<PAGE> PAGE 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
( ) 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; 1-5462
NORFOLK SOUTHERN RAILWAY COMPANY
- -------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 53-6002016
- ---------------------------------------- -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Three Commercial Place
Norfolk, Virginia 23510-2191
- ---------------------------------------- -------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (757) 629-2682
------------------
No Change
- -------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. (X) Yes ( ) No
The number of shares outstanding of each of the registrant's classes of
Common Stock, as of the last practicable date:
Class Outstanding as of October 31, 1997
----- ----------------------------------
Common Stock (par value $1.00) 16,668,997
<PAGE> PAGE 2
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NS RAIL)
INDEX
-----
Page
----
Part I. Financial Information:
Item 1. Consolidated Statements of Income
Three Months and Nine Months Ended
September 30, 1997 and 1996 3
Consolidated Balance Sheets
September 30, 1997, and December 31, 1996 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-17
PartII. Other Information:
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Index to Exhibits 20
<PAGE> PAGE 3
PART I. FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements.
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Income
(In millions of dollars)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
RAILWAY OPERATING REVENUES:
Coal $ 325.7 $ 327.5 $ 977.3 $ 979.8
Merchandise 580.6 570.3 1,781.1 1,737.5
Intermodal 141.8 122.3 402.5 357.5
-------- -------- -------- --------
Railway operating revenues 1,048.1 1,020.1 3,160.9 3,074.8
-------- -------- -------- --------
RAILWAY OPERATING EXPENSES:
Compensation and benefits 351.5 341.3 1,065.0 1,069.9
Materials, services and rents 174.1 156.1 521.5 468.9
Depreciation 105.0 101.0 309.9 300.5
Diesel fuel 51.3 53.7 169.1 165.8
Casualties and other claims 30.9 28.2 85.0 93.8
Other 38.1 39.5 111.0 113.8
-------- -------- -------- --------
Railway operating expenses 750.9 719.8 2,261.5 2,212.7
-------- -------- -------- --------
Income from railway operations 297.2 300.3 899.4 862.1
Other income (expense):
Interest income 7.7 6.5 19.6 22.7
Interest expense on debt (7.6) (8.3) (24.5) (25.3)
Charge for credit
facility costs (Note 3) -- -- (77.2) --
Other - net (1.8) 3.1 (2.5) (1.5)
-------- -------- -------- --------
Other income (expense) (1.7) 1.3 (84.6) (4.1)
-------- -------- -------- --------
Income before income taxes 295.5 301.6 814.8 858.0
Provision for income taxes 89.9 92.8 280.8 295.5
-------- -------- -------- --------
NET INCOME $ 205.6 $ 208.8 $ 534.0 $ 562.5
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 4
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets
(In millions of dollars)
(Unaudited)
<CAPTION>
September 30, December 31,
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14.6 $ 172.1
Short-term investments 128.5 143.4
Accounts receivable - net 582.6 545.7
Materials and supplies 58.2 61.2
Deferred income taxes 100.3 95.3
Other current assets 73.1 119.8
--------- ---------
Total current assets 957.3 1,137.5
Due from NS - net (Note 3) 192.8 --
Investments 1,029.8 870.7
Properties less accumulated depreciation 9,383.6 9,014.9
Other assets 62.6 30.2
--------- ---------
TOTAL ASSETS $11,626.1 $11,053.3
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 27.2 $ 27.2
Accounts payable 556.1 549.8
Income and other taxes 213.0 158.3
Due to NS - net (Note 3) -- 64.9
Other current liabilities 128.6 109.0
Current maturities of long-term debt (Note 4) 59.5 54.3
--------- ---------
Total current liabilities 984.4 963.5
Long-term debt (Note 4) 557.3 543.6
Other liabilities 848.0 886.0
Minority interests 2.2 2.4
Deferred income taxes (Note 3) 3,006.1 2,886.0
--------- ---------
TOTAL LIABILITIES 5,398.0 5,281.5
--------- ---------
Stockholders' equity:
Serial preferred stock $50 stated value 54.8 54.8
Common stock $10 stated value 166.7 166.7
Additional paid-in capital 525.5 525.5
Unrealized gain on marketable securities 469.5 397.8
Retained income 5,011.6 4,627.0
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 6,228.1 5,771.8
