Norfolk Southern System Map
Norfolk Southern Railway and its Railroad
Operating Subsidiaries
NS Trackage/Haulage Rights
Equal Employment Opportunity Policy
Norfolk Southern Corporation’s policy is to comply with all appli-
cable laws, regulations and executive orders concerning equal
employment opportunity and nondiscrimination and to offer
employment on the basis of qualification and performance,
regardless of race, religion, color, national origin, sex, age, sexual
orientation, veteran status, the presence of a disability or any
other legally protected status.
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.
NewOrleansMobileMaconAtlantaRoanokeBuffaloDetroitChicagoFt.WayneCincinnatiMemphisKansasCitySt. LouisCharlotteClevelandChattanoogaBirminghamColumbiaDesMoinesCharlestonSavannahJacksonvilleMiamiMorehead CityNorfolkMeridianPhiladelphia/South JerseyNew York/New JerseyBaltimoreLouisvilleKnoxvilleBrunswickDallasPalatkaRaleighBluefieldGreenvilleDecaturWilmingtonDearbornBinghamtonPittsburghHarrisburgAltoonaIndianapolisAlbanyAyerWatervilleCanadaColumbusToledo
Contents
Chairman’s Letter to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Performance Drives Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Financial Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Five-Year Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
NS Strengthens Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Form 10-K Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .K1
Stockholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .inside back cover
Financial Highlights
($ in millions, except per share amounts)
Financial Results
Railway operating revenues
Income from railway operations1
Railway operating ratio1
Income from continuing operations before accounting changes1 $
Earnings per share from continuing operations before
$
$
accounting changes — diluted1
Financial Position
Total assets
Total debt2
Stockholders’ equity
Debt to total capitalization ratio2
Stockholders’ equity per share
Other Information
Year-end stock price
Dividends per share
Price/earnings ratio at year end
Number of shareholders at year end
Shares outstanding at year end
Number of employees at year end
$
$
$
$
$
$
$
2002
6,270
1,158
81.5%
460
1.18
19,956
7,364
6,500
53.1%
16.71
19.99
0.26
16.9
51,418
388,985,340
28,514
$
$
$
$
$
$
$
$
$
$
20031
6,468
1,064
83.5%
411
1.05
20,596
7,160
6,976
50.7%
17.83
23.65
0.30
17.3
52,091
391,152,863
28,160
% Increase
(Decrease)
3
(8)
2
(11)
(11)
3
(3)
7
(5)
7
18
15
2
1
1
(1)
1 Results in 2003 include the costs of a voluntary separation program and a charge to recognize the impairment of certain telecommunications assets.
The costs of the voluntary separation program reduced income from railway operations by $107 million and increased the railway operating ratio by 1.6
percentage points. These two items reduced income from continuing operations before accounting changes by $119 million or 30 cents per diluted share.
2 Excludes notes payable to Conrail
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Annual Report 2003 1
DEAR FELLOW
SHAREHOLDERS:
In 2003, your company posted significant
improvements in performance not only in the
bottom line, but in overall results, affirming our
formula for creating continued growth and
improvement in stockholder value.
Our formula is based on our belief that if we perform well —
really well — improvements in our business process will drive better
service for our customers. In turn, we are convinced we can sell more
of our enhanced transportation products at better value. At the same
time, improving performance drives a more efficient transportation
system and better productivity.
In short, focusing intently on improving performance allows us
to introduce new products higher up on the logistics value chain and
reduce costs by better managing and utilizing capacity.
Inevitably, execution of that formula makes our returns better,
and that flows to all our constituents — the communities and cus-
tomers we serve, our own people and, of course, our investors. I
believe 2003 shows the formula works and suggests the growth we
can produce if we stay focused and continue the momentum we
have developed.
The year’s hallmark, along with our continued leadership in safe-
ty, was the service improvement shown by Norfolk Southern in a time
when the North American rail transportation system as a whole was
stretched to provide strong service. With full implementation of our
proprietary Thoroughbred Operating Plan — in effect, our scheduled
railroad — we were able to achieve clearly visible improvements
in the consistency and quality of our service. As a result, we were
ready to serve our customers as the economy grew stronger in the sec-
ond half of 2003. We are well equipped for what promises to be a con-
tinuing strong recovery in 2004.
We were able to respond to early challenges from harsh weather and
slow economic conditions and hit the strong third and fourth quarters
with good service and improving effi-
ciency. That is due to the great response
of our people to the diagnostic operating
tools our technology has produced and
our relentless search for improvement.
The commitment of Norfolk South-
ern people to provide the highest
levels of service is central to all we
do. Norfolk Southern long has been
the industry leader in safety. Our
intent is to continue as an industry
benchmark in safety and apply the
same level of commitment to service
so we can assume transportation
leadership in both.
I believe our strong revenue
growth and our improvement in mar-
gins over time are directly attributable
to making our products more attractive
and more valuable while improving our
efficiency and costs through better per-
formance. Norfolk Southern’s improv-
ing results are proof of the strategy. Now,
we have to perform at world-class levels
to produce the results our customers
and investors deserve. We showed in ’03
that we’ve just begun to roll.
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Annual Report 2003
For the past couple of years in this
letter, I have said we would accomplish
several specific objectives. Let’s take a
quick look at how we did in 2003.
n Improve service: Measuring more
aspects of the transportation cycle
means we can hone in on specific
service issues. Metrics improved,
and consistency improved even
more. Customers noticed, and you
can read on Page 7 a list of some of
the service awards Norfolk South-
ern received during the year.
n Improve productivity: Process
analysis of work functions and our
ongoing Six Sigma initiatives
produced better asset utilization
and work force productivity
during 2003.
n Grow revenue: Despite a particu-
larly challenging economic envi-
ronment in the first half, annual
revenue
increased more than
3 percent overall and set a record.
This was primarily the result of
service improvements, value-based
pricing and highway-to-rail traffic
conversions. Importantly, the increas-
es were seen in all our major busi-
ness lines.
n Generate cash flow, pay down
debt: We achieved more than
$400 million of debt reduction dur-
ing the year and redeemed $43 mil-
lion of preferred stock. Our credit
ratings continue to be among the
top of the industry.
n Earn fair returns: Earnings per
share grew 16 percent. We
increased our dividend for the
second consecutive year.
n Improve governance: We contin-
ued our tradition of strong ethics
and governance for the company
by working proactively to make
sure our standards remain at the
very top. I refer you to Page 16 for a
list of actions taken.
What does this mean for tomor-
row? We’ll take the experience and wis-
dom gained over the last few years and
make them pay off. Our people have
worked hard to restore Norfolk South-
ern to the efficient and highly produc-
tive organization our customers and
shareholders deserve. A lot of progress
has been made, with more to come. We
clearly are ready to grow now that the
economy is improving and demand for
our transportation is increasing.
We’ll grow revenues — both in val-
ues and increasingly by emphasizing
our high-end transportation products.
We’ll continue to improve productivity.
The reductions in staffing and over-
h e a d s a c h i e v e d i n ’ 0 3 a n d t h e
improvements of technology will be
fully felt in ’04. We have taken con-
structive actions to control med-
ical cost
increases and other
administrative costs. Meanwhile,
we will maintain our world-class per-
formance as a safe operation.
We’ll push even harder to help
policymakers understand, as our trans-
portation partners and shippers already
do, that it pays to use rail whenever
possible. Rail is better for the environ-
ment. It reduces road congestion,
thereby enhancing mobility. It is more
economical and efficient.
We’ll continue to improve on our
balance sheet. We’ll pay off debt and use
our assets even more effectively. We’ll
generate cash flow to continue our capi-
tal investment program and enhance
returns to our shareholders.
Norfolk Southern will make
improvements and changes in perform-
ance. We will, however, do that in the
continuing environment of sound cor-
porate governance, strong ethical com-
mitment and safety, which have been
hallmarks of our company and culture.
We’re making improvements in our
structure and governance practices.
Norfolk Southern will continue its tradi-
tion of absolute devotion to honesty,
high ethics and clear financial reporting.
The rail transportation industry is
showing stability and strength, I believe
the best in many years. It has enormous
potential to grow and be an even greater
piece of the fabric that makes our
economy strong.
We at Norfolk Southern have shown
willingness and an ability to make the
necessary commitment to growth, in the
conviction that we can both serve and
benefit by that commitment. Now, we
see the value of our capacity and the
investments we have made.
We have been tested by our own
expansion and by an economy that failed
to expand at the pace we had counted on.
Now, however, we are seeing much
greater demand for our services. This
comes at an ideal time, because we have a
system second to none and a lean, tested
and experienced group of Norfolk South-
ern people ready to serve our customers.
This combination of factors has
every prospect of enabling our success,
as long as we perform at the levels we
know we can. That’s why we put the
word “performance” on the cover of this
report. We’ll constantly remind our-
selves of our obligation to our owners,
customers and communities to perform
b e tt e r a n d b e tt e r. I h av e e v e r y
confidence the Thoroughbred will con-
tinue to respond.
g
January 27, 2004
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Annual Report 2003 3
PERFORMANCE DRIVES
GROWTH
Norfolk Southern achieved higher levels of per-
formance throughout the organization in 2003.
Refinements to the operating plan and new
performance measurement tools helped the company
produce more consistent and reliable transportation
service and provide higher value to customers.
Asset and work force productivity were enhanced
through the development of more cost-effective ways
of doing business.
The collective efforts of many initiatives paid off in
revenue growth and better returns for shareholders.
NS strengthened its network for supporting new business
growth anticipated as a result of improved service and a more
robust economy.
NS received its 14th consecutive E.H. Harriman Gold
Medal Award, continuing its leadership in employee safety
among the nation’s largest railroads.
The company continued its support of employee
reservists called up for active duty in the armed forces.
Beginning with the activation of reservists for Operation
Enduring Freedom in 2001, NS has offered enhanced benefits
designed to help employees and their families during the
deployments. The leave benefits include a monthly income
supplement and continued health care and life insurance
coverage.
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Annual Report 2003
Net Income,
Earnings per Share
Increase
n NS posted revenues $198 million
higher than in 2002.
n Net income increased by $75 mil-
lion or 16 percent.
n Earnings per share increased
by 16 percent.
n For the second consecutive year,
N S i n c re a s e d t h e q u a r t e rly
dividend on its common stock,
from 7 cents to 8 cents in July.
n Cash provided by operating activ-
ities increased by $251 million
more than in 2002.
n NS has reduced long-term debt by
$693 million since the beginning
of 2001. NS’ share of Conrail’s
long-term debt has declined
$103 million. The total three-year
reduction in debt obligations is
$796 million.
n NS credit ratings are among the
best in the industry, reflecting the
company’s emphasis on solid
financial performance.
n NS’ fuel hedging program in 2003
consumption hedged at an average
lowered the company’s aver-
price of 78 cents per gallon.
age price per gallon of fuel. Favor-
As part of an effort to address
able hedge settlements reduced
costs, the company initiated a volun-
expenses by $59 million for the
tary separation program for nonunion
year. Hedging helps to reduce the
employees. In total, 553 employees
volatility in the price of diesel fuel
were approved for separation, of
and protects the company and
which 314 also were eligible to retire
investors from the impact of errat-
under the company’s retirement plan.
ic price swings in the fuel market.
NS recorded a $66 million after-tax
At year-end 2003, NS had 63 per-
charge against fourth-quarter earn-
cent of projected 2004 fuel
ings related to the program.
1 2003 results include $107 million of costs related to a voluntary separation program and an $84 million charge
to recognize the impaired value of certain telecommunications assets. Together, these items reduced income
from continuing operations before accounting changes by $119 million, or 30 cents per diluted share.
Systems Refine
Operations,
Improve Service
New and enhanced tools added to
the company’s abilities to measure
service performance and to make
quick adjustments to network opera-
tions when necessary. Field personnel
were equipped with improved real-
time information, helping them to
make informed decisions about serv-
ice and to master performance of their
own operations.
The company’s Thoroughbred
Operating Plan, the foundation for NS’
transportation network, drove greater
consistency for merchandise traffic
movements. NS’ Coal Transportation
Management System — a commodity
transportation management system
that now includes grain traffic informa-
tion — and the Strategic Intermodal
Management System also provided sup-
port for improved network operations.
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Annual Report 2003 5
200320022001 $6,170 $6,270 $6,468Railway OperatingRevenues ($ millions)200320022001 $362 $460 $530 $119 $411Income from Continuing Operations before Accounting Changes ($ millions)200320022001 $5,163 $5,112 $5,404Railway OperatingExpenses ($ millions)200320022001 $0.94 $1.18 $1.35Diluted Earnings perShare from Continuing Operations before Accounting Changes (dollars)200320022001 $674 $692 $699Metals and Construction Revenue ($ millions)200320022001 $1,123 $1,181 $1,239Intermodal Revenue ($ millions)200320022001 $1,521 $1,441 $1,500Coal Revenue($ millions)Cash Provided by OperatingActivities ($ millions)200320022001 $654 $803 $1,054Revenue Ton-Milesper Employee200320022001 5,972 6,262 6,456Revenue Ton-Milesper Gallon of Diesel Fuel200320022001381379388Number of Employeesat Year End200320022001 29,828 28,51428,160Total Intermodal Volume(millions of units)2003200220012,2142,354 2,467FourthQuarterThirdQuarterSecondQuarter 6568 74Equipment Rents ($ millions)200320022001 $433 $371$345200320022001 $.24 $.26 $.30Dividends per SharePaid (dollars)200320022001 $617 $637 $688Agriculture, Consumer Products andGovernment Revenue ($ millions)200320022001 $612 $603 $634Paper, Clay and ForestProducts Revenue ($ millions)200320022001 $738 $755 $772Chemicals Revenue($ millions)FourthQuarterThirdQuarterSecondQuarter200320022001 $885 $961 $936Automotive Revenue ($ millions)On-Time TrainPerformance (percent)200320022001 71.8 83.684.3 77.1 76.975.7Switching Performance2003* (percent)Connection Performance2003* (percent)200320022001 $7,632 $7,364 $7,160Long-term Debt*($ millions)* Excludes notes payable to ConrailDebt to Total CapitalizationRatio* (percent)200320022001 55.6 53.150.7* Excludes notes payable to Conrail111 $0.30 $1.05200320022001 $1,007 $1,158 $1,171 $107$1,064Income from RailwayOperations ($ millions)200320022001 83.781.5 83.5Railway OperatingRatio (percent) 81.9 $5,297 1.6 $10711200320022001 $6,170 $6,270 $6,468Railway OperatingRevenues ($ millions)200320022001 $362 $460 $530 $119 $411Income from Continuing Operations before Accounting Changes ($ millions)200320022001 $5,163 $5,112 $5,404Railway OperatingExpenses ($ millions)200320022001 $0.94 $1.18 $1.35Diluted Earnings perShare from Continuing Operations before Accounting Changes (dollars)200320022001 $674 $692 $699Metals and Construction Revenue ($ millions)200320022001 $1,123 $1,181 $1,239Intermodal Revenue ($ millions)200320022001 $1,521 $1,441 $1,500Coal Revenue($ millions)Cash Provided by OperatingActivities ($ millions)200320022001 $654 $803 $1,054Revenue Ton-Milesper Employee200320022001 5,972 6,262 6,456Revenue Ton-Milesper Gallon of Diesel Fuel200320022001381379388Number of Employeesat Year End200320022001 29,828 28,51428,160Total Intermodal Volume(millions of units)2003200220012,2142,354 2,467FourthQuarterThirdQuarterSecondQuarter 6568 74Equipment Rents ($ millions)200320022001 $433 $371$345200320022001 $.24 $.26 $.30Dividends per SharePaid (dollars)200320022001 $617 $637 $688Agriculture, Consumer Products andGovernment Revenue ($ millions)200320022001 $612 $603 $634Paper, Clay and ForestProducts Revenue ($ millions)200320022001 $738 $755 $772Chemicals Revenue($ millions)FourthQuarterThirdQuarterSecondQuarter200320022001 $885 $961 $936Automotive Revenue ($ millions)On-Time TrainPerformance (percent)200320022001 71.8 83.684.3 77.1 76.975.7Switching Performance2003* (percent)Connection Performance2003* (percent)200320022001 $7,632 $7,364 $7,160Long-term Debt*($ millions)* Excludes notes payable to ConrailDebt to Total CapitalizationRatio* (percent)200320022001 55.6 53.150.7* Excludes notes payable to Conrail111 $0.30 $1.05200320022001 $1,007 $1,158 $1,171 $107$1,064Income from RailwayOperations ($ millions)200320022001 83.781.5 83.5Railway OperatingRatio (percent) 81.9 $5,297 1.6 $10711200320022001 $6,170 $6,270 $6,468Railway OperatingRevenues ($ millions)200320022001 $362 $460 $530 $119 $411Income from Continuing Operations before Accounting Changes ($ millions)200320022001 $5,163 $5,112 $5,404Railway OperatingExpenses ($ millions)200320022001 $0.94 $1.18 $1.35Diluted Earnings perShare from Continuing Operations before Accounting Changes (dollars)200320022001 $674 $692 $699Metals and Construction Revenue ($ millions)200320022001 $1,123 $1,181 $1,239Intermodal Revenue ($ millions)200320022001 $1,521 $1,441 $1,500Coal Revenue($ millions)Cash Provided by OperatingActivities ($ millions)200320022001 $654 $803 $1,054Revenue Ton-Milesper Employee200320022001 5,972 6,262 6,456Revenue Ton-Milesper Gallon of Diesel Fuel200320022001381379388Number of Employeesat Year End200320022001 29,828 28,51428,160Total Intermodal Volume(millions of units)2003200220012,2142,354 2,467FourthQuarterThirdQuarterSecondQuarter 6568 74Equipment Rents ($ millions)200320022001 $433 $371$345200320022001 $.24 $.26 $.30Dividends per SharePaid (dollars)200320022001 $617 $637 $688Agriculture, Consumer Products andGovernment Revenue ($ millions)200320022001 $612 $603 $634Paper, Clay and ForestProducts Revenue ($ millions)200320022001 $738 $755 $772Chemicals Revenue($ millions)FourthQuarterThirdQuarterSecondQuarter200320022001 $885 $961 $936Automotive Revenue ($ millions)On-Time TrainPerformance (percent)200320022001 71.8 83.684.3 77.1 76.975.7Switching Performance2003* (percent)Connection Performance2003* (percent)200320022001 $7,632 $7,364 $7,160Long-term Debt*($ millions)* Excludes notes payable to ConrailDebt to Total CapitalizationRatio* (percent)200320022001 55.6 53.150.7* Excludes notes payable to Conrail111 $0.30 $1.05200320022001 $1,007 $1,158 $1,171 $107$1,064Income from RailwayOperations ($ millions)200320022001 83.781.5 83.5Railway OperatingRatio (percent) 81.9 $5,297 1.6 $10711
Further driving productivity and
the system was introduced, to 74
efficiency, NS continued use of remote
control locomotive technology in
percent in the fourth quarter.
n Running the trains from origin
switching operations.
to destination is measured best by
Rail freight transportation essen-
on-time performance. Running
tially comprises three operations: cus-
trains according to the operating
tomer pickup and delivery, running
schedule results in dependable,
the trains, and making the right con-
consistent customer service. NS is
nections at intermediate yards
implementing a set of tools in its
between origin and destination.
