-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QCq8MVidffvPYg/isLcCvcjuIuWQGKAApuAyZaIKucCSfJicJWex5lFLgylraXCf LElyJS9DJfsIeEzqhhnhCA== 0000897732-96-000007.txt : 19960327 0000897732-96-000007.hdr.sgml : 19960327 ACCESSION NUMBER: 0000897732-96-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960326 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONRAIL INC CENTRAL INDEX KEY: 0000897732 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 232728514 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-12184 FILM NUMBER: 96538334 BUSINESS ADDRESS: STREET 1: TWO COMMERCE SQ STREET 2: P O BOX 41417 CITY: PHILADELPHIA STATE: PA ZIP: 19101-1417 BUSINESS PHONE: 2152094434 MAIL ADDRESS: STREET 1: P.O. BOX 41429 STREET 2: 2001 MARKET STREET CITY: PHILADELPHIA STATE: PA ZIP: 19101-1429 10-K 1 CONRAIL INC 1995 10K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For Transition Period from _________________ to ____________________ Commission File No. 1-12184 CONRAIL INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23 2728514 - ---------------------------- --------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 2001 Market Street, Two Commerce Square Philadelphia, Pennsylvania 19101-1417 - ---------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (215) 209-4000 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Conrail Inc. New York Stock Exchange Common Stock (Par Value $1.00) Philadelphia Stock Exchange and Common Stock Purchase Rights --------------------------- - -------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of voting stock held by non-affiliates of the Registrant (as of March 1, 1996): $5,873,037,422 Shares of Common Stock outstanding (as of March 1, 1996): 81,983,135 DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for Annual Meeting of Shareholders to be held on May 15, 1996 - Part III TABLE OF CONTENTS ----------------- Item Page ---- ---- Part I 1. Business...................................... 1 2. Properties.................................... 1 3. Legal Proceedings............................. 14 4. Submission of Matters to a Vote of Security Holders.................................... 20 Executive Officers of the Registrant........... 20 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 25 6. Selected Financial Data........................ 25 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 28 8. Financial Statements and Supplementary Data.... 37 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 60 Part III 10. Directors and Executive Officers of the Registrant.................................. 60 11. Executive Compensation......................... 60 12. Security Ownership of Certain Beneficial Owners and Management....................... 60 13. Certain Relationships and Related Transactions. 60 Part IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 61 Power of Attorney............................................. 66 Signatures.................................................... 66 Exhibit Index................................................. 68 i PART I Item 1. Business. - ------ -------- and Item 2. Properties. - ------ ---------- GENERAL. Conrail Inc. was incorporated in Pennsylvania on February 12, 1993 and on July 1, 1993 became the holding company of Consolidated Rail Corporation. Consolidated Rail Corporation is Conrail Inc.'s only significant subsidiary and primary asset. Conrail Inc.'s common stock is listed on the New York and Philadelphia Stock Exchanges. Consolidated Rail Corporation is a Pennsylvania corporation incorporated on February 10, 1976 to acquire, pursuant to the Regional Rail Reorganization Act of 1973, the rail properties of many of the railroads in the northeast and midwest region of the United States which had gone bankrupt during the early 1970's, the largest of which was the Penn Central Transportation Company ("Penn Central"). Reports on Form 10-K for years prior to 1993 were filed by Consolidated Rail Corporation, and historic data presented herein and therein reflect the results of Consolidated Rail Corporation for those time periods. Unless otherwise indicated, references to Conrail prior to July 1, 1993 denote Consolidated Rail Corporation and its consolidated subsidiaries, and references to Conrail after July 1, 1993 denote Conrail Inc. and its consolidated subsidiaries. RAIL OPERATIONS. Conrail, through its wholly-owned subsidiary Consolidated Rail Corporation, provides freight transportation services within the northeast and midwest United States. Conrail interchanges freight with other United States and Canadian railroads for transport to destinations within and outside Conrail's service region. Conrail operates no significant line of business other than the freight railroad business and does not provide common carrier passenger or commuter train service. Conrail serves a heavily industrial region that is marked by dense population centers which constitute a substantial market for consumer durable and non-durable goods, and a market for raw materials used in manufacturing and by electric utilities. Conrail's traffic levels and, as a result, its financial performance are substantially affected by its ability to compete with trucks and other railroads, the economic strength of the industries and metropolitan areas that produce and consume the freight Conrail hauls and the traffic generated by Conrail's connecting railroads. Conrail remains dependent on non-bulk traffic, which tends to generate higher revenues than bulk commodities, but also involves higher costs and is more vulnerable to truck competition. THE SERVICE GROUP SYSTEM. Beginning in 1994, Conrail's Marketing and Sales Department and related segments of its Operating Department were organized into four service groups: CORE Service, Intermodal Service, Unit Train Service and Automotive Service. Petrochemicals and waste products, 1 food and agriculture products, forest and manufactured products, and metals are handled by the CORE Service Group. The Intermodal Service Group handles intermodal trailers and containers. The Unit Train Service Group handles coal and ore traffic. The Automotive Service Group handles automotive parts and finished vehicles. Each of these groups controls the integrated planning, pricing and operating functions that will enable them to tailor services, develop products and make capital investments directed toward the special requirements of their respective customers. Revenues for the Service Groups for 1991 through 1995, together with total annual traffic volumes, are set forth in the following tables. SERVICE GROUPS - REVENUES ($ in Millions) Years ended December 31, -------------------------------------- 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ [S] [C] [C] [C] [C] [C] CORE Service Group(1) Revenues(2) $1,557 $1,587 $1,514 $1,468 $1,451 Percent of total 44.5% 44.5% 45.9% 46.0% 46.7% Intermodal Service Group Revenues(2) 701 742 647 597 575 Percent of total 20.0% 20.8% 19.6% 18.7% 18.5% Unit Train Service Group Revenues(2) 659 631 583 673 664 Percent of total 18.8% 17.7% 17.7% 21.1% 21.3% Automotive Service Group Revenues(2) 549 558 505 443 419 Percent of total 15.7% 15.7% 15.3% 13.9% 13.5% Total Unassigned Revenue(2) 36 46 48 10 0 1.0% 1.3% 1.5% 0.3% 0.0% Total line haul revenue $3,502 $3,564 $3,297 $3,191 $3,109 Miscellaneous revenue(3) 184 169 156 154 143 ----- ----- ----- ----- ----- Total freight revenue $3,686 $3,733 $3,453 $3,345 $3,252 _________________________ (1) Petrochemicals and Minerals $ 584 $ 603 $ 565 $ 541 $ 538 Food and Agriculture 353 361 351 347 335 Forest and Mfg. Products 329 326 308 315 311 Metals 291 297 290 265 267 ----- ----- ----- ----- ----- Total CORE Srv. Grp. $1,557 $1,587 $1,514 $1,468 $1,451 (2) Revenues for the years 1991 through 1994 have been reclassified to exclude unassigned revenue from Service Group totals to provide more accurate comparisons to the current period. (3) Includes switching, demurrage and other miscellaneous revenues. 2 SERVICE GROUPS - VOLUME IN UNITS (FREIGHT CARS AND INTERMODAL TRAILERS AND CONTAINERS) (In Thousands) Years ended December 31, 1995 1994 1993 1992 1991 ----- ----- ----- ----- ----- [S] [C] [C] [C] [C] [C] CORE Service Group (1) 1,254 1,321 1,302 1,213 1,179 Intermodal Service Group 1,473 1,589 1,355 1,220 1,108 Unit Train Service Group 862 912 878 964 1,003 Automotive Service Group 399 396 360 319 289 ----- ----- ----- ----- ----- Total Volume 3,988 4,218 3,895 3,716 3,579 ===== ===== ===== ===== ===== __________________________ (1) Petrochemicals and Minerals 358 376 374 360 350 Food and Agriculture 265 289 295 284 272 Forest and Mfg. Products 306 318 309 290 289 Metals 325 338 324 279 268 ----- ----- ----- ----- ----- Total CORE Srv. Grp. 1,254 1,321 1,302 1,213 1,179 ===== ===== ===== ===== ===== CORE Service Group. ------------------- In 1995, revenues and volume for this service group declined 1.9% and 5.1%, respectively, from 1994. All lines of business comprising the CORE Service Group experienced a greater decline in units than in revenue, as the result of initiatives in the second half of 1994 designed to selectively rationalize lower margin business and increase prices. PETROCHEMICALS AND MINERALS: This commodity group consists of a wide variety of commodities, including agricultural and organic chemicals, plastic pellets, soda ash, construction minerals, petroleum products and waste. The majority of traffic is joint-line and the primary flows are between Louisiana and Texas, (as originating sources), and Delaware, New Jersey, and Pennsylvania (as destination points). This commodity group's customer base and origin/destination pair mix are both large and diverse, with none occupying a dominant position in terms of Conrail's traffic volume or revenues. Conrail's traffic in this commodity group increased in 1992 and 1993, leveled off in 1994, and declined slightly in 1995, with revenue and volume down 3.1% and 4.6%, respectively. Revenues from petroleum and plastics products, which accounted for one-fourth of this group's volume in 1995, declined approximately 6% as the result of lower demand for plastics. The largest component of this business is chemical traffic, accounting for approximately 47% of the revenue and 42% of the volume in 1995. This traffic includes chlorine, smaller volumes of other hazardous chemicals and non-hazardous substances which, if spilled or released into the atmosphere, could be dangerous and could result in significant liability to Conrail. Under catastrophic circumstances, such liability could exceed Conrail's $300 million in insurance coverage for such accidents. It is impossible to 3 eliminate the risk of such liability; however, Conrail has not experienced any significant liability as a result of an accident involving chlorine or any other such substance. Furthermore, Conrail has safety procedures designed to prevent the occurrence of such accidents, or limit their impact should they occur, and works in concert with chemical manufacturers to reduce the risks in transporting these commodities, subscribing to the policies and procedures defined under Responsible Care partnerships. Several incidents in 1995, including derailments and the December 22 collision involving Conrail trains at Effingham, Illinois, involved hazardous substances. The recovery procedures were safely executed and potential liability from the hazardous substances was mitigated. Increasing regulation by federal, state and local governments of the transportation and handling of hazardous and non-hazardous substances and waste has increased the administrative burden and costs of transporting certain commodities in this group. FOOD AND AGRICULTURE: This commodity group includes fresh and processed food products moving primarily in boxcars, and grain and grain products moving in covered hopper and tank cars. Conrail's revenue for this group increased in 1994, but declined in 1995, with food and agriculture revenue and units down 2.1% and 8.2%, respectively. The decline in volume occurred in both the food products and agriculture areas as the result of price increases targeted at low margin business. In addition, the large 1994 eastern grain harvest decreased demand for midwest feed grain shipments into Conrail's eastern service territory in 1995. FOREST AND MANUFACTURED PRODUCTS: This commodity group includes paper and wood products moving in boxcars, certain lumber and related products moving on flatcars and general manufactured commodities moving in boxcars. These commodities generated $329 million in revenue in 1995. A volume decline of 3.9% was offset by price increases, which yielded a slight revenue increase of less than 1%. Price increases targeted at low-margin general manufactured products business was primarily responsible for the decline in volume. METALS: This commodity group includes scrap ferrous products and semi- finished, finished and sheet steel. In 1994, this group had substantial increases in units and revenue, as the result of market share gains from trucks and higher levels of steel production reflecting increases in North American vehicle production. In 1995, revenue and units declined 2% and 4%, respectively, compared to 1994, primarily as the result of increased truck competition and selective price increases on lower margin business. Intermodal Service Group. ------------------------- Conrail continues to be one of the rail industry's leaders in handling intermodal traffic, although volume and revenue declined 7.3% and 5.5%, 4 respectively, in 1995 from 1994's record levels. Conrail handled nearly 1.5 million units of intermodal traffic in 1995. Conrail's intermodal traffic consists of three segments. The first segment is Conrail's parcel/package traffic, which principally involves shipments for the U.S. Postal Service, United Parcel Service and less-than- truck-load companies. The U.S. Postal Service contracts for over 1,000 origin-destination points were rebid successfully for two years in 1995. The second segment is domestic traffic, which includes a variety of commodities and customers. Traffic in this segment declined approximately 8.5% in 1995, primarily due to reduced traffic from intermodal marketing companies (or third party freight consolidators and brokers), reflecting slower economic growth in the Northeast and increased price competition from trucks. Traffic from major truckload companies continued to increase, as did traffic from Triple Crown Services Company, which is jointly owned by Conrail and Norfolk Southern Corporation. International container traffic constitutes the third segment of Conrail's intermodal traffic. International container traffic chiefly involves goods produced in the Pacific Basin and shipped by rail from west coast ports to east coast markets. Conrail and its western railroad connections are able to participate in this traffic because they have established superior transit times compared with the all-water route through the Panama Canal. Conrail also participates in traffic moving through Atlantic ports for import and export trade with European and Mediterranean markets. Revenue from Conrail's international intermodal traffic decreased slightly (less than 1%) from 1994. In 1995, Conrail completed its project to raise clearances through Ohio, Pennsylvania and New Jersey, including those on Conrail's route from Harrisburg, PA to Hagerstown, MD where Conrail connects with the Norfolk Southern Corporation. The completion of this project will enable Conrail to provide more efficient double-stack service in these corridors. Unit Train Service Group. ------------------------- In 1995, revenues for this service group increased by approximately 4.4%, despite a 5.4% decrease in traffic volume. This was primarily as the result of a greater than 10% increase in revenue per unit, due to the elimination of a large, but low revenue, short-haul coal move. Utility coal traffic, which makes up the majority of Conrail's coal business, decreased 12.4% with a 3.7% decline in revenue in 1995. This decline in volume reflects a very mild winter, which reduced coal consumption by utilities. In addition, utilities began to maintain lower than usual stock piles in 1995, as they attempted to reduce costs in response to deregulation of their industry. Utility coal moves from mines located on and off Conrail's system to electric utilities located on Conrail. Annual traffic volumes fluctuate with the inventory practices of 5 the electric utilities, their use of alternative sources of energy and the weather. The utilities in Conrail's service territory increased their use of nuclear fuel in 1995 over 1994, but such use did not reach the near capacity levels of 1993. The federal acid rain legislation enacted in October 1990, which requires electric utilities to significantly limit sulfur dioxide emissions from their generating plants by burning lower sulfur coal or installing emissions control devices, has reduced demand for the higher sulfur coal from mines on Conrail's system, particularly in central Pennsylvania. Phase one of the regulations was effective January 1, 1995. As the result of declining demand, in December 1994, Conrail sold its lines serving coal mines in central Pennsylvania. However, the decline in the volume of coal from mines located in central Pennsylvania is being offset, in part, by an increase in Conrail's handling of lower sulfur coal from sources on Conrail- owned lines on the former Monongahela Railway Company and in southern West Virginia. Export, industrial/cogeneration and metallurgical coal represent the three remaining segments of Conrail's coal traffic, with export coal volumes being one-third greater than industrial/cogeneration volumes and more than twice as great as metallurgical coal volumes. Export coal traffic volume increased 58% in 1995, after having increased 28% in 1994. Revenue in 1995 increased approximately 64%. In 1993 and 1992, this traffic had declined significantly from the record levels of 1991. The increase in 1995 resulted from the increased competitiveness on the world market of the low-cost, high BTU, mid-sulfur coal produced by mines served by Conrail's Monongahela lines. Conrail's traffic volume and revenue for industrial/cogeneration coal increased 12% in 1995, primarily as the result of the initiation of service to two new cogeneration facilities. These facilities may be among the last congeneration facilities opened on Conrail, as deregulation of the utility industry has eliminated the utilities' economic incentives to support them. Conrail's traffic volume and revenue from metallurgical coal continues to decline, having decreased 8.6% in 1995 after a decline of 10% in 1994. Revenue in 1995 was down approximately 13.4%. Except for a slight increase in 1993, this business has declined in each year since 1989, as the domestic steel industry continues to eliminate inefficient production capacity and as competition for the industry's remaining transportation requirements increases. Conrail serves directly, or via short line switching carriers, many of the nation's largest active integrated steel production facilities. Although a significant portion of the active domestic steel industry is along the Cleveland-Chicago corridor on Conrail's system, the traditional domestic steel industry (using integrated steel production facilities) continues to eliminate inefficient production capacity, which in past years 6 has adversely affected the volume of raw materials for steel production handled by Conrail, and could continue to do so. In late 1995, Bethlehem Steel, one of Conrail's largest customers, closed its steel producing facility at Bethlehem, Pennsylvania. This, along with similar trends in the industry, reduced coke and iron ore volume by approximately 17%, with a corresponding 15% reduction in revenue, from 1994. Volume in this segment is expected to continue to decline in 1996. Automotive Service Group. ------------------------- In 1995, Conrail's automotive parts and finished vehicles traffic suffered from the weak domestic economy and the 3% decrease in North American vehicle production from 1994. Despite this decrease in domestic production, finished vehicles volume increased 3%, while automotive parts volume decreased 2%. Finished vehicles revenue increased 1%, with auto parts revenue decreasing 5%. As a whole, 1995 volume for this group increased approximately 1%; however, revenues were down 1.6%. In terms of revenues, General Motors, Ford and Chrysler were among Conrail's five largest customers in 1995. This commodity group, especially the automotive parts segment, is subject to vigorous truck competition. Nevertheless, Conrail was able to increase its automotive parts market share by offering new products and logistics services designed to compete with short-haul trucks. Conrail's vehicles traffic is subject to significant competition from other railroads. During 1995, Conrail's automotive parts and finished vehicles traffic continued to be favorably affected by the strength of the yen against the U.S. dollar, which created incentives for foreign-based domestic manufacturers to shift additional production to the United States and to export domestically produced vehicles. Also in 1995, this group experienced an increase in automotive parts and vehicle traffic to and from Mexico as a result of the North American Free Trade Agreement. 7 CERTAIN STATISTICS. The following tables provide various measurements relating to Conrail's rail operations from 1991 through 1995: PRODUCTIVITY DATA Years ended December 31, --------------------------------------- 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------- [S] [C] [C] [C] [C] [C] Operating ratio (1)................. 