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,626.1 $11,053.3
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 5
Item 1. Financial Statements. (continued)
- ------ --------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
(In millions of dollars)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 534.0 $ 562.5
Reconciliation of net income to net cash
provided by operating activities:
Charge for credit facility costs (Note 3) 77.2 --
Depreciation 310.9 301.4
Deferred income taxes 44.5 41.0
Nonoperating gains on property sales (6.5) (11.2)
Changes in assets and liabilities
affecting operations:
Accounts receivable (36.9) (50.9)
Materials and supplies 3.0 3.9
Other current assets 37.2 28.7
Current liabilities other than debt 63.0 (5.5)
Other - net (5.5) 36.6
-------- --------
Net cash provided by operating activities 1,020.9 906.5
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (Note 4) (661.0) (462.0)
Property sales and other transactions 43.5 60.3
Investments, including short-term (156.9) (155.2)
Investment sales and other transactions 123.8 171.2
-------- --------
Net cash used for investing activities (650.6) (385.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (Note 3) (2.1) (150.3)
Due to/from NS-net (482.3) (211.6)
Proceeds from long-term borrowings (Note 4) 2.0 9.6
Debt repayments (45.4) (50.9)
-------- --------
Net cash used for financing activities (527.8) (403.2)
-------- --------
Net increase (decrease) in cash
and cash equivalents (157.5) 117.6
CASH AND CASH EQUIVALENTS:*
At beginning of year 172.1 49.3
-------- --------
At end of period $ 14.6 $ 166.9
======== ========
- --------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 50.0 $ 52.0
Income taxes $ 178.4 $ 267.1
* Cash equivalents are highly liquid investments purchased three months
or less from maturity.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 6
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All tables in millions of dollars)
1. In the opinion of Management, the accompanying unaudited interim
financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly NS Rail's financial
position as of September 30, 1997, and its results of operations and
cash flows for the nine months ended September 30, 1997, and 1996.
While Management believes that the disclosures presented are
adequate to make the information not misleading, these consolidated
financial statements and notes should be read in conjunction with
the financial statements and notes included in the Corporation's
latest Annual Report on Form 10-K and subsequent Quarterly Report(s)
on Form 10-Q and any Current Reports on Form 8-K.
2. Commitments and Contingencies
Except as discussed below, there have been no significant changes
since year-end 1996 in the matters as discussed in NOTE 16,
COMMITMENTS AND CONTINGENCIES, and NOTE 17, EVENTS SUBSEQUENT TO THE
DATE OF THE INDEPENDENT AUDITORS' REPORT-CONRAIL DEVELOPMENTS,
appearing in the NS Rail Annual Report on Form 10-K for 1996, Notes
to Consolidated Financial Statements, beginning on page 61.
JOINT ACQUISITION OF CONRAIL INC. (CONRAIL) BY NS
-------------------------------------------------
On May 23, 1997, NS and CSX Corporation (CSX), through a jointly
owned entity, completed the acquisition of Conrail stock that was
tendered in response to the NS/CSX tender offer. On June 2, 1997, a
merger subsidiary jointly controlled by NS and CSX was merged into
Conrail. Pursuant to the merger, all previously issued Conrail
stock was either canceled or was converted into the right to receive
$115 per share in cash. NS' share of the purchase price to acquire
Conrail stock is expected to total $5.8 billion (including the cost
of shares acquired prior to May 23 and the transaction fees and
expenses). NS has a 58% economic and a 50% voting interest in the
entity which owns Conrail. All Conrail stock jointly owned by NS
and CSX has been placed in a voting trust pending approval of the
control transaction by the Surface Transportation Board (STB). The
approval of the STB, while anticipated, cannot be assumed, and a
final decision is not likely prior to mid-1998. The transaction
will be consummated after STB approval and is contingent upon, among
other things, attainment of labor implementing agreements (see also
Note 3, "Charge for Credit Facility Costs").