Operating Plan Adherence system
NS rolled out new systems in the sec-
to help manage compliance with
ond quarter of 2003 that enhance the
the Thoroughbred Operating Plan
measurement and management of
for individual shipments moving
these components in detail. The sys-
over the road from origination to
tems pinpoint performance on a car-
destination yards. Th e tools
l e v e l b a si s , h e l p i n g t o i m p r o v e
measure actual versus scheduled
consistency and reliability of service
times of arrival and permit better
for customers.
n Customer pickup and delivery
analysis of system operations.
Overall on-time train perform-
is a function of moving a rail car
ance improved to 84.3 percent in
between a customer’s facility and
2003.
a local yard at origin and destina-
n Making the right connections is
tion. NS created a system called
essential for efficient, on-time
Local Operating Plan Adherence
transportation operations. The
to help manage this transportation
Operating Plan Adherence tools
segment. The system measures the
provide for measurements of
amount of local switching work
train blocking and terminal con-
actually performed against the
nections. The measurement data
work scheduled in a 24-hour peri-
are supported by NS’ Thoroughbred
od. Field personnel can drill down
Yard Enterprise System, newly
to
identify service
issues by
enhanced as a real-time railroad
region, division, terminal, serv-
management tool. TYES now
ing yard, customer or industry
highlights cars that must make a
route. NS’ local switching per-
connection on the next train, cars
formance improved from 65 per-
in jeopardy of missing connec-
cent in the second quarter, when
tions, and cars running late.
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* Measurement began in second quarter.
6
Annual Report 2003
200320022001 $6,170 $6,270 $6,468Railway OperatingRevenues ($ millions)200320022001 $362 $460 $530 $119 $411Income from Continuing Operations before Accounting Changes ($ millions)200320022001 $5,163 $5,112 $5,404Railway OperatingExpenses ($ millions)200320022001 $0.94 $1.18 $1.35Diluted Earnings perShare from Continuing Operations before Accounting Changes (dollars)200320022001 $674 $692 $699Metals and Construction Revenue ($ millions)200320022001 $1,123 $1,181 $1,239Intermodal Revenue ($ millions)200320022001 $1,521 $1,441 $1,500Coal Revenue($ millions)Cash Provided by OperatingActivities ($ millions)200320022001 $654 $803 $1,054Revenue Ton-Milesper Employee200320022001 5,972 6,262 6,456Revenue Ton-Milesper Gallon of Diesel Fuel200320022001381379388Number of Employeesat Year End200320022001 29,828 28,51428,160Total Intermodal Volume(millions of units)2003200220012,2142,354 2,467FourthQuarterThirdQuarterSecondQuarter 6568 74Equipment Rents ($ millions)200320022001 $433 $371$345200320022001 $.24 $.26 $.30Dividends per SharePaid (dollars)200320022001 $617 $637 $688Agriculture, Consumer Products andGovernment Revenue ($ millions)200320022001 $612 $603 $634Paper, Clay and ForestProducts Revenue ($ millions)200320022001 $738 $755 $772Chemicals Revenue($ millions)FourthQuarterThirdQuarterSecondQuarter200320022001 $885 $961 $936Automotive Revenue ($ millions)On-Time TrainPerformance (percent)200320022001 71.8 83.684.3 77.1 76.975.7Switching Performance2003* (percent)Connection Performance2003* (percent)200320022001 $7,632 $7,364 $7,160Long-term Debt*($ millions)* Excludes notes payable to ConrailDebt to Total CapitalizationRatio* (percent)200320022001 55.6 53.150.7* Excludes notes payable to Conrail111 $0.30 $1.05200320022001 $1,007 $1,158 $1,171 $107$1,064Income from RailwayOperations ($ millions)200320022001 83.781.5 83.5Railway OperatingRatio (percent) 81.9 $5,297 1.6 $10711
Blocking plans and car trip plans
n Freight car utilization improved
n Schneider National presented its
are compared to actual results to
2 percent.
Partners in Quality Award to NS
ensure that the right cars are in
n Locomotive use efficiency increased
for achievements in service, inno-
the right blocks on the right
2 percent.
trains. Operating Plan Adherence
began at 11 rail yards in the sec-
ond quarter and was integrated at
more than 70 yards in the fourth
quarter. In that time, total con-
nection performance held steady
around 75 percent, with major
e m p h a si s f o r i m p r o v e m e n t
focused in 2004.
In addition to the benefits in
operational efficiency and customer
service, these new and enhanced sys-
tems and other efforts in 2003 also led
to improvements in asset utilization.
n Locomotive fuel consumption
was reduced by three-fourths of a
gallon per carload, saving more
than 5 million gallons.
n Better asset utilization led to a
reduction of more than 5,000
freight cars from the fleet.
NS Earns
Service Stars
Gains in operating efficiency
mean better service. NS achieved a
record number of consecutive days
without a service failure for customer
United Parcel Service, including a per-
fect fall peak season. The error-free
service streak exceeded 100 days, con-
tinuing into 2004.
vation, continuous improvement
and ease of doing business.
n Eaglebrook Inc. named NS Carri-
er of the Year.
n Hershey Corp. presented its
Galaxy Award to local NS crews
serving Hershey facilities.
n The American Chemistry Coun-
c i l re c o g n i z e d N S w i t h i t s
National Achievement Award for
outstanding support of TRANS-
CAER, a chemical safety aware-
Here are some customer service
ness program.
awards NS received during 2003.
n Coors Brewing Company named
NS Transportation Supplier of
the Year.
n Logistics Management magazine
cited Triple Crown Services Com-
pany, an NS affiliate, as Best Inter-
modal Service Provider for the
n Toyota presented NS two Logis-
third consecutive year.
tics Excellence Awards for on-
time performance and quality
performance.
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Annual Report 2003 7
200320022001 $6,170 $6,270 $6,468Railway OperatingRevenues ($ millions)200320022001 $362 $460 $530 $119 $411Income from Continuing Operations before Accounting Changes ($ millions)200320022001 $5,163 $5,112 $5,404Railway OperatingExpenses ($ millions)200320022001 $0.94 $1.18 $1.35Diluted Earnings perShare from Continuing Operations before Accounting Changes (dollars)200320022001 $674 $692 $699Metals and Construction Revenue ($ millions)200320022001 $1,123 $1,181 $1,239Intermodal Revenue ($ millions)200320022001 $1,521 $1,441 $1,500Coal Revenue($ millions)Cash Provided by OperatingActivities ($ millions)200320022001 $654 $803 $1,054Revenue Ton-Milesper Employee200320022001 5,972 6,262 6,456Revenue Ton-Milesper Gallon of Diesel Fuel200320022001381379388Number of Employeesat Year End200320022001 29,828 28,51428,160Total Intermodal Volume(millions of units)2003200220012,2142,354 2,467FourthQuarterThirdQuarterSecondQuarter 6568 74Equipment Rents ($ millions)200320022001 $433 $371$345200320022001 $.24 $.26 $.30Dividends per SharePaid (dollars)200320022001 $617 $637 $688Agriculture, Consumer Products andGovernment Revenue ($ millions)200320022001 $612 $603 $634Paper, Clay and ForestProducts Revenue ($ millions)200320022001 $738 $755 $772Chemicals Revenue($ millions)FourthQuarterThirdQuarterSecondQuarter200320022001 $885 $961 $936Automotive Revenue ($ millions)On-Time TrainPerformance (percent)200320022001 71.8 83.684.3 77.1 76.975.7Switching Performance2003* (percent)Connection Performance2003* (percent)200320022001 $7,632 $7,364 $7,160Long-term Debt*($ millions)* Excludes notes payable to ConrailDebt to Total CapitalizationRatio* (percent)200320022001 55.6 53.150.7* Excludes notes payable to Conrail111 $0.30 $1.05200320022001 $1,007 $1,158 $1,171 $107$1,064Income from RailwayOperations ($ millions)200320022001 83.781.5 83.5Railway OperatingRatio (percent) 81.9 $5,297 1.6 $10711
Revenue, Carloads
Increase
The payoff for improvements in
operating performance and service is
better business results. Overall for
2003, revenue increased $198 mil-
lion on 2 percent more carloads
than in 2002. Service improve-
ments and marketing efforts led
to significant conversion of b o t h
intermodal and merchandise traffic
from the highways to the rails.
Value-based pricing contributed to a
1 percent increase in average revenue
per unit.
n NS opened its first local guaran-
teed service lane between Chica-
go and the Northeast.
n Interline guaranteed service lanes
were increased from nine to 15.
n International traffic grew by
9 percent.
Agriculture, Paper
Lead Merchandise
Growth
n Overall, merchandise revenues
increased by 2 percent in 2003,
and carloads increased by 1 per-
cent. Revenue per car increased
NS’ industrial development activ-
by 1 percent.
ity resulted in the location of 69 new
industries and expansion of another 20
in 2003. This represents investment of
$1.5 billion by NS customers and cre-
ates an estimated 7,200 jobs in 17
states. NS expects this activity eventu-
ally to generate more than 85,000 car-
loads annually.
Intermodal Sets
Volume Record
n Intermodal traffic grew 5 percent
to a record volume. Revenue
increased by 5 percent over 2002.
n The truckload segment led the
growth with a 14 percent increase,
more than half of which was high-
way-to-rail conversions.
n Agriculture, Consumer Prod-
ucts and Government posted an
8 percent revenue growth on a
7 percent increase in carloads.
Revenue and carloads both were
record highs. Corn shipments set
a volume record, resulting in an
8 percent
revenue
increase.
Reopening of a PCS facility at
Occidental, Fla., brought back
phosphate shipments, generating
an increase of 11 percent in
fertilizer revenue. Shipments of
military equipment
increased
by 36 percent.
n Paper, Clay and Forest Products
revenue was up by 5 percent, and
carloads increased by 1 percent.
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Annual Report 2003
200320022001 $6,170 $6,270 $6,468Railway OperatingRevenues ($ millions)200320022001 $362 $460 $530 $119 $411Income from Continuing Operations before Accounting Changes ($ millions)200320022001 $5,163 $5,112 $5,404Railway OperatingExpenses ($ millions)200320022001 $0.94 $1.18 $1.35Diluted Earnings perShare from Continuing Operations before Accounting Changes (dollars)200320022001 $674 $692 $699Metals and Construction Revenue ($ millions)200320022001 $1,123 $1,181 $1,239Intermodal Revenue ($ millions)200320022001 $1,521 $1,441 $1,500Coal Revenue($ millions)Cash Provided by OperatingActivities ($ millions)200320022001 $654 $803 $1,054Revenue Ton-Milesper Employee200320022001 5,972 6,262 6,456Revenue Ton-Milesper Gallon of Diesel Fuel200320022001381379388Number of Employeesat Year End200320022001 29,828 28,51428,160Total Intermodal Volume(millions of units)2003200220012,2142,354 2,467FourthQuarterThirdQuarterSecondQuarter 6568 74Equipment Rents ($ millions)200320022001 $433 $371$345200320022001 $.24 $.26 $.30Dividends per SharePaid (dollars)200320022001 $617 $637 $688Agriculture, Consumer Products andGovernment Revenue ($ millions)200320022001 $612 $603 $634Paper, Clay and ForestProducts Revenue ($ millions)200320022001 $738 $755 $772Chemicals Revenue($ millions)FourthQuarterThirdQuarterSecondQuarter200320022001 $885 $961 $936Automotive Revenue ($ millions)On-Time TrainPerformance (percent)200320022001 71.8 83.684.3 77.1 76.975.7Switching Performance2003* (percent)Connection Performance2003* (percent)200320022001 $7,632 $7,364 $7,160Long-term Debt*($ millions)* Excludes notes payable to ConrailDebt to Total CapitalizationRatio* (percent)200320022001 55.6 53.150.7* Excludes notes payable to Conrail111 $0.30 $1.05200320022001 $1,007 $1,158 $1,171 $107$1,064Income from RailwayOperations ($ millions)200320022001 83.781.5 83.5Railway OperatingRatio (percent) 81.9 $5,297 1.6 $10711
Pulpboard, woodchips and print-
increased industrial chemical vol-
generating
faster
load-to-load
ing paper markets benefited
ume contributed to 2003 results.
cycles, which improves customer
from improved paper market
Plastics carloads increased by 2
service and reduces investment in
conditions and motor carrier
percent for the year.
hopper cars.
conversions. Partnerships with
n Metals and Construction
n Export coal through NS’ Lamberts
other carriers enabled NS to
extend storage, rail and truck
delivery services for paper, lum-
ber and other wood products.
n Automotive revenue and car-
revenue was up 1 percent on
Point transload facility at Norfolk
1 percent fewer carloads. Sheet
was up by about 2 million tons.
steel revenue was up by 3 percent,
Increased demand from Europe
scrap metal revenue increased
developed during the year and
by 11 percent, and cement revenue
loads decreased by 3 percent due
was up by 6 percent. A new Steel-
principally to reduced vehicle
net distribution facility expanded
production and numerous model
market reach. Highway conver-
changeovers at NS-served plants.
sions helped offset lower volumes
During 2003, NS began direct rail
in import slab steel.
service to a new Honda plant at
Lincoln, Ala. NS teamed with
Union Pacific to create the de Mex
AutoFlyer, which reduced transit
schedules by two days for auto
parts shipments from the Mid-
west to Mexico.
n Chemicals revenue
increased
by 2 percent on 1 percent more car-
loads. Motor carrier diversions,
higher plastics shipments and
NS Cycles
Coal Faster
n Overall, coal revenue increased
by 4 percent in 2003 on slightly
more carloads.
n A new Coal Transportation Man-
agement System improved trip and
car planning. The system allows NS
to move loads and empties quicker,
continued in first-quarter 2004.
n Utility shipments increased in the
North and decreased in the South,
where reduced electricity genera-
tion was a result of mild weather
and installation of clean coal
technology devices.
n Industrial coal traffic was flat
with 2002 levels, while the domes-
tic metallurgical coal market was
down due to a decline in integrat-
ed steel production.
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Annual Report 2003 9
200320022001 $6,170 $6,270 $6,468Railway OperatingRevenues ($ millions)200320022001 $362 $460 $530 $119 $411Income from Continuing Operations before Accounting Changes ($ millions)200320022001 $5,163 $5,112 $5,404Railway OperatingExpenses ($ millions)200320022001 $0.94 $1.18 $1.35Diluted Earnings perShare from Continuing Operations before Accounting Changes (dollars)200320022001 $674 $692 $699Metals and Construction Revenue ($ millions)200320022001 $1,123 $1,181 $1,239Intermodal Revenue ($ millions)200320022001 $1,521 $1,441 $1,500Coal Revenue($ millions)Cash Provided by OperatingActivities ($ millions)200320022001 $654 $803 $1,054Revenue Ton-Milesper Employee200320022001 5,972 6,262 6,456Revenue Ton-Milesper Gallon of Diesel Fuel200320022001381379388Number of Employeesat Year End200320022001 29,828 28,51428,160Total Intermodal Volume(millions of units)2003200220012,2142,354 2,467FourthQuarterThirdQuarterSecondQuarter 6568 74Equipment Rents ($ millions)200320022001 $433 $371$345200320022001 $.24 $.26 $.30Dividends per SharePaid (dollars)200320022001 $617 $637 $688Agriculture, Consumer Products andGovernment Revenue ($ millions)200320022001 $612 $603 $634Paper, Clay and ForestProducts Revenue ($ millions)200320022001 $738 $755 $772Chemicals Revenue($ millions)FourthQuarterThirdQuarterSecondQuarter200320022001 $885 $961 $936Automotive Revenue ($ millions)On-Time TrainPerformance (percent)200320022001 71.8 83.684.3 77.1 76.975.7Switching Performance2003* (percent)Connection Performance2003* (percent)200320022001 $7,632 $7,364 $7,160Long-term Debt*($ millions)* Excludes notes payable to ConrailDebt to Total CapitalizationRatio* (percent)200320022001 55.6 53.150.7* Excludes notes payable to Conrail111 $0.30 $1.05200320022001 $1,007 $1,158 $1,171 $107$1,064Income from RailwayOperations ($ millions)200320022001 83.781.5 83.5Railway OperatingRatio (percent) 81.9 $5,297 1.6 $10711
1 2003 operating expenses include $107 million of costs related to a voluntary separation program, which reduced income from railway operations by $107 million and
increased the railway operating ratio by 1.6 percentage points.
Financial Overview
Net income was $535 million, or
Absent all of these items, net
cost of the voluntary separation pro-
$1.37 per diluted share, in 2003. These
income would have been $530 million,
gram, and higher diesel fuel prices.
results include the following:
n the cumulative effect of required
or $1.35 per share, up $70 million or
Income from railway operations
15 percent.
was $1.1 billion, down $94 million or
changes in accounting principles,
Railway operating revenues were
8 percent, reflecting the costs of the
which increased net income by
$6.5 billion in 2003, up $198 million or
voluntary separation program.
$114 million, or 29 cents per
3 percent compared with 2002, a result
The railway operating ratio was
share;
of increases in traffic volume and aver-
83.5 percent in 2003, two percentage
n the costs of a voluntary separa-
age revenue per carload. General mer-
points above the 81.5 percent of 2002.
tion program, which reduced net
income by $66 million, or 17 cents
per share;
chandise revenues rose $81 million or
The cost of the voluntary separation
2 percent, coal revenues increased
program added 1.6 percentage points
$59 million or 4 percent, and inter-
to the ratio for 2003.
n the impairment of certain telecom-
modal revenues were up $58 million or
munications assets, which lowered
net income by $53 million, or
13 cents per share; and
n a discontinued operations gain of
$10 million, or 3 cents per share,
related to the 1998 sale of a motor
carrier subsidiary.
5 percent.
