<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 SEPT. 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file numbers 1-743; 1-3744; 1-4793; 1-546-2
NORFOLK SOUTHERN RAILWAY COMPANY
--------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 53-6002016
----------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Three Commercial Place
Norfolk, Virginia 23510-2191
----------------------------------- ---------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (757) 629-2680
----------------------
No Change
--------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. (X) Yes
( ) No
The number of shares outstanding of each of the registrant's classes
of Common Stock, as of the last practicable date:
Class Outstanding as of Oct. 31, 2000
----- --------------------------------
Common Stock (par value $1.00) 16,668,997
<PAGE> PAGE 2
TABLE OF CONTENTS
-----------------
Page
----
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Statements of Income
Three Months and Nine Months Ended
Sept. 30, 2000 and 1999 3
Consolidated Balance Sheets as of
Sept. 30, 2000, and December 31, 1999 4
Consolidated Statements of Cash Flows
Nine Months Ended Sept. 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information:
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
<PAGE> PAGE 3
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
------ --------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Income
($ in millions)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Railway operating revenues:
Coal $ 361 $ 369 $ 1,081 $ 949
General merchandise 869 864 2,713 2,210
Intermodal 252 234 687 519
------ ------ ------ ------
TOTAL RAILWAY OPERATING
REVENUES 1,482 1,467 4,481 3,678
------ ------ ------ ------
Railway operating expenses:
Compensation and benefits
(Notes 4 and 5) 389 571 1,526 1,472
Materials, services and rents
(Note 5) 442 328 1,106 818
Conrail rents and services
(Note 5) 123 123 378 166
Depreciation 122 117 364 345
Diesel fuel 118 74 339 159
Casualties and other claims 33 36 99 100
Other 80 81 251 237
------ ------ ------ ------
TOTAL RAILWAY OPERATING
EXPENSES 1,307 1,330 4,063 3,297
------ ------ ------ ------
Income from railway
operations 175 137 418 381
Other income (expense) - net (39) 4 (122) 23
Interest expense on debt (8) (11) (29) (27)
------ ------ ------ ------
Income before income taxes 128 130 267 377
Provision for income taxes 48 46 102 134
------ ------ ------ ------
NET INCOME $ 80 $ 84 $ 165 $ 243
====== ====== ====== ======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<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)
(Unaudited)
<CAPTION>
Sept. 30, 2000 Dec. 31, 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 125 $ --
Short-term investments 1 12
Accounts receivable, net (Note 3) 144 681
Due from Conrail (Note 5) 27 77
Materials and supplies 113 98
Deferred income taxes 160 124
Other current assets 67 144
-------- --------
Total current assets 637 1,136
Investments (Note 7) 544 624
Properties less accumulated depreciation 10,454 10,390
Other assets 498 482
-------- --------
TOTAL ASSETS $12,133 $12,632
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 924 $ 787
Income and other taxes 210 132
Due to NS - net (Note 5) 170 483
Notes and accounts payable to Conrail (Note 5) 148 184
Other current liabilities 165 152
Current maturities of long-term debt 78 85
-------- --------
Total current liabilities 1,695 1,823
Long-term debt 712 781
Other liabilities 1,020 1,044
Minority interests 3 3
Deferred income taxes 3,598 3,596
-------- --------
TOTAL LIABILITIES 7,028 7,247
-------- --------
Stockholders' equity:
Serial preferred stock 55 55
Common stock 167 167
Additional paid-in capital 695 673
Accumulated other comprehensive income
(Note 7) 178 259
Retained income 4,010 4,231
-------- --------
TOTAL STOCKHOLDERS' EQUITY 5,105 5,385
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,133 $12,632
======== ========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE> PAGE 5
Item 1. Financial Statements. (continued)
------ --------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
<CAPTION>
Nine Months Ended
Sept. 30,
----------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 165 $ 243
Reconciliation of net income to net cash
provided by operating activities:
Depreciation 365 346
Deferred income taxes 3 (14)
Gains on property sales (12) (14)
Changes in assets and liabilities affecting
operations:
Accounts receivable (Note 3) 41 (353)
Materials and supplies (15) (15)
Other current assets and due from Conrail 126 36
Income tax liabilities 95 143
Other short-term liabilities 163 253
Other - net (Note 4) (46) 159
----- -----
Net cash provided by operating activities 885 784
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (482) (717)
Property sales and other transactions 67 46
Investments, including short-term (60) (84)
Investment sales and other transactions 43 153
----- -----
Net cash used for investing activities (432) (602)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (Note 5) (2) (2)
Advances and repayments to NS (243) (398)
Advances and repayments from NS 43 26
Proceeds from borrowings 203 273
Debt repayments (329) (58)
----- -----
Net cash used for financing activities (328) (159)
----- -----
Net increase in cash and cash equivalents 125 23
CASH AND CASH EQUIVALENTS:
At beginning of year -- --
----- -----
At end of period $ 125 $ 23
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 99 $ 39
Income taxes $ 5 $ 4
See accompanying notes to Consolidated Financial Statements.
