UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-K405 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Dec. 31, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission file number 1-8339 NORFOLK SOUTHERN CORPORATION - ----------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Virginia 52-1188014 - ------------------------------------------------ ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Three Commercial Place, Norfolk, Virginia 23510-2191 - ------------------------------------------------ ------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (757) 629-2680 ------------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each Class on which registered ------------------- --------------------- Norfolk Southern Corporation Common Stock (Par Value $1.00) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K405 or any amendment to this Form 10-K405. (X) The aggregate market value of the voting stock held by nonaffiliates as of January 31, 2002: $8,716,403,555. The number of shares outstanding of each of the registrant's classes of common stock, as of January 31, 2002: 386,536,743 (excluding 21,169,125 shares held by registrant's consolidated subsidiaries). 2
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2002
( )
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-8339
NORFOLK SOUTHERN CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
52-1188014
(State or other jurisdiction of
(IRS Employer Identification No.)
incorporation or organization)
Three Commercial Place
Norfolk, Virginia
23510-2191
(Address of principal executive offices)
Zip Code
Registrant's telephone number, including area code
(757) 629-2680
No Change
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Name of each exchange
Norfolk Southern Corporation
on which registered
Common Stock (Par Value $1.00)
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all report required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)
The number of shares outstanding of each of the registrant's classes of common stock, as of January 31, 2003:
389,057,174 (excluding 21,169,125 shares held by registrant's consolidated subsidiaries).
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes (X) No ( )
The aggregate market value of the voting common equity held by nonaffiliates as of June 28, 2002 was $9,079,736,767 (based on the closing price as quoted on the New York Stock Exchange on that date).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement to be filed electronically pursuant to Regulation 14A not later than 120 days after the end of the fiscal year, are incorporated by reference in Part III.
3K1
TABLE OF CONTENTS
-----------------NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Page ---- Part I. 1. Business 4 2. Properties 4 3. Legal Proceedings 19 4. Submission of Matters to a Vote of Security Holders 19 Executive Officers of the Registrant 19 Part II. 5. Market for Registrant's Common Stock and Related Stockholder Matters 22 6. Selected Financial Data 23 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 7A. Quantitative and Qualitative Disclosures About Market Risk 48 8. Financial Statements and Supplementary Data 50 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 83 Part III. 10. Directors and Executive Officers of the Registrant 84 11. Executive Compensation 84 12. Security Ownership of Certain Beneficial Owners and Management 84 13. Certain Relationships and Related Transactions 84 Part IV. 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K 85 Index to Consolidated Financial Statement Schedule 85 Power of Attorney 91 Signatures 91 Exhibit Index 95 4
Page
Part I.
1. Business
K3
2. Properties
K3
3. Legal Proceedings
K12
4. Submission of Matters to a Vote of Security Holders
K12
Executive Officers of the Registrant
Part II.
5. Market for Registrant's Common Stock and Related Stockholders Matters
K14
6. Selected Financial Data
K15
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
K16
7A. Quantitative and Qualitative Disclosures About Market Risk
K35
8. Financial Statements and Supplementary Data
K36
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
K66
Part III.
10. Directors and Executive Officers of the Registrant
K66
11. Executive Compensation
K66
12. Security Ownership of Certain Beneficial Owners and Management
K66
13. Certain Relationships and Related Transactions
K69
14. Controls and Procedures
K69
Part IV.
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
K70
Index to Consolidated Financial Statement Schedule
Power of Attorney
K76
Signatures
K76
Certifications of CEO and CFO
K78
Exhibit Index
K81
K2
PART I------NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 1. Business.
- ------ --------and Item 2.Properties. - ------ ----------Properties.GENERAL - Norfolk Southern Corporation (Norfolk Southern) was incorporated on July 23, 1980, under the laws of the Commonwealth of Virginia. On June l, 1982, Norfolk Southern acquired control of two major operating railroads, Norfolk and Western Railway Company (NW) and Southern Railway Company (Southern) in accordance with an Agreement of Merger and Reorganization dated as of July 31, 1980, and with the approval of the transaction by the Interstate Commerce Commission (ICC) (now the Surface Transportation Board [STB]).
Effective Dec. 31, 1990, Norfolk Southern transferred all the common stock of NW to Southern, and Southern's name was changed to Norfolk Southern Railway Company (Norfolk Southern Railway). Effective Sept. 1, 1998, NW was merged with and into Norfolk Southern Railway. As of Dec. 31,
2001,2002, all the common stock of Norfolk Southern Railway and22.5 percent22.5% of its voting preferred stock (resulting in95.2 percent95.2% voting control) was owned directly by Norfolk Southern.Through a jointly owned entity, Norfolk Southern and CSX Corporation (CSX) own the stock of Conrail Inc., which owns the major freight railroad in the Northeast. Norfolk Southern has a 58% economic and 50% voting interest in the jointly owned entity. See also the discussion concerning operation of a portion of Conrail's rail assets, below.
On March 28, 1998, Norfolk Southern closed the sale of its motor carrier company, North American Van Lines, Inc. (NAVL) (see "Discontinued Operations"
on Page 38and Note17 on Page 79)17). NAVL's results are presented as "Discontinued operations" in the accompanying financial information.Norfolk Southern makes available free of charge through its website, www.nscorp.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.
Unless indicated otherwise, Norfolk Southern and its subsidiaries are referred to collectively as NS.
OPERATION OF A PORTION OF THE CONRAIL RAIL ASSETS - On June 1, 1999, Norfolk Southern and CSX, through their respective railroad subsidiaries, began operating separate portions of Conrail's rail routes and assets. Substantially all such assets are owned by two wholly owned subsidiaries of Consolidated Rail Corporation (CRC); one of those subsidiaries, Pennsylvania Lines LLC (PRR), has entered into
5various operating and leasing arrangements, more particularly described in Note 2,on Page 58,with Norfolk Southern Railway. Certain rail assets (Shared Assets Areas) still are owned by CRC, which operates them for joint and exclusive use by Norfolk Southern Railway and the rail subsidiary of CSX.Operation of the PRR routes and assets increased the size of the system over which Norfolk Southern Railway provides service by nearly 50% and afforded access to the New York metropolitan area, to
much of the Northeast and to most of the major East Coast ports north of Norfolk, Virginia. Also,
theleasing arrangements with PRR augmented Norfolk Southern Railway's locomotive, freight car and intermodal fleet.RAILROAD OPERATIONS - As of Dec. 31,
2001,2002, NS' railroads operated approximately 21,500 miles of road in the states of Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia,andWest Virginia, the District of Columbia and in the Province of Ontario, Canada.Of this total, about 12,000The milesare owned with the balanceoperatedunder lease or trackage rights; most of this total is main line track. In addition, its railroads operate almost 17,000 miles of passing, industrial, yard and side tracks.were as follows:K3
Mileage Operated as of Dec. 31, 2002
Passing
Track,
Miles of Road
Second and Other Main Track
Crossovers and Turnouts
Way and Yard Switching
Total
Owned
11,745
1,384
1,625
5,969
20,723
Operated under lease,
contract or trackage rights
9,813
3,441
891
3,647
17,792
Total
21,558
4,825
2,516
9,616
38,515
In addition to the lines leased from Conrail previously discussed, NS' railroads have major leased lines between Cincinnati, Ohio, and Chattanooga, Tennessee, and operate over trackage owned by North Carolina Railway Company (NCRR). The Cincinnati-Chattanooga lease, covering about 335 miles of road, expires in 2026, and is subject to an option to extend the lease for an additional 25 years, at terms to be agreed upon.
OperationsThe trackage rights overtheNCRR cover approximately330315 miles oftracks of NCRR, previouslyroad undera 100-year lease which expired on Dec. 31, 1994, are now under a trackage rights agreement. The term of thean agreementis 15 yearsthrough 2014 withNS' railroads havingthe right to renew for two additional 15-year periods.NS' railroads carry raw materials, intermediate products and finished goods primarily in the Southeast, East and Midwest, and via interchange with other rail carriers, to and from the rest of the United States and parts of Canada. They also transport overseas freight through several Atlantic and Gulf Coast ports. Atlantic ports served by NS include: Norfolk, Virginia; Morehead City, North Carolina; Charleston, South Carolina; Savannah and Brunswick, Georgia; Jacksonville, Florida; Baltimore, Maryland; Philadelphia, Pennsylvania/Camden, New Jersey; Wilmington, Delaware;
6and the Ports of New York/New Jersey. Gulf Coast ports served include Mobile, Alabama, and New Orleans, Louisiana.The lines of NS' railroads reach most of the larger industrial and trading centers of the Southeast, Northeast, Mid-Atlantic region and Midwest. Chicago, Norfolk, Detroit, Atlanta, Metropolitan New York City, Jacksonville, Kansas City (Missouri), Baltimore, Buffalo, Charleston, Cleveland, Columbus, Philadelphia, Pittsburgh, Toledo, Greensboro, Charlotte and Savannah are among the leading centers originating and terminating freight traffic on the system. In addition, haulage arrangements with connecting carriers allow NS' railroads to provide single-line service to and from additional markets, including haulage provided by Florida East Coast Railway Company to serve
southsouthern and eastern Florida, including the port cities of Miami, West Palm Beach and Fort Lauderdale; and haulage provided by The Kansas City Southern Railway Company to provide transcontinental intermodal service via a connection with the Burlington Northern and Santa Fe Railway Company. Service is provided to New England, including the Port of Boston, via haulage, trackage rights and interline arrangements with Canadian Pacific Railway Company and Guilford Transportation Industries. The system's lines also reach many individual industries, electric generating facilities, mines (in western Virginia, eastern Kentucky, southern and northern West Virginia and western Pennsylvania), distribution centers, transload facilities and other businesses located in smaller communities in its service area. The traffic corridors carrying the heaviest volumes of freight include those from the New York City area to Chicago (via Allentown and Pittsburgh); Chicago to Jacksonville (via Cincinnati, Chattanooga and Atlanta); Appalachian coal fields of Virginia, West Virginia and Kentucky, to Norfolk and Sandusky, Ohio;BuffaloCleveland toChicago andKansas City; andMemphisKnoxville to Chattanooga. Chicago, Memphis, Sidney/Salem, New Orleans, Kansas City, Buffalo, St. Louis and Meridian are major gateways for interterritorial system traffic.TRIPLE CROWN OPERATIONSTriple Crown Operations - Until April 1993, NS' intermodal subsidiary, Triple Crown Services, Inc. (TCS), offered intermodal service using
RoadRailer (Registered Trademark hereinafter abbreviated RT)RoadRailer® equipment and domestic containers.RoadRailer(RT)RoadRailer® units are enclosed vans that can be pulled over highways in tractor-trailer configuration and over the rails by locomotives. On April 1, 1993, the business, name and operations of TCS were transferred to Triple Crown Services Company (TCSC), a partnership in which subsidiaries of NS and Conrail are equal partners.RoadRailer(RT) equipment owned or leased by TCS (which was renamed TCS Leasing, Inc.) is operated by TCSC.From April 1, 1993, to June 1, 1999, the revenues of TCSC were not consolidated with the results of NS; however, effective June 1, 1999, NS gained control of TCSC and, therefore, now includes TCSC's results in itsK4
consolidated financial statements. TCSC offers door-to-door intermodal service using
RoadRailer(RT)RoadRailer® equipment in major traffic corridors, including those between the Midwest and the Northeast, the Midwest and the Southeast and the Midwest and Texas/Mexico.7
RAILWAY OPERATING REVENUES - NS' total railway operating revenues were $6.2 billion in 2001. Revenue, shipments and revenue yield by principal railway operating revenue sources for the past five years are set forth in the following table.Year Ended December 31, Principal Sources of -------------------------------------------------------- Railway Operating Revenues 2001 2000 1999 1998 1997 - -------------------- ---- ---- ---- ---- ---- (Revenues in millions, shipments in thousands, revenue yield in dollars per shipment)COAL Revenues $ 1,521 $ 1,435 $ 1,322 $ 1,252 $ 1,301 % of total revenues 25% 23% 25% 29% 31% Shipments 1,695 1,687 1,519 1,310 1,324 % of total shipments 26% 25% 25% 27% 28% Revenue Yield $ 897 $ 850 $ 870 $ 955 $ 983 AUTOMOTIVE Revenues $ 885 $ 921 $ 746 $ 577 $ 492 % of total revenues 14% 15% 14% 13% 11% Shipments 622 692 611 487 361 % of total shipments 9% 10% 10% 10% 7% Revenue Yield $ 1,423 $ 1,331 $ 1,220 $ 1,186 $ 1,364 CHEMICALS Revenues $ 752 $ 756 $ 641 $ 492 $ 504 % of total revenues 12% 13% 12% 12% 12% Shipments 432 453 394 315 316 % of total shipments 6% 6% 7% 7% 7% Revenue Yield $ 1,742 $ 1,668 $ 1,627 $ 1,559 $ 1,595 METALS/CONSTRUCTION Revenues $ 674 $ 689 $ 567 $ 375 $ 369 % of total revenues 11% 11% 11% 9% 9% Shipments 703 757 587 372 374 % of total shipments 11% 11% 10% 8% 8% Revenue Yield $ 959 $ 911 $ 965 $ 1,008 $ 987 PAPER/CLAY/FOREST Revenues $ 612 $ 630 $ 578 $ 535 $ 539 % of total revenues 10% 10% 11% 13% 13% Shipments 450 491 465 445 457 % of total shipments 7% 7% 8% 9% 10% Revenue Yield $ 1,357 $ 1,285 $ 1,243 $ 1,202 $ 1,178 AGR./CONSUMER PRODUCTS/GOVT. Revenues $ 603 $ 609 $ 539 $ 468 $ 476 % of total revenues 10% 10% 11% 11% 11% Shipments 509 525 489 441 455 % of total shipments 8% 8% 8% 9% 9% Revenue Yield $ 1,185 $ 1,160 $ 1,103 $ 1,063 $ 1,046 8 Year Ended December 31, Principal Sources of -------------------------------------------------------- Railway Operating Revenues 2001 2000 1999 1998 1997 - -------------------- ---- ---- ---- ---- ---- (Revenues in millions, shipments in thousands, revenue yield in dollars per shipment) INTERMODAL (Trailers, Containers and RoadRailers) Revenues $ 1,123 $ 1,119 $ 849 $ 555 $ 568 % of total revenues 18% 18% 16% 13% 13% Shipments 2,214 2,242 1,896 1,443 1,472 % of total shipments 33% 33% 32% 30% 31% Revenue Yield $ 507 $ 499 $ 448 $ 385 $ 386 Total Railway Operating Revenues $ 6,170 $ 6,159 $ 5,242 $ 4,254 $ 4,249 Total Railway Shipments 6,625 6,847 5,961 4,813 4,759 Railway Revenue Yield $ 931 $ 900 $ 879 $ 884 $ 893The following table sets forth certain statistics relating to NS railroads' operations for the past 5 years, including operations in the Northern Region that commenced June 1, 1999:
Rail Operating Statistics
Year Ended Dec. 31,
2002
2001
2000
1999
1998
Revenue ton miles (billions)
179
182
197
167
135
Freight train miles traveled (millions)
72.6
70.0
74.4
61.5
53.0
Revenue per ton mile
$0.0350
$0.0339
$0.0312
$0.0315
$0.0316
Revenue ton miles per
man-hour worked
3,067
3,023
2,888
2,577
2,659
Percentage ratio of railway operating
expenses to railway operating revenues
81.5%
83.7%
89.7%
86.3%
75.3%
RAILWAY OPERATING REVENUES - NS' total railway operating revenues were $6.3 billion in 2002. Revenue, shipments and revenue yield by principal railway operating revenue sources for the past five years are set forth in the following table.
Principal Sources of Railway Operating Revenues
Year Ended Dec. 31,
2002
2001
2000
1999
1998
(Revenues in millions, shipments in thousands, revenue yield in dollars per shipment)
COAL
Revenues
$
1,441
$
1,521
$
1,435
$
1,322
$
1,252
% of total revenues
23%
25%
23%
25%
29%
Shipments
1,610
1,695
1,687
1,519
1,310
% of total shipments
24%
26%
25%
25%
27%
Revenue Yield
$
895
$
897
$
850
$
870
$
955
AUTOMOTIVE
Revenues
$
961
$
885
$
921
$
746
$
577
% of total revenues
15%
14%
15%
14%
13%
Shipments
662
622
692
611
487
% of total shipments
10%
9%
10%
10%
10%
Revenue Yield
$
1,450
$
1,423
$
1,331
$
1,220
$
1,186
CHEMICALS
Revenues
$
769
$
752
$
756
$
641
$
492
% of total revenues
12%
12%
13%
12%
12%
Shipments
434
432
453
394
315
% of total shipments
6%
6%
6%
7%
7%
Revenue Yield
$
1,773
$
1,742
$
1,668
$
1,627
$
1,559
K5
Principal Sources of Railway Operating Revenues (continued)
Year Ended Dec. 31,
2002
2001
2000
1999
1998
(Revenues in millions, shipments in thousands, revenue yield in dollars per shipment)
METALS/CONSTRUCTION
Revenues
$
692
$
674
$
689
$
567
$
375
% of total revenues
11%
11%
11%
11%
9%
Shipments
716
703
757
587
372
% of total shipments
11%
11%
11%
10%
8%
Revenue Yield
$
966
$
959
$
911
$
965
$
1,008
AGR./CONSUMER
PRODUCTS/GOVT.
Revenues
$
623
$
603
$
609
$
539
$
468
% of total revenues
10%
10%
10%
11%
11%
Shipments
507
509
525
489
441
% of total shipments
8%
8%
8%
8%
9%
Revenue Yield
$
1,228
$
1,185
$
1,160
$
1,103
$
1,063
PAPER/CLAY/FOREST
Revenues
$
603
$
612
$
630
$
578
$
535
% of total revenues
10%
10%
10%
11%
13%
Shipments
438
450
491
465
445
% of total shipments
6%
7%
7%
8%
9%
Revenue Yield
$
1,378
$
1,357
$
1,285
$
1,243
$
1,202
INTERMODAL
Revenues
$
1,181
$
1,123
$
1,119
$
849
$
555
% of total revenues
19%
18%
18%
16%
13%
Shipments
2,354
2,214
2,242
1,896
1,443
% of total shipments
35%
33%
33%
32%
30%
Revenue Yield
$
502
$
507
$
499
$
448
$
385
TOTALS
Railway Operating Revenues
$
6,270
$
6,170
$
6,159
$
5,242
$
4,254
Railway Shipments
6,721
6,625
6,847
5,961
1
4,813
Railway Revenue Yield
$
933
$
931
$
900
$
879
$
884
COAL TRAFFIC - Coal, coke and iron ore -- most of which is bituminous coal -- is NS' railroads' largest commodity group as measured by revenues. The railroads
originated 155 million tons of coal, coke and iron ore in 2001 andhandled a total of178170.4 milliontons.tons in 2002, most of which originated on NS' lines in West Virginia, Virginia, Pennsylvania and Kentucky. Revenues from coal, coke and iron ore accounted for about25 percent23% of NS' total railway operating revenues in2001. 9 The following table shows total coal,2002.Coal, coke and iron ore tonnage
originated on line, received from connections and handledby market for the past fiveyears:
Tons of Coal, Coke and Iron Ore (Millions) -----------------------------------------2001 2000 1999 1998 1997 ---- ---- ---- ---- ----Originated 155 156 138 119 119 Received 23 19 20 15 15 ---- ---- ---- ---- ---- Handled 178 175 158 134 134 ==== ==== ==== ==== ====
Of the 155 million tons of coal, coke and iron ore originated at ports or on lines operated by NS' railroadsyears are set forth in2001, the approximate breakdown by origin state was as follows:Origin State Millions of Tons ------------ ----------------West Virginia 49 Virginia 32 Pennsylvania 26 Kentucky 24 Ohio 8 Indiana 7 Alabama 4 Illinois 4 Other 1 --- 155 ===Ofthe178 million tons handled, NS moved approximately 14 million tons for export, primarily through NS' pier facilities at Norfolk (Lamberts Point), Virginia; 20 million tons to domestic and Canadian steel industries; 133 million tons of steam coal to electric utilities; and 11 million tons to other industrial and miscellaneous users. 10following table.K6
Coal, Coke and Iron Ore Tonnage by Market
Year Ended December 31,
2002
2001
2000
1999
1998
(tons in thousands)
Utility
127,747
132,325
119,284
107,381
83,225
Export
11,342
13,872
19,845
18,373
24,453
Steel
21,578
20,457
25,003
21,399
18,236
Industrial
9,733
11,377
10,781
10,348
8,382
170,400
178,031
174,913
157,501
134,296
Total coal handled through all system ports in
20012002 was3732 million tons. Of this total,1410 million tons (including coastwise traffic) moved through Lamberts Point, Virginia, 3 million tons moved through the Baltimore Terminal,1011 million tons moved to various docks on the Ohio River, and108 million tons moved to various Lake Erie ports. Other than coal for export, virtually all coal handled by NS' railroads was terminated in statessituatedeast of the Mississippi River.The quantities of NS export coal handled through Lamberts Point for the past five years were as follows:
Export Coal through Lamberts Point (Millions of tons) ----------------------------------2001 2000 1999 1998 1997 ---- ---- ---- ---- ----12 16 17 24 28See the discussion of coal traffic, by type of coal, in Part II, Item 7, "Management's Discussion and Analysis."
MERCHANDISE TRAFFICGENERAL Merchandise Traffic -
TheGeneral merchandise trafficgroup consists of intermodal and general merchandise, whichiscomprisedcomposed of five major commodity groupings: automotive; chemicals; metals and construction; agriculture, consumer products and government; and paper, clay and forestproducts;products. The automotive group includes finished vehicles for BMW, Daimler Chrysler, Ford Motor Company, General Motors, Honda, Isuzu, Jaguar, Land Rover, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru, Suzuki, Toyota and Volkswagen, and auto parts for Ford Motor Company, General Motors, Mercedes-Benz and Toyota. The chemicals group includes sulfur and related chemicals, petroleum products, chlorine and bleaching compounds, plastics, rubber, industrial chemicals, chemical wastes and municipal wastes. The metals andconstruction;constructiongroup includes steel, aluminum products, machinery, scrap metals, cement, aggregates, bricks and minerals. The agriculture, consumer products and
government. Totalgovernment group includes soybeans, wheat, corn, fertilizer, animal and poultry feed, food oils, flour, beverages, canned goods, sweeteners, consumer products and items for the military. The paper, clay and forest products group includes lumber and wood products, pulpboard and paper products, woodfibers, woodpulp, scrap paper and clay. General merchandiserevenuescarloads handled in20012002 were$4.6 billion, a 2 percent decrease,2.76 million, compared with2000. Merchandise carloads and intermodal units2.72 million handled in 2001,were 4.93 million, compared with 5.16 million handled in 2000, a decreasean increase of4 percent. Revenues and carloads in all general merchandise groups declined, a result of the weak economy. Intermodal revenues were up $4 million, despite a 1 percent decline in traffic volume.2%.In
2001, 1562002, 134 million tons of general merchandise freight, or approximately68 percent67% of total general merchandise tonnage handled by NS, originated online. The balance of general merchandise traffic was received from connecting carriersusuallyat interterritorial gateways. The principal interchange points for NS-received traffic included Chicago, Memphis, New Orleans, Cincinnati, Kansas City, Detroit, Hagerstown, St. Louis/East St. Louis and Louisville.11See the discussion of general merchandise rail traffic by commodity group in Part II, Item 7, "Management's Discussion and Analysis."
INTERMODAL TRAFFIC - The intermodal
railmarket consists of shipments moving in trailers, domestic and international containers, and Roadrailer® equipment. These shipments are handled on behalfof intermodal marketing companies, international steamship lines, truckers and other shippers. Intermodal units handled in 2002 were 2.35 million, compared with 2.21 million handled in 2001,
an increase of 6%.
See the discussion of intermodal traffic in Part II, Item 7, "Management's Discussion and Analysis."
RAIL OPERATING STATISTICS - The following table sets forth certain statistics relating to NS' railroads' operations for the past five years, including operations in the Northern Region that commenced June 1, 1999:Year Ended December 31, -------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ----Revenue ton miles (billions) 182 197 167 135 137 Freight train miles traveled (millions) 70.0 74.4 61.5 53.0 49.7 Revenue per ton mile $0.0339 $0.0312 $0.0315 $0.0316 $0.0310 Revenue tons per train 2,604 2,653 2,710 2,539 2,755 Revenue ton miles per man-hour worked 3,023 2,888 2,577 2,659 2,930 Percentage ratio of railway operating expenses to railway operating revenues 83.7% 89.7% 86.3% 75.3% 71.5%K7
FREIGHT RATES - In
2001,2002, NS' railroads continued their reliance on private contracts and exempt price quotes as their predominant pricing mechanisms. Thus, a major portion of NS' railroads' freight business is not currently economically regulated by the government. In general, market forces have been substituted for government regulation and now are the primary determinant of rail service prices. However, in 2002 there were significant coal movements moving under common carrier (tariff) rates which had previously moved under rates contained in transportation contracts. Beginning Jan. 1, 2002, coal moving to Duke Energy's (Duke) Belew's Creek, Allen, Buck and Dan River generating stations moved under common carrier rates and beginning April 1, 2002, coal moving to Carolina Power and Light's (CP&L) Hyco and Mayo plants moved under common carrier rates. Duke and CP&L have challenged the reasonableness of these common carrier rates in proceedings currently pending before the Surface Transportation Board.In
2001,2002, NS' railroads were found by the STB not to be "revenue adequate" based on results for the year2000.2001. A railroad is "revenue adequate" under the applicable law when its return on net investment exceeds the rail industry's composite cost of capital. This determination is made pursuant to statutory requirement and does not adversely impact NS' liquidity or capital resources.PASSENGER OPERATIONS - Regularly scheduled passenger trains are operated by Amtrak on NS' lines between Alexandria and New Orleans, and between Greensboro and Selma, North Carolina. Commuter trains are operated on the NS line between Manassas and Alexandria
under contractin accordance with contracts with two transportation commissions of the Commonwealth of Virginia. NS also leases the Chicago to Manhattan, Illinois, line to the Commuter Rail Division of the Regional Transportation Authority of Northeast Illinois. Since June 1, 1999, Norfolk Southern Railway has operated former Conrail lines on which Amtrak conducts regularly12scheduled passenger operations between Chicago, Illinois, and Detroit, Michigan, and between Chicago and Harrisburg, Pennsylvania.Also since June 1, 1999, through its operation of PRR's routes, Norfolk Southern Railway has been providing freight service over former Conrail lines with significant ongoing Amtrak and commuter passenger operations, and is conducting freight operations over some trackage owned by Amtrak or by New Jersey Transit, the Southeastern Pennsylvania Transportation Authority, Metro-North Commuter Railway Company and Maryland DOT. Finally, passenger operations are conducted either by Amtrak or by the commuter agencies over trackage owned by Pennsylvania Lines LLC, or by Conrail in the Shared Assets Areas.
NONCARRIER OPERATIONS - NS' noncarrier subsidiaries engage principally in
telecommunications;the acquisition, leasing and management of coal, oil, gas and minerals; the development of commercial real estate; telecommunications; and the leasing or sale of rail property and equipment. In2001,2002, no such noncarrier subsidiary or industry segment grouping of noncarrier subsidiaries met the requirements for a reportable business segment set forth in Statement of Financial Accounting Standards No. 131.13RAILWAY
PROPERTY:
EQUIPMENTPROPERTYThe NS railroad system extends across 22 states and portions of Canada. The railroad infrastructure makes the company very capital intensive with total property of approximately $11 billion and investment in Conrail of approximately $6 billion.
K8
Capital Expenditures - Capital expenditures for road, equipment and other property for the past five years were as follows (including capitalized leases):
Capital Expenditures
2002
2001
2000
1999
1998
($ in millions)
Road
$
519
$
505
$
557
$
559
$
612
Equipment
174
233
146
349
442
Other property
2
8
28
4
6
Total
$
695
$
746
$
731
$
912
$
1,060
Capital spending and maintenance programs are and have been designed to assure the ability to provide safe, efficient and reliable transportation services. For 2003, NS has budgeted $798 million of capital spending. See the discussion following "Cash used for investing activities," in Part II, Item 7, "Management's Discussion and Analysis."
Equipment -
As of Dec. 31, 2001, NS owned or leased the following units of equipment:Number of Units ---------------------------- Capacity Owned* Leased** Total of Equipment ----- ------ ----- ------------Type of Equipment - ----------------- Locomotives: (Horsepower) Multiple purpose 2,260 1,048 3,308 11,031,600 Switching 106 113 219 319,800 Auxiliary units 59 18 77 0 ------ ------ ------- ---------- Total locomotives 2,425 1,179 3,604 11,351,400 ====== ====== ======= ========== Freight Cars: (Tons) Hopper 19,868 4,987 24,855 2,613,619 Box 17,629 4,666 22,295 1,735,275 Covered Hopper 10,439 3,035 13,474 1,468,158 Gondola 27,998 10,362 38,360 4,107,632 Flat 3,711 1,495 5,206 379,822 Caboose 174 77 251 0 Other 3,392 0 3,392 173,580 ------ ------ ------- ---------- Total freight cars 83,211 24,622 107,833 10,478,086 ====== ====== ======= ========== Other: Work equipment 4,971 1,642 6,613 Vehicles 3,391 1,306 4,697 Highway trailers and containers 403 8,053 8,456 RoadRailers(RT) 5,577 0 5,577 Miscellaneous 1,441 9,698 11,139 ------ ------ ------- Total other 15,783 20,699 36,482 ====== ====== =======* Includes equipment leased to outside parties and equipment subject to equipment trusts, conditional sale agreements and capitalized leases. ** Includes 982 locomotives, 17,640 freight cars and 2,957 units of other equipment leased from PRR. 14As of Dec. 31,
The following table indicates the number and year built for locomotives and freight cars owned at Dec. 31, 2001:Year Built ---------------------------------------------------------------- 1991- 1985- 1984 & 2001 2000 1999 1998 1997 1996 1990 Before Total ---- ---- ---- ---- ---- ---- ---- ------ -----Locomotives: Number of units 110 60 147 119 120 407 381 1,081 2,425 Percent of fleet 4% 2% 6% 5% 5% 17% 16% 45% 100% Freight cars: Number of units -- 106 503 1,567 1,076 6,344 5,132 68,483 83,211 Percent of fleet -- --% 1% 2% 1% 8% 6% 82% 100%2001,2002, NS owned or leased the following units of equipment:
Number of Units
Capacity
Owned*
Leased**
Total
of Equipment
Locomotives:
(Horsepower)
Multiple purpose
2,259
1,001
3,260
10,959,200
Switching
105
102
207
302,800
Auxiliary units
59
18
77
0
Total locomotives
2,423
1,121
3,544
11,262,000
Freight cars:
(Tons)
Hopper
18,568
5,036
23,604
2,486,500
Box
17,184
4,438
21,622
1,687,530
Covered hopper
9,956
3,097
13,053
1,423,216
Gondola
27,619
11,077
38,696
4,148,610
Flat
3,420
1,485
4,905
363,566
Caboose
169
57
226
0
Other
3,375
0
3,375
172,247
Total freight cars
80,291
25,190
105,481
10,281,669
Other:
Work equipment
4,619
1,584
6,203
Vehicles
3,529
1,063
4,592
Highway trailers and
containers
881
7,397
8,278
RoadRailer®
5,570
--
5,570
Miscellaneous
1,431
10,185
11,616
Total other
16,030
20,229
36,259
* Includes equipment leased to outside parties and equipment subject to equipment trusts, conditional sale agreements and capitalized leases.
** Includes locomotives, freight cars and units of other equipment leased from PRR.
K9
The following table indicates the number and year built for locomotives and freight cars owned at Dec. 31, 2002.
Year Built
1993-
1988-
1987 &
2002
2001
2000
1999
1998
1997
1992
Before
Total
Locomotives:
No. of units
--
160
60
147
119
420
257
1,260
2,423
% of fleet
--%
7%
2%
6%
5%
17%
11%
52%
100%
Freight cars:
No. of units
--
--
112
515
1,566
6,048
6,098
65,952
80,291
% of fleet
--%
--%
--%
1%
2%
7%
8%
82%
100%
As of Dec. 31, 2002, the average age of the locomotive fleet was
15.716.1 years. During2001, 1262002, 52 locomotives, the average age of which was22.428.2 years, were retired. The average age of the freight car fleet at Dec. 31,2001,2002, was25.425.9 years. During2001, 4,4072002, 3,013 freight cars were retired.Since 1988, about 29,000 coal cars have been rebodied. As a result, the remaining serviceability of the freight car fleet is greater than may be inferred from the high percentage of freight cars built in earlier years.
Annual Average Bad Order Ratio -----------------------------------2001 2000 1999 1998 1997 ---- ---- ---- ---- ----Freight Cars (excluding cabooses): NS Rail 6.9% 5.7% 3.7% 4.1% 4.6% Locomotives: NS Rail 5.8% 5.5% 5.3% 4.3% 5.0%15
Annual Average Bad Order Ratio
2002
2001
2000
1999
1998
Freight cars (excluding cabooses):
NS Rail
8.1%
6.9%
5.7%
3.7%
4.1%
Locomotives:
NS Rail
6.3%
5.8%
5.5%
5.3%
4.3%
Ongoing freight car and locomotive maintenance programs are intended to ensure the highest standards of safety, reliability, customer satisfaction and equipment marketability. In past years, the freight car bad order ratio reflected the storage of certain types of cars that were not in high demand. The ratio
had declined more recently as a result of a disposition program for underutilized, unserviceable and overage revenue cars. The ratiorose in 2000, 2001 and20012002 as a result of decreased maintenance activity. A review began in 2002 to address several hundred unserviceable, overage and commercially obsolete freight cars, which will likely result in their disposition in 2003. The locomotive bad order ratioalsoincludes units out of service forroutine maintenancerequired inspections every 92 days andmodifications.program work such as overhauls. The increase in the locomotive bad order ratio in 1999 was primarily due to the maintenance requirements of units being rented to meet short-term needs and to weather-related failures. The ratioremained highrose slightly in 2000 as maintenance activities were curtailed in response to a slowing economy. Thehigherelevated ratiointhrough 2001 and 2002 reflected units out of service related to the resumption of maintenance and modification activities.TRACKAGETrack Maintenance -
AllOf the approximately 38,500 total miles of track operated, NS had responsibility for maintaining about 31,000 miles of track with the remainder being operated under trackageis standard gauge, and the rail in approximately 97 percentrights. Over 75% of the main line trackage (including first, second, third and branch main tracks, all excluding trackage rights)rangeshas rail ranging from100131 to 155 pounds per yard with the standard installation currently at 141 pounds per yard.OfApproximately 40% of NS lines carried 20 million or more gross tons per track mile.K10
The following table summarizes several measurements regarding NS' track roadway additions and replacements during the
approximately 31,300 miles of track maintained as of Dec. 31, 2001, about 21,200 were laid with welded rail.
