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Norfolk Southern System Map
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.
Norfolk Southern Railway and its
Railroad Operating Subsidiaries
NS Trackage/Haulage Rights
Norfolk Southern Corporation Annual Report 2002
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 8, 2003, at 10 a.m. CDT
Pan American Life Conference Center
601 Poydras St.
New Orleans, La.
Publications
Upon written request, the corporation’s annual and
quarterly reports on Forms 10-K and 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 2003 meeting, the corporation’s board
of directors declared a quarterly dividend of 7 cents per
share on its common stock, payable on March 10, 2003, to
stockholders of record on Feb. 7, 2003.
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 82
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 S.E.
Roanoke, Va. 24042
99 Spring St. S.W.
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
101 Barclay St.–11E
New York, N.Y. 10286
(866) 272-9472
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: Michael Bickham, Wes Cheney,
Leon Guanzon, Bob Lake and Chris Little
Printing: Progress Press Inc. of Roanoke, Va.
Norfolk Southern Corporation Annual Report 2002
1
Contents
Chairman’s Letter to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Improving Service, Operations, Financial Performance . . . . . . . . . . . . . . .4
Moving Beyond the Traditional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Increasing Traffic and Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Sharpening the Focus on Customer Service . . . . . . . . . . . . . . . . . . . . . .16
Financial Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Five-Year Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Maintaining Sound Corporate Governance Policies . . . . . . . . . . . . . . . . .24
Form 10-K Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .K1 – K81
Stockholder Information . . . . . . . . . . . . . . . . . . . . . . . . . .inside back cover
Description of Business
Norfolk Southern Corporation is a
Norfolk, Va., based company that
controls a major freight railroad, Norfolk
Southern Railway Company. The railway
operates 21,500 route miles in
22 eastern states, the District of
Columbia and the province of Ontario,
serves 20 ports and connects with rail
partners in the West and Canada,
linking customers to markets around
the world. Norfolk Southern provides
comprehensive logistics services and
offers the most extensive intermodal
network in the East.
Financial Highlights
($ in millions, except per share amounts)
2002
2001
% Increase
(Decrease)
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
$
$
$
$
$
$
$
$
6,270
1,158
81.5%
460
1.18
19,956
7,364
6,500
53.1%
16.71
Other Information
19.99
Year-end stock price
0.26
Dividends per share
16.9
Price/earnings ratio at year end
Number of shareholders at year end
51,418
Shares outstanding at year end 388,985,340
Number of employees at year end
28,514
____________________________________________
*excludes notes payable to Conrail
$
$
$
$
$
$
$
$
$
$
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
2
15
(3)
27
26
3
(4)
7
(4)
6
9
8
(11)
(3)
1
(4)
Norfolk Southern Corporation Annual Report 2002
2
Dear Fellow
Shareholders:
This past year was one of
great turmoil for corporations in
general and a tough economic
climate for all of us. Still, I am
pleased to report that 2002 was a
good year for Norfolk Southern.
Although we have a lot further to
go before reaching our goals for
increasing shareholder value, we
made significant progress in 2002
and demonstrated that we are
moving in the right direction.
Last year in this letter,
I set out some goals for the year.
Here’s how we did.
■ Improved service:
We put in place our new
Thoroughbred Operating
Plan. Service steadily
improved as a result of
better scheduling and
consistent execution of
“We have the
people who have
been tested by
tough times, and
they have accepted
the challenge to
strive for industry
leadership in
safety, service
and value for
our investors.”
– David R. Goode
chairman,
president and
chief executive officer
us handle their business. We are determined to continue improving
service throughout 2003.
■ Continued improvement in productivity: We focused on
process improvement, using our own NS21 process and the
discipline of Six Sigma. Our operating ratio improved 2.2 points.
Productivity improvement is a constant necessity, and we continue
to devote ourselves to it.
the plan. On-time
■ Revenue growth: Our revenues in 2002 were 2 percent better
performance improved
by 17 percent, and we did
better in all our service
metrics, as you can see
elsewhere in this report.
than in 2001. We achieved this increase in a year when the
industrial economy was flat and our coal revenues were down
5 percent. The growth in automotive, intermodal and general
commodities shows our overall strength and confirms the soundness
of the investments we have made. For the year, highway diversions
Customers responded to the
generated more than $71 million in revenue. We entered into
service improvements in the
partnerships with all of our major connecting carriers to generate
best possible way – by letting
additional business. Our MODALGISTICS® business unit and
Norfolk Southern Corporation Annual Report 2002
3
TransWorks subsidiary laid the groundwork for new revenue sources.
safety, service and value for our
Given a stronger economy, we will be able to build on this growth.
investors. They met the challenge
■ Cash flow: We committed to generating cash and paying down debt,
and we did, achieving $303 million in debt reduction during the year.
■ Fair returns: Our earnings grew 23 percent, we increased our
dividend, and our total shareholder returns were in the
86th percentile of the S&P 500. At the same time, we recognize that
we still have a long way to go in improving our returns.
Significantly, our employees captured a record 13th consecutive
Harriman safety award. NS’ unparalleled safety leadership in our industry
is a continuing source of pride for all our people and good business for us.
Our goals are basics, just as our business is a basic component
of the economy. We believe better operations, service and returns
are sure to follow if we keep our eye on basic values and produce
consistent improvement.
Last year, American corporate and business values were called into
question by a series of highly visible problems in accounting, ethics and
business judgment at several major companies. We at Norfolk Southern
took the opportunity to look within our organization to test and ensure that
our values and principles are sound. Our board and management are
committed to high levels of ethics and strong, independent governance. We
of 2002, and they will meet it in
the years to come.
The year 2003 poses equal or
greater challenges. The economy
is uncertain, and growth is going
to be hard to find. Costs, such as
fuel, wages and benefits, continue
to rise. Still, we are steadfast in
our concentration on process and
productivity improvement, in our
dedication to being the leader in
service as we are in safety, and in
our determination to justify our
investors’ faith by improving our
returns. I believe these values
will produce a successful 2003.
We’ll accelerate the pace and
keep our company headed
in the right direction.
will continue to be vigilant so our investors and all our constituents can
rely on Norfolk Southern, as they have for more than 20 years, and just as
g
they relied on our predecessor companies for more than 150 years.
January 28, 2003
The past year was filled with challenge for everyone in business. Yet
for us it was a year when our company showed its mettle. The value of
expanding our system and diversifying our business base began to really
pay off. The value of service improvements is clear.
We have an enviable transportation network, and we have the
capacity to grow our business. We have invested in technology and
infrastructure to serve existing customers better and add new ones. Most
important, we have the people who have been tested by tough times, and
they have accepted the challenge to strive for industry leadership in
Norfolk Southern Corporation Annual Report 2002
4
The Right Direction:
Improving Service, Operations, Financial Performance
The right direction ...
Employees received their 13th
Operating efficiencies also drove
For customers, the right
consecutive E. H. Harriman Memorial
higher-value service. Principal
direction means innovation and new
Gold Medal Award for achieving the
measurements of rail network
service options, backed by reliability,
best safety record among the nation’s
performance – system average train
visibility of operations and ease of
largest railroads.
speed and terminal dwell, and
doing business.
NS completed rollout of its
number of cars on line – all set
For shareholders, it is industry-
redesigned service network,
record bests for NS. TOP contributed
leading returns on their investments
called the Thoroughbred Operating
to the improvement in those metrics
by strengthening the company’s
Plan, or TOP. Customers acclaimed
and in on-time performance.
financial position – increasing
the benefits of the plan. Service
Net Income,
Earnings Per Share Rise
Operations and service
improvements contributed to
increasing revenues and lowering
costs, which strengthened NS’
financial performance.
■ Net income increased 23 percent
in 2002 compared with 2001.
Earnings per share increased
22 percent and were higher for
the third consecutive year.
A 32 percent increase in system average train
speed from 18 mph to 24 mph reflects
improvements in operations that enhance
customer service.
revenues, containing costs, improving
consistency, transit time, on-time
asset utilization, reducing debt and
performance and interline service
increasing dividends.
improved. New information systems
For employees, it is a culture
and e-commerce applications
that embraces diversity and enables
further improved service and gave
all to contribute toward meeting the
customers more real-time data about
company’s business goals.
their shipments.
For communities, it is the
TOP optimizes NS operations.
security of solid corporate citizenship
A simplified, scheduled network
and a connection to global commerce,
routes traffic more directly, improves
supported by marketing and economic
asset utilization and raises capacity
development expertise.
for handling traffic growth. TOP
For all, it is the steady progress
enhancements during 2003 and 2004
Norfolk Southern maintained during
will provide reliable dock-to-dock
2002, despite economic and
tracking of shipments.
international uncertainty.
Norfolk Southern Corporation Annual Report 2002
■ In July, NS increased the
long-term debt has declined
dividend on its common stock
$256 million. The total
from 6 cents to 7 cents.
■ NS stock outperformed the
S&P 500 index in 2002
by 32.5 percentage points.
■ Market-value pricing, coupled
with rigorous cost controls and
savings, led to improvement in
the company’s operating ratio.
■ NS has produced year-
over-year improvement in
the operating ratio for each
quarter since the second
quarter of 1999.
■ NS is committed to reducing
outstanding debt as free cash
flow is generated. Long-term
debt has been reduced by
$695 million since the beginning
of 2000. NS’ share of Conrail’s
three-year reduction in debt
obligations is $951 million.
■ NS credit ratings remain among
the best in the industry, reflecting
the company’s emphasis on solid
financial performance.
Innovations Spur Gains
New service options
strengthened rail business for NS and
provided nontraditional revenue
sources as well.
■ MODALGISTICS and TransWorks,
which coordinate and support
supply chain management
services, both developed
independent revenue streams
as start-ups.
A 30 percent improvement in the amount of
time rail cars spend in terminals – from
32 hours to 22 hours – translates to better
delivery times for customers.
A 19 percent improvement in number of cars
on line from 226,159 to 183,877
demonstrates the fluidity of NS’ network,
which creates additional capacity for handling
business growth.
5
“We are very impressed with
how Norfolk Southern used
innovative thinking to bring
something of substance to us
that will be a win-win situation
for all parties.”
— Ed Palmer
Eastman Chemical Company
Prior to September 2002, coal for
Eastman’s Kingsport, Tenn., manufac-
turing site was unloaded at four plant
receiving locations in relatively small
rail car increments. Palmer, logistics
sourcing manager, said the coal deliv-
ery system was somewhat inefficient,
difficult to manage and caused rail car
congestion inside the facility.
“Norfolk Southern brought the
idea of a centralized coal unloading
facility to Eastman, along with a study
to determine if it would be feasible,”
Palmer said. The challenges were
complex. Coal would have to be
conveyed to the four different
receiving locations and across a river
that runs through the plant.
The solution was a unit coal train
rotary dump facility with conveyance
systems to the four plant receiving
locations. Designed, built and operated
by a third party, the facility began
operation in September and is capable
of handling 60- to 85-car unit trains
five to seven times per week. Coal is
unloaded in a few hours on the same
day it arrives, compared to three or
four days previously, creating
efficiencies for both Eastman and NS.
“The innovation was that NS
brought the idea to us and worked
well with us on options planning and
contract structure,” Palmer said.
Eastman and its lead logistics
provider, Cendian Corporation, an
Eastman subsidiary, continue to work
with NS to fine-tune the operation.
Norfolk Southern Corporation Annual Report 2002
6
“Norfolk Southern has not
only met but in many cases
exceeded our expectations
and, more importantly, the
expectations of our customers
relative to service. The proof
of that has been in our ability
to continue to grow this
business on NS and in our
entire transcontinental
network year over year.”
— Paul Bergant
J.B. Hunt Transport Services, Inc.
J.B. Hunt is a diversified
transportation company providing
one-way truckload, intermodal and
dedicated contract services. In the
East, it relies predominantly on NS
for rail intermodal handling of
shipments, mostly containerized
traffic. “We rely on the whole NS
network,” said Bergant, executive
vice president, chief commercial
officer and president of J.B. Hunt’s
intermodal division.
“Norfolk Southern is our
primary carrier for all intermodal
requirements in its network for both
local freight and transcontinental
business.
“You’ve given us the type of
service that has allowed us to grow
our product. Our customers have been
satisfied to continue to give us more
business. That’s the proof of it.”
Norfolk Southern Corporation Annual Report 2002
Investments Support
Business Growth
NS capital expenditures of
$695 million in 2002, together with
prior years’ investments in service
improvements and anticipated
spending in 2003, position the
company to handle business growth.
In 2003, NS plans to spend
$798 million for capital
improvements. The anticipated
spending includes $499 million for
roadway projects and $246 million
for equipment.
The largest expenditure,
$383 million, will be for maintaining
and improving the company’s
infrastructure – rail, crossties, ballast
and bridges. Another $36 million is
earmarked for marketing and
industrial development initiatives
to serve coal, automotive and
intermodal customers.
Projected equipment spending
includes the purchase of 100 six-axle
locomotives, which follows the
purchase of 50 locomotives in 2002.
This graph shows on-time improvement for
merchandise, multilevel, auto parts and
intermodal trains. On-time origination
improved from 87 percent to 89 percent.
On-time arrivals improved from 84 percent
to 87 percent.
■ General merchandise revenue
was up 3 percent. Revenue per
car increased 2 percent over
2001 and was more than
7 percent better than 2000.
■ Intermodal traffic led the rail
industry with the highest rate of
growth in 2002. Trailer and
container intermodal revenue
increased 6 percent on
7 percent greater volume.
NS’ Triple Crown Services
revenue was up 3 percent on
4 percent volume growth. NS
launched a number of intermodal
product expansions and service
partnerships with other carriers.
The Right Direction:
Moving Beyond the Traditional
Norfolk Southern in 2002
Thoroughbred Direct Intermodal
continued to develop business
Services, a postal and intermodal
opportunities that go beyond
logistics subsidiary, launched a
traditional rail services and provide
ground-breaking program that
transportation options for customers.
manages door-to-door intermodal
MODALGISTICS, a business unit
less-than-truckload freight on all four
that provides supply chain manage-
of the major U.S. railroads.
ment services, demonstrated its
strong position in the logistics
marketplace by growing its customer
base, opening new facilities,
introducing new technology and taking
an active role in managing various
customers’ supply chains.
TransWorks, an NS subsidiary
that provides information technology,
shipment monitoring, accounting
services, software development and
process consulting, began generating
revenue from sources outside NS and
its subsidiaries.
Delivering Higher-Value Service
The Thoroughbred Operating
Plan, augmented by newly developed
computer systems that monitor
performance in unprecedented detail
and make it easier to do business
with NS, enabled NS to increase the
value of its services to customers.
Along with a scheduled railroad,
NS provided service reliability and
improved visibility of operations and
ease of doing business. This has
attracted new business from the
highways and has reduced costs
through better utilization
of assets.
TOP restructured
the railroad’s network
from the local level up to
transcontinental
shipments. By minimizing
the complexity of
merchandise train
blocking, reducing car
handlings and avoiding
circuitous routes, the
plan improved transit
7
“It’s nice to have some
predictability on shipments.
That’s been a real winner. Not
only does it give you guys turn
times on your cars, but we also
can pretty much figure when
we’re going to get our
ingredients in.”
— Brad Fairbairn
Fieldale Farms
Fieldale Farms processes
2.9 million birds every week. For
Fairbairn, director of ingredient
procurement, that adds up to a lot
of chicken feed. He counts on the
systematic cycle of a 75-car unit
grain train operated by Norfolk
Southern to serve Fieldale’s two
feed mills at Baldwin, Ga.
“We really like the 75 cars,”
says Fairbairn. “They pretty much
run like clockwork. I can figure they
will make a complete turn from
Baldwin, Ga., up to the Midwest to
pick up corn and come back to me in
seven to eight days.
“There’s a lot of predictability in
shipments. Running these trains, we
can manage our inventories pretty
efficiently, which helps us manage our
money flow.”
Fieldale receives mostly corn,
and “our local switch crew does a
great job,” Fairbairn says. “We work
very closely with them and the
trainmaster. He does a phenomenal
job, but I don’t want to say too many
good things about him ‘cause we don’t
want to lose him to someone else.”
Norfolk Southern Corporation Annual Report 2002
8
“We’ve found the Norfolk
Southern coal export
marketing group to be very
supportive and creative in
fashioning not only rate
structures but also in
achieving operating
efficiencies that allow us to
maintain AMCI’s presence in
the international market.”
— Ernie Thrasher
AMCI Export Corporation
AMCI mines coal and markets it
worldwide. Much of AMCI’s coal comes
from West Virginia coal reserves owned
by Norfolk Southern subsidiary
Pocahontas Land Corp. NS trains haul
AMCI-mined coal to customers in North
America, including Norfolk, where the
NS Lamberts Point coal transload
facility handles it for export.
Thrasher, company president, said
NS has been a key to AMCI’s growth.
“‘Pokey’ Land was very instrumental in
AMCI’s efforts to develop coal reserves
that allowed us to mine specialized
coals in the most efficient manner
possible. The railroad did its part to
make sure we were competitive on a
delivered-cost basis to our customers.
Obviously, that’s driven not only by rate
structures but by the efficiencies
they’ve been able to offer in moving
traffic and in handling coal at Lamberts
Point,” Thrasher said.
“NS has worked with us from an
operating and blending standpoint at
Lamberts Point. These efforts allow
AMCI to blend coals that are
specifically tailored to our customers’
needs. It’s one of the unique benefits
that Lamberts Point offers to a
company like AMCI.
“The railroad’s been a critical
part of our success. We’re happy to
be their partner.”
Norfolk Southern Corporation Annual Report 2002
times and predictability. TOP
with Burlington Northern Santa Fe,
produced 240 new train schedules
NS offers coast-to-coast premium
that were phased in over an eight-
carload service for perishable
month period, reaching full
products. Interline service is
implementation in February 2002.
important for intermodal business as
Transit time variability was
well. More than 60 percent of NS’
reduced by up to 50 percent, and
total intermodal volume involves
transit times improved in key
interline shipments.
merchandise traffic lanes. For
Integral to TOP are investments
example, in the Chicago-Piedmont
NS made in computer and
lane, transit time improved by
communications technologies that
36 percent westbound and 49 percent
give customers the tools to plan,
eastbound. Transit time on the Gulf
monitor and make adjustments
States-Northeast lane improved
to shipments.
40 percent in each direction. About
AccessNS is a Web-based suite of
75 percent of NS’ merchandise
applications that gives customers
customers benefited from reduced
immediate access to a wide range of
transit times.
real-time data about shipments, from
TOP-driven performance
estimating the number of empty cars
improvement became a powerful
needed, to waybill submission, to final
marketing tool, enabling the NS sales
delivery. Detailed monitoring of
force to move traffic off the highway
shipments improves the accuracy of
and onto the rails. Truck-to-carload
delivery estimates and enables quick
diversions reached $33 million for
identification and resolution of
merchandise traffic and $38 million
problems. The railroad can use this
for intermodal.
information to improve transit time,
Faster, more reliable
on-time delivery and overall service
performance also enables NS to offer
quality. Customer service
premium services for which shippers
representatives can focus more on
are willing to pay more, an important
helping shippers resolve problems.
factor in improving the company’s
Coal and unit grain train
revenues.
customers have access to the
Interline service also has
Web-based Commodity Transportation
improved. Traffic is being handed off
Management System, which
faster and more reliably with other
generates customized reports,
rail carriers, making possible the
facilitates shipment planning and
creation of new premium services in
improves total asset management for
partnership with other railroads.
the company as well as car owners
For example, in a joint venture
and receivers.
The Thoroughbred Yard
Service reliability plus visibility
Enterprise System, another important
equal ease of doing business. The
element of system visibility, helps
entire process is simpler, from
yard managers see what cars are
rendering a bill of lading, to getting
coming into their terminals and
a rate, to final payment. It reduces
plan how to handle them efficiently
opportunities for errors and lowers
and effectively.
back-office costs for both carrier and
shipper. Providing
ready access to
real-time
information and
support enables
NS to address
concerns before
they become
problems.
Six Sigma Adds Service Value
In only their second year of
safety risks. Customer benefits
using Six Sigma problem-solving
methodology, Norfolk Southern
employee teams managed several
efforts to improve operations and
service.
Here are some examples:
■ A change in freight car suspension
include fewer service
disruptions, greater equipment
availability and reduced
lading damage.
■ A locomotive-mounted track
lubrication system reduces
friction between wheels and
design led to smoother ride quality
rail. Expected benefits include
and eliminated a source of freight
reduced fuel consumption, less
damage for customers.
■ Ride quality detectors on rail cars
improve ride quality for
customers’ freight and reduce
equipment and track wear
and fewer track-related service
disruptions.
9
“In the 43 years I’ve been in
the business, intermodal
service has never been better,
and NS has been a major part
of this improvement.”
— Phillip C. Yeager
Hub Group, Inc.
Hub Group, based in
Lombard, Ill., provides transportation
logistics services for customers
throughout North America. The
company depends on strong
relationships with transportation
carriers to coordinate intermodal
services as well as truckload and
less-than-truckload shipments.
“There are so many Norfolk
Southern people who I have
known over the past 50 years
in transportation,” said Yeager, Hub’s
chairman. “Our company has
faced problems over these years,
and what we have found is that
our NS representatives, on all
levels, have always worked with
us to solve these problems. We here
at Hub appreciate all of their
efforts, because we cannot
provide our customers great
service without a great railroad
assisting us.”
Norfolk Southern Corporation Annual Report 2002
10
The Right Direction:
Increasing Traffic and Revenue
Substantial growth in
merchandise and intermodal traffic
was offset in part by declines in coal.
But a greater emphasis on
merchandise traffic in the changing
mix of Norfolk Southern’s traffic base
enabled the company to post gains
despite weakness in the coal market.
Agriculture, Consumer
Products and Government
Norfolk Southern and the
Burlington Northern and Santa Fe
Railway Company introduced a new
coast-to-coast carload service
assurance program for temperature-
controlled commodities moving from
NS’ Industrial Development group
selected cities in the Pacific
continued to build the company’s
customer base, assisting with the
location of 93 new industries and the
expansion of another 33 in 2002.
This represents a planned investment
of nearly $4 billion by NS customers
and is expected to create about 4,800
jobs in the 21 states where the plants
and expansions are located. NS
expects these industrial development
efforts to generate more than 91,100
carloads annually, producing gross
revenues of $125 million.
Revenues increased $20 million or 3 percent
in 2002, despite a small decline in traffic
volume. Revenues benefited from higher rates,
increased length of haul and favorable
changes in the mix of traffic.
Norfolk Southern Corporation Annual Report 2002
Northwest to the Midwest, Northeast
and Southeast.
One new 75-car grain shuttle
destination was added to the network,
with more planned in 2003. This
brought the total number of receivers
using the shuttles to five. The shuttle
trains’ six-day cycle time represents
an improvement in car utilization of
nearly 200 percent over NS’ 50-car
network moving in this market.
Fertilizer shipments showed the
first year-over-year increase since
1999, thanks to an improving
agriculture market and aggressive
marketing.
Automotive
The Automotive group produced
its best year ever, with $961 million
in revenues, an increase of
$76 million or 9 percent over
2001, comparing favorably to a
6 percent increase in North American
vehicle production.
Implementation of TOP
resulted in on-time performance
improvement from 62 percent to
86 percent for automotive vehicle
traffic and from 83 percent to
97 percent for automotive parts.
Improved service won 4,800
annual carloads of multilevels from
DaimlerChrysler, traffic that formerly
moved by truck. DaimlerChrysler
benefited from reduced delivery costs to
Michigan, Illinois and Missouri dealers.
The Ford mixing center network
was restructured, which enabled NS
to improve reliability and velocity and
reduce equipment handling. These
improvements resulted not only in
better service but in reduced costs
and less damage to vehicles.
NS secured 3,800 annual
carloads of finished H2 Hummers
from Mishawaka, Ind., and inbound
frames for the vehicles from
St. Thomas, Ontario. A retooled and
reopened General Motors plant in
Oklahoma City awarded NS its entire
inbound rail parts business of 8,800
Revenues increased $76 million or 9 percent
in 2002, primarily because of a 7 percent gain
in traffic volume that resulted from higher
vehicle production and new business.
annual carloads, in cooperation with
including conversion from truck to rail
Burlington Northern Santa Fe.
of 300 carloads to a Bridgestone-
Assembly plant expansions on NS
Firestone plant in Graniteville, S.C.
include Mitsubishi in Normal, Ill.,
NS secured 500 annual carloads
Toyota in Princeton, Ind., and
from a new asphalt terminal in Perry,
Mercedes-Benz in Vance, Ala.
Ga., 200 additional annual carloads
GM’s new inbound vehicle
from an expanded shingle plant in
distribution facility in Moraine, Ohio,
Tuscaloosa, Ala., and 400 new
received more than 5,000 new
carloads from new plastics plants.
carloads of vehicles via NS.
Growth at Thoroughbred Bulk
GM recognized NS’ performance
Transfer terminals yielded 1,600
with its All Star Quality Award for
carloads. Truck diversion yielded 900
damage-free rail delivery.
new carloads.
Chemicals
Metals and Construction
Overall, carloadings were
NS’ comprehensive market and
essentially flat with 2001, while
equipment position, service
revenues grew 2 percent. Plastics
improvements and new business
shipments showed a 4 percent year-
initiatives helped extend its leadership
over-year increase, tracking an
role in transporting metals and
increase in automotive production
construction commodities. Metals
and housing starts.
and construction traffic increased by
TOP’s performance resulted in
2 percent in 2002.
6,300 annual carloads of new traffic,
11
“Logistics is a mission-critical
aspect of our commitment
to help make our customers’
products better. To meet that
commitment, we needed you
to act as a true partner, and
you did.”
— Dan Pigott
BASF Corporation
Norfolk Southern delivers raw
materials from Louisiana to BASF
chemical plants at Wyandotte, Mich.,
and Washington, N.J. “To address
critical service level issues, teams
from both companies worked together
to develop innovative solutions,”
said Pigott, director distribution
and transportation.
“We wanted to see improvement,
and you wanted to see improvement,
so we started with a shared goal.
“The key to success in meeting
this goal was open communication
between our companies,” Pigott said.
“Norfolk Southern’s service design
team brought trainmasters and
engineers into our meetings so
that we had hands-on expertise at
the table. These people not only knew
the routes but also the seasonality of
the business.”
Revenues increased $17 million or 2 percent
in 2002 on slightly higher traffic volume.
Average revenues increased as a result of a
favorable change in the mix of traffic and
market-driven rate increases
Revenues increased $18 million or 3 percent
in 2002, as a result of a 2 percent gain in
traffic volume. Metals volume benefited from
resumption of production at some mills that
closed in 2001 and increased volume from
new mills. Construction traffic declined as
highway projects were reduced because of
state government budget pressures.
Norfolk Southern Corporation Annual Report 2002
12
“Norfolk Southern delivers
creativity and operational
excellence.”
— John Bargerhuff
Vulcan Materials Company
Vulcan is the nation’s largest
producer of construction aggregates.
“We’re in the rock quarry business,”
says Bargerhuff, transportation
director.
NS serves Vulcan quarries in
Illinois, Alabama, Georgia, South
Carolina and Virginia. The rock often
must be delivered to remote locations
for use in making products such as
asphalt, concrete and pipe.
Bargerhuff says NS provides
dedicated unit-train service that
“enables us to reach markets with
our facilities that otherwise we would
not be able to participate in.”
NS “has been extremely creative
to come up with service designs to
drive costs out of the system for us
both to have acceptable margins.” An
example, he said, is a Virginia project
in which NS invested in track and
Vulcan invested in receiving facilities
to make it beneficial for both.
Business opportunities for metals
Paper, Clay and Forest Products
and construction in 2002 included
Although paper, clay and forest
the following:
■ Several steel mills that were
closed or idled during 2001
products revenues declined 1 percent,
traffic benefited from several key
initiatives during 2002:
returned to production. Among
■ TOP service improvements in key
them were the International
Steel Group purchase of LTV
Steel and Acme Metals, and
corridors led to an average
improvement of 11 percent in
transit times for paper, clay and
Nucor’s purchase of Trico Steel,
forest products customers.
which contributed more than
6,000 total carloads.