87.6% 83.8% 82.9% 84.0% 108.0% Compensation and benefits ratio..... 33.9% 33.7% 35.6% 37.0% 37.9% Employees (average)................. 23,510 24,833 25,406 25,380 25,852 Gross ton miles per freight employee hour worked (2)(3)............... 4,352 4,135 3,805 3,746 3,717 Gross ton miles per freight train hour (thousands) (2)(3).......... 118.7 113.0 119.0 122.1 120.0 Gross ton miles per locomotive in service (millions) (2)(3)......... 110.1 104.8 102.4 107.1 107.6 Gross ton miles per gallon of fuel (2) 774 749 745 770 776 (1) The 1995 operating ratio (operating expenses as a percent of revenues) includes the effect of a one-time $285 million charge for an asset disposition program. Without this charge, Conrail's operating ratio would have been 79.9%. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 to the Consolidated Financial Statements elsewhere in this Annual Report. Without the $51 million special charge in 1994, Conrail's operating ratio would have been 81.5%. See Note 9 to the Consolidated Financial Statements elsewhere in this Annual Report. Without the $719 million special charge in 1991, Conrail's operating ratio would have been 85.9%. See Note 5 to the Selected Financial Data elsewhere in this Annual Report. (2) Excluding subsidiaries, except Consolidated Rail Corporation. (3) Locomotive weight not included. QUALITY OF SERVICE DATA(1) Years ended December 31, -------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- [S] [C] [C] [C] [C] [C] Miles of track under slow order....... 43 49 62 73 90 Locomotive out of service ratio....... 9.1% 8.7% 8.3% 8.8% 7.8% Freight cars requiring heavy repairs.. 5.6% 4.9% 4.7% 4.0% 2.9% Reportable train accidents (2)........ 141 160 155 148 183 Cost of loss and damage incidents as a percent of revenue............ .47% .48% .39% .39% .39% (1) Excluding subsidiaries, except Consolidated Rail Corporation. (2) Reportable train accidents for 1992 have been restated to include 6 incidents that occurred in 1992, but were reported in 1993. 8 COMPETITION. Conrail's rail operations face significant competition from trucks, from other railroads, and from the availability of the same or substitute goods produced at points not served by Conrail. The trucking industry is especially competitive in Conrail's service area because, on average, freight in this region is moved shorter distances than in the West, and the cost characteristics of the railroad and trucking industries generally make trucks more competitive over shorter distances. Price and service competition from trucks, while present for all commodities, is especially evident in the movement of intermodal freight, auto parts, and finished steel. Competition from trucks has been increased by the passage of legislation removing certain barriers to entry into the trucking business and allowing the use of wider, longer, and heavier trailers and multiple trailer combinations. Larger trailers and multiple trailer combinations have substantially increased productivity in the trucking industry, and any future legislation permitting further increases in truck capacity could have a substantial adverse effect on the competitiveness of railroads. CSX Corporation and Norfolk Southern Corporation are Conrail's principal railroad competitors. Conrail is also subject to competition from smaller, regional railroads. The assets of the Delaware & Hudson Railway Company ("D&H"), a regional competitor of Conrail's, have been purchased by a subsidiary of CP Rail, a large Canadian railroad. CP Rail's use of D&H's former tracks, coupled with additional trackage rights it has obtained, has resulted in increased rail competition in Conrail's service area. Certain of Conrail's railroad competitors have become multi-modal transportation companies by purchasing previously independent water carriers or small shipment motor carriers, or both, and have thereby extended their operations into Conrail's service area. In addition, recent changes in rail products and technology have expanded the scope of rail service beyond the physical limitations of lines, which has resulted in increased railroad competition. An important influence on Conrail's competitive position is regulation by the Federal government. Prior to 1980, regulation significantly inhibited the ability of railroads to respond to changing transportation markets. The Staggers Rail Act of 1980 ("Staggers Act") substantially reduced the restrictions of regulation. In particular, railroads were given more opportunity to reduce costs and more freedom to adjust prices, which enabled them to compete more effectively and to adjust prices quickly to reflect competitive circumstances. Under the Staggers Act, the former Interstate Commerce Commission ("ICC") deregulated a significant amount of railroad traffic, including intermodal and most boxcar traffic, finished vehicles and miscellaneous commodities moving in other types of equipment. The Staggers Act further enhanced railroads' competitive options by permitting the use of railroad-shipper contracts for traffic still regulated, under which the parties can set the price, service standards and term for a special transportation movement. These contracts generally provide for prices lower than tariff rates and many do not guarantee that 9 any given amount of freight will be shipped during their term. As of December 31, 1995, Conrail was a party to 3,826 such contracts for regulated traffic, which Conrail estimates accounted for 36% of its line- haul revenues in 1995. Although some contracts have a term longer than one year, most contracts are for one year or less. The majority of Conrail's multi-year contracts are subject to cost-related adjustments that provide for flat percentage increases. The cost-based provisions in certain of these contracts are tied to indices formerly under the jurisdiction of the ICC. Action to adjust these indices for productivity gains by the railroads has had an adverse impact on Conrail's ability to recover costs under such contracts, which accounted for less than 3% of Conrail's line haul revenues in 1995. Effective January 1, 1996, pursuant to the ICC Termination Act of 1995, the authority of the ICC to regulate railroads was transferred to the Department of Transportation ("DOT") to be administered by the Surface Transportation Board. The prior regulatory scheme remains substantially intact, with the following significant changes: (1) access to freight railroad tracks by rail operators (both freight and passenger) operating on behalf of local governmental authorities has been eased; (2) some types of abandonments may take appreciably longer; (3) tariffs and most contracts will no longer be filed (other mechanisms are required for advising customers of rates and rate changes); (4) minimum rate levels will no longer be regulated; and (5) DOT will not regulate railroad issuances of securities or assumptions of debt. Other changes will require development of new regulations and/or of a body of precedent before their impact can be fully assessed. PROPERTY. Conrail directly holds no real property. The only significant property holdings are those of Consolidated Rail Corporation. As of December 31, 1995, Consolidated Rail Corporation (excluding its subsidiaries) maintained 17,715 miles of track including track for crossovers, turnouts, second main, other main, passing and switch track, on its 10,701 mile route system. Of total route miles, 8,860 are owned, 100 are leased or operated under contract and 1,741 are operated under trackage rights, including approximately 300 miles operated pursuant to an easement over Amtrak's Northeast Corridor. As of December 31, 1995, virtually all track over which at least 10 million gross tons moved annually (6,274 track miles) was heavy-weight rail of at least 127 pounds per yard, and 100% of such track had continuous welded rail. Continuous welded rail reduces track maintenance costs and, in general, permits trains to travel at higher speeds. As of December 31, 1995, Conrail had 9,493 miles of continuous welded rail on track it maintained. As of December 31, 1995, all of the 4,972 track miles maintained for fast freight traffic had a maximum operating speed of 50 MPH or more, and 58% had a maximum operating speed of at least 60 MPH. As of December 31, 1995, approximately 96% of the track over which at least 10 million gross tons moved annually was governed by automatic signal systems. In all, as 10 of December 31, 1995, 7,656 miles of track were controlled by automatic signal systems. Conrail is engaged in an ongoing process to identify certain under- utilized rail lines and other underperforming assets to avoid future capital costs and to improve its return on assets. Conrail recorded a $285 million charge in 1995 to cover the expected losses upon disposition of approximately 1,800 miles of lines and other assets not required to support Conrail's service. See Note 2 to the Consolidated Financial Statements elsewhere in this Annual Report. Previously, the expected losses upon disposition of similar assets were included in the 1991 special charge. See Note 5 to the Selected Financial Data included elsewhere in this Annual Report. The following table indicates the number of locomotives and freight cars owned (or subject to capitalized leases) and includes 21,948 freight cars used by Conrail under operating leases. These total figures are as of December 31, 1995, and include stored or surplus units, but exclude subsidiaries other than Consolidated Rail Corporation, which have an immaterial number of locomotives and freight cars: LOCOMOTIVES AND FREIGHT CARS Number of Units Total Stored(1) ------ ------ LOCOMOTIVES........................ 2,023 41 ----- -- Road............................. 1,815 5 Switching........................ 208 36 Total Surplus(2) ------ ------- FREIGHT CARS....................... 51,404 4,393 ------ ----- Box.............................. 8,299 1,332 Covered Hopper................... 4,410 0 Open Hopper...................... 12,409 2,405 Gondola.......................... 7,093 168 Coil Steel....................... 11,725 75 Multi-Level...................... 5,874 169 Flat and Other................... 1,594 244 - ----------- (1) Serviceable locomotives not required for current operations on December 31, 1995. (2) Freight cars which did not move during the seven days immediately preceding December 31, 1995 and which were available for loading. The number of surplus freight cars during 1995 fluctuated due to variations in traffic and fleet adjustments. On December 31, 1995, the average age of Conrail's road locomotives, not including stored-serviceable units, was 14.8 years (or 10.5 years defining "road locomotive" as those with 3,000 horsepower and above). The average age of the total locomotive fleet was 15.2 years, and the average age of the total freight car fleet was 22.1 years. 11 CAPITAL EXPENDITURES. The following tables provide information concerning capital expenditures from 1991 through 1995: CAPITAL EXPENDITURES (In Millions) Years ended December 31, ------------------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- [S] [C] [C] [C] [C] [C] Track rehabilitation...... $206 $221 $207 $275 $186 Rolling stock and transportation equipment.. 170 139 314 57 127 Other(1).................. 118 148 129 159 85 --- --- --- --- --- Total..................... $494 $508 $650 $491 $398 Subsidiaries of Consolidated Rail Corporation (included in Total).................... $ 4 $ 3 $ 3 $ 12 $ 12 (1) Includes communications and signals, bridges and tunnels, computers and telecommunications, and other improvements. TRACK REHABILITATION Years ended December 31, ------------------------------------- 1995 1994 1993 1992 1991 ----- ----- ----- ----- ----- [S] [C] [C] [C] [C] [C] Track miles surfaced...... 3,162 2,749 3,154 3,671 3,247 Track miles of rail laid.. 255 207 201 312 78 Ties installed (millions). 1.1 1.1 1.0 1.4 1.2 EMPLOYEES AND LABOR. Including subsidiaries, Conrail's average number of employees for 1995 was 23,510. Consolidated Rail Corporation (excluding subsidiaries) averaged 22,631 employees in 1995, 86% of whom are represented by a total of 14 labor organizations and are covered by 22 separate collective bargaining agreements. Conrail is currently engaged in collective bargaining with the labor organizations representing its union employees, which commenced on November 1, 1994. During 1995, CRC reached an agreement with approximately 300 of its employees represented by the Fraternal Order of Police. In addition, a tentative agreement was reached with approximately 4,000 of its employees represented by the United Transportation Union through negotiations carried on by the National Carriers' Committee, of which CRC is a member. The outcome of these various efforts cannot be predicted at this time. If the parties are unable to reach agreement through direct negotiation, either party may invoke the mediation services of the National Mediation Board; 12 there is no time limit on the mediation process. If the Mediation Board eventually concludes that its efforts to resolve the dispute will not be successful, it will proffer binding arbitration. If either side refuses to arbitrate, there is a 30-day "cooling-off" period during which the Board may make a finding that the dispute threatens "substantially to interrupt interstate commerce to a degree such as to deprive any section of the country of essential transportation service." Such finding is then presented to the President of the United States who has the option of appointing an Emergency Board to investigate the dispute. If the President does not appoint an Emergency Board, the parties are free to resort to self help at the conclusion of the above-mentioned cooling-off period. If the President does appoint an Emergency Board, it has 30 days to investigate the dispute and report its findings. The Emergency Board's findings are non-binding; although the parties must maintain the status quo for a period of 30 days following the Board's report, any party which rejects the Board's findings may thereafter resort to self help. In the event of a strike, Congress has the power to resolve the dispute by enacting legislation, including legislation imposing a labor contract in accordance with the findings of the Emergency Board. Under a decision by the United States Supreme Court on April 28, 1987, rail unions have the right, under the Railway Labor Act and other federal laws, to engage in secondary picketing against any railroad. As a result, a labor dispute between one railroad and a union can cause a strike to spread to any other railroad, or to all other railroads, whether or not the union has a collective bargaining agreement or a dispute with such other railroads. There is also the potential that railroads may be subject to secondary picketing in the event of a strike in the airline industry, which, like the railroad industry, is subject to the Railway Labor Act. Should Conrail or its subsidiaries be the subject of a strike or secondary picketing, Conrail's rail operations could be severely curtailed or stopped. GOVERNMENT REGULATION. Conrail is subject to environmental, safety, and other regulations generally applicable to all businesses, and its rail operations are also regulated by the DOT, the Federal Railroad Administration ("FRA"), state Departments of Transportation and some state and local regulatory agencies. The DOT has jurisdiction over, among other things, rates charged for certain traffic movements, service levels and freight car rents. It also has jurisdiction over the situations and terms under which one railroad may gain access to another railroad's traffic or facilities, extension or abandonment of rail lines, consolidation, merger, or acquisition of control of rail common carriers and of other carriers by rail common carriers, and labor protection provisions in connection with the foregoing. Under the Staggers Act, federal regulation of rates and services was reduced. The regulatory scheme, now administered by the Surface 13 Transportation Board, continues the ICC's prior deregulation of rates for intermodal traffic, most boxcar traffic and a series of miscellaneous commodities, including steel and automobiles. In addition, railroads are free to negotiate contracts with shippers setting rates, service standards and the terms for movements of other kinds of traffic. As a result, railroads have greater flexibility in adjusting rates and services to meet revenue needs and competitive conditions. For further discussion of the abolition of the ICC and the effect of the transfer of its regulatory authority to DOT, see "Competition." The FRA has jurisdiction over safety and railroad equipment standards. Conrail's rail operations are also subject to a variety of governmental laws and regulations relating to the protection of the environment. In addition to being involved as a potentially responsible party at numerous Superfund sites (see Item 3 - "Legal Proceedings"), Consolidated Rail Corporation is subject to increasing regulation of its transportation and handling of certain hazardous and non-hazardous commodities and waste which has resulted in additional administrative and operating costs. Also, the United States Environmental Protection Agency had been required to issue regulations applicable to new locomotive emissions during 1995. Its failure to do so is currently the subject of litigation, and Conrail anticipates that the regulations will be promulgated in 1997. Locomotive engines (other than those defined as new or remanufactured) may be regulated by the states. Additional investments will likely be required to bring other than new locomotives into compliance, although the timing and amount of the investments will not be determinable until the legislation is adopted. Except as it relates to the 1991 special charge (see Item 6 - "Selected Financial Data" and Note 5 thereto included elsewhere in this Annual Report), compliance with existing laws and regulations relating to the protection of the environment has not had a material effect on Conrail's capital expenditures, earnings or competitive condition. (See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters," Note 5 to Selected Financial Data and Note 12 to the Consolidated Financial Statements included elsewhere in this Annual Report.) Item 3. Legal Proceedings. - ------ ----------------- References to Conrail in "Item 3. Legal Proceedings" shall denote Consolidated Rail Corporation unless otherwise expressly noted. OCCUPATIONAL DISEASE LITIGATION. Conrail has been named as a defendant in lawsuits filed pursuant to the provisions of the Federal Employers' Liability Act ("FELA") by persons alleging (1) personal injury or death caused by exposure to asbestos in connection with railroad employment; (2) complete or partial loss of hearing caused by exposure to excessive noise in the course of railroad employment; (3) repetitive motion injury in connection with railroad employment; and (4) personal injury or death caused by exposure to deleterious substances (mixed dusts, fumes, chemicals, etc.) As of December 31, 1995, Conrail was a defendant in 484 pending asbestosis suits, 659 pending hearing loss suits, 118 pending 14 repetitive motion injury suits and 442 pending deleterious substance suits, and had notice of 1,408 potential asbestosis claims, 4,575 potential hearing loss claims, 3,044 potential repetitive motion injury claims and 45 deleterious substance claims. Conrail expects to be named as a defendant in a significant number of occupational disease cases in the future. STRUCTURE AND CROSSING REMOVAL DISPUTES IN CONNECTION WITH LINES ABANDONED UNDER NERSA. Conrail may be responsible, in whole or in part, for the costs of removal of several hundred overhead and underpass crossings located on railroad lines it has abandoned under the Northeast Rail Service Act of 1981 ("NERSA") (and, in some instances, responsible for the removal of the lines of railroad themselves as well as appurtenant structures). Conrail's liability for the removal of such lines, crossings and structures will be determined on a case-by-case basis. Some states have imposed upon Conrail the obligation to remove certain crossings. CONRAIL WITHDRAWAL FROM RCAF MASTER TARIFF. The Rail Cost Adjustment Factor ("RCAF") is an index of rail costs issued by the ICC according to which railroads may adjust their regulated rates for inflation and cost increases free of regulatory interference. In March 1989, the ICC decided to offset the quarterly RCAF by the entirety of the average rail industry productivity gain. On January 1, 1990, Conrail ceased applying RCAF increases to its regulated rates, by ending its participation in the RCAF master tariff. Effective July 1, 1990, Conrail published a series of independent rate increases approximately equal to its increases in costs as reflected by the RCAF. Conrail's action was contested, but was upheld by the ICC. Since July 1, 1990, Conrail has continued to make independent selective increases to its regulated rates. These regulated rates will continue to be subject to individual challenge to the extent the levels of the increases exceed those previously permitted pursuant to the RCAF and no other statutory provisions bar ICC jurisdiction. In January 1991, the ICC commenced a proceeding at the request of a shippers' organization to clarify the legal effect of Conrail's (and other railroads') withdrawal from the RCAF master tariff, including the