Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Norfolk Southern Corporation 10-K405 Fye 12/31/99 93 383K
2: EX-3.I Nsc Articles of Restatement 9 36K
3: EX-3.II Nsc Bylaws 8 31K
4: EX-10.I Agreement Between North Carolina Railroad Company 44 144K
and Norfolk Southern Railway Company
6: EX-10.L Nsc Executive Management Incentive Plan 4 17K
5: EX-10.L Nsc Management Incentive Plan 6 27K
7: EX-10.M Nsc Long-Term Incentive Plan 15 60K
8: EX-10.N Nsc Officers' Deferred Compensation Plan 8 32K
9: EX-10.R Nsc Supplemental Benefit Plan 6 21K
10: EX-12 Nsc Computation of Ratio of Earnings to Fixed 2± 10K
Charges
11: EX-21 Nsc Subsidiaries 2 13K
12: EX-23.A Consent of Independent Auditors 1 9K
13: EX-23.B Consent of Independent Accountants 1 10K
14: EX-23.C Consent of Pricewaterhousecoopers LLP 1 9K
15: EX-27 Year End 1999 EX-27 Nsc Financial Data Schedule 1 9K
16: EX-99 1999 Conrail Inc. Annual Report 26 106K
10-K405 — Norfolk Southern Corporation 10-K405 Fye 12/31/99
Document Table of Contents
1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K405
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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, 2000: $6,507,265,729.
The number of shares outstanding of each of the registrant's classes
of common stock, as of January 31, 2000: 382,780,337 (excluding
21,627,902 shares held by registrant's consolidated subsidiaries).
PAGE 2
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement (to be
dated March 31, 2000), 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 17
4. Submission of Matters to a Vote of Security Holders 17
Executive Officers of the Registrant 18
Part II. 5. Market for Registrant's Common Stock and
Related Stockholder Matters 20
6. Selected Financial Data 21
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 28
7A. Quantitative and Qualitative Disclosures
About Market Risk 47
8. Financial Statements and Supplementary Data 48
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 79
Part III. 10. Directors and Executive Officers of the Registrant 80
11. Executive Compensation 80
12. Security Ownership of Certain Beneficial Owners
and Management 80
13. Certain Relationships and Related Transactions 80
Part IV. 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K 81
Index to Consolidated Financial Statement Schedule 81
Power of Attorney 88
Signatures 88
Exhibit Index 92
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, 1999, 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
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 39 and Note 15 on Page 75). 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
operating and leasing arrangements, more particularly described in
Note 2 on Page 58, with Norfolk Southern Railway. Certain rail assets
(Shared Assets Areas) still are owned by CRC, which operates them for
joint and exclusive use by Norfolk Southern Railway and the rail
subsidiary of CSX.
PAGE 5
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, 1999, 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 operates 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;
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
PAGE 6
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, Jacksonville, Kansas City, Memphis,
New Orleans 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 which 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.
Since April 1, 1993, 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 the corridors
previously served by TCS, as well as service to the New York and New
Jersey markets via Conrail. Major traffic corridors include 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 $5.2 billion in 1999. Revenue, shipments and revenue yield by
principal railway operating revenue sources for the past five years
are set forth in the following table:
Year Ended December 31,
Principal Sources of ---------------------------------------------------
Railway Operating
Revenues 1999 1998 1997 1996 1995
-------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipment)
COAL
Revenues $1,315 $1,252 $1,301 $1,305 $1,268
% of total
revenues 25% 30% 31% 32% 32%
Shipments 1,519 1,310 1,324 1,310 1,267
% of total
shipments 25% 27% 28% 29% 29%
Revenue Yield $ 866 $ 956 $ 983 $ 996 $1,001
AUTOMOTIVE
Revenues $ 740 $ 566 $ 492 $ 489 $ 449
% of total
revenues 14% 13% 11% 12% 11%
Shipments 612 487 361 354 328
% of total
shipments 10% 10% 8% 8% 7%
Revenue Yield $1,209 $1,162 $1,364 $1,379 $1,368
CHEMICALS
Revenues $ 720 $ 574 $ 585 $ 560 $ 541
% of total
revenues 14% 13% 14% 14% 14%
Shipments 475 401 405 385 374
% of total
shipments 8% 8% 8% 8% 8%
Revenue Yield $1,516 $1,431 $1,446 $1,456 $1,447
PAPER/CLAY/FOREST
Revenues $ 575 $ 534 $ 539 $ 513 $ 537
% of total
revenues 11% 13% 13% 12% 13%
Shipments 465 445 457 438 459
% of total
shipments 8% 9% 9% 10% 10%
Revenue Yield $1,237 $1,200 $1,178 $1,171 $1,170
METALS/CONSTRUCTION
Revenues $ 562 $ 373 $ 368 $ 354 $ 349
% of total
revenues 11% 9% 9% 9% 8%
Shipments 587 372 374 359 367
% of total
shipments 10% 8% 8% 8% 8%
Revenue Yield $ 957 $1,003 $ 985 $ 986 $ 951
AGR./CONSUMER PRODUCTS/GOVT.
Revenues $ 453 $ 383 $ 391 $ 393 $ 394
% of total
revenues 9% 9% 9% 9% 10%
Shipments 407 355 366 376 391
% of total
shipments 7% 8% 8% 8% 9%
Revenue Yield $1,113 $1,079 $1,065 $1,045 $1,007
PAGE 8
Year Ended December 31,
Principal Sources of -------------------------------------------------
Railway Operating
Revenues 1999 1998 1997 1996 1995
-------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipment)
INTERMODAL
(Trailers, Containers
and RoadRailers)
Revenues $ 830 $ 539 $ 547 $ 487 $ 474
% of total
revenues 16% 13% 13% 12% 12%
Shipments 1,896 1,443 1,472 1,331 1,263
% of total
shipments 32% 30% 31% 29% 29%
Revenue Yield $ 438 $ 374 $ 372 $ 366 $ 376
Total Railway
Operating Revenues $5,195 $4,221 $4,223 $4,101 $4,012
Total Railway
Shipments 5,961 4,813 4,759 4,553 4,449
Railway Revenue
Yield $ 871 $ 877 $ 887 $ 901 $ 902
Note: Other railway revenues (principally switching and demurrage)
have been allocated to revenues reported for each commodity group.
Shipments include general merchandise and coal rail carloads and
intermodal rail and RoadRailer(RT) units.
PAGE 9
COAL TRAFFIC - Coal, coke and iron ore -- most of which is
bituminous coal -- is NS' railroads' largest commodity group as
measured by revenues. They originated 138 million tons of coal, coke
and iron ore in 1999 and handled a total of 158 million tons.
Originated tonnage and total tons handled increased due to the
commencement of operations in the Northern Region. Revenues from
coal, coke and iron ore account for about 25 percent of NS' total
railway operating revenues.
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)
--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Originated 138 119 119 117 114
Received 20 15 15 13 11
--- --- --- --- ---
Handled 158 134 134 130 125
=== === === === ===
[Download Table]
Of the 138 million tons of coal, coke and iron ore originated on
lines operated by NS' railroads in 1999, the approximate breakdown by
origin state was as follows:
Origin State Millions of Tons
------------ ----------------
West Virginia 45
Virginia 31
Kentucky 24
Pennsylvania 15
Indiana 7
Ohio 6
Alabama 4
Illinois 3
Tennessee 1
Other 2
---
138
===
Of the 158 million tons handled, approximately 18 million moved
for export, principally through NS' pier facilities at Norfolk
(Lamberts Point), Virginia; 22 million moved to domestic and Canadian
steel industries; 108 million of steam coal moved to electric
utilities; and 10 million moved to other industrial and miscellaneous
users.
NS' railroads moved 9 million tons of originated coal, coke and
iron ore to various docks on the Ohio River, and 7 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.
PAGE 10
Total coal handled through all system ports in 1999 was
38 million tons. Of this total, 53 percent, or 20 million tons
(including coastwise traffic), moved through Lamberts Point, a
26 percent decrease compared with the 27 million tons handled in 1998.
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)
----------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
17 24 28 26 25
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 1999 were $3.9 billion,
a 31 percent increase, compared with 1998. Merchandise carloads and
intermodal units handled in 1999 were 4.44 million, compared with
3.50 million handled in 1998, an increase of 27 percent. The
increases in revenues and carloads reflect the commencement of
operations in the Northern Region.
In 1999, 136 million tons of merchandise freight, or
approximately 67 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 1999, due to the commencement of operations in the
Northern Region.
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."
PAGE 11
[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,
---------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenue ton miles (billions) 165 133 136 130 127
Freight train miles
traveled (millions) 61.5 53.0 49.7 49.4 48.5
Revenue per ton mile $0.0314 $0.0316 $0.0311 $0.0316 $0.0317
Revenue tons per train 2,691 2,517 2,732 2,625 2,611
Revenue ton miles
per man-hour worked 2,560 2,635 2,905 2,764 2,679
Percentage ratio of
railway operating
expenses to railway
operating revenues 86.2% 75.1% 71.3% 71.6% 73.5%
FREIGHT RATES - In 1999, 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 1999, NS' railroads were found by the STB not to be "revenue
adequate" based on results for the year 1998. 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 Charlotte 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 scheduled passenger operations between
Chicago, Illinois, and Detroit, Michigan, and between Chicago and
Harrisburg, Pennsylvania. All of these services are under contracts
providing for reimbursement of related expenses incurred by NS.
Also since June 1, 1999, 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.
PAGE 12
In addition, through its operation of PRR's routes, Norfolk
Southern Railway provides freight service over lines with significant
ongoing Amtrak and commuter passenger operations, and conducts freight
operations over some trackage owned by Amtrak or by commuter entities.
NONCARRIER OPERATIONS - NS' noncarrier subsidiaries engage
principally in 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 1999, 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.
RAILWAY PROPERTY:
[Download Table]
EQUIPMENT - As of Dec. 31, 1999, 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 2,232 949 3,181 10,315,300
Switching 110 113 223 325,800
Auxiliary units 59 18 77 --
------ ------ ------- ----------
Total locomotives 2,401 1,080 3,481 10,641,100
====== ====== ======= ==========
Freight Cars: (Tons)
Hopper 20,605 5,796 26,401 2,773,704
Box 18,993 5,657 24,650 1,914,567
Covered Hopper 12,073 3,737 15,810 1,711,311
Gondola 28,592 12,534 41,126 4,380,406
Flat 4,181 1,035 5,216 392,663
Caboose 190 78 268 --
Other 3,956 -- 3,956 218,540
------ ------ ------- ----------
Total freight cars 88,590 28,837 117,427 11,391,191
====== ====== ======= ==========
Other:
Work equipment 6,005 2,151 8,156
Vehicles 3,685 1,720 5,405
Highway trailers
and containers 1,871 5,319 7,190
RoadRailers(RT) 5,593 -- 5,593
Miscellaneous 1,497 6,404 7,901
------ ------ -------
Total other 18,651 15,594 34,245
====== ====== =======
PAGE 13
* Includes equipment leased to outside parties and equipment
subject to equipment trusts, conditional sale agreements
and capitalized leases.
** Includes 1,020 locomotives, 20,351 freight cars and 3,880
units of other equipment leased from PRR.
In addition, NS has leased locomotives to meet immediate needs.
As of Dec. 31, 1999, NS had 555 units under several short-term leases,
most of which expire in the first quarter of 2000.
[Download Table]
The following table indicates the number and year built for
locomotives and freight cars owned at Dec. 31, 1999:
Year Built
--------------------------------------------------------
1989- 1983- 1982 &
1999 1998 1997 1996 1995 1994 1988 Before Total
---- ---- ---- ---- ---- ---- ---- ------ -----
Locomotives:
Number of
units 147 119 120 119 125 289 327 1,155 2,401
Percent of
fleet 6 5 5 5 6 12 13 48 100%
Freight cars:
Number of
units 439 1,567 1,076 987 1,036 8,128 1,835 73,522 88,590
Percent of
fleet 1 2 1 1 1 9 2 83 100%
The average age of the freight car fleet at Dec. 31, 1999, was
23.8 years. During 1999, 423 freight cars were retired. As of
Dec. 31, 1999, the average age of the locomotive fleet was 15.4 years.
During 1999, 13 locomotives, the average age of which was 22.7 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.
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 which were not in high demand. The ratio has declined more
recently as a result of a disposition program for underutilized,
unserviceable and overage revenue cars. In this connection, an
orderly disposition of 17,000 freight cars, begun in October 1994, was
completed in 1997. 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.
PAGE 14
[Download Table]
Annual Average Bad Order Ratio
-----------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Freight Cars (excluding cabooses):
NS Rail 3.3% 4.1% 4.6% 4.8% 5.8%
Locomotives:
NS Rail 5.3% 4.3% 5.0% 4.5% 4.7%
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, 1999, about 21,800
were laid with welded rail.
[Download Table]
The density of traffic on running tracks (main line trackage plus
passing tracks) during 1999 was as follows:
Gross tons of
freight carried
per track mile Track miles of Percent
(Millions) running tracks* of total
--------------- -------------- --------
0-4 9,070 39
5-19 6,561 29
20 and over 7,372 32
------ ---
23,003 100
====== ===
* Excludes trackage rights and includes track in the Northern
Region, where operations commenced June 1, 1999.
[Download Table]
The following table summarizes certain information about NS'
track roadway additions and replacements during the past five years:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Track miles of rail
installed 403 429 451 401 403
Miles of track surfaced 5,087 4,715 4,703 4,686 4,668
New crossties installed
(millions) 2.3 2.0 2.2 1.9 2.0
MICROWAVE SYSTEM - The NS microwave system, consisting of
8,140 radio path miles, 430 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.
PAGE 15
TRAFFIC CONTROL - Of a total of 21,800 road miles operated by NS,
excluding trackage rights over foreign lines, 8,370 road miles are
governed by centralized traffic control systems (of which 1,000 miles
are controlled by data radio from 78 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
$930 million as of Dec. 31, 1999, and $728 million at Dec. 31, 1998.
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
-------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In millions of dollars)
Road $ 559 $ 612 $ 599 $ 438 $ 386
Equipment 349 442 306 326 338
Other property 4 6 24 25 33
------ ------ ------ ------ ------
Total $ 912 $1,060 $ 929 $ 789 $ 757
====== ====== ====== ====== ======
Capital spending and maintenance programs are and have been
designed to assure the ability to provide safe, efficient and reliable
transportation services. For 2000, NS has budgeted $747 million of
capital spending. In addition, NS plans to enter into a lease
financing arrangement for 150 new locomotives, and NS expects to lease
475 articulated bilevels for automotive service.
