Annual Report (Form 10-K), fiscal year 1994

Item 1. Business. - ------ -------- and Item 2.



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.
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 are substantially affected by its ability to compete with trucks, 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 reorganized its Marketing and Sales Department and certain segments of its Operating Department into four service groups: CORE Service, Intermodal Service, Unit Train Service and Automotive Service. Petrochemicals and waste products, food and agriculture products, metals and forest and manufactured products 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 1990 through 1994, together with total annual traffic volumes, are set forth in the following tables.
CORE Service Group. ------------------ In 1994, revenues and volume for this service group increased 4.6% and 1.5%, respectively, over 1993.
Petrochemicals and Waste: 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, on the one hand, and Delaware, New Jersey, and Pennsylvania on the other. 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, but was unchanged in 1994. Conrail's minerals traffic, which accounts for approximately 20% of the revenue and 30% of the volume of this group, declined approximately 10% on relatively stable revenues, as a result of the collapse of a major salt mine located on Conrail. Revenues increased 5.1%, mostly as the result of rate increases and a favorable traffic mix.
Conrail's chemical 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 $250 million in insurance coverage for such accidents. It is impossible to 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 and has safety procedures designed to prevent the occurrence of such accidents, or limit their impact should they occur.
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. In 1994, food and agriculture revenue increased 1.6%, despite decreased volume of 2.0%, primarily as the result of increased rates. Agricultural products, primarily grain and grain products, generated $255 million of the $362 million in revenue for this segment in 1994. Conrail's export grain traffic, which is highly variable and depends on the value of the U.S.
dollar and the size of domestic and international grain harvests, declined as Conrail's markets continued to shift toward domestic uses, rather than exports. In 1994, export grain traffic declined significantly (58% in volume and 65% in revenue) from 1993 levels, a year in which volume increased 60% over 1992.
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 approximately $326 million in revenue in 1994, a 4.2% increase on increased volume of 3.1% over 1993 levels.
Metals: This commodity group includes metals, such as iron, steel and aluminum, and scrap metals. An increase in traffic volume in 1994 of 4.5% resulted in increased revenue of 7.9% over 1993 levels. These increases were due to gains in market share from trucks, increased rates and greater steel production resulting from increased North American vehicle production.
Intermodal Service Group. ------------------------
Conrail continues to be one of the rail industry's leaders in handling intermodal traffic, with revenues and volume increasing 14.5% and 17.3%, respectively, in 1994 over 1993. Conrail handled over 1.5 million units of intermodal traffic in 1994.
Conrail's intermodal traffic consists of three segments. The first segment is Conrail's premium service traffic which principally involves shipments for the U.S. Postal Service, United Parcel Service and less-than- truck-load companies. The four-year U.S. Postal Service contracts for over 1,000 origin-destination points will expire and be rebid in July 1995.
The second segment is domestic traffic, which includes a variety of commodities and customers. The 27% growth in this segment in 1994 was attributable primarily to market share gains in Conrail's partnerships with major nationwide truckload carriers and RoadRailer traffic through Triple Crown Services Company, a joint venture with 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. Conrail's Atlantic traffic increased 8% over 1993 levels.
In 1994, Conrail increased its intermodal service reliability by eliminating intermodal service to certain interior points on its system. Conrail expects this service group to benefit in 1995 from the anticipated completion of clearance routes in Pennsylvania, thus furthering the conversion of intermodal container traffic to more cost-effective, double- stack service.
Unit Train Service Group. ------------------------
In 1994, revenues for this service group increased by 7.9%, reflecting a 3.9% increase in traffic volume.
Utility coal traffic, which makes up the majority of Conrail's coal business, increased 3% in 1994, with increased revenue of 7.6%. This 3% increase occurred despite service disruptions due to severe winter weather and attendant capacity problems in the first quarter of the year, which prevented utilities from fully replenishing stock piles depleted during the eight-month coal strike in 1993. 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 the electric utilities, their use of alternative sources of energy and the weather. In addition, the utilities in Conrail's service territory decreased their use of nuclear fuel from 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. However, the decline in the volume of coal from mines located on Conrail is being offset, in part, by an increase in Conrail's handling of lower sulfur coal from sources on Conrail lines formerly owned by The Monongahela Railway Company (now merged into Conrail) and from off-line sources to utilities located on Conrail's system.
Metallurgical, industrial/cogeneration and export coal represent the three remaining segments of Conrail's coal traffic, with volumes essentially equal in each of these areas. Conrail's traffic volume and revenue from metallurgical coal decreased approximately 10% in 1994. 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's traffic volume and revenue for industrial/cogeneration coal increased 17% in 1994, primarily as the result of the initiation of service to a new cogeneration facility and increases in market share.
Export coal traffic increased 28% from 1993, after having declined significantly in 1993 and 1992 from the record levels of 1991. The increase resulted in significant part from increased amounts of coal available for export with the end of the coal strike. This segment of Conrail's coal business faces continuing competition by exports from South Africa and the former Soviet republics.
