Norfolk Southern Annual Report 2001

FY2001 Annual Report · Norfolk Southern

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On the Cover:
The green signal
represents “clear
tracks ahead”
for Norfolk Southern.

Our Vision:

Be the safest, most
customer-focused
and successful
transportation
company in
the world

Equal Opportunity Policy

Norfolk Southern Corporation’s policy is to comply with all applicable laws, regulations and
executive orders concerning equal opportunity and nondiscrimination and to offer employment
on the basis of qualification and performance, regardless of race, religion, color, national origin,
sex, age, veteran status, the presence of a disability or any other legally protected status.

Waterville

Canada

Albany

Buffalo

Ayer

Binghamton

Detroit

Des
Moines

Chicago

Cleveland

Altoona

New York/New Jersey

Ft.
Wayne

Pittsburgh

Harrisburg

Philadelphia

Baltimore

Indianapolis

Cincinnati

Kansas
City

St. Louis

Louisville

Charleston

Roanoke

Norfolk/Hampton Roads

Knoxville

Memphis

Chattanooga

Charlotte

Columbia

Morehead City

Birmingham

Meridian

Atlanta

Macon

Dallas

New
Orleans

Mobile

Charleston

Savannah

Brunswick

Jacksonville

Miami

NORFOLK SOUTHERN SYSTEM
NORFOLK SOUTHERN SYSTEM

Norfolk Southern Railway and its
Railroad Operating Subsidiaries

NS Trackage/Haulage Rights

Financial Highlights

($ in millions, except per share amounts)

Financial Results

Railway operating revenues
Income from railway operations
Railway operating ratio
Income from continuing operations
Earnings per share from continuing operations — diluted

Financial Position
Total assets
Total debt**
Stockholders’ equity
Debt-to-total capitalization**
Stockholders’ equity per share

Other Information

Year-end stock price
Dividends per share
Price/earnings ratio at year end
Number of shareholders at year end
Shares outstanding at year end
Number of employees at year end

2001

6,170
1,007

83.7%
362
0.94

19,418
7,632
6,090

55.6%

15.78

$
$

$
$
$

$
$

18.33
0.24
18.9
53,042
385,831,746
29,828

% Increase
(Decrease)

2000*

$
$

$
$
$

$
$

6,159
633
89.7%
172
0.45

18,976
7,636
5,824
56.7%
15.16

13.31
0.80
29.6
53,194
384,057,473
32,341

—
59
(7)
110
109

2
—
5
(2)
4

38
(70)
(36)
—
—
(8)

* 2000 results included costs for work-force reduction programs that reduced income from railway operations by $165 million,
net income by $101 million and diluted earnings per share by 26 cents. Excluding these costs, the railway operating ratio was
87.0%. See note 11 on page 42.
**excludes notes payable to Conrail

Description of Business

Contents

Norfolk Southern Corporation is a Virginia-based
holding company with headquarters in Norfolk. It controls a
major freight railroad, Norfolk Southern Railway Company,
and owns a natural resources company, Pocahontas Land
Corp., and a telecommunications company, Thoroughbred
Technology and Telecommunications, Inc.

Norfolk Southern links customers to worldwide markets.

The railway operates approximately 21,500 route miles in
22 eastern states, the District of Columbia and the province
of Ontario, serves 20 seaports and lake ports and connects
with western and Canadian partners. Norfolk Southern offers
the East’s most extensive intermodal network and provides
comprehensive transportation logistics services supported by
innovative data systems and technology.

CHAIRMAN’S LETTER TO STOCKHOLDERS

PERFORMANCE

OPERATIONS

TECHNOLOGY

SERVICE

COMMODITIES REVIEW

FINANCIAL OVERVIEW

UNAUDITED INFORMATION

FIVE-YEAR FINANCIAL REVIEW

MANAGEMENT’S DISCUSSION AND ANALYSIS

CONSOLIDATED FINANCIAL STATEMENTS

Pocahontas Land Corp. manages more than a million

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

acres of coal resources in Alabama, Illinois, Kentucky,
Tennessee, Virginia and West Virginia.

Thoroughbred Technology and Telecommunications, or
“T-Cubed,” installs and markets telecommunications facilities
and provides related services.

REPORT OF MANAGEMENT

REPORT OF INDEPENDENT AUDITORS

BOARD OF DIRECTORS AND OFFICERS

STOCKHOLDER INFORMATION

INSIDE BACK COVER

Dear Fellow Shareholders:

The cover of this report shows a green signal –

clear ahead. That image conveys the state of
your company today. We are in good shape and
moving ahead.

In 2001, we proved that we can produce results

in a difficult year, in an uncertain economy, even in
the face of terrible disaster. Our company has been
through a difficult period, and our people have
shown they are capable of meeting the challenge of
tough times.

Last year in this report, I said we had work to

do. To the credit of NS people, we did much of
that work in 2001. Our results show significant
progress. That is why I say, in spite of the bad
news of 2001, we still had a good year. Not that our
results are what they should be, but they are now
clearly on an improving trend.

We needed to improve our network and our effi-

ciency, and we did. We needed to
improve productivity, and we did.
We needed to improve financial
performance, and we did.

Our statistics show real
results. In this report, you can read
about NS 21, our process to drive
change throughout NS, and about
the implementation of our new
scheduled merchandise network
through the Thoroughbred
Operating Plan. We moved
aggressively to make needed
improvements and adapt quickly
to changing times in 2001,
despite a declining economy.

We were able to exceed last
year’s revenue even with 222,000

David R. Goode, Norfolk Southern chairman, president
and chief executive officer, welcomes John Wesley
Whitaker to the October 2001 dedication ceremony for
the NS intermodal terminal near Atlanta named for
Whitaker. A railroad industry civil rights pioneer,
Whitaker was the first African-American locomotive
engineer for Central of Georgia Railway, an NS predeces-
sor. He later became Southern Railway’s first African-
American transportation officer. The Whitaker terminal –
the largest intermodal facility in the East – and NS hubs
at Harrisburg, Pa., and Chicago form the backbone of
the East’s most comprehensive
intermodal network.

Sept. 11 Events Prompt
Humanitarian Response

The terrorist attacks of Sept. 11, 2001,
evoked the generosity and patriotism of the
Thoroughbred team.

Employees donated money and blood
to help the Red Cross, The Salvation Army
and other organizations providing aid after terrorists crashed passenger jets into the
World Trade Center towers in New York, the Pentagon in Washington and in a field
outside Pittsburgh.

NS offered New York officials free transportation service for removing debris from

the World Trade Center site. After President George W. Bush launched Operation
Enduring Freedom, a global campaign against terrorism, NS offered enhanced benefits
for employee reservists called up for active duty. Designed to help support employees
and their families during the deployments, the leave benefits included a monthly income
supplement of $1,500 and continued health care and life insurance benefits. The compa-
ny also provided free transport of teddy bears for Manhattan schoolchildren, and boots
and gloves for rescue and recovery workers in New York.

Immediately after the attacks, NS heightened security awareness throughout
the system. The company is working with the rail industry through the Association
of American Railroads to continue providing a safe and secure freight transportation
infrastructure for the nation.

fewer carloads. By increasing revenue yields and
reducing expenses, we improved our operating ratio
by more than three points in an economic decline.
Our earnings per share improved 37 percent, and the
stock finished the year up 38 percent in the face of
declining markets.

That is history – but it is also illustrative. We
showed ourselves and others that NS and its people
are capable of responding quickly and aggressively
and making the changes necessary to produce good
returns for our investors. We have a lot of work to
do, but the way is now clear.

As 2002 progresses, we will have to continue to

prove we can do the job through economic chal-
lenges. I believe we can and will.

Our goals for 2002 include:

Improved service – we are completing our sched-
uled merchandise service network and are imple-
menting new systems to better and more quickly
monitor our performance.

◗ Continued improvement in productivity – we are
engaged in a new phase of NS 21 that will yield
additional improvements in how we do business.

◗ Revenue growth – we are introducing new

services, highway traffic conversions and other
opportunities along with our connecting partners
to offer faster and better long-haul service.
◗ Cash flow – we again will generate cash from
operations and maintain spending discipline
so we can pay down debt to the benefit of all our
investors.

◗ Fair returns – we will not rest until our
shareholders are fairly compensated for
their faith in owning our company.
These goals may sound like the

Corporate Governance

Our Policies at Work

basics. If so, that is what we have learned. There are
no substitutes for discipline and hard work and con-
centration on improving our service offerings. Better
service to our customers will be the hallmark of our
endeavor and the springboard for future growth in
our business.
I am
hopeful that
the economy will
rebound this year. While
we are poised for that to
happen, we will run an
efficient and reliable
transportation network.
When the economy
needs us, we will have
the capacity and
capability. The cus-
tomers, communities
and shareholders we
serve will benefit.
NS has been
through challenges
before, and we’re
stronger for them.
I believe 2002 and
beyond will give NS peo-
ple the chance to show
what a well-tuned trans-
portation operation with
capacity, technology and
skill can produce.

Principles In Practice

The Board of Directors established the
Executive and Governance Committee in 2001
and gave the committee responsibility for
monitoring corporate governance trends and
practices and making recommendations to the
Board concerning corporate governance issues.
At the recommendation of the Executive
and Governance Committee, in 2001 each of
the committees of the Board adopted a writ-
ten charter to govern the responsibilities and
activities of that committee. The Board of
Directors is also in the process of increasing the
number of independent directors on the Board
and on certain key committees. Currently, the
Audit Committee and Performance-Based
Compensation Committee are comprised of all
independent directors, and the Compensation
and Nominating Committee is comprised of a
majority of independent directors.

Norfolk Southern commissioned an
independent review of its corporate gover-
nance practices in 2001 to compare present
practices against those of other corporations
and to recommend possible improvements.
The report concludes that Norfolk Southern
has in place a sound corporate governance
structure and, with some recommended
refinements, can become a leader in the field.

Norfolk Southern places a high priority on
the safety of its employees, customers and the
public and has the personnel, plans and poli-
cies in place to focus on accident and injury
prevention. This is reflected in Norfolk
Southern’s being the first railroad to win a
12th consecutive E. H. Harriman Memorial
Gold Medal award for safety.

Norfolk Southern is committed to protect-

ing the quality of the environment for its
employees, customers and the communities in
which it operates and complying with all
federal, state and local laws and regulations
designed to protect the environment.

Norfolk Southern has implemented a

Thoroughbred Quality program that
places highest importance on meeting
customer expectations by incorporating
the principles of quality management into
employees’ daily activities. Norfolk Southern
has demonstrated a commitment to
continuous quality improvement by introduc-
ing the stringent Six Sigma problem-solving
methodology to its operations.

January 21, 2002

As stated in the corporate vision state-
ment, Norfolk Southern strives to be the
most customer-focused company in the
transportation industry and to continuously
improve communication with customers and
the level of customer satisfaction.

◗
Norfolk Southern’s Performance Demonstrates Strengths

Norfolk Southern strengthened operations, customer

service and financial performance during 2001.

With rigorous cost controls, continual focus on providing

safe and reliable freight transportation and increases in rev-
enue yield in the face of a yearlong economic downturn, NS
improved its financial position and created opportunity to

NS employees
maintained their
industry leadership
in safety by receiving
an unprecedented
12th consecutive
E.H. Harriman
Memorial Gold
Medal award.

handle all the anticipated growth of
an eventual economic rebound.

Capacity enhancements – such

as opening the largest intermodal
terminal in the East near Atlanta –
and partnerships with other rail carri-
ers gave NS customers more service
options. With the Atlanta terminal
and other facility improvements, NS
offers the most extensive intermodal
infrastructure in the East for handling
the nation’s commerce and taking

traffic off the interstate highway system.

NS employees maintained their industry leadership in
safety by receiving an unprecedented 12th consecutive E.H.
Harriman Memorial Gold Medal award.

Even as safety received top priority, facing the challenges
of traffic declines across all business sectors required concen-
trated focus on improving financial performance.

At the beginning of the year, NS undertook several
initiatives designed to improve financial strength, service
reliability and operating efficiency. They included a
company restructuring, a cost-reducing analysis of corporate
processes called NS 21, efforts to generate greater
revenues and implementation of a new Thoroughbred
Operating Plan, or TOP.

NS Builds Record of Successes

These concurrent efforts scored a number of successes

for Norfolk Southern during 2001.
◗ Productivity improvement: A renewed sense of focus

drove NS people to accomplishments in service and opera-
tions in spite of the slumping economy. NS’ employee
count declined by 8 percent in 2001, following a 9 percent
reduction in 2000. Since January 2000, employment has
declined from 35,996 to 29,828. Work force productivity,
measured in operating revenue per employee and ton-
miles per employee, improved to its best level in five years.

Improved efficiency through line rationalization: NS
trimmed 412 miles from its rail system in 2001 through
sales, leases and abandonment. This generated $5.2 mil-
lion in maintenance savings annually and $1.5 million in
property tax savings, while eliminating almost 650 high-
way-rail grade crossings. The company has under review
more than 700 miles, including 485 miles in eastern North
Carolina. NS plans to establish an internal business unit to
manage the eastern North Carolina segment of its system.

◗ Enhanced service reliability through network redesign:
TOP, the Thoroughbred Operating Plan, increases service
consistency and reliability while reducing costs. The new
train service network improves asset utilization, train
velocity, terminal dwell time, routing and on-time train
performance.

◗ A strategic sourcing initiative identified cost-saving

opportunities in the company’s $2 billion-plus annual bill
for purchasing materials and services. Two early strategic
sourcing projects – purchases of crushed stone, or ballast,
and purchased services at intermodal terminals – are
expected to produce approximately $4 million in savings in
2002. New strategic sourcing targets include savings in
purchases of locomotive material, purchasing card costs
and energy bills.

NS 21 Targets Savings

The NS 21 program to improve customer service
and reduce costs worked in concert with the restructuring
program.

Highlights of NS 21:

Freight car improvement: NS reduced its freight car fleet
by 12,000 cars from late 2000 to early 2002, generating
more than $34 million in one-time proceeds plus recurring
improvement in depreciation expense of $1.7 million annu-
ally. In addition, new information technology tools enabled
the company’s car management team to gain productivity
improvements from the entire car fleet. Compared with
2000, freight car equipment rents decreased $32 million.
Other benefits include reduced maintenance costs and less
track and yard congestion.

◗ Reduced support facility costs: NS disposed of four
underutilized or redundant facilities. The foundry and
reclamation facilities at Roanoke, Va., were closed. NS sold
the Birmingham, Ala., shop used for building track compo-
nents, and the wheel shop at Knoxville, Tenn. Sale of the

◗
◗
facilities netted $6.3 million and produced ongoing savings
of $1.7 million annually. Additional annual savings of
$500,000 are projected as a result of plans to exit the
Atlanta rail welding shop and lease the facility. The compa-
ny also announced plans to close the car shop at
Hollidaysburg, Pa., pending resolution of a legal challenge.

◗ An examination of how customers conduct business

with NS brought about a number of improvements, includ-
ing an Internet bill of lading process. Some 75 percent of
NS customers use electronic data interchange. This, togeth-
er with field training initiatives, increases billing accuracy
and reduces costs of claims associated with errors.

Revenue Yield Grows

Gains in operating efficiency and service reliability in
2001 gave NS improved pricing opportunities, enabling it to
post higher revenue yield. Even though carloads were down 3
percent from 2000, railway operating revenues were $11 mil-
lion higher, a 3 percent improvement in revenue per car.
Aggressive industrial development efforts to locate
rail-served facilities on NS lines, coupled with added infra-
structure capacity and development of new services, laid the
foundation for additional revenue growth.

Financial Performance Improves

ance, focused on strengthening its financial position during
the year.

The company’s improvements during 2001 helped to pro-
duce higher earnings per share as compared with each
of the previous two years. Stock price trended upward dur-
ing the year even as the economic downturn continued,
and NS outperformed the S&P 500 index in 2001 by 50
percentage points.

◗ NS made progress in reducing debt. Long-term debt

has been reduced by $427 million since the beginning of
2000, and NS’ share of Conrail’s long-term debt declined
$235 million. The total reduction in debt obligations was
$662 million, and year-end cash and short-term invest-
ments totaled $204 million.

◗ NS initiated three new debt offerings in 2001 to take

advantage of an attractive interest rate environment and to
provide more financial flexibility. The offerings enabled the
company to eliminate all of its outstanding commercial
paper, which stood at $1.1 billion at the end of 2000.

NS’ emphasis on solid financial performance is reflected
in its credit ratings, which continue to be among the best in
the industry.

NS Invests in Customer Service
Norfolk Southern’s disciplined
approach in capital spending, together
with other steps to improve financial
performance and enhance service, are
expected to position the company to
achieve more rapid progress when the
economy recovers.

In 2002, NS plans to spend $705

million for capital improvements. The
anticipated spending includes $482
million for roadway projects and $173
million for equipment.

The largest expenditure, $366 mil-
lion, will be devoted to maintaining the
company’s rail infrastructure – rail,
crossties, ballast and bridges. Another
$43 million is earmarked for marketing
and industrial development initiatives
to better handle coal, vehicle and inter-
modal traffic.

Capital Expenditures
($ Millions)

$912

$731

$746

1999

2000

2001

Three years of investments
in customer service have
culminated in development
of the East’s most compre-
hensive intermodal network,
with capacity to handle traf-
fic growth when the econo-
my rebounds. With major
infrastructure projects – such
as the Whitaker intermodal
terminal near Atlanta –
having been completed,
capital spending is projected
to be $705 million in 2002.

which includes the purchase of 50 six-
axle locomotives, is lower than in previ-
ous years, reflecting efficiency gains
achieved in fleet management and asset utilization.

President Signs Railroad Retirement Reform

Historic legislation passed in December and signed by
President Bush modernized the Railroad Retirement system,
with benefits for rail carriers, employees and retirees. Efforts
by a broad coalition of rail industry labor and management
helped get the measure enacted.

The reforms provide for a more secure retirement for rail

workers, retirees and their spouses. The bill reduces Tier II
Railroad Retirement tax rates on rail companies over a three-
year period beginning in 2002 and provides for possible
future adjustments in Tier II tax rates for both companies and
employees. The new law also repeals the Railroad Retirement
supplemental annuity tax paid by rail companies. A related
provision allows for private investment of Tier II funds.

NS, historically a rail industry leader in financial perform-

Projected equipment spending,

◗
Norfolk Southern Service and Operations in ‘TOP’ Form

Norfolk Southern strengthened service reliability and consis-
tency during 2001, reducing transit times for customers’ freight by
realigning the operating plan for merchandise traffic.

The Thoroughbred Operating Plan, or TOP, was a combined
effort of Marketing, Transportation, Strategic Planning and field
operations employees.

“This was a team effort from the beginning,” said Mark
Manion, vice president transportation services and mechanical. “The
clear objective was to provide more reliable transportation to cus-
tomers, while realizing improvements in asset utilization.”

“We started from the premise that reducing the number of
times a car is handled and the distance it travels will reduce both
costs and variability, with improved shipment velocity,” said Tony
Ingram, vice president transportation operations.

“These added efficiencies, coupled with consistency, help
boost customer confidence and drive new business opportunities,”
said Don Seale, senior vice president merchandise marketing.

The process began with a study of waybills, which provided an

accurate database of traffic variation. From that, the team devel-
oped optimum schedules based on traffic volume and created ter-
minal plans.

The team built car blocks, streamlined routes and tested them
using modeling software. The team also developed consistent met-
rics to monitor performance.

“Being able to use software to test our ideas to minimize car
handling and improve transit times gave us a tremendous advan-
tage,” said Ingram. “We could analyze our routes and make im-
provements in the plan without having to test in the field. It saved
time and resources and gave us a plan to help achieve our goals.”

The redesigned network of 245 trains was
phased in to prevent service disruptions and to give
the team opportunity to fine-tune its work.

“Incremental implementation of TOP made it

seamless to our customers,” said Manion.

Performance monitoring takes place in a com-
mand center in Atlanta. There, team members who
developed and implemented the plan keep close
watch on train movements. Performance is measured
by on-time departures at origins, point-to-point transit
times and on-time arrival at destinations. The team
has the flexibility to make changes to the plan as con-
ditions change to ensure consistency. At year end, ter-
minal plans were in place at all yards.

“This team and all those who have responsibility

for moving trains are committed to excellence,” said
Dale Schaub, team leader and senior director service design and
transportation planning. “We had significant early successes in
reducing transit times on a number of lanes.”

For example, between Birmingham, Ala., and Allentown, Pa.,

a major north-south route, transit time was reduced from 96.1
hours to 57.4 hours. Also, between Linwood, N.C., and Elkhart,
Ind., NS reduced transit time from 82.1 hours to 51.9 hours west-
bound and from 90.6 hours to 46 hours eastbound.

“Our goal is to run our trains according to the planned sched-

ule every time,” said Schaub. “When we do that, we provide con-
sistent, reliable service to our customers, and that is how NS will
grow business and bring a greater return for shareholders.”

Transit Comparisons

90.6

96.1

In Hours

82.1

51.9

46.0

57.4

Before

After

37.4

24.2

C o r r i d o r

L i n w o o d – E l k h a r t
( w e s t b o u n d )

E l k h a r t – L i n w o o d
( e a s t b o u n d )

B i r m i n g h a m – A l

l e n t o w n

C o n w a y – C h i c a g o

Measurements Confirm Success

The redesigned merchandise network was one of the
factors contributing to dramatic improvements in Norfolk
Southern’s operating performance in 2001.