PAGE 16
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 44 in
Part II, Item 7, "Management's Discussion and Analysis," and in
Note 16 to the Consolidated Financial Statements on Page 76.
EMPLOYEES - NS employed an average of 31,166 employees in 1999,
compared with an average of 24,300 in 1998. The increase reflects the
substantial number of Conrail employees that became NS employees on
June 1, 1999. The approximate average cost per employee during 1999
was $48,500 in wages and $17,300 in employee benefits.
Approximately 85 percent of NS' railroad employees are
represented by labor unions under collective bargaining agreements
with 14 different labor organizations. See the discussion of "Labor
Agreements" on Page 46 in Part II, Item 7, "Management's Discussion
and Analysis."
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 2000 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.
PAGE 17
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.
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 1999.
PAGE 18
Executive Officers of the Registrant.
------------------------------------
Norfolk Southern's executive officers 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. 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,
2000, relating to the officers.
Business Experience During Past
Name, Age, Present Position Five Years
--------------------------- ------------------------------------
David R. Goode, 59, Present position since September
Chairman, President and 1992.
Chief Executive Officer
L. I. Prillaman, 56, Present position since August 1998.
Vice Chairman and Served as Executive Vice
Chief Marketing Officer President-Marketing from October
1995 to August 1998, and prior
thereto was Vice President-
Properties.
Stephen C. Tobias, 55, Present position since August 1998;
Vice Chairman and prior thereto was Executive Vice
Chief Operating Officer President-Operations.
Henry C. Wolf, 57, Present position since August 1998;
Vice Chairman and prior thereto was Executive Vice
Chief Financial Officer President-Finance.
James C. Bishop, Jr., 63, Present position since March 1996;
Executive Vice President-Law prior thereto was Vice President-
Law.
R. Alan Brogan, 59, Present position since December 1,
President Norfolk Southern 1999. Served as Executive Vice
Intermodal President-Corporate from April
1998 to December 1, 1999, and
prior thereto was Executive Vice
President-Transportation
Logistics.
John F. Corcoran, 59, Present position since August 1997;
Senior Vice President- prior thereto was Vice President-
Public Affairs Public Affairs.
David A. Cox, 64, Present position since October 1,
Senior Vice President- 1999. Served as Vice President-
Properties and Development Properties from December 1995 to
October 1, 1999, and prior
thereto was Assistant Vice
President-Industrial Development.
PAGE 19
Business Experience During Past
Name, Age, Present Position Five Years
--------------------------- ------------------------------------
John W. Fox, Jr., 52, Present position since December 1,
Senior Vice President- 1999. Served as Vice President-
Coal Marketing Coal Marketing from October 1995
to December 1, 1999, and prior
thereto was Assistant Vice
President-Coal Marketing.
James A. Hixon, 46, Present position since November 1,
Senior Vice President- 1999; prior thereto was Vice
Employee Relations President-Taxation.
Jon L. Manetta, 61, Present position since August 1998.
Senior Vice President- Served as Vice President-
Operations Transportation & Mechanical from
December 1995 to August 1998, and
prior thereto was Vice President-
Transportation.
James W. McClellan, 60, Present position since August 1998;
Senior Vice President- prior thereto was Vice President-
Planning Strategic Planning.
Phillip R. Ogden, 59, Present position since August 1998;
Senior Vice President- prior thereto was Vice President-
Engineering Engineering.
Donald W. Seale, 47, Present position since December 1,
Senior Vice President- 1999; prior thereto was Vice
Merchandise Marketing President-Merchandise Marketing.
Paul N. Austin, 56, Present position since November 1,
Vice President and Assistant 1999. Served as Vice President-
to Chairman, President Human Resources and Assistant to
and Chief Executive Chairman from September 1998 to
November 1, 1999, Vice President-
Personnel and Assistant to
Chairman from September 1, 1998,
to September 21, 1998, and prior
thereto was Vice President-
Personnel.
John P. Rathbone, 48, Present position since December
Vice President and Controller 1992.
PAGE 20
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 51,123
stockholders of record as of Dec. 31, 1999, 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
1999 and 1998.
Quarter
----------------------------------------------
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
1998 1st 2nd 3rd 4th
---- --- --- --- ---
Market price
High $ 41-3/4 $ 39-1/16 $ 31-1/2 $ 34-15/16
Low 29-1/2 28-5/8 27-7/16 27-7/16
Dividends per share $ 0.20 $ 0.20 $ 0.20 $ 0.20
PAGE 21
Item 6. Selected Financial Data.
------ -----------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1996 - 1999
Page One
1999(1) 1998 1997 1996
---- ---- ---- ----
($ in millions, except per share amounts)
RESULTS OF OPERATIONS
Railway operating revenues $ 5,195 $ 4,221 $ 4,223 $ 4,101
Railway operating expenses 4,477 3,169 3,010 2,936
--------- --------- --------- ---------
Income from
railway operations 718 1,052 1,213 1,165
Other income - net 164 309 170 117
Interest expense on debt 531 516 385 116
--------- --------- --------- ---------
Income from continuing
operations before
income taxes 351 845 998 1,166
Provision for income taxes 112 215 299 413
--------- --------- --------- ---------
Income from continuing
operations before
accounting changes 239 630 699 753
Discontinued operations (2) -- 104 22 17
Cumulative effect
of accounting changes -- -- -- --
--------- --------- --------- ---------
Net income $ 239 $ 734 $ 721 $ 770
========= ========= ========= =========
PER SHARE DATA
Net income - basic $ 0.63 $ 1.94 $ 1.91 $ 2.03
Net income - diluted $ 0.63 $ 1.93 $ 1.90 $ 2.01
Dividends $ 0.80 $ 0.80 $ 0.80 $0.74-2/3
Stockholders' equity
at year end $ 15.50 $ 15.61 $ 14.44 $ 13.26
PAGE 22
Item 6. Selected Financial Data. (continued)
------ -----------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1996 - 1999
Page Two
1999(1) 1998 1997 1996
---- ---- ---- ----
($ in millions, except per share amounts)
FINANCIAL POSITION
Total assets $ 19,250 $ 18,180 $ 17,350 $ 11,234
Total long-term debt,
including current
maturities $ 8,059 $ 7,624 $ 7,459 $ 1,856
Stockholders' equity $ 5,932 $ 5,921 $ 5,445 $ 4,977
OTHER
Capital expenditures $ 912 $ 1,060 $ 929 $ 789
Average number of shares
outstanding (thousands) 380,606 378,749 376,593 379,372
Number of stockholders
at year end 51,123 51,727 50,938 50,748
Average number of employees:
Rail 30,897 24,185 23,323 23,361
Nonrail (2) 269 115 2,494 2,469
--------- --------- --------- ---------
Total 31,166 24,300 25,817 25,830
========= ========= ========= =========
NOTES
(1) 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.
(2) 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 ($105 million, or
28 cents per diluted share, after-tax) gain. Accordingly, NAVL's
results of operations, financial position and cash flows are
presented as "Discontinued operations."
PAGE 23
Item 6. Selected Financial Data. (continued)
------ -----------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1992 - 1995
Page One
1995 1994 1993(3) 1992
---- ---- ---- ----
($ in millions, except per share amounts)
RESULTS OF OPERATIONS
Railway operating revenues $ 4,012 $ 3,918 $ 3,746 $ 3,777
Railway operating expenses 2,950 2,875 2,831 2,851
-------- -------- -------- --------
Income from
railway operations 1,062 1,043 915 926
Other income - net 140 86 135 97
Interest expense on debt 113 101 98 109
-------- -------- -------- --------
Income from continuing
operations before
income taxes 1,089 1,028 952 914
Provision for income taxes 391 372 370 328
-------- -------- -------- --------
Income from continuing
operations before
accounting changes 698 656 582 586
Discontinued operations (2) 15 12 (33) (28)
Cumulative effect
of accounting changes -- -- 223 --
-------- -------- -------- --------
Net income $ 713 $ 668 $ 772 $ 558
======== ======== ======== ========
PER SHARE DATA
Net income - basic $ 1.81 $ 1.63 $ 1.85 $ 1.31
Net income - diluted $ 1.80 $ 1.62 $ 1.83 $ 1.30
Dividends $0.69-1/3 $ 0.64 $ 0.62 $ 0.60
Stockholders' equity
at year end $ 12.47 $ 11.73 $ 11.12 $ 10.05
PAGE 24
Item 6. Selected Financial Data. (continued)
------ -----------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1992 - 1995
Page Two
1995 1994 1993(3) 1992
---- ---- ---- ----
($ in millions, except per share amounts)
FINANCIAL POSITION
Total assets $ 10,718 $ 10,403 $ 10,301 $ 10,188
Total long-term debt,
including current
maturities $ 1,638 $ 1,619 $ 1,594 $ 1,648
Stockholders' equity $ 4,829 $ 4,685 $ 4,621 $ 4,233
OTHER
Capital expenditures $ 757 $ 707 $ 639 $ 628
Average number of shares
outstanding (thousands) 392,987 408,904 418,243 424,378
Number of stockholders
at year end 53,401 52,442 51,884 51,200
Average number of employees:
Rail 24,488 24,710 25,531 25,650
Nonrail 2,456 2,458 3,773 4,485
-------- -------- -------- --------
Total 26,944 27,168 29,304 30,135
======== ======== ======== ========
NOTES
(3) 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
restructuring 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 $244 million.
PAGE 25
Item 6. Selected Financial Data. (continued)
------ -----------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1989 - 1991
Page One
1991(4) 1990 1989
---- ---- ----
($ in millions, except per share amounts)
RESULTS OF OPERATIONS
Railway operating revenues $ 3,654 $ 3,786 $ 3,694
Railway operating expenses 3,345 2,969 2,864
--------- --------- ---------
Income from
railway operations 309 817 830
Other income - net 131 142 155
Interest expense on debt 99 78 50
--------- --------- ---------
Income from continuing
operations before
income taxes 341 881 935
Provision for income taxes 112 316 323
--------- --------- ---------
Income from continuing
operations before
accounting changes 229 565 612
Discontinued operations (2 and 4) (199) (9) (6)
Cumulative effect
of accounting changes -- -- --
--------- --------- ---------
Net income $ 30 $ 556 $ 606
========= ========= =========
PER SHARE DATA
Net income - basic $ 0.07 $ 1.14 $ 1.16
Net income - diluted $ 0.07 $ 1.14 $ 1.15
Dividends $0.53-1/3 $0.50-2/3 $ 0.46
Stockholders' equity
at year end $ 9.55 $ 10.52 $ 10.15
PAGE 26
Item 6. Selected Financial Data. (continued)
------ -----------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1989 - 1991
Page Two
1991(4) 1990 1989
---- ---- ----
($ in millions, except per share amounts)
FINANCIAL POSITION
Total assets $ 9,959 $ 10,326 $ 10,049
Total long-term debt,
including current
maturities $ 1,387 $ 1,122 $ 838
Stockholders' equity $ 4,093 $ 4,912 $ 5,169
OTHER
Capital expenditures $ 688 $ 605 $ 620
Average number of shares
outstanding (thousands) 443,276 486,284 523,109
Number of stockholders
at year end 53,725 56,187 61,630
Average number of employees:
Rail 27,366 28,697 29,667
Nonrail 4,586 4,584 4,645
-------- -------- --------
Total 31,952 33,281 34,312
======== ======== ========
NOTES
(4) 1991 operating expenses include a $483 million special 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 27
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 four (4) separate
graphs with the Eleven-Year Financial Review in the 1999 Norfolk Southern
Corporation Annual Report to Stockholders.
(millions) 1999 1998 1997 1996 1995* 1994
---------- ---- ---- ---- ---- ---- ----
NET INCOME $ 239 $ 734 $ 721 $ 770 $ 733 $ 668
(dollars) 1999 1998 1997 1996 1995* 1994
--------- ---- ---- ---- ---- ---- ----
EARNINGS PER SHARE-
DILUTED $0.63 $1.93 $1.90 $2.01 $1.86 $1.62
* 1995 excludes an early retirement charge that reduced net
income by $20 million and diluted EPS by 6 cents.
1999's net income and diluted earnings per share were down 62%
compared with income from continuing operations in 1998,
reflecting the difficulties encountered in the commencement of
operations in the Northern Region and a sharp decline in
export coal.
[Download Table]
(dollars) 1999 1998 1997 1996 1995 1994
--------- ---- ---- ---- ---- ---- ----
DIVIDENDS PER SHARE $0.80 $0.80 $0.80 $0.74-2/3 $0.69-1/3 $0.64
Since 1983, NS' first full year after consolidation, the annual
dividend has grown at a compound annual rate of 6.1%.
Stockholders received a dividend yield of 3.9% in 1999,
compared with an average of 1.1% for all S&P 500 stocks.
[Download Table]
(millions) 1999 1998 1997 1996 1995 1994
---------- ---- ---- ---- ---- ---- ----
CAPITAL EXPENDITURES $912 $1,060 $929 $789 $757 $ 707
NS had made more than $5 billion of capital expenditures since
1994 -- demonstrating commitment to make the investments
necessary to support safe, efficient operations and revenue
growth.
PAGE 28
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 50 and the Eleven-Year Financial Review beginning on Page 21.
COMMENCEMENT 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 new "Northern Region") under
various agreements with Pennsylvania Lines LLC (PRR), a wholly owned
subsidiary of Consolidated Rail Corporation (CRC) (see Note 2 on
Page 58). As a result, both the railroad route miles operated by NSR
and the number of its railroad employees increased by approximately
50% on that date. Results for 1999 reflect five months (January
through May) of operating the former Norfolk Southern railroad system
and seven months (June through December) of operations that include
the Northern Region.
Difficulties encountered in the assimilation of the Northern
Region into NSR's existing system 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. Income from railway operations is expected to
continue to be adversely affected until these revenue and expense
issues have been resolved. A prolonged continuation of these
operational difficulties could have a substantial adverse impact on
NS' financial position, results of operations and liquidity.
SUMMARIZED RESULTS OF OPERATIONS
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 15 on Page 75). 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.
Diluted earnings per share of 63 cents were down 67%. Diluted
earnings per share from continuing operations were down 62%.
