<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 JUNE 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 July 31, 2000
----- --------------------------------
Common Stock (par value $1.00) 16,668,997
<PAGE> PAGE 2
TABLE OF CONTENTS
-----------------
Page
----
Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Statements of Income
Three Months and Six Months Ended
June 30, 1999 and 1998 3
Consolidated Balance Sheets as of
June 30, 2000, and December 31, 1999 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information:
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 18
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
<PAGE> PAGE 3
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.
------ --------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Income
($ in millions)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Railway operating revenues:
Coal $ 377 $ 298 $ 720 $ 580
General merchandise 934 723 1,844 1,346
Intermodal 229 160 435 285
------ ------ ------ ------
TOTAL RAILWAY OPERATING
REVENUES $1,540 $1,181 $2,999 $2,211
------ ------ ------ ------
Railway operating expenses:
Compensation and benefits
(Note 4) 486 533 1,137 901
Materials, services and rents 333 293 664 490
Conrail rents and services
(Note 5) 124 43 255 43
Depreciation 121 115 242 228
Diesel fuel 106 48 221 85
Casualties and other claims 34 29 66 64
Other 87 98 171 156
------ ------ ------ ------
TOTAL RAILWAY OPERATING
EXPENSES 1,291 1,159 2,756 1,967
------ ------ ------ ------
Income from railway
operations 249 22 243 244
Other income (expense) - net (50) 4 (83) 19
Interest expense on debt (11) (9) (21) (16)
------ ------ ------ ------
Income before income taxes 188 17 139 247
Provision for income taxes 73 4 54 88
------ ------ ------ ------
NET INCOME $ 115 $ 13 $ 85 $ 159
====== ====== ====== ======
</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>
June 30, 2000 Dec. 31, 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21 $ --
Short-term investments 5 12
Accounts receivable, net (Note 3) 129 681
Due from Conrail (Note 5) 18 77
Materials and supplies 134 98
Deferred income taxes 150 124
Other current assets 102 144
------- -------
Total current assets 559 1,136
------- -------
Due from NS - net (Note 5) 172 --
Investments (Note 7) 527 624
Properties less accumulated depreciation 10,437 10,390
Other assets 467 482
------- -------
TOTAL ASSETS $12,162 $12,632
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 850 $ 787
Income and other taxes 181 132
Due to NS - net (Note 5) -- 483
Notes and accounts payable to Conrail (Note 5) 103 184
Other current liabilities 166 152
Current maturities of long-term debt 85 85
------- -------
Total current liabilities 1,385 1,823
------- -------
Long-term debt 739 781
Other liabilities 1,054 1,044
Minority interests 2 3
Deferred income taxes 3,591 3,596
------- -------
TOTAL LIABILITIES 6,771 7,247
------- -------
Stockholders' equity:
Serial preferred stock 55 55
Common stock 167 167
Additional paid-in capital 673 673
Accumulated other comprehensive income (Note 7) 181 259
Retained income 4,315 4,231
------- -------
TOTAL STOCKHOLDERS' EQUITY 5,391 5,385
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,162 $12,632
======= =======
</TABLE>
See accompanying notes to Consolidated Financial Statements.
<PAGE> PAGE 5
Item 1. Financial Statements. (continued)
------ --------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
----------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 85 $ 159
Reconciliation of net income to net cash
provided by operating activities:
Depreciation 243 229
Deferred income taxes (8) (42)
Gains on property sales (6) (10)
Changes in assets and liabilities affecting
operations:
Accounts receivable (Note 3) 57 (172)
Materials and supplies (36) 7
Other current assets and due from Conrail 109 21
Income tax liabilities 55 128
Other short-term liabilities 100 156
Other - net (Note 4) 3 137
------- -------
Net cash provided by operating activities 602 613
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (333) (544)
Property sales and other transactions 43 23
Investments, including short-term (39) (73)
Investment sales and other transactions 38 146
------- -------
Net cash used for investing activities (291) (448)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (Note 5) (1) (1)
Advances and repayments to NS (194) (258)
Advances and repayments from NS 34 22
Proceeds from borrowings 125 188
Debt repayments (254) (25)
------- -------
Net cash used for financing activities (290) (74)
------- -------
Net increase in cash and cash equivalents 21 91
CASH AND CASH EQUIVALENTS:
At beginning of year -- --
------- -------
At end of period $ 21 $ 91
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 81 $ 31
Income taxes $ 6 $ 2
</TABLE>
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 June 30, 2000, and results of
operations and cash flows for the six months ended June 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 owner-
ship 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. Work Force Reduction Charge
"Compensation and benefits" expenses for the first six months of
2000 include a first-quarter $101 million work force 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 -- NS and CSX Corporation (CSX) jointly own Conrail Inc.