shippers' assertion that railroads thereby lose protection from challenge for rates previously adjusted under these procedures. In April 1991, Conrail individually opposed and participated in the rail industry's opposition to the petition. The ICC has taken no action on the matter since that time, and the matter has been transferred to the Surface Transportation Board of DOT. ENGELHART V. CONRAIL. In connection with the Special Voluntary Retirement Program offered to certain employees in late 1989 and early 1990, Conrail used surplus funds in its overfunded Supplemental Pension Plan ("Plan") to fund certain aspects of that program. In December 1992, certain former Conrail employees brought suit in the U.S. District Court for the Eastern District of Pennsylvania challenging the use of surplus 15 Plan funds (i) to pay administrative Plan expenses previously paid by Conrail, (ii) to fund the Special Voluntary Retirement Program, and (iii) to pay life insurance and medical insurance premiums of former employees as improper and unlawful, and alleging that employees who have made contributions to the Plan or its predecessor plans are entitled to share in the surplus assets of the Plan. In August 1993, the federal district court granted Conrail's Motion to Dismiss the majority of counts in the complaint, but declined to dismiss the issue of Conrail's use of Plan assets to pay administrative expenses of the Plan, which are estimated to be approximately $34 million as of December 31, 1995. Cross Motions for Summary Judgment on the remaining issues are pending. Conrail continues to believe that the use of surplus Plan assets for this purpose is lawful and proper. Conrail uses surplus Plan assets in a similar manner in connection with subsequent early retirement programs. ENVIRONMENTAL LITIGATION. Conrail is subject to various federal, state and local laws and regulations regarding environmental matters. In certain instances, Conrail has received notices of violations of such laws and regulations and either has taken or plans to take appropriate steps to address the problems cited or to contest the allegations of violation. As of December 31, 1995, Conrail had received inquiries from governmental agencies or had been identified, together with other companies, as a potentially responsible party for cleanup and/or removal costs due to its status as an alleged transporter, generator or property owner at 130 locations throughout the country. However, Conrail, through its own investigations and assessments, believes it may have some potential responsibility at only 56 of these sites. The amounts Conrail has accrued with respect to the proceedings listed below are included in its $64 million accrual for estimated future environmental expenses. (See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Environmental Matters" and Note 12 to the Consolidated Financial Statements included elsewhere in this Annual Report.) The significant environmental proceedings, including Superfund sites, are discussed below. UNITED STATES V. SOUTHEASTERN PENNSYLVANIA TRANSPORTATION AUTHORITY ("SEPTA"), NATIONAL RAILROAD PASSENGER CORPORATION ("AMTRAK"), AND CONSOLIDATED RAIL CORPORATION. In March 1986, the United States Environmental Protection Agency ("EPA") filed an action in the United States District Court for the Eastern District of Pennsylvania for cost recovery, injunctive relief, and a declaratory judgment against Conrail, Southeastern Pennsylvania Transportation Authority ("SEPTA") and National Railroad Passenger Corp. ("Amtrak") under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA" or "Superfund Law"), as amended. In 1990, the Pennsylvania Department of Environmental Resources ("PADER") intervened as a plaintiff. Suit is based on the release or threatened release at the Paoli Railroad Yard, Paoli, Chester County, Pennsylvania, of polychlorinated biphenyls ("PCBs"), a listed hazardous substance under CERCLA. Conrail is sued in its capacity as the operator of the rail yard from April 1, 1976 through December 31, 1982, under an agreement with SEPTA to provide commuter rail service. In March 16 1992, Penn Central brought suit before the Special Court arguing that the terms of the transfer of its properties to Conrail did not contemplate environmental liability for conditions existing at the time of the transfer. On August 23, 1994, the Special Court held that the reorganization did not prevent the government from pursuing its CERCLA claims against Penn Central. The Court also granted Conrail's Motion for Summary Judgment against Penn Central, finding that Conrail's liability for contamination to former Penn Central property was limited only to the period after April 1, 1976. Notwithstanding this finding, the Special Court declined to preclude federal courts from applying principles of joint and several liability and holding Conrail liable for pre-April 1, 1976 contamination in instances where contamination of the property was not divisible. In a related action, Conrail sought a declaration against the Reading Company similar to that granted with respect to Penn Central, as well as a declaration that Conrail is entitled to indemnification from SEPTA and/or the federal government for environmental liability resulting from its statutorily mandated provision of commuter rail service. In April 1995, the Special Court issued a similar declaration against the Reading Company as granted with respect to Penn Central, but refused to determine whether Conrail is entitled to such indemnification from SEPTA. The court rejected Conrail arguments that controlling federal statutes mandated indemnification of Conrail for environmental liability in connection with commuter rail service provided pursuant to such statutes. Immediately prior to trial scheduled for January 1996, Conrail and Reading reached a settlement of this matter. Conrail continues to assert its right to indemnification against SEPTA, and trial with respect to that issue is expected to commence in late 1996. Pursuant to a series of partial preliminary consent decrees, defendants have performed a series of cleanup actions both on and off-site and have conducted a Remedial Investigation/Feasibility Study ("RI/FS"). As of December 31, 1995, the cost of the RI/FS and of the interim cleanup measures performed by the three defendants is approximately $9 million. Those costs have been shared equally among the three defendants but are subject to reallocation. All work done to date has been performed subject to a denial of liability and without waiving any defense to the governmental claim for cleanup costs or other relief. Negotiations with EPA continue. UNITED STATES V. CONRAIL. The EPA has listed Conrail's Elkhart Yard in Indiana on the National Priorities List. The EPA contends that chemicals have migrated from the yard and contaminated drinking wells in the area. On February 14, 1990, the EPA filed a civil action against Conrail in the U.S. District Court for the Northern District of Indiana seeking recovery of approximately $345,000 for costs incurred in protecting the water supply. In addition, the EPA seeks a declaratory judgment against Conrail for all future costs incurred in responding to the release or threatened release of hazardous substances from the site. Conrail believes it is not the sole source and may not be a contributing source to 17 the contamination alleged by the EPA. Conrail filed a third-party action joining Penn Central as a defendant, to which Penn Central responded by filing a declaratory judgment action in Special Court. As a result of the Special Court decision in August 1994, Conrail and Penn Central have negotiated an interim cost-sharing arrangement for costs in implementing the EPA's 1992 interim Record of Decision, which is substantially complete. (See previous discussion regarding the Special Court under "United States v. SEPTA, et al"). On May 15, 1995, EPA issued an Administrative Order that required the parties to install a public water supply system for up to an additional 700 to 1,000 homes. On June 14, 1995, Conrail and Penn Central agreed that each company would comply with the Order. The cost for providing public water to the remaining residences is estimated to be between $4 and $6 million, which Conrail expects will be apportioned between Penn Central and Conrail. UNITED STATES V. CONRAIL, ET AL. Conrail has been identified as the fifth largest generator of waste oil at the Berks Associates Superfund site in Douglasville, Pennsylvania. In addition, Conrail has become aware that it and its predecessor, Penn Central, owned a small portion of land that was leased to the operator of the Berks site. As such, Conrail's liability could increase due to its questionable status as both an owner and a generator. In August 1991, the EPA issued an administrative order against Conrail and thirty-five other entities mandating the implementation of an approximately $2 million partial remedy and filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania for the recovery of approximately $8 million in costs incurred by the government. The parties have negotiated an administrative order with the EPA and have filed an answer to the civil action. A group of potentially responsible parties (including Conrail) undertook compliance with the administrative order. Conrail and the 35 other defendants have filed a third-party complaint against approximately 630 entities seeking contribution for the costs of the remedy and government costs. Conrail, along with other defendants, is negotiating a settlement with the EPA. On June 30, 1993, the EPA issued another administrative order against Conrail and 33 other entities, mandating the remediation of the southern portion of the site. The effective date of the order has been delayed in light of the negotiations. The most expensive aspect of the remediation of the site is the cleanup of Source Area 2, which the government estimates at between $45 and $55 million. This Source Area was closed prior to Conrail's incorporation, and therefore Conrail has maintained that it is not liable for the cost of remediating Source Area 2. In addition, PADER has filed with the court a complaint for the recovery of natural resource damages. UNITED STATES V. CONRAIL, ET AL. Conrail is a potentially responsible party ("PRP"), along with more than 50 other parties, in the United Scrap Lead federal Superfund action in Troy, Ohio, where substantial quantities of batteries were disposed of over a period of several years. The EPA sued Conrail and nine other parties in August 1991 in the Southern District of Ohio for the recovery of approximately $2 million in past costs. Conrail and other PRP's have commissioned treatability studies. The court has 18 imposed a stay to discuss whether this matter can be settled. EPA has selected a remedy for the site with an estimated cost of approximately $33 million, which the PRP's are challenging. Conrail estimates its share of the liability at 8%. COMMONWEALTH OF MASSACHUSETTS V. CONRAIL. On April 21, 1992, the Massachusetts Attorney General filed suit in Superior Court of Massachusetts alleging Conrail's violation of the Massachusetts Clean Air Act and its implementing regulations by allowing diesel engines to idle unnecessarily and/or in excess of thirty minutes. On May 4, 1992, the court entered a preliminary injunction, the terms of which are substantially consistent with Conrail's existing idling policy. The Attorney General subsequently filed a complaint alleging Conrail's violation of the preliminary injunction. On February 2, 1993, the parties entered into a partial settlement agreement; however, the Attorney General has alleged that Conrail has failed to comply with certain provisions of the settlement. Conrail is negotiating the terms of a settlement with the Attorney General's office. NEW YORK STATE DEPARTMENT OF ENVIRONMENTAL CONSERVATION ORDER ON CONSENT. On February 18, 1993, the New York State Department of Environmental Conservation ("NYSDEC") served Conrail with a draft Order on Consent requiring the payment of civil fines in connection with its inspection of Selkirk Yard. The order also seeks compensation for the hiring of three full-time NYSDEC employees to monitor Conrail's compliance at Selkirk and two other rail yards in New York. Conrail is negotiating the terms of the Order with NYSDEC. NEW YORK STATE DEPARTMENT OF ENVIRONMENTAL CONSERVATION ORDER ON CONSENT. On November 3, 1994, NYSDEC served Conrail with an Order on Consent requiring the payment of civil fines in connection with the alleged discharge of waste water from DeWitt Yard in Onondaga County, New York into New York State waters. Conrail is negotiating the terms of the Order with NYSDEC. IN THE MATTER OF CONSOLIDATED RAIL CORPORATION, ASHTABALA, OH. On September 21, 1994, the EPA filed an Administrative Complaint against Conrail seeking civil penalties for certain alleged violations of its National Pollutants Discharge Emissions System permit. Conrail filed its answer on November 30, 1994, and is negotiating with the EPA to settle this matter. CONWAY YARD, PITTSBURGH. In 1991, Conrail received Notices of Violation ("NOV") from the PADER alleging violations of the Clean Streams Act for discharges of oil into the Ohio River. In September 1993, PADER sent to Conrail a draft Consent Order and Agreement requiring a comprehensive site remediation for soil, ground water, surface waters and sediments at the Conway rail yard and requiring the payment of civil fines in connection with violations at the yard, including continuing ground water contamination. Conrail and PADER continue to negotiate the extent of 19 the investigation and remediation to be undertaken at the yard and the amount of the fines. OTHER. In addition to the above proceedings, Conrail has been named in various legal proceedings arising out of its activities as an employer and as an operator of a freight railroad, including personal injury actions brought by its employees under FELA, as well as administrative proceedings with and investigation by government agencies. In view of the inherent difficulty of predicting the outcome of legal proceedings, particularly in certain matters described above in which substantial damages are or may be sought, Conrail cannot state what the eventual outcomes of such legal proceedings will be. Certain of these matters, if determined adversely to Conrail, could result in the imposition of substantial damage awards against, or increased costs to, Conrail that could have a material adverse effect on Conrail's results of operations and financial position. Conrail's management believes, however, based on current knowledge, that such legal proceedings will not have a material adverse effect on Conrail's financial position. Item 4. Submission of Matters to a Vote of Security Holders. - ------ --------------------------------------------------- There were no matters submitted to a vote of security holders during the fourth quarter of 1995. Executive Officers of the Registrant. - ------------------------------------ Conrail's officers are elected annually by the Board of Directors at its first meeting held after the meeting of shareholders at which directors are elected, and they hold office until their successors are elected. There are no family relationships among the officers or directors, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. The following table sets forth certain information, as of March 1, 1996, relating to the executive 20 officers of Conrail and Consolidated Rail Corporation. An asterisk (*) indicates that such individual is an officer of Consolidated Rail Corporation only: Name, Age, Present Position Business Experience During Past 5 Years - ---------------------------------- ---------------------------------------- David M. LeVan, 50, President Present position since March 16, and Chief Executive Officer 1995. Served as President and Chief Operating Officer between September 1994 and March 1995. Served as Executive Vice President between November 1993 and September 1994. Served as Senior Vice President - Operations between July 1992 and November 1993. Served as Senior Vice President-Operating Systems and Strategy between November 1991 and June 1992. Served as Senior Vice President - Corporate Systems between November 1990 and November 1991. Cynthia A. Archer, 42, Senior Vice Present position since May 1995. President - Intermodal Service Served as General Manager - Group Transportation and Customer Service of the Harrisburg Division between February 1994 and May 1995. Served as Assistant Vice President - Food and Agriculture between September 1993 and January 1994. Served as Director - Intermodal Business Development between September 1991 and August 1993. H. William Brown, 57, Senior Present position since April Vice President - Finance 1992. Served as Senior Vice and Administration President - Finance between April 1986 and April 1992. Ronald J. Conway, 52, Senior Vice Present position since November President - Operations 1994. Served as Vice President - Operations between September 1994 and November 1994. Served as Vice President - Transportation between July 1994 and September 1994. Served as Vice President - Intermodal Service Group between November 1993 and July 1994. Served as Assistant Vice President - Petrochemicals and Minerals between April 1992 and November 1993. Served as General Manager - Philadelphia Division between 1989 and April 1992. 21 Timothy P. Dwyer, 46, Senior Vice Present position since November President - Unit Train Service 1994. Served as Vice President - Group Unit Train Service Group between November 1993 and November 1994. Served as General Manager - Philadelphia Division between April 1992 and November 1993. Served as Assistant Vice President - Metals between 1989 and April 1992. Frank H. Nichols, 49, Senior Present position since May 1995. Vice President - Organizational Served as Vice President - Human Performance Resources between February 1993 and May 1995. Served as Assistant Vice President - Finance between November 1988 and February 1993. John P. Sammon, 45, Senior Vice Present position since November President - CORE Service Group 1994. Served as Vice President - Intermodal between July 1994 and November 1994. Served as Assistant Vice President- Intermodal between January 1988 and July 1994. George P. Turner, 54, Senior Vice Present position since November President - Automotive Service 1994. Served as Vice President - Group Automotive Service Group between November 1993 and November 1994. Served as Assistant Vice President - Automotive between April 1992 and November 1993. Served as Assistant Vice President - Petrochemicals and Minerals between March 1990 and April 1992. Bruce B. Wilson, 60, Senior Present position since April Vice President - Law 1987. Lucy S.L. Amerman, 45, Vice Present position since July 1994. President - Risk Management* Served as Assistant Vice President - Claims and Litigation between April 1994 and July 1994. Served as General Counsel - Litigation between March 1990 and March 1994. Dennis A. Arouca, 44, Vice Present position since May 1994. President - Labor Relations* Served as Partner in the law firm of Pepper Hamilton & Scheetz between February 1986 and May 1994. John T. Bielan, Jr., 48, Present position since March Vice President - Continuous 1992. Served as Assistant Vice Quality Improvement* President - Automotive between April 1989 and March 1992. 22 Gerald T. Gates, 42, Vice Present position since January President - Customer Support* 1996. Served as Vice President - Transportation between November 1994 and January 1996. Served as Vice President - Mechanical between November 1993 and November 1994. Served as Assistant Vice President - Operations Planning and Administration between July 1992 and November 1993. Served as General Manager - Indianapolis Division between September 1990 and July 1992. Hugh J. Kiley, 43, Vice President Present position since January - Service Design & Planning* 1996. Served as Assistant Vice President - Performance and Process Management between November 1994 and January 1996. Served as Assistant Vice President - Program Management between May 1994 and November 1994. Served as General Manager - National Customer Service Center between November 1990 and May 1994. Craig R. MacQueen, 43, Vice Present position since June 1995. President - Corporate Served as Assistant Vice Communications* President - Public Affairs between September 1992 and June 1995. Served as Executive Director - Public Affairs between November 1990 and August 1992. Donald W. Mattson, 53, Vice Present position since April President - Controller 1994. Served as Vice President - Treasurer between May 1993 and April 1994. Served as Vice President - Controller between August 1988 and May 1993. John A. McKelvey, 44, Vice Present position since January President - Service Delivery* 1996. Served as Vice President - Materials and Purchasing between April 1994 and January 1996. Served as Vice President - Controller between May 1993 and March 1994. Served as Vice President - Treasurer between 1988 and May 1993. William B. Newman, Jr., 45, Present position since 1981. Vice President and Washington Counsel* Timothy T. O'Toole, 40, Vice Present position since April President and Treasurer 1994. Served as Vice President and General Counsel between May 1989 and April 1994. 