UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-8339
NORFOLK SOUTHERN CORPORATION
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 52-1188014
- ----------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Three Commercial Place
Norfolk, Virginia 23510-2191
- ----------------------------------- ---------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (757) 629-2680
----------------
No Change
- ---------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. (X) Yes ( ) No
The number of shares outstanding of each of the registrant's classes of
Common Stock, as of the last practicable date:
Class Outstanding as of July 31, 2002
----- -------------------------------
Common Stock (par value $1.00) 388,445,686 (excluding 21,169,125
shares held by registrant's
consolidated subsidiaries)
2
TABLE OF CONTENTS
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Page
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Part I. Financial Information:
Item 1. Financial Statements:
Consolidated Statements of Income
Three and Six Months Ended
June 30, 2002 and 2001 3
Consolidated Balance Sheets
June 30, 2002 and Dec. 31, 2001 4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 23
Part II. Other Information:
Item 4. Submission of Matters to a Vote of
Security Holders 24
Item 6. Exhibit and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
3
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements.
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NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
($ in millions except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Railway operating revenues:
Coal $ 350 $ 395 $ 709 $ 788
General merchandise 948 922 1,817 1,793
Intermodal 295 275 565 551
------- ------- ------- -------
TOTAL RAILWAY OPERATING REVENUES 1,593 1,592 3,091 3,132
------- ------- ------- -------
Railway operating expenses:
Compensation and benefits 497 502 1,020 1,021
Materials, services and rents 364 377 703 749
Conrail rents and services (Note 4) 103 106 216 211
Depreciation 129 128 256 255
Diesel fuel 84 106 165 223
Casualties and other claims 37 40 72 77
Other 57 51 100 109
------- ------- ------- -------
TOTAL RAILWAY OPERATING EXPENSES 1,271 1,310 2,532 2,645
------- ------- ------- -------
Income from railway operations 322 282 559 487
Other income - net 2 24 36 51
Interest expense on debt (130) (139) (264) (280)
------- ------- ------- -------
Income from continuing operations
before income taxes 194 167 331 258
Provision for income taxes 75 60 126 90
------- ------- ------- -------
Income from continuing operations 119 107 205 168
Discontinued operations - gain on sale of
motor carrier, net of taxes (Note 3) -- -- -- 13
------- ------- ------- -------
NET INCOME $ 119 $ 107 $ 205 $ 181
======= ======= ======= =======
Per share amounts (Note 8):
Income from continuing operations,
basic and diluted $ 0.31 $ 0.28 $ 0.53 $ 0.44
Net income, basic and diluted $ 0.31 $ 0.28 $ 0.53 $ 0.47
Dividends $ 0.06 $ 0.06 $ 0.12 $ 0.12
See accompanying notes to Consolidated Financial Statements.
4
Item 1. Financial Statements. (continued)
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NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in millions)
(Unaudited)
June 30, Dec. 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 94 $ 204
Accounts receivable, net (Note 6) 523 475
Due from Conrail (Note 4) 5 8
Materials and supplies 100 90
Deferred income taxes 166 162
Other current assets 70 108
-------- --------
Total current assets 958 1,047
Investment in Conrail (Note 4) 6,178 6,161
Properties less accumulated depreciation 11,305 11,208
Other assets 1,083 1,002
-------- --------
TOTAL ASSETS $ 19,524 $ 19,418
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 845 $ 848
Income and other taxes 277 312
Due to Conrail (Note 4) 77 373
Other current liabilities 213 248
Current maturities of long-term debt 106 605
-------- --------
Total current liabilities 1,518 2,386
Long-term debt (Note 5) 7,338 7,027
Other liabilities 1,047 1,089
Due to Conrail (Note 4) 398 --
Minority interests 45 45
Deferred income taxes 2,866 2,781
-------- --------
TOTAL LIABILITIES 13,212 13,328
-------- --------
Stockholders' equity:
Common stock $1.00 per share par value,
1,350,000,000 shares authorized; issued
409,523,991 and 407,000,871 shares, respectively 410 407
Additional paid-in capital 469 423
Accumulated other comprehensive loss (Note 9) (41) (55)
Retained income 5,494 5,335
Less treasury stock at cost, 21,169,125 shares (20) (20)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 6,312 6,090
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,524 $ 19,418
======== ========
See accompanying notes to Consolidated Financial Statements.
