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
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.
3
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
PART I
------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 1. Business.
- ------ --------
and
Item 2. 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, all the common stock of Norfolk Southern Railway and 22.5 percent of
its voting preferred stock (resulting in 95.2 percent 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 38 and Note 17 on Page 79). NAVL's results are
presented as "Discontinued operations" in the accompanying financial
information.
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
5
various 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, the leasing arrangements with PRR augmented Norfolk
Southern Railway's locomotive, freight car and intermodal fleet.
RAILROAD OPERATIONS - As of Dec. 31, 2001, 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 and West Virginia,
and in the Province of Ontario, Canada. Of this total, about 12,000 miles
are owned with the balance operated under 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.
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, expires
in 2026, and is subject to an option to extend the lease for an additional
25 years, at terms to be agreed upon.
Operations over the approximately 330 miles of tracks of NCRR,
previously under a 100-year lease which expired on Dec. 31, 1994, are
now under a trackage rights agreement. The term of the agreement is
15 years with NS' railroads having the 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 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;
6
and 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 south Florida, including the port cities of Miami, West Palm
Beach and Fort Lauderdale; and 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 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; Buffalo to Chicago and Kansas City; and
Memphis to Chattanooga. Chicago, Memphis, Sidney/Salem, New Orleans,
Kansas City, Buffalo, St. Louis and Meridian are major gateways for
interterritorial system traffic.
TRIPLE CROWN OPERATIONS - Until April 1993, NS' intermodal
subsidiary, Triple Crown Services, Inc. (TCS), offered intermodal service
using RoadRailer (Registered Trademark hereinafter abbreviated RT)
equipment and domestic containers. RoadRailer(RT) 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 its consolidated financial
statements. TCSC offers door-to-door intermodal service using RoadRailer(RT)
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 $ 893
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
and handled a total of 178 million tons. Revenues from coal, coke and iron
ore accounted for about 25 percent of NS' total railway operating revenues
in 2001.
9
The following table shows total coal, coke and iron ore tonnage
originated on line, received from connections and handled for the past
five years:
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' railroads in 2001, 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
===
Of the 178 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.
10
Total coal handled through all system ports in 2001 was 37 million
tons. Of this total, 14 million tons (including coastwise traffic) moved
through Lamberts Point, 3 million tons moved through the Baltimore Terminal,
10 million tons moved to various docks on the Ohio River, and 10 million
tons moved to various Lake Erie ports. Other than coal for export,
virtually all coal handled by NS' railroads was terminated in states
situated east 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 28
See the discussion of coal traffic, by type of coal, in Part II,
Item 7, "Management's Discussion and Analysis."
MERCHANDISE TRAFFIC - The merchandise traffic group consists of
intermodal and general merchandise, which is comprised of five major
commodity groupings: automotive; chemicals; paper, clay and forest
products; metals and construction; and agriculture, consumer products and
government. Total merchandise revenues in 2001 were $4.6 billion, a
2 percent decrease, compared with 2000. Merchandise carloads and
intermodal units handled in 2001 were 4.93 million, compared with
5.16 million handled in 2000, a decrease of 4 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.
In 2001, 156 million tons of merchandise freight, or approximately
68 percent of total merchandise tonnage handled by NS, originated online.
The balance of merchandise traffic was received from connecting carriers,
usually at 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.
11
See the discussion of general merchandise rail traffic by commodity
group and intermodal rail 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%
FREIGHT RATES - In 2001, 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.
In 2001, NS' railroads were found by the STB not to be "revenue
adequate" based on results for the year 2000. A railroad is "revenue
adequate" under the applicable law when its return on net investment
exceeds the rail industry's composite cost of capital.
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
contract 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 regularly
12
scheduled 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; and the leasing or sale of rail property and equipment.
In 2001, 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.
13
RAILWAY PROPERTY:
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.
14
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%
As of Dec. 31, 2001, the average age of the locomotive fleet was
15.7 years. During 2001, 126 locomotives, the average age of which was
22.4 years, were retired. The average age of the freight car fleet at
Dec. 31, 2001, was 25.4 years. During 2001, 4,407 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
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 ratio rose
in 2000 and 2001 as a result of decreased maintenance activity. The
locomotive bad order ratio also includes units out of service for routine
maintenance and modifications. 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 ratio remained high in 2000 as maintenance activities were curtailed
in response to a slowing economy. The higher ratio in 2001 reflected units
out of service related to the resumption of maintenance and modification
activities.
TRACKAGE - All NS trackage is standard gauge, and the rail in
approximately 97 percent of the main line trackage (including first, second,
third and branch main tracks, all excluding trackage rights) ranges from
100 to 155 pounds per yard. Of 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 2.2
MICROWAVE SYSTEM - The NS microwave system, consisting of 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 CONTROL - Of a total of 21,500 route miles operated by NS,
excluding trackage rights over foreign lines, 11,486 miles are signalized
including 8,521 miles of centralized traffic control (CTC) and 2,965 miles
of automatic block signals. Of the 8,521 miles of CTC, 1,870 miles are
controlled by data radio originating at 147 base station radio sites.
COMPUTERS - Data processing facilities connect the yards, terminals,
transportation offices, rolling stock repair points, sales offices and other
key system locations to the central computer complex in Atlanta, Georgia.