■ New steel mills located on NS
began or increased production,
including Chaparral Steel,
Petersburg, Va., IPSCO Steel,
Lemoyne, Ala., and Steel
Dynamics, Columbia City, Ind.,
resulting in an increase of more
than 4,300 carloads.
■ New opportunities and increased
volumes of imported semifinished
steel using the NS slab steel unit
train network from East Coast
ports resulted in a 46 percent
■ Focus on truck-to-rail conversions
brought a total of 5,000 carloads
diverted to NS during the year.
■ A car quality program enhanced
the boxcar fleet and reduced
damage to paper products.
■ A new lumber reload facility
opened with Raven Logistics in
Columbus, Ohio.
■ Supply chain projects with
various paper companies
optimized outbound paper traffic
flows from mill to receiver and
reduced total delivered cost.
“Even when things don’t go as
increase in carloads.
planned – machinery and people
occasionally will fail – at least we
communicate and have the depth of
relationship with each other that we
can work it out.”
■ New scrap steel business grew
almost 12,000 carloads over
2001 levels.
■ Other business growth resulted
from improved service levels and
equipment utilization.
■ Access to new stone quarries,
including Anderson Columbia,
Junction City, Ga., and Birdsboro
Materials, Reading, Pa.,
generated increased carloadings.
Norfolk Southern Corporation Annual Report 2002
Revenues decreased $9 million or 1 percent in
2002, a result of a 3 percent drop in traffic
volume that reflected continued weakness in the
paper market, especially in the first half of the
year.Traffic volume improved later in the year as
the paper market strengthened. Revenue per
unit benefited from rate increases and a decline
in shorter-haul business.
13
Intermodal
More than 7,300 loads were
Intermodal volume on NS grew
converted from truck to rail from
6 percent in 2002, more than on any
Dockside, at Port Elizabeth, N.J., to
other major U.S. railroad. New
Canada via Canadian Pacific, for an
“Norfolk Southern is a
key strategic partner for
Schneider National, helping
us take traffic off the
highways and put it on rail.”
services and service improvements
annual conversion rate of 15,000 units.
enabled significant conversions from
In a marketing alliance with
truck to rail. On-time reliability and
Florida East Coast Railway called the
service speed enhanced NS’ position
Hurricane Service, 6,000 loads
as a partner for premium customers
between Atlanta and Miami were
such as UPS and less-than-truckload
converted from truck to rail. Also,
carriers.
new Southeast-Northeast train
Reliability also made possible an
service converted more than
increase in interline guaranteed
26,000 loads.
services from four lanes in 2001 to
In its first full year of operation,
nine lanes in 2002. NS moved more
the John W. Whitaker intermodal
than 2,500 loads of guaranteed
facility at Austell, Ga., near Atlanta,
business.
contributed more than 61,000 truck-
In partnership with Union
to-rail conversions. At Cleveland,
Pacific, NS introduced new expedited
Ohio, the Maple Heights facility
intermodal train service from the
contributed more than 22,000
Northeast and Southeast to Mexico,
conversions, with an 80 percent
and an additional “Blue Streak”
growth in international traffic to and
guaranteed service between northern
from Cleveland. The Savannah, Ga.,
California and the Northeast.
intermodal facility contributed more
than 15,000 conversions, with a
34 percent growth in international
traffic to and from Savannah.
Revenues increased $58 million or 5 percent
in 2002 as a result of a 6 percent gain in
traffic volume. Volume growth was driven
principally by new and improved services
that resulted in new business, including the
conversion of truck business to rail.
— Brian Bowers
Schneider National, Inc.
Schneider is a leading provider of
premium truckload and intermodal
services in North America. With
45,000 trailers, all capable of being
lifted onto rail cars, plus container
service, Schneider seeks rail partners
that can meet stringent service
requirements.
“Intermodal is a very important
part of our business, and NS provides
the kind of consistent and reliable
rail service as well as ease of doing
business that we need to best
serve our customers,” says Bowers,
vice president intermodal and
brokerage services.
“It is critical that we provide
seamless service to our customers.
We can do that with NS as a rail
partner. New technology, new facilities
and some process changes have given
us a better product for our customers.
New products such as Blue Streak
coast-to-coast rail service, NS’ newest
intermodal facility in Austell, Ga., and
the elimination of crosstown draying
in Chicago help us provide superior
service to Schneider customers.
“We have seen significant
improvement in service from Norfolk
Southern over the past two years and
expect it to continue to improve.”
Norfolk Southern Corporation Annual Report 2002
14
“We anticipated a certain
amount of turn times on our
equipment, and as of right
now, we’ve exceeded the
original projections. The NS
operating group is working
with us to get that equipment
turned around.”
— Kevin Larkin
FirstEnergy Corp.
FirstEnergy, a diversified energy
services company headquartered in
Akron, Ohio, has received a lot of
attention for putting rail unloaders
at traditionally barge-served coal-
burning power plants. “Part of our
market strategy is to reach out
further than just the river-origin
coal,” says Larkin, general manager
fuel and transportation services.
“Basically, we want to increase our
options for purchasing and delivering
coal to our plants.”
FirstEnergy saw an opportunity
at its Sammis Plant at Stratton, Ohio,
a large facility adjacent to a Norfolk
Southern rail line, that burns in
excess of 6.5 million tons of coal
annually. “This really was a collective
effort by both FirstEnergy and NS to
determine the feasibility of bringing
direct rail service to a barge-served
plant,” Larkin said. “Based on the
delivered cost, we were able to reach
a cost-effective option with NS,
including the installation of the rail
unloader.”
The result? “We are achieving
our goal of unloading 130 cars in
four hours or less. I’d put that up
against any system in the country.
What this means for us is that we
now have the ability to ensure that
that plant has multiple transportation
options and sources of coal to meet
its generation needs.”
Norfolk Southern Corporation Annual Report 2002
Coal
5 percent improved revenue per car,
Coal, coke and iron ore tonnage
better locomotive utilization and lower
was down 4 percent in 2002, and
fuel costs. Improved cycle times,
revenue decreased 5 percent
better use of higher capacity cars and
compared with 2001.
retirement of lower capacity cars
As a result of high stockpiles,
enabled NS to reduce its coal car fleet
declining electricity prices and a
by 5 percent.
slower economy, domestic utility coal
Important areas for new business
shipments were mostly sluggish.
development and growth in 2002
Domestic metallurgical coal
included:
shipments declined in 2002, as did
export coal moving through Lamberts
Point in Norfolk.
The Coal Business Group
improved customer service and
efficiency of operations. New
business, customer focus and pricing
initiatives helped offset declining
export and domestic metallurgical
coal volume throughout the year.
■ A rail spur to FirstEnergy’s
Sammis Power plant
at Stratton, Ohio, created new
business of about 20,000
annual carloads.
■ Shuttle service to the Powhatan
Point river terminal in eastern
Ohio is adding more than 60,000
annual carloads of new business.
Efficiency improvements enabled
■ NS bought from Peabody Coal the
the company to increase trains with
Yankeetown Dock Railroad in
the optimal number of cars from
Indiana, which serves a large
60 percent in 2001 to 81 percent in
Alcoa generating plant in
2002, which reduced the total number
Warrick, Ind., the Culley coal-
of trains and associated crews and
fired generating unit operated by
locomotives. Tons per car were up
Vectren, and substantial Indiana
from 104 in 2000 to 106 in 2002,
coal reserves.
resulting in fewer train starts,
MODALGISTICS
By developing tailored, innovative
logistical solutions for a variety of
companies, MODALGISTICS secured
more than 9,000 additional carloads
for NS and strengthened strategic
partnerships with customers.
MODALGISTICS, an NS business
unit, continues to enhance customer
value and increase revenue for NS by
coupling the latest logistics technology
with NS’ rail network and assets. A
new suite of services includes
Revenues decreased $80 million or 5 percent
in 2002, reflecting lower utility and export
coal traffic volume.
shipment, fleet, vendor, transportation
East Carolina Business Unit
and inventory management, and
NS created the East Carolina
performance tracking capabilities to
Business Unit, a marketing and
provide customized logistical
management and support.
operating unit similar to a short line
railroad but linked to NS’ dispatching,
Various customers are benefiting
customer service and operating
from MODALGISTICS’ services to
systems. The ECBU has dedicated
track shipments for shippers and
local management with complete
receivers of high-value metal prod-
responsibility for managing 485 miles
ucts. An example is a new SteelNet
®
of track operated by NS in eastern
coil-processing and warehouse facility
North Carolina. The first of its kind
in Atlanta, operated by Collier Metals
within NS, the ECBU is designed to
LLC and MODALGISTICS.
bring the railroad closer to its local
MODALGISTICS also expanded
customers while improving the use of
its Thoroughbred Bulk Transfer
rail assets.
Terminals network with two new
facilities in Chicago and Augusta, Ga.
These facilities transfer bulk products
such as plastic pellets or liquid
sweeteners between truck and rail.
NS now has 27 TBT facilities.
TransWorks
TransWorks, an NS subsidiary,
has developed and implemented the
most comprehensive and automated
transportation technology and
services available in the industry.
NS’ Triple Crown Services,
Thoroughbred Direct Intermodal
Services and MODALGISTICS all use
TransWorks’ transportation
management technology and people to
minimize transportation costs and
increase employee productivity.
TransWorks aggressively grew its
external customers in 2002, providing
shippers, carriers and transportation
intermediaries with similar automated
transportation solutions, emphasizing
Short Line Partnerships
NS realized 2 percent revenue
growth from partnerships with 239
short line and regional railroad
connections in 2002, building upon an
already strong foundation of cooper-
ation and mutual business development.
Two of NS’ short line and regional
partners received top honors from
Railway Age magazine. The Reading
Blue Mountain & Northern in Port
Clinton, Pa., was named regional
railroad of the year, and the
Winchester & Western Railroad in
Bridgeton, N.J., was named short line
railroad of the year. NS nominated
them for their roles in developing new
business in construction materials in
southeastern Pennsylvania in
conjunction with NS. By shifting
movements of construction aggregates
off the highway and onto rail, the
railroads reduced costs for shippers
and relieved highway congestion in
the value that NS contributes to
the Philadelphia area.
customer success.
15
“I see more customer interface
than I have in the past, and to
me that’s the way you’ve got
to go.”
– Stoy Taylor
J. M. Huber
There’s a good chance the
bright white surface of this page
contains kaolin clay from Huber, a
diversified supplier of engineered
materials that ships kaolin clay from
Georgia to paper companies
throughout the United States and
Canada. Because of the specialized
nature of the product, Huber, like all
kaolin clay producers, owns its own
fleet of rail cars.
“NS’ destination times are the
basis of our fleet sizes,” says
Taylor, who has worked with NS’
MODALGISTICS team both as
material flow manager for Huber
and as president of the U.S. Clay
Producers Traffic Association. The
better the transit times, the smaller
the fleet the clay producer must
maintain. “Our people are working
closely with MODALGISTICS in
monitoring transit times, and these
are data that you can use to run a
more efficient fleet.”
Norfolk Southern Corporation Annual Report 2002
16
“I can pick up the phone and
talk to the Norfolk Southern
marketing people on a first-
name basis. They know what
we do and where we go.
When you already know each
other, you can work together
to solve problems.”
— Gary Strausbaugh
Mennel Milling Company
The next doughnut you eat, the
next box of cake mix you buy might
contain flour milled by Mennel, based
in Fostoria, Ohio. NS delivers grain to
Mennel’s mills and transports flour
from those mills to bakeries and
mix plants. Mennel also operates
an NS-served grain elevator at
Kingston, Ohio, that originates grain
for southeast poultry markets and
soy processors.
“I think the thing that makes
Norfolk Southern stand out from the
other rail carriers is their personal
way of doing business,” says
Strausbaugh, vice president
transportation.
The Right Direction:
Sharpening the Focus on Customer Service
New Human Resources Tools Equip Employees
A new operating plan, innovative
service options, better data systems
and more interline partnerships all
were put in place in 2002. What
made them work was the commitment
of Norfolk Southern employees
systemwide to create extra value
for customers.
Customer teams, including
employees who operate trains, as
well as sales and marketing
employees, improved customer
communications and provided
personal service. NS office employees
who routinely handle customer
inquiries by phone made more than
“Face-to-face
customer contact
is really impor-
tant. As we go
into the cus-
tomers’ plants,
they talk with us
about their serv-
ice needs. Being
able to relate to them on a one-on-one
basis is important to our knowing what
they need and providing that for them.
To me, that’s extra value – serving cus-
tomers with what they need at the time
they need it, whether it be a special car
or a special time for a switch. They are
really happy if we can serve them on
their time basis, and keeping customers
happy is the number one thing.”
— Andrea Crump
conductor
Birmingham, Ala.
3,000 on-site customer visits to
■ Through CareerTrack, an
address service needs firsthand.
Internet-based career
To better equip employees to
management tool, employees can
serve customers and to help the
create an online resume and
“Because the marketing people
company meet increasing business
indicate their preferences for
know us so well, we don’t have to
start over from square one when we
call them. Even the operating people
know who we are.
“It makes dealing with Norfolk
Southern really easy,” Strausbaugh
says. “We work hand in hand with
each other to make things work.”
Norfolk Southern Corporation Annual Report 2002
demands, NS implemented significant
possible next career steps.
work force initiatives in 2002. The
initiatives collectively are named
Forging Our Future Together.
Following are highlights.
■ Creating a more inclusive
workplace to make the best use
of everyone's talents and foster a
climate of fairness, mutual
respect and professionalism is
the goal of NS’ diversity program.
■ About 100 mentoring pairs were
formed in 2002 to help new
managers acclimate to the
company’s culture.
■ NS expanded its educational
assistance program and made
business training available
online.
■ An Internet-based Employee
Resource Center speeds
employee access to information
about training, benefits and
related subjects.
17
“Customer serv-
ice filters down
the line to
everybody. We
in the track
department pro-
vide the sup-
port. Our work
to maintain a sound roadway helps
keep train schedules on-time. Track
that is well maintained helps assure a
smooth, damage-free ride for cus-
tomers’ freight.”
— Bob Davis
backhoe operator
Conway Yard, Pittsburgh
“The only thing
we have to offer
is a service.
There must be
value in that
service to sell it
and increase
market share.
Value includes
competitive pricing, reliability, depend-
ability, communications and improved
efficiency of operation to reduce costs.
I provide value-added service to my
customers by focusing on their needs
first. I take personal interest in making
sure my customers are educated about
rail, successful in our partnerships and
satisfied with our service.”
— Ron Taylor
director marketing and sales
East Carolina Business Unit
Raleigh, N.C.
“To remain the
most successful
transportation
company in the
industry, we
must be com-
mitted to every
customer. Each
individual cus-
tomer makes us the success we are
today. Without them and the confidence
they hold in our product, we would be
just another railroad.”
— Maureen Severini
intermodal division manager
Croxton Yard, Jersey City, N.J.
“People want to
have a positive
story to tell.
When a compa-
ny goes the
extra mile and
impresses them,
they feel that
they have made
a good decision to select that service
provider. Right away, they will tell
someone else about what a good deci-
sion they made. We want to give our
customers a reason to brag about
Norfolk Southern.”
— Woodfin Cobbs
logistics manager vehicles
Northville, Mich.
“A well-main-
tained, service-
able locomotive
helps provide
customer value
in the form of
consistent, on-
time deliveries.
It shows we
care about our customers and want to
give them the highest-quality service.”
— Ava Ray
clerk
Roanoke Locomotive Shop
NS Supports
Employee Reservists
Norfolk Southern continued
providing benefits for employee
reservists activated for Operation
Enduring Freedom, the war on
terrorism declared by President
George Bush. International tensions
escalated as 2003 began, and
additional reservists were called up
for active duty.
Air Force Secretary James
Roche commended NS, saying “your
company’s support continues to be
critical to our ongoing efforts and
makes a real difference to our
country.”
NS military leave benefits are
designed to help provide support for
employees and their families during
the deployments. They include a
monthly income supplement of
$1,500 and continuation of health
care and life insurance benefits.
NS began the enhanced benefits
program in October 2001, following
the Sept. 11 terrorist attacks.
Norfolk Southern Corporation Annual Report 2002
18
Financial Overview
Norfolk Southern’s financial results
improved despite a difficult economic
environment. Net income increased
23% as strong operating results led to
a 15% gain in income from railway
operations. Cash flow improved, which
allowed NS to repay $303 million of
debt (excluding borrowings from
Conrail) and to reduce the amount
of accounts receivable sold by
$270 million. The quarterly dividend
was increased midyear from 6 cents to
7 cents a share, a 17% increase.
Railway operating revenues were
$6.3 billion, up 2% compared with
2001. General merchandise revenues
increased $122 million or 3%,
supported by a $76 million or 9% gain
in automotive revenues. Intermodal
revenues increased $58 million or 5%,
on a 6% rise in traffic volume. Coal
revenues were $80 million or
5% lower, as traffic was down 4%.
Railway operating expenses were
$5.1 billion, down $51 million or 1%,
despite a 1% increase in carloadings.
Income from railway operations
was $1.2 billion, an increase of
$151 million or 15%, resulting from the
$100 million gain in revenues and the
$51 million decline in expenses.
The railway operating ratio
improved to 81.5%, compared with
83.7% in 2001. The improvements
reflected efficiency gains achieved after
implementation of the Thoroughbred
Operating Plan.
Net income for 2002 was
$460 million or $1.18 per diluted
share, up $85 million or 23%,
compared with 2001.
Norfolk Southern Corporation Annual Report 2002
Railway operating revenues increased by
$100 million in 2002, primarily because of
higher traffic volume.
Railway operating expenses dropped
$51 million or 1%, despite slightly higher
traffic volume.
Income from railway operations increased
$151 million or 15% in 2002, reflecting the
improvement in revenues and expenses.
The 2% increase in railway operating revenues,
coupled with the 1% decline in railway
operating expenses, produced a railway
operating ratio of 81.5% in 2002,
2.2 percentage points better than that of 2001.
Net income increased $85 million or 23% in
2002, a result of the improvement in income
from railway operations.
Diluted earnings per share for 2002 were 22%
higher than in 2001.
*2000 excludes work-force reduction costs of $165 million, which added 2.7 percentage points to
the railway operating ratio, reduced net income by $101 million and reduced diluted earnings per
share by 26 cents.
Five-Year Financial Review
Norfolk Southern Corporation and Subsidiaries
($ in millions, except per-share amounts)
2002
2001
20001
19992
1998
19
$ 6,270
5,112
1,158
$ 6,170
5,163
1,007
$
6,159
5,526
633
$ 5,242
4,524
718
$ 4,254
3,202
1,052
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
$
66
518
706
246
460
--
460
99
553
553
191
362
13
375
$
Per share data
Net income – basic
Net income – diluted
Dividends
Stockholders’ equity at year end
$ 1.18
$ 1.18
$ 0.26
$ 16.71
0.97
$
0.97
$
$
0.24
$ 15.78
168
551
250
78
172
—
172
164
531
351
112
239
—
239
$
309
516
845
215
630
104
734
$
0.45
0.45
0.80
15.16
0.63
$
0.63
$
$
0.80
$ 15.50
1.94
$
1.93
$
$
0.80
$ 15.61
$
$
$
$
$
Financial position
Total assets
Total long-term debt, including current maturities
Stockholders’ equity
Other
Capital expenditures
Average number of shares outstanding (thousands)
Number of stockholders at year end
Average number of employees:
Notes
$19,956
$ 7,364
$ 6,500
$ 19,418
$ 7,632
$ 6,090
$ 18,976
7,636
$
5,824
$
$ 19,250
$ 8,059
$ 5,932
$ 18,180
$ 7,624
$ 5,921
695
$
388,213
51,418
28,970
746
$
385,158
53,042
30,894
$
731
383,358
53,194
33,738
$
912
380,606
51,123
31,166
$ 1,060
378,749
51,727
24,300
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 percent 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 indemnity obligations contained in the sales agreement.
Norfolk Southern Corporation Annual Report 2002
20
Income Statement
Railway operating revenues
$ 6,270
$ 6,170
$
6,159
Years ended December 31,
2002
2001
($ in millions, except earnings per share)
2000
Railway operating expenses
Compensation and benefits
Materials, services and rents
Conrail rents and services
Depreciation
Diesel fuel
Casualties and other claims
Other
Total railway operating expenses
Income from railway operations
Other income – net
Interest expense on debt
2,022
1,457
412
515
342
171
193
5,112
1,158
66
(518)
Income from continuing operations before income taxes
706
Provision for income taxes
Income from continuing operations
Discontinued operations – Gain on sale of
motor carrier, net of taxes
246
460
—
2,014
1,444
421
514
412
143
215
5,163
1,007
99
(553)
553
191
362
13
2,234
1,445
478
503
478
142
246
5,526
633
168
(551)
250
78
172
—
Net income
$
460
$
375
$
172
Earnings per share
Income from continuing operations – basic and diluted
Net income – basic and diluted
$
$
1.18
1.18
$
$
0.94
0.97
$
$
0.45
0.45
See Form 10-K report beginning on page K1 for full financial statements and footnotes.
Norfolk Southern Corporation Annual Report 2002
Balance Sheet
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Due from Conrail
Materials and supplies
Deferred income taxes
Other current assets
Total current assets
Investment in Conrail
Properties less accumulated depreciation
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
Income and other taxes
Due to Conrail
Other current liabilities
Current maturities of long-term debt
Total current liabilities
Long-term debt
Other liabilities
Due to Conrail
Minority interests
Deferred income taxes
Total liabilities
Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares authorized;
issued 410,154,465 and 407,000,871 shares, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained income
Less treasury stock at cost, 21,169,125 shares
Total stockholders’ equity
21
As of December 31,
2002
2001
($ in millions)
$
184
683
6
97
187
142
1,299
6,178
11,370
1,109
$
204
475
8
90
162
108
1,047
6,161
11,208
1,002
$ 19,956
$ 19,418
$
908
269
86
232
358
1,853
7,006
1,029
513
45
3,010
13,456
410
481
(65)
5,694
(20)
6,500
$
848
312
373
248
605
2,386
7,027
1,089
—
45
2,781
13,328
407
423
(55)
5,335
(20)
6,090
Total liabilities and stockholders’ equity
$ 19,956
$ 19,418
See Form 10-K report beginning on page K1 for full financial statements and footnotes.
Norfolk Southern Corporation Annual Report 2002
Norfolk Southern Corporation Annual Report 2002
22
Quarterly Financial Data
(Unaudited)
2002
Railway operating revenues
Income from railway operations
Net income
Earnings per share – basic and diluted
2001
Railway operating revenues
Income from railway operations
Net income
Earnings per share – basic and diluted
Three Months Ended
March 31
June 30
Sept. 30
Dec. 31
(In millions of dollars, except per share amounts)
$ 1,498
237
86
$ 0.22
$ 1,540
205
74*
0.19*
$
$ 1,593
322
119
$ 0.31
$ 1,592
282
107
0.28
$
$ 1,598
311
126
$ 0.32
$
$
1,508
245
79
0.20
$ 1,581
288
129
$ 0.33
$ 1,530
275
115
0.30
$
*Includes a $13 million, or 3 cents per share, after-tax gain related to the 1998 sale of NS’ motor carrier subsidiary.
Stock Price and Dividend Information
(Unaudited)
The Common Stock of Norfolk Southern Corporation, owned by 51,418 stockholders of record as of Dec. 31, 2002, is traded on
the New York Stock Exchange with the symbol NSC. The following table shows the high and low sales prices and dividends per
share, by quarter, for 2002 and 2001 (prices quoted in fractions have been rounded to the nearest cent).
2002
Market price
High
Low
Dividends per share
2001
Market price
High
Low
Dividends per share
Quarter
1st
2nd
3rd
4th
$ 26.98
18.26
$ 0.06
$ 24.45
19.85
$ 0.06
$ 23.90
17.20
$ 0.07
$ 22.54
18.70
$ 0.07
$ 18.90
13.63
0.06
$
$ 24.11
15.80
0.06
$
$ 22.60
13.41
0.06
$
$ 19.88
15.19
0.06
$
Norfolk Southern Corporation Annual Report 2002
Board of Directors
23
Gerald L. Baliles
Gene R. Carter
Alston D. Correll
David R. Goode
Board of Directors as of Feb. 1, 2003
Gerald L. Baliles, 62, 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 and Hong Kong. His board
service began in 1990; his current term expires in 2005.
Gene R. Carter, 63, 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 2005.
Alston D. Correll, 61, 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.
Landon Hilliard
Steven F. Leer
Jane Margaret O’Brien
Committees
of the
Board of
Directors
Executive
and Governance
L. Hilliard, chair
G.L. Baliles
A.D. Correll
D.R. Goode
S.F. Leer
Audit
H.W. Pote, chair
G.R. Carter
J.M. O’Brien
J.P. Reason
Compensation
and Nominating
G.R. Carter, chair
L. Hilliard
J.M. O’Brien
H.W. Pote
Finance
G.L. Baliles, chair
A.D. Correll
S.F. Leer
J.P. Reason
Performance-
Based
Compensation
G.R. Carter, chair
J.M. O’Brien
H.W. Pote
David R. Goode, 62, 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 chief executive officer of Norfolk Southern in 1992. His board service began in 1992;
his current term expires in 2003.
Harold W. Pote
J. Paul Reason
Landon Hilliard, 63, 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, 50, 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. Although his current term would have
expired in 2005, in order to comply with the requirements of Virginia law, Mr. Leer will resign from his
current term and has been nominated for a new three-year term that expires in 2006.
Jane Margaret O’Brien, 49, 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, 56, of New York City, is regional banking group executive of J.P. Morgan Chase &
Co. His board service began in 1988; his current term expires in 2003.
J. Paul Reason, 62, Admiral, USN, retired, of Norfolk, Va., is president and chief operating officer of
Metro Machine Corporation, a ship repair company. His board service began 2002; his current term
expires in 2005.
Carroll Campbell Retires from Board
Carroll A. Campbell Jr. retired from the board of directors of Norfolk Southern effective Nov. 29, 2002.
The board expressed “heartfelt appreciation for his effective and dedicated service” and his
“judgment, wise counsel and long-standing commitment to fiscal responsibility.”
Campbell was elected to the board in July 1996. He served on the Executive and Governance, Finance
and Audit committees, and he helped guide the company during a time of significant growth and expansion.
Before joining the board, Campbell served two terms as South Carolina's governor and was U.S.
representative from the state's 4th Congressional District. He served successively as a state representative
and as a state senator before his congressional term.
Norfolk Southern Corporation Annual Report 2002
24
The Right Direction:
Maintaining Sound
Corporate Governance Policies
Norfolk Southern’s management team is committed to
high standards of corporate governance.
■ An independent review of NS practices commissioned
in 2001 found that the company had in place a sound
corporate governance structure. NS is committed to
maintaining and strengthening that structure.
■ NS always has had rigorous internal control
procedures to help ensure the accuracy and reliability
of the financial information it produces and reports.
Those procedures now have been augmented with the
establishment of a disclosure committee with
responsibility for considering the materiality of
information and determining disclosure obligations on
a timely basis. It is comprised of senior officers and is
chaired by the senior vice president and controller.
The corporation’s independent public accountants also
attend disclosure committee meetings.
■ Although not required, management has received from
the independent public accountant an unqualified
opinion on management’s assertion of
the effectiveness of NS’ internal control over
financial reporting as of Dec. 31, 2002.
■ The board of directors adopted written corporate
governance standards for directors.
■ The board has in place policies to safeguard the
confidentiality of shareholder votes.
■ In response to a shareholder proposal adopted at the
2002 annual meeting, the board agreed to seek share-
holder approval for future severance packages in excess
of 2.99 times a senior executive’s salary and bonus.
■ For the first time, the corporation’s Form 10-K report,
a formal statement of financial information filed
annually with the Securities and Exchange
Commission, is published with this annual report,
giving shareholders and potential investors more
financial information than ever before included with
this annual report.
