Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Report -- [x] Reg. S-K Item 405 94 374K
2: EX-3 Articles of Incorporation/Organization or By-Laws 18± 63K
3: EX-10 Material Contract 3± 12K
4: EX-10 Material Contract 16± 63K
5: EX-10 Material Contract 16± 61K
6: EX-10 Material Contract 8± 31K
7: EX-10 Material Contract 11± 42K
8: EX-10 Material Contract 9± 34K
9: EX-12 Statement re: Computation of Ratios 2± 9K
10: EX-21 Subsidiaries of the Registrant 2 13K
11: EX-23 Consent of Experts or Counsel 3 14K
12: EX-99 Miscellaneous Exhibit 23 95K
1UNITED 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 December 31, 2000
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, 2001: $6,277,704,194.
The number of shares outstanding of each of the registrant's classes
of common stock, as of January 31, 2001: 384,427,691 (excluding
21,363,974 shares held by registrant's consolidated subsidiaries).
PAGE 2
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement (to be
dated April 2, 2001), 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.
PAGE 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 30
7A. Quantitative and Qualitative Disclosures
About Market Risk 50
8. Financial Statements and Supplementary Data 51
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 81
Part III. 10. Directors and Executive Officers of the Registrant 82
11. Executive Compensation 82
12. Security Ownership of Certain Beneficial Owners
and Management 82
13. Certain Relationships and Related Transactions 82
Part IV. 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K 83
Index to Consolidated Financial Statement Schedule 83
Power of Attorney 90
Signatures 90
Exhibit Index 94
PAGE 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, 2000, all the common stock of Norfolk Southern Railway
and 16.1 percent of its voting preferred stock (resulting in
94.8 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 42 and Note 16 on Page 78). NAVL's
results of operations, financial position and cash flows are presented
as "Discontinued operations" in the accompanying financial statements.
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, NS 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 various
PAGE 5
operating and leasing arrangements, more particularly described in
Note 2 on Page 60, 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, Va. Also, the leasing arrangements with PRR augmented Norfolk
Southern Railway's locomotive, freight car and intermodal fleet.
CONTINUING OPERATIONS:
RAILROAD OPERATIONS - As of Dec. 31, 2000, NS' railroads operated
approximately 21,800 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. The new arrangement resolved all outstanding
litigation between NS' railroads and NCRR and settled a number of
contested real property issues. The agreement also includes very broad
dispute resolution provisions.
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;
PAGE 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, East and Midwest, with the exception
of those in central and southern Florida. Atlanta, Birmingham, New
Orleans, Memphis, St. Louis, Kansas City (Missouri), Chicago, Detroit,
Cincinnati, Buffalo, Norfolk, Charleston, Savannah, Jacksonville,
Cleveland, Newark, Pittsburgh, Philadelphia and Baltimore are among the
leading centers originating and terminating freight traffic on the
system. In addition, a haulage arrangement with Florida East Coast
Railway Company allows NS' railroads to provide single-line service to
and from south Florida, including the port cities of Miami, West Palm
Beach and Fort Lauderdale. The system's lines also reach many
individual industries, mines (in western Virginia, eastern Kentucky,
southern and northern West Virginia and western Pennsylvania) and
businesses located in smaller communities in its service area. The
traffic corridors carrying the heaviest volumes of freight include
those from the Appalachian coal fields of Virginia, West Virginia and
Kentucky, to Norfolk and Sandusky, Ohio; Buffalo to Chicago and Kansas
City; Chicago to Jacksonville (via Cincinnati, Chattanooga and
Atlanta); and Washington, D.C./Hagerstown, Maryland, to New Orleans
(via Atlanta and Birmingham); and the New Jersey area to Chicago (via
Allentown and Pittsburgh).
Buffalo, Chicago, Hagerstown, Kansas City, Memphis, Meridian, New
Orleans, Sidney/Salem and St. Louis 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 and domestic containers in major traffic
corridors, including those between New York and Chicago, Chicago and
Atlanta, and Atlanta and New York.
PAGE 7
[Download Table]
RAILWAY OPERATING REVENUES - NS' total railway operating revenues
were $6.2 billion in 2000. Revenue, shipments and revenue yield by
principal railway operating revenue sources for the past five years are
set forth in the following table. The prior year "chemicals"and
"agriculture/consumer products/government" groups have been
reclassified to conform to the year 2000 presentation.
Year Ended December 31,
Principal Sources of --------------------------------------------------
Railway Operating
Revenues 2000 1999 1998 1997 1996
-------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipment)
COAL
Revenues $1,435 $1,322 $1,252 $1,301 $1,305
% of total revenues 23% 25% 29% 31% 32%
Shipments 1,687 1,519 1,310 1,324 1,310
% of total shipments 25% 25% 27% 28% 29%
Revenue Yield $ 850 $ 870 $ 955 $ 983 $ 996
AUTOMOTIVE
Revenues $ 921 $ 746 $ 577 $ 492 $ 489
% of total revenues 15% 14% 13% 11% 12%
Shipments 692 611 487 361 354
% of total shipments 10% 10% 10% 7% 8%
Revenue Yield $1,331 $1,220 $1,186 $1,364 $1,379
CHEMICALS
Revenues $ 756 $ 641 $ 492 $ 504 $ 482
% of total revenues 13% 12% 12% 12% 12%
Shipments 453 394 315 316 299
% of total shipments 6% 7% 7% 7% 6%
Revenue Yield $1,668 $1,627 $1,559 $1,595 $1,612
METALS/CONSTRUCTION
Revenues $ 689 $ 567 $ 375 $ 369 $ 355
% of total revenues 11% 11% 9% 9% 9%
Shipments 757 587 372 374 359
% of total shipments 11% 10% 8% 8% 8%
Revenue Yield $ 911 $ 965 $1,008 $ 987 $ 989
PAPER/CLAY/FOREST
Revenues $ 630 $ 578 $ 535 $ 539 $ 514
% of total revenues 10% 11% 13% 13% 12%
Shipments 491 465 445 457 438
% of total shipments 7% 8% 9% 10% 10%
Revenue Yield $1,285 $1,243 $1,202 $1,178 $1,172
AGR./CONSUMER PRODUCTS/GOVT.
Revenues $ 609 $ 539 $ 468 $ 476 $ 474
% of total revenues 10% 11% 11% 11% 11%
Shipments 525 489 441 455 462
% of total shipments 8% 8% 9% 9% 10%
Revenue Yield $1,160 1,103 $1,063 $1,046 $1,026
PAGE 8
Year Ended December 31,
Principal Sources of --------------------------------------------------
Railway Operating
Revenues 2000 1999 1998 1997 1996
-------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipment)
INTERMODAL
(Trailers, Containers
and RoadRailers)
Revenues $1,119 $ 849 $ 555 $ 568 $ 499
% of total revenues 18% 16% 13% 13% 12%
Shipments 2,242 1,896 1,443 1,472 1,331
% of total shipments 33% 32% 30% 31% 29%
Revenue Yield $ 499 $ 448 $ 385 $ 386 $ 375
Total Railway Operating
Revenues $6,159 $5,242 $4,254 $4,249 $4,118
Total Railway Shipments 6,847 5,961 4,813 4,759 4,553
Railway Revenue Yield $ 900 $ 879 $ 884 $ 893 $ 904
Note: Effective in 2000, NS adopted the consensus reached by the
Emerging Issues Task Force of the Financial Accounting Standards Board
(FASB) concerning Issue No. 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent." The consensus presents indicators
to consider in establishing the accounting for revenue. As a result of
the application of the consensus, NS has reclassified to railway
operating expenses certain charges that previously have been reported
net with railway operating revenues. This change in reporting has no
effect on income from railway operations. Prior period amounts have
been reclassified to conform to the current presentation.
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 156 million tons of
coal, coke and iron ore in 2000 and handled a total of 175 million
tons. Originated tonnage and total tons handled increased due to a
full year of operations in the Northern Region. Revenues from coal,
coke and iron ore accounted for about 23 percent of NS' total railway
operating revenues in 2000.
PAGE 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:
[Download Table]
Tons of Coal, Coke and Iron Ore (Millions)
--------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Originated 156 138 119 119 117
Received 19 20 15 15 13
---- ---- ---- ---- ----
Handled 175 158 134 134 130
==== ==== ==== ==== ====
[Download Table]
Of the 156 million tons of coal, coke and iron ore originated on
lines operated by NS' railroads in 2000, the approximate breakdown by
origin state was as follows:
Origin State Millions of Tons
------------ ----------------
West Virginia 50
Virginia 34
Pennsylvania 24
Kentucky 23
Ohio 8
Indiana 7
Alabama 4
Illinois 4
Tennessee 1
Other 1
---
156
===
Of the 175 million tons handled, approximately 20 million tons
moved for export, principally through NS' pier facilities at Norfolk
(Lamberts Point), Virginia; 25 million tons moved to domestic and
Canadian steel industries; 119 million tons of steam coal moved to
electric utilities; and 11 million tons moved to other industrial and
miscellaneous users.
PAGE 10
NS' railroads moved 9 million tons of originated coal, coke and
iron ore to various docks on the Ohio River, and 9 million tons 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.
Total coal handled through all system ports in 2000 was 40 million
tons. Of this total, 19 million tons (including coastwise traffic)
moved through Lambert's Point and 4 million tons moved through the
Baltimore Terminal.
The quantities of NS export coal handled through Lamberts Point
for the past five years were as follows:
[Download Table]
Export Coal through Lamberts Point
(Millions of tons)
----------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
16 17 24 28 26
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 consists 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 2000 were $4.7 billion,
a 21 percent increase, compared with 1999. Merchandise carloads and
intermodal units handled in 2000 were 5.16 million, compared with
4.44 million handled in 1999, an increase of 16 percent. The increases
in revenues and carloads reflect a full year of operations in the
Northern Region.
In 2000, 164 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.
Revenues in all six market groups comprising merchandise traffic
increased in 2000, due to a full year of operations in the Northern
Region.
PAGE 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."
[Download Table]
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,
--------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenue ton miles (billions) 197 167 135 137 131
Freight train miles
traveled (millions) 74.4 61.5 53.0 49.7 49.4
Revenue per ton mile $0.0312 $0.0315 $0.0316 $0.0310 $0.0315
Revenue tons per train 2,653 2,710 2,539 2,755 2,648
Revenue ton miles
per man-hour worked 2,888 2,577 2,659 2,930 2,787
Percentage ratio of
railway operating
expenses to railway
operating revenues 89.7% 86.3% 75.3% 71.5% 71.7%
FREIGHT RATES - In 2000, 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 2000, NS' railroads were found by the STB not to be "revenue
adequate" based on results for the year 1999. 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 operations on
NS' lines consist of Amtrak trains operating 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
PAGE 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 and subsequent
leasing of coal, oil, gas and timberlands, the development of
commercial real estate and the leasing or sale of rail property and
equipment. In 2000, 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.
PAGE 13
RAILWAY PROPERTY:
[Download Table]
EQUIPMENT - As of Dec. 31, 2000, 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 2,251 1,028 3,279 10,792,300
Switching 106 113 219 319,800
Auxiliary units 59 18 77 --
------ ------ ------- ----------
Total locomotives 2,416 1,159 3,575 11,112,100
====== ====== ======= ==========
Freight Cars: (Tons)
Hopper 20,484 5,634 26,118 2,746,297
Box 18,802 5,296 24,098 1,881,269
Covered Hopper 11,349 3,516 14,865 1,617,580
Gondola 28,551 11,293 39,844 4,260,435
Flat 4,008 1,409 5,417 392,862
Caboose 180 77 257 --
Other 3,900 -- 3,900 213,029
------ ------ ------- ----------
Total freight cars 87,274 27,225 114,499 11,111,472
====== ====== ======= ==========
Other:
Work equipment 5,771 2,101 7,872
Vehicles 3,684 1,720 5,404
Highway trailers
and containers 426 7,779 8,205
RoadRailers(RT) 5,577 -- 5,577
Miscellaneous 1,450 9,241 10,691
------ ------ -------
Total other 16,908 20,841 37,749
====== ====== =======
* Includes equipment leased to outside parties and equipment subject to
equipment trusts, conditional sale agreements and capitalized leases.
** Includes 982 locomotives, 18,404 freight cars and 3,830 units of other
equipment leased from PRR.
PAGE 14
[Download Table]
The following table indicates the number and year built for
locomotives and freight cars owned at Dec. 31, 2000:
Year Built
------------------------------------------------------------
1990- 1984- 1983 &
2000 1999 1998 1997 1996 1995 1989 Before Total
---- ---- ---- ---- ---- ---- ---- ------ -----
Locomotives:
Number of
units 35 147 119 120 119 334 403 1,139 2,416
Percent of
fleet 1% 6% 5% 5% 5% 14% 17% 47% 100%
Freight cars:
Number of
units 106 503 1,567 1,076 987 7,108 3,870 72,057 87,274
Percent of
fleet -- 1% 2% 1% 1% 8% 4% 83% 100%
The average age of the freight car fleet at Dec. 31, 2000, was
24.6 years. During 2000, 1,569 freight cars were retired. As of
Dec. 31, 2000, the average age of the locomotive fleet was 16.1 years.
During 2000, 20 locomotives, the average age of which was 24.5 years,
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.
[Download Table]
Annual Average Bad Order Ratio
-----------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Freight Cars (excluding cabooses):
NS Rail 5.7% 3.7% 4.1% 4.6% 4.8%
Locomotives:
NS Rail 5.5% 5.3% 4.3% 5.0% 4.5%
PAGE 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, which is expected to be
accelerated in 2001, for underutilized, unserviceable and overage
revenue cars. The ratio rose in 2000 as a result of decreased
maintenance activity. The locomotive bad order ratio rose in 1997,
particularly in the early months of the year, as older units required
additional servicing and some new units were out-of-service related to
warranty work. By year-end 1997, the locomotive bad order ratio had
returned to a level nearer that of prior years. 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.