(Conrail), whose primary subsidiary is Consolidated Rail
Corporation (CRC). From May 23, 1997, the date NS and CSX
completed their acquisition of Conrail stock, until June 1, 1999,
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 June 1, 1999 (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 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 CSXT.
<PAGE> PAGE 8
Item 1. Financial Statements. (continued)
------ --------------------
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 work force. 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 June 30, 2000, NS Rail has paid $34 million of
these costs. In addition, NS Rail has incurred $12 million and
expects to incur an additional $7 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 a transition period.
"Notes and accounts payable to Conrail" includes $33 million at
June 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
6.4% at June 30, 2000. Also included is $70 million at June 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 accounted
for as secured borrowings. Accordingly, at Dec. 31, 1999, "Accounts
receivable, net" included $388 million of such sold receivables, and
"Due to NS - net" included the related liability.
<PAGE> PAGE 9
Item 1. Financial Statements. (continued)
------ --------------------
<TABLE>
Intercompany Accounts
---------------------
<CAPTION>
June 30, 2000 Dec. 31, 1999
------------- -------------
Average Average
Interest Interest
Balance Rate Balance Rate
------- -------- ------- --------
($ in millions)
<S> <C> <C> <C> <C>
Due from NS:
Advances $ 525 6% $ 75 4%
Due to NS:
Advances -- (234) 5%
Notes (353) 8% (324) 7%
------ ------
Due from (to) NS-net $ 172 $ (483)
====== ======
</TABLE>
The majority of the change for the first six 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 June 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 $830 million and $809 million,
respectively.
Noncash Dividend
-----------------
In March and June 1999, NSR declared and issued to NS noncash
dividends totaling $467 million, which were settled by reduction
of NSR's interest-bearing advances due from NS. Noncash dividends
are excluded from the Consolidated Statements of Cash Flows.
Cash Required for NS Debt
-------------------------
A significant portion of the funding for the interest and
repayments on NS' debt is expected to be provided by NS Rail.
<PAGE> PAGE 10
Item 1. Financial Statements. (continued)
------ --------------------
6. Lease Commitment
In March and June 2000, NS Rail entered into operating leases for
a total of 140 locomotives, which have a maximum term of eight
years and include purchase options. If NS Rail does not purchase
the locomotives at the end of the lease terms, it is liable for
the difference between the then fair-value of the locomotives and
a specified residual value. NS Rail does not expect that any
payments under this provision would be material to its financial
statements.
7. Comprehensive Income
<TABLE>
NS Rail's total comprehensive income was as follows:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C>
Net income $ 115 $ 13 $ 85 $ 159
Other comprehensive
income (loss) 6 52 (78) (24)
------ ------ ------ ------
Total comprehensive
income $ 121 $ 65 $ 7 $ 135
====== ====== ====== ======
</TABLE>
For NS Rail, "Other comprehensive income (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 second quarter
and first six months of 1999 reflect only one month of operations of
the new NS railroad system, which includes 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 $115 million in the second quarter of 2000, up
$102 million, compared with $13 million in the second quarter of 1999.
For the first six months of 2000, net income was $85 million, compared
with $159 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 work force (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, second-quarter net income was about even with
that of last year, and six-month net income declined $115 million, or
44 percent. For the quarter, income from railway operations
increased, as last year's second quarter was significantly affected by
the difficulties encountered in the commencement of operations in the
Northern Region. However, the effects of this improvement were offset
by higher nonoperating expenses, largely attributable to the sale of
accounts receivable to NS (see Note 5). The unfavorable six-month
comparison was principally due to: (1) the higher nonoperating expenses
related to the sale of accounts receivable to NS and (2) reduced income
<PAGE> PAGE 12
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
from railway operations that resulted from higher diesel fuel costs, a
change in the mix of traffic (a lower proportion of export coal
traffic and a higher proportion of intermodal traffic), and expenses
related to efforts to improve service (primarily locomotive and
freight car costs earlier in the year).
Railway Operating Revenues
--------------------------
<TABLE>
Second-quarter railway operating revenues were $1.5 billion in 2000,
and were $1.2 billion in 1999. For the first six months, railway
operating revenues were $3.0 billion in 2000, and were $2.2 billion in
1999. As shown in the following table, the increases were
attributable to higher traffic volume, largely the result of the
commencement of operations in the Northern Region. The year-to-date
revenue per unit/mix component includes a $57 million negative
variance for coal, reflecting an increase in the proportion of shorter-
haul traffic, coupled with a decline in the proportion of export coal
traffic.