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 has adversely affected the volume of raw materials for steel production handled by Conrail, and could continue to do so. In 1994, coke and iron ore volumes declined 4% from 1993 levels. However, revenues increased slightly, 2%, as the result of selective rationalization of low margin traffic and price increases.
Automotive Service Group. ------------------------
In 1994, Conrail's automotive parts and finished vehicles traffic continued to benefit from the strong domestic economy and the 10% increase in North American vehicle production over 1993. Reflecting increased domestic production, finished vehicles volume increased 14%, while automotive parts volume increased 5.0%. Revenues for the vehicles and parts segments increased, respectively, 11.6% and 8.7%. As a whole, both 1994 volume and revenues for this group increased 10% from 1993. In terms of revenues, General Motors and Ford were among Conrail's five largest customers in 1994; Chrysler was among Conrail's ten largest customers.
This commodity group, especially the automotive parts segment, is subject to vigorous truck competition. The increase in automotive parts traffic primarily reflects the increase in production by domestic manufacturers and Conrail's gain in market share through the use of new products and logistics services, including the introduction in 1994 of a dedicated, just-in-time, auto-parts train network, designed to compete with
short-haul trucks. Conrail's vehicles traffic is subject to significant competition from other railroads.
In 1994, 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. Although there has been only a slight impact to date, Conrail expects the enactment of the North American Free Trade Agreement to increase its automotive parts and vehicle traffic to and from Mexico.
Certain Statistics. The following tables provide various measurements relating to Conrail's rail operations from 1990 through 1994:
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. The consummation of a merger or joint cooperation agreement between CP Rail and Canadian National Railroad could result in increased competition in certain portions of Conrail's service territory, depending upon the nature and terms of any such arrangement. 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 government regulation as currently administered by the Interstate Commerce Commission ("ICC"). 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 ICC also has 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 by the ICC, 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 any given amount of freight will be shipped during their term. As of December 31, 1994, Conrail was a party to 3,563 such contracts for regulated traffic, which Conrail estimates accounted for 31% of its line-haul revenues in 1994. 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 under the jurisdiction of the ICC. Action by the ICC 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 1994. For a discussion of regulation of the railroad industry, see "Government Regulation" and Item 3

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, 1994, Conrail was a defendant in 391 pending asbestosis suits, 853 pending hearing loss suits, 34 pending repetitive motion injury suits and 424 pending deleterious substance suits, and had notice of 963 potential asbestosis claims, 4,558 potential hearing loss claims, 2,354 potential repetitive motion injury claims and 47 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.
In 1989, an organization of interests that own property under and adjacent to Conrail's elevated West 30th Street rail line running along the west side of lower Manhattan filed a petition with the ICC seeking to force Conrail to abandon the line and finance its removal, which could have cost in excess of $30 million. In January 1992, the ICC voted to grant the petition, subject to the owners posting a bond indemnifying Conrail for demolition costs exceeding $7 million. The property owners refused to post the bond. The parties appealed to the U.S. Court of Appeals for the District of Columbia, which upheld the ICC's order, including the bond requirement. No appeal was taken. No abandonment certificate will be issued unless the property owners post a bond, which they have not done.
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.
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 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 $29 million as of December 31, 1994. However, Conrail believes 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 its 1994 early retirement program.
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, 1994, 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 128 locations throughout the country. However, Conrail, through its own investigations and assessments, believes it may have
some potential responsibility at only 53 of these sites. The amounts Conrail has accrued with respect to the proceedings listed below are included in its $74 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 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.
Conrail also awaits the Special Court's decision in a related action in which Conrail seeks 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. Oral argument in that matter was held October 24, 1994.
Motions and cross-motions for summary judgment by the parties are pending.
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, 1994, 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.
EPA has now requested that the parties submit a remediation plan that includes participation by Penn Central. Settlement 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 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 Conrail had undertaken alone. (See previous discussion regarding the Special Court under "United States v. SEPTA, et al"). EPA has recently issued a second Record of Decision in draft form that, if finalized, would require the parties to install a public water supply system for up to 700 additional homes.
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 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.
United States v. Consolidated Rail Corporation, The Monongahela Railway Company, et al. On September 30, 1992, Region VIII of the EPA filed an administrative action for civil penalties against Conrail and its former wholly-owned subsidiary, The Monongahela Railway Company (now merged into Conrail), under the Toxic Substances Control Act for allegedly improper handling of a shipment of PCB contaminated soil. The other railroads in the movement and the shipper were served with similar complaints. Conrail entered into a de minimus settlement with EPA which was effective October 31, 1994.
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.
United States v. Consolidated Rail Corporation, et al. On March 17, 1994, the United States Department of Justice ("DOJ") served notice that it had filed a complaint in the Federal District Court for the Eastern District of Pennsylvania against Consolidated Rail Corporation and two other parties citing various violations of the Clean Air Act ("CAA") and the National Emission Standard for Hazardous Air Pollutants ("NESHAP") in connection with the alleged release of asbestos during the renovation of a grain storage facility. DOJ seeks civil penalties and injunctive relief against further violations of CAA and NESHAP. Conrail has initiated settlement discussions with DOJ, as a result of which the litigation has been stayed.
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 the investigation and remediation to be undertaken at the yard and the amount of the fines.