<PAGE> PAGE 6
Item 1. Financial Statements. (continued)
------ --------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NS RAIL)
(A Majority-Owned Subsidiary of Norfolk Southern Corporation [NS])
Notes to Consolidated Financial Statements
1. In the opinion of Management, the accompanying unaudited interim
financial statements contain all adjustments (consisting of
normal recurring accruals) necessary to present fairly the
Company's financial position as of Sept. 30, 2000, and its
results of operations and cash flows for the nine months ended
Sept. 30, 2000 and 1999.
Although Management believes that the disclosures presented are
adequate to make the information not misleading, these
Consolidated Financial Statements should be read in conjunction
with: (a) the financial statements and notes included in the
Company's latest Annual Report on Form 10-K and in subsequent
Quarterly Report on Form 10-Q, and (b) any Current Reports on
Form 8-K.
2. Commitments and Contingencies
There have been no significant changes since year-end 1999 in the
matters as discussed in NOTE 15, COMMITMENTS AND CONTINGENCIES,
appearing in the NS Rail Annual Report on Form 10-K for 1999,
Notes to Consolidated Financial Statements, beginning on page 62.
3. Sale of Accounts Receivable
From Dec. 1, 1999, through April 30, 2000, NSR sold certain of
its rail accounts receivable, on a nonrecourse basis, to NS.
Based on the terms of the sale agreement, these sales were
accounted for as secured borrowings. Accordingly, at Dec. 31,
1999, "Accounts receivable, net" included $388 million of such
sold receivables, and "Due to NS - net" included the related
liability.
Effective May 2000, NS and NSR sold, to a bankruptcy-remote
special-purpose NS subsidiary, a pool of accounts receivable
totaling approximately $700 million. The pool consisted of
receivables NS earlier had purchased from NSR (as described
above), and certain additional NSR receivables. Subsequent sales
will occur as receivables are generated. NSR services and
collects the sold receivables on behalf of the purchaser but
retains no collection risk with respect to them.
The special-purpose NS subsidiary, in turn, sold an undivided
ownership interest in the pool of accounts receivable. NS has a
retained interest in the receivables sold through this bankruptcy-
remote subsidiary. Under the terms of the new sale agreement,
the receivables are treated as sold and, accordingly, are no
longer included on the balance sheet of NS Rail. This resulted
in a $495 million noncash reduction of receivables and
Intercompany Accounts which was excluded from the Consolidated
Statements of Cash Flows. Fees associated with the sale are
included in "Other income (expense) - net."
<PAGE> PAGE 7
Item 1. Financial Statements. (continued)
------ --------------------
4. Workforce Reduction Charge
"Compensation and benefits" expenses for the first nine months of
2000 include a first-quarter $101 million workforce reduction
charge, which lowered net income by $62 million. Most of the
charge resulted from a voluntary early retirement program, which
was accepted by 919 of 1,180 eligible employees. The retirements
were effective March 1, 2000, and most of the related benefits
will be paid from the overfunded pension plan. As a result,
there was a noncash reduction to NS Rail's pension plan asset.
Reductions in union personnel were achieved primarily through
furloughs, and some of these employees are entitled to
postemployment benefits. The charge includes an accrual for
these amounts for the period until these employees return to work
as a result of normal attrition.
5. Related Parties
General
-------
NS is the parent holding company of NSR. Rail operations are
coordinated at the holding company level by the NS Vice Chairman
and Chief Operating Officer. Effective June 1, 2000, NS charges
NS Rail a fee for management services it performs for NS Rail.
Previously, the costs of functions performed by NS were charged
to NS Rail. As a result, costs that were previously included in
"Compensation and benefits" will be reflected in "Materials,
services and rents." In addition, NS charges NS Rail a revenue-
based licensing fee for use of certain intangible assets owned by
NS.