Norfolk Southern Corporation Annual Report 2002
Officers
Officers as of Feb. 1, 2003
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
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
Charles W. Moorman, senior vice president corporate services and
president Thoroughbred Technology and Telecommunications, Inc.
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
Deborah H. Butler, vice president customer service
James E. Carter Jr., vice president internal audit
Joseph C. Dimino, senior general counsel
Cindy C. Earhart, vice president information technology
Terry N. Evans, vice president operations planning and budget
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
James A. Squires, senior general counsel
Charles J. Wehrmeister, vice president safety and environmental
F. Blair Wimbush, senior general counsel
Gary W. Woods, vice president engineering
Dezora M. Martin, corporate secretary
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2002
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-8339
NORFOLK SOUTHERN CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
Three Commercial Place
Norfolk, Virginia
(Address of principal executive offices)
Registrant’s telephone number, including area code
52-1188014
(IRS Employer Identification No.)
23510-2191
Zip Code
(757) 629-2680
No Change
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Norfolk Southern Corporation
Common Stock (Par Value $1.00)
Name of each exchange
on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all report required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. (X)
The number of shares outstanding of each of the registrant’s classes of common stock, as of January 31, 2003:
389,057,174 (excluding 21,169,125 shares held by registrant’s consolidated subsidiaries).
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes (X) No ( )
The aggregate market value of the voting common equity held by nonaffiliates as of June 28, 2002 was $9,079,736,767 (based
on the closing price as quoted on the New York Stock Exchange on that date).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant’s definitive proxy statement to be filed electronically pursuant to Regulation 14A not later than 120
days after the end of the fiscal year, are incorporated by reference in Part III.
K1
TABLE OF CONTENTS
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Part I.
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant
Part II.
5. Market for Registrant’s Common Stock and Related Stockholders Matters
6. Selected Financial Data
7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk
8. Financial Statements and Supplementary Data
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Part III.
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions
14. Controls and Procedures
Part IV.
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
Index to Consolidated Financial Statement Schedule
Power of Attorney
Signatures
Certifications of CEO and CFO
Exhibit Index
K2
Page
K3
K3
K12
K12
K14
K15
K16
K35
K36
K66
K66
K66
K66
K69
K69
K70
K76
K76
K78
K81
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
PART I
Item 1. Business. and Item 2. Properties.
GENERAL - Norfolk Southern Corporation (Norfolk Southern) was incorporated on July 23, 1980,
under the laws of the Commonwealth of Virginia. On June l, 1982, Norfolk Southern acquired control of
two major operating railroads, Norfolk and Western Railway Company (NW) and Southern Railway
Company (Southern) in accordance with an Agreement of Merger and Reorganization dated as of July
31, 1980, and with the approval of the transaction by the Interstate Commerce Commission (ICC) (now
the Surface Transportation Board [STB]).
Effective Dec. 31, 1990, Norfolk Southern transferred all the common stock of NW to Southern, and
Southern’s name was changed to Norfolk Southern Railway Company (Norfolk Southern Railway).
Effective Sept. 1, 1998, NW was merged with and into Norfolk Southern Railway. As of Dec. 31, 2002,
all the common stock of Norfolk Southern Railway and 22.5% of its voting preferred stock (resulting in
95.2% voting control) was owned directly by Norfolk Southern.
Through a jointly owned entity, Norfolk Southern and CSX Corporation (CSX) own the stock of
Conrail Inc., which owns the major freight railroad in the Northeast. Norfolk Southern has a 58%
economic and 50% voting interest in the jointly owned entity. See also the discussion concerning
operation of a portion of Conrail’s rail assets, below.
On March 28, 1998, Norfolk Southern closed the sale of its motor carrier company, North American Van
Lines, Inc. (NAVL) (see “Discontinued Operations” and Note 17). NAVL’s results are presented as
“Discontinued operations” in the accompanying financial information.
Norfolk Southern makes available free of charge through its website, www.nscorp.com, its annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to
those reports as soon as reasonably practicable after such material is electronically filed with or furnished
to the Securities and Exchange Commission.
Unless indicated otherwise, Norfolk Southern and its subsidiaries are referred to collectively as NS.
OPERATION OF A PORTION OF THE CONRAIL RAIL ASSETS - On June 1, 1999, Norfolk
Southern and CSX, through their respective railroad subsidiaries, began operating separate portions of
Conrail’s rail routes and assets. Substantially all such assets are owned by two wholly owned
subsidiaries of Consolidated Rail Corporation (CRC); one of those subsidiaries, Pennsylvania Lines LLC
(PRR), has entered into various operating and leasing arrangements, more particularly described in
Note 2, with Norfolk Southern Railway. Certain rail assets (Shared Assets Areas) still are owned by
CRC, which operates them for joint and exclusive use by Norfolk Southern Railway and the rail
subsidiary of CSX.
Operation of the PRR routes and assets increased the size of the system over which Norfolk Southern
Railway provides service by nearly 50% and afforded access to the New York metropolitan area, to
much of the Northeast and to most of the major East Coast ports north of Norfolk, Virginia. Also,
leasing arrangements with PRR augmented Norfolk Southern Railway’s locomotive, freight car and
intermodal fleet.
RAILROAD OPERATIONS - As of Dec. 31, 2002, NS’ railroads operated approximately 21,500 miles
of road in the states of Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky,
Louisiana, Maryland, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio,
Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, the District of Columbia and in the
Province of Ontario, Canada. The miles operated were as follows:
K3
Mileage Operated as of Dec. 31, 2002
Second and
Miles of Other Main
Track
Road
Track, Way and
Yard
Switching
Crossovers
and Turnouts
Total
Passing
Owned
Operated under lease, contract
or trackage rights
Total
11,745
9,813
21,558
1,384
3,441
4,825
1,625
891
2,516
5,969
20,723
3,647
9,616
17,792
38,515
In addition to the lines leased from Conrail previously discussed, NS’ railroads have major leased lines
between Cincinnati, Ohio, and Chattanooga, Tennessee, and operate over trackage owned by North
Carolina Railway Company (NCRR). The Cincinnati-Chattanooga lease, covering about 335 miles of
road, expires in 2026, and is subject to an option to extend the lease for an additional 25 years, at terms
to be agreed upon. The trackage rights over NCRR cover approximately 315 miles of road under an
agreement through 2014 with the right to renew for two additional 15-year periods.
NS’ railroads carry raw materials, intermediate products and finished goods primarily in the Southeast,
East and Midwest, and via interchange with other rail carriers, to and from the rest of the United States
and parts of Canada. They also transport overseas freight through several Atlantic and Gulf Coast ports.
Atlantic ports served by NS include: Norfolk, Virginia; Morehead City, North Carolina; Charleston,
South Carolina; Savannah and Brunswick, Georgia; Jacksonville, Florida; Baltimore, Maryland;
Philadelphia, Pennsylvania/Camden, New Jersey; Wilmington, Delaware; and the Ports of New
York/New Jersey. Gulf Coast ports served include Mobile, Alabama, and New Orleans, Louisiana.
The lines of NS’ railroads reach most of the larger industrial and trading centers of the Southeast,
Northeast, Mid-Atlantic region and Midwest. Chicago, Norfolk, Detroit, Atlanta, Metropolitan New
York City, Jacksonville, Kansas City (Missouri), Baltimore, Buffalo, Charleston, Cleveland, Columbus,
Philadelphia, Pittsburgh, Toledo, Greensboro, Charlotte and Savannah are among the leading centers
originating and terminating freight traffic on the system. In addition, haulage arrangements with
connecting carriers allow NS’ railroads to provide single-line service to and from additional markets,
including haulage provided by Florida East Coast Railway Company to serve southern and eastern
Florida, including the port cities of Miami, West Palm Beach and Fort Lauderdale; and haulage provided
by The Kansas City Southern Railway Company to provide transcontinental intermodal service via a
connection with the Burlington Northern and Santa Fe Railway Company. Service is provided to New
England, including the Port of Boston, via haulage, trackage rights and interline arrangements with
Canadian Pacific Railway Company and Guilford Transportation Industries. The system’s lines also
reach many individual industries, electric generating facilities, mines (in western Virginia, eastern
Kentucky, southern and northern West Virginia and western Pennsylvania), distribution centers,
transload facilities and other businesses located in smaller communities in its service area. The traffic
corridors carrying the heaviest volumes of freight include those from the New York City area to Chicago
(via Allentown and Pittsburgh); Chicago to Jacksonville (via Cincinnati, Chattanooga and Atlanta);
Appalachian coal fields of Virginia, West Virginia and Kentucky, to Norfolk and Sandusky, Ohio;
Cleveland to Kansas City; and Knoxville to Chattanooga. Chicago, Memphis, Sidney/Salem, New
Orleans, Kansas City, Buffalo, St. Louis and Meridian are major gateways for interterritorial system
traffic.
Triple Crown Operations - Until April 1993, NS’ intermodal subsidiary, Triple Crown Services, Inc.
(TCS), offered intermodal service using RoadRailer® equipment and domestic containers. RoadRailer®
units are enclosed vans that can be pulled over highways in tractor-trailer configuration and over the rails
by locomotives. On April 1, 1993, the business, name and operations of TCS were transferred to Triple
Crown Services Company (TCSC), a partnership in which subsidiaries of NS and Conrail are equal
partners. From April 1, 1993, to June 1, 1999, the revenues of TCSC were not consolidated with the
results of NS; however, effective June 1, 1999, NS gained control of TCSC and, therefore, now includes
K4
TCSC’s results in its consolidated financial statements. TCSC offers door-to-door intermodal service
using RoadRailer® equipment in major traffic corridors, including those between the Midwest and the
Northeast, the Midwest and the Southeast and the Midwest and Texas/Mexico.
The following table sets forth certain statistics relating to NS railroads’ operations for the past 5 years,
including operations in the Northern Region that commenced June 1, 1999:
Rail Operating Statistics
2002
Year Ended Dec. 31,
2000
1999
2001
1998
Revenue ton miles (billions)
Freight train miles traveled (millions)
Revenue per ton mile
Revenue ton miles per
man-hour worked
Percentage ratio of railway operating
expenses to railway operating revenues
179
72.6
$0.0350
182
70.0
$0.0339
197
74.4
$0.0312
167
61.5
135
53.0
$0.0315 $0.0316
3,067
3,023
2,888
2,577
2,659
81.5%
83.7%
89.7%
86.3%
75.3%
RAILWAY OPERATING REVENUES - NS’ total railway operating revenues were $6.3 billion in
2002. Revenue, shipments and revenue yield by principal railway operating revenue sources for the past
five years are set forth in the following table.
Principal Sources of Railway Operating Revenues
Year Ended Dec. 31,
(Revenues in millions, shipments in thousands, revenue yield in dollars per shipment)
2002
2001
2000
1999
1998
COAL
Revenues
% of total revenues
Shipments
% of total shipments
Revenue Yield
AUTOMOTIVE
Revenues
% of total revenues
Shipments
% of total shipments
Revenue Yield
CHEMICALS
Revenues
% of total revenues
Shipments
% of total shipments
Revenue Yield
$ 1,441 $
23%
1,610
24%
895 $
$
1,521
$
25%
1,695
26%
$
897
$
961 $
15%
662
10%
$ 1,450 $
885
$
14%
622
9%
$
1,423
$
769 $
12%
434
$
752
12%
432
6%
$ 1,773 $
6%
$
1,742
K5
23%
1,687
25%
850 $
921 $
15%
692
10%
1,435 $ 1,322
25%
1,519
25%
$
870
$ 1,252
29%
1,310
27%
955
746
$
14%
611
10%
577
13%
487
10%
$ 1,186
1,331 $ 1,220
756 $
13%
453
6%
$
641
12%
394
7%
492
12%
315
7%
$ 1,559
1,668 $ 1,627
Principal Sources of Railway Operating Revenues (continued)
Year Ended Dec. 31,
(Revenues in millions, shipments in thousands, revenue yield in dollars per shipment)
2002
2001
2000
1999
1998
METALS/CONSTRUCTION
Revenues
% of total revenues
Shipments
% of total shipments
Revenue Yield
AGR./CONSUMER
PRODUCTS/GOVT.
Revenues
% of total revenues
Shipments
% of total shipments
Revenue Yield
PAPER/CLAY/FOREST
Revenues
% of total revenues
Shipments
% of total shipments
Revenue Yield
INTERMODAL
Revenues
% of total revenues
Shipments
% of total shipments
Revenue Yield
$
$
$
692 $
11%
716
11%
966 $
674
$
11%
703
11%
$
959
689 $
11%
757
11%
911 $
567
$
11%
587
10%
965
375
9%
372
8%
$ 1,008
623 $
10%
507
603
$
10%
509
8%
$ 1,228 $
8%
$
1,185
$
603 $
10%
438
$
612
10%
450
6%
$ 1,378 $
7%
$
1,357
1,160 $ 1,103
609 $
10%
525
8%
630 $
10%
491
7%
539
$
11%
489
8%
468
11%
441
9%
$ 1,063
$
578
11%
465
8%
535
13%
445
9%
$ 1,202
1,285 $ 1,243
$ 1,181 $
19%
2,354
35%
502 $
$
1,123 $
18%
2,214
33%
507 $
1,119 $
18%
2,242
33%
499 $
849 $
16%
1,896
32%
448 $
555
13%
1,443
30%
385
TOTALS
Railway Operating Revenues
Railway Shipments
Railway Revenue Yield
$ 6,270 $
6,721
$
933 $
6,170 $
6,625
931 $
6,159 $ 5,242 $ 4,254
4,813
5,961
6,847
884
900 $
879 $
COAL TRAFFIC - Coal, coke and iron ore -- most of which is bituminous coal -- is NS’ railroads’
largest commodity group as measured by revenues. The railroads handled a total of 170.4 million tons in
2002, most of which originated on NS’ lines in West Virginia, Virginia, Pennsylvania and Kentucky.
Revenues from coal, coke and iron ore accounted for about 23% of NS’ total railway operating revenues
in 2002.
Coal, coke and iron ore tonnage by market for the past five years are set forth in the following table.
K6
Coal, Coke and Iron Ore Tonnage by Market
Utility
Export
Steel
Industrial
2002
127,747
11,342
21,578
9,733
170,400
2001
Year Ended December 31,
2000
(tons in thousands)
1999
132,325
13,872
20,457
11,377
178,031
119,284
19,845
25,003
10,781
174,913
107,381
18,373
21,399
10,348
157,501
1998
83,225
24,453
18,236
8,382
134,296
Total coal handled through all system ports in 2002 was 32 million tons. Of this total, 10 million tons
(including coastwise traffic) moved through Lamberts Point, Virginia, 3 million tons moved through the
Baltimore Terminal, 11 million tons moved to various docks on the Ohio River, and 8 million tons
moved to various Lake Erie ports. Other than coal for export, virtually all coal handled by NS’ railroads
was terminated in states east of the Mississippi River.
See the discussion of coal traffic, by type of coal, in Part II, Item 7, “Management’s Discussion and
Analysis.”
GENERAL MERCHANDISE TRAFFIC - General merchandise traffic is composed of five major
commodity groupings: automotive; chemicals; metals and construction; agriculture, consumer products
and government; and paper, clay and forest products. The automotive group includes finished vehicles
for BMW, Daimler Chrysler, 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. The chemicals group
includes sulfur and related chemicals, petroleum products, chlorine and bleaching compounds, plastics,
rubber, industrial chemicals, chemical wastes and municipal wastes. The metals and construction
group includes steel, aluminum products, machinery, scrap metals, cement, aggregates, bricks and
minerals. The agriculture, consumer products and government group includes soybeans, wheat, corn,
fertilizer, animal and poultry feed, food oils, flour, beverages, canned goods, sweeteners, consumer
products and items for the military. The paper, clay and forest products group includes lumber and wood
products, pulpboard and paper products, woodfibers, woodpulp, scrap paper and clay. General
merchandise carloads handled in 2002 were 2.76 million, compared with 2.72 million handled in 2001,
an increase of 2%.
In 2002, 134 million tons of general merchandise freight, or approximately 67% of total general
merchandise tonnage handled by NS, originated online. The balance of general merchandise traffic was
received from connecting carriers at interterritorial gateways. The principal interchange points for NS-
received traffic included Chicago, Memphis, New Orleans, Cincinnati, Kansas City, Detroit,
Hagerstown, St. Louis/East St. Louis and Louisville.
See the discussion of general merchandise rail traffic by commodity group in Part II, Item 7,
“Management’s Discussion and Analysis.”
INTERMODAL TRAFFIC - The intermodal market consists of shipments moving in trailers, domestic
and international containers, and Roadrailer® equipment. These shipments are handled on behalf
of intermodal marketing companies, international steamship lines, truckers and other shippers.
Intermodal units handled in 2002 were 2.35 million, compared with 2.21 million handled in 2001,
an increase of 6%.
See the discussion of intermodal traffic in Part II, Item 7, “Management’s Discussion and Analysis.”
K7
FREIGHT RATES - In 2002, NS’ railroads continued their reliance on private contracts and exempt
price quotes as their predominant pricing mechanisms. Thus, a major portion of NS’ railroads’ freight
business is not currently economically regulated by the government. In general, market forces have been
substituted for government regulation and now are the primary determinant of rail service prices.
However, in 2002 there were significant coal movements moving under common carrier (tariff) rates
which had previously moved under rates contained in transportation contracts. Beginning Jan. 1, 2002,
coal moving to Duke Energy’s (Duke) Belew’s Creek, Allen, Buck and Dan River generating stations
moved under common carrier rates and beginning April 1, 2002, coal moving to Carolina Power and
Light’s (CP&L) Hyco and Mayo plants moved under common carrier rates. Duke and CP&L have
challenged the reasonableness of these common carrier rates in proceedings currently pending before the
Surface Transportation Board.
In 2002, NS’ railroads were found by the STB not to be “revenue adequate” based on results for the year
2001. A railroad is “revenue adequate” under the applicable law when its return on net investment
exceeds the rail industry’s composite cost of capital. This determination is made pursuant to statutory
requirement and does not adversely impact NS’ liquidity or capital resources.
PASSENGER OPERATIONS - Regularly scheduled passenger trains are operated by Amtrak on NS’
lines between Alexandria and New Orleans, and between Greensboro and Selma, North Carolina.
Commuter trains are operated on the NS line between Manassas and Alexandria in accordance with
contracts with two transportation commissions of the Commonwealth of Virginia. NS also leases the
Chicago to Manhattan, Illinois, line to the Commuter Rail Division of the Regional Transportation
Authority of Northeast Illinois. Since June 1, 1999, Norfolk Southern Railway has operated former
Conrail lines on which Amtrak conducts regularly scheduled passenger operations between Chicago,
Illinois, and Detroit, Michigan, and between Chicago and Harrisburg, Pennsylvania.
Also since June 1, 1999, through its operation of PRR’s routes, Norfolk Southern Railway has been
providing freight service over former Conrail lines with significant ongoing Amtrak and commuter
passenger operations, and is conducting freight operations over some trackage owned by Amtrak or by
New Jersey Transit, the Southeastern Pennsylvania Transportation Authority, Metro-North Commuter
Railway Company and Maryland DOT. Finally, passenger operations are conducted either by Amtrak or
by the commuter agencies over trackage owned by Pennsylvania Lines LLC, or by Conrail in the Shared
Assets Areas.
NONCARRIER OPERATIONS - NS’ noncarrier subsidiaries engage principally in the acquisition,
leasing and management of coal, oil, gas and minerals; the development of commercial real estate;
telecommunications; and the leasing or sale of rail property and equipment. In 2002, no such noncarrier
subsidiary or industry segment grouping of noncarrier subsidiaries met the requirements for a reportable
business segment set forth in Statement of Financial Accounting Standards No. 131.
RAILWAY PROPERTY
The NS railroad system extends across 22 states and portions of Canada. The railroad infrastructure
makes the company very capital intensive with total property of approximately $11 billion and
investment in Conrail of approximately $6 billion.
K8
Capital Expenditures - Capital expenditures for road, equipment and other property for the past five
years were as follows (including capitalized leases):
2002
2001
2000
1999
1998
Capital Expenditures
Road
Equipment
Other property
Total
$
$
519 $
174
2
695 $
($ in millions)
$
557 $
146
28
$
731 $
505
233
8
746
559 $
349
4
912 $
612
442
6
1,060
Capital spending and maintenance programs are and have been designed to assure the ability to provide
safe, efficient and reliable transportation services. For 2003, NS has budgeted $798 million of capital
spending. See the discussion following “Cash used for investing activities,” in Part II, Item 7,
“Management’s Discussion and Analysis.”
Equipment - As of Dec. 31, 2002, NS owned or leased the following units of equipment:
Locomotives:
Multiple purpose
Switching
Auxiliary units
Total locomotives
Freight cars:
Hopper
Box
Covered hopper
Gondola
Flat
Caboose
Other
Total freight cars
Other:
Work equipment
Vehicles
Highway trailers and
containers
RoadRailer®
Miscellaneous
Total other
Owned*
Leased**
Total
Number of Units
2,259
105
59
2,423
18,568
17,184
9,956
27,619
3,420
169
3,375
80,291
4,619
3,529
881
5,570
1,431
16,030
1,001
102
18
1,121
5,036
4,438
3,097
11,077
1,485
57
0
25,190
1,584
1,063
7,397
--
10,185
20,229
3,260
207
77
3,544
23,604
21,622
13,053
38,696
4,905
226
3,375
105,481
6,203
4,592
8,278
5,570
11,616
36,259
Capacity
of Equipment
(Horsepower)
10,959,200
302,800
0
11,262,000
(Tons)
2,486,500
1,687,530
1,423,216
4,148,610
363,566
0
172,247
10,281,669
* Includes equipment leased to outside parties and equipment subject to equipment trusts, conditional sale
agreements and capitalized leases.
** Includes locomotives, freight cars and units of other equipment leased from PRR.
K9
The following table indicates the number and year built for locomotives and freight cars owned at
Dec. 31, 2002.
2002 2001
2000
1999
1998
1993-
1997
1988-
1992
1987 &
Before
Total
Year Built
-- 160
7%
--%
60 147
6%
2%
119
5%
420
17%
257
11%
1,260
52%
2,423
100%
--
--%
--
--%
112 515
1%
--%
1,566
2%
6,048
7%
6,098 65,952 80,291
100%
82%
8%
Locomotives:
No. of units
% of fleet
Freight cars:
No. of units
% of fleet
As of Dec. 31, 2002, the average age of the locomotive fleet was 16.1 years. During 2002, 52
locomotives, the average age of which was 28.2 years, were retired. The average age of the freight car
fleet at Dec. 31, 2002, was 25.9 years. During 2002, 3,013 freight cars were retired.
Since 1988, about 29,000 coal cars have been rebodied. As a result, the remaining serviceability of the
freight car fleet is greater than may be inferred from the high percentage of freight cars built in earlier
years.
Annual Average Bad Order Ratio
2000
2001
1999
2002
1998
Freight cars (excluding cabooses):
NS Rail
Locomotives:
NS Rail
8.1%
6.9%
6.3%
5.8%
5.7%
5.5%
3.7%
4.1%
5.3%
4.3%
Ongoing freight car and locomotive maintenance programs are intended to ensure the highest standards
of safety, reliability, customer satisfaction and equipment marketability. In past years, the freight car bad
order ratio reflected the storage of certain types of cars that were not in high demand. The ratio rose in
2000, 2001 and 2002 as a result of decreased maintenance activity. A review began in 2002 to address
several hundred unserviceable, overage and commercially obsolete freight cars, which will likely result
in their disposition in 2003. The locomotive bad order ratio includes units out of service for required
inspections every 92 days and program work such as overhauls. The increase in the locomotive bad
order ratio in 1999 was primarily due to the maintenance requirements of units being rented to meet
short-term needs and to weather-related failures. The ratio rose slightly in 2000 as maintenance activities
were curtailed in response to a slowing economy. The elevated ratio through 2001 and 2002 reflected
units out of service related to the resumption of maintenance and modification activities.
Track Maintenance - Of the approximately 38,500 total miles of track operated, NS had responsibility
for maintaining about 31,000 miles of track with the remainder being operated under trackage rights.
Over 75% of the main line trackage (including first, second, third and branch main tracks, all excluding
trackage rights) has rail ranging from 131 to 155 pounds per yard with the standard installation currently
at 141 pounds per yard. Approximately 40% of NS lines carried 20 million or more gross tons per track
mile.
K10
The following table summarizes several measurements regarding NS’ track roadway additions and
replacements during the past five years:
2002
2001
2000
1999
1998
Track miles of rail installed
Miles of track surfaced
New crossties installed (millions)
235
5,270
2.8
254
3,836
1.5
390
3,687
1.5
403
5,087
2.3
429
4,715
2.0
Microwave System - The NS microwave system, consisting of approximately 7,282 radio route miles,
442 active stations and 4 passive repeater stations, provides communications between most operating
locations. The microwave system is used primarily for voice communications, VHF radio control
circuits, data and facsimile transmissions, traffic control operations and AEI data transmissions.
Traffic Control - Of a total of 21,500 route miles operated by NS, excluding trackage rights over
foreign lines, 11,511 miles are signalized, including 8,546 miles of centralized traffic control (CTC) and
2,965 miles of automatic block signals. Of the 8,546 miles of CTC, 1,895 miles are controlled by data
radio originating at 148 base station radio sites.
Computers - A computer network consisting of a centralized data center in Atlanta, Georgia, and
various distributed computers throughout the company connects the yards, terminals, transportation
offices, rolling stock repair points, sales offices and other key system locations. Operating and traffic
data are processed and stored to provide customers with information on their shipments throughout the
system. Computer systems provide current information on the location of every train and each car on
line, as well as related waybill and other train and car movement data. In addition, the computer systems
are utilized to assist management in the performance of a variety of functions and services including
payroll, car and revenue accounting, billing, material management activities and controls, and special
studies.
Other - The railroads have extensive facilities for support of operations, including freight depots, car
construction shops, maintenance shops, office buildings, and signals and communications facilities.
Encumbrances - Certain railroad equipment is subject to the prior lien of equipment financing
obligations amounting to approximately $864 million as of Dec. 31, 2002, and $895 million at Dec. 31,
2001.
ENVIRONMENTAL MATTERS - Compliance with federal, state and local laws and regulations
relating to the protection of the environment is a principal NS goal. To date, such compliance has not
affected materially NS’ capital additions, earnings, liquidity or competitive position. See the discussion
of “Environmental Matters” in Part II, Item 7, “Management’s Discussion and Analysis,” and in Note 18
to the Consolidated Financial Statements.
EMPLOYEES - NS employed an average of 28,970 employees in 2002, compared with an average of
30,894 in 2001. The decrease reflects NS’ continuous drive to operate more efficiently, accompanied by
railroad retirement legislation late in 2001, which lowered the retirement age for rail employees. The
approximate average cost per employee during 2002 was $54,000 in wages and $24,000 in employee
benefits.
Approximately 85% of NS’ railroad employees are covered by collective bargaining agreements with 15
different labor unions. See the discussion of “Labor Agreements” in Part II, Item 7, “Management’s
Discussion and Analysis.”
GOVERNMENT REGULATION - In addition to environmental, safety, securities and other
regulations generally applicable to all businesses, NS’ railroads are subject to regulation by the STB,
which succeeded the ICC on Jan. 1, 1996. The STB has jurisdiction over some rates, routes, conditions
of service and the extension or abandonment of rail lines. The STB also has jurisdiction over the
K11
consolidation, merger or acquisition of control of and by rail common carriers. The Department of
Transportation regulates certain track and mechanical equipment standards.
The relaxation of economic regulation of railroads, begun over two decades ago by the ICC under the
Staggers Rail Act of 1980, has continued under the STB. Significant exemptions are TOFC/COFC (i.e.,
“piggyback”) business, rail boxcar traffic, lumber, manufactured steel, automobiles and certain bulk
commodities such as sand, gravel, pulpwood and wood chips for paper manufacturing. Transportation
contracts on regulated shipments effectively remove those shipments from regulation as well. About
80% of NS’ freight revenues come from either exempt traffic or traffic moving under transportation
contracts.
Efforts may be made in 2003 to re-subject the rail industry to unwarranted federal economic regulation.