NS DEBT COMMITMENTS
-------------------
On May 21, 1997, NS terminated the remaining $1.65 billion of the
commitments available under a $13.0 billion credit agreement dated
February 10, 1997, as amended. NS currently has in place a
$2.8 billion, five-year credit facility that supports its commercial
<PAGE> PAGE 7
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All tables in millions of dollars)
2. Commitments and Contingencies (continued)
NS DEBT COMMITMENTS (continued)
-------------------
paper. The credit facility provides for interest on borrowings at
rates prevailing at the time and contains customary financial
covenants. The cost of the Conrail transaction was financed through
the issuance of senior term debt and commercial paper (see Note 3,
"Cash Required for NS Debt"). On May 14, 1997, NS terminated the
contracts and agreements previously entered into to hedge its
exposure to changes in interest rates.
3. Related Parties
GENERAL
-------
Norfolk Southern Corporation (NS) is the parent holding company of
NS Rail. The costs of functions performed by NS are allocated to
NS Rail. Rail operations are coordinated at the holding company
level by the NS Executive Vice President-Operations.
CHARGE FOR CREDIT FACILITY COSTS
--------------------------------
NS Rail recorded a $77.2 million pretax charge in the first quarter
of 1997 for the direct costs, principally loan commitment fees, of
having secured and maintained certain now-terminated commitments
under the February credit agreement (see Note 2, "NS Debt
Commitments"). This charge reduced net income by $49.7 million.
NON-CASH DIVIDEND
-----------------
In March 1997, NS Rail declared and issued to NS a non-cash
dividend of $147.4 million, which was settled by reduction of
NS Rail's interest-bearing advances due from NS. Non-cash
dividends are excluded from the Consolidated Statements of Cash
Flows.
<PAGE> PAGE 8
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All tables in millions of dollars)
3. Related Parties (continued)
<TABLE>
INTERCOMPANY ACCOUNTS
---------------------
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -------------------
Average Average
Interest Interest
Balance Rate Balance Rate
------- -------- ------- --------
<S> <C> <C> <C> <C>
Due from NS:
Advances $ 494.4 4.9% $ 155.6 4.1%
Due to NS:
Notes and advances 301.6 7.1% 220.5 6.1%
------- -------
Due from (to) NS-net $ 192.8 $ (64.9)
======= =======
</TABLE>
Interest is applied to certain advances at the average NS yield on
short-term investments and to the notes at specified rates.
INTERCOMPANY FEDERAL INCOME TAX ACCOUNTS
----------------------------------------
In accordance with the NS Tax Allocation Agreement, intercompany
federal income tax accounts are recorded between companies in the NS
consolidated group. At September 30, 1997, and December 31, 1996,
NS Rail had intercompany federal income tax payables (which are
included in deferred income taxes in the Consolidated Balance
Sheets) of $323.4 million and $292.6 million, respectively.
CASH REQUIRED FOR NS DEBT
-------------------------
To finance the cost of the Conrail transaction, NS has issued and
sold commercial paper and $4.3 billion of senior term notes. A
significant portion of the funding for the interest and repayments
on this debt is expected to be provided by NS Rail.
4. Capital Lease Obligations
During the first halves of 1997 and 1996, NS Rail entered into
capital leases covering new locomotives. The related capital lease
obligations totaling $64.0 million in 1997 and $107.8 million in
1996 were reflected in the Consolidated Balance Sheets as debt and,
because they were non-cash transactions, were excluded from the
Consolidated Statements of Cash Flows. The lease obligations carry
stated interest rates of between 6.83 percent and 7.40 percent for
the leases entered into in 1997, and between 6.20 percent and
6.75 percent for those entered into in 1996. All were converted to
<PAGE> PAGE 9
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All tables in millions of dollars)
4. Capital Lease Obligations (continued)
variable rate obligations using interest rate swap agreements. The
interest rates on these obligations are based on the six-month
London Interbank Offered Rate and are reset every six months with
realized gains or losses accounted for as an adjustment of interest
expense over the terms of the leases. As a result, NS Rail is
exposed to the market risk associated with fluctuations in interest
rates. To date, the effects of the rate fluctuations have been
favorable and not material. Counterparties to the interest rate
swap agreements are major financial institutions believed by
Management to be creditworthy. NS Rail's use of interest rate swaps
has been limited to those discussed above.