NS Rail owns 21,627,902 shares of NS common stock.
Operations Over Conrail's Lines
-------------------------------
Overview -- Through a jointly owned entity, NS and CSX
Corporation (CSX) own the stock of Conrail Inc. (Conrail), whose
primary subsidiary is Consolidated Rail Corporation (CRC). NS
has a 58 percent economic and 50 percent voting interest in the
jointly owned entity, and CSX has the remainder of the economic
and voting interests. From May 23, 1997, the date NS and CSX
completed their acquisition of Conrail stock, until June 1, 1999
(the "Closing Date"), Conrail's operations continued
substantially unchanged while NS and CSX awaited regulatory
approvals and prepared for the integration of the respective
Conrail routes and assets to be leased to their railroad
subsidiaries, Norfolk Southern Railway Company (NSR) and CSX
Transportation, Inc. (CSXT).
Commencement of Operations -- On the Closing Date, NSR began
operating the routes and assets of Pennsylvania Lines LLC (PRR),
a wholly owned subsidiary of CRC, under various leasing and
operating arrangements. Costs necessary to operate and maintain
the PRR assets, including leasehold improvements, are borne by
NSR. CSXT operates the routes and assets of another CRC
<PAGE> PAGE 8
Item 1. Financial Statements. (continued)
------ --------------------
subsidiary under comparable terms. Certain other Conrail routes
and assets (the "Shared Assets Areas") continue to be operated by
CRC for the joint and exclusive benefit of NSR and CRXT.
In addition to a fee paid for such access, NSR and CSXT pay,
based on usage, the costs incurred by CRC to operate the Shared
Assets Areas.
NSR and CSXT now provide substantially all rail freight services
on Conrail's route system, are responsible for performing most
services incident to customer rail transportation contracts, and
employ the majority of Conrail's former workforce. As a result,
on the Closing Date, both NS Rail's route miles and its employees
increased by approximately 50 percent.
NS Rail accrued in the second quarter of 1999 $168 million
($103 million after taxes) for contractual obligations,
principally to former Conrail employees. Most of these costs are
expected to be paid in the two years following the Closing Date,
and $42 million of such is classified on NS Rail's balance sheet
as "Current liabilities." However, certain contractual
obligations by their terms will be paid out over a longer period
and are classified as "Other liabilities" on NS Rail's balance
sheet. Through Sept. 30, 2000, NS Rail has paid $46 million of
these costs. In addition, NS Rail has incurred $17 million and
expects to incur an additional $3 million of costs for
relocations of former Conrail employees.
NS Rail provides certain general and administrative support
functions to Conrail, the fees for which are billed in accordance
with several service-provider arrangements.
"Conrail rents and services," a line added to the income
statements beginning June 1, 1999, includes expenses for amounts
due to PRR and CRC for use by NSR of operating properties and
equipment, operation of the Shared Assets Areas, and continued
operation of certain facilities during the transition period.
"Notes and accounts payable to Conrail" includes $68 million at
Sept. 30, 2000, and $123 million, at Dec. 31, 1999, of interest-
bearing loans made to NS Rail by a PRR subsidiary, payable on
demand. The interest rate for these loans is variable and was
6.2 percent at Sept. 30, 2000. Also included is $80 million at
Sept. 30, 2000, and $61 million, at Dec. 31, 1999, due to PRR and
CRC related to expenses included in "Conrail rents and services,"
as discussed above.
Sales of Accounts Receivable
----------------------------
From Dec. 1, 1999, through April 30, 2000, NSR sold certain of
its rail accounts receivable, on a nonrecourse basis, to NS.
Based on the terms of the sale agreement, these sales were
<PAGE> PAGE 9
Item 1. Financial Statements. (continued)
------ --------------------
accounted for as secured borrowings. Accordingly, at Dec. 31, 1999,
"Accounts receivable, net" included $388 million of such sold
receivables, and "Due to NS - net" included the related liability.
</TABLE>
<TABLE>
Intercompany Accounts
---------------------
<CAPTION>
Sept. 30, 2000 Dec. 31, 1999
-------------- -------------
Average Average
Interest Interest
Balance Rate Balance Rate
------- -------- ------- --------
($ in millions)
<S> <C> <C> <C> <C>
Due from NS:
Advances $ 191 6% $ 75 4%
Due to NS:
Advances -- (234) 5%
Notes (361) 8% (324) 7%
----- -----
Due to NS - net $(170) $(483)
===== =====
</TABLE>
The majority of the change for the first nine months of 2000 in
the Intercompany Accounts results from the sale of receivables
under the new sale agreement (see Note 3).