“Our operations reflect the success of our network
redesign and the work of all our employees to improve
customer service and reduce costs,” said Steve Tobias, vice
chairman and chief operating officer.

The NS system achieved record improvements in the
key measurements of cars on line, terminal dwell time and
system average train speed.

The number of cars on line – a count of rail cars on
the NS system – was reduced 8.1 percent in 2001 because
of better operating performance, a rail car fleet reduction
and declining traffic attributed to a soft economy.

NS Employees Continue To Be the Rail Industry’s Safest

Norfolk Southern employees took top honors

for the 12th consecutive year as the company
received the E.H. Harriman Memorial Gold Medal
Award for the best safety record among the
nation’s largest railroads.

Rudy Bilka of Altoona, Pa., an NS locomotive

engineer, received the Harold F. Hammond Award,
presented annually to a railroad employee for outstanding safety achievement.
An NS employee has won the national award four of the last five years.

Mastrangelo, King and Lowe (l-r)

Bilka

Other NS employees received accolades during 2001. The Association of American
Railroads presented its John H. Chafee North American Railroad Employee Environmental
Excellence Award to Paul Contrado, a mechanical supervisor at Norfolk’s Lamberts Point.
Three NS employees earned the Thoroughbred Award, the company’s highest honor.

Adam Mastrangelo and Greg Lowe of the Research and Tests Department in Roanoke
won for developing “Railview,” a locomotive-mounted digital video system that records
information important to the investigation of highway-rail grade crossing and trespasser
incidents. Randy King, a crew management analyst in Atlanta, received the award for
creating a computer model that forecasts train crew requirements. The software
improves NS’ ability to maintain the work force required to provide consistent customer
service and accommodate business growth.

Contrado

Chicago Team‘s Pride: Knowing Customers

Knowing a diverse group of customers and anticipating their

needs is the job of the Chicago Terminal customer service team.
“I am very familiar with these industries, and I know these
people,” says Linda Myers, agent terminal control. “Knowing our
customers is the best way to provide for their service needs.”

Terminal Superintendent Corey Veal says each person on the
12-member team plays an active role in communicating with cus-
tomers. Whether it’s improving operating efficiency or getting
involved in the nuts and bolts of a new project, Veal practices a
team approach to customer service.

“We are always looking for input from the train crews and the

yardmasters. These are the people who put the ideas into action,
and we depend on them to be the eyes and ears,” Veal says. “They
take pride in what they can offer, and their input helps us become
more efficient and productive – for our customers and NS.”

Customer call: Linda Myers, NS agent termi-
nal control, and Corey Veal, NS terminal
superintendent, discuss service needs of
customer Tim Berens (r), Chicago terminal
manager of Kinder Morgan Liquids
Terminals LLC.

In addition to Veal and Myers, other members of the Chicago
team are Rich Juram, senior terminal superintendent; Pat Damron, Walt Sailers
and Mike Smith, terminal trainmasters; Ted Calhoun, John Martin and Jerry
Simon, trainmasters; Frank Waggoner, assistant trainmaster; Pat Coseglia,
national account manager; and George Marx, intermodal director.

Performance Improvement

Cars On Line

242,814 Cars

)
0
0
0
(

s
r
a
C

250

240

230

220

210

200

190

180

Jun-99

These graphs show

sustained three-year

improvement in

key operating

performance

measurements.

190,345 Cars

Dec-01

System Average Terminal Dwell

32.0

30.0

28.0

27.9 Hours

A downward trend

shows improvement

s
r
u
o
H

26.0

for cars on line

and system average

terminal dwell.

For system average

train speed,

higher is better.

24.0

22.0

20.0

Jun-99

System Average Train Speed

H
P
M

18.2 MPH

Jun-99

22.6 MPH

Dec-01

Terminal dwell time – a measurement of time cars
spend in rail yards – improved by 5.3 percent to 24.6
hours. Average system train speed improved by 9.7 percent,
rising to more than 22 miles per hour. Both of these
measurements of operating efficiency are better than pre-
Conrail levels.

Overall on-time train performance increased 33.9 per-

cent as compared with 2000.

Quality Processes Enhanced

In addition to strengthening operating performance,
NS raised the bar in the Thoroughbred Quality process in
2001 by introducing Six Sigma problem-solving methodology.
“Six Sigma is the beginning of a new era in our quality
process,” said Jeff G. Yates, assistant vice
president quality management. “Striving for
Six Sigma quality can lead to best-in-class
operations.”

Six Sigma is a fact-based methodology to

study problems that cause variation in the quali-
ty of service. By adopting Six Sigma methods, NS
demonstrates commitment to continuous quality
improvement, a requirement to comply with the
new ISO 9001:2000 standard. ISO 9001 is an
internationally recognized quality standard
developed by the International Organization for
Standardization in Geneva, Switzerland, and
adopted by more than 90 countries. The compa-
ny’s transportation operations, major mechanical
shops and a number of other areas already are
certified to ISO 9002:1994 standards. They will be reregis-
tered to reflect more recent ISO 9001:2000 standards, which
require reflecting the voice of the customer in addition to a
continuous improvement process. Six Sigma is that process.
More than 100 NS employees received Six Sigma
training in the past year and a half. Using Six Sigma meth-
ods, NS reduced end-of-train device battery failures, which
resulted in fewer train delays, and improved the locomotive
overhaul process, which resulted in fewer in-service locomo-
tive delays. Other projects are expected to result in improved
customer service and cost savings.

“Six Sigma builds on what we’ve accomplished,” said

Yates. “One day it will simply be ‘the way we work.’”

24.6 Hours

Dec-01

New Technology Enhances Service and Operations

Norfolk Southern launched important new initiatives in

Systems Further Strengthen Operations

2001 to develop information systems providing higher levels

Among operational systems enhancements in 2001,

of service and information to customers while supporting

NS made key improvements in the core transportation sys-

continuous improvements in internal business processes.

tem, Thoroughbred Yard Enterprise System (TYES). This

On the customer service front, NS is making self-service

helped make Central Yard Office and National Customer

more accessible through better e-commerce tools. NS’

Service Center operations more efficient. New operational

Thoroughbred Information System (TIS) offers a suite of

tools helped field people reduce car rent charges and pro-

secure, Web-based business applications. These include

vide more timely shipment status information to customers.

extensive shipment tracking, mileage queries, the ability to

TYES added an automatic train reporting feature, using

divert and reconsign equipment, performance reporting and

Automatic Equipment Identification (AEI) technology. This

coal shipment management.

enhancement ensures that customers have the most current

information for shipment tracing.

New Customer Enhancements for 2001:
◗ A Bill of Lading (BOL) function that goes far beyond tradi-
tional programs. Customers receive acknowledgment that

In 2001, NS continued aggressive use of decision sup-

port technology. Railroads produce enormous amounts

of data every day. Capturing and organizing those data so

their Web-submitted BOLs have been successfully turned

they can be used effectively on a timely basis is a key NS

into waybills. They also get the price to be charged for

strategy for improving service and network efficiency. Several

each shipment. This unprecedented feature has resulted in

new decision support functions provide additional support

a 99.5% success rate on producing waybills from Web-

for marketing and transportation managers.

submitted BOLs. Customers have cited the application as

NS is an industry leader in the use of operations

the easiest to use in the industry.

research (OR) techniques to enhance network performance.

◗ Rate Inquiry, which allows merchandise customers to use
the Internet to view rates. A rate request application

The Algorithmic Blocking and Classification System (ABC)

automates the most efficient routing of freight traffic. In

allows customers to request quotes for new business

2001, the OR group continued developing models and tools

online through the Web. The feature permits NS to

to improve network performance and equipment utilization.

respond more quickly to requests for quotes. Requests

can be tracked to ensure that customers’ concerns are

completely addressed.

Three Tools Under Development:
◗ Operating Plan Developer assesses the impact of operat-

◗ E-Cars, which allows customers to forecast their empty

ing plan changes prior to implementation

equipment requests two weeks in advance with an easy-
to-use Web interface. E-Cars provides better service for the

Locomotive Routing Model forecasts network supply and
demand for locomotives and recommends efficient loco-

customer. By retaining the information in a database, NS

motive repositioning strategies

has improved ability to forecast equipment demand.

◗ Car Distribution Optimization Model will help improve the

By year end, some 3,000 customers were registered to
use TIS. Other new features planned for 2002 will allow cus-
tomers to review and pay freight bills online and receive vari-
ous customized service reports.

car distribution process.

These and other advanced analytical tools under devel-

opment will provide NS with information to better allocate

resources and improve productivity.

◗
Norfolk Southern Caps East’s Most Comprehensive Intermodal Network

Norfolk Southern boosted service quality and launched
new services in 2001 that position the company for growth.
The John W. Whitaker Intermodal Terminal near Atlanta

opened in the summer. The terminal, named after a retired
trainmaster and railroad industry civil rights pioneer, allows
Norfolk Southern to offer additional services and more reli-
able transit times. It is a competitive transportation alterna-
tive to over-the-road shipping that helps reduce congestion
on the nation’s highways.

The terminal is named for John Wesley Whitaker, who
after serving as one of the famed Tuskegee Airmen during
World War II became NS predecessor Central of Georgia’s
first African-American locomotive engineer. He later was
named a road foreman of engines on Southern Railway –
the railroad’s first African-American transportation officer.
Situated on 450 acres, the Whitaker terminal is the
largest intermodal facility in the East. As a southeast cross-
roads for movement of containerized freight in all directions,
the terminal caps NS’ four-year systemwide investment of
$380 million in intermodal transportation infrastructure. The
Whitaker terminal and NS’ Rutherford hub at Harrisburg, Pa.,
along with major terminals in Chicago, form the backbone of
the East’s most comprehensive intermodal network.

A new 70-acre intermodal facility at Maple Heights,
Ohio, provides improved and expanded services for northern
Ohio businesses moving goods between the Cleveland area
and ports on the East Coast.

Exclusive NS service to the new Mason Intermodal
Container Transfer Facility operated by the Georgia Ports
Authority in Savannah offers direct rail service to the port,
efficient transfer of containers between rail and ship, im-
proved performance in key lanes and new east-west services.
NS also announced plans for a new intermodal terminal
at the former Philadelphia Navy Yard that will be capable of
handling 60,000 lifts annually.

Among nonintermodal investments, NS quadrupled the

capacity of Enola Yard near Harrisburg, Pa., streamlining
routings, enhancing quality of service and solidifying
Harrisburg’s position as a major freight hub for the Mid-
Atlantic. Immediate benefits to customers include improved
transit times and equipment utilization.

MODALGISTICS Manages
Customer Supply Chain

MODALGISTICSSM is a new business group created in
2001, pulling together existing services to provide supply
chain management services for NS customers in a single
package at one price, using a range of modes and informa-
tion support systems.

MODALGISTICS determines the most cost-effective mix
of transportation modes, supply sources and warehousing for
a customer’s specific distribution needs. The service tests vari-
ous “what if” scenarios to compare total costs against the
customer’s baseline costs.

Once an optimum solution is determined, MODALGIS-

TICS helps customers implement it – pulling together the
resources of the railroad, Triple Crown Services, trucking
companies, rail transfer facilities, lumber reload facilities, met-
als distribution centers and just-in-time rail auto parts cen-
ters. The service enables customers to realize cost savings in
transportation, inventory management and capitalization.
MODALGISTICS launched a Web site in October
(www.modalgistics.com) to enhance service to customers.

Industrial Development and Real Estate
Post Strong Year

NS assisted with the location of 76 new industries and

the expansion of another 33 in 2001. This represents an
investment of $2.9 billion by NS customers and is expected
to create approximately 5,144 jobs in the 19 states where
the plants and expansions are located. Norfolk Southern
expects these industrial development efforts to generate
more than 95,000 carloads annually.

NS continued to dispose of properties in its extensive
real estate holdings. In one of the largest land sales ever in
the Washington, D.C., area, NS sold property in its Carlyle
development in Alexandria, Va., to LCOR Alexandria, L.L.C.
The land will be the site of headquarters for the United
States Patent and Trademark Office and will include some
2.5 million square feet of office space and enclosed parking.
With this sale, the Carlyle development has established itself
as one of the premier mixed residential and commercial
areas within the Washington, D.C., metropolitan area.

Pocahontas Land Celebrates 100 Years

In October, Pocahontas Land Corporation, a natural

resources subsidiary of NS, celebrated its centennial
anniversary.

In 1901, Norfolk and Western Railway, an NS predeces-

sor company, acquired lands held by Flat Top Coal Land
Association and vested them in its subsidiary Pocahontas
Coal & Coke, which was renamed Pocahontas Land Corp. in
1939. Since 1901, 1.7 billion tons of coal have been mined
from Pocahontas Land properties. Pocahontas Land has coal
reserves totaling an additional 1.7 billion tons. It manages
more than a million acres, and 70 percent of the current coal
production of its lessees is used in electricity generation.

Through sound land management practices and leader-
ship in reclamation efforts, Pocahontas Land has given back
to the community, providing educational and recreational
enrichment as well as economic opportunity for many. In
2001, the company donated land to the West Virginia
Housing Development Fund to provide temporary housing
for flood victims.

T-Cubed Develops Infrastructure

In 2001, T-Cubed, the NS telecommunications sub-
sidiary, substantially completed construction of 1,600 miles
of fiber-optic infrastructure on its corridors between Chicago
and Washington; Chattanooga, Tenn., and Atlanta; and
Atlanta and Jacksonville, Fla. It also negotiated and complet-
ed several transactions to provide infrastructure to telecom-
munications services providers.

Southeastern intermodal crossroads: These photos show
NS’ John W. Whitaker Intermodal Terminal, which
opened in 2001 at Austell, Ga., near Atlanta. Above,
John Ring, NS yardmaster, monitors operations from the
terminal’s tower.

The telecommunications industry suffered a major
slowdown in 2001. However, T-Cubed continues to focus on
providing fiber-optic and wireless infrastructure to a variety of
telecommunications companies and plans to pursue addi-
tional transactions in 2002.

In addition, T-Cubed is exploring ways in which its
assets can be used to enhance the current telecommunica-
tions infrastructure, along with opportunities to leverage
existing assets for commercial purposes.

Teams Sharpen Customer Focus

No one knows a customer’s service requirements like the people who deliver the service. That’s why Jim Tush

and Chuck Showers are on a team that regularly calls on customers to discuss and improve service.

Tush is a locomotive engineer and Showers a conductor on a nightly train that operates out of Pittsburgh’s
Kenny Yard. Once a month, they get together with Benny Dripps, trainmaster; Max Solomon, Pittsburgh district
superintendent; and John Schaal, national account manager. The group meets with Bob Webster, vice president
operating services for Transtar Logistics, a subsidiary of U.S. Steel,
to discuss service to U.S. Steel’s Pittsburgh area plants.

This is a customer service team, one of many throughout the
system. It’s a powerful tool available to both the railroad and the
customer to sharpen Norfolk Southern’s customer focus to a fine,
competitive edge.

“We include engineers and conductors on the team because
they’re on the ground every day,” says Schaal. “They see things we
don’t see. They get to know the crews at the plant, and that allows
us to understand our relationship with the customer better.”

Train crews know from experience what a customer’s specific
needs are, what can and can’t be done with available equipment,
what traditional practices can be eliminated or modified and what
can be done that hasn’t been tried. The trainmaster and superin-
tendent bring a larger view of the railroad’s operational capabili-
ties, while the account manager is familiar with the railroad’s
marketing strategy. Combined with the customer representative’s
knowledge of the customer’s commercial requirements, they make
for a formidable team.

Webster says Norfolk Southern’s focus

on customer service “has cemented a strong rela-
tionship with U.S. Steel, to where we’re dependent
upon it. It’s reached the point where we expect
this kind of service from Norfolk Southern.”

Pittsburgh team delivers service: From left, Jim Tush, locomotive engineer;
Chuck Showers, conductor; Max Solomon, Pittsburgh district superintendent;
Benny Dripps, trainmaster; John Schaal, national account manager; and Bob
Webster, vice president operating services for Transtar Logistics, constitute
the customer service team that explores how service can be improved at
U.S. Steel’s Irvin Works in Pittsburgh.

Charlotte Team Builds Good Will

“Customer good will is very important,” says Ben Lee, locomotive engi-

neer at Charlotte, N.C. For Lee, those are words to live by.

With his customer service team, Lee regularly calls on customers in the
Charlotte area to solicit new business, regain lost business, increase busi-
ness with existing customers, solve customers’ problems and improve car
utilization.

“And this is very important,” he adds. “We even go around to the peo-
ple we know can’t increase their business with us just to say thank you.”
Many of the customers served in the Charlotte area are consumer goods
warehouses.

Lee, vice general chairman Eastern Region and local chairman of the
Brotherhood of Locomotive Engineers, says getting train crews involved in
customer service benefits everyone. “It gives crews a feeling that they have
a future here. This is one of the best things I’ve done in my nearly 19 years
as local chairman.”

He sums up his commitment to customer service with a quote from
D. W. Brosnan, former Southern Railway president: “Jobs follow the freight.”

Other members of the Charlotte customer service team are Dale

Boatwright, yardmaster; Leon Craighead, superintendent of terminals; and
Mark Bean, account manager.

Charlotte team meeting: From left, Dale Boatwright,
yardmaster; Ben Lee, locomotive engineer;
Leon Craighead, superintendent of terminals;
Debbie Tucker and Scot Jansen, traffic managers for
C&T Refinery, Inc., an NS customer; and Mark Bean, NS
account manager.

Commodities Review: Revenues Up Despite Down Economy

Changes in traffic mix, pricing strategies and
improvements in operating efficiency during 2001
enabled Norfolk Southern to improve its per-car
revenue yield by 3% overall, resulting in an $11
million increase in railway operating revenues. This
was achieved despite a decline in carloadings,
which were 3% below 2000 as all business
sectors were affected by a soft economy and fur-
ther dampening of consumer spending following
the Sept. 11 terrorist attacks.

Coal

Coal, coke and iron ore finished the year 6%

ahead in total revenues and 2% ahead on tons
that totaled 178 million.

Growing demand and high natural gas prices
early in the year spurred increased electricity pro-
duction by coal-powered generation plants served
by NS. Utilities replenished very low coal stockpiles.
NS coal volumes to the important domestic utility
market grew by 11%.

Per-car revenue yields increased by 6% in

2001 following a strategy of measured price
increases, reduced refunds on export coal and
improved per-car lading weights.

Mining problems and increased domestic coal

demand caused coal prices to rise in 2001.
Nevertheless, coal production in states served by
NS rose by about 2.3% in 2001.

The Coal Transportation and Coal Marketing

departments were combined in February 2001 to create the
Coal Business Group. The new group is better able to meet
customer service expectations while improving equipment
utilization and yields.

Projects started during 2000 continued to grow
utility volumes in 2001, and NS and its coal supply partners
also took advantage of new opportunities to improve
market share.

Projects planned for 2002 include a new rail spur to
serve the Sammis Power plant of First Energy at Stratton,
Ohio, creating an opportunity for 20,000 new carloads annu-
ally over the next five years. Also, a new shuttle train to
serve increased Ohio coal production for the river utility
market will lead to new traffic for NS in 2002.

A Norfolk Southern coal train near Bluefield, Va.

Intermodal

Despite a constricted freight market in 2001,

Intermodal was able to hold ground by the steady launch of
new services, including:

Improved international services from new Cleveland and
Savannah terminals

◗ A premium transcontinental train between Southern

California and the Northeast with Burlington Northern
Santa Fe

◗ Blue Streak, a new premium service with Union Pacific

that offers several levels of premium transcontinental serv-
ice, including on-time-or-free guaranteed service, between
Los Angeles and the Southeast

◗ A significantly expanded portfolio of services between the

Southeast and the Northeast

◗
International services between the Port of New York and
Montreal with Canadian Pacific.

The new services and the completion of major enhance-

ments to the intermodal network, including the new
Whitaker terminal in Austell, Ga., near Atlanta, will allow NS
to handle increased traffic when the economy begins grow-
ing again. NS will launch more new intermodal services in
2002, including more premium products designed to speed
the pace of converting truck traffic to rail intermodal.

General Merchandise
Highlights of 2001:

In agriculture, a 50% improvement in cycle time for
new 75-car grain trains enabled NS to handle the same
amount of traffic with 200 fewer cars. The 2001 harvest
saw a gain of 4,000 carloads over the previous year.
Agriculture business came back strong in the fourth quar-
ter as weather conditions improved and markets started to
move, boosting fourth quarter revenues for the commodity
group by 6%.

◗ While automotive carloadings decreased by 10% as North
American vehicle production fell from a record level in
2000, automotive revenues declined only 4%, due in part
to the continued redesign of the automotive mixing center
network and continued market penetration in the Northern
Region of NS’ system. NS benefits from access to more
automotive plants than any other railroad.

Revenue gains resulted from:
◗ New vehicle traffic moving between Detroit and

St. Louis for DaimlerChrysler

◗ New vehicle traffic moving from Fort Wayne to
Canadian destinations for General Motors
◗ Return of previously diverted traffic as a result

of rectifying Conrail implementation service issues.