<TABLE>
5. Norfolk and Western Railway Company and Subsidiaries (NW)--
Summarized Consolidated Financial Information
SUMMARIZED CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Railway operating revenues $ 498.9 $ 471.6 $1,508.4 $1,455.6
Railway operating expenses 356.8 332.7 1,062.1 1,040.0
-------- -------- -------- --------
Income from operations 142.1 138.9 446.3 415.6
Other - net 23.2 14.3 28.5 37.2
-------- -------- -------- --------
Income before
income taxes 165.3 153.2 474.8 452.8
Provision for income taxes 49.9 49.5 163.3 158.3
-------- -------- -------- --------
Net income $ 115.4 $ 103.7 $ 311.5 $ 294.5
======== ======== ======== ========
</TABLE>
<PAGE> PAGE 10
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All tables in millions of dollars)
<TABLE>
5. Norfolk and Western Railway Company and Subsidiaries (NW)--
Summarized Consolidated Financial Information (continued)
SUMMARIZED CONSOLIDATED BALANCE SHEETS
--------------------------------------
<CAPTION>
September 30, December 31,
1997 1996
------------ -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets $ 379.2 $ 353.4
Noncurrent assets 6,049.3 5,631.2
-------- --------
Total assets $6,428.5 $5,984.6
======== ========
Liabilities and stockholder's equity
Current liabilities $ 238.3 $ 205.7
Noncurrent liabilities 1,850.3 1,812.5
Stockholder's equity 4,339.9 3,966.4
-------- --------
Total liabilities and
stockholder's equity $6,428.5 $5,984.6
======== ========
</TABLE>
<PAGE> PAGE 11
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations.
-------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Net Income
- ----------
Net income for the third quarter was $205.6 million, a decrease of
$3.2 million, or 2 percent, compared with the third quarter of 1996. Net
income for the nine months ended September 30, 1997, was $534.0 million,
down $28.5 million, or 5 percent, compared with the same period last year.
The third-quarter decrease was primarily attributable to a 1 percent
decrease in income from railway operations and lower nonoperating income.
Included in 1997's year-to-date results was a $77.2 million ($49.7 million
after-tax) charge for costs related to the February credit agreement which
had been established and maintained by NS to purchase all Conrail shares
(see Note 3, "Charge for Credit Facility Costs"). Excluding the charge,
net income for the first nine months was $583.7 million, up $21.2 million,
or 4 percent, due to increased income from railway operations.
<TABLE>
Railway Operating Revenues
- --------------------------
Third-quarter railway operating revenues were a record $1.05 billion, up
$28.0 million, or 3 percent. For the first nine months, railway operating
revenues were a record $3.16 billion, up $86.1 million, or 3 percent. As
shown in the following table, increased traffic volume and higher revenue
per unit were responsible for the third-quarter improvement, while the
beneficial effects of increased traffic volume were partly offset by lower
revenue per unit for the first nine months.