1998 Compared with 1997
-----------------------
Net income in 1998 was $734 million, an increase of 2%,
reflecting the $105 million gain from the sale of the former motor
carrier subsidiary. Income from continuing operations was
$630 million, a decrease of 10%. The decline was principally due to
Conrail-related integration expenses and additional expenses related
to the start-up of the Ford mixing centers.
Diluted earnings per share of $1.93 were up 2%. Diluted earnings
per share from continuing operations of $1.65 were down 10%.
PAGE 29
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
[Download Table]
INCOME FROM RAILWAY OPERATIONS
(Shown as a graph in the Annual Report to Stockholders)
(millions)
1999 1998 1997 1996 1995* 1994
---- ---- ---- ---- ---- ----
$ 718 $1,052 $1,213 $1,165 $1,096 $1,043
Income from railway operations decreased 32% in 1999,
reflecting both service issues that arose after the Closing
Date and a sharp decline in export coal revenues.
* 1995 excludes a $34 million charge for an early retirement
program.
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
--------------------------
Railway operating revenues were $5.2 billion in 1999 and were
$4.2 billion in both 1998 and 1997. Revenues in 1999 reflect the
commencement of operations in the Northern Region on June 1. Revenues
were lower than expected because of service issues associated with the
expansion of the network and a sharp decline in export coal traffic.
The following table presents a three-year comparison of revenues by
market group.
[Download Table]
RAILWAY OPERATING REVENUES BY MARKET GROUP
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
Coal $1,315 $1,252 $1,301
General merchandise:
Automotive 740 566 492
Chemicals 720 574 585
Paper/clay/forest 575 534 539
Metals/construction 562 373 368
Agriculture/consumer
products/
government 453 383 391
------ ------ ------
General merchandise 3,050 2,430 2,375
Intermodal 830 539 547
------ ------ ------
Total $5,195 $4,221 $4,223
====== ====== ======
In 1999, revenues increased for all market groups as a result of
traffic handled in the Northern Region. Prior to the Closing Date,
revenues for all commodity groups, except automotive, were below or
even with those of the prior year. As shown in the following table,
the full-year volume gains attributable to expanded operations
produced the revenue increase. Revenue per unit improved principally
due to the effects of the consolidation of Triple Crown Services
Company's revenues and Northern Region traffic; however, the effects
of changes in the mix of traffic, most notably the reduced export coal
traffic, more than offset the effects of the revenue-per-unit
improvements.
In 1998, revenue increases in the automotive and metals and
construction groups were offset by revenue decreases in the other
market groups. Volume gains were more than offset by lower revenue per
unit. However, almost all of the volume increase and revenue per unit
PAGE 30
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
decrease were mixing-center related (see the discussion under the
"Automotive" caption, below). Revenues for the remaining market groups
declined $76 million, $60 million of which resulted from lower traffic
volume and $16 million of which resulted from lower revenue per unit that
was mitigated by favorable effects from changes in traffic mix.
[Download Table]
RAILWAY OPERATING REVENUE VARIANCE ANALYSIS
Increases (Decreases)
($ in millions) 1999 vs. 1998 1998 vs. 1997
--------------- ------------- -------------
Volume $ 1,007 $ 48
Revenue per unit/mix (33) (50)
------- -------
Total $ 974 $ (2)
======= =======
COAL tonnage increased 18% in 1999, but revenues increased by
only 5%. The positive revenue effects of tonnage handled in the
Northern Region were largely offset by significantly lower export coal
tonnage. In addition, a larger proportion of the Northern Region
traffic is shorter-haul (lower average revenue) traffic. Coal revenues
represented 25% of total railway operating revenues in 1999, and 88%
of coal shipments originated on lines operated by NS. In 1998, coal
tonnage was unchanged compared with 1997, but revenues decreased 4%.
An increase in utility tonnage, especially shorter-haul traffic,
helped offset decreases in longer-haul (higher average revenue) export
and domestic metallurgical traffic.
[Download Table]
TOTAL COAL, COKE AND IRON ORE TONNAGE
(In millions of tons) 1999 1998 1997
--------------------- ---- ---- ----
Utility 108 83 76
Export 18 25 29
Domestic metallurgical 22 18 21
Other 10 8 8
--- --- ---
Total 158 134 134
=== === ===
Utility coal traffic increased 30% in 1999, due to the expansion
of operations into the Northern Region.
In 1998, utility coal traffic increased 9%, due to rising
electricity production, the return of some traffic to rail and
increased business from several customers.
The near-term outlook for utility coal remains positive. U.S.
demand for electricity continues to increase at a rate greater than
generation capacity is being added, and coal-fired generation
continues to be the cheapest marginal source of electricity. Many
underutilized coal-fired power plants are making the transition from
peak-only generation to full-time generation. NS also could benefit
from access to several utility coal customers not now receiving coal
by rail. However, competitive pressures on utilities to reduce costs
could put price pressure on generation source fuels, including NS-
delivered coal. NS continues to work with utility customers to reduce
the delivered price of coal by developing more efficient coal handling
facilities, which lead to more efficient train operations.
Many of the mines served by NS produce coals that satisfy the
Phase II requirements of the Clean Air Act Amendments. In the Northern
PAGE 31
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Region, NS now has access to high-quality, low-cost coal that can be
blended with coal from the Powder River Basin to meet the 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, more stringent
environmental rules have been promulgated and are scheduled to be
implemented during the next decade, some as early as 2003. Most of
these rules are being challenged in court; but, if they survive and
are implemented, they could increase the cost of coal-fired
generation. Also, the Kyoto Protocol, if ratified and implemented,
could put additional cost pressures on some coal-fired generation.
A recent decision by a federal district court judge in West
Virginia holds 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 coal mining operations and on
NS' coal traffic, revenues and royalties (see Note 3 on Page 61,
"Royalties from coal").
Export coal tonnage decreased 28% in 1999, despite additional
traffic handled in 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.
In 1998, export coal tonnage decreased 14%, due to weak economies
in Asia and a strong U.S. dollar. The dollar gained 20% or more
compared with the currencies of other countries (such as Australia,
South Africa and Indonesia) that provide the primary competition for
U.S. export coal. A significant decline in Asian demand for coal
created supplies that competed at deeply discounted prices with U.S.
export coal in Europe and South America. Steam coal exports declined
to 0.4 million tons in 1998, compared with 1.7 million tons in 1997.
U.S. low-sulfur coals were not price-competitive due to lower-cost
foreign production and the strength of the dollar.
Export coal tonnage is expected to continue to suffer from the
effects of strong global competition. Despite rising steel production,
continued pricing pressure from foreign producers is expected to keep
demand for U.S. coking coal weak. In addition, the Kyoto Protocol, if
implemented, could increase pressure to reduce the use of carbon-based
fuels.
Domestic metallurgical coal, coke and iron ore traffic increased
22% in 1999, 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 dampening demand for raw materials.
In 1998, domestic metallurgical coal, coke and iron ore traffic
declined 14%, due to plant closures, reduced blast furnace operations
and the continuation of aggressive producer pricing of high-volatile
metallurgical coals not located on NS' lines.
Domestic metallurgical coal, coke and iron ore traffic is
expected to benefit from recent strengthening of domestic and foreign
steel markets. Several domestic blast furnaces are expected to resume
production in 2000. However, long-term demand is expected to continue
to decline, due to advanced technologies that allow production of
steel using less coal.
Other coal traffic, primarily steam coal shipped to manufacturing
plants, increased 25% in 1999, due to the expansion of operations in
the Northern Region, and was flat in 1998.
PAGE 32
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
[Download Table]
COAL
(Shown as a graph in the Annual Report to Stockholders)
(millions)
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
Export $ 204 $ 314 $ 380 $ 374 $ 353 $ 340
Domestic 1,111 938 921 931 915 950
------ ------ ------ ------ ------ ------
$1,315 $1,252 $1,301 $1,305 $1,268 $1,290
====== ====== ====== ====== ====== ======
Revenues increased $63 million, or 5%, in 1999 as the
effects of Northern Region traffic were largely offset by a
sharp decline in export coal traffic. This group includes
utility coal, export coal, domestic metallurgical coal and
industrial coal, coke and iron ore.
GENERAL MERCHANDISE traffic volume (carloads) increased 24%, and
revenues increased 26%, in 1999, due to the addition of Northern
Region traffic. Service issues resulted in traffic diversions in all
market groups. In 1998, traffic volume increased 5%, and revenues
increased 2%, driven by higher automotive revenues.
Automotive traffic volume increased 26%, and revenues increased
31%, in 1999, largely reflecting the expansion of operations in the
Northern Region and record vehicle production. The new NS-served
Toyota plant in Princeton, Ind., and the new vehicle parts
distribution center in Dayton, Ohio, also contributed to the increase.
NS' mixing center network is not yet fully utilized due to network
design and service issues and equipment shortages caused by extended
cycle times. In addition, service issues after the Closing Date
resulted in significant traffic diversions.
In 1998, automotive carloads increased 35%, and revenues
increased 15%. Finished vehicles led the growth, as carloads increased
54% and revenues increased 19%, primarily due to new business through
the Ford mixing centers. Full production volume at the Mercedes-Benz
plant in Vance, Ala., and the Toyota minivan line at Georgetown, Ky.,
also contributed to the increases. Vehicle parts traffic volume and
revenues remained steady despite the effects of the mid-year strike at
General Motors.
A substantial portion of the 1998 increase in carloads resulted
from the nature of the mixing centers. Previously, carloads of
vehicles went from plant to distribution center, where vehicles were
classified and loaded onto trucks for transport to dealers. Now,
carloads of vehicles, mostly in unit-train service, go from plant to
the mixing centers, where vehicles are sorted by destination and
loaded onto other trains in a mix suitable for direct transport to
dealers. As a result, carload counts have increased; each vehicle that
is handled through the centers arrives on one carload and departs on
another carload. This hub-and-spoke method of distribution is intended
to improve Ford's delivery logistics and reduce its inventory costs
and order-to-delivery times.
Light vehicle production in 2000 is expected to decline 3% from
the record level of 1999. However, NS expects to recapture diverted
traffic as its service improves and to benefit from increased
shipments of finished vehicles from Ford's Norfolk, Va., assembly
plant and from the introduction of new sport utility vehicles at BMW's
Greer, S.C., assembly plant and at Toyota's second plant in Princeton,
Ind., and increased parts business from General Motors.
PAGE 33
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
[Download Table]
AUTOMOTIVE
(Shown as a graph in the Annual Report to Stockholders)
(millions)
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
$ 740 $ 566 $ 492 $ 489 $ 449 $ 429
Revenues increased $174 million, or 31%, in 1999, due to
the expansion of operations into the Northeast, new
vehicles and parts business 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 18%, and revenues increased
25%, in 1999, due to the addition of Northern Region traffic. Chemical
production increased slightly during the year, but fertilizer
production declined. In addition, significant production cutbacks at
plants served by NS affected shipments of both sulfur and fertilizer.
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 improved
shipments of plastic pellets. Chemicals shipments also increased
through NS' Thoroughbred Bulk Transfer (TBT) facilities that handle
chemicals and bulk commodities for customers not located on lines it
serves.
In 1998, chemicals traffic volume decreased 1%, and revenues
decreased 2%, the first decline since 1989. The weak economies in Asia
and softness in certain domestic markets adversely affected shipments
of products for the vinyl, polyester and pulp markets. In addition,
nationwide rail service issues, particularly early in the year, caused
some customers to divert traffic to truck and barge. However, several
NS-served facilities with new and expanded plant capacity increased
shipments of plastics and petroleum products, somewhat offsetting
these reductions. NS also increased traffic through its TBT
facilities.
Chemicals revenues in 2000 are expected to benefit from plant
expansions, increases in U.S. chemical production and extended market
reach through the TBT facilities.
[Download Table]
CHEMICALS
(Shown as a graph in the Annual Report to Stockholders)
(millions)
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
$ 720 $ 574 $ 585 $ 560 $ 541 $ 538
Revenues increased $146 million, or 25%, in 1999,
reflecting the addition of Northern Region traffic. This
group includes fertilizers, sulfur and related chemicals,
petroleum products, chlorine and bleaching compounds,
plastics, industrial chemicals, chemical wastes and
municipal wastes.
PAGE 34
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Paper, clay and forest products traffic volume increased 4%, and
revenues increased 8%, in 1999, principally due to the expansion of
operations into the Northern Region. The closure of four major paper
mills and some chip mills late in 1998, coupled with the effects of
continued consolidation and weak demand within the paper industry, had
a negative impact on 1999 traffic volume.
In 1998, paper, clay and forest products traffic volume decreased
3%, and revenues declined 1%. Traffic volume increases in the first
three quarters were offset by a sudden and pronounced weakness in the
paper industry in the fourth quarter, adversely affecting shipments of
paper, wood fiber and kaolin clay. Decreased domestic and foreign
demand resulted in both widespread paper mill downtime late in the
year and indefinite closure of several NS-served paper mills. Record
carloads and revenues from shipments of lumber and wood products to
meet demand in the housing construction industry partially offset the
effects of these declines.
The paper industry is expected to continue to experience weak
demand during 2000.
[Download Table]
PAPER, CLAY AND FOREST PRODUCTS
(Shown as a graph in the Annual Report to Stockholders)
(millions)
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
$ 575 $ 534 $ 539 $ 513 $ 537 $ 522
Revenues increased $41 million, or 8%, in 1999,
principally due to the expansion of operations into the
Northern Region. This group includes lumber and wood
products, pulpboard and paper products, wood fibers,
woodpulp, scrap paper and clay. NS serves 83 paper mills,
94 paper distribution centers and more than 100 lumber
reload centers.
Metals and construction traffic volume increased 57%, and
revenues increased 51%, in 1999, due to the addition of Northern
Region traffic. NS' expanded operations give it access to numerous
steel mills, processors and distribution facilities. Continued growth
from new mini-mills and steel processors locating in NS' service
territory offset the effects of a weaker scrap market. Construction
traffic benefited from continued strength in housing starts and
highway construction in the Southeast. Agricultural limestone
shipments were higher in the first half of the year, due to an early
planting season as a result of the mild winter. In addition, new
cement terminals on NS' lines generated additional traffic.
In 1998, metals and construction traffic volume was unchanged,
and revenues increased 1%. The strong performance in the metals market
during 1997 was repeated in the first half of 1998, due to improved
efficiency at integrated mills and the continued growth of new mini-
mills and steel processors in NS' service territory. However, the
domestic metals market weakened in the second half of 1998, due to an
increase in the supply of lower-priced, imported steel. Construction
traffic and revenues increased, due to increased highway and housing
construction activity in the Southeast.
