PAGE 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 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; 1-546-2
NORFOLK SOUTHERN RAILWAY COMPANY
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 53-6002016
- ---------------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer
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 (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 April 30, 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. Financial Statements:
Consolidated Statements of Income
Three Months Ended March 31, 1997 and 1996 3
Consolidated Balance Sheets as of
March 31, 1997, and December 31, 1996 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 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
Part II. 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
March 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
RAILWAY OPERATING REVENUES:
Coal $ 326.1 $ 323.8
General merchandise 594.2 574.1
Intermodal 125.7 118.8
-------- --------
Railway operating revenues 1,046.0 1,016.7
-------- --------
RAILWAY OPERATING EXPENSES:
Compensation and benefits 361.9 377.3
Materials, services and rents 170.6 153.2
Depreciation 101.7 99.1
Diesel fuel 62.7 55.4
Casualties and other claims 29.0 34.7
Other 38.6 35.2
-------- --------
Railway operating expenses 764.5 754.9
-------- --------
Income from railway operations 281.5 261.8
Other income (expense):
Interest income 6.8 7.9
Interest expense on debt (8.6) (8.2)
Charge for credit facility costs (Note 3) (77.2) --
Other - net (0.8) (0.4)
-------- --------
Other income (expense) (79.8) (0.7)
-------- --------
Income before income taxes 201.7 261.1
Provision for income taxes 73.6 98.0
-------- --------
NET INCOME $ 128.1 $ 163.1
======== ========
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>
March 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 98.1 $ 172.1
Short-term investments 133.7 143.4
Accounts receivable - net 587.3 545.7
Materials and supplies 62.9 61.2
Deferred income taxes 97.4 95.3
Other current assets 98.6 119.8
--------- ---------
Total current assets 1,078.0 1,137.5
Investments 874.7 870.7
Properties less accumulated depreciation 9,168.2 9,014.9
Other assets 45.0 30.2
--------- ---------
TOTAL ASSETS $11,165.9 $11,053.3
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 27.2 $ 27.2
Accounts payable 520.1 549.8
Income and other taxes 207.3 158.3
Due to NS - net (Note 3) 156.1 64.9
Other current liabilities 129.3 109.0
Current maturities of long-term debt 54.3 54.3
--------- ---------
Total current liabilities 1,094.3 963.5
Long-term debt (Note 4) 576.5 543.6
Other liabilities 864.8 886.0
Minority interests 2.6 2.4
Deferred income taxes (Note 3) 2,889.2 2,886.0
--------- ---------
TOTAL LIABILITIES 5,427.4 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 384.5 397.8
Retained income 4,607.0 4,627.0
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 5,738.5 5,771.8
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,165.9 $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>
Three Months Ended
March 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 128.1 $ 163.1
Reconciliation of net income to net cash
provided by operating activities:
Charge for credit facility costs (Note 3) 77.2 --
Depreciation 102.0 100.5
Deferred income taxes 8.4 14.6
Nonoperating gains on property sales (1.9) (0.6)
Changes in assets and liabilities
affecting operations:
Accounts receivable (41.6) (43.6)
Materials and supplies (1.7) (2.3)
Other current assets 10.0 8.7
Current liabilities other than debt 22.1 84.3
Other - net (4.9) 7.2
-------- --------
Net cash provided by operating activities 297.7 331.9
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (Note 4) (226.0) (142.3)
Property sales and other transactions 13.9 5.8
Investments, including short-term (115.9) (79.9)
Investment sales and other transactions 101.1 77.7
-------- --------
Net cash used for investing activities (226.9) (138.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (Note 3) (0.7) (71.6)
Due to/from NS - net (133.4) (118.1)
Proceeds from long-term borrowings (Note 4) 1.2 5.6
Long-term debt repayments (11.9) (12.0)
-------- --------
Net cash used for financing activities (144.8) (196.1)
-------- --------
Net decrease in cash and cash equivalents (74.0) (2.9)
CASH AND CASH EQUIVALENTS:*
At beginning of year 172.1 49.3
-------- --------
At end of period $ 98.1 $ 46.4
======== ========
- ----------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 14.9 $ 13.8
Income taxes $ 3.8 $ 2.8
* Cash equivalents are highly liquid investments purchased three months or
less from maturity.
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> PAGE 6
Item 1. Financial Statements. (continued)
- ------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
(All tables in millions of dollars)
1. In the opinion of Management, the accompanying unaudited interim
financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial
position as of March 31, 1997, and the results of operations and
cash flows for the three months ended March 31, 1997 and 1996.