The density of traffic on running tracks (including passing tracks but excluding trackage rights) during 2001 was as follows:Gross tons of freight carried per track mile Track miles of Percent (Millions) running tracks of total --------------- -------------- --------0-4 6,044 27 5-19 7,769 35 20 and over 8,629 38 ------ --- 22,442 100 ====== ===16
The following table summarizes certain information about NS' track roadway additions and replacements during the past five years:2001 2000 1999 1998 1997 ---- ---- ---- ---- ----Track miles of rail installed 254 390 403 429 451 Miles of track surfaced 3,836 3,687 5,087 4,715 4,703 New crossties installed (millions) 1.5 1.5 2.3 2.0 2.2MICROWAVE SYSTEMpast five years:
2002
2001
2000
1999
1998
Track miles of rail installed
235
254
390
403
429
Miles of track surfaced
5,270
3,836
3,687
5,087
4,715
New crossties installed (millions)
2.8
1.5
1.5
2.3
2.0
Microwave System - The NS microwave system, consisting of approximately 7,282 radio route miles, 442 active stations and 4 passive repeater stations, provides communications between most operating locations. The microwave system is used primarily for voice communications, VHF radio control circuits, data and facsimile transmissions, traffic control operations and AEI data transmissions.
TRAFFIC CONTROLTraffic Control - Of a total of 21,500 route miles operated by NS, excluding trackage rights over foreign lines,
11,48611,511 miles are signalized, including8,5218,546 miles of centralized traffic control (CTC) and 2,965 miles of automatic block signals. Of the8,5218,546 miles of CTC,1,8701,895 miles are controlled by data radio originating at147148 base station radio sites.COMPUTERSComputers -
Data processing facilities connectA computer network consisting of a centralized data center in Atlanta, Georgia, and various distributed computers throughout the company connects the yards, terminals, transportation offices, rolling stock repair points, sales offices and other key systemlocations to the central computer complex in Atlanta, Georgia.locations. Operating and traffic data arecompiledprocessed and stored to provide customers with information on their shipments throughout the system.Data processing facilities are capable of providingComputer systems provide current information on the location of every train and each car on line, as well as related waybill and other train and car movement data.Additionally, these facilities afford substantial capacity for, andIn addition, the computer systems are utilized to assist management in the performance of awidevariety of functions and services including payroll, car and revenue accounting, billing, material management activities and controls, and special studies.OTHEROther - The railroads have extensive facilities for support of operations, including freight depots, car construction shops, maintenance shops, office buildings, and signals and communications facilities.
ENCUMBRANCESEncumbrances - Certain railroad equipment is subject to the prior lien of equipment financing obligations amounting to approximately
$895$864 million as of Dec. 31,2001,2002, and$816$895 million at Dec. 31,2000. 17 CAPITAL EXPENDITURES - Capital expenditures for road, equipment and other property for the past five years were as follows (including capitalized leases):
Capital Expenditures -------------------------------------------2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (In millions of dollars)Road $ 505 $ 557 $ 559 $ 612 $ 599 Equipment 233 146 349 442 306 Other property 8 28 4 6 24 ------ ------ ------ ------ ------ Total $ 746 $ 731 $ 912 $ 1,060 $ 929 ====== ====== ====== ====== ======Capital spending and maintenance programs are and have been designed to assure the ability to provide safe, efficient and reliable transportation services. For 2002, NS has budgeted $705 million of capital spending. See the discussion following "Cash used for investing activities," on Page 40 in Part II, Item 7, "Management's Discussion and Analysis." ENVIRONMENTAL MATTERS2001.Environmental Matters - Compliance with federal, state and local laws and regulations relating to the protection of the environment is a principal NS goal. To date, such compliance has not affected materially NS' capital additions, earnings, liquidity or competitive position. See the discussion of "Environmental Matters"
on Page 45in Part II, Item 7, "Management's Discussion and Analysis," and in Note 18 to the Consolidated FinancialStatements on Page 79.Statements.EMPLOYEES - NS employed an average of
30,89428,970 employees in2001,2002, compared with an average of33,73830,894 in2000.2001. The decrease reflects NS' continuous drive to operate more efficiently, accompanied by railroad retirement legislation late in 2001, which lowered theeffects of the earlyretirementand work-force reduction programs in 2000.age for rail employees. The approximate average cost per employee during20012002 was$52,000$54,000 in wages and$21,000$24,000 in employee benefits.Approximately
85 percent85% of NS' railroad employees are covered by collective bargaining agreements with 15 different labor unions. See the discussion of "Labor Agreements"on Page 43in Part II, Item 7, "Management's Discussion and Analysis."18GOVERNMENT REGULATION - In addition to environmental, safety, securities and other regulations generally applicable to all businesses, NS' railroads are subject to regulation by the STB, which succeeded the ICC on Jan. 1, 1996. The STB has jurisdiction over some rates, routes, conditions of service and the extension or abandonment of rail lines. The STB also has jurisdiction over the consolidation, merger or acquisition of control of and by rail common carriers. The Department of Transportation regulates certain track and mechanical equipment standards.
The relaxation of economic regulation of railroads, begun over two decades ago by the ICC under the Staggers Rail Act of 1980, has continued under the STB. Significant exemptions are TOFC/COFC (i.e., "piggyback")
K11
business, rail boxcar traffic, lumber, manufactured steel, automobiles and certain bulk commodities such as sand, gravel, pulpwood and wood chips for paper manufacturing. Transportation contracts on regulated shipments effectively remove those shipments from regulation as well. About
75 percent80% of NS' freight revenues come from either exempt traffic or traffic moving under transportation contracts.Efforts may be made in
20022003 to re-subject the rail industry to unwarranted federal economic regulation. The Staggers Rail Act of 1980, which substantially reduced such regulation, encouraged and enabled rail carriers to innovate and to compete for business, thereby contributing to the economic health of the nation and to the revitalization of the industry. Accordingly, NS will oppose efforts to reimpose unwarranted economic regulation.COMPETITION - There is continuing strong competition among rail, water and highway carriers. Price is usually only one factor of importance as shippers and receivers choose a transport mode and specific hauling company. Inventory carrying costs, service reliability, ease of handling and the desire to avoid loss and damage during transit are also important considerations, especially for higher-valued finished goods, machinery and consumer products. Even for raw materials,
semi-finishedsemifinished goods and work-in-process, users are increasingly sensitive to transport arrangementswhichthat minimize problems at successive production stages.NS' primary rail competitor is the CSX system; both operate throughout much of the same territory. Other railroads also operate in parts of the territory. NS also competes with motor carriers, water carriers and with shippers who have the additional option of handling their own goods in private carriage.
Certain
cooperativemarketing strategies between railroads and between railroads and motor carriers enable carriers to compete more effectively in specific markets.19Item
3.3. LegalProceedings. - ------ -----------------Proceedings.None.
Item
4.4. Submission of Matters to a Vote of SecurityHolders. - ------ ---------------------------------------------------Holders.There were no matters submitted to a vote of security holders during the fourth quarter of
2001.2002.Executive Officers of the
Registrant. - ------------------------------------Registrant.Norfolk Southern's executive officers generally are elected and designated annually by the Board of Directors at its first meeting held after the annual meeting of stockholders, and they hold office until their successors are elected. Executive officers also may be elected and designated throughout the year as the Board of Directors considers appropriate. There are no family relationships among the officers, 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 February 1,
2002,2003, relating to the executive officers.Business Experience During Past Name, Age, Present Position Five Years - --------------------------- ------------------------------- David R. Goode, 61, Present position since September Chairman, President and 1992. Chief Executive Officer L. I. Prillaman, 58, Present position since August 1998; Vice Chairman and prior thereto was Executive Vice Chief Marketing Officer President-Marketing Stephen C. Tobias, 57, Present position since August 1998; Vice Chairman and prior thereto was Executive Vice Chief Operating Officer President-Operations. Henry C. Wolf, 59, Present position since August 1998; Vice Chairman and prior thereto was Executive Vice Chief Financial Officer President-Finance. John F. Corcoran, 61, Present position since August 1997; Senior Vice President- prior thereto was Vice President- Public Affairs Public Affairs. 20 Business Experience During Past Name, Age, Present Position Five Years - --------------------------- -------------------------------- John W. Fox, Jr., 54, Present position since April 1, 2001. Senior Vice President- Served as Senior Vice President - Coal Services Coal Marketing from December 1999 to April 1, 2001, and prior thereto was Vice President - Coal Marketing. James A. Hixon, 48, Present position since February 1, Senior Vice President- 2001. Served as Senior Vice Administration President-Employee Relations from November 1999 to February 1, 2001, and prior thereto was Vice President-Taxation. Henry D. Light, 61,K12
Name, Age, Present Position
Business Experience During Past Five Years
David R. Goode, 62,
Present position since September 1992.
Chairman, President and
Chief Executive Officer
L. I. Prillaman, 59,
Present position since August 1998; prior thereto was
Vice Chairman and
Executive Vice President Marketing.
Chief Marketing Officer
Stephen C. Tobias, 58,
Present position since August 1998; prior thereto was
Vice Chairman and
Executive Vice President Operations.
Chief Operating Officer
Henry C. Wolf, 60,
Present position since August 1998; prior thereto was
Vice Chairman and
Executive Vice President Finance.
Chief Financial Officer
John F. Corcoran, 62,
Present position since August 1997; prior thereto was
Senior Vice President
Vice President Public Affairs
Public Affairs
John W. Fox, Jr., 55,
Present position since April 2001. Served as Senior Vice
Senior Vice President
President Coal Marketing from December 1999 to April 1,
Coal Services
2001, and prior thereto was Vice President Coal Marketing.
James A. Hixon, 49,
Present position since February 2001. Served as Senior Vice
Senior Vice President
President Employee Relations from November 1999 to
Administration
February 2001, and prior thereto was Vice President
Taxation.
Henry D. Light, 62,
Present position since January
22, Senior Vice President-Law 2002. Served as Vice President- Law from April 2000 to January 22, 2002, and prior thereto was General Counsel-Operations. James W. McClellan, 62, Present position since August 1998; Senior Vice President- prior thereto was Vice President- Planning Strategic Planning. Kathryn B. McQuade, 45, Present position since April 2000. Senior Vice President- Served as Vice President-Financial Financial Planning Planning from August 1998 to April 2000, and prior thereto was Vice President-Internal Audit. Charles W. Moorman, 50, Present position since October 1999; President-Thoroughbred prior thereto was Vice President- Technology and Information Technology. Telecommunications, Inc. John P. Rathbone, 50, Present position since April 2000; Senior Vice President prior thereto was Vice President and Controller and Controller. Stephen P. Renken, 58, Present position since February 1, Senior Vice President- 2001. Served as Vice President- Chief Information Officer Information Technology from September 1999 to February 1, 2001, Assistant Vice President-Program Management from December 1997 to September 1999, and prior thereto was a consultant to NS. 21 Business Experience During Past Name, Age, Present Position Five Years - --------------------------- ------------------------------- John M. Samuels, 58, Present position since April 2000; Senior Vice President- Served as Vice President-Operations Operations Planning and Planning and Budget from January Support 1998 to April 2000; and prior thereto was Vice President- Operating Assets of Conrail. Donald W. Seale, 49, Present position since December 1999; Senior Vice President- prior thereto was Vice President- Merchandise Marketing Merchandise Marketing.22, 2002. Served as ViceSenior Vice President Law
President Law from April 2000 to January 22, 2002, and
prior thereto General Counsel Operations.
James W. McClellan, 63,
Present position since August 1998; prior thereto was Vice
Senior Vice President Planning
President Strategic Planning
Kathryn B. McQuade, 46,
Present position since April 2000. Served as Vice President
Senior Vice President
Financial Planning from August 1998 to April 2000, and
Financial Planning
prior thereto was Vice President Internal Audit.
Charles W. Moorman, 51,
Present position since February 1, 2003. Also serves as
Senior Vice President
President Thoroughbred Technology and
Corporate Services
Telecommunications, Inc. since October 1999, and prior
thereto was Vice President Information Technology.
John P. Rathbone, 51,
Present position since April 2000; prior thereto was Vice
Senior Vice President and
President and Controller
Controller
Stephen P. Renken, 59,
Present position since February 2001. Served as Vice
Senior Vice President Chief
President Information Technology September 1999 to
Information Officer
February 2001, Assistant Vice President Program
Management from December 1997 to September 1999, and
prior thereto was a consultant to NS.
K13
John M. Samuels, 59,
Present position since April 2000; Served as Vice President
Senior Vice President
Operations Planning and Budget from January 1998 to April
Operations Planning and
2000; and prior thereto was Vice President Operating Assets
Support
of Conrail.
Donald W. Seale, 50,
Present position since December 1999; prior thereto was Vice
Senior Vice President
President Merchandise Marketing.
Merchandise Marketing
PART II
- ------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)Item
5.5. Market for Registrant's Common Stock and Related- ------ ------------------------------------------------StockholderMatters. -------------------Matters.NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
STOCK PRICE AND DIVIDEND INFORMATION
(Unaudited)
The Common Stock of Norfolk Southern Corporation, owned by 53,042 stockholders of record as of Dec. 31, 2001, is traded on the New York Stock Exchange with the symbol NSC. The following table shows the high and low sales prices and dividends per share, by quarter, for 2001 and 2000 (prices quoted in fractions have been rounded to the nearest cent).Quarter ---------------------------------------------- 2001 1st 2nd 3rd 4th - ---- --- --- --- ---Market price High $ 18.90 $ 24.11 $ 22.60 $ 19.88 Low 13.63 15.80 13.41 15.19 Dividends per share $ 0.06 $ 0.06 $ 0.06 $ 0.06 2000 1st 2nd 3rd 4th - ---- --- --- --- --- Market price High $ 22.75 $ 19.69 $ 19.75 $ 15.63 Low 12.69 14.19 14.13 11.94 Dividends per share $ 0.20 $ 0.20 $ 0.20 $ 0.2023The Common Stock of Norfolk Southern Corporation, owned by 51,418 stockholders of record as of Dec. 31, 2002, is traded on the New York Stock Exchange with the symbol NSC. The following table shows the high and low sales prices as reported by Bloomberg L.P. on its internet-based service and dividends per share, by quarter, for 2002 and 2001 (prices quoted in fractions have been rounded to the nearest cent).
Quarter
2002
1st
2nd
3rd
4th
Market price
High
$
26.98
$
24.45
$
23.90
$
22.54
Low
18.26
19.85
17.20
18.70
Dividends per share
$
0.06
$
0.06
$
0.07
$
0.07
2001
1st
2nd
3rd
4th
Market price
High
$
18.90
$
24.11
$
22.60
$
19.88
Low
13.63
15.80
13.41
15.19
Dividends per share
$
0.06
$
0.06
$
0.06
$
0.06
K14
Item
6.6. Selected FinancialData. - ------ -----------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES FIVE-YEAR FINANCIAL REVIEW 1997 - 2001 Page One2001 2000(1) 1999(2) 1998 1997 ---- ---- ---- ---- ---- ($ in millions, except per share amounts)RESULTS OF OPERATIONS Railway operating revenues $ 6,170 $ 6,159 $ 5,242 $ 4,254 $ 4,249 Railway operating expenses 5,163 5,526 4,524 3,202 3,036 ------ ------ ------ ------ ------ Income from railway operations 1,007 633 718 1,052 1,213 Other income - net 99 168 164 309 170 Interest expense on debt 553 551 531 516 385 ------ ------ ------ ------ ------ Income from continuing operations before income taxes 553 250 351 845 998 Provision for income taxes 191 78 112 215 299 ------ ------ ------ ------ ------ Income from continuing operations 362 172 239 630 699 Discontinued operations (3) 13 -- -- 104 22 ------ ------ ------ ------ ------ Net income $ 375 $ 172 $ 239 $ 734 $ 721 ====== ====== ====== ====== ====== PER SHARE DATA Net income - basic $ 0.97 $ 0.45 $ 0.63 $ 1.94 $ 1.91 Net income - diluted $ 0.97 $ 0.45 $ 0.63 $ 1.93 $ 1.90 Dividends $ 0.24 $ 0.80 $ 0.80 $ 0.80 $ 0.80 Stockholders' equity at year end $ 15.78 $ 15.16 $ 15.50 $ 15.61 $ 14.4424 Item 6. Selected Financial Data. (continued) - ------ -----------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES FIVE-YEAR FINANCIAL REVIEW 1997 - 2001 Page Two2001 2000(1) 1999(2) 1998 1997 ---- ---- ---- ---- ---- ($ in millions, except per share amounts)FINANCIAL POSITION Total assets $ 19,418 $ 18,976 $ 19,250 $ 18,180 $ 17,350 Total long-term debt, including current maturities $ 7,632 $ 7,636 $ 8,059 $ 7,624 $ 7,459 Stockholders' equity $ 6,090 $ 5,824 $ 5,932 $ 5,921 $ 5,445 OTHER Capital expenditures $ 746 $ 731 $ 912 $ 1,060 $ 929 Average number of shares outstanding (thousands) 385,158 383,358 380,606 378,749 376,593 Number of stockholders at year end 53,042 53,194 51,123 51,727 50,938 Average number of employees: Rail 30,510 33,344 30,897 24,185 23,323 Nonrail (3) 384 394 269 115 2,494 ------- ------- ------- ------- ------- Total 30,894 33,738 31,166 24,300 25,817 ======= ======= ======= ======= =======NOTES (1) 2000 operating expenses include $165 million in work-force reduction costs for early retirement and separation programs. These costs reduced net income by $101 million, or 26 cents per diluted share. (2) On June 1, 1999, NS began operating a substantial portion of Conrail's properties. As a result, both its railroad route miles and the number of its railroad employees increased by approximately 50% on that date. (3) In 1998, NS sold all the common stock of its motor carrier subsidiary, North American Van Lines, Inc. (NAVL), for $207 million and recorded a $90 million pretax ($105 million, or 28 cents per diluted share, after-tax) gain. Accordingly, NAVL's results of operations, financial position and cash flows are presented as "Discontinued operations." Results in 2001 include an additional after-tax gain of $13 million, or 3 cents per diluted share, that resulted from the expiration of certain indemnities contained in the sales agreement. 25 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. -----------------------------------Data.NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
FIVE-YEAR FINANCIAL REVIEW
1998-2002
2002
2001
2000(1)
1999(2)
1998
($ in millions, except per share amounts)
RESULTS OF OPERATIONS
Railway operating revenues
$
6,270
$
6,170
$
6,159
$
5,242
$
4,254
Railway operating expenses
5,112
5,163
5,526
4,524
3,202
Income from railway operations
1,158
1,007
633
718
1,052
Other income – net
66
99
168
164
309
Interest expense on debt
518
553
551
531
516
Income from continuing operations
before income taxes
706
553
250
351
845
Provision for income taxes
246
191
78
112
215
Income from continuing operations
460
362
172
239
630
Discontinued operations (3)
--
13
--
--
104
Net income
$
460
$
375
$
172
$
239
$
734
PER SHARE DATA
Net income – basic
$
1.18
$
0.97
$
0.45
$
0.63
$
1.94
Net income – diluted
$
1.18
$
0.97
$
0.45
$
0.63
$
1.93
Dividends
$
0.26
$
0.24
$
0.80
$
0.80
$
0.80
Stockholders' equity at year end
$
16.71
$
15.78
$
15.16
$
15.50
$
15.61
FINANCIAL POSITION
Total assets
$
19,956
$
19,418
$
18,976
$
19,250
$
18,180
Total long-term debt, including
current maturities
$
7,364
$
7,632
$
7,636
$
8,059
$
7,624
Stockholders' equity
$
6,500
$
6,090
$
5,824
$
5,932
$
5,921
OTHER
Capital expenditures
$
695
$
746
$
731
$
912
$
1,060
Average number of shares outstanding
(thousands)
388,213
385,158
383,358
380,606
378,749
Number of stockholders at year end
51,418
53,042
53,194
51,123
51,727
Average number of employees:
Rail
28,587
30,510
33,344
30,897
24,185
Nonrail
383
384
394
269
115
Total
28,970
30,894
33,738
31,166
24,300
(1)
2000 operating expenses include $165 million in work-force reduction costs for early retirement and separation programs. These costs reduced net income by $101 million, or 26 cents per diluted share.
(2)
On June 1, 1999, NS began operating a substantial portion of Conrail's properties. As a result, both its railroad route miles and the number of its railroad employees increased by approximately 50% on that date.
(3)
In 1998, NS sold all the common stock of its motor carrier subsidiary, North American Van Lines, Inc. (NAVL), for $207 million and recorded a $90 million pretax ($105 million, or 28 cents per diluted share, after-tax) gain. Accordingly, NAVL's results of operations, financial position and cash flows are presented as "Discontinued operations." Results in 2001 include an additional after-tax gain of $13 million, or 3 cents per diluted share, that resulted from the expiration of certain indemnities contained in the sales agreement.
K15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes
beginning on Page 51and the Five-Year FinancialReview beginning on Page 23.Review.SUMMARIZED RESULTS OF OPERATIONS
20012002 Compared with
2000 - -----------------------2001Net income was $460 million in
2001 was $3752002, up $85 million,up 118%or 23%. Results in 2001 included a $13 million gain from discontinued operations related to the 1998 sale of NS' former motor carrier subsidiary (see Note17 on Page 79)17). Excluding that gain from 2001's results, net income was up $98 million, or 27%, in 2002. The improvement was primarily the result of a $151 million, or 15%, increase in income from railway operations.Diluted earnings per share were $1.18, up 22%. Excluding the discontinued operations gain, diluted earnings per share increased 26%.
2001 Compared with 2000
Net income in 2001 was $375 million, up 118%. Income from continuing operations, which excludes
thatthe $13 million discontinued operations gain, was $362 million, up 110%. Results in 2000 included $165 million of costs related to actions taken to reduce the size of the work force, which reduced income from continuing operations by $101 million, or 26 cents per diluted share. Excluding these costs, income from continuing operations increased $89 million, or 33%, in 2001. The improvement resulted from higher income from railway operations, which was up $209 million, or 26%, that more than offset lower nonoperating income, which was down $69 million (see Note3 on Page 61)3).Diluted earnings per share were 97 cents, up 116%. Diluted earnings per share from continuing operations were 94 cents, up 109%. Excluding the work-force reduction costs in 2000, diluted earnings per share from continuing operations were up 32%.
2000 Compared with 1999 - ----------------------- Results for 2000 reflected the first full year of operations over Conrail's lines. On June 1, 1999 (the Closing Date), NS' railroad subsidiary (Norfolk Southern Railway Company [NSR]) began operating a substantial portion of Conrail's properties (substantially all of which comprise NSR's Northern Region) under various agreements with Pennsylvania Lines LLC (PRR), a wholly owned subsidiary of Consolidated Rail Corporation (CRC) (see Note 2 on Page 58). As a result, both the railroad route miles operated by NSR and the number of its railroad employees increased by approximately 50% on that date. Results for 1999 reflect five months (January through May) of operating the former Norfolk Southern railroad system and seven months (June through December) of operating the present system, which includes the Northern Region. Results in 1999 were adversely affected by difficulties encountered in the assimilation of the Northern Region into NSR's existing system that resulted in system congestion, an increase in cars on line, increased terminal dwell time and reduced system velocity. These service issues and actions taken to address them increased operating expenses, primarily labor costs and equipment costs, including car hire and locomotive rentals. Moreover, revenues were lower than expected as some customers diverted traffic to other modes of transportation. 26 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------------------- Net income in 2000 was $172 million, down 28%. Excluding the $101 million after-tax cost of the work-force reductions, net income would have been $273 million, up 14%. The increase resulted from gains from the sale of nonoperating properties (see Note 3 on Page 61) and higher income from railway operations, compared with a weak 1999. Diluted earnings per share were 45 cents, down 29%. Excluding the effects of the work-force reduction costs, diluted earnings per share were up 13%.DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
- --------------------------Railway operating revenues were $6.3 billion in 2002, and $6.2 billion in both 2001 and
2000, and were $5.2 billion in 1999. Revenues in 1999 include results of operations in the Northern Region for seven months.2000. The following table presents a three-year comparison of revenues by market group.
RAILWAY OPERATIING REVENUES BY MARKET GROUP($ in millions) 2001 2000 1999 - -------------- ---- ---- ----Coal $ 1,521 $ 1,435 $ 1,322 General merchandise: Automotive 885 921 746 Chemicals 752 756 641 Metals/construction 674 689 567 Paper/clay/forest 612 630 578 Agriculture/consumer products/government 603 609 539 ------ ------ ------ General merchandise 3,526 3,605 3,071 Intermodal 1,123 1,119 849 ------ ------ ------ Total $ 6,170 $ 6,159 $ 5,242 ====== ====== ======K16
Revenues by Market Group
2002
2001
2000
($ in millions)
Coal
$
1,441
$
1,521
$
1,435
General merchandise:
Automotive
961
885
921
Chemicals
769
752
756
Metals/construction
692
674
689
Agriculture/consumer products/
government
623
603
609
Paper/clay/forest
603
612
630
General merchandise
3,648
3,526
3,605
Intermodal
1,181
1,123
1,119
Total
$
6,270
$
6,170
$
6,159
In 2002, revenues increased 2%, as a 3% rise in general merchandise revenues coupled with a 5% improvement in intermodal revenues offset a 5% decline in coal revenues. All but one of the general merchandise market groups (paper, clay and forest products) posted increases over 2001. As shown in the following table, most of the revenue improvement was the result of higher traffic volumes. The favorable revenue per unit/mix variance was driven by higher average revenue per unit, offset in part by the effects of unfavorable changes in the mix of traffic.
Revenue Variance Analysis
Increases (Decreases)
2002 vs. 2001
2001 vs. 2000
($ in millions)
Volume
$
89
$
(200)
Revenue per unit/mix
11
211
Total
$
100
$
11
In 2001, revenues fell for all the general merchandise market groups. However, a 6% increase in coal revenues offset the effects of the lower general merchandise revenues.
As shown in the following table, higher revenue yields offset the effects of lower traffic volume.
RAILWAY OPERATING REVENUE VARIANCE ANALYSIS Increases (Decreases)($ in millions) 2001 vs. 2000 2000 vs. 1999 - -------------- ------------- -------------Volume $ (200) $ 779 Revenue per unit/mix 211 138 ----- ----- Total $ 11 $ 917 ===== =====27 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) -------------------------------------------------Revenue per unit increased in all market groups, principally due to rate increases, use of higher-capacity equipment and favorable changes in the mix of traffic.In 2000,COAL tonnage decreased 4% in 2002 and revenues
increased for all market groups, reflecting a full year of handling Northern Region traffic. Revenues improved for the last seven months, a comparison that fully includes the Northern Region in both years, reflecting recovery of most of the diverted traffic and new business. However, weakness in the economy resulted in lower revenues very late in the year.declined 5%. Revenue per unitimproveddeclined slightly, reflecting unfavorable changes inmost market groups, principally due tothe mix of traffic (more shorter-haul business) that offset the effects ofNorthern Region trafficrate increases andincreased rates. About halfgains in tonnage per car. Coal, coke and iron ore represented 23% ofthe revenue per unit increase for the intermodal market group was attributable to the effectstotal railway operating revenues in 2002, and 84% ofthe consolidation of Triple Crown Services Company (TCS) revenues (see discussion of intermodal revenues below). COALNS' coal shipments originated on lines it operates.In 2001, coal tonnage increased 2%
in 2001, and revenuesincreasedimproved 6%. Revenue per unit increased 6%, a result of rate increases, including lower volume-related refunds on export coal shipments, gains in tonnage per car and favorable changestoin the mix of traffic (less shorter-haul business).Coal, coke and iron ore revenues represented 25% of total railway operating revenuesK17
Total Coal, Coke and Iron Ore Tonnage
2002
2001
2000
(In millions of tons)
Utility
128
133
119
Export
11
14
20
Domestic metallurgical
21
20
25
Other
10
11
11
Total
170
178
175
Utility coal tonnage decreased 3% in
2001, and 83% of NS' coal shipments originated on lines it operated. In 2000, coal tonnage increased 11%, and revenues increased 9%, reflecting a full year of Northern Region traffic. Revenue per unit declined,2002, a result ofa higher proportion of traffic with a shorter length of haul, principally attributable to a fulllower demand that reflected the weak economy, high coal stockpile levels entering the year,of Northern Region operations. TOTAL COAL, COKE AND IRON ORE TONNAGE (In millions of tons)mild temperatures in the first quarter, reduced stockpile targets set by utility companies and increased generation from new natural gas-fired plants. Licensing requirements for these new plants resulted in additional generation that temporarily displaced coal-fired generation.In 2001,
2000 1999 - -------------------- ---- ---- ---- Utility 133 119 108 Export 14 20 18 Domestic metallurgical 20 25 22 Other 11 11 10 --- --- --- Total 178 175 158 === === === Utilityutility coal traffic increased 11%in 2001,, reflecting higher demand for coal-fired electricity and the effects of very high natural gas prices early in the year. High demand forelectricity,coal, a volatile market for natural gas and production problems at a number of large mines in the East late in 2000 combined to increasethedemandfor coalsomewhat early in 2001 with a resulting increase in coal prices. Utility coal traffic volume also benefited somewhat from the shifting of coal that traditionally would have been bound for export to the domestic market.In 2000,Two of NS' utility
coal traffic increased 11%customers, Duke Energy (Duke) and Carolina Power and Light (CP&L),reflecting a full year of Northern Region operations. The effects of expanded operations were somewhat offset by coal production problems at several NS-served mines, unanticipated outages at some NS-served utility plants, large stockpileshave filed rate reasonableness complaints at thebeginningSurface Transportation Board (STB) alleging that the NS tariff rates for the transportation of coal to their solely served power plants are unreasonable. NS is disputing these allegations. Since January 1, 2002, in theyearcase of Duke andmild summer weathersince April 1, 2002, inportionsthe case of CP&L, NS has been billing and collecting amounts from the customers based on the challenged tariff rates. Management expects that the resolution of these cases, which is anticipated to occur in 2003, will not have a material effect on NS'service territory.financial statements.The near-term outlook for utility coal remains positive.
U.S. demand for electricity continues to grow rapidly, and coal-firedCoal-fired generation remains thecheapestlowest cost marginal source of electricity.Several underutilizedCoal plant generation should continue to track the U.S. economy, and management expects that utilities will use coal-firedpowerplantsare makingto meet increased demand because of coal's low cost. As always, demand will be influenced by thetransition 28 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------------------- from peak-only generation to full-time generation.weather. In addition,although natural gas prices have returned to more normal levels,while thevolatilityprice of natural gaspricescan affect demand for utility coal, its higher price and volatility may improve the long-term competitive position of coal-fired generation.Phase II of Title IV of the Clean Air Act Amendments of 1990, which
imposesimposed more stringent limits on sulfur dioxide emissions, took effect on Jan. 1, 2000. Many of the mines served by NS produce coals that satisfy Phase II requirements. In addition, substantial banks of sulfur dioxide allowances held by many NS-served utilities, as well as implementation of sulfur dioxide emission control systems at many NS-served plants, should continue to provide a market for other NS-servedmines for many years. However, several federalmines.While the Phase II impact on NS utility coal has been minimal, there are a number of other evolving environmental
regulatory initiatives continuedissues that have the potential tobe pursued during 2001, includingincrease or ease cost pressures on the utility coal market, depending upon their outcome. These include a potential new national energy policy, proposed multi-pollutant legislation, a proposed new rule concerning "new sourcereview" for older coal-fired plants. Manyreview," the impending mercury emissions standard and the fate ofthe rules that have been promulgated to date are in litigation. If the rules survive litigation and are implemented, they could increase the cost of coal-fired generation and potentially adversely affect the value of the sulfur dioxide allowance bank. The Bush Administration rejected in 2001 the Kyoto Protocol and withdrewU.S. participation inthat process. If implemented,theproposedKyotolimits on greenhouse gasesProtocol.K18
Although impending developments with these environmental issues could
have put additionalpotentially increase cost pressures on coal-firedgeneration. The U.S. withdrawal fromgeneration, theKyoto process has renewed interestoutlook remains positive for maintaining coal's position inbuildingthe power generation mix for regions served by NS. However, different developments with these issues could actually ease cost pressures on coal-fired generation,plants.further strengthening coal's position.The 1999 decision by a federal district court judge in West Virginia holding that some common mountaintop mining practices in the coal industry are illegal was overturned in April 2001 by the U.S. Fourth Circuit Court of Appeals. In January 2002, the U.S. Supreme Court refused to hear an appeal of the case. In May 2002, the same district court judge made a similar ruling in a different case in which NS had again intervened. In January 2003, this ruling also was overturned by the Fourth Circuit Court of Appeals.
Export coal tonnage declined 18% in 2002. Steam coal exports through Baltimore declined 4%, and export metallurgical coals through Norfolk declined 22%. During the first half of 2002, demand for U.S. coal was soft as international buyers focused their purchases toward other, lower-priced sources. Market uncertainty resulted in late contract settlements and delayed shipments. Late in 2002, demand for U.S. coking coals increased, reflecting a shift in the market as exports from China, Australia and Poland declined. As a result, shipments through Norfolk increased in the fourth quarter.