Beacon Park, Massachusetts. Massachusetts and federal officials are currently investigating an alleged unlawful discharge of oil by the Company into the Charles River. The investigation could result in the assessment of fines or other penalties against Conrail.
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.

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 1994.
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, 1995, relating to the executive 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
James A. Hagen, 62, Chairman of Retired effective March 16, 1995 the Board of Directors from the position of Chief Executive Officer. Served as Chairman, President and Chief Executive Officer between May 1989 and September 1994.
David M. LeVan, 49, President Present position since March 16, and Chief Executive Officer 1995. Served as President and Chief Operating Officer between September 1994 and March 16, 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. Served as Vice President - Corporate Strategy between September 1988 and November 1990.
H. William Brown, 56, 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, 51, 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.
Timothy P. Dwyer, 45, 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.
Gordon H. Kuhn, 44, Senior Present position since November Vice President - Intermodal 1994. Served as Senior Vice Service Group President - CORE Service Group between November 1993 and November 1994. Served as Senior Vice President - Marketing and Sales between January 1990 and November 1993.
Charles N. Marshall, 53, Senior Present position since January Vice President - Development 1990. Served as Senior Vice President - Marketing and Sales between March 1985 and January 1990.
John P. Sammon, 44, 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, 53, 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. Served as Assistant Vice President - Sales between 1987 and March 1990.
Bruce B. Wilson, 59, Senior Present position since April Vice President - Law 1987.
Lucy L.S. Amerman, 42, 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. Held various positions in the Law Department prior to that time.
Dennis A. Arouca, 43, 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., 47, Present position since March Vice President - Continuous 1992. Served as Assistant Vice Quality Improvement* President - Automotive between April 1989 and March 1992.
Gerald T. Gates, 41, Vice Present position since November President - Transportation* 1994. 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. Served as Assistant General Manager - Albany Division between 1989 and September 1990.
Donald W. Mattson, 52, 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, 43, Vice Present position since April President - Materials and 1994. Served as Vice President - Purchasing* Controller between May 1993 and March 1994. Served as Vice President - Treasurer between 1988 and May 1993.
William B. Newman, Jr., 44, Present position since 1981. Vice President and Washington Counsel*
Frank H. Nichols, 48, Vice Present position since February President - Resource 1993. Served as Assistant Vice Development* President - Finance between November 1988 and February 1993.
Timothy T. O'Toole, 39, Vice Present position since April President and Treasurer 1994. Served as Vice President and General Counsel between May 1989 and April 1994.
Lester M. Passa, 41, Vice Present position since March 16, President - Logistics and 1995. Served as Assistant Vice Corporate Strategy* President - Strategic Planning between February 1993 and March 15, 1995. Served as Director - Intermodal Planning between October 1991 and
January 1993. Served as Senior Director - Customer Service between January 1990 and September 1991.
Albert M. Polinsky, 48, 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. Served as Director - Information Resources and Systems prior to that time.
Richard S. Pyson, 53, Vice Present position since November President - Engineering* 1994. 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. Served as Assistant Vice President - Engineering and Maintenance between March 1990 and March 1991.
John M. Samuels, 51, Vice Present position since November President - Mechanical* 1994. Served as Vice President - Engineering between April 1992 and November 1994. Served as Vice President - Continuous Quality Improvement between April 1990 and March 1992. Served as Assistant Vice President - Industrial Engineering between 1980 and April 1990.
Allan Schimmel, 54, Vice Present position since November President - Administrative 1990. Served as Corporate Services and Corporate Secretary and Assistant to the Secretary Chairman between 1980 and November 1990.
Gery M. Williams, Jr., 53, Vice Present position since January President - State and Local 1990. Affairs*
PART II
Item 5.

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 3, 1995 was 19,698. 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 1994 and 1993, see Note 13 to the Consolidated Financial Statements included elsewhere in this Annual Report.
Item 6.

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, 1994 and the consolidated balance sheets as of December 31, 1994 and 1993 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.
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
1. 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 will be 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 3 to the Consolidated Financial Statements included elsewhere in this Annual Report.)
2. Conrail adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), and Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("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, 7 and 8 to the Consolidated Financial Statements included elsewhere in this Annual Report.)
3. In 1993, Conrail committed to a plan for the disposition of its investment in Concord Resources Group, Inc. 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 benefits of $30 million relating to the disposition. (See Note 10 to the Consolidated Financial Statements included elsewhere in this Annual Report.)
4. 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).
5. In 1990, Conrail completed a financial restructuring plan which included a Dutch auction tender offer, the establishment of an employee stock ownership plan for non-union employees ("Non-union ESOP") and a related open market common stock purchase program. Through the Dutch auction tender offer, Conrail purchased 44.64 million shares of its outstanding common stock at a price of $24.50 per share, or an aggregate of $1.094 billion. In March 1990, Conrail issued 9,979,562 shares of Series A ESOP Convertible Junior Preferred stock to the Non-union ESOP in exchange for a promissory note of $288 million. In connection with its restructuring, Conrail acquired 8,715,902 shares of its common stock in the open market for $200 million. The cost of the restructuring was financed with approximately $450 million of available funds, $50 million in short-term borrowings (commercial paper) and with proceeds from the sale of $250 million principal amount of 9 3/4% Notes due 2000 and $550 million principal amount of 9 3/4% Debentures due 2020.