Operating and traffic data are compiled and stored to provide customers with
information on their shipments throughout the system. Data processing
facilities are capable of providing 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, and are utilized to assist management in the performance of,
a wide variety of functions and services, including payroll, car and revenue
accounting, billing, material management activities and controls, and
special studies.
OTHER - The railroads have extensive facilities for support of
operations, including freight depots, car construction shops, maintenance
shops, office buildings, and signals and communications facilities.
ENCUMBRANCES - Certain railroad equipment is subject to the prior
lien of equipment financing obligations amounting to approximately
$895 million as of Dec. 31, 2001, and $816 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 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 45 in Part II, Item 7, "Management's
Discussion and Analysis," and in Note 18 to the Consolidated Financial
Statements on Page 79.
EMPLOYEES - NS employed an average of 30,894 employees in 2001,
compared with an average of 33,738 in 2000. The decrease reflects the
effects of the early retirement and work-force reduction programs in 2000.
The approximate average cost per employee during 2001 was $52,000 in
wages and $21,000 in employee benefits.
Approximately 85 percent of NS' railroad employees are covered by
collective bargaining agreements with 15 different labor unions. See the
discussion of "Labor Agreements" on Page 43 in Part II, Item 7,
"Management's Discussion and Analysis."
18
GOVERNMENT 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")
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 percent of NS' freight revenues come from either exempt traffic or
traffic moving under transportation contracts.
Efforts may be made in 2002 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-finished
goods and work-in-process, users are increasingly sensitive to transport
arrangements which 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 cooperative strategies between railroads and between
railroads and motor carriers enable carriers to compete more
effectively in specific markets.
19
Item 3. Legal Proceedings.
- ------ -----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security holders during
the fourth quarter of 2001.
Executive Officers of the 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, 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, 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
PART II
- -------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 5. Market for Registrant's Common Stock and Related
- ------ ------------------------------------------------
Stockholder 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 $ 0.20
23
Item 6. Selected Financial Data.
- ------ -----------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
FIVE-YEAR FINANCIAL REVIEW
1997 - 2001
Page One
2001 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 $ 14.44
24
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
FIVE-YEAR FINANCIAL REVIEW
1997 - 2001
Page Two
2001 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.
-----------------------------------
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 51
and the Five-Year Financial Review beginning on Page 23.
SUMMARIZED RESULTS OF OPERATIONS
2001 Compared with 2000
- -----------------------
Net income in 2001 was $375 million, up 118%. Results in 2001
included a $13 million gain related to the 1998 sale of NS' former motor
carrier subsidiary (see Note 17 on Page 79). Income from continuing
operations, which excludes that 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 Note 3 on Page 61).
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 $6.2 billion in both 2001 and 2000,
and were $5.2 billion in 1999. Revenues in 1999 include results of
operations in the Northern Region for seven months. The following table
presents a three-year comparison of revenues by market group.
RAILWAY OPERATIING REVENUES BY MARKET GROUP
($ 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
====== ====== ======
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, 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. Revenue per unit improved in most market groups, principally due to the
effects of Northern Region traffic and increased rates. About half of the
revenue per unit increase for the intermodal market group was attributable to
the effects of the consolidation of Triple Crown Services Company (TCS)
revenues (see discussion of intermodal revenues below).
COAL tonnage increased 2% in 2001 and revenues increased 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
changes to the mix of traffic (less shorter-haul business). Coal, coke and
iron ore revenues represented 25% of total railway operating revenues 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,
a result of a higher proportion of traffic with a shorter length of haul,
principally attributable to a full year of Northern Region operations.
TOTAL COAL, COKE AND IRON ORE TONNAGE
(In millions of tons) 2001 2000 1999
- -------------------- ---- ---- ----
Utility 133 119 108
Export 14 20 18
Domestic metallurgical 20 25 22
Other 11 11 10
--- --- ---
Total 178 175 158
=== === ===
Utility 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 for electricity, a volatile market for
natural gas and production problems at a number of large mines in the East
late in 2000 combined to increase the demand for coal early in 2001 with a
resulting increase in coal prices. Utility coal traffic volume also
benefited from the shifting of coal that traditionally would have been
bound for export to the domestic market.
In 2000, utility coal traffic increased 11%, 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 stockpiles
at the beginning of the year and mild summer weather in portions of NS'
service territory.
The near-term outlook for utility coal remains positive. U.S.
demand for electricity continues to grow rapidly, and coal-fired
generation remains the cheapest marginal source of electricity. Several
underutilized coal-fired power plants are making the transition
28
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------------------
from peak-only generation to full-time generation. In addition, although
natural gas prices have returned to more normal levels, the volatility of
natural gas prices 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
imposes 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 should continue to provide a
market for other NS-served mines for many years. However, several federal
environmental regulatory initiatives continued to be pursued during 2001,
including "new source review" for older coal-fired plants. Many of the
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
withdrew U.S. participation in that process. If implemented, the proposed
Kyoto limits on greenhouse gases could have put additional cost pressures
on coal-fired generation. The U.S. withdrawal from the Kyoto process has
renewed interest in building coal-fired generation plants.
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.
Export coal tonnage declined 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 low volatile coal. The combination of these factors resulted
in most of the decline in shipments of export coal. Steam coal exported
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, the strong 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, 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 to 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 any increase in demand. Moreover, Chinese
participation in Pacific Rim markets could displace Australian coals there
and force that tonnage to Europe.