TRACKAGE - All NS trackage is standard gauge, and the rail in
approximately 96 percent of the main line trackage (including first,
second, third and branch main tracks, all excluding trackage rights)
ranges from 100 to 140 pounds per yard. Of the approximately
31,900 miles of track maintained as of Dec. 31, 2000, about 22,100 were
laid with welded rail.
[Download Table]
The density of traffic on running tracks (main line trackage plus
passing tracks) during 2000 was as follows:
Gross tons of
freight carried
per track mile Track miles of Percent
(Millions) running tracks* of total
--------------- -------------- --------
0-4 7,821 34
5-19 6,590 29
20 and over 8,598 37
------ ---
23,009 100
====== ===
* Excludes trackage rights.
PAGE 16
[Download Table]
The following table summarizes certain information about NS' track
roadway additions and replacements during the past five years:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Track miles of rail installed 392 403 429 451 401
Miles of track surfaced 3,687 5,087 4,715 4,703 4,686
New crossties installed
(millions) 1.5 2.3 2.0 2.2 1.9
MICROWAVE SYSTEM - The NS microwave system, consisting of
8,374 radio path miles, 443 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, AEI data transmissions and relay of intelligence
from defective equipment detectors.
TRAFFIC CONTROL - Of a total of 21,800 road miles operated by NS,
excluding trackage rights over foreign lines, 8,420 road miles are
governed by centralized traffic control systems (of which 1,490 miles
are controlled by data radio from 135 microwave site locations and
460 miles are cab-signal only) and 3,070 road miles are equipped for
automatic block system operation.
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
$816 million as of Dec. 31, 2000, and $930 million at Dec. 31, 1999.
PAGE 17
CAPITAL EXPENDITURES - Capital expenditures for road, equipment
and other property for the past five years were as follows (including
capitalized leases):
[Download Table]
Capital Expenditures
-------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In millions of dollars)
Road $ 557 $ 559 $ 612 $ 599 $ 438
Equipment 146 349 442 306 326
Other property 28 4 6 24 25
------ ------ ------ ------ ------
Total $ 731 $ 912 $1,060 $ 929 $ 789
====== ====== ====== ====== ======
Capital spending and maintenance programs are and have been
designed to assure the ability to provide safe, efficient and reliable
transportation services. For 2001, NS has budgeted $806 million of
capital spending. See the discussion following "Cash used for
investing activities," on Page 43 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 47 in
Part II, Item 7, "Management's Discussion and Analysis," and in Note 17
to the Consolidated Financial Statements on Page 78.
EMPLOYEES - NS employed an average of 33,738 employees in 2000,
compared with an average of 31,166 in 1999. The increase reflects the
substantial number of former Conrail employees who became NS employees
on June 1, 1999 and therefore are included in the year 2000 average for
a full year. The approximate average cost per employee during 2000 was
$51,000 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 48 in Part II, Item 7,
"Management's Discussion and Analysis."
PAGE 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 a
decade ago by the ICC under the Staggers Rail Act of 1980, has
continued under the STB, and additional rail business could be exempted
from regulation in the future. 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 80 percent of NS' freight revenues come
from either exempt traffic or traffic moving under transportation
contracts.
Efforts may be made in 2001 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 and other rail
carriers vigorously will oppose these counterproductive efforts to
reimpose or to authorize reimposing such 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 increasingly 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.
PAGE 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 2000.
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, 2001, relating to the
executive officers.
Business Experience During Past
Name, Age, Present Position Five Years
--------------------------- ------------------------------------
David R. Goode, 60, Present position since September
Chairman, President and 1992.
Chief Executive Officer
L. I. Prillaman, 57, Present position since August 1998;
Vice Chairman and prior thereto was Executive Vice
Chief Marketing Officer President-Marketing
Stephen C. Tobias, 56, Present position since August 1998;
Vice Chairman and prior thereto was Executive Vice
Chief Operating Officer President-Operations.
Henry C. Wolf, 58, Present position since August 1998;
Vice Chairman and prior thereto was Executive Vice
Chief Financial Officer President-Finance.
John F. Corcoran, 60, Present position since August 1997;
Senior Vice President- prior thereto was Vice President-
Public Affairs Public Affairs.
PAGE 20
Business Experience During Past
Name, Age, Present Position Five Years
--------------------------- -----------------------------------
John W. Fox, Jr., 53, Present position since December 1999;
Senior Vice President- prior thereto was Vice President-
Coal Marketing Coal Marketing.
James A. Hixon, 47, Present position since February 1, 2001.
Senior Vice President- Served as Senior Vice President-
Administration Employee Relations from November 1999
to February 1, 2001, and prior thereto
was Vice President-Taxation.
J. Gary Lane, 51, Present position since April 1, 2000.
Senior Vice President-Law Served as Senior General Counsel
from November 1999 to April 1, 2000,
General Counsel-Corporate from April
1996 to November 1999, and prior
thereto was General Solicitor.
James W. McClellan, 61, Present position since August 1998;
Senior Vice President- prior thereto was Vice President-
Planning Strategic Planning.
Kathryn B. McQuade, 44, Present position since April 1, 2000.
Senior Vice President- Served as Vice President- Financial
Financial Planning Planning from August 1998 to
April 1, 2000, and prior thereto
was Vice President-Internal Audit.
Charles W. Moorman, 49, Present position since October 1999;
President-Thoroughbred prior thereto was Vice President-
Technology and Information Technology.
Telecommunications, Inc.
John P. Rathbone, 49, Present position since April 1, 2000;
Senior Vice President prior thereto was Vice President
and Controller and Controller.
Stephen P. Renken, 57, Present position since February 1, 2001.
Senior Vice President- Served as Vice President-Information
Chief Information Officer 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.
PAGE 21
Business Experience During Past
Name, Age, Present Position Five Years
--------------------------- -----------------------------------
John M. Samuels, 57, Present position since April 1, 2000;
Senior Vice President- Served as Vice President-Operations
Operations Planning and Planning and Budget from January
Support 1998 to April 1, 2000; prior
thereto was Vice President-
Operating Assets of Conrail.
Donald W. Seale, 48, Present position since December 1999;
Senior Vice President- prior thereto was Vice President-
Merchandise Marketing Merchandise Marketing.
PAGE 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)
[Download Table]
The Common Stock of Norfolk Southern Corporation, owned by 53,194
stockholders of record as of Dec. 31, 2000, 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 2000 and
1999.
Quarter
----------------------------------------------
2000 1st 2nd 3rd 4th
---- --- --- --- ---
Market price
High $ 22-3/4 $ 19-11/16 $ 19-3/4 $ 15-5/8
Low 12-11/16 14-3/16 14-1/8 11-15/16
Dividends per share $ 0.20 $ 0.20 $ 0.20 $ 0.20
1999 1st 2nd 3rd 4th
---- --- --- --- ---
Market price
High $ 32-3/16 $ 36-7/16 $ 31-5/16 $ 25-3/8
Low 26-1/4 25-1/2 24-1/8 19-5/8
Dividends per share $ 0.20 $ 0.20 $ 0.20 $ 0.20
PAGE 23
Item 6. Selected Financial Data.
------ -----------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1997 - 2000
Page One
2000(1) 1999(2) 1998 1997
---- ---- ---- ----
($ in millions, except per share amounts)
RESULTS OF OPERATIONS
Railway operating revenues $ 6,159 $ 5,242 $ 4,254 $ 4,249
Railway operating expenses 5,526 4,524 3,202 3,036
--------- --------- --------- ---------
Income from
railway operations 633 718 1,052 1,213
Other income - net 168 164 309 170
Interest expense on debt 551 531 516 385
--------- --------- --------- ---------
Income from continuing
operations before
income taxes 250 351 845 998
Provision for income taxes 78 112 215 299
--------- --------- --------- ---------
Income from continuing
operations before
accounting changes 172 239 630 699
Discontinued operations (3) -- -- 104 22
Cumulative effect
of accounting changes -- -- -- --
--------- --------- --------- ---------
Net income $ 172 $ 239 $ 734 $ 721
========= ========= ========= =========
PER SHARE DATA
Net income - basic $ 0.45 $ 0.63 $ 1.94 $ 1.91
Net income - diluted $ 0.45 $ 0.63 $ 1.93 $ 1.90
Dividends $ 0.80 $ 0.80 $ 0.80 $ 0.80
Stockholders' equity
at year end $ 15.16 $ 15.50 $ 15.61 $ 14.44
PAGE 24
Item 6. Selected Financial Data. (continued)
------ -----------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1997 - 2000
Page Two
2000(1) 1999(2) 1998 1997
---- ---- ---- ----
($ in millions, except per share amounts)
FINANCIAL POSITION
Total assets $ 18,976 $ 19,250 $ 18,180 $ 17,350
Total long-term debt,
including current
maturities $ 7,636 $ 8,059 $ 7,624 $ 7,459
Stockholders' equity $ 5,824 $ 5,932 $ 5,921 $ 5,445
OTHER
Capital expenditures $ 731 $ 912 $ 1,060 $ 929
Average number of shares
outstanding (thousands) 383,358 380,606 378,749 376,593
Number of stockholders
at year end 53,194 51,123 51,727 50,938
Average number of employees:
Rail 33,344 30,897 24,185 23,323
Nonrail (3) 394 269 115 2,494
--------- --------- --------- ---------
Total 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 ($105 million, or 28
cents per diluted share, after-tax) gain. Accordingly, NAVL's
results of operations, financial position and cash flows are
presented as "Discontinued operations."
PAGE 25
Item 6. Selected Financial Data. (continued)
------ -----------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1993 - 1996
Page One
1996 1995 1994 1993(4)
---- ---- ---- ----
($ in millions, except per share amounts)
RESULTS OF OPERATIONS
Railway operating revenues $ 4,118 $ 4,028 $ 3,921 $ 3,746
Railway operating expenses 2,953 2,966 2,878 2,831
--------- --------- --------- ---------
Income from
railway operations 1,165 1,062 1,043 915
Other income - net 117 140 86 135
Interest expense on debt 116 113 101 98
--------- --------- --------- ---------
Income from continuing
operations before
income taxes 1,166 1,089 1,028 952
Provision for income taxes 413 391 372 370
--------- --------- --------- ---------
Income from continuing
operations before
accounting changes 753 698 656 582
Discontinued operations (3) 17 15 12 (33)
Cumulative effect
of accounting changes -- -- -- 223
--------- --------- --------- ---------
Net income $ 770 $ 713 $ 668 $ 772
========= ========= ========= =========
PER SHARE DATA
Net income - basic $ 2.03 $ 1.81 $ 1.63 $ 1.85
Net income - diluted $ 2.01 $ 1.80 $ 1.62 $ 1.83
Dividends $0.74-2/3 $0.69-1/3 $ 0.64 $ 0.62
Stockholders' equity
at year end $ 13.26 $ 12.47 $ 11.73 $ 11.12
PAGE 26
Item 6. Selected Financial Data. (continued)
------ -----------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1993 - 1996
Page Two
1996 1995 1994 1993(4)
---- ---- ---- ----
($ in millions, except per share amounts)
FINANCIAL POSITION
Total assets $ 11,234 $ 10,718 $ 10,403 $ 10,301
Total long-term debt,
including current
maturities $ 1,856 $ 1,638 $ 1,619 $ 1,594
Stockholders' equity $ 4,977 $ 4,829 $ 4,685 $ 4,621
OTHER
Capital expenditures $ 789 $ 757 $ 707 $ 639
Average number of shares
outstanding (thousands) 379,372 392,987 408,904 418,243
Number of stockholders
at year end 50,748 53,401 52,442 51,884
Average number of employees:
Rail 23,361 24,488 24,710 25,531
Nonrail 2,469 2,456 2,458 3,773
--------- --------- --------- ---------
Total 25,830 26,944 27,168 29,304
========= ========= ========= =========
NOTES
(4) 1993 results include an increase in the provision for income taxes
reflecting a 1% increase in the federal income tax rate, which
reduced net income by $54 million, or 13 cents per diluted share.
"Discontinued operations" includes a $50 million pretax
charge for the disposition of two NAVL businesses.
Net income also reflects two accounting changes, the cumulative
effect of which increased 1993 net income by $223 million, or
53 cents per diluted share: a change in accounting for income
taxes increased net income by $467 million, with a corresponding
reduction in deferred taxes, and changes in accounting for
postretirement and postemployment benefits decreased net income by
$244 million.
PAGE 27
Item 6. Selected Financial Data. (continued)
------ -----------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1990 - 1992
Page One
1992 1991(5) 1990
---- ---- ----
($ in millions, except per share amounts)
RESULTS OF OPERATIONS
Railway operating revenues $ 3,777 $ 3,654 $ 3,786
Railway operating expenses 2,851 3,345 2,969
--------- --------- ---------
Income from
railway operations 926 309 817
Other income - net 97 131 142
Interest expense on debt 109 99 78
--------- --------- ---------
Income from continuing
operations before
income taxes 914 341 881
Provision for income taxes 328 112 316
--------- --------- ---------
Income from continuing
operations before
accounting changes 586 229 565
Discontinued operations (3 and 5) (28) (199) (9)
Cumulative effect
of accounting changes -- -- --
--------- --------- ---------
Net income $ 558 $ 30 $ 556
========= ========= =========
PER SHARE DATA
Net income - basic $ 1.31 $ 0.07 $ 1.14
Net income - diluted $ 1.30 $ 0.07 $ 1.14
Dividends $ 0.60 $0.53-1/3 $0.50-2/3
Stockholders' equity
at year end $ 10.05 $ 9.55 $ 10.52
PAGE 28
Item 6. Selected Financial Data. (continued)
------ -----------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1990 - 1992
Page Two
1992 1991(5) 1990
---- ---- ----
($ in millions, except per share amounts)
FINANCIAL POSITION
Total assets $ 10,188 $ 9,959 $ 10,326
Total long-term debt,
including current
maturities $ 1,648 $ 1,387 $ 1,122
Stockholders' equity $ 4,233 $ 4,093 $ 4,912
OTHER
Capital expenditures $ 628 $ 688 $ 605
Average number of shares
outstanding (thousands) 424,378 443,276 486,284
Number of stockholders
at year end 51,200 53,725 56,187
Average number of employees:
Rail 25,650 27,366 28,697
Nonrail 4,485 4,586 4,584
--------- --------- ---------
Total 30,135 31,952 33,281
========= ========= =========
NOTES
(5) 1991 operating expenses include a $483 million charge primarily
for labor force reductions. "Discontinued operations" includes a
$197 million charge primarily for the write-down of the goodwill
portion of NS' investment in NAVL. These charges reduced net
income by $498 million, or $1.12 per diluted share.