The Staggers Rail Act of 1980, which substantially reduced such regulation, encouraged and enabled rail
carriers to innovate and to compete for business, thereby contributing to the economic health of the
nation and to the revitalization of the industry. Accordingly, NS will oppose efforts to reimpose
unwarranted economic regulation.
COMPETITION - There is continuing strong competition among rail, water and highway carriers.
Price is usually only one factor of importance as shippers and receivers choose a transport mode and
specific hauling company. Inventory carrying costs, service reliability, ease of handling and the desire to
avoid loss and damage during transit are also important considerations, especially for higher-valued
finished goods, machinery and consumer products. Even for raw materials, semifinished goods and
work-in-process, users are increasingly sensitive to transport arrangements that minimize problems at
successive production stages.
NS’ primary rail competitor is the CSX system; both operate throughout much of the same territory.
Other railroads also operate in parts of the territory. NS also competes with motor carriers, water carriers
and with shippers who have the additional option of handling their own goods in private carriage.
Certain marketing strategies between railroads and between railroads and motor carriers enable carriers
to compete more effectively in specific markets.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the fourth quarter of 2002.
Executive Officers of the Registrant.
Norfolk Southern’s executive officers generally are elected and designated annually by the Board of
Directors at its first meeting held after the annual meeting of stockholders, and they hold office until their
successors are elected. Executive officers also may be elected and designated throughout the year as the
Board of Directors considers appropriate. There are no family relationships among the officers, nor any
arrangement or understanding between any officer and any other person pursuant to which the officer
was selected. The following table sets forth certain information, as of February 1, 2003, relating to the
executive officers.
K12
Name, Age, Present Position
Business Experience During Past Five Years
David R. Goode, 62,
Chairman, President and
Chief Executive Officer
L. I. Prillaman, 59,
Vice Chairman and
Chief Marketing Officer
Stephen C. Tobias, 58,
Vice Chairman and
Chief Operating Officer
Henry C. Wolf, 60,
Vice Chairman and
Chief Financial Officer
John F. Corcoran, 62,
Senior Vice President
Public Affairs
John W. Fox, Jr., 55,
Senior Vice President
Coal Services
James A. Hixon, 49,
Senior Vice President
Administration
Present position since September 1992.
Present position since August 1998; prior thereto was
Executive Vice President Marketing.
Present position since August 1998; prior thereto was
Executive Vice President Operations.
Present position since August 1998; prior thereto was
Executive Vice President Finance.
Present position since August 1997; prior thereto was
Vice President Public Affairs
Present position since April 2001. Served as Senior Vice
President Coal Marketing from December 1999 to April 1,
2001, and prior thereto was Vice President Coal Marketing.
Present position since February 2001. Served as Senior Vice
President Employee Relations from November 1999 to
February 2001, and prior thereto was Vice President
Taxation.
Henry D. Light, 62,
Senior Vice President Law
Present position since January 22, 2002. Served as Vice
President Law from April 2000 to January 22, 2002, and
prior thereto General Counsel Operations.
James W. McClellan, 63,
Senior Vice President Planning
Present position since August 1998; prior thereto was Vice
President Strategic Planning
Kathryn B. McQuade, 46,
Senior Vice President
Financial Planning
Charles W. Moorman, 51,
Senior Vice President
Corporate Services
John P. Rathbone, 51,
Senior Vice President and
Controller
Stephen P. Renken, 59,
Senior Vice President Chief
Information Officer
Present position since April 2000. Served as Vice President
Financial Planning from August 1998 to April 2000, and
prior thereto was Vice President Internal Audit.
Present position since February 1, 2003. Also serves as
President Thoroughbred Technology and
Telecommunications, Inc. since October 1999, and prior
thereto was Vice President Information Technology.
Present position since April 2000; prior thereto was Vice
President and Controller
Present position since February 2001. Served as Vice
President Information Technology September 1999 to
February 2001, Assistant Vice President Program
Management from December 1997 to September 1999, and
prior thereto was a consultant to NS.
K13
John M. Samuels, 59,
Senior Vice President
Operations Planning and
Support
Donald W. Seale, 50,
Senior Vice President
Merchandise Marketing
Present position since April 2000; Served as Vice President
Operations Planning and Budget from January 1998 to April
2000; and prior thereto was Vice President Operating Assets
of Conrail.
Present position since December 1999; prior thereto was Vice
President Merchandise Marketing.
PART II
Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters.
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
STOCK PRICE AND DIVIDEND INFORMATION
(Unaudited)
The Common Stock of Norfolk Southern Corporation, owned by 51,418 stockholders of record as of
Dec. 31, 2002, is traded on the New York Stock Exchange with the symbol NSC. The following table
shows the high and low sales prices as reported by Bloomberg L.P. on its internet-based service and
dividends per share, by quarter, for 2002 and 2001 (prices quoted in fractions have been rounded to the
nearest cent).
2002
Market price
High
Low
Dividends per share
2001
Market price
High
Low
Dividends per share
1st
26.98
18.26
0.06
1st
18.90
13.63
0.06
$
$
$
$
$
$
$
$
Quarter
2nd
24.45
19.85
0.06
2nd
24.11
15.80
0.06
$
$
$
$
3rd
23.90
17.20
0.07
3rd
22.60
13.41
0.06
$
$
$
$
4th
22.54
18.70
0.07
4th
19.88
15.19
0.06
K14
Item 6. Selected Financial Data.
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
FIVE-YEAR FINANCIAL REVIEW
1998-2002
2002
2001
2000(1)
($ in millions, except per share amounts)
1999(2)
1998
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 operations (3)
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
Capital expenditures
Average number of shares outstanding
(thousands)
Number of stockholders at year end
Average number of employees:
Rail
Nonrail
Total
$
$
$
$
$
$
$
$
$
$
6,270 $
5,112
1,158
6,170 $
5,163
1,007
6,159 $
5,526
633
5,242 $
4,524
718
4,254
3,202
1,052
66
518
706
246
460
99
553
553
191
362
168
551
250
78
172
164
531
351
112
239
--
460 $
13
375 $
--
172 $
--
239 $
309
516
845
215
630
104
734
1.18 $
1.18 $
0.26 $
16.71 $
0.97 $
0.97 $
0.24 $
15.78 $
0.45 $
0.45 $
0.80 $
15.16 $
0.63 $
0.63 $
0.80 $
15.50 $
1.94
1.93
0.80
15.61
19,956 $
19,418 $
18,976 $
19,250 $
18,180
7,364 $
6,500 $
7,632 $
6,090 $
7,636 $
5,824 $
8,059 $
5,932 $
7,624
5,921
695 $
746 $
731 $
912 $
1,060
388,213
51,418
385,158
53,042
383,358
53,194
380,606
51,123
378,749
51,727
28,587
383
28,970
30,510
384
30,894
33,344
394
33,738
30,897
269
31,166
24,185
115
24,300
(1)
(2)
(3)
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.
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.
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.
K15
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the Consolidated Financial
Statements and Notes and the Five-Year Financial Review.
SUMMARIZED RESULTS OF OPERATIONS
2002 Compared with 2001
Net income was $460 million in 2002, up $85 million, or 23%. Results in 2001 included a $13 million
gain from discontinued operations related to the 1998 sale of NS’ former motor carrier subsidiary (see
Note 17). Excluding that gain from 2001’s results, net income was up $98 million, or 27%, in 2002.
The improvement was primarily the result of a $151 million, or 15%, increase in income from railway
operations.
Diluted earnings per share were $1.18, up 22%. Excluding the discontinued operations gain, diluted
earnings per share increased 26%.
2001 Compared with 2000
Net income in 2001 was $375 million, up 118%. Income from continuing operations, which excludes
the $13 million discontinued operations 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).
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%.
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
Railway operating revenues were $6.3 billion in 2002, and $6.2 billion in both 2001 and 2000. The
following table presents a three-year comparison of revenues by market group.
K16
Revenues by Market Group
Coal
General merchandise:
Automotive
Chemicals
Metals/construction
Agriculture/consumer products/
government
Paper/clay/forest
General merchandise
Intermodal
Total
2002
$
1,441
2001
($ in millions)
1,521
$
2000
$
1,435
961
769
692
623
603
3,648
1,181
6,270
$
885
752
674
603
612
3,526
1,123
6,170
$
921
756
689
609
630
3,605
1,119
6,159
$
In 2002, revenues increased 2%, as a 3% rise in general merchandise revenues coupled with a 5%
improvement in intermodal revenues offset a 5% decline in coal revenues. All but one of the general
merchandise market groups (paper, clay and forest products) posted increases over 2001. As shown in
the following table, most of the revenue improvement was the result of higher traffic volumes. The
favorable revenue per unit/mix variance was driven by higher average revenue per unit, offset in part by
the effects of unfavorable changes in the mix of traffic.
Revenue Variance Analysis
Increases (Decreases)
Volume
Revenue per unit/mix
Total
2002 vs. 2001
2001 vs. 2000
($ in millions)
$
$
89
11
100
$
$
(200)
211
11
In 2001, revenues fell for all the general merchandise market groups. However, a 6% increase in coal
revenues offset the effects of the lower general merchandise revenues. Revenue per unit increased in all
market groups, principally due to rate increases, use of higher-capacity equipment and favorable changes
in the mix of traffic.
COAL tonnage decreased 4% in 2002 and revenues declined 5%. Revenue per unit declined slightly,
reflecting unfavorable changes in the mix of traffic (more shorter-haul business) that offset the effects of
rate increases and gains in tonnage per car. Coal, coke and iron ore represented 23% of total railway
operating revenues in 2002, and 84% of NS’ coal shipments originated on lines it operates.
In 2001, coal tonnage increased 2%, and revenues improved 6%. Revenue per unit increased 6%, a
result of rate increases, including lower volume-related refunds on export coal shipments, gains in
tonnage per car and favorable changes in the mix of traffic (less shorter-haul business).
K17
Total Coal, Coke and Iron Ore Tonnage
Utility
Export
Domestic metallurgical
Other
Total
2002
2001
(In millions of tons)
2000
128
11
21
10
170
133
14
20
11
178
119
20
25
11
175
Utility coal tonnage decreased 3% in 2002, a result of lower demand that reflected the weak economy,
high coal stockpile levels entering the year, mild temperatures in the first quarter, reduced stockpile
targets set by utility companies and increased generation from new natural gas-fired plants. Licensing
requirements for these new plants resulted in additional generation that temporarily displaced coal-fired
generation.
In 2001, utility coal traffic increased 11%, reflecting higher demand for coal-fired electricity and the
effects of very high natural gas prices early in the year. High demand for coal, a volatile market for
natural gas and production problems at a number of large mines in the East late in 2000 combined to
increase demand somewhat early in 2001 with a resulting increase in coal prices. Utility coal traffic
volume also benefited somewhat from the shifting of coal that traditionally would have been bound for
export to the domestic market.
Two of NS’ utility customers, Duke Energy (Duke) and Carolina Power and Light (CP&L), have filed
rate reasonableness complaints at the Surface Transportation Board (STB) alleging that the NS tariff
rates for the transportation of coal to their solely served power plants are unreasonable. NS is disputing
these allegations. Since January 1, 2002, in the case of Duke and since April 1, 2002, in the case of
CP&L, NS has been billing and collecting amounts from the customers based on the challenged tariff
rates. Management expects that the resolution of these cases, which is anticipated to occur in 2003, will
not have a material effect on NS’ financial statements.
The near-term outlook for utility coal remains positive. Coal-fired generation remains the lowest cost
marginal source of electricity. Coal plant generation should continue to track the U.S. economy, and
management expects that utilities will use coal-fired plants to meet increased demand because of coal’s
low cost. As always, demand will be influenced by the weather. In addition, while the price of natural
gas can affect demand for utility coal, its higher price and volatility 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 imposed more stringent limits on
sulfur dioxide emissions, took effect on Jan. 1, 2000. Many of the mines served by NS produce coals
that satisfy Phase II requirements. In addition, substantial banks of sulfur dioxide allowances held by
many NS-served utilities, as well as implementation of sulfur dioxide emission control systems at many
NS-served plants, should continue to provide a market for other NS-served mines.
While the Phase II impact on NS utility coal has been minimal, there are a number of other evolving
environmental issues that have the potential to increase or ease cost pressures on the utility coal market,
depending upon their outcome. These include a potential new national energy policy, proposed multi-
pollutant legislation, a proposed new rule concerning “new source review,” the impending mercury
emissions standard and the fate of U.S. participation in the Kyoto Protocol.
K18
Although impending developments with these environmental issues could potentially increase cost
pressures on coal-fired generation, the outlook remains positive for maintaining coal’s position in the
power generation mix for regions served by NS. However, different developments with these issues
could actually ease cost pressures on coal-fired generation, further strengthening coal’s position.
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. In May 2002, the same district court judge made a similar ruling in a different case in which
NS had again intervened. In January 2003, this ruling also was overturned by the Fourth Circuit Court of
Appeals.
Export coal tonnage declined 18% in 2002. Steam coal exports through Baltimore declined 4%, and
export metallurgical coals through Norfolk declined 22%. During the first half of 2002, demand for U.S.
coal was soft as international buyers focused their purchases toward other, lower-priced sources. Market
uncertainty resulted in late contract settlements and delayed shipments. Late in 2002, demand for U.S.
coking coals increased, reflecting a shift in the market as exports from China, Australia and Poland
declined. As a result, shipments through Norfolk increased in the fourth quarter.
In 2001, export coal tonnage decreased 30%. The rapid rise of domestic utility coal prices early in the
year enticed many foreign-market suppliers to place much of their 2001 production in the domestic
utility markets. In addition, production difficulties at several large NS-served mines and flooding in
West Virginia in July significantly reduced the supply of low volatility coal. The combination of these
factors resulted in most of the decline in shipments of export coal. Steam coal exports through Baltimore
declined 32%, and export metallurgical coals through Norfolk declined by 30%. Demand for steam coal
to export strengthened in the last half of 2001; however, strong U.S. demand limited NS’ participation in
this market. Demand for coking coal to export continued to soften, as steel production moved from
traditional NS markets in Europe to Asia, which in recent years has been supplied by Australian or
Canadian coals.
It is expected that export coal tonnage will continue to be limited by supply and subject to the
fluctuations of the world market. The increase in demand for U.S. coals seen in the fourth quarter of
2002 has continued into the first quarter of 2003, and early indications are that these market forces
should remain in place as contracts are settled in the spring for the coming year. Should these market
forces continue, U.S. coal export volumes could recover somewhat. However, the inherent volatility and
uncertainties in this market make predictions especially vulnerable.
Domestic metallurgical coal, coke and iron ore tonnage increased 5% in 2002, reflecting higher U.S.
steel production that was aided by the imported steel tariff program implemented in 2002. In addition,
continued strong vehicle production resulted in demand for steel.
In 2001, domestic metallurgical coal, coke and iron ore tonnage decreased 18% 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.
Domestic metallurgical coal, coke and iron ore traffic is expected to continue to experience modest gains
during the two-year life of the import tariffs. However, long-term demand is expected to decline,
reflecting advanced technologies that allow production of steel using less coke.
K19
Other coal tonnage, principally steam coal shipped to manufacturing plants, decreased 14% in 2002, but
increased 6% in 2001. The decline in 2002 was primarily the result of the weak economy. The gain in
2001 resulted from new and increased business from industrial customers.
GENERAL MERCHANDISE traffic volume (carloads) increased 2% in 2002, and revenues increased
3%, principally due to a 9% improvement in automotive revenues. In 2001, traffic volume decreased
7%, and revenues decreased 2%, reflecting the effects of a weak economy.
Automotive traffic volume increased 7%, and revenues increased 9% in 2002, principally due to a rise in
vehicle production and new business. Revenue per unit increased 2%, reflecting some pricing
improvements, extended length of haul, special ancillary services and the settlement of a disputed
charge.
In 2001, automotive traffic volume decreased 10%, and revenues declined 4%, principally due to a 10%
drop in vehicle production. Revenue per unit increased 7%, principally due to rate increases, efficiencies
gained from the redesign of the mixing center network and use of higher capacity equipment.
Automotive revenues in 2003 are expected to be lower than those of 2002. Light vehicle production is
predicted to be down slightly, and NS’ largest automotive customer has announced a 5% decrease in first
quarter 2003 production.
Chemicals traffic volume increased slightly, and revenues increased 2% in 2002. Higher traffic volume
for plastics and a small increase for miscellaneous chemicals offset a decline for petroleum products.
Demand for plastics was supported by increases in light vehicle production and housing starts. Traffic
volume also benefited from increased shipments 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 as a result of a favorable change in the mix of traffic (more higher-rated
business) and market-driven rate increases.
In 2001, chemicals traffic volume decreased 5%, and revenues decreased 1%. The weak economy
depressed shipments of petroleum, plastics, industrial and miscellaneous chemicals. These declines were
partially offset by new business through NS’ TBT facilities. Revenue per unit increased due to higher
rates and a favorable change in the mix of traffic (more longer-haul moves).
Chemicals revenues are expected to improve in 2003, supported by a recovering economy, new business
and improved revenue per unit.
Metals and construction traffic volume increased 2%, and revenues improved 3% in 2002, reflecting
improvement in the steel industry, which was aided by the two-year imported steel tariff program
implemented in 2002. Metals volume benefited from resumption of production at some mills that closed
in 2001 and increased volume from new mills. Construction traffic declined, primarily as a result of
reductions in highway projects due to state government budget pressures.
In 2001, metals and construction traffic volume decreased 7%, and revenues declined 2%, reflecting
weakness in the steel and construction industries. The steel industry recession, which began in 2000,
resulted in excess capacity and the closing of numerous steel mills. Revenue per unit increased due to
higher rates and favorable changes in the mix of traffic.
Metals and construction revenues are expected to continue to benefit from added production along NS’
lines, although further consolidation in the steel industry is expected. Construction markets may benefit
from new business from stone quarries and cement terminals in the Southeast.
Agriculture, consumer products and government traffic volume decreased slightly in 2002, but
revenues increased 3%. Traffic volume increases for corn, food products and beverages largely offset
declines for soybeans and feed. Corn volume benefited from increased shipments from the Midwest to
K20
drought-stricken areas in the East. The increase for food products was primarily the result of new
business. Soybean and feed volumes were adversely affected by lower domestic and export demand.
Revenue per unit increased because of higher rates, increased length of haul and favorable changes in the
mix of traffic.
In 2001, agriculture, consumer products and government traffic volume decreased 3%, and revenues
declined 1%, primarily due to reduced shipments of fertilizer. This decline was due to soft farm demand,
record high natural gas prices early in the year (which curtailed production of certain fertilizers) and
increased imports. This was mitigated by traffic volume increases for grain, flour and canned goods. The
revenue per unit increase was primarily due to favorable changes in the mix of traffic.
Agriculture, consumer products and government revenues in 2003 are expected to continue to benefit
from higher corn, fertilizer and food product volume. Fertilizer volumes may be favorably affected by
the reopening of a large phosphate fertilizer plant.
Paper, clay and forest products traffic volume declined 3%, and revenues decreased 1%, in 2002,
primarily due to continued weakness in the paper market, especially in the first half of the year. Traffic
volume improved later in the year as the paper market strengthened. In addition, NS gained business
from conversion of truck shipments to rail and from continued strength in housing starts. Revenue per
unit benefited from rate increases and a decline in shorter-haul business.
In 2001, paper, clay and forest products traffic volume declined 8%, and revenues decreased 3%,
primarily due to a weakened paper market. Paper shipments were adversely affected by reduced
production at many NS-served paper mills, a result of sluggish newspaper advertising and soft demand
for paper. Lumber traffic began the year weak, 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.
Paper, clay and forest products revenues are expected to improve slightly in 2003 as a result of a
recovering economy, service improvements and new business.
INTERMODAL traffic volume increased 6%, and revenues increased 5%, in 2002. Volume growth
was principally the result of new and improved services that resulted in new business, including the
conversion of truck business to rail. International traffic, which accounts for about half of intermodal
volume, increased 10%, supported by growth in trade activity and new business, including the
conversion of over-the-road traffic. Domestic shipments grew 6%, primarily because of new business
gained from the conversion of truck shipments. Triple Crown Services Company (TCS) volume
increased 4%. Revenue per unit declined as a result of an increase in shorter-haul business and the
absence of fuel surcharges that were in place in 2001, which were partially offset by some rate increases.
In 2001, intermodal traffic volume decreased 1%, but revenues increased slightly. Domestic traffic
volume was up in the first half of the year, but demand increasingly weakened as the year progressed,
which eroded NS’ base of traffic. New business supported by the opening of three new terminals and
other initiatives mitigated the effects of the weakened economy. International traffic grew slightly as
U.S. imports slowed with the economy. TCS traffic volume increased 1% despite economic conditions,
as it continued to provide reliable, trucklike service. Intermodal revenue per unit dropped later in the
year, reflecting the expiration of fuel surcharges that were implemented late in 2000 and the introduction
of new shorter-haul business.
In 2003, intermodal revenues are expected to continue to benefit from new business supported by
continued improvements in service and conversion of truck traffic to rail.
K21
Railway Operating Expenses
Railway operating expenses decreased 1% in 2002, while carloads increased 1%. In 2001, railway
operating expenses declined 7%. However, expenses in 2000 included $165 million of costs related to
actions taken to reduce the size of the work force. Excluding these costs, railway operating expenses
decreased 4% in 2001, while carloads dropped 3%.
The railway operating ratio, which measures the percentage of railway operating revenues consumed by
railway operating expenses, was 81.5% in 2002, compared with 83.7% in 2001 and 87% in 2000
(excluding the work-force reduction costs, which increased the ratio 2.7 percentage points). Both
declines primarily resulted from gains in efficiency, although 2002 also benefited from higher traffic
volume, and 2001 benefited from increased revenue per unit. The efficiency gains in 2002 were
principally the result of the implementation of a new operating plan that emphasizes adherence to a
schedule and reductions in service variability. These improvements came despite a continuing change in
the mix of traffic (more resource-intensive traffic, such as automotive and intermodal, coupled with the
decrease in export coal traffic).
The following table shows the changes in railway operating expenses summarized by major
classifications.
Operating Expense Variances
Increases (Decreases)
2002 vs. 2001
2001 vs. 2000
($ in millions)
Compensation and benefits*
Materials, services and rents
Conrail rents and services
Depreciation
Diesel fuel
Casualties and other claims
Other
Total
$
$
8
13
(9)
1
(70)
28
(22)
(51)
$
$
(220)
(1)
(57)
11
(66)
1
(31)
(363)
* Includes $165 million of work-force reduction costs in 2000.
Compensation and benefits represented 40% of total railway operating expenses and increased slightly
in 2002. Higher wage rates, reduced pension income (see Note 11) and increased health and welfare
benefits costs more than offset savings from reduced employment levels and lower payroll taxes (see the
discussion of the Railroad Retirement and Survivors’ Improvement Act, below). Medical costs are
expected to continue to increase in 2003, a result of higher costs for active employees and an increase in
the expected inflation related to postretirement benefits.
In 2001, compensation and benefits decreased 10%; however, this comparison reflects the $165 million
of work-force reduction costs in 2000. Excluding those costs, compensation and benefits decreased 3%,
primarily a result of savings attributable to the reduced size of the work force, which were somewhat
offset by higher wages and benefit costs for union employees, higher incentive compensation and
reduced pension income.
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 15.6% in 2002 to 14.2% in 2003 and 13.1% in 2004. In addition, the
supplemental annuity tax was eliminated. These changes resulted in an estimated $21 million reduction
in payroll taxes in 2002 and are expected to result in savings of $20 million in 2003, compared with
K22
2002. However, these savings are expected to be offset by an increase in the railroad unemployment tax
rate, higher payroll taxes on increased wages and a higher wage base. 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 future
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 equipment; the costs of services purchased from outside contractors, including the net costs of
operating joint (or leased) facilities with other railroads; and the net cost of equipment rentals. This
category of expenses increased 1% in 2002 and decreased slightly in 2001.
The increase in 2002 was the result of higher volume-related expenses for automotive and intermodal
traffic, increased material costs for locomotives, higher expenses for roadway and bridge repairs and
increased derailment costs. These higher costs were largely offset by a significant reduction in
equipment rents. In 2001, the effects of lower equipment rents were largely offset by higher costs for
purchased services, including expenses for software, consulting and legal fees.
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 14% in 2002
and 11% in 2001. The decline in 2002 was principally the result of continued improvement in cycle
times, reflecting efficiency gains and, for intermodal equipment, service design and process changes
implemented during the year. The decrease in 2001 was primarily due to shorter car cycle times that
resulted in fewer car days on line and fewer freight car and locomotive leases.
Locomotive repair costs increased in 2002 and 2001, principally due to renewed maintenance activity,
which is expected to continue into 2003. Freight car maintenance costs, which were relatively flat in
2002, are also likely to increase in 2003, as it is expected that the economy will recover and more freight
cars are due for maintenance.
Conrail rents and services decreased 2% in 2002 and 12% in 2001. 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, plus the additional amortization
related to the difference between NS’ investment in Conrail and its underlying equity (see Note 2). Both
declines reflected higher Conrail earnings and lower expenses in the Shared Assets Areas (see “Conrail’s
Results of Operations, Financial Condition and Liquidity,” below).
Depreciation expense was up slightly in 2002 and increased 2% in 2001. Substantial levels of capital
spending affected both years; however, depreciation expense in 2002 benefited from lower rates
implemented early in the year following completion of a periodic study (see Note 1, “Properties,” for
NS’ depreciation policy).
Diesel fuel expenses decreased 17% in 2002 and 14% in 2001. The decline in 2002 reflected a 16%
drop in the average price per gallon and slightly lower consumption. Expenses in 2002 included a $10
million benefit from the hedging program initiated in the second quarter of 2001 (see “Market Risks and
Hedging Activities,” below and Note 16). The decrease in 2001 was the result of an 8% drop in
consumption and a 7% decline in the average price per gallon. Expenses in 2001 included $8 million of
cost related to the hedging program. NS expects diesel fuel prices to be higher in 2003.
Casualties and other claims expenses (including the estimates of costs related to personal injury,
property damage and environmental matters) increased 20% in 2002, but only slightly in 2001. The
increase in 2002 reflected adverse personal injury claims development as indicated by an actuarial study
and higher expenses for loss and damage to lading, as well as higher insurance and environmental
remediation costs.
K23
The largest component of casualties and other claims expense is personal injury costs. In 2002, cases
involving occupational injuries comprised about 30% of the total employee injury cases settled and 24%
of the total settlement payments made. Injuries of this type are not generally caused by a specific
accident or event, but, rather, result from a claimed exposure over time. Many such claims are being
asserted by former or retired employees, some of whom have not been actively employed in the rail
industry for decades. NS continues to work actively to eliminate all employee injuries and to reduce the
associated costs.
The rail industry remains uniquely susceptible to litigation involving job-related accidental injury and
occupational claims because of the Federal Employers’ Liability Act (FELA), which is applicable only to
railroads. This law, which covers employee claims for job-related injuries, produces results that are
unpredictable and inconsistent as compared with a no-fault workers’ compensation system.
NS, like many other businesses in the U.S., has experienced difficulty obtaining property and casualty
insurance at reasonable terms since the September 11 terrorist attacks. Thus far, NS has been successful
in maintaining a substantial amount of commercial insurance for third-party personal injury, property
damage and FELA claims that exceed the self-insured retention. However, both the cost of this
commercial insurance and the amount of risk that NS retains through self-insurance has more than
doubled since the attacks.
Other expenses decreased 10% in 2002 and 13% in 2001. The decline in 2002 reflected lower expenses
for property and sales and use taxes. The decrease in 2001 was principally the result of lower bad debt
costs, reduced franchise and property taxes, and lower travel and employee-relocation expenses.
Other Income – Net
Other income – net was $66 million in 2002, $99 million in 2001 and $168 million in 2000 (see Note 3).