Railway operating expenses were
$5.4 billion, up $292 million or 6 per-
cent, while traffic volume was up
2 percent. The expense
increase
reflected higher compensation and
benefits, including the $107 million
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Annual Report 2003
200320022001 $6,170 $6,270 $6,468Railway OperatingRevenues ($ millions)200320022001 $362 $460 $530 $119 $411Income from Continuing Operations before Accounting Changes ($ millions)200320022001 $5,163 $5,112 $5,404Railway OperatingExpenses ($ millions)200320022001 $0.94 $1.18 $1.35Diluted Earnings perShare from Continuing Operations before Accounting Changes (dollars)200320022001 $674 $692 $699Metals and Construction Revenue ($ millions)200320022001 $1,123 $1,181 $1,239Intermodal Revenue ($ millions)200320022001 $1,521 $1,441 $1,500Coal Revenue($ millions)Cash Provided by OperatingActivities ($ millions)200320022001 $654 $803 $1,054Revenue Ton-Milesper Employee200320022001 5,972 6,262 6,456Revenue Ton-Milesper Gallon of Diesel Fuel200320022001381379388Number of Employeesat Year End200320022001 29,828 28,51428,160Total Intermodal Volume(millions of units)2003200220012,2142,354 2,467FourthQuarterThirdQuarterSecondQuarter 6568 74Equipment Rents ($ millions)200320022001 $433 $371$345200320022001 $.24 $.26 $.30Dividends per SharePaid (dollars)200320022001 $617 $637 $688Agriculture, Consumer Products andGovernment Revenue ($ millions)200320022001 $612 $603 $634Paper, Clay and ForestProducts Revenue ($ millions)200320022001 $738 $755 $772Chemicals Revenue($ millions)FourthQuarterThirdQuarterSecondQuarter200320022001 $885 $961 $936Automotive Revenue ($ millions)On-Time TrainPerformance (percent)200320022001 71.8 83.684.3 77.1 76.975.7Switching Performance2003* (percent)Connection Performance2003* (percent)200320022001 $7,632 $7,364 $7,160Long-term Debt*($ millions)* Excludes notes payable to ConrailDebt to Total CapitalizationRatio* (percent)200320022001 55.6 53.150.7* Excludes notes payable to Conrail111 $0.30 $1.05200320022001 $1,007 $1,158 $1,171 $107$1,064Income from RailwayOperations ($ millions)200320022001 83.781.5 83.5Railway OperatingRatio (percent) 81.9 $5,297 1.6 $10711
Five-Year Financial Review
Norfolk Southern Corporation and Subsidiaries
($ in millions, except per-share amounts)
20031
2002
2001
20005
19996
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 and accounting changes
Provision for income taxes
Income from continuing operations before
accounting changes
Discontinued operations2
Cumulative effect of changes in accounting
principles, net of taxes3
Net income
Per share data
Income from continuing operations before
accounting changes — basic and diluted
Net income — basic and diluted
Dividends
Stockholders’ equity at year end
Financial position
Total assets
Total long-term debt, including current maturities4
Stockholders’ equity
Other
Capital expenditures
Average number of shares outstanding (thousands)
Number of stockholders at year end
Average number of employees
Notes
$
6,468
5,404
1,064
6,270
5,112
1,158
$
6,170
5,163
1,007
$
6,159
5,526
633
$
5,242
4,524
718
19
497
586
175
411
10
114
535
1.05
1.37
0.30
17.83
20,596
7,160
6,976
720
389,788
52,091
28,753
$
$
$
$
$
$
$
$
$
66
518
706
246
460
—
—
460
1.18
1.18
0.26
16.71
19,956
7,364
6,500
695
388,213
51,418
28,970
$
$
$
$
$
$
$
$
99
553
553
191
362
13
—
375
0.94
0.97
0.24
15.78
19,418
7,632
6,090
746
385,158
53,042
30,894
$
$
$
$
$
$
$
$
$
168
551
250
78
172
—
—
172
0.45
0.45
0.80
15.16
18,976
7,636
5,824
731
383,358
53,194
33,738
$
$
$
$
$
$
$
$
$
164
531
351
112
239
—
—
239
0.63
0.63
0.80
15.50
19,250
8,059
5,932
912
380,606
51,123
31,166
$
$
$
$
$
$
$
$
$
1 2003 operating expenses include a $107 million charge for a voluntary separation program. Other income — net includes an $84 million charge to recognize the impaired
value of certain telecommunications assets. These charges reduced net income by $119 million, or 30 cents per diluted share.
2 In 1998, NS sold all the common stock of its motor carrier subsidiary, North American Van Lines, Inc. (NAVL), for $207 million and recorded a $90 million pretax ($105 mil-
lion, or 28 cents per diluted share, after-tax) gain. 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. Results in 2003 include an additional after-tax gain of $10 million, or 3 cents per diluted
share, resulting from the resolution of tax issues related to the transaction.
3 Net income in 2003 reflects two accounting changes, the cumulative effect of which increased net income by $114 million or 29 cents per diluted share: a change in
accounting for the cost to remove railroad crossties, which increased net income by $110 million; and a change in accounting related to a special-purpose entity that
leases certain locomotives to NS, which increased net income by $4 million. This entity’s assets and liabilities, principally the locomotives and debt related to their pur-
chase, are now reflected in NS’ Consolidated Balance Sheet.
4 Excludes notes payable to Conrail of $716 million in 2003, $513 million in 2002, $301 million in 2001, $51 million in 2000 and $123 million in 1999.
5 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.
6 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.
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Annual Report 2003 11
Income Statement
Railway operating revenues
$
6,468
$
6,270
$
6,170
Years ended December 31,
2003
2002
2001
($ in millions, except earnings per share)
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
Income from continuing operations before income
taxes and accounting changes
Provision for income taxes
Income from continuing operations before
accounting changes
Discontinued operations — Gain on sale of motor
carrier, net of taxes
Cumulative effect of changes in accounting principles,
net of taxes
Net income
Earnings per share, basic and diluted
Income from continuing operations before accounting
changes
Discontinued operations
Cumulative effect of changes in accounting principles
Net income
$
$
$
2,275
1,427
419
513
380
181
209
5,404
1,064
19
(497)
586
175
411
10
114
535
1.05
0.03
0.29
1.37
2,022
1,457
412
515
342
171
193
5,112
1,158
66
(518)
706
246
460
—
—
460
1.18
—
—
1.18
$
$
$
2,014
1,444
421
514
412
143
215
5,163
1,007
99
(553)
553
191
362
13
—
375
0.94
0.03
—
0.97
$
$
$
See Form 10-K report beginning on page K1 for full financial statements and footnotes.
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Annual Report 2003
Balance Sheet
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
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 $1.00 per share par value, 1,350,000,000 shares authorized;
issued 412,168,988 and 410,154,465 shares, respectively
Additional paid-in capital
Unearned restricted stock
Accumulated other comprehensive loss
Retained income
Less treasury stock at cost, 21,016,125 and 21,169,125 shares, respectively
Total stockholders’ equity
As of December 31,
2003
2002
($ in millions)
$
$
$
284
695
92
189
165
1,425
6,259
11,779
1,133
20,596
948
199
81
213
360
1,801
6,800
1,071
716
9
3,223
13,620
412
521
(5)
(44)
6,112
(20)
6,976
$
$
$
184
683
97
187
148
1,299
6,178
11,370
1,109
19,956
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
Total liabilities and stockholders’ equity
$
20,596
$
19,956
See Form 10-K report beginning on page K1 for full financial statements and footnotes.
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Quarterly Financial Data
2003
Railway operating revenues
Income from railway operations
Income from continuing operations
before accounting changes
Net income
Earnings per share — basic and diluted:
Income from continuing operations
before accounting changes
Net income
2002
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)
$
$
$
$
$
1,561
231
85
2091
0.22
0.541
1,498
237
86*
0.22*
$
1,633
298
$
1,598
311
$
1,676
224
137
137
0.35
0.35
1,593
322
119
0.31
$
$
$
$
137
137
0.35
0.35
1,598
311
126
0.32
$
$
$
$
522
522
0.132
0.132
1,581
288
129
0.33
$
$
$
$
1 Includes a $114 million or 29 cents per share increase related to required accounting changes and $10 million or 3 cents per share from discontinued
operations
2 Includes a $107 million pretax charge in operating expenses for a voluntary separation program, which reduced net income by $66 million or 17 cents
per share. Also includes an $84 million pretax nonoperating impairment charge that reduced net income by $53 million or 13 cents per share.
Stock Price and Dividend Information
The Common Stock of Norfolk Southern Corporation, owned by 52,091 stockholders of record as of Dec. 31, 2003, 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 2003 and 2002.
2003
Market price
High
Low
Dividends per share
2002
Market price
High
Low
Dividends per share
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Annual Report 2003
1st
20.89
17.35
0.07
26.98
18.26
0.06
$
$
$
$
Quarter
3rd
20.20
18.00
0.08
23.90
17.20
0.07
$
$
$
$
2nd
22.39
18.31
0.07
24.45
19.85
0.06
$
$
$
$
4th
24.62
18.32
0.08
22.54
18.70
0.07
$
$
$
$
Board of Directors
As of Feb. 1, 2004
Gerald L. Baliles, 63, 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, Brus-
sels, London and Hong Kong. His board
service began in 1990; his current term
expires in 2005.
Gene R. Carter, 64, of Alexandria, Va.,
is executive director and chief executive
officer of the Association for Supervision
and Curriculum Development, among
the world’s largest international educa-
tion associations. His board service began
in 1992; his current term expires in 2005.
Gerald L. Baliles
Gene R. Carter
Alston D. Correll
David R. Goode
Landon Hilliard
George D. Johnson Jr.
Burton M. Joyce
Steven F. Leer
Alston D. Correll, 62, of Atlanta, Ga., is chairman, chief execu-
tive officer and president of Georgia-Pacific Corporation. His
board service began in 2000; his current term expires in 2004.
David R. Goode, 63, 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 execu-
tive officer of Norfolk Southern in 1992. His board service began in
1992; his current term expires in 2006.
Landon Hilliard, 64, 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.
George D. Johnson Jr., 61, of Spartanburg, S.C., is chief executive officer of Extended
Stay America, Inc., a company that develops, owns and manages three brands of extend-
ed stay hotels. His board service began in July 2003; his current term expires in 2004.
Burton M. Joyce, 61, of Penhook, Va. is chairman of IPSCO, a leading electric-
furnace, flat-rolled steel producer. His board service began in November 2003; his
current term expires in 2004.
Steven F. Leer, 51, of St. Louis, is president and chief executive officer of Arch Coal,
Inc., the nation’s second-largest coal producer. His board service began in 1999. His
current term expires in 2006.
Jane Margaret O’Brien, 50, 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, 57, 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 2006.
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 in 2002; his current term expires in 2005.
Jane Margaret O’Brien
Harold W. Pote
J. Paul Reason
Committees of the Board of Directors
Executive
D.R. Goode, chair
G.L. Baliles
G.R. Carter
L. Hilliard
H.W. Pote
Compensation
G.R. Carter, chair
L. Hilliard
B.M. Joyce
J.M. O’Brien
H.W. Pote
Finance
G.L. Baliles, chair
A.D. Correll
G.D. Johnson Jr.
S.F. Leer
J.P. Reason
Performance-Based
Compensation
G.R. Carter, chair
B.M. Joyce
J.M. O’Brien
H.W. Pote
Governance and
Nominating
L. Hilliard, chair
G.L. Baliles
A.D. Correll
S.F. Leer
Audit
H.W. Pote, chair
G.R. Carter
G.D. Johnson Jr.
B.M. Joyce
J.M. O’Brien
J.P. Reason
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Annual Report 2003 15
Officers
Officers as of Feb. 1, 2004
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
James A. Hixon, senior vice president legal and government affairs
Tony L. Ingram, senior vice president transportation network and mechanical
Henry D. Light, senior vice president law
Mark D. Manion, senior vice president transportation operations
Kathryn B. McQuade, senior vice president finance
Charles W. Moorman, senior vice president corporate planning and services
John P. Rathbone, senior vice president administration
John M. Samuels, senior vice president operations planning and support
Donald W. Seale, senior vice president marketing services
Daniel D. Smith, senior vice president energy and properties
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
H. Craig Lewis, vice president corporate affairs
Mark R. MacMahon, vice president labor relations
Michael R. McClellan, vice president intermodal marketing
Bruno Maestri, vice president public affairs
Robert E. Martínez, vice president business development
Thomas H. Mullenix Jr., vice president human resources
William J. Romig, vice president and treasurer
James A. Squires, vice president law
Marta R. Stewart, vice president and controller
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
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Annual Report 2003
NS Strengthens
Corporate Governance
Norfolk Southern is committed to high standards of cor-
porate governance, and the board of directors acted to
strengthen the company’s policies.
n Implementing new rules of the New York Stock
Exchange, the board determined that all NS directors
are independent, with the exception of David Goode,
NS chairman, president and chief executive officer.
n Board committees were restructured in January 2004. A
new Governance and Nominating Committee com-
bines duties previously held by two separate board
committees and improves coordination between the
two important and related functions. The new commit-
tee structure also stipulates that only independent
directors may serve on the Compensation, Perfor-
mance-Based Compensation, Audit and Governance
and Nominating committees.
n A revised Code of Ethics now applies to directors in
addition to officers and employees.
n A new Code of Ethical Conduct for Senior Financial
Officers was adopted.
n Corporate Governance Guidelines, board committee
charters, the corporation’s bylaws, Code of Ethics, Code
of Ethical Conduct for Senior Financial Officers and
procedures for reporting accounting concerns are post-
ed on the NS Web site at www.nscorp.com.
n The board and the committees continue to perform
annual self-evaluations, which are established practice
at NS.
n The Internal Audit Hotline, in existence for many years,
has been designated for use by employees and third
parties who wish to report concerns about accounting
and audit matters confidentially. The number is
800-732-9279.
n The NS board has determined that the Audit Committee
includes at least one audit committee financial expert.
n While companies are not yet required to include a man-
agement report on internal control and auditors’
assessment, NS included an independent public
accountants’ report on management’s assertion of the
effectiveness of the company’s internal control over
financial reporting in this annual report and in the
annual report for 2002.
n Shareholders can contact outside board members by
sending written communication to the Chair of the
Governance and Nominating Committee, c/o Corpo-
rate Secretary, Norfolk Southern Corporation, Three
Commercial Place, Norfolk, Virginia 23510. All commu-
nications directed to this address will be forwarded to
the Chair.
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 13, 2004, at 10 a.m. CDT
The Eric P. Newman Education Center
320 S. Euclid Ave.
St. Louis, Mo.
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.
Upon request, a stockholder may receive a printed
copy of the Corporate Goverance Guidelines, board com-
mittee charters, Code of Ethics, and Code of Ethical Con-
duct for Senior Financial Officers. Contact the Corporate
Secretary, Norfolk Southern Corporation, Three Commer-
cial Place, Norfolk, Va. 23510-9219.
A toll-free telephone number — (800) 531-6757 — is
available for information.
Dividends
At its January 2004 meeting, the corporation’s board of
directors declared a quarterly dividend of 8 cents per share
on its common stock, payable on March 10, 2004, to stock-
holders of record on Feb. 6, 2004.
Norfolk Southern Corporation pays quarterly divi-
dends on its common stock, usually on or about March 10,
June 10, Sept. 10 and Dec. 10. The corporation has paid 86
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
certificates,
transfer requirements and the Dividend Reinvestment Plan,
contact:
stock
lost
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 par-
ticipate 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
OUR CREED:
W E A R E R E S P O N S I B L E
to our stockholders, customers, employees
and the communities we serve.
FOR ALL OUR CONSTITUENCIES,
we will make safety our highest priority.
F O R O U R C U S T O M E R S ,
we will provide quality service, always
trying to reduce our costs in order to offer
competitive prices.
F O R O U R STO C K H O L D E R S,
we will strive to earn a return on their
equity investment that will increase the
value of their ownership. By generating a
reasonable return on invested capital,
we will provide the security of a financially
strong company to our customers,
employees, stockholders and communities.
F O R O U R E M P L O Y E E S ,
our greatest asset, we will provide fair
and dignified treatment with equal
opportunity at ever y level. We will
seek a talented, diverse work force and
management with the highest standards of
honesty and fairness.
F O R T H E C O M M U N I T I E S
we serve, we will be good corporate
citizens, seeking to enhance their quality of
life through service, jobs, investment
and the energies and good will of our
employees.
OUR VISION:
BE THE SAFEST, MOST
CUSTOMER-FOCUSED
AND SUCCESSFUL
TRANSPORTATION COMPANY
IN THE WORLD
r g i n i a 2 3 5 1 0 - 2 1 9 1
f o l k , V i
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•
P l a c e
T h r e e C o m m e r c i a l
2X4 inch for label
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, 2003
( ) 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)
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 reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein
and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( )
The number of shares outstanding of each of the registrant's classes of common stock, as of January 31, 2004:
391,852,750 (excluding 21,016,125 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 30, 2003 was $7,491,970,330
(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.
TABLE OF CONTENTS
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Part I.
Part II.
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant
5. Market for Registrant's Common Equity 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
9A. Controls and Procedures
Part III.
10. Directors and Executive Officers of the Registrant
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
13. Certain Relationships and Related Transactions
14. Principal Accountant Fees and Services
Part IV.
15. Exhibits, Financial Statement Schedule and Reports on Form 8-K
Index to Consolidated Financial Statement Schedule
Power of Attorney
Signatures
Exhibit Index
K2
Page
K3
K3
K14
K14
K16
K17
K19
K38
K39
K74
K74
K75
K75
K75
K78
K78
K79
K86
K86
K89
PART I
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 1. Business. and Item 2. Properties.
GENERAL - Norfolk Southern Corporation (Norfolk Southern) was incorporated on July 23, 1980,
under the laws of the Commonwealth of Virginia. On June l, 1982, Norfolk Southern acquired control of
two major operating railroads, Norfolk and Western Railway Company (NW) and Southern Railway
Company (Southern) in accordance with an Agreement of Merger and Reorganization dated as of July 31,
1980, and with the approval of the transaction by the Interstate Commerce Commission (ICC) (now the
Surface Transportation Board [STB]).
Effective Dec. 31, 1990, Norfolk Southern transferred all the common stock of NW to Southern, and
Southern's name was changed to Norfolk Southern Railway Company (Norfolk Southern Railway or
NSR). Effective Sept. 1, 1998, NW was merged with and into Norfolk Southern Railway. As of Dec. 31,
2003, all the common stock of Norfolk Southern Railway 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 (SEC). Additionally, Norfolk Southern’s corporate
governance guidelines, board committee charters, code of ethics and code of ethical conduct for senior
financial officers are available on the company’s website and in print to any shareholder who requests
them.
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. The other subsidiary, New York Central Lines LLC (NYC) has entered into
similar arrangements with CSX Transportation, Inc. (CSXT). Certain rail assets (Shared Assets Areas)
still are owned by CRC, which operates them for joint and exclusive use by Norfolk Southern Railway
and CSXT.
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
K3
arrangements with PRR augmented Norfolk Southern Railway's locomotive, freight car and intermodal
fleet.