PAGE 29
Item 6. Selected Financial Data. (continued)
------ -----------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Table of Graphs
Included with the Eleven-Year Financial Review
[Download Table]
The following financial information appears as three (3) separate
graphs with the Eleven-Year Financial Review in the 2000 Norfolk Southern
Corporation Annual Report to Stockholders.
(millions) 2000* 1999 1998 1997 1996 1995*
---------- ---- ---- ---- ---- ---- ----
NET INCOME $273 $239 $734 $721 $770 $733
[Download Table]
(dollars) 2000* 1999 1998 1997 1996 1995*
--------- ---- ---- ---- ---- ---- ----
EARNINGS PER SHARE-DILUTED $0.71 $0.63 $1.93 $1.90 $2.01 $1.86
* 2000 excludes work-force reduction costs that reduced net
income by $101 million and diluted earnings per share by 26
cents. 1995 excludes an early retirement charge that reduced
net income by $20 million and diluted earnings per share by
6 cents.
In 2000, excluding the work-force reduction costs, net
income increased 14% and diluted earnings per share increased
13%, compared with results in 1999. The improvement reflected
gains from the sale of nonoperating properties and higher income
from railway operations.
[Download Table]
(millions) 2000 1999 1998 1997 1996 1995
---------- ---- ---- ---- ---- ---- ----
CAPITAL EXPENDITURES $731 $ 912 $1,060 $929 $789 $ 757
NS has made more than $5 billion of capital expenditures
since 1995 -- demonstrating a commitment to make the investments
necessary to support safe, efficient and reliable operations and
revenue growth.
PAGE 30
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 53 and
the Eleven-Year Financial Review beginning on Page 23.
OPERATIONS OVER CONRAIL'S LINES
Results for 2000 reflect 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 (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 60).
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.
SUMMARIZED RESULTS OF OPERATIONS
2000 Compared with 1999
-----------------------
Net income in 2000 was $172 million, down 28%. Results in 2000
included $165 million of costs related to actions taken to reduce the size
of the work force, which reduced net income by $101 million, or 26 cents
per diluted share. Excluding these costs, 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 63) 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%.
1999 Compared with 1998
-----------------------
Net income in 1999 was $239 million, a decrease of 67%. Net income in
1998 included the $105 million gain from the sale of NS' former motor
carrier subsidiary (see Note 16 on Page 78). Income from continuing
operations, which excludes both the motor carrier's results of operations
prior to its sale and the gain from its sale, declined 62%. The decrease
resulted from lower income from railway operations and from lower Conrail
earnings before the Closing Date. The decline in income from railway
operations reflected the difficulties in integrating the Northern Region
and a sharp decline in export coal traffic.
PAGE 31
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Diluted earnings per share of 63 cents were down 67%. Diluted earnings
per share from continuing operations were down 62%.
[Download Table]
INCOME FROM RAILWAY OPERATIONS
(Shown as a graph in the Annual Report to Stockholders)
(millions)
2000* 1999 1998 1997 1996 1995*
---- ---- ---- ---- ---- ----
$ 798 $ 718 $1,052 $1,213 $1,165 $1,096
Income from railway operations increased 11% in 2000,
despite a sharp rise in diesel fuel prices, reflecting a full
year of Northern Region operations.
* 2000 excludes $165 million of work-force reduction
costs. 1995 excludes a $34 million charge for an early
retirement program.
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
--------------------------
Railway operating revenues were $6.2 billion in 2000, $5.2 billion in
1999, and $4.3 billion in 1998. Revenues in 2000 and 1999 include results
of operations in the Northern Region for 12 months and seven months,
respectively. The following table presents a three-year comparison of
revenues by market group.
[Download Table]
RAILWAY OPERATING REVENUES BY MARKET GROUP
($ in millions) 2000 1999 1998
--------------- ---- ---- ----
Coal $1,435 $1,322 $1,252
General merchandise:
Automotive 921 746 577
Chemicals 756 641 492
Metals/construction 689 567 375
Paper/clay/forest 630 578 535
Agriculture/consumer products/
government 609 539 468
------ ------ ------
General merchandise 3,605 3,071 2,447
Intermodal 1,119 849 555
------ ------ ------
Total $6,159 $5,242 $4,254
====== ====== ======
PAGE 32
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
In 2000, revenues increased for all market groups, reflecting a full
year of handling Northern Region traffic. Revenues for the last seven
months, a comparison that fully includes the Northern Region in both years,
improved, reflecting recovery of most of the diverted traffic and new
business. However, weakness in the economy resulted in lower revenues very
late in the year. As shown in the following table, the full-year volume
gains attributable to expanded operations produced most of the revenue
increase.
[Download Table]
RAILWAY OPERATING REVENUE VARIANCE ANALYSIS
Increases (Decreases)
($ in millions) 2000 vs. 1999 1999 vs. 1998
--------------- ------------- -------------
Volume $779 $1,015
Revenue per unit/mix 138 (27)
---- ------
Total $917 $ 988
==== ======
Revenue per unit improved in most market groups, principally due to
the effects of Northern Region traffic and increased rates. About one-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.
In 1999, revenues increased for all market groups as a result of
Northern Region traffic. Prior to the Closing Date, revenues for all market
groups, except automotive, were below or even with those of the prior year.
Revenue per unit improved principally due to the effects of consolidating
TCS' revenues and Northern Region traffic; however, the effects of changes
in the mix of traffic, most notably reduced export coal traffic, more than
offset the revenue-per-unit improvements.
COAL tonnage increased 11% in 2000, 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. Coal revenues represented 23% of total railway operating
revenues in 2000, and 89% of NS' coal shipments originated on lines it
operated. In 1999, coal tonnage increased 18%, but revenues increased only
5%. The positive revenue effects of handling Northern Region tonnage were
largely offset by the significant drop in export coal tonnage. In addition,
a larger proportion of the Northern Region traffic is shorter-haul (lower
revenue-per-unit) traffic.
PAGE 33
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
[Download Table]
TOTAL COAL, COKE AND IRON ORE TONNAGE
(In millions of tons) 2000 1999 1998
--------------------- ---- ---- ----
Utility 119 108 83
Export 20 18 25
Domestic metallurgical 25 22 18
Other 11 10 8
---- ---- ----
Total 175 158 134
==== ==== ====
Utility coal traffic increased 11% in 2000, 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. In 1999, utility coal traffic increased 30%, due to the
expansion of operations into the Northern Region after the Closing Date.
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 from peak-only generation
to full-time generation. In addition, natural gas prices reached record
levels in 2000 and are anticipated to remain higher than historical levels
for the near future, further improving the 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 nearly a decade. However, several
federal environmental regulatory initiatives continued to be pursued during
2000. 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. Also, the Kyoto Protocol,
if ratified and implemented, could put additional cost pressures on coal-
fired generation.
A 1999 decision by a federal district court judge in West Virginia
held that some common mountaintop mining practices in the coal industry are
illegal. There are a small number of mountaintop mining operations on NS'
lines; however, if sustained, the decision could have an adverse effect on
these operations and on NS' coal traffic, revenues and royalties (see Note 3
on Page 63, "Royalties from coal"). A decision by the appellate court is
expected in 2001. The district court's ruling already has made coal mine
permitting a more arduous and lengthy process.
Export coal tonnage increased 8% in 2000, a result of a full year of
access to Baltimore through the Northern Region, mitigated by lower tonnage
through Lambert's Point. 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.
PAGE 34
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
In 1999, export coal tonnage decreased 28%, despite the expansion of
operations into the Northern Region. The lower traffic resulted from
reduced demand for U.S. coking coal (in part, the result of a strong U.S.
dollar), productivity gains made by foreign producers, lower ocean
transportation rates and lower foreign royalties. Steam coal exports
continued to be noncompetitive on price, making domestic markets more
attractive for U.S. producers.
Export tonnage is expected to continue to be limited by supply and
competition from Australian coals. In addition, environmental issues
concerning carbon-based fuels could increase pressure to reduce their use.
Domestic metallurgical coal, coke and iron ore traffic increased 17%
in 2000, 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.
In 1999, domestic metallurgical coal, coke and iron ore traffic
increased 22%, as the addition of Northern Region traffic more than offset
the effects of reduced U.S. steel production. Lower-priced steel imports
led to reduced production levels at integrated steel manufacturers,
especially through the first three quarters of 1999, thereby lowering
demand for raw materials.
Domestic metallurgical coal, coke and iron ore traffic is expected to
continue to suffer from the effects of the slowing economy. Curtailed steel
production levels are expected to continue in the near term, which could
further weaken the steel industry. In 2000, an Alabama steel producer
closed permanently, and several others filed for Chapter 11 bankruptcy
protection. 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 4% in 2000, reflecting a full year of handling Northern
Region traffic; however, this was mitigated by the loss of some traffic to
competitors. Other coal traffic increased 25% in 1999, due to the
commencement of operations in the Northern Region.
[Download Table]
COAL
(Shown as a graph in the Annual Report to Stockholders)
(millions)
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
Export $ 201 $ 204 $ 314 $ 380 $ 374 $ 353
Domestic 1,234 1,118 938 921 931 915
------ ------ ------ ------ ------ ------
$1,435 $1,322 $1,252 $1,301 $1,305 $1,268
====== ====== ====== ====== ====== ======
Revenues increased $113 million, or 9%, in 2000, due to
the effects of a full year of Northern Region traffic. This
group includes utility coal, export coal, domestic
metallurgical coal and industrial coal, coke and iron ore.
PAGE 35
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
GENERAL MERCHANDISE traffic volume (carloads) increased 15% in 2000,
and revenues increased 17%, principally due to a full year of operating the
Northern Region. In 1999, traffic volume increased 24%, and revenues
increased 26%, reflecting the commencement of operations in the Northern
Region; however, service issues resulted in traffic diversions in all
market groups.
Automotive traffic volume increased 13%, and revenues increased 23% in
2000, 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.
In 1999, automotive traffic volume increased 26%, and revenues
increased 29%, largely due to the expansion of operations into the Northern
Region and record vehicle production. The NS-served Toyota plant in
Princeton, Ind., and the vehicle parts distribution center in Dayton, Ohio,
which were new in 1999, also contributed to the increase. However, design
and service issues and equipment shortages caused by extended cycle times
adversely affected NS' mixing center network. In addition, service issues
after the Closing Date resulted in significant traffic diversions.
Automotive revenues in 2001 are expected to be down, reflecting an
anticipated decline in light vehicle production from the record level of
2000.
[Download Table]
AUTOMOTIVE
(Shown as a graph in the Annual Report to Stockholders)
(millions)
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
$921 $746 $ 577 $ 492 $489 $449
Revenues increased $175 million, or 23%, in 2000, due to a
full year of operations in the Northeast and record vehicle
production. 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 increased 15%, and revenues increased 18% in
2000, 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'
Thoroughbred Bulk Transfer (TBT) facilities that handle chemicals and bulk
commodities for customers not located on NS-served lines.
PAGE 36
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
In 1999, chemicals traffic volume increased 25%, and revenues
increased 30%, due to the addition of Northern Region traffic. Chemical
production increased slightly during the year, and shipments of chlorine,
caustic soda and PVC plastics rebounded from 1998 levels, benefiting from
an improved Asian economy. The location of new and expanded processing
plants on lines NS serves increased shipments of plastic pellets. Chemicals
shipments also increased through NS' TBT facilities. Shipments of sulfur
declined, due to production cutbacks at plants served by NS.
Chemicals revenues in 2001 are expected to remain relatively flat, due
to fewer plant expansions and softness in U.S. chemical and petroleum
production.
[Download Table]
CHEMICALS
(Shown as a graph in the Annual Report to Stockholders)
(millions)
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
$756 $641 $ 492 $ 504 $482 $541
Revenues increased $115 million, or 18%, in 2000,
reflecting a full year of Northern Region traffic and the
return of traffic diverted last year. 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 increased 29%, and revenues
increased 22% in 2000, 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.
In 1999, metals and construction traffic volume increased 57%, and
revenues increased 51%, due to the addition of Northern Region traffic.
Continued growth, resulting from the location of new mini-mills and steel
processors in NS' service territory, offset the effects of a weaker scrap
market. Construction traffic benefited from strong housing starts and
highway construction in the Southeast. In addition, new cement terminals on
NS' lines generated additional traffic.
PAGE 37
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Metals and construction revenues in 2001 are expected to suffer from
the effects of a continued softness in the steel market.
[Download Table]
METALS AND CONSTRUCTION
(Shown as a graph in the Annual Report to Stockholders)
(millions)
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
$689 $567 $ 375 $ 369 $355 $350
Revenues increased $122 million, or 22%, in 2000, principally
due to the effects of a full year of expanded operations.
This group includes steel, aluminum products, machinery,
scrap metals, cement, aggregates, bricks and minerals.