Automotive Group prospects
for 2002 include:
◗ A new General Motors inbound vehicle
distribution facility in Moraine, Ohio, that
opened in fourth quarter 2001

◗ Expansion of the Mitsubishi assembly plant

at Bloomington, Ill.

◗ Toyota’s second plant at Princeton, Ind.

◗ Southeast Toyota’s new vehicle distribution

facility in Jacksonville, Fla., scheduled for opening
in September 2002.

In chemicals, revenues were stable despite a weak market
as a result of improved pricing to meet market conditions.
As a result of aggressive industrial development, NS
expects new business from a new Stolt-Nielsen’s bulk ter-
minal at Braithwaite, La., a new Michelin plant at
Anderson, S.C., and a new salt transload facility for
American Rock Salt at Radford, Va. Another growth area
is ethanol, a gasoline additive.
In the metals market, NS’ dominant market and equip-
ment position and new business opportunities helped to
partially offset market softness, enabling it to maintain a
leadership role in transporting metals commodities.

Business opportunities for metals
in 2001 included:

Continued production ramp-up of new steel
mills located on NS and recent success in
acquiring new business
Export sheet steel to Mexico
Import slab steel business via East
Coast ports
Domestic slab steel and billet shipments
Continued strength in pig iron shipments
Steel pipe shipments to oil and gas
pipeline projects.

In the construction market, highway spending remained
strong, based on increased highway construction funding
from the Transportation Equity Act for the 21st Century
(TEA-21). This resulted in revenue growth from sand and
shipments to regional highway projects.
In paper, clay and forest products, improved pricing and a
positive change in traffic mix led to a gain of 6 percent in
revenue per unit despite a soft market. Wood pulp traffic
remained robust, with expansions at several tissue and
towel production facilities and increased NS market share.
Low pulpboard inventory levels prompted a rebound in
shipments in the fourth quarter. Lumber shipments almost
matched record levels of 2000 as a result of strong hous-
ing starts and low mortgage rates. NS scrap paper volume
will benefit from a shift to 100% recycled paper at a large
newsprint mill in Alabama.

◗
◗
◗
◗
◗
◗
◗
◗
◗
◗
◗
◗
Financial Overview

NS posted improved results in 2001,

despite the challenges of a weak economy.
Net income improved as a result of rigorous
cost controls, increases in revenue yield and a
commitment to provide safe and reliable freight
transportation service.

Net income for 2001 was $375 million, or

97 cents per diluted share, and included a
$13 million, or 3 cents per share, after-tax gain
related to the 1998 sale of NS’ motor carrier
subsidiary, which was reported as discontinued
operations. Income from continuing operations
was $362 million, or 94 cents per share, com-
pared with $172 million, or 45 cents per share,
reported in 2000. Results in 2000 included
$165 million of work-force reduction charges,
which reduced net income by $101 million, or
26 cents per share.

Net income improved in 2001 as a result
of a $209 million, or 26%, increase in income
from railway operations. The improvement in
income from operations more than offset a
decline in nonoperating income that was
$69 million below 2000.

Railway operating revenues were
$6.2 billion, up $11 million compared with
2000, despite 222,000 fewer carloads, or a
3% decline in traffic volume. Coal revenues
increased $86 million, or 6%, reflecting
improved revenue yield. Intermodal revenues
were up $4 million, despite a 1% decline in
traffic volume. General merchandise revenues
declined $79 million, or 2%, reflecting a 7%
decline in traffic volume that was partially offset
by a 5% increase in revenue per unit.

Railway operating expenses were $5.2
billion, down $363 million, or 7%, compared
with 2000. Excluding the work-force reduction
charges in 2000, expenses were down $198
million, or 4%. The railway operating ratio
improved to 83.7% in 2001, compared
with 87% in 2000, excluding work-force
reduction charges.

Railway Operating
Revenues
($ millions)

Railway Operating
Expenses
($ millions)

Railway Operating Ratio
(percent)

$6,159 $6,170

$5,361*

87.0*

$5,163

86.3

$5,242

$4,524

83.7

1999

2001

2000
Railway operating revenues
increased by $11 million in
2001 as a result of higher
revenue per unit that offset a
3% decline in traffic volume.

1999

2001
2000
Railway operating expenses
dropped $198 million, or 4%,
compared with 2000.

1999

2000

2001

The increase in railway
operating revenues, coupled
with the 4% drop in railway
operating expenses, produced
an operating ratio of 83.7% in
2001, 3.3 percentage points
better than that of 2000.

Income from Railway
Operations
($ millions)

$1,007

Net Income
($ millions)

$375

Earnings per Share –Diluted
(dollars)

$0.97

$798*

$718

$273*

$239

$0.71*

$0.63

1999

2000

2001

Income from railway
operations increased $209
million, or 26%, in 2001,
primarily because of the
$198 million drop in railway
operating expenses.

1999

2000

2001
Net income increased $102
million, or 37%, in 2001. The
improvement was principally as
a result of the $209 million
increase in income from railway
operations, which more than
offset a $69 million decline in
nonoperating income.

1999

2000

2001
Diluted earnings per share
for 2001 were 37% higher
than in 2000 as a result
of higher income from
railway operations, which
more than offset lower
nonoperating income.

* 2000 excludes work-force reduction costs of $165 million, which added 2.7 percentage
points to the railway operating ratio, reduced net income by $101 million and reduced
diluted earnings per share by 26 cents.

Quarterly Financial Data

(UNAUDITED)

2001

Three Months Ended

March 31

June 30

Sept. 30

Dec. 31

(In millions of dollars, except per share amounts)

Railway operating revenues
Income from railway operations
Net income
Earnings per share – basic and diluted

2000

Railway operating revenues
Income from railway operations
Net income (loss)
Earnings (loss) per share – basic and diluted

1,540
205
74*
0.19*

1,508
28
(48)
(0.12)

1,592
282
107
0.28

$ 1,592
278
116
0.30

1,508
245
79
0.20

1,535
211
99
0.26

1,530
275
115
0.30

1,524
116
5
0.01

* Includes a $13 million, or 3 cents per share, after-tax gain related to the 1998 sale of NS’ motor carrier subsidiary

(see Note 17 on Page 48).

Stock Price and Dividend Information

(UNAUDITED)

The Common Stock of Norfolk Southern Corporation, owned by 53,042 stockholders of record as of Dec. 31, 2001, is traded
on the New York Stock Exchange with the symbol NSC. The following table shows the high and low sales prices and divi-
dends per share, by quarter, for 2001 and 2000 (prices quoted in fractions have been rounded to the nearest cent).

1st

2nd

3rd

4th

Quarter

$ 18.90

13.63

0.06

24.11

15.80

0.06

22.60

13.41

0.06

19.88

15.19

0.06

1st

2nd

3rd

4th

$ 22.75

12.69

0.20

19.69

14.19

0.20

19.75

14.13

0.20

$ 15.63

11.94

0.20

2001

Market price

High

Low

Dividends per share

2000

Market price

High

Low

Dividends per share

Five-Year Financial Review
Norfolk Southern Corporation and Subsidiaries

($ in millions, except per-share amounts)
Results of operations
Railway operating revenues
Railway operating expenses

Income from railway operations

Other income – net
Interest expense on debt

Income from continuing operations

before income taxes

Provision for income taxes

Income from continuing operations

Discontinued operations3
Net income

Per share data
Net income – basic
Net income – diluted
Dividends
Stockholders’ equity at year end

Financial position
Total assets
Total long-term debt, including current maturities
Stockholders’ equity
Other

2001

20001

19992

$ 6,170
5,163
1,007

$ 6,159
5,526
633

5,242
4,524
718

99
553

553

191
362
13
375

168
551

250

78
172
—
172

0.97
$
0.97
$
$
0.24
$ 15.78

0.45
$
0.45
$
$
0.80
$ 15.16

164
531

351

112
239
—
239

0.63
0.63
0.80
15.50

$
$
$
$

1998

4,254
3,202
1,052

309
516

845

215
630
104
734

1.94
1.93
0.80
15.61

$
$
$
$

1997

4,249
3,036
1,213

170
385

998

299
699
22
721

1.91
1.90
0.80
14.44

$
$
$
$

$ 19,418
$ 7,632
$ 6,090

$ 18,976
$ 7,636
$ 5,824

$ 19,250
8,059
$
5,932
$

$ 18,180
7,624
$
5,921
$

$ 17,350
7,459
$
5,445
$

Capital expenditures

746

731

912

1,060

929

Average number of shares outstanding (thousands)

385,158

Number of stockholders at year end

Average number of employees:

Rail
Nonrail3
Total

Notes

53,042

30,510
384
30,894

383,358

53,194

380,606

51,123

378,749

51,727

376,593

50,938

33,344
394
33,738

30,897
269
31,166

24,185
115
24,300

23,323
2,494
25,817

1 2000 operating expenses include $165 million in work-force reduction costs for early retirement and separation

programs. These costs reduced net income by $101 million, or 26 cents per diluted share.

2 On June 1, 1999, NS began operating a substantial portion of Conrail’s properties. As a result, both its railroad

route miles and the number of its railroad employees increased by approximately 50% on that date.

3 In 1998, NS sold all the common stock of its motor carrier subsidiary, North American Van Lines, Inc. (NAVL), for

$207 million and recorded a $90 million pretax ($105 million, or 28 cents per diluted share, after-tax) gain.
Accordingly, NAVL’s results of operations, financial position and cash flows are presented as “Discontinued
operations.” Results in 2001 include an additional after-tax gain of $13 million, or 3 cents per diluted share, that
resulted from the expiration of certain indemnities contained in the sales agreement.

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 32 and the Five-Year
Financial Review on Page 17.

Summarized Results of Operations

2001 Compared with 2000
Net income in 2001 was $375 million, up 118%. Results in
2001 included a $13 million gain related to the 1998 sale
of NS’ former motor carrier subsidiary (see Note 17 on
Page 48). Income from continuing operations, which
excludes that gain, was $362 million, up 110%. Results in
2000 included $165 million of costs related to actions
taken to reduce the size of the work force, which reduced
income from continuing operations by $101 million, or 26
cents per diluted share. Excluding these costs, income from
continuing operations increased $89 million, or 33%, in
2001. The improvement resulted from higher income from
railway operations, which was up $209 million, or 26%,
that more than offset lower nonoperating income, which
was down $69 million (see Note 3 on Page 39).

Diluted earnings per share were 97 cents, up 116%.
Diluted earnings per share from continuing operations were
94 cents, up 109%. Excluding the work-force reduction
costs in 2000, diluted earnings per share from continuing
operations were up 32%.

2000 Compared with 1999
Results for 2000 reflected the first full year of operations
over Conrail’s lines. On June 1, 1999 (the Closing Date),
NS’ railroad subsidiary (Norfolk Southern Railway Company
[NSR]) began operating a substantial portion of Conrail’s
properties (substantially all of which comprise NSR’s
Northern Region) under various agreements with
Pennsylvania Lines LLC (PRR), a wholly owned subsidiary of
Consolidated Rail Corporation (CRC) (see Note 2 on Page
37). As a result, both the railroad route miles operated by
NSR and the number of its railroad employees increased by
approximately 50% on that date. Results for 1999 reflect
five months (January through May) of operating the former
Norfolk Southern railroad system and seven months (June
through December) of operating the present system, which
includes the Northern Region.

Results in 1999 were adversely affected by difficulties

encountered in the assimilation of the Northern Region

into NSR’s existing system that resulted in system conges-
tion, 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 expens-
es, 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.

Net income in 2000 was $172 million, down 28%.
Excluding the $101 million after-tax cost of the work-force
reductions, net income would have been $273 million, up
14%. The increase resulted from gains from the sale of non-
operating properties (see Note 3 on Page 39) and higher
income from railway operations, compared with a weak 1999.
Diluted earnings per share were 45 cents, down 29%.

Excluding the effects of the work-force reduction costs,
diluted earnings per share were up 13%.

Detailed Results Of Operations

Railway Operating Revenues
Railway operating revenues were $6.2 billion in both 2001
and 2000, and were $5.2 billion in 1999. Revenues in
1999 include results of operations in the Northern Region
for seven months. The following table presents a three-year
comparison of revenues by market group.

Railway Operating Revenues by Market Group
2001
($ in millions)

2000

1999

Coal

General merchandise:

Automotive

Chemicals

Metals/construction

Paper/clay/forest

Agriculture/consumer products/government

General merchandise

Intermodal

Total

$ 1,521

$ 1,435

$ 1,322

885

752

674

612

603

3,526

1,123

921

756

689

630

609

3,605

1,119

746

641

567

578

539

3,071

849

$ 6,170

$ 6,159

$ 5,242

In 2001, revenues fell for all the general merchandise
market groups. However, a 6% increase in coal revenues
offset the effects of the lower general merchandise rev-
enues. As shown in the following table, higher revenue
yields offset the effects of lower traffic volume.

Railway Operating Revenue Variance Analysis

Increases (Decreases)

($ in millions) 2001 vs. 2000 2000 vs. 1999

Volume

Revenue per unit/mix

Total

(200)

211

779

138

917

Revenue per unit increased in all market groups, princi-

pally due to rate increases, use of higher-capacity equip-
ment and favorable changes in the mix of traffic.

In 2000, revenues increased for all market groups,
reflecting a full year of handling Northern Region traffic.
Revenues improved for the last seven months, a compari-
son that fully includes the Northern Region in both years,
reflecting recovery of most of the diverted traffic and new
business. However, weakness in the economy resulted in
lower revenues very late in the year. Revenue per unit
improved in most market groups, principally due to the
effects of Northern Region traffic and increased rates.
About half of the revenue per unit increase for the inter-
modal market group was attributable to the effects of the
consolidation of Triple Crown Services Company (TCS) rev-
enues (see discussion of intermodal revenues below).

COAL tonnage increased 2% in 2001 and revenues
increased 6%. Revenue per unit increased 6%, a result of
rate increases, including lower volume-related refunds on
export coal shipments, gains in tonnage per car and favor-
able changes to the mix of traffic (less shorter-haul busi-
ness). Coal, coke and iron ore revenues represented 25%
of total railway operating revenues in 2001, and 83% of
NS’ coal shipments originated on lines it operated.

In 2000, coal tonnage increased 11%, and revenues
increased 9%, reflecting a full year of Northern Region traf-
fic. Revenue per unit declined, a result of a higher propor-
tion of traffic with a shorter length of haul, principally
attributable to a full year of Northern Region operations.

Total Coal, Coke and Iron Ore Tonnage
(In millions of tons)

Utility

Export

Domestic metallurgical

Other

Total

2001

133

178

2000

119

175

1999

108

158

Utility coal traffic increased 11% in 2001, reflecting
higher demand for coal-fired electricity and the effects of
very high natural gas prices early in the year. High demand
for electricity, a volatile market for natural gas and produc-
tion problems at a number of large mines in the East late
in 2000 combined to increase the demand for coal early in
2001 with a resulting increase in coal prices. Utility coal
traffic volume also benefited from the shifting of coal that
traditionally would have been bound for export to the
domestic market.

In 2000, utility coal traffic increased 11%, reflecting a

full year of Northern Region operations. The effects of
expanded operations were somewhat offset by coal pro-
duction problems at several NS-served mines, unanticipated
outages at some NS-served utility plants, large stockpiles at
the beginning of the year and mild summer weather in por-
tions of NS’ service territory.

The near-term outlook for utility coal remains positive.
U.S. demand for electricity continues to grow rapidly, and
coal-fired generation remains the cheapest marginal source
of electricity. Several underutilized coal-fired power plants
are making the transition from peak-only generation to
full-time generation. In addition, although natural gas
prices have returned to more normal levels, the volatility of
natural gas prices may improve the long-term competitive
position of coal-fired generation.

Phase II of Title IV of the Clean Air Act Amendments of
1990, which imposes more stringent limits on sulfur diox-
ide emissions, took effect on Jan. 1, 2000. Many of the
mines served by NS produce coals that satisfy Phase II
requirements. In addition, substantial banks of sulfur diox-
ide allowances held by many NS-served utilities should
continue to provide a market for other NS-served mines for
many years. However, several federal environmental regula-
tory initiatives continued to be pursued during 2001,
including “new source review” for older coal-fired plants.
Many of the rules that have been promulgated to date are
in litigation. If the rules survive litigation and are imple-
mented, they could increase the cost of coal-fired genera-
tion and potentially adversely affect the value of the sulfur
dioxide allowance bank.

The Bush Administration rejected in 2001 the Kyoto
Protocol and withdrew U.S. participation in that process.
If implemented, the proposed Kyoto limits on greenhouse
gases could have put additional cost pressures on coal-
fired generation. The U.S. withdrawal from the Kyoto
process has renewed interest in building coal-fired genera-
tion plants.

The 1999 decision by a federal district court judge in West

Virginia holding that some common mountaintop mining
practices in the coal industry are illegal was overturned in
April 2001 by the U.S. Fourth Circuit Court of Appeals. In
January 2002, the U.S. Supreme Court refused to hear an
appeal of the case.

market. While the consolidation of Australian producers
should help stabilize that supply channel, new Australian
production could displace U.S. volumes to Europe absent
any increase in demand. Moreover, Chinese participation in
Pacific Rim markets could displace Australian coals there
and force that tonnage to Europe.

Export coal tonnage declined 30% in 2001. The rapid
rise of domestic utility coal prices early in the year enticed
many foreign-market suppliers to place much of their 2001

Coal
($ millions)

$1,521

$1,435

$1,322

2000

1999

2001
Revenues increased $86
million, or 6%, in 2001,
primarily due to increased
utility coal traffic volume
and higher revenue per
unit. This group includes
utility coal, export coal,
domestic metallurgical coal
and industrial coal, coke
and iron ore.

production in the domestic utility mar-
kets. In addition, production difficulties at
several large NS-served mines and flood-
ing in West Virginia in July significantly
reduced the supply of low volatile coal.
The combination of these factors resulted
in most of the decline in shipments of
export coal. Steam coal exported through
Baltimore declined 32%, and export met-
allurgical coals through Norfolk declined
by 30%. Demand for steam coal to
export strengthened in the last half of
2001; however, the strong U.S. demand
limited NS’ participation in this market.
Demand for coking coal to export contin-
ued to soften, as steel production moved
from traditional NS markets in Europe to
Asia, which in recent years has been sup-
plied by Australian or Canadian coals.
In 2000, export coal tonnage
increased 8%, a result of a full year of
access to Baltimore through the Northern
Region, mitigated by lower tonnage
through Norfolk. Several additional fac-
tors also adversely affected export coal
traffic volume. Delayed settlements
between buyers and sellers in the spring
postponed shipments of some export ton-
nage. Foreign buyers ultimately intended
to purchase additional U.S. metallurgical
coal, but production capacity available for

export had been diminished by two years of dramatically
lower prices. Toward the end of 2000, production difficul-
ties at several large NS-served mines significantly reduced
tonnage available for export. Limited supplies overall pre-
vented other coal producers from providing substitute coal.
Export coal tonnage is expected to continue to be limit-

ed by supply and subject to the fluctuations of the world

Domestic metallurgical coal, coke and iron ore traffic
decreased 18% in 2001, due to a decline in the market
for domestic steel. The softening economy and an increase
in steel imports drastically cut blast furnace production,
sharply reducing the demand for coking coal, iron ore
and coke. The increase in imported steel also resulted in
lower prices that put pressure on the U.S. steel industry
and led to plant closures and bankruptcies that included
some NS customers.

In 2000, domestic metallurgical coal, coke and iron ore
traffic increased 17%, due to a full year of Northern Region
operations. In addition, increased production in the first
half of the year and gains in NS market share contributed
to the higher traffic. However, the softening economy and
increased steel imports diminished blast furnace production
rates, sharply reducing demand for raw materials.

Domestic metallurgical coal, coke and iron ore traffic is
expected to continue to suffer from the decline in demand
for domestically produced steel. However, the United States
has applied a tariff on imported coke, which has reduced
its entry to the U.S. market. Moreover, the U.S. International
Trade Commission has recommended that President Bush
take similar action on imported steel. But long-term
demand is expected to continue to decline, due to
advanced technologies that allow production of steel
using less coke.

Other coal traffic, principally steam coal shipped to
manufacturing plants, increased 6% in 2001 and 4% in
2000. The gain in 2001 resulted from new and increased
business from industrial customers. The increase in 2000
reflected a full year of handling Northern Region traffic;
however, this was mitigated by the loss of some traffic to
competitors.

GENERAL MERCHANDISE traffic volume (carloads)

decreased 7% in 2001, and revenues decreased 2%,
principally due to the effects of the weak economy.
In 2000, traffic volume increased 15%, and revenues
increased 17%, reflecting a full year of operating the
Northern Region.

Automotive traffic volume decreased 10%, and rev-
enues declined 4% in 2001, principally due to a 10% drop
in vehicle production. Revenue per unit increased 7%, prin-
cipally due to rate increases, efficiencies gained from the
redesign of the mixing center network and use of higher
capacity equipment.