Metals revenues are expected to show the benefits of continued
strength in the steel and construction industries.
PAGE 35
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
[Download Table]
METALS AND CONSTRUCTION
(Shown as a graph in the Annual Report to Stockholders)
(millions)
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
$ 562 $ 373 $ 368 $ 354 $ 349 $ 330
Revenues increased $189 million, or 51%, in 1999, due to
the addition of traffic in the Northern Region. This
group includes steel, aluminum products, machinery, scrap
metals, cement, aggregates, bricks and minerals.
Agriculture, consumer products and government traffic volume
increased 15%, and revenues increased 18%, in 1999, reflecting new
access to the large Northeast consumer markets. Service issues that
arose early in the year due to harsh weather conditions and continued
during efforts to integrate the Northern Region had an adverse effect
on traffic volume. In addition, soybean traffic was negatively
affected by low-priced imports from South America.
In 1998, agriculture, consumer products and government traffic
volume decreased 3%, and revenues declined 2%. Weak export and soybean
meal markets adversely affected shipments. Sweeteners volume and
revenues declined, as a strong beet sugar crop negatively affected
cane sugar shipments out of the South. Increased revenues from grain,
soybeans and feed ingredients from the longer-haul Southeast feed and
corn processing markets somewhat offset the effects of the declines.
Moderate growth is expected in 2000 as service levels improve and
more benefits are realized from NS' expanded operations. Continued low
prices and abundant supply are expected to increase consumption of
corn for feed and processing. However, the export market for other
grain products is expected to remain weak.
[Download Table]
AGRICULTURE, CONSUMER PRODUCTS AND GOVERNMENT
(Shown as a graph in the Annual Report to Stockholders)
(millions)
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
$ 453 $ 383 $ 391 $ 393 $ 394 $ 380
Revenues increased $70 million, or 18%, in 1999,
reflecting the addition of Northern Region traffic. This
group includes soybeans, wheat, corn, animal and poultry
feed, food oils, flour, beverages, canned goods,
sweeteners, consumer products and items for the military.
INTERMODAL traffic volume increased 31%, and revenues increased
54%, in 1999, due to the addition of Northern Region traffic and the
consolidation of Triple Crown Services Company (TCS) revenues,
beginning June 1 (see Note 2 on Page 58). More than half of the
increase in revenue per unit resulted from the effects of
consolidating TCS. Prior to June 1, NS' revenues included only the
amounts for rail services it performed under contract to TCS, but NS'
volume included most TCS units. NS was awarded the majority of
Conrail's postal business, which it handles through a new subsidiary,
Thoroughbred Direct Intermodal Services (TDIS), a logistics company
headquartered in Plymouth Meeting, Pa. Intermodal traffic volume
PAGE 36
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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.
In 1998, intermodal traffic volume decreased 2%, and revenues
decreased 1%. The decline, the first in 12 years, was due to the
service network redesign that was implemented in August. As a result,
trailer traffic volume declined 16%, but this decrease was largely
offset by increases in both container traffic volume and revenues
(respectively, 2% and 5%) and TCS traffic volume and revenues
(respectively, 5% and 9%).
Intermodal revenues are expected to continue to benefit from the
expansion of operations in the Northeast, as well as terminal and line
capacity expansions and equipment additions. However, APL, which
generated 247,000 units of annualized volume on NS, moved almost all
of this volume to CSX after their strategic alliance. Most of this
traffic had been shifted by December 1999.
[Download Table]
INTERMODAL
(Shown as a graph in the Annual Report to Stockholders)
(millions)
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
$ 830 $ 539 $ 547 $ 487 $ 474 $ 429
Revenues increased $291 million, or 54%, in 1999, due to
the addition of Northern Region traffic and the
consolidation of Triple Crown Services Company's
revenues. This group handles trailers, domestic and
international containers, Triple Crown Services equipment
and equipment for intermodal marketing companies,
international steamship lines, truckers and other
shippers.
Railway Operating Expenses
--------------------------
Railway operating expenses increased 41% in 1999, while
carloadings increased 24%. The expense increase was attributable to
the commencement of operations in the Northern Region, and includes
significant costs arising from the service issues experienced after
the Closing Date.
Railway operating expenses increased 5% in 1998, while
carloadings increased 1%. The expense increase was mostly attributable
to Conrail-related integration expenses, and additional expenses,
including start-up costs, related to the Ford mixing centers.
As a result, the railway operating ratio, which measures the
percentage of railway revenues consumed by railway expenses, was 86.2%
in 1999, compared with 75.1% in 1998 and the record-low 71.3% in 1997.
Management estimates that the integration-related service issues
in the Northern Region, including estimated traffic diversions,
resulted in more than half of the increase in the railway operating
ratio in 1999. 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.
In 1998, the railway operating ratio was adversely affected by
Conrail-related integration expenses and a change in traffic mix
related to the growth in automotive traffic coupled with the change in
coal traffic mix. Automotive traffic includes some of NS' most time-
sensitive and resource-intensive business, requiring more trains,
increased handling costs and higher equipment rents.
PAGE 37
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
The railway operating ratio is not expected to return to pre-
Closing Date levels in the near term, due to changes in NS' traffic
mix and the higher cost structure of the Conrail properties now
operated by NSR. However, the railway operating ratio is expected to
show favorable year-to-year comparisons after the first quarter of
2000.
The following table shows the changes in railway operating
expenses summarized by major classifications.
[Download Table]
RAILWAY OPERATING EXPENSES
Increases (Decreases)
($ in millions) 1999 vs. 1998 1998 vs. 1997
--------------- ------------- -------------
Compensation and benefits $ 363 $ 87
Materials, services and rents 421 121
Conrail rents and services 311 --
Depreciation 38 16
Diesel fuel 81 (53)
Casualties and other claims 43 (28)
Other 51 16
------ ------
Total $1,308 $ 159
====== ======
Compensation and benefits, which represented 41% of total railway
operating expenses in 1999, increased 24% in 1999 and 6% in 1998.
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 expansion of operations also contributed to the increase,
including $49 million for the Special Work Incentive Program available
to union employees during much of the third quarter. These increases
were mitigated by reduced stock-based incentive compensation, the
absence of bonus accruals and reduced pension and other postretirement
benefits expenses. NS has substantial unrecognized gains relating to
its over-funded pension plan; amortization of these gains will
continue to be included in "Compensation and benefits" expenses (see
Note 10 on Page 68).
In 1998, higher wages and salaries -- results of additional
staffing in anticipation of the Closing Date and union wage increases,
including the effect of an increase in the bonus fund for locomotive
engineers -- were offset somewhat by lower expenses for pension
benefits, due to favorable investment returns on pension plan assets.
Also contributing to the increase were new FRA train inspection
requirements and a higher Railroad Unemployment Tax rate.
In January 2000, NS announced a voluntary early retirement
program that included enhancements to pension benefits for eligible
nonunion employees. Approximately 1,180 employees, or 20% of NS'
nonunion work force, were eligible for the program; and 916 accepted
and retired effective March 1. Benefits will be paid out of NS' over-
funded pension plan. Actions also were taken in the first quarter of
2000 to reduce the size of the union work force. These work force
reduction efforts were taken to resize employment levels and reduce
operating expenses in response to changes in NS' business. The cost of
these work force reductions will be reflected in expenses in the first
quarter of 2000.
PAGE 38
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Materials, services and rents includes items used for the
maintenance of the 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 52% in 1999 and 18% in 1998.
The 1999 increase 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.
The 1998 increase was principally due to Conrail-related
integration costs and higher-than-anticipated mixing center costs
associated with the increase in automotive traffic. Higher equipment
rents and locomotive repair expenses also contributed to the increase.
Equipment rents, which represent 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 93% in 1999 and 18% in 1998. The 1999 increase principally
was due to: (1) increased volume attributable to expanded operations,
(2) higher rental costs for freight cars, as service issues increased
car cycle times and (3) costs for short-term locomotive leases to
improve system fluidity. In addition, Conrail historically rented a
higher percentage of its freight cars than has NS, resulting in higher
equipment rents in the Northern Region. The 1998 increase was due to:
(1) rents for equipment needed to support the increase in automotive
traffic, (2) reduced rents received from the leasing of owned
locomotives and (3) increased lease expenses for equipment obtained to
meet anticipated demand after the Closing Date. These 1998 increases
were somewhat offset by higher receipts on NS-owned freight cars and
auto racks.
Locomotive and car repair costs increased in 1999 due to the
expansion of operations and to the higher repair costs associated with
the leased locomotives. Locomotive repair costs increased in 1998 due
to the higher traffic levels and an increase in the average number of
locomotives in service, reflecting the retention of older units.
Conrail rents and services, a new category of expense arising
from the expansion of operations on June 1, amounted to $311 million
in 1999. This item includes amounts due to PRR and CRC for: (1) use of
their operating properties and equipment, (2) CRC's operation of the
Shared Assets Areas and (3) CRC's operation of certain transition
facilities. Also included is NS' equity in Conrail's net earnings
since June 1, plus additional amortization related to the difference
between NS' investment in Conrail and its underlying equity (see
Note 2 on Page 58).
Depreciation expense (see Note 1, "Properties," on Page 57 for
NS' depreciation policy) was up 9% in 1999 and 4% in 1998. Increases
in both years were due to property additions, reflecting substantial
levels of capital spending.
Diesel fuel expenses increased 47% in 1999, but declined 23% in
1998. The increase in 1999 resulted from a 19% increase in the average
price per gallon, due to a sharp rise in the last half of the year,
and higher consumption, primarily the result of the additional
Northern Region traffic. The 1998 decrease was due to a 26% drop in
the average price per gallon, which was the lowest since 1988,
somewhat offset by a 3% increase in consumption.
Casualties and other claims expenses (including the estimates of
costs related to personal injury, property damage and environmental
matters) increased 45% in 1999, but decreased 23% in 1998. The 1999
increase principally resulted from higher personal injury accruals
related to the increased size of the work force as well as higher
environmental expenses. The 1998 decrease was due to cost recoveries
from third parties and lower accruals for environmental remediation
costs and to reduced personal injury expenses.
PAGE 39
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
The largest component of casualties and other claims expense is
personal injury costs. Costs related to so-called "occupational"
injuries continued to increase. Within the past decade, there has been
a dramatic increase in the number of these types of claims. In 1999,
about two-thirds of the total employee injury cases settled and one-
quarter of settlement payments made were related to occupational
claims. These claims generally do not relate to a specific accident or
event, but rather result from a claimed exposure over time to some
condition of employment. As a result, many of these claims are
asserted by former or retired employees. NS continues to work actively
to eliminate all accidents and exposure risks and to control
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 31% in 1999 and 11% in 1998. The 1999
increase resulted from the expansion of operations, including property
and other taxes related to the Northern Region, and to costs arising
from the service issues. The 1998 increase principally resulted from:
(1) higher property and other taxes, due to the effects of favorable
adjustments in prior years resulting from settlements with taxing
authorities; and (2) increased travel expenses, mostly attributable to
planning in advance of the Closing Date.
Income Taxes
------------
Income tax expense in 1999 was $112 million, for an effective
rate of 32%, compared with an effective rate of 25% in 1998 and 30% in
1997. Excluding the equity in Conrail's after-tax earnings, the
effective rate was 34% in 1999, 33% in 1998 and 34% in 1997.
The effective rates in all three years were below the statutory
federal and state rates -- results 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, 1998 and 1997 benefited from investments in corporate-owned
life insurance, and 1998 benefited from favorable adjustments
resulting from settlement of federal income tax years 1993 and 1994.
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 15 on Page 75). Motor carrier operations in 1998
(through March 28) produced a $1 million loss; these same operations
produced income of $22 million in 1997.
PAGE 40
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, decreased $357 million, or 40%, in 1999, and $260 million,
or 23%, in 1998. Both declines reflected the reductions in income from
operations, mitigated somewhat by lower income tax payments. In 1998,
higher interest payments related to the debt issued in mid-1997 in
connection with the Conrail transaction also contributed to the
decline in operating cash flow. The large change 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
has slowed.
NS' working capital deficit of $553 million at Dec. 31, 1999,
included $400 million of notes due May 1, 2000. 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)
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
$ 533 $ 890 $1,150 $1,198 $1,234 $1,144
Cash provided by operations declined significantly in 1999
and 1998, reflecting lower income from railway
operations. Cash provided by operations is NS' principal
source of liquidity.
Cash used for investing activities in 1999 decreased 11%,
compared with 1998. Investing activities in 1999 included
approximately $160 million more of borrowings against the net cash
surrender value of company-owned life insurance, compared with 1998.
In addition, 1999 included $60 million in proceeds from the sale of
certain licensing arrangements and the sale of NS' signboard business.
Investing activities in 1998 included the $207 million of
proceeds from the sale of NS' motor carrier subsidiary. Investing
activities in 1997 included the costs of NS' acquisition of its
interest in Conrail. Property additions account for most of the
recurring spending in this category.
The following tables show capital spending, track and equipment
statistics for the past five years. Capital expenditures include
amounts relating to capital leases, which are excluded from the
Consolidated Statements of Cash Flows (see Note 7, "Capital Lease
Obligations," on Page 66).
[Download Table]
CAPITAL EXPENDITURES
($ in millions) 1999 1998 1997 1996 1995
--------------- ---- ---- ---- ---- ----
Road $ 559 $ 612 $ 599 $ 438 $ 386
Equipment 349 442 306 326 338
Other property 4 6 24 25 33
------ ------ ------ ------ ------
Total $ 912 $1,060 $ 929 $ 789 $ 757
====== ====== ====== ====== ======
Capital expenditures decreased 14% in 1999, but increased 14% in
1998. Both variances were largely attributable to significant outlays
in 1998 for roadway projects and equipment in anticipation of the
Closing Date. In addition, 1997 and 1998 included significant
expenditures for automotive-related projects.
PAGE 41
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
[Download Table]
TRACK STRUCTURE STATISTICS (CAPITAL AND MAINTENANCE)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Track miles of
rail installed 403 429 451 401 403
Miles of track
surfaced 5,087 4,715 4,703 4,686 4,668
New crossties
installed
(millions) 2.3 2.0 2.2 1.9 2.0
[Download Table]
AVERAGE AGE OF OWNED RAILWAY EQUIPMENT
(Years) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
Freight cars 23.8 23.6 23.0 22.3 22.0
Locomotives 15.4 15.4 15.3 15.4 15.7
Retired locomotives 22.7 20.6 23.3 24.4 22.6
In addition to NS-owned equipment, approximately 20% of the
freight car fleet and 30% of the locomotive fleet is leased from PRR
(see Note 2 on Page 58).