23 Lester M. Passa, 42, Vice Present position since March President - Logistics and 1995. Served as Assistant Vice Corporate Strategy* President - Strategic Planning between February 1993 and March 1995. Served as Director - Intermodal Planning between October 1991 and January 1993. Albert M. Polinsky, 49, Vice Present position since April President - Information Systems* 1994. Served as Assistant Vice President - Program Management between December 1993 and March 1994. Served as Assistant Vice President - Marketing Services between April 1992 and December 1993. Served as Director - Information Services between March 1990 and April 1992. Richard S. Pyson, 54, Vice Present position since January President - Operations Services* 1996. Served as Vice President - Engineering between November 1994 and January 1996. Served as Vice President between July 1994 and November 1994. Served as Vice President - Transportation between April 1992 and July 1994. Served as Vice President - Engineering between March 1991 and March 1992. John M. Samuels, 52, Vice Present position since January President - Operating Assets* 1996. Served as Vice President - Mechanical between November 1994 and January 1996. Served as Vice President - Engineering between April 1992 and November 1994. Served as Vice President - Continuous Quality Improvement between April 1990 and March 1992. Allan Schimmel, 55, Corporate Present position since November Secretary 1980. 24 PART II Item 5. Market for Registrant's Common Equity - ------ ------------------------------------- and Related Stockholder Matters. ------------------------------- Conrail's common stock is listed for trading on the New York Stock Exchange and the Philadelphia Stock Exchange. The number of holders of record of Conrail common stock on March 1, 1996 was 20,083. For the high and low sales prices of Conrail's common stock on the New York Stock Exchange and the frequency and amount of cash dividends for 1995 and 1994, see Note 13 to the Consolidated Financial Statements included elsewhere in this Annual Report. Item 6. Selected Financial Data. - ------ ----------------------- The selected consolidated financial data included in the following tables have been derived from Conrail's Consolidated Financial Statements. The consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995 and the consolidated balance sheets as of December 31, 1995 and 1994 appear elsewhere in this Annual Report and have been audited by the Company's independent accountants, as indicated in their reports thereon. For purposes of the following selected consolidated financial data, references to Conrail reflect the consolidated entities of Consolidated Rail Corporation for periods prior to July 1, 1993 and Conrail Inc. for subsequent periods. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and related notes and other financial information included elsewhere in this Annual Report. 25 Years ended December 31, --------------------------------------- 1995 1994 1993(3) 1992 1991 ------ ------ ------ ------ ------ (In Millions Except Per Share Amounts) [S] [C] [C] [C] [C] [C] STATEMENT OF INCOME DATA: Revenues............................. $3,686 $3,733 $3,453 $3,345 $3,252 Operating expenses (before one-time charges)............................. 2,945 3,043 2,862 2,811 2,794 One-time charges (1),(2) and (5)..... 285 84 719 ------ ------ ------ ------ ------ Income (loss) from operations........ 456 606 591 534 (261) Interest expense..................... (194) (192) (185) (172) (181) Loss on disposition of subsidiary (4) (80) Other income, net 130 118 114 98 107 ------ ------ ------ ------ ------ Income (loss) before income taxes and the cumulative effect of changes in accounting principles... 392 532 440 460 (335) Income taxes (benefits) (1).......... 128 208 206 178 (128) ------ ------ ------ ------ ------ Income (loss) before the cumulative effect of changes in accounting principles......................... 264 324 234 282 (207) Cumulative effect of changes in accounting principles.............. (74) ------ ------ ------ ------ ------ Net income (loss).................... $ 264 $ 324 $ 160 $ 282 $ (207) ====== ====== ====== ====== ====== Income (loss) per common share before the cumulative effect of changes in accounting principles... Primary............................ $3.19 $3.90 $2.74 $3.28 $(2.70) Fully diluted...................... 2.94 3.56 2.51 2.99 (2.70) Cumulative effect of changes in accounting principles Primary............................ (.92) Fully diluted...................... (.81) Net income (loss) per common share (6) Primary............................ 3.19 3.90 1.82 3.28 (2.70) Fully diluted...................... 2.94 3.56 1.70 2.99 (2.70) Dividends per common share (6)....... 1.60 1.40 1.20 1.00 .85 Years ended December 31, ------------------------------------------ 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ (In Millions) [S] [C] [C] [C] [C] [C] BALANCE SHEET DATA: Cash and cash equivalents and temporary cash investments........ $ 73 $ 43 $ 38 $ 40 $ 135 Working capital (deficit)........... 36 (76) (13) (489) (286) Total assets........................ 8,424 8,322 7,948 7,315 7,096 Other noncurrent liabilities (net of current maturities of debt)....... 2,444 2,480 2,433 2,075 2,215 Deferred income taxes............... 1,393 1,203 1,081 644 429 Special income tax obligation....... 440 513 575 569 627 Stockholders' equity................ 2,977 2,925 2,784 2,748 2,661 26 NOTES TO SELECTED FINANCIAL DATA 1. Included in 1995 operating expenses is an asset disposition charge of $285 million, which reduced net income by $176 million. The asset disposition charge resulted from a review of the Company's route system and other operating assets to determine those that no longer effectively and economically support current and expected operations. The Company identified and has committed to sell 1,800 miles of rail lines that are expected to provide proceeds substantially less than net book value. In addition, other assets, principally yards and side tracks, identified for disposition have been written down to estimated net realizable value. Also, in 1995, as a result of a decrease in a state income tax rate enacted during the second quarter of 1995, income tax expense was reduced by $21 million representing the effect of adjustment for the rate decrease as required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Without these items, net income for 1995 would have been $419 million ($5.16 per share, primary and $4.69 per share, fully diluted). (See Notes 2 and 6 to the Consolidated Financial Statements included elsewhere in this Annual Report.) 2. In 1994, Conrail recorded a charge of $51 million (after tax benefits of $33 million) for a non-union employee voluntary early retirement program and related costs. The majority of the cost of the early retirement program is being paid from Conrail's overfunded pension plan. Without this one-time charge, net income would have been $375 million ($4.54 per share, primary and $4.13 per share, fully diluted). (See Note 9 to the Consolidated Financial Statements included elsewhere in this Annual Report.) 3. Conrail adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), and SFAS 109 effective January 1, 1993. As a result, in the first quarter of 1993, Conrail recorded cumulative after-tax charges of $22 million and $52 million, respectively. In addition, as a result of the increase in the federal corporate income tax rate from 34% to 35%, effective January 1, 1993, income tax expense includes $34 million of a retroactive nature, primarily for the effects of adjusting deferred income taxes and the special income tax obligation for the rate increase as required under SFAS 109. (See Notes 1, 6 and 7 to the Consolidated Financial Statements included elsewhere in this Annual Report.) 4. In 1993, Conrail committed to a plan for the disposition of its investment in Concord Resources Group, Inc. ("Concord"). Pursuant to this plan, Conrail recorded an estimated loss of $80 million for the disposition of its investment, including $19 million for operating losses expected to be incurred during the phase-out period and disposition costs. Conrail also recorded estimated federal tax 27 benefits of $30 million relating to the disposition. In June 1995, the Company completed the disposition of the last of two major waste disposal facilities of Concord. The dispositions had no financial statement impact. (See Note 10 to the Consolidated Financial Statements included elsewhere in this Annual Report.) 5. In 1991, Conrail recorded in operating expenses a special charge totalling $719 million which was composed of $362 million for disposition of certain under-utilized rail lines and other facilities, $212 million for labor settlements primarily representing certain expected costs associated with a new labor agreement that reduced the size of train crews, $57 million for certain environmental clean up costs, and $88 million for legal matters including settlement of the Amtrak-Conrail collision at Chase, Maryland in January 1987. The 1991 special charge reduced net income by $447 million, and without the special charge net income would have been $240 million ($2.73 and $2.48 per share, primary and fully diluted, respectively). 6. Net income (loss) and dividends per common share include the effects of a 1992 two-for-one common stock split. The calculations of income per common share for 1995, 1994 and 1993 are shown in Exhibit 11, Part IV included elsewhere in this Annual Report. Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. ----------------------------------- Overview - -------- Conrail's net income for 1995 was $264 million, compared with $324 million for 1994 and $160 million for 1993. The results for 1995 include the effects of a $285 million asset disposition charge ($176 million after income taxes) and the recognition of a $21 million reduction in income taxes related to a decrease in a state tax rate (see Notes 2 and 6 to the Consolidated Financial Statements included elsewhere in this Annual Report). Without these items, net income for 1995 would have been $419 million. The results for 1994 include a one-time charge of $51 million (net of tax benefits of $33 million) relating to a non-union early retirement program and related costs (see Note 9 to the Consolidated Financial Statements included elsewhere in this Annual Report). Results for 1993 include one- time after-tax charges of $74 million for the adoption of required changes in accounting for income taxes and postretirement benefits other than pensions; the estimated net loss on the disposition of its subsidiary, Concord Resources Group, Inc., $50 million; and the one-time effects on deferred taxes of the increase in the federal tax rate, $34 million (see 28 Notes 1, 6, 7 and 10 to the Consolidated Financial Statements included elsewhere in this Annual Report). Absent the one-time charges, Conrail's net income for 1994 and 1993 would have been $375 million and $318 million, respectively. Traffic volumes and operating revenues decreased 5.4% and 1.3%, respectively, in 1995 compared with 1994. However, continued emphasis on cost reduction and productivity improvement enabled Conrail to achieve an operating ratio (operating expenses as a percent of revenues) of 79.9%, excluding the asset disposition charge, which was worse than its 1995 operating ratio goal of 79.5%. The 1994 operating ratio was 81.5% excluding the early retirement program charge. In 1994, traffic volume and operating revenues increased 8.3% and 8.1%, respectively, over 1993, while operating expenses were 6.3% higher (excluding the early retirement program charge). 1996 Outlook - ------------ Conrail expects the economy to grow at a slower pace in 1996 than in 1995. Conrail's outlook for 1996 is based on assumptions of 2.2% growth in real gross domestic product, as measured on a "1987 prices" basis, and 2.5% growth in industrial production. Conrail projects line haul revenue growth of between 3.5% to 4.5% in 1996, and expects to achieve this growth primarily through increasing its market share in the Intermodal, Unit Train and CORE Service Groups. Within the CORE Service Group, market share growth is projected in steel, petrochemicals and food and agriculture products. Conrail's market share growth plans are based on the implementation of new service initiatives, and its achievement of these growth estimates is highly dependent upon the success of these initiatives. Conrail's operating ratio goal for 1996 is 77.5%. Conrail's ability to meet this goal is dependent upon continuing emphasis on cost reduction programs, in addition to the projected growth in revenues. This goal has been made more challenging by severe winter weather in the first quarter of 1996, which has increased operating costs and reduced traffic volume below the levels originally projected for the quarter. On February 21, 1996, the Board of Directors approved a voluntary early retirement program and voluntary separation program for eligible members of the non-union workforce with the goal of eliminating 900 non-union positions. Eligible employees have until April 23, 1996 to apply for the programs. In the event the 900 position goal is not achieved through the voluntary programs, the Company expects to obtain the additional reductions through non-voluntary separation programs. The costs of the programs are expected to be recorded in the second quarter of 1996, and are expected to have a material effect on the income statement in that quarter. The programs will not have a significant effect on the Company's cash position as the majority of the costs will be paid from the Company's overfunded pension plan (see Notes 7 and 12 to the Consolidated Financial Statements included elsewhere in this Annual Report). 29 1995 Asset Disposition Charge - ----------------------------- The fourth quarter 1995 asset disposition charge resulted from a review of Conrail's route system and other assets to determine those that no longer effectively and economically support current and expected operations. As a result of this review, Conrail identified approximately 1,800 miles of rail lines that will be candidates for sale. These dispositions are expected to provide proceeds substantially less than net book value. Certain other operating assets identified for disposition, primarily yards and sidetracks, have also been written down to estimated net realizable value. Accordingly, the asset disposition charge of $285 million represents the expected loss on rail line and other asset dispositions. Conrail estimates that net cash proceeds from the disposition of these assets will be approximately $50 million. Conrail's goal is to have sales agreements in place on many of the lines during 1996 and on most of the lines by the end of 1997. Results of Operations - --------------------- 1995 Compared with 1994 Net income for 1995 was $264 million ($3.19 per share, primary and $2.94 per share, fully diluted) compared with 1994 net income of $324 million ($3.90 per share, primary and $3.56 per share, fully diluted). Excluding the one-time charges (see "Overview") in both years and the one-time tax benefit in 1995, Conrail's net income would have been $419 million ($5.16 per share, primary and $4.69 per share, fully diluted) for 1995 and $375 million ($4.54 per share, primary and $4.13 per share, fully diluted) for 1994. Operating revenues (primarily freight line haul revenues, but also including switching, demurrage and incidental revenues) decreased $47 million, or 1.3%, from $3,733 million in 1994 to $3,686 million in 1995. A 5.4% decrease in traffic volume in units (freight cars and intermodal trailers and containers) resulted in a $191 million decrease in revenues which was partially offset by an increase in average revenue per unit that increased revenues by $140 million. The improvement in average revenue per unit resulted from increases in average rates, $117 million, and a favorable traffic mix, $23 million. Traffic volume decreases were experienced by three of the four service groups, with only Automotive showing a slight volume increase of .8%. Traffic volume declines for the other service groups were as follows: Intermodal, 7.3%; Unit Train, 5.4%; and CORE, 5.1%. Within the CORE Service Group, traffic volume declines were also experienced by each of the commodity groups: Food and Agriculture, 8.2%; Petrochemicals, 4.6%; Metals, 4.0%; and Forest and Manufactured Products, 3.9%. Other revenues increased $4 million. 30 Operating expenses increased $103 million, or 3.3%, from $3,127 million in 1994 to $3,230 million in 1995. The following table sets forth the operating expenses for the two years: Increase (In Millions) 1995 1994 (Decrease) ------ ------ ---------- [S] [C] [C] [C] Compensation and benefits $1,249 $1,260 $(11) Fuel 168 188 (20) Material and supplies 167 203 (36) Equipment rents 355 381 (26) Depreciation and amortization 293 278 15 Casualties and insurance 175 184 (9) Other 538 549 (11) Asset disposition charge 285 285 Early retirement program 84 (84) ------ ------ ---- $3,230 $3,127 $103 ====== ====== ==== Compensation and benefits costs decreased $11 million, or .9%, as a result of a 5.3% reduction in employment levels, which exceeded the increases in wage rates and fringe benefit costs. Compensation and benefits as a percent of revenues was 33.9% in 1995 compared with 33.7% in 1994. Fuel costs decreased $20 million, or 10.6%, as a result of greater use of newer fuel efficient locomotives, lower average fuel prices and lower traffic volume. The decrease of $36 million, or 17.7%, in material and supplies costs was primarily attributable to a lower level of repair and maintenance expenditures related to lower traffic volume. Equipment rents decreased $26 million, or 6.8%, primarily as a result of fewer foreign cars on Conrail's lines and improved equipment utilization, partially offset by the increased costs associated with new operating leases for equipment. Depreciation and amortization increased $15 million, or 5.4%, due to asset additions and increased depreciation rates for track structure as a result of a depreciation study required by the former Interstate Commerce Commission. Casualties and insurance decreased $9 million, or 4.9%. The cost reduction attributable to an approximate 35% decline in the number of employee injuries was largely offset by the escalating costs to settle claims as well as the continuing increase in the number and cost of occupational claims. Conrail recorded an asset disposition charge of $285 million in 1995 (see Note 2 to the Consolidated Financial Statements included elsewhere in this 31 Annual Report) and a one-time pre-tax charge of $84 million in 1994 for the non-union voluntary early retirement program and related costs (see Note 9 to the Consolidated Financial Statements included elsewhere in this Annual Report). Conrail's operating ratio was 87.6% for 1995, compared with 83.8% for 1994. Without the $285 million asset disposition charge in 1995 and the $84 million charge for the early retirement program in 1994, the operating ratios for 1995 and 1994 would have been 79.9% and 81.5%, respectively. Other income, net, increased $12 million, or 10.2%, primarily due to an $8 million gain from a property sale completed during the second quarter of 1995. The Company's effective income tax rate for 1995 was 32.7% compared with 39.1% for 1994. The lower rate reflects the effect of a $21 million reduction in income taxes resulting from a decrease in a state income tax rate enacted during the second quarter of 1995 (see Note 6 to the Consolidated Financial Statements included elsewhere in this Annual Report). 1994 Compared with 1993 Net income for 1994 was $324 million ($3.90 per share, primary and $3.56 per share, fully diluted) compared with 1993 net income of $160 million ($1.82 per share, primary and $1.70 per share, fully diluted). Excluding the one-time charges (see "Overview"), Conrail's net income would have been $375 million ($4.54 per share, primary and $4.13 per share, fully diluted) for 1994 and $318 million ($3.78 per share, primary and $3.43 per share, fully diluted) for 1993. Operating revenues increased $280 million, or 8.1%, from $3,453 million in 1993 to $3,733 million in 1994. An 8.3% increase in traffic volume in units resulted in a $274 million increase in revenues that was partially offset by a slight decrease in average revenue per unit which reduced revenues by $8 million. The decrease in average revenue per unit was caused by an unfavorable traffic mix which reduced revenues by $46 million, substantially offset by increases in average rates which increased revenues by $38 million. Traffic volume increases were experienced by each of the four service groups: Intermodal, 17.3%; Automotive, 10.0%; Unit Train, 3.9%; and CORE, 1.5%. Within the CORE Service Group, Metals increased 4.5%, Forest and Manufactured Products increased 3.1%, Petrochemicals increased .5%, and Food and Agriculture decreased 2.0%. Switching, demurrage and incidental revenues increased $14 million. 