Conrail Corporate Reorganization
NS, CSX and Conrail are jointly seeking to reorganize Conrail and establish direct ownership and control
by NSR and CSXT of PRR and NYC, respectively. The proposed reorganization would replace the
operating agreements described above and allow NSR and CSXT to directly own and operate PRR and
NYC, respectively. Consummation of the reorganization requires a ruling from the Internal Revenue
Service (IRS), the approval of the STB and filings with the SEC. In addition, NS, CSX and Conrail must
obtain the consent of Conrail’s debt holders to carry out the transaction and will obtain a valuation of
PRR and of NYC.
In 2003, the IRS issued a ruling that the reorganization would qualify as a tax-free distribution. Also in
2003, the STB granted its authorization to carry out the reorganization, subject to a condition requiring
NS, CSX and Conrail to either: (i) obtain the voluntary consent of the Conrail debt holders; or (ii)
propose further proceedings to determine whether the terms offered to the Conrail debt holders are fair,
just and reasonable. In 2004, NS, CSX and Conrail intend to file registration statements on Form S-4
with the SEC to allow a proposed exchange offer relating to Conrail’s unsecured debt (see below). In
order to implement the reorganization approved by the IRS, the companies have engaged an investment
banking firm to provide a valuation. The results of the valuation could impact NS’ carrying amount of its
investment in Conrail and the recording of the corporate reorganization.
As a part of the proposed reorganization, Conrail would undertake a restructuring of its existing
unsecured and secured public indebtedness. There are currently two series of unsecured public
debentures with an outstanding principal amount of $800 million and 13 series of secured debt with an
outstanding principal amount of approximately $321 million. It is currently contemplated that guaranteed
debt securities of two newly formed corporate subsidiaries of NSR and CSXT would be offered in a
58%/42% ratio in exchange for Conrail’s unsecured debentures. Upon completion of the proposed
transaction, the new debt securities would become direct unsecured obligations of NSR and CSXT,
respectively, and would rank equally with all existing and future senior unsecured debt obligations, if any,
of NSR and CSXT. These new debt securities will have maturity dates, interest rates and principal and
interest payment dates identical to those of the respective series of Conrail’s unsecured debentures. In
addition, these new debt securities will have covenants substantially similar to those of the publicly traded
debt securities of NS and CSX, respectively.
Conrail’s secured debt and lease obligations will remain obligations of Conrail and are expected to be
supported by new leases and subleases which, upon completion of the proposed transaction, would be the
direct lease and sublease obligations of NSR or CSXT.
NS, CSX and Conrail are diligently working to complete all steps necessary to consummate the Conrail
corporate reorganization in 2004. Upon consummation of the proposed transaction, NS’ investment in
Conrail will no longer include amounts related to PRR and NYC. Instead, the assets and liabilities of
PRR will be reflected in their respective line items in NS’ Consolidated Balance Sheet, and any amounts
owed to PRR would be extinguished.
RAILROAD OPERATIONS - As of Dec. 31, 2003, 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:
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Mileage Operated as of Dec. 31, 2003
Miles of
Road
11,707
9,813
21,520
Second and
Other Main
Track
1,383
3,435
4,818
Passing
Track,
Crossovers
and
Turnouts
Way and
Yard
Switching
Total
1,623
891
2,514
5,972
20,685
3,647
9,619
17,786
38,471
Owned
Operated under lease,
contract or trackage rights
Total
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, Virginia 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.
K5
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
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
2003
Year Ended Dec. 31,
2001
2000
2002
1999
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
183
73.9
$0.0353
179
72.6
$0.0350
182
70.0
$0.0339
197
74.4
$0.0312
167
61.5
$0.0315
3,111
3,067
3,023
2,888
2,577
83.5%1
81.5%
83.7%
89.7%2
86.3%
1Includes $107 million of costs for a voluntary separation program, which added 1.6 percentage points to
the ratio.
2Includes $165 million of costs for early retirement and separation programs, which added 2.7 percentage
points to the ratio.
RAILWAY OPERATING REVENUES - NS' total railway operating revenues were $6.5 billion in
2003. Revenue, shipments and revenue yield by principal railway operating revenue sources for the past
five years are set forth in the following table (prior year amounts have been reclassified to conform to the
current market groupings).
Principal Sources of Railway Operating Revenues
Year Ended Dec. 31,
(Revenues in millions, shipments in thousands, revenue yield in dollars per shipment)
2003
2002
2001
2000
1999
COAL
Revenues
% of total revenues
Shipments
% of total shipments
Revenue Yield
$
$
1,500 $
23%
1,615
24%
929 $
1,441 $
23%
1,610
24%
895 $
1,521
25%
1,695
26%
897
$
$
1,435
23%
1,687
25%
851
$
$
1,322
25%
1,519
25%
870
K6
Principal Sources of Railway Operating Revenues (continued)
Year Ended Dec. 31,
(Revenues in millions, shipments in thousands, revenue yield in dollars per shipment)
2003
2002
2001
2000
1999
AUTOMOTIVE
Revenues
% of total revenues
Shipments
% of total shipments
Revenue Yield
CHEMICALS
Revenues
% of total revenues
Shipments
% of total shipments
Revenue Yield
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
TOTALS
Railway Operating Revenues
Railway Shipments
Railway Revenue Yield
$
$
$
$
$
$
$
$
$
$
$
$
$
$
936 $
14%
645
9%
1,450 $
961 $
15%
662
10%
1,450 $
885
14%
622
9%
1,423
772 $
12%
426
6%
1,815 $
755 $
12%
423
6%
1,783 $
738
12%
422
6%
1,750
699 $
11%
710
10%
984 $
692 $
11%
716
11%
966 $
674
11%
703
11%
959
688 $
11%
556
8%
1,238 $
637 $
10%
518
8%
1,231 $
617
10%
519
8%
1,188
634 $
10%
443
7%
1,431 $
603 $
10%
438
6%
1,378 $
612
10%
450
7%
1,357
1,239 $
19%
2,466
36%
502 $
1,181 $
19%
2,354
35%
502 $
1,123
18%
2,214
33%
507
6,468 $
6,861
943 $
6,270 $
6,721
933 $
6,170
6,625
931
$
$
$
$
$
$
$
$
$
$
$
$
$
$
921
15%
692
10%
1,331
743
12%
443
6%
1,678
689
11%
757
11%
911
622
10%
535
8%
1,161
630
11%
491
7%
1,285
1,119
18%
2,242
33%
499
6,159
6,847
900
$
$
$
$
$
$
$
$
$
$
$
$
$
$
746
14%
611
10%
1,220
633
12%
387
7%
1,635
567
11%
587
10%
966
547
11%
496
8%
1,104
578
11%
465
8%
1,243
849
16%
1,896
32%
448
5,242
5,961
879
K7
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 172 million tons in
2003, 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 2003.
Coal, coke and iron ore tonnage by market for the past five years are set forth in the following table.
Coal, Coke and Iron Ore Tonnage by Market
Utility
Domestic Metallurgical
Export
Other
2003
129,904
20,486
12,312
9,624
172,326
2002
Year Ended December 31,
2001
(tons in thousands)
2000
127,747
21,578
11,342
9,733
170,400
132,325
20,457
13,872
11,377
178,031
119,284
25,003
19,845
10,781
174,913
1999
107,381
21,399
18,373
10,348
157,501
Total coal handled through all system ports in 2003 was 35 million tons. Of this total, 11 million tons
(including coastwise traffic) moved through Norfolk, Virginia, 2 million tons moved through the
Baltimore Terminal, 13 million tons moved to various docks on the Ohio River, and 9 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 of Financial Condition and Results of Operations.”
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, DaimlerChrysler, Ford Motor Company, General Motors, Honda, Isuzu, Jaguar, Land Rover,
Mazda, Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru, Suzuki, Toyota and Volkswagen, and auto
parts for Ford Motor Company, General Motors, Mercedes-Benz and Toyota. 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,
ethanol 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 2003 were 2.78 million, compared with 2.76 million handled in 2002, an
increase of 1%.
In 2003, 134 million tons of general merchandise freight, or approximately 66% 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.
K8
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 2003 were 2.47 million, compared with 2.35 million handled in 2002, an increase of 5%.
See the discussion of intermodal traffic in Part II, Item 7, “Management's Discussion and Analysis of
Financial Conditions and Results of Operations.”
FREIGHT RATES - In 2003, 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 2003 there were significant coal movements moving under common carrier (tariff) rates that
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. In 2002, Duke and CP&L filed rate
reasonableness complaints at the STB alleging that NS’ tariff rates for the transportation of coal were
unreasonable. In the Duke proceeding the STB initially found NS’ rates to be reasonable in November
2003, but subsequently issued technical corrections in February 2004 finding that in certain years some
portion of the rates was unreasonable. The case is currently stayed because both parties have indicated
that they intend to file petitions for reconsideration, and the STB has not yet ordered any rate relief. In
the CP&L proceeding the STB found NS’ rates to be unreasonable in December 2003, but upheld a
significant portion of NS’ tariff increase. Both of the STB’s rate decisions remain subject to petitions for
rehearing and appeals. Future developments in the two cases could result in additional adjustments, and
could have a significant impact on results of operations in a particular quarter.
In 2003, NS' railroads were found by the STB not to be “revenue adequate” based on results for the year
2002. 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 a 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
Railroad 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.
K9
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 2003, 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, the District of Columbia and portions of Canada. The
railroad infrastructure makes the company very capital intensive with total property of approximately $12
billion and investment in Conrail of approximately $6 billion.
Capital Expenditures - Capital expenditures for road, equipment and other property for the past five
years were as follows (including capitalized leases):
2003
2002
2001
2000
1999
Capital Expenditures
($ in millions)
Road
Equipment
Other property
Total
$
$
495 $
218
7
720 $
519 $
174
2
695 $
505 $
233
8
746 $
557 $
146
28
731 $
559
349
4
912
Capital spending and maintenance programs are and have been designed to assure the ability to provide
safe, efficient and reliable transportation services. For 2004, NS has budgeted $810 million of capital
spending. See the discussion following “Cash used for investing activities,” in Part II, Item 7,
“Management's Discussion and Analysis of Financial Condition and Results of Operations.”
K10
Equipment - As of Dec. 31, 2003, NS owned or leased the following units of equipment:
Owned*
Number of Units
Leased**
Total
Capacity
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
2,412
104
56
2,572
16,099
16,644
9,369
26,850
3,111
162
3,250
75,485
4,479
3,629
877
5,549
1,422
15,956
777
101
18
896
5,014
4,810
3,084
11,217
1,435
50
--
25,610
1,022
959
7,345
--
13,380
22,706
(Horsepower)
10,951,550
300,700
--
11,252,250
3,189
205
74
3,468
(Tons)
2,232,141
1,694,590
1,359,205
4,085,456
343,587
--
162,514
9,877,493
21,113
21,454
12,453
38,067
4,546
212
3,250
101,095
5,501
4,588
8,222
5,549
14,802
38,662
* 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.
The following table indicates the number and year built for locomotives and freight cars owned at
Dec. 31, 2003.
2003
2002
2001
2000
1999
1992-
1998
1987-
1991
1986 &
Before
Year Built
100
4%
--*
--%
160
6%
200
8%
147
6%
592
23%
238
9%
1,135
44%
Total
2,572
100%
--
--%
--
--%
--
--%
112
--%
515
1%
8,193
11%
5,530
7%
61,135
81%
75,485
100%
Locomotives:
No. of units
% of fleet
Freight cars:
No. of units
% of fleet
*Fifty of the locomotives built in 2001 were purchased in 2002.
K11
As of Dec. 31, 2003, the average age of the locomotive fleet was 15.3 years. During 2003, 91
locomotives, the average age of which was 28.7 years, were retired. The average age of the freight car
fleet at Dec. 31, 2003, was 26.6 years. During 2003, 4,855 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.
Freight cars:
NS Rail
Locomotives:
NS Rail
Annual Average Bad Order Ratio
2003
2002
2001
2000
1999
7.4%
8.1%
6.9%
5.7%
3.7%
6.2%
6.3%
5.8%
5.5%
5.3%
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. The decline in 2003 reflected an
increase in maintenance activity as well as the retirement of unserviceable units. The locomotive bad
order ratio includes units out of service for required inspections every 92 days and program work such as
overhauls. The ratio rose slightly in 2000 as maintenance activities were curtailed in response to a
slowing economy. The elevated ratio through 2003 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.
The following table summarizes several measurements regarding NS' track roadway additions and
replacements during the past five years:
2003
2002
2001
2000
1999
Track miles of rail installed
Miles of track surfaced
New crossties installed (millions)
233
5,105
2.8
235
5,270
2.8
254
3,836
1.5
390
3,687
1.5
403
5,087
2.3
Microwave System - The NS microwave system, consisting of approximately 7,400 radio route miles,
424 core stations, 14 secondary stations and 5 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, 10,978 miles are signalized, including 8,091 miles of centralized traffic control (CTC) and 2,887
K12
miles of automatic block signals. Of the 8,091 miles of CTC, 2,487 miles are controlled by data radio
originating at 183 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 $910 million as of Dec. 31, 2003, and $864 million at Dec. 31,
2002.
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 of Financial
Condition and Results of Operations,” and in Note 18 to the Consolidated Financial Statements.
EMPLOYEES - NS employed an average of 28,753 employees in 2003, compared with an average of
28,970 in 2002. The approximate average cost per employee during 2003 was $58,000 in wages and
$28,000 in employee benefits.
Approximately 85% of NS' railroad employees are covered by collective bargaining agreements with 14
different labor unions. See the discussion of “Labor Agreements” in Part II, Item 7, “Management's
Discussion and Analysis of Financial Condition and Results of Operations.”
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. The
STB has jurisdiction over some rates, routes, conditions of service and the extension or abandonment of
rail lines. The STB also has jurisdiction over the consolidation, merger or acquisition of control of and by
rail common carriers. The Department of Transportation regulates certain track and mechanical
equipment standards.
The relaxation of economic regulation of railroads, begun over two decades ago under the Staggers Rail
Act of 1980, has continued. 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 2004 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
K13
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 among 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 2003.
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, 2004, relating to the
executive officers.
Name, Age, Present Position
Business Experience During Past Five Years
David R. Goode, 63,
Chairman, President and
Chief Executive Officer
L. I. Prillaman, 60,
Vice Chairman and
Chief Marketing Officer
Stephen C. Tobias, 59,
Vice Chairman and
Chief Operating Officer
Present position since September 1992.
Present position since August 1998.
Present position since August 1998.
K14
Henry C. Wolf, 61,
Vice Chairman and
Chief Financial Officer
James A. Hixon, 50,
Senior Vice President
Legal and Government Affairs
Present position since August 1998.
Present position since December 1, 2003. Served as Senior
Vice President Administration from February 2001 to
December 1, 2003, Senior Vice President Employee
Relations from November 1999 to February 2001, and prior
thereto was Vice President Taxation.
Henry D. Light, 63,
Senior Vice President Law
Present position since January 2002. Served as Vice
President Law from April 2000 to January 2002, and
prior thereto was General Counsel Operations.
Kathryn B. McQuade, 47,
Senior Vice President
Finance
Charles W. Moorman, 52,
Senior Vice President
Corporate Planning and Services
John P. Rathbone, 52,
Senior Vice President
Administration
Donald W. Seale, 51,
Senior Vice President
Marketing Services
Present position since December 1, 2003. Served as Senior
Vice President Financial Planning from April 2000 to
December 1, 2003, Vice President Financial Planning from
August 1998 to April 2000, and prior thereto was Vice
President Internal Audit.
Present position since December 1, 2003. Served as Senior
Vice President Corporate Services from February 1, 2003, to
December 1, 2003; also served as President Thoroughbred
Technology and Telecommunications, Inc. since October
1999, and prior thereto was Vice President Information
Technology.
Present position since December 1, 2003. Served as Senior
Vice President and Controller from April 2000 to December 1,
2003; prior thereto was Vice President and Controller.
Present position since December 1, 2003. Served as Senior
Vice President Merchandise Marketing from December 1999 to
December 1, 2003; prior thereto was Vice President
Merchandise Marketing.
Daniel D. Smith, 52,
Senior Vice President
Energy and Properties
Present position since December 1, 2003. Served as President
NS Development; prior thereto was President Pocahontas
Land Corporation.
Marta R. Stewart, 46,
Vice President and Controller
Present position since December 1, 2003; prior thereto was
Assistant Vice President Corporate Accounting.
K15
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
STOCK PRICE AND DIVIDEND INFORMATION
The Common Stock of Norfolk Southern Corporation, owned by 52,091 stockholders of record as of Dec.
31, 2003, 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 2003 and 2002.
2003
Market price
High
Low
Dividends per share
2002
Market price
High
Low
Dividends per share
1st
2nd
Quarter
3rd
4th
$
$
$
$
20.89 $
17.35
0.07 $
22.39 $
18.31
0.07 $
20.20 $
18.00
0.08 $
26.98 $
18.26
0.06 $
24.45 $
19.85
0.06 $
23.90 $
17.20
0.07 $
24.62
18.32
0.08
22.54
18.70
0.07
K16
Item 6. Selected Financial Data.
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
FIVE-YEAR FINANCIAL REVIEW 1999-2003
20031
20005
2002
2001
($ in millions, except per share amounts)
19996
$
6,468 $
5,404
6,270 $
5,112
6,170 $
5,163
6,159 $
5,526
5,242
4,524
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 and accounting changes
Provision for income taxes
Income from continuing
operations before accounting
changes
Discontinued operations2
Cumulative effect of changes in
accounting principles, net of
taxes3
Net income
$
PER SHARE DATA
Income from continuing
operations before accounting
$
changes – basic and diluted
$
Net income – basic and diluted
Dividends
$
Stockholders' equity at year end $
FINANCIAL POSITION
Total assets
Total long-term debt, including
current maturities4
Stockholders' equity
OTHER
Capital expenditures
$
$
$
$
Average number of shares
outstanding (thousands)
Number of stockholders at year
end
Average number of employees:
Rail
Nonrail
Total
1,064
19
497
586
175
411
10
1,158
1,007
66
518
706
246
460
--
99
553
553
191
362
13
633
168
551
250
78
172
--
114
535 $
--
460 $
--
375 $
--
172 $
718
164
531
351
112
239
--
--
239
1.05 $
1.37 $
0.30 $
17.83 $
1.18 $
1.18 $
0.26 $
16.71 $
0.94 $
0.97 $
0.24 $
15.78 $
0.45 $
0.45 $
0.80 $
15.16 $
0.63
0.63
0.80
15.50
20,596 $
19,956 $
19,418 $
18,976 $
19,250
7,160 $
6,976 $
7,364 $
6,500 $
7,632 $
6,090 $
7,636 $
5,824 $
8,059
5,932
720 $
695 $
746 $
731 $
912
389,788
388,213
385,158
383,358
380,606
52,091
28,363
390
28,753
51,418
53,042
53,194
51,123
28,587
383
28,970
30,510
384
30,894
33,344
394
33,738
30,897
269
31,166
K17
1
2
3
4
5
6
2003 operating expenses include a $107 million charge for a voluntary separation program. Other income –
net includes an $84 million charge to recognize the impaired value of certain telecommunications assets.