The decline in 2002 was primarily the result of higher interest accruals on federal income tax liabilities,
lower gains from the sale of properties and investments, and the absence of a $13 million gain from a
nonrecurring settlement that benefited 2001. These reductions were partially offset by reduced discount
from the sales of receivables (due to a lower amount of receivables sold and a lower interest rate
environment, which favorably affects the amount of discount). The reduction in 2001 resulted from the
absence of $101 million of gains that occurred in 2000 related to the sale of timber rights and gas and oil
royalty and working interests. This was somewhat offset by lower interest accruals on federal income
tax liabilities and the $13 million nonrecurring settlement gain. Results in 2001 also included an $18
million gain from a large property sale that closed in December.
Income Taxes
Income tax expense in 2002 was $246 million for an effective rate of 35%, compared with effective rates
of 35% in 2001 and 31% in 2000. Excluding the equity in Conrail’s after-tax earnings, the effective
rates were 38% in 2002 and 2001 and 34% in 2000.
The effective rates in 2002 and 2001 were higher than that of 2000, 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, 2000 benefited from investments in coal-seam gas properties. The 2003 effective
rate may benefit from the resolution of various tax audits.
In March 2002, the Job Creation and Worker Assistance Act of 2002 was signed into law and began
providing immediate tax incentives for business. A 30% additional first-year depreciation allowance was
a primary element of this legislation. This depreciation incentive continues for three years, and during
these years the resulting acceleration of tax depreciation deductions will improve cash flow by reducing
current tax expense and increasing deferred tax expense by significant amounts.
K24
Discontinued Operations
Income from discontinued operations in 2001 consisted of a $13 million after-tax gain related to the sale
of NS’ motor carrier subsidiary (see Note 17).
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities, NS’ principal source of liquidity, was $803 million in 2002,
compared with $654 million in 2001 and $1.3 billion in 2000. In 2002, the improvement was the result
of higher income from railway operations and favorable changes in working capital, which were offset,
in part, by fewer accounts receivable sold (see Note 5). Receivable sales declined $270 million in 2002
and $88 million in 2001. The significant decline in operating cash flow in 2001 reflects the
commencement in 2000 of the accounts receivable sales program. Excluding the infusion of cash in
2000 from the start of this program, operating cash flow declined by $300 million in 2001. The decrease
primarily resulted from an $88 million reduction in the amount of accounts receivable sold, higher tax
payments including amounts applicable to prior years, an increase in telecommunication receivables,
bonus payments in 2001 (no such payments in 2000) and the timing of payrolls.
A significant portion of payments made to PRR (which are included in “Conrail Rents and Services”
and, therefore, are a use of cash in “Cash provided by operating activities”) are borrowed back from a
PRR subsidiary and, therefore, are a source of cash in “Proceeds from borrowings.” NS’ net cash flow
from these borrowings amounted to $212 million in 2002 and $250 million in 2001.
NS’ working capital deficit was $554 million at Dec. 31, 2002, compared with $1.3 billion at Dec. 31,
2001. The decline resulted principally from the change in the terms of the note under which NS borrows
funds from a subsidiary of PRR (see Note 2) and a reduction in the amount of debt due within one year.
Debt due in 2003 is expected to be paid using cash generated from operations (including sales of
accounts receivable) and cash on hand.
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 2002, the amount of
receivables NS could sell under this program ranged from $368 million to $421 million, and the amount
of receivables NS sold ranged from $30 million to $400 million. Moreover, NS has the capability to
issue up to $1 billion of commercial paper (see Note 8); however, reductions in its credit ratings could
limit NS’ ability to access the commercial paper markets (see also the discussion of financing activities,
below).
NS expects to generate sufficient cash flow from operations to meet its ongoing obligations. This
expectation is based on a view that the economy will remain flat for the first half of 2003 and resume
growth in the third and fourth quarters.
K25
Contractual obligations at Dec. 31, 2002, related to NS’ long-term debt (including capital leases),
operating leases, agreements with CRC, unconditional purchase obligations and other long-term
obligations are as follows:
Total
2003
2004-
2005
($ in millions)
2006-
2007
2008 and
Subsequent
Long-term debt and
capital leases
Operating leases
Agreements with CRC
Unconditional purchase
obligations
Other long-term obligations
Total
$
$
7,364 $
880
748
164
38
9,194 $
358 $
113
30
164
8
673 $
856 $
166
65
--
16
1,103 $
1,153 $
115
68
--
14
1,350 $
4,997
486
585
--
--
6,068
NS also has contractual obligations to PRR as disclosed in Note 2. 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. Conrail has no
unconditional purchase or other long-term obligations.
Total
2003
2004-
2005
($ in millions)
2006-
2007
2008 and
Subsequent
Long-term debt and
capital leases
Operating leases
Total
$
$
684 $
327
1,011 $
33 $
32
65 $
62 $
64
126 $
62 $
62
124 $
527
169
696
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) and an operating lease
covering 140 locomotives (see Note 9).
Under the accounts receivable sale program, NS sells without recourse undivided ownership interests in
a pool of accounts receivable to two unrelated buyers. NS has no ownership interest in the buyers. The
buyers issued debt to fund their initial purchase, and NS used the proceeds it received from the initial
purchase primarily to pay down its outstanding debt. NS has no obligation related to the buyers’ debt,
and there is no existing obligation to repurchase sold receivables. Upon termination of the program, the
buyers would cease purchasing new receivables and would retain collections related to the previously
sold receivables (see Note 5).
The operating lease covering the 140 locomotives is renewable annually at NS’ option and expires in
2008. The lessor is a special-purpose entity formed to enter into this transaction, but it 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
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under this provision (see Note 9). As the primary beneficiary of the business of the lessor, effective
Jan. 1, 2003, NS consolidated the assets (locomotives) and liabilities (debt) of this special-purpose entity
when it implemented Financial Accounting Standards Board Interpretation No. 46 (see “New
Accounting Pronouncement” on page K34).
Cash used for investing activities increased 12% in 2002 and 3% in 2001. Property additions, which
account for most of the recurring spending in this category, were down 8% in 2002, following a 2%
increase in 2001. Property sales were significantly lower in 2002, which resulted in the net increase in
cash used for investing activities despite the reduction in capital spending. The following tables show
capital spending (including capital leases) and track and equipment statistics for the past five years.
Capital Expenditures
2002
2001
2000
($ in millions)
1999
1998
Road
Equipment
Other property
Total
$
$
519 $
174
2
695 $
505 $
233
8
746 $
557 $
146
28
731 $
559 $
349
4
912 $
612
442
6
1,060
Capital expenditures (which in 2002 included $6 million of capitalized leases) decreased 7% in 2002, but
increased 2% in 2001. The decline in 2002 reflected lower spending for intermodal facilities, as NS
completed in 2001 several significant projects that expanded the capacity of the intermodal network.
Higher spending on track program work was offset by fewer locomotive purchases (50 in 2002 compared
with 100 in 2001). Outlays in 2001 included amounts for locomotive purchases (no such purchases were
made in 2000 as locomotives were leased) that were somewhat offset by lower expenditures for freight
car purchases and roadway projects. In 2002, 2001 and 2000, spending for road included fiber-optic
infrastructure (see “Telecommunications Subsidiary,” below).
Track Structure Statistics (Capital and Maintenance)
2002
2001
2000
1999
1998
Track miles of rail installed
Miles of track surfaced
New crossties installed (millions)
235
5,270
2.8
254
3,836
1.5
390
3,687
1.5
403
5,087
2.3
429
4,715
2.0
Average Age of Owned Railway Equipment
Freight cars
Locomotives
Retired locomotives
2002
2001
25.9
16.1
28.2
25.4
15.7
22.4
2000
(years)
24.6
16.1
24.5
1999
1998
23.8
15.4
22.7
23.6
15.4
20.6
The table above excludes equipment leased from PRR (see Note 2), which comprises 17% of the freight
car fleet and 25% of the locomotive fleet.
Through its coal car rebody program, which was suspended in 2000, NS converted about 29,000 hopper
cars into high-capacity steel gondolas or hoppers. As a result, the remaining service life of the freight-car
fleet is greater than may be inferred from the increasing average age shown in the table above.
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For 2003, NS has budgeted $798 million for capital expenditures. The anticipated spending includes
$499 million for roadway projects, of which $383 million is for track and bridge program work. Also
included are projects for communications, signal and electrical systems, as well as projects for
environmental and public improvements such as grade crossing separations and signal upgrades. Other
roadway projects include marketing and industrial development initiatives, including increasing track
capacity and access to coal receivers and vehicle production and distribution facilities, and continuing
investments in intermodal infrastructure. Equipment spending of $246 million includes the purchase of
100 locomotives and upgrades to existing units, improvements to multilevel automobile racks, and
projects related to computers and information technology, including additional security and backup
systems.
Cash used for financing activities in 2002 was $150 million. Financing activities provided cash of
$151 million in 2001 and used cash of $798 million in 2000. The comparisons reflect a net reduction of
debt in 2002, a net increase in 2001 and a net reduction in 2000. The comparison in 2001 also reflected
the effects of the reduction to the dividend in January 2001. Financing activities include loan
transactions with a subsidiary of PRR that resulted in net borrowings of $212 million in 2002 and $250
million in 2001 and net repayments of $72 million in 2000 (see Note 2). Excluding these borrowings,
debt was reduced $303 million in 2002, $20 million in 2001 and $422 million in 2000. The net reduction
of debt in 2000 was accomplished in part with the proceeds from the sale of accounts receivable. NS’
debt-to-total capitalization ratio (excluding notes payable to the PRR subsidiary) at year end was 53.1%
in 2002 and 55.6% in 2001.
NS currently has in place a $1 billion, five-year credit agreement, which provides for borrowings at
prevailing rates and includes financial covenants (see Note 8).
NS has outstanding $717 million of its 7.05% notes due May 1, 2037. Each holder of a 2037 note may
require NS to redeem all or part of the note at face value, plus accrued and unpaid interest, on May 1,
2004. NS will not know the amount of 2037 notes that it may be required to redeem until April 1, 2004.
NS expects to be able to redeem any such notes using cash generated from operations (including sales of
accounts receivable), cash on hand and proceeds from borrowings.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting period.
These estimates and assumptions may require significant judgment about matters that are inherently
uncertain, and future events are likely to occur that may require management to change them.
Accordingly, management regularly reviews these estimates and assumptions based on historical
experience, changes in the business environment and other factors that management believes to be
reasonable under the circumstances. Management discusses the development, selection and disclosures
concerning critical accounting estimates with the Audit Committee of its Board of Directors.
Pensions and Other Postretirement Benefits
Accounting for pensions and other postretirement benefit plans requires management to make several
estimates and assumptions (see Note 11). These include the expected rate of return from investment of
the plans’ assets, projected increases in medical costs and the expected retirement age of employees as
well as their projected earnings and mortality. In addition, the amounts recorded are affected by changes
in the interest rate environment because the associated liabilities are discounted to their present value.
Management makes these estimates based on the company’s historical experience and other information
that it deems pertinent under the circumstances (for example, expectations of future stock market
K28
performance). Management engages an independent consulting actuarial firm to aid it in selecting
appropriate assumptions and valuing its related liabilities.
NS’ net pension benefit, which is included in “Compensation and benefits” on its Consolidated Income
Statement, was $79 million for the year ended Dec. 31, 2002. In recording this amount, NS assumed a
long-term investment rate of return of 9%, compared with the 10% rate used in the previous two years.
Investment experience of the pension fund over the past 10-, 15- and 20-year periods has been in excess
of 10%. A one percentage point change to this rate of return assumption would result in a $20 million
change to the pension credit and, as a result, an equal change in “Compensation and benefits” expense.
Changes that are reasonably likely to occur in assumptions concerning retirement age, projected earnings
and mortality would not be expected to have a material effect on NS’ net pension benefit or net pension
asset in the future. The net pension asset is recorded at its net present value using a discount rate that is
based on the current interest rate environment; therefore, management has little discretion in this
assumption.
NS’ net cost for other postretirement benefits, which is also included in “Compensation and benefits,”
was $34 million for the year ended Dec. 31, 2002. In recording this expense and valuing the net liability
for other postretirement benefits, which is included in “Other benefits” as disclosed in Note 11,
management estimated future increases in health-care costs. These assumptions, along with the effect of
a one percentage point change in them, are described in Note 11.
Properties and Depreciation
Most of NS’ total assets are comprised of long-lived railway properties (see Note 6) and its investment in
Conrail (see Note 2). Most of Conrail’s assets are long-lived railway properties. As disclosed in Note 1,
NS’ properties are depreciated using group depreciation. Rail is depreciated primarily on the basis of use
measured by gross-ton miles. Other properties are depreciated generally using the straight-line method
over the lesser of estimated service or lease lives. NS reviews the carrying amount of properties
whenever events or changes in circumstances indicate that such carrying amount may not be recoverable
based on future undiscounted cash flows or estimated net realizable value. Assets that are deemed
impaired as a result of such review are recorded at the lesser of carrying amount or fair value. NS is
amortizing the excess of the purchase price paid for its investment in Conrail over its share of Conrail’s
net equity using the principles of purchase accounting, based primarily on the estimated remaining useful
lives of Conrail’s properties.
NS’ depreciation expense is based on management’s assumptions concerning service lives of its
properties as well as the expected net salvage that will be received upon their retirement. These
assumptions are the product of periodic depreciation studies that are performed by a firm of consulting
engineers. These studies analyze NS’ historical patterns of asset use and retirement and take into
account any expected change in operation or maintenance practices. NS’ recent experience with these
studies has been that while they do result in changes in the rates used to depreciate its properties, these
changes have not caused a significant effect to its annual depreciation expense. The studies may also
indicate that the recorded amount of accumulated depreciation is deficient (or in excess) of the amount
indicated by the study. Any such deficiency (or excess) is amortized as a component of depreciation
expense over the remaining service lives of the affected class of property. NS’ “Depreciation expense”
for the year ended Dec. 31, 2002, amounted to $515 million. NS’ weighted-average depreciation rates
for 2002 are disclosed in Note 6; a one-tenth percentage point increase (or decrease) in these rates would
result in a $17 million increase (or decrease) to NS’ depreciation expense.
Personal Injury, Environmental and Legal Liabilities
NS’ expense for “Casualties and other claims” amounted to $171 million for the year ended Dec. 31,
2002. Most of this expense was composed of NS’ accrual related to personal injury liabilities (see
discussion of FELA in the discussion captioned “Casualties and other claims” on page K23). NS
K29
engages an independent consulting actuarial firm to aid in valuing its personal injury liability and
determining the amount to accrue during the year. The actuarial firm studies NS’ historical patterns of
reserving for claims and subsequent settlements. The actuary also takes into account outside influences
considered pertinent. The study uses the results of these analyses to estimate the ultimate amount of the
liability, which includes amounts for incurred but unasserted claims. NS has recorded this actuarially
determined liability. The liability is dependent upon many individual judgments made as to the specific
case reserves as well as the judgments of the consulting actuary and management in the periodic studies.
Accordingly, there could be significant changes in the liability, which NS would recognize when such a
change became known. The most recent actuarial study was performed as of June 30, 2002, and resulted
in an increase to NS’ personal injury liability during the third quarter. While the liability recorded is
supported by the most recent study, it is reasonably possible that the liability could be higher or lower.
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 (see
Note 18). Environmental engineers regularly participate in ongoing evaluations of all known sites and in
determining any necessary adjustments to liability estimates. NS also has established an Environmental
Policy Council, composed of senior managers, to oversee and interpret its environmental policy.
Operating expenses for environmental matters totaled approximately $15 million in 2002, $12 million in
2001, and $11 million in 2000, and capital expenditures totaled approximately $10 million in each of
2002, 2001 and 2000. Capital expenditures in 2003 are expected to be comparable to those in 2002.
NS’ balance sheets included liabilities for environmental exposures in the amount of $29 million at
Dec. 31, 2002, and $33 million at Dec. 31, 2001 (of which $8 million was accounted for as a current
liability in each year). At Dec. 31, 2002, the liability represented NS’ estimate of the probable cleanup
and remediation costs based on available information at 114 identified locations. On that date, 10 sites
accounted for $16 million of the liability, and no individual site was considered to be material. NS
anticipates that much of this liability will be paid out over five years; however, some costs will be paid
out over a longer period.
At some of the 114 locations, certain NS subsidiaries, usually in conjunction with a number of other
parties, have been identified as potentially responsible parties by the Environmental Protection Agency
(EPA) or similar state authorities under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, or comparable state statutes, which often impose joint and several liability for
cleanup costs.
With respect to known environmental sites (whether identified by NS or by the EPA or comparable state
authorities), estimates of NS’ ultimate potential financial exposure for a given site or in the aggregate for
all such sites are necessarily imprecise because of the widely varying costs of currently available cleanup
techniques, the likely development of new cleanup technologies, the difficulty of determining in advance
the nature and full extent of contamination and each potential participant’s share of any estimated loss
(and that participant’s ability to bear it), and evolving statutory and regulatory standards governing
liability. NS estimates its environmental remediation liability on a site-by-site basis, using assumptions
and judgments that management deems appropriate for each site. As a result, it is not practical to
quantitatively discuss the effects of changes in these many assumptions and judgments. NS has
consistently applied its methodology of estimating its environmental liabilities.
The risk of incurring environmental liability – for acts and omissions, past, present and future – is
inherent in the railroad business. Some of the commodities in NS’ traffic mix, particularly those
classified as hazardous materials, can pose special risks that NS and its subsidiaries work diligently to
minimize. In addition, several NS subsidiaries own, or have owned, land used as operating property, or
which is leased or may have been leased and operated by others, or held for sale. Because
environmental problems may exist on these properties that are latent or undisclosed, there can be no
assurance that NS will not incur environmentally related liabilities or costs with respect to one or more of
them, the amount and materiality of which cannot be estimated reliably at this time. Moreover, lawsuits
and claims involving these and potentially other now-unidentified environmental sites and matters are
K30
likely to arise from time to time. The resulting liabilities could have a significant effect on financial
condition, results of operations or liquidity in a particular year or quarter.
However, based on its assessment of the facts and circumstances now known, management believes that
it has recorded the probable costs for dealing with those environmental matters of which the Corporation
is aware. Further, management believes that it is unlikely that any known matters, either individually or
in the aggregate, will have a material adverse effect on NS’ financial position, results of operations or
liquidity.
Norfolk Southern and certain subsidiaries are defendants in numerous lawsuits and other claims relating
principally to railroad operations. When management concludes that it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge
to expenses. While the ultimate amount of liability incurred in any of these lawsuits and claims is
dependent on future developments, in management’s opinion the recorded liability, if any, is adequate to
cover the future payment of such liability and claims. However, the final outcome of any of these
lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could
result in additional accruals that could be significant to results of operations in a particular year or
quarter. Any adjustments to recorded liability will be reflected in expenses in the periods in which such
adjustments are known.
Income Taxes
NS’ net deferred tax liability totaled $3,010 million at Dec. 31, 2002 (see Note 4). This liability is
estimated based on the expected future tax consequences of items recognized in the financial statements.
After application of the federal statutory tax rate to book income, judgment is required with respect to the
timing and deductibility of expenses in the corporate income tax returns. For state income and other
taxes, judgment is also required with respect to the apportionment among the various jurisdictions. A
valuation allowance is recorded if management expects that it is more likely than not that its deferred tax
assets will not be realized. NS has only a $24 million valuation allowance on $592 million of deferred
tax assets as of Dec. 31, 2002, reflecting the expectation that most of these assets will be realized. For
2002, 2001 and 2000, the effective tax rates, excluding NS’ equity in Conrail’s earnings, were 38%, 38%
and 34%, respectively. For every 1/2% change in the 2002 effective tax rate, net income would have
changed by $4 million.
CONRAIL’S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY
Conrail’s net income was $180 million in 2002, compared with $174 million in 2001 and $170 million in
2000 (see Note 2). The increase in 2002 was primarily the result of a favorable federal tax settlement.
The improvement in 2001 reflected lower casualties and other claims expenses, a favorable adjustment to
state income tax reserves and environmental and insurance settlements in Conrail’s favor. These positive
items were offset in part by the absence of significant gains from the sale of property.
Conrail’s operating revenues were $893 million in 2002, $903 million in 2001 and $985 million in 2000.
Both decreases resulted from the expiration of certain equipment leases and lower operating fees, largely
because of reduced operating costs in the Shared Assets Areas. The decline in 2001 also reflected lower
revenues at Conrail’s Indiana Harbor Belt subsidiary.
Conrail’s operating expenses were $623 million in 2002, $639 million in 2001 and $749 million in 2000.
The decrease in 2002 reflected lower expenses for materials, services and rents and compensation and
benefits, which were offset, in part, by higher costs for casualties and other claims. The decline in 2001
was primarily due to lower expenses for materials, services and rents; casualties and other claims; and
compensation and benefits.
K31
Conrail’s cash provided by operations decreased $79 million, or 16%, in 2002, and increased $140
million, or 39%, in 2001. The decline in 2002 was primarily the result of the absence of two items that
benefited 2001: 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. This was offset, in part, by favorable changes in working capital. The
increase in 2001 was largely the result of the two unusual items discussed above. Cash generated from
operations is Conrail’s principal source of liquidity and is primarily used for debt repayments and capital
expenditures. Debt repayments totaled $59 million in 2002 and $61 million in 2001. Capital expenditures
totaled $23 million in 2002 and $47 million in 2001.
Conrail had a working capital deficit of $29 million at Dec. 31, 2002, compared with working capital of
$438 million at Dec. 31, 2001, which included $687 million of amounts receivable from NS and CSX.
Conrail is not an SEC registrant and, therefore, presently cannot issue any publicly traded securities.
Conrail is expected to have sufficient cash flow to meet its ongoing obligations.
NS’ equity in earnings of Conrail, net of amortization, was $54 million in 2002, $44 million in 2001 and
$21 million in 2000. NS’ other comprehensive loss for 2002 and 2001, as shown in the Consolidated
Statement of Changes in Stockholders’ Equity, included $34 million and $41 million, respectively, for its
portion of Conrail’s other comprehensive loss (see Note 13).
OTHER MATTERS
Telecommunications Subsidiary
NS’ subsidiary, Thoroughbred Technology and Telecommunications, Inc. (T-Cubed), has developed
fiber optic infrastructure with members of the telecommunications industry. This industry has
experienced a severe downturn. As a result of changes in the values of telecommunications assets, T-
Cubed is monitoring its carrying amount of these assets, as required by SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets.” To date, based on known facts and circumstances,
management believes that its ultimate investment in these assets will be recovered, and accordingly, no
impairment has been recognized (see Note 6).
During 2001, one of T-Cubed’s codevelopers, 360networks (USA), inc. (“360”), filed for protection
under Chapter 11 of the U.S. Bankruptcy Code and foreign laws. 360 owes T-Cubed amounts for work
performed on certain joint projects; and T-Cubed owes 360 amounts for work performed on other joint
projects. The bankruptcy judge has approved set-off of these amounts, leaving about $7 million due to
T-Cubed from 360. T-Cubed has the right to collect this amount from any proceeds due 360 from the
sale of joint assets. Management believes that it will collect this receivable.
T-Cubed is engaged in contract litigation with a second codeveloper, Williams Communications, LLC
(“Williams Communications”), concerning the latter’s obligation to purchase fiber optic infrastructure
installed by T-Cubed between Cleveland, Ohio, and northern Virginia. On Jan. 29, 2003, the United
States District Court for the Northern District of Georgia entered an order requiring Williams
Communications to pay T-Cubed the remaining amount due for such infrastructure, approximately $36
million, plus prejudgment interest at a rate of 9% per annum. Williams Communications may elect to
appeal. The ability to collect and retain a judgment against Williams Communications may be limited
due to its financial condition; however, the shortfall, if any, cannot now be determined. Its parent,
Williams Communications Group, Inc., filed in April 2002 a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code, and emerged from bankruptcy in October 2002. Williams
Communications was not included in the bankruptcy petition (see Note 18).
K32
Labor Arbitration
Several hundred claims have been filed with NSR on behalf of 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. Several labor organizations have initiated
arbitration on behalf of individual employees. Other disputes are pending wherein similar benefits are
sought under labor agreement provisions that, in management’s judgment, do not apply to the involved
circumstances.
Based on known facts, including the availability of legal defenses, management believes that NS will
prevail in these disputes and that any potential liability for the involved claims should not have a material
adverse effect on NS’ financial position, results of operations or liquidity. Depending on the outcome of
these arbitrations, additional claims may be filed or progressed to arbitration. Should all such claimants
prevail, there could be a significant effect on results of operations in a particular quarter (see Note 18).
Labor Agreements
Approximately 24,000 of NS’ railroad employees are covered by collective bargaining agreements with
15 different labor unions. These agreements remain in effect until changed pursuant to the Railway
Labor Act. Moratorium provisions in these agreements permitted NS and the unions to propose such
changes in late 1999; negotiations at the national level commenced shortly thereafter. The outcome of
these negotiations is uncertain at this time. However, agreements have been reached with the
Brotherhood of Maintenance of Way Employes (BMWE), which represents about 4,200 NS employees;
the Brotherhood of Locomotive Engineers (BLE), which represents about 4,500 NS employees; the
United Transportation Union (UTU), which represents about 6,700 NS employees; the International
Brotherhood of Boilermakers and Blacksmiths (IBB), which represents about 100 NS employees; and the
Transportation Communications International Union (TCU), which represents about 4,400 NS
employees. Health and welfare issues have been resolved with BMWE and TCU. The UTU agreement
provides that, subsequent to a further period of negotiation, health and welfare issues may be submitted
to arbitration. Health and welfare issues with the other organizations have not yet been resolved.
Market Risks and Hedging Activities
NS uses derivative financial instruments to reduce the risk of volatility in its diesel fuel costs and to
manage its overall exposure to fluctuations in interest rates.
In 2001, NS began a program to hedge a portion of its diesel fuel consumption. The intent of the program
is to assist in the management of NS’ aggregate risk exposure to fuel price fluctuations, which can
significantly affect NS’ operating margins and profitability, through the use of one or more types of
derivative instruments.
Diesel fuel costs represented 7% of NS’ operating expenses for 2002. 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 any month within any 36-month period.
As of Dec. 31, 2002, through swap transactions, NS has hedged approximately 62% of expected 2003
diesel fuel requirements. The effect of the hedges is to yield an average cost of 73 cents per hedged
gallon, including federal taxes and transportation. A 10% decrease in diesel fuel prices would reduce
NS’ asset related to the swaps by approximately $30 million as of Dec. 31, 2002.
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.
K33
At Dec. 31, 2002, NS’ debt subject to interest rate fluctuations totaled $784 million (excluding debt due
to the PRR subsidiary). A 1% increase in interest rates would increase NS’ total annual interest expense
related to all its variable debt by approximately $8 million. Management considers it unlikely that
interest rate fluctuations applicable to these instruments will result in a material adverse effect on NS’
financial position, results of operations or liquidity.
Some of NS’ capital leases, which carry an average fixed rate of 7%, were effectively converted to
variable rate obligations using interest rate swap agreements. On Dec. 31, 2002, the average pay rate
under these agreements was 2.1%, and the average receive rate was 7%. During 2002, the effect of the
swaps was to reduce interest expense by $9 million. A portion of the lease obligations is payable in
Japanese yen. NS eliminated the associated exchange rate risk at the inception of each lease with a yen
deposit sufficient to fund the yen-denominated obligation. Most of these deposits are held by foreign
banks, primarily Japanese. As a result, NS is exposed to financial market risk relative to Japan.
Counterparties to the interest rate swaps and Japanese banks holding yen deposits are major financial
institutions believed by management to be creditworthy.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement No. 143, “Accounting for
Asset Retirement Obligations,” (SFAS No. 143) which is effective Jan. 1, 2003, and addresses legal
obligations associated with the retirement of tangible long-lived assets and the associated asset retirement
costs. In accordance with the Uniform System of Accounts for Railroad Companies (see Code of Federal
Regulations, Title 49, Subtitle B, Chapter X, Part 1201), NS depreciates track structure (rail, other track
material and ties) to its net salvage value (gross salvage less cost to remove). SFAS No. 143 prohibits
the accrual of a liability for removal costs absent a legal obligation to remove the related asset.