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 Sept. 30, 2000, and Dec. 31, 1999,
NS Rail had long-term intercompany federal income tax payables
(which are included in "Deferred income taxes" in the
Consolidated Balance Sheets) of $819 million and $809 million,
respectively.
Noncash Dividend
-----------------
NSR declared and issued to NS noncash dividends of $383 million
in September 2000 and a total of $467 million in March and June,
1999. The dividends were settled by reduction of NSR's interest-
bearing advances due from NS.
<PAGE> PAGE 10
Item 1. Financial Statements. (continued)
------ --------------------
Cash Required for NS Debt
-------------------------
A significant portion of the funding for the interest and
repayments on NS' debt is expected to be provided by NS Rail.
6. Lease Commitment
In March and June 2000, NS Rail entered into operating leases for
a total of 140 locomotives, which have a maximum term of eight
years and include purchase options. If NS Rail does not purchase
the locomotives at the end of the lease terms, it is liable for
the difference between the then fair-value of the locomotives and
a specified residual value. NS Rail does not expect to be
required to make any payments under this provision.
7. Comprehensive Income
<TABLE>
NS Rail's total comprehensive income was as follows:
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C>
Net income $ 80 $ 84 $ 165 $ 243
Other comprehensive loss (3) (77) (81) (101)
----- ----- ----- -----
Total comprehensive
income $ 77 $ 7 $ 84 $ 142
===== ===== ===== =====
</TABLE>
For NS Rail, "Other comprehensive loss" is the unrealized gains
and losses on certain investments in debt and equity securities,
principally NS common stock.
<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
OPERATIONS OVER CONRAIL'S LINES
On June 1, 1999 (the "Closing Date"), NS Rail began operating a
substantial portion of Conrail's properties (NS Rail's new "Northern
Region") under various agreements with Pennsylvania Lines LLC (PRR), a
wholly owned subsidiary of Consolidated Rail Corporation (CRC) (see
Note 5). As a result, both the railroad route miles operated by
NS Rail and the number of its railroad employees increased
approximately 50 percent on that date. Results for the first nine
months of 1999 reflect only four months of operations on the Northern
Region.
Difficulties encountered in the assimilation of the Northern Region
into NS Rail's existing system during 1999 resulted in system
congestion, an increase in cars on line, increased terminal dwell time
and reduced system velocity. These service issues and actions taken
to address them increased operating expenses. Moreover, revenues were
lower than expected as some customers diverted traffic to other modes
of transportation. Although system fluidity has improved, income from
railway operations is expected to continue to be affected adversely
until these revenue and expense issues have been resolved fully.
RESULTS OF OPERATIONS
Net Income
----------
Net income was $80 million in the third quarter of 2000, down
$4 million, or 5 percent, compared with last year, reflecting higher
nonoperating expenses that more than offset a $38 million increase in
income from railway operations. For the first nine months of 2000,
net income was $165 million, compared with $243 million in the
comparable period of 1999. Results in 2000 included a first-quarter
pretax charge of $101 million ($62 million after taxes) for pension
expense associated with a voluntary early retirement program and
protective benefits related to other actions taken to reduce the
workforce (See Note 4). Results in 1999 included $168 million
($103 million after taxes) of costs for contractual obligations,
principally to former Conrail employees. Excluding the effects of
these items, nine-month net income declined $119 million, or
34 percent, principally due to higher nonoperating expenses and lower
income from railway operations.
<PAGE> PAGE 12
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Railway Operating Revenues
--------------------------
<TABLE>
Third-quarter railway operating revenues were $1.5 billion in 2000, up
$15 million, or 1 percent, compared with last year. For the first
nine months of 2000, railway operating revenues were $4.5 billion,
compared with $3.7 billion in 1999. As shown in the following table,
the increases were attributable to higher traffic volume, which, for
the year-to-date, was largely the result of a full period this year of
Northern Region operations. The year-to-date revenue per unit/mix
component includes a $48 million negative variance for coal,
reflecting an increase in the proportion of shorter-haul traffic.