6. Net income (loss) and dividends per common share include the effects of the common stock split which is described in Note 2 to the Consolidated Financial Statements included elsewhere in this Annual Report. The calculations of income (loss) per common share for 1994, 1993 and 1992 are shown in Exhibit 11, Part IV included elsewhere in this Annual Report.
Item 7.

Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. ------------------------------------ Overview - -------- Conrail's net income for 1994 was $324 million, compared with $160 million for 1993 and $282 million for 1992. 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 recorded in the first quarter (see Note 3 to the Consolidated Financial Statements included elsewhere in this Annual Report). The 1993 results 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 Concord Resources Group, Inc. ("Concord"), $50 million; and the one-time effects on deferred taxes of the increase in the federal tax rate, $34 million (see Notes 1, 7, 8 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.
In the first quarter of 1994, Conrail's results were adversely affected by difficult operating conditions caused by severe winter weather and by greater than anticipated traffic volumes, the combination of which created a shortage of crews and locomotives. At the same time, Conrail reorganized its marketing department and certain of its operating functions into four service groups: Intermodal, Automotive, Unit Train and CORE. These factors in combination created service disruptions and increased operating expenses in the first quarter. Nevertheless, a strong economy throughout the year resulted in increases in both revenue and traffic volume for 1994 that were 8.1% and 8.3% higher, respectively, than in 1993. Despite increased traffic volume, Conrail's continued cost reduction and containment programs in the last three quarters enabled Conrail to limit the increase in its operating expenses (excluding the early retirement program charge) to 6.3% over 1993.
In 1993, traffic volume and operating revenues increased 5.0% and 3.2%, respectively, compared with 1992, while operating expenses were up only 1.8%.
For 1994, Conrail achieved its operating ratio goal of 81.5%, without the $84 million one-time charge for the early retirement program, and a return on funded assets of 9.8%, compared to its cost of capital of 11%.
1995 Outlook - ------------ Conrail expects the economy to grow throughout 1995, however, at a slower pace as the year progresses. Conrail's 1995 plans are based on assumptions of 2.4% growth in real gross domestic product and 3.4% growth in industrial production. Conrail's outlook for 1995 includes line haul revenue growth of 2.5% to 3.5%, and, in anticipation of this continued growth, Conrail will further increase its locomotive fleet and will hire additional train and engine employees, if necessary, to meet the demand for transportation services. A key Conrail goal for 1995 is to achieve an operating ratio of 79.5%.
The service groups are making significant progress in improving how Conrail manages the resources needed to profitably serve its customers, and towards this end, the analyses to evaluate assets required to effectively and economically support their operations will continue in 1995.
Results of Operations - --------------------- 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 (primarily freight line haul revenues, but also including switching, demurrage and incidental 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 (freight cars and intermodal trailers and containers) 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 and Waste increased .5%, and Food and Agriculture decreased 2.0%. Switching, demurrage and incidental revenues increased $14 million.
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:
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 3 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%.
1993 Compared with 1992
Net income for 1993 was $160 million ($1.82 per share, primary and $1.70 per share, fully diluted) compared with 1992 net income of $282
million ($3.28 per share, primary and $2.99 per share, fully diluted). The decrease in net income is attributable primarily to the following unusual or one-time charges in 1993: one-time after tax charges of $74 million for adoption of required changes in accounting for income taxes and postretirement benefits other than pensions; the recording of the estimated net loss on the disposition of Concord, $50 million; and the one-time effects on deferred taxes of the increase in the 1993 federal corporate income tax rate, $34 million (see Notes 1, 7, 8 and 10 to the Consolidated Financial Statements included elsewhere in this Annual Report). Absent these charges, Conrail's net income for 1993 would have been $318 million ($3.78 per share, primary and $3.43 per share, fully diluted).
Operating revenues increased $108 million, or 3.2%, from $3,345 million in 1992 to $3,453 million in 1993. A 5.0% increase in traffic volume resulted in a $160 million increase in revenues that was partially offset by a 1.6% decrease in average revenue per unit which reduced revenues $54 million. The decline in average revenue per unit is attributable to decreases in average rates which reduced revenue by $62 million, partially offset by a favorable mix of traffic which increased revenues $8 million. Traffic volume increases were experienced by three of the four service groups: Intermodal, 11.1%; Automotive, 12.9%; and CORE, 7.3%. Traffic volume decreased for the Unit Train Service Group by 8.9%. Within the CORE Service Group, Metals increased 16.1%, Forest and Manufactured Products increased 6.6%, Petrochemicals and Waste increased 3.9%, and Food and Agriculture increased 3.9%. Switching, demurrage and incidental revenues increased $2 million.