While Management believes that the disclosures presented are
adequate to make the information not misleading, these consolidated
financial statements should be read in conjunction with the
financial statements and notes included in the Company's latest
Annual Report on Form 10-K.
2. 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 February 11, 1997, pursuant to its tender offer as then amended,
a Norfolk Southern Corporation (NS) subsidiary purchased 8.2 million
Conrail shares at $115 in cash per share, or $943 million in the
aggregate.
On April 8, 1997, NS and CSX Corporation (CSX) entered into an
agreement ("Agreement") providing for a joint acquisition of Conrail.
The two companies will form a jointly owned entity to acquire all
outstanding shares of Conrail, not currently held by NS or CSX, for
$115 in cash per share, pursuant to a tender offer scheduled to
expire May 23, 1997, followed by a second-step merger. Following the
joint acquisition of the Conrail shares and receipt of all required
regulatory approvals, most of the assets and liabilities of Conrail
are expected to be allocated between NS and CSX pursuant to leasing,
operating, partnership or other arrangements yet to be negotiated by
NS and CSX. NS will contribute $5.9 billion for its 58 percent share
of the purchase price of the Conrail shares, and CSX will contribute
$4.3 billion for its 42 percent share (including amounts previously
paid by NS and CSX to acquire Conrail shares).
Conrail tender offer and merger shares purchased previously by NS
and CSX, and Conrail shares jointly purchased will be placed in a
joint voting trust pending STB approval. NS and CSX intend to file
a joint application with the Surface Transportation Board (STB) in
June 1997 seeking approval of the proposed acquisition of Conrail.
The approval of the STB, while expected, cannot be assumed and is
not likely to be effective prior to April 1, 1998.
<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)
JOINT ACQUISITION OF CONRAIL INC. (CONRAIL) BY NS (continued)
-------------------------------------------------
NS intends to account for its investment in Conrail using the equity
method of accounting following consummation of the joint acquisition
and during the period Conrail shares are held in a voting trust--a
period that will extend at least until the effective date of the
STB's decision approving the transactions contemplated by the
Agreement (if such approval is obtained). The method of accounting
for the investment in Conrail subsequent to the voting trust being
dissolved will depend on the ownership arrangement that is
ultimately negotiated between NS and CSX, and approved by the STB,
and the determination of whether and how controlling financial
interests will be established for selected assets, liabilities and
operations of Conrail. Additionally, the terms of leases,
operating, partnership and other arrangements, yet to be negotiated,
will impact the accounting. It is also expected that some of the
assets and operations of Conrail will remain subject to joint
control by NS and CSX and thus will continue to be accounted for
using the equity method of accounting post STB approval.
The Conrail shares purchased on February 11, 1997, were financed
with commercial paper debt (see Note 3, "Cash Required for NS
Debt"). During the second quarter of 1997, NS intends to finance
the remaining approximately $5 billion cost of the Conrail
transaction by accessing both public and private markets by issuing
commercial paper and term debt.
NS DEBT COMMITMENTS
-------------------
Following the April 8, 1997, Agreement with CSX, NS terminated all
but $1.65 billion of the commitments available under a $13.0 billion
credit agreement dated February 10, 1997, as amended. The February
credit agreement provided financing for NS' then-proposed
acquisition of all Conrail shares. NS has begun negotiating a new
credit agreement to provide a bank facility of up to $7.0 billion.
During the second quarter of 1997, NS intends to finance the
remaining approximately $5 billion cost of the Conrail transaction
by accessing both public and private markets by issuing commercial
paper and term debt. NS has entered into certain agreements to
hedge its exposure to changes in interest rates. The total
notional amount of such contracts and agreements is $1.25 billion.
As a result, NS is exposed to the market risk associated with
interest rate fluctuations until the contracts and agreements are
terminated. NS expects to terminate them when the term debt is
issued and account for any gain or loss, which is not expected
to be material, as a component of interest expense over the life
of the term debt. Counterparties to the contracts and agreements
are major financial institutions believed by Management to be
creditworthy.
<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
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.
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 first-quarter 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.