In 2000, automotive traffic volume increased 13%, and
revenues increased 23%, reflecting a full year of Northern
Region operations, record vehicle production and the
recapture of business diverted because of service issues

ness through NS’ Thoroughbred Bulk Transfer (TBT) facilities
that handle chemicals and bulk commodities for customers
not located on NS-served lines. Revenue per unit increased
due to higher rates and a favorable change in the mix of
traffic (more longer-haul moves).

In 2000, chemicals traffic volume increased 15%, and

revenues increased 18%, due to a full year of Northern
Region operations and the return of traffic that had been
diverted because of service issues after the Closing Date.
Shipments of miscellaneous chemicals, chlorine, caustic

Automotive
($ millions)

$921

$885

$746

2000

1999

2001
Revenues decreased $36
million, or 4%, in 2001,
due to a 10% drop in traffic
volume. Revenue per unit
increased, principally due to
rate increases and improved
efficiency. This group
includes finished vehicles
for BMW, DaimlerChrysler,
Ford Motor Company,
General Motors, Honda,
Isuzu, Jaguar, Land Rover,
Mazda, Mercedes-Benz,
Mitsubishi, Nissan, Saab,
Subaru, Suzuki, Toyota and
Volkswagen, and auto parts
for Ford Motor Company,
General Motors, Mercedes-
Benz and Toyota.

Chemicals
($ millions)

$756

$752

$641

1999

2000

2001

Revenues decreased $4
million, or 1%, in 2001,
due to lower traffic vol-
umes that resulted from
the weak economy. This
group includes sulfur and
related chemicals, petrole-
um products, chlorine and
bleaching compounds,
plastics, rubber, industrial
chemicals, chemical wastes
and municipal wastes.

after the Closing
Date. The carload
increase was less
than the revenue
increase principally
due to the effects of
a redesign of the
mixing center net-
work. This redesign
improves vehicle
velocity through
the network and
includes changes
in traffic flows
that resulted in a
decline in carloads,
with no correspon-
ding decrease in
revenues.

Ford Motor
Company, NS’
largest customer, has
announced potential
reductions in vehicle
production which
could affect NS vol-
umes. However,
automotive revenues
in 2002 are expect-
ed to be comparable
to those of 2001, as

Metals and Construction
($ millions)

$689

$674

$567

1999

2001
2000
Revenues decreased $15
million, or 2%, in 2001,
principally due to weakness
in the steel industry.
Revenue per unit increased
due to higher rates and
favorable changes in the
mix of traffic. This group
includes steel, aluminum
products, machinery, scrap
metals, cement, aggregates,
bricks and minerals.

soda and plastics contin-
ued to rebound, but sulfur
carloads were down due
to weak fertilizer markets.
Chemicals shipments con-
tinued to increase through
NS’ TBT facilities.

Chemicals revenues are
expected to continue to be
adversely affected until the
economy recovers.
However, NS expects to
benefit from new business
and improved yields.

Metals and construc-

tion traffic volume
decreased 7%, and rev-
enues declined 2% in
2001, reflecting weakness
in the steel and construc-
tion industries. The steel
industry recession,
which began in 2000, has
resulted in excess capacity
and the closing of numer-
ous steel mills. Revenue
per unit increased due
to higher rates and favor-
able changes in the mix
of traffic.

light vehicle production is predicted to be flat.

In 2000, metals and construction traffic volume

Chemicals traffic volume decreased 5%, and revenues
decreased 1% in 2001. The weak economy depressed ship-
ments of petroleum, plastics, industrial and miscellaneous
chemicals. These declines were partially offset by new busi-

increased 29%, and revenues increased 22%, reflecting a
full year of operations over the expanded system. Revenue
per unit declined, largely due to a change in the mix of
traffic. Metals traffic benefited from increased shipments of
sheet steel, imported slab steel and ferrous scrap; however,

this was tempered by a significant slowdown in the steel
industry in the last half of the year. Construction traffic
benefited from continued strength in housing starts and
highway construction.

Metals and construction revenues are expected to suffer

from the effects of a continued softness in the steel mar-
ket. However, increased highway construction in NS’ service
area is expected to mitigate the drop in metals demand.

Agriculture, consumer products and government traffic
volume decreased 3%, and revenues declined 1% in 2001,
primarily due to reduced shipments of fertilizer. This decline
was due to soft farm demand, record high natural gas
prices early in the year (which curtailed production of cer-
tain fertilizers) and increased imports. This was mitigated by
traffic volume increases for grain, flour, wheat and canned
goods. The revenue per unit increase was primarily due to
favorable changes in the mix of traffic.

Paper, clay and forest products traffic volume declined

In 2000, agriculture, consumer products and government

Paper, Clay and Forest Products
($ millions)

$630

$612

$578

1999

2001
2000
Revenues decreased $18
million, or 3%, in 2001, pri-
marily due to a weakened
paper market. Revenue per
unit benefited from higher
rates. This group includes
lumber and wood products,
pulpboard and paper prod-
ucts, woodfibers, woodpulp,
scrap paper and clay. NS
serves 66 paper mills, 105
paper distribution centers
and more than 100 lumber
reload centers.

Agriculture, Consumer
Products and Government
($ millions)

$609

$603

$539

1999

2000

2001

Revenues decreased $6
million, or 1%, in 2001,
principally due to soft
farm demand, depressed
fertilizer production and
increased imports. This
group includes soybeans,
wheat, corn, fertilizers,
animal and poultry feed,
food oils, flour, beverages,
canned goods, sweeteners,
consumer products and
items for the military.

8%, and revenues decreased
3%, in 2001, primarily due to
a weakened paper market.
Paper shipments were adverse-
ly affected by reduced produc-
tion at many NS-served paper
mills, a result of sluggish
newspaper advertising and
soft demand for paper. Lumber
traffic began the year weak,
improved in late summer, but
softened late in the year due
to short-term weakness in
housing starts. Revenue per
unit increased principally due
to higher rates.

In 2000, paper, clay and
forest products traffic volume
increased 5%, and revenues
increased 9%, principally due
to the effects of a full year of
Northern Region operations.
Consolidation in the paper
industry and a weakening
paper market in the second
half of the year contributed to
lower carloads during the
summer months and into the
fall. Weak demand for paper
production inputs, such as
scrap paper and wood pulp,

traffic volume increased 7%, and revenues
increased 13%, due to the effects of a full year
of Northern Region traffic and modest growth
in the Southeast markets. Rate increases and
more longer-haul (higher revenue-per-unit) traf-
fic also contributed to the revenue increase.
Grain traffic benefited from new shuttle-train
service that improved service to new and
expanded Southeast feed mills. In addition, traf-
fic increased for Midwest grain and sweeteners
and consumer goods from the West.

Agriculture, consumer products and gov-
ernment revenues in 2002 are expected to be
comparable to those of 2001. Continued
weakness in the fertilizer market is expected
to offset gains in the Southeast feed markets
and new business.

INTERMODAL traffic volume decreased
1%, but revenues increased slightly in 2001.
Domestic traffic volume was up in the first
half of the year, but demand increasingly
weakened as the year progressed, which
eroded NS’ base of traffic. New business sup-
ported by the opening of three new terminals
and other initiatives mitigated the effects of
the weakened economy. International traffic,
which accounts for about half of intermodal
volume, grew slightly as U.S. imports slowed
with the economy. TCS traffic volume
increased 1% despite economic conditions,

was tempered by stronger demand for newsprint and
printing paper.

Paper, clay and forest products revenues are expected to

continue to be adversely affected by weak demand in
2002, due to continued consolidations and little anticipat-
ed capacity expansion through 2003. NS is pursuing new
business using MODALGISTICS(SM), its supply-chain focused
business unit formed in February 2001.

as it continued to benefit from reliable, trucklike service.
Intermodal revenue per unit dropped later in the year,
reflecting the expiration of fuel surcharges that were imple-
mented late in 2000 and the introduction of new shorter-
haul business.

In 2000, intermodal traffic volume increased 18%, and

revenues increased 32%, primarily due to a full year of
Northern Region traffic and the consolidation of TCS

Intermodal
($ millions)

revenues (see Note 2 on Page 37). About half of the
improvement in revenue per unit resulted from the effects of
consolidating TCS. Prior to June 1, 1999, NS revenues
included only the amounts for rail services it performed
under contract to TCS, but NS volume included most TCS
units. Also contributing to the revenue-per-unit improvement
were rate increases throughout the year on domestic busi-
ness and the implementation of fuel surcharges later in the
year. In addition, increased demand, new business and
improved service contributed to the gains, as major cus-
tomers, including UPS, JB
Hunt, Hub Group and
Maersk, increased volumes.
Despite weak demand in the
first quarter and the loss in
December 1999 of a major
customer, NS had regained its
market share by the second
quarter. Domestic and premi-
um business volumes benefit-
ed from service improvements
and expansion initiatives.
International traffic, which
accounts for about half of
intermodal volume, grew 5%,
notwithstanding the loss of
business from a major cus-
tomer. TCS traffic increased
3%, as it recovered from
service shortcomings after the
Closing Date.

$1,119 $1,123

$849

2001

1999

2000
Revenues increased $4 mil-
lion in 2001, despite a 1%
drop in traffic volume. This
group handles trailers,
domestic and international
containers, TCS equipment
and equipment for
intermodal marketing
companies, international
steamship lines, truckers
and other shippers.

Intermodal revenues are

expected to benefit from
continued improvements in
service and the terminal
capacity added in 2001.

Railway Operating
Expenses
Railway operating expenses
decreased 7% in 2001, but

increased 22% in 2000. Expenses in 2000 included
$165 million of costs related to actions taken to reduce the
size of the work force. Excluding these costs, railway oper-
ating expenses decreased 4% in 2001, while carloads
dropped 3%; and increased 19% in 2000 on carloads that
were 15% higher.

The higher expense increase in 2000 reflected a full year
of Northern Region operations and sharply higher diesel
fuel prices.

The railway operating ratio, which measures the per-
centage of railway operating revenues consumed by railway
operating expenses, was 83.7% in 2001, compared with
87.0% in 2000 (excluding the work-force reduction costs,
which increased the ratio 2.7 percentage points) and
86.3% in 1999.

The decline in the 2001 ratio reflected the increase in
revenue per unit as well as reduced expenses that resulted
from gains in efficiency. The increase in the 2000 ratio
reflected the effects of a full year of Northern Region oper-
ations and the sharp increase in diesel fuel prices, which
more than offset the absence of the significant costs
incurred in 1999 related to the service issues after the
Closing Date. In addition, the ratio was adversely affected
by a change in traffic mix (more resource-intensive traffic,
such as automotive and intermodal) and the new traffic in
the Northern Region, coupled with the decrease in export
coal traffic.

The following table shows the changes in railway oper-

ating expenses summarized by major classifications.

Railway Operating Expenses

($ in millions)

Compensation and benefits *

Materials, services and rents

Conrail rents and services

Depreciation

Diesel fuel

Casualties and other claims

Other

Total

Increases (Decreases)

2001 vs. 2000

2000 vs. 1999

$ (220)

(1)

(57)

(66)

(31)

379

171

167

223

$ (363)

$ 1,002

* Includes $165 million of work-force reduction costs in 2000.

Compensation and benefits represented 39% of total
railway operating expenses and decreased 10% in 2001,
but increased 20% in 2000. Both comparisons reflect the
$165 million of work-force reduction costs in 2000.
Excluding those costs, compensation and benefits
decreased 3% in 2001, but increased 12% in 2000.

The 3% decline in 2001 reflected savings attributable to

the reduced size of the work force. These savings were
somewhat offset by higher wages and benefit costs for
union employees, higher incentive compensation and
reduced pension income.

The 12% increase in 2000 was largely attributable
to the effects of a full year of expanded operations and
higher wages and benefit costs for union employees. These
increases were mitigated by higher pension income and the
absence of the $49 million incurred in 1999 for the Special
Work Incentive Program (SWIP) for union employees in the
third quarter of 1999. Pension income was higher in 2000
largely due to the transfer of assets from the Conrail
pension plan after the Closing Date. NS has substantial
unrecognized gains related to its overfunded pension plan;
amortization of these gains will continue to be included
in “Compensation and benefits” expenses (see Note 11
on Page 42).

The Railroad Retirement and Survivors’ Improvement

Act, which took effect on Jan. 1, 2002, provides for a
phased reduction of the employers’ portions of Tier II
Railroad Retirement payroll taxes. The phase-in calls for a
reduction from 16.1% in 2001 to 15.6% in 2002, 14.2%
in 2003 and 13.1% in 2004. In addition, the supplemental
annuity tax was eliminated. These changes are expected to
result in a $21 million reduction to payroll tax expenses in
2002. The new law allows for investment of Tier II assets in
a diversified portfolio through the newly established
National Railroad Retirement Investment Trust. The law also
provides a mechanism for automatic adjustment of Tier II
payroll taxes should the trust assets fall below a four-year
reserve or exceed a six-year reserve.

Materials, services and rents includes items used for the

maintenance of the railroad’s lines, structures and equip-
ment; the costs of services purchased from outside contrac-
tors, including the net costs of operating joint (or leased)
facilities with other railroads; and the net cost of equip-
ment rentals. This category of expenses decreased slightly
in 2001, but increased 13% in 2000.

In 2001, the effects of lower equipment rents were
largely offset by higher costs for purchased services, includ-
ing expenses for software, consulting and legal fees. The
increase in 2000 was mostly attributable to the effects of a
full year of Northern Region operations and the consolida-
tion of TCS and was mitigated by the absence of significant
costs incurred in 1999 related to the service issues encoun-
tered after the Closing Date.

Equipment rents, which includes the cost to NS of using
equipment (mostly freight cars) owned by other railroads or
private owners, less the rent paid to NS for the use of its
equipment, decreased 11% in 2001, but increased 22% in

2000. The decline in 2001 was principally due to shorter
car cycle times that resulted in fewer car days on line and
fewer freight car and locomotive leases. The 2000 increase
was principally due to the effects of a full year of expanded
operations but was mitigated by a favorable comparison
for the last seven months, as expenses in 1999 were
high due to the service issues encountered after the
Closing Date.

Locomotive and equipment repair costs increased in
2001, principally due to renewed maintenance activity. This
trend is expected to continue in 2002, driven by higher
expenses for freight car repairs. In 2000, maintenance costs
increased, reflecting a full year of Northern Region opera-
tions; however, the increase was tempered by reduced
maintenance activities, a result of cost control efforts.

Conrail rents and services, a new category of expense
beginning in 1999, arose from the expansion of operations
on the Closing Date and amounted to $421 million in
2001, $478 million in 2000 and $311 million in 1999. This
item includes amounts due to PRR and CRC for use of their
operating properties and equipment and CRC’s operation
of the Shared Assets Areas. Also included is NS’ equity in
Conrail’s net earnings since the Closing Date, plus the addi-
tional amortization related to the difference between NS’
investment in Conrail and its underlying equity (see Note 2
on Page 37). The decline in 2001 reflected higher Conrail
earnings and lower expenses in the Shared Assets Areas
(see “Conrail’s Results of Operations, Financial Condition
and Liquidity,” below). Expenses in 2000 included a full
year of operations over Conrail’s lines, compared with
seven months in 1999.

Depreciation expense was up 2% in 2001 and 6% in
2000. Increases in both years were due to property addi-
tions, reflecting substantial levels of capital spending (see
Note 1, “Properties,” on Page 36 for NS’ depreciation poli-
cy). A periodic review of depreciation rates is being final-
ized, and rates are expected to be somewhat lower.

Diesel fuel expenses decreased 14% in 2001, but

increased 87% in 2000. The decline in 2001 was the result
of an 8% drop in consumption and a 7% decline in the
average price per gallon. Expenses in 2001 include $8 mil-
lion related to the hedging program initiated in the second
quarter (see “Market Risks and Hedging Activities,” below
and Note 16 on Page 47). The increase in 2000 expenses

resulted from a 61% rise in the average price per gallon
and higher consumption that reflected a full year of
Northern Region operations.

Casualties and other claims expenses (including the
estimates of costs related to personal injury, property dam-
age and environmental matters) increased slightly in 2001
and 3% in 2000.

The largest component of casualties and other claims
expense is personal injury costs. In 2001, cases involving
occupational injuries comprised about 31% of the total
employee injury cases settled and 15% of the total settle-
ment payments made. Injuries of this type are not generally
caused by a specific accident or event, but, rather, result
from a claimed exposure over time. Many such claims are
being asserted by former or retired employees, some of
whom have not been actively employed in the rail industry
for decades. NS continues to work actively to eliminate all
employee injuries and to reduce the associated costs.
The rail industry remains uniquely susceptible to

litigation involving job-related accidental injury and occu-
pational claims because of an outmoded law, the Federal
Employers’ Liability Act (FELA), originally passed in 1908
and applicable only to railroads. This law, which covers
employee claims for job-related injuries, promotes an
adversarial claims environment and produces results that
are unpredictable and inconsistent. The railroads have
been unsuccessful so far in efforts to persuade Congress
to replace FELA with a no-fault workers’ compensation
system.

NS maintains substantial amounts of commercial insur-
ance for potential third-party liability and property damage
claims. It also retains reasonable levels of risk through self-
insurance.

Other expenses decreased 13% in 2001, but increased
14% in 2000. The decline in 2001 was principally due to
lower bad debt costs, reduced franchise and property taxes,
and lower travel and employee-relocation expenses. The
increase in 2000 reflected a full year of Northern Region
operations and higher bad debt expense.

Other Income – Net
Other income – net was $99 million in 2001, $168 million
in 2000 and $115 million in 1999 (see Note 3 on Page
39). The reduction in 2001 resulted from the absence of
$101 million of gains that occurred in 2000 related to the

sale of certain timber rights and gas and oil royalty and
working interests. This was somewhat offset by lower inter-
est accruals on federal income tax liabilities and a $13 mil-
lion gain from a nonrecurring settlement. Results in 2001
also included an $18 million gain from a large property
sale that closed in December. The increase in 2000 reflect-
ed the $101 million of gains, mitigated by the commence-
ment of a program under which accounts receivable are
sold on a revolving basis (see Note 5 on Page 40).

Income Taxes
Income tax expense in 2001 was $191 million for an effec-
tive rate of 35%, compared with effective rates of 31% in
2000 and 32% in 1999. Excluding the equity in Conrail’s
after-tax earnings, the effective rates were 38% in 2001
and 34% in both 2000 and 1999.

The effective rate in 2001 was higher than that of 2000

and 1999, primarily due to dispositions of tax benefits
related to coal-seam gas properties. The effective rates in
all three years benefited from favorable adjustments upon
filing the prior year tax returns and favorable adjustments
to state tax liabilities. In addition, both 2000 and 1999
benefited from investments in coal-seam gas properties.
In January 1995, the United States Tax Court issued a
preliminary decision that disallowed some of the tax bene-
fits a subsidiary of NS purchased from a third party pur-
suant to a safe harbor lease agreement in 1981. In January
2001, NS received payment from the third party in accor-
dance with indemnification provisions of the lease agreement.

Discontinued Operations
Income from discontinued operations consisted of a
$13 million after-tax gain related to the sale of NS’ motor
carrier subsidiary (see Note 17 on Page 48).

Financial Condition, Liquidity
and Capital Resources

Cash provided by operating activities, NS’ principal source
of liquidity, was $654 million in 2001, compared with
$1.3 billion in 2000 and $533 million in 1999. Results in
2000 reflect the commencement of a program under which
accounts receivable are sold on a revolving basis (see Note
5 on Page 40). Excluding the infusion of cash from this
program, operating cash flow declined $300 million in
2001. The decrease primarily resulted from an $88 million

reduction in the amount of accounts receivable sold, higher
tax payments including amounts applicable to prior years,
an increase in telecommunication receivables, bonus pay-
ments in 2001 (no such payments in 2000) and the timing
of payrolls. A significant portion of payments made to PRR
(which are included in “Conrail Rents and Services” and,
therefore, are a use of cash in “Cash provided by operating
activities”) are borrowed back from a PRR subsidiary and,
therefore, are a source of cash in “Proceeds from borrow-
ings.” In 2001, NS’ net cash flow from these borrowings
amounted to $250 million. The improvement in cash pro-
vided by operating activities in 2000 resulted primarily from
favorable changes in working capital, including an
improvement in collection of accounts receivable, a length-
ening of accounts payable and the lack of bonus payments.

The large changes in “Accounts receivable” and

“Current liabilities other than debt” in the 1999 cash flow
statement primarily resulted from the commencement of
operations in the Northern Region. In addition, collection
of accounts receivable had slowed.

NS’ working capital deficit was $1.3 billion at Dec. 31,

2001, compared with $1.0 billion at Dec. 31, 2000. The
increase resulted principally from a higher amount of debt
due within one year. Debt due in 2002 is expected to be
paid using cash generated from operations (including sales
of accounts receivable), cash on hand and proceeds from
borrowings. Part of the working capital deficit at Dec. 31,
2001, arises from a $373 million balance in “Notes and
accounts payable to Conrail” that is not expected to be
repaid in 2002.

NS currently has the capability to increase the amount
of accounts receivable being sold under the revolving sale
program to meet its more immediate working capital
needs. During 2001, the amount of receivables NS could
sell under this program ranged from $345 million to $468
million, and the amount of receivables NS sold ranged from
$300 million to $402 million. Moreover, NS has the capa-
bility to issue up to $1 billion of commercial paper (see
Note 8 on Page 41); however, any reduction in its credit
rating could limit NS’ ability to access the commercial
paper markets (see also the discussion of financing activi-
ties, below).