Domestic metallurgical coal, coke and iron ore traffic 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 from the decline in demand for domestically produced
steel. 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. But long-term demand is expected to
continue to decline, due to advanced technologies that allow production of
steel using less coke.
Other coal traffic, principally steam coal shipped to manufacturing
plants, increased 6% in 2001 and 4% in 2000. 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 $1,322
Revenues 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) decreased 7% in 2001,
and revenues decreased 2%, principally due to the effects of the weak
economy. In 2000, traffic volume increased 15%, and revenues increased 17%,
reflecting a full year of operating the Northern Region.
30
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------------------
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,
automotive revenues in 2002 are expected to be comparable to those of 2001,
as light vehicle production is predicted to be flat.
AUTOMOTIVE
(Shown as a graph in the Annual Report to Stockholders)
(millions)
2001 2000 1999
---- ---- ----
$ 885 $ 921 $ 746
Revenues decreased $36 million, or 4%, in 2001, 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.
Chemicals traffic volume decreased 5%, and revenues decreased 1% in
2001. The weak economy depressed shipments of petroleum, plastics,
industrial and miscellaneous chemicals. These declines were partially
offset by new business through NS' Thoroughbred Bulk Transfer (TBT)
facilities that handle chemicals and bulk commodities for customers not
located on NS-served lines. 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 the economy recovers. However, NS expects to benefit from new business
and improved yields.
31
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------------------
CHEMICALS
(Shown as a graph in the Annual Report to Stockholders)
(millions)
2001 2000 1999
---- ---- ----
$ 752 $ 756 $ 641
Revenues decreased $4 million, or 1%, in 2001, due to lower
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.
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, has
resulted 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 suffer from the
effects of a continued softness in the steel market. However, increased
highway construction in NS' service area is expected 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 $ 567
Revenues decreased $15 million, or 2%, in 2001, principally
due to weakness in the steel industry. Revenue per unit
increased due to higher rates 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%, in 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 $ 578
Revenues 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, 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, flour, wheat and 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 2002 are
expected to be comparable to those of 2001. Continued weakness in the
fertilizer market is expected to offset gains in the Southeast feed
markets and new business.
33
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------------------
AGRICULTURE, CONSUMER PRODUCTS AND GOVERNMENT
(Shown as a graph in the Annual Report to Stockholders)
(millions)
2001 2000 1999
---- ---- ----
$ 603 $ 609 $ 539
Revenues decreased $6 million, or 1%, in 2001, principally
due to soft farm demand, depressed fertilizer production
and increased imports. This group includes soybeans, wheat,
corn, fertilizers, animal and poultry feed, food oils, flour,
beverages, canned goods, sweeteners, consumer products and
items for the military.
INTERMODAL traffic volume decreased 1%, but revenues increased slightly
in 2001. 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
traffic, which 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 to benefit from 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, intermodal traffic 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.
Intermodal revenues are expected to benefit from continued
improvements in service and the terminal capacity added in 2001.
34
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
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 $ 849
Revenues increased $4 million in 2001, despite a 1% drop
in traffic volume. This group handles trailers, domestic
and international containers, TCS equipment and equipment
for intermodal marketing companies, international steamship
lines, truckers and other shippers.
Railway Operating Expenses
- --------------------------
Railway operating expenses decreased 7% in 2001, but increased 22%
in 2000. Expenses in 2000 included $165 million of costs related to
actions taken to reduce the size of the work force. Excluding these costs,
railway operating expenses decreased 4% in 2001, while carloads dropped 3%;
and increased 19% in 2000 on carloads that were 15% higher. The higher
expense increase in 2000 reflected a full year of Northern Region
operations and sharply higher diesel fuel prices.
The railway operating ratio, which measures the percentage of
railway operating revenues consumed by railway operating expenses, was
83.7% in 2001, compared with 87.0% in 2000 (excluding the work-force
reduction costs, which increased the ratio 2.7 percentage points) and
86.3% in 1999.
The decline in the 2001 ratio reflected the increase in revenue
per unit as well as reduced expenses that resulted from gains in efficiency.
The increase in the 2000 ratio reflected the effects of a full year of
Northern Region operations and the sharp increase in diesel fuel prices,
which more than offset the absence of the significant costs incurred in
1999 related to the service issues after the Closing Date. In addition,
the ratio was adversely affected by a change in traffic mix (more
resource-intensive traffic, such as automotive and intermodal) and the
new traffic in the Northern Region, coupled with the decrease in export
coal traffic.
35
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------------------
The following table shows the changes in railway operating expenses
summarized by major classifications.
RAILWAY OPERATING EXPENSES
Increases (Decreases)
($ 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
===== =====
* Includes $165 million of work-force reduction costs in 2000.
Compensation and benefits represented 39% of total railway operating
expenses and decreased 10% in 2001, but increased 20% in 2000. Both
comparisons reflect 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 savings attributable to the reduced
size of the work force. These savings 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 to 15.6% in 2002, 14.2% in 2003 and
13.1% in 2004. In addition, the supplemental annuity tax was eliminated.
These changes are expected to result in a $21 million reduction to payroll
tax expenses in 2002. 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 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 decreased slightly in 2001,
but increased 13% in 2000.
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 11% in 2001, but
increased 22% in 2000. The decline in 2001 was principally 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 equipment repair costs increased in 2001, principally
due to renewed maintenance activity. This trend is expected to continue in
2002, driven by higher expenses for freight 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.