32 Operating expenses increased $265 million, or 9.3%, from $2,862 million in 1993 to $3,127 million in 1994. The following table sets forth the operating expenses for the two years: Increase (In Millions) 1994 1993 (Decrease) ------ ------ --------- [S] [C] [C] [C] Compensation and benefits $1,260 $1,229 $ 31 Fuel 188 178 10 Material and supplies 203 194 9 Equipment rents 381 305 76 Depreciation and amortization 278 284 (6) Casualties and insurance 184 131 53 Other 549 541 8 Early retirement program 84 84 ------ ------ ---- $3,127 $2,862 $265 ====== ====== ==== Compensation and benefits costs increased $31 million, or 2.5%, primarily due to increased wage rates which were partially offset by reduced fringe benefits costs and lower employment levels. Compensation and benefits as a percent of revenues was 33.7% in 1994 compared with 35.6% in 1993. The increase of $76 million, or 24.9%, in equipment rents reflects the effects of increased traffic volume and new operating leases, as well as the effects of crowded serving yards and train delays experienced primarily in the first half of 1994. Casualties and insurance costs increased $53 million, or 40.5%. While the number of injuries for the year was about the same as in 1993, the cost per claim to settle injuries has continued to escalate. The costs related to occupational claims and the number of those claims also increased. In the first quarter of 1994, Conrail incurred a one-time pre-tax charge of $84 million for the non-union voluntary early retirement program and related costs (see Note 9 to the Consolidated Financial Statements included elsewhere in this Annual Report). Conrail's operating ratio was 83.8% for 1994, compared with 82.9% for 1993. Without the $84 million one-time charge for the early retirement program, the operating ratio for 1994 would have been 81.5%. Liquidity and Capital Resources - ------------------------------- Conrail's cash and cash equivalents increased $30 million, from $43 million at December 31, 1994 to $73 million at December 31, 1995. Cash generated from operations, principally from its wholly-owned subsidiary, Consolidated Rail Corporation ("CRC"), and borrowings are Conrail's principal sources of liquidity and are used primarily for capital expenditures, debt service, and dividends. Operating activities provided cash of $773 million in 1995, 33 compared with $697 million in 1994 and $504 million in 1993. Issuance of long-term debt provided cash of $85 million in 1995. The principal uses of cash in 1995 were for property and equipment acquisitions, $415 million, cash dividends on preferred and common stock, $150 million, payment of long- term debt including capital lease and equipment obligations, $134 million, and the repurchase of common stock, $92 million. Working capital (current assets less current liabilities) of $36 million existed at December 31, 1995, compared with a $76 million deficiency at December 31, 1994. The improvement in working capital is primarily related to an increase in deferred tax assets in 1995 (see Note 6 to the Consolidated Financial Statements included elsewhere in this Annual Report). Management believes that Conrail's financial position allows it sufficient access to credit sources on investment grade terms, and, if necessary, additional intermediate or long-term debt could be issued for additional working capital requirements. In July 1994, the Board of Directors authorized a fourth common stock repurchase program of up to $100 million. In December 1995, this program was completed at a total of 1,664,053 shares. In April 1995, the Company's Board of Directors approved an additional $250 million multi-year stock repurchase program. At December 31, 1995, Conrail had acquired 20,000 shares for approximately $1 million under this program. During 1995, CRC issued an additional $128 million of commercial paper and repaid $151 million. Of the $189 million outstanding at December 31, 1995, $100 million is classified as long-term debt since it is expected to be refinanced through subsequent issuances of commercial paper and is supported by the long-term portion of the $500 million uncollateralized bank credit agreement. At December 31, 1995, $312 million remains available to Conrail and CRC under a 1993 shelf registration statement whereby CRC can issue debt securities and Conrail can issue both convertible debt and equity securities. In June 1995, CRC issued $110 million of 6.76% Pass Through Certificates, Series 1995-A, due 2015, to finance the acquisition of equipment. Of these Certificates, $55 million are direct obligations of CRC secured by the acquired equipment. The remaining $55 million of Certificates were issued to finance equipment that CRC will utilize under a capital lease, and while such certificates are not direct obligations of, or guaranteed by CRC, the amounts payable by CRC under the lease will be sufficient to pay principal and interest on the Certificates. In June 1995, CRC issued $30 million of 6.3% Medium-Term Notes maturing in 1999. During 1995, CRC borrowed and repaid $130 million under its uncollateralized bank credit agreement at interest rates ranging from 6.0% to 6.4% during the year. At December 31, 1995, no amount was outstanding under this agreement. 34 Capital Expenditures - -------------------- Capital expenditures totalled $494 million, $508 million and $650 million in 1995, 1994 and 1993, respectively. Of these totals, Conrail directly financed $126 million in 1995, $57 million in 1994 and $232 million in 1993. In addition, the proceeds of notes and debentures sold in those years, $30 million, $65 million, and $329 million, respectively, were available to fund capital expenditures. Conrail identified 1,800 miles of underutilized rail lines and other assets for sale or disposal which are expected to provide proceeds substantially less than the net book value of such assets. The Company has provided for such deficiencies in its 1995 asset disposition charge (see Note 2 to the Consolidated Financial Statements included elsewhere in this Annual Report and "1995 Asset Disposition Charge"). Although these disposals will eliminate the need for future capital expenditures on these lines and improve Conrail's cash position in the year of disposition, the extent of the effect on cash will depend on the final terms of the sales agreements. In response to lower than expected traffic and revenues, Conrail reduced its planned capital expenditures for 1995 from $550 million to $494 million. Capital expenditures for 1996 are expected to be approximately $450 million. Inflation - --------- Generally accepted accounting principles require the use of historical costs in preparing financial statements. This approach does not consider the effects of inflation on the costs of replacing assets. The replacement cost of Conrail's property and equipment is substantially higher than its historical cost basis. Similarly, depreciation expense on a replacement cost basis would be substantially in excess of the amount recorded under generally accepted accounting principles. Environmental Matters - --------------------- Conrail's operations and property are subject to various federal, state and local laws regulating the environment. CRC is a party to numerous proceedings brought by regulatory agencies and private parties under federal, state and local laws, including Superfund laws, and has also received inquiries from governmental agencies with respect to other potential environmental issues. As of December 31, 1995, CRC had received, together with other companies, notices of its involvement as a potentially responsible party or requests for information under the Superfund laws with respect to cleanup and/or removal costs due to its status as an alleged transporter, generator or property owner at 130 locations throughout the country. However, based on currently available information, Conrail believes CRC may have some potential responsibility at only 56 of these sites. Due to the number of parties involved at many of these sites, the wide range of costs of the possible remediation alternatives, changing technology and the length of time over which these matters develop, it is 35 not always possible to estimate CRC's liability for the costs associated with the assessment and remediation of contaminated sites. At December 31, 1995, Conrail had accrued $64 million for estimated future environmental expenses. Although Conrail's operating results and liquidity could be significantly affected in any quarterly or annual reporting period in which CRC was held principally liable in certain of these actions, Conrail believes the ultimate liability for these matters will not materially affect its financial condition. (See Note 12 to the Consolidated Financial Statements included elsewhere in this Annual Report). Conrail spent $14 million, $8 million and $7 million in 1995, 1994 and 1993, respectively, for environmental remediation and related costs and anticipates spending approximately $10 million in 1996. In addition, Conrail's capital expenditures for environmental control and abatement projects were approximately $6 million in 1995, $5 million in 1994 and $2 million in 1993, and are anticipated to be approximately $8 million in 1996. Conrail has an Environmental Quality Department, the mission of which is to institute and promote compliance with environmentally sound operating practices and to monitor and assess the status of sites where liability under environmental laws may exist. Other Matters - ------------- During 1995, CRC reached an agreement with approximately 300 of its employees represented by the Fraternal Order of Police. In addition, a tentative agreement was reached with approximately 4,000 of its employees represented by the United Transportation Union through negotiations carried on by the National Carriers' Committee, of which CRC is a member. Except for the historical information contained herein, the matters discussed in this report are forward-looking statements that involve risks and uncertainties that may cause actual results to differ, including but not limited to the effect of economic conditions, competition, regulation and weather on Conrail's operations, customers, service and prices, and other factors discussed elsewhere in this report and, from time to time, in other reports filed with the Securities and Exchange Commission. 36 Item 8. Financial Statements and Supplementary Data. - ------ -------------------------------------------- Report Of Independent Accountants The Stockholders and Board of Directors of Conrail Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)1. and 2. present fairly, in all material respects, the financial position of Conrail Inc. and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The consolidated financial statements of Conrail Inc. and subsidiaries for the year ended December 31, 1993 were audited by other independent accountants whose report dated January 24, 1994 expressed an unqualified opinion on those statements. As discussed in Note 1 to the consolidated financial statements, the Company changed its methods for accounting for income taxes and postretirement benefits other than pensions in 1993. Price Waterhouse LLP Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 January 22, 1996, except as to paragraphs five and six of Note 12, which are as of February 21, 1996 37 REPORT OF INDEPENDENT ACCOUNTANTS The Stockholders and Board of Directors of Conrail Inc. We have audited the 1993 consolidated financial statements and the financial statement schedule of Conrail Inc. and subsidiaries listed in Item 14(a) of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Conrail Inc. and subsidiaries for the year ended December 31, 1993, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. As discussed in Note 1 to the consolidated financial statements, the Company changed its methods for accounting for income taxes and postretirement benefits other than pensions in 1993. COOPERS & LYBRAND 2400 Eleven Penn Center Philadelphia, Pennsylvania January 24, 1994 38 CONRAIL INC. CONSOLIDATED STATEMENTS OF INCOME [CAPTION] Years ended December 31, ---------------------------- ($ In Millions Except Per Share Data) 1995 1994 1993 ------ ------ ------ [S] [C] [C] [C] Revenues $3,686 $3,733 $3,453 ------ ------ ------ Operating expenses Way and structures 485 499 492 Equipment 766 815 703 Transportation 1,324 1,379 1,283 General and administrative 370 350 384 Asset disposition charge (Note 2) 285 Early retirement program (Note 9) 84 ------ ------ ------ Total operating expenses 3,230 3,127 2,862 ------ ------ ------ Income from operations 456 606 591 Interest expense (194) (192) (185) Loss on disposition of subsidiary (Note 10) (80) Other income, net (Note 11) 130 118 114 ------ ------ ------ Income before income taxes and the cumulative effect of changes in accounting principles 392 532 440 Income taxes (Note 6) 128 208 206 ------ ------ ------ Income before the cumulative effect of changes in accounting principles 264 324 234 Cumulative effect of changes in accounting principles (Notes 1, 6 and 7) (74) ------ ------ ------ Net income $ 264 $ 324 $ 160 ====== ====== ====== Income per common share (Note 1) Before the cumulative effect of changes in accounting principles Primary $ 3.19 $ 3.90 $ 2.74 Fully diluted 2.94 3.56 2.51 Cumulative effect of changes in accounting principles Primary ( .92) Fully diluted ( .81) Net income per common share Primary $ 3.19 $ 3.90 $ 1.82 Fully diluted 2.94 3.56 1.70 Ratio of earnings to fixed charges (Note 1) 2.51x 3.19x 2.98x See accompanying notes. 39 CONRAIL INC. CONSOLIDATED BALANCE SHEETS [CAPTION] December 31, ---------------- ($ In Millions) 1995 1994 ------ ------ [S] [C] [C] ASSETS Current assets Cash and cash equivalents $ 73 $ 43 Accounts receivable 614 646 Deferred tax assets (Note 6) 333 249 Material and supplies 158 164 Other current assets 28 23 ------ ------ Total current assets 1,206 1,125 Property and equipment, net (Note 3) 6,408 6,498 Other assets 810 699 ------ ------ Total assets $8,424 $8,322 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings 89 112 Current maturities of long-term debt (Note 5) 181 130 Accounts payable 113 119 Wages and employee benefits 183 169 Casualty reserves 110 103 Accrued and other current liabilities (Note 4) 494 568 ------ ------ Total current liabilities 1,170 1,201 Long-term debt (Note 5) 1,911 1,940 Casualty reserves 217 212 Deferred income taxes (Note 6) 1,393 1,203 Special income tax obligation (Note 6) 440 513 Other liabilities 316 328 ------ ------ Total liabilities 5,447 5,397 ------ ------ Commitments and contingencies (Note 12) Stockholders' equity (Note 8) Preferred stock (no par value; 15,000,000 shares authorized; no shares issued) Series A ESOP convertible junior preferred stock (no par value; 10,000,000 shares authorized; 9,770,993 and 9,821,358 shares issued and outstanding, respectively) 282 283 Unearned ESOP compensation (233) (243) Common stock ($1 par value; 250,000,000 shares authorized; 85,392,392 and 80,409,598 shares issued, respectively; 82,094,675 and 78,620,434 shares outstanding, respectively) 85 80 Additional paid-in capital 2,187 1,848 Employee benefits trust (4,706,665 shares) at market (329) Retained earnings 1,176 1,056 ------ ------ 3,168 3,024 Treasury stock, at cost (3,297,717 and 1,789,164 shares, respectively) (191) (99) ------ ------ Total stockholders' equity 2,977 2,925 ------ ------ Total liabilities and stockholders' equity $8,424 $8,322 ====== ====== See accompanying notes. 40 CONRAIL INC. CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Series A Unearned Additional Employee Preferred ESOP Common Paid-In Benefits Retained Treasury ($ In Millions Except Per Share Data) Stock Compensation Stock Capital Trust Earnings Stock --------- ------------ ------ ---------- -------- -------- -------- Balance, January 1, 1993 $287 $(263) $ 83 $1,888 $ 903 $(150) Amortization 10 Net income 160 Common dividends, $1.20 per share (96) Preferred dividends, $2.165 per share (21) Common shares acquired (64) Exercise of stock options 1 20 Common shares reclassified as unissued (4) (107) (98) 209 Other (1) 18 9 ----- ----- ----- ------ -------- ----- ----- Balance, December 31, 1993 286 (253) 80 1,819 857 (5) Amortization 10 Net income 324 Common dividends, $1.40 per share (111) Preferred dividends, $2.165 per share (21) Common shares acquired (94) Exercise of stock options 14 Other (3) 15 7 ----- ----- ----- ----- -------- ----- ----- Balance, December 31, 1994 283 (243) 80 1,848 1,056 (99) Amortization 10 Net income 264 Common dividends, $1.60 per share (129) Preferred dividends, $2.165 per share (21) Common shares acquired (92) Exercise of stock options 6 Establishment of employee benefit trust 5 245 $(250) Employee benefits trust transactions, net 84 (79) Other (1) 4 6 ----- ----- ----- ----- -------- ----- ----- Balance, December 31, 1995 $282 $(233) $ 85 $2,187 $(329) $1,176 $(191) ===== ===== ===== ===== ======== ===== ===== See accompanying notes.
41 CONRAIL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS [CAPTION] Years ended December 31, ------------------------ ($ In Millions) 1995 1994 1993 ----- ----- ----- [S] [C] [C] [C] Cash flows from operating activities Net income $ 264 $ 324 $ 160 Adjustments to reconcile net income to net cash provided by operating activities: Asset disposition charge 285 Early retirement program 84 Loss on disposition of subsidiary 80 Cumulative effect of accounting changes 74 Depreciation and amortization 293 278 284 Deferred income taxes 108 150 221 Special income tax obligation (73) (62) (50) Gains from sales of property (27) (18) (20) Pension credit (43) (46) (43) Changes in: Accounts receivable 32 (2) (52) Accounts and wages payable 8 41 (15) Settlement of tax audit (51) Other (74) (52) (84) ----- ----- ----- Net cash provided by operating activities 773 697 504 ----- ----- ----- Cash flows from investing activities Property and equipment acquisitions (415) (490) (566) Proceeds from disposals of properties 38 32 23 Other (59) (23) (45) ----- ----- ----- Net cash used in investing activities (436) (481) (588) ----- ----- ----- Cash flows from financing activities Repurchase of common stock (92) (94) (64) Net proceeds from (repayments of) short-term borrowings (23) 33 (48) Proceeds from long-term debt 85 114 485 Payment of long-term debt (134) (158) (195) Dividends on common stock (129) (111) (96) Dividends on Series A preferred stock (21) (16) (21) Proceeds from stock options and other 7 21 21 ----- ----- ----- Net cash provided by (used in) financing activities (307) (211) 82 ----- ----- ----- Increase(decrease) in cash and cash equivalents 30 5 (2) Cash and cash equivalents Beginning of year 43 38 40 ----- ----- ----- End of year $ 73 $ 43 $ 38 ===== ===== ===== See accompanying notes. 42 CONRAIL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies ------------------------------------------ Industry -------- Conrail Inc. ("Conrail") is a holding company of which the principal subsidiary is Consolidated Rail Corporation ("CRC"), a freight railroad which operates within the northeast and midwest United States and the Province of Quebec. Principles of Consolidation --------------------------- The consolidated financial statements include Conrail and majority- owned subsidiaries. Investments in 20% to 50% owned companies are accounted for by the equity method. Cash Equivalents ---------------- Cash equivalents consist of commercial paper, certificates of deposit and other liquid securities purchased with a maturity of three months or less, and are stated at cost which approximates market value. Material and Supplies --------------------- Material and supplies consist mainly of fuel oil and items for maintenance of property and equipment, and are valued at the lower of cost, principally weighted average, or market. Property and Equipment ---------------------- Property and equipment are recorded at cost. Depreciation is provided using the composite straight-line method. The cost (net of salvage) of depreciable property retired or replaced in the ordinary course of business is charged to accumulated depreciation and no gain or loss is recognized. Revenue Recognition ------------------- Revenue is recognized proportionally as a shipment moves on the Conrail system from origin to destination. Earnings Per Share ------------------ Primary earnings per share are based on net income adjusted for the effects of preferred dividends net of income tax benefits, divided by the weighted average number of shares outstanding during the period, including the dilutive effect of stock options. Fully diluted earnings per share assume conversion of Series A ESOP Convertible Junior Preferred Stock ("ESOP Stock") into Conrail common stock. Net income amounts applicable to fully diluted earnings per share have been adjusted by the increase, net of income tax benefits, in ESOP- related expenses assuming conversion of all ESOP Stock to common 43 stock. Shares in the Conrail Employee Benefits Trust are not considered outstanding for computing earnings per share. The weighted average number of shares of common stock outstanding during each of the most recent three years are as follows: 1995 1994 1993 ---------- ---------- ---------- Primary weighted average shares 78,733,947 79,674,781 80,646,495 Fully diluted weighted average shares 88,702,712 89,562,721 90,835,982 Ratio of Earnings to Fixed Charges ---------------------------------- Earnings used in computing the ratio of earnings to fixed charges represent income before income taxes plus fixed charges, less equity in undistributed earnings of 20% to 50% owned companies. Fixed charges represent interest expense together with interest capitalized and a portion of rent under long-term operating leases representative of an interest factor. New Accounting Standards ------------------------ Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106") (Note 7) and Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") (Note 6). As a result, the Company recorded cumulative after tax charges of $22 million and $52 million for SFAS 106 and SFAS 109, respectively. During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121) and SFAS No. 123, "Accounting for Stock-Based Compensation"(SFAS 123), which are both effective in 1996. The Company has decided to adopt only the disclosure provisions of SFAS 123 in 1996. The Company has also determined that SFAS 121 will not have a material effect on its financial statements. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 44 2. Asset Disposition Charge ------------------------ Included in 1995 operating expenses is an asset disposition charge of $285 million, which reduced net income by $176 million. The asset disposition charge resulted from a review of the Company's route system and other operating assets to determine those that no longer effectively and economically support current and expected operations. The Company identified and has committed to sell 1,800 miles of rail lines that are expected to provide proceeds substantially less than net book value. In addition, other assets, principally yards and side tracks, identified for disposition have been written down to estimated net realizable value. 3. Property and Equipment ---------------------- December 31, ----------------- 1995 1994 ------- ------- (In Millions) Roadway $ 6,828 $ 6,764 Equipment 1,213 1,171 Less: Accumulated depreciation (1,572) (1,571) Allowance for disposition (439) (241) ------- ------- 6,030 6,123 ------- ------- Capital leases (primarily equipment) 908 988 Accumulated amortization (530) (613) ------- ------- 378 375 ------- ------- $ 6,408 $ 6,498 ======= ======= Conrail acquired equipment and incurred related long-term debt under various capital leases of $71 million in 1995, $8 million in 1994 and $75 million in 1993. As part of the 1995 (Note 2) and 1991 asset dispositions, the Company recorded allowances for disposition for the sale or abandonment of certain under-utilized rail lines and other facilities. 4.Accrued and Other Current Liabilities ------------------------------------- December 31, -------------- 1995 1994 ---- ---- (In Millions) Freight settlements due others $ 54 $ 55 Equipment rents (primarily car hire) 71 76 Unearned freight revenue 56 74 Property and corporate taxes 66 78 Other 247 285 ---- ---- $494 $568 ==== ==== 45 5. Long-Term Debt -------------- Long-term debt outstanding, including the weighted average interest rates at December 31, 1995, is composed of the following: December 31, ----------------- 1995 1994 ------ ------ (In Millions) Capital leases $ 489 $ 488 Medium-term notes payable, 6.16%, due 1996 to 1999 208 228 Notes payable, 9.75%, due 2000 250 250 Debentures payable, 7.88%, due 2043 250 250 Debentures payable, 9.75%, due 2020 544 544 Equipment and other obligations, 6.43% 251 210 Commercial paper, 5.90% 100 100 ------ ------ 2,092 2,070 Less current portion (181) (130) ------ ------ $1,911 $1,940 ====== ====== Using current market prices when available, or a valuation based on the yield to maturity of comparable debt instruments having similar characteristics, credit rating and maturity, the total fair value of the Company's long-term debt, including the current portion, but excluding capital leases, is $1,870 million and $1,601 million at December 31, 1995 and 1994, respectively, compared with carrying values of $1,603 million and $1,582 million at December 31, 1995 and 1994, respectively. The Company's noncancelable long-term leases generally include options to purchase at fair value and to extend the terms. Capital leases have been discounted at rates ranging from 3.09% to 14.26% and are collateralized by assets with a net book value of $378 million at December 31, 1995. 46 Minimum commitments, exclusive of executory costs borne by the Company, are: Capital Operating Leases Leases ------- --------- (In Millions) 1996 $ 102 $ 127 1997 92 109 1998 84 100 1999 75 84 2000 58 76 2001 - 2017 269 576 ----- ------ Total 680 $1,072 ====== Less interest portion (191) ----- Present value $ 489 ===== Operating lease rent expense was $130 million in 1995, $118 million in 1994 and $88 million in 1993. In June 1993, the Company and CRC filed a shelf registration statement on Form S-3 to enable CRC to issue up to $500 million in debt securities or the Company to issue up to $500 million in convertible debt and equity securities. The remaining balance under this shelf registration was $312 million at December 31, 1995. In June 1995, CRC issued $110 million of 6.76% Pass Through Certificates, Series 1995-A, due 2015, to finance the acquisition of equipment. Of these Certificates, $55 million are direct obligations of CRC secured by the acquired equipment. The remaining $55 million of Certificates were issued to finance equipment that CRC will utilize under a capital lease, and while such certificates are not direct obligations of, or guaranteed by CRC, the amounts payable by CRC under the lease will be sufficient to pay principal and interest on the Certificates. In June 1995, CRC issued $30 million of 6.3% Medium-Term Notes maturing in 1999. Equipment and other obligations mature in 1996 through 2043 and are collateralized by assets with a net book value of $279 million at December 31, 1995. Maturities of long-term debt other than capital leases and commercial paper are $114 million in 1996, $64 million in 1997, $44 million in 1998, $44 million in 1999, $264 million in 2000 and $973 million in total from 2001 through 2043. CRC had $189 million of commercial paper outstanding at December 31, 1995. Of the total amount outstanding, $100 million is classified as long-term since it is expected to be refinanced through subsequent issuances of commercial paper and is supported by the long-term credit facility mentioned below. 47 CRC maintains a $500 million uncollateralized bank credit agreement with a group of banks which is used for general corporate purposes and to support CRC's commercial paper program. The agreement has a five year maturity and requires interest to be paid on amounts borrowed at rates based on various defined short-term rates and an annual maximum fee of .125% of the facility amounts. The agreement contains, among other conditions, restrictive covenants relating to a debt ratio and consolidated tangible net worth. During 1995, CRC borrowed $130 million under its uncollateralized bank credit agreement at interest rates ranging from 6.0% to 6.4%, and repaid $130 million during the year. At December 31, 1995, no amount was outstanding under this agreement. Interest payments were $177 million in 1995, $174 million in 1994 and $164 million in 1993. 6. Income Taxes ------------ The provisions for income taxes are composed of the following: 1995 1994 1993 ---- ---- ----- (In Millions) Current Federal $ 78 $104 $ 25 State 15 16 10 ---- ---- ---- 93 120 35 ---- ---- ---- Deferred Federal 110 125 189 State (2) 25 32 ---- ---- ---- 108 150 221 ---- ---- ---- Special income tax obligation Federal (61) (53) (42) State (12) (9) (8) ---- ---- ---- (73) (62) (50) ---- ---- ---- $128 $208 $206 ==== ==== ==== Effective January 1, 1993, the Company adopted the provisions of SFAS 109 which requires a liability approach for measuring deferred tax assets and liabilities based on differences between the financial statement and tax bases of assets and liabilities at each balance sheet date using enacted tax rates in effect when those differences are expected to reverse. As a result, the Company recorded a cumulative adjustment of $52 million. 48 In conjunction with the public sale in 1987 of the 85% of the Company's common stock owned by the U.S. Government, federal legislation was enacted which resulted in a reduction of the tax basis of certain of the Company's assets, particularly property and equipment, thereby substantially decreasing tax depreciation deductions and increasing future federal income tax payments. Also, net operating loss and investment tax credit carryforwards were cancelled. As a result of the sale-related transactions, a special income tax obligation was recorded in 1987 based on an estimated effective federal and state income tax rate of 37.0%. As a result of a decrease in a state income tax rate enacted during the second quarter of 1995, income tax expense for 1995 was reduced by $21 million representing the effects of adjusting deferred income taxes and the special income tax obligation for the rate decrease as required by SFAS 109. As a result of the increase in the federal corporate income tax rate from 34% to 35% enacted August 10, 1993, and effective January 1, 1993, income tax expense for 1993 was increased by $38 million, of which $34 million related to the effects of adjusting deferred income taxes and the special income tax obligation for the rate increase. During 1993, the Company reached a settlement with the Internal Revenue Service ("IRS") related to the audit of the Company's consolidated federal income tax returns for the fiscal years 1987 through 1989. Under the settlement, the Company paid $51 million, including interest, all of which had been provided for in years prior to 1993. The Company's consolidated federal income tax returns for the fiscal years 1990 through 1992 are currently being examined by the IRS. Federal and state income tax payments were $109 million in 1995, $80 million in 1994 and $39 million in 1993 (excluding tax settlement). Reconciliations of the U.S. statutory tax rates with the effective tax rates follow: 1995 1994 1993 ---- ---- ---- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 3.5 3.9 5.1 Effect of federal tax increase on deferred taxes 7.7 Effect of state tax decrease on deferred taxes (5.3) Other (.5) .2 (1.0) ---- ---- ---- Effective tax rate 32.7% 39.1% 46.8% ==== ==== ==== 49 Significant components of the Company's special income tax obligation and deferred income tax liabilities and (assets) are as follows: December 31, ----------------- 1995 1994 ------ ------ (In Millions) Current assets (primarily accounts receivable) $ (27) $ (33) Current liabilities (primarily accrued liabilities and casualty reserves) (265) (175) Tax benefits related to disposition of subsidiary (30) (30) Net operating loss carryforwards (11) (11) ------- ------ Current deferred tax asset, net $ (333) $ (249) ======= ====== Noncurrent liabilities: Property and equipment 1,936 1,923 Other long-term assets (primarily prepaid pension asset) 67 62 Miscellaneous 66 50 ------ ------ 2,069 2,035 ------ ------ Noncurrent assets: Nondeductible reserves and other liabilities (144) (151) Tax benefit transfer receivable (33) (38) Alternative minimum tax credits (38) (75) Miscellaneous (21) (55) ------ ------ (236) (319) ------ ------ Special income tax obligation and deferred income tax liabilities, net $1,833 $1,716 ====== ====== 7. Employee Benefits ----------------- Pension Plans ------------- The Company and certain subsidiaries maintain defined benefit pension plans which are noncontributory for all non-union employees and generally contributory for participating union employees. Benefits are based primarily on credited years of service and the level of compensation near retirement. Funding is based on the minimum amount required by the Employee Retirement Income Security Act of 1974. 50 Pension credits include the following components: 1995 1994 1993 ---- ---- ---- (In Millions) Service cost -benefits earned during the period $ 8 $ 8 $ 8 Interest cost on projected benefit obligation 51 48 46 Return on plan assets - actual (254) (10) (124) - deferred 167 (77) 42 Net amortization and deferral (15) (15) (15) ---- ---- ---- $(43) $(46) $(43) ==== ==== ==== The funded status of the pension plans and the amounts reflected in the balance sheets are as follows: 1995 1994 ---- ---- (In Millions) Accumulated benefit obligation ($603 million and $526 million vested, respectively) $ 609 $ 530 ------ ----- Market value of plan assets 1,168 982 Projected benefit obligation (726) (594) ------ ----- Plan assets in excess of projected benefit obligation 442 388 Unrecognized prior service cost 50 44 Unrecognized transition net asset (120) (139) Unrecognized net gain (157) (117) ------ ----- Net prepaid pension cost $ 215 $ 176 ====== ===== The assumed weighted average discount rates used in 1995 and 1994 are 7.0% and 8.5%, respectively, and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation as of December 31, 1995 and 1994 is 6.0%. The expected long-term rate of return on plan assets (primarily equity securities) in 1995 and 1994 is 9.0%. Savings Plans ------------- The Company and certain subsidiaries provide 401(k) savings plans for union and non-union employees. Under the Non-union ESOP, 100% of employee contributions are matched in the form of ESOP Stock for the first 6% of a participating employee's base pay. There is no Company match provision under the union employee plan. Savings plan expense was $4 million in 1995 and $5 million in 1994 and 1993. In connection with the Non-union ESOP, the Company issued 9,979,562 of the authorized 10 million shares of its ESOP Stock to the Non- union ESOP in exchange for a 20 year promissory note with interest at 9.55% from the Non-union ESOP in the principal amount of $288 51 million. In addition, unearned ESOP compensation of $288 million was recognized as a charge to stockholders' equity coincident with the Non-union ESOP's issuance of its $288 million promissory note to the Company. The debt of the Non-union ESOP was recorded by the Company and offset against the promissory note from the Non-union ESOP. Unearned ESOP compensation is charged to expense as shares of ESOP Stock are allocated to participants. The number of allocated ESOP shares outstanding at December 31, 1995 was approximately 2.2 million shares. An amount equivalent to the preferred dividends declared on the ESOP Stock partially offsets compensation and interest expense related to the Non-union ESOP. In 1994, the ESOP's promissory note to the Company was refinanced. As part of the refinancing, the interest rate was decreased to 8.0%, from the original 9.55%, and accrued interest of $21 million was capitalized as part of the principal balance of the promissory note. The Company is obligated to make dividend payments at a rate of 7.51% on the ESOP Stock and additional contributions in an aggregate amount sufficient to enable the Non-union ESOP to make the required interest and principal payments on its note to the Company. Interest expense incurred by the Non-union ESOP on its debt to the Company was $24 million in 1995, $30 million in 1994 and $29 million in 1993. Compensation expense related to the Non-union ESOP was $10 million in 1995, 1994 and 1993. Preferred dividends of $21 million were declared in 1995, 1994 and 1993. Preferred dividend payments of $21 million, $16 million and $21 million were made in 1995, 1994 and 1993, respectively. The Company received debt service payments from the Non-union ESOP of $31 million in 1995, $21 million in 1994, and $26 million in 1993. Postretirement Benefits Other Than Pensions ------------------------------------------- The Company provides health and life insurance benefits to certain retired non-union employees. Certain non-union employees are eligible for retiree medical benefits, while substantially all non-union employees are eligible for retiree life insurance benefits. Generally, company-provided health care benefits terminate when individuals reach age 65. Retiree life insurance plan assets consist of a retiree life insurance reserve held in the Company's group life insurance policy. There are no plan assets for the retiree health benefits plan. Effective January 1, 1993, the Company adopted SFAS 106, which requires that the cost of retiree benefits other than pensions be accrued during the period of employment rather than when benefits are paid. The Company elected the immediate recognition method allowed under the statement and accordingly recorded a cumulative, one-time charge of $22 million (net of 52 tax benefits of $14 million). This accrual was in addition to the remaining balance of $21 million which had been accrued for postretirement health benefits for employees who participated in the Company's 1989 non-union voluntary retirement program. The following sets forth the plans' funded status reconciled with amounts reported in the Company's balance sheets: 1995 1994 ----------------- ----------------- Life Life Medical Insurance Medical Insurance Plan Plan Plan Plan (In Millions) Accumulated postretirement benefit obligation: Retirees $38 $19 $38 $15 Fully eligible active plan participants 5 1 3 1 Other active plan participants 5 1 4 --- --- --- --- Accumulated benefit obligation 43 25 42 20 Market value of plan assets (7) (6) --- --- --- --- Accumulated benefit obligation in excess of plan assets 43 18 42 14 Unrecognized gains and (losses) 1 (1) 1 3 Accrued benefit cost recognized in the Consolidated Balance --- --- --- --- Sheet $44 $17 $43 $17 === === === === Net periodic postretirement benefit cost, primarily interest cost $ 4 $ 1 $ 4 $ 1 === === === === A 10 percent rate of increase in per capita costs of covered health care benefits was assumed for 1996, gradually decreasing to 6 percent by the year 2008. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995 by $3 million and would have an immaterial effect on the net periodic postretirement benefit cost for 1995. Discount rates of 7.0% and 8.5% were used to determine the accumulated postretirement benefit obligations for both the medical and life insurance plans in 1995 and 1994, respectively. The assumed rate of compensation increase was 5.0% in both 1995 and 1994. Retiree medical benefits are funded by a combination of Company and retiree contributions. Retiree life insurance benefits are provided by insurance companies whose premiums are based on claims paid during the year. 53 8.Capital Stock ------------- Preferred Stock --------------- The Company is authorized to issue 25 million shares of preferred stock with no par value. The Board of Directors has the authority to divide the preferred stock into series and to determine the rights and preferences of each. The Company cannot pay dividends on its common stock unless full cumulative dividends have been paid on its ESOP Stock, and no distributions can be made to the holders of common stock upon liquidation or dissolution of the Company unless the holders of the ESOP Stock have received a cash liquidation payment of $28.84375 per share, plus unpaid dividends up to the date of such payment. The ESOP Stock is convertible into an equivalent number of shares of common stock based on their respective market values at the date of conversion. The ESOP Stock is entitled to one vote per share, voting together as a single class with common stock on all matters. Employee Benefits Trust ----------------------- In June 1995, the Company issued approximately 4.7 million shares of its common stock to the Conrail Employee Benefits Trust (the "Trust")in exchange for a promissory note of $250 million at an interest rate of 6.9%. The Trust will be used to fund certain employee benefits and other forms of compensation over its fifteen- year term. The amount representing unearned employee benefits is recorded as a deduction from stockholders' equity and is reduced as benefits and compensation are paid through the release of shares from the Trust. The shares owned by the Trust are valued at the closing market price as of the end of each reporting period, with the corresponding changes in the balance of the Trust reflected in additional paid-in capital. Shares held by the Trust are not considered outstanding for earnings per share computations until released by the Trust, but do have voting and dividend rights. Common Stock Repurchase Program ------------------------------- In July 1994, the Board of Directors authorized a fourth common stock repurchase program of up to $100 million. In December 1995, this program was completed at a total of 1,664,053 shares. In April 1995, the Company's Board of Directors approved an additional $250 million multi-year stock repurchase program. At December 31, 1995, the Company had acquired 20,000 shares for approximately $1 million under this program. 54 The activity and status of treasury stock follow: 1995 1994 1993 ---------- --------- --------- Shares, beginning of year 1,789,164 83,745 3,690,002 Acquired 1,508,553 1,705,419 1,181,322 Reclassified as authorized but unissued (4,787,579) ---------- --------- ---------- Shares, end of year 3,297,717 1,789,164 83,745 ========== ========= ========== Stock Plans ----------- The Company's 1987 and 1991 Long-Term Incentive Plans authorize the granting to officers and key employees of up to 4 million and 3.2 million shares of common stock, respectively, through stock options, stock appreciation rights, and awards of restricted or performance shares. A stock option is exercisable for a specified term commencing after grant at a price not less than the fair market value of the stock on the date of grant. The vesting of awards made pursuant to these plans is contingent upon one or more of the following: continued employment, passage of time or financial and other performance goals. The Company has granted phantom shares and restricted stock under its non-union employee bonus plans to eligible employees who elect to defer all or a portion of their annual bonus in a given year. The number of shares granted depends on the length of the deferral period. Grants are made at the market price of the Company's common stock at the date of grant. The Company has granted 87,529 shares and 317,028 shares of phantom and restricted stock, respectively, under its non-union employee bonus plans through December 31, 1995. The Company has also granted 68,896 performance shares under its 1991 Long-Term Incentive Plan through December 31, 1995. Compensation expense related to these plans was $3 million in 1995. In May 1995, the Company's shareholders approved the Conrail Senior Executive Performance Plan (the "Plan") under which certain senior executive officers of Conrail will be eligible to receive annual bonus awards, payable in cash or common stock, upon the satisfaction of certain performance criteria. No awards have been granted under the Plan as of December 31, 1995. 