5
Item 1. Financial Statements. (continued)
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NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in millions)
(Unaudited)
Six Months Ended
June 30,
----------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 205 $ 181
Reconciliation of net income to net cash
provided by operating activities:
Depreciation 262 262
Deferred income taxes 70 4
Equity in earnings of Conrail (19) (26)
Gains and losses on properties and investments (32) (26)
Income from discontinued operations -- (13)
Changes in assets and liabilities affecting
operations:
Accounts receivable (48) (29)
Materials and supplies (10) (5)
Other current assets and due from Conrail 53 102
Current liabilities other than debt (34) (52)
Other - net (62) (88)
-------- --------
Net cash provided by operating activities 385 310
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (345) (425)
Property sales and other transactions (3) 25
Investments, including short-term (44) (59)
Investment sales and other transactions 13 32
-------- --------
Net cash used for investing activities (379) (427)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (46) (46)
Common stock issued - net 36 13
Proceeds from borrowings 526 1,606
Debt repayments (632) (1,409)
-------- --------
Net cash provided by (used for)
financing activities (116) 164
-------- --------
Net increase (decrease) in cash and
cash equivalents (110) 47
CASH AND CASH EQUIVALENTS:
At beginning of year 204 --
-------- --------
At end of period $ 94 $ 47
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amounts capitalized) $ 268 $ 285
Income taxes $ 38 $ 67
See accompanying notes to Consolidated Financial Statements.
6
Item 1. Financial Statements. (continued)
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NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. In the opinion of Management, the accompanying unaudited interim
financial statements contain all adjustments (consisting of normal
recurring accruals) necessary to present fairly the Corporation's
financial position as of June 30, 2002, its results of operations
for the three and six months ended June 30, 2002 and 2001, and its
cash flows for the six months ended June 30, 2002 and 2001.
Although Management believes that the disclosures presented are
adequate to make the information not misleading, these
Consolidated Financial Statements should be read in conjunction with:
(a) the financial statements and notes included in the Corporation's
latest Annual Report on Form 10-K and in any subsequent Quarterly
Reports on Form 10-Q and (b) any Current Reports on Form 8-K.
2. 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. While the
ultimate amount of liability incurred in any of these lawsuits and
claims is dependent on future developments, in management's opinion
the recorded liability is adequate to cover the future payment of
such liability and claims. However, the final outcome of any of
these lawsuits and claims cannot be predicted with certainty, and
unfavorable or unexpected outcomes could result in additional accruals
that could be significant to results of operations in a particular
year or quarter. Any adjustments to recorded liability will be
reflected in expenses in the periods in which such adjustments
are known.
Presently, there are two cases, one involving labor arbitration claims
for "New York Dock" income protection benefits and the other involving
contractual obligations of a fiber optic codeveloper, Williams
Communications, LLC, where the aggregated range of loss could be from
nothing to $75 million. Management believes that NS will prevail in
both these cases; however, the ability to collect the $36 million
receivable due from Williams Communications, LLC may be limited
because of its declining financial condition. The shortfall, if any,
cannot now be determined. Its parent, Williams Communications Group,
Inc., filed in April 2002 a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. However, Williams
Communications, LLC, was not included in the bankruptcy petition.
Unfavorable outcomes in either of these cases could result in
accruals that could be significant to results of operations in a
particular year or quarter.
In addition, there are several lawsuits involving labor issues for
which a probable liability has been accrued through a charge to
expenses. It is possible that the loss in these cases could exceed
the accrued liability; however, this amount cannot reasonably be
estimated. An unfavorable outcome in these cases could result in
an additional accrual 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
7
Item 1. Financial Statements. (continued)
- ------ --------------------
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 (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
liability estimates. NS also has established an Environmental
Policy Council, composed of senior managers, to oversee and
interpret its environmental policy.
NS' balance sheets included liabilities for environmental exposures
in the amount of $29 million at June 30, 2002, and $33 million at
Dec. 31, 2001 (of which $8 million was accounted for as a current
liability for each period). At June 30, 2002, the liability
represented NS' estimate of the probable cleanup and remediation
costs based on available information at 124 identified locations.
On that date, 10 sites accounted for $16 million of the liability,
and no individual site was considered to be material. NS
anticipates that much of this liability will be paid out over five
years; however, some costs will be paid out over a longer period.
At some of the 124 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
8
Item 1. Financial Statements. (continued)
- ------ --------------------
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
--------------------
At June 30, 2002, NS had outstanding purchase commitments of
approximately $11 million in connection with its 2002 capital program.
NS had forward fuel purchase commitments for the remainder of 2002
covering 13 million gallons of fuel at an average cost of 64 cents
per gallon, which includes federal taxes.
3. Discontinued Operations
On March 28, 1998, NS sold all the common stock of North American
Van Lines, Inc., its motor carrier subsidiary. Results for the six
months ended June 30, 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.
4. 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. NS has a 58
percent economic and 50 percent voting interest in the jointly owned
entity, and CSX has the remainder of the economic and voting
interests. 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.
Operations of Conrail's Lines
-----------------------------
Norfolk Southern's railroad subsidiary, Norfolk Southern Railway
Company (NSR) operates as a part of its rail system the routes and
assets of Pennsylvania Lines LLC (PRR), a wholly owned subsidiary of
CRC, pursuant to operating and lease agreements. Costs necessary to
operate and maintain the PRR assets, including leasehold improvements,
are borne by NSR. CSX Transportation, Inc. (CSXT) operates the
routes and assets of another CRC subsidiary under comparable terms.