Conrail rents and services, a new category of expense beginning in
1999, arose from the expansion of operations on the Closing Date and
amounted to $421 million in 2001, $478 million in 2000 and $311 million
in 1999. 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 Note 2
on Page 58). The decline in 2001 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 2% in 2001 and 6% in 2000. Increases in
both years were due to property additions, reflecting substantial levels of
capital spending (see Note 1, "Properties," on Page 57 for 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 14% in 2001, but increased 87% in 2000.
The decline in 2001 was the result of an 8% drop in consumption and a 7%
decline in the average price per gallon. Expenses in 2001 include $8 million
related to the hedging program initiated in the 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.
Casualties and other claims expenses (including the estimates of costs
related to personal injury, property damage and environmental matters)
increased slightly in 2001 and 3% in 2000.
The largest component of casualties and other claims expense is
personal injury costs. In 2001, cases involving occupational injuries
comprised about 31% of the total employee injury cases settled and 15% 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 and applicable only to railroads. This law,
which covers employee claims for job-related injuries, promotes an
adversarial claims environment and produces results that are
unpredictable and inconsistent. The railroads have been unsuccessful
so far in efforts to persuade Congress to replace FELA with a no-fault
workers' compensation system.
NS maintains substantial amounts of commercial insurance for
potential third-party liability and property damage claims. It also
retains reasonable levels of risk through self-insurance.
Other expenses decreased 13% in 2001, but increased 14% in 2000.
The decline in 2001 was principally due to 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 $99 million in 2001, $168 million in 2000
and $115 million in 1999 (see Note 3 on Page 61). The reduction in 2001
resulted from the absence of $101 million of gains that occurred in 2000
related to the sale of certain timber rights and gas and oil royalty and
working interests. This was somewhat offset by lower interest accruals
on federal income tax liabilities and a $13 million gain from a
nonrecurring settlement. 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 2001 was $191 million for an effective rate of
35%, compared with effective rates of 31% in 2000 and 32% in 1999.
Excluding the equity in Conrail's after-tax earnings, the effective rates
were 38% in 2001 and 34% in both 2000 and 1999.
The effective rate in 2001 was 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, both 2000 and 1999 benefited 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 payment from the third party in
accordance with indemnification provisions of the lease agreement.
Discontinued Operations
- -----------------------
Income from discontinued operations consisted of a $13 million
after-tax gain related to the sale of NS' motor carrier subsidiary (see
Note 17 on Page 79).
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities, NS' principal source of
liquidity, was $654 million in 2001, compared with $1.3 billion in 2000
and $533 million in 1999. Results in 2000 reflect the commencement of a
program under which accounts receivable are sold on a revolving basis
(see Note 5 on Page 63). Excluding the infusion of cash from this program,
operating cash flow declined $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 $250 million. The improvement in cash
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.
NS' working capital deficit was $1.3 billion at Dec. 31, 2001,
compared with $1.0 billion at Dec. 31, 2000. The increase resulted
principally from a higher amount of debt due within one year. Debt due
in 2002 is expected to be paid using cash generated from operations
(including sales of accounts receivable), cash on hand 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)
-----------------------------------------------
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, the amount of receivables
NS could sell under this program ranged from $345 million to $468 million,
and the amount of receivables NS sold ranged from $300 million to
$402 million. Moreover, NS has the capability to issue up to $1 billion
of commercial paper (see Note 8 on Page 65); however, any reduction in
its credit rating could limit NS' ability to access the commercial paper
markets (see also the discussion of financing activities, below).
NS expects to generate sufficient cash flow from operations to meet
its ongoing obligations. This expectation is based on a view that the
economy will remain flat for the first half of 2002 and resume growth in
the third and fourth quarters.
NS' contractual obligations related to its long-term debt
(including capital leases), operating leases and agreements with CRC
are as follows:
2003- 2005- 2007 and
($ 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
====== ===== ===== ===== ======
NS also has contractual obligations to PRR as disclosed in Note 2 on
Page 58. 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.
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
====== ===== ===== ===== =====
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) and an
operating lease covering 140 locomotives (see Note 9 on Page 67).
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
collections related to the sold receivables would be retained by the buyers.
The operating lease covering the 140 locomotives is renewable annually
at NS' option and expires in 2008. The lessor 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 under this provision.
Cash used for investing activities increased slightly in 2001, but
decreased slightly in 2000. 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
$140 million more of borrowings against the net cash surrender value of
corporate-owned life insurance than in 2000. Property additions account
for most of the recurring spending in this category.
The following tables show capital spending and track and equipment
statistics for the past five years.
CAPITAL EXPENDITURES
($ 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 increased 2% in 2001, but decreased 20%
in 2000. Outlays in 2001 included amounts for locomotive purchases that
were somewhat offset by lower expenditures for freight car purchases
and roadway projects. The decline in 2000 reflected lower capital
expenditures for locomotives as a result of the operating lease. In
both years, spending for road included fiber-optic infrastructure that
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
The table above excludes equipment leased from PRR (see Note 2 on
Page 58), which comprises 16% of the freight car fleet and 27% 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.
For 2002, NS has budgeted $705 million for capital expenditures.