<TABLE>
INTERCOMPANY ACCOUNTS
---------------------
<CAPTION>
March 31, 1997 December 31, 1996
------------------ ------------------
Average Average
Interest Interest
Balance Rate Balance Rate
------- -------- ------- --------
<S> <C> <C> <C> <C>
Due from NS:
Advances $ 101.9 3.6% $ 155.6 4.1%
Due to NS:
Notes and advances 258.0 6.6% 220.5 6.1%
------- -------
Due to NS - net $(156.1) $ (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.
<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)
3. 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 March 31, 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 $292.6 million.
CASH REQUIRED FOR NS DEBT
-------------------------
In the first quarter of 1997, NS filed with the Securities and
Exchange Commission shelf registration statements on Form S-3
covering the issuance of up to $4.25 billion principal amount of any
combination of debt or equity securities, and NS issued $1.0 billion
of commercial paper debt to finance its purchase of 8.2 million
Conrail shares (see Note 2, "Joint Acquisition of Conrail Inc. by
NS"). 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 quarter of 1997 and 1996, NS Rail entered into
capital leases covering new locomotives. The related capital lease
obligations totaling $44.7 million in 1997 and $74.4 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 6.83 percent for the lease entered into in
1997, and between 6.20 percent and 6.75 percent for those entered
into in 1996. All were converted to variable rate obligations using
interest rate swap agreements. The interest rates on these
obligations are based on the six-month London Interbank Offered Rate
and are reset every six months with realized gains or losses
accounted for as an adjustment of interest expense over the terms of
the leases. As a result, NS Rail is exposed to the market risk
associated with fluctuations in interest rates. To date, the
effects of the rate fluctuations have been favorable.
Counterparties to the interest rate swap agreements are major
financial institutions believed by Management to be credit-worthy.
<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
SUMMARIZED CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------
<CAPTION>
Three Months Ended
March 31,
------------------
1997 1996
-------- --------
(Unaudited)
<S> <C> <C>
Railway operating revenues $ 498.4 $ 483.2
Railway operating expenses 357.8 364.6
------- -------
Income from operations 140.6 118.6
Other - net (18.2) 11.2
------- -------
Income before income taxes 122.4 129.8
Provision for income taxes 44.5 48.2
------- -------
Net income $ 77.9 $ 81.6
======= =======
</TABLE>
<TABLE>
SUMMARIZED CONSOLIDATED BALANCE SHEETS
--------------------------------------
<CAPTION>
March 31, December 31,
1997 1996
--------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets $ 381.7 $ 353.4
Noncurrent assets 5,705.3 5,631.2
-------- --------
Total assets $6,087.0 $5,984.6
======== ========
Liabilities and stockholder's equity
Current liabilities $ 256.5 $ 205.7
Noncurrent liabilities 1,797.7 1,812.5
Stockholder's equity 4,032.8 3,966.4
-------- --------
Total liabilities and
stockholder's equity $6,087.0 $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 first quarter of 1997 was $128.1 million, a
decrease of $35.0 million, or 21 percent, compared with first-quarter
1996. Included in 1997's 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, first-quarter net income was $177.8 million, up $14.7 million,
or 9 percent, compared with the same period last year, due to a
$19.7 million, or 8 percent, increase in operating income.
<TABLE>
Railway Operating Revenues
- --------------------------
Railway operating revenues were a record $1.05 billion for the first
quarter, a $29.3 million, or 3 percent, increase, compared with the same
period last year. As shown in the table below, the improvement was the
result of increased traffic volume.
<CAPTION>
First Quarter
1997 vs. 1996
Increase (Decrease)
------------------
(In millions of dollars)
<S> <C>
Traffic volume (carloads) $ 42.3
Revenue per unit (13.0)
------
$ 29.3
======
</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 Carloads
1997 1996 1997 1996
--------- --------- ------- -------
($ in millions) (in thousands)
<S> <C> <C> <C> <C>
Coal $ 326.1 $ 323.8 327.7 319.6
Chemicals 147.2 141.1 100.6 96.6
Paper/forest 134.8 129.7 114.7 109.8
Automotive 123.8 118.3 92.1 83.8
Agriculture 99.2 101.6 91.0 93.1
Metals/construction 89.2 83.4 87.2 82.7
-------- -------- ------- -------
General merchandise 594.2 574.1 485.6 466.0
Intermodal 125.7 118.8 342.2 319.2
-------- -------- ------- -------
Total $1,046.0 $1,016.7 1,155.5 1,104.8
======== ======== ======= =======
</TABLE>
Coal
- ----
First-quarter coal revenues of $326.1 million were $2.3 million, or
1 percent, higher than first-quarter 1996. The improvement was due to a
3 percent increase in carloads resulting from increased export, coke and
utility tonnage. Export coal tonnage rose 9 percent, led by increased
shipments to Japan, Brazil and Turkey. Steel coal tonnage also
improved, supported by new coke business that more than offset declines
in the domestic metallurgical coal market resulting from inventory
adjustments, shipment timing and some lost market share. Utility
tonnage improved 2 percent despite strong carloadings late in the first
quarter of 1996.