Operating expenses increased $51 million, or 1.8%, from $2,811 million in 1992 to $2,862 million in 1993. The following table sets forth the operating expenses for the two years:
Compensation and benefits costs decreased $8 million, or 0.6%, with relatively stable employment levels. The decrease is attributable primarily to a decrease in payroll taxes, partially offset by increases
in fringe benefit costs and increased wage rates. Compensation and benefits as a percent of revenues was 35.6% in 1993 compared with 37.0% in 1992.
The increase of $15 million, or 5.2%, in equipment rents reflects the effects of new operating leases for equipment and the increase in traffic volume, partially offset by improvement in equipment utilization.
Depreciation and amortization expense decreased $11 million, or 3.7%, primarily due to lower depreciation rates for locomotives and freight cars as a result of a depreciation study required by the Interstate Commerce Commission.
Other operating expenses increased $55 million, or 11.3%, primarily due to increases in property and corporate taxes, increases in write-downs of uncollectible accounts, and a reduction in 1992 due to reducing accruals related to the 1991 special charge with no corresponding reduction in 1993.
Conrail's operating ratio was 82.9% for 1993 compared with 84.0% for 1992.
Interest expense increased $13 million, or 7.6%, from $172 million in 1992 to $185 million in 1993 due to the net addition of long-term debt in 1993.
The loss on disposition of subsidiary, $80 million, represents Conrail's estimated gross loss on the planned disposition of Concord (see Note 10 to the Consolidated Financial Statements included elsewhere in this Annual Report).
Other income, net, increased $16 million, or 16.3%, from $98 million in 1992 to $114 million in 1993, principally due to higher gains from property sales and increased equity income as a result of higher net income of Conrail's affiliated companies.
Liquidity and Capital Resources - ------------------------------- Conrail's cash and cash equivalents increased $5 million, from $38 million at December 31, 1993 to $43 million at December 31, 1994. 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 $697 million in 1994, compared with $504 million in 1993 and $496 million in 1992. Issuance of long-term debt provided cash of $114
of $114 million in 1994. The principal uses of cash in 1994 were for property and equipment acquisitions, $490 million, payment of long-term debt including capital lease and equipment obligations, $158 million, cash dividends on preferred and common stock, $127 million, and the repurchase of common stock, $94 million.
A working capital (current assets less current liabilities) deficiency of $76 million existed at December 31, 1994, compared with $13 million at December 31, 1993. The increase in the deficiency during 1994 is principally due to increases in short-term borrowings, accounts payable and accrued and other current liabilities. 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 working capital requirements.
In July 1993, Conrail announced a third common stock repurchase program of up to $100 million. In December 1994, this program was complete at a total of 1,767,626 shares. On July 20, 1994, the Board of Directors authorized an additional $100 million stock repurchase program. At December 31, 1994, Conrail had acquired 175,500 shares for approximately $9 million under this program.
During 1994, CRC issued an additional $214 million of commercial paper and repaid $181 million. Of the remaining $212 million outstanding at December 31, 1994, $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 Conrail's $500 million revolving credit facility.
At December 31, 1994, $342 million remains available to Conrail and CRC under a 1993 shelf registration statement whereby CRC can issue debt securities or Conrail can issue both convertible debt or equity securities.
During the first half of 1994, CRC issued $65 million of Medium-Term Notes with interest rates ranging from 5.70% to 6.33% maturing over various periods through 1997.
In July 1994, CRC issued $49 million of 1994 Equipment Trust Certificates, Series A, with interest rates ranging from 5.5% to 7.6%, maturing annually from 1995 to 2009. The certificates were used to finance approximately 85% of the total purchase price of 36 locomotives.
In December 1994, CRC issued $30 million of 1994-A 8.45% Pass Through Trust Certificates due 2014 pursuant to the shelf registration statement to finance approximately 80% of the total equipment cost of 795 new hopper
cars and 57 rebuilt boxcars. These certificates are not direct obligations of CRC.
Capital Expenditures - -------------------- Capital expenditures totalled $508 million, $650 million and $491 million in 1994, 1993 and 1992, respectively. Of these totals, Conrail directly financed $57 million in 1994, $232 million in 1993 and $13 million in 1992 through private third-party financing. In addition, the proceeds of notes and debentures sold in those years, $65 million, $329 million, and $80 million, respectively, were available to fund capital expenditures.
Capital expenditures for 1995 are expected to be approximately $550 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, 1994, 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 128 locations throughout the country. However, based on currently available information, Conrail believes CRC may have some potential responsibility at only 53 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 not always possible to estimate CRC's liability for the costs associated with the assessment and remediation of contaminated sites. At December 31, 1994, Conrail had accrued $74
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 $8 million in 1994 and $7 million in each of 1993 and 1992 for environmental remediation and anticipates spending in 1995 an amount comparable to that spent in each of the last three years. In addition, Conrail's capital expenditures for environmental control and abatement projects were approximately $5 million in 1994 and $2 million in 1993, and are anticipated to be approximately $9 million in 1995.
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 the third quarter of 1993, Conrail committed to a plan for disposition of its investment in Concord and recorded an estimated loss on the disposition of $80 million less estimated tax benefits of $30 million (see Note 10 to the Consolidated Financial Statements included elsewhere in this Annual Report). In July 1994, Conrail completed the sale of one of Concord's two waste disposal facilities, with no material financial statement impact. Negotiations for the sale of Concord's remaining waste disposal facility are currently in progress and are anticipated to be completed during 1995. Conrail expects that this proposed sale will not have a material financial statement effect upon completion.