The anticipated spending includes $482 million for roadway projects, of
which $366 million is for track and bridge program work. Also included
are projects for marketing and industrial development initiatives and
continuing investments in intermodal infrastructure. Equipment spending
of $173 million includes the purchase of 50 locomotives and upgrades to
existing units, and projects related to computers and information
technology, including additional security and backup systems. NS
issued in February 2002 debt secured by the locomotives.
Cash provided by financing activities in 2001 was $151 million, and
reflects the effects of the reduction to the dividend in January 2001.
Financing activities included loan transactions with a PRR subsidiary that
resulted in net borrowings of $250 million in 2001 and net repayments of
$72 million in 2000 (see Note 2 on Page 58). Excluding these borrowings,
debt was reduced $20 million in 2001 and $422 million in 2000. The
substantial net 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 to Conrail) at year end
was 55.6% in 2001 and 56.7% in 2000.
NS currently has in place a new $1 billion, five-year credit
facility, which replaced the facility that would have expired in May 2002.
The new agreement provides for borrowings at prevailing rates and
includes financial covenants similar to the old
42
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------------------
facility (see Note 8 on Page 65). In addition, NS has issued only $250
million of debt under its $1 billion shelf registration that became
effective in April 2001.
CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY
Through May 31, 1999, Conrail's results 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 (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 assumption of a lease 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 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. 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 absence
of the $180 million of expenses discussed above and $60 million of
transition-related expenses (principally technology integration costs
and employee stay bonuses).
Conrail's cash provided 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 advertising on Conrail's property for 25 years and
proceeds from a favorable insurance settlement. The 2000 reduction
reflected the change in operations and payment of one-time items owed
to NSR and CSXT. 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
is not an 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 is expected
to have sufficient cash flow to meet its ongoing obligations.
NS' equity in earnings of Conrail, net of amortization, was
$44 million in 2001, $21 million in 2000 and $17 million in 1999. NS'
other comprehensive loss for 2001, as shown in the Consolidated Statement
of Changes in Stockholders' Equity on Page 55, included $41 million for
its portion of Conrail's other comprehensive loss (see Note 13 on Page 74).
OTHER MATTERS
Telecommunications Subsidiary
- -----------------------------
NS' subsidiary, Thoroughbred Technology and Telecommunications, Inc.
(T-Cubed), is codeveloping fiber optic infrastructure with members of the
telecommunications industry. This industry has recently experienced a
severe downturn. During the second quarter, one of T-Cubed's codevelopers
filed for protection under Chapter 11 of the U.S. Bankruptcy Code and
foreign laws. This codeveloper owes T-Cubed amounts for work performed on
joint projects; however, based on known facts and circumstances, management
believes that such 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.
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. 121, "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed Of." To date, based on the 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 on Page 63).
Labor Arbitration
- -----------------
Several hundred claims have been filed on behalf of NSR 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. One labor organization has
initiated arbitration on behalf of approximately 100 of these claimants.
Management believes, based on known facts and circumstances, including
the availability of legal defenses, that the amount of liability for
these claims should not have a material adverse effect on NS' financial
position, results of operations or liquidity. Depending on the outcome of
the arbitration, other 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.
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 such changes in late 1999;
negotiations at the national level commenced shortly thereafter. The
outcome of these negotiations is uncertain. However, agreements have been
reached with the Brotherhood of Maintenance of Way Employes, which
represents about 4,400 NS employees, and with the Brotherhood 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 one or more 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
- ---------------------
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. 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.
Operating expenses for environmental matters totaled approximately
$10 million in 2001, $11 million in 2000 and $12 million in 1999, and
capital expenditures totaled approximately $10 million in each of 2001 and
2000 and $8 million in 1999. Capital expenditures in 2002 are expected to be
comparable to those in 2001.
NS' balance sheets included liabilities for environmental exposures in
the amount of $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, the liability represented NS' estimate of the probable
cleanup and remediation costs based on available information at 126
identified locations. On that date, 10 sites accounted for $17 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 126 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 unavoidably 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 that are latent or undisclosed may exist
on these properties, there can be no assurance that NS will not incur
environmental liabilities or costs with respect to one or more of them,
the amount and materiality of which cannot be
46
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 other 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 an assessment of known facts and circumstances,
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 October 2001, the Financial Accounting Standards Board issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Statement No. 144 supersedes Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," but it retains many of the fundamental provisions of that Statement.
Statement No. 144 also broadens the presentation of discontinued operations
to include more disposal transactions. NS' adoption of Statement No. 144,
effective Jan. 1, 2002, did not have a material effect on its
financial statements.
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 2002 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 diligently to ensure that its customers remain
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 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
- --------------------------
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-
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.
48
Item 7A. Quantitative and Qualitative Disclosures about Market 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 44 under the heading "Market Risks and
Hedging Activities."
49
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
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)
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
2000
----
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 -
Basic and diluted $ (0.12) $ 0.30 $ 0.26 $ 0.01
* Includes a $13 million, or 3 cents per share, after-tax gain related to
the 1998 sale of NS' motor carrier subsidiary (see Note 17 on Page 79).
50
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 2001, 2000 and 1999 51
Consolidated Balance Sheets
As of December 31, 2001 and 2000 52
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999 53
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999 55
Notes to Consolidated Financial Statements 56
Independent Auditors' Report 82
The Index to Consolidated Financial Statement Schedule
appears in Item 14 on Page 85.