<CAPTION>
Third Quarter First Nine Months
2000 vs. 1999 2000 vs. 1999
Increase (Decrease) Increase (Decrease)
------------------ ------------------
($ in millions)
<S> <C> <C>
Traffic volume (carloads) $ 16 $ 801
Revenue per unit/mix (1) 2
------ ------
$ 15 $ 803
====== ======
</TABLE>
<TABLE>
Revenues and carloads for the commodity groups were as follows (prior
year data has been reclassified to conform to the current
presentation):
<CAPTION>
Revenues
----------------------------------------
Third Quarter Nine Months
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C>
Coal $ 361 $ 369 $1,081 $ 949
General merchandise:
Automotive 207 190 694 537
Chemicals 188 189 567 461
Metals/construction 170 181 526 401
Paper/clay/forest 156 159 469 426
Agr./consumer prod./govt. 148 145 457 385
------ ------ ------ ------
General merchandise 869 864 2,713 2,210
Intermodal 252 234 687 519
------ ------ ------ ------
Total $1,482 $1,467 $4,481 $ 3,678
====== ====== ====== ======
</TABLE>
<PAGE> PAGE 13
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
<TABLE>
<CAPTION>
Carloads
----------------------------------------
Third Quarter Nine Months
2000 1999 2000 1999
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Coal 425 438 1,282 1,078
General merchandise:
Automotive 158 155 530 446
Chemicals 114 111 343 282
Metals/construction 194 187 591 404
Paper/clay/forest 122 126 374 341
Agr./consumer prod./govt. 129 132 392 354
----- ----- ----- -----
General merchandise 717 711 2,230 1,827
Intermodal 590 565 1,653 1,337
----- ----- ----- -----
Total 1,732 1,714 5,165 4,242
===== ===== ===== =====
</TABLE>
Coal
----
Third-quarter coal revenues were $361 million, down $8 million, or 2
percent, compared with last year. For the first nine months, coal
revenues were $1.1 billion, versus $949 million last year. Total tonnage
handled decreased 1 million tons in the quarter, as the effects of reduced
utility coal shipments were offset somewhat by increased export and
metallurgical coal volume. For the first nine months, total tonnage
handled increased 21 million tons, most of which was utility coal traffic,
reflecting a full period this year of Northern Region traffic.
Fourth-quarter coal revenues are expected to be slightly lower than the
comparable period of 1999.
General Merchandise
-------------------
Third-quarter general merchandise revenues were $869 million, up
$5 million, or 1 percent, compared with last year, as the effects of the
return of business diverted last year were largely offset by softening
economic conditions. Automotive revenues posted the only notable
increase, up $17 million, or 9 percent, principally due to recaptured
business. Metals and construction revenues decreased $11 million, or 6
percent, reflecting adverse market conditions. For the first nine months,
general merchandise revenues were $2.7 billion, versus $2.2 billion last
year, and reflected a full period this year of Northern Region operations.
General merchandise revenues are expected to be somewhat higher in the
fourth quarter, compared with last year, reflecting additional business
and higher rates.
<PAGE> PAGE 14
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Intermodal
----------
Third-quarter intermodal revenues were $252 million, up $18 million, or
8 percent, compared with last year, reflecting higher container traffic
volume and higher revenue per unit. For the first nine months, intermodal
revenues were $687 million, versus $519 million last year, primarily due
to a full period this year of Northern Region operations.
Fourth-quarter intermodal revenues are expected to be higher than last
year, as the effects of the loss of APL business late in 1999 should
continue to be offset by new business.
Railway Operating Expenses
--------------------------
Third-quarter railway operating expenses were $1.3 billion in 2000,
down $23 million, or 2 percent, compared with last year, despite a
sharp rise in diesel fuel expenses. For the first nine months of
2000, railway operating expenses were $4.1 billion compared with
$3.3 billion in 1999. Expenses in 2000 reflected both a full period
of Northern Region operations and sharply higher diesel fuel prices.
The comparison was also affected by the $101 million first-quarter
2000 workforce reduction charge and the $168 million of costs in
second-quarter 1999 from the contractual obligations assumed on the
Closing Date that principally resulted from employing a significant
portion of Conrail's former workforce.