Management believes that there is no such legal obligation to remove track. The SEC staff has recently
taken a position with a registrant in another industry that calls into question whether the use of net
salvage that results in depreciating more than the cost basis of an asset (negative salvage) is appropriate
once SFAS No. 143 becomes effective. NS is in the process of studying its track accounts to determine
where current depreciation rates will result in negative salvage. To the extent that NS’ accumulated
depreciation includes such amounts, they will be removed. The cumulative effect of this catch-up
adjustment will be recorded as a change in accounting principle in the first quarter of 2003. Going
forward, this change will result in lower depreciation expense (because the depreciation rate will no
longer reflect any negative salvage) and higher compensation and benefits expenses (for the labor cost to
remove retired assets); NS does not expect that this will result in a material change to its total railway
operating expenses.
The FASB has issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” (FIN No. 46),
which addresses consolidation of certain variable interest entities (also commonly referred to as “special
purpose entities”). NS adopted FIN No. 46, effective Jan 1, 2003. As a result, on that date NS
consolidated a special-purpose entity that leases certain locomotives to NS (see Note 9). This entity has
no other significant assets or liabilities other than the locomotives and the debt related to their purchase,
which will be reflected on NS’ Consolidated Balance Sheet in 2003. This change in reporting will also
have the following effects to NS’ Consolidated Income Statement beginning in 2003: operating lease
expense will decline, and depreciation expense and interest expense on debt will increase. The net effect
of these income statement changes is not significant. Adoption of FIN No. 46 did not have a significant
effect on NS’ financial position or liquidity.
Inflation
Generally accepted accounting principles require the use of historical cost in preparing financial
statements. This approach disregards the effects of inflation on the replacement cost of property. NS, a
capital-intensive company, has most of its capital invested in such assets. The replacement cost of these
assets, as well as the related depreciation expense, would be substantially greater than the amounts
reported on the basis of historical cost.
K34
TRENDS
Federal Economic Regulation -- Efforts may be made in 2003 to reimpose unwarranted federal
economic regulation on the rail industry. The Staggers Rail Act of 1980, which substantially reduced
such regulation, encouraged and enabled rail carriers to innovate and to compete for business. NS and
other rail carriers will oppose any efforts to reimpose unwarranted economic regulation.
Utility Deregulation -- Deregulation of the electrical utility industry is expected to increase competition
among electric power generators; deregulation over time would permit wholesalers and possibly retailers
of electric power to sell or purchase increasing quantities of power to or from distant parties. The effects
of deregulation on NS and on its customers cannot be predicted with certainty; however, NS serves a
number of efficient power producers who are expected to remain competitive in this evolving
environment.
Carbon-Based Fuel -- There is growing concern in some quarters that emissions resulting from burning
carbon-based fuel, including coal, are contributing to global warming and causing other environmental
changes. To the extent that these concerns evolve into a consensus among policy-makers, the impact
could be either a reduction in the demand for coal or imposition of more stringent regulations on
emissions, which might result in making coal a less economical source of power generation or make
permitting of coal-fired facilities even more difficult. The revenues and net income of NSR and other
railroads that move large quantities of coal could be affected adversely.
FORWARD-LOOKING STATEMENTS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains
forward-looking statements that may be identified by the use of words like “believe,” “expect,”
“anticipate” and “project.” Forward-looking statements reflect management’s good-faith evaluation of
information currently available. However, such statements are dependent on and, therefore, can be
influenced by, a number of external variables over which management has little or no control, including:
domestic and international economic conditions; the business environment in industries that produce and
consume rail freight; competition and consolidation within the transportation industry; fluctuation in
prices of key materials, in particular diesel fuel; labor difficulties, including strikes and work stoppages;
legislative and regulatory developments; changes in securities and capital markets; and natural events
such as severe weather, floods and earthquakes. Forward-looking statements are not, and should not be
relied upon as, a guaranty of future performance or results. Nor will they necessarily prove to be accurate
indications of the times at or by which any such performance or results will be achieved. As a result,
actual outcomes and results may differ materially from those expressed in forward-looking statements.
The Company undertakes no obligation to update or revise forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The information required by this item is included in Part II, Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” under the heading “Market Risks and
Hedging Activities.”
K35
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Report of Management
Independent Auditors’ Report
Independent Accountants’ Report on Internal Control over Financial Reporting
Consolidated Statements of Income
Years ended December 31, 2002, 2001 and 2000
Consolidated Balance Sheets
As of December 31, 2002 and 2001
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders’ Equity
Years ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
The Index to Consolidated Financial Statement Schedule in Item 15
Page
K37
K38
K38
K39
K40
K41
K42
K43
K70
K36
REPORT OF MANAGEMENT
January 28, 2003
To the Stockholders
Norfolk Southern Corporation
Management is responsible for the preparation and fair presentation 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.
Management is also responsible for establishing and maintaining effective internal control over financial
reporting. The Corporation’s internal control over financial reporting includes those policies and
procedures that pertain to the Corporation’s ability to record, process, summarize and report reliable
financial data. Management recognizes that there are inherent limitations in the effectiveness of any
internal control over financial reporting, including the possibility of human error and the circumvention
or overriding of internal control. Accordingly, even effective internal control over financial reporting
can provide only reasonable assurance with respect to financial statement preparation. Further, because
of changes in conditions, the effectiveness of internal control over financial reporting may vary over
time.
In order to ensure that the Corporation’s internal control over financial reporting is effective,
management regularly assesses such controls and did so most recently for its financial reporting as of
December 31, 2002. This assessment was based on criteria for effective internal control over financial
reporting described in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management believes the
Corporation maintained effective internal control over financial reporting as of December 31, 2002.
The Board of Directors, acting through its Audit Committee, is responsible for the oversight of the
Corporation’s accounting policies, financial reporting and internal control. The Audit Committee of the
Board of Directors is comprised entirely of outside directors who are independent of management. The
Audit Committee is responsible for the appointment and compensation of the independent auditor, and
approves decisions regarding the appointment or removal of the Vice President-Internal Audit. It meets
periodically with management, the independent auditors, and the internal auditors to ensure that they are
carrying out their responsibilities. The Audit Committee is also responsible for performing an oversight
role by reviewing and monitoring the financial, accounting and auditing procedures of the Corporation in
addition to reviewing the Corporation’s financial reports. The independent auditors and the internal
auditors have full and unlimited access to the Audit Committee, with or without management, to discuss
the adequacy of internal control over financial reporting, and any other matters which they believe
should be brought to the attention of the Audit Committee.
KPMG LLP, independent auditors of the Corporation’s financial statements, has reported on
management’s assertion with respect to the effectiveness of the Corporation’s internal control over
financial reporting as of December 31, 2002.
/s/ David R. Goode
David R. Goode
Chairman, President and
Chief Executive Officer
/s/ Henry C. Wolf
Henry C. Wolf
Vice Chairman and
Chief Financial Officer
/s/ John P. Rathbone
John P. Rathbone
Senior Vice President and
Controller
K37
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 subsidiaries
as of December 31, 2002 and 2001, 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, 2002. In connection with
our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed
in Item 15(A)2. These consolidated financial statements and financial statement schedule are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Norfolk Southern Corporation and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Norfolk, Virginia
January 28, 2003
INDEPENDENT ACCOUNTANTS’ REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
The Board of Directors
Norfolk Southern Corporation:
We have examined management’s assertion, included in the accompanying Report of Management, that Norfolk
Southern Corporation maintained effective internal control over financial reporting as of December 31, 2002 based
on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Norfolk Southern Corporation’s management is responsible
for maintaining effective internal control over financial reporting. Our responsibility is to express an opinion on
management’s assertion based on our examination.
Our examination was conducted in accordance with attestation standards established by the American Institute of
Certified Public Accountants and, accordingly, included obtaining an understanding of the internal control over
financial reporting, testing, and evaluating the design and operating effectiveness of the internal control, and
performing such other procedures as we considered necessary in the circumstances. We believe that our
examination provides a reasonable basis for our opinion.
Because of inherent limitations in any internal control, misstatements due to error or fraud may occur and not be
detected. Also, projections of any evaluation of the internal control over financial reporting to future periods are
subject to the risk that the internal control may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assertion that Norfolk Southern Corporation maintained effective internal control
over financial reporting as of December 31, 2002 is fairly stated, in all material respects, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
/s/ KPMG LLP
Norfolk, Virginia
January 28, 2003
K38
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31,
2001
($ in millions, except earnings per share)
2002
2000
Railway operating revenues
$
6,270
$
6,170
$
6,159
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
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)
Net income
Earnings per share (Note 14)
Income from continuing operations –
basic and diluted
Net income – basic and diluted
2,022
1,457
412
515
342
171
193
5,112
1,158
66
(518)
706
246
460
--
2,014
1,444
421
514
412
143
215
5,163
1,007
99
(553)
553
191
362
13
2,234
1,445
478
503
478
142
246
5,526
633
168
(551)
250
78
172
--
$
$
$
460
$
375
$
172
1.18
1.18
$
$
0.94
0.97
$
$
0.45
0.45
See accompanying notes to consolidated financial statements.
K39
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
Assets
Current assets:
Cash and cash equivalents
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
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable (Note 7)
Income and other taxes
Due 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)
Due to Conrail (Note 2)
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 410,154,465 and 407,000,871 shares,
respectively
Additional paid-in capital
Accumulated other comprehensive loss (Note 13)
Retained income
Less treasury stock at cost, 21,169,125 shares
Total stockholders’ equity
$
$
$
As of Dec. 31,
2002
2001
($ in millions)
184 $
683
6
97
187
142
1,299
204
475
8
90
162
108
1,047
6,178
11,370
1,109
19,956 $
6,161
11,208
1,002
19,418
908 $
269
86
232
358
1,853
7,006
1,029
513
45
3,010
13,456
410
481
(65)
5,694
(20)
6,500
848
312
373
248
605
2,386
7,027
1,089
--
45
2,781
13,328
407
423
(55)
5,335
(20)
6,090
Total liabilities and stockholders’ equity
$
19,956 $
19,418
See accompanying notes to consolidated financial statements.
K40
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
2002
Years Ended December 31,
2001
($ in millions)
2000
$
460 $
375 $
172
529
178
(54)
(47)
--
(208)
(7)
1
35
(84)
803
(689)
31
(78)
63
(673)
(101)
42
672
(763)
(150)
(20)
527
44
(44)
(59)
(13)
(74)
1
46
(27)
(122)
654
(746)
156
(99)
88
(601)
(93)
14
1,995
(1,765)
151
204
204
--
184 $
204 $
517
2
(21)
(160)
--
446
9
60
220
97
1,342
(731)
137
(77)
90
(581)
(306)
2
1,055
(1,549)
(798)
(37)
37
--
525 $
54 $
550 $
74 $
543
5
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
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents
At beginning of year
At end of year
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized)
Income taxes
See accompanying notes to consolidated financial statements.
$
$
$
K41
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
Accum.
Other
Common
Stock
Additional Compre-
hensive
Loss
Paid-in
Capital
Retained Treasury
Income
Stock
Total
($ in millions, except per share amounts)
Balance Dec. 31, 1999
$
404
$
372
$
(11)
$
5,187
$
(20) $
5,932
Comprehensive income
Net income
Other comprehensive
income (Note 13)
Total comprehensive
income
Dividends on Common
Stock, $0.80 per share
Other (Notes 11 and 12)
Balance Dec. 31, 2000
Comprehensive income
Net income
Other comprehensive
loss (Note 13)
Total comprehensive
income
Dividends on Common
Stock, $0.24 per share
Other (Notes 11 and 12)
5
172
(306)
172
5
177
(306)
21
(6)
5,053
(20)
5,824
(49)
375
(93)
375
(49)
326
(93)
33
1
405
20
392
2
31
Balance Dec. 31, 2001
$
407
$
423
$
(55)
$
5,335
$
(20) $
6,090
Comprehensive income
Net income
Other comprehensive
loss (Note 13)
Total comprehensive
income
Dividends on Common
Stock, $0.26 per share
Other (Notes 11 and 12)
(10)
460
(101)
460
(10)
450
(101)
61
3
58
Balance Dec. 31, 2002
$
410
$
481
$
(65)
$
5,694
$
(20) $
6,500
See accompanying notes to consolidated financial statements.
K42
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following Notes are an integral part of the Consolidated Financial Statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Norfolk Southern Corporation is a Virginia-based holding company engaged principally in the rail
transportation business, operating approximately 21,500 route miles primarily in the East and Midwest.
These consolidated financial statements include Norfolk Southern Corporation (Norfolk Southern) and
its majority-owned and controlled subsidiaries (collectively, NS). Norfolk Southern’s major subsidiary is
Norfolk Southern Railway Company (NSR). All significant intercompany balances and transactions have
been eliminated in consolidation.
The railroad transports raw materials, intermediate products and finished goods classified in the
following market groups (percent of total railway operating revenues in 2002): coal (23%); automotive
(15%); chemicals (12%); metals/construction (11%); agriculture/consumer products/government (10%);
paper/clay/forest products (10%); and intermodal (19%). Ultimate points of origination or destination for
some of the freight (particularly coal bound for export and intermodal containers) are outside the United
States. Approximately 85% of NS’ railroad employees are covered by collective bargaining agreements
with 15 different labor unions.
Through a jointly owned entity, Norfolk Southern and CSX Corporation own the stock of Conrail Inc.,
which owns the major Northeast freight railroad. Norfolk Southern has a 58% economic and 50% voting
interest in the jointly owned entity (see Note 2).
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Management reviews its
estimates, including those related to the recoverability and useful lives of assets, as well as liabilities for
litigation, environmental remediation, casualty claims, income taxes, and pension and postretirement
benefits. Changes in facts and circumstances may result in revised estimates.
Cash Equivalents
“Cash equivalents” are highly liquid investments purchased three months or less from maturity.
Investments
Marketable equity and debt securities are reported at amortized cost or fair value, depending upon their
classification as securities “held-to-maturity,” “trading” or “available-for-sale.” Unrealized gains and
losses for investments designated as “available-for-sale,” net of taxes, are recognized in “Accumulated
other comprehensive loss.”
Investments, where NS has the ability to exercise significant influence over but does not control the
entity, are accounted for using the equity method in accordance with APB Opinion No. 18, “The Equity
Method of Accounting for Investments in Common Stock.”
K43
Materials and Supplies
“Materials and supplies,” consisting mainly of fuel oil and items for maintenance of property and
equipment, are stated at the lower of average cost or market. The cost of materials and supplies expected
to be used in capital additions or improvements is included in “Properties.”
Properties
“Properties” are stated principally at cost and are depreciated using group depreciation. Rail is
depreciated primarily on the basis of use measured by gross ton-miles. Other properties are depreciated
generally using the straight-line method over the lesser of estimated service or lease lives. NS capitalizes
interest on major capital projects during the period of their construction. Expenditures, including those
on leased assets, that extend an asset’s useful life or increase its utility are capitalized. Maintenance
expense is recognized when repairs are performed. When properties other than land and nonrail assets
are sold or retired in the ordinary course of business, the cost of the assets, net of sale proceeds or
salvage, is charged to accumulated depreciation rather than recognized through income. Gains and losses
on disposal of land and nonrail assets are included in “Other income - net” (see Note 3).
NS reviews the carrying amount of properties whenever events or changes in circumstances indicate that
such carrying amount may not be recoverable based on future undiscounted cash flows or estimated net
realizable value. Assets that are deemed impaired as a result of such review are recorded at the lower of
carrying amount or fair value.
Revenue Recognition
Revenue is recognized proportionally as a shipment moves from origin to destination. Refunds are
recorded as a reduction to revenues based on management’s best estimate of projected liability.
Derivatives
NS does not engage in the trading of derivatives. NS uses derivative financial instruments to reduce the
risk of volatility in its diesel fuel costs and in the management of its mix of fixed and floating-rate debt.
Management has determined that these derivative instruments qualify as either fair-value or cash-flow
hedges, having values that highly correlate with the underlying hedged exposures and have designated
such instruments as hedging transactions. Income and expense related to the derivative financial
instruments is recorded in the same category as generated by the underlying asset or liability. 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.
Stock-based Compensation
NS has stock-based employee compensation plans, which are more fully described in Note 12. NS
applies the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting
for Stock Issued to Employees” (APB Opinion No. 25), and related interpretations in accounting for
these plans.
The following table illustrates the effect on net income and earnings per share if NS had applied the fair
value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for
Stock-Based Compensation” (SFAS No. 123), to stock-based employee compensation:
K44
2002
2001
($ in millions except per share)
2000
Net income, as reported
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects
Deduct: Stock-based employee compensation
expense determined under fair value method, net
of related tax effects
Pro forma net income
Earnings per share:
Basic and diluted - as reported
Basic and diluted - pro forma
Required Accounting Changes
$
460
$
375
$
172
14
(45)
429
1.18
1.10
$
$
$
12
(29)
358
0.97
0.93
$
$
$
3
(26)
149
0.45
0.39
$
$
$
The adoption of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets,” which was effective Jan. 1, 2002, did not have a material effect on
NS’ consolidated financial statements.
2. INVESTMENT IN CONRAIL AND OPERATIONS OVER ITS LINES
Overview
Through a limited liability company, Norfolk Southern and CSX Corporation (CSX) jointly own Conrail
Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC), the major freight
railroad in the Northeast. NS has a 58% economic and 50% voting interest in the jointly owned entity,
and CSX has the remainder of the economic and voting interests. From time to time, Norfolk Southern
and CSX, as the indirect owners of Conrail, may have to make capital contributions, loans or advances to
Conrail under the terms of the Transaction Agreement among NS, CSX and Conrail.
Operation of Conrail’s Lines
Norfolk Southern’s railroad subsidiary, Norfolk Southern Railway Company (NSR), operates as a part of
its rail system the routes and assets of Pennsylvania Lines LLC (PRR), a wholly owned subsidiary of
CRC, pursuant to operating and lease agreements. CSX Transportation, Inc. (CSXT) operates the routes
and assets of another CRC subsidiary under comparable terms.
The Operating Agreement between NSR and PRR governs substantially all nonequipment assets to be
operated by NSR and has an initial 25-year term, renewable at the option of NSR for two five-year terms.
Payments under the Operating Agreement are subject to adjustment every six years to reflect changes in
values. NSR also has leased or subleased for varying terms from PRR a number of equipment assets.
Costs necessary to operate and maintain the PRR assets, including leasehold improvements, are borne by
NSR. NSR receives all freight revenues on the PRR lines.
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.
K45
Future minimum lease payments due to PRR under the Operating Agreement and lease agreements and
to CRC under the Shared Assets Areas (SAA) agreements are as follows:
PRR Oper.
Agmt.
PRR Lease
Agmt.
($ in millions)
SAA
Agmts.
2003
2004
2005
2006
2007
2008 and subsequent years
Total
$
$
217
238
246
246
246
4,285
5,478
$
$
116
94
74
60
48
129
521
$
$
30
32
33
34
34
585
748
Operating lease expense related to the agreements, which is included in “Conrail rents and services,”
amounted to $468 million in 2002, $467 million in 2001 and $502 million in 2000.
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 depreciable property
and equipment, including the related deferred tax effect of the differences in tax and accounting bases for
certain assets. At Dec. 31, 2002, the difference between NS’ investment in Conrail and its share of
Conrail’s underlying net equity was $3.7 billion.
NS’ consolidated balance sheet at Dec. 31, 2002, includes $60 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, 2002, NS had paid
$143 million of such costs.
Related-Party Transactions
NS provides certain general and administrative support functions to Conrail, the fees for which are billed
in accordance with several service-provider arrangements and totaled $7 million in 2002, $6 million in
2001 and $7 million in 2000.
“Conrail rents and services” includes: (1) expenses for amounts due to PRR and CRC for use by NSR of
operating properties and equipment and operation of the Shared Assets Areas and (2) NS’ equity in the
earnings of Conrail, net of amortization.
A significant portion of payments made to PRR is borrowed back from a subsidiary of PRR. Previously,
these loans were made under a demand note; however, in the first quarter of 2002, the subsidiary of PRR
exchanged this demand note for a new note due in 2032. As a result, borrowings owed to the subsidiary
of PRR now comprise the noncurrent balance “Due to Conrail.” The interest rate for these loans is
variable and was 1.82% at Dec. 31, 2002. The current balance “Due to Conrail” at Dec. 31, 2002, is
composed of amounts related to expenses included in “Conrail rents and services,” as discussed above.
At Dec. 31, 2001, the current balance “Due to Conrail” included $72 million of such amounts and $301
million of advances owed under the previous demand note.
K46
Summary Financial Information - Conrail
The following historical cost basis financial information should be read in conjunction with Conrail’s
audited financial statements, included as Exhibit 99 to this Annual Report on Form 10-K.
Summarized Consolidated Statements of Income - Conrail
Operating revenues
Operating expenses
Operating income
Other – net
Income before income taxes
Provision for income taxes
Net income
2002
2001
($ in millions)
2000
$
$
893
623
270
(10)
260
80
180
$
$
903
639
264
(6)
258
84
174
$
$
985
749
236
31
267
97
170
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 $17 million after taxes, were excluded in determining NS’ equity in Conrail’s net
income.
Summarized Consolidated Balance Sheets - Conrail
Assets:
Current assets
Noncurrent assets
Total assets
Liabilities and stockholders’ equity:
Current liabilities
Noncurrent liabilities
Stockholders’ equity
Total liabilities and stockholders equity
December 31,
2002
2001
($ in millions)
$
$
$
$
300
7,857
8,157
329
3,602
4,226
8,157
$
$
$
$
846
7,236
8,082
408
3,569
4,105
8,082
Note: Current assets include amounts due from NS and CSX totaling $158 million at Dec. 31, 2002, and
$687 million at Dec. 31, 2001. Noncurrent assets include amounts due from NS and CSX totaling $892
million at Dec. 31, 2002, and zero at Dec. 31, 2001. Current liabilities include amounts payable to NS
and CSX totaling $9 million at Dec. 31, 2002, and $12 million at Dec. 31, 2001.
K47
3. OTHER INCOME - NET
Income from natural resources:
Royalties from coal
Gains from sale of timber, oil and gas rights
and interests
Nonoperating depletion and depreciation
Subtotal
Gains from sale of properties and investments
Rental income
Interest income
Other interest expense
Taxes on nonoperating property
Discount on sales of accounts receivable (Note 5)
Corporate-owned life insurance – net
Equity in earnings (losses) of partnerships
Charitable contributions
Other
Total
2002
2001
2000
($ in millions)
$
48 $
52 $
--
(14)
34
47
36
12
(31)
(7)
(4)
(1)
(1)
--
(19)
66 $
--
(13)
39
59
40
15
1
(11)
(17)
6
(8)
(4)
(21)
99 $
$
55
101
(13)
143
59
40
11
(39)
(9)
(23)
--
3
(4)
(13)
168
“Other income - net” includes the income generated by the activities of NS’ noncarrier subsidiaries as
well as the costs incurred by those subsidiaries in their operations.
“Other current assets” in the Consolidated Balance Sheets includes prepaid interest of $46 million at
Dec. 31, 2002, and $45 million at Dec. 31, 2001, arising from corporate-owned life insurance
borrowings.
4. INCOME TAXES
Provision for Income Taxes
Current:
Federal
State
Total current taxes
Deferred:
Federal
State
Total deferred taxes
2002
2001
2000
($ in millions)
$
61 $
7
68
125 $
22
147
145
33
178
35
9
44
65
11
76
1
1
2
78
Provision for income taxes
$
246 $
191 $
K48
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:
2002
Amount
%
2001
Amount
($ in millions)
%
2000
Amount
%
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
$
247
26
(19)
(1)
(7)
35 $
194
35 $
4
(3)
--
(1)
20
(16)
(3)
(4)
4
(3)
--
(1)
Provision for income taxes
$
246
35 $
191
35 $
87
8
(7)
(2)
(8)
78
35
3
(3)
(1)
(3)
31
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:
Deferred tax assets:
Reserves, including casualty and other claims
Employee benefits
Retiree health and death benefit obligations
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
December 31,
2002
2001
($ in millions)
$
178
26
138
234
16
592
(24)
568
(3,300)
(91)
(3,391)
(2,823)
187
$
158
75
137
221
22
613
(18)
595
(3,126)
(88)
(3,214)
(2,619)
162
Net long-term deferred tax liability
$
(3,010)
$
(2,781)
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 2002, $6
million in 2001 and $3 million in 2000.
K49
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
In May 2000, a bankruptcy-remote special purpose subsidiary of NS began selling without recourse
undivided ownership interests in a pool of accounts receivable. 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 of receivables
exceeds the amount sold. NS services and collects the receivables on behalf of the buyers; however, no
servicing asset or liability has been recognized because the benefits of servicing are estimated to be just
adequate to compensate NS for its responsibilities. Payments collected from sold receivables can be
reinvested in new accounts receivable on behalf of the buyers. Should NS’ credit rating drop below
investment grade, the buyers have the right to discontinue this reinvestment.
Accounts receivable sold under this arrangement, and therefore not included in “Accounts receivable,
net” on the Consolidated Balance Sheets, were $30 million at Dec. 31, 2002, and $300 million at Dec.
31, 2001. The fees associated with the sale, which are based on the buyers’ financing costs, are included
in “Other income – net” (see Note 3). NS’ retained interest, which is included in “Accounts receivable,
net,” is recorded at fair value using estimates of dilution based on NS’ historical experience. These
estimates are adjusted regularly based on NS’ actual experience with the pool, including defaults and
credit deterioration. NS has historically experienced very low levels of default. If historical dilution
percentages were to increase one percentage point, the value of NS’ retained interest would be reduced
by approximately $5 million.
NS’ allowance for doubtful accounts was $5 million at Dec. 31, 2002, and Dec. 31, 2001.
6. PROPERTIES
Railway property:
Road
Equipment
Other property
Less accumulated depreciation
December 31,
2002
2001
($ in millions)
Depreciation
Rate for 2002
$
10,859
5,573
655
17,087
(5,717)
$
10,452
5,559
632
16,643
(5,435)
2.9%
3.9%
3.1%
Net properties
$
11,370
$
11,208
Included in properties is approximately $110 million of telecommunications assets consisting of fiber
optic conduit. NS evaluated the recoverability of these assets at Dec. 31, 2002, and based on known facts
and circumstances, management believes that its investment in these assets will be recovered.
Railway property includes $480 million at Dec. 31, 2002 and $474 million at Dec. 31, 2001, of assets
recorded pursuant to capital leases. Other property includes the costs of obtaining rights to natural
resources of $341 million at Dec. 31, 2002 and 2001.
K50
Capitalized Interest
Total interest cost incurred on debt in 2002, 2001 and 2000 was $529 million, $570 million and $569
million, respectively, of which $11 million, $17 million and $18 million was capitalized.
7. CURRENT LIABILITIES
Accounts payable:
Accounts and wages payable
Casualty and other claims
Equipment rents payable – net
Vacation liability
Other
Total
Other current liabilities:
Interest payable
Accrued Conrail-related costs (Note 2)
Liabilities for forwarded traffic
Retiree health and death benefit obligations (Note 11)
Derivative instruments
Other
Total
8. LONG-TERM DEBT
December 31,
2002
2001
($ in millions)
$
$
$
$
446
207
116
117
22
908
118
34
34
31
--
15
232
$
$
$
$
385
192
130
118
23
848
118
35
35
24
17
19
248
Notes at average rates and maturities as follows:
6.64%, maturing 2003 to 2007
6.91%, maturing 2008 to 2011
8.10%, maturing 2017 to 2021
7.54%, maturing 2027 to 2031
7.05%, maturing 2037
7.90%, maturing 2097
Equipment obligations at an average rate of 4.7%, maturing to 2014
Capitalized leases at an average rate of 2.1%, maturing to 2015
Other debt at an average rate of 6.1%, maturing to 2019
Discounts and premiums, net
Total long-term debt
Less current maturities
Long-term debt excluding current maturities
Long-term debt maturities subsequent to 2003 are as follows:
2004
2005
2006
2007
2008 and subsequent years
Total
$
$
$
$
K51
December 31,
2002
2001
($ in millions)
1,840 $
1,200
800
1,500
717
350
558
306
122
(29)
7,364
(358)
7,006 $
1,500
1,750
800
1,500
750
350
579
316
119
(32)
7,632
(605)
7,027
356
500
295
858
4,997
7,006
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 $86 million at Dec. 31, 2002, and $78 million at Dec. 31, 2001.