In 2001, export coal tonnage
declineddecreased 30%in 2001.. The rapid rise of domestic utility coal prices early in the year enticed many foreign-market suppliers to place much of their 2001 production in the domestic utility markets. In addition, production difficulties at several large NS-served mines and flooding in West Virginia in July significantly reduced the supply of lowvolatilevolatility coal. The combination of these factors resulted in most of the decline in shipments of export coal. Steam coalexportedexports through Baltimore declined 32%, and export metallurgical coals through Norfolk declined by 30%. Demand for steam coal to export strengthened in the last half of 2001; however,thestrong U.S. demand limited NS' participation in this market. Demand for coking coal to export continued to soften, as steel production moved from traditional NS markets in Europe to Asia, which in recent years has been supplied by Australian or Canadian coals.In 2000,It is expected that export coal tonnage
increased 8%, a result of a full year of access to Baltimore through the Northern Region, mitigated by lower tonnage through Norfolk. Several additional factors also adversely affected export coal traffic volume. Delayed settlements between buyers and sellers in the spring postponed shipments of some export tonnage. Foreign buyers ultimately intended to purchase additional U.S. metallurgical coal, but production capacity available for export had been diminished by two years of dramatically lower prices. Toward the end of 2000, production difficulties at several large NS-served mines significantly reduced tonnage available for export. Limited supplies overall prevented other coal producers from providing substitute coal. Export coal tonnage is expected towill continue to be limited by supply and subject to the fluctuations of the world market.While the consolidation of Australian producers should help stabilize that supply channel, new Australian production could displace U.S. 29 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------------------- volumes to Europe absent anyThe increase indemand. Moreover, Chinese participationdemand for U.S. coals seen inPacific Rim marketsthe fourth quarter of 2002 has continued into the first quarter of 2003, and early indications are that these market forces should remain in place as contracts are settled in the spring for the coming year. Should these market forces continue, U.S. coal export volumes coulddisplace Australian coals thererecover somewhat. However, the inherent volatility andforceuncertainties in this market make predictions especially vulnerable.Domestic metallurgical coal, coke and iron ore tonnage increased 5% in 2002, reflecting higher U.S. steel production that
tonnage to Europe. Domesticwas aided by the imported steel tariff program implemented in 2002. In addition, continued strong vehicle production resulted in demand for steel.In 2001, domestic metallurgical coal, coke and iron ore
traffictonnage decreased 18%in 2001,due to a decline in the market for domestic steel. The softening economy and an increase in steel imports drastically cut blast furnace production, sharply reducing the demand for coking coal, iron ore and coke. The increase in imported steel also resulted in lower prices that put pressure on the U.S. steel industry and led to plant closures and bankruptcies that included some NS customers.In 2000, domestic metallurgical coal, coke and iron ore traffic increased 17%, due to a full year of Northern Region operations. In addition, increased production in the first half of the year and gains in NS market share contributed to the higher traffic. However, the softening economy and increased steel imports diminished blast furnace production rates, sharply reducing demand for raw materials.Domestic metallurgical coal, coke and iron ore traffic is expected to continue to
suffer fromexperience modest gains during thedecline in demand for domestically produced steel.two-year life of the import tariffs. However,the United States has applied a tariff on imported coke, which has reduced its entry to the U.S. market. Moreover, the U.S. International Trade Commission has recommended that President Bush take similar action on imported steel. Butlong-term demand is expected tocontinue todecline,due toreflecting advanced technologies that allow production of steel using less coke.K19
Other coal
traffic,tonnage, principally steam coal shipped to manufacturing plants, decreased 14% in 2002, but increased 6% in2001 and 4%2001. The decline in2000.2002 was primarily the result of the weak economy. The gain in 2001 resulted from new and increased business from industrial customers.The increase in 2000 reflected a full year of handling Northern Region traffic; however, this was mitigated by the loss of some traffic to competitors.
COAL (Shown as a graph in the Annual Report to Stockholders) (millions)2001 2000 1999 ---- ---- ----$1,521 $1,435 $1,322Revenues increased $86 million, or 6%, in 2001, primarily due to increased utility coal traffic volume and higher revenue per unit. This group includes utility coal, export coal, domestic metallurgical coal and industrial coal, coke and iron ore.GENERAL MERCHANDISE traffic volume (carloads) increased 2% in 2002, and revenues increased 3%, principally due to a 9% improvement in automotive revenues. In 2001, traffic volume decreased 7%
in 2001,, and revenues decreased 2%,principally due toreflecting the effects ofthea weak economy.In 2000,Automotive traffic volume increased
15%7%, and revenues increased17%9% in 2002, principally due to a rise in vehicle production and new business. Revenue per unit increased 2%, reflecting some pricing improvements, extended length of haul, special ancillary services and the settlement of afull year of operating the Northern Region. 30 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------------------- Automotivedisputed charge.In 2001, automotive traffic volume decreased 10%, and revenues declined 4%
in 2001,, principally due to a 10% drop in vehicle production. Revenue per unit increased 7%, principally due to rate increases, efficiencies gained from the redesign of the mixing center network and use of higher capacity equipment.In 2000, automotive traffic volume increased 13%, and revenues increased 23%, reflecting a full year of Northern Region operations, record vehicle production and the recapture of business diverted because of service issues after the Closing Date. The carload increase was less than the revenue increase principally due to the effects of a redesign of the mixing center network. This redesign improves vehicle velocity through the network and includes changes in traffic flows that resulted in a decline in carloads, with no corresponding decrease in revenues. Ford Motor Company, NS' largest customer, has announced potential reductions in vehicle production which could affect NS volumes. However, automotiveAutomotive revenues in
20022003 are expected to becomparable tolower than those of2001, as light2002. Light vehicle production is predicted to beflat.
AUTOMOTIVE (Shown as a graph in the Annual Report to Stockholders) (millions)2001 2000 1999 ---- ---- ----$ 885 $ 921 $ 746Revenues decreased $36 million, or 4%,down slightly, and NS' largest automotive customer has announced a 5% decrease in2001, due to a 10% drop in traffic volume. Revenue per unit increased, principally due to rate increases and improved efficiency. This group includes finished vehicles for BMW, DaimlerChrysler, Ford Motor Company, General Motors, Honda, Isuzu, Jaguar, Land Rover, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru, Suzuki, Toyota and Volkswagen, and auto parts for Ford Motor Company, General Motors, Mercedes-Benz and Toyota.first quarter 2003 production.Chemicals traffic volume
decreased 5%,increased slightly, and revenuesdecreased 1%increased 2% in2001. The weak economy depressed2002. Higher traffic volume for plastics and a small increase for miscellaneous chemicals offset a decline for petroleum products. Demand for plastics was supported by increases in light vehicle production and housing starts. Traffic volume also benefited from increased shipmentsof petroleum, plastics, industrial and miscellaneous chemicals. These declines were partially offset by new businessthrough NS' Thoroughbred Bulk Transfer (TBT) facilities that handle chemicals and bulk commodities for customers not located on NS-served lines. Revenue per unit increased as a result of a favorable change in the mix of traffic (more higher-rated business) and market-driven rate increases.In 2001, chemicals traffic volume decreased 5%, and revenues decreased 1%. The weak economy depressed shipments of petroleum, plastics, industrial and miscellaneous chemicals. These declines were partially offset by new business through NS' TBT facilities. Revenue per unit increased due to higher rates and a favorable change in the mix of traffic (more longer-haul moves).
In 2000, chemicals traffic volume increased 15%, and revenues increased 18%, due to a full year of Northern Region operations and the return of traffic that had been diverted because of service issues after the Closing Date. Shipments of miscellaneous chemicals, chlorine, caustic soda and plastics continued to rebound, but sulfur carloads were down due to weak fertilizer markets. Chemicals shipments continued to increase through NS' TBT facilities.Chemicals revenues are expected to
continue to be adversely affected until theimprove in 2003, supported by a recovering economy,recovers. However, NS expects to benefit fromnew business and improvedyields. 31 Item 7. Management's Discussionrevenue per unit.Metals and
Analysisconstruction traffic volume increased 2%, and revenues improved 3% in 2002, reflecting improvement in the steel industry, which was aided by the two-year imported steel tariff program implemented in 2002. Metals volume benefited from resumption ofFinancial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) -----------------------------------------------
CHEMICALS (Shown as a graph in the Annual Report to Stockholders) (millions)2001 2000 1999 ---- ---- ----$ 752 $ 756 $ 641Revenues decreased $4 million, or 1%,production at some mills that closed in 2001 and increased volume from new mills. Construction traffic declined, primarily as a result of reductions in highway projects due tolower traffic volumes that resulted from the weak economy. This group includes sulfur and related chemicals, petroleum products, chlorine and bleaching compounds, plastics, rubber, industrial chemicals, chemical wastes and municipal wastes. Metalsstate government budget pressures.In 2001, metals and construction traffic volume decreased 7%, and revenues declined 2%
in 2001,, reflecting weakness in the steel and construction industries. The steel industry recession, which began in 2000,hasresulted in excess capacity and the closing of numerous steel mills. Revenue per unit increased due to higher rates and favorable changes in the mix of traffic.In 2000, metals and construction traffic volume increased 29%, and revenues increased 22%, reflecting a full year of operations over the expanded system. Revenue per unit declined, largely due to a change in the mix of traffic. Metals traffic benefited from increased shipments of sheet steel, imported slab steel and ferrous scrap; however, this was tempered by a significant slowdown in the steel industry in the last half of the year. Construction traffic benefited from continued strength in housing starts and highway construction.Metals and construction revenues are expected to
suffercontinue to benefit fromthe effects of a continued softnessadded production along NS' lines, although further consolidation in the steelmarket. However, increased highway construction in NS' service areaindustry isexpected to mitigate the drop in metals demand.
METALS AND CONSTRUCTION (Shown as a graph in the Annual Report to Stockholders) (millions)2001 2000 1999 ---- ---- ----$ 674 $ 689 $ 567Revenues decreased $15 million, or 2%, in 2001, principally due to weaknessexpected. Construction markets may benefit from new business from stone quarries and cement terminals in thesteel industry.Southeast.Agriculture, consumer products and government traffic volume decreased slightly in 2002, but revenues increased 3%. Traffic volume increases for corn, food products and beverages largely offset declines for soybeans and feed. Corn volume benefited from increased shipments from the Midwest to
K20
drought-stricken areas in the East. The increase for food products was primarily the result of new business. Soybean and feed volumes were adversely affected by lower domestic and export demand. Revenue per unit increased
due tobecause of higher rates, increased length of haul and favorable changes in the mix of traffic.This group includes steel, aluminum products, machinery, scrap metals, cement, aggregates, bricks and minerals. Paper, clay and forest products traffic volume declined 8%, and revenues decreased 3%, inIn 2001,
primarily due to a weakened paper market. Paper shipments were adversely affected by reduced production at many NS-served paper mills, a result of sluggish newspaper advertising and soft demand for paper. Lumber traffic began the year weak, 32 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------------------- improved in late summer, but softened late in the year due to short-term weakness in housing starts. Revenue per unit increased principally due to higher rates. In 2000, paper, clay and forest products traffic volume increased 5%, and revenues increased 9%, principally due to the effects of a full year of Northern Region operations. Consolidation in the paper industry and a weakening paper market in the second half of the year contributed to lower carloads during the summer months and into the fall. Weak demand for paper production inputs, such as scrap paper and wood pulp, was tempered by stronger demand for newsprint and printing paper. Paper, clay and forest products revenues are expected to continue to be adversely affected by weak demand in 2002, due to continued consolidations and little anticipated capacity expansion through 2003. NS is pursuing new business using MODALGISTICS(SM), its supply-chain focused business unit formed in February 2001.
PAPER, CLAY AND FOREST PRODUCTS (Shown as a graph in the Annual Report to Stockholders) (millions)2001 2000 1999 ---- ---- ----$ 612 $ 630 $ 578Revenues decreased $18 million, or 3%, in 2001, primarily due to a weakened paper market. Revenue per unit benefited from higher rates. This group includes lumber and wood products, pulpboard and paper products, woodfibers, woodpulp, scrap paper and clay. NS serves 66 paper mills, 105 paper distribution centers and more than 100 lumber reload centers. Agriculture,agriculture, consumer products and government traffic volume decreased 3%, and revenues declined 1%in 2001,, primarily due to reduced shipments of fertilizer. This decline was due to soft farm demand, record high natural gas prices early in the year (which curtailed production of certain fertilizers) and increased imports. This was mitigated by traffic volume increases for grain, flourwheatand canned goods. The revenue per unit increase was primarily due to favorable changes in the mix of traffic.In 2000, agriculture, consumer products and government traffic volume increased 7%, and revenues increased 13%, due to the effects of a full year of Northern Region traffic and modest growth in the Southeast markets. Rate increases and more longer-haul (higher revenue-per-unit) traffic also contributed to the revenue increase. Grain traffic benefited from new shuttle-train service that improved service to new and expanded Southeast feed mills. In addition, traffic increased for Midwest grain and sweeteners and consumer goods from the West.Agriculture, consumer products and government revenues in
20022003 are expected to continue to benefit from higher corn, fertilizer and food product volume. Fertilizer volumes may becomparablefavorably affected by the reopening of a large phosphate fertilizer plant.Paper, clay and forest products traffic volume declined 3%, and revenues decreased 1%, in 2002, primarily due to
those of 2001. Continuedcontinued weakness in thefertilizerpaper market,is expected to offset gainsespecially in theSoutheast feed markets and new business. 33 Item 7. Management's Discussion and Analysisfirst half ofFinancial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------------------- AGRICULTURE, CONSUMER PRODUCTS AND GOVERNMENT (Shown as a graphthe year. Traffic volume improved later in theAnnual Reportyear as the paper market strengthened. In addition, NS gained business from conversion of truck shipments toStockholders) (millions)rail and from continued strength in housing starts. Revenue per unit benefited from rate increases and a decline in shorter-haul business.In 2001,
2000 1999 ---- ---- ---- $ 603 $ 609 $ 539 Revenuespaper, clay and forest products traffic volume declined 8%, and revenues decreased$6 million, or 1%3%, primarily due to a weakened paper market. Paper shipments were adversely affected by reduced production at many NS-served paper mills, a result of sluggish newspaper advertising and soft demand for paper. Lumber traffic began the year weak, improved in2001,late summer, but softened late in the year due to short-term weakness in housing starts. Revenue per unit increased principally due tosoft farm demand, depressed fertilizer productionhigher rates.Paper, clay and forest products revenues are expected to improve slightly in 2003 as a result of a recovering economy, service improvements and new business.
INTERMODAL traffic volume increased
imports. This group includes soybeans, wheat, corn, fertilizers, animal6%, andpoultry feed, food oils, flour, beverages, canned goods, sweeteners, consumer productsrevenues increased 5%, in 2002. Volume growth was principally the result of new anditemsimproved services that resulted in new business, including the conversion of truck business to rail. International traffic, which accounts for about half of intermodal volume, increased 10%, supported by growth in trade activity and new business, including themilitary. INTERMODALconversion of over-the-road traffic. Domestic shipments grew 6%, primarily because of new business gained from the conversion of truck shipments. Triple Crown Services Company (TCS) volume increased 4%. Revenue per unit declined as a result of an increase in shorter-haul business and the absence of fuel surcharges that were in place in 2001, which were partially offset by some rate increases.In 2001, intermodal traffic volume decreased 1%, but revenues increased
slightly in 2001.slightly. Domestic traffic volume was up in the first half of the year, but demand increasingly weakened as the year progressed, which eroded NS' base of traffic. New business supported by the opening of three new terminals and other initiatives mitigated the effects of the weakened economy. International trafficwhich accounts for about half of intermodal volume,grew slightly as U.S. imports slowed with the economy. TCS traffic volume increased 1% despite economic conditions, as it continued tobenefit fromprovide reliable, trucklike service. Intermodal revenue per unit dropped later in the year, reflecting the expiration of fuel surcharges that were implemented late in 2000 and the introduction of new shorter-haul business.In
2000,2003, intermodaltraffic volume increased 18%, and revenues increased 32%, primarily due to a full year of Northern Region traffic and the consolidation of TCS revenues (see Note 2 on Page 58). About half of the improvement in revenue per unit resulted from the effects of consolidating TCS. Prior to June 1, 1999, NS revenues included only the amounts for rail services it performed under contract to TCS, but NS volume included most TCS units. Also contributing to the revenue-per-unit improvement were rate increases throughout the year on domestic business and the implementation of fuel surcharges later in the year. In addition, increased demand, new business and improved service contributed to the gains, as major customers, including UPS, JB Hunt, Hub Group and Maersk, increased volumes. Despite weak demand in the first quarter and the loss in December 1999 of a major customer, NS had regained its market share by the second quarter. Domestic and premium business volumes benefited from service improvements and expansion initiatives. International traffic, which accounts for about half of intermodal volume, grew 5%, notwithstanding the loss of business from a major customer. TCS traffic increased 3%, as it recovered from service shortcomings after the Closing Date. Intermodalrevenues are expected to continue to benefit from new business supported by continued improvements in service andthe terminal capacity added in 2001. 34 Item 7. Management's Discussion and Analysisconversion ofFinancial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) -----------------------------------------------
INTERMODAL (Shown as a graph in the Annual Report to Stockholders) (millions)2001 2000 1999 ---- ---- ----$ 1,123 $ 1,119 $ 849Revenues increased $4 million in 2001, despite a 1% drop intruck trafficvolume. This group handles trailers, domestic and international containers, TCS equipment and equipment for intermodal marketing companies, international steamship lines, truckers and other shippers.to rail.K21
Railway Operating Expenses
- --------------------------Railway operating expenses decreased
7%1% in 2002, while carloads increased 1%. In 2001,but increased 22% in 2000. Expensesrailway operating expenses declined 7%. However, expenses in 2000 included $165 million of costs related to actions taken to reduce the size of the work force. Excluding these costs, railway operating expenses decreased 4% in 2001, while carloads dropped 3%; and increased 19% in 2000 on carloads that were 15% higher. The higher expense increase in 2000 reflected a full year of Northern Region operations and sharply higher diesel fuel prices..The railway operating ratio, which measures the percentage of railway operating revenues consumed by railway operating expenses, was 81.5% in 2002, compared with 83.7% in 2001
compared with 87.0%and 87% in 2000 (excluding the work-force reduction costs, which increased the ratio 2.7 percentage points)and 86.3% in 1999. The decline in the 2001 ratio reflected the increase in revenue per unit as well as reduced expenses that. Both declines primarily resulted from gains inefficiency.efficiency, although 2002 also benefited from higher traffic volume, and 2001 benefited from increased revenue per unit. Theincreaseefficiency gains in 2002 were principally the result of the implementation of a new operating plan that emphasizes adherence to a schedule and reductions in service variability. These improvements came despite a continuing change in the2000 ratio reflected the effectsmix ofa full year of Northern Region operations and the sharp increase in diesel fuel prices, which more than offset the absence of the significant costs incurred in 1999 related to the service issues after the Closing Date. In addition, the ratio was adversely affected by a change intrafficmix(more resource-intensive traffic, such as automotive andintermodal) and the new traffic in the Northern Region,intermodal, coupled with the decrease in export coaltraffic. 35 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) -----------------------------------------------traffic).The following table shows the changes in railway operating expenses summarized by major classifications.
RAILWAY OPERATING EXPENSES Increases (Decreases) ($ in millions) 2001 vs. 2000 2000 vs. 1999 - -------------- ------------- ------------- Compensation and benefits * $ (220) $ 379 Materials, services and rents (1) 171 Conrail rents and services (57) 167 Depreciation 11 28 Diesel fuel (66) 223 Casualties and other claims 1 4 Other (31) 30 ----- ----- Total $ (363) $1,002 ===== =====
Operating Expense Variances
Increases (Decreases)
2002 vs. 2001
2001 vs. 2000
($ in millions)
Compensation and benefits*
$
8
$
(220)
Materials, services and rents
13
(1)
Conrail rents and services
(9)
(57)
Depreciation
1
11
Diesel fuel
(70)
(66)
Casualties and other claims
28
1
Other
(22)
(31)
Total
$
(51)
$
(363)
* Includes $165 million of work-force reduction costs in 2000.
Compensation and benefits represented
39%40% of total railway operating expenses and increased slightly in 2002. Higher wage rates, reduced pension income (see Note 11) and increased health and welfare benefits costs more than offset savings from reduced employment levels and lower payroll taxes (see the discussion of the Railroad Retirement and Survivors' Improvement Act, below). Medical costs are expected to continue to increase in 2003, a result of higher costs for active employees and an increase in the expected inflation related to postretirement benefits.In 2001, compensation and benefits decreased 10%
in 2001, but increased 20% in 2000. Both comparisons reflect; however, this comparison reflects the $165 million of work-force reduction costs in 2000. Excluding those costs, compensation and benefits decreased 3%in 2001, but increased 12% in 2000. The 3% decline in 2001 reflected, primarily a result of savings attributable to the reduced size of the workforce. These savingsforce, which were somewhat offset by higher wages and benefit costs for union employees, higher incentive compensation and reduced pension income.The 12% increase in 2000 was largely attributable to the effects of a full year of expanded operations and higher wages and benefit costs for union employees. These increases were mitigated by higher pension income and the absence of the $49 million incurred in 1999 for the Special Work Incentive Program (SWIP) for union employees in the third quarter of 1999. Pension income was higher in 2000 largely due to the transfer of assets from the Conrail pension plan after the Closing Date. NS has substantial unrecognized gains related to its overfunded pension plan; amortization of these gains will continue to be included in "Compensation and benefits" expenses (see Note 11 on Page 68).The Railroad Retirement and Survivors' Improvement Act, which took effect on Jan. 1, 2002, provides for a phased reduction of the employers' portions of Tier II Railroad Retirement payroll taxes. The phase-in calls for a reduction from
16.1% in 2001 to15.6% in 2002 to 14.2% in 2003 and 13.1% in 2004. In addition, the supplemental annuity tax was eliminated. These changes resulted in an estimated $21 million reduction in payroll taxes in 2002 and are expected to result in savings of $20 million in 2003, compared with 2002. However, theseK22
savings are expected to be offset by an increase in the railroad unemployment tax rate, higher payroll taxes on increased wages and a
$21 million reduction to payroll tax expenses in 2002.higher wage base. The new law allows for investment of Tier II assets in a diversified portfolio through the newly established National Railroad Retirement Investment Trust. The law also provides a mechanism for automatic adjustment of future Tier II payroll taxes should the trust assets fall below a four-year reserve or exceed a six-year reserve.36 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) -----------------------------------------------Materials, services and rents includes items used for the maintenance of the railroad's lines, structures and equipment; the costs of services purchased from outside contractors, including the net costs of operating joint (or leased) facilities with other railroads; and the net cost of equipment rentals. This category of expenses increased 1% in 2002 and decreased slightly in
2001, but2001.The increase in 2002 was the result of higher volume-related expenses for automotive and intermodal traffic, increased
13%material costs for locomotives, higher expenses for roadway and bridge repairs and increased derailment costs. These higher costs were largely offset by a significant reduction in2000.equipment rents. In 2001, the effects of lower equipment rents were largely offset by higher costs for purchased services, including expenses for software, consulting and legal fees.The increase in 2000 was mostly attributable to the effects of a full year of Northern Region operations and the consolidation of TCS and was mitigated by the absence of significant costs incurred in 1999 related to the service issues encountered after the Closing Date.Equipment rents, which includes the cost to NS of using equipment (mostly freight cars) owned by other railroads or private owners, less the rent paid to NS for the use of its equipment, decreased 14% in 2002 and 11% in
2001, but increased 22% in 2000.2001. The decline in 2002 was principally the result of continued improvement in cycle times, reflecting efficiency gains and, for intermodal equipment, service design and process changes implemented during the year. The decrease in 2001 wasprincipallyprimarily due to shorter car cycle times that resulted in fewer car days on line and fewer freight car and locomotive leases.The 2000 increase was principally due to the effects of a full year of expanded operations but was mitigated by a favorable comparison for the last seven months, as expenses in 1999 were high due to the service issues encountered after the Closing Date.Locomotive
and equipmentrepair costs increased in 2002 and 2001, principally due to renewed maintenanceactivity. This trendactivity, which is expected to continue into 2003. Freight car maintenance costs, which were relatively flat in 2002,driven by higher expensesare also likely to increase in 2003, as it is expected that the economy will recover and more freight cars are due forfreight car repairs. In 2000, maintenance costs increased, reflecting a full year of Northern Region operations; however, the increase was tempered by reduced maintenance activities, a result of cost control efforts.maintenance.Conrail rents and services
a new category of expense beginningdecreased 2% in1999, arose from the expansion of operations on the Closing Date2002 andamounted to $421 million12% in2001, $478 million in 2000 and $311 million in 1999.2001. This item includes amounts due to PRR and CRC for use of their operating properties and equipment and CRC's operation of the Shared Assets Areas. Also included is NS' equity in Conrail's net earnings,since the Closing Date,plus the additional amortization related to the difference between NS' investment in Conrail and its underlying equity (see Note2 on Page 58)2).The decline in 2001Both declines reflected higher Conrail earnings and lower expenses in the Shared Assets Areas (see "Conrail's Results of Operations, Financial Condition and Liquidity," below).Expenses in 2000 included a full year of operations over Conrail's lines, compared with seven months in 1999.Depreciation expense was up slightly in 2002 and increased 2% in
2001 and 6% in 2000. Increases in both years were due to property additions, reflecting substantial2001. Substantial levels of capital spending affected both years; however, depreciation expense in 2002 benefited from lower rates implemented early in the year following completion of a periodic study (see Note 1, "Properties,"on Page 57for NS' depreciation policy).A periodic review of depreciation rates is being finalized, and rates are expected to be somewhat lower. 37 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) -----------------------------------------------Diesel fuel expenses decreased 17% in 2002 and 14% in
2001, but increased 87% in 2000.2001. The decline in 2002 reflected a 16% drop in the average price per gallon and slightly lower consumption. Expenses in 2002 included a $10 million benefit from the hedging program initiated in the second quarter of 2001 (see "Market Risks and Hedging Activities," below and Note 16). The decrease in 2001 was the result of an 8% drop in consumption and a 7% decline in the average price per gallon. Expenses in 2001includeincluded $8 million of cost related to the hedgingprogram initiatedprogram. NS expects diesel fuel prices to be higher inthe second quarter (see "Market Risks and Hedging Activities," below and Note 16 on Page 77). The increase in 2000 expenses resulted from a 61% rise in the average price per gallon and higher consumption that reflected a full year of Northern Region operations.2003.Casualties and other claims expenses (including the estimates of costs related to personal injury, property damage and environmental matters) increased 20% in 2002, but only slightly in
20012001. The increase in 2002 reflected adverse personal injury claims development as indicated by an actuarial study and3% in 2000.higher expenses for loss and damage to lading, as well as higher insurance and environmental remediation costs.K23
The largest component of casualties and other claims expense is personal injury costs. In
2001,2002, cases involving occupational injuries comprised about31%30% of the total employee injury cases settled and15%24% of the total settlement payments made. Injuries of this type are not generally caused by a specific accident or event, but, rather, result from a claimed exposure over time. Many such claims are being asserted by former or retired employees, some of whom have not been actively employed in the rail industry for decades. NS continues to work actively to eliminate all employee injuries and to reduce the associated costs.The rail industry remains uniquely susceptible to litigation involving job-related accidental injury and occupational claims because of
an outmoded law,the Federal Employers' Liability Act (FELA),originally passed in 1908 andwhich is applicable only to railroads. This law, which covers employee claims for job-related injuries,promotes an adversarial claims environment andproduces results that are unpredictable andinconsistent. The railroads have been unsuccessful so far in efforts to persuade Congress to replace FELAinconsistent as compared with a no-fault workers' compensation system.NS,
maintainslike many other businesses in the U.S., has experienced difficulty obtaining property and casualty insurance at reasonable terms since the September 11 terrorist attacks. Thus far, NS has been successful in maintaining a substantialamountsamount of commercial insurance forpotentialthird-partyliability andpersonal injury, property damageclaims. It also retains reasonable levelsand FELA claims that exceed the self-insured retention. However, both the cost of this commercial insurance and the amount of risk that NS retains throughself-insurance.self-insurance has more than doubled since the attacks.Other expenses decreased 10% in 2002 and 13% in
2001, but increased 14%2001. The decline in2000.2002 reflected lower expenses for property and sales and use taxes. Thedeclinedecrease in 2001 was principallydue tothe result of lower bad debt costs, reduced franchise and property taxes, and lower travel and employee-relocation expenses.The increase in 2000 reflected a full year of Northern Region operations and higher bad debt expense.Other Income
-– Net- ------------------Other income
-– net was $66 million in 2002, $99 million in 2001 and $168 million in 2000and $115 million in 1999(see Note33). The decline in 2002 was primarily the result of higher interest accruals onPage 61)federal income tax liabilities, lower gains from the sale of properties and investments, and the absence of a $13 million gain from a nonrecurring settlement that benefited 2001. These reductions were partially offset by reduced discount from the sales of receivables (due to a lower amount of receivables sold and a lower interest rate environment, which favorably affects the amount of discount). The reduction in 2001 resulted from the absence of $101 million of gains that occurred in 2000 related to the sale ofcertaintimber rights and gas and oil royalty and working interests. This was somewhat offset by lower interest accruals on federal income tax liabilities andathe $13 milliongain from anonrecurringsettlement.settlement gain. Results in 2001 also included an $18 million gain from a large property sale that closed in December.The increase in 2000 reflected the $101 million of gains, mitigated by the commencement of a program under which accounts receivable are sold on a revolving basis (see Note 5 on Page 63). 38 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) -----------------------------------------------Income Taxes
- ------------Income tax expense in
20012002 was$191$246 million for an effective rate of 35%, compared with effective rates of 35% in 2001 and 31% in2000 and 32% in 1999.2000. Excluding the equity in Conrail's after-tax earnings, the effective rates were 38% in 2002 and 2001 and 34% inboth 2000 and 1999.2000.The effective
raterates in 2002 and 2001waswere higher than that of 2000,and 1999,primarily due to dispositions of tax benefits related to coal-seam gas properties. The effective rates in all three years benefited from favorable adjustments upon filing the prior year tax returns and favorable adjustments to state tax liabilities. In addition,both2000and 1999benefited from investments in coal-seam gas properties.In January 1995, the United States Tax Court issued a preliminary decision that disallowed some of the tax benefits a subsidiary of NS purchased from a third party pursuant to a safe harbor lease agreement in 1981. In January 2001, NS received paymentThe 2003 effective rate may benefit from thethird party in accordance with indemnification provisionsresolution of various tax audits.In March 2002, the
lease agreement.Job Creation and Worker Assistance Act of 2002 was signed into law and began providing immediate tax incentives for business. A 30% additional first-year depreciation allowance was a primary element of this legislation. This depreciation incentive continues for three years, and during these years the resulting acceleration of tax depreciation deductions will improve cash flow by reducing current tax expense and increasing deferred tax expense by significant amounts.K24
Discontinued Operations
- -----------------------Income from discontinued operations in 2001 consisted of a $13 million after-tax gain related to the sale of NS' motor carrier subsidiary (see Note
17 on Page 79)17).FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities, NS' principal source of liquidity, was $803 million in 2002, compared with $654 million in 2001
compared withand $1.3 billion in20002000. In 2002, the improvement was the result of higher income from railway operations and$533favorable changes in working capital, which were offset, in part, by fewer accounts receivable sold (see Note 5). Receivable sales declined $270 million in1999. Results2002 and $88 million in 2001. The significant decline in operating cash flow in 2001 reflects the commencement in 2000reflectof thecommencement of a program under whichaccounts receivableare sold on a revolving basis (see Note 5 on Page 63).sales program. Excluding the infusion of cash in 2000 from the start of this program, operating cash flow declined by $300 million in 2001. The decrease primarily resulted from an $88 million reduction in the amount of accounts receivable sold, higher tax payments including amounts applicable to prior years, an increase in telecommunication receivables, bonus payments in 2001 (no such payments in 2000) and the timing of payrolls.A significant portion of payments made to PRR (which are included in "Conrail Rents and Services" and, therefore, are a use of cash in "Cash provided by operating activities") are borrowed back from a PRR subsidiary and, therefore, are a source of cash in "Proceeds from borrowings."
In 2001,NS' net cash flow from these borrowings amounted to $212 million in 2002 and $250million. The improvementmillion incash provided by operating activities in 2000 resulted primarily from favorable changes in working capital, including an improvement in collection of accounts receivable, a lengthening of accounts payable and the lack of bonus payments. The large changes in "Accounts receivable" and "Current liabilities other than debt" in the 1999 cash flow statement primarily resulted from the commencement of operations in the Northern Region. In addition, collection of accounts receivable had slowed.2001.NS' working capital deficit was $554 million at Dec. 31, 2002, compared with $1.3 billion at Dec. 31,
2001, compared with $1.0 billion at Dec. 31, 2000.2001. Theincreasedecline resulted principally from the change in the terms of the note under which NS borrows funds from ahighersubsidiary of PRR (see Note 2) and a reduction in the amount of debt due within one year. Debt due in20022003 is expected to be paid using cash generated from operations (including sales of accounts receivable),and cash onhand and proceeds from borrowings. Part of the working capital deficit at Dec. 31, 2001, arises from a $373 million balance in "Notes and accounts payable to Conrail" that is not expected to be repaid in 2002. 39 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) -----------------------------------------------hand.NS currently has the capability to increase the amount of accounts receivable being sold under the revolving sale program to meet its more immediate working capital needs. During
2001,2002, the amount of receivables NS could sell under this program ranged from$345$368 million to$468$421 million, and the amount of receivables NS sold ranged from$300$30 million to$402$400 million. Moreover, NS has the capability to issue up to $1 billion of commercial paper (see Note8 on Page 65)8); however,any reductionreductions in its creditratingratings could limit NS' ability to access the commercial paper markets (see also the discussion of financing activities, below).NS expects to generate sufficient cash flow from operations to meet its ongoing obligations. This expectation is based on a view that the economy will remain flat for the first half of
20022003 and resume growth in the third and fourth quarters.NS' contractualK25
Contractual obligations at Dec. 31, 2002, related to
itsNS' long-term debt (including capital leases), operating leases,andagreements with CRC, unconditional purchase obligations and other long-term obligations are as follows:
2003- 2005- 2007 and ($ in millions) Total 2002 2004 2006 Subsequent - -------------- ----- ---- ---- ---- ----------Long-term debt and capital leases $ 7,632 $ 605 $ 705 $ 706 $ 5,616 Operating leases 890 113 172 117 488 Agreements with CRC 775 27 62 68 618 ------ ----- ----- ----- ------ Total $ 9,297 $ 745 $ 939 $ 891 $ 6,722 ====== ===== ===== ===== ======
2004-
2006-
2008 and
Total
2003
2005
2007
Subsequent
($ in millions)
Long-term debt and
capital leases
$
7,364
$
358
$
856
$
1,153
$
4,997
Operating leases
880
113
166
115
486
Agreements with CRC
748
30
65
68
585
Unconditional purchase
obligations
164
164
--
--
--
Other long-term obligations
38
8
16
14
--
Total
$
9,194
$
673
$
1,103
$
1,350
$
6,068
NS also has contractual obligations to PRR as disclosed in Note
2 on Page 58.2. However, NS has the ability to borrow back funds from PRR to the extent they are not needed to fund contractual obligations at Conrail. As an indirect owner of Conrail, NS may need to make capital contributions, loans or advances to Conrail to fund its contractual obligations. The following table presents 58% of Conrail's contractual obligations for long-term debt (including capital leases) and operating leases.Conrail has no unconditional purchase or other long-term obligations.