55 The activity and status of stock options under the incentive plans follow: Non-qualified Stock Options ----------------------------------- Option Price Shares Per Share Under Option ----------------- ------------ Balance, January 1, 1993 $14.000 - $45.125 2,870,878 Granted $49.375 - $60.500 73,027 Exercised $14.000 - $53.875 (928,822) Cancelled $31.813 - $45.125 (48,762) ----------- Balance, December 31, 1993 $14.000 - $60.500 1,966,321 Granted $52.188 - $66.938 23,988 Exercised $14.000 - $51.375 (507,450) Cancelled $42.625 - $60.500 (118,904) ----------- Balance, December 31, 1994 $14.000 - $66.938 1,363,955 Granted $50.688 - $68.563 516,757 Exercised $14.000 - $53.875 (200,940) Cancelled $42.625 - $53.875 (123,560) ----------- Balance, December 31, 1995 $14.000 - $68.563 1,556,212 ============ Exercisable, December 31, 1995 $14.000 - $57.875 799,476 ============ Available for future grants December 31, 1994 1,678,293 ============ December 31, 1995 1,188,193 ============ Stock Rights ------------ In 1989, the Company declared a dividend of one common share purchase right (the "Right") on each outstanding share of common stock. The Rights are not exercisable or transferable apart from the common stock until the occurrence of certain events arising out of an actual or potential acquisition of 10% or more of the Company's common stock, and would at such time provide the holder with certain additional entitlements. If the Rights become exercisable, each Right will entitle stockholders to purchase one share of common stock at an exercise price of $205.00, as amended in 1995. In September 1995, a dividend of one Right for each share of ESOP Stock was declared, which was paid on October 2, 1995. At the Company's option, the Rights are redeemable prior to becoming exercisable at one-half cent ($.005) per Right at September 2005, as amended in 1995, and do not have any voting privileges or rights to receive dividends. 9. 1994 Early Retirement Program ----------------------------- During the first quarter of 1994, the Company recorded a charge of $51 million (after tax benefits of $33 million) for a non-union employee voluntary early retirement program and related costs. The 56 majority of the cost of the early retirement program is being paid from the Company's overfunded pension plan. 10.Disposition of Subsidiary ------------------------- In 1993, the Company committed to a plan for the disposition of its investment in Concord Resources Group, Inc. ("Concord"). Pursuant to this plan, the Company recorded the estimated loss of $80 million in 1993 for the disposition of its investment, including $19 million for operating losses expected to be incurred during the phase-out period and disposition costs. The Company also recorded estimated federal tax benefits of $30 million relating to the disposition. In June 1995, the Company completed the disposition of the last of two major waste disposal facilities of Concord. The dispositions had no financial statement impact. 11.Other Income, Net ----------------- 1995 1994 1993 ---- ---- ---- (In Millions) Interest income $ 33 $ 34 $ 39 Rental income 57 53 56 Property sales 27 18 20 Other, net 13 13 (1) ---- ---- ---- $130 $118 $114 ==== ==== ==== 12.Commitments and Contingencies ----------------------------- Environmental ------------- The Company is subject to various federal, state and local laws and regulations regarding environmental matters. CRC is a party to various proceedings brought by both regulatory agencies and private parties under federal, state and local laws, including Superfund laws, and has also received inquiries from governmental agencies with respect to other potential environmental issues. At December 31, 1995, CRC has received, together with other companies, notices of its involvement as a potentially responsible party or requests for information under the Superfund laws with respect to cleanup and/or removal costs due to its status as an alleged transporter, generator or property owner at 130 locations. However, based on currently available information, the Company believes CRC may have some potential responsibility at only 56 of these sites. Due to the number of parties involved at many of these sites, the wide range of costs of possible remediation alternatives, the changing technology and the length of time over which these matters develop, it is often not possible to estimate CRC's liability for the costs associated with the assessment and remediation of contaminated sites. Although the Company's operating results and liquidity could be significantly affected in any quarterly or annual reporting period if 57 CRC were held principally liable in certain of these actions, at December 31, 1995, the Company had accrued $64 million, an amount it believes is sufficient to cover the probable liability and remediation costs that will be incurred at Superfund sites and other sites based on known information and using various estimating techniques. The Company believes the ultimate liability for these matters will not materially affect its consolidated financial condition. The Company spent $14 million in 1995, $8 million in 1994 and $7 million in 1993 for environmental remediation and related costs and anticipates spending approximately $10 million in 1996. In addition, the Company's capital expenditures for environmental control and abatement projects were approximately $6 million in 1995 and $5 million in 1994, and are anticipated to be approximately $8 million in 1996. The Environmental Quality Department is charged with promoting the Company's compliance with laws and regulations affecting the environment and instituting environmentally sound operating practices. The department monitors the status of the sites where the Company is alleged to have liability and continually reviews the information available and assesses the adequacy of the recorded liability. Non-union Voluntary Retirement and Separation Programs ------------------------------------------------------- On February 21, 1996, the Board of Directors approved a voluntary early retirement program and voluntary separation program for eligible members of the non-union workforce with the goal of eliminating 900 non-union positions. Eligible employees have until April 23, 1996 to apply for the programs. In the event the 900 position goal is not achieved through the voluntary programs, the Company expects to obtain the additional reductions through non- voluntary separation programs. The costs of the programs are expected to be recorded in the second quarter of 1996, and are expected to have a material effect on the income statement in that quarter. The programs will not have a significant effect on the Company's cash position as the majority of the costs will be paid from the Company's overfunded pension plan (Note 7). Other ----- The Company is involved in various legal actions, principally relating to occupational health claims, personal injuries, casualties, property damage and damage to lading. The Company has recorded liabilities on its balance sheet for amounts sufficient to cover the expected payments for such actions. 58 The Company may be contingently liable for approximately $81 million at December 31, 1995 under indemnification provisions related to sales of tax benefits. CRC had an average of 22,631 employees in 1995, approximately 86% of whom are represented by 14 different labor organizations and are covered by 22 separate collective bargaining agreements. The Company was engaged in collective bargaining at December 31, 1995 with labor organizations representing approximately 84% of its labor force. CRC has reached an agreement with its employees represented by the Fraternal Order of Police and has reached a tentative agreement with its employees represented by the United Transportation Union through negotiations carried on by the National Carriers'Committee, of which CRC is a member. In 1994, Locomotive Management Services, a general partnership of which CRC holds a fifty percent interest, issued approximately $96 million of Equipment Trust Certificates to fund 100% of the purchase price of 60 new locomotives. While the principal and interest payments on the certificates will be fully guaranteed by CRC, through a sharing agreement with its partner, CRC's portion of the guarantee is reduced to approximately $80 million. 13.Condensed Quarterly Data (Unaudited) ----------------------------------- First Second Third Fourth ----------- ----------- ----------- --------- 1995 1994 1995 1994 1995 1994 1995 1994 ---- ---- ---- ---- ---- ---- ---- ---- ($ In Millions Except Per Share) Revenues $889 $847 $923 $951 $923 $949 $951 $986 Income (loss) from operations 114 (32) 180 189 208 194 (46) 255 Net income (loss) 55 (32) 123 101 116 106 (30) 149 Net income (loss) per common share: Primary .66 (.45) 1.52 1.24 1.44 1.29 (.43) 1.84 Fully diluted .61 (.45) 1.37 1.12 1.31 1.17 (.43) 1.66 Ratio of earnings to fixed charges 2.39x - 3.42x 3.84x 4.02x 4.04x - 4.61x Dividends per common share .375 .325 .375 .325 .425 .375 .425 .375 Market prices per common share (New York Stock Exchange) High 57 5/8 69 1/4 56 1/4 59 1/8 70 1/4 58 1/8 74 3/8 55 1/4 Low 50 1/2 56 1/2 51 1/8 50 3/8 55 1/8 48 3/8 65 1/2 48 1/8
As a result of a decrease in a state income tax rate enacted during the second quarter of 1995, income tax expense was reduced by $21 million representing the effects of adjusting deferred income taxes and the special income tax obligation for the rate decrease as required under SFAS 109 (Note 6). Without this one-time tax benefit, the Company's net income for the quarter would have been $102 million ($1.25 and $1.14 per share, primary and fully diluted, respectively). 59 During the fourth quarter of 1995, an asset disposition charge reduced income from operations by $285 million and adversely affected the quarter's net income by $176 million (Note 2). Without the asset disposition charge, net income would have been $146 million ($1.82 and $1.65 per share, primary and fully diluted, respectively) for the fourth quarter of 1995. After the asset disposition charge, earnings were insufficient by $58 million to cover fixed charges for the quarter. During the first quarter of 1994, the Company recorded a charge of $51 million (after tax benefits of $33 million) for a non-union employee voluntary retirement program and related costs (Note 9). Without this one-time charge, the Company's net income per common share for the quarter would have been $.20, primary and $.19, fully diluted. After this one-time charge, earnings were insufficient by $56 million to cover fixed charges for the quarter. Item 9. Changes in and Disagreements with Accountants - ------ --------------------------------------------- on Accounting and Financial Disclosure. -------------------------------------- None. PART III Item 10. Directors and Executive Officers of the Registrant. - ------- -------------------------------------------------- Item 11. Executive Compensation. - ------- ---------------------- Item 12. Security Ownership of Certain Beneficial - ------- ---------------------------------------- Owners and Management. --------------------- and Item 13. Certain Relationships and Related Transactions. - ------- ---------------------------------------------- In accordance with General Instruction G(3), the information called for by Part III is incorporated herein by reference from Conrail's definitive Proxy Statement for the Conrail Annual Meeting of Shareholders to be held on May 15, 1996, which definitive Proxy Statement will be filed with the Commission pursuant to Regulation 14A. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I under "Executive Officers of the Registrant." 60 PART IV Item 14. Exhibits, Financial Statement - ------- ----------------------------- Schedules, and Reports on Form 8-K. ---------------------------------- (a) The following documents are filed as a part of this report: 1. Financial Statements: Page ---- Reports of Independent Accountants...................... 37 Consolidated Statements of Income for each of the three years in the period ended December 31, 1995.. 39 Consolidated Balance Sheets at December 31, 1995 and 1994 .......................................... 40 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1995..................... 41 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1995 ............................... 42 Notes to Consolidated Financial Statements.............. 43 2. Financial Statement Schedules: The following financial statement schedules should be read in connection with the financial statements listed in Item 14(a)1 above. Index to Financial Statement Schedules Page ---- Schedule II Valuation and Qualifying Accounts... S-1 Schedules other than those listed above are omitted for reasons that they are not required, are not applicable, or the information is included in the financial statements or related notes. 61 3. Exhibits: Exhibit No. ---------- 2. Agreement and Plan of Merger among Consolidated Rail Corporation, Conrail Inc. and Conrail Subsidiary Corporation dated as of February 17, 1993, filed as Appendix A to the Proxy Statement of Consolidated Rail Corporation, dated April 16, 1993 and incorporated herein by reference. 3.1 Articles of Incorporation of the Registrant filed as Appendix B to the Proxy Statement of Consolidated Rail Corporation, dated April 16, 1993 and incorporated herein by reference. 3.2 Amended and Restated Bylaws of the Registrant filed as Exhibit 3.1 to the Registrant's Report on Form 10-Q for the quarterly period ended September 30, 1995 and incorporated herein by reference. 4.1 Articles of Incorporation of the Registrant filed as Appendix B to the Proxy Statement of Consolidated Rail Corporation, dated April 16, 1993 and incorporated herein by reference. 4.2 Form of Certificate of Common Stock, par value $1.00 per share, of the Registrant, filed as Exhibit 3.4(i)(c) to the Registrant's Form 8-B dated July 13, 1993 and incorporated herein by reference. 4.3 Form of Certificate of Series A ESOP Convertible Junior Preferred Stock, no par value, of the Registrant filed as Exhibit 3.4(i)(d) to the Registrant's Form 8-B dated July 13, 1993 and incorporated herein by reference. 4.4 Rights Agreement dated as of July 19, 1989, between Consolidated Rail Corporation and First Chicago Trust Company of New York, together with Form of Right Certificate and Summary of Rights to Purchase Common Shares as exhibits thereto, filed as Exhibit 1 to Consolidated Rail Corporation's Form 8-K dated July 31, 1989 and incorporated herein by reference. 4.5 Amendment to Rights Agreement dated as of March 21, 1990, filed as Exhibit 4.5 to Consolidated Rail Corporation's Report on Form 8-K dated March 27, 1990 and incorporated herein by reference. 4.6 Amendment, Assignment and Assumption Agreement, dated as of February 17, 1993, with respect to the Rights Agreement, 62 filed as Exhibit 3.4(i)(g) to the Registrant's Form 8-B dated July 13, 1993 and incorporated herein by reference. 4.7 Amendment to Rights Agreement dated as of October 19, 1994 filed as Exhibit 4.1 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1994 and incorporated herein by reference. 4.8 Amendment to Rights Agreement of the Registrant dated as of September 20, 1995, filed as Exhibit 3.4(i)(i) to the Registrant's Form 8-B/A dated as of September 25, 1995 and incorporated herein by reference. 4.9 Form of Indenture between Consolidated Rail Corporation and The First National Bank of Chicago, as Trustee, with respect to the issuance of up to $1.25 billion aggregate principal amount of Consolidated Rail Corporation's debt securities, filed as Exhibit 4 to Consolidated Rail Corporation's Registration Statement on Form S-3 (Registration No. 33- 34040) and incorporated herein by reference. In accordance with Item 601(b)(4)(iii) of Regulation S-K, copies of instruments of the Registrant and its subsidiaries with respect to the rights of holders of certain long-term debt are not filed herewith, or incorporated by reference, but will be furnished to the Commission upon request. 10.1 Second Amended and Restated Northeast Corridor Freight Operating Agreement dated October 1, 1986 between National Railroad Passenger Corporation and Consolidated Rail Corporation, filed as Exhibit 10.1 to Consolidated Rail Corporation's Registration Statement on Form S-1 (Registration No. 33-11995) and incorporated herein by reference. 10.2 Letter agreements dated September 30, 1982 and July 19, 1986 between Consolidated Rail Corporation and The Penn Central Corporation, filed as Exhibit 10.5 to Consolidated Rail Corporation's Registration Statement on Form S-1 (Registration No. 33-11995) and incorporated herein by reference. 10.3 Letter agreement dated March 16, 1988 between Consolidated Rail Corporation and Penn Central Corporation relating to hearing loss litigation, filed as Exhibit 19.1 to Consolidated Rail Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 1988 and incorporated herein by reference. 63 Management Compensation Plans and Contracts ------------------------------------------- 10.4 Consolidated Rail Corporation 1993 Annual Performance Achievement Reward Plan, filed as Exhibit 3.10(v) to the Registrant's Form 8-B dated July 13, 1993 and incorporated herein by reference. 10.5 Consolidated Rail Corporation 1994 Annual Performance Achievement Reward Plan for Officers, filed as Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.6 Consolidated Rail Corporation 1995 Annual Performance Achievement Reward Plan for Officers. 10.7 Retirement Plan for Non-employee Directors, as amended February 21, 1990, filed as Exhibit 10.10 to Consolidated Rail Corporation's Annual Report on Form 10-K for the year ended December 31, 1989 and included herein by reference. 10.8 Conrail 1987 Long-Term Incentive Plan, filed as Exhibit 4.4 to Consolidated Rail Corporation's Registration Statement on Form S-8 (Registration No. 33-19155) and incorporated herein by reference. 10.9 Conrail 1991 Long-Term Incentive Plan, filed as Exhibit 4.8 to Consolidated Rail Corporation's Registration Statement on Form S-8 (Registration No. 33-44140) and incorporated herein by reference. 10.10 Conrail Senior Executive Performance Plan, filed as Appendix A to the Registrant's Proxy Statement for the 1995 Annual Meeting of Shareholders, dated April 3, 1995, and incorporated herein by reference. 10.11 Agreement for Supplemental Employee Retirement Plan between James A. Hagen and Consolidated Rail Corporation, dated as of January 17, 1990, filed as Exhibit 10.12 to Consolidated Rail Corporation's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference. 10.12 Form of Severance Agreement between the Registrant and each of the officers of Consolidated Rail Corporation, dated as of August 1, 1995, filed as Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarterly period ended September 30, 1995 and incorporated herein by reference. 64 11 Statement of earnings per share computations. 12 Computation of the ratio of earnings to fixed charges. 21 Subsidiaries of the Registrant, filed as Exhibit 21 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 23.1 Consent of Independent Accountants. 23.2 Consent of Independent Accountants. 24 Each of the officers and directors signing this Annual Report on Form 10-K has signed a power of attorney, contained on page 66 hereof, with respect to amendments to this Annual Report. 27 Financial Data Schedule. (b) Reports on Form 8-K. ------------------- None. (c) Exhibits. -------- The Exhibits required by Item 601 of Regulation S-K as listed in Item 14(a)3 are filed herewith or incorporated herein by reference. (d) Financial Statement Schedules. ----------------------------- Financial statement schedules and separate financial statements specified by this Item are included in Item 14(a)2 or are otherwise omitted for reasons that they are not required or are not applicable. 65 POWER OF ATTORNEY ----------------- Each person whose signature appears below under "SIGNATURES" hereby authorizes H. William Brown and Bruce B. Wilson, or either of them, to execute in the name of each such person, and to file, any amendment to this report and hereby appoints H. William Brown and Bruce B. Wilson, or either of them, as attorneys-in-fact to sign on his or her behalf, individually and in each capacity stated below, and to file any and all amendments to this report. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act 1934, Conrail Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONRAIL INC. Date: March 20, 1996 By /S/ David M. LeVan ----------------------------- David M. LeVan President and Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 20th day of March, 1996, by the following persons on behalf of Conrail Inc. and in the capacities indicated. Signature Title /S/ David M. LeVan - ------------------ President and Chief Executive David M. LeVan Officer and Director (Principal Executive Officer) /S/ H. William Brown - -------------------- Senior Vice President - Finance H. William Brown and Administration (Principal Financial Officer) /S/ Donald W. Mattson - --------------------- Vice President - Controller Donald W. Mattson (Principal Accounting Officer) 66 /S/ James A. Hagen - ------------------------------------ Chairman of the Board of James A. Hagen Directors /S/ H. Furlong Baldwin - ------------------------------------ Director H. Furlong Baldwin /S/ Claude S. Brinegar - ----------------------------------- Director Claude S. Brinegar - ----------------------------------- Director Daniel B. Burke /S/ Kathleen Foley Feldstein - ---------------------------------- Director Kathleen Foley Feldstein /S/ Roger S. Hillas - ---------------------------------- Director Roger S. Hillas /S/ E. Bradley Jones - ---------------------------------- Director E. Bradley Jones /S/ David B. Lewis - ---------------------------------- Director David B. Lewis /S/ John C. Marous - ---------------------------------- Director John C. Marous /S/ Raymond T. Schuler - ---------------------------------- Director Raymond T. Schuler - ---------------------------------- Director David H. Swanson 67 E-1 EXHIBIT INDEX Exhibit No. - ----------- 10.6 Consolidated Rail Corporation 1995 Annual Performance Achievement Reward Plan for Officers 11 Statement of earnings per share computations 12 Computation of the ratio of earnings to fixed charges 23.1 Consent of Independent Accountants 23.2 Consent of Independent Accountants 27 Financial Data Schedule Exhibits 2, 3.1, 3.2, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 4.9, 10.1, 10.2, 10.3, 10.4, 10.5, 10.7, 10.8, 10.9, 10.10, 10.11, 10.12 and 21 are incorporated herein by reference. Powers of attorney with respect to amendments to this Annual Report are contained on page 66. 68 EX-10 2 EX-10.6 Exhibit 10.6 CONSOLIDATED RAIL CORPORATION ANNUAL PERFORMANCE ACHIEVEMENT REWARD PLAN FOR 1995 FOR OFFICERS 1. DEFINITIONS When used in this document, the following terms shall have the meanings set forth below: Board means the Board of Directors of Conrail. Conrail means the Consolidated Rail Corporation. Operating Ratio means the percentage determined by di- viding (a) operating expenses by (b) revenues, as shown on Conrail's consolidated financial statements. Participant means an officer of Conrail who participates in the Plan in accordance with Section 3. Plan means the Consolidated Rail Corporation Annual Performance Achievement Reward Plan for 1995, as set forth in this document and as may be amended from time to time. Salary means the salary earned by a Participant in 1995 from employment with Conrail. For purposes of this Plan, Salary shall include salary earned pursuant to any holiday, vacation, or sick leave policy of Conrail, salary deferred pursuant to the Consolidated Rail Corporation Matched Savings Plan, and salary contributed pursuant to the Consolidated Rail Corporation Flexible Benefits Plan. Except as otherwise provided in the preceding sentence, Salary shall not include any amount payable pursuant to receipt of a Spot Award or a 1994 Selective Cash Award paid in 1995 or to an employee bene- fit or incentive compensation plan. 2. INTRODUCTION The Board has approved the implementation of this Plan. The Board expects that the Plan will provide an incentive for enhanced individual and corporate performance and aid Conrail in attracting and retaining capable employees. 3. ELIGIBILITY Each officer of Conrail, who is employed during 1995, shall participate in the Plan. 4. PREREQUISITE FOR AWARD Anything in this Plan to the contrary notwithstanding, no award shall be payable under the Plan in the event actual operating income for 1995, as shown on Conrail's consolidated financial statements, is less than $625 million. 5. AMOUNT OF AWARD (a) Under the Plan, a Participant may earn an award equal to a percentage (or percentages) of his/her Salary. This award may consist of two parts, the Annual Performance Achievement Reward ("APAR") and the Annual Performance Achievement Reward Plus ("APAR Plus"). The percentage(s) shall depend upon the position held by the Participant and the performance of Conrail, measured by the relationship of (i) the Operating Ratio for 1995, as certified by Conrail's chief financial officer, after taking into account any amounts payable pursuant to the Plan that are not taken into account in the Operating Ratio goal set by the Board (or its delegate) for purposes of the Plan, to (ii) the Operating Ratio goal set by the Board (or its delegate) for purposes of the Plan. The percentage(s) shall be determined in accordance with one of three schedules. Conrail shall furnish each Participant with a copy of the schedule(s) of awards applicable to him/her. (b) A Participant's award shall be pro-rated, as provided in Section 8, in the event he/she participates in the Plan for less than all of 1995 or moves into a position cov- ered under a different schedule of awards. The Participant's award shall equal the sum of the partial awards computed by multiplying (i) the Salary earned by the Participant while covered under a schedule of awards, by (ii) the percentage of Salary determined in accordance with such schedule. -2- (c) Anything to the contrary in this Section 5 not withstanding, a Participant's award may be reduced by up to 50 percent by Conrail's President and Chief Executive Officer (or his delegate(s)) on the basis of individual or group performance. 6. ELECTION TO DEFER AWARDS (a) Each Participant shall be entitled to elect irrevocably to defer, for a period of one, two, three, four, or five years, all or a portion of any APAR award payable to him/her pursuant to this Plan. The minimum deferral permitted is 10 percent and a deferral may be made in any percentage above this minimum. A Participant who so elects shall receive his/her APAR award in the form of whole shares of Conrail Inc. restricted common stock, which shares shall be forfeited (except as otherwise provided in the Plan) in the event the Participant terminates employment with Conrail during the ap plicable periods of deferral, as described in Section 7, and prior to the receipt of a certificate(s) for the shares. Such elections must be made no later than July 28, 1995, on forms provided by Conrail's Assistant Vice President-Compensation and Benefits for this purpose. (b) A Participant who elects to receive an APAR award in Conrail Inc. common stock shall be granted shares of such stock equal in value to the amount of his/her deferred award (the "Deferred Shares"), plus additional shares of such stock equal in value to 10 percent (10%) of his/her deferred award times the period of deferral selected, up to a maximum of fifty percent (50%) (the "Bonus Shares"). The number of shares so awarded shall be determined as of the date the non- deferred portions of awards are or would have been paid. (c) Deferred Shares and Bonus Shares shall be issued as restricted shares pursuant to the Consolidated Rail Corporation 1991 Long-Term Incentive Plan. Each such share shall entitle the Participant to the same dividend and voting rights as one share of Conrail Inc. common stock. (d) The APAR Plus award shall not be eligible for defer- ral. 7. TIME AND FORM OF PAYMENTS (a) In the case of a Participant who has made an election to defer, the certificates for the Participant's -3- Deferred Shares and for the Participant's Bonus Shares, shall be paid or delivered to him/her, as soon as practicable after expiration of the deferral period chosen by the Participant. Any portion of an APAR award not deferred by a Participant shall be paid to him/her in cash during the first quarter of 1996. (b) In the case of a Participant who has made no election to defer, the Participant's award shall be paid to him/her in cash in a single installment during the first quarter of 1996. 8. SPECIAL PAYMENT RULES Anything in this Plan to the contrary notwithstanding, a Participant who is dismissed for cause prior to receipt of any portion of his/her award shall forfeit such portion of the award. A Participant who resigns from Conrail during 1995 shall receive a prorated portion of his/her APAR and APAR Plus awards. The amount of the prorated award shall be determined by applying a fraction to the Participant's salary determined up until his/her date of termination. The numerator of this fraction is the number of days of the year until the termination occurred and the denominator is 365, the number of days in the year. A Participant who resigns from Conrail after December 31, 1995, but before the date in the first quarter of 1996 on which payments are made under the Plan, shall receive a full APAR and APAR Plus award. If the Participant has elected to defer his/her award, such election is void and the prorated or full award will be paid in cash in the first quarter of 1996. If the Participant resigns during the deferral period the Participant forfeits both the Deferred and Bonus Shares. If a Participant who has elected to defer all or a portion of his/her APAR award in the form of Deferred and Bonus Shares retires with the right to an immediate pension under the Supplemental Pension Plan of Consolidated Rail Corpo ration (the "Pension Plan") prior to receipt of any such shares, the restriction on such shares shall be lifted and the Participant shall receive all of the Deferred Shares representing the Participant's deferred APAR award. The matching or Bonus Shares shall be prorated on the basis of a fraction, the denominator of which shall be the number of days -4- from the date of the award through the end of the elected deferral period and the numerator shall be the number of days from the date of the award through the last day of employment. This proration factor shall be multiplied by the number of Bonus Shares and the resulting number of Bonus Shares shall be distributed to the Participant. The balance of the Bonus Shares shall be forfeited on the last day of the Participant's employment. If during 1995, a Participant is force reduced, goes on a leave of absence, becomes disabled or dies, such Participant's award shall be prorated in the first quarter of 1996 on the basis of a fraction applied to the Participant's salary, the numerator of which is the number of days of the year until the event occurred and the denominator of which is 365, the number of days in the year. The amount of the award shall be paid in cash. A Participant who is force reduced or goes on a leave of absence after the end of 1995, but before payments under the Plan are made shall receive a full APAR and APAR Plus award. If the Participant has elected to defer his or her APAR award, the election is void and the APAR award is payable in cash. A Participant who becomes disabled or dies after the end of 1995, but before payments under the Plan are made shall receive a full APAR and APAR Plus award. If the Participant has elected to defer his/her APAR award, such award will be paid in cash to the Participant or his/her beneficiary(ies) or estate. If, after the APAR award is made in the first quarter of 1996, a Participant is force reduced, becomes disabled or dies, his/her Deferred and Bonus Shares shall be distributed in full to him/her or to his/her beneficiary(ies) or estate. If after the APAR award is made in the first quarter of 1996 a Participant goes on a leave of absence, his/her Deferred and Bonus shares shall be retained in the Plan and distributed at the end of the deferral period selected by the Participant. -5- 9. WITHHOLDING FOR TAXES Payments pursuant to this Plan shall be reduced by amounts sufficient to satisfy any Federal, state, and/or local tax withholding requirements. With respect to payments in the form of stock, an amount of stock shall be withheld from the award that is sufficient to enable Conrail to satisfy any Federal, state, and/or local tax withholding requirements. 10. DESIGNATION OF BENEFICIARY A Participant may designate a beneficiary(ies) to receive any payment pursuant to the Plan that has not been made prior to the Participant's death. Such designation must be submitted to Conrail's Assistant Vice President-Compensation and Benefits, on a form provided for this purpose. Such form is available upon request from the Administrator-APAR/APAR Plus, 18-B 2001 Market Street, Philadelphia, PA 19101-1418. In the absence of such a designation, a Participant's most recent designation of beneficiary(ies) pursuant to a prior annual performance achievement reward plan maintained by Conrail shall be treated as his/her designation for purposes of this Plan. 11. DURATION, AMENDMENT, AND TERMINATION OF PLAN The Plan shall take effect on January 1, 1995. Conrail, by action of the Board, may amend or terminate the Plan at any time. In addition, Conrail's President and Chief Executive Officer may amend the eligibility requirements and/or the schedules of awards under the Plan, in connection with a re- assessment of positions or changes in organization or staffing. The Plan shall terminate automatically as of January 1, 1996, unless terminated earlier by Conrail; provided, however, that such termination shall not preclude the subsequent payment of awards earned under the Plan. -6- EX-11 3 EX-11 Exhibit 11 ---------- CONRAIL INC. ------------ EARNINGS PER SHARE COMPUTATIONS ------------------------------- [CAPTION] ($ In Millions Except Per Share) Years ended December 31, ------------------------ 1995 1994 1993 ---- ---- ---- [S] Primary [C] [C] [C] - ------- Income before the cumulative effect of changes in accounting principles (1) $264 $324 $234 Dividends declared on Series A ESOP convertible junior preferred stock (ESOP Stock), net of tax benefits (13) (13) (13) ---- ---- ---- 251 311 221 Charges relative to the cumulative effect of changes in accounting principles (1) (74) ---- ---- ---- Adjusted net income $251 $311 $147 ==== ==== ==== Fully Diluted - ------------- Income before the cumulative effect of changes in accounting principles (1) 264 324 234 Nondiscretionary adjustment (2) (3) (5) (6) ---- ---- ---- 261 319 228 Charges relative to the cumulative effect of changes in accounting principles (1) (74) ---- ---- ---- Adjusted net income $261 $319 $154 ==== ==== ==== Page 1 of 3 Exhibit 11 ---------- CONRAIL INC. ------------ EARNINGS PER SHARE COMPUTATIONS ------------------------------- [CAPTION] ($ In Millions Except Per Share) Years ended December 31, ----------------------------------- 1995 1994 1993 ---------- ---------- ---------- [S] [C] [C] [C] Weighted average number of shares (3) Primary Weighted average number of common shares outstanding 78,144,694 79,089,464 79,656,302 Effect of shares issuable under employee stock compensation plans 589,253 585,317 990,193 ---------- ---------- ---------- 78,733,947 79,674,781 80,646,495 ========== ========== ========== Fully diluted Weighted average number of common shares outstanding 78,144,694 79,089,464 79,656,302 ESOP Stock 9,799,611 9,887,940 9,954,311 Effect of shares issuable under employee stock compensation plans 758,407 585,317 1,225,369 ---------- ---------- ---------- 88,702,712 89,562,721 90,835,982 ========== ========== ========== Income per common share Before the cumulative effect of changes in accounting principles Primary $3.19 $3.90 $2.74 Fully diluted 2.94 3.56 2.51 Cumulative effect of changes in accounting principles Primary (.92) Fully diluted (.81) Net income per common share Primary $3.19 $3.90 $1.82 Fully diluted 2.94 3.56 1.70 Page 2 of 3 Exhibit 11 ---------- CONRAIL INC. ------------ EARNINGS PER SHARE COMPUTATIONS ------------------------------- Notes: 1. The Company adopted Statement of Financial Accounting Standards No. 106 ("Employers' Accounting for Postretirement Benefits Other Than Pensions") and Statement of Financial Accounting Standards No. 109 ("Accounting for Income Taxes") effective January 1, 1993. As a result, the Company recorded cumulative after tax charges of $22 million and $52 million, respectively. 2. Represents the increase, net of income tax benefits, in ESOP-related expenses assuming conversion of all ESOP Stock to common stock. 3. Shares held by the Employee Benefits Trust (the "Trust") are not considered outstanding for earnings per share computations until issued by the Trust. Page 3 of 3 EX-12 4 EX-12 Exhibit 12 ---------- CONRAIL INC. ----------- COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES ----------------------------------------------------- ($ In Millions)
Quarters Ended Quarters Ended Quarters Ended Quarters Ended Years Ended March 31, June 30, September 30, December 31, December 31, -------------- -------------- -------------- -------------- -------------------- 1995 1994(1) 1995 1994 1995 1994 1995(2) 1994 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Earnings -------- Pre-tax income (loss) $ 91 $(53) $165 $166 $188 $ 174 $(52) $245 $392 $532 $440 Add: Interest expense 48 47 50 48 49 48 47 49 194 192 185 Rental expense interest factor 14 9 16 9 12 7 11 17 53 42 29 Less equity in undistributed earnings of 20-50% owned companies (5) (3) (5) (4) (4) (3) (6) (7) (20) (17) (14) ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Earnings available for fixed charges $148 $ - $226 $219 $245 $226 $ - $304 $619 $749 $640 ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== Fixed Charges ------------- Interest expense 48 47 50 48 49 48 47 49 194 192 185 Rental expense interest factor 14 9 16 9 12 7 11 17 53 42 29 Capitalized interest 1 1 1 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Fixed charges $ 62 $ 56 $ 66 $ 57 $ 61 $ 56 $ 58 $ 66 $247 $235 $215 ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== Ratio of earnings to fixed charges 2.39x - 3.42x 3.84x 4.02x 4.04x - 4.61x 2.51X 3.19x 2.98x ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== Note: For the purpose of computing the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges, less equity in undistributed earnings of 20% to 50% owned companies. Fixed charges represent interest expense together with interest capitalized and a portion of rent under long-term operating leases representative of an interest factor. (1) During the first quarter of 1994, the Company recorded a charge of $51 million (after tax benefits of $33 million) for a non-union employee voluntary retirement program and related costs. After this one-time charge, earnings were insufficient by $56 million to cover fixed charges for the quarter. (2) In the fourth quarter of 1995, the Company recorded an asset disposition charge of $176 million (after tax benefits of $109 million). After this charge, earnings were insufficient by $58 million to cover fixed charges for the quarter.
EX-23 5 EX-23.1 Exhibit 23.1 ------------ Consent of Independent Accountants We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-64670 and 33-62929) and in the Registration Statements on Form S-8 (Nos. 33-19155, 33-44140, 33-57717 and 33- 60445) of Conrail Inc. and subsidiaries of our report dated January 22, 1996, except for paragraphs five and six of Note 12, which are as of February 21, 1996, included in this Form 10-K. PRICE WATERHOUSE LLP Thirty South Seventeenth Street Philadelphia, PA 19103 March 25, 1996 EX-23 6 EX-23.2 Exhibit 23.2 ------------ Consent of Independent Accountants We consent to the incorporation by reference in the registration statements of Conrail Inc. and subsidiaries on Forms S-8 (File Nos. 33- 19155, 33-44140, 33-57717 and 33-60445), and on Forms S-3 (File Nos. 33-64670 and 33-62929) of our report dated January 24, 1994, on our audit of the consolidated financial statements and financial statement schedule of Conrail Inc. and subsidiaries for the year ended December 31, 1993, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania March 25, 1996 EX-27 7 EX-27
5 Exhibit 27 ---------- CONRAIL INC. FINANCIAL DATA SCHEDULE ($ In Millions Except Per Share)
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K. 1,000,000 DEC-31-1995 JAN-01-1995 DEC-31-1995 12-MOS 73 0 614 0 158 1,206 6,408 0 8,424 1,170 1,911 0 282 85 2,610 8,424 0 3,686 0 3,230 0 0 194 392 128 264 0 0 0 264 3.19 2.94
EX-99 8 CONRAIL INC 10K EX-99 Schedule II CONRAIL INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, (In Millions)
Additions ------------------- Balance at Charged to Charged Balance Beginning Costs and to Other At End Description of Period Expenses Accounts Deductions of Period - ----------- ---------- ---------- -------- ---------- --------- (1) 1993 Casualty reserves Current $110 $17 (2) $ 93 Noncurrent 153 $122 $11 154 (3) 132 Allowance for disposition of property and equipment (4) 277 21 256 1994 Casualty reserves Current 93 (10) (2) 103 Noncurrent 132 172 12 104 (3) 212 Allowance for disposition of property and equipment (4) 256 15 241 1995 Casualty reserves Current 103 3 (4) (2) 110 Noncurrent 212 171 14 180 (3) 217 Allowance for disposition of property and equipment (4)(5) 241 261 63 439 (1) Includes charges to property accounts in connection with construction projects and the recording of receivables from third parties. (2) Includes net transfers from noncurrent. (3) Transfers to current. (4) Deductions of $21 million, $15 million and $63 million in 1993, 1994, and 1995 respectively, represent net losses on asset dispositions. (5) In 1995, the Company recorded an asset disposition charge, which resulted from a review of the Company's route system and other operating assets to determine those that no longer effectively and economically support current and expected operations. The Company identified and has committed to sell 1,800 miles of rail lines that are expected to provide proceeds substantially less than net book value. In addition, other assets, principally yards and side tracks, identified for disposition have been written down to estimated net realizable value.
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