Paper, clay and forest products traffic volume increased 5%, and
revenues increased 9% in 2000, principally due to the effects of a full
year of Northern Region operations. Additional 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.
Demand for paper production inputs, such as scrap paper and wood pulp, was
weak, but this was tempered by stronger demand for newsprint and printing
paper.
In 1999, paper, clay and forest products traffic volume increased 4%,
and revenues increased 8%, reflecting the commencement of Northern Region
operations. The closure of four major paper mills and some chip mills late
in 1998, coupled with the effects of consolidations and weak demand within
the paper industry, had a negative impact on traffic volume.
Paper, clay and forest products revenues are expected to continue to
be adversely affected by weak demand in 2001, due to continued
consolidations and little anticipated capacity expansion through 2003.
[Download Table]
PAPER, CLAY AND FOREST PRODUCTS
(Shown as a graph in the Annual Report to Stockholders)
(millions)
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
$630 $578 $ 535 $ 539 $514 $538
Revenues increased $52 million, or 9%, in 2000, reflecting
a full year of operations in the Northern Region. This
group includes lumber and wood products, pulpboard and
paper products, wood fibers, woodpulp, scrap paper and
clay. NS serves 85 paper mills, 95 paper distribution
centers and more than 100 lumber reload centers.
PAGE 38
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Agriculture, consumer products and government traffic volume increased
7%, and revenues increased 13% in 2000, 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.
In 1999, agriculture, consumer products and government traffic volume
increased 11%, and revenues increased 15%, reflecting access to the large
Northeast consumer markets. Service issues that arose early in the year due
to harsh weather conditions and continued during integration of the
Northern Region had an adverse effect on volume. In addition, soybean
traffic was negatively affected by low-priced imports from South America.
Shipments of fertilizer declined, reflecting significantly lower
production.
Agriculture, consumer products and government revenues are expected to
be tempered by the soft economic conditions. While only a normal crop year
is expected, strong export demand could help offset the resulting drop in
domestic shipments.
[Download Table]
AGRICULTURE, CONSUMER PRODUCTS AND GOVERNMENT
(Shown as a graph in the Annual Report to Stockholders)
(millions)
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
$609 $539 $ 468 $ 476 $474 $397
Revenues increased $70 million, or 13%, in 2000, reflecting
a full year of Northern Region operations and modest growth
in the Southeast markets. 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 increased 18%, and revenues increased 32% in
2000, primarily due to a full year of Northern Region traffic and the
consolidation of TCS revenues (see Note 2 on Page 60). About one-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 the major customer. TCS traffic
increased 3%, as it recovered from service shortcomings after the Closing
Date.
PAGE 39
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
In 1999, intermodal traffic volume increased 31%, and revenues
increased 53%, due to the addition of the Northern Region and the
consolidation of TCS after the Closing Date. More than half of the increase
in revenue per unit resulted from the effects of consolidating TCS.
Intermodal traffic volume declined in the first five months of 1999,
reflecting the network redesign implemented in August 1998, which pared a
significant number of lanes and associated volumes. Service issues
following the integration of the Northern Region also negatively affected
volume and revenues.
Intermodal revenues are expected to continue to grow, supported by
continued improvements in service and added capacity, notably through a new
terminal in Austell, Ga., scheduled to open in the third quarter of 2001.
However, a softening economy could temper this positive outlook.
[Download Table]
INTERMODAL
(Shown as a graph in the Annual Report to Stockholders)
(millions)
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
$1,119 $849 $ 555 $ 568 $499 $485
Revenues increased $270 million, or 32%, in 2000, due to a
full year of Northern Region traffic and the consolidation
of TCS revenues. 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 increased 22% in 2000 and included $165
million of costs related to actions taken to reduce the size of the work
force. Excluding these costs, railway operating expenses increased 19%,
while carloadings increased 15%, reflecting a full year of Northern Region
operations and sharply higher diesel fuel prices.
In 1999, railway operating expenses increased 41%, while carloadings
increased 24%. The expense increase was attributable to the commencement of
operations in the Northern Region, and included significant costs arising
from the service issues experienced after the Closing Date.
As a result, the railway operating ratio, which measures the
percentage of railway operating revenues consumed by railway operating
expenses, was 87.0% in 2000 (excluding the work-force reduction costs,
which increased the ratio 2.7 percentage points), compared with 86.3% in
1999 and 75.3% in 1998.
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 continuation of the trends seen in 1999
involving changes in the mix of traffic.
PAGE 40
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
In 1999, the railway operating ratio reflected the effects of
integration-related service issues, including traffic diversions, which in
total were estimated to have resulted in more than half of the ratio's 1999
increase. The remaining increase was principally attributable to the 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.
The railway operating ratio is not expected to return to pre-Closing
Date levels in the near term, due to the changes in NS' traffic mix and the
higher cost structure attributable to the Conrail properties now operated
by NSR.
In response to the economic slowdown and changes to its transportation
markets, NS announced in January 2001 several strategies designed to reduce
costs. These include additional work-force reductions, disposition of
surplus freight cars, line rationalization programs, consolidation or
disposition of underutilized or redundant facilities and a redesign of its
service network.
The following table shows the changes in railway operating expenses
summarized by major classifications.
[Download Table]
RAILWAY OPERATING EXPENSES
Increases (Decreases)
($ in millions) 2000 vs. 1999 1999 vs. 1998
--------------- ------------- -------------
Compensation and benefits $ 379* $ 363
Materials, services and rents 171 435
Conrail rents and services 167 311
Depreciation 28 38
Diesel fuel 223 81
Casualties and other claims 4 43
Other 30 51
------ ------
Total $ 1,002 $ 1,322
====== ======
* Includes $165 million of work-force reduction costs in 2000.
Compensation and benefits (excluding work-force reduction costs)
represented 39% of total railway operating expenses in 2000 and increased
12% in 2000 and 24% in 1999.
The work-force reduction costs, which totaled $165 million,
principally resulted from voluntary early retirement and separation
programs accepted by 1,446 nonunion employees (see Note 11 on Page 70 for
details concerning the early retirement programs). In addition, an accrual
was made for certain postemployment benefits due to some union employees
who were furloughed. At year end, employment levels were down about 9%,
largely the result of these programs and other actions taken throughout the
year to reduce the size of the work force.
The 12% increase (excluding the work-force reduction costs) in
compensation and benefits 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 70).
In 1999, the increase resulted largely from the almost 50% increase in
the railroad work force following commencement of operations in the
Northern Region. The service issues encountered after the Closing Date also
PAGE 41
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
contributed to the increase, including the $49 million cost of the SWIP.
These increases were somewhat offset by reduced stock-based incentive
compensation, the absence of bonus accruals and reduced pension and other
postretirement benefits expenses.
Materials, services and rents includes items used for the maintenance
of the railroads' lines, structures and equipment; the costs of services
purchased from outside contractors, including the net costs of operating
joint (or leased) facilities with other railroads; and the net cost of
equipment rentals. This category of expenses increased 13% in 2000 and 52%
in 1999.
The 2000 increase 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.
The increase in 1999 reflected the expanded operations in the Northern
Region; additional costs attributable to the service issues, including
costs for alternate transportation to meet the needs of customers; and the
effects of consolidating TCS.
Equipment rents, which include 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, increased 22% in 2000 and 93%
in 1999. 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. The 1999 increase principally
was due to: (1) the commencement of Northern Region operations, (2) higher
rental costs driven by cycle times that were increased because of the
service issues and (3) short-term locomotive leases to improve system
fluidity. In addition, Conrail historically rented a higher percentage of
its freight cars than NS, resulting in higher equipment rents in the
Northern Region.
Locomotive and car repair costs increased in 2000, reflecting a full
year of Northern Region operations; however, the increase was tempered by
reduced maintenance activities, a result of cost control efforts. In 1999,
maintenance costs increased due to the expansion of operations and higher
repair costs associated with temporarily leased locomotives.
Conrail rents and services, a new category of expense arising from the
expansion of operations on the Closing Date, amounted to $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 60).
Depreciation expense was up 6% in 2000 and 9% in 1999. Increases in
both years were due to property additions, reflecting substantial levels of
capital spending (see Note 1, "Properties," on Page 59 for NS' depreciation
policy).
Diesel fuel expenses increased 87% in 2000 and 47% in 1999. In both
years, most of the increase resulted from higher prices. In 2000, 86% of
the increase resulted from a 61% rise in the average price per gallon,
which ranged from 77 cents in January to $1.07 in December. In 1999, 53% of
the increase was attributable to a 19% increase in the average price per
gallon, due to a sharp rise in the last half of the year. Higher
consumption accounted for the remainder of the increases, primarily the
result of the addition of the Northern Region.
PAGE 42
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Casualties and other claims expenses (including the estimates of costs
related to personal injury, property damage and environmental matters)
increased 3% in 2000 and 45% in 1999. The 1999 increase resulted
principally from higher personal injury accruals related to the increased
size of the work force as well as higher environmental expenses.
The largest component of casualties and other claims expense is
personal injury costs. In 2000, cases involving so-called "occupational"
injuries comprised about 40% of the total employee injury cases settled and
20% 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 to some condition of
employment. 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,
at a far greater cost to the rail industry than the no-fault workers'
compensation system to which nonrail competitors and other employers are
universally subject. 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 increased 14% in 2000 and 31% in 1999. The increase in
2000 reflected a full year of Northern Region operations and higher bad
debt expense. The 1999 increase resulted from the expansion of operations,
including property and other taxes related to the Northern Region, and to
costs arising from service issues.
Income Taxes
------------
Income tax expense in 2000 was $78 million, for an effective rate of
31%, compared with effective rates of 32% in 1999 and 25% in 1998.
Excluding the equity in Conrail's after-tax earnings, the effective rate
was 34% in both 2000 and 1999 and was 33% in 1998.
The effective rates in all three years were below the statutory
federal and state rates because of investments in coal-seam gas properties,
favorable adjustments upon filing the prior year tax returns and favorable
adjustments to state tax liabilities. In addition, the rate in 1998
benefited from investments in corporate-owned life insurance and favorable
adjustments resulting from settlement of federal income tax years 1993 and
1994.
The effective rate in 2001 is expected to increase somewhat, primarily
due to a substantial reduction in the level of benefits 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 in 1998 included the $105 million
after-tax gain from the sale of NS' motor carrier subsidiary (see Note 16
on Page 78). Motor carrier operations in 1998 (through March 28) produced a
$1 million loss.
PAGE 43
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities, NS' principal source of
liquidity, was $1.3 billion in 2000, and reflects a new program under which
accounts receivable are sold on a revolving basis (see Note 5 on Page 65).
Excluding the infusion of cash from this program, operating cash flow was
$954 million in 2000, compared with $533 million in 1999 and $890 million
in 1998.
The improvement 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 decline in 1999 reflected lower income from operations,
offset somewhat by lower income tax 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 $1.0 billion at Dec. 31, 2000,
compared with $553 million at Dec. 31, 1999. The large increase reflected
the use of accounts receivable sale proceeds to reduce long-term debt. NS
currently has the capability to issue commercial paper to meet its more
immediate working capital needs (see the discussion of financing
activities, below).
[Download Table]
CASH PROVIDED BY OPERATIONS
(Shown as a graph in the Annual Report to Stockholders)
(millions)
2000 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------
$1,342 $ 533 $ 890 $1,150 $1,198 $1,234
Cash provided by operations increased significantly,
reflecting an infusion of cash from the commencement of
a revolving accounts receivable sale program and
favorable changes in working capital.
Cash used for investing activities decreased slightly in 2000,
following an 11% decline in 1999. In 2000, property additions were
significantly lower than in the prior years - locomotive fleet additions in
2000 were accomplished by operating lease, whereas locomotives were
purchased in prior years. Investing activities in 1999 included more
borrowings against the net cash surrender value of corporate-owned life
insurance: approximately $140 million more than in 2000 and $160 million
more than in 1998. In addition, 1999 included $60 million in proceeds from
the sublease of certain licensing rights and the sale of NS' signboard
business. Investing activities in 1998 included the $207 million of
proceeds from the sale of NS' motor carrier subsidiary. Property additions
account for most of the recurring spending in this category.
The following tables show capital spending and track and equipment
statistics for the past five years. Capital expenditures include amounts
relating to capital leases, which are excluded from the Consolidated
Statements of Cash Flows (see Note 8, "Capital Lease Obligations," on Page
69).
PAGE 44
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
[Download Table]
CAPITAL EXPENDITURES
($ in millions) 2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Road $ 557 $ 559 $ 612 $ 599 $ 438
Equipment 146 349 442 306 326
Other property 28 4 6 24 25
------ ------ ------ ------ ------
Total $ 731 $ 912 $1,060 $ 929 $ 789
====== ====== ====== ====== ======
Capital expenditures decreased 20% in 2000 and 14% in 1999. The
decline in 2000 reflected lower capital expenditures for locomotives as a
result of the operating lease. The 1999 decrease was largely attributable
to significant outlays in 1998 for roadway projects and equipment in
anticipation of the Closing Date and automotive-related projects.
[Download Table]
TRACK STRUCTURE STATISTICS (CAPITAL AND MAINTENANCE)
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Track miles of rail installed 392 403 429 451 401
Miles of track surfaced 3,687 5,087 4,715 4,703 4,686
New crossties installed (millions) 1.5 2.3 2.0 2.2 1.9
[Download Table]
AVERAGE AGE OF OWNED RAILWAY EQUIPMENT
(Years) 2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Freight Cars 24.6 23.8 23.6 23.0 22.3
Locomotives 16.1 15.4 15.4 15.3 15.4
Retired locomotives 24.5 22.7 20.6 23.3 24.4
In addition to NS-owned equipment, 16% of the freight car fleet and
27% of the locomotive fleet is leased from PRR (see Note 2 on Page 60).