2003- 2005- 2007 and ($ in millions) Total 2002 2004 2006 Subsequent - -------------- ----- ---- ---- ---- ----------Long-term debt and capital leases $ 705 $ 35 $ 62 $ 48 $ 560 Operating leases 369 36 61 64 208 ------ ----- ----- ----- ----- Total $ 1,074 $ 71 $ 123 $ 112 $ 768 ====== ===== ===== ===== =====
2004-
2006-
2008 and
Total
2003
2005
2007
Subsequent
($ in millions)
Long-term debt and
capital leases
$
684
$
33
$
62
$
62
$
527
Operating leases
327
32
64
62
169
Total
$
1,011
$
65
$
126
$
124
$
696
NS also has two transactions not included in the balance sheets or in the previous table of its contractual obligations consisting of an accounts receivable sale program (see Note
5 on Page 63)5) and an operating lease covering 140 locomotives (see Note9 on Page 67)9).40 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) -----------------------------------------------Under the accounts receivable sale program, NS sells without recourse undivided ownership interests in a pool of accounts receivable to two unrelated buyers. NS has no ownership interest in the buyers. The buyers issued debt to fund their initial purchase, and NS used the proceeds it received from the initial purchase primarily to pay down its outstanding debt. NS has no obligation related to the buyers' debt, and there is no existing obligation to repurchase sold receivables. Upon termination of the program, the buyers would cease purchasing new receivables and would retain collections related to the previously sold receivables
would be retained by the buyers.(see Note 5).The operating lease covering the 140 locomotives is renewable annually at NS' option and expires in 2008. The lessor is a special-purpose entity formed to enter into this transaction, but it is not related to NS and its owner has a substantive residual equity capital investment at risk in the entity. The lessor owns the locomotives and issued debt to finance their purchase. NS has no obligation related to the debt. NS has the option to purchase the locomotives, but also can return them to the lessor. The return provisions of the lease are not so onerous as to preclude this option. If NS does not purchase the locomotives at the end of the maximum lease term, it is liable for any shortfall in the then fair value of the locomotives and a specified residual value. NS does not expect to be required to make any payments
K26
under this
provision.provision (see Note 9). As the primary beneficiary of the business of the lessor, effectiveJan. 1, 2003, NS consolidated the assets (locomotives) and liabilities (debt) of this special-purpose entity when it implemented Financial Accounting Standards Board Interpretation No. 46 (see "New Accounting Pronouncement" on page K34).
Cash used for investing activities increased
slightly12% in2001, but decreased slightly2002 and 3% in2000.2001. Property additions,were up 2% in 2001, following a large decline in 2000 that reflected the absence of significant locomotive purchases, as fleet additions were accomplished by operating lease. Investing activities in 1999 included approximately $140 million more of borrowings against the net cash surrender value of corporate-owned life insurance than in 2000. Property additionswhich account for most of the recurring spending in thiscategory.category, were down 8% in 2002, following a 2% increase in 2001. Property sales were significantly lower in 2002, which resulted in the net increase in cash used for investing activities despite the reduction in capital spending. The following tables show capital spending (including capital leases) and track and equipment statistics for the past five years.
CAPITAL EXPENDITURES($ in millions) 2001 2000 1999 1998 1997 - -------------- ---- ---- ---- ---- ----Road $ 505 $ 557 $ 559 $ 612 $ 599 Equipment 233 146 349 442 306 Other property 8 28 4 6 24 ---- ---- ---- ----- ---- Total $ 746 $ 731 $ 912 $1,060 $ 929 ==== ==== ==== ===== ====
Capital Expenditures
2002
2001
2000
1999
1998
($ in millions)
Road
$
519
$
505
$
557
$
559
$
612
Equipment
174
233
146
349
442
Other property
2
8
28
4
6
Total
$
695
$
746
$
731
$
912
$
1,060
Capital expenditures (which in 2002 included $6 million of capitalized leases) decreased 7% in 2002, but increased 2% in 2001. The decline in 2002 reflected lower spending for intermodal facilities, as NS completed in 2001
but decreased 20%several significant projects that expanded the capacity of the intermodal network. Higher spending on track program work was offset by fewer locomotive purchases (50 in2000.2002 compared with 100 in 2001). Outlays in 2001 included amounts for locomotive purchases (no such purchases were made in 2000 as locomotives were leased) that were somewhat offset by lower expenditures for freight car purchases and roadway projects.The decline inIn 2002, 2001 and 2000,reflected lower capital expenditures for locomotives as a result of the operating lease. In both years,spending for road included fiber-optic infrastructurethat is expected to be completed in 2002(see "Telecommunications Subsidiary," below).41 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) -----------------------------------------------
TRACK STRUCTURE STATISTICS (CAPITAL AND MAINTENANCE)2001 2000 1999 1998 1997 ---- ---- ---- ---- ----Track miles of rail installed 254 390 403 429 451 Miles of track surfaced 3,836 3,687 5,087 4,715 4,703 New crossties installed (millions) 1.5 1.5 2.3 2.0 2.2
AVERAGE AGE OF OWNED RAILWAY EQUIPMENT(Years) 2001 2000 1999 1998 1997 - ------ ---- ---- ---- ---- ----Freight cars 25.4 24.6 23.8 23.6 23.0 Locomotives 15.7 16.1 15.4 15.4 15.3 Retired locomotives 22.4 24.5 22.7 20.6 23.3
Track Structure Statistics (Capital and Maintenance)
2002
2001
2000
1999
1998
Track miles of rail installed
235
254
390
403
429
Miles of track surfaced
5,270
3,836
3,687
5,087
4,715
New crossties installed (millions)
2.8
1.5
1.5
2.3
2.0
Average Age of Owned Railway Equipment
2002
2001
2000
1999
1998
(years)
Freight cars
25.9
25.4
24.6
23.8
23.6
Locomotives
16.1
15.7
16.1
15.4
15.4
Retired locomotives
28.2
22.4
24.5
22.7
20.6
The table above excludes equipment leased from PRR (see Note
2 on Page 58)2), which comprises16%17% of the freight car fleet and27%25% of the locomotive fleet.The higher average age of owned locomotives in 2000 reflects the fact that locomotives leased in 2000 are not included in the statistic. The 1998 decrease in the average age of retired locomotives resulted from a disproportionate share of early retirements as well as retention of older units in anticipation of the Closing Date.Through its coal car rebody program, which was suspended in 2000, NS converted about 29,000 hopper cars into high-capacity steel gondolas or hoppers. As a result, the remaining service life of the freight-car fleet is greater than may be inferred from the increasing average age shown in the table above.
K27
For
2002,2003, NS has budgeted$705$798 million for capital expenditures. The anticipated spending includes$482$499 million for roadway projects, of which$366$383 million is for track and bridge program work. Also included are projects for communications, signal and electrical systems, as well as projects for environmental and public improvements such as grade crossing separations and signal upgrades. Other roadway projects include marketing and industrial development initiatives, including increasing track capacity and access to coal receivers and vehicle production and distribution facilities, and continuing investments in intermodal infrastructure. Equipment spending of$173$246 million includes the purchase of50100 locomotives and upgrades to existing units, improvements to multilevel automobile racks, and projects related to computers and information technology, including additional security and backup systems.NS issuedCash used for financing activities in
February2002debt secured by the locomotives. Cashwas $150 million. Financing activities providedby financing activitiescash of $151 million in 2001was $151and used cash of $798 million in 2000. The comparisons reflect a net reduction of debt in 2002, a net increase in 2001 andreflectsa net reduction in 2000. The comparison in 2001 also reflected the effects of the reduction to the dividend in January 2001. Financing activitiesincludedinclude loan transactions with a subsidiary of PRRsubsidiarythat resulted in net borrowings of $212 million in 2002 and $250 million in 2001 and net repayments of $72 million in 2000 (see Note2 on Page 58)2). Excluding these borrowings, debt was reduced $303 million in 2002, $20 million in 2001 and $422 million in 2000. Thesubstantialnet reduction of debt in 2000 was accomplished in part with the proceeds from the sale of accounts receivable. NS' debt-to-total capitalization ratio (excluding notes payable toConrail)the PRR subsidiary) at year end was 53.1% in 2002 and 55.6% in2001 and 56.7% in 2000.2001.NS currently has in place a
new$1 billion, five-year creditfacility,agreement, whichreplaced the facility that would have expired in May 2002. The new agreementprovides for borrowings at prevailing rates and includes financial covenantssimilar to the old 42 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------------------- facility(see Note8 on Page 65)8).In addition,NS has
issued only $250outstanding $717 million ofdebt underits$1 billion shelf registration that became effective in April 2001. CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY Through7.05% notes due May31, 1999, Conrail's results of operations include freight line-haul revenues and related expenses. After the Closing Date, June1,1999, its results reflect its new structure and operations (see Note 2 on Page 58). Currently, Conrail's major sources of operating revenues are operating fees and rents from NSR and CSXT. The composition of Conrail's operating expenses also changed. Conrail's net income was $174 million in 2001, compared with $170 million in 2000 and $26 million in 1999 (see Note 2 on Page 58). Results in 1999 included $180 million of expenses ($121 million after taxes), principally to increase certain components of its casualty liability based on an actuarial valuation, to adjust certain litigation and environmental liabilities related to settlements and completion of site reviews and a credit adjustment related to the assumption2037. Each holder of alease obligation by CSX. Excluding the effects of these items, net income would have been $147 million in 1999. The improvement in 2001 reflected lower casualties and other claims expenses, a favorable adjustment2037 note may require NS tostate income tax reserves and environmental and insurance settlements in Conrail's favor. These positive items were offset inredeem all or partby the absence of significant gains from the sale of property. The 2000 increase reflected a $37 million after-tax gain from a property sale and the absence of significant transition-related expenses. Conrail's operating revenues were $903 million in 2001, $985 million in 2000 and $2.2 billion in 1999. The decline in 2001 resulted from lower revenues at Conrail's Indiana Harbor Belt subsidiary, the expiration of certain equipment leases and lower operating fees, largely because of reduced operating costs in the Shared Assets Areas. The decline in 2000 was attributable to the change in operations. Conrail's operating expenses were $639 million in 2001, $749 million in 2000 and $2.0 billion in 1999. The decline in 2001 was primarily due to lower expenses for materials, services and rents; casualties and other claims; and compensation and benefits. The decrease in 2000 was principally due to the change in operations and the absenceof the$180 millionnote at face value, plus accrued and unpaid interest, on May 1, 2004. NS will not know the amount ofexpenses discussed above and $60 million2037 notes that it may be required to redeem until April 1, 2004. NS expects to be able to redeem any such notes using cash generated from operations (including sales oftransition-related expenses (principally technology integration costs and employee stay bonuses). Conrail'saccounts receivable), cashprovided by operations increased $140 million, or 39%, in 2001, but decreased $34 million, or 9%, in 2000. The 2001 increase was principally due to a $50 million cash payment for transferring to a third party certain rights to license, manage and market signboard advertisingonConrail's property for 25 yearshand and proceeds from borrowings.APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions may require significant judgment about matters that are inherently uncertain, and future events are likely to occur that may require management to change them. Accordingly, management regularly reviews these estimates and assumptions based on historical experience, changes in the business environment and other factors that management believes to be reasonable under the circumstances. Management discusses the development, selection and disclosures concerning critical accounting estimates with the Audit Committee of its Board of Directors.
Pensions and Other Postretirement Benefits
Accounting for pensions and other postretirement benefit plans requires management to make several estimates and assumptions (see Note 11). These include the expected rate of return from investment of the plans' assets, projected increases in medical costs and the expected retirement age of employees as well as their projected earnings and mortality. In addition, the amounts recorded are affected by changes in the interest rate environment because the associated liabilities are discounted to their present value. Management makes these estimates based on the company's historical experience and other information that it deems pertinent under the circumstances (for example, expectations of future stock market performance). Management engages an independent consulting actuarial firm to aid it in selecting appropriate assumptions and valuing its related liabilities.
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NS' net pension benefit, which is included in "Compensation and benefits" on its Consolidated Income Statement, was $79 million for the year ended Dec. 31, 2002. In recording this amount, NS assumed a
favorable insurance settlement. The 2000 reduction reflectedlong-term investment rate of return of 9%, compared with the 10% rate used in the previous two years. Investment experience of the pension fund over the past 10-, 15- and 20-year periods has been in excess of 10%. A one percentage point change to this rate of return assumption would result in a $20 million change to the pension credit and, as a result, an equal change inoperations"Compensation andpayment of one-time items owedbenefits" expense. Changes that are reasonably likely toNSRoccur in assumptions concerning retirement age, projected earnings andCSXT. Cash generated from operations is Conrail's principal source of liquidity and is primarily used for debt repayments and capital expenditures. Debt repayments totaled $61 million in 2001 and $318 million in 2000. Capital expenditures totaled $47 million in 2001 and $220 million in 2000. Conrail had working capital of $438 million at Dec. 31, 2001, compared with $85 million at Dec. 31, 2000, including $687 million and $323 million, respectively, of amounts receivable from NS and CSX. Conrail ismortality would notan SEC registrant and, therefore, 43 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------------------- presently cannot issue any publicly traded securities. Conrail isbe expected to havesufficient cash flow to meet its ongoing obligations.a material effect on NS'equity in earnings of Conrail,netof amortization, was $44 million in 2001, $21 million in 2000 and $17 million in 1999. NS' other comprehensive loss for 2001, as shownpension benefit or net pension asset in theConsolidated Statement of Changesfuture. The net pension asset is recorded at its net present value using a discount rate that is based on the current interest rate environment; therefore, management has little discretion inStockholders' Equity on Page 55,this assumption.NS' net cost for other postretirement benefits, which is also included
$41in "Compensation and benefits," was $34 million for the year ended Dec. 31, 2002. In recording this expense and valuing the net liability for other postretirement benefits, which is included in "Other benefits" as disclosed in Note 11, management estimated future increases in health-care costs. These assumptions, along with the effect of a one percentage point change in them, are described in Note 11.Properties and Depreciation
Most of NS' total assets are comprised of long-lived railway properties (see Note 6) and its
portioninvestment in Conrail (see Note 2). Most of Conrail'sother comprehensive loss (seeassets are long-lived railway properties. As disclosed in Note131, NS' properties are depreciated using group depreciation. Rail is depreciated primarily onPage 74). OTHER MATTERS Telecommunications Subsidiary - ----------------------------- NS' subsidiary, Thoroughbred Technology and Telecommunications, Inc. (T-Cubed), is codeveloping fiber optic infrastructure with membersthe basis of use measured by gross-ton miles. Other properties are depreciated generally using thetelecommunications industry. This industry has recently experienced a severe downturn. Duringstraight-line method over thesecond quarter, onelesser ofT-Cubed's codevelopers filed for protection under Chapter 11estimated service or lease lives. NS reviews the carrying amount ofthe U.S. Bankruptcy Code and foreign laws. This codeveloper owes T-Cubed amounts for work performed on joint projects; however,properties whenever events or changes in circumstances indicate that such carrying amount may not be recoverable based onknown facts and circumstances, management believesfuture undiscounted cash flows or estimated net realizable value. Assets thatsuch amounts ultimately will be realized. T-Cubed is engaged in contract litigation with a second codeveloper concerning the latter's obligation to purchase fiber optic infrastructure installed by T-Cubed between Cleveland, Ohio, and northern Virginia. Management expects to prevail in this litigation. The ability to collect a judgment against the codeveloper, Williams Communications, LLC, may be limited due to its declining financial condition; however, the shortfall, if any, cannot now be determined. Asare deemed impaired as a result of such review are recorded at the lesser of carrying amount or fair value. NS is amortizing the excess of the purchase price paid for its investment in Conrail over its share of Conrail's net equity using the principles of purchase accounting, based primarily on the estimated remaining useful lives of Conrail's properties.NS' depreciation expense is based on management's assumptions concerning service lives of its properties as well as the expected net salvage that will be received upon their retirement. These assumptions are the product of periodic depreciation studies that are performed by a firm of consulting engineers. These studies analyze NS' historical patterns of asset use and retirement and take into account any expected change in operation or maintenance practices. NS' recent experience with these studies has been that while they do result in changes in the
values of telecommunications assets, T-Cubed is monitoringrates used to depreciate itscarryingproperties, these changes have not caused a significant effect to its annual depreciation expense. The studies may also indicate that the recorded amount ofthese assets,accumulated depreciation is deficient (or in excess) of the amount indicated by the study. Any such deficiency (or excess) is amortized asrequired by SFAS No. 121, "Accountinga component of depreciation expense over the remaining service lives of the affected class of property. NS' "Depreciation expense" for theImpairment of Long-Lived Assets and Long-Lived Assetsyear ended Dec. 31, 2002, amounted toBe Disposed Of." To date, based on the known facts and circumstances, management believes that its ultimate investment$515 million. NS' weighted-average depreciation rates for 2002 are disclosed in Note 6; a one-tenth percentage point increase (or decrease) in theseassets will be recoveredrates would result in a $17 million increase (or decrease) to NS' depreciation expense.Personal Injury, Environmental and
accordingly, no impairment has been recognizedLegal LiabilitiesNS' expense for "Casualties and other claims" amounted to $171 million for the year ended Dec. 31, 2002. Most of this expense was composed of NS' accrual related to personal injury liabilities (see
Note 6discussion of FELA in the discussion captioned "Casualties and other claims" onPage 63)page K23).Labor Arbitration - ----------------- Several hundredNS engages an independent consulting actuarial firm to aid in valuing its personal injury liability and determining the amount to accrue during the year. The actuarial firm studies NS' historical patterns of reserving for claimshave been filed on behalfand subsequent settlements. The actuary also takes into account outside influences considered pertinent. The study uses the results ofNSR employees furloughed after June 1, 1999, for various periods of time, alleging thatthese analyses to estimate thefurloughs were a resultultimate amount of theConrail transaction and seeking "New York Dock" income protection benefits. One labor organizationliability, which includes amounts for incurred but unasserted claims. NS hasinitiated arbitration on behalf of approximately 100 of these claimants. Management believes, based on known facts and circumstances, includingrecorded this actuarially determined liability. The liability is dependent upon many individual judgments made as to theavailability of legal defenses, thatspecific case reserves as well as theamount of liability for these claims should not have a material adverse effect on NS' financial position, results of operations or liquidity. Depending on the outcomejudgments of thearbitration, other claims may be filed or progressed to arbitration. Should all such claimants prevail,consultingK29
actuary and management in the periodic studies. Accordingly, there could be
asignificanteffect on results of operations in a particular quarter. Labor Agreements - ---------------- Approximately 85 percent of NS' railroad employees are covered by collective bargaining agreements with 15 different labor unions. These agreements remain in effect until changed pursuant to the Railway Labor Act. Moratorium provisions in these agreements 44 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------------------- permitted NS and the unions to propose suchchanges inlate 1999; negotiations atthenational level commenced shortly thereafter.liability, which NS would recognize when such a change became known. Theoutcomemost recent actuarial study was performed as ofthese negotiationsJune 30, 2002, and resulted in an increase to NS' personal injury liability during the third quarter. While the liability recorded isuncertain. However, agreements have been reached withsupported by theBrotherhood of Maintenance of Way Employes, which represents about 4,400 NS employees, and withmost recent study, it is reasonably possible that theBrotherhood of Locomotive Engineers, which represents about 5,000 NS employees. In addition, a tentative national agreement (subject to ratification) has been reached with the United Transportation Union, which represents about 7,000 NS employees. The tentative national agreement reached with the International Brotherhood of Electrical Workers, which represents about 1,000 NS employees, was not ratified. Market Risks and Hedging Activities - ----------------------------------- NS uses derivative financial instruments to reduce the risk of volatility in its diesel fuel costs and to manage its overall exposure to fluctuations in interest rates. In 2001, NS began a program to hedge a portion of its diesel fuel consumption. The intent of the program is to assist in the management of NS' aggregate risk exposure to fuel price fluctuations, which can significantly affect NS' operating margins and profitability, through the use of oneliability could be higher ormore types of derivative instruments. Diesel fuel costs represented 8% of NS' operating expenses for 2001. The program provides that NS will not enter into any fuel hedges with a duration of more than 36 months, and that no more than 80% of NS' average monthly fuel consumption will be hedged for each month within any 36-month period. As of Dec. 31, 2001, through swap transactions and advance purchases, NS has hedged approximately 40% of expected 2002 diesel fuel requirements. The effect of the hedges is to yield an average cost of 70 cents per hedged gallon, including federal taxes and transportation. A 10% decrease in diesel fuel prices would increase NS' liability related to the swaps by approximately $15 million. NS manages its overall exposure to fluctuations in interest rates by issuing both fixed- and floating-rate debt instruments and by entering into interest-rate hedging transactions to achieve an appropriate mix within its debt portfolio. Of NS' total debt outstanding (see Note 8 on Page 65), all is fixed-rate debt, except for most capital leases, $250 million of notes due in 2003 and $174 million of equipment obligations. As a result, NS' debt subject to interest rate exposure totaled $675 million at Dec. 31, 2001. A 1% increase in interest rates would increase NS' total annual interest expense related to all its variable debt by approximately $7 million. Management considers it unlikely that interest rate fluctuations applicable to these instruments will result in a material adverse effect on NS' financial position, results of operations or liquidity. The capital leases, which carry an average fixed rate of 7.1%, were effectively converted to variable rate obligations using interest rate swap agreements. On Dec. 31, 2001, the average pay rate under these agreements was 2.8%, and the average receive rate was 7.1%. During 2001, the effect of the swaps was to reduce interest expense by $3 million. A portion of the lease obligations is payable in Japanese yen. NS eliminated the associated exchange rate risk at the inception of each lease with a yen deposit sufficient to fund the yen-denominated obligation. Most of these deposits are held by foreign banks, primarily Japanese. As a result, NS is exposed to financial market risk relative to Japan. 45 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) ----------------------------------------------- Counterparties to the interest rate swaps and Japanese banks holding yen deposits are major financial institutions believed by management to be creditworthy. Environmental Matters - ---------------------lower.NS is subject to various jurisdictions' environmental laws and regulations. It is NS' policy to record a liability where such liability or loss is probable and its amount can be estimated
reasonably. Claims, if any, against third parties for recovery of cleanup costs incurred by NS are reflected as receivables (when collection is probable) in the balance sheet and are not netted against the associated NS liability.reasonably (see Note 18). Environmental engineers regularly participate in ongoing evaluations of allidentifiedknown sites and in determining any necessary adjustments toinitialliability estimates. NS also has established an Environmental Policy Council, composed of senior managers, to oversee and interpret its environmental policy.Operating expenses for environmental matters totaled approximately
$10$15 million in 2002, $12 million in 2001, and $11 million in 2000,and $12 million in 1999,and capital expenditures totaled approximately $10 million in each of 2002, 2001 and2000 and $8 million in 1999.2000. Capital expenditures in20022003 are expected to be comparable to those in2001.2002.NS' balance sheets included liabilities for environmental exposures in the amount of $29 million at Dec. 31, 2002, and $33 million at Dec. 31, 2001
and $36 million at Dec. 31, 2000(of which $8 million was accounted for as a current liability in each year). At Dec. 31,2001,2002, the liability represented NS' estimate of the probable cleanup and remediation costs based on available information at126114 identified locations. On that date, 10 sites accounted for$17$16 million of the liability, and no individual site was considered to be material. NS anticipates that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period.At some of the
126114 locations, certain NS subsidiaries, usually in conjunction with a number of other parties, have been identified as potentially responsible parties by the Environmental Protection Agency (EPA) or similar state authorities under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or comparable state statutes, which often impose joint and several liability for cleanup costs.With respect to known environmental sites (whether identified by NS or by the EPA or comparable state authorities), estimates of NS' ultimate potential financial exposure for a given site or in the aggregate for all such sites are
unavoidablynecessarily imprecise because of the widely varying costs of currently available cleanup techniques, the likely development of new cleanup technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant's share of any estimated loss (and that participant's ability to bear it), and evolving statutory and regulatory standards governing liability. NS estimates its environmental remediation liability on a site-by-site basis, using assumptions and judgments that management deems appropriate for each site. As a result, it is not practical to quantitatively discuss the effects of changes in these many assumptions and judgments. NS has consistently applied its methodology of estimating its environmental liabilities.The risk of incurring environmental liability
--– for acts and omissions, past, present and future--– is inherent in the railroad business. Some of the commodities in NS' traffic mix, particularly those classified as hazardous materials, can pose special risks that NS and its subsidiaries work diligently to minimize. In addition, several NS subsidiaries own, or have owned, land used as operating property, or which is leased or may have been leased and operated by others, or held for sale. Because environmental problems may exist on these properties that are latent or undisclosed,may exist on these properties,there can be no assurance that NS will not incurenvironmentalenvironmentally related liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be46 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) -----------------------------------------------estimated reliably at this time. Moreover, lawsuits and claims involving these and potentially otherunidentifiednow-unidentified environmental sites and matters are likely to arise from time to time. The resulting liabilities could have a significant effect on financial condition, results of operations or liquidity in a particular year or quarter.However, based on
anits assessment ofknownthe facts and circumstances now known, management believes that it has recorded the probable costs for dealing with those environmental matters of which the Corporation is aware. Further, management believes that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on NS' financial position, results of operations or liquidity.New Accounting Pronouncement - ---------------------------- In OctoberK30
Norfolk Southern and certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations. When management concludes that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to expenses. While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in management's opinion the recorded liability, if any, is adequate to cover the future payment of such liability and claims. However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter. Any adjustments to recorded liability will be reflected in expenses in the periods in which such adjustments are known.
Income Taxes
NS' net deferred tax liability totaled $3,010 million at Dec. 31, 2002 (see Note 4). This liability is estimated based on the expected future tax consequences of items recognized in the financial statements. After application of the federal statutory tax rate to book income, judgment is required with respect to the timing and deductibility of expenses in the corporate income tax returns. For state income and other taxes, judgment is also required with respect to the apportionment among the various jurisdictions. A valuation allowance is recorded if management expects that it is more likely than not that its deferred tax assets will not be realized. NS has only a $24 million valuation allowance on $592 million of deferred tax assets as of Dec. 31, 2002, reflecting the expectation that most of these assets will be realized. For 2002, 2001 and 2000, the
Financial Accounting Standards Board issuedeffective tax rates, excluding NS' equity in Conrail's earnings, were 38%, 38% and 34%, respectively. For every 1/2% change in the 2002 effective tax rate, net income would have changed by $4 million.CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY
Conrail's net income was $180 million in 2002, compared with $174 million in 2001 and $170 million in 2000 (see Note 2). The increase in 2002 was primarily the result of a favorable federal tax settlement. The improvement in 2001 reflected lower casualties and other claims expenses, a favorable adjustment to state income tax reserves and environmental and insurance settlements in Conrail's favor. These positive items were offset in part by the absence of significant gains from the sale of property.
Conrail's operating revenues were $893 million in 2002, $903 million in 2001 and $985 million in 2000. Both decreases resulted from the expiration of certain equipment leases and lower operating fees, largely because of reduced operating costs in the Shared Assets Areas. The decline in 2001 also reflected lower revenues at Conrail's Indiana Harbor Belt subsidiary.
Conrail's operating expenses were $623 million in 2002, $639 million in 2001 and $749 million in 2000. The decrease in 2002 reflected lower expenses for materials, services and rents and compensation and benefits, which were offset, in part, by higher costs for casualties and other claims. The decline in 2001 was primarily due to lower expenses for materials, services and rents; casualties and other claims; and compensation and benefits.
Conrail's cash provided by operations decreased $79 million, or 16%, in 2002, and increased $140 million, or 39%, in 2001. The decline in 2002 was primarily the result of the absence of two items that benefited 2001: a $50 million cash payment for transferring to a third party certain rights to license, manage and market signboard advertising on Conrail's property for 25 years and proceeds from a favorable insurance settlement. This was offset, in part, by favorable changes in working capital. The increase in 2001 was largely the result of the two unusual items discussed above. Cash generated from operations is Conrail's principal source of liquidity and is primarily used for debt repayments and capital expenditures. Debt repayments totaled $59 million in 2002 and $61 million in 2001. Capital expenditures totaled $23 million in 2002 and $47 million in 2001.
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Conrail had a working capital deficit of $29 million at Dec. 31, 2002, compared with working capital of $438 million at Dec. 31, 2001, which included $687 million of amounts receivable from NS and CSX. Conrail is not an SEC registrant and, therefore, presently cannot issue any publicly traded securities. Conrail is expected to have sufficient cash flow to meet its ongoing obligations.
NS' equity in earnings of Conrail, net of amortization, was $54 million in 2002, $44 million in 2001 and $21 million in 2000. NS' other comprehensive loss for 2002 and 2001, as shown in the Consolidated Statement of Changes in Stockholders' Equity, included $34 million and $41 million, respectively, for its portion of Conrail's other comprehensive loss (see Note 13).
OTHER MATTERS
Telecommunications Subsidiary
NS' subsidiary, Thoroughbred Technology and Telecommunications, Inc. (T-Cubed), has developed fiber optic infrastructure with members of the telecommunications industry. This industry has experienced a severe downturn. As a result of changes in the values of telecommunications assets, T-Cubed is monitoring its carrying amount of these assets, as required by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." To date, based on known facts and circumstances, management believes that its ultimate investment in these assets will be recovered, and accordingly, no impairment has been recognized (see Note 6).
During 2001, one of T-Cubed's codevelopers, 360networks (USA),inc. ("360"), filed for protection under Chapter 11 of the U.S. Bankruptcy Code and foreign laws. 360 owes T-Cubed amounts for work performed on certain joint projects; and T-Cubed owes 360 amounts for work performed on other joint projects. The bankruptcy judge has approved set-off of these amounts, leaving about $7 million due to T-Cubed from 360. T-Cubed has the right to collect this amount from any proceeds due 360 from the sale of joint assets. Management believes that it will collect this receivable.
T-Cubed is engaged in contract litigation with a second codeveloper, Williams Communications, LLC ("Williams Communications"), concerning the latter's obligation to purchase fiber optic infrastructure installed by T-Cubed between Cleveland, Ohio, and northern Virginia. On Jan. 29, 2003, the United States District Court for the Northern District of Georgia entered an order requiring Williams Communications to pay T-Cubed the remaining amount due for such infrastructure, approximately $36 million, plus prejudgment interest at a rate of 9% per annum. Williams Communications may elect to appeal. The ability to collect and retain a judgment against Williams Communications may be limited due to its financial condition; however, the shortfall, if any, cannot now be determined. Its parent, Williams Communications Group, Inc., filed in April 2002 a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code, and emerged from bankruptcy in October 2002. Williams Communications was not included in the bankruptcy petition (see Note 18).
Labor Arbitration
Several hundred claims have been filed with NSR on behalf of employees furloughed after June 1, 1999, for various periods of time, alleging that the furloughs were a result of the Conrail transaction and seeking "New York Dock" income protection benefits. Several labor organizations have initiated arbitration on behalf of individual employees. Other disputes are pending wherein similar benefits are sought under labor agreement provisions that, in management's judgment, do not apply to the involved circumstances.
Based on known facts, including the availability of legal defenses, management believes that NS will prevail in these disputes and that any potential liability for the involved claims should not have a material adverse effect on NS' financial position, results of operations or liquidity. Depending on the outcome of these arbitrations, additional claims may be filed or progressed to arbitration. Should all such claimants prevail, there could be a significant effect on results of operations in a particular quarter (see Note 18).
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Labor Agreements
Approximately 24,000 of NS' railroad employees are covered by collective bargaining agreements with 15 different labor unions. These agreements remain in effect until changed pursuant to the Railway Labor Act. Moratorium provisions in these agreements permitted NS and the unions to propose such changes in late 1999; negotiations at the national level commenced shortly thereafter. The outcome of these negotiations is uncertain at this time. However, agreements have been reached with the Brotherhood of Maintenance of Way Employes (BMWE), which represents about 4,200 NS employees; the Brotherhood of Locomotive Engineers (BLE), which represents about 4,500 NS employees; the United Transportation Union (UTU), which represents about 6,700 NS employees; the International Brotherhood of Boilermakers and Blacksmiths (IBB), which represents about 100 NS employees; and the Transportation Communications International Union (TCU), which represents about 4,400 NS employees. Health and welfare issues have been resolved with BMWE and TCU. The UTU agreement provides that, subsequent to a further period of negotiation, health and welfare issues may be submitted to arbitration. Health and welfare issues with the other organizations have not yet been resolved.
Market Risks and Hedging Activities
NS uses derivative financial instruments to reduce the risk of volatility in its diesel fuel costs and to manage its overall exposure to fluctuations in interest rates.
In 2001, NS began a program to hedge a portion of its diesel fuel consumption. The intent of the program is to assist in the management of NS' aggregate risk exposure to fuel price fluctuations, which can significantly affect NS' operating margins and profitability, through the use of one or more types of derivative instruments.
Diesel fuel costs represented 7% of NS' operating expenses for 2002. The program provides that NS will not enter into any fuel hedges with a duration of more than 36 months, and that no more than 80% of NS' average monthly fuel consumption will be hedged for any month within any 36-month period.
As of Dec. 31, 2002, through swap transactions, NS has hedged approximately 62% of expected 2003 diesel fuel requirements. The effect of the hedges is to yield an average cost of 73 cents per hedged gallon, including federal taxes and transportation. A 10% decrease in diesel fuel prices would reduce NS' asset related to the swaps by approximately $30 million as of Dec. 31, 2002.
NS manages its overall exposure to fluctuations in interest rates by issuing both fixed- and floating-rate debt instruments and by entering into interest-rate hedging transactions to achieve an appropriate mix within its debt portfolio.
At Dec. 31, 2002, NS' debt subject to interest rate fluctuations totaled $784 million (excluding debt due to the PRR subsidiary). A 1% increase in interest rates would increase NS' total annual interest expense related to all its variable debt by approximately $8 million. Management considers it unlikely that interest rate fluctuations applicable to these instruments will result in a material adverse effect on NS' financial position, results of operations or liquidity.
Some of NS' capital leases, which carry an average fixed rate of 7%, were effectively converted to variable rate obligations using interest rate swap agreements. On Dec. 31, 2002, the average pay rate under these agreements was 2.1%, and the average receive rate was 7%. During 2002, the effect of the swaps was to reduce interest expense by $9 million. A portion of the lease obligations is payable in Japanese yen. NS eliminated the associated exchange rate risk at the inception of each lease with a yen deposit sufficient to fund the yen-denominated obligation. Most of these deposits are held by foreign banks, primarily Japanese. As a result, NS is exposed to financial market risk relative to Japan. Counterparties to the interest rate swaps and Japanese banks holding yen deposits are major financial institutions believed by management to be creditworthy.
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New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement No.
144 supersedes Statement No. 121,143, "Accounting forthe Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,Asset Retirement Obligations,"but it retains many of the fundamental provisions of that Statement. Statement(SFAS No.144 also broadens the presentation of discontinued operations to include more disposal transactions. NS' adoption of Statement No. 144,143) which is effective Jan. 1,2002,2003, and addresses legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. In accordance with the Uniform System of Accounts for Railroad Companies (see Code of Federal Regulations, Title 49, Subtitle B, Chapter X, Part 1201), NS depreciates track structure (rail, other track material and ties) to its net salvage value (gross salvage less cost to remove). SFAS No. 143 prohibits the accrual of a liability for removal costs absent a legal obligation to remove the related asset. Management believes that there is no such legal obligation to remove track. The SEC staff has recently taken a position with a registrant in another industry that calls into question whether the use of net salvage that results in depreciating more than the cost basis of an asset (negative salvage) is appropriate once SFAS No. 143 becomes effective. NS is in the process of studying its track accounts to determine where current depreciation rates will result in negative salvage. To the extent that NS' accumulated depreciation includes such amounts, they will be removed. The cumulative effect of this catch-up adjustment will be recorded as a change in accounting principle in the first quarter of 2003. Going forward, this change will result in lower depreciation expense (because the depreciation rate will no longer reflect any negative salvage) and higher compensation and benefits expenses (for the labor cost to remove retired assets); NS does not expect that this will result in a material change to its total railway operating expenses.The FASB has issued Interpretation No. 46, "Consolidation of Variable Interest Entities," (FIN No. 46), which addresses consolidation of certain variable interest entities (also commonly referred to as "special purpose entities"). NS adopted FIN No. 46, effective Jan 1, 2003. As a result, on that date NS consolidated a special-purpose entity that leases certain locomotives to NS (see Note 9). This entity has no other significant assets or liabilities other than the locomotives and the debt related to their purchase, which will be reflected on NS' Consolidated Balance Sheet in 2003. This change in reporting will also have the following effects to NS' Consolidated Income Statement beginning in 2003: operating lease expense will decline, and depreciation expense and interest expense on debt will increase. The net effect of these income statement changes is not significant. Adoption of FIN No. 46 did not have a
materialsignificant effect onitsNS' financialstatements.position or liquidity.Inflation
- ---------Generally accepted accounting principles require the use of historical cost in preparing financial statements. This approach disregards the effects of inflation on the replacement cost of property. NS, a capital-intensive company, has most of its capital invested in such assets. The replacement cost of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical cost.