Coal revenues for all of 1997 are expected to compare favorably with
those of 1996.
General Merchandise
- -------------------
General merchandise revenues were $594.2 million in the first quarter,
increasing $20.1 million, or 4 percent, compared with the same period last
year. All commodity groups except agriculture posted carload and revenue
gains. Leading the improvement was the chemicals group, up $6.1 million,
or 4 percent, reflecting increased traffic volume, a result of strong
demand for plastics, chloral-alkali and miscellaneous chemicals.
Metals/construction revenues posted a $5.8 million, or 7 percent, increase
on a 5 percent increase in traffic volume. Growth was broad based with
revenue increases reported for most of metals and construction
commodities. Automotive revenues increased $5.5 million, or 5 percent, as
traffic volume increased 10 percent supported by improved demand for both
<PAGE> PAGE 13
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
parts and finished automobiles despite a mid-March strike at one GM
plant and unscheduled downtime at two Ford plants. Lower average
revenues per car, the result of shorter length of haul and a shift in
traffic mix among customers, offset some of the volume improvement.
Paper/forest revenues improved $5.1 million, or 4 percent, compared with
a weak first quarter last year. Agriculture revenues declined
$2.4 million, or 2 percent, due to softness in the export grain market.
General merchandise revenues are expected to continue to show
improvement for the remainder of the year.
Intermodal
- ----------
Intermodal revenues were $125.7 million in the first quarter, a
$6.9 million, or 6 percent, increase, compared with the same period last
year. Traffic volume increased 7 percent, due to strong unit increases
in international and domestic containers, and double-digit growth in
Triple Crown Services Company volume.
Intermodal traffic is expected to continue the first-quarter's
positive growth trend for the remainder of this year.
Railway Operating Expenses
- --------------------------
First-quarter railway operating expenses were $764.5 million, up
$9.6 million, or 1 percent, compared with last year's first quarter,
despite a 5 percent increase in carloadings.
The largest increase was in materials, services and rents expense, up
$17.4 million, or 11 percent. Higher equipment rents resulted from a
change in the mix of received and forwarded traffic, new freight car
leases (mainly covered hoppers and some box cars), and the absence this
year of income from leased locomotives. Purchased services expense was
also higher due to increased automotive and intermodal handling costs
resulting from increased traffic volume.
Diesel fuel expense increased $7.3 million, or 13 percent, due almost
entirely to increased price per gallon--average prices in the first
quarter were 12 percent higher than a year ago. As the quarter
progressed, however, fuel prices did decline.
The largest decrease was in compensation and benefits expense, which was
down $15.4 million, or 4 percent, due to lower accruals for stock-based
compensation and favorable experience in employee benefit costs.
Casualties and other claims expense decreased $5.7 million, or
16 percent. The presence of an accrual last year for the environmental
remediation of a specific site and lower personal injury costs this year
resulting from favorable claims experience were responsible for the
improvement.
<PAGE> PAGE 14
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
The 3 percent increase in railway operating revenues, combined with only
a 1 percent increase in railway operating expenses, produced a railway
operating ratio for the first quarter of 73.1 percent, a first-quarter
record, surpassing last year's record of 74.2 percent by more than one
percentage point.
Other Income (Expense)
- ----------------------
Total other income and expense for the first quarter was an expense of
$79.8 million, compared with an expense of $0.7 million in the first
quarter of last year. Included in this year's expense was a $77.2 million
pretax charge to write off the costs incurred to establish and maintain a
$13.0 billion credit facility in connection with NS' tender offer for all
Conrail shares (see Note 2, "Joint Acquisition of Conrail Inc. by NS," and
Note 3, "Charge for Credit Facility Costs").
<TABLE>
FINANCIAL CONDITION AND LIQUIDITY
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
(Dollars in millions)
<S> <C> <C>
Cash and short-term investments $ 231.8 $ 315.5
Debt to total capitalization 10.3% 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 decline in cash provided by operations, compared
with the first quarter of last year, was primarily attributable to a
decrease in operating accounts payable, compared with an increase in the
same period last year.