Certain other Conrail routes and assets (the "Shared Assets Areas")
continue to be operated by CRC for the joint and exclusive benefit of
NSR and CSXT. In addition to a fee paid for access, NSR and CSXT pay,
based on usage, the costs incurred by CRC to operate the Shared Assets
Areas.
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 June 30, 2002, the difference
between NS' investment in Conrail and its share of Conrail's
underlying net equity was $3.8 billion.
9
Item 1. Financial Statements. (continued)
- ------ --------------------
NS' Consolidated Balance Sheet at June 30, 2002 includes $65 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
June 30, 2002, NS has paid $124 million of these costs.
Related-Party Transactions
--------------------------
NS provides certain general and administrative support functions to
Conrail, the fees for which are billed in accordance with several
service-provider arrangements and amount to approximately $6 million
annually.
"Conrail rents and services" includes: (1) expenses for amounts due
to PRR and CRC for use by NSR of operating properties and equipment
and operation of the Shared Assets Areas and (2) NS' equity in the
earnings of Conrail, net of amortization. A significant portion of
payments made to PRR is borrowed back from a PRR subsidiary.
Previously, these loans were made under a demand note; however, in
the first quarter of 2002, the PRR subsidiary exchanged this demand
note for a new note due in 2032. As a result, borrowings owed to
the PRR subsidiary now comprise the noncurrent balance "Due to
Conrail." The interest rate for these loans is variable and was
2.87 percent at June 30, 2002. The current balance "Due to
Conrail" at June 30, 2002, is composed of amounts related to
expenses included in "Conrail rents and services," as discussed
above. At Dec. 31, 2001, the current balance "Due to Conrail"
included $72 million of such amounts and $301 million of advances
owed under the previous demand note.
Summary Financial Information - Conrail
---------------------------------------
The following summary financial information should be read in
conjunction with Conrail's audited financial statements, included
as Exhibit 99 with NS' 2001 Annual Report on Form 10-K.
Summarized Consolidated Statements of Income - Conrail
- ------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
($ in millions)
(Unaudited)
Operating revenues $ 222 $ 229 $ 447 $ 462
Operating expenses 158 153 322 322
------- ------- ------- -------
Operating income 64 76 125 140
Other income (expense) - net 3 (3) (2) (11)
------- ------- ------- -------
Income before income taxes 67 73 123 129
Provision for income taxes 25 26 45 37
------- ------- ------- -------
Net income $ 42 $ 47 $ 78 $ 92
======= ======= ======= =======
10
Item 1. Financial Statements. (continued)
- ------ --------------------
Summarized Consolidated Balance Sheets - Conrail
- ------------------------------------------------
June 30, Dec. 31,
2002 2001
---- ----
($ in millions)
(Unaudited)
Assets:
Current assets $ 315 $ 846
Noncurrent assets 7,785 7,236
------- -------
Total assets $ 8,100 $ 8,082
======= =======
Liabilities and stockholders' equity:
Current liabilities $ 394 $ 408
Noncurrent liabilities 3,522 3,569
Stockholders' equity 4,184 4,105
------- -------
Total liabilities and stockholders' equity $ 8,100 $ 8,082
======= =======
5. Long-Term Debt
In April 2002, NS received net proceeds of $298 million from
issuing $200 million of 6 percent Senior Notes due April 30, 2008,
and $100 million of Floating Rate Senior Notes due February 28, 2005.
The notes were issued under NS' $1 billion shelf registration; NS
has issued a total of $550 million of debt under this shelf.
NS had commercial paper debt of $30 million outstanding at June 30,
2002, which was classified as long-term debt because NS has the
ability, through its $1 billion credit facility agreement that
expires in 2006, to convert this obligation into longer-term debt.
At Dec. 31, 2001, NS had no commercial paper debt outstanding.
6. Sales of Accounts Receivable
A bankruptcy-remote special purpose subsidiary of NS sells without
recourse undivided ownership interests in a pool of accounts
receivable. The buyers have a priority collection interest in the
entire pool of receivables, and as a result, NS has retained credit
risk to the extent the pool of receivables exceeds the amount sold.
NS services and collects the receivables on behalf of the buyers;
however, no servicing asset or liability has been recognized because
the benefits of servicing are estimated to be just adequate to
compensate NS for its responsibilities. Payments collected from
sold receivables can be reinvested in new accounts receivable on
behalf of the buyers. Should NS' credit rating drop below investment
grade, the buyers have the right to discontinue this reinvestment.
Accounts receivable sold under this arrangement, and therefore not
included in "Accounts receivable, net" on the Consolidated Balance
Sheets, were $250 million at June 30, 2002, and $300 million at
Dec. 31, 2001. The fees associated with the sale, which are based
on the buyers' financing costs, are included in "Other income - net."