These charges reduced net income by $119 million, or 30 cents per diluted share.
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. Results in 2003 include an additional after-tax gain of $10 million, or 3 cents per diluted share,
resulting from resolution of tax issues related to the transaction.
Net income in 2003 reflects two accounting changes, the cumulative effect of which increased net income by
$114 million, or 29 cents per diluted share: a change in accounting for the cost to remove railroad crossties,
which increased net income by $110 million, and a change in accounting related to a special-purpose entity
that leases certain locomotives to NS, which increased net income by $4 million. This entity’s assets and
liabilities, principally the locomotives and debt related to their purchase, are now reflected in NS’ Consolidated
Balance Sheet.
Excludes notes payable to Conrail of $716 million in 2003, $513 million in 2002, $301 million in 2001, $51
million in 2000 and $123 million in 1999.
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.
K18
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
2003 Compared with 2002
Net income was $535 million, or $1.37 per diluted share, in 2003, up $75 million, or 16%. Results in
2003 included a $10 million, or 3 cents per share, gain from discontinued operations (see Note 17) and a
$114 million, or 29 cents per share, benefit related to the cumulative effect of changes in accounting
principles (see Note 1). Income from continuing operations before accounting changes, which excludes
these items, was $411 million, or $1.05 per diluted share, down $49 million, or 11%, compared with
2002, reflecting higher compensation and benefits costs, which included the costs of a voluntary
separation program (see Note 11), and lower nonoperating income that reflected the impairment of certain
telecommunications assets (see Note 6). The costs of the voluntary separation program and the asset
impairment combined to reduce income by $119 million, or 30 cents per share.
2002 Compared with 2001
Net income was $460 million, or $1.18 per diluted share, in 2002, up $85 million, or 23%. Net income in
2001 was $375 million and included a $13 million, or 3 cents per share, gain from discontinued
operations (see Note 17); accordingly, income from continuing operations was $362 million, or 94 cents
per diluted share. Results in 2002 were $98 million, or 27%, above 2001’s income from continuing
operations. The improvement was primarily the result of a $151 million, or 15%, increase in income from
railway operations.
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
Railway operating revenues were $6.5 billion in 2003, $6.3 billion in 2002 and $6.2 billion in 2001. The
following table presents a three-year comparison of revenues by market group (prior year amounts have
been reclassified to conform to the current market groupings).
K19
Revenues by Market Group
Coal
General merchandise:
Automotive
Chemicals
Metals/construction
Agriculture/consumer products/
government
Paper/clay/forest
General merchandise
Intermodal
Total
2003
2002
($ in millions)
2001
$
1,500 $
1,441 $
1,521
936
772
699
688
634
3,729
1,239
6,468 $
961
755
692
637
603
3,648
1,181
6,270 $
885
738
674
617
612
3,526
1,123
6,170
$
In 2003, revenues increased 3%, reflecting a 2% rise in general merchandise revenues, a 4% improvement
in coal revenues, and a 5% increase in intermodal revenues. All but automotive within the general
merchandise market group posted increases over 2002. 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, particularly a 5% increase in lower-priced intermodal traffic volume.
Revenue Variance Analysis
Increases (Decreases)
Volume
Revenue per unit/mix
Total
2003 vs. 2002
2002 vs. 2001
($ in millions)
$
$
131
67
198
$
$
89
11
100
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.
Beginning March 1, 2004, NS will modify its fuel surcharge program for its merchandise and coal traffic.
The fuel surcharge program in effect until that time applies a 2% fuel surcharge to line haul freight
charges when the WTI crude oil price, as published in the Wall Street Journal, exceeds $28.00 per barrel
for 30 consecutive business days. For each $5.00 per barrel increase, an additional 2% fuel surcharge
applies. The revised fuel surcharge will be based on the monthly average price of West Texas
Intermediate (WTI) crude oil. Line haul freight charges will be adjusted by 0.4% for every dollar the
average price exceeds $23 per barrel in the second calendar month prior to the month in which the fuel
surcharge is applied. The modification in the fuel surcharge program will cause the amount charged to
more closely reflect fuel price fluctuations in today’s volatile market.
COAL tonnage increased 1% in 2003 and revenues increased 4% versus 2002. Revenue per unit
increased 4%, reflecting favorable developments in the coal rate reasonableness proceedings before the
STB, as discussed below, as well as increases resulting from more longer haul business and loading
K20
productivity improvements that led to more tons per car. Coal, coke and iron ore revenues represented
23% of total railway operating revenues in 2003, and 86% of NS' coal shipments originated on lines it
operates.
In 2002, two of NS’ utility customers, Duke Energy (Duke) and Carolina Power & Light (CP&L), filed
rate reasonableness complaints at the STB alleging that NS’ tariff rates for the transportation of coal were
unreasonable. In the Duke proceeding the STB initially found NS’ rates to be reasonable in November
2003, but subsequently issued technical corrections in February 2004 finding that in certain years some
portion of the rates was unreasonable. The case is currently stayed because both parties have indicated
that they intend to file petitions for reconsideration, and the STB has not yet ordered any rate relief. In
the CP&L proceeding the STB found NS’ rates to be unreasonable in December 2003, but upheld a
significant portion of NS’ tariff increase. Both of the STB’s rate decisions remain subject to petitions for
rehearing and appeals. Future developments in the two cases could result in additional adjustments and
could have a significant impact on results of operations in a particular quarter. Over the long term,
Management believes the STB decisions in the Duke and CP&L proceedings will help support improved
pricing for coal transportation services.
In 2002, coal tonnage decreased 4% 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.
Total Coal, Coke and Iron Ore Tonnage
Utility
Export
Domestic metallurgical
Other
Total
2003
2002
(In millions of tons)
2001
130
12
20
10
172
128
11
21
10
170
132
14
21
11
178
Utility coal tonnage increased 2%, compared to 2002, primarily due to a 6% gain in tonnage moving to
the Northeast. These gains were led by a full year’s operation of two projects completed in 2002 that
captured traffic from truck and barge.
In the first quarter of 2003, higher natural gas prices and colder temperatures caused coal-fired generating
stations to run at near capacity in the Northeast, reducing the high stockpiles that were carried forward
from 2002. However, the mild temperatures through the remainder of the year diminished seasonal
demand for coal. Volumes to utilities in the South decreased 4% due to milder weather and extended
power plant outages for the installation of environmental emission-control technology.
In 2002, utility coal tonnage decreased 3%, 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.
The outlook for utility coal remains positive. Coal-fired generation continues to be the lowest-cost source
for electric generation that has additional growth capacity above current levels. Management expects
K21
utilities to use coal-fired plants to meet increased electricity demand because of coal’s low generating cost
and the strengthening economy. As always, demand will be influenced by the weather.
There remain a number of 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 new national energy
policy, proposed multi-emissions legislation, mercury emissions standard, new source review and the fate
of the United States participation in the Kyoto Protocol. Although 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.
Favorable developments with these issues could actually ease cost pressures on coal-fired generation,
further strengthening coal’s position.
Export coal tonnage increased 9% in 2003, compared to 2002. Export coal through Norfolk, primarily
metallurgical coal, increased by 24% in 2003, benefiting from a decline in exports from China. Strong
steel production in China increased demand for metallurgical coal and coke and shifted Chinese exports
of these commodities to domestic consumption. Also, ocean freight rates are at an all time high. Spot
vessel rates from Australia to Europe have more than tripled, while transatlantic rates have increased less
dramatically. The combination of the resulting gap in ocean freight rates and the shorter sailing times has
given the United States a competitive advantage in European markets. Last, the decline in the value of
the dollar against the Euro and Australian Dollar also increased demand for United States metallurgical
coal abroad. Coal exported through Baltimore, primarily steam coal, declined 41% due to strong
domestic demand for utility coal, as discussed above.
In 2002, export coal tonnage declined 18% compared to 2001. 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 of 2002.
Strong domestic steam coal prices and reduced metallurgical coal production have limited export growth
in the United States. The stage is set for further recovery in export volumes in 2004. Export growth will
depend, however, upon the availability of coal supply from key metallurgical mines on NS. Pricing is
also expected to strengthen.
Domestic metallurgical coal, coke and iron ore volumes decreased 5% in 2003, when compared to 2002,
due to the temporary closing of a large mine that produced low-volatile coal, the continuing consolidation
of the steel industry, and fewer blast furnaces operating than in the past.
In 2002, domestic metallurgical coal, coke and iron ore tonnage increased 5%, reflecting higher U.S. steel
production, aided by the imported steel tariff program implemented in 2002. In addition, continued
strong vehicle production resulted in demand for steel.
Future demand for domestic metallurgical coal, coke and iron ore is uncertain but may increase in 2004
due to the shortage that exists in the world market. Continuation of the anticipated rationalization of the
steel industry is expected, resulting in fewer blast furnaces in operation; however, the furnaces that
remain are expected to run near capacity. Growth may be limited by the availability of coal supply from a
key metallurgical mine on NS that was idled in 2003 but is expected to reopen sometime in the second
half of 2004. In addition, the end of the steel tariff in December 2003 could mean lower steel prices
worldwide and may lead to further consolidations in the industry.
K22
Other coal volumes, principally steam coal shipped to manufacturing plants, finished the year down 1%,
when compared to 2002. In 2002, other coal traffic decreased 14%, a result of the weak economy.
GENERAL MERCHANDISE traffic volume (carloads) increased 1% in 2003, and revenues increased
2%, principally due to higher average revenues in most business groups and higher agriculture traffic
volume. In 2002, traffic volume increased 2%, and revenues increased 3%, reflecting a 9% improvement
in automotive revenues.
Automotive traffic volume and revenues decreased 3% in 2003, principally due to reduced vehicle
production.
In 2002, automotive traffic volume increased 7%, and revenues increased 9%, 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.
Automotive revenues in 2004 are expected to be somewhat higher than those of 2003, due to several
factors: light vehicle production is predicted to be slightly above the 2003 level, NS has increased rail
service to a major customer with a second plant opening towards the end of 2004, and the addition of
several new products.
Chemicals traffic volume increased 1% and revenue increased 2% compared to 2002. Traffic volume
benefited from higher shipments of industrial intermediates, petroleum and environmental products, and
plastics. Also contributing to 2003 growth, approximately 2,000 annual carloads of new traffic were
diverted from the waterways and highways. Revenue per unit reflected improved pricing to meet market
conditions, as well as favorable changes in mix.
In 2002, chemicals traffic volume increased slightly and revenues increased 2%. 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.
Chemical volume is expected to improve in 2004, primarily due to expectations for a stronger economy
and growth from new or expanded plastics plants. However, volume could be adversely affected by the
price of energy in North America, particularly that of natural gas and crude oil. Both of these
commodities account for more than 50% of the cost of most chemical products, and high North American
prices are causing chemical producers increasingly to look off shore for production.
Metals and construction traffic volume decreased 1%, but revenues increased 1% in 2003 compared
with 2002. The decline in volume resulted from reduced metals volume (mostly iron and steel), offset in
part by higher construction traffic. Revenue per unit improved 2%, reflecting favorable pricing and
traffic mix changes.
In 2002, metals and construction traffic volume increased 2%, and revenues improved 3%, reflecting
improvement in the steel industry, aided by the two-year imported steel tariff program. 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.
K23
Metals and construction revenues in 2004 are expected to benefit from an improved economic
environment and converting motor carrier traffic to rail, although further consolidation in the steel
industry is expected. New stone terminals on NS lines in Florida, Georgia and Tennessee will generate
additional aggregate business, and new access to existing cement facilities will increase traffic.
Agriculture, consumer products and government traffic volume increased 7% and revenues increased
8% compared with 2002. Commodities contributing most to these increases were corn, fertilizer,
military, sweeteners and wheat. Only feed, food products and beverages showed a slight decrease. Corn
shipments increased 4% in 2003 and revenue was up 8%. Due to the drought of 2002, which caused a
depletion of inventories, there was a significant increase in demand for corn to Southeast feed mill
customers and poultry producers in eastern Pennsylvania, Maryland, and Delaware, resulting in long haul
rail movements from Midwest suppliers to these areas. Higher fertilizer traffic resulted from the re-
opening of a large phosphate fertilizer plant. Shipments of military vehicles and military equipment
increased 36% over 2002 levels due to the war in Iraq.
In 2002, agriculture, consumer products and government traffic volume decreased slightly compared to
2001, 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 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.
Agriculture, consumer products and government revenues in 2004 are expected to remain steady,
reflecting a more normalized 2003 crop, and the overall strong performance of the other commodities.
Traffic levels should benefit from new southeastern feed mills that are expected to come on line by late
2004, as well as more shipments of corn, ethanol and transcontinental shipments of fresh and frozen
foods.
Paper, clay and forest products traffic increased 1% and revenues increased 5% compared to 2002,
principally due to improved domestic demand for paper products. Paper traffic benefited from increased
domestic orders for consumer products packaging and from the advertising sector, as well as new
business. Newsprint shipments continued to remain soft, largely due to a prolonged decline in demand.
Woodchip volume increased significantly as NS-served paper mills experienced shortages and were
forced to source wood fiber from more distant suppliers due to wet weather in the Southeast. NS clay
revenue was up compared to 2002 due to a strong increase in revenue per carload and a more positive mix
as NS handled more long-haul domestic traffic. Lumber business was soft in early 2003 despite strong
demand due in part to wet weather and several mill closures. Lumber business was up in the fourth
quarter as weather in the Southeast and commodity prices improved.
In 2002, paper, clay and forest products traffic volume declined 3%, and revenues decreased 1%,
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 2004, paper, clay and forest product revenues are expected to experience modest growth consistent
with the general outlook for the domestic economy. NS revenue growth initiatives will focus on
converting motor carrier traffic to rail and offering more transload or rail/truck bundled services to non-
rail served customers.
K24
INTERMODAL volume increased 5% and revenues increased 5% compared to 2002. Volume growth
was driven by improved service performance that enabled the conversion of truck business to rail.
Shipments for asset-based truckload carriers increased 14% as these trucking companies used intermodal
to reduce their exposure to driver shortages and the need for larger fleets. International volume, which
represents 45% of intermodal’s volume, grew 9%, primarily a result of strong import trade and new
business driven by enhanced service. Triple Crown Services Company (TCS) grew 1% in 2003,
hampered by a fleet at full capacity. NS is expanding this fleet in 2004.
In 2002, intermodal traffic volume increased 6%, and revenues increased 5%, compared to 2001. 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. Domestic shipments
grew 6%, primarily because of new business gained from the conversion of truck shipments. 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 2004, intermodal revenues are expected to benefit from unfavorable forces affecting trucking
companies, including changes to the highway hours of service laws, driver shortages, new truck emission
standards and, accordingly, higher truck prices. These forces are expected to accelerate truck to rail
conversion in addition to creating an environment conducive to rail price increases.
Railway Operating Expenses
Railway operating expenses increased 6% in 2003, while carloads increased 2%. Expenses in 2003
included $107 million of costs related to a voluntary separation program to reduce the size of the work
force, which resulted in 2% of the 6% expense increase. In 2002, railway operating expenses declined
1%, while carloads increased 1%.
The railway operating ratio, which measures the percentage of railway operating revenues consumed by
railway operating expenses, was 83.5% in 2003, compared with 81.5% in 2002 and 83.7% in 2001. The
voluntary separation costs added 1.6 percentage points to the 2003 ratio.
The following table shows the changes in railway operating expenses summarized by major
classifications.
Operating Expense Variances
Increases (Decreases)
2003 vs. 2002
2002 vs. 2001
($ in millions)
Compensation and benefits*
Materials, services and rents
Conrail rents and services
Depreciation
Diesel fuel
Casualties and other claims
Other
Total
$
$
253
(30)
7
(2)
38
10
16
292
$
$
8
13
(9)
1
(70)
28
(22)
(51)
* Includes $107 million of voluntary separation costs in 2003.
K25
Compensation and benefits represented 42% of total railway operating expenses and increased 13% in
2003. Almost half of the increase was the result of the $107 million voluntary separation program. The
remaining increase was principally due to higher wage rates (including the BLE bonus in lieu of wage
increases), which added $45 million, increased health and welfare benefits costs, which were up $44
million, and reduced pension income down $34 million (see Note 11). Approximately $25 million of the
increase in health and welfare benefit costs was attributable to retirees, reflecting a higher estimated
medical inflation rate. NS expects these costs to be down slightly in 2004, a result of a recent plan
amendment and changes in Medicare coverage (see Note 11). However, NS anticipates that this
reduction will largely be offset by lower pension income. Therefore, total pension and postretirement
expenses in 2004 are expected to be comparable to 2003.
In 2002, compensation and benefits increased slightly and represented 40% of total railway operating
expenses. 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).
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 14.2% in 2003 to 13.1% in 2004 and thereafter. In addition, the supplemental
annuity tax was eliminated. These changes resulted in an estimated $21 million reduction in payroll taxes
in 2003 and are expected to result in savings of $16 million in 2004, compared with 2003. However,
these savings are expected to continue 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 decreased 2% in 2003 and increased 1% in 2002.
The 2003 decline reflected lower equipment rents costs, down $26 million, and reduced purchased
services, down $20 million, including lower expenses for intermodal, automotive and bulk transfer
services, and professional and legal fees.
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.
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 7% in 2003
and 14% in 2002. The decline in 2003 was principally the result of lower automotive traffic volume in
addition to adjustments relating to periodic studies of equipment rents and favorable settlements of recent
bills. In addition, the change in accounting related to certain leased locomotives (see Notes 1 and 6) also
reduced equipment rents. 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.
K26
Locomotive repair costs increased in 2003 and 2002, due to more maintenance activity. Locomotive and
freight car maintenance costs are expected to increase further in 2004.
Conrail rents and services increased 2% in 2003 and decreased 2% in 2002. 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). The increase in 2003 reflects lower Conrail earnings and higher expenses in the Shared Assets
Areas, whereas the decline in 2002 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 down slightly in 2003 and up slightly in 2002. Substantial levels of capital
spending affected both years; however, expense in 2003 benefited from a change in accounting for the
cost to remove crossties (see Note 1), and expenses 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 increased 11% in 2003 and decreased 17% in 2002. The increase in 2003 reflects an
11% rise in the average price per gallon and essentially flat consumption. The decline in 2002 reflected a
16% drop in the average price per gallon and slightly lower consumption. Expenses in 2003 and 2002
included benefits of $59 million and $10 million, respectively, from the diesel fuel hedging program (see
“Market Risks and Hedging Activities,” below and Note 16). NS has hedged approximately 63% of
expected 2004 diesel fuel requirements as of December 31, 2003, at an average price of 78 cents per
gallon. Accordingly, if diesel fuel prices are volatile during 2004 it is unlikely that NS will experience
the same degree of volatility in its diesel fuel expense.