CASH USED FOR INVESTING ACTIVITIES increased principally due to higher
property additions in the first quarter of 1997, compared with 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 represents amounts received in connection with capital
lease transactions (see Note 4). The decrease in dividends paid in the
first quarter 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, "Cash Required for NS Debt," and in Note 2,
"NS Debt Commitments," NS has issued and expects to issue a significant
amount of debt related to its joint acquisition of Conrail. A
significant portion of the funds to service this debt is expected
to come from NS Rail, NS' principal subsidiary.
<PAGE> PAGE 15
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
JOINT ACQUISITION OF CONRAIL BY NS
On April 8, 1997, NS and CSX announced that they had entered into an
Agreement providing for the joint acquisition of all outstanding Conrail
shares not already owned by them for $115 in cash per share. The
Agreement followed several months of attempts by each of NS and CSX to
acquire all of Conrail. In connection therewith, NS' tender offer to
acquire Conrail shares was terminated and CSX's tender offer to acquire
Conrail shares was amended, among other things, to include NS as co-bidder
and to extend its expiration date to May 23, 1997.
The estimated total cost of the joint acquisition and of the Conrail
shares already acquired by NS and CSX is approximately $10.2 billion,
before transaction expenses. Pursuant to the Agreement, NS will bear
58 percent of that total cost (or approximately $5.9 billion), and CSX
will bear 42 percent of such cost, in each case taking into consideration
amounts previously paid by each of NS and CSX to acquire Conrail shares.
NS and CSX will have, respectively, a 58 percent and a 42 percent economic
interest in--and each will exercise a 50 percent voting interest in--the
entity formed to acquire Conrail shares. Under the Agreement and subject
to STB approval, NS will operate routes and assets (or rights therein or
thereto) that generated approximately 58 percent of Conrail's 1995
revenues, pursuant to leasing, operating partnerships or other
arrangements to be negotiated and implemented between NS and CSX. Each of
NS and CSX will have the right to appoint 50 percent of that entity's
directors and will be entitled to appoint full-time Co-Chief Executive
Officers.
Under the Agreement, it is expected that in some form, yet to be
determined, NS will have primary operating interest in Conrail lines
between Chicago and Cleveland, Ohio, and between Cleveland and northern
New Jersey, via Pittsburgh and Harrisburg, Pennsylvania. In addition, NS
will operate the Conrail line serving the metropolitan New York area
between northern New Jersey and Buffalo through Binghamton, New York, and
another between Buffalo and Harrisburg, Pennsylvania. NS will also
operate most Conrail lines in Michigan, Maryland, Delaware and
Pennsylvania, and will operate the routes between Toledo and Detroit,
between Columbus and Cincinnati and between Columbus and Charleston, West
Virginia. NS and CSX will jointly operate certain Conrail assets in major
terminal areas such as Detroit and northern and southern New Jersey. NS
and CSX will also share access to certain lines in Philadelphia and
Indianapolis, and to the rail lines serving the Monongahela coal fields in
southwestern Pennsylvania.
NS and CSX intend to file a joint application with the STB in June of 1997
seeking approval of the Conrail acquisition. NS and CSX have requested a
255-day STB review period. However, other interested parties have
requested either a 365-day review period or the maximum period permitted
under the statute--16 months. Therefore, even under the accelerated
schedule requested by NS and CSX, an STB decision is not likely prior to
March 1, 1998, and could be delayed until as late as October 1998 if the
maximum statutory period is used.
<PAGE> PAGE 16
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Conrail shares purchased previously by NS and CSX, and Conrail shares
purchased in the joint acquisition will be placed in a joint voting trust
pending STB approval. NS intends to account for its investment in Conrail
using the equity method of accounting following consummation of the joint
acquisition and during the period Conrail shares are held in a voting
trust--a period that will extend at least until the effective date of the
STB's decision approving the transactions contemplated by the Agreement
(if such approval is obtained). The method of accounting for the
investment in Conrail subsequent to the voting trust being dissolved will
depend on the ownership arrangement that is ultimately negotiated between
NS and CSX, and approved by the STB, and the determination of whether and
how controlling financial interests will be established for selected
assets, liabilities and operations of Conrail. Additionally, the terms of
leases, operating, partnership and other arrangements, yet to be
negotiated, will impact the accounting. It is also expected that some of
the assets and operations of Conrail will remain subject to joint control
by NS and CSX and thus will continue to be accounted for using the equity
method of accounting post STB approval.