<CAPTION>
Second Quarter First Six Months
2000 vs. 1999 2000 vs. 1999
Increase (Decrease) Increase (Decrease)
------------------ ------------------
($ in millions)
<S> <C> <C>
Traffic volume (carloads) $ 337 $ 796
Revenue per unit/mix 22 (8)
------- -------
$ 359 $ 788
======= =======
</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
----------------------------------------
Second Quarter Six Months
2000 1999 2000 1999
---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C>
Coal $ 377 $ 298 $ 720 $ 580
General merchandise:
Automotive 247 187 487 347
Chemicals 195 147 379 272
Metals/construction 182 126 356 220
Paper/clay/forest 160 139 313 267
Agr./consumer prod./govt. 150 124 309 240
------ ------ ------ ------
General merchandise 934 723 1,844 1,346
Intermodal 229 160 435 285
------ ------ ------ ------
Total $1,540 $1,181 $2,999 $2,211
====== ====== ====== ======
</TABLE>
<PAGE> PAGE 13
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
<TABLE>
Carloads
----------------------------------------
<CAPTION>
Second Quarter Six Months
2000 1999 2000 1999
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Coal 436 340 858 640
General merchandise:
Automotive 189 156 372 292
Chemicals 116 92 230 170
Metals/construction 206 126 396 217
Paper/clay/forest 126 113 252 215
Agr./consumer prod./govt. 128 117 263 223
----- ----- ----- -----
General merchandise 765 604 1,513 1,117
Intermodal 555 425 1,062 771
----- ----- ----- -----
Total 1,756 1,369 3,433 2,528
===== ===== ===== =====
</TABLE>
Coal
----
Second-quarter coal revenues were $377 million, compared with
$298 million last year, and were $720 million for the first six
months, compared with $580 million last year. Total tonnage handled
increased 10 million tons in the quarter and 22 million tons for the
first six months, most of which was utility coal traffic. The effects
of Northern Region traffic were somewhat offset by lower export
tonnage out of Norfolk, Va., and reduced utility demand in the
Southeast earlier in the year. Utility volume was affected by plant
repairs and outages in the Spring; however, demand continues to be
driven by increased electricity generation in NS' service region.
Domestic metallurgical coal, coke and iron ore traffic volume also
benefited from increased domestic steel production and new business.
For the remainder of the year, coal revenues are expected to be
slightly higher than the comparable period of 1999.
General Merchandise
-------------------
Second-quarter general merchandise revenues were $934 million,
compared with $723 million last year, and were $1.8 billion for the
first six months, compared with $1.3 billion last year. Both
increases were principally the result of the addition of Northern
Region traffic. Continued strong automotive demand, increased metals
and construction business, and recovery of much of the traffic
diverted last year also contributed to increased revenues.
For the remainder of the year, general merchandise revenues are
expected to be somewhat higher than in the comparable period of 1999,
reflecting the return of diverted traffic, new business and higher rates.
<PAGE> PAGE 14
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Intermodal
----------
Second-quarter intermodal revenues were $229 million, compared with
$160 million last year, and were $435 million in the first six months,
compared with $285 million last year. Both increases reflected the
addition of Northern Region traffic. Higher traffic volume also
resulted from increased demand, new business and the recovery of
diverted traffic.
For the remainder of the year, intermodal revenues are expected to be
somewhat higher than last year, as the effects of the loss of APL business
late in 1999 is expected to be offset by new business.
Railway Operating Expenses
--------------------------
Second-quarter railway operating expenses were $1.3 billion in 2000
and $1.2 billion in 1999. For the first six months, railway operating
expenses were $2.8 billion in 2000 and $2.0 billion in 1999. Both
increases reflected Northern Region operations, which commenced
June 1, 1999, and sharply higher diesel fuel prices. Both comparisons
were also affected by the contractual obligations assumed on the
Closing Date that principally resulted form employing a significant
portion of Conrail's former work force. In addition, year-to-date
expenses in 2000 included the $101 million pretax charge in the first
quarter related to the work force reduction efforts.
"Compensation and benefits" expense decreased $47 million, or
9 percent, in the second quarter, but increased $236 million, or 26
percent, for the first six months, including the effects of the work
force reduction charge. The decline for the quarter resulted from the
effects of the contractual obligations incurred last year in employing
a substantial portion of Conrail's work force, somewhat offset by the
effects of a full period this year of Northern Region operations. The
increase for the first six months principally was due to the addition
of Northern Region operations and the first-quarter 2000 work force
reduction charge, partially offset by the effects of last year's costs
for the contractual obligations assumed on the Closing Date. Both
comparisons were also affected by wage increases and fringe benefit
costs for union employees, which were partially offset by pension
income of $34 million in each of the first and second quarters
($21 million and $43 million higher than in the second quarter and
first six months of 1999, respectively), lower stock-based
compensation costs, and lower nonunion salary expense following the
voluntary early retirement program.