The increase in 2000 in the average age of owned locomotives 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 due to casualties and service
failures and 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 2001, NS has budgeted $806 million for capital expenditures. The
anticipated spending includes $449 million for roadway projects, of which
$264 million is for track and bridge program work. Also included are
projects for new or improved intermodal facilities, marketing and
industrial development initiatives, signal upgrades and environmental and
other public improvements. Equipment spending includes the purchase of
locomotives and the upgrade of existing locomotives. In addition, NS'
telecommunications subsidiary plans to spend $62 million on the
installation of fiber optic conduits.
PAGE 45
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Cash used for financing activities was $798 million in 2000 and
reflected a substantial net reduction of debt, accomplished using the
proceeds from the sale of accounts receivable, compared with the net
increase in 1999. Dividend payments were comparable in all three years;
however, in January 2001 the Corporation's Board of Directors declared a
quarterly dividend of 6 cents per share, compared with the 20 cents per
share that had been paid in recent quarters. NS' debt-to-total
capitalization ratio at year end was 57% in 2000 and 58% in 1999.
NS currently has in place a $2.0 billion credit facility to support
the $1.1 billion of commercial paper outstanding at Dec. 31, 2000. In
February 2001, NS issued $1.0 billion of debt under its $1.0 billion shelf
registration and used the proceeds to reduce the amount of commercial paper
outstanding.
NS is subject to various financial covenants with respect to its
credit agreement, including a maximum leverage ratio restriction (see Note
8, "Debt Covenants," on Page 69). As a result of a negotiated amendment
to the credit agreement, the maximum leverage ratio will not tighten
through the remainder of the agreement's term.
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 60). 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 has changed.
Conrail's net income was $170 million in 2000, compared with $26
million in 1999 and $267 million in 1998 (see Note 2 on Page 60).
Results in 1999 included $180 million of expenses ($121 million after
taxes), principally to increase certain components of its casualty reserves
based on an actuarial valuation, to adjust certain litigation and
environmental reserves related to settlements and completion of site
reviews and a credit adjustment related to the assumption of a lease
obligation by CSX. Results in 1998 included a $170 million charge ($105
million after taxes) for severance benefits covering nonunion employees and
$132 million ($82 million after taxes) of other charges and reserves.
Excluding the effects of these items, net income increased $23 million
in 2000, but decreased $307 million in 1999. The 2000 increase reflected a
$37 million after-tax gain from a property sale. The 1999 decrease was
principally the result of Conrail's change in operations.
Conrail's operating revenues were $985 million in 2000, $2.2 billion
in 1999 and $3.9 billion in 1998. Both year-to-year declines were
attributable to the change in operations. In addition, 1999's comparison
reflected a 2% decrease in freight revenues prior to the Closing Date.
Conrail's operating expenses were $749 million in 2000, $2.0 billion in
1999 and $3.3 billion in 1998.
In addition to the $180 million of 1999 expenses and the $302 million
of 1998 expenses discussed above, Conrail's operating expenses reflect
transition-related expenses of $60 million in 1999 and $149 million in 1998
(principally technology integration costs and employee stay bonuses).
Excluding the effects of the acquisition-related compensation and
transition costs, operating expenses decreased 62% in 2000 and 34% in 1999.
Both declines reflected the change in operations. In 1999, this was
somewhat offset by higher casualty and other claims expenses.
Conrail's cash provided by operations decreased $34 million, or 9%, in
2000, and $331 million, or 46%, in 1999. The 2000 reduction reflected the
change in operations and payment of one-time items owed to NSR and CSXT.
The 1999 decrease was principally due to the change in operations. Cash
generated from operations is Conrail's principal source of liquidity and is
primarily used for debt repayments and capital expenditures. Debt
repayments totaled $318 million in 2000 and $112 million in 1999. Capital
expenditures totaled $220 million in 2000 and $176 million in 1999, but are
expected to decrease significantly in 2001.
PAGE 46
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Conrail had working capital of $85 million at Dec. 31, 2000, compared
with a working capital deficit of $194 million at Dec. 31, 1999. The
deficit at Dec. 31, 1999, reflected $250 million of long-term debt paid in
June 2000.
Conrail is not an SEC registrant and, therefore, presently cannot
issue any publicly traded securities. Conrail is expected to have
sufficient cash flow to meet its ongoing obligations.
NS' equity in earnings of Conrail, net of amortization, was $21
million in 2000, $17 million in 1999 and $194 million in 1998.
OTHER MATTERS
Proposed Merger Guidelines
--------------------------
The Surface Transportation Board (STB) has issued proposed merger
guidelines which, if adopted as proposed, would increase the substantive
and evidentiary standards that Class 1 railroad applicants will have to
satisfy. Final rules are due in June 2001.
Prior to the STB's release of its proposed guidelines, Canadian
National Railway Company and Burlington Northern Sante Fe Corporation
announced the cancellation of their earlier proposal to combine their
companies under common control.
Market Risks and Hedging Activities
-----------------------------------
NS does not engage in the trading of derivatives. 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 a targeted mix within its debt portfolio.
Of NS' total debt outstanding (see Note 8 on Page 67), all is fixed-
rate debt, except for commercial paper and most capital leases. As a
result, NS' debt subject to interest rate exposure totaled $1.4 billion on
Dec. 31, 2000. A 1% increase in interest rates would increase NS' total
annual interest expense related to all its variable debt by approximately
$14 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 average interest rate on commercial paper was 7.0% on Dec. 31,
2000, and 6.4% on Dec. 31, 1999. During 2000, the weighted-average
interest rate on NS' outstanding commercial paper ranged from 6.1% to 7.0%.
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, 2000, the average pay rate under these agreements
was 7.2%, and the average receive rate was 7.1%. During 2000, the effect of
the swaps was to reduce interest expense by $1 million. A portion of the
lease obligations is payable in Japanese yen. NS hedged 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 Japanese banks. 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.
Accounting Changes and New Pronouncements
-----------------------------------------
As discussed in Note 1 under "Required Accounting Changes" on Page 59,
NS adopted in 2000 the consensus reached by the Emerging Issues Task Force
of the Financial Accounting Standards Board (FASB) concerning Issue No. 99-
19, "Reporting Revenue Gross as a Principal versus Net as an Agent." In
addition, NS has adopted the disclosure provisions of the FASB's Statement
of Financial Accounting Standards (SFAS) No. 140.
NS has adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," effective Jan. 1, 2001. This adoption did not have
a material effect on NS' consolidated financial statements.
PAGE 47
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Lawsuits
--------
Norfolk Southern and certain subsidiaries are defendants in numerous
lawsuits relating principally to railroad operations. While the final
outcome of these lawsuits cannot be predicted with certainty, it is the
opinion of Management, based on known facts and circumstances, that the
amount of NS' ultimate liability is unlikely to have a material adverse
effect on NS' financial position, results of operations or liquidity.
The Corporation has reached agreement on terms of a consent decree
that should bring to a conclusion a class action suit filed in federal
district court in Birmingham, Ala. The action had been brought on behalf of
African-Americans currently employed or working since Dec. 16, 1989, who
alleged that the Corporation had discriminated against them in promotion to
nonunion positions because of their race. The consent decree, which
received preliminary approval from the court on Dec. 22, 2000, provides for
a total payment of $28 million to the class of approximately 7,700 African-
Americans and their attorneys and commits the Corporation to establish good
faith goals for the promotion of class members to management-level
positions during the four-year term of the decree. In addition, the decree
commits the Corporation to make extensive improvements to its procedures
for identifying, training and selecting candidates for promotion to higher-
rated positions for all its employees.
The settlement funds have been paid into a trust account in the South
Trust Bank in Birmingham. Final approval of the consent decree and
distribution of the settlement proceeds to qualified members of the class
are subject to a fairness hearing scheduled for March 2, 2001.
While it is possible that the district court will decline to give
final approval to the settlement, or that the settlement will be overturned
on appeal, Management believes that the consent decree is a fair resolution
of this controversy and that disapproval by the courts is unlikely.
On Sept. 8, 1997, a state court jury in New Orleans returned a verdict
awarding $175 million in punitive damages against The Alabama Great
Southern Railroad Company (AGS), a subsidiary of NSR. The verdict was
returned in a class action suit which ultimately involved some 10,000
individuals who claimed injury or damage as the result of an explosion and
fire that occurred in New Orleans on Sept. 9, 1987, when a chemical called
butadiene leaked from a tankcar.
The jury verdict awarded a total of nearly $3.2 billion in punitive
damages against four other defendants in the same case: two rail carriers,
the owner of the car and the shipper. Previously, the jury had awarded
nearly $2 million in compensatory damages to 20 of the individual
plaintiffs. Prior to the trial court's ruling on the post trial motions,
AGS and four other defendants agreed to settle their liability in this case
for a total payment of approximately $150 million, of which AGS' share was
$15 million. The settlement has been given final approval by the trial
court, the time for appeals has expired, and the case has been concluded
insofar as AGS is concerned.
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.
PAGE 48
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Operating expenses for environmental matters totaled approximately $11
million in 2000, $12 million in 1999 and $4 million in 1998, and capital
expenditures totaled approximately $10 million in 2000, $8 million in 1999
and $7 million in 1998. The lower operating expenses in 1998 principally
were due to higher recoveries from third parties of amounts paid by NS in
prior years for environmental cleanup and remediation. Capital
expenditures in 2001 are expected to be comparable to those of 2000.
As of Dec. 31, 2000, NS' balance sheet included a reserve for
environmental exposures in the amount of $36 million (of which $8 million
is accounted for as a current liability), which is NS' estimate of the
probable cleanup and remediation costs based on available information at
125 identified locations. On that date, 10 sites accounted for $18 million
of the reserve, 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 125 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 that are latent or undisclosed may
exist on these properties, 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 assessments 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.
Labor Agreements
----------------
Approximately 85% of NS' railroad employees are covered by collective
bargaining agreements with 15 different labor unions. These agreements
remain in effect until changed pursuant to the Railway Labor Act.
Moratorium provisions in these agreements permitted NS and the unions to
propose such changes in late 1999; negotiations at the national level
commenced shortly thereafter. The outcome of these negotiations is
uncertain at this time. However, an agreement was reached with the
Brotherhood of Locomotive Engineers,
PAGE 49
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
which represents about 5,000 locomotive engineers on NS, and a tentative
national agreement (subject to ratification) has been reached with the
United Transportation Union, which represents about 7,500 train service
employees on NS.
Inflation
---------
Generally accepted accounting principals 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 2001 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 and other rail
carriers vigorously will oppose these counterproductive efforts to reimpose
or to authorize reimposing such 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 far-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 assure
that its customers remain competitive in this evolving environment.
- Carbon-Based Fuel -- There is growing concern 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 firm consensus, the impact could be either a
reduction in the demand for coal or imposition of even 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 and other sections of this Annual Report contain
forward-looking statements that are based on current expectations,
estimates and projections. Such forward-looking statements reflect
Management's good-faith evaluation of information currently available.
However, because such statements are based upon and, therefore, can be
influenced by, a number of external variables over which Management has no,
or incomplete, control, they are not, and should not be read as being,
guarantees of future performance or of actual future results; nor will they
necessarily prove to be accurate indications of the times at or by which
any such performance or result will be achieved. Accordingly, actual
outcomes and results may differ materially from those expressed in such
forward-looking statements. This caveat has particular importance in the
context of all such statements that relate to the addition of new business
and the ability to reduce expenses.
PAGE 50
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 46 under the heading "Market Risks
and Hedging Activities."
PAGE 51
Item 8. Financial Statements and Supplementary Data.
------ -------------------------------------------
[Enlarge/Download Table]
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)
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 $(0.12) $ 0.30 $ 0.26 $ 0.01
- Diluted $(0.12) $ 0.30 $ 0.26 $ 0.01
1999
----
Railway operating revenues $1,038 $1,202 $1,514 $1,488
Income from railway operations 237 198 146 137
Net income 112 77 19 31
Earnings (loss) per share - Basic $ 0.30 $ 0.20 $ 0.05 $ 0.08
- Diluted $ 0.30 $ 0.20 $ 0.05 $ 0.08
PAGE 52
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 2000, 1999, and 1998 53
Consolidated Balance Sheets
As of December 31, 2000 and 1999 54
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999, and 1998 55
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 2000, 1999, and 1998 57
Notes to Consolidated Financial Statements 58
Independent Auditors' Report 80
The Index to Consolidated Financial Statement Schedule appears in
Item 14 on Page 83.
PAGE 53
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31,
2000 1999 1998
---- ---- ----
($ in millions, except earnings per share)
RAILWAY OPERATING REVENUES $ 6,159 $ 5,242 $ 4,254
RAILWAY OPERATING EXPENSES
Compensation and benefits (Note 11) 2,234 1,855 1,492
Materials, services and rents 1,445 1,274 839
Conrail rents and services (Note 2) 478 311 --
Depreciation 503 475 437
Diesel fuel 478 255 174
Casualties and other claims 142 138 95
Other 246 216 165
------- ------- -------
Total railway operating expenses 5,526 4,524 3,202
------- ------- -------
Income from railway operations 633 718 1,052
Equity in earnings of Conrail (Note 2) -- 49 194
Other income - net (Note 3) 168 115 115
Interest expense on debt (Note 6) (551) (531) (516)
------- ------- -------
Income from continuing
operations before income taxes 250 351 845
Provision for income taxes (Note 4) 78 112 215
------- ------- -------
Income from continuing operations 172 239 630
Discontinued operations (Note 16):
Loss from motor carrier
operations, net of taxes -- -- (1)
Gain on sale of motor carrier,
net of taxes -- -- 105
------- ------- -------
Income from discontinued operations -- -- 104
------- ------- -------
NET INCOME $ 172 $ 239 $ 734
======= ======= =======
EARNINGS PER SHARE (Note 14)
Income from continuing operations - Basic $ 0.45 $ 0.63 $ 1.66
- Diluted $ 0.45 $ 0.63 $ 1.65
Net income - Basic $ 0.45 $ 0.63 $ 1.94
- Diluted $ 0.45 $ 0.63 $ 1.93
See accompanying Notes to Consolidated Financial Statements.