Trends
- ------Federal Economic Regulation -- Efforts may be made in
20022003 to reimpose unwarranted federal economic regulation on the rail industry. The Staggers Rail Act of 1980, which substantially reduced such regulation, encouraged and enabled rail carriers to innovate and to compete for business. NS and other rail carriers will oppose any efforts to reimpose unwarranted economic regulation.Utility Deregulation -- Deregulation of the electrical utility industry is expected to increase competition among electric power generators; deregulation over time would permit wholesalers and possibly retailers of electric power to sell or purchase increasing quantities of power to or from distant parties. The effects of deregulation on NS and on its customers cannot be predicted with certainty; however, NS serves a number of efficient power producers
and is working diligentlywho are expected toensure that its customersremain competitive in this evolving environment.Carbon-Based Fuel -- There is growing concern in some quarters that emissions resulting from burning carbon-based fuel, including coal, are contributing to global warming and causing other environmental changes. To the extent that these concerns evolve into a consensus among policy-makers, the impact could be
K34
either a reduction in the demand
47 Item 7. Management's Discussion and Analysis of Financial - ------ ------------------------------------------------- Condition and Results of Operations. (continued) -----------------------------------------------for coal or imposition of more stringent regulations on emissions, which might result in making coal a less economical source of power generation or make permitting of coal-fired facilities even more difficult. The revenues and net income of NSR and other railroads that move large quantities of coal could be affected adversely.Forward-Looking Statements - --------------------------FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that may be identified by the use of words like "believe," "expect," "anticipate" and "project." Forward-looking statements reflect management's good-faith evaluation of information currently available. However, such statements are dependent on and, therefore, can be influenced by, a number of external variables over which management has little or no control, including: domestic and international economic conditions; the business environment in industries that produce and consume rail freight; competition and consolidation within the transportation industry; fluctuation in prices of key materials, in particular diesel fuel; labor difficulties, including strikes and work stoppages; legislative and regulatory developments; changes in securities and capital markets; and natural events such as severe weather, floods and earthquakes.
Forward- lookingForward-looking statements are not, and should not be relied upon as, a guaranty of future performance or results. Nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved. As a result, actual outcomes and results may differ materially from those expressed in forward-looking statements. The Company undertakes no obligation to update or revise forward-looking statements.48Item
7A.7A. Quantitative and Qualitative Disclosures about MarketRisk. - ------- ----------------------------------------------------------Risk.The information required by this item is included in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations"
on Page 44under the heading "Market Risks and Hedging Activities."49K35
Item
8.8. Financial Statements and SupplementaryData. - ------ -------------------------------------------Data.
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES QUARTERLYINDEX TO FINANCIAL
DATA (Unaudited)Three Months Ended ----------------------------------------------- MarchSTATEMENTSPage
Report of Management
K37
Independent Auditors' Report
K38
Independent Accountants' Report on Internal Control over Financial Reporting
K38
Consolidated Statements of Income
K39
Years ended December 31,
June 30 Sept. 30 Dec.2002, 2001 and 2000Consolidated Balance Sheets
K40
As of December 31,
-------- ------- -------- ------- (In millions2002 and 2001Consolidated Statements of
dollars, except per share amounts)Cash FlowsK41
Years ended December 31, 2002, 2001
----Railway operating revenues $ 1,540 $ 1,592 $ 1,508 $ 1,530 Income from railway operations 205 282 245 275 Net income 74* 107 79 115 Earnings per share - Basicanddiluted $ 0.19* $ 0.28 $ 0.20 $ 0.302000---- Railway operating revenues $ 1,508 $ 1,592 $ 1,535 $ 1,524 Income from railway operations 28 278 211 116 Net income (loss) (48) 116 99 5 Earnings (loss) per share - BasicConsolidated Statements of Changes in Stockholders' Equity
K42
Years ended December 31, 2002, 2001 and
diluted $ (0.12) $ 0.30 $ 0.26 $ 0.01 * Includes a $13 million, or 3 cents per share, after-tax gain related2000Notes to
the 1998 sale of NS' motor carrier subsidiary (see Note 17 on Page 79)Consolidated Financial StatementsK43
The Index to Consolidated Financial Statement Schedule in Item 15
K70
K36
Report of Management
January 28, 2003
To the Stockholders
Norfolk Southern Corporation
Management is responsible for the preparation and fair presentation of the financial statements included in this annual report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management's judgments and estimates concerning effects of events and transactions that are accounted for or disclosed.
Management is also responsible for establishing and maintaining effective internal control over financial reporting. The Corporation's internal control over financial reporting includes those policies and procedures that pertain to the Corporation's ability to record, process, summarize and report reliable financial data. Management recognizes that there are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
In order to ensure that the Corporation's internal control over financial reporting is effective, management regularly assesses such controls and did so most recently for its financial reporting as of December 31, 2002. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes the Corporation maintained effective internal control over financial reporting as of December 31, 2002.
The Board of Directors, acting through its Audit Committee, is responsible for the oversight of the Corporation's accounting policies, financial reporting and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. The Audit Committee is responsible for the appointment and compensation of the independent auditor, and approves decisions regarding the appointment or removal of the Vice President-Internal Audit. It meets periodically with management, the independent auditors, and the internal auditors to ensure that they are carrying out their responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Corporation in addition to reviewing the Corporation's financial reports. The independent auditors and the internal auditors have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over financial reporting, and any other matters which they believe should be brought to the attention of the Audit Committee.
KPMG LLP, independent auditors of the Corporation's financial statements, has reported on management's assertion with respect to the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2002.
/s/ David R. Goode
/s/ Henry C. Wolf
/s/ John P. Rathbone
David R. Goode
Henry C. Wolf
John P. Rathbone
Chairman, President and
Vice Chairman and
Senior Vice President and
Chief Executive Officer
Chief Financial Officer
Controller
K37
Independent Auditors' ReportThe Stockholders and Board of Directors
Norfolk Southern Corporation:
We have audited the accompanying consolidated balance sheets of Norfolk Southern Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in Item 15(A)2. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Norfolk Southern Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Norfolk, Virginia
January 28, 2003
INDEPENDENT ACCOUNTANTS' REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
The Board of Directors
Norfolk Southern Corporation:
We have examined management's assertion, included in the accompanying Report of Management, that Norfolk Southern Corporation maintained effective internal control over financial reporting as of December 31, 2002 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
50 Item 8. Financial StatementsNorfolk Southern Corporation's management is responsible for maintaining effective internal control over financial reporting. Our responsibility is to express an opinion on management's assertion based on our examination.Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and,
Supplementary Data. (continued) - ------ ------------------------------------------- Indexaccordingly, included obtaining an understanding of the internal control over financial reporting, testing, and evaluating the design and operating effectiveness of the internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.Because of inherent limitations in any internal control, misstatements due to
Financial Statements: Page ----------------------------- ----error or fraud may occur and not be detected. Also, projections of any evaluation of the internal control over financial reporting to future periods are subject to the risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, management's assertion that Norfolk Southern Corporation maintained effective internal control over financial reporting as of December 31, 2002 is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ KPMG LLP
Norfolk, Virginia
January 28, 2003
K38
Norfolk Southern Corporation And SubsidiariesConsolidated Statements of Income
Years ended December 31, 2001, 2000 and 1999 51
Years ended December 31,
2002
2001
2000
($ in millions, except earnings per share)
Railway operating revenues
$
6,270
$
6,170
$
6,159
Railway operating expenses
Compensation and benefits (Note 11)
2,022
2,014
2,234
Materials, services and rents
1,457
1,444
1,445
Conrail rents and services (Note 2)
412
421
478
Depreciation
515
514
503
Diesel fuel
342
412
478
Casualties and other claims
171
143
142
Other
193
215
246
Total railway operating expenses
5,112
5,163
5,526
Income from railway operations
1,158
1,007
633
Other income – net (Note 3)
66
99
168
Interest expense on debt (Note 6)
(518)
(553)
(551)
Income from continuing operations
before income taxes
706
553
250
Provision for income taxes (Note 4)
246
191
78
Income from continuing operations
460
362
172
Discontinued operations – gain on sale
of motor carrier, net of taxes (Note 17)
--
13
--
Net income
$
460
$
375
$
172
Earnings per share (Note 14)
Income from continuing operations –
basic and diluted
$
1.18
$
0.94
$
0.45
Net income – basic and diluted
$
1.18
$
0.97
$
0.45
See accompanying notes to consolidated financial statements.
K39
Norfolk Southern Corporation And SubsidiariesConsolidated Balance Sheets
As of December 31, 2001 and 2000 52
As of Dec. 31,
2002
2001
($ in millions)
Assets
Current assets:
Cash and cash equivalents
$
184
$
204
Accounts receivable-net (Note 5)
683
475
Due from Conrail (Note 2)
6
8
Materials and supplies
97
90
Deferred income taxes (Note 4)
187
162
Other current assets
142
108
Total current assets
1,299
1,047
Investment in Conrail (Note 2)
6,178
6,161
Properties less accumulated depreciation (Note 6)
11,370
11,208
Other assets
1,109
1,002
Total assets
$
19,956
$
19,418
Liabilities and stockholders' equity
Current liabilities:
Accounts payable (Note 7)
$
908
$
848
Income and other taxes
269
312
Due to Conrail (Note 2)
86
373
Other current liabilities (Note 7)
232
248
Current maturities of long-term debt (Note 8)
358
605
Total current liabilities
1,853
2,386
Long-term debt (Note 8)
7,006
7,027
Other liabilities (Note 10)
1,029
1,089
Due to Conrail (Note 2)
513
- --
Minority interests
45
45
Deferred income taxes (Note 4)
3,010
2,781
Total liabilities
13,456
13,328
Stockholders' equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; issued 410,154,465 and 407,000,871 shares,
respectively
410
407
Additional paid-in capital
481
423
Accumulated other comprehensive loss (Note 13)
(65)
(55)
Retained income
5,694
5,335
Less treasury stock at cost, 21,169,125 shares
(20)
(20)
Total stockholders' equity
6,500
6,090
Total liabilities and stockholders' equity
$
19,956
$
19,418
See accompanying notes to consolidated financial statements.
K40
Norfolk Southern Corporation And SubsidiariesConsolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999 53
Years Ended December 31,
2002
2001
2000
($ in millions)
Cash flows from operating activities
Net income
$
460
$
375
$
172
Reconciliation of net income to net cash
provided by operating activities:
Depreciation
529
527
517
Deferred income taxes
178
44
2
Equity in earnings of Conrail
(54)
(44)
(21)
Gains and losses on properties and investments
(47)
(59)
(160)
Income from discontinued operations
--
(13)
--
Changes in assets and liabilities affecting operations:
Accounts receivable (Note 5)
(208)
(74)
446
Materials and supplies
(7)
1
9
Other current assets and due from Conrail
1
46
60
Current liabilities other than debt
35
(27)
220
Other – net (Note 11)
(84)
(122)
97
Net cash provided by operating activities
803
654
1,342
Cash flows from investing activities
Property additions
(689)
(746)
(731)
Property sales and other transactions
31
156
137
Investments, including short-term
(78)
(99)
(77)
Investment sales and other transactions
63
88
90
Net cash used for investing activities
(673)
(601)
(581)
Cash flows from financing activities
Dividends
(101)
(93)
(306)
Common stock issued – net
42
14
2
Proceeds from borrowings
672
1,995
1,055
Debt repayments
(763)
(1,765)
(1,549)
Net cash provided by (used for) financing activities
(150)
151
(798)
Net increase (decrease) in cash and cash equivalents
(20)
204
(37)
Cash and cash equivalents
At beginning of year
204
--
37
At end of year
$
184
$
204
$
--
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized)
$
525
$
550
$
543
Income taxes
$
54
$
74
$
5
See accompanying notes to consolidated financial statements.
K41
Norfolk Southern Corporation And SubsidiariesConsolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999 55
Accum.
Other
Additional
Compre-
Common
Paid-in
hensive
Retained
Treasury
Stock
Capital
Loss
Income
Stock
Total
($ in millions, except per share amounts)
Balance Dec. 31, 1999
$
404
$
372
$
(11)
$
5,187
$
(20)
$
5,932
Comprehensive income
Net income
172
172
Other comprehensive
income (Note 13)
5
5
Total comprehensive
income
177
Dividends on Common
Stock, $0.80 per share
(306)
(306)
Other (Notes 11 and 12)
1
20
21
Balance Dec. 31, 2000
405
392
(6)
5,053
(20)
5,824
Comprehensive income
Net income
375
375
Other comprehensive
loss (Note 13)
(49)
(49)
Total comprehensive
326
income
Dividends on Common
Stock, $0.24 per share
(93)
(93)
Other (Notes 11 and 12)
2
31
33
Balance Dec. 31, 2001
$
407
$
423
$
(55)
$
5,335
$
(20)
$
6,090
Comprehensive income
Net income
460
460
Other comprehensive
loss (Note 13)
(10)
(10)
Total comprehensive
income
450
Dividends on Common
Stock, $0.26 per share
(101)
(101)
Other (Notes 11 and 12)
3
58
61
Balance Dec. 31, 2002
$
410
$
481
$
(65)
$
5,694
$
(20)
$
6,500
See accompanying notes to consolidated financial statements.
K42
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIESNotes to Consolidated Financial Statements
56 Independent Auditors' Report 82 The Index to Consolidated Financial Statement Schedule appears in Item 14 on Page 85. 51 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Consolidated Statements of IncomeYears ended December 31, 2001 2000 1999 ---- ---- ---- ($ in millions, except earnings per share)RAILWAY OPERATING REVENUES $ 6,170 $ 6,159 $ 5,242 RAILWAY OPERATING EXPENSES Compensation and benefits (Note 11) 2,014 2,234 1,855 Materials, services and rents 1,444 1,445 1,274 Conrail rents and services (Note 2) 421 478 311 Depreciation 514 503 475 Diesel fuel 412 478 255 Casualties and other claims 143 142 138 Other 215 246 216 -------- -------- -------- Total railway operating expenses 5,163 5,526 4,524 -------- -------- -------- Income from railway operations 1,007 633 718 Equity in earnings of Conrail (Note 2) -- -- 49 Other income - net (Note 3) 99 168 115 Interest expense on debt (Note 6) (553) (551) (531) -------- -------- -------- Income from continuing operations before income taxes 553 250 351 Provision for income taxes (Note 4) 191 78 112 -------- -------- -------- Income from continuing operations 362 172 239 Discontinued operations - gain on sale of motor carrier, net of taxes (Note 17) 13 -- -- -------- -------- -------- NET INCOME $ 375 $ 172 $ 239 ======== ======== ======== EARNINGS PER SHARE (Note 14) Income from continuing operations - Basic and diluted $ 0.94 $ 0.45 $ 0.63 Net income - Basic and diluted $ 0.97 $ 0.45 $ 0.63See accompanying Notes to Consolidated Financial Statements. 52 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Consolidated Balance SheetsAs of December 31, 2001 2000 ---- ---- ($ in millions)ASSETS Current assets: Cash and cash equivalents $ 204 $ -- Short-term investments -- 2 Accounts receivable, net (Note 5) 475 411 Due from Conrail (Note 2) 8 31 Materials and supplies 90 91 Deferred income taxes (Note 4) 162 182 Other current assets 108 132 ------ ------ Total current assets 1,047 849 Investment in Conrail (Note 2) 6,161 6,154 Properties less accumulated depreciation (Note 6) 11,208 11,105 Other assets 1,002 868 ------ ------ TOTAL ASSETS $19,418 $18,976 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable (Note 7) $ 848 $ 925 Income and other taxes 312 251 Notes and accounts payable to Conrail (Note 2) 373 155 Other current liabilities (Note 7) 248 259 Current maturities of long-term debt (Note 8) 605 297 ------ ------ Total current liabilities 2,386 1,887 Long-term debt (Note 8) 7,027 7,339 Other liabilities (Note 10) 1,089 1,131 Minority interests 45 50 Deferred income taxes (Note 4) 2,781 2,745 ------ ------ TOTAL LIABILITIES 13,328 13,152 ------ ------ Stockholders' equity: Common stock $1.00 per share par value, 1,350,000,000 shares authorized; issued 407,000,871 and 405,421,447 shares, respectively 407 405 Additional paid-in capital 423 392 Accumulated other comprehensive loss (Note 13) (55) (6) Retained income 5,335 5,053 Less treasury stock at cost, 21,169,125 and 21,363,974 shares, respectively (20) (20) ------ ------ TOTAL STOCKHOLDERS' EQUITY 6,090 5,824 ------ ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,418 $18,976 ====== ======See accompanying Notes to Consolidated Financial Statements. 53 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash FlowsYears ended December 31, 2001 2000 1999 ---- ---- ---- ($ in millions)CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 375 $ 172 $ 239 Reconciliation of net income to net cash provided by operating activities: Depreciation 527 517 489 Deferred income taxes 44 2 85 Equity in earnings of Conrail (44) (21) (17) Gains and losses on properties and investments (59) (160) (62) Income from discontinued operations (13) -- -- Changes in assets and liabilities affecting operations: Accounts receivable (Note 5) (74) 446 (322) Materials and supplies 1 9 (40) Other current assets and due from Conrail 46 60 (50) Current liabilities other than debt (27) 220 259 Other - net (Note 11) (122) 97 (48) ------ ------ ------ Net cash provided by operating activities 654 1,342 533 CASH FLOWS FROM INVESTING ACTIVITIES Property additions (746) (731) (912) Property sales and other transactions 156 137 104 Investments, including short-term (99) (77) (126) Investment sales and other transactions 88 90 343 ------ ------ ------ Net cash used for investing activities (601) (581) (591) CASH FLOWS FROM FINANCING ACTIVITIES Dividends (93) (306) (304) Common stock issued - net 14 2 14 Proceeds from borrowings 1,995 1,055 1,110 Debt repayments (1,765) (1,549) (730) ------ ------ ------ Net cash provided by (used for) financing activities 151 (798) 90 Net increase (decrease) in cash and cash equivalents 204 (37) 32 CASH AND CASH EQUIVALENTS At beginning of year -- 37 5 ------ ------ ------ At end of year $ 204 $ -- $ 37 ====== ====== ======(continued) 54 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued)Years ended December 31, 2001 2000 1999 ---- ---- ---- ($ in millions)SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest (net of amounts capitalized) $ 550 $ 543 $ 520 Income taxes $ 74 $ 5 $ 16See accompanying Notes to Consolidated Financial Statements. 55 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' EquityAccumu- lated Addi- Other tional Compre- Common Paid-In hensive Retained Treasury Stock Capital Loss Income Stock Total ----- ------- ---- ------ ----- ----- ($ in millions, except per share amounts)BALANCE DECEMBER 31, 1998 $ 401 $ 296 $ (8) $ 5,252 $ (20) $ 5,921 Comprehensive income - 1999 Net income 239 239 Other comprehensive loss (Note 13) (3) (3) ------ Total comprehensive income 236 Dividends on Common Stock, $0.80 per share (304) (304) Other (Notes 11 and 12) 3 76 79 ------ ------ ------ ------ ------ ------ BALANCE DECEMBER 31, 1999 404 372 (11) 5,187 (20) 5,932 Comprehensive income - 2000 Net income 172 172 Other comprehensive income (Note 13) 5 5 ------ Total comprehensive income 177 Dividends on Common Stock, $0.80 per share (306) (306) Other (Notes 11 and 12) 1 20 21 ------ ------ ------ ------ ------ ------ BALANCE DECEMBER 31, 2000 $ 405 $ 392 $ (6) $ 5,053 $ (20) $ 5,824 Comprehensive income - 2001 Net income 375 375 Other comprehensive loss (Note 13) (49) (49) ------ Total comprehensive income 326 Dividends on Common Stock, $0.24 per share (93) (93) Other (Notes 11 and 12) 2 31 33 ------ ------ ------ ------ ------ ------ BALANCE DECEMBER 31, 2001 $ 407 $ 423 $ (55) $ 5,335 $ (20) $ 6,090 ====== ====== ====== ====== ====== ======See accompanying Notes to Consolidated Financial Statements. 56 Item 8. Financial Statements and Supplementary Data. (continued) - ------ ------------------------------------------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial StatementsThe following Notes are an integral part of the Consolidated Financial Statements.
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESSummary of Significant Accounting PoliciesDescription of Business
- -----------------------Norfolk Southern Corporation is a Virginia-based holding company engaged principally in the rail transportation
of freight by rail,business, operating approximately 21,500 route miles primarily in the East and Midwest. These consolidated financial statements include Norfolk Southern Corporation (Norfolk Southern) and its majority-owned and controlled subsidiaries (collectively, NS)on a consolidated basis.. Norfolk Southern's major subsidiary is Norfolk Southern Railway Company (NSR). All significant intercompany balances and transactions have been eliminated in consolidation.The railroad transports raw materials, intermediate products and finished goods classified in the following market groups (percent of total railway operating
revenues)revenues in 2002): coal(25%(23%); automotive(14%(15%); chemicals (12%); metals/construction (11%); agriculture/consumer products/government (10%); paper/clay/forest products (10%);agriculture/consumer products/government (10%);and intermodal(18%(19%). Ultimate points of origination or destination for some of the freight (particularly coal bound for export and intermodal containers) are outside the United States. Approximately 85% of NS' railroad employees are covered by collective bargaining agreements with 15 different labor unions.Through a jointly owned entity, Norfolk Southern and CSX
CorporationCorporation own the stock of Conrail Inc., which owns the major Northeast freight railroad. Norfolk Southern has a 58% economic and 50% voting interest in the jointly owned entity (see Note 2).Use of Estimates
- ----------------The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management reviews its estimates, including those related to the recoverability and useful lives of assets, as well as liabilities for litigation, environmental remediation, casualty claims, income taxes,
pensionsand pension and postretirement benefits. Changes in facts and circumstances may result in revised estimates.Cash Equivalents
- ---------------- "Cash"Cash equivalents" are highly liquid investments purchased three months or less from maturity.
Investments
- -----------Marketable equity and debt securities are reported at amortized cost or fair value, depending upon their classification as securities
"held-to- maturity,"held-to-maturity," "trading" or "available-for-sale." Unrealized gains and losses for investments designated as "available-for-sale," net of taxes, are recognized in "Accumulated other comprehensive loss."57 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------Investments, where NS has the ability to exercise significant influence over but does not control the entity, are accounted for using the equity method in accordance with APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock."
K43
Materials and Supplies
- ---------------------- "Materials"Materials and supplies," consisting mainly of fuel oil and items for maintenance of property and equipment, are stated at the lower of average cost or market. The cost of materials and supplies expected to be used in capital additions or improvements is included in "Properties."
Properties
- ---------- "Properties""Properties" are stated principally at cost and are depreciated using group depreciation. Rail is depreciated primarily on the basis of use measured by gross ton-miles. Other properties are depreciated generally using the straight-line method over the lesser of estimated service or lease lives. NS capitalizes interest on major capital projects during the period of their construction. Expenditures, including those on leased assets, that extend an asset's useful life or increase its utility are capitalized. Maintenance expense is recognized when repairs are performed. When properties other than land and nonrail assets are sold or retired in the ordinary course of business, the cost of the assets, net of sale proceeds or salvage, is charged to accumulated depreciation rather than recognized through income. Gains and losses on disposal of land and nonrail assets are included in "Other income - net" (see Note 3).
NS reviews the carrying amount of properties whenever events or changes in circumstances indicate that such carrying amount may not be recoverable based on future undiscounted cash flows or estimated net realizable value. Assets that are deemed impaired as a result of such review are recorded at the lower of carrying amount or fair value.
Revenue Recognition
- -------------------Revenue is recognized proportionally as a shipment moves from origin to destination. Refunds
due in accordance with transportation contractsare recorded as a reduction to revenuesduring the life of the contract,based on management's best estimate of projected liability.Derivatives
- -----------NS does not engage in the trading of derivatives. NS uses derivative financial instruments to reduce the risk of volatility in its diesel fuel costs and in the management of its mix of fixed and floating-rate debt. Management has determined that these derivative instruments qualify as either fair-value or cash-flow hedges, having values that highly correlate with the underlying hedged exposures and have designated such instruments as hedging transactions. Income and expense related to the derivative financial instruments is recorded in the same category as generated by the underlying asset or liability. Credit risk related to the derivative financial instruments is considered to be minimal and is managed by requiring high credit standards for counterparties and periodic settlements.
Required Accounting Changes - --------------------------- Effective Jan. 1, 2001,Stock-based Compensation
NS
adoptedhas stock-based employee compensation plans, which are more fully described in Note 12. NS applies the intrinsic value recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and related interpretations in accounting for these plans.The following table illustrates the effect on net income and earnings per share if NS had applied the fair value recognition provisions of Statement of Financial Accounting Standards
(SFAS)No.133,123, "Accounting forDerivative Instruments and Hedging Activities," and SFASStock-Based Compensation" (SFAS No.138,123), to stock-based employee compensation:K44
2002
2001
2000
($ in millions except per share)
Net income, as reported
$
460
$
375
$
172
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects
14
12
3
Deduct: Stock-based employee compensation
expense determined under fair value method, net
of related tax effects
(45)
(29)
(26)
Pro forma net income
$
429
$
358
$
149
Earnings per share:
Basic and diluted - as reported
$
1.18
$
0.97
$
0.45
Basic and diluted - pro forma
$
1.10
$
0.93
$
0.39
Required Accounting Changes
The adoption of Statement of Financial Accounting Standards No. 144, "Accounting for
Certain Derivative Instruments and Certain Hedging Activitiesthe Impairment or Disposal of Long-Lived Assets,"(see Note 16). 58 Item 8. Financial Statements and Supplementary Data. (continued) - ------ ------------------------------------------- Reclassifications - ----------------- Certain amounts in thewhich was effective Jan. 1, 2002, did not have a material effect on NS' consolidated financialstatementsstatements.2. Investment in Conrail and
notes thereto have been reclassified to conform to the 2001 presentation. 2. INVESTMENT IN CONRAIL AND OPERATIONS OVER ITS LINESOperations Over Its LinesOverview
- --------Through a limited liability company, Norfolk Southern and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC), the major freight railroad in the Northeast.
From May 23, 1997,NS has a 58% economic and 50% voting interest in thedate Norfolk Southernjointly owned entity, and CSXcompleted their acquisition of Conrail stock, until June 1, 1999, Conrail's operations continued substantially unchanged while Norfolk Southern and CSX awaited regulatory approvals and prepared forhas theintegrationremainder of therespective Conrail routeseconomic andassets to be leased to their railroad subsidiaries, NSR and CSX Transportation, Inc. (CSXT).voting interests. From time to time, Norfolk Southern and CSX, as the indirect owners of Conrail, mayneedhave to make capital contributions, loans or advances toConrail. CommencementConrail under the terms ofOperations - -------------------------- On June 1, 1999 (the Closing Date)the Transaction Agreement among NS, CSX and Conrail.Operation of Conrail's Lines
Norfolk Southern's railroad subsidiary, Norfolk Southern Railway Company (NSR),
NSR and CSXT began operatingoperates aspartsa part oftheir respectiveits railsystemssystem theseparate Conrailroutes and assetsleased to them pursuant to operating and lease agreements. The Operating Agreement between NSR andof Pennsylvania Lines LLC (PRR), a wholly owned subsidiary of CRC, pursuant to operating and lease agreements. CSX Transportation, Inc. (CSXT) operates the routes and assets of another CRC subsidiary under comparable terms.The Operating Agreement between NSR and PRR governs substantially all nonequipment assets to be operated by NSR and has an initial 25-year term, renewable at the option of NSR for two five-year terms. Payments under the
OperatingOperating Agreement are subject to adjustment every six years to reflect changes in values. NSR also has leased or subleased for varying terms from PRR a number of equipment assets. Costs necessary to operate and maintain the PRR assets, including leasehold improvements, are borne by NSR.CSXT has entered into comparable arrangements, forNSR receives all freight revenues on theoperation and use of certain other CRC routes and assets, with another wholly owned CRC subsidiary.PRR lines.NSR and CSXT also have entered into agreements with CRC governing other properties that continue to be owned and operated by CRC (the Shared Assets Areas). NSR and CSXT pay CRC a fee for joint and exclusive access to the Shared Assets Areas. In addition, NSR and CSXT pay, based on usage, the costs incurred by CRC to operate the Shared Assets Areas.
K45
Future minimum lease payments due to PRR under the Operating Agreement and lease agreements and to CRC under the Shared Assets Areas (SAA) agreements are as follows:
PRR Oper. PRR Lease SAA ($ in millions) Agmt. Agmts. Agmts. -------------- --------- --------- --------2002 $ 196 $ 131 $ 27 2003 217 109 30 2004 238 93 32 2005 246 72 34 2006 246 57 34 2007 and subsequent years 4,530 171 618 --------- --------- -------- Total $ 5,673 $ 633 $ 775 ========= ========= ========59 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------
PRR Oper.
PRR Lease
SAA
Agmt.
Agmt.
Agmts.
($ in millions)
2003
$
217
$
116
$
30
2004
238
94
32
2005
246
74
33
2006
246
60
34
2007
246
48
34
2008 and subsequent years
4,285
129
585
Total
$
5,478
$
521
$
748
Operating lease expense related to the agreements, which is included in "Conrail rents and services," amounted to $468 million in 2002, $467 million in 2001 and $502 million in
2000 and $273 million in 1999. On the Closing Date, both NS' railroad route miles and its railroad employees increased approximately 50 percent. NSR and CSXT now provide substantially all rail freight services on Conrail's route system, perform most services incident to customer freight contracts and employ the majority of Conrail's former work force. As a result, NSR receives all freight revenues and incurs all expenses on the PRR lines.2000.Investment in Conrail
- ---------------------NS is applying the equity method of accounting to its investment in Conrail in accordance with APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." NS is amortizing the excess of the purchase price over Conrail's net equity using the principles of purchase accounting, based primarily on the estimated remaining useful lives of Conrail's depreciable property and equipment, including the related deferred tax effect of the differences in tax and accounting bases for certain assets. At Dec. 31,
2001,2002, the difference between NS' investment in Conrail and its share of Conrail's underlying net equity was$3.8$3.7 billion.NS' consolidated balance sheet at Dec. 31,
2001,2002, includes$80$60 million of liabilities related to the Conrail transaction, principally for contractual obligations to Conrail employees imposed by the Surface Transportation Board when it approved the transaction. Through Dec. 31,2001,2002, NS had paid$109$143 million of such costs.Effective June 1, 1999, NS' consolidated financial statements include the consolidated financial position and results of Triple Crown Services Company (TCS), a partnership in which subsidiaries of NS and PRR are partners.Related-Party Transactions
- -------------------------- Until the Closing Date, NSR and CRC had transactions with each other in the customary course of handling interline traffic. As of Dec. 31, 2001, substantially all of the amounts receivable or payable related to these transactions had been satisfied.NS provides certain general and administrative support functions to Conrail, the fees for which are billed in accordance with several
service- providerservice-provider arrangements and totaled $7 million in 2002, $6 million in 2001 and $7 million in2000 and $10 million in 1999. "Conrail2000."Conrail rents and
services," a new line on the income statements beginning June 1, 1999,services" includes: (1) expenses for amounts due to PRR and CRC for use by NSR of operating properties and equipment and operation of the Shared Assets Areasand continued operation of certain facilities during a transition period;and (2) NS' equity in the earnings ofConrail,Conrail, net of amortization."Notes and accounts payable to Conrail" includes $301 million at Dec. 31, 2001, and $51 million at Dec. 31, 2000,A significant portion of
interest-bearing loanspayments made toNS byPRR is borrowed back from a subsidiary of PRR. Previously, these loans were made under a demand note; however, in the first quarter of 2002, the subsidiary of PRR exchanged this demand note for a new note due in 2032. As a result, borrowings owed to the subsidiarythat are payable on demand.of PRR now comprise the noncurrent balance "Due to Conrail." The interest rate for these loans is variable and was2.45%1.82% at Dec. 31,2001. Also included is $72 million2002. The current balance "Due to Conrail" at Dec. 31,2001, and $104 million at Dec. 31, 2000, due to PRR and CRC2002, is composed of amounts related to expenses included in "Conrail rents and services," as discussed above.60 Item 8. Financial StatementsAt Dec. 31, 2001, the current balance "Due to Conrail" included $72 million of such amounts andSupplementary Data. (continued) - ------ -------------------------------------------$301 million of advances owed under the previous demand note.K46
Summary Financial Information - Conrail
- ----------------------------------------The following
summaryhistorical cost basis financial information should be read in conjunction with Conrail's audited financial statements, included as Exhibit 99 to this Annual Report on Form 10-K.Through May 31, 1999, Conrail's resultsSummarized Consolidated Statements of
operations include freight line-haul revenues and related expenses. After the Closing Date, June 1, 1999, its results reflect its new structure and operations. Currently, Conrail's major sources of operating revenues are from NSR and CSXT. The composition of Conrail's operating expenses also has changed.Income - Conrail
Summarized Consolidated Statements of Income - Conrail - ------------------------------------------------------($ in millions) 2001 2000 1999 - --------------- ---- ---- ----Operating revenues $ 903 $ 985 $ 2,174 Operating expenses 639 749 2,046 ------ ------ ------- Operating income 264 236 128 Other - net (6) 31 (83) ------ ------ ------- Income before income taxes 258 267 45 Provision for income taxes 84 97 19 ------ ------ ------- Net income $ 174 $ 170 $ 26 ====== ====== =======
2002
2001
2000
($ in millions)
Operating revenues
$
893
$
903
$
985
Operating expenses
623
639
749
Operating income
270
264
236
Other – net
(10)
(6)
31
Income before income taxes
260
258
267
Provision for income taxes
80
84
97
Net income
$
180
$
174
$
170
Note: Conrail's results for 2000 included gains from the sale of property that had been written up to fair market value in the allocation of NS' investment in Conrail. Accordingly, the gains related to that fair-value write-up, totaling $17 million after taxes, were excluded in determining NS' equity in Conrail's net income.