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 experienced very low
11
Item 1. Financial Statements. (continued)
- ------ --------------------
levels of default, and as a result, little dilution. If historical
dilution percentages were to increase one percentage point, the
value of NS' retained interest would be reduced by approximately
$6 million.
NS' allowance for doubtful accounts was $5 million at June 30, 2002
and Dec. 31, 2001.
7. Derivative Financial Instruments
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. NS' management has determined that its
derivative financial instruments qualify as either fair-value or
cash-flow hedges, having values which 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 second quarter 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 approximately 7 percent
of NS' operating expenses for the second quarter and first six months
of 2002, and approximately 8 percent of NS' operating expenses for
the second quarter and first six months of 2001. The program
provides that NS will not enter into any fuel hedges with a duration
of more than thirty-six months, and that no more than eighty percent
of NS' average monthly fuel consumption will be hedged for each
month within any thirty-six month period.
NS' 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.
During second quarter 2002 NS entered into 72 fuel swaps for
approximately 98 million gallons at an average price of
approximately $0.67 per gallon of Nymex No. 2 heating oil. As of
June 30, 2002, outstanding swaps covered approximately 52 percent,
41 percent, and 6 percent of estimated fuel purchases for the
remainder of 2002 and for the years 2003 and 2004, respectively.
NS' fuel hedging activity resulted in a net decrease in diesel fuel
expense of $1 million for second quarter 2002 and a net increase in
diesel fuel expense of less than $1 million for second quarter 2001.
For the first six months, NS' fuel hedging activity resulted in net
increases in diesel fuel expense of $3 million and less than
$1 million for 2002 and 2001, respectively. Ineffectiveness, or the
extent to which changes in the fair values of derivative instruments
do not offset changes in the fair values of the hedged items, was
less than $1 million for the second quarters of 2002 and 2001 and
the first six months of 2001, and was approximately $1 million for
the first six months of 2002.
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 $235 million,
or 3.4 percent, and $251 million, or 3.5 percent, of its fixed rate
debt portfolio hedged at June 30, 2002, and Dec. 31, 2001,
respectively, using interest rate swaps that qualify for and are
designated as fair-value hedge transactions. These swaps have been
effective in hedging the changes in fair value of the related debt
arising from changes in interest rates, and accordingly, there has
been no impact on earnings resulting from ineffectiveness associated
with these derivative transactions.
12
Item 1. Financial Statements. (continued)
- ------ --------------------
Fair Values
-----------
The fair values of NS' diesel fuel derivative instruments at June 30,
2002 and 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
non-cash transactions, and accordingly, are excluded from the
Consolidated Statement of Cash Flows. "Accumulated other
comprehensive loss," a component of "Stockholders' equity," includes
$14 million (pretax) of unrealized gains at June 30, 2002, and
$15 million (pretax) of unrealized losses at Dec. 31, 2001, related
to the fair value of derivative fuel hedging transactions that will
terminate within twelve months of the respective dates.
The asset and liability positions of NS' outstanding derivative
financial instruments at June 30, 2002 and Dec. 31, 2001 were
as follows:
June 30, Dec. 31,
2002 2001
---- ----
($ in millions)
Interest rate hedges:
Gross fair market asset position $ 16 $ 12
Fuel hedges:
Gross fair market asset position 15 --
Gross fair market (liability) position (1) (19)
---- ----
Total net asset (liability) position $ 30 $ (7)
==== ====
8. Earnings Per Share
The following table sets forth the reconciliation of the number of
weighted-average shares outstanding used in the calculations of
basic and diluted earnings per share:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
(In millions)
Weighted-average shares
outstanding 388.3 385.0 387.7 384.8
Dilutive effect of
outstanding options and
performance share units
(as determined by the
application of the
treasury stock method) 2.4 1.9 2.5 1.1
----- ----- ----- -----
Diluted weighted-average
shares outstanding 390.7 386.9 390.2 385.9
===== ===== ===== =====
The calculations exclude options on shares whose exercise price
exceeded the average market price of Common Stock for the period
as follows: in 2002, 24 million in the second and first quarters;
and in 2001, 19 million in the second quarter and 28 million in
the first quarter. There are no adjustments to "Net income" for
the diluted earnings per share computations.
13
Item 1. Financial Statements. (continued)
- ------ --------------------
9. Comprehensive Income
NS' total comprehensive income was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
($ in millions)
Net income $ 119 $ 107 $ 205 $ 181
Other comprehensive
income (loss) (1) (3) 14 (4)
------- ------- ------- -------
Total comprehensive
income $ 118 $ 104 $ 219 $ 177
======= ======= ======= =======
For NS, "Other comprehensive income (loss)" reflects the unrealized
gains and losses on certain investments in debt and equity securities
and net fair value adjustments to derivative financial instruments.