Casualties and other claims expenses (including the estimates of costs related to personal injury,
property damage and environmental matters) increased 6% in 2003 and 20% in 2002. The higher expense
in 2003 was due to adverse personal injury claims development and derailments earlier in the year as well
as higher insurance costs. The increase in 2002 reflected adverse personal injury claims development and
higher expenses for loss and damage to lading, as well as higher insurance and environmental remediation
costs.
The largest component of casualties and other claims expense is personal injury costs. In 2003, cases
involving occupational injuries comprised about 40% of the total employee injury cases settled and 31%
of the total settlement payments made. Injuries of this type are often not 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. FELA, 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 on reasonable terms after the September 11 terrorist attacks. NS has been successful in
maintaining a substantial amount of commercial insurance for third-party personal injury, property
damage and FELA claims, although both the cost of this insurance and the amount of risk that NS retains
K27
through self-insurance have more than doubled since the attacks. The magnitude of the premium
increases that NS experienced in 2002 began to subside in 2003, however.
Other expenses increased 8% in 2003 but decreased 10% in 2002. The increase in 2003 was primarily
attributable to higher state franchise and sales and use taxes, the absence of a favorable bad debt
settlement that benefited 2002 and higher union employee travel expenses. The decline in 2002 reflected
lower expenses for property and sales and use taxes.
Other Income – Net
Other income – net was $19 million in 2003, $66 million in 2002 and $99 million in 2001 (see Note 3).
The decline in 2003 was primarily due to the $84 million telecommunications assets impairment charge
that offset increased gains from the sale of properties, higher corporate-owned life insurance returns and
lower interest accruals related to tax liabilities. 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).
Income Taxes
Income tax expense in 2003 was $175 million for an effective rate of 30%, compared with effective rates
of 35% in 2002 and 2001. Excluding NS’ equity in Conrail's after-tax earnings, the effective rate was
33% in 2003, and 38% in 2002 and 2001.
In 2003, the effective rate was reduced by the favorable resolution of prior years’ tax audits. 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 (see Note 4).
In May 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 was signed into law. The law
increased from 30% to 50% the additional first-year depreciation allowance for property acquired after
May 5, 2003, and before January 1, 2005. The 30% additional first-year depreciation allowance was an
element of earlier tax legislation. The acceleration of tax depreciation deductions allowed by these laws
reduces current taxes and increases deferred tax levels by significant amounts.
Discontinued Operations
Income from discontinued operations in 2003 consisted of a $10 million after-tax gain related to the
resolution of tax issues arising from the sale of NS' motor carrier subsidiary. Income from discontinued
operations in 2001 consisted of a $13 million after-tax gain resulting from the expiration of certain
indemnities contained in the sales agreement (see Note 17).
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities, NS' principal source of liquidity, was $1,054 million in 2003,
compared with $803 million in 2002 and $654 million in 2001. The increase in 2003 reflected a smaller
change in the amount of accounts receivables sold; declines in receivables sold amounted to $30 million
in 2003 and $270 million in 2002 (see Note 5). In 2002, the improvement was the result of higher income
K28
from railway operations and favorable changes in working capital, which were offset, in part, by fewer
accounts receivable sold (see Note 5).
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 largely cash neutral because a significant portion 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 $203 million in 2003, $212 million
in 2002 and $250 million in 2001.
NS' working capital deficit was $376 million at Dec. 31, 2003, compared with $554 million at Dec. 31,
2002. The improvement resulted principally from an increase in cash flow from operations and a
reduction in federal income taxes due within one year. Debt due in 2004 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 2003, the amount of
receivables NS could sell under this program ranged from $358 million to $433 million, and the amount
of receivables NS sold ranged from zero to $150 million. Moreover, NS has a $1 billion credit facility,
which expires in 2006, that it can borrow under or use to support commercial paper debt; however,
reductions in its credit rating could limit NS' ability to access the commercial paper markets (see also the
discussion of financing activities, below).
NS expects to generate sufficient cash flow from operations to meet its ongoing obligations. This
expectation is based on a view that the economy will continue a moderate growth rate through 2004.
Contractual obligations at Dec. 31, 2003, related to NS' long-term debt (including capital leases) (see
Note 8), operating leases (see Note 9), agreements with CRC (see Note 2), unconditional purchase
obligations (see Note 18) and other long-term obligations (see Note 18), are as follows:
Total
Payments Due By Period
2005-
2006
($ in millions)
2007-
2008
2004
2009 and
Subsequent
Long-term debt and
capital leases
Operating leases
Agreements with CRC
Unconditional purchase
obligations
Other long-term obligations
Total
$
$
7,160 $
837
718
166
30
8,911 $
360 $
111
32
166
8
677 $
811 $
164
67
--
16
1,058 $
1,338 $
109
68
--
6
1,521 $
4,651
453
551
--
--
5,655
NS also has a contractual obligation related to a lease covering 140 locomotives. 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; however, NS has no obligation related to the debt. NS has the
option to purchase the locomotives, but also can return them to the lessor. If NS does not purchase the
locomotives at the end of the maximum lease term, it is liable for any shortfall in the then fair value of the
locomotives and a specified residual value. NS does not expect to be required to make any payments
under this provision (see Note 9). As the primary beneficiary of the business of the lessor, effective
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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 Note 1, “New
Accounting Pronouncements”).
In addition, NS 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
Payments Due by Period
2005-
2006
($ in millions)
2007-
2008
2004
2009 and
Subsequent
Long-term debt and
capital leases
Operating leases
Total
$
$
676 $
318
994 $
43 $
34
77 $
60 $
66
126 $
60 $
61
121 $
513
157
670
Off balance sheet arrangements consist of an accounts receivable sale program (see Note 5). Under the
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). As of
Dec. 31, 2003, there were no accounts receivable sold, however, NS has the capability to increase the
amounts sold, as discussed above.
Cash used for investing activities decreased 5% in 2003 and increased 12% in 2002. Property additions,
which account for most of the recurring spending in this category, were up 4% in 2003 and down 8% in
2002. Property sales were higher in 2003, which resulted in the net decrease in cash used for investing
activities. The following tables show capital spending (including capital leases) and track and equipment
statistics for the past five years.
Capital Expenditures
2003
2002
2001
($ in millions)
2000
1999
Road
Equipment
Other property
Total
$
$
495 $
218
7
720 $
519 $
174
2
695 $
505 $
233
8
746 $
557 $
146
28
731 $
559
349
4
912
Capital expenditures increased 4% in 2003 and decreased 7% in 2002 (which included $6 million of
capitalized leases). The increase in 2003 reflects higher locomotive purchases offset, in part, by lower
spending on signal and electrical projects and computers. The decline in 2002 reflected higher spending
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on track program work that was offset by fewer locomotive purchases (50 in 2002 compared with 100 in
2001) and lower spending for intermodal facilities.
NS and six other railroads (five Class I railroads and a commuter railroad) have agreed to participate in
the Chicago Region Environmental and Transportation Efficiency (CREATE) project in Chicago. The
project is a proposed public-private partnership between the railroads and city, state and federal
governments to design and implement a comprehensive plan to keep passenger and freight trains moving
on schedule through the metropolitan Chicago area, the largest rail transportation hub in the U.S. The
intent is to reduce rail and highway congestion and add freight and passenger capacity. The project is
estimated to cost $1.5 billion with city, state and federal support. The railroads’ financial contribution to
the project is contingent upon a binding commitment that establishes the availability, on terms and
conditions satisfactory to the railroads, of all required public funding and of third-party properties
necessary to complete the entire project. If public funding is secured, the railroads will contribute a total
of $232 million towards the project with NS’ share slated to be $34 million over an estimated six-year
period.
Track Structure Statistics (Capital and Maintenance)
2003
2002
2001
2000
1999
Track miles of rail installed
Miles of track surfaced
New crossties installed (millions)
233
5,105
2.8
235
5,270
2.8
254
3,836
1.5
390
3,687
1.5
403
5,087
2.3
Average Age of Owned Railway Equipment
Freight cars
Locomotives
Retired locomotives
2003
2002
2001
(years)
2000
1999
26.6
15.3
28.7
25.9
16.1
28.2
25.4
15.7
22.4
24.6
16.1
24.5
23.8
15.4
22.7
The table above excludes equipment leased from PRR (see Note 2), which comprises 17% of the freight
car fleet and 22% 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.
For 2004, NS has budgeted $810 million for capital expenditures. The anticipated spending includes
$517 million for roadway projects, of which $384 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 $220 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.
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Cash used for financing activities was $314 million in 2003 and $150 million in 2002. Financing
activities provided cash of $151 million in 2001. The comparisons reflect net reductions of debt in 2003
and 2002 and a net increase in 2001. Financing activities include loan transactions with a subsidiary of
PRR that resulted in net borrowings of $203 million in 2003, $212 million in 2002 and $250 million in
2001 (see Note 2). Excluding these borrowings, debt was reduced $370 million in 2003, $303 million in
2002 and $20 million in 2001. NS' debt-to-total capitalization ratio (excluding notes payable to the PRR
subsidiary) at year end was 50.7% in 2003 and 53.1% in 2002.
In 2003, NS redeemed all publicly held shares of Norfolk Southern Railway’s $2.60 Cumulative Preferred
Stock, Series A for a redemption price of $50 per share plus accrued and unpaid dividends, for an
aggregate redemption price of $50.2066. The total use of cash was $43 million.
NS currently has in place and available 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.
Should it be necessary, NS has the ability and intent to refinance such notes properly presented.
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
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 $25 million for the year ended Dec. 31, 2003, including $19 million related to the
voluntary separation program. In recording this amount, NS assumed a long-term investment rate of
return of 9%. Investment experience of the pension fund over the past 10-, 15- and 20-year periods has
K32
been in excess of 10%. A one percentage point change to this rate of return assumption would result in a
$17 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
$80 million for the year ended Dec. 31, 2003, which included $22 million related to the voluntary
separation program. 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. Additionally, as discussed in Note 11, recent changes to Medicare are
expected to reduce NS’ postretirement benefit costs.
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, 2003, amounted to $513 million. NS' weighted-average depreciation rates for 2003 are
disclosed in Note 6; a one-tenth percentage point increase (or decrease) in these rates would result in a
$18 million increase (or decrease) to NS' depreciation expense.
Personal Injury, Environmental and Legal Liabilities
NS' expense for “Casualties and other claims” amounted to $181 million for the year ended Dec. 31,
2003. 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 K27). NS 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
K33
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 Sept. 30, 2003, and resulted in a slight
decrease to NS' personal injury liability during the fourth 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 $9 million in 2003, $15 million in
2002 and $12 million in 2001, and capital expenditures totaled approximately $9 million in 2003, and $10
million in both 2002 and 2001. Capital expenditures in 2004 are expected to be comparable to those in
2003.
NS' balance sheets included liabilities for environmental exposures in the amount of $25 million at Dec.
31, 2003, and $29 million at Dec. 31, 2002, (of which $8 million was accounted for as a current liability
in each year). At Dec. 31, 2003, the liability represented NS' estimate of the probable cleanup and
remediation costs based on available information at 113 identified locations. On that date, 10 sites
accounted for $12 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 113 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 describe 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 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 and operated by others, or held for sale.
Because environmental problems may exist on these properties that are latent or undisclosed, there can be
K34
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 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 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 liabilities will be reflected in expenses in the periods in which such
adjustments are known.
Income Taxes
NS' net long-term deferred tax liability totaled $3,223 million at Dec. 31, 2003 (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 a $22 million valuation allowance on $628 million of
deferred tax assets as of Dec. 31, 2003, reflecting the expectation that most of these assets will be
realized. For 2003, 2002 and 2001, the effective tax rates, excluding NS' equity in Conrail's earnings,
were 33%, 38% and 38%, respectively. For every one half percent change in the 2003 effective tax rate,
net income would have changed by $3 million.
CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY
Conrail's net income was $203 million in 2003, compared with $180 million in 2002 and $174 million in
2001 (see Note 2). Results in 2003 included $40 million for the cumulative effect on years prior to 2003
of a change in accounting principles as required by Conrail’s adoption of SFAS No. 143. NS excluded
this amount from its determination of equity in earnings of Conrail because an amount related to Conrail
is included in NS’ cumulative effect adjustment for SFAS No. 143. Conrail’s income before the
accounting change was $163 million, $17 million below 2002, reflecting lower income from operations.
Conrail's operating revenues were $918 million in 2003, $893 million in 2002 and $903 million in 2001.
The 2003 increase was primarily attributable to higher operating fees related to PRR and NYC. The
decrease in 2002 resulted from the expiration of certain equipment leases and lower operating fees,
largely because of reduced operating costs in the Shared Assets Areas.
K35
Conrail's operating expenses were $659 million in 2003, $623 million in 2002 and $639 million in 2001.
The increase in 2003 was primarily the result of higher expenses for compensation and benefits, and
casualties and insurance. 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.
Conrail's cash provided by operations decreased $11 million, or 3%, in 2003, and $79 million, or 16%, in
2002. The decrease in 2003 reflects the absence of an IRS refund received in 2002 that was partially
offset by a decreased use of cash for casualty payments. 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. Cash generated from operations is Conrail's principal source of liquidity and is primarily used for
debt repayments and capital expenditures. Debt repayments totaled $57 million in 2003 and $59 million
in 2002. Capital expenditures totaled $35 million in 2003 and $23 million in 2002.
Conrail had a working capital deficit of $22 million at Dec. 31, 2003, and $29 million at Dec. 31, 2002.
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 $58 million in 2003, $54 million in 2002 and
$44 million in 2001. NS' other comprehensive income (loss) for 2003, 2002 and 2001, as shown in the
Consolidated Statement of Changes in Stockholders' Equity, included a $14 million gain, a $34 million
loss and a $41 million loss, respectively, for its portion of Conrail's other comprehensive loss (see
Note 13).
OTHER MATTERS
Labor Agreements
Approximately 24,000 of NS' railroad employees are covered by collective bargaining agreements with
14 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.
Agreements have been reached with the Brotherhood of Maintenance of Way Employes (BMWE), which
represents about 4,200 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; the Transportation Communications International Union (TCU),
which represents about 4,400 NS employees; the American Train Dispatchers Department (ATDD),
which represents about 400 NS employees; the Brotherhood of Railroad Signalmen (BRS), which
represents about 1,100 NS employees; and the Brotherhood of Locomotive Engineers (BLE), which
represents about 4,500 NS employees. The agreement with the BLE was through 2004; NS recently
reached a further contract extension with BLE through 2009. A tentative agreement with the International
Brotherhood of Electrical Workers (IBEW), which represents about 900 NS employees, failed
ratification.
Health and welfare issues have been resolved with BMWE, TCU, BRS, BLE and UTU. Health and
welfare issues with the other organizations have not yet been resolved.
K36
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 2003. 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, 2003, through swap transactions, NS has hedged approximately 63% of expected 2004
diesel fuel requirements. The effect of the hedges is to yield an average cost of 78 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 $38 million as of Dec. 31, 2003.
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.
At Dec. 31, 2003, NS' debt subject to interest rate fluctuations totaled $636 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 $6 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, 2003, the average pay rate
under these agreements was 1.6%, and the average receive rate was 7%. During 2003, the effect of the
swaps was to reduce interest expense by $10 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
As discussed in Note 1, effective Jan. 1, 2003, NS adopted Financial Accounting Standards Board
(FASB) Statement No. 143, “Accounting for Asset Retirement Obligations,” (SFAS No. 143) and FASB
Interpretation No. 46, “Consolidation of Variable Interest Entities,” (FIN No. 46).
Inflation
In preparing financial statements, accounting principles generally accepted in the United States of
America require the use of historical cost that 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
K37
replacement cost of these assets, as well as the related depreciation expense, would be substantially
greater than the amounts reported on the basis of historical cost.
Trends
Federal Economic Regulation -- Efforts may be made in 2004 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.”
K38
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, 2003, 2002 and 2001
Consolidated Balance Sheets
As of December 31, 2003 and 2002
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
The Index to Consolidated Financial Statement Schedule in Item 15
Page
K40
K41
K42
K43
K44
K45
K46
K47
K79
K39
Report of Management
January 27, 2004
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,
2003. 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, 2003.
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, 2003.
/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/ Marta R. Stewart
Marta R. Stewart
Vice President and
Controller
K40
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, 2003 and 2002, 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, 2003. 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, 2003
and 2002, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2003 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.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2003 the Company
adopted Financial Accounting Standards Board Statement No. 143, Accounting for Asset Retirement
Obligations, and Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable
Interest Entities.
/s/ KPMG LLP
Norfolk, Virginia
January 27, 2004
K41
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, 2003 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
internal control over financial reporting, testing, and evaluating the design and operating effectiveness of
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 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, 2003 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 27, 2004
K42
Norfolk Southern Corporation And Subsidiaries
Consolidated Statements of Income
Years ended December 31,
2002
($ in millions, except earnings per share)
2001
2003
Railway operating revenues
$
6,468
$
6,270 $
6,170
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
2,275
1,427
419
513
380
181
209
5,404
2,022
1,457
412
515
342
171
193
2,014
1,444
421
514
412
143
215
5,112
5,163
Income from railway operations
1,064
1,158
1,007
Other income – net (Note 3)
Interest expense on debt (Note 6)
Income from continuing operations
before income taxes and accounting changes
Provision for income taxes (Note 4)
Income from continuing operations
before accounting changes
Discontinued operations – gain on sale
of motor carrier, net of taxes (Note 17)
Cumulative effect of changes in accounting
principles, net of taxes (Note 1)
Net income
Earnings per share – basic and diluted (Note 14):
Income from continuing operations before
accounting changes
Discontinued operations
Cumulative effect of changes in
accounting principles
Net income
19
(497)
586
175
411
10
114
66
(518)
706
246
99
(553)
553
191
460
362
--
--
13
--
$
$
$
535
$
460 $
375
1.05
0.03
0.29
$
1.18 $
--
--
0.94
0.03
--
1.37
$
1.18 $
0.97
See accompanying notes to consolidated financial statements.
K43
Norfolk Southern Corporation And Subsidiaries
Consolidated Balance Sheets
Assets
Current assets:
Cash and cash equivalents
Accounts receivable-net (Note 5)
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 412,168,988 and 410,154,465 shares,
respectively
Additional paid-in capital
Unearned restricted stock (Note 12)
Accumulated other comprehensive loss (Note 13)
Retained income
Less treasury stock at cost, 21,016,125 and 21,169,125 shares,
respectively
Total stockholders' equity
$
$
$
As of Dec. 31,
2003
2002
($ in millions)
284 $
695
92
189
165
1,425
6,259
11,779
1,133
20,596 $
948 $
199
81
213
360
1,801
6,800
1,071
716
9
3,223
13,620
412
521
(5)
(44)
6,112
(20)
6,976
184
683
97
187
148
1,299
6,178
11,370
1,109
19,956
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
Total liabilities and stockholders' equity
$
20,596 $
19,956
See accompanying notes to consolidated financial statements.