51
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31,
2001 2000 1999
---- ---- ----
($ 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 $ 0.63
See accompanying Notes to Consolidated Financial Statements.
52
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As 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 $18,976
====== ======
See accompanying Notes to Consolidated Financial Statements.
53
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
2001 2000 1999
---- ---- ----
($ 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 $ 16
See 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' Equity
Accumu-
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 Statements
The following Notes are an integral part of the Consolidated
Financial Statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
- -----------------------
Norfolk Southern Corporation is a Virginia-based holding company
engaged principally in the transportation of freight by rail, operating
approximately 21,500 route miles primarily in the East and Midwest.
These 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): coal (25%); automotive (14%);
chemicals (12%); metals/construction (11%); paper/clay/forest
products (10%); agriculture/consumer products/government (10%); and
intermodal (18%). 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 Corporation
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,
pensions and postretirement benefits. Changes in facts and circumstances
may result in revised estimates.
Cash Equivalents
- ----------------
"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," "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."
Materials and Supplies
- ----------------------
"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" 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 contracts are
recorded as a reduction to revenues during 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. 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, NS adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities " (see Note 16).
58
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Reclassifications
- -----------------
Certain amounts in the consolidated financial statements and notes
thereto have been reclassified to conform to the 2001 presentation.
2. INVESTMENT IN CONRAIL AND OPERATIONS OVER ITS LINES
Overview
- --------
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, the date
Norfolk Southern and CSX completed 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
for the integration of the respective Conrail routes and assets to be
leased to their railroad subsidiaries, NSR and CSX Transportation, Inc.
(CSXT). From time to time, Norfolk Southern and CSX, as the indirect owners
of Conrail, may need to make capital contributions, loans or advances
to Conrail.
Commencement of Operations
- --------------------------
On June 1, 1999 (the Closing Date), NSR and CSXT began operating as
parts of their respective rail systems the separate Conrail routes and assets
leased to them pursuant to operating and lease agreements.
The Operating Agreement between NSR and Pennsylvania Lines LLC (PRR),
a wholly owned subsidiary of CRC, 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 Operating
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, for the operation and use of certain
other CRC routes and assets, with another wholly owned CRC subsidiary.
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.
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)
- ------ -------------------------------------------
Operating lease expense related to the agreements, which is included
in "Conrail rents and services," amounted to $467 million in 2001,
$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.
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 property and equipment,
including the related deferred tax effect of the differences in tax and
accounting bases for certain assets. At Dec. 31, 2001, the difference
between NS' investment in Conrail and its share of Conrail's underlying net
equity was $3.8 billion.
NS' consolidated balance sheet at Dec. 31, 2001, includes $80 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, NS had paid $109 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-
provider arrangements and totaled $6 million in 2001, $7 million in 2000
and $10 million in 1999.
"Conrail rents and services," a new line on the income statements
beginning June 1, 1999, includes: (1) expenses for amounts due to PRR and
CRC for use by NSR of operating properties and equipment, operation of the
Shared Assets Areas and continued operation of certain facilities during
a transition period; and (2) NS' equity in the earnings of Conrail,
net of amortization.
"Notes and accounts payable to Conrail" includes $301 million at
Dec. 31, 2001, and $51 million at Dec. 31, 2000, of interest-bearing loans
made to NS by a PRR subsidiary that are payable on demand. The interest
rate for these loans is variable and was 2.45% at Dec. 31, 2001. Also
included is $72 million at Dec. 31, 2001, and $104 million at Dec. 31,
2000, due to PRR and CRC related to expenses included in "Conrail rents
and services," as discussed above.
60
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Summary Financial Information - Conrail
- ----------------------------------------
The following summary financial information should be read in
conjunction with Conrail's audited financial statements, included as
Exhibit 99 to this Annual Report on Form 10-K.
Through May 31, 1999, Conrail's results of operations include freight
line-haul revenues and related expenses. After the Closing Date, June 1,
1999, its results reflect its new structure and operations. Currently,
Conrail's major sources of operating revenues are from NSR and CSXT. The
composition of Conrail's operating expenses also has changed.
Summarized Consolidated Statements of Income - Conrail
- ------------------------------------------------------
($ 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
====== ====== =======
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 $121 million, principally: (1) to increase certain
components of its casualty reserves based on an actuarial valuation,
(2) to adjust certain litigation and environmental reserves related to
settlements and completion of site reviews and (3) to adjust a credit
related to the assumption of a lease obligation by CSX. These 1999 items
were considered in the allocation of NS' investment in Conrail to the
fair values of Conrail's assets and liabilities and, accordingly, were
excluded in determining NS' equity in Conrail's net income.
Summarized Consolidated Balance Sheets - Conrail
- -------------------------------------------------
December 31,
($ 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
====== ======
Note: Current assets include demand notes and receivables from NS and CSX
totaling $687 million at Dec. 31, 2001, and $323 million at Dec. 31, 2000.
Current liabilities include amounts payable to NS and CSX totaling
$12 million at Dec. 31, 2001, and $31 million at Dec. 31, 2000.
61
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
3. OTHER INCOME - NET
($ 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 8
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
====== ===== ======
"Other current assets" in the Consolidated Balance Sheets includes
prepaid interest on corporate-owned life insurance borrowings of
$45 million at Dec. 31, 2001, and $43 million at Dec. 31, 2000.