Item 8.


Item 8. Financial Statements and Supplementary Data. - ------ -------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors 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, 1994, and the results of their operations and their cash flows for the year ended December 31, 1994, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed above. The consolidated financial statements of Conrail Inc. and subsidiaries for the years ended December 31, 1993 and 1992 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 23, 1995
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors Conrail Inc.
We have audited the 1993 and 1992 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Conrail Inc. and subsidiaries as of December 31, 1993, and the consolidated results of their operations and their cash flows for each of the two years in the period 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, presents 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
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 stock. The weighted average number of shares of common stock outstanding (Note 2) during each of the most recent three years ended December 31, 1994 are as follows:
1994 1993 1992 ---------- ---------- ---------- Primary weighted average shares 79,674,781 80,646,495 81,743,648
Fully diluted weighted average shares 89,562,721 90,835,982 91,856,193
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 8) and Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") (Note 7). As a result, the Company recorded cumulative after tax charges of $22 million and $52 million for SFAS 106 and SFAS 109, respectively.
2. Corporate Structure and Presentation ------------------------------------ In May 1993, the shareholders of CRC approved a plan for the adoption of a holding company structure. Under the plan, each share of CRC common stock that was issued and outstanding or held in the treasury
of CRC, and each share of CRC ESOP Stock, all of which were held by the Non-union Employee Stock Ownership Plan (the "Non-union ESOP"), were automatically converted on July 1, 1993, into one share of common stock and one share of ESOP Stock, respectively, of a newly created holding company, Conrail Inc. As a result, Conrail Inc. became the publicly held entity effective July 1, 1993.
The change in corporate structure did not represent a change in the operations or financial position of the consolidated entity. On July 1, 1993, Conrail had the same consolidated operations, assets, liabilities and stockholders' equity as CRC had on June 30, 1993. In this report, references to the "Company" will denote the consolidated entities Consolidated Rail Corporation for periods prior to July 1, 1993 and Conrail Inc. for subsequent periods.
In 1992, the Company's Board of Directors authorized a two-for-one common stock split which was effected in the form of a common stock dividend. An amount equal to the par value of the common shares issued was transferred from additional paid-in capital to the common stock account. In addition, a stock dividend on the ESOP Stock in the amount of one share of ESOP Stock for each share of ESOP Stock outstanding was also distributed.
All references in the financial statements with regard to the number of shares, and related dividends and per share amounts for both common stock (including treasury shares) and ESOP Stock have been restated to reflect the stock split. Stock compensation and other plans that provide for the issuance of common stock, ESOP Stock, or an amount equivalent to their respective fair market values, have also been amended to reflect the stock split.
3. 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 majority of the cost of the early retirement program will be paid from the Company's overfunded pension plan.
4. Property and Equipment ----------------------
Conrail acquired equipment and incurred related long-term debt under various capital leases of $8 million in 1994, $75 million in 1993 and $13 million in 1992. As part of a 1991 special charge, the Company recorded an allowance for disposition for the sale or abandonment of certain under-utilized rail lines and other facilities.
5. Accrued and Other Current Liabilities -------------------------------------
6. Long-Term Debt -------------- Long-term debt outstanding, including the weighted average interest rates at December 31, 1994, is composed of the following:
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 $1,601 million and $1,782 million at December 31, 1994 and 1993, respectively, compared with carrying values of $1,582 million and $1,544 million at December 31, 1994 and 1993, 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 which average 7.69% and are collateralized by assets with a net book value of $375 million at December 31, 1994.
Minimum commitments, exclusive of executory costs borne by the Company, are:
Operating lease rent expense was $ 118 million in 1994, $88 million in 1993 and $71 million in 1992.
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 or equity securities. The remaining balance under this shelf registration was $342 million at December 31, 1994.
During 1994, CRC issued $65 million of Medium-Term Notes with interest rates ranging from 5.70% to 6.33%, maturing over various periods through 1997, pursuant to the registration statement on Form S-3.
In July 1994, CRC issued $49 million of 1994 Equipment Trust Certificates, Series A, with interest rates ranging from 5.5% to 7.6%, maturing annually from 1995 to 2009. The certificates were used to finance approximately 85% of the total purchase price of 36 locomotives.
Equipment and other obligations mature in 1995 through 2013 and are collateralized by assets with a net book value of $229 million at December 31, 1994. Maturities of long-term debt other than capital leases and commercial paper are $65 million in 1995, $108 million in 1996, $67 million in 1997, $43 million in 1998, $13 million in 1999 and $1,186 million in total from 2000 through 2043.
In December 1994, CRC issued $30 million of 8.45% Pass Through Certificates, Series 1994-A due 2014. The certificates will be used
to finance equipment which CRC will use under an operating lease, and while such certificates are not direct obligations of, or guaranteed by CRC, the amounts paid under the lease will be sufficient to pay principal and interest on the certificates.