"Materials, services and rents" increased $40 million, or 14 percent,
in the second quarter, and $174 million, or 36 percent, for the first
six months. The increases were principally due to the addition of
Northern Region operations and included higher maintenance expenses,
equipment rents, and intermodal handling costs. These increases were
partially offset by the absence of certain costs, mostly for alternate
transportation, related to the difficulties encountered last year in
the commencement of Northern Region operations.
<PAGE> PAGE 15
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
"Conrail rents and services" amounted to $124 million in the second
quarter, and $255 million for the first six months, for use of PRR's
assets and for NS Rail's share of CRC's operation of the Shared Assets
Areas (see Note 5).
"Diesel fuel" expense increased $58 million, or 121 percent, in the
second quarter, and $136 million, or 160 percent, for the first six
months. Both increases reflected sharply higher average prices per
gallon, up 69 percent for the quarter and 88 percent for the first six
months, and increased consumption related to Northern Region operations.
"Casualties and other claims" expense increased $5 million, or
17 percent, in the second quarter, and $2 million, or 3 percent, for
the first six months. Both increases reflect the addition of Northern
Region operations. The comparison for the first six months also was
affected by higher environmental expenses last year related to a first-
quarter 1999 settlement associated with a Superfund site.
"Other" expense decreased $11 million, or 11 percent, in the second
quarter, but increased $15 million, or 10 percent, for the first six
months. Both periods were affected by higher property and other taxes
related to the Northern Region, and costs incurred on the Closing Date
for obligations in the Northern Region.
The railway operating ratio was 83.8 percent in the second quarter,
compared with 98.1 percent last year. For the first six months, the
ratio was 91.9 percent; excluding the first-quarter work force
reduction charge, the ratio would have been 88.5 percent, compared
with 89.0 percent last year. Excluding the $168 million of
contractual obligations and commitments, the 1999 operating ratios
would have been 83.9 percent for the quarter and 81.4 percent for the
first six months. For the remainder of the year, the ratio is
expected to improve, compared with 1999's second-half ratio, which was
adversely affected by system congestion and related traffic diversions
after the Closing Date.
Other Income (Expense) - Net
----------------------------
"Other income (expense) - net" was an expense of $50 million in the
second quarter and $83 million for the first six months, compared with
income of $4 million for the quarter and $19 million for the first six
months last year. Both changes principally resulted from the sales of
accounts receivable (see Notes 3 and 5).
Provision for Income Taxes
--------------------------
The second-quarter and six-month effective income tax rates were
38.8 percent, compared with 23.5 percent for the quarter and
35.6 percent for the first six months last year. The lower second-
quarter 1999 average rate resulted from the difference between the
deferred and effective tax rates.
<PAGE> PAGE 16
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
<TABLE>
FINANCIAL CONDITION AND LIQUIDITY
<CAPTION>
June 30, Dec. 31,
2000 1999
------- -------
($ in millions)
<S> <C> <C>
Cash and short-term investments $ 26 $ 12
Debt-to-total capitalization 13.7% 15.5%
</TABLE>
CASH PROVIDED BY OPERATING ACTIVITIES, NS Rail's principal source of
liquidity, decreased $11 million, or 2 percent, in the second quarter
of 2000, compared with last year. The decline was largely
attributable to the effects of the decrease in operating income
(excluding the noncash work force 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). However, the effects of the operating income
decline were mostly offset by the lack of bonus payments and other
favorable changes in working capital combined with the sale of
receivables; see Note 3. NS Rail's working capital deficit was
$826 million at June 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 property additions -- locomotive fleet additions in 2000
were accomplished by operating lease (see Note 6), whereas 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.
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,
<PAGE> PAGE 17
Item 2. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
actual outcomes and results may differ materially from those expressed
in such forward-looking statements. This caveat has particular
importance in the context of all 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 4. Submission of Matters to a Vote of Security Holders.
------ ---------------------------------------------------
Registrant's annual meeting of stockholders was held on May 23,
2000, at which meeting stockholders elected one director whose term
will expire in 2003.
The one nominee, who was uncontested, was elected by the
following vote:
THREE-YEAR TERM
-----------------------------------------------------------------
FOR AUTHORITY WITHHELD
--- ------------------
L. I. Prillaman 17,578,067 votes 18,895 votes
Item 6. Exhibits and Reports on Form 8-K.
------ --------------------------------
A report on Form 8-K was filed on April 3, 2000, advising
that NS Rail expected to record a $100 million charge in the
first quarter to reflect the cost of certain work force
reductions.
A report on Form 8-K was filed on May 24, 2000, advising
that on May 23, 2000, the Registrant's parent had closed the
sale of $300 million of its 8-3/8 percent Senior Notes due
in 2005 and $300 million of its 8-5/8 percent Senior Notes
due in 2010.
<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: August 9, 2000 /s/ Reginald J. Chaney
------------------- -------------------------------------------
Reginald J. Chaney
Corporate Secretary (Signature)
Date: August 9, 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