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.
Since 1988, NS has rebodied about 29,000 coal cars, and plans to
continue that program at least through the first half of 2000. This
work, performed at NS' Roanoke Car Shop, converts 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 2000, NS has budgeted $747 million for capital expenditures.
In addition, NS plans to enter into a lease financing arrangement for
150 new locomotives. The anticipated spending includes $576 million
for roadway projects, of which $284 million is for track and bridge
program work. Also included are projects to increase track and
terminal capacity. Equipment spending includes the rebodying of coal
and coke hoppers, the purchase of 255 multilevel automobile racks, the
upgrading of existing locomotives and the modification of open coil
steel cars. NS also plans to lease 475 articulated bilevels for
automobile service.
Cash provided by financing activities was $90 million in 1999 and
included proceeds from the sale of notes, commercial paper and
equipment trust certificates as well as $149 million of borrowings
from a PRR subsidiary (see Note 2 on Page 58). Proceeds from
borrowings in 1998 included amounts received from the sale of
commercial paper and equipment trust certificates, and in 1997
included debt issued to finance NS' share of the cost of acquiring
Conrail stock. Debt repayments in all three years included repayment
of some commercial paper. Financing activities in 1997 also included
$72 million of credit facility costs related to certain now-terminated
commitments under credit agreements that were in place to support NS'
tender offer for all shares of Conrail. NS' debt-to-total
capitalization ratio was 58% at the end of 1999 and 56% at the end of
1998.
NS currently has in place a $2.8 billion credit facility to
support its commercial paper program. In addition, NS has issued only
$400 million of debt under its November 1998 $1 billion shelf
registration. NS expects to issue additional debt in 2000 to refinance
the Senior Notes maturing in May.
PAGE 42
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
NS is subject to various financial covenants with respect to its
debt and under its credit agreement, including a maximum leverage
ratio restriction (see Note 7, "Debt Covenants," on Page 66). The
maximum leverage ratio tightens in the first quarter of 2001.
CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY
Through May 31, 1999, Conrail's results of operations include
freight line-haul revenues and related expenses. After the Closing
Date, June 1, 1999, its results reflect its new structure and
operations (see Note 2 on Page 58). Conrail's major sources of
operating revenues are now from operating fees and rents from NSR and
CSXT. The composition of Conrail's operating expenses also has
changed.
Conrail's net income was $26 million in 1999, compared with
$267 million in 1998 and $7 million in 1997 (see Note 2 on Page 58).
Conrail's operating revenues were $2.2 billion in 1999,
$3.9 billion in 1998 and $3.8 billion in 1997. The decline in 1999 was
attributable to the change in operations and a 2% decrease in freight
revenues prior to the Closing Date. The increase in 1998 was due to a
4% increase in traffic volume, as all market groups except automotive
posted gains for the year.
Conrail's operating expenses were $2.0 billion in 1999,
$3.3 billion in 1998 and $3.4 billion in 1997. Operating expenses 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. Operating expenses 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. Operating expenses in 1997 included a
$221 million charge in conjunction with the termination of the Conrail
ESOP (which had no related income tax effect) and a $173 million
charge ($142 million after taxes) for stock compensation and executive
severance costs related to the change in ownership. In addition,
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) and $114 million in 1997
(principally investment banking, legal and consulting fees and
employee stay bonuses). Excluding the effects of the acquisition-
related compensation and transition costs, operating expenses
decreased 34% in 1999, but increased 3% in 1998. The 1999 decreases
reflected the change in operations, somewhat offset by higher casualty
and other claims expenses. The 1998 increase resulted from volume-
related expense increases and higher casualty and other claims
expenses, somewhat offset by lower diesel fuel costs.
Conrail's cash provided by operations decreased by $331 million,
or 46%, in 1999, and by $157 million, or 18%, in 1998. The 1999
decrease was principally due to the change in operations. The decline
in 1998 reflected higher incentive compensation payments and
transition-related costs. Cash generated from operations is the
principal source of liquidity and is primarily used for debt
repayments and capital expenditures. Debt repayments totaled
$112 million in 1999 and $119 million in 1998. Capital expenditures
totaled $176 million in 1999 and $550 million in 1998; the decline
reflected the change in operations.
Conrail had a working capital deficit of $194 million at Dec. 31,
1999, compared with a deficit of $202 million at Dec. 31, 1998. The
deficit at Dec. 31, 1999, resulted from reclassifying as a current
liability $250 million of long-term debt due in June 2000.
PAGE 43
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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 $17
million in 1999, $194 million in 1998 and $117 million in 1997.
OTHER MATTERS
Proposed CN-BNSF Combination
----------------------------
On Dec. 20, 1999, Canadian National Railway Company and
Burlington Northern Santa Fe Corporation announced plans to combine
their companies under common control, thereby forming the largest
railroad in North America. Norfolk Southern and other Class I
railroads have expressed strong concerns about both the timing and the
implications for the railroad industry of the proposed combination;
moreover, the Surface Transportation Board (which would have to
approve the combination) has indicated that the carriers will be
expected to address the "cumulative impacts and crossover effects" of
the transaction. Management will monitor developments and take
appropriate actions to protect the interests of NS stockholders.
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 7 on Page 65), all is
fixed-rate debt, except for commercial paper and most capital leases.
As a result, NS' debt subject to interest rate exposure totaled
$2.0 billion on Dec. 31, 1999. A 1% increase in interest rates would
increase NS' total annual interest expense related to all its variable
debt by approximately $20 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 6.4% on
Dec. 31, 1999, and 6.0% on Dec. 31, 1998. During 1999, interest rates
on NS' commercial paper ranged from 5.1% to 6.5%.
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, 1999, the average pay rate under
these agreements was 6.3%, and the average receive rate was 7.1%.
During 1999, the effect of the swaps was to reduce interest expense by
$4 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 57, NS adopted AICPA Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use"
in 1999.
PAGE 44
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
During 1999, the Financial Accounting Standards Board deferred
the effective date of Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." NS expects to adopt SFAS No. 133 effective Jan. 1, 2001.
This adoption is not expected to have a material effect on NS'
consolidated financial statements.
Lawsuits
--------
Norfolk Southern and certain subsidiaries are defendants in
numerous lawsuits relating principally to railroad operations.
The Corporation is the defendant in a class action suit filed in
federal district court in Birmingham, Ala., on behalf of African
Americans currently employed or working since Dec. 16, 1989, who
allege that the Corporation has discriminated against them in
promotion to nonagreement positions because of their race. The nonjury
trial on liability, which the Corporation vigorously defended,
concluded in June 1997, and the matter is with the court for
requesting briefs and decision. In the meantime, the parties are
participating in mediation of the case.
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, all of the
common stock of which is owned by NS. The verdict was returned in a
class action suit involving some 8,000 individuals who claim to have
been damaged 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 more than 8,000 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 preliminary approval by the trial court, and
the money has been paid into an escrow account maintained by Bank One
Trust Company in New Orleans. Final approval of the settlement and
distribution of the settlement proceeds to qualified members of the
class are subject to a fairness hearing scheduled for March 22, 2000.
While it is possible that the trial court will decline to give
final approval to the settlement, or that the settlement may be
overturned on appeal, Management believes that the settlement is a
fair resolution of this controversy and that disapproval by the courts
is unlikely.
While the final outcome of these matters and other 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 (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 45
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Operating expenses for environmental matters totaled
approximately $12 million in 1999, $4 million in 1998 and $21 million
in 1997, and capital expenditures totaled approximately $8 million in
1999, $7 million in 1998 and $6 million in 1997. The increase in
operating expenses in 1999 compared with 1998 was principally due to a
combination of unfavorable development experience on identified sites
during 1999, and higher recoveries in 1998 from third parties of
amounts paid by NS in prior years for environmental cleanup and
remediation. Capital expenditures in 2000 are expected to be
comparable with 1999.
As of Dec. 31, 1999, NS' balance sheet included a reserve for
environmental exposures in the amount of $41 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 126 identified locations. On that date,
12 sites accounted for $20 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 126 locations, certain NS subsidiaries, usually in
conjunction with a number of other parties, have been identified as
potentially responsible parties by the Environmental Protection Agency
(EPA) or similar state authorities under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, or
comparable state statutes, which often impose joint and several
liability for cleanup costs.
With respect to known environmental sites (whether identified by
NS or by the EPA or comparable state authorities), estimates of NS'
ultimate potential financial exposure for a given site or in the
aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available cleanup techniques, the
likely development of new cleanup technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it), and evolving statutory and
regulatory standards governing liability.
The risk of incurring environmental liability -- for acts and
omissions, past, present and future -- is inherent in the railroad
business. Some of the commodities in NS' traffic mix, particularly
those classified as hazardous materials, can pose special risks that
NS and its subsidiaries work diligently to minimize. In addition,
several NS subsidiaries own, or have owned, land used as operating
property, or which is leased or may have been leased and operated by
others, or held for sale.
Because environmental problems 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.
PAGE 46
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Labor Agreements
----------------
Approximately 85% of NS' railroad employees are represented by
labor unions under collective bargaining agreements with 14 different
labor organizations. Moratorium provisions of the agreements currently
in force expired Dec. 31, 1999; however, the agreements remain in
effect until amendments are agreed to or until the Railway Labor Act's
procedures are exhausted. In late 1999, negotiations began at the
national level on agreements with major labor organizations. The
outcome of these negotiations is uncertain at this time. However, a
tentative agreement was reached with the Brotherhood of Locomotive
Engineers which represents approximately 5,000 of NS' locomotive
engineers. The settlement requires ratification by the members before
acceptance. Negotiations with the other unions are progressing.
Inflation
---------
Generally accepted accounting principles require the use of
historical cost in preparing financial statements. This approach
disregards the effects of inflation on the replacement cost of
property. NS, a capital-intensive company, has most of its capital
invested in such assets. The replacement cost of these assets, as well
as the related depreciation expense, would be substantially greater
than the amounts reported on the basis of historical cost.
Trends
------
- Federal Economic Regulation -- Efforts may be made in 2000
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.
- Reduction of "Greenhouse" Gases -- In December 1997,
international environmental officials meeting in Kyoto, Japan, agreed
to reduce substantially the emission of so-called "greenhouse" gases
by 2010. Agreement on such reductions was reached on the basis of
questionable scientific evidence and in spite of the fact that the
burden of the reduction regimen will be borne disproportionally by
developed nations such as the United States. NS, the rail industry and
a wide variety of other affected constituencies in the United States
expect to assure that, prior to a Senate vote on the proposed treaty,
the public and governmental authorities have available to them
additional scientific information and data concerning other effects
that are likely to result from implementation.
- 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.
PAGE 47
Item 7. Management's Discussion and Analysis of Financial
------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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 resolution of the service
issues, the recapture of diverted business, the addition of new
business and the ability to reduce expenses.
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 43 under the heading "Market Risks
and Hedging Activities."
PAGE 48
Item 8. Financial Statements and Supplementary Data.
------ -------------------------------------------
[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)
1999
----
Railway operating
revenues $ 1,030 $ 1,194 $ 1,500 $ 1,471
Income from railway
operations 237 198 146 137
Income from continuing
operations 112 77 19 31
Net income 112 77 19 31
Earnings per share
- Basic $ 0.30 $ 0.20 $ 0.05 $ 0.08
- Diluted $ 0.30 $ 0.20 $ 0.05 $ 0.08
1998
----
Railway operating
revenues $ 1,066 $ 1,079 $ 1,048 $ 1,028
Income from railway
operations 251 293 258 250
Income from continuing
operations 132 187 151 160
Net income 229 187 158 160
Earnings per share
- Basic $ 0.61 $ 0.49 $ 0.42 $ 0.42
- Diluted $ 0.61 $ 0.48 $ 0.42 $ 0.42
PAGE 49
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997 50
Consolidated Balance Sheets
As of December 31, 1999 and 1998 51
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997 53
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997 55
Notes to Consolidated Financial Statements 56
Independent Auditors' Report 78
The Index to Consolidated Financial Statement Schedule appears in
Item 14 on Page 81.
PAGE 50
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31,
1999 1998 1997
---- ---- ----
($ in millions, except earnings per share)
RAILWAY OPERATING REVENUES $ 5,195 $ 4,221 $ 4,223
RAILWAY OPERATING EXPENSES
Compensation and benefits 1,855 1,492 1,405
Materials, services and rents 1,227 806 685
Conrail rents and services (Note 2) 311 -- --
Depreciation 475 437 421
Diesel fuel 255 174 227
Casualties and other claims 138 95 123
Other 216 165 149
------- ------- -------
Total railway operating expenses 4,477 3,169 3,010
------- ------- -------
Income from railway operations 718 1,052 1,213
Equity in earnings of Conrail (Note 2) 49 194 117
Charge for credit facility costs -- -- (77)
Other income - net (Note 3) 115 115 130
Interest expense on debt (Note 5) (531) (516) (385)
------- ------- -------
Income from continuing
operations before income taxes 351 845 998
Provision for income taxes (Note 4) 112 215 299
------- ------- -------
Income from continuing operations 239 630 699
Discontinued operations (Note 15):
Income (loss) from motor carrier
operations, net of taxes -- (1) 22
Gain on sale of motor carrier,
net of taxes -- 105 --
------- ------- -------
Income from discontinued
operations -- 104 22
------- ------- -------
NET INCOME $ 239 $ 734 $ 721
======= ======= =======
EARNINGS PER SHARE (Note 13)
Income from continuing operations
-Basic $ 0.63 $ 1.66 $ 1.85
-Diluted $ 0.63 $ 1.65 $ 1.84
Net income
-Basic $ 0.63 $ 1.94 $ 1.91
-Diluted $ 0.63 $ 1.93 $ 1.90
See accompanying Notes to Consolidated Financial Statements.