CRC had $212 million of commercial paper outstanding at December 31, 1994. 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.
In April 1994, CRC entered into a $500 million uncollateralized bank credit agreement with a group of banks to replace the $300 million credit facility that would have expired in the first quarter of 1995. The new credit agreement, which is used for general corporate purposes and to support CRC's commercial paper program, provides for a $350 million revolving credit facility with a five year maturity and a $150 million revolving credit facility with a one year maturity. Both credit facilities require 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.
Interest payments were $174 million in 1994, $164 million in 1993 and $162 million in 1992.
7. Income Taxes ------------ The provisions for income taxes are composed of the following:
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. Prior years' financial statements were not restated.
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 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 previously 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 $80 million in 1994, $39 million in 1993 (excluding tax settlement) and $31 million in 1992.
Significant components of the Company's special income tax obligation and deferred income tax liabilities and (assets) are as follows:
The tax effects of each source of deferred income taxes and special income tax obligation for 1992 (disclosure for 1994 and 1993 is not required nor applicable under SFAS 109) are as follows: (In Millions) Deferred taxes Tax depreciation over book $ 84 Other property transactions 80 Casualty, wage and other accruals 78 Alternative minimum tax (40) Other 6 ---- $208 ==== Special income tax obligation Reduced tax basis depreciation (31) Other property transactions (27) ---- $(58) ====
As of December 31, 1994, the Company has approximately $75 million of alternative minimum tax credits available to offset future U.S. federal income taxes on an indefinite carryforward basis.
Reconciliations of the U.S. statutory tax rates with the effective tax rates follow: 1994 1993 1992 ---- ---- ---- Statutory tax rate 35.0% 35.0% 34.0% State income taxes, net of federal benefit 3.9 5.1 3.9 Effect of federal tax increase on deferred taxes 7.7 Other .2 (1.0) .8 ---- ---- ---- Effective tax rate 39.1% 46.8% 38.7% ==== ==== ====
8. 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.
Pension credits include the following components:
The funded status of the pension plans and the amounts reflected in the balance sheets are as follows:
The assumed weighted average discount rates used in 1994 and 1993 are 8.50% and 7.25%, 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, 1994 and 1993 is 6.0%. The expected long-term rate of return on plan assets (primarily equity securities) in 1994 and 1993 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 $5 million in 1994 and 1993 and $4 million in 1992.
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 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, 1994 was approximately 1.5 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.
Effective October 1, 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. This refinancing will not have a material effect on the Company's financial statements.
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 $30 million in 1994, $29 million in 1993 and $28 million in 1992. Compensation expense related to the Non-union ESOP was $10 million in 1994 and 1993 and $9 million in 1992. Preferred dividends of $21 million were declared in 1994, of which $16 million were paid in 1994 and $5 million were paid in 1995. Preferred dividends declared and paid to the Non-union ESOP were $21 million in 1993 and 1992. The Company received debt service payments from the Non-union ESOP of $21 million in 1994, $26 million in 1993 and $21 million in 1992.
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 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:
An 11 percent rate of increase in per capita costs of covered health care benefits was assumed for 1995, 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, 1994 by $5 million and would have an immaterial effect on the service cost and interest cost components of net periodic postretirement benefit cost for 1994. Discount rates of 8.5% and 7.0% were used to determine the accumulated postretirement benefit obligations for both the medical and life
insurance plans in 1994 and 1993, respectively. The assumed rate of compensation increase was 5.0% in both 1994 and 1993.
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.
Prior to the adoption of SFAS 106, the cost of medical benefits provided by the Company as self-insurer was recognized as claims and administrative expenses were paid. The cost of retiree life insurance benefits was previously recognized as the annual insurance premium. The expense of providing both non-union retiree medical and life insurance benefits for 1992 was $5 million.
9. Capital 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 preferencs 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.
In July 1993, the Company announced a third common stock repurchase program of up to $100 million. In December 1994, this program was completed at a total of 1,767,626 shares. On July 20, 1994, the Board of Directors authorized an additional $100 million stock repurchase program. At December 31, 1994, the Company had acquired 175,500 shares for approximately $9 million under this program.
During 1993, the Company reclassified 4,787,579 shares of repurchased common stock (treasury stock) as authorized but unissued.
The activity and status of treasury stock follow:
1994 1993 1992 --------- ---------- --------- Shares, beginning of year 83,745 3,690,002 546,400 Acquired 1,705,419 1,181,322 3,143,602 Reclassified as authorized but unissued (4,787,579) --------- ---------- --------- Shares, end of year 1,789,164 83,745 3,690,002 ========= ========== =========
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 283,664 shares of restricted stock under its incentive plans through December 31, 1994.
The activity and status of stock options under the incentive plans follow:
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 $105.00, as amended in 1994. At the Company's option, the Rights are redeemable prior to becoming exercisable at one-half cent ($.005) per Right. The Rights expire in July 1999 and do not have any voting privileges or rights to receive dividends.
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.