<CAPTION>
Third Quarter First Nine Months
1997 vs. 1996 1997 vs. 1996
Increase (Decrease) Increase (Decrease)
------------------ ------------------
(In millions of dollars)
<S> <C> <C>
Traffic volume (carloads) $ 20.0 $ 96.0
Revenue per unit 8.0 (9.9)
------- -------
$ 28.0 $ 86.1
======= =======
</TABLE>
<PAGE> PAGE 12
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
<TABLE>
Revenues and carloads for the commodity groups were as follows:
<CAPTION>
Revenues
------------------------------------------
Third Quarter Nine Months
1997 1996 1997 1996
--------- --------- --------- ---------
($ in millions)
<S> <C> <C> <C> <C>
Coal $ 325.7 $ 327.5 $ 977.3 $ 979.8
Chemicals 144.3 141.4 441.0 422.3
Paper/forest 138.0 130.1 407.0 388.5
Automotive 112.1 112.2 368.0 364.2
Agriculture 93.6 94.4 288.1 293.1
Metals/construction 92.6 92.2 277.0 269.4
-------- -------- -------- --------
General merchandise 580.6 570.3 1,781.1 1,737.5
Intermodal 141.8 122.3 402.5 357.5
-------- -------- -------- --------
Total $1,048.1 $1,020.1 $3,160.9 $3,074.8
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Carloads
-------------------------------------------
Third Quarter Nine Months
1997 1996 1997 1996
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Coal 332.3 333.4 987.4 987.5
Chemicals 100.8 97.5 303.6 286.8
Paper/forest 116.1 111.6 345.0 329.8
Automotive 81.4 83.5 270.5 263.1
Agriculture 86.9 91.6 267.3 275.5
Metals/construction 96.2 94.4 282.0 273.5
-------- -------- -------- --------
General merchandise 481.4 478.6 1,468.4 1,428.7
Intermodal 379.8 334.1 1,095.0 976.5
-------- -------- -------- --------
Total 1,193.5 1,146.1 3,550.8 3,392.7
======== ======== ======== ========
</TABLE>
<PAGE> PAGE 13
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Coal
- ----
Revenues from coal traffic were down slightly in both the third quarter
and the first nine months, compared with the same periods last year.
Tonnage handled increased 1 percent for both periods as gains in export
and steel coal volume offset declines in utility coal volume. Export
coal tonnage increased 7 percent in the third quarter and 8 percent for
the first nine months, primarily due to increased shipments to Holland,
Japan and Brazil. Utility tonnage decreased 3 percent in the third
quarter and 2 percent for the first nine months, principally due to
reduced shipments because of the mild summer, unscheduled plant outages
and service disruptions in the West. Average revenues per car were down
slightly for both periods due to increases in shorter-haul traffic.
Fourth-quarter coal revenues are expected to be about even with those of
1996.
General Merchandise
- -------------------
Revenues from general merchandise traffic increased 2 percent in the third
quarter and 3 percent for the first nine months, compared with the same
periods last year. Increased paper/forest and chemicals revenues were
principally responsible for these improvements.
Chemicals revenues increased 2 percent in the third quarter and 4 percent
for the first nine months, due to increased traffic volume in most market
groups. Paper/forest revenues increased 6 percent in the third quarter
and 5 percent for the first nine months, due to wood chip and kaolin
volume growth, increased demand for lumber and printing paper, and
compared with relatively weak periods last year. Metals/construction
revenues were up slightly in the third quarter and increased 3 percent for
the first nine months, due to strong demand for aggregates required for
new construction projects. Automotive revenues were flat in the third
quarter, but increased 1 percent for the first nine months. In the third
quarter, continued bilevel equipment shortages, service disruptions in the
West and unexpected plant downtime adversely affected traffic volume.
Agriculture revenues decreased 1 percent in the third quarter and
2 percent for the first nine months, due to lower traffic volume.
General merchandise revenues in the fourth quarter are expected to
continue to be ahead of the same period last year.
Intermodal
- ----------
Revenues from intermodal traffic increased 16 percent in the third
quarter and 13 percent for the first nine months, compared with the same
periods last year. Container traffic volume led the growth, increasing
16 percent in the third quarter and 14 percent for the first nine
months. Trailer volume increased 9 percent for the quarter and the
first nine months. RoadRailer volume increased 13 percent in the third
quarter and 11 percent for the first nine months. Fourth-quarter
intermodal revenues are expected to continue to show double-digit
percentage growth, compared with last year.