PAGE 51
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31,
1999 1998
---- ----
($ in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 37 $ 5
Short-term investments 14 58
Accounts receivable, net of allowance for
doubtful accounts of $5 million and
$4 million, respectively 857 519
Due from Conrail (Note 2) 77 --
Materials and supplies 100 59
Deferred income taxes (Note 4) 134 141
Other current assets 152 131
------- -------
Total current assets 1,371 913
------- -------
Investment in Conrail (Note 2) 6,132 6,210
Properties less accumulated depreciation
(Note 5) 10,956 10,477
Other assets 791 580
------- -------
TOTAL ASSETS $19,250 $18,180
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note 6) $ 818 $ 600
Income and other taxes 163 151
Notes and accounts payable to Conrail (Note 2) 184 --
Other current liabilities (Note 6) 256 225
Current maturities of long-term debt (Note 7) 503 141
------- -------
Total current liabilities 1,924 1,117
------- -------
Long-term debt (Note 7) 7,556 7,483
Other liabilities (Note 9) 1,101 1,065
Minority interests 50 49
Deferred income taxes (Note 4) 2,687 2,545
------- -------
TOTAL LIABILITIES 13,318 12,259
------- -------
PAGE 52
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
As of December 31,
1999 1998
---- ----
($ in millions)
Stockholders' equity:
Common stock $1.00 per share par value,
1,350,000,000 shares authorized;
issued 404,309,672 shares and
401,031,994 shares, respectively 404 401
Additional paid-in capital 372 296
Accumulated other comprehensive income (Note 12) (11) (8)
Retained income 5,187 5,252
Less treasury stock at cost, 21,627,902 shares (20) (20)
------- -------
TOTAL STOCKHOLDERS' EQUITY 5,932 5,921
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,250 $18,180
======= =======
See accompanying Notes to Consolidated Financial Statements.
PAGE 53
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31,
1999 1998 1997
---- ---- ----
($ in millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 239 $ 734 $ 721
Reconciliation of net income to
net cash provided by continuing
operations:
Depreciation 489 450 432
Deferred income taxes 85 114 75
Equity in earnings of Conrail (17) (194) (117)
Charge for credit facility costs -- -- 77
Nonoperating gains and losses
on properties and investments (62) (51) (63)
Income from discontinued operations -- (104) (22)
Changes in assets and liabilities
affecting continuing operations:
Accounts receivable (322) 33 (23)
Materials and supplies (40) (1) 3
Other current assets and due from
Conrail (50) (16) (8)
Current liabilities other than debt 259 (23) 115
Other - net (48) (50) (44)
------- ------- -------
Net cash provided by continuing
operations 533 892 1,146
Net cash provided by (used for)
discontinued operations -- (2) 4
------- ------- -------
Net cash provided by operating
activities 533 890 1,150
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions (912) (956) (875)
Property sales and other transactions 104 83 74
Investment in Conrail (3) (40) (5,741)
Investments, including short-term (123) (116) (185)
Investment sales and other transactions 343 155 217
Proceeds from sale of motor carrier -- 207 --
------- ------- -------
Net cash used for investing
activities (591) (667) (6,510)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (304) (303) (301)
Common stock issued - net 14 34 24
Credit facility costs paid -- -- (72)
Proceeds from borrowings 1,110 196 5,781
Debt repayments (730) (179) (245)
------- ------- -------
Net cash provided by (used for)
financing activities 90 (252) 5,187
Net increase (decrease) in cash
and cash equivalents 32 (29) (173)
PAGE 54
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Years ended December 31,
1999 1998 1997
---- ---- ----
($ in millions)
CASH AND CASH EQUIVALENTS
At beginning of year 5 34 207
------- ------- -------
At end of year $ 37 $ 5 $ 34
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest (net of amounts capitalized) $ 520 $ 519 $ 379
Income taxes $ 16 $ 76 $ 209
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 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,
1996 $ 132 $ 462 $ 3 $4,401 $ (21) $4,977
Comprehensive income -
1997
Net income 721 721
Other comprehensive
income (Note 12) 2 2
------
Total comprehensive
income 723
Dividends on Common Stock,
$0.80 per share (301) (301)
3-for-1 stock split,
effective Sept. 5 266 (266) -- --
Other 1 45 46
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1997 399 241 5 4,821 (21) 5,445
Comprehensive income -
1998
Net income 734 734
Other comprehensive
income (Note 12) (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 12) (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
====== ====== ====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements.
PAGE 56
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following Notes are an integral part of the Consolidated Financial
Statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
-----------------------
Norfolk Southern Corporation is a Virginia-based holding company
engaged principally in the transportation of freight by rail,
operating approximately 21,800 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 15). 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: coal;
automotive; chemicals; paper/clay/forest products;
metals/construction; agriculture/consumer products/government; and
intermodal. Except for coal, all groups are approximately equal in
size based on revenues; coal accounts for about 25% of total railway
operating revenues. Ultimate points of origination or destination for
some of the freight (particularly coal bound for export and intermodal
containers) are outside the United States.
Through a jointly owned entity, Norfolk Southern and CSX
Corporation own the stock of Conrail Inc., which owns the major
railroad in the Northeast. 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,
1999 and 1998, 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 57
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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" (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.
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 Jan. 1, 1999, NS adopted AICPA Statement of Position 98-
1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Adoption of this pronouncement had no
material effect on NS' consolidated financial statements.
Reclassifications
-----------------
Certain amounts in the financial statements and notes thereto
have been reclassified to conform to the 1999 presentation.
PAGE 58
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
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 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 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.
[Download Table]
Future minimum lease payments due to PRR under the Operating
Agreement and lease agreements and to CRC under the Shared Assets
Areas (SAA) agreements are as follows:
PRR Oper. PRR Lease SAA
($ in millions) Agmt. Agmts. Agmts.
--------------- -------- --------- ------
2000 $ 166 $ 154 $ 22
2001 178 129 24
2002 196 122 27
2003 217 110 30
2004 238 92 32
2005 and
subsequent years 5,022 367 687
------ ------ ------
Total $6,017 $ 974 $ 822
====== ====== ======
Operating lease expense related to the agreements, which is
included in "Conrail rents and services," amounted to $273 million in
1999.
On the Closing Date, both NS' railroad route miles and its
railroad employees increased by 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. Consequently, NSR began to receive all
freight revenues and incur all expenses on the PRR lines.
PAGE 59
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
2. INVESTMENT IN CONRAIL AND OPERATIONS OVER ITS LINES (continued)
Since June 1, 1999, difficulties in integrating the PRR routes
and assets have affected adversely both NSR's revenues and expenses.
These higher expenses included the cost of a special incentive program
available to unionized employees for much of the third quarter, higher
labor costs and equipment rents and service alteration costs to meet
the needs of shippers. A long-term failure by NSR to integrate
successfully these PRR properties could have a substantial adverse
impact on NS' financial position, results of operations and liquidity.
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."
[Download Table]
On the effective date of the STB decision approving the Conrail
transaction, NS' 58% investment in Conrail exceeded Conrail's net
equity by $4.1 billion. This excess has been allocated to the fair
values of Conrail's assets and liabilities, using the principles of
purchase accounting, as follows:
($ in millions)
---------------
Property, equipment and investments in railroads $ 6,708
Other assets, principally pension and other
employee benefit plans and trusts 224
Debt revaluation and other liabilities (209)
Deferred taxes (2,585)
-------
Total $ 4,138
=======
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, 1999, the difference between NS' investment in Conrail and
its share of Conrail's underlying net equity was $3.9 billion.
NS' investment in Conrail includes $187 million ($115 million
after taxes) of costs that will be paid by NSR. These costs consist
principally of: (1) contractual obligations to Conrail employees
imposed by the STB when it approved the transaction and (2) costs to
relocate Conrail employees. Most of these costs are expected to be
paid in the two years following the Closing Date; $52 million is
classified on NS' balance sheet as "Current liabilities." However,
certain contractual obligations by their terms will be paid out over a
longer period and are classified as "Other liabilities" on NS' balance
sheet. Through Dec. 31, 1999, NS has paid $33 million of these costs.
Had NS acquired its investment in Conrail on Jan. 1, 1997, NS'
net income and diluted earnings per share for the year ended Dec. 31,
1997, would have been $671 million and $1.77, respectively. These pro
forma results reflect only the application of the equity method of
accounting and the specific financing costs of the transaction. They
do not reflect revenues from or costs of operating PRR's assets nor do
they include integration 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. As a result, NS' total assets increased by
approximately $140 million (including $121 million of properties,
mostly RoadRailer (RT) equipment), and NS' total liabilities increased
by approximately $130 million (including $109 million of long-term
debt).
PAGE 60
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
2. INVESTMENT IN CONRAIL AND OPERATIONS OVER ITS LINES (continued)
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, 1999, most of the amounts receivable or payable related to
these transactions have 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.
"Due from Conrail" includes $39 million for vacation liability
related to the portion of CRC's work force that became NS employees on
the Closing Date. NS increased its vacation liability accordingly, and
will pay these employees as they take vacation.
"Notes and accounts payable to Conrail" includes $123 million of
interest-bearing loans made to NS by a PRR subsidiary, payable on
demand. The interest rate for these loans is variable and was 5.6% at
Dec. 31, 1999. Also included is $61 million due to PRR and CRC related
to expenses included in "Conrail rents and services," as discussed
above.
Summary Financial Information - Conrail
---------------------------------------
The following summary financial information should be read in
conjunction with Conrail's audited financial statements, included as
Exhibit 99 with this Annual Report on Form 10-K.
Conrail's results of operations include freight line-haul
revenues and related expenses through May 31, 1999, but reflect its
new structure and operations since June. Conrail's major sources of
operating revenues are now from NSR and CSXT. The composition of
Conrail's operating expenses also has changed.
[Download Table]
Summarized Consolidated Statements of Income - Conrail
------------------------------------------------------
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
Operating revenues $2,174 $3,863 $3,765
Operating expenses 2,046 3,348 3,443
------ ------ ------
Operating income 128 515 322
Other - net (83) (81) (87)
------ ------ ------
Income before income taxes 45 434 235
Provision for income taxes 19 167 228
------ ------ ------
Net income $ 26 $ 267 $ 7
====== ====== ======
PAGE 61
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
2. INVESTMENT IN CONRAIL AND OPERATIONS OVER ITS LINES (continued)
Note: 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. Conrail's results in 1997 included a $221 million (no
related tax effect) charge in conjunction with the termination of
the Conrail ESOP and a $142 million after-tax charge for
transaction-related stock compensation costs and change-in-
control benefits. These items were considered in the allocation
of NS' investment in Conrail to the fair values of Conrail's
assets and liabilities and, accordingly, were excluded in
determining NS' equity in Conrail's net income.
[Download Table]
Summarized Consolidated Balance Sheets - Conrail
------------------------------------------------
December 31,
($ in millions) 1999 1998
--------------- ---- ----
Assets:
Current assets $ 669 $1,005
Noncurrent assets 7,714 8,039
------ ------
Total assets $8,383 $9,044
====== ======
Liabilities and
stockholders' equity:
Current liabilities $ 863 $1,207
Noncurrent liabilities 3,701 4,037
Stockholders' equity 3,819 3,800
------ ------
Total liabilities and
stockholders' equity $8,383 $9,044
====== ======
[Download Table]
3. OTHER INCOME - NET
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
Gains from sale of properties
and investments $ 62 $ 51 $ 56
Royalties from coal 59 57 58
Rental income 34 26 22
Interest income 8 12 30
Gain from partial redemption
of partnership interest -- -- 7
Other interest expense (30) (21) (27)
Nonoperating depletion
and depreciation (14) (13) (11)
Taxes on nonoperating property (7) (4) (5)
Corporate-owned
life insurance - net (3) 11 7
Other - net 6 (4) (7)
------- ------- -------
Total $ 115 $ 115 $ 130
======= ======= =======
PAGE 62
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
4. INCOME TAXES
[Download Table]
Provision for Income Taxes
--------------------------
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
Current:
Federal $ 18 $ 89 $ 197
State 9 12 27
------ ------ ------
Total current taxes 27 101 224
Deferred:
Federal 78 100 78
State 7 14 (3)
------ ------ ------
Total deferred taxes 85 114 75
------ ------ ------
Provision for income
taxes $ 112 $ 215 $ 299
====== ====== ======
Reconciliation of Statutory Rate to Effective Rate
--------------------------------------------------
[Download Table]
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:
1999 1998 1997
($ in millions) Amount % Amount % Amount %
--------------- ------ -- ------ -- ------ --
Federal income tax
at statutory rate $ 123 35 $ 296 35 $ 349 35
State income taxes,
net of federal tax
benefit 10 3 17 2 16 2
Equity in earnings
of Conrail (6) (2) (68) (8) (41) (4)
Corporate-owned
life insurance 1 -- (11) (1) (10) (1)
Other - net (16) (4) (19) (3) (15) (2)
------ --- ------ --- ------ ---
Provision for
income taxes $ 112 32 $ 215 25 $ 299 30
====== === ====== === ====== ===
PAGE 63
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
4. INCOME TAXES (continued)
Deferred Tax Assets and Liabilities
-----------------------------------
Certain items are reported in different periods for financial
reporting and income tax purposes. Deferred tax assets and liabilities
were recorded in recognition of these differences.
[Download Table]
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows:
December 31,
($ in millions) 1999 1998
--------------- ---- ----
Deferred tax assets:
Reserves, including casualty
and other claims $ 168 $ 157
Employee benefits 111 209
Retiree health and death
benefit obligation 127 127
Taxes, including state and property 174 173
Other 42 41
-------- --------
Total gross deferred tax
assets 622 707
Less valuation allowance (9) (3)
-------- --------
Net deferred tax assets 613 704
-------- --------
Deferred tax liabilities:
Property (3,093) (3,023)
Other (73) (85)
-------- --------
Total gross deferred
tax liabilities (3,166) (3,108)
-------- --------
Net deferred tax liability (2,553) (2,404)
Net current deferred tax
assets 134 141
-------- --------
Net long-term deferred
tax liability $ (2,687) $ (2,545)
======== ========
Except for amounts for which a valuation allowance has been
provided, Management believes the other deferred tax assets will be
realized. The total valuation allowance increased $6 million in 1999
and $1 million in 1998.
Internal Revenue Service (IRS) Reviews
---------------------------------------
Consolidated federal income tax returns have been examined and
Revenue Agent Reports have been received for all years up to and
including 1994. The consolidated federal income tax returns for 1995
and 1996 are being audited by the IRS. Management believes that
adequate provision has been made for any additional taxes and interest
thereon that might arise as a result of IRS examinations.