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, 2002, NS had issued a total of
$550 million of notes under this shelf registration.
Commercial Paper and Credit Agreement
NS has the ability to issue commercial paper backed by a $1 billion credit agreement that expires in
2006. At Dec. 31, 2002, and Dec. 31, 2001, NS had no commercial paper outstanding. Any borrowings
under the credit agreement are contingent on the continuing effectiveness of the representations and
warranties made at the inception of the agreement.
Debt Covenants
NS is subject to various financial covenants with respect to its debt and under its credit agreement,
including a minimum net worth requirement, a maximum leverage ratio restriction and certain
restrictions on issuance of further debt. At Dec. 31, 2002, NS was in compliance with all debt covenants.
9. LEASE COMMITMENTS
NS is committed under long-term lease agreements, which expire on various dates through 2067, for
equipment, lines of road and other property. The following amounts do not include payments to PRR
under the Operating Agreement and lease agreements or to CRC under the SAA agreements (see Note 2).
Future minimum lease payments and operating lease expense, other than to PRR and CRC, are as
follows:
Operating
Leases
Capital
Leases
($ in millions)
2003
2004
2005
2006
2007
2008 and subsequent years
Total
Less imputed interest on capital leases at an average rate of 7.0%
Present value of minimum lease payments included in debt
$
$
113
89
77
61
54
486
880
$
$
$
47
52
47
43
40
123
352
(46)
306
K52
Operating Lease Expense
Minimum rents
Contingent rents
Total
2002
2001
($ in millions)
2000
$
$
140
60
200
$
$
149
55
204
$
$
167
61
228
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 in the table above does include
amounts related to this lease as follows: $13 million in 2002, $18 million in 2001 and $11 million in
2000. If NS does not renew the lease during the eight-year period or 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. As of Dec. 31, 2002, the maximum liability under this provision, assuming NS
chose not to renew the lease in 2003 and the then fair value of the locomotives was zero, would be $116
million. The lessor is a special-purpose entity whose activities are limited to those incident to this
particular transaction. Upon adoption of Financial Accounting Standards Board Interpretation No. 46,
“Consolidation of Variable Interest Entities,” which will occur in 2003, NS will consolidate this entity.
As a result, the locomotives will be shown as assets, debt will increase, operating lease expense will
decline, depreciation expense will increase and interest expense on debt will increase.
10. OTHER LIABILITIES
Retiree health and death benefit obligations (Note 11)
Casualty and other claims
Deferred compensation
Net pension obligations (Note 11)
Accrued Conrail-related costs (Note 2)
Other
Total
December 31,
2002
2001
($ in millions)
$
$
286
254
144
82
26
237
1,029
$
$
291
265
147
79
46
261
1,089
11. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Norfolk Southern and certain subsidiaries have both funded and unfunded defined benefit pension plans
covering principally salaried employees. Norfolk Southern and certain subsidiaries also provide specified
health care and death benefits to eligible retired employees and their dependents. Under the present
plans, which may be amended or terminated at NS’ option, a defined percentage of health care expenses
is covered, reduced by any deductibles, copayments, Medicare payments and, in some cases, coverage
provided under other group insurance policies.
K53
Pension and Other Postretirement Benefit Obligations and Plan Assets
Change in benefit obligations
Benefit obligation at beginning of year
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 (gain) loss
Unrecognized prior service cost
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
Pension Benefits
2001
2002
($ in millions)
Other Benefits
2001
2002
$
$
$
$
1,324
17
91
--
--
54
(116)
1,370
1,798
(201)
6
(18)
(116)
1,469
99
305
26
430
497
(82)
15
430
$
$
$
$
1,312 $
15
94
6
(19)
36
(120)
1,324
479 $
13
33
--
--
98
(31)
592
1,999
(74)
7
(14)
(120)
1,798
118
(12)
31
--
(31)
106
445
14
33
--
--
21
(34)
479
126
(8)
34
--
(34)
118
474
(486)
(361)
(142)
30
362 $
169
--
(317) $
46
--
(315)
426 $
(79)
15
362 $
-- $
(317)
--
(317) $
--
(315)
--
(315)
Of the pension plans included above, the unfunded pension plans were the only plans with an
accumulated benefit obligation in excess of plan assets. These plans’ accumulated benefit obligations
were $82 million at Dec. 31, 2002, and $79 million at Dec. 31, 2001. These plans’ projected benefit
obligations were $94 million at Dec. 31, 2002 and $89 million at Dec. 31, 2001. Because of the nature of
such plans, there are no plan assets.
NS received Section 401(h) account transfers, from pension assets, of $18 million in 2002 and $14
million in 2001 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 benefits paid by NS are offset by a portion of benefits paid under The Act, the amendment
served to reduce NS’ obligation by approximately $19 million at Dec. 31, 2001.
During 2001, NS amended its qualified and nonqualified pension plans to enhance benefits to certain NS
employees. The amendments increased the pension benefit obligation by $6 million at Dec. 31, 2001.
During 2000, NS amended its qualified pension plan to allow for the payment of qualifying disability
benefits.
K54
Pension and Other Postretirement Benefit Costs Components
Pension benefits
Service cost
Interest cost
Cost of early retirement programs
Expected return on plan assets
Amortization of prior service cost
Amortization of initial net asset
Recognized net actuarial gain
Net benefit
Other postretirement benefits
Service cost
Interest cost
Cost of early retirement programs
Expected return on plan assets
Amortization of prior service cost
Net cost
Pension Assumptions
2002
2001
($ in millions)
2000
$
$
$
$
17
91
--
(179)
4
--
(13)
(80)
13
33
--
(13)
--
33
$
$
$
$
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
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. A summary of the
major assumptions follows:
Funded status:
Discount rate
Future salary increases
Pension cost:
Discount rate
Return on assets in plans
Future salary increases
2002
2001
2000
6.75%
4.5%
7.25%
9%
5%
7.25%
5%
7.50%
10%
5%
7.50%
5%
7.75%
10%
5%
Health Care Cost Trend Assumptions
For measurement purposes, increases in the per capita cost of covered health care benefits were assumed
to be 10% for 2003 and 9% for 2004. It is assumed the rate will decrease gradually to an ultimate rate of
5.0% for 2008 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:
Increase (decrease) in:
Total service and interest cost components
Postretirement benefit obligation
$
$
6 $
69 $
(5)
(57)
One percentage point
Decrease
Increase
($ in millions)
K55
Other Postretirement Coverage
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 $11 million in
2002, $10 million in 2001 and $7 million in 2000.
401(k) Plans
Norfolk Southern and certain subsidiaries provide 401(k) savings plans for employees. Under the plans,
NS matches a portion of employee contributions, subject to applicable limitations. Since 1999, NS has
contributed newly issued shares of Common Stock for its matching contributions. NS’ expenses under
these plans were $12 million in 2002, $11 million in 2001 and $12 million in 2000.
Early Retirement Programs in 2000
During 2000, NS offered two voluntary early retirement programs to its salaried employees. The
principal incentives offered in these programs were enhanced pension benefits, the cost for most of
which will be paid from NS’ overfunded pension plan. A February program was accepted by 919 of
1,180 eligible employees, and a December program was accepted by 370 of 846 eligible employees. The
total cost of these programs, which is included in “Compensation and benefits,” was $133 million. The
resulting noncash reduction to NS’ pension plan asset is included in “Other - net” in the Consolidated
Statement of Cash Flows.
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). Of these shares, 5,000,000 were approved by the Board for issuance to non-
officer participants; as a broadly based issuance, stockholder approval was not required. Under the
Board-approved Thoroughbred Stock Option Plan (TSOP), the committee may grant stock options up to
a maximum of 6,000,000 shares of Common Stock. Options may be granted for a term not to exceed 10
years, but may not be exercised prior to the first anniversary of the date of grant. Options are exercisable
at the fair market value of Common Stock on the date of grant.
The LTIP also permits the payment –- on a current or a deferred basis and in cash or in stock -– of
dividend equivalents on shares of Common Stock covered by options or PSUs in an amount
commensurate with dividends paid on Common Stock. Tax absorption payments also are authorized in
amounts estimated to equal the federal and state income taxes applicable to shares of Common Stock
issued subject to a share retention agreement.
Accounting Method
As disclosed in Note 1, 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 $23 million in 2002, $20 million in 2001 and $5 million in
2000. NS recognized additional paid-in capital of $6 million in 2002, $1 million in 2001 and zero in
2000 related to the tax benefit generated by stock option exercises.
Note 1 includes a table that illustrates the effect on net income and earnings per share had NS applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. The pro
forma amounts include compensation costs calculated using the Black-Scholes option-pricing model,
with average expected option lives of five years; average risk-free interest rates of 4.6% in 2002, 5.1% in
2001 and 6.8% in 2000; average stock-price volatilities of 32% in 2002, 39% in 2001 and 33% in 2000;
K56
and dividend yields of zero in 2002, 2% in 2001 and 3% in 2000. These assumptions produced per-share
grant-date fair values of $8.26 in 2002, $5.48 in 2001, and $5.22 in 2000.
Stock Option Activity
Balance 12/31/99
Granted
Exercised
Expired
Balance 12/31/00
Granted
Exercised
Expired
Balance 12/31/01
Granted
Exercised
Expired
Balance 12/31/02
Option Shares
21,116,363
Weighted
Average
Exercise Price
27.77
$
7,705,800
(273,813)
(427,400)
28,120,950
6,985,000
(1,079,902)
(612,525)
33,413,523
7,384,000
(2,851,538)
(287,341)
37,658,644
16.94
13.95
26.84
24.96
15.48
16.58
26.51
23.21
22.49
17.48
26.73
23.47
$
$
$
Of the total options outstanding at Dec. 31, 2002, 30 million were vested and have a weighted-average
exercise price of $23.71.
Stock Options Outstanding
Exercise Price
Range
$15.48 to $16.94
$20.09 to $22.49
$24.31 to $27.69
$29.46 to $33.25
$15.48 to $33.25
Weighted Average
$ 16.25
22.20
26.85
32.10
$ 23.47
Number Weighted Average
Outstanding
at 12/31/02
12,317,834
9,001,960
7,708,350
8,630,500
37,658,644
Remaining
Contractual Life
7.6 years
7.7 years
4.7 years
5.5 years
6.5 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 815,000 and
$22.49 in 2002; 817,500 and $15.48 in 2001; and 937,500 and $16.94 in 2000. PSUs may be paid in the
form of shares of Common Stock, cash or any combination thereof. Shares earned and issued may be
subject to share retention agreements and held by NS for up to five years.
K57
Shares Available and Issued
Shares of stock available for future grants and issued in connection with all features of the LTIP and
TSOP are as follows:
Available for future grants 12/31:
LTIP
TSOP
Shares of Common Stock issued:
LTIP
TSOP
2002
2001
2000
23,645,146
2,568,200
30,816,365
2,535,000
2,554,584
2,488,700
2,917,898
--
1,146,346
--
395,626
--
13. STOCKHOLDERS’ EQUITY
Accumulated Other Comprehensive Loss
“Accumulated other comprehensive loss” reported in the Consolidated Statements of Changes in
Stockholders’ Equity consisted of the following:
Balance
at Beginning
of Year
Net
Gain
(Loss)
Reclassification
Adjustments
Balance
at End
of Year
($ in millions)
December 31, 2002
Unrealized gains on securities
Cash flow hedges
Minimum pension liability
Accumulated other
comprehensive loss
December 31, 2001
Unrealized gains on securities
Cash flow hedges
Minimum pension liability
Accumulated other
comprehensive loss
$
$
$
$
6 $
(11)
(50)
(55) $
7 $
--
(13)
(6) $
--
35
(34)
1
(1)
(16)
(37)
(54)
$
$
$
$
(5) $
(6)
--
(11) $
-- $
5
--
5 $
1
18
(84)
(65)
6
(11)
(50)
(55)
K58
“Other comprehensive income (loss)” reported in the Consolidated Statements of Changes in
Stockholders’ Equity consisted of the following:
Tax
Pretax
Amount
(Expense) Net-of-Tax
Benefit
($ in millions)
Amount
Year ended Dec. 31, 2002
Net gain (loss) arising during the year:
Cash flow hedges
Reclassification adjustments for gains
included in net income
Subtotal
Reclassification adjustments for realized
gains on securities included in net income
Minimum pension liability
Other comprehensive income (loss)
Year ended Dec. 31, 2001
Net gain (loss) arising during the year:
Cash flow hedges
Reclassification adjustments for gains
included in net income
Subtotal
Unrealized gains (losses) on securities
Minimum pension liability
Other comprehensive income (loss)
Year ended Dec. 31, 2000
Net gain (loss) arising during the year:
Unrealized gains (losses) on securities
Other comprehensive income (loss)
$
$
$
$
$
$
58 $
(23) $
(10)
48
(9)
(34)
5 $
4
(19)
4
--
(15) $
(27) $
11 $
8
(19)
(1)
(35)
(55) $
(3)
8
--
(2)
6 $
35
(6)
29
(5)
(34)
(10)
(16)
5
(11)
(1)
(37)
(49)
7 $
7 $
(2) $
(2) $
5
5
In 2002 and 2001, Conrail recorded a $59 million and a $70 million loss, respectively, in other
comprehensive income related to an increase in its minimum pension liability. NS’ “Other
comprehensive loss” includes $34 million for 2002 and $41 million for 2001, arising from the Conrail
adjustments.
Undistributed Earnings of Equity Investees
“Retained income” includes undistributed earnings of equity investees, principally attributable to NS’
equity in the earnings of Conrail, of $375 million at Dec. 31, 2002; $355 million at Dec. 31, 2001; and
$351 million at Dec. 31, 2000.
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14. EARNINGS PER SHARE
The following table sets forth the calculation of basic and diluted earnings per share:
2002
2001
2000
($ in millions except per share, shares in millions)
Income available to common stockholders for
basic and diluted computations
Basic earnings per share:
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
$
$
$
460 $
375 $
172
388
1.18 $
385
0.97 $
388
385
2
390
1.18 $
1
386
0.97 $
383
0.45
383
--
383
0.45
These calculations exclude options for which the exercise price exceeded the average market price of
Common Stock as follows: 24 million in 2002, 21 million in 2001 and 26 million in 2000.
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:
Investments
Notes receivable
Long-term debt
2002
2001
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
30 $
93
(7,364)
($ in millions)
39 $
104
(8,412)
44 $
93
(7,632)
51
98
(8,067)
Quoted market prices were used to determine the fair value of marketable securities; underlying net
assets were used to estimate the fair value of other investments. The fair values of notes receivable are
based on future discounted cash flows. The fair values of debt were estimated based on quoted market
prices or discounted cash flows using current interest rates for debt with similar terms, company rating
and remaining maturity.
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Carrying amounts of marketable securities reflect unrealized holding gains of $1 million on Dec. 31,
2002, and $10 million on Dec. 31, 2001. Sales of “available-for-sale” securities were immaterial for the
years ended Dec. 31, 2002, 2001 and 2000.
16. DERIVATIVE FINANCIAL INSTRUMENTS
On Jan. 1, 2001, NS adopted Statement of Financial Accounting Standards No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (SFAS 133), as amended by Statement of Financial
Accounting Standards No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging
Activities” (SFAS 138). The Statements establish accounting and reporting standards for derivative
instruments and hedging activities, requiring that all derivatives be recognized in the financial statements
as either assets or liabilities and that they be measured at fair value. Changes in fair value are recorded as
adjustments to the assets or liabilities being hedged in “Other comprehensive income,” or in current
earnings, depending on whether the derivative is designated and qualifies for hedge accounting, the type
of hedge transaction represented and the effectiveness of the hedge.
NS uses derivative financial instruments to reduce the risk of volatility in its diesel fuel costs and to
manage its overall exposure to fluctuations in interest rates. NS does not engage in the trading of
derivatives. Management has determined that its derivative financial instruments qualify as either fair-
value or cash-flow hedges, having values that highly correlate with the underlying hedged exposures,
and has designated such instruments as hedging transactions. Credit risk related to the derivative
financial instruments is considered to be minimal and is managed by requiring high credit standards for
counterparties and periodic settlements.
Diesel Fuel Hedging
In the second quarter of 2001, NS began a program to hedge a portion of its diesel fuel consumption. The
intent of the program is to assist in the management of NS’ aggregate risk exposure to fuel price
fluctuations, which can significantly affect NS’ operating margins and profitability. In order to minimize
this risk, NS instituted a continuous hedging strategy for a portion of its estimated future fuel needs by
entering into a series of swaps in order to lock in the purchase prices of some of its diesel fuel.
Management has designated these derivative instruments as cash-flow hedges of the exposure to
variability in expected future cash flows attributable to fluctuations in diesel fuel prices.
Following is a summary of NS’ diesel fuel swaps:
Number of swaps entered into during the year
Approximate number of gallons hedged (millions)
Approximate average price per gallon of Nymex
No. 2 heating oil
2002
288
393
2001
222
370
$0.66
$0.68
Percent of estimated future diesel fuel
consumption covered as of Dec. 31, 2002
2003
62%
2004
22%
2005
--
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% of NS’ average monthly fuel consumption
will be hedged for each month within any 36-month period. Diesel fuel costs represented 7%, 8% and
9% of NS’ operating expenses for the years ended Dec. 31, 2002, 2001 and 2000, respectively.
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In 2001, NS also 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.
NS’ fuel hedging activity resulted in a net decrease in 2002 diesel fuel expense of $10 million and a net
increase in 2001 diesel fuel expense of $8 million. Ineffectiveness related to the use of diesel fuel hedges
in 2002 and 2001 was less than $1 million for each year.
Interest Rate Hedging
NS manages its overall exposure to fluctuations in interest rates by issuing both fixed and floating-rate
debt instruments, and by entering into interest rate hedging transactions. NS had $220 million, or 3.2%,
and $251 million, or 3.5%, of its fixed rate debt portfolio hedged at Dec. 31, 2002, and Dec. 31, 2001,
respectively, using interest rate swaps that qualify for and are designated as fair-value hedge transactions.
These swaps have been effective in hedging the changes in fair value of the related debt arising from
changes in interest rates and, accordingly, there has been no impact on earnings resulting from
ineffectiveness associated with these derivative transactions.
Fair Values
The fair values of NS’ diesel fuel derivative instruments at Dec. 31, 2002 and 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.
“Accumulated other comprehensive loss,” a component of “Stockholders’ equity,” included $29 million
(pretax) at Dec. 31, 2002, relating to an increase, and $15 million (pretax) at Dec. 31, 2001, relating to a
decrease in the fair value of derivative fuel hedging transactions that will terminate within 12 months.
The asset and liability positions of NS’ outstanding derivative financial instruments were as follows:
Interest rate hedges:
Gross fair market asset position
Gross fair market (liability) position
Fuel hedges:
Gross fair market asset position
Gross fair market (liability) position
Total net asset (liability) position
December 31,
2002
2001
($ in millions)
$
$
24 $
--
29
--
53 $
12
--
--
(19)
(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.
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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. While the ultimate amount of liability incurred in any of these lawsuits and claims is
dependent on future developments, in management’s opinion the recorded liability is adequate to cover
the future payment of such liability. However, the final outcome of any of these lawsuits and claims
cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional
accruals that could be significant to results of operations in a particular year or quarter. Any adjustments
to the recorded liability will be reflected in expenses in the periods in which such adjustments are
known.
Presently, there are two matters, one involving labor arbitration and other claims for “New York Dock”
and other income protection benefits and the other involving contractual obligations of a fiber optic
codeveloper, Williams Communications, LLC (“Williams Communications”), where the aggregated
range of loss could be from zero to $75 million. Management believes that NS will prevail in both these
matters. On January 29, 2003, the United States District Court for the Northern District of Georgia
entered an order requiring Williams Communications to pay T-Cubed approximately $36 million, plus
prejudgment interest at a rate of 9% per annum, in connection with its contractual obligations to T-
Cubed. Williams Communications may elect to appeal. The ability to collect and retain the $36 million
receivable due from Williams Communications may be limited because of its financial condition. The
shortfall, if any, cannot now be determined. Its parent, Williams Communications Group, Inc., filed in
April 2002 a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code, and
emerged from bankruptcy in October 2002. Williams Communications was not included in the
bankruptcy petition. Unfavorable outcomes in either of these matters could result in accruals that could
be significant to results of operations in a particular year or quarter.
Casualty Claims
NS is generally self-insured for casualty claims. Claims in excess of self-insurance levels are insured up
to excess coverage limits. The casualty claims liability is determined actuarially, based upon claims filed
and an estimate of claims incurred but not yet reported. While the ultimate amount of claims incurred is
dependent on future developments, in management’s opinion, the recorded liability is adequate to cover
the future payments of claims. However, it is possible that the recorded liability may not be adequate to
cover the future payment of claims. Adjustments to the recorded liability will be reflected in operating
expenses in the periods in which such adjustments are known.
Environmental Matters
NS is subject to various jurisdictions’ environmental laws and regulations. It is NS’ policy to record a
liability where such liability or loss is probable and its amount can be estimated reasonably. Claims, if
any, against third parties for recovery of cleanup costs incurred by NS are reflected as receivables in the
balance sheet and are not netted against the associated NS liability. Environmental engineers regularly
participate in ongoing evaluations of all identified sites and in determining any necessary adjustments to
initial liability estimates. NS also has established an Environmental Policy Council, composed of senior
managers, to oversee and interpret its environmental policy.
NS’ balance sheets included liabilities for environmental exposures in the amount of $29 million at
Dec. 31, 2002, and $33 million at Dec. 31, 2001 (of which $8 million was accounted for as a current
liability in each year). At Dec. 31, 2002, the liability represented NS’ estimate of the probable cleanup
and remediation costs based on available information at 114 identified locations. On that date, 10 sites
accounted for $16 million of the liability, and no individual site was considered to be material. NS
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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 114 locations, certain NS subsidiaries, usually in conjunction with a number of other
parties, have been identified as potentially responsible parties by the Environmental Protection Agency
(EPA) or similar state authorities under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, or comparable state statutes, which often impose joint and several liability for
cleanup costs.
With respect to known environmental sites (whether identified by NS or by the EPA or comparable state
authorities), estimates of NS’ ultimate potential financial exposure for a given site or in the aggregate for
all such sites are necessarily imprecise because of the widely varying costs of currently available cleanup
techniques, the likely development of new cleanup technologies, the difficulty of determining in advance
the nature and full extent of contamination and each potential participant’s share of any estimated loss
(and that participant’s ability to bear it), and evolving statutory and regulatory standards governing
liability.
The risk of incurring environmental liability – for acts and omissions, past, present and future – is
inherent in the railroad business. Some of the commodities in NS’ traffic mix, particularly those
classified as hazardous materials, can pose special risks that NS and its subsidiaries work diligently to
minimize. In addition, several NS subsidiaries own, or have owned, land used as operating property, or
which is leased or may have been leased and operated by others, or held for sale. Because environmental
problems may exist on these properties that are latent or undisclosed, there can be no assurance that NS
will not incur environmentally related liabilities or costs with respect to one or more of them, the amount
and materiality of which cannot be estimated reliably at this time. Moreover, lawsuits and claims
involving these and other now-unidentified environmental sites and matters are likely to arise from time
to time. The resulting liabilities could have a significant effect on financial condition, results of
operations or liquidity in a particular year or quarter.
However, based on its assessment of the facts and circumstances now known, management believes that
it has recorded the probable costs for dealing with those environmental matters of which the Corporation
is aware. Further, management believes that it is unlikely that any identified matters, either individually
or in the aggregate, will have a material adverse effect on NS’ financial position, results of operations or
liquidity.
Purchase Commitments
NSR had outstanding purchase commitments of approximately $164 million in connection with its 2003
capital program. In addition, Norfolk Southern has committed to purchase telecommunications services
totaling $38 million through 2006.
Change-In-Control Arrangements
Norfolk Southern has compensation agreements with officers and certain key employees that become
operative only upon a change in control of the Corporation, as defined in those agreements. The
agreements provide generally for payments based on compensation at the time of a covered individual’s
involuntary or other specified termination and for certain other benefits.
Guarantees
In a number of instances, NS and its subsidiaries have agreed to indemnify lenders for additional costs
they may bear as a result of certain changes in laws or regulations applicable to their loans. Such
changes may include impositions or modifications with respect to taxes, duties, reserves, liquidity,
capital adequacy, special deposits, and similar requirements relating to extensions of credit by, deposits
with, or the assets or liabilities of such lenders. Similar provisions exist in NS’ accounts receivable
K64
sales program. The nature and timing of changes in laws or regulations applicable to NS’ financings are
inherently unpredictable, and therefore NS’ exposure in connection with the foregoing indemnifications
cannot be quantified. No liability has been recorded related to these indemnifications. In the case of one
type of equipment financing, NSR’s Japanese leveraged leases, NSR may terminate the leases and
ancillary agreements if such a change-in-law indemnity is triggered. Such a termination would require
NSR to make early termination payments that would not be expected to have a material adverse effect on
NS’ financial condition, results of operations or liquidity.
NS has indemnified parties in a number of transactions for U.S. income tax withholding imposed as a
result of changes in U.S. tax law. In all cases, NS has the right to unwind the related transaction if the
withholding cannot be avoided in the future. Because these indemnities would be triggered and are
dependent upon a change in the tax law, the maximum exposure is not quantifiable. Management does
not believe that it is likely that it will be required to make any payments under these indemnities.
Norfolk Southern has indemnified the purchaser of North American Van Lines, Inc. (see Note 17) for tax
liabilities related to tax years ended on or before the date of sale. The maximum exposure is not
quantifiable; however, NS has recorded a reserve for its expected liability under this indemnification. It
is unlikely that any additional payments would have a material adverse effect on NS’ financial position,
results of operations or liquidity.
NS has outstanding warranty liabilities primarily related to work performed at its locomotive facilities.
NS has recorded a reserve of less than $2 million as of Dec. 31, 2002 and 2001 for these warranties.
As of Dec. 31, 2002, certain Norfolk Southern subsidiaries are contingently liable as guarantors with
respect to $8 million of indebtedness of an entity in which it has an ownership interest, the Terminal
Railroad Association of St. Louis, due in 2019. Six other railroads are also jointly and severally liable as
guarantors for this indebtedness. No liability has been recorded related to this guaranty.
NS is liable for any shortfall in the then fair market value of certain leased locomotives and a specified
residual value for the locomotives if the leases are not renewed, as discussed in Note 9.
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(Unaudited)
2002
Railway operating revenues
Income from railway operations
Net income
Earnings per share -
basic and diluted
2001
Railway operating revenues
Income from railway operations
Net income
Earnings per share -
basic and diluted
Three Months Ended
March 31
June 30
Sept. 30
Dec. 31
(In millions of dollars, except per share amounts)
$
$
$
$
1,498
237
86
$
1,593
322
119
$
1,598
311
126
1,581
288
129
0.22
$
0.31
$
0.32
$
0.33
$
1,540
205
74*
$
1,592
282
107
$
1,508
245
79
1,530
275
115
$
0.19*
$
0.28
$
0.20
$
0.30
* 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).
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 10. Directors and Executive Officers of the Registrant.
In accordance with General Instruction G(3), information called for by Part III is incorporated
herein by reference from the information appearing under the caption “Election of Directors,”
including the subcaptions “Nominees for terms expiring in 2006,” “Continuing Directors – those
whose terms expire in 2004” and “Continuing Directors – those whose terms expire in 2005” in
Norfolk Southern’s definitive Proxy Statement, for the Norfolk Southern Annual Meeting of
Stockholders to be held on May 8, 2003, which definitive Proxy Statement will be filed
electronically with the Commission pursuant to Regulation 14A. The information regarding
executive officers called for by Item 401 of Regulation S-K is included in Part I hereof beginning
under “Executive Officers of the Registrant.”
Item 11. Executive Compensation.