"Compensation and benefits" expense decreased $182 million, or
32 percent, in the third quarter, primarily due to the effects of the
management fee charged by NS (see Note 5), the absence of $49 million
of accruals made last year for a special incentive program for union
employees, and pension income that was $15 million higher. Cost
savings attributable to reduced employment, estimated at $27 million,
were almost entirely offset by a $25 million increase in wages and
health and welfare benefits for union employees. Compensation and
benefits increased $54 million, or 4 percent, for the first nine
months, as the effects of the addition of Northern Region operations
together with higher wage and fringe benefit costs for union employees
were largely offset by the effects of the management fee, reduced
employment, the special incentive program last year, and pension
income that was $57 million higher. The comparison was also affected
by the first-quarter 2000 workforce reduction charge and the second-
quarter 1999 costs for contractual obligations assumed on the Closing
Date. Pension income in the fourth quarter of 2000 is expected to be
comparable to that of 1999.
"Materials, services and rents" increased $114 million, or 35 percent, in
the third quarter, and $288 million, or 35 percent, for the first nine
months of 2000. The increase for the quarter was principally due to the
effects of the managment fee, which was slightly offset by reduced
maintenance expenses and lower equipment rents. The year-to-date increase
<PAGE> PAGE 15
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
was primarily due to the addition of Northern Region operations, including
higher maintenance expenses, equipment rents, and intermodal handling
costs. These increases were partially offset by the absence of certain
costs, mostly to provide alternate transportation, related to the
difficulties encountered last year in the commencement of Northern Region
operations.
"Diesel fuel" expense increased $44 million, or 59 percent, in the third
quarter, and $180 million, or 113 percent, for the first nine months.
Both increases reflected sharply higher average prices per gallon, up
56 percent for the quarter and 72 percent for the first nine months, and
increased consumption.
"Other" expense was about even in the third quarter of 2000, compared
with last year, but increased $14 million, or 6 percent, for the first
nine months, primarily due to higher property and other taxes.
The railway operating ratio was 88.2 percent in the third quarter,
compared with 90.7 percent (87.3 percent excluding the special
incentive program) last year. For the first nine months, the ratio
was 90.7 percent; excluding the first-quarter workforce reduction
charge, the ratio would have been 88.4 percent, compared with
89.6 percent (83.7 percent excluding the contractual obligation and
commitments incurred on the Closing Date and the special incentive
program) last year. The fourth quarter is expected to improve,
compared with 1999's fourth-quarter ratio of 91.5 percent. In light
of the changes in its business, NS Rail continues to review its
operations for opportunities to reduce its costs.
Other Income (Expense) - Net
----------------------------
"Other income (expense) - net" was an expense of $39 million in the
third quarter and $122 million for the first nine months, compared
with income of $4 million for the quarter and $23 million for the
first nine months of last year. Both changes principally resulted
from the sales of accounts receivable (see Notes 3 and 5).
Provision for Income Taxes
--------------------------
The third-quarter effective income tax rate was 37.5 percent in 2000,
compared with 35.4 percent in 1999. The year-to-date effective rate
was 38.2 percent in 2000, compared with 35.5 percent in 1999. The
effective rates in 1999 reflected more favorable adjustments related
to the filing of the federal tax return for the prior year.
<PAGE> PAGE 16
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
<TABLE>
FINANCIAL CONDITION AND LIQUIDITY
<CAPTION>
Sept. 30, Dec. 31,
2000 1999
------- -------
($ in millions)
<S> <C> <C>
Cash and short-term investments $ 126 $ 12
Debt-to-total capitalization 14.4% 15.5%
</TABLE>
CASH PROVIDED BY OPERATING ACTIVITIES, NS Rail's principal source of
liquidity, increased $101 million in the first nine months of 2000,
compared with last year. The increase was largely attributable to the
sale of accounts receivable, proceeds of which were advanced to NS,
and favorable changes in working capital, including the lack of bonus
payments this year. These increases were somewhat offset by the
effects of the decrease in operating income (excluding the noncash
workforce reduction charge, see Note 4, and the unpaid portion of the
contractual obligations incurred on the Closing Date, reflected in
"Other - net" in the Statement of Cash Flows, see Note 5). NS Rail's
working capital deficit was $1.1 billion at Sept. 30, 2000. A working
capital deficit is not unusual for NS Rail; it is expected that NS
Rail will continue to generate sufficient cash to meet its ongoing
obligations. In addition, NS currently has the capability to issue
commercial paper, the proceeds of which could be advanced to NS Rail,
if necessary, to meet its more immediate working capital needs.