14
Item 2. 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
RESULTS OF OPERATIONS
Net Income
- ----------
Second-quarter net income was $119 million in 2002, up $12 million, or
11 percent, compared with second quarter last year, reflecting a
14 percent increase in income from railway operations that offset lower
nonoperating income. For the first six months of 2002, net income was
$205 million, up $24 million, or 13 percent, compared with the first
six months of 2001. Results in 2001 included a $13 million gain related
to the 1998 sale of NS' former motor carrier subsidiary (see Note 3).
Excluding that gain, which is reported as "Discontinued operations,"
net income increased $37 million, or 22 percent. The improvement was
primarily the result of a 15 percent increase in income from railway
operations, which was driven by lower railway operating expenses.
Railway Operating Revenues
- --------------------------
Second-quarter railway operating revenues were $1.6 billion in 2002, up
$1 million, compared with 2001. For the first six months, railway operating
revenues were $3.1 billion, down $41 million, or 1 percent, compared with
last year. As shown in the following table, traffic volume was higher for
the quarter, but was lower for the first six months. The unfavorable revenue
per unit/mix variances were largely attributable to changes in the mix of
traffic (notably less coal traffic volume and more intermodal traffic
volume).
Second Quarter First Six Months
2002 vs. 2001 2002 vs. 2001
Increase (Decrease) Increase (Decrease)
------------------- -------------------
($ in millions) ($ in millions)
Traffic volume (carloads) $ 28 $ (17)
Revenue per unit/mix (27) (24)
------- -------
$ 1 $ (41)
======= =======
15
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Revenues and carloads for the commodity groups were as follows:
Revenues
----------------------------------------------
Second Quarter Six Months
2002 2001 2002 2001
---- ---- ---- ----
($ in millions)
Coal $ 350 $ 395 $ 709 $ 788
General merchandise:
Automotive 259 244 487 458
Chemicals 194 191 380 379
Metals/construction 189 177 349 342
Agr./consumer prod./govt. 152 148 306 298
Paper/clay/forest 154 162 295 316
------- ------- ------- -------
General merchandise 948 922 1,817 1,793
Intermodal 295 275 565 551
------- ------- ------- -------
Total $ 1,593 $ 1,592 $ 3,091 $ 3,132
======= ======= ======= =======
Carloads
----------------------------------------------
Second Quarter Six Months
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Coal 394 437 792 876
General merchandise:
Automotive 181 173 344 325
Chemicals 110 111 214 218
Metals/construction 196 185 358 351
Agr./consumer prod./govt. 125 126 250 256
Paper/clay/forest 112 117 217 234
------ ------ ------ ------
General merchandise 724 712 1,383 1,384
Intermodal 599 538 1,148 1,081
------ ------ ------ ------
Total 1,717 1,687 3,323 3,341
====== ====== ====== ======
Coal
- ----
Coal revenues decreased $45 million, or 11 percent, in the second quarter
and $79 million, or 10 percent, in the first six months, compared with the
same periods last year. Total tonnage handled declined 9 percent for both
periods, reflecting lower utility volume and continued weakness in export
coal traffic. Utility traffic volume continued to be adversely affected by
reduced demand; however, stockpiles are declining and are now thought to be
nearer to normal levels. The decline in export volume was primarily the
result of weak demand. Average revenues were down 2 percent in the second
quarter and down slightly for the first six months. The decline for the
quarter was largely the result of an increase in shorter-haul (lower
revenue per unit) business coupled with a decline in longer-haul (higher
revenue per unit) business, which was offset, in part, by higher rates.
16
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Coal volumes are expected to strengthen in August, based upon utility
projections and recent contract settlements in the metallurgical and
export markets, resulting in more favorable revenue comparisons during
the second half of 2002.
General Merchandise
- -------------------
General merchandise revenues increased $26 million, or 3 percent, in
the second quarter and $24 million, or 1 percent, in the first six months,
compared with the same periods last year. Traffic volume (carloads)
increased 2 percent for the quarter, but was flat for the first six months.
The increase for the quarter was driven by higher automotive and
metals/construction volume. For the first six months, increased volumes for
these two commodity groups were offset by declines for the remaining
commodity groups. Automotive and metals/construction benefited from higher
light vehicle production, increased metals business and strength in highway
construction. Paper/clay/forest traffic volume continued to be adversely
affected by mill closures and production curtailments. General merchandise
revenue per unit increased 1 percent for both periods, compared with last
year. Agriculture revenue per unit increased 4 percent for the quarter and
5 percent for the first six months, largely because of more longer-haul
corn business.
General merchandise revenues are expected to continue to compare favorably
with those of last year and strengthen when the economy improves.
Intermodal
- ----------
Intermodal revenues increased $20 million, or 7 percent, in the second
quarter and $14 million, or 3 percent, in the first six months, compared
with the same periods last year. Traffic volume (units) increased 11 percent
for the quarter and 6 percent for the first six months, reflecting higher
container and Triple Crown volumes. The increases in container traffic
reflected gains in international and domestic business that continued to
benefit from the expansion of the intermodal network and service
improvements. Intermodal revenue per unit declined 4 percent for both
periods, reflecting the absence of fuel surcharges that were in place in
2001, changes in the mix of traffic, including an increase in shorter-haul
business and market-driven rate reductions (largely a result of the excess
truck capacity that was driven by softer demand earlier in the year).