In accordance with General Instruction G(3), information called for by Part III is incorporated
herein by reference from the information appearing under the subcaption “Compensation” under the
caption “Board of Directors” for directors and under the caption “Executive Compensation” for
executives, including the information appearing in the “Summary Compensation Table” and under
the subcaptions “Long-Term Incentive Plan” (including the three tables therein), “Pension Plans”
(including the table therein), and “Change in Control Arrangements” in Norfolk Southern’s
definitive Proxy Statement, for the Norfolk Southern Annual Meeting of Stockholders to be held on
May 8, 2003, which definitive Proxy Statement will be filed electronically with the Commission
pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
In accordance with General Instruction G(3), information called for by Part III is incorporated
herein by reference from the information appearing under the caption “Beneficial Ownership of
Stock” in Norfolk Southern’s definitive Proxy Statement, for the Norfolk Southern Annual Meeting
of Stockholders to be held on May 8, 2003, which definitive Proxy Statement will be filed
electronically with the Commission pursuant to Regulation 14A.
K66
Equity Compensation Plan Information
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price
of outstanding
options, warrants
and rights
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding
securities reflected
in column (a))
(c)
31,786,844
$23.57 (4)
23,645,146 (6)
8,431,800 (3)
$23.12 (3) (5)
3,113,200 (7)
Plan
category
Equity compensation
plans approved by
security holders (1)
Equity compensation
plans not approved by
security holders (2)
Total
40,218,644
$23.47
26,758,346
(1) The Long-Term Incentive Plan, excluding five million shares for broad-based issuance to non-officers.
(2) The Long-Term Incentive Plan’s five million shares for broad-based issuance to non-officers, the Thoroughbred
Stock Option Plan, the Directors’ Restricted Stock Plan and the Safety Incentive Plan.
(3) Includes options and performance share units granted under the Long-Term Incentive Plan on five million shares for
non-officers and options granted under the Thoroughbred Stock Option Plan.
(4) Calculated without regard to 2,315,000 outstanding performance share units.
(5) Calculated without regard to 245,000 outstanding performance share units.
(6) Of the shares remaining available for grant under plans approved by stockholders, 5,185,000 are available for grant
as restricted shares or performance shares under the Long-Term Incentive Plan.
(7) Of the shares remaining available for grant under plans not approved by stockholders, 45,000 are available for grant
as restricted stock under the Directors’ Restricted Stock Plan and 500,000 are available for grant as stock under
the Safety Incentive Plan.
Norfolk Southern Corporation Long-Term Incentive Plan (“LTIP”)
Established on June 28, 1983, and approved by the stockholders at their Annual Meetings on May 10,
1984, on May 11, 1995, and most recently on May 10, 2001, LTIP was adopted to promote the success
of Norfolk Southern by providing an opportunity for officers and other key employees to acquire a
proprietary interest in the Corporation. On January 23, 2001, the Board of Directors approved the
issuance of an additional 5,000,000 shares of authorized but unissued Common Stock under LTIP to
participants who are not officers of Norfolk Southern. The issuance of these shares was broadly-based,
and stockholder approval of these shares was not required. Accordingly, this portion of LTIP is included
in the number of securities available for future issuance for plans not approved by stockholders. The
Board also adopted an amended plan effective January 23, 2001, subject to stockholder approval, which
included the reservation for issuance of an additional 30,000,000 shares
of authorized but unissued Norfolk Southern Common Stock, with no more than 6 million of such
additional shares to be awarded as restricted shares or performance shares (including performance
share units earned as performance shares). This amended plan was approved by stockholders on
May 10, 2001, resulting in an aggregate of 74,878,604 shares of Common Stock authorized for
issuance under LTIP.
Non-employee directors, officers and other key employees residing in the United States or Canada are
eligible for selection to receive LTIP awards. Under LTIP, the Performance-Based Compensation
Committee (Committee) may grant incentive stock options, nonqualified stock options, stock
K67
appreciation rights, restricted shares and performance share units (in addition, dividend equivalents may
be awarded for options and performance share units). The Committee may establish such terms and
conditions for the awards as provided in the plan.
For options, the option price per share will not be less than 100% of the fair market value of Norfolk
Southern’s Common Stock on the effective date the option is granted. All options are subject to a
vesting period of at least one year, and the term of the option will not exceed ten years. LTIP
specifically prohibits option repricing without stockholder approval, except for capital adjustments.
Performance share units are performance-based awards which are earned upon achievement of goals the
Committee establishes at the time of the grant for three equally weighted performance criteria approved
by the stockholders -- return on average invested capital, operating ratio, and total return to NS
stockholders as compared with the total return on all stocks comprising the S&P 500 Composite Stock
Price Index -- and the units may be payable as shares of Norfolk Southern Common Stock or in cash.
Norfolk Southern Corporation Thoroughbred Stock Option Plan
The Board adopted the Norfolk Southern Corporation Thoroughbred Stock Option Plan (“TSOP”) on
January 26, 1999, to promote the success of Norfolk Southern by providing an opportunity for
nonagreement employees to acquire a proprietary interest in Norfolk Southern and thereby to provide an
additional incentive to nonagreement employees to devote their maximum efforts and skills to the
advancement, betterment, and prosperity of Norfolk Southern and its stockholders. The plan has not
been approved by stockholders. Six million shares of authorized but unissued Common Stock were
reserved for issuance under TSOP.
Active full-time nonagreement employees residing in the United States or Canada are eligible for
selection to receive TSOP awards. Under TSOP, the Compensation and Nominating Committee of the
Board of Directors may grant nonqualified stock options and may establish such terms and conditions as
provided in the plan.
The option price per share will not be less than 100% of the fair market value of Norfolk Southern’s
Common Stock on the effective date the option is granted. All options are subject to a vesting period of
at least one year, and the term of the option will not exceed ten years. TSOP specifically prohibits option
repricing without stockholder approval, except for capital adjustments.
Norfolk Southern Corporation Directors’ Restricted Stock Plan
The Norfolk Southern Corporation Directors’ Restricted Stock Plan (“Plan”) was adopted on January 1,
1994, and is designed to increase ownership of Norfolk Southern’s Common Stock by its non-employee
directors so as to further align their ownership interest in Norfolk Southern with that of stockholders.
The Plan has not been approved by stockholders. Currently, a maximum of 66,000 shares of Corporation
Common Stock may be granted under the Plan. To make the grants to eligible directors, Norfolk
Southern purchases, through one or more subsidiary companies, the number of shares required in open-
market transactions at prevailing market prices, or makes such grants from Common Stock already
owned by one or more of Norfolk Southern’s subsidiary companies.
Only non-employee directors, who are not and never have been employees of Norfolk Southern, are
eligible to participate in the Plan. Upon becoming a director, each eligible director receives a one-time
grant of 3,000 restricted shares of Norfolk Southern Common Stock. No individual member of the
Board exercises discretion concerning the eligibility of any director or the number of shares granted.
The restriction period begins on the date of the grant and ends on the earlier of six months after the
eligible director ceases to be a director by reason of disability, retirement or death. Directors will forfeit
the right to receive the restricted shares if they cease to serve as a director of Norfolk Southern for
reasons other than their disability, retirement or death.
K68
Norfolk Southern Corporation Safety Incentive Plan
The Norfolk Southern Corporation Safety Incentive Plan (“SIP”) is designed to provide an additional
incentive for eligible agreement employees to work safely. Under the plan, eligible employees who
work without injury during the year receive a safety award payable in shares of Norfolk Southern
Common Stock. A SIP award is between five and eight shares of stock.
SIP is broadly-based and has not been approved by stockholders. Shares of Common Stock issued under
its terms are not registered under the Securities Act of 1933, pursuant to a no-action letter issued by the
Securities and Exchange Commission on November 20, 1992. Accordingly, SIP does not define a
specific amount of authorized shares for issuance under the plan. The Board has approved using up to
500,000 authorized but unissued shares for awards under the plan, and the number of shares remaining
under this authorization are included in the number of securities available for future issuance for plans
not approved by shareholders.
Item 13. Certain Relationships and Related Transactions.
In accordance with General Instruction G(3), information called for by Part III is incorporated herein by
reference from the information appearing under the caption “Certain Relationships and Related
Transactions” in Norfolk Southern’s definitive Proxy Statement, for the Norfolk Southern Annual
Meeting of Stockholders to be held on May 8, 2003, which definitive Proxy Statement will be filed
electronically with the Commission pursuant to Regulation 14A.
Item 14. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
NS’ Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of NS’
disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of a date within 90 days prior to
the filing date of this annual report (the “Evaluation Date”). Based on such evaluation, such officers
have concluded that, as of the Evaluation Date, NS’ disclosure controls and procedures are effective in
alerting them on a timely basis to material information relating to NS (including its consolidated
subsidiaries) required to be included in NS’ periodic filings under the Exchange Act.
(b) Changes in Internal Controls.
Since the Evaluation Date, there have not been any significant changes in NS’ internal controls or in
other factors that could significantly affect such controls.
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NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
PART IV
(A)
The following documents are filed as part of this report:
1.
Index to Consolidated Financial Statements
Independent Auditors’ Report
Consolidated Statements of Income, Years ended Dec. 31, 2002, 2001 and 2000
Consolidated Balance Sheets As of Dec. 31, 2002 and 2001
Consolidated Statements of Cash Flows, Years ended Dec. 31, 2002, 2001
and 2000
Consolidated Statements of Changes in Stockholders’ Equity, Years ended
Dec. 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
2.
Financial Statement Schedule:
The following consolidated financial statement schedule should be read in
connection with the consolidated financial statements:
Index to Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
Schedules other than the one listed above are omitted either because they are not
required or are inapplicable, or because the information is included in the
consolidated financial statements or related notes.
Page
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K39
K40
K41
K42
K43
Page
K80
3.
Exhibits
Exhibit
Number
3
3(i)
3(ii)
Articles of Incorporation and Bylaws -
Description
The Restated Articles of Incorporation of Norfolk Southern Corporation are incorporated
by reference to Exhibit 3(i) to Norfolk Southern Corporation’s 10-K filed on March 5,
2001.
The Bylaws of Norfolk Southern Corporation, as amended December 1, 2002, are filed
herewith.
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4
Instruments Defining the Rights of Security Holders, Including Indentures:
(a)
(b)
(c)
Indenture, dated as of January 15, 1991, from Norfolk Southern Corporation to First Trust
of New York, National Association, as Trustee, related to the issuance of notes in the
principal amount of $750 million, incorporated by reference to Exhibit 4.1 to Norfolk
Southern Corporation’s Registration Statement on Form S-3 (No. 33-38595).
First Supplemental Indenture, dated May 19, 1997, between Norfolk Southern Corporation
and First Trust of New York, National Association, as Trustee, related to the issuance of
notes in the principal amount of $4.3 billion, is incorporated herein by reference to Exhibit
1.1(d) to Norfolk Southern Corporation’s Form 8-K filed on May 21, 1997.
Second Supplemental Indenture, dated April 26, 1999, between Norfolk Southern
Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance
of notes in the principal amount of $400 million, is incorporated herein by reference to
Exhibit 1.1(c) to Norfolk Southern Corporation’s Form 8-K filed on April 30, 1999.
(d) Third Supplemental Indenture, dated May 23, 2000, between Norfolk Southern
Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance
of notes in the principal amount of $600 million, is incorporated herein by reference to
Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on May 25, 2000.
(e)
(f)
Fourth Supplemental Indenture, dated as of February 6, 2001, between Norfolk Southern
Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance
of notes in the principal amount of $1 billion, is incorporated herein by reference to
Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on February 7, 2001.
Fifth Supplemental Indenture, dated as of July 5, 2001, between Norfolk Southern
Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance
of notes in the principal amount of $250 million, is incorporated herein by reference to
Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on July 5, 2001.
(g) Rights Agreement, dated as of September 26, 2000, between Norfolk Southern
Corporation and The Bank of New York, with exhibits thereto, is incorporated herein
by reference to Exhibit 4 to Norfolk Southern Corporation’s Form 8-K filed on
September 26, 2000.
(h)
(i)
Sixth Supplemental Indenture, dated as of April 30, 2002, between Norfolk Southern
Corporation and U.S. Bank Trust National Association, as Trustee, relating to the issuance
of notes in the principal amount of $200 million, is incorporated herein by reference to
Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on May 1, 2002.
Seventh Supplemental Indenture, dated as of April 30, 2002, between Norfolk Southern
Corporation and U.S. Bank Trust National Association, as Trustee, relating to the issuance
of notes in the principal amount of $100 million, is incorporated herein by reference to
Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on May 1, 2002.
(j) Amendment to Rights Agreement, dated as of November 26, 2002, between Norfolk
Southern Corporation and The Bank of New York, with exhibits thereto, is incorporated by
reference to Exhibit 4 to Norfolk Southern Corporation’s Form 8-K filed on November 26,
2002.
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In accordance with Item 601(b)(4)(iii) of Regulation S-K, copies of other instruments of
Norfolk Southern Corporation and its subsidiaries with respect to the rights of holders of
long-term debt are not filed herewith, or incorporated by reference, but will be furnished to
the Commission upon request.
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Material Contracts -
(a) The Transaction Agreement, dated as of June 10, 1997, by and among CSX, CSX
Transportation, Inc., Registrant, Norfolk Southern Railway Company, Conrail Inc.,
Consolidated Rail Corporation and CRR Holdings LLC, with certain schedules thereto,
previously filed, is refiled herewith pursuant to Item 10(d) of Regulation S-K.
(b) Amendment No. 1, dated as of August 22, 1998, to the Transaction Agreement, dated as of
June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk
Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated
Rail Corporation and CRR Holdings LLC is incorporated herein by reference from Exhibit
10.1 to Norfolk Southern Corporation’s Form 10-Q filed on August 11, 1999.
(c) Amendment No. 2, dated as of June 1, 1999, to the Transaction Agreement, dated June 10,
1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern
Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail
Corporation and CRR Holdings LLC is incorporated herein by reference from Exhibit 10.2
to Norfolk Southern Corporation’s Form 10-Q filed on August 11, 1999.
(d) Operating Agreement, dated as of June 1, 1999, by and between Pennsylvania Lines LLC
and Norfolk Southern Railway Company is incorporated herein by reference from Exhibit
10.3 to Norfolk Southern Corporation’s Form 10-Q filed on August 11, 1999.
(e) Amendment No. 1, dated as of September 29, 2001, to Operating Agreement, dated as of
June 1, 1999, by and between Pennsylvania Lines LLC and Norfolk Southern Railway
Company, is incorporated herein by reference from Exhibit 10(e) to Norfolk Southern
Corporation’s Form 10-K filed on February 21, 2002.
(f)
(g)
(h)
Shared Assets Area Operating Agreement for North Jersey, dated as of June 1, 1999, by
and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern
Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit
10.4 to Norfolk Southern Corporation’s Form 10-Q filed on August 11, 1999.
Shared Assets Area Operating Agreement for South Jersey/ Philadelphia, dated as of June
1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and
Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by
reference from Exhibit 10.5 to Norfolk Southern Corporation’s Form 10-Q filed on August
11, 1999.
Shared Assets Area Operating Agreement for Detroit, dated as of June 1, 1999, by and
among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern
Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit
10.6 to Norfolk Southern Corporation’s Form 10-Q filed on August 11, 1999.
(i) Amendment No. 1, dated as of June 1, 2000, to the Shared Assets Areas Operating
Agreement for North Jersey, South Jersey/Philadelphia and Detroit, dated as of June 1,
1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk
Southern Railway Company, with exhibit thereto, is incorporated herein by reference to
Exhibit 10(h) to Norfolk Southern Corporation’s 10-K filed on March 5, 2001.
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(j) Amendment No. 2, dated as January 1, 2001, to the Shared Assets Area Operating
Agreements for North Jersey, South Jersey/Philadelphia and Detroit, dated as of June 1,
1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and
Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by
reference to Exhibit 10(j) to Norfolk Southern Corporation’s Form 10-K filed on February
21, 2002.
(k) Amendment No. 3, dated as of June 1, 2001, and executed in May of 2002, to the Shared
Assets Area Operating Agreement for North Jersey, South Jersey/Philadelphia and
Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX
Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is filed
herewith.
(l) Monongahela Usage Agreement, dated as of June 1, 1999, by and among CSX
Transportation, Inc., Norfolk Southern Railway Company, Pennsylvania Lines LLC and
New York Central Lines LLC, with exhibit thereto, is incorporated herein by reference
from Exhibit 10.7 to Norfolk Southern Corporation’s Form 10-Q filed on August 11,
1999.
(m) The Agreement, entered into as of July 27, 1999, between North Carolina Railroad
Company and Norfolk Southern Railway Company, is incorporated herein by reference
from Exhibit 10(i) to Norfolk Southern Corporation’s Form 10-K filed on March 6, 2000.
(n) The Supplementary Agreement, entered into as of January 1, 1987, between the Trustees
of the Cincinnati Southern Railway and The Cincinnati, New Orleans and Texas Pacific
Railway Company (the latter a wholly owned subsidiary of Norfolk Southern Railway
Company) - extending and amending a Lease, dated as of October 11, 1881 - is
incorporated by reference to Exhibit 10(k) to Norfolk Southern Corporation’s Form 10-K
filed on March 5, 2001.
(o) The Norfolk Southern Corporation Executive Management Incentive Plan, effective
January 25, 2000, is incorporated by reference herein from Exhibit 10(1) to Norfolk
Southern Corporation’s Form 10-K filed on March 6, 2000.
(p) The Norfolk Southern Corporation Long-Term Incentive Plan, as amended effective
January 28, 2003, is filed herewith.
(q) The Norfolk Southern Corporation Officers’ Deferred Compensation Plan, as amended
effective September 26, 2000, is incorporated herein by reference to Exhibit 10(n) to
Norfolk Southern Corporation’s Form 10-K filed on March 5, 2001.
(r)
(s)
(t)
The Norfolk Southern Corporation Executives’ Deferred Compensation Plan, as amended
effective January 20, 2001, is incorporated herein by reference to Exhibit 10(o) to Norfolk
Southern Corporation’s Form 10-K filed on March 5, 2001.
The Directors’ Deferred Fee Plan of Norfolk Southern Corporation, as amended effective
January 23, 2001, is incorporated herein by reference to Exhibit 10(p) to Norfolk Southern
Corporation’s Form 10-K filed on March 5, 2001.
The Norfolk Southern Corporation Directors’ Restricted Stock Plan, effective January 1,
1994, as restated November 24, 1998, is incorporated herein by reference from Exhibit
10(h) to Norfolk Southern Corporation’s Form 10-K filed on March 24, 1999.
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(u)
Form of Severance Agreement, dated as of June 1, 1996, between Norfolk Southern
Corporation and certain executive officers (including those defined as “named executive
officers” and identified in the Corporation’s Proxy Statement for the 1997 through 2001
Annual Meetings of Stockholders) is incorporated herein by reference from Exhibit 10(t)
to Norfolk Southern Corporation’s Form 10-K filed on February 21, 2002.
(v) Norfolk Southern Corporation Supplemental (formerly, Excess) Benefit Plan, effective as
of August 22, 1999, is incorporated herein by reference from Exhibit 10(r) to Norfolk
Southern Corporation’s Form 10-K filed on March 6, 2000.
(w) The Norfolk Southern Corporation Directors’ Charitable Award Program, effective
February 1, 1996, is incorporated herein by reference from Exhibit 10(v) to Norfolk
Southern Corporation’s Form 10-K filed on February 21, 2002.
(x) The Norfolk Southern Corporation Outside Directors’ Deferred Stock Unit Program, as
amended effective January 28, 2003, is filed herewith.
(y) Agreement, dated as of October 1, 2001, providing enhanced pension benefits to three
officers in exchange for their continued employment with Norfolk Southern Corporation
for two years, is incorporated herein by reference to Exhibit 10(w) to Norfolk Southern
Corporation’s Form 10-Q filed on November 9, 2001. The agreement was entered into
with L. Ike Prillaman, Vice Chairman and Chief Marketing Officer; Stephen C. Tobias,
Vice Chairman and Chief Operating Officer; and Henry C. Wolf, Vice Chairman and
Chief Financial Officer.
(z) The Norfolk Southern Corporation Thoroughbred Stock Option Plan, as amended
effective January 28, 2003, is filed herewith.
(aa) The Norfolk Southern Safety Incentive Plan for Operating Agreement Employees and For
Non-Operating Agreement Employees, as amended effective October 1, 2002, is filed
herewith.
(bb) The Norfolk Southern Corporation Restricted Stock Unit Plan, effective January 28, 2003,
is filed herewith.
Statement re: Computation of Ratio of Earnings to Fixed Charges.
Subsidiaries of the Registrant.
Consents of Experts -
Consent of KPMG LLP.
(a)
(b) Consent of KPMG LLP and Ernst & Young LLP.
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21
23
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(a)
Certifications of the CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Conrail Inc. 2002 Annual Report to Stockholders.
(B)
Reports on Form 8-K.
A report on Form 8-K was filed November 26, 2002, advising of the amendment of the
Rights Agreement to terminate it effective November 26, 2002, and attaching as an
exhibit the related press release.
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A report on Form 8-K was filed November 12, 2002, advising that the Corporation had
decreased its expected long-term rate of return assumption on pension plan assets for
purposes of pension accounting, and attaching as an exhibit the related press release.
(C)
Exhibits.
The Exhibits required by Item 601 of Regulation S-K as listed in Item 14(a)3 are filed
herewith or incorporated herein by references.
(D)
Financial Statement Schedules.
Financial statement schedules and separate financial statements specified by this Item are
included in Item 14(a)2 or are otherwise not required or are not applicable.
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POWER OF ATTORNEY
Each person whose signature appears below under “SIGNATURES” hereby authorizes Henry C. Wolf
and Henry D. Light, or either of them, to execute in the name of each such person, and to file,
any amendment to this report and hereby appoints Henry C. Wolf and Henry D. Light, or either of them,
as attorneys-in-fact to sign on his or her behalf, individually and in each capacity stated below, and to
file, any and all amendments to this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Norfolk
Southern Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on this 21st day of February, 2003.
NORFOLK SOUTHERN CORPORATION
By: /s/ David R. Goode
(David R. Goode, Chairman,
President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below on this 21st day of February, 2003, by the following persons on behalf of Norfolk Southern
Corporation and in the capacities indicated.
Signature
Title
/s/ David R. Goode
(David R. Goode)
Chairman, President and Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Henry C. Wolf
(Henry C. Wolf)
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)
/s/ John P. Rathbone
(John P. Rathbone)
Senior Vice President and Controller
(Principal Accounting Officer)
/s/ Gerald L. Baliles
(Gerald L. Baliles)
/s/ Gene R. Carter
(Gene R. Carter)
/s/ Alston D. Correll
(Alston D. Correll)
Director
Director
Director
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/s/ Landon Hilliard
(Landon Hilliard)
/s/ Steven F. Leer
(Steven F. Leer)
___________________
(Jane Margaret O’Brien)
/s/ Harold W. Pote
(Harold W. Pote)
/s/ J. Paul Reason
(J. Paul Reason)
Director
Director
Director
Director
Director
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I, David R. Goode, certify that:
1.
2.
3.
4.
5.
6.
I have reviewed this annual report on Form 10-K of Norfolk Southern Corporation;
Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to
the period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in
this annual report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this annual
report;
The registrant’s other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for the registrant and have:
a.
designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual
report is being prepared;
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of
a date within 90 days prior to the filing date of this annual report (the “Evaluation
Date”); and
presented in this annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date;
b.
c.
The registrant’s other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
a.
all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant’s ability to record, process, summarize and report
financial data and have identified for the registrant’s auditors any material
weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal controls; and
b.
The registrant’s other certifying officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.
Date: February 21, 2003
/s/ David R. Goode
David R. Goode
Chairman, President and Chief Executive Officer
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I, Henry C. Wolf, certify that:
1.
2.
3.
4.
5.
6.
I have reviewed this annual report on Form 10-K of Norfolk Southern Corporation;
Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to
the period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in
this annual report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this annual
report;
The registrant’s other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for the registrant and have:
a.
designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual
report is being prepared;
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of
a date within 90 days prior to the filing date of this annual report (the “Evaluation
Date”); and
presented in this annual report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date;
b.
c.
The registrant’s other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
a.
all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant’s ability to record, process, summarize and report
financial data and have identified for the registrant’s auditors any material
weaknesses in internal controls; and
any fraud, whether or not material, that involves management or other employees
who have a significant role in the registrant’s internal controls; and
b.
The registrant’s other certifying officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material weaknesses.
Date: February 21, 2003
/s/ Henry C. Wolf
Henry C. Wolf
Vice Chairman and Chief Financial Officer
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Schedule II
Norfolk Southern Corporation and Subsidiaries
Valuation and Qualifying Accounts
Years Ended December 31, 2000, 2001 and 2002
(In millions of dollars)
Additions charged to:
Beginning
Balance
Expenses
Other
Ending
Accounts Deductions Balance
Year ended December 31, 2000
Valuation allowance (included net in
deferred tax liability) for deferred tax
assets
Casualty and other claims included
in other liabilities
Current portion of casualty and
other claims included in accounts
payable
Year ended December 31, 2001
Valuation allowance (included net in
deferred tax liability) for deferred tax
assets
Casualty and other claims included
in other liabilities
Current portion of casualty and
other claims included in accounts
payable
Year ended December 31, 2002
Valuation allowance (included net in
deferred tax liability) for deferred tax
assets
Casualty and other claims included
in other liabilities
Current portion of casualty and
other claims included in accounts
payable
$
$
$
$
$
$
$
$
$
9 $
3 $
-- $
-- $
12
275 $
117 $
8 (1) $ 138 (2) $
262
181 $
19 $ 221 (1) $ 198 (3) $
223
12 $
6 $
-- $
-- $
18
262 $
110 $
20 (1) $ 127 (2) $
265
223 $
22 $ 142 (1) $ 195 (3) $
192
18 $
6 $
-- $
-- $
24
265 $
119 $
9 (1) $ 139 (2) $
254
192 $
32 $ 124 (1) $ 141 (3) $
207
(1) Includes revenue refunds and overcharges provided through deductions from operating revenues and
transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
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EXHIBIT INDEX
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Electronic
Submission
Exhibit
Number
3(ii)
10(a)
10(k)
10(p)
10(x)
10(z)
10(aa)
Description
The Bylaws of Norfolk Southern Corporation, as amended December 1, 2002.
The Transaction Agreement, dated as of June 10, 1997, by and among CSX, CSX
Transportation, Inc., Registrant, Norfolk Southern Railway Company, Conrail Inc.,
Consolidated Rail Corporation and CRR Holdings LLC, with certain schedules thereto.
Amendment No. 3, dated as of June 1, 2001, and executed in May of 2002, to the Shared
Assets Area Operating Agreement for North Jersey, South Jersey/Philadelphia and Detroit,
dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation,
Inc. and Norfolk Southern Railway Company, with exhibit thereto.
The Norfolk Southern Corporation Long-Term Incentive Plan, as amended effective January
28, 2003.
The Norfolk Southern Corporation Outside Directors’ Deferred Stock Unit Program, as
amended effective January 28, 2003.
The Norfolk Southern Corporation Thoroughbred Stock Option Plan, as amended effective
January 28, 2003.
The Norfolk Southern Safety Incentive Plan for Operating Agreement Employees and For Non-
Operating Agreement Employees, as amended effective October 1, 2002.
10(bb)
The Norfolk Southern Corporation Restricted Stock Unit Plan, effective January 28, 2003.
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Statement re: Computation of Ratio of Earnings to Fixed Charges.
Subsidiaries of Norfolk Southern Corporation.
Consents of Experts -
(a) Consent of KPMG LLP.
(b) Consent of KPMG LLP and Ernst & Young LLP.
(a) Certification of the CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Conrail Inc. 2002 Annual Report to Stockholders.
Exhibits 23(a), 23(b) and 99(a) are included; remaining exhibits are not included in copies assembled for public
dissemination. These exhibits are included in the 2002 Form 10-K posted on our website at www.nscorp.com
under “SEC documents” or you may request copies by writing to:
Office of Corporate Secretary
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Virginia 23510-9219
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