PAGE 54
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31,
2000 1999
---- ----
($ in millions)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 37
Short-term investments 2 14
Accounts receivable, net (Note 5) 411 857
Due from Conrail (Note 2) 31 77
Materials and supplies 91 100
Deferred income taxes (Note 4) 182 134
Other current assets 132 152
------- -------
Total current assets 849 1,371
Investment in Conrail (Note 2) 6,154 6,132
Properties less accumulated depreciation (Note 6) 11,105 10,956
Other assets 868 791
------- -------
TOTAL ASSETS $18,976 $19,250
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note 7) $ 925 $ 818
Income and other taxes 251 163
Notes and accounts payable to Conrail (Note 2) 155 184
Other current liabilities (Note 7) 259 256
Current maturities of long-term debt (Note 8) 297 503
------- -------
Total current liabilities 1,887 1,924
Long-term debt (Note 8) 7,339 7,556
Other liabilities (Note 10) 1,131 1,101
Minority interests 50 50
Deferred income taxes (Note 4) 2,745 2,687
------- -------
TOTAL LIABILITIES 13,152 13,318
------- -------
Stockholders' equity:
Common stock $1.00 per share par value,
1,350,000,000 shares authorized; issued
405,421,447 and 404,309,672 shares, respectively 405 404
Additional paid-in capital 392 372
Accumulated other comprehensive income (Note 13) (6) (11)
Retained income 5,053 5,187
Less treasury stock at cost, 21,363,974 and
21,627,902 shares, respectively (20) (20)
------- -------
TOTAL STOCKHOLDERS' EQUITY 5,824 5,932
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,976 $19,250
======= =======
See accompanying Notes to Consolidated Financial Statements.
PAGE 55
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
2000 1999 1998
---- ---- ----
($ in millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 172 $ 239 $ 734
Reconciliation of net income to
net cash provided by continuing operations:
Depreciation 517 489 450
Deferred income taxes 2 85 114
Equity in earnings of Conrail (21) (17) (194)
Gains and losses on properties and investments (160) (62) (51)
Income from discontinued operations -- -- (104)
Changes in assets and liabilities
affecting continuing operations:
Accounts receivable (Note 5) 446 (322) 33
Materials and supplies 9 (40) (1)
Other current assets and due from Conrail 60 (50) (16)
Current liabilities other than debt 220 259 (23)
Other - net (Note 11) 97 (48) (50)
------- ------- -------
Net cash provided by continuing operations 1,342 533 892
Net cash used for discontinued operations -- -- (2)
------- ------- -------
Net cash provided by operating activities 1,342 533 890
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions (731) (912) (956)
Property sales and other transactions 137 104 83
Investments, including short-term (77) (126) (156)
Investment sales and other transactions 90 343 155
Proceeds from sale of motor carrier -- -- 207
------- ------- -------
Net cash used for investing activities (581) (591) (667)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (306) (304) (303)
Common stock issued - net 2 14 34
Proceeds from borrowings 1,055 1,110 196
Debt repayments (1,549) (730) (179)
------- ------- -------
Net cash provided by (used for)
financing activities (798) 90 (252)
Net increase (decrease) in cash
and cash equivalents (37) 32 (29)
CASH AND CASH EQUIVALENTS
At beginning of year 37 5 34
------- ------- -------
At end of year $ -- $ 37 $ 5
======= ======= =======
(continued)
PAGE 56
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Years ended December 31,
2000 1999 1998
---- ---- ----
($ in millions)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amounts capitalized) $ 543 $ 520 $ 519
Income taxes $ 5 $ 16 $ 76
See accompanying Notes to Consolidated Financial Statements.
PAGE 57
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
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 Income Income Stock Total
------- ------- ------- -------- -------- -------
($ in millions, except per share amounts)
BALANCE DECEMBER 31, 1997 $ 399 $ 241 $ 5 $ 4,821 $ (21) $ 5,445
Comprehensive income - 1998
Net income 734 734
Other comprehensive
income (Note 13) (13) (13)
-------
Total comprehensive
income 721
Dividends on Common Stock,
$0.80 per share (303) (303)
Other 2 55 1 58
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31, 1998 401 296 (8) 5,252 (20) 5,921
Comprehensive income - 1999
Net income 239 239
Other comprehensive
income (Note 13) (3) (3)
------
Total comprehensive
income 236
Dividends on Common Stock,
$0.80 per share (304) (304)
Other 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 1 20 21
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31, 2000 $ 405 $ 392 $ (6) $5,053 $ (20) $5,824
====== ====== ====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements.
PAGE 58
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 21,800 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). Financial results of a former motor carrier
subsidiary, North American Van Lines, Inc. (NAVL), are reflected as
"Discontinued Operations" (see Note 16). 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 (23%); automotive (15%); chemicals (13%);
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 conformity 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. Actual results could differ from those
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." On Dec. 31, 2000 and 1999,
all "Short-term investments," consisting primarily of United States
government and federal agency securities, were designated as "available-for-
sale." Accordingly, unrealized gains and losses, net of taxes, are
recognized in "Accumulated other comprehensive income."
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."
PAGE 59
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
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. Additions to properties, including those
under lease, 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 has entered into
a limited number of derivative agreements to hedge interest rate exposures
on certain components of its debt portfolio. All of these derivative
instruments are designated as hedges, have high correlation with the
underlying exposure and are highly effective in offsetting underlying price
movements. Accordingly, payments made or received under interest rate swap
agreements are recorded in the income statement with the corresponding
interest expense. Payments made to hedge interest rate exposure related to
the anticipated issuance of debt were deferred as a reduction of the debt
proceeds and are being amortized to interest expense over the life of the
underlying debt.
Required Accounting Changes
---------------------------
Effective Oct. 1, 2000, NS adopted the consensus reached by the
Emerging Issues Task Force of the Financial Accounting Standards Board
(FASB) concerning Issue No. 99-19, "Reporting Revenue Gross as a Principal
versus Net as an Agent." The consensus presents indicators to consider in
establishing the accounting for revenue. As a result of the application of
the consensus, NS has reclassified to railway operating expenses certain
charges that previously have been reported net with railway operating
revenues. This change in reporting has no effect on income from railway
operations. Prior period amounts have been reclassified to conform to the
current presentation.
PAGE 60
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
Effective with this Annual Report, NS has adopted the disclosure
provisions of the FASB's Statement of Financial Accounting Standards (SFAS)
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," which replaced SFAS No. 125 of the same
name. SFAS No. 140 revises the standards for accounting for securitizations
and other transfers of financial assets and requires certain disclosures,
but carries over most of the provisions of SFAS No. 125.
Reclassifications
-----------------
Certain amounts in the financial statements and notes thereto have
been reclassified to conform to the 2000 presentation.
2. INVESTMENT IN CONRAIL AND OPERATIONS OVER ITS LINES
Overview
--------
NS 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 NS and CSX
completed their acquisition of Conrail stock, until June 1, 1999, Conrail's
operations continued substantially unchanged while NS 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, NS 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 Conrail properties that continue to be owned and operated by Conrail
(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:
PAGE 61
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
PRR Oper. PRR Lease SAA
($ in millions) Agmt. Agmts. Agmts.
-------------- --------- --------- --------
2001 $ 178 $ 126 $ 24
2002 196 119 27
2003 217 105 30
2004 238 89 32
2005 246 71 34
2006 and subsequent years 4,776 229 652
--------- --------- --------
Total $ 5,851 $ 739 $ 799
========= ========= ========
Operating lease expense related to the agreements, which is included
in "Conrail rents and services," amounted to $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
or are responsible for performing most services incident to customer
freight contracts and employ the majority of Conrail's former work force.
As a result, NSR began to receive all freight revenues and incur 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, 2000, 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, 2000, includes $116 million
of liabilities related to the Conrail transaction, principally for
contractual obligations to Conrail employees imposed by the STB when it
approved the transaction. Through Dec. 31, 2000, NS had paid $71 million of
these 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, 2000,
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.
"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 (or loss) of Conrail,
net of amortization.
PAGE 62
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
"Notes and accounts payable to Conrail" includes $51 million at Dec.
31, 2000, and $123 million at Dec. 31, 1999, 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 5.9% at Dec. 31, 2000. Also included is
$104 million at Dec. 31, 2000, and $61 million at Dec. 31, 1999, due to PRR
and CRC related to expenses included in "Conrail rents and services," as
discussed above.
Summary Financial Information - Conrail
----------------------------------------
The following summary financial information should be read in
conjunction with Conrail's audited financial statements, included as
Exhibit 99 with this Annual Report on Form 10-K.
Through May 31, 1999, Conrail's results of operations include freight
line-haul revenues and related expenses. After the Closing Date, June 1,
1999, its results reflect its new structure and operations. Currently,
Conrail's major sources of operating revenues are from NSR and CSXT. The
composition of Conrail's operating expenses also has changed.
[Download Table]
Summarized Consolidated Statements of Income - Conrail
-------------------------------------------------------
($ in millions) 2000 1999 1998
--------------- ---- ---- ----
Operating revenues $ 985 $ 2,174 $ 3,863
Operating expenses 749 2,046 3,348
----- ------- -------
Operating income 236 128 515
Other - net 31 (83) (81)
----- ------- -------
Income before
income taxes 267 45 434
Provision for income taxes 97 19 167
----- ------- -------
Net income $ 170 $ 26 $ 267
===== ======= =======
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. Conrail's
results in 1998 included a $187 million after-tax charge, primarily for
estimated severance obligations to nonunion employees. These 1999 and 1998
items were considered in the allocation of NS' investment in Conrail to the
fair values of Conrail's assets and liabilities and, accordingly, were
excluded in determining NS' equity in Conrail's net income.
PAGE 63
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
Summarized Consolidated Balance Sheets - Conrail
-------------------------------------------------
December 31,
($ in millions) 2000 1999
--------------- ---- ----
Assets:
Current assets $ 520 $ 669
Noncurrent assets 7,540 7,714
--------- ---------
Total assets $ 8,060 $ 8,383
========= =========
Liabilities and
stockholders' equity:
Current liabilities $ 435 $ 863
Noncurrent liabilities 3,643 3,701
Stockholders' equity 3,982 3,819
--------- ---------
Total liabilities and
stockholders' equity $ 8,060 $ 8,383
========= =========
[Download Table]
3. OTHER INCOME - NET
($ in millions) 2000 1999 1998
--------------- ---- ---- ----
Income from natural resources:
Gains from sale of timber, oil
and gas rights and interests $ 101 $ - $ -
Royalties from coal 55 59 57
Nonoperating depletion
and depreciation (13) (14) (13)
--------- ------- -------
Subtotal 143 45 44
Gains from sale of properties
and investments 59 62 51
Rental income 40 34 26
Interest income 11 8 12
Other interest expense (39) (30) (21)
Sale of accounts receivable
(Note 5) (23) - -
Taxes on nonoperating property (9) (7) (4)
Corporate-owned
life insurance - net - (3) 11
Other - net (14) 6 (4)
---------- -------- -------
Total $ 168 $ 115 $ 115
========== ======== =======
"Other current assets" in the Consolidated Balance Sheets includes
prepaid interest on corporate-owned life insurance borrowings of $43
million at Dec. 31, 2000, and $37 million at Dec. 31, 1999.
PAGE 64
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
4. INCOME TAXES
[Download Table]
Provision for Income Taxes
--------------------------
($ in millions) 2000 1999 1998
--------------- ---- ---- ----
Current:
Federal $ 65 $ 18 $ 89
State 11 9 12
------- ------- ------
Total current taxes 76 27 101
Deferred:
Federal 1 78 100
State 1 7 14
-------- ------- ------
Total deferred taxes 2 85 114
-------- ------- ------
Provision for income taxes $ 78 $ 112 $ 215
======== ======= ======
[Download Table]
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:
2000 1999 1998
($ in millions) Amount % Amount % Amount %
--------------- ------ -- ------ -- ------ --
Federal income tax
at statutory rate $ 87 35 $ 123 35 $ 296 35
State income taxes,
net of federal tax
benefit 8 3 10 3 17 2
Equity in earnings
of Conrail (7) (3) (6) (2) (68) (8)
Corporate-owned
life insurance (2) (1) 1 - (11) (1)
Other - net (8) (3) (16) (4) (19) (3)
------ -- ------ -- ------ --
Provision for
income taxes $ 78 31 $ 112 32 $ 215 25
====== == ====== == ====== ==
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.
PAGE 65
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
[Download Table]
December 31,
($ in millions) 2000 1999
--------------- ---- ----
Deferred tax assets:
Reserves, including casualty
and other claims $ 158 $ 168
Employee benefits 104 111
Retiree health and death
benefit obligation 139 127
Taxes, including state and property 200 174
Other 28 42
--------- ---------
Total gross deferred tax assets 629 622
Less valuation allowance (12) (9)
--------- ---------
Net deferred tax assets 617 613
--------- ---------
Deferred tax liabilities:
Property (3,117) (3,093)
Other (63) (73)
--------- ---------
Total gross deferred
tax liabilities (3,180) (3,166)
--------- ---------
Net deferred tax liability (2,563) (2,553)
Net current deferred tax assets 182 134
--------- ---------
Net long-term deferred
tax liability $ (2,745)$ (2,687)
========= =========
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 $3 million in 2000, $6 million in 1999
and $1 million in 1998.
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 are reinvested in new accounts receivable on behalf of the
buyers.
PAGE 66
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
At Dec. 31, 2000, $388 million had been sold under this arrangement
and, therefore, is 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,
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 $7 million.