11.Other Income, Net -----------------
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, 1994, 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 128 locations. However, based on currently available information, the Company believes CRC may have some potential responsibility at only 53 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 CRC were held principally liable in certain of these actions, at December 31, 1994, the Company had accrued $74 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 $8 million in 1994 and $7 million in each of 1993 and 1992 for environmental remediation and anticipates spending in 1995, an amount comparable to that spent in each of the last three years. In addition, the Company's capital expenditures for environmental control and abatement projects were approximately $5 million in 1994 and $2 million in 1993, and are anticipated to be approximately $9 million in 1995.
The Environmental Quality Department of the Company 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.
Other ----- The Company is involved in various legal actions, principally relating to occupational health claims, personal injuries, casualties, property damage and loss and damage. The Company has recorded liabilities on its balance sheet for amounts sufficient to cover the expected payments for such actions. At December 31, 1993, these liabilities are presented net of estimated insurance recoveries of approximately $80 million. At December 31, 1994, estimated insurance recoveries are included in "Other assets."
Conrail may be contingently liable for approximately $88 million at December 31, 1994 under indemnification provisions related to sales of tax benefits.
In October 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 was reduced to approximately $80 million.
13.Condensed Quarterly Data (Unaudited) ------------------------------------
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 3). 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.
Effective January 1, 1993, the Company adopted SFAS 106 and SFAS 109, related to the accounting for postretirement benefits other than pensions and for income taxes, respectively. As a result, the Company recorded cumulative after tax charges totalling $74 million ($.91 per share, primary and fully diluted) in the first quarter of 1993 (Notes 1, 7 and 8).
During the third quarter of 1993, the Company recorded an estimated loss for the disposition of its investment in its subsidiary, Concord (Note 10). As a result, net income for the quarter was reduced by $50 million. Also, as a result of the increase in the federal corporate
income tax rate enacted August 10, 1993 and effective January 1, 1993, income tax expense for the third quarter of 1993 includes a charge of $36 million, primarily related to the adjustment of deferred taxes and the special income tax obligation as required by SFAS 109 (Note 7). Without these two charges, net income per common share for the third quarter of 1993 would have been $1.00 on a primary basis and $.91 on a fully diluted basis.
Item 9.

Item 9. Changes in and Disagreements with Accountants - ------ --------------------------------------------- on Accounting and Financial Disclosure. --------------------------------------
Previously reported in Conrail's Current Report on Form 8-K, filed February 18, 1994.
PART III
Item 10.



Item 10. Directors and Executive Officers of the Registrant. - ------- --------------------------------------------------
Item 11.

Item 11. Executive Compensation. - ------- ----------------------
Item 12.

Item 12. Security Ownership of Certain Beneficial - ------- ---------------------------------------- Owners and Management. ---------------------
and
Item 13.

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 17, 1995, 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."
PART IV
Item 14.

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...................... 41 Consolidated Statements of Income for each of the three years in the period ended December 31, 1994.. 43 Consolidated Balance Sheets at December 31, 1994 and 1993 .......................................... 44 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1994..................... 45 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1994 ............................... 46 Notes to Consolidated Financial Statements.............. 47
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 I - 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.
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 Bylaws of the Registrant.
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, 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 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.
Management Compensation Plans and Contracts -------------------------------------------
10.4 Consolidated Rail Corporation Annual Profit Incentive Plan for 1991, filed as Exhibit 10.6 to Consolidated Rail Corporation's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference.
10.5 Consolidated Rail Corporation 1992 Annual Performance Achievement Reward Plan, filed as Exhibit 10.6 to Consolidated Rail Corporation's Annual Report on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference.
10.6 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.
10.7 Consolidated Rail Corporation 1994 Annual Performance Achievement Reward Plan for Officers.
10.8 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.
10.9 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.
10.10 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.
10.11 Employment Agreement between James A. Hagen and Consolidated Rail Corporation, dated as of April 3, 1989, filed as Exhibit 10.11 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 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.
10.13 Form of Continuation Agreement between Consolidated Rail Corporation and each of its officers other than James A. Hagen, dated as of January 15, 1990, filed as Exhibit 10.14 to Consolidated Rail Corporation's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference.
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 74 hereof, with respect to amendments to this Annual Report.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated December 31, 1994, filed in connection with Consolidated Rail Corporation's issuance of $29,738,000 of 8.45% 1994-A Pass-Through Trust Certificates Due 2014 pursuant to its current Registration Statement on Form S-3 (No. 33- 64670).
(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.
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 15, 1995 By /S/ James A. Hagen ------------------------ James A. Hagen Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 15th day of March, 1994, by the following persons on behalf of Conrail Inc. and in the capacities indicated.
Signature Title
/s/ James A. Hagen - --------------------------- Chairman and Chief Executive James A. Hagen 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)
/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 M. LeVan - --------------------------- Director David M. LeVan
/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
E-1 EXHIBIT INDEX
Exhibit No. - ----------
3.2 Bylaws of the Registrant
10.7 Consolidated Rail Corporation 1994 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, 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.7, 4.8, 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 10.8, 10.9, 10.10, 10.11, 10.12, 10.13 and 21 are incorporated herein by reference. Powers of attorney with respect to amendments to this Annual Report are contained on page 74.