NS expects to generate sufficient cash flow from opera-

tions to meet its ongoing obligations. This expectation is
based on a view that the economy will remain flat for the
first half of 2002 and resume growth in the third and
fourth quarters.

NS’ contractual obligations related to its long-term debt
(including capital leases), operating leases and agreements
with CRC are as follows:

($ in millions)
Long-term debt
and capital leases

Operating leases

Agreements with CRC

Total

2002

2003-
2004

2005-
2006

2007 and
Subsequent

$ 7,632

890

775

605

113

$ 705

172

706

117

$ 5,616

488

618

Total

$ 9,297

745

$ 939

891

$ 6,722

NS also has contractual obligations to PRR as disclosed in

Note 2 on Page 37. However, NS has the ability to borrow
back funds from PRR to the extent they are not needed to
fund contractual obligations at Conrail. As an indirect owner
of Conrail, NS may need to make capital contributions, loans
or advances to Conrail to fund its contractual obligations.
The following table presents 58% of Conrail’s contractual
obligations for long-term debt (including capital leases) and
operating leases.

($ in millions)
Long-term debt
and capital leases

Operating leases

Total

2002

705

369

$ 1,074

2003-
2004

2005-
2006

2007 and
Subsequent

$ 560

208

$ 123

112

$ 768

NS also has two transactions not included in the balance
sheets or in the previous table of its contractual obligations
consisting of an accounts receivable sale program (see Note
5 on Page 40) and an operating lease covering 140 locomo-
tives (see Note 9 on Page 42).

Under the accounts receivable sale program, NS sells
without recourse undivided ownership interests in a pool of
accounts receivable to two unrelated buyers. NS has no own-
ership interest in the buyers. The buyers issued debt to fund
their initial purchase, and NS used the proceeds it received
from the initial purchase primarily to pay down its outstand-
ing debt. NS has no obligation related to the buyers’ debt,
and there is no existing obligation to repurchase sold receiv-
ables. Upon termination of the program, the buyers would
cease purchasing new receivables and collections related to
the sold receivables would be retained by the buyers.

The operating lease covering the 140 locomotives is
renewable annually at NS’ option and expires in 2008. The
lessor is not related to NS and its owner has a substantive
residual equity capital investment at risk in the entity. The

lessor owns the locomotives and issued debt to finance
their purchase. NS has no obligation related to the debt.
NS has the option to purchase the locomotives, but also can
return them to the lessor. The return provisions of the lease
are not so onerous as to preclude this option. If NS does not
purchase the locomotives at the end of the maximum lease
term, it is liable for any shortfall in the then fair value of the
locomotives and a specified residual value. NS does not
expect to be required to make any payments under this
provision.

Cash used for investing activities increased slightly in 2001,
but decreased slightly in 2000. Property additions were up
2% in 2001, following a large decline in 2000 that reflected
the absence of significant locomotive purchases, as fleet
additions were accomplished by operating lease. Investing
activities in 1999 included approximately $140 million more
of borrowings against the net cash surrender value of corpo-
rate-owned life insurance than in 2000. Property additions
account for most of the recurring spending in this category.

The following tables show capital spending and track and

equipment statistics for the past five years.

Capital Expenditures
2001

($ in millions)

2000

1999

Road

Equipment

Other property

Total

$ 505

233

557

146

$ 559

349

1998

612

442

1997

$ 599

306

$ 746

731

$ 912

$ 1,060

$ 929

Capital expenditures increased 2% in 2001, but
decreased 20% in 2000. Outlays in 2001 included
amounts for locomotive purchases that were somewhat
offset by lower expenditures for freight car purchases and
roadway projects. The decline in 2000 reflected lower capital
expenditures for locomotives as a result of the operating
lease. In both years, spending for road included fiber-optic
infrastructure that is expected to be completed in 2002
(see “Telecommunications Subsidiary,” below).

Track Structure Statistics (Capital and Maintenance)

2001

Track miles of rail installed

254

Miles of track surfaced

3,836

New crossties installed

2000

390

3,687

1999

403

5,087

1998

429

4,715

1997

451

4,703

(millions)

1.5

2.3

2.0

2.2

Average Age of Owned Railway Equipment
1999
2001
(Years)

2000

Freight cars

Locomotives

Retired locomotives

25.4

15.7

22.4

24.6

16.1

24.5

23.8

15.4

22.7

1998

23.6

15.4

20.6

1997

23.0

15.3

23.3

The table above excludes equipment leased from PRR

(see Note 2 on Page 37), which comprises 16% of the
freight car fleet and 27% of the locomotive fleet.

The higher average age of owned locomotives in 2000

reflects the fact that locomotives leased in 2000 are not
included in the statistic. The 1998 decrease in the average
age of retired locomotives resulted from a disproportionate
share of early retirements as well as retention of older units
in anticipation of the Closing Date.

Through its coal car rebody program, which was sus-
pended in 2000, NS converted about 29,000 hopper cars
into high-capacity steel gondolas or hoppers. As a result,
the remaining service life of the freight-car fleet is greater
than may be inferred from the increasing average age
shown in the table above.

For 2002, NS has budgeted $705 million for capital
expenditures. The anticipated spending includes $482 mil-
lion for roadway projects, of which $366 million is for track
and bridge program work. Also included are projects for
marketing and industrial development initiatives and con-
tinuing investments in intermodal infrastructure. Equipment
spending of $173 million includes the purchase of 50 loco-
motives and upgrades to existing units, and projects related
to computers and information technology, including addi-
tional security and backup systems. NS issued in February
2002 debt secured by the locomotives.

Cash provided by financing activities in 2001 was
$151 million, and reflects the effects of the reduction to
the dividend in January 2001. Financing activities included
loan transactions with a PRR subsidiary that resulted in net
borrowings of $250 million in 2001 and net repayments of
$72 million in 2000 (see Note 2 on Page 37). Excluding
these borrowings, debt was reduced $20 million in 2001
and $422 million in 2000. The substantial net reduction of
debt in 2000 was accomplished in part with the proceeds
from the sale of accounts receivable. NS’ debt-to-total capi-
talization ratio (excluding notes payable to Conrail) at year
end was 55.6% in 2001 and 56.7% in 2000.

NS currently has in place a new $1 billion, five-year credit
facility, which replaced the facility that would have expired in
May 2002. The new agreement provides for borrowings at
prevailing rates and includes financial covenants similar to the
old facility (see Note 8 on Page 41). In addition, NS has
issued only $250 million of debt under its $1 billion shelf reg-
istration that became effective in April 2001.

Conrail’s Results of Operations,
Financial Condition and Liquidity

Through May 31, 1999, Conrail’s results of operations
include freight line-haul revenues and related expenses.
After the Closing Date, June 1, 1999, its results reflect its
new structure and operations (see Note 2 on Page 37).
Currently, Conrail’s major sources of operating revenues are
operating fees and rents from NSR and CSXT. The composi-
tion of Conrail’s operating expenses also changed.

Conrail’s net income was $174 million in 2001, com-
pared with $170 million in 2000 and $26 million in 1999
(see Note 2 on Page 37). Results in 1999 included $180
million of expenses ($121 million after taxes), principally to
increase certain components of its casualty liability based on
an actuarial valuation, to adjust certain litigation and envi-
ronmental liabilities related to settlements and completion
of site reviews and a credit adjustment related to the
assumption of a lease obligation by CSX. Excluding the
effects of these items, net income would have been $147
million in 1999.

The improvement in 2001 reflected lower casualties and

other claims expenses, a favorable adjustment to state
income tax reserves and environmental and insurance set-
tlements in Conrail’s favor. These positive items were offset
in part by the absence of significant gains from the sale of
property. The 2000 increase reflected a $37 million after-tax
gain from a property sale and the absence of significant
transition-related expenses.

Conrail’s operating revenues were $903 million in 2001,
$985 million in 2000 and $2.2 billion in 1999. The decline
in 2001 resulted from lower revenues at Conrail’s Indiana
Harbor Belt subsidiary, the expiration of certain equipment
leases and lower operating fees, largely because of reduced
operating costs in the Shared Assets Areas. The decline in
2000 was attributable to the change in operations.

Conrail’s operating expenses were $639 million in 2001,

$749 million in 2000 and $2.0 billion in 1999. The decline

in 2001 was primarily due to lower expenses for materials,
services and rents; casualties and other claims; and compen-
sation and benefits. The decrease in 2000 was principally
due to the change in operations and the absence of the
$180 million of expenses discussed above and $60 million
of transition-related expenses (principally technology inte-
gration costs and employee stay bonuses).

Conrail’s cash provided by operations increased $140
million, or 39%, in 2001, but decreased $34 million, or 9%,
in 2000. The 2001 increase was principally due to a $50
million cash payment for transferring to a third party certain
rights to license, manage and market signboard advertising
on Conrail’s property for 25 years and proceeds from a
favorable insurance settlement. The 2000 reduction reflected
the change in operations and payment of one-time items
owed to NSR and CSXT. Cash generated from operations is
Conrail’s principal source of liquidity and is primarily used
for debt repayments and capital expenditures. Debt repay-
ments totaled $61 million in 2001 and $318 million in
2000. Capital expenditures totaled $47 million in 2001 and
$220 million in 2000.

Conrail had working capital of $438 million at Dec. 31,
2001, compared with $85 million at Dec. 31, 2000, includ-
ing $687 million and $323 million, respectively, of amounts
receivable from NS and CSX. Conrail is not an SEC regis-
trant 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 $44 million in 2001, $21 million in 2000 and $17 mil-
lion in 1999. NS’ other comprehensive loss for 2001, as
shown in the Consolidated Statement of Changes in
Stockholders’ Equity on Page 35, included $41 million for
its portion of Conrail’s other comprehensive loss (see Note
13 on Page 45).

Other Matters

Telecommunications Subsidiary
NS’ subsidiary, Thoroughbred Technology and
Telecommunications, Inc. (T-Cubed), is codeveloping fiber
optic infrastructure with members of the telecommunications
industry. This industry has recently experienced a severe
downturn. During the second quarter, one of T-Cubed’s
codevelopers filed for protection under Chapter 11 of the
U.S. Bankruptcy Code and foreign laws. This codeveloper

owes T-Cubed amounts for work performed on joint proj-
ects; however, based on known facts and circumstances,
Management believes that such amounts ultimately will
be realized. T-Cubed is engaged in contract litigation with
a second codeveloper concerning the latter’s obligation
to purchase fiber optic infrastructure installed by T-Cubed
between Cleveland, Ohio, and northern Virginia.
Management expects to prevail in this litigation. The
ability to collect a judgment against the codeveloper,
Williams Communications, LLC, may be limited due to its
declining financial condition; however, the shortfall,
if any, cannot now be determined.

As a result of changes in the values of telecommunica-
tions assets, T-Cubed is monitoring its carrying amount of
these assets, as required by SFAS No. 121, “Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of.” To date, based on the known facts and
circumstances, management believes that its ultimate invest-
ment in these assets will be recovered and, accordingly, no
impairment has been recognized (see Note 6 on Page 40).

Labor Arbitration
Several hundred claims have been filed on behalf of
NSR employees furloughed after June 1, 1999, for various
periods of time, alleging that the furloughs were a result
of the Conrail transaction and seeking “New York Dock”
income protection benefits. One labor organization has ini-
tiated arbitration on behalf of approximately 100 of these
claimants. Management believes, based on known facts
and circumstances, including the availability of legal
defenses, that the amount of liability for these claims
should not have a material adverse effect on NS’ financial
position, results of operations or liquidity. Depending on
the outcome of the arbitration, other claims may be filed
or progressed to arbitration. Should all such claimants pre-
vail, there could be a significant effect on results of opera-
tions in a particular quarter.

Labor Agreements
Approximately 85 percent of NS’ railroad employees are
covered by collective bargaining agreements with 15 dif-
ferent labor unions. These agreements remain in effect
until changed pursuant to the Railway Labor Act.
Moratorium provisions in these agreements permitted NS
and the unions to propose such changes in late 1999;
negotiations at the national level commenced shortly
thereafter. The outcome of these negotiations is uncertain.

However, agreements have been reached with the
Brotherhood of Maintenance of Way Employes, which
represents about 4,400 NS employees, and with the
Brotherhood of Locomotive Engineers, which represents
about 5,000 NS employees. In addition, a tentative
national agreement (subject to ratification) has been
reached with the United Transportation Union, which rep-
resents about 7,000 NS employees. The tentative national
agreement reached with the International Brotherhood of
Electrical Workers, which represents about 1,000 NS
employees, was not ratified.

Market Risks and Hedging Activities
NS uses derivative financial instruments to reduce the risk
of volatility in its diesel fuel costs and to manage its over-
all exposure to fluctuations in interest rates.

In 2001, NS began a program to hedge a portion of

its diesel fuel consumption. The intent of the program is to
assist in the management of NS’ aggregate risk exposure
to fuel price fluctuations, which can significantly affect NS’
operating margins and profitability, through the use of one
or more types of derivative instruments.

Diesel fuel costs represented 8% of NS’ operating
expenses for 2001. The program provides that NS will not
enter into any fuel hedges with a duration of more than
36 months, and that no more than 80% of NS’ average
monthly fuel consumption will be hedged for each month
within any 36-month period.

As of Dec. 31, 2001, through swap transactions and
advance purchases, NS has hedged approximately 40% of
expected 2002 diesel fuel requirements. The effect of the
hedges is to yield an average cost of 70 cents per hedged
gallon, including federal taxes and transportation.

A 10% decrease in diesel fuel prices would increase NS’
liability related to the swaps by approximately $15 million.

NS manages its overall exposure to fluctuations in
interest rates by issuing both fixed- and floating-rate debt
instruments and by entering into interest-rate hedging
transactions to achieve an appropriate mix within its debt
portfolio.

Of NS’ total debt outstanding (see Note 8 on Page
41), all is fixed-rate debt, except for most capital leases,
$250 million of notes due in 2003 and $174 million of
equipment obligations. As a result, NS’ debt subject to
interest rate exposure totaled $675 million at Dec. 31,
2001. A 1% increase in interest rates would increase NS’
total annual interest expense related to all its variable

debt by approximately $7 million. Management considers
it unlikely that interest rate fluctuations applicable to these
instruments will result in a material adverse effect on NS’
financial position, results of operations or liquidity.

The capital leases, which carry an average fixed rate

of 7.1%, were effectively converted to variable rate obliga-
tions using interest rate swap agreements. On Dec. 31,
2001, the average pay rate under these agreements was
2.8%, and the average receive rate was 7.1%. During
2001, the effect of the swaps was to reduce interest
expense by $3 million. A portion of the lease obligations is
payable in Japanese yen. NS eliminated the associated
exchange rate risk at the inception of each lease with a
yen deposit sufficient to fund the yen-denominated obliga-
tion. Most of these deposits are held by foreign banks, pri-
marily Japanese. As a result, NS is exposed to financial
market risk relative to Japan. Counterparties to the interest
rate swaps and Japanese banks holding yen deposits are
major financial institutions believed by management to be
creditworthy.

Environmental Matters
NS is subject to various jurisdictions’ environmental laws
and regulations. It is NS’ policy to record a liability where
such liability or loss is probable and its amount can be
estimated reasonably. Claims, if any, against third parties
for recovery of cleanup costs incurred by NS are reflected
as receivables (when collection is probable) in the balance
sheet and are not netted against the associated NS liabili-
ty. Environmental engineers regularly participate in ongo-
ing evaluations of all identified sites and in determining
any necessary adjustments to initial liability estimates. NS
also has established an Environmental Policy Council, com-
posed of senior managers, to oversee and interpret its
environmental policy.

Operating expenses for environmental matters totaled

approximately $10 million in 2001, $11 million in 2000
and $12 million in 1999, and capital expenditures totaled
approximately $10 million in each of 2001 and 2000 and
$8 million in 1999. Capital expenditures in 2002 are
expected to be comparable to those in 2001.

NS’ balance sheets included liabilities for environmen-

tal exposures in the amount of $33 million at Dec. 31,
2001, and $36 million at Dec. 31, 2000 (of which $8 mil-
lion was accounted for as a current liability in each year). At
Dec. 31, 2001, the liability represented NS’ estimate of the
probable cleanup and remediation costs based on available
information at 126 identified locations. On that date,

10 sites accounted for $17 million of the liability, and no
individual site was considered to be material. NS anticipates
that much of this liability will be paid out over five years;
however, some costs will be paid out over a longer period.
At some of the 126 locations, certain NS subsidiaries,
usually in conjunction with a number of other parties, have
been identified as potentially responsible parties by the
Environmental Protection Agency (EPA) or similar state
authorities under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, or
comparable state statutes, which often impose joint and
several liability for cleanup costs.

With respect to known environmental sites (whether

identified by NS or by the EPA or comparable state authori-
ties), estimates of NS’ ultimate potential financial exposure
for a given site or in the aggregate for all such sites are
unavoidably imprecise because of the widely varying costs
of currently available cleanup techniques, the likely develop-
ment of new cleanup technologies, the difficulty of deter-
mining in advance the nature and full extent of contamina-
tion 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’ traf-
fic mix, particularly those classified as hazardous materials,
can pose special risks that NS and its subsidiaries work
diligently to minimize. In addition, several NS subsidiaries
own, or have owned, land used as operating property, or
which is leased or may have been leased and operated by
others, or held for sale.

Because environmental problems that are latent or
undisclosed may exist on these properties, there can be no
assurance that NS will not incur environmental liabilities or
costs with respect to one or more of them, the amount and
materiality of which cannot be estimated reliably at this
time. Moreover, lawsuits and claims involving these and
other unidentified environmental sites and matters are like-
ly to arise from time to time. The resulting liabilities could
have a significant effect on financial condition, results of
operations or liquidity in a particular year or quarter.

However, based on an assessment of known facts
and circumstances, management believes that it is unlikely
that any known matters, either individually or in the
aggregate, will have a material adverse effect on NS’
financial position, results of operations or liquidity.

New Accounting Pronouncement
In October 2001, the Financial Accounting Standards
Board issued Statement No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.” Statement
No. 144 supersedes Statement No. 121, “Accounting for
the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of,” but it retains many of the fun-
damental provisions of that Statement. Statement No. 144
also broadens the presentation of discontinued operations
to include more disposal transactions. NS’ adoption of
Statement No. 144, effective Jan. 1, 2002, did not have a
material effect on its financial statements.

Inflation
Generally accepted accounting principles require the use
of historical cost in preparing financial statements. This
approach disregards the effects of inflation on the replace-
ment cost of property. NS, a capital-intensive company,
has most of its capital invested in such assets. The replace-
ment cost of these assets, as well as the related deprecia-
tion expense, would be substantially greater than the
amounts reported on the basis of historical cost.

Trends
Federal Economic Regulation
Efforts may be made in 2002 to reimpose unwarranted
federal economic regulation on the rail industry. The
Staggers Rail Act of 1980, which substantially reduced
such regulation, encouraged and enabled rail carriers to
innovate and to compete for business. NS and other rail
carriers will oppose any efforts to reimpose unwarranted
economic regulation.

Utility Deregulation
Deregulation of the electrical utility industry is expected to
increase competition among electric power generators;
deregulation over time would permit wholesalers and pos-
sibly retailers of electric power to sell or purchase increas-
ing quantities of power to or from distant parties. The
effects of deregulation on NS and on its customers cannot
be predicted with certainty; however, NS serves a number
of efficient power producers and is working diligently to
ensure that its customers remain competitive in this evolv-
ing environment.

Carbon-Based Fuel
There is growing concern in some quarters that emissions
resulting from burning carbon-based fuel, including coal,
are contributing to global warming and causing other
environmental changes. To the extent that these concerns
evolve into a consensus among policy-makers, the impact
could be either a reduction in the demand for coal or
imposition of more stringent regulations on emissions,
which might result in making coal a less economical
source of power generation or make permitting of coal-
fired facilities even more difficult. The revenues and net
income of NSR and other railroads that move large quanti-
ties of coal could be affected adversely.

Forward-Looking Statements
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations contains forward-
looking statements that may be identified by the use of
words like “believe,” “expect,” “anticipate” and “project.”
Forward-looking statements reflect management’s good-
faith evaluation of information currently available.
However, such statements are dependent on and, there-
fore, can be influenced by, a number of external variables
over which management has little or no control, including:
domestic and international economic conditions; the busi-
ness environment in industries that produce and consume
rail freight; competition and consolidation within the
transportation industry; fluctuation in prices of key materi-
als, in particular diesel fuel; labor difficulties, including
strikes and work stoppages; legislative and regulatory
developments; changes in securities and capital markets;
and natural events such as severe weather, floods and
earthquakes. Forward-looking statements are not, and
should not be relied upon as, a guaranty of future per-
formance or results. Nor will they necessarily prove to be
accurate indications of the times at or by which any such
performance or results will be achieved. As a result, actual
outcomes and results may differ materially from those
expressed in forward-looking statements. The Company
undertakes no obligation to update or revise forward-
looking statements.

