David R. Goode, President and Chief
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below on this 15th day of March,
1996, by the following persons on behalf of Norfolk Southern Railway
Company and in the capacities indicated.
Signature Title
--------- -----
/s/ David R. Goode
- -------------------------- President and Chief Executive
(David R. Goode) Officer and Director
(Principal Executive Officer)
/s/ John P. Rathbone
- -------------------------- Vice President and Controller
(John P. Rathbone) (Principal Accounting Officer)
/s/ Henry C. Wolf
- -------------------------- Vice President-Finance
(Henry C. Wolf) (Principal Financial Officer)
<PAGE> PAGE 70
Signature Title
--------- -----
/s/ James C. Bishop, Jr.
- -------------------------- Director
(James C. Bishop, Jr.)
/s/ L. I. Prillaman
- -------------------------- Director
(L. I. Prillaman)
/s/ Stephen C. Tobias
- -------------------------- Director
(Stephen C. Tobias)
/s/ D. Henry Watts
- -------------------------- Director
(D. Henry Watts)
/s/ Henry C. Wolf
- -------------------------- Director
(Henry C. Wolf)
<PAGE> PAGE 71
<TABLE>
Schedule II
Page 1 of 2
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1993, 1994 and 1995
(In millions of dollars)
<CAPTION>
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993
- ----------------------------
Valuation accounts deducted
from balance sheet assets -
Reserves for adjustments of
investment in affiliated
and other companies $ 0.3 $ -- $ -- $ 0.3 $ --
Valuation allowance (included
net in deferred tax
liability) for deferred tax
assets $ -- $ 2.0 $ -- $ -- $ 2.0
Casualty and other claims
included in other
liabilities $277.4 $100.0 $ 2.9 (1) $102.6 (2) $277.7
Current portion of casualty
and other claims included
in accounts payable $156.3 $ 16.4 $125.0 (1) $142.2 (3) $155.5
Year ended December 31, 1994
- ----------------------------
Valuation allowance (included
net in deferred tax
liability) for deferred tax
assets $ 2.0 $ -- $ -- $ 1.4 $ 0.6
Casualty and other claims
included in other
liabilities $277.7 $105.3 $ 2.5 (1) $121.3 (2) $264.2
Current portion of casualty
and other claims included
in accounts payable $155.5 $ 26.8 $163.7 (1) $181.9 (3) $164.1
(1) Includes revenue overcharges provided through charges to operating
revenues and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
(continued)
</TABLE>
<PAGE> PAGE 72
<TABLE>
Schedule II
Page 2 of 2
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1993, 1994 and 1995
(In millions of dollars)
<CAPTION>
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
- ----------------------------
Valuation allowance (included
net in deferred tax
liability) for deferred tax
assets $ 0.6 $ -- $ -- $ 0.1 $ 0.5
Casualty and other claims
included in other
liabilities $264.2 $ 99.5 $ 3.1 (1) $109.5 (2) $257.3
Current portion of casualty
and other claims included
in accounts payable $164.1 $ 21.1 $163.5 (1) $185.1 (3) $163.6
(1) Includes revenue overcharges provided through charges to operating
revenues and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
</TABLE>
<PAGE> PAGE 73
EXHIBIT INDEX
-------------
Electronic
Submission
Exhibit Page
Number Description Number
- ---------- ------------------------------------------- ------
21 Subsidiaries of Norfolk Southern Railway. 74
27 Financial Data Schedule (Required to be
electronically submitted for use by the
Securities and Exchange Commission only
and not deemed part of this filing). 75
<PAGE> PAGE 74
EXHIBIT 21
Page 1 of 1
NAME AND STATE OF INCORPORATION OF SUBSIDIARIES
OF NORFOLK SOUTHERN RAILWAY COMPANY
AS OF MARCH 1, 1996
Airforce Pipeline, Inc., North Carolina
Alabama Great Southern Railroad Company, The; Alabama
Atlanta and Charlotte Air Line Railway Company, The; Georgia,
North Carolina, South Carolina
Atlantic and East Carolina Railway Company, North Carolina
Camp Lejeune Railroad Company, North Carolina
Central of Georgia Railroad Company, Georgia
Chesapeake Western Railway, Virginia
Cincinnati, New Orleans and Texas Pacific Railway Company, The; Ohio
Citico Realty Company, Virginia
Elberton Southern Railway Company, Georgia
Georgia Midland Railway Company, The; Georgia
Georgia Southern and Florida Railway Company, Georgia
High Point, Randleman, Asheboro and Southern Railroad Company, North
Carolina
Interstate Railroad Company, Virginia
Memphis and Charleston Railway Company, Mississippi
Mobile and Birmingham Railroad Company, Alabama
Norfolk and Portsmouth Belt Line Railroad Company, Virginia
Norfolk and Western Railway Company, Virginia
North Carolina Midland Railroad Company, The; North Carolina
Rail Investment Company, Delaware
Richmond-Washington Company, Delaware
Shenandoah-Virginia Corporation, Virginia
South Western Rail Road Company, The; Georgia
Southern Rail Terminals, Inc., Georgia
Southern Rail Terminals of North Carolina, Inc., North Carolina
Southern Railway-Carolina Division, South Carolina
Southern Region Coal Transport, Inc., Alabama
Southern Region Materials Supply, Inc., Georgia
Southern Region Motor Transport, Inc., Georgia
State University Railroad Company, North Carolina
Tennessee, Alabama & Georgia Railway Company, Delaware
Tennessee Railway Company, Tennessee
Toledo Belt Railway Company, The; Ohio
Virginia and Southwestern Railway Company, Virginia
Yadkin Railroad Company, North Carolina
NOTE: Of the above subsidiaries, each of which is more than 50%
owned, only Norfolk and Western Railway Company meets the
Commission's "significant subsidiary" test on an individual basis.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 49
<SECURITIES> 181
<RECEIVABLES> 545
<ALLOWANCES> 3
<INVENTORY> 60
<CURRENT-ASSETS> 1,023
<PP&E> 12,822
<DEPRECIATION> 4,072
<TOTAL-ASSETS> 10,752
<CURRENT-LIABILITIES> 978
<BONDS> 495
<COMMON> 167
0
55
<OTHER-SE> 5,423
<TOTAL-LIABILITY-AND-EQUITY> 10,752
<SALES> 0
<TOTAL-REVENUES> 4,012
<CGS> 0
<TOTAL-COSTS> 2,949
<OTHER-EXPENSES> (44)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> 1,074
<INCOME-TAX> 372
<INCOME-CONTINUING> 702
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 702
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