<PAGE> PAGE 14
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Railway Operating Expenses
- --------------------------
Railway operating expenses increased 4 percent in the third quarter and
2 percent for the first nine months, compared with the same periods last
year.
The largest increases were in materials, services and rents, which was
up 12 percent in the third quarter and 11 percent for the first nine
months. These increases, primarily volume driven, reflect a rise in
equipment rents, handling costs related to the growth in intermodal
traffic, locomotive repair costs and joint facility costs. Additionally,
higher information technology costs, primarily Year-2000 compliance
programming, contributed to the increases.
Compensation and benefits expenses increased 3 percent in the third
quarter, but decreased slightly for the first nine months. The increase
for the quarter was primarily due to higher wages for agreement employees,
including the July 1 general wage increase for certain agreement
employees, and train and engine employee training costs. For the first
nine months, productivity gains and lower fringe benefits costs more than
offset the effects of the higher wage rates.
Casualties and other claims expenses increased 10 percent in the third
quarter, but decreased 9 percent for the first nine months. The
comparative increase for the quarter was related to the effect of a 1996
insurance premium rebate for earlier periods. The year-to-date decline
was primarily due to lower personal injury and environmental accruals.
Diesel fuel expenses decreased 4 percent in the third quarter, but
increased 2 percent for the first nine months. The decrease for the
quarter was due to a 7 percent decline in the average price per gallon,
which was partially offset by a 3 percent increase in consumption caused
by higher traffic volume. For the first nine months, the average price
per gallon was down slightly, while consumption was up 2 percent.
Other expenses declined 4 percent in the third quarter and 2 percent for
the first nine months due to favorable adjustments of sales and use
taxes and, for the year-to-date, favorable adjustments of property
taxes.
The 3 percent increase in railway operating revenues combined with a
4 percent increase in railway operating expenses produced a
third-quarter railway operating ratio of 71.6 percent, 1 percentage
point higher than last year. The higher railway operating ratio
reflects, in part, that intermodal traffic was a larger component of
railway traffic. For the first nine months, the railway operating ratio
was 71.5 percent, a record for that period compared to 72.0 percent for
the first nine months of 1996.
<PAGE> PAGE 15
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Other Income (Expense)
- ----------------------
Total other income and expense in the third quarter was an expense of
$1.7 million, compared with income of $1.3 million in third-quarter 1996.
For the first nine months, total other income and expense was an expense
of $84.6 million, compared with an expense of $4.1 million in the first
nine months of 1996. The third-quarter variance was primarily due to less
gains from property dispositions. The large difference for the first nine
months was principally attributable to the one-time charge of
$77.2 million in the first quarter of 1997 to write off costs incurred to
establish and maintain a $13 billion credit facility in connection with
NS' bid to acquire all of Conrail (see also "Joint Acquisition of Conrail
by NS," below, and Notes 2 and 3, "Charge for Credit Facility Costs").
<TABLE>
FINANCIAL CONDITION AND LIQUIDITY
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Dollars in millions)
<S> <C> <C>
Cash and short-term investments $143.1 $315.5
Debt to total capitalization 9.4% 9.8%
</TABLE>
CASH PROVIDED BY OPERATING ACTIVITIES is NS Rail's principal source of
liquidity and was sufficient to cover the cash outflows for dividends,
debt repayments and capital spending (see Consolidated Statements of Cash
Flows on page 5). The increase in cash provided by operations, compared
with the first nine months of last year, was primarily attributable to an
increase in income, excluding the charge for credit facility costs, and
lower current income tax payments.
CASH USED FOR INVESTING ACTIVITIES increased principally due to higher
property additions in the first nine months of 1997, compared with the
same period last year, the result of increased roadway additions and the
purchase of some locomotives in 1997 using cash, instead of capital
leases.
CASH USED FOR FINANCING ACTIVITIES includes proceeds from long-term
borrowings which represent amounts received in connection with capital
lease transactions (see Note 4). The decrease in dividends paid in the
first nine months of 1997, compared with the same period last year,
resulted from the declaration this year of a non-cash dividend (see
Note 3, "Non-Cash Dividend").