CASH USED FOR INVESTING ACTIVITIES declined significantly, principally
due to lower capital spending, reflecting the acquisition of
locomotives in 2000 under an operating lease. Locomotives were
purchased in 1999 using proceeds from the sale of equipment trust
certificates.
CASH USED FOR FINANCING ACTIVITIES increased significantly, reflecting
the pay down of NS Rail's indebtedness to PRR.
LABOR AGREEMENTS
Approximately 85 percent of NS Rail's railroad employees are
represented by labor unions under collective bargaining agreements
with 14 different labor organizations. Moratorium provisions of the
agreements currently in force expired Dec. 31, 1999; however, the
agreements remain in effect until amendments are agreed to or until
the Railway Labor Act's procedures are exhausted. In late 1999,
negotiations began at the national level on agreements with major
labor organizations. An agreement was reached with the Brotherhood of
Locomotive Engineers which represents NS Rail's locomotive engineers.
In addition, a tentative national agreement has been reached with the
United Transportation Union, which represents NS Rail's trainmen,
switchmen, conductors, and, in some cases, yardmasters. That
settlement requires ratification by the members before acceptance.
Negotiations with the other unions are continuing on a national basis,
the outcome of which is uncertain at this time.
<PAGE> PAGE 17
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
PROPOSED MERGER GUIDELINES
The Surface Transportation Board (STB) has now issued proposed merger
guidelines which, if adopted as proposed, would increase the substantive
and evidentiary standards that applicants will have to satisfy.
Prior to the STB's release of its proposed guidelines, Canadian National
Railway Company and Burlington Northern Sante Fe Corporation announced the
cancellation of their earlier proposal to combine their companies under
common control.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus concerning Issue No. 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent." The consensus
presents indicators to consider in establishing the accounting for
revenue. Based on the application of this consensus, which is effective
in the fourth quarter, NS Rail expects to reclassify to railway operating
expenses certain charges that previously have been reported net in railway
operating revenues. This change in reporting will have no effect on
income from railway operations.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," replacing SFAS No. 125 of the same name. SFAS No. 140
revises the standards for accounting for securitizations and other
transfers of financial assets and requires certain disclosures, but
carries over most of the provisions of SFAS No. 125. NS Rail expects to
adopt the disclosure provisions of SFAS No. 140 in its Annual Report for
the year 2000. NS Rail does not expect the provisions of SFAS No. 140 to
have a material effect on its financial statements.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that are
based on current expectations, estimates and projections. Such
forward-looking statements reflect Management's good-faith evaluation
of information currently available. However, because such statements
are based upon, and therefore can be influenced by, a number of
external variables over which Management has no, or incomplete,
control, they are not, and should not be read as being, guarantees of
future performance or of actual future results; nor will they
necessarily prove to be accurate indications of the times at or by
which any such performance or result will be achieved. Accordingly,
actual outcomes and results may differ materially from those expressed
in such forward-looking statements. This caveat has particular
importance in the context of any such statements that relate to the
resolution of the service issues, the recapture of diverted business,
the addition of new business, and the ability to reduce expenses.
<PAGE> PAGE 18
PART II. OTHER INFORMATION
---------------------------
Item 3. Quantitative and Qualitative Disclosures about Market Risks.
------ -----------------------------------------------------------
There has been no material change to the disclosures made under
the heading "Market Risks and Hedging Activities" on page 36
of the Company's 1999 Annual Report on Form 10-K.
Item 6. Exhibits and Reports on Form 8-K.
------ --------------------------------
None.
<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, 2000 /s/ Reginald J. Chaney
------------------- ------------------------------------------
Reginald J. Chaney
Corporate Secretary (Signature)
Date: November 10, 2000 /s/ John P. Rathbone
------------------- ------------------------------------------
John P. Rathbone
Vice President and Controller
(Principal Accounting Officer) (Signature)
<PAGE> PAGE 20
EXHIBIT INDEX
-------------
Electronic
Submission
Exhibit
Number Description Page
----------- ----------------------------------------- ----
27 Financial Data Schedule 21
(This exhibit is required to be submitted
electronically pursuant to the rules and
regulations of the Securities and
Exchange Commission and shall not be
deemed filed for purposes of Section 11
of the Securities Act of 1933 or
Section 18 of the Securities Exchange Act
of 1934.)
<PAGE> PAGE 21