K44
Norfolk Southern Corporation And Subsidiaries
Consolidated Statements of Cash Flows
2003
Years Ended Dec. 31,
2002
($ in millions)
2001
$
535 $
460 $
375
(114)
528
132
(58)
(45)
(10)
(12)
5
(4)
(25)
122
1,054
(720)
78
(106)
108
(640)
(117)
13
(43)
261
(428)
(314)
100
--
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
184
204
--
$
284 $
184 $
204
$
$
510 $
93 $
525 $
54 $
550
74
Cash flows from operating activities
Net income
Reconciliation of net income to net cash
provided by operating activities:
Net cumulative effects of changes in accounting principles
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
Current liabilities other than debt
Other – net (Notes 6 and 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
Redemption of minority interest
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.
K45
Norfolk Southern Corporation And Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Common
Stock
Additional
Paid-in
Capital
Accum.
Other
Compre-
hensive
Loss
Unearned
Retained
Restricted
Income
Stock
($ in millions, except per share amounts)
Treasury
Stock
Total
Balance Dec. 31, 2000
$
405
$
392
$
(6) $
--
$
5,053
$
(20)
$
5,824
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)
Balance Dec. 31, 2001
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)
Balance Dec. 31, 2002
Comprehensive income
Net income
Other comprehensive
income (Note 13)
Total comprehensive
income
Dividends on Common
Stock, $0.30 per share
Other (Notes 11 and 12)
(49)
375
(93)
375
(49)
326
(93)
33
(55)
--
5,335
(20)
6,090
(10)
460
(101)
460
(10)
450
(101)
61
(65)
--
5,694
(20)
6,500
2
407
31
423
3
410
58
481
21
535
(117)
2
40
(5)
535
21
556
(117)
37
Balance Dec. 31, 2003
$
412
$
521
$
(44) $
(5)
$
6,112
$
(20)
$
6,976
See accompanying notes to consolidated financial statements.
K46
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 2003): coal (23%); intermodal (19%);
automotive (14%); chemicals (12%); metals/construction (11%); agriculture/consumer
products/government (11%); and paper/clay/forest products (10%). 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 14 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 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.
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.”
K47
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.”
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 (see Note 6).
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 are 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.
K48
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:
2003
2002
($ in millions except per share)
2001
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:
As reported – basic and diluted
Pro forma – basic and diluted
Required Accounting Changes
$
535
$
460
$
375
18
14
12
(35)
518
1.37
1.33
$
$
$
(45)
429
1.18
1.10
$
$
$
(29)
358
0.97
0.93
$
$
$
NS adopted Financial Accounting Standards Board (FASB) Statement No. 143, “Accounting for Asset
Retirement Obligations,” (SFAS No. 143) effective Jan. 1, 2003, and recorded a $110 million net
adjustment ($182 million before taxes) for the cumulative effect of this change in accounting on years
prior to 2003. Pursuant to SFAS No. 143, the cost to remove crossties must be recorded as an expense
when incurred; previously these removal costs were accrued as a component of depreciation. This change
in accounting lowered depreciation expense by about $26 million for 2003 (because the depreciation rate
for crossties no longer reflects cost to remove) and increased compensation and benefits and other
expenses by about $21 million for the year (for the costs to remove retired assets).
NS also adopted FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” (FIN No. 46)
effective Jan. 1, 2003, and recorded a $4 million net adjustment ($6 million before taxes) for the
cumulative effect of this change in accounting on years prior to 2003. Pursuant to FIN No. 46, NS has
consolidated a special-purpose entity that leases certain locomotives to NS (see Note 9). This entity’s
assets and liabilities at Jan. 1, 2003, included $169 million of locomotives and $157 million of debt
related to their purchase as well as a $6 million minority interest liability. This change in accounting
increased depreciation and interest expense (to reflect the locomotives as owned assets) and lowered lease
expense. The net effect to total railway operating expenses and net income was not material.
Reclassifications
Certain amounts in the consolidated financial statements and notes thereto have been reclassified to
conform to the 2003 presentation.
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
K49
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.
Norfolk Southern's railroad subsidiary, 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.
Operation of Conrail's Lines
The June 1999 Operating Agreement between NSR and PRR governs substantially all track assets
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 equipment for varying terms from PRR. 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.
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:
2004
2005
2006
2007
2008
2009 and subsequent years
Total
PRR Oper.
Agmt.
PRR Lease
Agmt.
($ in millions)
SAA
Agmts.
$
$
238
246
246
246
246
4,039
5,261
$
$
104
75
61
49
44
89
422
$
$
32
33
34
34
34
551
718
Operating lease expense related to the agreements, which is included in “Conrail rents and services,”
amounted to $478 million in 2003, $468 million in 2002 and $467 million in 2001.
Conrail Corporate Reorganization
NS, CSX and Conrail are jointly seeking to reorganize Conrail and establish direct ownership and control
by NSR and CSXT of PRR and NYC, respectively. The proposed reorganization would replace the
operating agreements described above and allow NSR and CSXT to directly own and operate PRR and
NYC, respectively. The reorganization would not involve the Shared Assets Areas, and would have no
effect on the competitive rail service provided in the Shared Assets Areas. Conrail would continue to
own, manage and operate the Shared Assets Areas as previously approved by the Surface Transportation
Board (STB).
K50
Consummation of the reorganization requires a ruling from the Internal Revenue Service (IRS), the
approval of the STB and filings with the Securities and Exchange Commission. In addition, NS, CSX
and Conrail must obtain the consent of Conrail’s debt holders to carry out the transaction and will obtain a
valuation of PRR and of NYC.
In 2003, the IRS issued a ruling that the reorganization would qualify as a tax-free distribution. Also in
2003, the STB granted its authorization to carry out the reorganization, subject to a condition requiring
NS, CSX and Conrail to either: (i) obtain the voluntary consent of the Conrail debt holders; or (ii)
propose further proceedings to determine whether the terms offered to the Conrail debt holders are fair,
just and reasonable. In 2004, NS, CSX and Conrail intend to file registration statements on Form S-4
with the Securities and Exchange Commission to allow a proposed exchange offer relating to Conrail’s
unsecured debt (see below). In order to implement the reorganization approved by the IRS, the
companies have engaged an investment banking firm to provide a valuation. The results of the valuation
could impact NS’ carrying amount of its investment in Conrail and the recording of the corporate
reorganization.
As a part of the proposed reorganization, Conrail would undertake a restructuring of its existing
unsecured and secured public indebtedness. There are currently two series of unsecured public
debentures with an outstanding principal amount of $800 million and 13 series of secured debt with an
outstanding principal amount of approximately $321 million. It is currently contemplated that guaranteed
debt securities of two newly formed corporate subsidiaries of NSR and CSXT would be offered in a
58%/42% ratio in exchange for Conrail’s unsecured debentures. Upon completion of the proposed
transaction, the new debt securities would become direct unsecured obligations of NSR and CSXT,
respectively, and would rank equally with all existing and future senior unsecured debt obligations, if any,
of NSR and CSXT. These new debt securities will have maturity dates, interest rates and principal and
interest payment dates identical to those of the respective series of Conrail’s unsecured debentures. In
addition, these new debt securities will have covenants substantially similar to those of the publicly traded
debt securities of NS and CSX, respectively.
Conrail’s secured debt and lease obligations will remain obligations of Conrail and are expected to be
supported by new leases and subleases which, upon completion of the proposed transaction, would be the
direct lease and sublease obligations of NSR or CSXT.
NS, CSX and Conrail are diligently working to complete all steps necessary to consummate the Conrail
corporate reorganization in 2004. Upon consummation of the proposed transaction, NS’ investment in
Conrail will no longer include amounts related to PRR and NYC. Instead, the assets and liabilities of
PRR will be reflected in their respective line items in NS’ Consolidated Balance Sheet, and any amounts
due to PRR would be extinguished.
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, 2003, the difference between NS' investment in Conrail and its share of
Conrail's underlying net equity was $3.7 billion.
K51
NS' consolidated balance sheet at Dec. 31, 2003, includes $35 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, 2003, NS had paid
$168 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 2003 and 2002 and $6
million in 2001.
“Conrail rents and services” includes: (1) expenses for amounts due to PRR and CRC for use by NSR of
operating properties and equipment and operation of the Shared Assets Areas and (2) NS' equity in the
earnings of Conrail, net of amortization.
A significant portion of payments made to PRR is borrowed back from a subsidiary of PRR. Previously,
these loans were made under a demand note; however, in the first quarter of 2002, the subsidiary of PRR
exchanged this demand note for a new note due in 2032. As a result, borrowings owed to the subsidiary
of PRR now comprise the noncurrent balance “Due to Conrail.” The interest rate for these loans is
variable and was 1.7% at Dec. 31, 2003. Upon consummation of the proposed reorganization, these loans
would be extinguished. The current balance “Due to Conrail” at Dec. 31, 2003, is composed of amounts
related to expenses included in “Conrail rents and services,” as discussed above.
Summary Financial Information - Conrail
The following historical cost basis financial information should be read in conjunction with Conrail's
audited financial statements, included as Exhibit 99 to this Annual Report on Form 10-K.
Summarized Consolidated Statements of Income - Conrail
Operating revenues
Operating expenses
Operating income
Other – net
Income before income taxes
Provision for income taxes
Income before accounting change
Cumulative effect of change in
accounting principle, net of taxes
Net income
2003
Years Ended Dec. 31,
2002
($ in millions)
2001
$
$
918
659
259
(3)
256
93
163
40
203
$
$
893
623
270
(10)
260
80
180
--
180
$
$
903
639
264
(6)
258
84
174
--
174
Note: Conrail adopted SFAS No. 143, effective Jan. 1, 2003, and recorded a $40 million net adjustment
for the cumulative effect of this change in accounting on years prior to 2003. NS excluded this amount
from its determination of equity earnings of Conrail because an amount related to Conrail is included in
NS’ cumulative effect adjustment for SFAS No. 143.
K52
Summarized Consolidated Balance Sheets - Conrail
Assets:
Current assets
Noncurrent assets
Total assets
Liabilities and stockholders' equity:
Current maturities of long-term debt
Other current liabilities
Long-term debt
Other noncurrent liabilities
Stockholders' equity
Total liabilities and stockholders equity
As of Dec. 31,
2003
2002
($ in millions)
$
$
$
$
257 $
7,959
8,216 $
58 $
221
1,067
2,416
4,454
8,216 $
300
7,857
8,157
57
272
1,123
2,479
4,226
8,157
Note: Current assets include amounts due from NS and CSX totaling $136 million at Dec. 31, 2003, and
$158 million at Dec. 31, 2002. Noncurrent assets include amounts due from NS and CSX totaling $1,231
million at Dec. 31, 2003, and $892 million at Dec. 31, 2002. Current liabilities include amounts payable
to NS and CSX totaling $5 million at Dec. 31, 2003, and $9 million at Dec. 31, 2002.
3. Other Income - Net
Income from natural resources:
Royalties from coal
Nonoperating depletion and depreciation
Subtotal
Gains from sale of properties and investments
Rental income
Corporate-owned life insurance – net
Interest income
Discount on sales of accounts receivable (Note 5)
Impairment of telecommunications assets (Note 6)
Taxes on nonoperating property
Other interest expense
Charitable contributions
Equity in earnings (losses) of partnerships
Other
Total
$
$
2003
2002
($ in millions)
2001
39
(15)
24
45
38
21
10
--
(84)
(8)
(4)
(4)
--
(19)
19
$
$
48 $
(14)
34
47
36
(1)
12
(4)
--
(7)
(31)
--
(1)
(19)
66 $
52
(13)
39
59
40
6
15
(17)
--
(11)
1
(4)
(8)
(21)
99
“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 $50 million at Dec.
31, 2003, and $46 million at Dec. 31, 2002, arising from corporate-owned life insurance borrowings.
K53
4. Income Taxes
Provision for Income Taxes
Current:
Federal
State
Total current taxes
Deferred:
Federal
State
Total deferred taxes
2003
2002
($ in millions)
2001
$
32 $
11
43
61 $
7
68
97
35
132
145
33
178
125
22
147
35
9
44
Provision for income taxes
$
175 $
246 $
191
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:
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
2003
2002
2001
Amount
%
Amount
%
Amount
%
($ in millions)
$
205
35 $
247
35 $
194
35
30
(20)
(8)
(32)
5
(3)
(1)
(6)
26
(19)
(1)
(7)
4
(3)
--
(1)
20
(16)
(3)
(4)
4
(3)
--
(1)
35
Provision for income taxes
$
175
30 $
246
35 $
191
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.
K54
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
Employee benefits
Other
Total gross deferred tax liabilities
Net deferred tax liability
Net current deferred tax asset
December 31,
2003
2002
($ in millions)
$
194
--
157
240
37
628
(22)
606
(3,466)
(8)
(166)
(3,640)
(3,034)
189
$
178
26
138
234
16
592
(24)
568
(3,300)
--
(91)
(3,391)
(2,823)
187
Net long-term deferred tax liability
$
(3,223)
$
(3,010)
Except for amounts for which a valuation allowance has been provided, management believes that it is
more likely than not that future taxable income will support the realization of the other deferred tax assets.
The total valuation allowance decreased $2 million in 2003 and increased $6 million in both 2002 and
2001.
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 1999. The favorable resolution of prior years’ audits is reflected
in the “Other – net” line of the reconciliation of statutory rate to the effective rate, as shown above, and
for 2003 comprised most of that line item. The consolidated federal income tax returns for 2000 and
2001 are being audited by the IRS. In addition, the 1998 through 2001 federal income tax returns of a tax
credit investment affiliate in which NS owns a minority interest 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
Since May 2000, NS has sold, through a bankruptcy-remote special purpose subsidiary, undivided
ownership interests in a pool of accounts receivable. The buyers have a priority collection interest in the
entire pool of receivables and, as a result, NS has retained credit risk to the extent the pool of receivables
exceeds the amount sold. NS services and collects the receivables on behalf of the buyers; however, no
servicing asset or liability has been recognized because the benefits of servicing are estimated to be just
K55
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.
No accounts receivable have been sold under this arrangement since the third quarter of 2003. At
Dec. 31, 2002, $30 million of accounts receivable were sold, and therefore not included in “Accounts
receivable, net” on the Consolidated Balance Sheets. 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.
The fees associated with sales, which are based on the buyers' financing costs, are included in “Other
income – net” (see Note 3).
NS' allowance for doubtful accounts was $7 million at Dec. 31, 2003, and $5 million at Dec. 31, 2002.
6. Properties
Railway property:
Road
Equipment
Other property
Less accumulated depreciation
December 31,
2003
2002
($ in millions)
Depreciation
Rate for 2003
$
11,243
5,779
569
17,591
(5,812)
$
10,859
5,573
655
17,087
(5,717)
2.7%
4.2%
3.0%
Net properties
$
11,779
$
11,370
Railway property includes $477 million at Dec. 31, 2003 and $480 million at Dec. 31, 2002, of assets
recorded pursuant to capital leases. Other property includes the costs of obtaining rights to natural
resources of $341 million at Dec. 31, 2003 and 2002.
Impairment of Telecommunications Assets
In 2003, NS recorded an $84 million non-cash reduction in the carrying value of certain
telecommunications assets to recognize their impaired value in accordance with the provisions of SFAS
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” NS’ subsidiary,
Thoroughbred Technology and Telecommunications (T-Cubed), developed fiber optic infrastructure with
companies in the telecommunications industry. This industry has been in a severe downturn and,
accordingly, T-Cubed monitored the carrying amount of these assets through independent fair market
value appraisals. As a result of a deterioration in the long-term prospects for these assets, an updated
appraisal obtained in the fourth quarter indicated a significant decline in their value.
Capitalized Interest
Total interest cost incurred on debt in 2003, 2002 and 2001 was $509 million, $529 million and $570
million, respectively, of which $12 million, $11 million and $17 million was capitalized.
K56
7. Current Liabilities
Accounts payable:
Accounts and wages payable
Casualty and other claims
Vacation liability
Equipment rents payable – net
Other
Total
Other current liabilities:
Interest payable
Retiree health and death benefit obligations (Note 11)
Liabilities for forwarded traffic
Accrued Conrail-related costs (Note 2)
Other
Total
8. Long-term Debt
December 31,
2003
2002
($ in millions)
$
$
$
$
491
218
113
103
23
948
104
38
37
21
13
213
$
$
$
$
446
207
117
116
22
908
118
31
34
34
15
232
December 31,
2003
2002
($ in millions)
Notes at average rates and maturities as follows:
7.17%, maturing 2004 to 2008
7.09%, maturing 2009 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 3.8%, maturing to 2014
Capitalized leases at an average rate of 1.7%, maturing to 2023
Other debt at an average rate of 6.2%, 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 2004 are as follows:
2005
2006
2007
2008
2009 and subsequent years
Total
$
$
$
$
1,790 $
1,000
800
1,500
717
350
636
274
118
(25)
7,160
(360)
6,800 $
509
302
866
472
4,651
6,800
1,840
1,200
800
1,500
717
350
558
306
122
(29)
7,364
(358)
7,006
K57
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. Should it be necessary, NS has the ability and intent to refinance
such notes properly presented.
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 $96 million at Dec. 31, 2003, and $86 million at Dec. 31, 2002.
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, 2003, 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 $1 billion credit agreement that expires in 2006.
At Dec. 31, 2003, and Dec. 31, 2002, NS had no commercial paper outstanding. Any borrowings under
the credit agreement are contingent on the continuing effectiveness of the representations and warranties
made at the inception of the agreement.
Debt Covenants
NS is subject to various financial covenants with respect to its debt and under its credit agreement,
including a minimum net worth requirement, a maximum leverage ratio restriction and certain restrictions
on issuance of further debt. At Dec. 31, 2003, NS was in compliance with all debt covenants.
9. Lease Commitments
NS is committed under long-term lease agreements, which expire on various dates through 2067, for
equipment, lines of road and other property. The following amounts do not include payments to PRR
under the Operating Agreement and lease agreements or to CRC under the SAA agreements (see Note 2).