As discussed in Note 3, NS has issued a significant amount of long-term
debt. Funds to service this debt are expected to come primarily from
NS Rail, NS' principal subsidiary.
<PAGE> PAGE 16
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
JOINT ACQUISITION OF CONRAIL BY NS
On May 23, 1997, NS and CSX completed the acquisition of Conrail stock
that was tendered in response to the NS/CSX tender offer (see Note 2).
On June 2, a merger subsidiary jointly controlled by NS and CSX was
merged into Conrail. Pursuant to the merger, all previously issued
Conrail stock was either canceled or converted into the right to
receive $115 per share in cash. NS' estimated total cost for its share
of the acquisition is expected to be $5.8 billion. On June 23, NS and
CSX filed a joint application with the STB for control and division of
the use and operations of Conrail's assets as well as related matters
necessary to implement the transaction. The application addresses
projected traffic flows, proposed operations and related matters;
outlines the capital investments each of NS and CSX plans to make in
new connections and facilities and to increase capacity on critical
routes; and details operating savings and other public benefits
resulting from the transaction. The application also contains certain
historical and pro forma financial information required by the STB.
The STB has the authority to modify contract terms and impose
additional conditions, including divestitures, grants of trackage rights
and modification of other proposed aspects of operations. In May, the
STB issued a scheduling order providing for issuance of a final STB
decision no later than June 8, 1998, to become effective 30 days
thereafter.
On November 3, the STB extended the period for issuing its final
decision by 45 days, to July 23, 1998, to become effective 30 days
thereafter. This extension was in conjunction with a new requirement
that NS and CSX comply with the STB's order requiring submission of
detailed safety integration plans. This may or may not delay the
realization of the expected transaction benefits. No assurance can be
given with respect to the receipt of STB approval or as to modifications
or conditions that may be imposed in connection therewith. The joint
application is a public document, available for review in its
entirety at the office of the STB, located at 1925 K Street, NW,
Washington, DC 20423-0001.
Until the date NS and CSX are permitted by the STB to assume control
over Conrail (the "Control Date"), Conrail will continue to be managed
by its current Board of Directors and management. After the Control
Date, various agreements between NS and CSX provide, among other things
and subject to approval by the STB and other conditions, for each of the
parties: (1) separately to operate portions of the routes and assets
now owned and operated by Conrail, and (2) jointly to operate other
Conrail properties. Those agreements also provide for the allocation
between NS and CSX of responsibility for certain known and contingent
Conrail liabilities. Until the STB renders a final decision on the
control application filed by NS and CSX, NS will not have complete
access to Conrail's related books, records and physical assets, and will
not know precisely which Conrail properties NS will have responsibility
for under its agreements with CSX. As a consequence, it is not possible
at this time for NS to state or to assess with precision the amount of
its share of Conrail assets and liabilities.
<PAGE> PAGE 17
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
DERIVATIVE FINANCIAL INSTRUMENTS
NS Rail uses derivative financial instruments in limited instances to
manage interest rate risk. NS Rail manages its overall exposure to
fluctuations in interest rates by issuing both fixed and floating rate
debt instruments and by entering into interest rate hedging transactions
to achieve a targeted mix within its debt portfolio. NS Rail had a
limited number of interest rate swaps in place at September 30, 1997
(see Note 4, "Capital Lease Obligations"), all of which were accounted
for as hedging transactions. Because these derivative instruments are
being used to convert certain fixed-rate debt to a variable market-based
rate, NS Rail's total potential interest rate exposure under these swaps
is not determinable. However, NS Rail's management considers it highly
unlikely that interest rate fluctuations applicable to these instruments
will result in a material adverse effect on the Company's financial
position, results of operations or liquidity.
JURY VERDICT
On September 8, 1997, a state court jury in New Orleans, Louisiana,
returned a verdict awarding $175 million in punitive damages against The
Alabama Great Southern Railroad Company (AGS), a subsidiary of NS Rail.