4. INCOME TAXES
Provision for Income Taxes
- --------------------------
($ 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)
- ------ -------------------------------------------
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
====== == ====== == ====== ==
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)
- ------ -------------------------------------------
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 2001, $3 million in 2000
and $6 million in 1999.
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 in May 2000, a bankruptcy-remote special purpose
subsidiary of NS sold without recourse undivided ownership interests in a
pool of accounts receivable totaling approximately $700 million. 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 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 been sold under this arrangement and, therefore, are not
included in "Accounts receivable, net," on the consolidated balance sheet.
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 million.
NS' allowance for doubtful accounts was $5 million at Dec. 31, 2001,
and $7 million at Dec. 31, 2000.
6. PROPERTIES
December 31, Depreciation
($ 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)
- ------ -------------------------------------------
Included in properties are approximately $110 million in
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.
Based on known facts and circumstances, management believes that its
ultimate investment in these assets, which is expected to total
approximately $130 million upon completion of the network, will
be recovered.
Equipment includes $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, 2001 and 2000.
Capitalized Interest
- --------------------
Total interest cost incurred on debt in 2001, 2000 and 1999 was
$570 million, $569 million and $546 million, respectively, of which
$17 million, $18 million and $15 million was capitalized.
65
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
7. CURRENT LIABILITIES
December 31,
($ 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)
- ------ -------------------------------------------
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 $78 million at Dec. 31, 2001, and $90 million at
Dec. 31, 2000.
Shelf Registration
- ------------------
NS filed on Form S-3 a shelf registration statement with the Securities
and Exchange Commission covering the issuance of up to $1 billion of
securities. As of Dec. 31, 2001, NS had issued $250 million of debt 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, 2001, NS had no commercial
paper outstanding. At Dec. 31, 2000, $1,132 million of commercial paper was
outstanding and was classified as long-term because NS had the ability,
through a previous credit agreement, to convert this obligation into
longer-term debt. Any borrowings under the credit agreement are contingent
on the continuing effectiveness of the representations and warranties made
at the inception of the agreement.
Debt Covenants
- --------------
NS is subject to various financial covenants with respect to its debt
and under its credit agreement, including a minimum net worth requirement, a
maximum leverage ratio restriction and certain restrictions on issuance of
further debt. At Dec. 31, 2001, NS was in compliance with all debt covenants.
67
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
9. LEASE COMMITMENTS
NS is committed under long-term lease agreements, which expire on
various dates through 2067, for equipment, lines of road and other property.
The following amounts do not include payments to PRR under the Operating
Agreement and lease agreements or to CRC under the SAA agreements (see
Note 2). Future minimum lease payments and operating lease expense, other
than to PRR and CRC, are as follows:
Operating Capital
($ 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
======= ======= =======
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 2001 in the table above does include $18 million related
to this lease. If NS does not purchase the locomotives at the end of the
maximum lease term, it is liable for any shortfall in the then fair value
of the locomotives and a specified residual value. NS does not expect to
be required to make any payments under this provision.
68
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
10. OTHER LIABILITIES
December 31,
($ 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
======== ========
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.
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 COMPENSATION
Under 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). 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
- -----------------
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 $20 million in 2001, $5 million
in 2000 and $2 million in 1999. NS recognized additional paid-in capital of
$1 million in 2001, none in 2000 and $4 million in 1999 related to the tax
benefit generated by stock option exercises.
Had such compensation costs been determined in accordance with SFAS 123,
net income would have been $358 million in 2001, $149 million in 2000 and
$210 million in 1999; and basic and diluted earnings per share would have
been $0.93 in 2001, $0.39 in 2000 and $0.55 in 1999. These pro forma amounts
include compensation costs as calculated using the Black-Scholes option-
pricing model, with average expected option lives of five years for 2001
and 2000 grants and four years for 1999 grants; average risk-free interest
rates of 5.1% in 2001, 6.8% in 2000 and 5.2% in 1999; average stock-price
volatilities of 39% in 2001, 33% in 2000 and 21% in 1999; and dividend
yields of 2% in 2001 and 3% in 2000 and 1999. These assumptions produce
per-share grant-date fair values of $5.48 in 2001, $5.22 in 2000 and
$5.12 in 1999.
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
==========
Of the total options outstanding at Dec. 31, 2001, 26 million were
vested and have a weighted-average exercise price of $25.25.
73
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
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
==========
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 817,500 and $15.48 in 2001;
937,500 and $16.94 in 2000; and 850,000 and $27.72 in 1999, respectively.
PSUs may be paid in the form of shares of Common Stock, cash or any
combination thereof. Shares earned and issued may be subject to share
retention agreements and held by NS for up to five years.
Shares Available and Issued
- ---------------------------
Shares of stock available for future grants and issued in connection
with all features of the LTIP and TSOP are as follows:
2001 2000 1999
---- ---- ----
Available for future
grants 12/31:
LTIP 30,816,365 2,554,584 10,512,997
TSOP 2,535,000 2,488,700 2,349,600
Shares of Common Stock
issued:
LTIP 1,146,346 395,626 1,086,288
TSOP - - -
74
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Loss
- ------------------------------------
"Accumulated other comprehensive loss" reported in the Consolidated
Statements of Changes in Stockholders' Equity consisted of the following:
Balance Net Balance
at Beginning Gain Reclassification at End
($ 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 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)
===== ====== ======
In 2001, Conrail recorded a $70 million loss in other comprehensive
income related to an increase in its minimum pension liability. NS'
"Other comprehensive loss" for 2001 and its "Accumulated other
comprehensive loss" at Dec. 31, 2001, include $41 million arising from
this Conrail adjustment.