Conrail's results in 1999 included after-tax expenses of $121 million, principally: (1) to increase certain components of its casualty reserves based on an actuarial valuation, (2) to adjust certain litigation and environmental reserves related to settlements and completion of site reviews and (3) to adjust a credit related to the assumption of a lease obligation by CSX. These 1999 items were considered in the allocation of NS' investment inSummarized Consolidated Balance Sheets - Conrail
to the fair values of Conrail's assets and liabilities and, accordingly, were excluded in determining NS' equity in Conrail's net income.
Summarized Consolidated Balance Sheets - Conrail - -------------------------------------------------December 31, ($ in millions) 2001 2000 - --------------- ---- ----Assets: Current assets $ 846 $ 520 Noncurrent assets 7,236 7,540 ------ ------ Total assets $ 8,082 $ 8,060 ====== ====== Liabilities and stockholders' equity: Current liabilities $ 408 $ 435 Noncurrent liabilities 3,569 3,643 Stockholders' equity 4,105 3,982 ------ ------ Total liabilities and stockholders' equity $ 8,082 $ 8,060 ====== ======
December 31,
2002
2001
($ in millions)
Assets:
Current assets
$
300
$
846
Noncurrent assets
7,857
7,236
Total assets
$
8,157
$
8,082
Liabilities and stockholders' equity:
Current liabilities
$
329
$
408
Noncurrent liabilities
3,602
3,569
Stockholders' equity
4,226
4,105
Total liabilities and stockholders equity
$
8,157
$
8,082
Note: Current assets include
demand notes and receivablesamounts due from NS and CSX totaling $158 million at Dec. 31, 2002, and $687 million at Dec. 31,2001,2001. Noncurrent assets include amounts due from NS and$323CSX totaling $892 million at Dec. 31,2000.2002, and zero at Dec. 31, 2001. Current liabilities include amounts payable to NS and CSX totaling $9 million at Dec. 31, 2002, and $12 million at Dec. 31,2001, and $31 million at Dec. 31, 2000. 61 Item 8. Financial Statements and Supplementary Data. (continued)2001.K47
3. Other Income -
------ -------------------------------------------
3. OTHER INCOME - NET($ in millions) 2001 2000 1999 -------------- ---- ---- ----Income from natural resources: Royalties from coal $ 52 $ 55 $ 59 Gains from sale of timber, oil and gas rights and interests - 101 - Nonoperating depletion and depreciation (13) (13) (14) ------ ----- ------ Subtotal 39 143 45 Gains from sale of properties and investments 59 59 62 Rental income 40 40 34 Interest income 15 11 8Net
2002
2001
2000
($ in millions)
Income from natural resources:
Royalties from coal
$
48
$
52
$
55
Gains from sale of timber, oil and gas rights
and interests
--
--
101
Nonoperating depletion and depreciation
(14)
(13)
(13)
Subtotal
34
39
143
Gains from sale of properties and investments
47
59
59
Rental income
36
40
40
Interest income
12
15
11
Other interest expense
(31)
1
(39)
Taxes on nonoperating property
(7)
(11)
(9)
Discount on sales of accounts receivable (Note 5)
(4)
(17)
(23)
Corporate-owned life insurance – net
(1)
6
--
Equity in earnings (losses) of partnerships
(1)
(8)
3
Charitable contributions
--
(4)
(4)
Other
(19)
(21)
(13)
Total
$
66
$
99
$
168
"Other income - net" includes the income generated by the activities of NS' noncarrier subsidiaries as well as the costs incurred by those subsidiaries in their operations.
"Other
interest expense 1 (39) (30) Sale of accounts receivable (Note 5) (17) (23) - Taxes on nonoperating property (11) (9) (7) Corporate-owned life insurance - net 6 - (3) Equity in undistributed earnings of partnerships (8) 3 1 Charitable contributions (4) (4) - Other - net (21) (13) 5 ------ ----- ------ Total $ 99 $ 168 $ 115 ====== ===== ======"Othercurrent assets" in the Consolidated Balance Sheets includes prepaid intereston corporate-owned life insurance borrowingsof $46 million at Dec. 31, 2002, and $45 million at Dec. 31, 2001,and $43 million at Dec. 31, 2000.
4. INCOME TAXESProvision for Income Taxes - -------------------------- ($ in millions) 2001 2000 1999 - --------------- ---- ---- ----Current: Federal $ 125 $ 65 $ 18 State 22 11 9 ------ ------ ------ Total current taxes 147 76 27 Deferred: Federal 35 1 78 State 9 1 7 ------ ------ ------ Total deferred taxes 44 2 85 ------ ------ ------ Provision for income taxes $ 191 $ 78 $ 112 ====== ====== ======62 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------arising from corporate-owned life insurance borrowings.4. Income Taxes
Provision for Income Taxes
2002
2001
2000
($ in millions)
Current:
Federal
$
61
$
125
$
65
State
7
22
11
Total current taxes
68
147
76
Deferred:
Federal
145
35
1
State
33
9
1
Total deferred taxes
178
44
2
Provision for income taxes
$
246
$
191
$
78
K48
Reconciliation of Statutory Rate to Effective Rate
- --------------------------------------------------Total income taxes as reflected in the Consolidated Statements of Income differ from the amounts computed by applying the statutory federal corporate tax rate as follows:
2001 2000 1999 ($ in millions) Amount % Amount % Amount % --------------- ------ -- ------ -- ------ --Federal income tax at statutory rate $ 194 35 $ 87 35 $ 123 35 State income taxes, net of federal tax benefit 20 4 8 3 10 3 Equity in earnings of Conrail (16) (3) (7) (3) (6) (2) Corporate-owned life insurance (3) - (2) (1) 1 - Other - net (4) (1) (8) (3) (16) (4) ------ -- ------ -- ------ -- Provision for income taxes $ 191 35 $ 78 31 $ 112 32 ====== == ====== == ====== ==
2002
2001
2000
Amount
%
Amount
%
Amount
%
($ in millions)
Federal income tax at
statutory rate
$
247
35
$
194
35
$
87
35
State income taxes, net of
federal tax benefit
26
4
20
4
8
3
Equity in earnings of
Conrail
(19)
(3)
(16)
(3)
(7)
(3)
Corporate-owned life
insurance
(1)
--
(3)
--
(2)
(1)
Other – net
(7)
(1)
(4)
(1)
(8)
(3)
Provision for income taxes
$
246
35
$
191
35
$
78
31
Deferred Tax Assets and Liabilities
- -----------------------------------Certain items are reported in different periods for financial reporting and income tax purposes. Deferred tax assets and liabilities are recorded in recognition of these differences.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
December 31, ($ in millions) 2001 2000 - --------------- ---- ----Deferred tax assets: Reserves, including casualty and other claims $ 158 $ 158 Employee benefits 75 104 Retiree health and death benefit obligation 137 139 Taxes, including state and property 221 200 Other 22 28 ----- ----- Total gross deferred tax assets 613 629 Less valuation allowance (18) (12) ----- ----- Net deferred tax assets 595 617 ----- ----- Deferred tax liabilities: Property (3,126) (3,117) Other (88) (63) ----- ----- Total gross deferred tax liabilities (3,214) (3,180) ----- ----- Net deferred tax liability (2,619) (2,563) Net current deferred tax assets 162 182 ----- ----- Net long-term deferred tax liability $(2,781) $(2,745) ===== =====63 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------
December 31,
2002
2001
($ in millions)
Deferred tax assets:
Reserves, including casualty and other claims
$
178
$
158
Employee benefits
26
75
Retiree health and death benefit obligations
138
137
Taxes, including state and property
234
221
Other
16
22
Total gross deferred tax assets
592
613
Less valuation allowance
(24)
(18)
Net deferred tax asset
568
595
Deferred tax liabilities:
Property
(3,300)
(3,126)
Other
(91)
(88)
Total gross deferred tax liabilities
(3,391)
(3,214)
Net deferred tax liability
(2,823)
(2,619)
Net current deferred tax asset
187
162
Net long-term deferred tax liability
$
(3,010)
$
(2,781)
Except for amounts for which a valuation allowance has been provided, management believes the other deferred tax assets will be realized. The total valuation allowance increased $6 million in 2002, $6 million in 2001 and $3 million in
2000 and $6 million in 1999.2000.K49
Internal Revenue Service (IRS) Reviews
- --------------------------------------Consolidated federal income tax returns have been examined and Revenue Agent Reports have been received for all years up to and including 1996. The consolidated federal income tax returns for 1997, 1998 and 1999 are being audited by the IRS. Management believes that adequate provision has been made for any additional taxes and interest thereon that might arise as a result of IRS examinations.
5.
ACCOUNTS RECEIVABLE Beginning inAccounts ReceivableIn May 2000, a bankruptcy-remote special purpose subsidiary of NS
soldbegan selling without recourse undivided ownership interests in a pool of accountsreceivable totaling approximately $700 million.receivable. Upon commencement of this program, NS received cash proceeds of $460 million. The buyers have a priority collection interest in the entire pool of receivables and, as a result, NS has retained credit risk to the extent the pool of receivables exceeds the amount sold. NS services and collects the receivables on behalf of the buyers; however, no servicing asset or liability has been recognized because the benefits of servicing are estimated to be just adequate to compensate NS for its responsibilities. Payments collected from sold receivables can be reinvested in new accounts receivable on behalf of the buyers. Should NS' credit rating drop below investment grade, the buyers have the right to discontinue this reinvestment.At Dec. 31, 2001 and 2000, $300 million and $388 million, respectively, had beenAccounts receivable sold under this arrangement, and therefore
arenot included in "Accounts receivable,net,"net" on theconsolidated balance sheet.Consolidated Balance Sheets, were $30 million at Dec. 31, 2002, and $300 million at Dec. 31, 2001. The fees associated with the sale, which are based on the buyers' financing costs, are included in "Other income-– net" (see Note 3). NS' retained interest, which is included in "Accounts receivable, net," is recorded at fair value using estimates of dilution based on NS' historical experience. These estimates are adjusted regularly based on NS' actual experience with the pool, including defaults and credit deterioration. NS has historically experienced very low levels of default. If historical dilution percentages were to increase one percentage point, the value of NS' retained interest would be reduced by approximately$7$5 million.NS' allowance for doubtful accounts was $5 million at Dec. 31,
2001,2002, and$7 million atDec. 31,2000.2001.6.
PROPERTIES
December 31, Depreciation ($ in millions) 2001 2000 Rate for 2001 - --------------- ---- ---- -------------Railway property: Road $ 10,452 $ 10,078 3.0% Equipment 5,559 5,588 4.1% Other property 632 653 3.2% ------- ------- 16,643 16,319 Less: Accumulated depreciation 5,435 5,214 ------- ------- Net properties $ 11,208 $ 11,105 ======= =======64 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------Properties
December 31,
Depreciation
2002
2001
Rate for 2002
($ in millions)
Railway property:
Road
$
10,859
$
10,452
2.9%
Equipment
5,573
5,559
3.9%
Other property
655
632
3.1%
17,087
16,643
Less accumulated depreciation
(5,717)
(5,435)
Net properties
$
11,370
$
11,208
Included in properties
areis approximately $110 millioninof telecommunications assets consisting of fiber optic conduit.Because of the significant economic downturn in the telecommunications industry during the year,NS evaluated the recoverability of these assets at Dec. 31,2001. Based2002, and based on known facts and circumstances, management believes that itsultimateinvestment in these assetswhich is expected to total approximately $130 million upon completion of the network,will be recovered.EquipmentRailway property includes $480 million at Dec. 31, 2002 and $474 million at Dec. 31, 2001,
and 2000,of assets recorded pursuant to capital leases. Other property includes the costs of obtaining rights to natural resources of $341 million at Dec. 31,20012002 and2000.2001.K50
Capitalized Interest
- --------------------Total interest cost incurred on debt in 2002, 2001 and 2000
and 1999was $529 million, $570 million$569 millionand$546$569 million, respectively, of which $11 million, $17 million$18 millionand$15$18 million was capitalized.65 Item7. Current Liabilities
December 31,
2002
2001
($ in millions)
Accounts payable:
Accounts and wages payable
$
446
$
385
Casualty and other claims
207
192
Equipment rents payable – net
116
130
Vacation liability
117
118
Other
22
23
Total
$
908
$
848
Other current liabilities:
Interest payable
$
118
$
118
Accrued Conrail-related costs (Note 2)
34
35
Liabilities for forwarded traffic
34
35
Retiree health and death benefit obligations (Note 11)
31
24
Derivative instruments
--
17
Other
15
19
Total
$
232
$
248
8.
Financial Statements and Supplementary Data. (continued) - ------ ------------------------------------------- 7. CURRENT LIABILITIES
December 31, ($ in millions) 2001 2000 - --------------- ---- ----Accounts payable: Accounts and wages payable $ 385 $ 427 Casualty and other claims 192 223 Equipment rents payable - net 130 134 Vacation liability 118 117 Other 23 24 ------- ------- Total $ 848 $ 925 ======= ======= Other current liabilities: Interest payable $ 118 $ 131 Accrued Conrail-related costs (Note 2) 35 47 Liabilities for forwarded traffic 35 40 Retiree health and death benefit obligation (Note 11) 24 24 Derivative instruments 17 - Other 19 17 ------- ------- Total $ 248 $ 259 ======= =======8. LONG-TERM DEBT
December 31, ($ in millions) 2001 2000 - --------------- ---- ----Notes at average rates and maturities as follows: 6.69%, maturing 2002 to 2006 $ 1,500 $ 1,450 7.20%, maturing 2007 to 2011 1,750 1,450 8.10%, maturing 2017 to 2021 800 800 7.54%, maturing 2027 to 2031 1,500 800 7.05%, maturing 2037 750 750 7.90%, maturing 2097 350 350 Commercial paper - 1,132 Equipment obligations at an average rate of 5.9%, maturing to 2014 579 473 Capitalized leases at an average rate of 2.8%, maturing to 2015 316 343 Other debt at an average rate of 6.6%, maturing to 2019 119 119 Discounts and premiums, net (32) (31) ------- ------- Total long-term debt $ 7,632 $ 7,636 Current maturities (605) (297) ------- ------- Long-term debt less current maturities $ 7,027 $ 7,339 ======= ======= Long-term debt maturities subsequent to 2002 are as follows: 2003 $ 357 2004 348 2005 401 2006 305 2007 and subsequent years 5,616 ------- Total $ 7,027 =======66 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------Long-term Debt
December 31,
2002
2001
($ in millions)
Notes at average rates and maturities as follows:
6.64%, maturing 2003 to 2007
$
1,840
$
1,500
6.91%, maturing 2008 to 2011
1,200
1,750
8.10%, maturing 2017 to 2021
800
800
7.54%, maturing 2027 to 2031
1,500
1,500
7.05%, maturing 2037
717
750
7.90%, maturing 2097
350
350
Equipment obligations at an average rate of 4.7%, maturing to 2014
558
579
Capitalized leases at an average rate of 2.1%, maturing to 2015
306
316
Other debt at an average rate of 6.1%, maturing to 2019
122
119
Discounts and premiums, net
(29)
(32)
Total long-term debt
7,364
7,632
Less current maturities
(358)
(605)
Long-term debt excluding current maturities
$
7,006
$
7,027
Long-term debt maturities subsequent to 2003 are as follows:
2004
$
356
2005
500
2006
295
2007
858
2008 and subsequent years
4,997
Total
$
7,006
K51
Each holder of a 2037 note may require NS to redeem all or part of the note at face value, plus accrued and unpaid interest, on May 1, 2004.
The railroad equipment obligations and the capitalized leases are secured by liens on the underlying equipment.
Certain lease obligations require the maintenance of yen-denominated deposits, which are pledged to the lessor to satisfy yen-denominated lease payments. These deposits are included in "Other assets" on the balance sheet and totaled $86 million at Dec. 31, 2002, and $78 million at Dec. 31,
Shelf Registration2001, and $90 million at Dec. 31, 2000.2001.- ------------------NS filed on Form S-3 a shelf registration statement with the Securities and Exchange
CommissionCommission covering theissuanceissuance of up to $1 billion ofsecurities.securities. As of Dec. 31,2001,2002, NS had issued$250a total of $550 million ofdebtnotes under this shelf registration.Commercial Paper and Credit Agreement
- -------------------------------------NS has the ability to issue commercial paper backed by a $1 billion credit agreement that expires in 2006. At Dec. 31, 2002, and Dec. 31, 2001, NS had no commercial paper outstanding.
Debt CovenantsAt Dec. 31, 2000, $1,132 million of commercial paper was outstanding and was classified as long-term because NS had the ability, through a previous credit agreement, to convert this obligation into longer-term debt.Any borrowings under the credit agreement are contingent on the continuing effectiveness of the representations and warranties made at the inception of the agreement.- --------------NS is subject to various financial covenants with respect to its debt and under its credit agreement, including a minimum net worth requirement, a maximum leverage ratio restriction and certain restrictions on issuance of further debt. At Dec. 31,
2001,2002, NS was in compliance with all debt covenants.67 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------9.
LEASE COMMITMENTSLease CommitmentsNS is committed under long-term lease
agreements,agreements, which expire on various dates through 2067, for equipment, lines of road and other property. The following amounts do not include payments to PRR under the Operating Agreement and lease agreements or to CRC under the SAA agreements (see Note 2). Future minimum lease payments and operating lease expense, other than to PRR and CRC, are as follows:
Operating Capital ($ in millions) Leases Leases - --------------- --------- -------2002 $ 113 $ 47 2003 97 49 2004 75 48 2005 65 51 2006 52 57 2007 and subsequent years 488 123 ------- ------- Total $ 890 $ 375 ======= Less imputed interest on capital leases at an average rate of 7.1% 59 ------- Present value of minimum lease payments included in debt $ 316 =======
Operating Lease Expense - -----------------------($ in millions) 2001 2000 1999 - --------------- ---- ---- ----Minimum rents $ 149 $ 167 $ 118 Contingent rents 55 61 61 ------- ------- ------- Total $ 204 $ 228 $ 179 ======= ======= =======
Operating
Capital
Leases
Leases
($ in millions)
2003
$
113
$
47
2004
89
52
2005
77
47
2006
61
43
2007
54
40
2008 and subsequent years
486
123
Total
$
880
$
352
Less imputed interest on capital leases at an average rate of 7.0%
(46)
Present value of minimum lease payments included in debt
$
306
K52
Operating Lease Expense
2002
2001
2000
($ in millions)
Minimum rents
$
140
$
149
$
167
Contingent rents
60
55
61
Total
$
200
$
204
$
228
During 2000, NS entered into an operating lease for 140 locomotives, which is renewable annually at NS' option, has a maximum term of eight years and includes purchase options. Because the fixed, noncancellable term of the lease is one year, future minimum lease payments in the table above do not include amounts related to this lease. However, operating lease expense
for 2001in the table above does include$18 millionamounts related to thislease.lease as follows: $13 million in 2002, $18 million in 2001 and $11 million in 2000. If NS does not renew the lease during the eight-year period or does not purchase the locomotives at the end of the maximum lease term, it is liable for any shortfall in the then fair value of the locomotives and a specified residual value. NS does not expect to be required to make any payments under this provision.68 Item 8.As of Dec. 31, 2002, the maximum liability under this provision, assuming NS chose not to renew the lease in 2003 and the then fair value of the locomotives was zero, would be $116 million. The lessor is a special-purpose entity whose activities are limited to those incident to this particular transaction. Upon adoption of FinancialStatementsAccounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities," which will occur in 2003, NS will consolidate this entity. As a result, the locomotives will be shown as assets, debt will increase, operating lease expense will decline, depreciation expense will increase andSupplementary Data. (continued) - ------ -------------------------------------------interest expense on debt will increase.
10. OTHER LIABILITIESDecember 31, ($ in millions) 2001 2000 - --------------- ---- ----Retiree health and death benefit obligation (Note 11) $ 291 $ 291 Casualty and other claims 265 262 Deferred compensation 147 148 Net pension obligations (Note 11) 79 83 Accrued Conrail-related costs (Note 2) 46 72 Other 261 275 -------- -------- Total $ 1,089 $ 1,131 ======== ========10. Other Liabilities
December 31,
2002
2001
($ in millions)
Retiree health and death benefit obligations (Note 11)
$
286
$
291
Casualty and other claims
254
265
Deferred compensation
144
147
Net pension obligations (Note 11)
82
79
Accrued Conrail-related costs (Note 2)
26
46
Other
237
261
Total
$
1,029
$
1,089
11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Norfolk Southern and certain subsidiaries have both funded and unfunded defined benefit pension plans covering principally salaried employees. Norfolk Southern and certain subsidiaries also provide specified health care and death benefits to eligible retired employees and their dependents. Under the present plans, which may be amended or terminated at NS' option, a defined percentage of health care expenses is covered, reduced by any deductibles, copayments, Medicare payments and, in some cases, coverage provided under other group insurance policies.
K53
Pension and Other Postretirement Benefit Obligations and Plan Assets
Pension Benefits
Other Benefits
2002
2001
2002
2001
($ in millions)
Change in benefit obligations
Benefit obligation at beginning of year
$
1,324
$
1,312
$
479
$
445
Service cost
17
15
13
14
Interest cost
91
94
33
33
Amendment
--
6
--
--
Legislative changes
--
(19)
--
--
Actuarial (gains) losses
54
36
98
21
Benefits paid
(116)
(120)
(31)
(34)
Benefit obligation at end of year
1,370
1,324
592
479
Change in plan assets
Fair value of plan assets at beginning of year
1,798
1,999
118
126
Actual return on plan assets
(201)
(74)
(12)
(8)
Employer contribution
6
7
31
34
401(h) account transfer
(18)
(14)
--
--
Benefits paid
(116)
(120)
(31)
(34)
Fair value of plan assets at end of year
1,469
1,798
106
118
Funded status
99
474
(486)
(361)
Unrecognized (gain) loss
305
(142)
169
46
Unrecognized prior service cost
26
30
--
--
Net amount recognized
$
430
$
362
$
(317)
$
(315)
Amounts recognized in the Consolidated
Balance Sheets consist of:
Prepaid benefit cost
$
497
$
426
$
--
$
--
Accrued benefit liability
(82)
(79)
(317)
(315)
Accumulated other comprehensive income
15
15
--
--
Net amount recognized
$
430
$
362
$
(317)
$
(315)
Of the pension plans included above, the unfunded pension plans were the only plans with an accumulated benefit obligation in excess of plan assets. These plans' accumulated benefit obligations were $82 million at Dec. 31, 2002, and $79 million at Dec. 31, 2001. These plans' projected benefit obligations were $94 million at Dec. 31, 2002 and $89 million at Dec. 31, 2001. Because of the nature of such plans, there are no plan assets.
NS received Section 401(h) account transfers, from pension assets, of $18 million in 2002 and $14 million in 2001 as reimbursement for medical payments for retirees.
Legislative changes primarily resulting from the December 2001 amendment to the Railroad Retirement Act ("The Act") increased benefits payable to certain retirees covered by The Act. Since employees' pension benefits paid by NS are offset by a portion of benefits paid under The Act, the amendment served to reduce NS' obligation by approximately $19 million at Dec. 31, 2001.
During 2001, NS amended its qualified and nonqualified pension plans to enhance benefits to certain NS employees. The amendments increased the pension benefit obligation by $6 million at Dec. 31, 2001. During 2000, NS amended its qualified pension plan to allow for the payment of qualifying disability benefits.
K54
Pension and Other Postretirement Benefit Costs Components
2002
2001
2000
($ in millions)
Pension benefits
Service cost
$
17
$
15
$
18
Interest cost
91
94
79
Cost of early retirement programs
--
--
119
Expected return on plan assets
(179)
(202)
(192)
Amortization of prior service cost
4
4
4
Amortization of initial net asset
--
(3)
(7)
Recognized net actuarial gain
(13)
(24)
(38)
Net benefit
$
(80)
$
(116)
$
(17)
Other postretirement benefits
Service cost
$
13
$
14
$
15
Interest cost
33
33
27
Cost of early retirement programs
--
--
14
Expected return on plan assets
(13)
(13)
(14)
Amortization of prior service cost
--
--
(4)
Net cost
$
33
$
34
$
38
Pension Assumptions
Pension and other postretirement benefit costs are determined based on actuarial valuations that reflect appropriate assumptions as of the measurement date, ordinarily the beginning of each year. The funded status of the plans is determined using appropriate assumptions as of each year end. A summary of the major assumptions follows:
2002
2001
2000
Funded status:
Discount rate
6.75%
7.25%
7.50%
Future salary increases
4.5%
5%
5%
Pension cost:
Discount rate
7.25%
7.50%
7.75%
Return on assets in plans
9%
10%
10%
Future salary increases
5%
5%
5%
Health Care Cost Trend Assumptions
For measurement purposes, increases in the per capita cost of covered health care benefits were assumed to be 10% for 2003 and 9% for 2004. It is assumed the rate will decrease gradually to an ultimate rate of 5.0% for 2008 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported in the financial statements. To illustrate, a one-percentage-point change in the assumed health care cost trend would have the following effects:
One percentage point
Increase
Decrease
($ in millions)
Increase (decrease) in:
Total service and interest cost components
$
6
$
(5)
Postretirement benefit obligation
$
69
$
(57)
K55
Other Postretirement Coverage
Under collective bargaining agreements, NS and certain subsidiaries participate in a multi-employer benefit plan, which provides certain postretirement health care and life insurance benefits to eligible union employees. Premiums under this plan are expensed as incurred and amounted to $11 million in 2002, $10 million in 2001 and $7 million in 2000.
401(k) Plans
Norfolk Southern and certain subsidiaries provide 401(k) savings plans for employees. Under the plans, NS matches a portion of employee contributions, subject to applicable limitations. Since 1999, NS has contributed newly issued shares of Common Stock for its matching contributions. NS' expenses under these plans were $12 million in 2002, $11 million in 2001 and $12 million in 2000.
Early Retirement Programs in 2000
- ---------------------------------During 2000, NS offered two voluntary early retirement programs to its salaried employees. The principal incentives offered in these programs were enhanced pension benefits, the cost for most of which will be paid from NS' overfunded pension plan. A February program was accepted by 919 of 1,180 eligible employees, and a December program was accepted by 370 of 846 eligible employees. The total cost of these programs, which is included in "Compensation and benefits," was $133 million. The resulting noncash reduction to NS' pension plan asset is included in "Other - net" in the Consolidated Statement of Cash Flows.
69 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------
Pension Benefits Other Benefits ($ in millions) 2001 2000 2001 2000 - --------------- ---- ---- ---- ----CHANGE IN BENEFIT OBLIGATIONS Benefit obligation at beginning of year $ 1,312 $ 1,058 $ 445 $ 340 Cost of early retirement benefits - 119 - 14 Service cost 15 18 14 15 Interest cost 94 79 33 27 Amendment 6 21 - - Legislative changes (19) - - - Actuarial (gains) losses 36 120 21 79 Benefits paid (120) (103) (34) (30) ------- ------- ------- ------- Benefit obligation at end of year 1,324 1,312 479 445 ------- ------- ------- ------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 1,999 2,072 126 152 Actual return on plan assets (74) 30 (8) (5) Employer contribution 7 8 34 9 401(h) account transfer (14) (8) - - Benefits paid (120) (103) (34) (30) ------- ------- ------- ------- Fair value of plan assets at end of year 1,798 1,999 118 126 ------- ------- ------- ------- Funded status 474 687 (361) (319) Unrecognized initial net asset - (3) - - Unrecognized (gain) loss (142) (478) 46 4 Unrecognized prior service cost (benefit) 30 47 - - ------- ------- ------- ------- Net amount recognized $ 362 $ 253 $ (315) $ (315) ======= ======= ======= ======= Amounts recognized in the Consolidated Balance Sheets consist of: Prepaid benefit cost $ 426 $ 315 $ - $ - Accrued benefit liability (79) (83) (315) (315) Accumulated other comprehensive income 15 21 - - ------- ------- ------- ------- Net amount recognized $ 362 $ 253 $ (315) $ (315) ======= ======= ======= =======Of the pension plans included above, the unfunded pension plans were the only plans with an accumulated benefit obligation in excess of plan assets. These plans' accumulated benefit obligations were $79 million at Dec. 31, 2001, and $83 million at Dec. 31, 2000. These plans' projected benefit obligations were $89 million at Dec. 31, 2001 and 2000. Because of the nature of such plans, there are no plan assets. NS received Section 401(h) account transfers, from pension assets, of $14 million in 2001 and $8 million in 2000 as reimbursement for medical payments for retirees. 70 Item 8. Financial Statements and Supplementary Data. (continued) - ------ ------------------------------------------- Legislative changes primarily resulting from the December 2001 amendment to the Railroad Retirement Act ("The Act") increased benefits payable to certain retirees covered by The Act. Since employees' pension benefits paid by NS are offset by a portion of benefits paid under The Act, the amendment served to reduce NS' obligation by approximately $19 million at Dec. 31, 2001. During 2001, NS amended its qualified and nonqualified pension plans to enhance benefits to certain NS employees. The amendments increased the pension benefit obligation by $6 million at Dec. 31, 2001. During 2000, NS amended its qualified pension plan to allow for the payment of qualifying disability benefits. The amendment increased the pension benefit obligation by $21 million at Dec. 31, 2000. Pension and other postretirement benefit costs are determined based on actuarial valuations that reflect appropriate assumptions as of the measurement date, ordinarily the beginning of each year. The funded status of the plans is determined using appropriate assumptions as of each year end. During 1999, NS received assets from the Conrail pension plan and assumed certain related liabilities. As a result, the measurement dates for determining pension costs were Jan. 1, 1999, and Aug. 31, 1999; the costs reflect discount rates of 6.75% and 7.75%, respectively, and other assumptions appropriate at those dates. A summary of the major assumptions follows:
2001 2000 1999 ---- ---- ----Funded status: Discount rate 7.25% 7.50% 7.75% Future salary increases 5% 5% 5% Pension cost: Discount rate 7.50% 7.75% 6.75% Return on assets in plans 10% 10% 10% Future salary increases 5% 5% 5%
Pension and Other Postretirement Benefit Costs Components - ---------------------------------------------------------($ in millions) 2001 2000 1999 - --------------- ---- ---- ----PENSION BENEFITS Service cost $ 15 $ 18 $ 17 Interest cost 94 79 73 Cost of early retirement programs - 119 - Expected return on plan assets (202) (192) (152) Amortization of prior service cost 4 4 4 Amortization of initial net asset (3) (7) (7) Recognized net actuarial (gain) loss (24) (38) (22) ------ ------ ------ Net cost (benefit) $ (116) $ (17) $ (87) ====== ====== ====== OTHER POSTRETIREMENT BENEFITS Service cost $ 14 $ 15 $ 11 Interest cost 33 27 23 Cost of early retirement programs - 14 - Expected return on plan assets (13) (14) (12) Amortization of prior service cost - - (12) Recognized net actuarial (gain) loss - (4) (2) ------ ------ ------ Net cost $ 34 $ 38 $ 8 ====== ====== ======71 Item 8. Financial Statements and Supplementary Data. (continued) - ------ ------------------------------------------- For measurement purposes, increases in the per capita cost of covered health care benefits were assumed to be 7.0% for 2002 and 6.0% for 2003. It is assumed the rate will decrease gradually to an ultimate rate of 5.0% for 2004 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported in the financial statements. To illustrate, a one- percentage-point change in the assumed health care cost trend would have the following effects:
One percentage point ($ in millions) Increase Decrease - -------------------- -------- --------Increase (decrease) in: Total service and interest cost components $ 5 $ (4) Postretirement benefit obligation $ 42 $ (36)Under collective bargaining agreements, NS and certain subsidiaries participate in a multi-employer benefit plan, which provides certain postretirement health care and life insurance benefits to eligible union employees. Premiums under this plan are expensed as incurred and amounted to $10 million in 2001, $7 million in 2000 and $5 million in 1999. 401(k) Plans - ------------ Norfolk Southern and certain subsidiaries provide 401(k) savings plans for employees. Under the plans, NS matches a portion of employee contributions, subject to applicable limitations. Since 1999, NS has issued shares of Common Stock to fund its contributions. NS' expenses under these plans were $11 million in 2001 and $12 million in both 2000 and 1999. In November 1999, NS issued and contributed to eligible participants' accounts approximately 2 million shares of Norfolk Southern Common Stock in connection with a temporary special work incentive program available to its unionized employees during much of the third quarter of 1999. The cost of the program, which was charged to compensation and benefits expenses, was $49 million.12.
STOCK-BASED COMPENSATIONStock-based CompensationUnder the stockholder-approved Long-Term Incentive Plan (LTIP), a committee of nonemployee directors of the Board may grant stock options, stock appreciation rights (SARs), restricted stock and performance share units (PSUs), up to a maximum 88,025,000 shares of Norfolk Southern Common Stock (Common Stock). Of these shares, 5,000,000 were approved by the Board for issuance to non-officer participants; as a broadly based issuance, stockholder approval was not required. Under the Board-approved Thoroughbred Stock Option Plan (TSOP), the committee may grant stock options up to a maximum of 6,000,000 shares of Common Stock. Options may be granted for a term not to exceed 10 years, but may not be exercised prior to the first anniversary of the date of grant. Options are exercisable at the fair market value of Common Stock on the date of grant.
The LTIP also permits the payment
--–- on a current or a deferred basis and in cash or in stock---– of dividend equivalents on shares of Common Stock covered by options or PSUs in an amount commensurate with dividends paid on Common Stock. Tax absorption payments also are authorized in amounts estimated to equal the federal and state income taxes applicable to shares of Common Stock issued subject to a share retention agreement.72 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------Accounting Method
- -----------------As disclosed in Note 1, NS applies APB Opinion 25 and related interpretations in accounting for awards made under the plans. Accordingly, grants of PSUs, restricted stock, dividend equivalents, tax absorption payments and SARs result in charges to net income, while grants of stock options have no effect on net income. Related compensation costs were $23 million in 2002, $20 million in 2001 and $5 million in
2000 and $2 million in 1999.2000. NS recognized additional paid-in capital of $6 million in 2002, $1 million in 2001noneand zero in 2000and $4 million in 1999related to the tax benefit generated by stock option exercises.Had such compensation costs been determined in accordance with SFAS 123,Note 1 includes a table that illustrates the effect on net income
would have been $358 million in 2001, $149 million in 2000and$210 million in 1999; and basic and dilutedearnings per sharewould have been $0.93 in 2001, $0.39 in 2000 and $0.55 in 1999. Thesehad NS applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. The pro forma amounts include compensation costsascalculated using the Black-Scholesoption- pricingoption-pricing model, with average expected option lives of fiveyears for 2001 and 2000 grants and four years for 1999 grants;years; average risk-free interest rates of 4.6% in 2002, 5.1% in 2001 and 6.8% in2000 and 5.2% in 1999;K56
2000; average stock-price volatilities of 32% in 2002, 39% in 2001 and 33% in
2000 and 21% in 1999;2000; and dividend yields of zero in 2002, 2% in 2001 and 3% in2000 and 1999.2000. These assumptionsproduceproduced per-share grant-date fair values of $8.26 in 2002, $5.48 in 2001, and $5.22 in2000 and $5.12 in 1999.2000.