The verdict was returned in a class action suit involving some
8,000 individuals who claim to have been damaged as the result of an
explosion and fire that occurred in New Orleans on September 9, 1987,
when a chemical called butadiene leaked from a tank car.
The jury verdict awarded a total of nearly $3.2 billion in punitive
damages against four other defendants in the same case: two rail
carriers, the owner of the car and the shipper.
Previously, the jury had awarded nearly $2.0 million in compensatory
damages to 20 individuals who are members of the class. However, at
least in part because there has been no determination of the amount of
compensatory damage, if any, sustained by all the class members to whom
the jury awarded punitive damages, the Supreme Court of Louisiana
recently entered an order prohibiting the trial judge from entering a
final judgment for punitive damages until liability for all remaining
compensatory damages has been determined.
Management will continue to monitor the progress of the litigation.
If the trial judge does not set aside or modify the jury verdict in
an acceptable manner, appropriate appeals will be pursued. Management
believes that the jury verdicts are both grossly excessive and
without factual or legal justification, and AGS' ultimate financial
liability--the amount of which could be reduced substantially by
anticipated recoveries from liability insurance carriers--will not
have a material adverse effect on NS Rail's consolidated financial
position, results of operations or cash flows.
<PAGE> PAGE 18
PART II - OTHER INFORMATION
---------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits:
Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K dated July 3, 1997, was filed
electronically on July 3, 1997, reporting that NS
closed the $3.5 billion, five-year credit agreement
dated as of May 21, 1997, among NS, the banks from
time to time parties thereto, Morgan Guaranty Trust
Company of New York, as administrative agent, and
Merrill Lynch Capital Corporation, as document
agent.
A report on Form 8-K dated July 22, 1997, was filed
electronically on July 23, 1997, reporting that the
Board of Directors of NS approved a three-for-one
split of NS' common stock, with an expected
effective and record date of September 5, 1997.
A report on Form 8-K dated September 10, 1997, was
filed electronically on September 10, 1997,
reporting that a state court jury in New Orleans,
Louisiana, returned a verdict awarding $175 million
in punitive damages against The Alabama Great
Southern Railroad Company, a subsidiary of NS Rail.
<PAGE> PAGE 19
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NORFOLK SOUTHERN RAILWAY COMPANY
------------------------------------------
(Registrant)
Date: November 10, 1997 /s/ Dezora M. Martin
------------------- ------------------------------------------
Dezora M. Martin
Assistant Corporate Secretary (Signature)
Date: November 10, 1997 /s/ John P. Rathbone
------------------- ------------------------------------------
John P. Rathbone
Vice President and Controller
(Principal Accounting Officer) (Signature)
<PAGE> PAGE 20
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
INDEX TO EXHIBITS
-----------------
Electronic
Submission
Exhibit
Number Description Page Number
- ----------- ----------------------------------------- -----------
27 Financial Data Schedule
(This exhibit is required to be submitted
electronically pursuant to the rules and
regulations of the Securities and
Exchange Commission and shall not be
deemed filed for purposes of Section 11
of the Securities Act of 1933 or Section
18 of the Securities Exchange Act
of 1934). 21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> $ 15
<SECURITIES> 129
<RECEIVABLES> 586
<ALLOWANCES> 3
<INVENTORY> 58
<CURRENT-ASSETS> 957
<PP&E> 13,621
<DEPRECIATION> 4,237
<TOTAL-ASSETS> 11,626
<CURRENT-LIABILITIES> 984
<BONDS> 557
0
55
<COMMON> 167
<OTHER-SE> 6,007
<TOTAL-LIABILITY-AND-EQUITY> 11,626
<SALES> 0
<TOTAL-REVENUES> 3,161
<CGS> 0
<TOTAL-COSTS> 2,262
<OTHER-EXPENSES> 60
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> 815
<INCOME-TAX> 281
<INCOME-CONTINUING> 534
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 534
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