Consolidated Statements of Income
Norfolk Southern Corporation and Subsidiaries

Railway operating revenues

6,170

6,159

5,242

2001

Years ended December 31,
2000
($ in millions, except earnings per share)

1999

Railway operating expenses

Compensation and benefits (Note 11)
Materials, services and rents
Conrail rents and services (Note 2)
Depreciation
Diesel fuel
Casualties and other claims
Other

Total railway operating expenses

Income from railway operations

Equity in earnings of Conrail (Note 2)
Other income – net (Note 3)
Interest expense on debt (Note 6)

Income from continuing operations before income taxes

Provision for income taxes (Note 4)

Income from continuing operations

Discontinued operations – Gain on sale of
motor carrier, net of taxes (Note 17)

2,014
1,444
421
514
412
143
215
5,163

1,007

—
99
(553)
553

191
362

2,234
1,445
478
503
478
142
246
5,526

633

—
168
(551)
250

78
172

—

1,855
1,274
311
475
255
138
216
4,524

718

49
115
(531)
351

112
239

—

Net income

375

172

239

Earnings per share (Note 14)

Income from continuing operations – basic and diluted

Net income – basic and diluted

See accompanying Notes to Consolidated Financial Statements

0.94

0.97

0.45

0.63

Consolidated Balance Sheets
Norfolk Southern Corporation and Subsidiaries

Assets
Current assets:

Cash and cash equivalents
Short-term investments
Accounts receivable, net (Note 5)
Due from Conrail (Note 2)
Materials and supplies
Deferred income taxes (Note 4)
Other current assets

Total current assets

Investment in Conrail (Note 2)
Properties less accumulated depreciation (Note 6)
Other assets

As of December 31,

2001

2000

($ in millions)

204
—
475
8
90
162
108
1,047

6,161
11,208
1,002

—
2
411
31
91
182
132
849

6,154
11,105
868

Total assets

$ 19,418

$ 18,976

Liabilities and stockholders’ equity
Current liabilities:

Accounts payable (Note 7)
Income and other taxes
Notes and accounts payable to Conrail (Note 2)
Other current liabilities (Note 7)
Current maturities of long-term debt (Note 8)

Total current liabilities

Long-term debt (Note 8)
Other liabilities (Note 10)
Minority interests
Deferred income taxes (Note 4)

Total liabilities

Stockholders’ equity:

Common stock $1.00 per share par value, 1,350,000,000 shares authorized;

issued 407,000,871 and 405,421,447 shares, respectively

Additional paid-in capital
Accumulated other comprehensive loss (Note 13)
Retained income
Less treasury stock at cost, 21,169,125 and 21,363,974 shares, respectively

Total stockholders’ equity

848
312
373
248
605
2,386

7,027
1,089
45
2,781
13,328

407
423
(55)

5,335
(20)
6,090

925
251
155
259
297
1,887

7,339
1,131
50
2,745
13,152

405
392
(6)
5,053
(20)
5,824

Total liabilities and stockholders’ equity

$ 19,418

$ 18,976

See accompanying Notes to Consolidated Financial Statements

Consolidated Statements of Cash Flows
Norfolk Southern Corporation and Subsidiaries

Cash flows from operating activities

Net income
Reconciliation of net income to

net cash provided by operating activities:

Depreciation
Deferred income taxes
Equity in earnings of Conrail
Gains and losses on properties and investments
Income from discontinued operations
Changes in assets and liabilities affecting operations:

Accounts receivable (Note 5)
Materials and supplies
Other current assets and due from Conrail
Current liabilities other than debt
Other – net (Note 11)

Net cash provided by operating activities

Cash flows from investing activities

Property additions
Property sales and other transactions
Investments, including short-term
Investment sales and other transactions

Net cash used for investing activities

Cash flows from financing activities

Dividends
Common stock issued – net
Proceeds from borrowings
Debt repayments

Net cash provided by (used for) financing activities

527
44
(44)
(59)
(13)

(74)
1
46
(27)
(122)
654

(746)
156
(99)
88
(601)

(93)
14
1,995
(1,765)
151

Net increase (decrease) in cash and cash equivalents

204

Cash and cash equivalents

At beginning of year

—

2001

Years ended December 31,
2000

1999

($ in millions)

$ 375

172

239

517
2
(21)
(160)
—

446
9
60
220
97
1,342

(731)
137
(77)
90
(581)

(306)
2
1,055
(1,549)
(798)

(37)

489
85
(17)
(62)
—

(322)
(40)
(50)
259
(48)
533

(912)
104
(126)
343
(591)

(304)
14
1,110
(730)
90

At end of year

$ 204

$ —

Supplemental disclosures of cash flow information

Cash paid during the year for:

Interest (net of amounts capitalized)
Income taxes

See accompanying Notes to Consolidated Financial Statements

$ 550
74
$

$
$

543
5

$
$

520
16

Consolidated Statements of Changes in Stockholders’ Equity
Norfolk Southern Corporation and Subsidiaries

Common
Stock

Accumulated
Addi-
Other
tional
Paid-In Comprehensive Retained
Capital
Income
Loss
($ in millions, except per share amounts)

Treasury
Stock

Total

$ 401

$ 296

(8)

$5,252

$ (20)

$ 5,921

(3)

239

(304)

239
(3)
236

(304)
79

404

372

(11)

5,187

(20)

5,932

172

(306)

172
5
177

(306)
21

405

392

(6)

5,053

(20)

5,824

(49)

375

(93)

375
(49)
326

(93)
33

Balance December 31, 1998
Comprehensive income – 1999

Net income
Other comprehensive loss (Note 13)
Total comprehensive income

Dividends on Common Stock,

$0.80 per share

Other (Notes 11 and 12)

Balance December 31, 1999
Comprehensive income – 2000

Net income
Other comprehensive income (Note 13)
Total comprehensive income

Dividends on Common Stock,

$0.80 per share

Other (Notes 11 and 12)

Balance December 31, 2000
Comprehensive income – 2001

Net income
Other comprehensive loss (Note 13)
Total comprehensive income

Dividends on Common Stock,

$0.24 per share

Other (Notes 11 and 12)

Balance December 31, 2001

$ 407

$ 423

$ (55)

$5,335

$ (20)

$ 6,090

See accompanying Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements

The following Notes are an integral part of the Consolidated
Financial Statements.

pensions and postretirement benefits. Changes in facts and
circumstances may result in revised estimates.

1 Summary of Significant

Accounting Policies

Description of Business
Norfolk Southern Corporation is a Virginia-based holding
company engaged principally in the transportation of
freight by rail, operating approximately 21,500 route miles
primarily in the East and Midwest. These financial state-
ments include Norfolk Southern Corporation (Norfolk
Southern) and its majority-owned and controlled sub-
sidiaries (collectively, NS) on a consolidated basis. Norfolk
Southern’s major subsidiary is Norfolk Southern Railway
Company (NSR). All significant intercompany balances and
transactions have been eliminated in consolidation.

The railroad transports raw materials, intermediate
products and finished goods classified in the following
market groups (percent of total railway operating rev-
enues): coal (25%); automotive (14%); chemicals (12%);
metals/construction (11%); paper/clay/forest products
(10%); agriculture/consumer products/government (10%);
and intermodal (18%). Ultimate points of origination or
destination for some of the freight (particularly coal bound
for export and intermodal containers) are outside the
United States. Approximately 85% of NS’ railroad employ-
ees are covered by collective bargaining agreements with
15 different labor unions.

Through a jointly owned entity, Norfolk Southern and
CSX Corporation own the stock of Conrail Inc., which owns
the major Northeast freight railroad. Norfolk Southern has
a 58% economic and 50% voting interest in the jointly
owned entity (see Note 2).

Use of Estimates
The preparation of financial statements in accordance with
generally accepted accounting principles requires manage-
ment to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Management reviews
its estimates, including those related to the recoverability and
useful lives of assets, as well as liabilities for litigation, envi-
ronmental remediation, casualty claims, income taxes,

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 classifi-
cation as securities “held-to-maturity,” “trading” or “avail-
able-for-sale.” Unrealized gains and losses for investments
designated as “available-for-sale,” net of taxes, are recog-
nized in “Accumulated other comprehensive loss.”

Investments, where NS has the ability to exercise signif-

icant influence over but does not control the entity, are
accounted for using the equity method in accordance with
APB Opinion No. 18, “The Equity Method of Accounting
for Investments in Common Stock.”

Materials and Supplies
“Materials and supplies,” consisting mainly of fuel oil and
items for maintenance of property and equipment, are
stated at the lower of average cost or market. The cost of
materials and supplies expected to be used in capital addi-
tions or improvements is included in “Properties.”

Properties
“Properties” are stated principally at cost and are depreci-
ated using group depreciation. Rail is depreciated primarily
on the basis of use measured by gross ton-miles. Other
properties are depreciated generally using the straight-line
method over the lesser of estimated service or lease lives.
NS capitalizes interest on major capital projects during the
period of their construction. Expenditures, including those
on leased assets, that extend an asset’s useful life or
increase its utility are capitalized. Maintenance expense is
recognized when repairs are performed. When properties
other than land and nonrail assets are sold or retired in
the ordinary course of business, the cost of the assets, net
of sale proceeds or salvage, is charged to accumulated
depreciation rather than recognized through income. Gains
and losses on disposal of land and nonrail assets are
included in “Other income - net” (see Note 3).

NS reviews the carrying amount of properties whenever
events or changes in circumstances indicate that such car-
rying amount may not be recoverable based on future

undiscounted cash flows or estimated net realizable value.
Assets that are deemed impaired as a result of such review
are recorded at the lower of carrying amount or fair value.

Revenue Recognition
Revenue is recognized proportionally as a shipment moves
from origin to destination. Refunds due in accordance with
transportation contracts are recorded as a reduction to rev-
enues during the life of the contract, based on management’s
best estimate of projected liability.

Derivatives
NS does not engage in the trading of derivatives. NS uses
derivative financial instruments to reduce the risk of
volatility in its diesel fuel costs and in the management of
its mix of fixed and floating-rate debt. Management has
determined that these derivative instruments qualify as
either fair-value or cash-flow hedges, having values that
highly correlate with the underlying hedged exposures and
have designated such instruments as hedging transac-
tions. Credit risk related to the derivative financial instru-
ments is considered to be minimal and is managed by
requiring high credit standards for counterparties and peri-
odic settlements.

Required Accounting Changes
Effective Jan. 1, 2001, NS adopted Statement of Financial
Accounting Standards (SFAS) No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and SFAS
No. 138, “Accounting for Certain Derivative Instruments and
Certain Hedging Activities “ (see Note 16).

Reclassifications
Certain amounts in the consolidated financial statements and
notes thereto have been reclassified to conform to the 2001
presentation.

2 Investment in Conrail and
Operations Over Its Lines

Overview
Norfolk Southern and CSX Corporation (CSX) jointly own
Conrail Inc. (Conrail), whose primary subsidiary is
Consolidated Rail Corporation (CRC), the major freight rail-
road in the Northeast. From May 23, 1997, the date
Norfolk Southern and CSX completed their acquisition of
Conrail stock, until June 1, 1999, Conrail’s operations con-

tinued substantially unchanged while Norfolk Southern
and CSX awaited regulatory approvals and prepared
for the integration of the respective Conrail routes and
assets to be leased to their railroad subsidiaries, NSR
and CSX Transportation, Inc. (CSXT). From time to time,
Norfolk Southern and CSX, as the indirect owners of
Conrail, may need to make capital contributions, loans
or advances to Conrail.

Operations of Conrail’s Lines
On June 1, 1999 (the Closing Date), NSR and CSXT began
operating as parts of their respective rail systems the sepa-
rate Conrail routes and assets leased to them pursuant to
operating and lease agreements.

The Operating Agreement between NSR and Pennsyl-
vania Lines LLC (PRR), a wholly owned subsidiary of CRC,
governs substantially all nonequipment assets to be oper-
ated by NSR and has an initial 25-year term, renewable at
the option of NSR for two five-year terms. Payments under
the Operating Agreement are subject to adjustment every
six years to reflect changes in values. NSR also has leased
or subleased for varying terms from PRR a number of
equipment assets. Costs necessary to operate and maintain
the PRR assets, including leasehold improvements, are
borne by NSR. CSXT has entered into comparable
arrangements, for the operation and use of certain other
CRC routes and assets, with another wholly owned CRC
subsidiary.

NSR and CSXT also have entered into agreements with
CRC governing other properties that continue to be owned
and operated by CRC (the Shared Assets Areas). NSR and
CSXT pay CRC a fee for joint and exclusive access to the
Shared Assets Areas. In addition, NSR and CSXT pay, based
on usage, the costs incurred by CRC to operate the Shared
Assets Areas.

Future minimum lease payments due to PRR under the

Operating Agreement and lease agreements and to CRC
under the Shared Assets Areas (SAA) agreements are as
follows:

($ in millions)
2002
2003
2004
2005
2006
2007 and subsequent years

Total

PRR Oper.
Agmt.
$ 196
217
238
246
246
4,530
$ 5,673

PRR Lease
Agmts.
$ 131
109
93
72
57
171
$ 633

SAA
Agmts.
27
$
30
32
34
34
618
$ 775

Operating lease expense related to the agreements,
which is included in “Conrail rents and services,” amount-
ed to $467 million in 2001, $502 million in 2000 and
$273 million in 1999.

On the Closing Date, both NS’ railroad route miles and
its railroad employees increased approximately 50 percent.
NSR and CSXT now provide substantially all rail freight
services on Conrail’s route system, perform most services
incident to customer freight contracts and employ the
majority of Conrail’s former work force. As a result, NSR
receives all freight revenues and incurs all expenses on the
PRR lines.

Investment in Conrail
NS is applying the equity method of accounting to its
investment in Conrail in accordance with APB Opinion No.
18, “The Equity Method of Accounting for Investments in
Common Stock.”

NS is amortizing the excess of the purchase price over

Conrail’s net equity using the principles of purchase
accounting, based primarily on the estimated remaining
useful lives of Conrail’s property and equipment, including
the related deferred tax effect of the differences in tax and
accounting bases for certain assets. At Dec. 31, 2001, the
difference between NS’ investment in Conrail and its share
of Conrail’s underlying net equity was $3.8 billion.

NS’ consolidated balance sheet at Dec. 31, 2001,
includes $80 million of liabilities related to the Conrail
transaction, principally for contractual obligations to
Conrail employees imposed by the Surface Transportation
Board when it approved the transaction. Through Dec. 31,
2001, NS had paid $109 million of such costs.

Effective June 1, 1999, NS’ consolidated financial state-

ments include the consolidated financial position and
results of Triple Crown Services Company (TCS), a partner-
ship in which subsidiaries of NS and PRR are partners.

Related-Party Transactions
Until the Closing Date, NSR and CRC had transactions
with each other in the customary course of handling inter-
line traffic. As of Dec. 31, 2001, substantially all of the
amounts receivable or payable related to these transac-
tions had been satisfied.

NS provides certain general and administrative support

functions to Conrail, the fees for which are billed in
accordance with several service-provider arrangements
and totaled $6 million in 2001, $7 million in 2000 and
$10 million in 1999.

“Conrail rents and services,” a new line on the income
statements beginning June 1, 1999, includes: (1) expenses
for amounts due to PRR and CRC for use by NSR of oper-
ating 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 earn-
ings of Conrail, net of amortization.

“Notes and accounts payable to Conrail” includes
$301 million at Dec. 31, 2001, and $51 million at Dec. 31,
2000, of interest-bearing loans made to NS by a PRR
subsidiary that are payable on demand. The interest rate for
these loans is variable and was 2.45% at Dec. 31, 2001.
Also included is $72 million at Dec. 31, 2001, and
$104 million at Dec. 31, 2000, due to PRR and CRC relat-
ed 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 state-
ments, included as an exhibit to NS’ Annual Report on
Form 10-K filed with the Securities and Exchange
Commission.

Through May 31, 1999, Conrail’s results of operations
include freight line-haul revenues and related expenses. After
the Closing Date, June 1, 1999, its results reflect its new
structure and operations. Currently, Conrail’s major sources
of operating revenues are from NSR and CSXT. The composi-
tion of Conrail’s operating expenses also has changed.

Summarized Consolidated
Statements of Income — Conrail

($ in millions)
Operating revenues
Operating expenses

Operating income

Other – net

Income before income taxes

Provision for income taxes

Net income

2001
$ 903
639
264
(6)
258
84
$ 174

2000
$ 985
749
236
31
267
97
$ 170

1999
$ 2,174
2,046
128
(83)
45
19
26

Note: Conrail’s results for 2000 included gains from the sale of property
that had been written up to fair market value in the allocation of NS’
investment in Conrail. Accordingly, the gains related to that fair-value
write-up, totaling $17 million after taxes, were excluded in determining
NS’ equity in Conrail’s net income. Conrail’s results in 1999 included
after-tax expenses of $121 million, principally: (1) to increase certain
components of its casualty reserves based on an actuarial valuation, (2)
to adjust certain litigation and environmental reserves related to settle-
ments and completion of site reviews and (3) to adjust a credit related to
the assumption of a lease obligation by CSX. These 1999 items were
considered in the allocation of NS’ investment in Conrail to the fair val-
ues of Conrail’s assets and liabilities and, accordingly, were excluded in
determining NS’ equity in Conrail’s net income.

Summarized Consolidated
Balance Sheets — Conrail

($ in millions)
Assets:

Current assets
Noncurrent assets
Total assets

Liabilities and stockholders’ equity:

Current liabilities
Noncurrent liabilities
Stockholders’ equity

Total liabilities and stockholders’ equity

December 31,

2001

846
7,236
8,082

408
3,569
4,105
8,082

2000

520
7,540
$ 8,060

435
3,643
3,982
$ 8,060

Note: Current assets include demand notes and receivables from NS and
CSX totaling $687 million at Dec. 31, 2001, and $323 million at Dec. 31,
2000. Current liabilities include amounts payable to NS and CSX totaling
$12 million at Dec. 31, 2001, and $31 million at Dec. 31, 2000.

3 Other Income — Net

($ in millions)
Income from natural resources:
Royalties from coal
Gains from sale of timber, oil
and gas rights and interests
Nonoperating depletion and depreciation

Subtotal

Gains from sale of properties and investments
Rental income
Interest income
Other interest expense
Sale of accounts receivable (Note 5)
Taxes on nonoperating property
Corporate-owned life insurance – net
Equity in undistributed earnings of partnerships
Charitable contributions
Other – net
Total

2001

2000

1999

—
(13)
39
59
40
15
1
(17)
(11)
6
(8)
(4)
(21)
99

101
(13)
143
59
40
11
(39)
(23)
(9)
—
3
(4)
(13)
168

—
(14)
45
62
34
8
(30)
—
(7)
(3)
1
—
5
$ 115

“Other current assets” in the Consolidated Balance
Sheets includes prepaid interest on corporate-owned life
insurance borrowings of $45 million at Dec. 31, 2001, and
$43 million at Dec. 31, 2000.

4 Income Taxes

Provision for Income Taxes

($ in millions)
Current:

Federal
State

Total current taxes

Deferred:

Federal
State

Total deferred taxes
Provision for income taxes

2001

2000

1999

$ 125
22
147

35
9
44
$ 191

65
11
76

1
1
2
78

18
9
27

78
7
85
$ 112

Reconciliation of Statutory Rate to Effective Rate
Total income taxes as reflected in the Consolidated
Statements of Income differ from the amounts computed
by applying the statutory federal corporate tax rate as
follows:

($ in millions)
Federal income tax at statutory rate
State income taxes, net of federal tax benefit
Equity in earnings of Conrail
Corporate-owned life insurance
Other – net

Provision for income taxes

2001
Amount %
$194 35
4
20
(3)
(16)
(3) —
(4)
(1)
$191 35

2000
Amount %
35
$ 87
3
8
(3)
(7)
(1)
(2)
(3)
(8)
31
$ 78

1999
Amount %
35
$123
3
10
(2)
(6)
1 —
(4)
32

(16)
$112

Deferred Tax Assets and Liabilities
Certain items are reported in different periods for financial
reporting and income tax purposes. Deferred tax assets and
liabilities are recorded in recognition of these differences.

The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred
tax liabilities are as follows:

($ in millions)
Deferred tax assets:

Reserves, including casualty and other claims
Employee benefits
Retiree health and death benefit obligation
Taxes, including state and property
Other

Total gross deferred tax assets

Less valuation allowance
Net deferred tax asset

Deferred tax liabilities:

Property
Other

Total gross deferred tax liabilities
Net deferred tax liability
Net current deferred tax asset
Net long-term deferred tax liability

December 31,

2001

2000

158
75
137
221
22
613
(18)
595

(3,126)
(88)
(3,214)
(2,619)
162
$ (2,781)

158
104
139
200
28
629
(12)
617

(3,117)
(63)
(3,180)
(2,563)
182
$ (2,745)

Except for amounts for which a valuation allowance

has been provided, management believes the other
deferred tax assets will be realized. The total valuation
allowance increased $6 million in 2001, $3 million in
2000 and $6 million in 1999.

Internal Revenue Service (IRS) Reviews
Consolidated federal income tax returns have been
examined and Revenue Agent Reports have been received
for all years up to and including 1996. The consolidated
federal income tax returns for 1997, 1998 and 1999 are
being audited by the IRS. Management believes that
adequate provision has been made for any additional
taxes and interest thereon that might arise as a result of
IRS examinations.