Intermodal revenues are expected to continue to benefit from continued
improvements in service and the terminal capacity added in 2001.
Railway Operating Expenses
- --------------------------
Second-quarter railway operating expenses were $1.3 billion in 2002, down
$39 million, or 3 percent, compared with last year. For the first six
months, expenses were $2.5 billion, down $113 million, or 4 percent.
Compensation and benefits expenses decreased $5 million, or 1 percent, in
the second quarter and $1 million for the first six months. Both periods
benefited from reduced employment levels and lower payroll taxes; however,
higher wage rates, increased health and welfare benefit costs and lower
pension income largely offset these declines.
Materials, services and rents decreased $13 million, or 3 percent, in the
second quarter and $46 million, or 6 percent, in the first six months. The
declines reflected lower equipment rents largely resulting from efficiency
improvements and, for the first six months, lower expenses for locomotive
and freight car materials. These declines were somewhat offset by higher
joint facility costs.
Conrail rents and services expenses decreased $3 million, or 3 percent, in
the second quarter, but increased $5 million, 2 percent, for the first
six months. The increase reflected lower Conrail earnings that were largely
attributable to the absence of a favorable adjustment to Conrail's state
tax liabilities that benefited 2001.
17
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
Depreciation expense was up slightly for both periods, as lower rates
implemented as a result of a recently completed depreciation study largely
offset the effects of property additions.
Diesel fuel expenses decreased $22 million, or 21 percent, in the second
quarter and $58 million, or 26 percent, in the first six months, reflecting
declines in the average price per gallon of 20 percent for the quarter and
23 percent for the first six months and slightly lower consumption.
Other expense increased $6 million, or 12 percent, in the second quarter,
but decreased $9 million, or 8 percent, for the first six months. The
increase for the quarter was principally the result of higher bad debt
expense. The decline for the first six months resulted from a first-quarter
reduction to prior years' property tax accruals made in response to a
first-quarter settlement.
Other Income - Net
- ------------------
Other income - net was $22 million lower in the second quarter of 2002 and
was $15 million lower for the first six months, compared with the same
periods of 2001. The decline for the quarter reflected the absence of a
gain from the sale of a real estate investment in 2001 as well as lower
returns on corporate-owned life insurance and reduced rental income. The
decrease for the first six months resulted from the absence of a $13 million
gain from a nonrecurring settlement that benefited 2001. Lower
corporate-owned life insurance returns and rental income were largely offset
by reduced accounts receivable sales fees.
Provision for Income Taxes
- --------------------------
The second-quarter effective income tax rate was 38.7 percent in 2002, compared
with 35.9 percent last year. For the first six months, the effective rate was
38.1 percent, compared with 34.9 percent last year. Excluding NS' equity in
Conrail's after-tax earnings, the second-quarter rate was 41.0% in 2002 and
39.2% in 2001, and the year-to-date rate was 40.4% in 2002 and 38.8% in 2001.
The increases were largely the result of an increase in the Indiana state
income tax rate.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operating activities, NS' principal source of liquidity,
was $385 million in the first six months of 2002, compared with $310 million
in the first six months of 2001. The increase was the result of higher
operating income, lower tax payments (2001 included the settlement of federal
tax years 1995 and 1996) and favorable changes in working capital. These
improvements were partially offset by a reduction in the amount of accounts
receivable sold. The amount of accounts receivable sold was reduced
$50 million in the first six months of 2002 versus a $14 million increase
for the same period of 2001. 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." NS' net cash flow from these borrowings amounted to
$98 million in the first six months of 2002 and $144 million for the same
period of 2001.
NS' working capital deficit was $560 million at June 30, 2002, compared
with $1.3 billion at Dec. 31, 2001. The improvement was principally the
result of the change in the terms of the note under which NS borrows
funds from the PRR subsidiary (see Note 4) and a reduction in current
maturities of long-term debt. NS repaid $500 million of debt that matured
May 1, 2002, using proceeds from new borrowings (see Note 5), the sale of
accounts receivable and cash on hand. NS has issued $550 million of debt
under its $1 billion shelf registration that became effective in
April 2001.
18
Item 2. 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. Over the last twelve months, the amount of
receivables NS could sell under this program ranged from $359 million to
$468 million. Moreover, NS has a $1 billion credit facility, which expires
in 2006, that it can borrow under or use to support commercial paper debt
(see Note 5). However, any reduction in its credit rating could limit NS'
ability to access the commercial paper markets.
NS expects to generate sufficient cash flow from operations to meet its
ongoing obligations. This expectation is based on the view that the economy
will continue to grow as the last half of the year progresses.