NS has identified a number of synergies related to the transaction which
its management believes can be achieved and that are estimated to yield
operating income in nominal dollars of about $71 million in 1998,
$236 million in 1999 and $399 million by the year 2000. For 1996, NS' and
Conrail's most recent full year, combined operating income, reflecting
58 percent of Conrail's operating income adjusted for non-recurring
charges, was $1.6 billion. The synergy estimates reflect anticipated
operating expense savings and revenue enhancements and do not include any
one-time costs to achieve such improvements. Expense savings are expected
to result from, among other things, reduced general and administrative
expenses, improved equipment utilization and maintenance, improved use of
rail yards and routes, more efficient purchasing of material and equipment
coupled with maintenance-of-way efficiencies, and more efficient
transportation operations. Revenue enhancements are expected to result
from net new business (single-line service, new coal traffic and the
diversion of truck traffic to rail). NS anticipates the synergies from
the transaction will result in accretion in NS' earnings per share of
about 6 percent in 1999, 15 percent in 2000 and more than 17 percent
thereafter. NS expects the acquisition to be dilutive to earnings by
approximately 2 percent in 1997 and 3 percent in 1998.
The foregoing estimates of cost savings, synergies, and projected
earnings per share are "forward-looking" and inherently subject to
significant uncertainties and contingencies, many of which are beyond
the control of NS, including: (a) future economic conditions in the
markets in which NS and Conrail operate; (b) financial market
conditions; (c) inflation rates; (d) changing competition and the
effects of new and increased competition in the areas served by NS and
Conrail; (e) changes in the economic regulatory climate in the United
States railroad industry; (f) NS' ability to eliminate or reduce
duplicative administrative and other functions and facilities following
the transaction; (g) labor uncertainties and NS' ability to implement
<PAGE> PAGE 17
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
anticipated labor savings; (h) unanticipated environmental and other
situations relating to Conrail assets; (i) NS' ability to integrate
certain Conrail assets, including its information technology systems,
within NS' systems; and (j) adverse changes in applicable laws,
regulations or rules governing environmental, tax or accounting
matters. There can be no assurance that the estimated savings, revenue
increases, synergies or projected earnings per share will be achieved;
actual savings, revenue increases, synergies and earnings per share may
vary materially from those estimated. The inclusion of such estimates
herein should not be regarded as an indication or affirmation that NS
or any other party considers such estimates an accurate prediction of
future events.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1997, NS Rail adopted AICPA Statement of
Position 96-1, "Environmental Remediation Liabilities." The statement
provides guidance with respect to recognition and measurement of
environmental remediation liabilities and disclosure of such liabilities
in financial statements. The impact to NS Rail of adopting the standards
of this statement was not material to the Corporation's financial
position, results of operations or liquidity.
<PAGE> PAGE 18
PART II. OTHER INFORMATION
---------------------------
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 February 5, 1997 (date of earliest
event reported), was filed on February 14, 1997, reporting
that a wholly owned subsidiary of NS had accepted for
payment 8.2 million shares of Conrail tendered pursuant to
its tender offer and that NS had arranged for the issuance
and sale, through private placement, of $1.0 billion of
commercial paper.
<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: May 14, 1997 /s/ Sandra T. Pierce
------------------- ------------------------------------------
Sandra T. Pierce
Corporate Secretary (Signature)
Date: May 14, 1997 /s/ John P. Rathbone
------------------- ------------------------------------------
John P. Rathbone
Vice President and Controller
(Principal Accounting Officer) (Signature)
<PAGE> PAGE 20
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
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> $ 98
<SECURITIES> 134
<RECEIVABLES> 591
<ALLOWANCES> 4
<INVENTORY> 63
<CURRENT-ASSETS> 1,078
<PP&E> 13,316
<DEPRECIATION> 4,148
<TOTAL-ASSETS> 11,166
<CURRENT-LIABILITIES> 1,094
<BONDS> 577
<COMMON> 167
0
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<OTHER-SE> 5,517
<TOTAL-LIABILITY-AND-EQUITY> 11,166
<SALES> 0
<TOTAL-REVENUES> 1,046
<CGS> 0
<TOTAL-COSTS> 764
<OTHER-EXPENSES> 71
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