5 Accounts Receivable

Beginning in May 2000, a bankruptcy-remote special pur-
pose subsidiary of NS sold without recourse undivided
ownership interests in a pool of accounts receivable total-
ing approximately $700 million. Upon commencement of
this program, NS received cash proceeds of $460 million.
The buyers have a priority collection interest in the entire
pool of receivables and, as a result, NS has retained credit
risk to the extent the pool exceeds the amount sold. NS
services and collects the receivables on behalf of the buy-
ers; however, no servicing asset or liability has been recog-
nized because the benefits of servicing are estimated to be
just adequate to compensate NS for its responsibilities.
Payments collected from sold receivables can be reinvested
in new accounts receivable on behalf of the buyers. Should
NS’ credit rating drop below investment grade, the buyers
have the right to discontinue this reinvestment.

At Dec. 31, 2001 and 2000, $300 million and $388
million, respectively, had been sold under this arrangement
and, therefore, are not included in “Accounts receivable,
net,” on the consolidated balance sheet. The fees associat-
ed with the sale, which are based on the buyers’ financing
costs, are included in “Other income – net” (see Note 3).
NS’ retained interest, which is included in “Accounts
receivable, net,” is recorded at fair value using estimates
of dilution based on NS’ historical experience. These

estimates are adjusted regularly based on NS’ actual expe-
rience with the pool, including defaults and credit deterio-
ration. NS has historically experienced very low levels of
default. If historical dilution percentages were to increase
one percentage point, the value of NS’ retained interest
would be reduced by approximately $7 million.

NS’ allowance for doubtful accounts was $5 million at

Dec. 31, 2001, and $7 million at Dec. 31, 2000.

6 Properties

($ in millions)
Railway property:

Road
Equipment
Other property

Less: Accumulated depreciation

Net properties

December 31,

2001

2000

Depreciation
Rate for 2001

3.0%
4.1%
3.2%

$ 10,452
5,559
632
16,643
5,435
$ 11,208

$ 10,078
5,588
653
16,319
5,214
$ 11,105

Included in properties are approximately $110 million in
telecommunications assets consisting of fiber optic conduit.
Because of the significant economic downturn in the
telecommunications industry during the year, NS evaluated
the recoverability of these assets at Dec. 31, 2001. Based
on known facts and circumstances, management believes
that its ultimate investment in these assets, which is
expected to total approximately $130 million upon comple-
tion of the network, will be recovered.

Equipment includes $474 million at Dec. 31, 2001 and
2000, of assets recorded pursuant to capital leases. Other
property includes the costs of obtaining rights to natural
resources of $341 million at Dec. 31, 2001 and 2000.

Capitalized Interest
Total interest cost incurred on debt in 2001, 2000 and
1999 was $570 million, $569 million and $546 million,
respectively, of which $17 million, $18 million and $15 mil-
lion was capitalized.

7 Current Liabilities

($ in millions)
Accounts payable:
Accounts and wages payable
Casualty and other claims
Equipment rents payable – net
Vacation liability
Other

Total

Other current liabilities:
Interest payable
Accrued Conrail-related costs (Note 2)
Liabilities for forwarded traffic
Retiree health and death benefit obligation (Note 11)
Derivative instruments
Other

Total

8 Debt

Long-Term Debt

December 31,

2001

2000

385
192
130
118
23
848

118
35
35
24
17
19
248

427
223
134
117
24
925

131
47
40
24
—
17
259

($ in millions)
Notes at average rates and maturities as follows:

6.69%, maturing 2002 to 2006
7.20%, maturing 2007 to 2011
8.10%, maturing 2017 to 2021
7.54%, maturing 2027 to 2031
7.05%, maturing 2037
7.90%, maturing 2097

Commercial paper
Equipment obligations at an average rate of 5.9%,
maturing to 2014
Capitalized leases at an average rate of 2.8%,
maturing to 2015
Other debt at an average rate of 6.6%, maturing to 2019
Discounts and premiums, net
Total long-term debt
Current maturities
Long-term debt less current maturities

Long-term debt maturities subsequent to 2002 are as follows:

2003
2004
2005
2006
2007 and subsequent years

Total

December 31,

2001

2000

1,450
1,450
800
800
750
350
1,132

473

343
119
(31)
7,636
(297)
7,339

$ 1,500
1,750
800
1,500
750
350
—

579

316
119
(32)
7,632
(605)
$ 7,027

357
348
401
305
5,616
$ 7,027

Each holder of a 2037 note may require NS to redeem

all or part of the note at face value, plus accrued and
unpaid interest, on May 1, 2004.

The railroad equipment obligations and the capitalized
leases are secured by liens on the underlying equipment.
Certain lease obligations require the maintenance of
yen-denominated deposits, which are pledged to the lessor
to satisfy yen-denominated lease payments. These deposits
are included in “Other assets” on the balance sheet and
totaled $78 million at Dec. 31, 2001, and $90 million at
Dec. 31, 2000.

Shelf Registration
NS filed on Form S-3 a shelf registration statement with
the Securities and Exchange Commission covering the
issuance of up to $1 billion of securities. As of Dec. 31,
2001, NS had issued $250 million of debt under this
shelf registration.

Commercial Paper and Credit Agreement
NS has the ability to issue commercial paper backed by a
$1 billion credit agreement that expires in 2006. At Dec.
31, 2001, NS had no commercial paper outstanding. At
Dec. 31, 2000, $1,132 million of commercial paper was
outstanding and was classified as long-term because NS
had the ability, through a previous credit agreement, to
convert this obligation into longer-term debt. Any borrow-
ings under the credit agreement are contingent on the con-
tinuing effectiveness of the representations and warranties
made at the inception of the agreement.

Debt Covenants
NS is subject to various financial covenants with respect to
its debt and under its credit agreement, including a mini-
mum net worth requirement, a maximum leverage ratio
restriction and certain restrictions on issuance of further
debt. At Dec. 31, 2001, NS was in compliance with all
debt covenants.

9 Lease Commitments

10 Other Liabilities

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 agree-
ments (see Note 2). Future minimum lease payments and
operating lease expense, other than to PRR and CRC, are
as follows:

($ in millions)

2002
2003
2004
2005
2006
2007 and subsequent years

Total

Less imputed interest on capital leases at an
average rate of 7.1%

Operating
Leases

Capital
Leases

$ 113
97
75
65
52
488
$ 890

47
49
48
51
57
123
375

Present value of minimum lease payments included in debt

316

Operating Lease Expense

($ in millions)
Minimum rents
Contingent rents
Total

2001
$ 149
55
$ 204

2000
167
61
228

1999
118
61
179

During 2000, NS entered into an operating lease for

140 locomotives, which is renewable annually at NS’
option, has a maximum term of eight years and includes
purchase options. Because the fixed, noncancellable term
of the lease is one year, future minimum lease payments in
the table above do not include amounts related to this
lease. However, operating lease expense for 2001 in the
table above does include $18 million related to this lease.
If NS does not purchase the locomotives at the end of the
maximum lease term, it is liable for any shortfall in the
then fair value of the locomotives and a specified residual
value. NS does not expect to be required to make any pay-
ments under this provision.

December 31,

($ in millions)
Retiree health and death benefit obligation (Note 11)
Casualty and other claims
Deferred compensation
Net pension obligations (Note 11)
Accrued Conrail-related costs (Note 2)
Other

Total

2001
291
265
147
79
46
261
1,089

2000
291
262
148
83
72
275
$ 1,131

11 Pensions and Other Postretirement

Benefits

Norfolk Southern and certain subsidiaries have both funded
and unfunded defined benefit pension plans covering prin-
cipally 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 termi-
nated at NS’ option, a defined percentage of health care
expenses is covered, reduced by any deductibles, copay-
ments, Medicare payments and, in some cases, coverage
provided under other group insurance policies.

Early Retirement Programs in 2000
During 2000, NS offered two voluntary early retirement
programs to its salaried employees. The principal incentives
offered in these programs were enhanced pension benefits,
the cost for most of which will be paid from NS’ overfund-
ed pension plan. A February program was accepted by 919
of 1,180 eligible employees, and a December program was
accepted by 370 of 846 eligible employees. The total cost
of these programs, which is included in “Compensation
and benefits,” was $133 million. The resulting noncash
reduction to NS’ pension plan asset is included in “Other -
net” in the Consolidated Statement of Cash Flows.

During 2001, NS amended its qualified and nonquali-

fied pension plans to enhance benefits to certain NS
employees. The amendments increased the pension benefit
obligation by $6 million at Dec. 31, 2001.

During 2000, NS amended its qualified pension plan to
allow for the payment of qualifying disability benefits. The
amendment increased the pension benefit obligation by
$21 million at Dec. 31, 2000.

Pension and other postretirement benefit costs are
determined based on actuarial valuations that reflect
appropriate assumptions as of the measurement date,
ordinarily the beginning of each year. The funded status of
the plans is determined using appropriate assumptions as
of each year end. During 1999, NS received assets from the
Conrail pension plan and assumed certain related liabilities.
As a result, the measurement dates for determining pen-
sion costs were Jan. 1, 1999, and Aug. 31, 1999; the costs
reflect discount rates of 6.75% and 7.75%, respectively,
and other assumptions appropriate at those dates. A sum-
mary of the major assumptions follows:

Pension Benefits
2000
2001

Other Benefits
2000
2001

$ 445
—
14
33
—
—
21
(34)
479

126
(8)
34
—
(34)
118
(361)

$ 340
14
15
27
—
—
79
(30)
445

152
(5)
9
—
(30)
126
(319)

—
46
—
$ (315)

—
4
—
$ (315)

($ in millions)
Change in benefit obligations
Benefit obligation at beginning of year
Cost of early retirement benefits
Service cost
Interest cost
Amendment
Legislative changes
Actuarial (gains) losses
Benefits paid

Benefit obligation at end of year

Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
401(h) account transfer
Benefits paid

Fair value of plan assets at end of year

Funded status

Unrecognized initial net asset
Unrecognized (gain) loss
Unrecognized prior service cost (benefit)

Net amount recognized

Amounts recognized in the
Consolidated Balance
Sheets consist of:

Prepaid benefit cost
Accrued benefit liability
Accumulated other
comprehensive income
Net amount recognized

$ 1,312
—
15
94
6
(19)
36
(120)
1,324

$ 1,058
119
18
79
21
—
120
(103)
1,312

2,072
30
8
(8)
(103)
1,999
687

(3)
(478)
47
253

1,999
(74)
7
(14)
(120)
1,798
474

—
(142)
30
362

426
(79)

15
362

315
(83)

$ — $ —
(315)

(315)

21
253

—
$ (315)

Funded status:

Discount rate
Future salary increases

Pension cost:

Discount rate
Return on assets in plans
Future salary increases

2001

2000

1999

7.25%
5%

7.50%
10%
5%

7.50%
5%

7.75%
10%
5%

7.75%
5%

6.75%
10%
5%

Of the pension plans included above, the unfunded pen-
sion plans were the only plans with an accumulated benefit
obligation in excess of plan assets. These plans’ accumulat-
ed benefit obligations were $79 million at Dec. 31, 2001,
and $83 million at Dec. 31, 2000. These plans’ projected
benefit obligations were $89 million at Dec. 31, 2001 and
2000. Because of the nature of such plans, there are no
plan assets.

NS received Section 401(h) account transfers, from
pension assets, of $14 million in 2001 and $8 million in
2000 as reimbursement for medical payments for retirees.

Legislative changes primarily resulting from the
December 2001 amendment to the Railroad Retirement
Act (“The Act”) increased benefits payable to certain
retirees covered by The Act. Since employees’ pension ben-
efits paid by NS are offset by a portion of benefits paid
under The Act, the amendment served to reduce NS’ obli-
gation by approximately $19 million at Dec. 31, 2001.

Pension and Other Postretirement
Benefit Costs Components

($ in millions)
Pension benefits
Service cost
Interest cost
Cost of early retirement programs
Expected return on plan assets
Amortization of prior service cost
Amortization of initial net asset
Recognized net actuarial (gain) loss

Net cost (benefit)

Other postretirement benefits
Service cost
Interest cost
Cost of early retirement programs
Expected return on plan assets
Amortization of prior service cost
Recognized net actuarial (gain) loss

Net cost

2001

2000

1999

15
94
—
(202)
4
(3)
(24)
$ (116)

14
33
—
(13)
—
—
34

18
79
119
(192)
4
(7)
(38)
(17)

15
27
14
(14)
—
(4)
38

17
73
—
(152)
4
(7)
(22)
(87)

11
23
—
(12)
(12)
(2)
8

For measurement purposes, increases in the per capita
cost of covered health care benefits were assumed to be
7.0% for 2002 and 6.0% for 2003. It is assumed the rate
will decrease gradually to an ultimate rate of 5.0% for
2004 and remain at that level thereafter.

Assumed health care cost trend rates have a significant
effect on the amounts reported in the financial statements.
To illustrate, a one-percentage-point change in the assumed
health care cost trend would have the following effects:

($ in millions)
Increase (decrease) in:

One percentage point
Decrease
Increase

Total service and interest cost components
Postretirement benefit obligation

$
5
$ 42

$ (4)
$ (36)

Under collective bargaining agreements, NS and
certain subsidiaries participate in a multi-employer benefit
plan, which provides certain postretirement health care
and life insurance benefits to eligible union employees.
Premiums under this plan are expensed as incurred and
amounted to $10 million in 2001, $7 million in 2000 and
$5 million in 1999.

401(k) Plans
Norfolk Southern and certain subsidiaries provide 401(k) sav-
ings plans for employees. Under the plans, NS matches a por-
tion of employee contributions, subject to applicable limita-
tions. Since 1999, NS has issued shares of Common Stock to
fund its contributions. NS’ expenses under these plans were
$11 million in 2001 and $12 million in both 2000 and 1999.
In November 1999, NS issued and contributed to eligible

participants’ accounts approximately 2 million shares of
Norfolk Southern Common Stock in connection with a tem-
porary special work incentive program available to its union-
ized employees during much of the third quarter of 1999.
The cost of the program, which was charged to compensa-
tion and benefits expenses, was $49 million.

12 Stock-Based Compensation

Under the stockholder-approved Long-Term Incentive Plan
(LTIP), a committee of nonemployee directors of the Board
may grant stock options, stock appreciation rights (SARs),
restricted stock and performance share units (PSUs), up to a
maximum 88,025,000 shares of Norfolk Southern Common
Stock (Common Stock). Under the Board-approved

Thoroughbred Stock Option Plan (TSOP), the committee may
grant stock options up to a maximum of 6,000,000 shares of
Common Stock. Options may be granted for a term not to
exceed 10 years, but may not be exercised prior to the first
anniversary of the date of grant. Options are exercisable at
the fair market value of Common Stock on the date of grant.
The LTIP also permits the payment — on a current or a
deferred basis and in cash or in stock — of dividend equiva-
lents on shares of Common Stock covered by options or
PSUs in an amount commensurate with dividends paid on
Common Stock. Tax absorption payments also are authorized
in amounts estimated to equal the federal and state income
taxes applicable to shares of Common Stock issued subject
to a share retention agreement.

Accounting Method
NS applies APB Opinion 25 and related interpretations in
accounting for awards made under the plans. Accordingly,
grants of PSUs, restricted stock, dividend equivalents, tax
absorption payments and SARs result in charges to net
income, while grants of stock options have no effect on net
income. Related compensation costs were $20 million in
2001, $5 million in 2000 and $2 million in 1999. NS recog-
nized additional paid-in capital of $1 million in 2001, none in
2000 and $4 million in 1999 related to the tax benefit gen-
erated by stock option exercises.

Had such compensation costs been determined in accor-

dance with SFAS 123, net income would have been $358
million in 2001, $149 million in 2000 and $210 million in
1999; and basic and diluted earnings per share would have
been $0.93 in 2001, $0.39 in 2000 and $0.55 in 1999.
These pro forma amounts include compensation costs as cal-
culated using the Black-Scholes option-pricing model, with
average expected option lives of five years for 2001 and
2000 grants and four years for 1999 grants; average risk-free
interest rates of 5.1% in 2001, 6.8% in 2000 and 5.2% in
1999; average stock-price volatilities of 39% in 2001, 33%
in 2000 and 21% in 1999; and dividend yields of 2% in
2001 and 3% in 2000 and 1999. These assumptions pro-
duce per-share grant-date fair values of $5.48 in 2001,
$5.22 in 2000 and $5.12 in 1999.

Stock Option Activity

Balance 12/31/98
Granted
Exercised
Canceled
Balance 12/31/99
Granted
Exercised
Canceled
Balance 12/31/00
Granted
Exercised
Canceled
Balance 12/31/01

Option Shares
13,059,048
9,150,400
(859,085)
(234,000)
21,116,363
7,705,800
(273,813)
(427,400)
28,120,950
6,985,000
(1,079,902)
(612,525)
33,413,523

Weighted Average
Exercise Price
$25.48
30.09
17.10
29.84
27.77
16.94
13.95
26.84
24.96
15.48
16.58
26.51
$23.21

Of the total options outstanding at Dec. 31, 2001, 26
million were vested and have a weighted-average exercise
price of $25.25.

Stock Options Outstanding

Exercise Price

Number

Weighted Average

Range

$ 15.48

18.81

24.31

29.46

$ 15.48

Weighted

Average

Outstanding

Remaining

at 12/31/01

Contractual Life

$ 16.94

$ 16.22

14,143,232

21.08

27.69

33.25

20.56

26.83

32.10

2,691,350

7,821,600

8,757,341

$ 33.25

$ 23.21

33,413,523

8.6 years

1.8 years

5.7 years

6.3 years

6.8 years

Performance Share Units
PSUs provide for awards based on achievement of certain
predetermined corporate performance goals at the end of a
three-year cycle. PSU grants and average grant-date fair
market values were 817,500 and $15.48 in 2001; 937,500
and $16.94 in 2000; and 850,000 and $27.72 in 1999,
respectively. PSUs may be paid in the form of shares of
Common Stock, cash or any combination thereof. Shares
earned and issued may be subject to share retention agree-
ments and held by NS for up to five years.

Shares Available and Issued
Shares of stock available for future grants and issued in
connection with all features of the LTIP and TSOP are as
follows:

2001

2000

1999

Available for future grants 12/31:

LTIP

TSOP

30,816,365

2,535,000

2,554,584

2,488,700

10,512,997

2,349,600

Shares of Common Stock issued:

LTIP

TSOP

1,146,346

—

395,626

—

1,086,288

—

13 Stockholders’ Equity

Accumulated Other Comprehensive Loss
“Accumulated other comprehensive loss” reported in the
Consolidated Statements of Changes in Stockholders’
Equity consisted of the following:

($ in millions)
December 31, 2001

Balance

Net
at Beginning Gain
(Loss)

of Year

Balance
Reclassification at End
of Year
Adjustments

Unrealized gains on securities
Cash flow hedges
Minimum pension liability
Accumulated other comprehensive loss $

7
—
(13)
(6)

(1)
(16)
(37)
$ (54)

$ — $
5
—
5

6
(11)
(50)
$ (55)

December 31, 2000

Unrealized gains on securities
Minimum pension liability
Accumulated other comprehensive loss $

2
(13)
(11)

5
—
5

$ — $
—
$ — $

7
(13)
(6)

“Other comprehensive income (loss)” reported in the
Consolidated Statements of Changes in Stockholders’
Equity consisted of the following:

($ in millions)
Year ended 12/31/01
Net gain (loss) arising during the year:

Cash flow hedges
Less reclassification adjustments

Subtotal

Unrealized gains (losses) on securities
Minimum pension liability
Other comprehensive income (loss)

Year ended 12/31/00
Net gain (loss) arising during the year:
Unrealized gains (losses) on securities
Other comprehensive income (loss)

Year ended 12/31/99
Net gain (loss) arising during the year:
Unrealized gains (losses) on securities
Minimum pension liability
Other comprehensive income (loss)

Pretax
Amount

Tax (Expense) Net-of-Tax
Amount

Benefit

$
$

(27)
8
(19)
(1)
(35)
(55)

7
7

(6)
2
(4)

$
$

11
(3)
8
—
(2)
6

(2)
(2)

1
—
1

$
$

(16)
5
(11)
(1)
(37)
(49)

5
5

(5)
2
(3)

second quarter; and in 1999, 17 million in the fourth quar-
ter, 9 million in the third quarter, 7 million in the second
quarter and 5 million in the first quarter.

There are no adjustments to “Net income” or “Income

from continuing operations” for the diluted earnings per
share computations.

15 Fair Values of Financial Instruments

The fair values of “Cash and cash equivalents,” “Short-
term investments,” “Accounts receivable,” and “Accounts
payable” approximate carrying values because of the short
maturity of these financial instruments. The fair value of
corporate-owned life insurance approximates carrying
value. The carrying amounts and estimated fair values for
the remaining financial instruments, excluding derivatives
(see Note 16) and investments accounted for under the
equity method in accordance with APB Opinion No. 18,
consisted of the following at Dec. 31:

($ in millions)
Investments
Notes receivable
Long-term debt

2001

Carrying
Amount
44
93
(7,632)

Fair
Value
51
98
(8,067)

2000

Carrying
Amount
49
93
(7,636)

Fair
Value
56
93
(7,809)

Quoted market prices were used to determine the fair
value of marketable securities; underlying net assets were
used to estimate the fair value of other investments. The
fair values of notes receivable are based on future dis-
counted cash flows. The fair values of debt were estimated
based on quoted market prices or discounted cash flows
using current interest rates for debt with similar terms,
company rating and remaining maturity.