NS' allowance for doubtful accounts was $7 million at Dec. 31, 2000,
and $5 million at Dec. 31, 1999.
[Download Table]
6. PROPERTIES
December 31, Depreciation
($ in millions) 2000 1999 Rate for 2000
--------------- ---- ---- -------------
Railway property:
Road $ 10,078 $ 9,681 2.9%
Equipment 5,588 5,577 4.1%
Other property 653 627 3.3%
------------ -----------
16,319 15,885
Less: Accumulated
depreciation 5,214 4,929
------------ -----------
Net properties $ 11,105 $ 10,956
============ ===========
Equipment includes $592 million at Dec. 31, 2000, and $593 million at
Dec. 31, 1999, of assets recorded pursuant to capital leases. Other
property includes the costs of obtaining rights to natural resources of
$341 million at Dec. 31, 2000, and $349 million at Dec. 31, 1999.
Capitalized Interest
--------------------
Total interest cost incurred on debt in 2000, 1999 and 1998 was $569
million, $546 million and $537 million, respectively, of which $18 million,
$15 million and $21 million was capitalized.
PAGE 67
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
7. CURRENT LIABILITIES
December 31,
($ in millions) 2000 1999
--------------- ---- ----
Accounts payable:
Accounts and wages payable $ 427 $ 354
Casualty and other claims 223 181
Equipment rents payable - net 134 135
Vacation liability 117 124
Other 24 24
--------- ---------
Total $ 925 $ 818
========= =========
Other current liabilities:
Interest payable $ 131 $ 123
Accrued Conrail-related costs
(Note 2) 47 56
Liabilities for forwarded traffic 40 37
Retiree health and death
benefit obligation (Note 11) 24 24
Other 17 16
--------- ---------
Total $ 259 $ 256
========= =========
8. DEBT
Shelf Registration
------------------
NS has filed with the Securities and Exchange Commission a shelf
registration statement on Form S-3 covering the issuance of up to $1
billion of securities. As of Dec. 31, 2000, NS had not issued any
securities under this shelf registration; however, NS expected to issue
debt in February 2001 and use the proceeds to reduce the amount of
commercial paper outstanding.
PAGE 68
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
Long-Term Debt
--------------
December 31,
($ in millions) 2000 1999
--------------- ---- ----
Commercial paper at an average
rate of 7.0% $ 1,132 $ 1,722
Notes at average rates and
maturities as follows:
6.93%, maturing 2001 to 2002 700 1,100
7.52%, maturing 2004 to 2010 2,200 1,600
8.10%, maturing 2017 to 2021 800 800
7.80%, maturing 2027 800 800
7.05%, maturing 2037 750 750
7.90%, maturing 2097 350 350
Equipment obligations at an
average rate of 6.7%,
maturing to 2014 473 548
Capitalized leases at an
average rate of 7.2%,
maturing to 2015 343 382
Other debt at an average rate
of 7.4%, maturing to 2019 119 35
Discounts and premiums, net (31) (28)
----------- ---------
Total long-term debt 7,636 8,059
Current maturities (297) (503)
----------- ---------
Long-term debt less
current maturities $ 7,339 $ 7,556
=========== =========
Long-term debt matures as follows:
2002 $ 593
2003 92
2004 335
2005 388
2006 and subsequent years 5,931
-----------
Total $ 7,339
===========
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.
Commercial Paper
----------------
Commercial paper debt is due within one year, but has been classified
as long-term because NS has the ability through a $2.0 billion credit
agreement to convert this obligation into longer-term debt. The credit
agreement expires in 2002 and provides for interest on borrowings at
prevailing rates. NS intends to refinance the commercial paper either by
issuing additional commercial paper or by replacing commercial paper notes
with long-term debt.
PAGE 69
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
Capital Lease Obligations
-------------------------
During 1998, NSR entered into capital leases covering new locomotives.
The related capital lease obligations, totaling $127 million, were
reflected in the Consolidated Balance Sheets as debt and, because they were
noncash transactions, were excluded from the Consolidated Statements of
Cash Flows.
These and certain other lease obligations require the maintenance of a
yen-denominated deposit, which is pledged to the lessor to satisfy yen-
denominated lease payments. They carry an average stated interest rate of
7.1%, but were effectively converted to variable rate obligations using
interest rate swap agreements. The interest rates on the swap obligations
are based on the six-month London Interbank Offered Rate and are reset
every six months with changes in interest rates accounted for as an
adjustment of interest expense over the terms of the leases. As of Dec. 31,
2000, the notional amount of the swap agreements was $253 million, and the
average interest rate was 7.2%. As a result, NS is exposed to the market
risk associated with fluctuations in interest rates. To date, the effects
of the rate fluctuations have been favorable and not material.
Counterparties to the interest rate swap agreements are major financial
institutions believed by Management to be creditworthy.
Debt Covenants
--------------
NS is subject to various financial covenants with respect to its debt
and under its credit agreement, including a minimum net worth requirement,
a maximum leverage ratio restriction and certain restrictions on issuance
of further debt. At Dec. 31, 2000, NS was in compliance with all debt
covenants.
9. LEASE COMMITMENTS
NS is committed under long-term lease agreements, which expire on
various dates through 2067, for equipment, lines of road and other
property. The following amounts do not include payments to PRR under the
Operating Agreement and lease agreements or to CRC under the SAA agreements
(see Note 2). Future minimum lease payments and operating lease expense,
other than to PRR and CRC, are as follows:
[Download Table]
Operating Capital
($ in millions) Leases Leases
--------------- --------- -------
2001 $ 107 $ 47
2002 94 46
2003 84 46
2004 69 46
2005 62 44
2006 and subsequent years 512 190
--------- -------
Total $ 928 $ 419
=========
Less imputed interest
on capital leases at an
average rate of 7.1% 76
-------
Present value of minimum
lease payments included
in debt $ 343
=======
PAGE 70
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
Operating Lease Expense
-----------------------
($ in millions) 2000 1999 1998
--------------- ---- ---- ----
Minimum rents $ 167 $ 118 $ 75
Contingent rents 61 61 40
--------- --------- --------
Total $ 228 $ 179 $ 115
========= ========= ========
During 2000, NS entered into an operating lease for 140 locomotives,
which is renewable annually, has a maximum term of eight years and includes
purchase options. 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.
[Download Table]
10. OTHER LIABILITIES
December 31,
($ in millions) 2000 1999
--------------- ---- ----
Retiree health and death
benefit obligation (Note 11) $ 291 $ 261
Casualty and other claims 262 275
Deferred compensation 148 142
Net pension obligations (Note 11) 83 74
Accrued Conrail-related costs(Note 2) 72 102
Other 275 247
--------- --------
Total $ 1,131 $ 1,101
========= =========
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
-------------------------
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 $133
million. The resulting noncash reduction to NS' pension plan asset is
included in "Other - net" in the Consolidated Statement of Cash Flows.
PAGE 71
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
Pension Benefits Other Benefits
($ in millions) 2000 1999 2000 1999
--------------- ---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation at
beginning of year $ 1,058 $ 1,063 $ 340 $ 362
Cost of early retirement
benefits 119 - 14 -
Increase related to
former Conrail employees - 68 - -
Service cost 18 17 15 11
Interest cost 79 73 27 23
Amendment 21 - - -
Actuarial (gains) losses 120 (92) 79 (33)
Benefits paid (103) (71) (30) (23)
------- ------ ----- -----
Benefit obligation
at end of year 1,312 1,058 445 340
------- ------ ----- -----
CHANGE IN PLAN ASSETS
Fair value of plan assets
at beginning of year 2,072 1,544 152 139
Transfer of assets from
Conrail plan - 352 - -
Actual return on plan assets 30 250 (5) 21
Employer contribution 8 4 9 15
401(h) account transfer (8) (7) - -
Benefits paid (103) (71) (30) (23)
------- ------ ----- -----
Fair value of plan
assets at end of year 1,999 2,072 126 152
------- ------ ----- -----
Funded status 687 1,014 (319) (188)
Unrecognized initial net asset (3) (10) - -
Unrecognized (gain) loss (478) (799) 4 (97)
Unrecognized prior
service cost (benefit) 47 40 - -
------- ------- ----- ------
Net amount recognized $ 253 $ 245 $(315) $ (285)
======= ======= ===== ======
Amounts recognized in the
Consolidated Balance
Sheets consist of:
Prepaid benefit cost $ 315 $ 298 $ - $ -
Accrued benefit liability (83) (74) (315) (285)
Accumulated other
comprehensive income 21 21 - -
------- ------- ------ -------
Net amount recognized $ 253 $ 245 $(315) $ (285)
======= ======= ====== =======
PAGE 72
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
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 $83 million at
Dec. 31, 2000, and $74 million at Dec. 31, 1999. These plans' projected
benefit obligations were $89 million at Dec. 31, 2000, and $76 million
at Dec. 31, 1999. Because of the nature of such plans, there are no plan
assets.
NS received Section 401(h) account transfers, from pension assets, of
$8 million in 2000 and $7 million in 1999 as reimbursement for medical
payments for retirees.
As a result of the commencement of operations over Conrail's lines
(see Note 2), NS hired a substantial portion of Conrail's former work force.
In August 1999, NS assumed certain pension obligations related to those
employees. These obligations, along with pension plan assets in excess of
the obligations, were transferred to the NS plans in 1999. This transfer
resulted in an increase to NS' pension plan asset and a corresponding
decrease in NS' investment in Conrail.
NS amended its qualified pension plan, effective Oct. 1, 2000, to
allow for the payment of qualifying disability benefits. The amendment
increased the pension benefit obligation by $21 million at Dec. 31, 2000.
Pension and other postretirement benefit costs are determined based on
actuarial valuations that reflect appropriate assumptions as of the
measurement date, ordinarily the beginning of each year. The funded status
of the plans is determined using appropriate assumptions as of each year
end. During 1999, NS received assets from the Conrail pension plan and
assumed certain related liabilities. As a result, the measurement dates for
determining pension costs were Jan. 1, 1999, and Aug. 31, 1999; the costs
reflect discount rates of 6.75% and 7.75%, respectively, and other
assumptions appropriate at those dates. A summary of the major
assumptions follows:
[Download Table]
2000 1999 1998
---- ---- ----
Funded status:
Discount rate 7.5% 7.75% 6.75%
Future salary increases 5% 5% 5%
Pension cost:
Discount rate 7.75% 6.75% 7.25%
Return on assets in plans 10% 10% 9%
Future salary increases 5% 5% 5.25%
PAGE 73
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
Pension and Other Postretirement Benefit Costs Components
---------------------------------------------------------
($ in millions) 2000 1999 1998
--------------- ---- ---- ----
PENSION BENEFITS
Service cost $ 18 $ 17 $ 13
Interest cost 79 73 67
Cost of early retirement
programs 119 - -
Expected return on
plan assets (192) (152) (106)
Amortization of prior
service cost 4 4 1
Amortization of initial
net asset (7) (7) (7)
Recognized net actuarial
(gain) loss (38) (22) (12)
-------- ------- -------
Net cost (benefit) $ (17) $ (87) $ (44)
======== ======= =======
OTHER POSTRETIREMENT BENEFITS
Service cost $ 15 $ 11 $ 10
Interest cost 27 23 24
Cost of early retirement
programs 14 - -
Expected return on plan
assets (14) (12) (9)
Amortization of prior
service cost - (12) (12)
Recognized net actuarial
(gain) loss (4) (2) (2)
-------- ------- -------
Net cost $ 38 $ 8 $ 11
======== ======= =======
For measurement purposes, increases in the per capita cost of covered
health care benefits were assumed to be 7.0% for 2001 and 7.5% for 2000. It
is assumed the rate will decrease gradually to an ultimate rate of 5.0% for
2003 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:
[Download Table]
One percentage point
($ in millions) Increase Decrease
-------------------- -------- --------
Increase (decrease) in:
Total service and interest cost components $ 5 $ (4)
Postretirement benefit obligation $35 $(30)
PAGE 74
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
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 $7 million in 2000 and $5 million in both 1999 and 1998.
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 $12 million in both 2000 and 1999 and $10 million in 1998.
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 53,025,000 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.
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 $5 million in 2000, $2 million in
1999 and $25 million in 1998. NS recognized additional paid-in capital of
$4 million in 1999 and $10 million in 1998 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 $149 million in 2000, $210 million in 1999
and $718 million in 1998; basic earnings per share would have been $0.39 in
2000, $0.55 in 1999 and $1.90 in 1998; and diluted earnings per share would
have been $0.39 in 2000, $0.55 in 1999 and $1.89 in 1998. 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
2000 grants, four years for 1999 grants and five years for 1998 grants;
average risk-free interest rates of 6.8% in 2000, 5.2% in 1999 and 5.5% in
1998; average stock-price volatilities of 33% in 2000, 21% in 1999 and 15%
in 1998; and dividend yields ranging from 0% to 3%. These assumptions
produce per-share grant-date fair values of $5.22 in 2000, $5.12 in 1999
and $8.82 in 1998.
PAGE 75
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
Stock Option Activity
---------------------
Weighted Average
Option Shares Exercise Price
------------- ----------------
Balance 12/31/97 11,373,418 $22.32
Granted 3,625,000 32.16
Exercised (1,908,370) 19.22
Canceled (31,000) 29.46
-----------
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
===========
Of the total options outstanding at Dec. 31, 2000, 20 million were
vested and have a weighted-average exercise price of $27.97.
[Download Table]
Stock Options Outstanding
-------------------------
Exercise Price Number Weighted Average
------------------------------------ Outstanding Remaining
Range Weighted Average at 12/31/00 Contractual Life
----- ---------------- ----------- ----------
$14.25 to $16.94 $16.82 8,037,350 8.7 years
18.81 to 21.08 20.43 3,059,750 2.7 years
24.31 to 27.69 26.81 7,988,100 6.7 years
29.46 to 33.25 32.09 9,035,750 7.3 years
---------------- ------- ----------- ----------
$14.25 to $33.25 $24.96 28,120,950 7.0 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 937,500 and $16.94 in 2000;
850,000 and $27.72 in 1999; and 565,500 and $32.16 in 1998, 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.