Stock Option Activity - --------------------- Weighted Average Option Shares Exercise Price ------------- ----------------Balance 12/31/98 13,059,048 $ 25.48 Granted 9,150,400 30.09 Exercised (859,085) 17.10 Canceled (234,000) 29.84 ---------- Balance 12/31/99 21,116,363 27.77 Granted 7,705,800 16.94 Exercised (273,813) 13.95 Canceled (427,400) 26.84 ---------- Balance 12/31/00 28,120,950 24.96 Granted 6,985,000 15.48 Exercised (1,079,902) 16.58 Canceled (612,525) 26.51 ---------- Balance 12/31/01 33,413,523 $ 23.21 ==========Stock Option Activity
Weighted
Average
Option Shares
Exercise Price
Balance 12/31/99
21,116,363
$
27.77
Granted
7,705,800
16.94
Exercised
(273,813)
13.95
Expired
(427,400)
26.84
Balance 12/31/00
28,120,950
$
24.96
Granted
6,985,000
15.48
Exercised
(1,079,902)
16.58
Expired
(612,525)
26.51
Balance 12/31/01
33,413,523
$
23.21
Granted
7,384,000
22.49
Exercised
(2,851,538)
17.48
Expired
(287,341)
26.73
Balance 12/31/02
37,658,644
$
23.47
Of the total options outstanding at Dec. 31,
2001, 262002, 30 million were vested and have a weighted-average exercise price of$25.25. 73 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------$23.71.
Stock Options Outstanding - ------------------------- Exercise Price Number Weighted Average - ------------------------------------ Outstanding Remaining Range Weighted Average at 12/31/01 Contractual Life - ----- ---------------- ----------- ----------------$15.48 to $16.94 $16.22 14,143,232 8.6 years 18.81 to 21.08 20.56 2,691,350 1.8 years 24.31 to 27.69 26.83 7,821,600 5.7 years 29.46 to 33.25 32.10 8,757,341 6.3 years - ---------------- ------ ---------- ----------------- $15.48 to $33.25 $23.21 33,413,523 6.8 years ==========Stock Options Outstanding
Number
Weighted Average
Exercise Price
Outstanding
Remaining
Range
Weighted Average
at 12/31/02
Contractual Life
$15.48 to $16.94
$ 16.25
12,317,834
7.6 years
$20.09 to $22.49
22.20
9,001,960
7.7 years
$24.31 to $27.69
26.85
7,708,350
4.7 years
$29.46 to $33.25
32.10
8,630,500
5.5 years
$15.48 to $33.25
$ 23.47
37,658,644
6.5 years
Performance Share Units
- -----------------------PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle. PSU grants and average grant-date fair market values were 815,000 and $22.49 in 2002; 817,500 and $15.48 in 2001; and 937,500 and $16.94 in
2000; and 850,000 and $27.72 in 1999, respectively.2000. PSUs may be paid in the form of shares of Common Stock, cash or any combination thereof. Shares earned and issued may be subject to share retention agreements and held by NS for up to five years.K57
Shares Available and Issued
- ---------------------------Shares of stock available for future grants and issued in connection with all features of the LTIP and TSOP are as follows:
2001 2000 1999 ---- ---- ----Available for future grants 12/31: LTIP 30,816,365 2,554,584 10,512,997 TSOP 2,535,000 2,488,700 2,349,600 Shares of Common Stock issued: LTIP 1,146,346 395,626 1,086,288 TSOP - - -74 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------
2002
2001
2000
Available for future grants 12/31:
LTIP
23,645,146
30,816,365
2,554,584
TSOP
2,568,200
2,535,000
2,488,700
Shares of Common Stock issued:
LTIP
2,917,898
1,146,346
395,626
TSOP
--
--
--
13.
STOCKHOLDERS' EQUITYStockholders' EquityAccumulated Other Comprehensive Loss
- ------------------------------------ "Accumulated"Accumulated other comprehensive loss" reported in the Consolidated Statements of Changes in Stockholders' Equity consisted of the following:
Balance Net Balance at Beginning Gain Reclassification at End ($ in millions) of Year (Loss) Adjustments of Year ------------- ------- ---- ----------- ------- December 31, 2001 -----------------Unrealized gains on securities $ 7 $ (1) $ - $ 6 Cash flow hedges - (16) 5 (11) Minimum pension liability (13) (37) - (50) ------ ------ ------ ----- Accumulated other comprehensive loss $ (6) $ (54) $ 5 $ (55) ====== ====== ====== ===== December 31, 2000 ----------------- Unrealized gains on securities $ 2 $ 5 $ - $ 7 Minimum pension liability (13) - - (13) ------ ------ ------ ----- Accumulated other comprehensive loss $ (11) $ 5 $ - $ (6) ====== ====== ====== =====75 Item 8. Financial Statements and Supplementary Data. (continued) - ------ ------------------------------------------- "Other
Balance
Net
Balance
at Beginning
Gain
Reclassification
at End
of Year
(Loss)
Adjustments
of Year
($ in millions)
December 31, 2002
Unrealized gains on securities
$
6
$
--
$
(5)
$
1
Cash flow hedges
(11)
35
(6)
18
Minimum pension liability
(50)
(34)
--
(84)
Accumulated other
comprehensive loss
$
(55)
$
1
$
(11)
$
(65)
December 31, 2001
Unrealized gains on securities
$
7
$
(1)
$
--
$
6
Cash flow hedges
--
(16)
5
(11)
Minimum pension liability
(13)
(37)
--
(50)
Accumulated other
comprehensive loss
$
(6)
$
(54)
$
5
$
(55)
K58
"Other comprehensive income (loss)" reported in the Consolidated Statements of Changes in Stockholders' Equity consisted of the following:
Pretax Tax (Expense) Net-of-Tax ($ in millions) Amount Benefit Amount ------------- ------ ------- ------Year ended 12/31/01 - ------------------- Net gain (loss) arising during the year: Cash flow hedges $ (27) $ 11 $ (16) Less reclassification adjustments 8 (3) 5 ----- ------ ------ Subtotal (19) 8 (11) Unrealized gains (losses) on securities (1) - (1) Minimum pension liability (35) (2) (37) ----- ------ ------ Other comprehensive income (loss) $ (55) $ 6 $ (49) ===== ====== ====== Year ended 12/31/00 - ------------------- Net gain (loss) arising during the year: Unrealized gains (losses) on securities $ 7 $ (2) $ 5 ----- ------ ------ Other comprehensive income (loss) $ 7 $ (2) $ 5 ===== ====== ====== Year ended 12/31/99 - ------------------- Net gain (loss) arising during the year: Unrealized gains (losses) on securities $ (6) $ 1 $ (5) Minimum pension liability 2 - 2 ----- ------ ------ Other comprehensive income (loss) $ (4) $ 1 $ (3) ===== ====== ======
Tax
Pretax
(Expense)
Net-of-Tax
Amount
Benefit
Amount
($ in millions)
Year ended Dec. 31, 2002
Net gain (loss) arising during the year:
Cash flow hedges
$
58
$
(23)
$
35
Reclassification adjustments for gains
included in net income
(10)
4
(6)
Subtotal
48
(19)
29
Reclassification adjustments for realized
gains on securities included in net income
(9)
4
(5)
Minimum pension liability
(34)
--
(34)
Other comprehensive income (loss)
$
5
$
(15)
$
(10)
Year ended Dec. 31, 2001
Net gain (loss) arising during the year:
Cash flow hedges
$
(27)
$
11
$
(16)
Reclassification adjustments for gains
included in net income
8
(3)
5
Subtotal
(19)
8
(11)
Unrealized gains (losses) on securities
(1)
--
(1)
Minimum pension liability
(35)
(2)
(37)
Other comprehensive income (loss)
$
(55)
$
6
$
(49)
Year ended Dec. 31, 2000
Net gain (loss) arising during the year:
Unrealized gains (losses) on securities
$
7
$
(2)
$
5
Other comprehensive income (loss)
$
7
$
(2)
$
5
In 2002 and 2001, Conrail recorded a $59 million and a $70 million loss, respectively, in other comprehensive income related to an increase in its minimum pension liability. NS' "Other comprehensive loss" includes $34 million for 2002 and $41 million for 2001,
and its "Accumulated other comprehensive loss" at Dec. 31, 2001, include $41 millionarising fromthisthe Conrailadjustment.adjustments.Undistributed Earnings of Equity Investees
- ------------------------------------------ "Retained"Retained income" includes undistributed earnings of equity investees, principally attributable to NS' equity in the earnings of Conrail, of $375 million at Dec. 31, 2002; $355 million at Dec. 31, 2001; and $351 million at Dec. 31,
2000; and $330 million at Dec. 31, 1999. 76 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------2000.K59
14.
EARNINGS PER SHAREEarnings Per ShareThe following table sets forth the calculation of basic and diluted earnings per share:
($ in millions except per share, shares in millions) 2001 2000 1999 - -------------------------------- ---- ---- ----Basic earnings per share: Income available to common stockholders for basic and diluted computations $ 375 $ 172 $ 239 ------ ------ ------ Weighted-average shares outstanding 385 383 381 ------ ------ ------ Basic earnings per share $ 0.97 $ 0.45 $ 0.63 ------ ------ ------ Diluted earnings per share: Weighted-average shares outstanding per above 385 383 381 Dilutive effect of outstanding options, PSUs and SARs (as determined by the application of the treasury stock method) 1 - 1 ------ ------ ------ Adjusted weighted-average shares outstanding 386 383 382 ------ ------ ------ Diluted earnings per share $ 0.97 $ 0.45 $ 0.63 ====== ====== ======
2002
2001
2000
($ in millions except per share, shares in millions)
Income available to common stockholders for
basic and diluted computations
$
460
$
375
$
172
Basic earnings per share:
Weighted-average shares outstanding
388
385
383
Basic earnings per share
$
1.18
$
0.97
$
0.45
Diluted earnings per share:
Weighted-average shares outstanding per above
388
385
383
Dilutive effect of outstanding options, PSUs and
SARs (as determined by the application of the
treasury stock method)
2
1
--
Adjusted weighted-average shares outstanding
390
386
383
Diluted earnings per share
$
1.18
$
0.97
$
0.45
These calculations exclude options for which the exercise price
of whichexceeded the average market price of Common Stock as follows: 24 million in 2002, 21 million in 200120and 26 million inthe fourth quarter, 19 million in each of the third and second quarters, and 28 million in the first quarter; in 2000, 28 million in the fourth, third and first quarters, and 20 million in the second quarter; and in 1999, 17 million in the fourth quarter, 9 million in the third quarter, 7 million in the second quarter and 5 million in the first quarter.2000.There are no adjustments to "Net income" or "Income from continuing operations" for the diluted earnings per share computations.
15.
FAIR VALUES OF FINANCIAL INSTRUMENTSFair Values of Financial InstrumentsThe fair values of "Cash and cash equivalents," "Short-term investments," "Accounts receivable" and "Accounts payable" approximate carrying values because of the short maturity of these financial instruments. The fair value of corporate-owned life insurance approximates carrying value. The carrying amounts and estimated fair values for the remaining financial instruments, excluding derivatives (see Note 16) and investments accounted for under the equity method in accordance with APB Opinion No. 18, consisted of the following at Dec. 31:
2001 2000 ---- ---- Carrying Fair Carrying Fair ($ in millions) Amount Value Amount Value - --------------- -------- ----- -------- -----Investments $ 44 $ 51 $ 49 $ 56 Notes receivable 93 98 93 93 Long-term debt (7,632) (8,067) (7,636) (7,809)77 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------
2002
2001
Carrying
Fair
Carrying
Fair
Amount
Value
Amount
Value
($ in millions)
Investments
$
30
$
39
$
44
$
51
Notes receivable
93
104
93
98
Long-term debt
(7,364)
(8,412)
(7,632)
(8,067)
Quoted market prices were used to determine the fair value of marketable securities; underlying net assets were used to estimate the fair value of other investments. The fair values of notes receivable are based on future discounted cash flows. The fair values of debt were estimated based on quoted market prices or discounted cash flows using current interest rates for debt with similar terms, company rating and remaining maturity.
K60
Carrying amounts of marketable securities reflect unrealized holding gains of $1 million on Dec. 31, 2002, and $10 million on Dec. 31,
2001, and $11 million on Dec. 31, 2000.2001. Sales of "available-for-sale" securities were immaterial for the years ended Dec. 31, 2002, 2001 and 2000.16.
DERIVATIVE FINANCIAL INSTRUMENTSDerivative Financial InstrumentsOn Jan. 1, 2001, NS adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as amended by Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (SFAS 138). The Statements establish accounting and reporting standards for derivative instruments and hedging activities, requiring that all derivatives be recognized in the financial statements as either assets or liabilities and that they be measured at fair value. Changes in fair value are recorded as adjustments to the assets or liabilities being hedged in "Other comprehensive income," or in current earnings, depending on whether the derivative is designated and qualifies for hedge accounting, the type of hedge transaction represented and the effectiveness of the hedge.
The adoption of SFAS 133 and SFAS 138 resulted in the recognition of a $5 million asset and a $5 million increase in long-term debt as of Jan. 1, 2001.NS uses derivative financial instruments to reduce the risk of volatility in its diesel fuel costs and to manage its overall exposure to fluctuations in interest rates. NS does not engage in the trading of derivatives. Management has determined that its derivative financial instruments qualify as either fair-value or cash-flow hedges, having values that highly correlate with the underlying hedged exposures, and has designated such instruments as hedging transactions. Credit risk related to the derivative financial instruments is considered to be minimal and is managed by requiring high credit standards for counterparties and periodic settlements.
Diesel Fuel Hedging
- -------------------In the second quarter of 2001, NS began a program to hedge a portion of its diesel fuel consumption. The intent of the program is to assist in the management of NS' aggregate risk exposure to fuel price fluctuations, which can significantly affect NS' operating margins and profitability. In order to minimize this risk, NS instituted a continuous hedging strategy for a portion of its estimated future fuel needs by entering into a series of
forward purchases andswaps in order to lock in the purchase prices of some of its diesel fuel. Management has designated these derivative instruments as cash-flow hedges of the exposure to variability in expected future cash flows attributable to fluctuations in diesel fuel prices.Following is a summary of NS' diesel fuel swaps:
2002 2001 Number of swaps entered into during the year 288 222 Approximate number of gallons hedged (millions) 393 370 Approximate average price per gallon of Nymex No. 2 heating oil $0.66 $0.68 2003 2004 2005 Percent of estimated future diesel fuel consumption covered as of Dec. 31, 2002 62% 22% -- Hedges are placed each month by competitive bid among selected counterparties. The goal of this hedging strategy is to average fuel costs over an extended period of time while minimizing the incremental cost of hedging. The program provides that NS will not enter into any fuel hedges with a duration of more than 36 months, and that no more than
80 percent80% of NS' average monthly fuel consumption will be hedged for each month within any 36-month period. Diesel fuel costs represented8%7%,9%8% and6%9% of NS' operating expenses for the years ended Dec. 31, 2002, 2001 and 2000,and 1999,respectively.78 Item 8. Financial Statements and Supplementary Data. (continued) - ------ ------------------------------------------- NS entered into two types of diesel fuel derivative transactions in 2001. Management has designated these derivative instruments as cash-flow hedges of the exposure to variability in expected future cash flows attributable to fluctuations in diesel fuel prices.K61
In 2001, NS also purchased eight monthly call options at a strike price of 84 cents per gallon of Nymex No. 2 heating oil. The cost of the monthly options, which expired serially through Dec. 31, 2001, was amortized as a component of diesel fuel expense. Because the price of diesel fuel did not reach the strike price at any time during the period the options were outstanding, NS did not record any benefit related to these transactions.
During 2001, NS entered into 222 fuel swaps for approximately 370 million gallons at an average price of approximately 68 cents per gallon of Nymex No. 2 heating oil. As of Dec. 31, 2001, outstanding swaps covered approximately 32 percent and 21 percent of estimated fuel purchases for the years 2002 and 2003, respectively.NS' fuel hedging activity resulted in a net decrease in 2002 diesel fuel expense of $10 million and a net increase in 2001 diesel fuel expense of $8 million. Ineffectiveness related to the use of diesel fuel hedges in 2002 and 2001 was less than $1
million.million for each year.Interest Rate Hedging
- ---------------------NS manages its overall exposure to fluctuations in interest rates by issuing both fixed and floating-rate debt instruments, and by entering into interest rate hedging transactions. NS had $220 million, or 3.2%, and $251 million, or 3.5%
, and $280 million, or 4.3%, of its fixed rate debt portfolio hedged at Dec. 31,20012002, and Dec. 31,2000,2001, respectively, using interest rate swaps that qualify for and are designated as fair-value hedge transactions. These swaps have been effective in hedging the changes in fair value of the related debt arising from changes in interest rates and, accordingly, there has been no impact on earnings resulting from ineffectiveness associated with these derivative transactions.Fair Values
- -----------The fair values of NS' diesel fuel derivative instruments at Dec. 31, 2002 and 2001, were determined based upon current fair market values as quoted by third party dealers. Fair values of interest rate swaps were determined based upon the present value of expected future cash flows discounted at the appropriate implied spot rate from the spot rate yield curve. Fair value adjustments are noncash transactions and, accordingly, are excluded from the Consolidated Statement of Cash Flows.
At Dec. 31, 2001,"Accumulated other comprehensive loss," a component of "Stockholders' equity,"includesincluded $29 million (pretax) at Dec. 31, 2002, relating to an increase, and $15 million (pretax) at Dec. 31, 2001, relating tothea decrease in the fair value ofthederivative fuel hedging transactions that will terminate withinthe next12 months.The asset and liability positions of NS' outstanding derivative financial instruments were as follows:
December 31, ($ in millions) 2001 2000 - --------------- ---- ----Interest rate hedges: Gross fair market asset position $ 12 $ 5 Gross fair market (liability) position - - Fuel hedges: Gross fair market asset position - - Gross fair market (liability) position (19) - ----- ----- Total net asset (liability) position $ (7) $ 5 ===== =====79 Item 8. Financial Statements and Supplementary Data. (continued)
December 31,
2002
2001
($ in millions)
Interest rate hedges:
Gross fair market asset position
$
24
$
12
Gross fair market (liability) position
--
--
Fuel hedges:
Gross fair market asset position
29
--
Gross fair market (liability) position
--
(19)
Total net asset (liability) position
$
53
$
(7)
17. Discontinued Operations -
------ ------------------------------------------- 17. DISCONTINUED OPERATIONS - MOTOR CARRIERMotor CarrierOn March 28, 1998, NS sold all the common stock of North American Van Lines, Inc. (NAVL), its motor carrier subsidiary. Results in 2001 include an additional after-tax gain of $13 million, or 3 cents per share, that resulted from the expiration of certain indemnities contained in the sales agreement.
K62
18.
COMMITMENTS AND CONTINGENCIESCommitments and ContingenciesLawsuits
- --------Norfolk Southern and certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations. When management concludes that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to expenses.
An accrualWhile the ultimate amount of liability incurred in any of these lawsuits and claims isnot made whendependent on future developments, in management'sbest estimate, based on known factsopinion the recorded liability is adequate to cover the future payment of such liability. However, the final outcome of any of these lawsuits andcircumstances, isclaims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals thatit is unlikely thatcould be significant to results of operations in aloss has been incurred.particular year or quarter. Any adjustments to the recorded liability will be reflected in expenses in the periods in which such adjustments are known.Presently, there are two
casesmatters, one involving laborissuesarbitration and other claims for "New York Dock" and other income protection benefits and the other involving contractual obligations of a fiber optic codeveloper, Williams Communications, LLC ("Williams Communications"), where the aggregated range of loss could be fromnothingzero to $75 million. Management believes that NS will prevail in both thesecases.matters. On January 29, 2003, the United States District Court for the Northern District of Georgia entered an order requiring Williams Communications to pay T-Cubed approximately $36 million, plus prejudgment interest at a rate of 9% per annum, in connection with its contractual obligations to T-Cubed. Williams Communications may elect to appeal. The ability to collecta judgment againstand retain thecodeveloper,$36 million receivable due from Williams CommunicationsLLC,may be limiteddue tobecause of itsdecliningfinancialcondition; however, thecondition. The shortfall, if any, cannot now be determined. Its parent, Williams Communications Group, Inc., filed in April 2002 a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code, and emerged from bankruptcy in October 2002. Williams Communications was not included in the bankruptcy petition. Unfavorable outcomesonin either of thesecasesmatters could result in accruals that could be significant to results of operations in a particular year or quarter.Casualty Claims
- ---------------NS is generally self-insured for casualty claims. Claims in excess of self-insurance levels are insured up to excess coverage limits. The casualty claims liability is determined actuarially, based upon claims filed and an estimate of claims incurred but not yet reported. While the ultimate amount of claims incurred is dependent on future developments, in management's opinion, the recorded liability is adequate to cover the future payments of claims. However, it is possible that the recorded liability may not be adequate to cover the future payment of claims. Adjustments to the recorded liability will be reflected in operating expenses in the periods in which such adjustments are known.
Environmental Matters
- ---------------------NS is subject to various jurisdictions' environmental laws and regulations. It is NS' policy to record a liability where such liability or loss is probable and its amount can be estimated reasonably. Claims, if any, against third parties for recovery of cleanup costs incurred by NS are reflected as receivables in the balance sheet and are not netted against the associated NS liability. Environmental engineers regularly participate in ongoing evaluations of all identified sites and in determining any necessary adjustments to initial liability estimates. NS also has established an Environmental Policy Council, composed of senior managers, to oversee and interpret its environmental policy.
80 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------NS' balance sheets included liabilities for environmental exposures in the amount of $29 million at Dec. 31, 2002, and $33 million at Dec. 31, 2001
and $36 million at Dec. 31, 2000(of which $8 million was accounted for as a current liability in each year). At Dec. 31,2001,2002, the liability represented NS' estimate of the probable cleanup and remediation costs based on available information at126114 identified locations. On that date, 10 sites accounted for$17$16 million of the liability, and no individual site was considered to be material. NS anticipates that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period.K63
At some of the
126114 locations, certain NS subsidiaries, usually in conjunction with a number of other parties, have been identified as potentially responsible parties by the Environmental Protection Agency (EPA) or similar state authorities under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or comparable state statutes, which often impose joint and several liability for cleanup costs.With respect to known environmental sites (whether identified by NS or by the EPA or comparable state authorities), estimates of NS' ultimate potential financial exposure for a given site or in the aggregate for all such sites are necessarily imprecise because of the widely varying costs of currently available cleanup techniques, the likely development of new cleanup technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant's share of any estimated loss (and that participant's ability to bear it), and evolving statutory and regulatory standards governing liability.
The risk of incurring environmental liability
-– for acts and omissions, past, present and future-– is inherent in the railroad business. Some of the commodities in NS' traffic mix, particularly those classified as hazardous materials, can pose special risks that NS and its subsidiaries work diligently to minimize. In addition, several NS subsidiaries own, or have owned, land used as operating property, or which is leased or may have been leased and operated by others, or held for sale. Because environmental problems may exist on these properties that are latent or undisclosed, there can be no assurance that NS will not incur environmentally related liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably at this time. Moreover, lawsuits and claims involving these and other now-unidentified environmental sites and matters are likely to arise from time to time. The resulting liabilities could have a significant effect on financial condition, results of operations or liquidity in a particular year or quarter.However, based on its assessment of the facts and circumstances now known, management believes that it has recorded the probable costs for dealing with those environmental matters of which the Corporation is aware. Further, management believes that it is unlikely that any identified matters, either individually or in the aggregate, will have a material adverse effect on NS' financial position, results of operations or liquidity.
Purchase Commitments
- --------------------NSR had outstanding purchase commitments of approximately
$150$164 million in connection with its20022003 capital program.NSIn addition, Norfolk Southern hasforward fuelcommitted to purchasecommitments in the first quarter of 2002 covering 38telecommunications services totaling $38 milliongallons of fuel at an average cost of 62 cents per gallon, which includes federal taxes. 81 Item 8. Financial Statements and Supplementary Data. (continued) - ------ -------------------------------------------through 2006.Change-In-Control Arrangements
- ------------------------------Norfolk Southern has compensation agreements with officers and certain key employees that become operative only upon a change in control of the Corporation, as defined in those agreements. The agreements provide generally for payments based on compensation at the time of a covered individual's involuntary or other specified termination and for certain other benefits.
DebtGuarantees
- ---------------In a number of instances, NS and its subsidiaries have agreed to indemnify lenders for additional costs they may bear as a result of certain changes in laws or regulations applicable to their loans. Such changes may include impositions or modifications with respect to taxes, duties, reserves, liquidity, capital adequacy, special deposits, and similar requirements relating to extensions of credit by, deposits with, or the assets or liabilities of such lenders. Similar provisions exist in NS' accounts receivable sales program. The nature and timing of changes in laws or regulations applicable to NS' financings are inherently unpredictable, and therefore NS' exposure in connection with the foregoing indemnifications cannot be quantified. No liability has been recorded related to these indemnifications. In the case of one type of equipment financing, NSR's Japanese leveraged leases, NSR may terminate the leases and ancillary agreements if such a change-in-law indemnity is triggered. Such a termination would require NSR to make early termination payments that would not be expected to have a material adverse effect on NS' financial condition, results of operations or liquidity.
K64
NS has indemnified parties in a number of transactions for U.S. income tax withholding imposed as a result of changes in U.S. tax law. In all cases, NS has the right to unwind the related transaction if the withholding cannot be avoided in the future. Because these indemnities would be triggered and are dependent upon a change in the tax law, the maximum exposure is not quantifiable. Management does not believe that it is likely that it will be required to make any payments under these indemnities.
Norfolk Southern has indemnified the purchaser of North American Van Lines, Inc. (see Note 17) for tax liabilities related to tax years ended on or before the date of sale. The maximum exposure is not quantifiable; however, NS has recorded a reserve for its expected liability under this indemnification. It is unlikely that any additional payments would have a material adverse effect on NS' financial position, results of operations or liquidity.
NS has outstanding warranty liabilities primarily related to work performed at its locomotive facilities. NS has recorded a reserve of less than $2 million as of Dec. 31, 2002 and 2001 for these warranties.
As of Dec. 31,
2001,2002, certain Norfolk Southern subsidiaries are contingently liable as guarantors with respect to $8 million of indebtedness of an entity in which it has an ownership interest, the Terminal Railroad Association of St. Louis, due in 2019. Six other railroads are also jointly and severally liable as guarantors for this indebtedness. No liability has been recorded relatedentities. 82 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Norfolk Southern Corporation: We have audited the consolidated financial statements of Norfolk Southern Corporation and subsidiaries as listedto this guaranty.NS is liable for any shortfall in the
indexthen fair market value of certain leased locomotives and a specified residual value for the locomotives if the leases are not renewed, as discussed inItem 8. In connection with our audits of the consolidated financial statements, we have also audited the consolidated financial statement schedule listed in Item 14(a)2. These consolidated financial statements and this consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and this consolidated financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, onNote 9.NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(Unaudited)
Three Months Ended
March 31
June 30
Sept. 30
Dec. 31
(In millions of dollars, except per share amounts)
2002
Railway operating revenues
$
1,498
$
1,593
$
1,598
$
1,581
Income from railway operations
237
322
311
288
Net income
86
119
126
129
Earnings per share -
basic and diluted
$
0.22
$
0.31
$
0.32
$
0.33
2001
Railway operating revenues
$
1,540
$
1,592
$
1,508
$
1,530
Income from railway operations
205
282
245
275
Net income
74*
107
79
115
Earnings per share -
basic and diluted
$
0.19*
$
0.28
$
0.20
$
0.30
* Includes 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Norfolk Southern Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the$13 million, or 3 cents per share, after-tax gain relatedconsolidated financial statement schedule, when considered in relationto thebasic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP Norfolk, Virginia January 21, 2002 831998 sale of NS' motor carrier subsidiary (see Note 17).K65
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------ -----------------------------------------------------------and FinancialDisclosure. ------------------------Disclosure.None.
84PART III
- --------NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 10. Directors and Executive Officers of the
Registrant. - ------- -------------------------------------------------- Item 11. Executive Compensation. - ------- ---------------------- Item 12. Security Ownership of Certain Beneficial Owners and - ------- --------------------------------------------------- Management. ---------- and Item 13. Certain Relationships and Related Transactions. - ------- ----------------------------------------------Registrant.In accordance with General Instruction G(3),
theinformation called for by Part III is incorporated herein by reference from the information appearing under the caption "Election of Directors," including the subcaptions "Nominees for terms expiring in 2006," "Continuing Directors – those whose terms expire in 2004" and "Continuing Directors – those whose terms expire in 2005" in Norfolk Southern's definitive Proxy Statement, for the Norfolk Southern Annual Meeting of Stockholders to be held on May9, 2002,8, 2003, which definitive Proxy Statement will be filed electronically 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 hereof beginningon Page 19under "Executive Officers of the Registrant."85 PART IV - ------- NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)Item
14. Exhibits, Financial Statement Schedule and - ------- ------------------------------------------ Reports on Form 8-K. ------------------- (A) The following documents are filed as part of this report: 1. Index to Consolidated Financial Statements: Page ------------------------------------------ ---- Consolidated Statements of Income Years ended December 31, 2001, 2000, and 1999 51 Consolidated Balance Sheets As of December 31, 2001 and 2000 52 Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000, and 1999 53 Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 2001, 2000, and 1999 55 Notes to Consolidated Financial Statements 56 Independent Auditors' Report 82 2. Financial Statement Schedule: The following consolidated financial statement schedule should be read in connection with the consolidated financial statements: Index to Consolidated Financial Statement Schedule Page -------------------------------------------------- ---- Schedule II - Valuation and Qualifying Accounts 93 Schedules other than the one listed above are omitted either because they are not required or are inapplicable, or because the information is included in the consolidated financial statements or related notes. 86 Item 14. Exhibits, Financial Statement Schedule and - ------- ------------------------------------------ Reports on Form 8-K. (continued) ------------------- 3. Exhibits Exhibit Number Description - ------- ----------------------------------------------------------- 3 Articles of Incorporation and Bylaws - 3(i) The Restated Articles of Incorporation of Norfolk Southern Corporation are incorporated by reference to Exhibit 3(i) to Norfolk Southern Corporation's 10-K filed on March 5, 2001. 3(ii) The Bylaws of Norfolk Southern Corporation, as amended January 22, 2002, are filed herewith. 4 Instruments Defining the Rights of Security Holders, Including Indentures - (a) Indenture, dated as of January 15, 1991, from Norfolk Southern Corporation to First Trust of New York, National Association, as Trustee, related to the issuance of notes in the principal amount of $750 million, incorporated by reference to Exhibit 4.1 to Norfolk Southern Corporation's Registration Statement on Form S-3 (No. 33-38595)11. Executive Compensation.(b) First Supplemental Indenture, dated May 19, 1997, between Norfolk Southern Corporation and First Trust of New York, National Association, as Trustee, related to the issuance of notes in the principal amount of $4.3 billion, is incorporated herein by reference to Exhibit 1.1(d) to Norfolk Southern Corporation's Form 8-K filed on May 21, 1997. (c) Second Supplemental Indenture, dated April 26, 1999, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $400 million, is incorporated herein by reference to Exhibit 1.1(c) to Norfolk Southern Corporation's Form 8-K filed on April 30, 1999. (d) Third Supplemental Indenture, dated May 23, 2000, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $600 million, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on May 25, 2000. (e) Fourth Supplemental Indenture, dated as of February 6, 2001, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $1 billion, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on February 7, 2001. (f) Fifth Supplemental Indenture, dated as of July 5, 2001, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $250 million, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on July 5, 2001. (g) Rights Agreement, dated as of September 26, 2000, between Norfolk Southern Corporation and The Bank of New York, with exhibits thereto, is incorporated herein by reference to Exhibit 4 to Norfolk Southern Corporation's Form 8-K filed on September 26, 2000. 87 Item 14. Exhibits, Financial Statement Schedule and - ------- ------------------------------------------ Reports on Form 8-K. (continued) ------------------- 3. Exhibits (continued) Exhibit Number Description - ------- ------------------------------------------------------------In accordance with
Item 601(b)(4)(iii) of Regulation S-K, copies of other instruments of Norfolk Southern Corporation and its subsidiaries with respect to the rights of holders of long-term debt are not filed herewith, or incorporatedGeneral Instruction G(3), information called for byreference, but will be furnished to the Commission upon request. 10 Material Contracts - (a) The Transaction Agreement, dated as of June 10, 1997, by and among CSX, CSX Transportation, Inc., Registrant, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation and CRR Holdings LLC, with certain schedules thereto,Part III is incorporated herein by reference fromExhibit 10 tothe information appearing under the subcaption "Compensation" under the caption "Board of Directors" for directors and under the caption "Executive Compensation" for executives, including the information appearing in the "Summary Compensation Table" and under the subcaptions "Long-Term Incentive Plan" (including the three tables therein), "Pension Plans" (including the table therein), and "Change in Control Arrangements" in Norfolk Southern's definitive Proxy Statement, for the Norfolk SouthernCorporation's Form 8-KAnnual Meeting of Stockholders to be held on May 8, 2003, which definitive Proxy Statement will be filedon June 30, 1997. (b) Amendment No. 1, dated aselectronically with the Commission pursuant to Regulation 14A.Item 12. Security Ownership of
August 22, 1998, to the Transaction Agreement, dated as of June 10, 1997,Certain Beneficial Owners and Management.In accordance with General Instruction G(3), information called for by
and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation and CRR Holdings LLCPart III is incorporated herein by reference fromExhibit 10.1 tothe information appearing under the caption "Beneficial Ownership of Stock" in Norfolk Southern's definitive Proxy Statement, for the Norfolk SouthernCorporation's Form 10-QAnnual Meeting of Stockholders to be held on May 8, 2003, which definitive Proxy Statement will be filedon August 11, 1999. (c) Amendment No. 2, dated as of June 1, 1999,electronically with the Commission pursuant tothe Transaction Agreement, dated June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation and CRR Holdings LLC is incorporated herein by reference from Exhibit 10.2 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999. (d) Operating Agreement, dated as of June 1, 1999, by and between Pennsylvania Lines LLC and Norfolk Southern Railway Company is incorporated herein by reference from Exhibit 10.3 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999. (e) Amendment No. 1, dated as of September 29, 2001, to Operating Agreement, dated as of June 1, 1999, by and between Pennsylvania Lines LLC and Norfolk Southern Railway Company, is filed herewith. (f) Shared Assets Area Operating Agreement for North Jersey, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit 10.4 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999. (g) Shared Assets Area Operating Agreement for South Jersey/Philadelphia, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit 10.5 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999. (h) Shared Assets Area Operating Agreement for Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit 10.6 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999. 88 Item 14. Exhibits, Financial Statement Schedule and - ------- ------------------------------------------ Reports on Form 8-K. (continued) ------------------- 3. Exhibits (continued) Exhibit Number Description - ------- ------------------------------------------------------------ 10 Material Contracts (continued) - (i) Amendment No. 1, dated as of June 1, 2000, to the Shared Assets Areas Operating Agreement for North Jersey, South Jersey/Philadelphia and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference to Exhibit 10(h) to Norfolk Southern Corporation's 10-K filed on March 5, 2001. (j) Amendment No. 2, dated as January 1, 2001, to the Shared Assets Area Operating Agreements for North Jersey, South Jersey/Philadelphia and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is filed herewith. (k) Monongahela Usage Agreement, dated as of June 1, 1999, by and among CSX Transportation, Inc., Norfolk Southern Railway Company, Pennsylvania Lines LLC and New York Central Lines LLC, with exhibit thereto, is incorporated herein by reference from Exhibit 10.7 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999. (l) The Agreement, entered into as of July 27, 1999, between North Carolina Railroad Company and Norfolk Southern Railway Company, is incorporated herein by reference from Exhibit 10(i) to Norfolk Southern Corporation's Form 10-K filed on March 6, 2000. (m) The Supplementary Agreement, entered into as of January 1, 1987, between the Trustees of the Cincinnati Southern Railway and The Cincinnati, New Orleans and Texas Pacific Railway Company (the latter a wholly owned subsidiary of Norfolk Southern Railway Company) - extending and amending a Lease, dated as of October 11, 1881 - is incorporated by reference to Exhibit 10(k) to Norfolk Southern Corporation's Form 10-K filed on March 5, 2001. (n) The Norfolk Southern Corporation Executive Management IncentiveRegulation 14A.K66
Equity Compensation Plan
effective January 25, 2000, is incorporated by reference herein from Exhibit 10(l) to Norfolk Southern Corporation's Form 10-K filed on March 6, 2000. (o) TheInformation
Number of securities
remaining available
for future issuance
Number of securities
Weighted-average
under equity
to be issued upon
exercise price
compensation plans
exercise of
of outstanding
(excluding
Plan
outstanding options,
options, warrants
securities reflected
category
warrants and rights
and rights
in column (a))
(a)
(b)
(c)
Equity compensation
plans approved by
security holders (1)
31,786,844
$23.57 (4)
23,645,146 (6)
Equity compensation
plans not approved by
security holders (2)
8,431,800 (3)
$23.12 (3) (5)
3,113,200 (7)
Total
40,218,644
$23.47
26,758,346
(1) The Long-Term Incentive Plan, excluding five million shares for broad-based issuance to non-officers.