Cash used for investing activities decreased in the first six months of 2002,
compared with the first six months of 2001. The decline was principally the
result of lower capital expenditures driven by fewer locomotive purchases.
Cash used for financing activities was $116 million in the first six months
of 2002, compared with cash provided by financing activities of $164 million
in the same period of 2001. Financing activities in 2002 resulted in a
$204 million net reduction in debt, compared with a net increase of
$53 million in 2001, excluding borrowings from a PRR subsidiary. Loan
transactions with a PRR subsidiary resulted in net borrowings of $98 million
in 2002 and $144 million in 2001 (see Note 4). Including those borrowings,
debt was reduced $106 million in 2002, versus a $197 million increase in
2001. NS' debt-to-total capitalization ratio (excluding the notes payable to
the PRR subsidiary) was 54.1 percent at June 30, 2002, and 55.6 percent at
Dec. 31, 2001.
NS has outstanding $734 million of its 7.05% notes due May 1, 2037. 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. NS will not
know the amount of 2037 notes that it may be required to redeem until
April 1, 2004. NS expects to be able to redeem any notes properly
presented using cash generated from operations (including sales of
accounts receivable), cash on hand and proceeds from borrowings.
CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY
Conrail's second-quarter net income was $42 million in 2002, down
$5 million, or 11 percent, compared with the same period last year. For the
first six months, Conrail's net income was $78 million in 2002, down
$14 million, or 15 percent. The six-month decline reflected a favorable
adjustment to state tax reserves that benefited results in 2001.
Conrail's second-quarter operating revenues were $222 million, down
$7 million, or 3 percent, compared with the same period last year. Six-month
revenues were $447 million, down $15 million, or 3 percent. The declines
reflected lower operating fees, largely a result of reduced operating
costs in the Shared Assets Areas and, for the first six months, lower
revenues at Conrail's Indiana Harbor Belt subsidiary.
Conrail's second-quarter operating expenses were $158 million, up
$5 million, or 3 percent, compared with the same period last year,
primarily because of higher expenses for casualties and other claims.
Six-month expenses were $322 million, unchanged from last year.
Conrail's working capital deficit was $79 million at June 30, 2002,
compared with working capital of $438 million at Dec. 31, 2001. The
change was largely the result of the exchange of the demand notes
receivable from NS and CSX for new long-term notes. Conrail is
expected to have sufficient cash flow to meet its ongoing
obligations.
NS' equity in earnings of Conrail, net of amortization, was
$11 million in the second quarter of 2002, compared with $14 million
in 2001, and was $19 million for the first six months, compared with
$26 million in 2001.
19
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
OTHER MATTERS
Telecommunications Subsidiary
- -----------------------------
NS' subsidiary, Thoroughbred Technology and Telecommunications, Inc.
("T-Cubed"), is co-developing fiber optic infrastructure with members of
the telecommunications industry. This industry has experienced a severe
downturn. As a result of changes in the values of telecommunications
assets, T-Cubed is monitoring its carrying amount of these assets, as
required by SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." To date, based on the known facts and circumstances,
management believes that its ultimate investment in these assets will be
recovered, and accordingly, no impairment has been recognized.
During 2001, one of T-Cubed's codevelopers, 360networks (USA) inc. ("360"),
filed for protection under Chapter 11 of the U.S. Bankruptcy Code and
foreign laws. 360 owes T-Cubed amounts for work performed on certain joint
projects, and T-Cubed owes 360 amounts for work performed on other joint
projects. The bankruptcy judge has approved the set-off of these amounts,
leaving about $7 million due to T-Cubed from 360. T-Cubed has the right to
collect this amount from any proceeds due 360 from the sale of joint assets.
Management believes that it will collect this receivable.
T-Cubed is engaged in contract litigation with a second codeveloper
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. Its parent, Williams Communications
Group, Inc., filed in April 2002 a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. However, Williams
Communications, LLC, was not included in the bankruptcy petition (see
Note 2).
Labor Arbitration and Litigation
- --------------------------------
Several hundred labor arbitration claims have been filed with NSR 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 NS
will prevail and 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 (see Note 2).
Sixty-seven current and former employees have filed lawsuits involving
labor issues against NSR in West Virginia state court, alleging that NSR
discriminated against them on the basis of their age when it assigned
them rankings on the conductor seniority roster pursuant to a national
collective bargaining agreement. In 1997 a state court jury returned a
verdict finding NSR liable for age discrimination, and the West Virginia
Supreme Court of Appeals affirmed the judgement of liability. The cases
are now before the County Circuit Court for jury trial on the issue of
remedies, and trails are scheduled to begin in September 2002. The
probable liability has been accrued through a charge to expenses.
However, depending on the outcome of these cases, they could have a
significant effect on results of operations in a particular year or
quarter (see Note 2).