Undistributed Earnings of Equity Investees
- ------------------------------------------
"Retained income" includes undistributed earnings of equity investees,
principally attributable to NS' equity in the earnings of Conrail, of
$355 million at Dec. 31, 2001; $351 million at Dec. 31, 2000; and
$330 million at Dec. 31, 1999.
76
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
14. EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted
earnings per share:
($ 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
====== ====== ======
These calculations exclude options the exercise price of which
exceeded the average market price of Common Stock as follows: in 2001,
20 million in the 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.
There are no adjustments to "Net income" or "Income from
continuing operations" for the diluted earnings per share computations.
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The 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)
- ------ -------------------------------------------
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.
Carrying amounts of marketable securities reflect unrealized holding
gains of $10 million on Dec. 31, 2001, and $11 million on Dec. 31, 2000.
Sales of "available-for-sale" securities were immaterial for years ended
Dec. 31, 2001 and 2000.
16. DERIVATIVE FINANCIAL INSTRUMENTS
On 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 and swaps in order to lock in the purchase prices of
some of its diesel fuel. 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 percent
of NS' average monthly fuel consumption will be hedged for each month
within any 36-month period. Diesel fuel costs represented 8%, 9% and 6%
of NS' operating expenses for the years ended Dec. 31, 2001, 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. In 2001, NS 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 increase in 2001 diesel
fuel expense of $8 million. Ineffectiveness related to the use of diesel
fuel hedges in 2001 was less than $1 million.
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 $251 million, or 3.5%, and
$280 million, or 4.3%, of its fixed rate debt portfolio hedged at
Dec. 31, 2001 and Dec. 31, 2000, 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,
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," includes $15 million (pretax) relating to the decrease in the
fair value of the derivative fuel hedging transactions that will terminate
within the next 12 months.
The asset and liability positions of NS' outstanding derivative
financial instruments were as follows:
December 31,
($ 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)
- ------ -------------------------------------------
17. DISCONTINUED OPERATIONS - MOTOR CARRIER
On 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.
18. COMMITMENTS AND CONTINGENCIES
Lawsuits
- --------
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 accrual is not made when management's best
estimate, based on known facts and circumstances, is that it is unlikely
that a loss has been incurred.
Presently, there are two cases involving labor issues and contractual
obligations of a fiber optic codeveloper where the aggregated range of loss
could be from nothing to $75 million. Management believes that NS will
prevail in these cases. 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. Unfavorable outcomes on these cases 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 $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, the liability represented NS' estimate of the probable
cleanup and remediation costs based on available information at 126
identified locations. On that date, 10 sites accounted for $17 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 126 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 million
in connection with its 2002 capital program. NS has forward fuel purchase
commitments in the first quarter of 2002 covering 38 million gallons of
fuel at an average cost of 62 cents per gallon, which includes federal taxes.
81
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
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.
Debt Guarantees
- ---------------
As of Dec. 31, 2001, certain Norfolk Southern subsidiaries are
contingently liable as guarantors with respect to $8 million of
indebtedness of related entities.
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 listed in the index in Item 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, 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, 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 related consolidated 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 21, 2002
83
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------ -----------------------------------------------------------
and Financial Disclosure.
------------------------
None.
84
PART 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.
- ------- ----------------------------------------------
In accordance with General Instruction G(3), the information called for
by Part III is incorporated herein by reference from Norfolk Southern's
definitive Proxy Statement, for the Norfolk Southern Annual Meeting of
Stockholders to be held on May 9, 2002, 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 beginning on Page 19 under
"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).
(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 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, is incorporated herein
by reference from Exhibit 10 to Norfolk Southern
Corporation's Form 8-K filed on June 30, 1997.
(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 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
Incentive 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) The Norfolk Southern Corporation Long-Term Incentive Plan,
as amended effective January 23, 2001, is incorporated
herein by reference to Exhibit 10(m) to Norfolk Southern
Corporation's Form 10-K filed on March 5, 2001.
(p) 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.
(q) 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.
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 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.
(s) 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.
(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) is filed herewith.
(u) 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.
(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) to Norfolk Southern
Corporation's Form 10-K filed on March 25, 1998.
(x) 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.
90
Item 14. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-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.
91
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.
NORFOLK SOUTHERN CORPORATION
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, 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 1 of 2
Norfolk Southern Corporation and Subsidiaries
---------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1999, 2000 and 2001
(In millions of dollars)
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
Year ended December 31, 1999
- ----------------------------
Valuation allowance (included
net in deferred tax liability)
for deferred tax assets $ 3 $ 6 $ -- $ -- $ 9
Casualty and other claims
included in other liabilities $ 271 $ 114 $ 9 (1) $ 119 (2) $ 275
Current portion of casualty
and other claims included
in accounts payable $ 144 $ 19 $ 191 (1) $ 173 (3) $ 181
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
(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.
(continued)
94
Schedule II
Page 2 of 2
Norfolk 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.
95
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) 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. 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) are not included in
copies assembled for public dissemination. If you have a need for this type
of information, we will be pleased to send it to you.
Write to:
Office of Corporate Secretary
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Virginia 23510-9219