(2) The Long-Term Incentive Plan's five million shares for broad-based issuance to non-officers, the Thoroughbred
Stock Option Plan, the Directors' Restricted Stock Plan and the Safety Incentive Plan.
(3) Includes options and performance share units granted under the Long-Term Incentive Plan on five million shares for
non-officers and options granted under the Thoroughbred Stock Option Plan.
(4) Calculated without regard to 2,315,000 outstanding performance share units.
(5) Calculated without regard to 245,000 outstanding performance share units.
(6) Of the shares remaining available for grant under plans approved by stockholders, 5,185,000 are available for grant
as restricted shares or performance shares under the Long-Term Incentive Plan.
(7) Of the shares remaining available for grant under plans not approved by stockholders, 45,000 are available for grant
as restricted stock under the Directors' Restricted Stock Plan and 500,000 are available for grant as stock under
the Safety Incentive Plan.
Norfolk Southern Corporation Long-Term Incentive Plan
as("LTIP")Established on June 28, 1983, and approved by the stockholders at their Annual Meetings on May 10, 1984, on May 11, 1995, and most recently on May 10, 2001, LTIP was adopted to promote the success of Norfolk Southern by providing an opportunity for officers and other key employees to acquire a proprietary interest in the Corporation. On January 23, 2001, the Board of Directors approved the issuance of an additional 5,000,000 shares of authorized but unissued Common Stock under LTIP to participants who are not officers of Norfolk Southern. The issuance of these shares was broadly-based, and stockholder approval of these shares was not required. Accordingly, this portion of LTIP is included in the number of securities available for future issuance for plans not approved by stockholders. The Board also adopted an amended plan effective January 23, 2001,
is incorporated herein by referencesubject toExhibit 10(m) tostockholder approval, which included the reservation for issuance of an additional 30,000,000 shares of authorized but unissued Norfolk SouthernCorporation's Form 10-K filedCommon Stock, with no more than 6 million of such additional shares to be awarded as restricted shares or performance shares (including performance share units earned as performance shares). This amended plan was approved by stockholders onMarch 5, 2001. (p)May 10, 2001, resulting in an aggregate of 74,878,604 shares of Common Stock authorized for issuance under LTIP.Non-employee directors, officers and other key employees residing in the United States or Canada are eligible for selection to receive LTIP awards. Under LTIP, the Performance-Based Compensation Committee (Committee) may grant incentive stock options, nonqualified stock options, stock appreciation rights, restricted shares and performance share units (in addition, dividend equivalents may be awarded for options and performance share units). The Committee may establish such terms and conditions for the awards as provided in the plan.
K67
For options, the option price per share will not be less than 100% of the fair market value of Norfolk Southern's Common Stock on the effective date the option is granted. All options are subject to a vesting period of at least one year, and the term of the option will not exceed ten years. LTIP specifically prohibits option repricing without stockholder approval, except for capital adjustments.
Performance share units are performance-based awards which are earned upon achievement of goals the Committee establishes at the time of the grant for three equally weighted performance criteria approved by the stockholders -- return on average invested capital, operating ratio, and total return to NS stockholders as compared with the total return on all stocks comprising the S&P 500 Composite Stock Price Index -- and the units may be payable as shares of Norfolk Southern Common Stock or in cash.
Norfolk Southern Corporation
Officers' Deferred CompensationThoroughbred Stock Option Planas amended effective September 26, 2000, is incorporated herein by reference to Exhibit 10(n) to Norfolk Southern Corporation's Form 10-K filed on March 5, 2001. (q)The Board adopted the Norfolk Southern Corporation
Executives' Deferred CompensationThoroughbred Stock Option Planas amended effective("TSOP") on January20, 2001, is incorporated herein by reference26, 1999, toExhibit 10(o) to Norfolk Southern Corporation's Form 10-K filed on March 5, 2001. 89 Item 14. Exhibits, Financial Statement Schedule and - ------- ------------------------------------------ Reports on Form 8-K. (continued) ------------------- 3. Exhibits (continued) Exhibit Number Description - ------- ------------------------------------------------------------ 10 Material Contracts (continued) - (r) The Directors' Deferred Fee Planpromote the success of Norfolk SouthernCorporation, as amended effective January 23, 2001, is incorporated hereinbyreferenceproviding an opportunity for nonagreement employees toExhibit 10(p) toacquire a proprietary interest in Norfolk SouthernCorporation's Form 10-K filedand thereby to provide an additional incentive to nonagreement employees to devote their maximum efforts and skills to the advancement, betterment, and prosperity of Norfolk Southern and its stockholders. The plan has not been approved by stockholders. Six million shares of authorized but unissued Common Stock were reserved for issuance under TSOP.Active full-time nonagreement employees residing in the United States or Canada are eligible for selection to receive TSOP awards. Under TSOP, the Compensation and Nominating Committee of the Board of Directors may grant nonqualified stock options and may establish such terms and conditions as provided in the plan.
The option price per share will not be less than 100% of the fair market value of Norfolk Southern's Common Stock on
March 5, 2001. (s)the effective date the option is granted. All options are subject to a vesting period of at least one year, and the term of the option will not exceed ten years. TSOP specifically prohibits option repricing without stockholder approval, except for capital adjustments.Norfolk Southern Corporation Directors' Restricted Stock Plan
The Norfolk Southern Corporation Directors' Restricted Stock Plan
effective("Plan") was adopted on January 1, 1994, and is designed to increase ownership of Norfolk Southern's Common Stock by its non-employee directors so asrestatedto further align their ownership interest in Norfolk Southern with that of stockholders. The Plan has not been approved by stockholders. Currently, a maximum of 66,000 shares of Corporation Common Stock may be granted under the Plan. To make the grants to eligible directors, Norfolk Southern purchases, through one or more subsidiary companies, the number of shares required in open-market transactions at prevailing market prices, or makes such grants from Common Stock already owned by one or more of Norfolk Southern's subsidiary companies.Only non-employee directors, who are not and never have been employees of Norfolk Southern, are eligible to participate in the Plan. Upon becoming a director, each eligible director receives a one-time grant of 3,000 restricted shares of Norfolk Southern Common Stock. No individual member of the Board exercises discretion concerning the eligibility of any director or the number of shares granted.
The restriction period begins on the date of the grant and ends on the earlier of six months after the eligible director ceases to be a director by reason of disability, retirement or death. Directors will forfeit the right to receive the restricted shares if they cease to serve as a director of Norfolk Southern for reasons other than their disability, retirement or death.
K68
Norfolk Southern Corporation Safety Incentive Plan
The Norfolk Southern Corporation Safety Incentive Plan ("SIP") is designed to provide an additional incentive for eligible agreement employees to work safely. Under the plan, eligible employees who work without injury during the year receive a safety award payable in shares of Norfolk Southern Common Stock. A SIP award is between five and eight shares of stock.
SIP is broadly-based and has not been approved by stockholders. Shares of Common Stock issued under its terms are not registered under the Securities Act of 1933, pursuant to a no-action letter issued by the Securities and Exchange Commission on November
24, 1998,20, 1992. Accordingly, SIP does not define a specific amount of authorized shares for issuance under the plan. The Board has approved using up to 500,000 authorized but unissued shares for awards under the plan, and the number of shares remaining under this authorization are included in the number of securities available for future issuance for plans not approved by shareholders.Item 13. Certain Relationships and Related Transactions.
In accordance with General Instruction G(3), information called for by Part III is incorporated herein by reference from
Exhibit 10(h) tothe information appearing under the caption "Certain Relationships and Related Transactions" in NorfolkSouthern Corporation's Form 10-K filed on March 24, 1999. (t) Form of Severance Agreement, dated as of June 1, 1996, between Norfolk Southern Corporation and certain executive officers (including those defined as "named executive officers" and identified in the Corporation'sSouthern's definitive Proxy Statement, for the1997 through 2001 Annual Meetings of Stockholders) is filed herewith. (u)Norfolk SouthernCorporation Supplemental (formerly, Excess) Benefit Plan, effective asAnnual Meeting ofAugust 22, 1999, is incorporated herein by reference from Exhibit 10(r)Stockholders toNorfolk Southern Corporation's Form 10-Kbe held on May 8, 2003, which definitive Proxy Statement will be filedon March 6, 2000. (v) The Norfolk Southern Corporation Directors' Charitable Award Program, effective February 1, 1996, is filed herewith. (w) The Norfolk Southern Corporation Outside Directors' Deferred Stock Unit Program, as amended on September 23, 1997, is incorporated herein by reference from Exhibit 10(m)electronically with the Commission pursuant toNorfolk Southern Corporation's Form 10-K filed on March 25, 1998. (x) Agreement, dated asRegulation 14A.Item 14. Controls and Procedures.
(a) Evaluation of
October 1, 2001, providing enhanced pension benefits to three officers in exchange for their continued employment with Norfolk Southern Corporation for two years, is incorporated herein by reference to Exhibit 10(w) to Norfolk Southern Corporation's Form 10-Q filed on November 9, 2001. The agreement was entered into with L. Ike Prillaman, Vice ChairmanDisclosure Controls and Procedures.NS' Chief
Marketing Officer; Stephen C. Tobias, Vice Chairman and Chief Operating Officer; and Henry C. Wolf, Vice ChairmanExecutive Officer and Chief FinancialOfficer.Officer have evaluated the effectiveness of NS' disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, NS' disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to NS (including its consolidated subsidiaries) required to be included in NS' periodic filings under the Exchange Act.(b) Changes in Internal Controls.
Since the Evaluation Date, there have not been any significant changes in NS' internal controls or in other factors that could significantly affect such controls.
K69
PART IV
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item
14.15. Exhibits, Financial Statement Schedule and- ------- ------------------------------------------Reports on Form8-K. (continued) ------------------- 3. Exhibits (continued) Exhibit Number Description - ------- ------------------------------------------------------------ 12 Statement re: Computation of Ratio of Earnings to Fixed Charges. 21 Subsidiaries of the Registrant. 23 Consents of Experts and Counsel - (a) Consent of KPMG LLP. (b) Consent of KPMG LLP and Ernst & Young LLP. 99 Conrail Inc. 2001 Annual Report to Stockholders. (B) Reports on Form 8-K. None (C) Exhibits. The Exhibits required by Item 601 of Regulation S-K as listed in Item 14(a)3 are filed herewith or incorporated herein by reference. (D) Financial Statement Schedules. Financial statement schedules and separate financial statements specified by this Item are included in Item 14(a)2 or are otherwise not required or are not applicable. 918-K.
Page
(A)
The following documents are filed as part of this report:
1.
Index to Consolidated Financial Statements
Independent Auditors' Report
K38
Consolidated Statements of Income, Years ended Dec. 31, 2002, 2001 and 2000
K39
Consolidated Balance Sheets As of Dec. 31, 2002 and 2001
K40
Consolidated Statements of Cash Flows, Years ended Dec. 31, 2002, 2001
and 2000
K41
Consolidated Statements of Changes in Stockholders' Equity, Years ended
Dec. 31, 2002, 2001 and 2000
K42
Notes to Consolidated Financial Statements
K43
2.
Financial Statement Schedule:
The following consolidated financial statement schedule should be read in
connection with the consolidated financial statements:
Index to Consolidated Financial Statement Schedule
Page
Schedule II - Valuation and Qualifying Accounts
K80
Schedules other than the one listed above are omitted either because they are not required or are inapplicable, or because the information is included in the consolidated financial statements or related notes.
3.
Exhibits
Exhibit
Number
Description
3
Articles of Incorporation and Bylaws -
The Restated Articles of Incorporation of Norfolk Southern Corporation are incorporated
by reference to Exhibit 3(i) to Norfolk Southern Corporation's 10-K filed on March 5,
3(i)
2001.
The Bylaws of Norfolk Southern Corporation, as amended December 1, 2002, are filed
3(ii)
herewith.
K70
4
Instruments Defining the Rights of Security Holders, Including Indentures:
(a)
Indenture, dated as of January 15, 1991, from Norfolk Southern Corporation to First Trust of New York, National Association, as Trustee, related to the issuance of notes in the principal amount of $750 million, incorporated by reference to Exhibit 4.1 to Norfolk Southern Corporation's Registration Statement on Form S-3 (No. 33-38595).
(b)
First Supplemental Indenture, dated May 19, 1997, between Norfolk Southern Corporation and First Trust of New York, National Association, as Trustee, related to the issuance of notes in the principal amount of $4.3 billion, is incorporated herein by reference to Exhibit 1.1(d) to Norfolk Southern Corporation's Form 8-K filed on May 21, 1997.
(c)
Second Supplemental Indenture, dated April 26, 1999, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $400 million, is incorporated herein by reference to Exhibit 1.1(c) to Norfolk Southern Corporation's Form 8-K filed on April 30, 1999.
(d)
Third Supplemental Indenture, dated May 23, 2000, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $600 million, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on May 25, 2000.
(e)
Fourth Supplemental Indenture, dated as of February 6, 2001, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $1 billion, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on February 7, 2001.
(f)
Fifth Supplemental Indenture, dated as of July 5, 2001, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $250 million, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on July 5, 2001.
(g)
Rights Agreement, dated as of September 26, 2000, between Norfolk Southern Corporation and The Bank of New York, with exhibits thereto, is incorporated herein
by reference to Exhibit 4 to Norfolk Southern Corporation's Form 8-K filed on
September 26, 2000.
(h)
Sixth Supplemental Indenture, dated as of April 30, 2002, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, relating to the issuance of notes in the principal amount of $200 million, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on May 1, 2002.
(i)
Seventh Supplemental Indenture, dated as of April 30, 2002, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, relating to the issuance of notes in the principal amount of $100 million, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on May 1, 2002.
(j)
Amendment to Rights Agreement, dated as of November 26, 2002, between Norfolk Southern Corporation and The Bank of New York, with exhibits thereto, is incorporated by reference to Exhibit 4 to Norfolk Southern Corporation's Form 8-K filed on November 26, 2002.
K71
In accordance with Item 601(b)(4)(iii) of Regulation S-K, copies of other instruments of Norfolk Southern Corporation and its subsidiaries with respect to the rights of holders of long-term debt are not filed herewith, or incorporated by reference, but will be furnished to the Commission upon request.
10
Material Contracts -
(a)
The Transaction Agreement, dated as of June 10, 1997, by and among CSX, CSX Transportation, Inc., Registrant, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation and CRR Holdings LLC, with certain schedules thereto, previously filed, is refiled herewith pursuant to Item 10(d) of Regulation S-K.
(b)
Amendment No. 1, dated as of August 22, 1998, to the Transaction Agreement, dated as of June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation and CRR Holdings LLC is incorporated herein by reference from Exhibit 10.1 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.
(c)
Amendment No. 2, dated as of June 1, 1999, to the Transaction Agreement, dated June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation and CRR Holdings LLC is incorporated herein by reference from Exhibit 10.2 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.
(d)
Operating Agreement, dated as of June 1, 1999, by and between Pennsylvania Lines LLC and Norfolk Southern Railway Company is incorporated herein by reference from Exhibit 10.3 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.
(e)
Amendment No. 1, dated as of September 29, 2001, to Operating Agreement, dated as of June 1, 1999, by and between Pennsylvania Lines LLC and Norfolk Southern Railway Company, is incorporated herein by reference from Exhibit 10(e) to Norfolk Southern Corporation's Form 10-K filed on February 21, 2002.
(f)
Shared Assets Area Operating Agreement for North Jersey, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit 10.4 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.
(g)
Shared Assets Area Operating Agreement for South Jersey/ Philadelphia, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit 10.5 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.
(h)
Shared Assets Area Operating Agreement for Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit 10.6 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.
(i)
Amendment No. 1, dated as of June 1, 2000, to the Shared Assets Areas Operating Agreement for North Jersey, South Jersey/Philadelphia and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference to Exhibit 10(h) to Norfolk Southern Corporation's 10-K filed on March 5, 2001.
K72
(j)
Amendment No. 2, dated as January 1, 2001, to the Shared Assets Area Operating Agreements for North Jersey, South Jersey/Philadelphia and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference to Exhibit 10(j) to Norfolk Southern Corporation's Form 10-K filed on February 21, 2002.
(k)
Amendment No. 3, dated as of June 1, 2001, and executed in May of 2002, to the Shared Assets Area Operating Agreement for North Jersey, South Jersey/Philadelphia and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is filed herewith.
(l)
Monongahela Usage Agreement, dated as of June 1, 1999, by and among CSX Transportation, Inc., Norfolk Southern Railway Company, Pennsylvania Lines LLC and New York Central Lines LLC, with exhibit thereto, is incorporated herein by reference from Exhibit 10.7 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.
(m)
The Agreement, entered into as of July 27, 1999, between North Carolina Railroad Company and Norfolk Southern Railway Company, is incorporated herein by reference from Exhibit 10(i) to Norfolk Southern Corporation's Form 10-K filed on March 6, 2000.
(n)
The Supplementary Agreement, entered into as of January 1, 1987, between the Trustees of the Cincinnati Southern Railway and The Cincinnati, New Orleans and Texas Pacific Railway Company (the latter a wholly owned subsidiary of Norfolk Southern Railway Company) - extending and amending a Lease, dated as of October 11, 1881 - is incorporated by reference to Exhibit 10(k) to Norfolk Southern Corporation's Form 10-K filed on March 5, 2001.
(o)
The Norfolk Southern Corporation Executive Management Incentive Plan, effective January 25, 2000, is incorporated by reference herein from Exhibit 10(1) to Norfolk Southern Corporation's Form 10-K filed on March 6, 2000.
(p)
The Norfolk Southern Corporation Long-Term Incentive Plan, as amended effective January 28, 2003, is filed herewith.
(q)
The Norfolk Southern Corporation Officers' Deferred Compensation Plan, as amended effective September 26, 2000, is incorporated herein by reference to Exhibit 10(n) to Norfolk Southern Corporation's Form 10-K filed on March 5, 2001.
(r)
The Norfolk Southern Corporation Executives' Deferred Compensation Plan, as amended effective January 20, 2001, is incorporated herein by reference to Exhibit 10(o) to Norfolk Southern Corporation's Form 10-K filed on March 5, 2001.
(s)
The Directors' Deferred Fee Plan of Norfolk Southern Corporation, as amended effective January 23, 2001, is incorporated herein by reference to Exhibit 10(p) to Norfolk Southern Corporation's Form 10-K filed on March 5, 2001.
(t)
The Norfolk Southern Corporation Directors' Restricted Stock Plan, effective January 1, 1994, as restated November 24, 1998, is incorporated herein by reference from Exhibit 10(h) to Norfolk Southern Corporation's Form 10-K filed on March 24, 1999.
K73
(u)
Form of Severance Agreement, dated as of June 1, 1996, between Norfolk Southern Corporation and certain executive officers (including those defined as "named executive officers" and identified in the Corporation's Proxy Statement for the 1997 through 2001 Annual Meetings of Stockholders) is incorporated herein by reference from Exhibit 10(t) to Norfolk Southern Corporation's Form 10-K filed on February 21, 2002.
(v)
Norfolk Southern Corporation Supplemental (formerly, Excess) Benefit Plan, effective as of August 22, 1999, is incorporated herein by reference from Exhibit 10(r) to Norfolk Southern Corporation's Form 10-K filed on March 6, 2000.
(w)
The Norfolk Southern Corporation Directors' Charitable Award Program, effective February 1, 1996, is incorporated herein by reference from Exhibit 10(v) to Norfolk Southern Corporation's Form 10-K filed on February 21, 2002.
(x)
The Norfolk Southern Corporation Outside Directors' Deferred Stock Unit Program, as amended effective January 28, 2003, is filed herewith.
(y)
Agreement, dated as of October 1, 2001, providing enhanced pension benefits to three officers in exchange for their continued employment with Norfolk Southern Corporation for two years, is incorporated herein by reference to Exhibit 10(w) to Norfolk Southern Corporation's Form 10-Q filed on November 9, 2001. The agreement was entered into with L. Ike Prillaman, Vice Chairman and Chief Marketing Officer; Stephen C. Tobias, Vice Chairman and Chief Operating Officer; and Henry C. Wolf, Vice Chairman and Chief Financial Officer.
(z)
The Norfolk Southern Corporation Thoroughbred Stock Option Plan, as amended effective January 28, 2003, is filed herewith.
(aa)
The Norfolk Southern Safety Incentive Plan for Operating Agreement Employees and For Non-Operating Agreement Employees, as amended effective October 1, 2002, is filed herewith.
(bb)
The Norfolk Southern Corporation Restricted Stock Unit Plan, effective January 28, 2003, is filed herewith.
12
Statement re: Computation of Ratio of Earnings to Fixed Charges.
21
Subsidiaries of the Registrant.
23
Consents of Experts -
(a)
Consent of KPMG LLP.
(b)
Consent of KPMG LLP and Ernst & Young LLP.
99
(a)
Certifications of the CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)
Conrail Inc. 2002 Annual Report to Stockholders.
(B)
Reports on Form 8-K.
A report on Form 8-K was filed November 26, 2002, advising of the amendment of the Rights Agreement to terminate it effective November 26, 2002, and attaching as an exhibit the related press release.
K74
A report on Form 8-K was filed November 12, 2002, advising that the Corporation had decreased its expected long-term rate of return assumption on pension plan assets for purposes of pension accounting, and attaching as an exhibit the related press release.
(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 references.
(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 not required or are not applicable.
K75
POWER OF ATTORNEY- -----------------Each person whose signature appears below under "SIGNATURES" hereby authorizes Henry C. Wolf and Henry D. Light, or either of them, to execute in the name of each such person, and to file, any amendment to this report and hereby appoints Henry C. Wolf and Henry D. Light, 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 of 1934, Norfolk Southern Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 21st day of February,
2002.2003.NORFOLK SOUTHERN CORPORATION
By /s/By: /s/ David R. Goode
----------------------------------(David R. Goode, Chairman,
President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 21st day of February,
2002,2003, by the following persons on behalf of Norfolk Southern Corporation and in the capacities indicated.Signature Title - --------- ----- /s/ David R. Goode - ------------------------------ Chairman, President and Chief (David R. Goode) Executive Officer and Director (Principal Executive Officer) /s/ Henry C. Wolf - ------------------------------ Vice Chairman and (Henry C. Wolf) Chief Financial Officer (Principal Financial Officer) 92 Signature Title - --------- ----- /s/ John P. Rathbone - ------------------------------ Senior Vice President and (John P. Rathbone) Controller (Principal Accounting Officer) /s/ Gerald L. Baliles - ------------------------------ Director (Gerald L. Baliles) /s/ Carroll A. Campbell, Jr. - ------------------------------ Director (Carroll A. Campbell, Jr.) /s/ Gene R. Carter - ------------------------------ Director (Gene R. Carter) /s/ Alston D. Correll - ------------------------------ Director (Alston D. Correll) /s/ Landon Hilliard - ------------------------------ Director (Landon Hilliard) /s/ Steven F. Leer - ------------------------------ Director (Steven F. Leer) /s/ Jane Margaret O'Brien - ------------------------------ Director (Jane Margaret O'Brien) /s/ Harold W. Pote - ------------------------------ Director (Harold W. Pote) /s/ J. Paul Reason - ------------------------------ Director (J. Paul Reason) 93
Schedule II Page 1Signature
Title
/s/ David R. Goode
Chairman, President and Chief Executive Officer and Director
(David R. Goode)
(Principal Executive Officer)
/s/ Henry C. Wolf
Vice Chairman and Chief Financial Officer
(Henry C. Wolf)
(Principal Financial Officer)
/s/ John P. Rathbone
Senior Vice President and Controller
(John P. Rathbone)
(Principal Accounting Officer)
/s/ Gerald L. Baliles
Director
(Gerald L. Baliles)
/s/ Gene R. Carter
Director
(Gene R. Carter)
/s/ Alston D. Correll
Director
(Alston D. Correll)
K76
/s/ Landon Hilliard
Director
(Landon Hilliard)
/s/ Steven F. Leer
Director
(Steven F. Leer)
___________________
Director
(Jane Margaret O'Brien)
/s/ Harold W. Pote
Director
(Harold W. Pote)
/s/ J. Paul Reason
Director
(J. Paul Reason)
K77
I, David R. Goode, certify that:
1.
I have reviewed this annual report on Form 10-K of
2Norfolk SouthernCorporation and Subsidiaries --------------------------------------------- Valuation and Qualifying Accounts Years Ended December 31, 1999, 2000 and 2001 (In millionsCorporation;2.
Based on my knowledge, this annual report does not contain any untrue statement of
dollars)Additions chargeda material fact or omit to-------------------- Beginning Other Ending Balance Expenses Accounts Deductions Balance --------- -------- -------- ---------- -------Year ended December 31, 1999 - ---------------------------- Valuation allowance (included netstate a material fact necessary to make the statements made, indeferred tax liability) for deferred tax assets $ 3 $ 6 $ -- $ -- $ 9 Casualtylight of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;3.
Based on my knowledge, the financial statements, and other
claimsfinancial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;4.
The registrant's other
liabilities $ 271 $ 114 $ 9 (1) $ 119 (2) $ 275 Current portioncertifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:a.
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b.
evaluated the effectiveness of
casualtythe registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); andc.
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a.
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.
The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: February 21, 2003
/s/ David R. Goode
David R. Goode
Chairman, President and Chief Executive Officer
K78
I, Henry C. Wolf, certify that:
1.
I have reviewed this annual report on Form 10-K of Norfolk Southern Corporation;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other
claimsfinancial information included inaccounts payable $ 144 $ 19 $ 191 (1) $ 173 (3) $ 181 Year ended December 31, 2000 - ---------------------------- Valuation allowance (included netthis annual report, fairly present indeferred tax liability)all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,deferred tax assets $ 9 $ 3 $ -- $ -- $ 12 Casualtythe periods presented in this annual report;4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a.
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b.
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c.
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant's other
claims includedcertifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):a.
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b.
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.
The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other
liabilities $ 275 $ 117 $ 8 (1) $ 138 (2) $ 262 Current portionfactors that could significantly affect internal controls subsequent to the date ofcasualtyour most recent evaluation, including any corrective actions with regard to significant deficiencies andother claims included in accounts payable $ 181 $ 19 $ 221 (1) $ 198 (3) $ 223 (1) Includes revenue refundsmaterial weaknesses.Date: February 21, 2003
/s/ Henry C. Wolf
Henry C. Wolf
Vice Chairman and
overcharges provided through deductions from operating revenues and transfers from other accounts. (2) Payments and reclassifications to/from accounts payable. (3) Payments and reclassifications to/from other liabilities.Chief Financial Officer(continued) 94
Schedule II Page 2 of 2Norfolk Southern Corporation and Subsidiaries --------------------------------------------- Valuation and Qualifying Accounts Years Ended December 31, 1999, 2000 and 2001 (continued) (In millions of dollars) Additions charged to -------------------- Beginning Other Ending Balance Expenses Accounts Deductions Balance --------- -------- -------- ---------- ------- Year ended December 31, 2001 - ----------------------------Valuation allowance (included net in deferred tax liability) for deferred tax assets $ 12 $ 6 $ -- $ -- $ 18 Casualty and other claims included in other liabilities $ 262 $ 110 $ 20 (1) $ 127 (2) $ 265 Current portion of casualty and other claims included in accounts payable $ 223 $ 22 $ 142 (1) $ 195 (3) $ 192(1) Includes revenue refunds and overcharges provided through deductions from operating revenues and transfers from other accounts. (2) Payments and reclassifications to/from accounts payable. (3) Payments and reclassifications to/from other liabilities. 95K79
Schedule II
Norfolk Southern Corporation and Subsidiaries
Valuation and Qualifying Accounts
Years Ended December 31, 2000, 2001 and 2002
(In millions of dollars)
Additions charged to:
Beginning
Other
Ending
Balance
Expenses
Accounts
Deductions
Balance
Year ended December 31, 2000
Valuation allowance (included net in deferred tax liability) for deferred tax assets
$
9
$
3
$
--
$
--
$
12
Casualty and other claims included in other liabilities
$
275
$
117
$
8 (1)
$
138 (2)
$
262
Current portion of casualty and other claims included in accounts payable
$
181
$
19
$
221 (1)
$
198 (3)
$
223
Year ended December 31, 2001
Valuation allowance (included net in deferred tax liability) for deferred tax assets
$
12
$
6
$
--
$
--
$
18
Casualty and other claims included in other liabilities
$
262
$
110
$
20 (1)
$
127 (2)
$
265
Current portion of casualty and other claims included in accounts payable
$
223
$
22
$
142 (1)
$
195 (3)
$
192
Year ended December 31, 2002
Valuation allowance (included net in deferred tax liability) for deferred tax assets
$
18
$
6
$
--
$
--
$
24
Casualty and other claims included in other liabilities
$
265
$
119
$
9 (1)
$
139 (2)
$
254
Current portion of casualty and other claims included in accounts payable
$
192
$
32
$
124 (1)
$
141 (3)
$
207
(1) Includes revenue refunds and overcharges provided through deductions from operating revenues and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
K80
EXHIBIT INDEX
- -------------NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Electronic Submission Exhibit Number Description Page - --------- ------------------------------------------------------- ---- 3(ii) The Bylaws of Norfolk Southern Corporation, as amended January 22, 2002. 96 10(e)
Electronic
Submission
Exhibit
Number
Description
3(ii)
The Bylaws of Norfolk Southern Corporation, as amended December 1, 2002.
10(a)
The Transaction Agreement, dated as of June 10, 1997, by and among CSX, CSX Transportation, Inc., Registrant, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation and CRR Holdings LLC, with certain schedules thereto.
10(k)
Amendment No. 3, dated as of June 1,
dated as of September 29,2001, and executed in May of 2002, to the Shared Assets Area Operating Agreement for North Jersey, South Jersey/Philadelphia and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto.10(p)
The Norfolk Southern Corporation Long-Term Incentive Plan, as amended effective January 28, 2003.
10(x)
The Norfolk Southern Corporation Outside Directors' Deferred Stock Unit Program, as amended effective January 28, 2003.
10(z)
The Norfolk Southern Corporation Thoroughbred Stock Option Plan, as amended effective January 28, 2003.
10(aa)
The Norfolk Southern Safety Incentive Plan for Operating Agreement Employees and For Non-Operating Agreement Employees, as amended effective October 1, 2002.
10(bb)
The Norfolk Southern Corporation Restricted Stock Unit Plan, effective January 28, 2003.
12
Statement re: Computation of Ratio of Earnings to Fixed Charges.
21
Subsidiaries of Norfolk Southern Corporation.
23
Consents of Experts -
(a) Consent of KPMG LLP.
(b) Consent of KPMG LLP and Ernst & Young LLP.
99
(a) Certification of the CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Conrail Inc. 2002 Annual Report to Stockholders.
Exhibits 23(a), 23(b) and
between Pennsylvania Lines LLC and Norfolk Southern Railway Company. 109 10(j) Amendment No. 2, dated as January 1, 2001, to the Shared Assets Area Operating Agreements for North Jersey, South Jersey/Philadelphia and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto. 111 10(t) Form of Severance Agreement, dated as of June 1, 1996, between Norfolk Southern Corporation and certain executive officers (including those defined as "named executive officers" and identified in the Corporation's Proxy Statement for the 1997 through 2001 Annual Meetings of Stockholders). 123 10(v) The Norfolk Southern Corporation Directors' Charitable Award Program, effective February 1, 1996. 136 12 Statement re: Computation of Ratio of Earnings to Fixed Charges. 140 21 Subsidiaries of Norfolk Southern Corporation. 141 23 Consent of Experts and Counsel - (a) Consent of KPMG LLP. 143 (b) Consent of KPMG LLP and Ernst & Young LLP. 144 99 Conrail Inc. 2001 Annual Report to Stockholders. 145 Exhibits 3(ii), 10(e), 10(j), 10(t) and 10(v)99(a) are included; remaining exhibits are not included in copies assembled for public dissemination.IfThese exhibits are included in the 2002 Form 10-K posted on our website at www.nscorp.com under "SEC documents" or youhave a need for this type of information, we will be pleased to send it to you. Writemay request copies by writing to:Office of Corporate Secretary
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Virginia 23510-9219
K81