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
20
Item 2. 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 at this time. 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 national agreement with the United
Transportation Union, which represents about 7,000 NS employees, was
recently 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. As of June 30, 2002, through swap transactions and
advance purchases, NS has hedged approximately 57 percent of expected
diesel fuel requirements for the remainder of 2002. The effect of the
hedges is to yield an average cost of approximately 73 cents per hedged
gallon, including federal taxes and transportation.
A 10 percent decrease in diesel fuel prices would reduce NS' asset related
to the swaps by approximately $24 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 at June 30, 2002, all is fixed-rate debt,
except for most capital leases, $250 million of notes due in 2003,
$215 million of equipment obligations and $100 million of notes due in
2005. As a result, NS' debt subject to interest rate exposure totaled
$830 million at June 30, 2002. A 1 percentage point increase in interest
rates would increase NS' total annual interest expense related to all
its variable debt by approximately $8 million. Management considers it
unlikely that interest rate fluctuations applicable to these instruments
will result in a material adverse effect on NS' financial position,
results of operations or liquidity.
The capital leases, which carry an average fixed rate of 7.1 percent, were
effectively converted to variable rate obligations using interest rate swap
agreements. On June 30, 2002, the average pay rate under these agreements
was 2.6 percent, and the average receive rate was 7.1 percent. A portion
of the lease obligations is payable in Japanese yen. NS eliminated the
associated exchange rate risk at the inception of each lease with a yen
deposit sufficient to fund the yen-denominated obligation. Most of these
deposits are held by foreign banks, primarily Japanese. As a result, NS is
exposed to financial market risk relative to Japan. Counterparties to the
interest rate swaps and Japanese banks holding yen deposits are major
financial institutions believed by management to be creditworthy.
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 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
$3 million and $2 million in second quarter 2002 and 2001, respectively,
and $5 million for the first six months of 2002 and 2001. Capital
expenditures totaled approximately $3 million and $4 million for the first
six months of 2002 and 2001, respectively.
21
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
NS' balance sheets included liabilities for environmental exposures in the
amount of $29 million at June 30, 2002, and $33 million at Dec. 31, 2001
(of which $8 million was accounted for as a current liability in each
period). At June 30, 2002, the liability represented NS' estimate of the
probable cleanup and remediation costs based on available information at
124 identified locations. On that date, 10 sites accounted for $16 million
of the liability, and no individual site was considered to be material. NS
anticipates that much of this liability will be paid out over five years;
however, some costs will be paid out over a longer period.
At some of the 124 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 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.
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
22
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations. (continued)
-------------------------
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.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
- ------ -----------------------------------------------------------
The information required by this item is included in Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 20 under the heading "Market Risks and Hedging
Activities."
24
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Registrant's Annual Meeting of Stockholders was held on May 9, 2002, at
which meeting four directors were elected to serve for a term of three
years, the appointment of independent public accountants was ratified and
a stockholder proposal was approved.
The four directors were elected by the following vote:
FOR AUTHORITY WITHHELD
--- ------------------
Gerald L. Baliles 317,654,404 votes 10,343,019 votes
Gene R. Carter 317,445,388 votes 10,552,035 votes
Steven F. Leer 316,550,846 votes 11,446,577 votes
J. Paul Reason 320,708,590 votes 7,288,833 votes
The appointment of KPMG LLP, independent public accountants, as auditors of
the Corporation's books and records was ratified by the following vote:
FOR: 313,685,701 shares
AGAINST: 12,263,200 shares
ABSTAINED: 2,048,522 shares
A stockholder proposal concerning stockholder approval for future severance
agreements with senior executives was approved by the following vote:
FOR: 152,305,954 shares
AGAINST: 120,782,081 shares
ABSTAINED: 11,001,761 shares
Item 6. Exhibit and Reports on Form 8-K
- ------ -------------------------------
(a) Exhibit:
99 Certifications of the CEO and CFO pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002.
(b) Reports on Form 8-K:
A report on Form 8-K was filed May 1, 2002, advising of certain
details of the issuance and sale of Registrant's 6 percent Senior
Notes due April 30, 2008, and attaching as exhibits the related
agreements, including indenture and opinions.
A report on Form 8-K was filed May 1, 2002, advising of certain
details of the issuance and sale of Registrant's Floating Rate
Senior Notes due Feb. 28, 2005, and attaching as exhibits the
related agreements, including indenture and opinions.
25
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORFOLK SOUTHERN CORPORATION
----------------------------
(Registrant)
Date: Aug. 8, 2002 /s/ Dezora M. Martin
------------ --------------------------------------
Dezora M. Martin
Corporate Secretary (Signature)
Date: Aug. 8, 2002 /s/ John P. Rathbone
------------ --------------------------------------
John P. Rathbone
Senior Vice President and Controller
(Principal Accounting Officer) (Signature)
26
EXHIBIT INDEX
- -------------
Electronic
Submission
Exhibit
Number Description Page
- ---------- -------------------------- ----
99 Certifications of the CEO and CFO pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes - Oxley Act of 2002. 27