Carrying amounts of marketable securities reflect
unrealized holding gains of $10 million on Dec. 31, 2001,
and $11 million on Dec. 31, 2000. Sales of “available-for-
sale” securities were immaterial for years ended Dec. 31,
2001 and 2000.

In 2001, Conrail recorded a $70 million loss in other
comprehensive income related to an increase in its mini-
mum pension liability. NS’ “Other comprehensive loss” for
2001 and its “Accumulated other comprehensive loss” at
Dec. 31, 2001, include $41 million arising from this
Conrail adjustment.

Undistributed Earnings of Equity Investees
“Retained income” includes undistributed earnings of equi-
ty investees, principally attributable to NS’ equity in the
earnings of Conrail, of $355 million at Dec. 31, 2001;
$351 million at Dec. 31, 2000; and $330 million at
Dec. 31, 1999.

14 Earnings Per Share

The following table sets forth the calculation of basic and
diluted earnings per share:

($ in millions except per share,

shares in millions)

Basic earnings per share:

Income available to common

stockholders for basic and

diluted computations

Weighted-average shares

outstanding

Basic earnings per share

Diluted earnings per share:

Weighted-average shares

outstanding per above

Dilutive effect of outstanding

options, PSUs and SARs (as

determined by the application

of the treasury stock method)

Adjusted weighted-average

shares outstanding

Diluted earnings per share

2001

2000

1999

375

385

0.97

172

383

0.45

239

381

0.63

385

383

381

386

0.97

—

383

0.45

382

0.63

These calculations exclude options the exercise price of

which exceeded the average market price of Common
Stock as follows: in 2001, 20 million in the fourth quarter,
19 million in each of the third and second quarters, and
28 million in the first quarter; in 2000, 28 million in the
fourth, third and first quarters, and 20 million in the

16 Derivative Financial Instruments

On Jan. 1, 2001, NS adopted Statement of Financial
Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (SFAS 133), as amend-
ed by Statement of Financial Accounting Standards No.
138, “Accounting for Certain Derivative Instruments and
Certain Hedging Activities” (SFAS 138). The Statements
establish accounting and reporting standards for derivative
instruments and hedging activities, requiring that all deriva-
tives be recognized in the financial statements as either
assets or liabilities and that they be measured at fair value.
Changes in fair value are recorded as adjustments to the
assets or liabilities being hedged in “Other comprehensive
income,” or in current earnings, depending on whether the
derivative is designated and qualifies for hedge accounting,
the type of hedge transaction represented and the effec-
tiveness of the hedge. The adoption of SFAS 133 and SFAS
138 resulted in the recognition of a $5 million asset and a
$5 million increase in long-term debt as of Jan. 1, 2001.
NS uses derivative financial instruments to reduce the
risk of volatility in its diesel fuel costs and to manage its
overall exposure to fluctuations in interest rates. NS does
not engage in the trading of derivatives. Management has
determined that its derivative financial instruments qualify
as either fair-value or cash-flow hedges, having values that
highly correlate with the underlying hedged exposures,
and has designated such instruments as hedging transac-
tions. Credit risk related to the derivative financial
instruments is considered to be minimal and is managed
by requiring high credit standards for counterparties and
periodic settlements.

Diesel Fuel Hedging
In the second quarter of 2001, NS began a program to
hedge a portion of its diesel fuel consumption. The intent
of the program is to assist in the management of NS’
aggregate risk exposure to fuel price fluctuations, which
can significantly affect NS’ operating margins and prof-
itability. In order to minimize this risk, NS instituted a con-
tinuous hedging strategy for a portion of its estimated
future fuel needs by entering into a series of forward pur-
chases and swaps in order to lock in the purchase prices of
some of its diesel fuel. Hedges are placed each month by
competitive bid among selected counterparties. The goal of
this hedging strategy is to average fuel costs over an
extended period of time while minimizing the incremental
cost of hedging.

The program provides that NS will not enter into any
fuel hedges with a duration of more than 36 months, and
that no more than 80 percent of NS’ average monthly fuel
consumption will be hedged for each month within any 36-
month period. Diesel fuel costs represented 8%, 9% and
6% of NS’ operating expenses for the years ended Dec. 31,
2001, 2000 and 1999, respectively.

NS entered into two types of diesel fuel derivative trans-
actions in 2001. Management has designated these deriva-
tive instruments as cash-flow hedges of the exposure to
variability in expected future cash flows attributable to fluc-
tuations in diesel fuel prices. In 2001, NS purchased eight
monthly call options at a strike price of 84 cents per gallon
of Nymex No. 2 heating oil. The cost of the monthly
options, which expired serially through Dec. 31, 2001, was
amortized as a component of diesel fuel expense. Because
the price of diesel fuel did not reach the strike price at any
time during the period the options were outstanding, NS
did not record any benefit related to these transactions.
During 2001, NS entered into 222 fuel swaps for approxi-
mately 370 million gallons at an average price of approxi-
mately 68 cents per gallon of Nymex No. 2 heating oil. As
of Dec. 31, 2001, outstanding swaps covered approximate-
ly 32 percent and 21 percent of estimated fuel purchases
for the years 2002 and 2003, respectively.

NS’ fuel hedging activity resulted in a net increase in

2001 diesel fuel expense of $8 million. Ineffectiveness
related to the use of diesel fuel hedges in 2001 was less
than $1 million.

Interest Rate Hedging
NS manages its overall exposure to fluctuations in interest
rates by issuing both fixed and floating-rate debt instru-
ments, and by entering into interest rate hedging transac-
tions. NS had $251 million, or 3.5%, and $280 million, or
4.3%, of its fixed rate debt portfolio hedged at Dec. 31,
2001 and Dec. 31, 2000, respectively, using interest rate
swaps that qualify for and are designated as fair-value
hedge transactions. These swaps have been effective in
hedging the changes in fair value of the related debt aris-
ing from changes in interest rates and, accordingly, there
has been no impact on earnings resulting from ineffective-
ness associated with these derivative transactions.

Fair Values
The fair values of NS’ diesel fuel derivative instruments at
Dec. 31, 2001, were determined based upon current fair
market values as quoted by third party dealers. Fair values
of interest rate swaps were determined based upon the
present value of expected future cash flows discounted at
the appropriate implied spot rate from the spot rate yield
curve. Fair value adjustments are noncash transactions and,
accordingly, are excluded from the Consolidated Statement
of Cash Flows. At Dec. 31, 2001, “Accumulated other com-
prehensive loss,” a component of “Stockholders’ equity,”
includes $15 million (pretax) relating to the decrease in the
fair value of the derivative fuel hedging transactions that
will terminate within the next 12 months.

The asset and liability positions of NS’ outstanding

derivative financial instruments were as follows:

December 31,

2001

2000

12
—

—
(19)

5
—

—
—

($ in millions)
Interest rate hedges:
Gross fair market asset position
Gross fair market (liability) position
Fuel hedges:
Gross fair market asset position
Gross fair market (liability) position

Total net asset (liability) position

(7)

17 Discontinued Operations —

Motor Carrier

On March 28, 1998, NS sold all the common stock of
North American Van Lines, Inc. (NAVL), its motor carrier
subsidiary. Results in 2001 include an additional after-tax
gain of $13 million, or 3 cents per share, that resulted from
the expiration of certain indemnities contained in the sales
agreement.

18 Commitments and Contingencies

Lawsuits
Norfolk Southern and certain subsidiaries are defendants in
numerous lawsuits and other claims relating principally to
railroad operations. When management concludes that it is
probable that a liability has been incurred and the amount

of the liability can be reasonably estimated, it is accrued
through a charge to expenses. An accrual is not made
when management’s best estimate, based on known facts
and circumstances, is that it is unlikely that a loss has been
incurred.

Presently, there are two cases involving labor issues and

contractual obligations of a fiber optic codeveloper where
the aggregated range of loss could be from nothing to
$75 million. Management believes that NS will prevail in
these cases. The ability to collect a judgment against the
codeveloper, Williams Communications, LLC, may be limited
due to its declining financial condition; however, the short-
fall, if any, cannot now be determined. Unfavorable out-
comes on these cases could result in accruals that could be
significant to results of operations in a particular year or
quarter.

Casualty Claims
NS is generally self-insured for casualty claims. Claims in
excess of self-insurance levels are insured up to excess cov-
erage limits. The casualty claims liability is determined actu-
arially, based upon claims filed and an estimate of claims
incurred but not yet reported. While the ultimate amount of
claims incurred is dependent on future developments, in
management’s opinion, the recorded liability is adequate to
cover the future payments of claims. However, it is possible
that the recorded liability may not be adequate to cover
the future payment of claims. Adjustments to the recorded
liability will be reflected in operating expenses in the peri-
ods in which such adjustments are known.

Environmental Matters
NS is subject to various jurisdictions’ environmental laws
and regulations. It is NS’ policy to record a liability where
such liability or loss is probable and its amount can be esti-
mated 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 regu-
larly participate in ongoing evaluations of all identified sites
and in determining any necessary adjustments to initial lia-
bility estimates. NS also has established an Environmental
Policy Council, composed of senior managers, to oversee
and interpret its environmental policy.

NS’ balance sheets included liabilities for environmental

exposures in the amount of $33 million at Dec. 31, 2001,
and $36 million at Dec. 31, 2000 (of which $8 million was
accounted for as a current liability in each year). At Dec.
31, 2001, the liability represented NS’ estimate of the
probable cleanup and remediation costs based on available
information at 126 identified locations. On that date, 10
sites accounted for $17 million of the liability, and no indi-
vidual 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 com-
parable 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 authori-
ties), 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 develop-
ment of new cleanup technologies, the difficulty of
determining in advance the nature and full extent of con-
tamination 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’ traf-
fic mix, particularly those classified as hazardous materials,
can pose special risks that NS and its subsidiaries work dili-
gently 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 undis-
closed, 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, law-
suits 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 signifi-
cant effect on financial condition, results of operations or
liquidity in a particular year or quarter.

However, based on its assessments of the facts and cir-
cumstances now known, management believes that it has
recorded the probable costs for dealing with those environ-
mental matters of which the Corporation is aware. Further,
management believes that it is unlikely that any identified
matters, either individually or in the aggregate, will have a
material adverse effect on NS’ financial position, results of
operations or liquidity.

Purchase Commitments
NSR had outstanding purchase commitments of approxi-
mately $150 million in connection with its 2002 capital
program. NS has forward fuel purchase commitments in
the first quarter of 2002 covering 38 million gallons of fuel
at an average cost of 62 cents per gallon, which includes
federal taxes.

Change-In-Control Arrangements
Norfolk Southern has compensation agreements with offi-
cers and certain key employees that become operative only
upon a change in control of the Corporation, as defined in
those agreements. The agreements provide generally for
payments based on compensation at the time of a covered
individual’s involuntary or other specified termination and
for certain other benefits.

Debt Guarantees
As of Dec. 31, 2001, certain Norfolk Southern subsidiaries
are contingently liable as guarantors with respect to
$8 million of indebtedness of related entities.

Report of Management

January 21, 2002

To the Stockholders
Norfolk Southern Corporation:

Management is responsible for the preparation and content of the financial statements included in this annual
report. The financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America and reflect management’s judgments and estimates concerning effects of events
and transactions that are accounted for or disclosed. The financial information contained in other sections of
this annual report is consistent with that contained in the financial statements.

Norfolk Southern Corporation and its subsidiaries maintain accounting systems that are supported by internal
accounting controls. These systems and controls provide reasonable assurance that assets are safeguarded and
that transactions are executed in accordance with management’s authorization and recorded properly to per-
mit the preparation of financial statements in accordance with accounting principles generally accepted in the
United States of America. The concept of reasonable assurance is based on the recognition that the cost of a
system of internal accounting control should not exceed its benefits. A staff of experienced and highly trained
internal auditors conducts audit procedures designed to test compliance with internal controls. Results of audit
efforts and actions are communicated to appropriate management, including the Chairman, President and
Chief Executive Officer, and to the Audit Committee of the Board of Directors.

Norfolk Southern Corporation and its subsidiaries have established their intent to maintain the highest
standards of ethical conduct in all their business activities. Internal accounting and operating control policies, as
well as a corporate code of conduct, are documented and communicated to all levels of management. Adherence
to these policies and procedures and this code is continuously being evaluated by a thorough, coordinated effort
of internal audit staff and independent auditors.

The Audit Committee of the Board of Directors is composed solely of independent nonemployee directors.
The Committee meets periodically with the Vice President-Internal Audit and the independent auditors to review
and discuss audit findings and other accounting and financial matters. Matters reviewed include the annual
audit plan and the accounting policies of Norfolk Southern Corporation and its subsidiaries, conflict of interest
policy, internal control systems, and financial operations and reporting.

KPMG LLP, a firm of independent public accountants, has been engaged to audit and render an opinion on
the consolidated financial statements. As independent auditors, they also provide an objective, outside review
of management’s report of operating results and financial condition. Working with the internal auditors,
they review internal accounting controls and make tests as appropriate of the data included in the financial
statements.

David R. Goode
Chairman, President and
Chief Executive Officer

Henry C. Wolf
Vice Chairman and
Chief Financial Officer

John P. Rathbone
Senior Vice President and
Controller

Independent Auditors’ Report

The Stockholders and Board of Directors
Norfolk Southern Corporation:

We have audited the accompanying consolidated balance sheets of Norfolk Southern Corporation and sub-
sidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in
stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2001.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of

America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Norfolk Southern Corporation and subsidiaries as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

Norfolk, Virginia
January 21, 2002

Board of Directors and Officers

Gene R. Carter

Jane Margaret O’Brien

Gerald L. Baliles

Landon Hilliard

David R. Goode

J. Paul Reason

Alston D. Correll

Harold W. Pote

Carroll A. Campbell Jr.

Steven F. Leer

Board of Directors as of Feb. 1, 2002

Gerald L. Baliles, 61, of Richmond, Va., is a partner in the law firm of
Hunton & Williams, a business law firm with offices in several major
U.S. cities and international offices in Bangkok, Brussels, London,
Warsaw and Hong Kong. His Board service began in 1990; his current
term expires in 2002.

Carroll A. Campbell Jr., 61, of Georgetown, S.C., is retired president
and chief executive officer of the American Council of Life Insurers.
His Board service began in 1996; his current term expires in 2003.

Gene R. Carter, 62, of Alexandria, Va., is executive director and

chief executive officer of the Association for Supervision and Curriculum
Development, among the world’s largest international education
associations. His Board service began in 1992; his current term expires
in 2002.

Alston D. Correll, 60, of Atlanta, Ga., is chairman, chief executive

officer and president of Georgia-Pacific Corporation. His Board service
began in 2000; his current term expires in 2004.

David R. Goode, 61, of Norfolk, Va., is chairman, president and
chief executive officer of Norfolk Southern Corporation. He joined
Norfolk and Western Railway in 1965 and was named CEO of Norfolk
Southern in 1992. His Board service began in 1992; his current term
expires in 2003.

Landon Hilliard, 62, of New York City, is a partner in Brown Brothers
Harriman & Co., a private bank in New York City. His Board service
began in 1992; his current term expires in 2004.

Steven F. Leer, 49, of St. Louis, is president and chief executive officer
of Arch Coal, Inc., the nation’s second largest coal producer. His Board
service began in 1999; his current term expires in 2002.

Jane Margaret O’Brien, 48, of St. Mary’s City, Md., is president of
St. Mary’s College of Maryland. Her Board service began in 1994;
her current term expires in 2004.

Harold W. Pote, 55, of New York City, is regional banking group

executive of JPMorganChase & Co. His Board service began in 1988;
his current term expires in 2003.

J. Paul Reason, Admiral, USN, retired, 61, of Norfolk, Va., is president

and chief operating officer of Metro Machine Corporation, a ship repair
company. His Board service began Jan. 22, 2002; his current term
expires in 2002.

Officers as of Feb. 1, 2002

David R. Goode, chairman, president and chief executive officer
L.I. Prillaman, vice chairman and chief marketing officer
Stephen C. Tobias, vice chairman and chief operating officer
Henry C. Wolf, vice chairman and chief financial officer
Charles W. Moorman, president T-Cubed, Inc.
John F. Corcoran, senior vice president Public Affairs
John W. Fox Jr., senior vice president Coal Services
James A. Hixon, senior vice president Administration
Henry D. Light, senior vice president Law
James W. McClellan, senior vice president Planning
Kathryn B. McQuade, senior vice president Financial Planning
John P. Rathbone, senior vice president and controller
Stephen P. Renken, senior vice president and chief information officer
John M. Samuels, senior vice president Operations Planning and Support
Donald W. Seale, senior vice president Merchandise Marketing
James E. Carter Jr., vice president Internal Audit
Cindy C. Earhart, vice president Information Technology

Robert C. Fort, vice president Public Relations
William A. Galanko, vice president Taxation
Robert E. Huffman, vice president Intermodal Operations
Tony L. Ingram, vice president Transportation Operations
H. Craig Lewis, vice president Corporate Affairs
Mark R. MacMahon, vice president Labor Relations
Bruno Maestri, vice president Public Affairs
Mark D. Manion, vice president Transportation Services and Mechanical
Robert E. Martínez, vice president Marketing Services and International
Michael R. McClellan, vice president Intermodal Marketing
Thomas H. Mullenix Jr., vice president Human Resources
Richard W. Parker, vice president Real Estate
William J. Romig, vice president and treasurer
Daniel D. Smith, president NS Development
Charles J. Wehrmeister, vice president Safety and Environmental
Gary W. Woods, vice president Engineering
Dezora M. Martin, corporate secretary

In Memoriam
Gary Lane

The Norfolk Southern
family lost a valued
colleague with the death
Jan. 17, 2002, of
J. Gary Lane, senior vice
president law and chief
legal officer. Among his
many contributions
during 23 years of service,
Mr. Lane helped guide
Norfolk Southern through
the Conrail transaction and
expansion into the
Northeast. We will miss
his leadership, wise counsel
and friendship.

Stockholder Information

Common Stock
Ticker symbol: NSC
Newspaper listing: NorflkSo

Common stock of Norfolk Southern Corporation is
listed and traded on the New York Stock Exchange.

Annual Meeting
May 9, 2002, at 10 a.m. CDT
Bank One
Ten South Dearborn St.
Bank One Auditorium, Plaza Level
Chicago, lII.

Publications
Upon written request, the Corporation’s annual
report to the Securities and Exchange Commission
on Form 10-K for the fiscal year ended Dec. 31,
2001, and its quarterly reports on Form 10-Q will
be furnished free to stockholders. Write to:
Public Relations Department, Norfolk Southern
Corporation, Three Commercial Place, Norfolk, Va.
23510-9227.

A Notice and Proxy Statement/Annual Meeting of
Stockholders are furnished to stockholders in advance of
the annual meeting.

A toll-free telephone number — (800) 531-6757 —

is available for information.

Dividends
At its January 2002 meeting, the Corporation’s Board of
Directors declared a quarterly dividend of 6 cents per share
on its common stock, payable on March 11, 2002, to
stockholders of record on Feb. 1, 2002.

Norfolk Southern Corporation pays quarterly dividends
on its common stock, usually on or about March 10, June
10, Sept. 10 and Dec. 10. The Corporation has paid 78
consecutive quarterly dividends since its inception in 1982.

Financial Inquiries
Henry C. Wolf
Vice Chairman and Chief Financial Officer
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Va. 23510-9215
(757) 629-2650

Stockholder Inquiries
Leanne D. McGruder
Director Investor Relations
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Va. 23510-9215
(757) 629-2861

Corporate Offices
Executive offices

Norfolk Southern Corporation
Three Commercial Place
Norfolk, Va. 23510-9227
(757) 629-2600

Regional offices

110 Franklin Road, SE
Roanoke, Va. 24042

99 Spring St., SW
Atlanta, Ga. 30303

Account Assistance
For assistance with lost stock certificates, transfer
requirements and the Dividend Reinvestment Plan, contact:

Registrar and Transfer Agent
The Bank of New York
63 Madison Ave., 8th Floor*
New York, N.Y. 10016
(866) 272-9472
*Temporary address

For assistance with address changes, dividend checks and
direct deposit of dividends, contact:
Assistant Corporate Secretary-

Stockholder Records

Norfolk Southern Corporation
Three Commercial Place
Norfolk, Va. 23510-9219
(800) 531-6757

Dividend Reinvestment Plan
Stockholders whose names appear on their stock
certificates (not a street or broker name) are eligible to
participate in the Dividend Reinvestment Plan.

The Plan provides a convenient, economical and
systematic method of acquiring additional shares of
the Corporation’s common stock by permitting eligible
stockholders of record to reinvest dividends.

The Plan’s administrator is The Bank of New York.

For additional information, dial (866) 272-9472.

Annual Report Requests
(800) 531-6757

World Wide Web Address
www.nscorp.com

Photography: Jim Cunningham, Diane Davis, Ken Krakow and
Lyal Lauth
Printing: Progress Press, Inc., of Roanoke , Va.