PAGE 76
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
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:
2000 1999 1998
---- ---- ----
Available for future
grants 12/31:
LTIP 2,554,584 10,512,997 16,233,600
TSOP 2,488,700 2,349,600 -
Shares of Common Stock
issued:
LTIP 395,626 1,086,288 2,212,323
TSOP - - -
13. STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Income
--------------------------------------
"Accumulated other comprehensive income" reported in "Stockholders'
equity" included the following net-of-tax amounts: unrealized gains on
securities of $7 million at Dec. 31, 2000, and $2 million at Dec. 31, 1999;
and minimum pension liability of $13 million at each of Dec. 31, 2000, and
Dec. 31, 1999. "Other comprehensive income" reported in the Consolidated
Statements of Changes in Stockholders' Equity consisted of the following:
[Download Table]
($ in millions) 2000 1999 1998
--------------- ---- ---- ----
Unrealized gains on securities $ 7 $ (6) $ 1
Minimum pension liability -- 2 (23)
Income taxes (2) 1 9
------ ------- ------
Other comprehensive income $ 5 $ (3) $ (13)
====== ======= ======
"Unrealized gains on securities" included reclassification adjustments
for gains realized in income from the sale of the securities of less than
$1 million in each year.
Undistributed Earnings of Equity Investees
------------------------------------------
"Retained income" includes undistributed earnings of equity investees,
principally attributable to NS' equity in the earnings of Conrail, of $351
million at Dec. 31, 2000; $330 million at Dec. 31, 1999; and $314 million
at Dec. 31, 1998.
PAGE 77
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
14. EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted
earnings per share:
($ in millions except per share,
shares in millions) 2000 1999 1998
-------------------------------- ---- ---- ----
Basic earnings per share:
Income available to common
stockholders for basic and
diluted computations $ 172 $ 239 $ 734
Weighted-average shares
outstanding 383 381 379
-------- -------- --------
Basic earnings per share $ 0.45 $ 0.63 $ 1.94
-------- -------- --------
Diluted earnings per share:
Weighted-average shares
outstanding per above 383 381 379
Dilutive effect of outstanding
options, PSUs and SARs (as
determined by the application
of the treasury stock method) - 1 2
-------- -------- --------
Adjusted weighted-average
shares outstanding 383 382 381
-------- -------- --------
Diluted earnings per share $ 0.45 $ 0.63 $ 1.93
======== ======== ========
These calculations exclude options the exercise price of which
exceeded the average market price of Common Stock as follows: in 2000, 28
million in the fourth, third and first quarters, and 20 million in the
second quarter; 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; and in 1998, 4 million in the fourth and third quarters.
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," "Short-term debt" 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 investments accounted
for under the equity method in accordance with APB Opinion No. 18,
consisted of the following at Dec. 31:
[Download Table]
2000 1999
---- ----
Carrying Fair Carrying Fair
($ in millions) Amount Value Amount Value
--------------- -------- ----- -------- -----
Investments $ 142 $ 149 $ 49 $ 54
Long-term debt (7,636) (7,809) (8,058) (7,980)
Interest rate swaps - 5 - 4
PAGE 78
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 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. The
fair value of interest rate swaps was estimated based on discounted cash
flows, reflecting the difference between estimated future variable-rate
payments and future fixed-rate receipts.
Carrying amounts of marketable securities reflect unrealized holding
gains of $11 million on Dec. 31, 2000, and $3 million on Dec. 31, 1999.
Sales of "available-for-sale" securities were immaterial for years ended
Dec. 31, 2000 and 1999.
16. 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. Total proceeds from the
sale were $207 million, resulting in a $90 million pretax gain ($105
million, or 28 cents per basic and diluted share, after taxes). The higher
after-tax gain was the result of differences between book and tax bases and
the realization of deferred tax benefits.
NAVL's results of operations, financial position and cash flows are
presented as "Discontinued operations" in the accompanying financial
statements. A summary of NAVL's results of operations follows:
[Download Table]
($ in millions) 1998
--------------- ----
Motor carrier revenues $ 207
Motor carrier expenses 208
-----
Loss from operations (1)
Gain on sale, net of taxes 105
-----
Income from discontinued operations $ 104
=====
Earnings per share (basic and diluted)
from discontinued operations $0.28
=====
17. COMMITMENTS AND CONTINGENCIES
Lawsuits
--------
Norfolk Southern and certain subsidiaries are defendants in numerous
lawsuits relating principally to railroad operations. While the final
outcome of these lawsuits cannot be predicted with certainty, it is the
opinion of Management, based on known facts and circumstances, that the
amount of NS' ultimate liability is unlikely to have a material adverse
effect on NS' financial position, results of operations or liquidity.
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.
PAGE 79
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
As of Dec. 31, 2000, NS' balance sheet included a reserve for
environmental exposures in the amount of $36 million (of which $8 million
is accounted for as a current liability), which is NS' estimate of the
probable cleanup and remediation costs based on available information at
125 identified locations. On that date, 10 sites accounted for $18 million
of the reserve, 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 125 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 assessments 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 Commitment
-------------------
NSR committed in 2000 to purchase 160 locomotives in 2001. Some of the
locomotives were received and paid for in 2000, and the remainder will be
delivered in the first half of 2001. NSR expects to finance the purchase of
these locomotives with proceeds from the sale of equipment trust
certificates.
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, 2000, certain Norfolk Southern subsidiaries are
contingently liable as guarantors with respect to $8 million of
indebtedness of related entities.
PAGE 80
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,
2000 and 1999, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 2000,
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 23, 2001
PAGE 81
Item 9. Changes in and Disagreements with Accountants on Accounting
------ -----------------------------------------------------------
and Financial Disclosure.
------------------------
None.
PAGE 82
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, to be dated April 2, 2001, for
the Norfolk Southern Annual Meeting of Stockholders to be held on
May 10, 2001, 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."
PAGE 83
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, 2000, 1999, and 1998 53
Consolidated Balance Sheets
As of December 31, 2000 and 1999 54
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999, and 1998 55
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 2000, 1999, and 1998 57
Notes to Consolidated Financial Statements 58
Independent Auditors' Report 80
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 92
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.
PAGE 84
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 filed herewith.
3(ii) The Bylaws of Norfolk Southern Corporation, as
amended November 28, 2000, are incorporated herein by
reference from Exhibit 4 to Norfolk Southern Corporation's
Form S-8 filed on January 26, 2001.
4 Instruments Defining the Rights of Security Holders,
Including Indentures -
(a) Indentures related to the issuance of notes in the
principal amount of $4.3 billion are incorporated herein
by reference from Exhibits 4.1 and 4.2 to Norfolk Southern
Corporation's Amendment No. 3 to Form S-3, Registration
No. 333-24051, filed on May 12, 1997.
(b) Indentures related to the issuance of notes in the principal
amount of $400 million are incorporated herein by reference from
Exhibits 4.1 and 4.2 to Norfolk Southern Corporation's Form S-3,
Registration No. 333-67937, filed on November 25, 1998.
(b) 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 from Exhibit 4 to
Norfolk Southern Corporation's Form 8-K filed on September 26,
2000.
(c) Indentures related to the issuance of notes in the principal
amount of $1 billion are incorporated herein by reference from
Exhibits 4.1 and 4.2 to Norfolk Southern Corporation's Form
S-3, Registration No. 333-46810, filed on September 27, 2000.
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.
PAGE 85
Item 14. Exhibits, Financial Statement Schedule and
------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
------- ------------------------------------------------------------
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
electronically 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 Report for the
period ended June 30, 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 Report for the period ended
June 30, 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 Report for the
period ended June 30, 1999.
PAGE 86
Item 14. Exhibits, Financial Statement Schedule and
------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
------- ------------------------------------------------------------
10 Material Contracts (continued) -
(e) 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 Report for the period ended
June 30, 1999.
(f) 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 Report
for the period ended June 30, 1999.
(g) 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 Report for the period ended
June 30, 1999.
(h) 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 filed herewith.
(i) 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 Report for the period ended
June 30, 1999.
PAGE 87
Item 14. Exhibits, Financial Statement Schedule and
------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
------- ------------------------------------------------------------
10 Material Contracts (continued) -
(j) 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 1999
Annual Report on Form 10-K.
(k) 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 (both the Lease and
Supplementary Agreement, formerly incorporated by reference
with Exhibit 10(b) to Southern's 1987 Annual Report on
Form 10-K) - is filed herewith.
(l) 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 1999 Annual Report on Form 10-K.
(m) The Norfolk Southern Corporation Long-Term Incentive Plan,
as amended effective January 23, 2001, is filed herewith.
(n) The Norfolk Southern Corporation Officers' Deferred
Compensation Plan, as amended effective September 26, 2000,
is filed herewith.
(o) The Norfolk Southern Corporation Executives' Deferred
Compensation Plan, as amended effective January 20, 2001,
is filed herewith.
PAGE 88
Item 14. Exhibits, Financial Statement Schedule and
------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
------- ------------------------------------------------------------
10 Material Contracts (continued) -
(p) The Directors' Deferred Fee Plan of Norfolk Southern
Corporation, as amended effective January 23, 2001,
is filed herewith.
(q) 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
1998 Annual Report on Form 10-K.
(r) 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 and 1998 Annual Meeting of
Stockholders) is incorporated herein by reference from
Exhibit 10 to Norfolk Southern Corporation's Form 10-Q
Report for the quarter ended June 30, 1996.
(s) 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 1999 Annual Report
on Form 10-K.
(t) The Norfolk Southern Corporation Directors' Charitable
Award Program, effective February 1, 1996, is
incorporated herein by reference from Exhibit 10(j) to
Norfolk Southern Corporation's Form 10-Q Report for the
quarter ended June 30, 1996.
(u) 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 1997 Annual
Report on Form 10-K.
PAGE 89
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.
(c) Consent of PricewaterhouseCoopers LLP.
99 Conrail Inc. 2000 Annual Report to Stockholders.
(B) Reports on Form 8-K.
A report on Form 8-K was filed on Oct. 2, 2000, advising of
the sales of certain timber interests and indicating the
anticipated range of earnings per share for the third quarter
and the contribution to such earnings of the timber interest
sales, and, attaching as an exhibit, the related press
release.
(C) Exhibits.
The Exhibits required by Item 601 of Regulation S-K as listed
in Item 14(a)3 are filed herewith or incorporated herein by
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.
PAGE 90
POWER OF ATTORNEY
-----------------
Each person whose signature appears below under "SIGNATURES"
hereby authorizes Henry C. Wolf and J. Gary Lane, 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 J. Gary Lane, 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 5th day of March, 2001.
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 5th day of March, 2001,
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)
PAGE 91
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)
------------------------------ 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)
PAGE 92
Schedule II
Page 1 of 2
[Enlarge/Download Table]
Norfolk Southern Corporation and Subsidiaries
---------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1998, 1999 and 2000
(In millions of dollars)
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- ---------
Year ended December 31, 1998
----------------------------
Valuation allowance (included
net in deferred tax
liability) for deferred tax
assets $ 2 $ 1 $ -- $ -- $ 3
Casualty and other claims
included in other
liabilities $253 $ 86 $ 22 (1) $ 90 (2) $271
Current portion of casualty
and other claims included
in accounts payable $172 $ 11 $149 (1) $188 (3) $144
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
(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)
PAGE 93
Schedule II
Page 2 of 2
Norfolk Southern Corporation and Subsidiaries
---------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1998, 1999 and 2000 (continued)
(In millions of dollars)
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- ---------
Year ended December 31, 2000
----------------------------
Valuation allowance (included
net in deferred tax
liability) for deferred tax
assets $ 9 $ 3 $ -- $ -- $ 12
Casualty and other claims
included in other
liabilities $275 $117 $ 8 (1) $138 (2) $262
Current portion of casualty
and other claims included
in accounts payable $181 $ 19 $221 (1) $198 (3) $223
(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.
PAGE 94
EXHIBIT INDEX
-------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Electronic
Submission
Exhibit
Number Description
--------- ------------------------------------------------------------
3(i) The Restated Articles of Incorporation of Norfolk Southern
Corporation.
10(h) Amendment No. 1, dated as of June 1, 2000, to the Shared
Assets Areas Operating Agreement for North Jersey, South
Jersey/Philadelphia and Detroit.
10(k) The Supplementary Agreement, entered into as of Jan. 1,
1987, between the Trustees of the Cincinnati Southern Railway
and The Cincinnati, New Orleans and Texas Pacific Railway
Company, extending and amending a Lease, dated as of October 11,
1881.
10(m) The Norfolk Southern Corporation Long-Term Incentive Plan,
as amended effective January 23, 2001.
10(n) The Norfolk Southern Corportation Officers' Deferred
Compensation Plan, as amended effective September 26, 2000.
10(o) The Norfolk Southern Corporation Executives' Deferred
Compensation Plan, as amended effective January 20, 2001.
10(p) The Directors' Deferred Fee Plan of Norfolk Southern
Corporation, as amended effective January 23, 2001.
12 Statement re: Computation of Ratio of Earnings to Fixed
Charges.
21 Subsidiaries of Norfolk Southern Corporation.
23 Consent of Experts and Counsel -
(a)Consent of KPMG LLP.
(b)Consent of KPMG LLP and Ernst & Young LLP.
(c)Consent of PricewaterhouseCoopers LLP.
99 Conrail Inc. 2000 Annual Report to Stockholders.
Dates Referenced Herein and Documents Incorporated by Reference
4 Subsequent Filings that Reference this Filing
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