PAGE 64
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
5. PROPERTIES
December 31, Depreciation
($ in millions) 1999 1998 Rate for 1999
--------------- ---- ---- -------------
Railway property:
Road $ 9,681 $ 9,267 2.8%
Equipment 5,577 5,157 4.2%
Other property 627 639 3.4%
------- -------
15,885 15,063
Less: Accumulated
depreciation 4,929 4,586
------- -------
Net properties $10,956 $10,477
======= =======
Equipment includes $593 million at Dec. 31, 1999 and 1998, of
assets recorded pursuant to capital leases.
Capitalized Interest
--------------------
Total interest cost incurred on debt in 1999, 1998 and 1997 was
$546 million, $537 million and $402 million, respectively, of which
$15 million, $21 million and $17 million was capitalized.
[Download Table]
6. CURRENT LIABILITIES
December 31,
($ in millions) 1999 1998
--------------- ---- ----
Accounts payable:
Accounts and wages payable $ 354 $ 283
Casualty and other claims 181 144
Equipment rents payable - net 135 72
Vacation liability 124 81
Other 24 20
------- -------
Total $ 818 $ 600
======= =======
Other current liabilities:
Interest payable $ 123 $ 91
Accrued Conrail-related costs
(Note 2) 56 67
Liabilities for forwarded traffic 37 27
Retiree health and death
benefit obligation (Note 10) 24 24
Other 16 16
------- -------
Total $ 256 $ 225
======= =======
PAGE 65
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
7. DEBT
Shelf Registration
------------------
In November 1998, NS 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. In April 1999, NS issued
$400 million of 6.2% 10-year term Senior Notes under this
registration.
[Download Table]
Long-Term Debt
--------------
December 31,
($ in millions) 1999 1998
--------------- ---- ----
Commercial paper at an average
rate of 6.4% $ 1,722 $ 1,889
Notes at average rates and
maturities as follows:
6.85%, maturing 2000 to 2002 1,100 1,100
7.14%, maturing 2004 to 2009 1,600 1,200
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
Railroad equipment obligations
at an average rate of 6.8%,
maturing to 2014 548 379
Capitalized leases at an
average rate of 6.3%,
maturing to 2015 382 349
Other debt at an average rate
of 5.4%, maturing to 2015 35 35
Discounts and premiums, net (28) (28)
------- -------
Total long-term debt 8,059 7,624
Current maturities (503) (141)
------- -------
Long-term debt less
current maturities $ 7,556 $ 7,483
======= =======
Long-term debt matures as follows:
2001 $ 297
2002 593
2003 92
2004 335
2005 and subsequent years 6,239
-------
Total $ 7,556
=======
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.
PAGE 66
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
7. DEBT (continued)
Commercial Paper
----------------
Commercial paper debt is due within one year, but has been
classified as long-term because NS has the ability through a
$2.8 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.
Capital Lease Obligations
-------------------------
During 1998 and 1997, NSR entered into capital leases covering
new locomotives. The related capital lease obligations, totaling
$127 million in 1998 and $64 million in 1997, 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 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, 1999, the notional amount of the
swap agreements was $281 million, and the average interest rate was
6.3%. As a result, NS is exposed to the market risk associated with
fluctuations in interest rates. To date, the effects of the rate
fluctuations have been favorable and not material. Counterparties to
the interest rate swap agreements are major financial institutions
believed by Management to be creditworthy.
Debt Covenants
--------------
NS is subject to various financial covenants with respect to its
debt and under its credit agreement, including a minimum net worth
requirement, a maximum leverage ratio restriction and certain
restrictions on issuance of further debt. At Dec. 31, 1999, NS was in
compliance with all debt covenants.
8. LEASE COMMITMENTS
NS is committed under long-term lease agreements, which expire on
various dates through 2067, for equipment, lines of road and other
property. The following amounts do not include payments to PRR under
the Operating Agreement and lease agreements or to CRC under the SAA
agreements (see Note 2). Future minimum lease payments other than to
PRR and CRC are as follows:
PAGE 67
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
8. LEASE COMMITMENTS (continued)
Operating Capital
($ in millions) Leases Leases
--------------- --------- -------
2000 $ 97 $ 47
2001 75 47
2002 62 47
2003 59 46
2004 50 46
2005 and subsequent years 555 245
------ ------
Total $ 898 478
======
Less imputed interest on capital
leases at an average rate of 7.1% 96
------
Present value of minimum
lease payments included
in debt $ 382
======
[Download Table]
Operating Lease Expense
-----------------------
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
Minimum rents $ 118 $ 75 $ 68
Contingent rents 61 40 43
------ ------ ------
Total $ 179 $ 115 $ 111
====== ====== ======
[Download Table]
9. OTHER LIABILITIES
December 31,
($ in millions) 1999 1998
--------------- ---- ----
Casualty and other claims $ 275 $ 271
Retiree health and death
benefit obligation (Note 10) 261 268
Accrued Conrail-related costs
(Note 2) 102 100
Net pension obligations (Note 10) 74 72
Other 389 354
------- -------
Total $ 1,101 $ 1,065
======= =======
PAGE 68
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
[Download Table]
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, co-payments, Medicare payments
and, in some cases, coverage provided under other group insurance
policies.
Pension Benefits Other Benefits
($ in millions) 1999 1998 1999 1998
--------------- ---- ---- ---- ----
CHANGE IN BENEFIT
OBLIGATIONS
Benefit obligation at
beginning of year $ 1,063 $ 956 $ 362 $ 360
Increase related to
former Conrail
employees 68 -- -- --
Service cost 17 13 11 10
Interest cost 73 67 23 24
Amendment -- 40 -- --
Actuarial (gains) losses (92) 61 (33) (9)
Benefits paid (71) (74) (23) (23)
------- ------- ------- -------
Benefit obligation
at end of year 1,058 1,063 340 362
------- ------- ------- -------
CHANGE IN PLAN ASSETS
Fair value of plan
assets at beginning
of year 1,544 1,360 139 111
Transfer of assets from
Conrail plan 352 -- -- --
Actual return on plan
assets 250 253 21 28
Employer contribution 4 5 15 23
401(h) account transfer (7) -- -- --
Benefits paid (71) (74) (23) (23)
------- ------- ------- -------
Fair value of plan
assets at end of
year 2,072 1,544 152 139
------- ------- ------- -------
Funded status 1,014 481 (188) (223)
Unrecognized initial
net asset (10) (16) -- --
Unrecognized (gain)
loss (799) (517) (97) (57)
Unrecognized prior
service cost (benefit) 40 44 -- (12)
------- ------- ------- -------
Net amount
recognized $ 245 $ (8) $ (285) $ (292)
======= ======= ======= =======
Amounts recognized in
the Consolidated
Balance Sheets
consist of:
Prepaid benefit cost $ 298 $ 41 $ -- $ --
Accrued benefit
liability (74) (72) (285) (292)
Accumulated other
comprehensive
income 21 23 -- --
------- ------- ------- -------
Net amount
recognized $ 245 $ (8) $ (285) $ (292)
======= ======= ======= =======
PAGE 69
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
Of the pension plans included above, the nonqualified pension
plans were the only plans with an accumulated benefit obligation in
excess of plan assets. These plans' accumulated benefit obligations
were $74 million at Dec. 31, 1999, and $72 million at Dec. 31, 1998.
These plans' projected benefit obligations were $76 million at
Dec. 31, 1999, and $77 million at Dec. 31, 1998. Because of the nature
of such plans, there are no plan assets.
During 1999, a Section 401(h) account transfer of $7 million was
made, transferring a portion of pension assets to fund 1999 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 to NS' investment in Conrail.
NS has amended its qualified pension plan to conform certain
provisions of its plan with the Conrail plan and to provide prior
service credit to Conrail employees for benefits under the NS plan.
The amendment, as it relates to NS employees, increased the pension
benefit obligation at Dec. 31, 1998, by $40 million.
In January 2000, NS announced a voluntary early retirement
program that included enhancements to pension benefits for eligible
nonunion employees. Approximately 1,180 employees, or 20% of NS'
nonunion work force, were eligible for the program. Benefits will be
paid out of NS' over-funded pension plan.
[Download Table]
Pension and other postretirement benefit costs are determined
based on actuarial valuations that reflect appropriate assumptions as
of the measurement date, ordinarily the beginning of each year. The
funded status of the plans is determined using appropriate assumptions
as of each year end. During 1999, NS received assets from the Conrail
pension plan and assumed certain related liabilities. As a result, the
measurement dates for determining pension costs were Jan. 1, 1999, and
Aug. 31, 1999, and reflect discount rates of 6.75% and 7.75%,
respectively, and other assumptions appropriate at those dates. A
summary of the major assumptions follows:
1999 1998 1997
---- ---- ----
Funded status:
Discount rate 7.75% 6.75% 7.25%
Future salary increases 5% 5% 5.25%
Pension cost:
Discount rate 6.75% 7.25% 7.75%
Return on assets in plans 10% 9% 9%
Future salary increases 5% 5.25% 5.25%
PAGE 70
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
[Download Table]
Pension and Other Postretirement Benefit Costs Components
---------------------------------------------------------
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
PENSION BENEFITS
Service cost $ 17 $ 13 $ 11
Interest cost 73 67 66
Expected return on
plan assets (152) (106) (90)
Amortization of prior
service cost 4 1 1
Amortization of initial
net asset (7) (7) (6)
Recognized net actuarial
(gain) loss (22) (12) (7)
------ ------ ------
Net cost (benefit) $ (87) $ (44) $ (25)
====== ====== ======
OTHER POSTRETIREMENT BENEFITS
Service cost $ 11 $ 10 $ 9
Interest cost 23 24 25
Expected return on plan
assets (12) (9) (7)
Amortization of prior
service cost (12) (12) (12)
Recognized net actuarial
(gain) loss (2) (2) --
------ ------ ------
Net cost $ 8 $ 11 $ 15
====== ====== ======
For measurement purposes, increases in the per capita cost of
covered health care benefits were assumed to be 7.5% for 2000 and 8.0%
for 1999. The rate was assumed to decrease gradually to an ultimate
rate of 5.0% for 2003 and remain at that level thereafter.
[Download Table]
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 assumed health care cost trend would have
the following effects:
One percentage point
($ in millions) Increase Decrease
--------------- -------- --------
Increase (decrease) in:
Total service and interest cost
components $ 4 $ (3)
Postretirement benefit obligation $ 28 $(24)
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 agreement employees. Premiums under this plan are
expensed as incurred and amounted to $5 million in 1999, $5 million in
1998 and $4 million in 1997.
PAGE 71
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
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. In 1999, NS issued
shares of Common Stock to fund its contributions. NS' expenses under
these plans were $12 million in 1999, $10 million in 1998 and
$9 million in 1997.
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. The cost of the program, which was charged to
compensation and benefits expenses, was $49 million.
11. 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, PSUs,
restricted stock, dividend equivalents, tax absorption payments and
SARs result in charges to net income, while stock options have no
effect on net income. Related compensation costs were $2 million in
1999, $25 million in 1998 and $29 million in 1997. Had such
compensation costs been determined in accordance with SFAS 123, net
income would have been $210 million in 1999, $718 million in 1998 and
$714 million in 1997; basic earnings per share would have been $0.55
in 1999, $1.90 in 1998 and $1.90 in 1997; and diluted earnings per
share would have been $0.55 in 1999, $1.89 in 1998 and $1.89 in 1997.
These pro forma amounts include compensation costs as calculated using
the Black-Scholes option-pricing model with average expected option
lives of four years for 1999 grants and five years for grants made in
1998 and 1997; average risk-free interest rates of 5.2% in 1999, 5.5%
in 1998 and 6.3% in 1997; average stock-price volatilities of 21% in
1999, 15% in 1998 and 16% in 1997; and dividend yields ranging from 0%
to 3%.
PAGE 72
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
11. STOCK-BASED COMPENSATION (continued)
[Download Table]
Stock Option Activity
---------------------
Weighted Average
Option Shares Exercise Price
------------- ---------------
Balance 12/31/96 10,884,537 $ 20.38
Granted 1,986,000 29.46
Exercised (1,477,226) 17.62
Surrendered for SAR (6,393) 7.42
Canceled (13,500) 29.46
----------
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
==========
Except for those granted during 1999, all outstanding options
were exercisable on Dec. 31, 1999. The difference between the weighted
average exercise prices for all outstanding options and those
exercisable on Dec. 31, 1999, was not significant.
[Download Table]
Stock Options Outstanding
-------------------------
Exercise Price Number Weighted Average
---------------------------------- Outstanding Remaining
Range Weighted Average at 12/31/99 Contractual Life
----- ---------------- ----------- ----------------
$12.56 to $14.25 $14.12 619,163 1.0 years
18.81 to 21.08 20.44 3,170,450 3.7 years
24.31 to 27.69 26.78 8,123,100 7.6 years
29.46 to 33.25 32.10 9,203,650 8.3 years
----------
$12.56 to $33.25 $27.77 21,116,363 7.1 years
==========
Performance Share Units
-----------------------
PSUs provide for awards based upon 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
850,000 and $27.72 in 1999; 565,500 and $32.16 in 1998; and 529,500
and $29.46 in 1997, respectively. PSUs may be paid in the form of
shares of Common Stock, cash or a combination. Shares earned and
issued may be subject to share retention agreements and held by NS for
up to five years.
PAGE 73
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
11. STOCK-BASED COMPENSATION (continued)
Shares Available and Issued
---------------------------
[Download Table]
Shares of stock available for future grants and issued in
connection with all features of the LTIP and TSOP are as follows:
1999 1998 1997
---- ---- ----
Available for future
grants 12/31:
LTIP 10,512,997 16,233,600 19,928,853
TSOP 2,349,600 -- --
Shares of Common Stock
issued:
LTIP 1,086,288 2,212,323 1,933,703
TSOP -- -- --
12. STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Income
--------------------------------------
[Download Table]
"Accumulated other comprehensive income" reported in
"Stockholders' equity" included unrealized gains on securities, net of
taxes, of $2 million at Dec. 31, 1999, and $6 million at Dec. 31,
1998, and minimum pension liability of $13 million at Dec. 31, 1999,
and $14 million at Dec. 31, 1998. "Other comprehensive income"
reported in the Consolidated Statements of Changes in Stockholders'
Equity consisted of the following:
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
Unrealized gains on securities $ (6) $ 1 $ 4
Minimum pension liability 2 (23) --
Income taxes 1 9 (2)
----- ----- -----
Other comprehensive
income $ (3) $ (13) $ 2
===== ===== =====
"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 $330 million at Dec. 31, 1999, $314 million at Dec. 31,
1998, and $120 million at Dec. 31, 1997.
Stock Split
-----------
On July 22, 1997, the Board of Directors approved an amendment of
the Articles of Incorporation increasing the number of authorized
shares of Common Stock from 450 million to 1,350 million in connection
with a three-for-one split to stockholders of record on Sept. 5, 1997.
This stock split, with no change in the par value of $1 per share,
resulted in the issuance of approximately 266 million additional
shares of Common Stock. All share and per share amounts in this report
have been restated to reflect the split.
PAGE 74
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
13. EARNINGS PER SHARE
[Download Table]
The following table sets forth the calculation of basic and
diluted earnings per share:
($ in millions except per
share, shares in millions) 1999 1998 1997
--------------------------- ---- ---- ----
Basic earnings per share:
Income available to common
stockholders for basic
and diluted computations $ 239 $ 734 $ 721
------ ------ ------
Weighted-average shares
outstanding 381 379 377
------ ------ ------
Basic earnings per
share $ 0.63 $ 1.94 $ 1.91
------ ------ ------
Diluted earnings per share:
Weighted-average shares
outstanding per above 381 379 377
Dilutive effect of
outstanding options,
PSUs and SARs (as
determined by the
application of the
treasury stock method) 1 2 3
------ ------ ------
Adjusted weighted-
average shares
outstanding 382 381 380
------ ------ ------
Diluted earnings
per share $ 0.63 $ 1.93 $ 1.90
====== ====== ======
These calculations exclude options the exercise price of which
exceeded the average market price of Common Stock as follows: 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.
14. 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
December 31:
PAGE 75
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
[Download Table]
14. FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
1999 1998
---- ----
Carrying Fair Carrying Fair
($ in millions) Amount Value Amount Value
--------------- ------ ----- ------ -----
Investments $ 49 $ 54 $ 100 $ 105
Long-term debt (8,058) (7,980) (7,624) (8,182)
Interest rate swaps -- 4 -- 20
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 were
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 $3 million on Dec. 31, 1999, and $9 million on
Dec. 31, 1998. Sales of "available-for-sale" securities were
immaterial for years ended Dec. 31, 1999 and 1998.
15. 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 ($105 million, or 28 cents per basic and diluted share, after
taxes). The higher after-tax gain was the result of differences
between book and tax bases and the realization of deferred tax
benefits.
[Download Table]
NAVL's results of operations, financial position and cash flows
are presented as "Discontinued operations" in the accompanying
financial statements. A summary of NAVL's results of operations
follows:
($ in millions) 1998 1997
--------------- ---- ----
Motor carrier revenues $ 207 $ 942
Motor carrier expenses 208 907
Provision for income taxes -- 13
------- -------
Income (loss) from operations (1) 22
Gain on sale, net of taxes 105 --
------- -------
Income from
discontinued operations $ 104 $ 22
------- -------
Earnings per share (basic and
diluted) from discontinued
operations $ 0.28 $ 0.06
======= =======
PAGE 76
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
16. 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.
As of Dec. 31, 1999, NS' balance sheet included a reserve for
environmental exposures in the amount of $41 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 126 identified locations. On that date,
12 sites accounted for $20 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 126 locations, certain NS subsidiaries, usually in
conjunction with a number of other parties, have been identified as
potentially responsible parties by the Environmental Protection Agency
(EPA) or similar state authorities under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, or
comparable state statutes, which often impose joint and several
liability for cleanup costs.
With respect to known environmental sites (whether identified by
NS or by the EPA or comparable state authorities), estimates of NS'
ultimate potential financial exposure for a given site or in the
aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available cleanup techniques, the
likely development of new cleanup technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it), and evolving statutory and
regulatory standards governing liability.
The risk of incurring environmental liability -- for acts and
omissions, past, present and future -- is inherent in the railroad
business. Some of the commodities in NS' traffic mix, particularly
those classified as hazardous materials, can pose special risks that
NS and its subsidiaries work diligently to minimize. In addition,
several NS subsidiaries own, or have owned, land used as operating
property, or which is leased or may have been leased and operated by
others, or held for sale. Because environmental problems may exist on
these properties that are latent or undisclosed, there can be no
assurance that NS will not incur environmentally related liabilities
or costs with respect to one or more of them, the amount and
materiality of which cannot be estimated reliably at this time.
Moreover, lawsuits and claims involving these and other now-
unidentified environmental sites and matters are likely to arise from
time to time. The resulting liabilities could have a significant
effect on financial condition, results of operations or liquidity in a
particular year or quarter.
PAGE 77
Item 8. Financial Statements and Supplementary Data. (continued)
------ -------------------------------------------
16. COMMITMENTS AND CONTINGENCIES (continued)
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.
Tax Benefit Leases
------------------
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. The Tax Court finalized this decision in February 1997, and
all avenues of appeal have been exhausted. NS has requested payment
and filed suit to collect from the third party in accordance with
indemnification provisions of the lease agreement, and Management
believes that this receivable will be collected.
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, 1999, certain Norfolk Southern subsidiaries are
contingently liable as guarantors with respect to $8 million of
indebtedness of related entities.
PAGE 78
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 generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 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,
1999 and 1998, and the results of their operations and their cash
flows for each of the years in the three-year period ended December
31, 1999, in conformity with generally accepted accounting principles.
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 25, 2000
PAGE 79
Item 9. Changes in and Disagreements with Accountants on Accounting
------ -----------------------------------------------------------
and Financial Disclosure.
------------------------
None.
PAGE 80
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 March 31,
2000, for the Norfolk Southern Annual Meeting of Stockholders to be
held on May 11, 2000, 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 18 under
"Executive Officers of the Registrant."
PAGE 81
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, 1999, 1998 and 1997 50
Consolidated Balance Sheets
As of December 31, 1999 and 1998 51
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997 53
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997 55
Notes to Consolidated Financial Statements 56
Independent Auditors' Report 78
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 90
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 82
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
May 13, 1999, are filed herewith.
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.
In accordance with Item 601(b)(4)(iii) of Regulation S-K,
copies of other instruments of Norfolk Southern Corporation
and its subsidiaries with respect to the rights of holders
of long-term debt are not filed herewith, or incorporated by
reference, but will be furnished to the Commission upon
request.
10 Material Contracts -
(a) The Transaction Agreement, dated as of June 10, 1997,
by and among CSX, CSX Transportation, Inc., Registrant,
Norfolk Southern Railway Company, Conrail Inc.,
Consolidated Rail Corporation and CRR Holdings LLC,
with certain schedules thereto, is incorporated herein
by reference from Exhibit 10 to Norfolk Southern
Corporation's Form 8-K filed electronically on June 30,
1997.
PAGE 83
Item 14. Exhibits, Financial Statement Schedule and
------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
------- ------------------------------------------------------------
10 Material Contracts (continued) -
(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.
(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.
PAGE 84
Item 14. Exhibits, Financial Statement Schedule and
------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
------- ------------------------------------------------------------
10 Material Contracts (continued) -
(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) 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.
(i) The Agreement, entered into as of July 27, 1999,
between North Carolina Railroad Company and Norfolk
Southern Railway Company, is filed herewith.
(j) 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
incorporated herein by reference from Exhibit 10(a) to
Norfolk Southern Corporation's 1994 Annual Report on
Form 10-K.
Management Compensation Plans
-----------------------------
(k) The Norfolk Southern Corporation Management Incentive
Plan, as amended effective January 25, 2000, is filed
herewith.
(l) The Norfolk Southern Corporation Executive Management
Incentive Plan, effective January 25, 2000, is filed
herewith.
PAGE 85
Item 14. Exhibits, Financial Statement Schedule and
------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
------- ------------------------------------------------------------
10 Material Contracts (continued) -
Management Compensation Plans (continued)
-----------------------------
(m) The Norfolk Southern Corporation Long-Term Incentive
Plan, as amended effective January 25, 2000, is filed
herewith.
(n) The Norfolk Southern Corporation Officers' Deferred
Compensation Plan, as amended effective May 13, 1999,
is filed herewith.
(o) The Directors' Deferred Fee Plan of Norfolk Southern
Corporation, as amended effective May 9, 1996, is
incorporated herein by reference from Exhibit 10(f) to
Norfolk Southern Corporation's Form 10-Q Report for the
quarter ended June 30, 1996.
(p) 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.
(q) 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.
(r) Norfolk Southern Corporation Supplemental (formerly,
Excess) Benefit Plan, effective as of August 22, 1999,
is filed herewith.
(s) 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.
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) -
Management Compensation Plans (continued)
-----------------------------
(t) The Norfolk Southern Corporation Directors' Pension
Plan, as amended effective June 1, 1996, is
incorporated herein by reference from Exhibit 10(k) 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.
(v) The Excess Long-Term Disability Plan of Norfolk
Southern Corporation and Participating Subsidiary
Companies, effective October 1, 1995, is incorporated
herein by reference from Exhibit 10(m) to Norfolk
Southern Corporation's Form 10-Q Report for the quarter
ended June 30, 1996.
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.
27 Financial Data Schedule.
99 Conrail Inc. 1999 Annual Report to Stockholders.
PAGE 87
Item 14. Exhibits, Financial Statement Schedule and
------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
(B) Reports on Form 8-K.
The Registrant filed no reports on Form 8-K for the three
months ended December 31, 1999.
(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 88
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 6th day of March, 2000.
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 6th day of March,
2000, 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)
/s/ John P. Rathbone
------------------------------ Vice President and Controller
(John P. Rathbone) (Principal Accounting Officer)
PAGE 89
Signature Title
--------- -----
/s/ Gerald L. Baliles
------------------------------ Director
(Gerald L. Baliles)
/s/ Carroll A. Campbell, Jr.
------------------------------ Director
(Carroll A. Campbell, Jr.)
/s/ Gene R. Carter
------------------------------ Director
(Gene R. Carter)
/s/ L. E. Coleman
------------------------------ Director
(L. E. Coleman)
/s/ Landon Hilliard
------------------------------ Director
(Landon Hilliard)
/s/ Steven F. Leer
------------------------------ Director
(Steven F. Leer)
/s/ Arnold B. McKinnon
------------------------------ Director
(Arnold B. McKinnon)
/s/ Jane Margaret O'Brien
------------------------------ Director
(Jane Margaret O'Brien)
/s/ Harold W. Pote
------------------------------ Director
(Harold W. Pote)
PAGE 90
Schedule II
Page 1 of 2
[Download Table]
Norfolk Southern Corporation and Subsidiaries
---------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1998 and 1999
(In millions of dollars)
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
Year ended December 31, 1997
----------------------------
Valuation allowance
(included net in
deferred tax liability)
for deferred tax assets $ 2 $ -- $ -- $ -- $ 2
Casualty and other claims
included in other
liabilities $ 248 $ 108 $ 2 (1) $ 105 (2) $ 253
Current portion of
casualty and other
claims included in
accounts payable $ 166 $ 14 $ 170 (1) $ 178 (3) $ 172
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
(1) Includes revenue overcharges provided through charges to operating
revenues and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
Note: Prior year amounts have been conformed with the current year
presentation, which excludes valuation and qualifying accounts
of discontinued operations.
(continued)
PAGE 91
Schedule II
Page 2 of 2
Norfolk Southern Corporation and Subsidiaries
---------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1998 and 1999 (continued)
(In millions of dollars)
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
Year ended December 31, 1999
----------------------------
Valuation allowance
(included net in
deferred tax liability)
for deferred tax assets $ 3 $ 6 $ -- $ -- $ 9
Casualty and other
claims included in
other liabilities $ 271 $ 114 $ 9 (1) $ 119 (2) $ 275
Current portion of
casualty and other
claims included in
accounts payable $ 144 $ 19 $ 191 (1) $ 173 (3) $ 181
(1) Includes revenue overcharges provided through charges to operating
revenues and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
Note: Prior year amounts have been conformed with the current year
presentation, which excludes valuation and qualifying accounts
of discontinued operations.
PAGE 92
EXHIBIT INDEX
-------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Electronic
Submission
Exhibit
Number Description Page
--------- ------------------------------------------------- ----
3 (i) The Restated Articles of Incorporation of
Norfolk Southern Corporation. 94
3 (ii) The Bylaws of Norfolk Southern Corporation,
as amended May 13, 1999. 103
10 (i) The Agreement, entered into as of July 27, 1999,
between North Carolina Railroad Company and
Norfolk Southern Railway Company. 111
10 (k) The Norfolk Southern Corporation Management
Incentive Plan, as amended effective
January 25, 2000. 155
10 (l) The Norfolk Southern Corporation Executive
Management Incentive Plan, effective
January 25, 2000. 161
10 (m) The Norfolk Southern Corporation Long-Term
Incentive Plan, as amended effective
January 25, 2000. 165
10 (n) The Norfolk Southern Corporation Officers'
Deferred Compensation Plan, as amended effective
May 13, 1999. 180
10 (r) Norfolk Southern Corporation Supplemental
(formerly, Excess) Benefit Plan, effective as
of August 22, 1999. 188
12 Statement re: Computation of Ratio of Earnings
to Fixed Charges. 194
21 Subsidiaries of Norfolk Southern Corporation. 195
23 Consent of Experts and Counsel -
(a) Consent of KPMG LLP. 197
(b) Consent of KPMG LLP and Ernst & Young LLP. 198
(c) Consent of PricewaterhouseCoopers LLP. 199
PAGE 93
EXHIBIT INDEX
-------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Electronic
Submission
Exhibit
Number Description Page
--------- ------------------------------------------------- ----
27 Financial Data Schedule. 200
(This exhibit is required to be submitted
electronically pursuant to the rules and
regulations of the Securities and Exchange
Commission and shall not be deemed filed
for purposes of Section 11 of the
Securities Act of 1933 or Section 18 of the
Securities Exchange Act of 1934.)
99 Conrail Inc. 1999 Annual Report to Stockholders. 201
Exhibits 3(i), 3(ii), 10(i), 10(k), 10(l), 10(m), 10(n), 10(r) and 27
are not included in copies assembled for public dissemination.
If you have a need for this type of information,
we will be pleased to send it to you.
Write to:
Office of Corporate Secretary
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Virginia 23510-9219
Dates Referenced Herein and Documents Incorporated by Reference
4 Subsequent Filings that Reference this Filing
↑Top
Filing Submission 0000702165-00-000037 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Thu., May 16, 2:46:51.2am ET 