Future minimum lease payments and operating lease expense, other than to PRR and CRC, are as follows:
Operating
Leases
Capital
Leases
($ in millions)
2004
2005
2006
2007
2008
2009 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
$
$
111
94
70
61
48
453
837
$
$
$
47
48
43
41
14
113
306
(32)
274
K58
Operating Lease Expense
Minimum rents
Contingent rents
Total
2003
2002
($ in millions)
2001
$
$
130
63
193
$
$
140 $
60
200 $
149
55
204
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. The lessor is a special-purpose
entity whose activities are limited to those incident to this particular transaction. As discussed in Note 1
under the heading “Required Accounting Changes,” NS has consolidated this entity for reporting
purposes as of Jan. 1, 2003. For the periods prior to consolidation, the table above includes operating
lease expense related to this lease of $13 million in 2002 and $18 million in 2001. 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,
2003, the maximum liability under this provision, assuming NS chose not to renew the lease in 2004 and
the then fair value of the locomotives was zero, would be $106 million.
10. Other Liabilities
Retiree health and death benefit obligations (Note 11)
Casualty and other claims
Deferred compensation
Net pension obligations (Note 11)
Accrued Conrail-related costs (Note 2)
Other
Total
11. Pensions and Other Postretirement Benefits
December 31,
2003
2002
($ in millions)
$
$
321 $
270
143
89
14
234
1,071 $
286
254
144
82
26
237
1,029
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.
Pension Plan Asset Management
Eleven investment firms manage the Company’s defined benefit pension plan’s assets under investment
guidelines approved by the Board of Directors. Investments are restricted to domestic fixed income
securities, a limited amount of international fixed income securities, domestic and international equity
K59
investments and unleveraged exchange-traded options and financial futures. Limitations restrict
investment concentration and use of certain derivative instruments. Fixed income investments must have
an average rating of “AA” or better and all fixed income securities must be rated “A” or better except
bond index funds. Equity investments must be in liquid securities listed on national exchanges. No
investment is permitted in the securities of Norfolk Southern Corporation or its subsidiaries (except
through commingled pension trust funds). Investment managers’ returns are expected to exceed selected
market indices by prescribed margins.
The target asset allocation range for equity is between 65% and 75% of the fund’s assets, with
approximately 10% of the fund’s assets allocated to international equity investments. The asset allocation
on Dec. 31, 2003, was 25% in fixed income investments and 75% in equity investments, including 9% in
international equities. This compared to 33%, 67% and 9%, respectively, on Dec. 31, 2002.
The plan’s assumed future returns are based principally on the asset allocation and on the historic returns
for the plan’s asset classes determined from both actual plan returns and, over longer time periods, market
returns for those asset classes. As of Dec. 31, 2003, the plan had assets of $1.72 billion and a current
pension obligation of $1.49 billion.
Voluntary Separation Program
Compensation and benefits expense in 2003 includes $107 million of costs related to a voluntary
separation program undertaken in the fourth quarter. Through the program, 553 nonagreement employees
were separated from service, of which 314 retired under Norfolk Southern’s retirement plan. The costs
include $66 million for separation payments and other benefits of the program and $41 million of costs
related to the pension and other benefit plans.
Medicare Changes
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act) was signed into
law in December 2003. The Act introduces a new prescription drug benefit under Medicare (Medicare
Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. Norfolk Southern believes that its medical
plan’s prescription drug benefit will qualify as actuarially equivalent to Medicare Part D based on a
review by the plan’s external prescription drug administrator of the plan’s prescription drug benefit
compared with the prescription drug benefit that would be paid under Medicare Part D beginning in 2006.
Norfolk Southern has elected to take into account these legislative changes in the measurement of its
postretirement benefit obligations in accordance with Financial Accounting Standards Board Staff
Position No. 106-1. This resulted in a $45 million decrease in the end-of-year benefit obligation with a
corresponding decline in the unrecognized actuarial loss for 2003. There was no effect on the net benefit
cost in 2003; however, the effects of the Act will be reflected in the net benefit cost in 2004 and
subsequent years. Specific authoritative guidance on the accounting for the Act’s subsidy is pending, and
that guidance, when issued, could require Norfolk Southern to change information previously reported
herein.
K60
Pension and Other Postretirement Benefit Obligations and Plan Assets
Pension Benefits
2002
2003
($ in millions)
Other Benefits
2002
2003
Change in benefit obligations
Benefit obligation at beginning of year
Service cost
Interest cost
Amendment
Legislative changes
Curtailment loss
Special termination benefits
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
$
$
$
$
1,370 $
20
89
--
--
17
--
105
(113)
1,488
1,324 $
17
91
--
--
--
--
54
(116)
1,370
1,798
(201)
6
(18)
(116)
1,469
1,469
358
6
--
(113)
1,720
232
592 $
18
40
(51)
(45)
10
17
65
(38)
608
106
24
38
--
(38)
130
479
13
33
--
--
--
--
98
(31)
592
118
(12)
31
--
(31)
106
99
(478)
(486)
208
21
461 $
305
26
430 $
163
(44)
(359) $
169
--
(317)
532 $
(89)
18
461 $
497 $
(82)
15
430 $
-- $
(359)
--
(359) $
--
(317)
--
(317)
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 $89 million at Dec. 31, 2003, and $82 million at Dec. 31, 2002. These plans' projected benefit
obligations were $103 million at Dec. 31, 2003, and $94 million at Dec. 31, 2002. Because of the nature
of such plans, there are no plan assets.
Section 401(h) account transfers to NS, from pension assets, were zero in 2003 and $18 million in 2002
as reimbursement for medical payments for retirees.
During 2003, NS amended its retiree medical plan to require participants retiring after Dec. 31, 2003 to
share in any increased medical costs. Contributions will be determined annually and will increase at a
K61
rate similar to that of active nonagreement employees. The amendment decreased the retiree medical
benefit obligation by $51 million.
Pension and Other Postretirement Benefit Costs Components
Pension benefits
Service cost
Interest cost
Curtailment loss
Expected return on plan assets
Amortization of prior service cost
Amortization of initial net asset
Recognized net actuarial gains (losses)
Net benefit
Other postretirement benefits
Service cost
Interest cost
Curtailment loss
Special termination benefits
Expected return on plan assets
Amortization of prior service cost
Amortization of unrecognized losses
Net cost
Pension Assumptions
2003
2002
($ in millions)
2001
$
$
$
$
20 $
89
17
(158)
5
--
2
(25) $
18 $
40
10
17
(12)
(7)
14
80 $
17 $
91
--
(179)
4
--
(13)
(80) $
13 $
33
--
--
(13)
--
--
33 $
15
94
--
(202)
4
(3)
(24)
(116)
14
33
--
--
(13)
--
--
34
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
Health Care Cost Trend Assumptions
2003
6.25%
4.5%
6.75%
9%
4.5%
2002
6.75%
4.5%
7.25%
9%
5%
2001
7.25%
5%
7.50%
10%
5%
For measurement purposes, increases in the per capita cost of covered health care benefits were assumed
to be 9% for 2004 and 8% for 2005. It is assumed the rate will decrease gradually to an ultimate rate of
5% for 2008 and remain at that level thereafter.
K62
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
Contributions for Pension and Other Postretirement Benefits
One percentage point
Increase
Decrease
($ in millions)
$
$
8 $
65 $
(7)
(47)
NS expects to contribute approximately $7 million to its pension plans and $42 million to its other
postretirement benefit plans in 2004.
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 $18 million in
2003, $11 million in 2002 and $10 million
in 2001.
Section 401(k) Plans
Norfolk Southern and certain subsidiaries provide Section 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 2003, $12 million in 2002 and $11 million in 2001.
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 shares and
performance share units (PSUs), up to a maximum of 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.
K63
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 shares, 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 $29 million in 2003, $23 million in 2002 and
$20 million in 2001. NS recognized additional paid-in capital of $2 million in 2003, $6 million in 2002
and $1 million in 2001 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 2.8% in 2003, 4.6% in 2002
and 5.1% in 2001; average stock-price volatilities of 33% in 2003, 32% in 2002 and 39% in 2001; and
dividend yields of zero in 2003, zero in 2002 and 2% in 2001. These assumptions produced per-share
grant-date fair values of $6.60 in 2003, $8.26 in 2002 and
$5.48 in 2001.
Stock Option Activity
Balance 12/31/00
Granted
Exercised
Expired
Balance 12/31/01
Granted
Exercised
Expired
Balance 12/31/02
Granted
Exercised
Expired
Balance 12/31/03
Option Shares
28,120,950
Weighted
Average
Exercise Price
24.96
$
6,985,000
(1,079,902)
(612,525)
33,413,523
7,384,000
(2,851,538)
(287,341)
37,658,644
5,700,000
(781,610)
(863,219)
41,713,815
15.48
16.58
26.51
23.21
22.49
17.48
26.73
23.47
19.63
16.13
24.37
23.07
$
$
$
Of the total options outstanding at Dec. 31, 2003, 36 million were vested and have a weighted-average
exercise price of $23.61.
K64
Stock Options Outstanding
Range
$15.48-$16.94
19.63-22.49
24.31-27.69
29.46-33.25
$15.48-$33.25
Exercise Price
Weighted Average
$16.27
21.21
26.84
32.09
$23.07
Number Weighted Average
Remaining
Contractual Life
6.5 years
7.9 years
3.7 years
4.4 years
6.1 years
Outstanding
at 12/31/03
11,568,474
14,070,100
7,658,250
8,416,991
41,713,815
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 946,000 and
$19.63 in 2003; 815,000 and $22.49 in 2002; and 817,500 and $15.48 in 2001. 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.
Restricted Shares
420,000 restricted shares were granted in 2003, with a grant-date fair market value of $19.63 and a three-
year restriction period. At Dec. 31, 2003, the balance of unearned compensation was $5 million relating
to 391,800 restricted shares.
Shares Available and Issued
Shares of stock available for future grants and issued in connection with all features of the LTIP and
TSOP are as follows:
Available for future grants 12/31:
LTIP
TSOP
Shares of Common Stock issued:
LTIP
TSOP
2003
2002
2001
17,994,726
2,737,200
23,645,146
2,568,200
30,816,365
2,535,000
1,412,749
--
2,917,898
--
1,146,346
--
K65
13. Stockholders' Equity
Accumulated Other Comprehensive Loss
“Accumulated other comprehensive loss” reported in the Consolidated Statements of Changes in
Stockholders' Equity consisted of the following:
Balance
at Beginning
of Year
Net
Gain
(Loss)
Reclassification
Adjustments
($ in millions)
Balance
at End
of Year
$
$
$
$
1 $
18
(84)
(65) $
6 $
(11)
(50)
$
$
$
(1)
46
12
57
--
35
(34)
$
--
(36)
--
(36)
$
$
(5)
(6)
--
(55) $
1
$
(11)
$
--
28
(72)
(44)
1
18
(84)
(65)
December 31, 2003
Unrealized gains on securities
Cash flow hedges
Minimum pension liability
Accumulated other
comprehensive loss
December 31, 2002
Unrealized gains on securities
Cash flow hedges
Minimum pension liability
Accumulated other
comprehensive loss
K66
“Other comprehensive income (loss)” reported in the Consolidated Statements of Changes in
Stockholders' Equity consisted of the following:
Year ended Dec. 31, 2003
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, 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)
Tax
Pretax
Amount
(Expense) Net-of-Tax
Benefit
($ in millions)
Amount
$
75 $
(29) $
(59)
16
(1)
11
26 $
23
(6)
--
1
(5) $
58 $
(23) $
(10)
48
(9)
(34)
5 $
4
(19)
4
--
(15) $
(27) $
11 $
8
(19)
(1)
(35)
(55) $
(3)
8
--
(2)
6 $
$
$
$
$
$
46
(36)
10
(1)
12
21
35
(6)
29
(5)
(34)
(10)
(16)
5
(11)
(1)
(37)
(49)
In 2003, 2002 and 2001, Conrail recorded a $25 million gain, a $59 million loss and a $70 million loss,
respectively, in other comprehensive income (loss) related to its minimum pension liability. NS' “Other
comprehensive income (loss)” includes a $14 million gain for 2003, a $34 million loss for 2002 and a $41
million loss for 2001, arising from the Conrail adjustments.
K67
Undistributed Earnings of Equity Investees
“Retained income” includes undistributed earnings of equity investees, principally attributable to NS'
equity in the earnings of Conrail, of $455 million at Dec. 31, 2003; $375 million at Dec. 31, 2002; and
$355 million at Dec. 31, 2001.
14. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share:
2003
2002
($ in millions except per share, shares in millions)
2001
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
restricted shares (as determined by the
application of the treasury stock method)
Adjusted weighted-average shares outstanding
Diluted earnings per share
$
$
$
535
$
460 $
375
390
1.37
$
388
1.18 $
390
2
392
1.37
$
388
2
390
1.18 $
385
0.97
385
1
386
0.97
These calculations exclude options for which the exercise price exceeded the average market price of
Common Stock as follows: 28 million in 2003, 24 million in 2002 and 21 million in 2001.
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
2003
2002
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
32 $
93
(7,160)
($ in millions)
40 $
105
(8,101)
30 $
93
(7,364)
39
104
(8,412)
K68
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.
Carrying amounts of marketable securities reflect unrealized holding gains of $1 million on Dec. 31, 2003
and 2002. Sales of “available-for-sale” securities were immaterial for the years ended Dec. 31, 2003,
2002 and 2001.
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 No. 133), as amended by Statement of Financial
Accounting Standards No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging
Activities” (SFAS No. 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
2003
286
374
2002
288
393
$0.76
$0.66
Percent of estimated future diesel fuel consumption covered as of
Dec. 31, 2003
2004
63%
2005
22%
2006
--
K69
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%, 7% and 8%
of NS' operating expenses for the years ended Dec. 31, 2003, 2002 and 2001, respectively.
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 2003 diesel fuel expenses of $59 million, 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 2003, 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 $186 million, or 2.8%,
and $220 million, or 3.2%, of its fixed rate debt portfolio hedged at Dec. 31, 2003, and Dec. 31, 2002,
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, 2003 and 2002, 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 $40 million (pretax) at Dec. 31,
2003, and $29 million (pretax) at Dec. 31, 2002, both relating to an increase in the fair value of derivative
fuel hedging transactions that will terminate within 12 months.
The asset and liability positions of NS' outstanding derivative financial instruments were as follows:
Interest rate hedges:
Gross fair market asset position
Gross fair market (liability) position
Fuel hedges:
Gross fair market asset position
Gross fair market (liability) position
Total net asset (liability) position
K70
December 31,
2003
2002
($ in millions)
$
$
16 $
--
45
--
61 $
24
--
29
--
53
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 2003 include an additional after-tax gain of $10 million, or 3 cents
per share, that resulted from resolution of tax issues related to the transaction. Results in 2001 include an
additional after-tax gain of $13 million, or 3 cents per share, that resulted from the expiration of certain
indemnities contained in the sales agreement.
18. Commitments and Contingencies
Lawsuits
Norfolk Southern and certain subsidiaries are defendants in numerous lawsuits and other claims relating
principally to railroad operations. When management concludes that it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge
to expenses. 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 accrual
adjustments 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.
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 $25 million at Dec.
31, 2003, and $29 million at Dec. 31, 2002, (of which $8 million was accounted for as a current liability
in each year). At Dec. 31, 2003, the liability represented NS' estimate of the probable cleanup and
remediation costs based on available information at 113 identified locations. On that date, 10 sites
accounted for $12 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.
K71
At some of the 113 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 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 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 unidentified environmental sites and matters are
likely to arise from time to time. The resulting liabilities could have a significant effect on NS’ 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 $166 million in connection with its 2004
capital program. In addition, Norfolk Southern has committed to purchase telecommunications services
totaling $30 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 sales program.
K72
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.
NS has outstanding warranty liabilities primarily related to work performed at its locomotive facilities.
NS has recorded a reserve of $1 million as of Dec. 31, 2003, and less than $2 million as of Dec. 31, 2002
for these warranties.
As of Dec. 31, 2003, certain Norfolk Southern subsidiaries are contingently liable as guarantors with
respect to $8 million of indebtedness of an entity in which they have 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.
K73
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
2003
Railway operating revenues
Income from railway operations
Income from continuing operations
before accounting changes
Net income
Earnings per share – basic and diluted:
Income from continuing operations
before accounting changes
Net income
2002
Railway operating revenues
Income from railway operations
Net income
Earnings per share -
basic and diluted
March 31
Three Months Ended
Sept. 30
June 30
Dec. 31
(In millions of dollars, except per share amounts)
$
1,561
231
$
1,633
298
$
1,598
311
$
1,676
224**
85
209*
0.22
0.54*
137
137
0.35
0.35
137
137
0.35
0.35
52**
52**
0.13**
0.13**
$
$
$
1,498
237
86
$
1,593
322
119
$
1,598
311
126
1,581
288
129
0.22
$
0.31
$
0.32
$
0.33
* Includes a $114 million, or 29 cents per share, increase related to required accounting changes (see
Note 1 on page K47), and a $10 million, or 3 cents per share, gain from discontinued operations (see
Note 17 on page K71).
** Includes a $107 million pre-tax charge for a voluntary separation program (see Note 11 on page K59),
which reduced net income by $66 million or 17 cents per share. Also includes an $84 million impairment
charge (see Note 6 on page K56), which reduced net income by $53 million or 13 cents per share.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a)
Evaluation of Disclosure Controls and Procedures.
Norfolk Southerns’ 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-
15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of December 31, 2003. Based on such evaluation, such officers have concluded that, as
of December 31, 2003, 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.
K74
(b)
Changes in Internal Controls.
During the fourth quarter of 2003, management has not identified any changes in NS' internal
controls over financial reporting that have materially affected, or are reasonably likely to
materially affect, NS’ internal controls over financial reporting.
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 Item 10, Part III, is incorporated
herein by reference from the information appearing under the caption “Election of Directors,” under the
subcaptions “Committees” (including the information appearing under “Audit Committee”) and
“Corporate Governance” under the caption “Board of Directors;” and under the caption “Section 16(a)
Beneficial Ownership Reporting Compliance” in Norfolk Southern's definitive Proxy Statement, for the
Norfolk Southern Annual Meeting of Stockholders to be held on May 13, 2004, 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 Item 11, 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 13, 2004, 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 and Related
Stockholder Matters.
In accordance with General Instruction G(3), information called for by Item 12, 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 13, 2004, which definitive Proxy Statement will be filed electronically with the
Commission pursuant to Regulation 14A.
K75
Equity Compensation Plan Information (as of Dec. 31, 2003)
Number of
securities
to be issued upon
exercise of
Plan
category
outstanding options,
warrants and rights
(a)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding
securities reflected
in column (a))
(c)
Weighted-average
exercise price
of outstanding
options, warrants
and rights
(b)
Equity compensation
plans approved by
security holders1
Equity compensation
plans not approved by
security holders2
Total
36,024,515
23.114
17,994,7266
8,262,8003
44,287,315
22.913,5
23.07
3,282,2007
21,276,926
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 2,328,500 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, 4,239,000 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, 39,000 are available for grant
as restricted stock under the Directors' Restricted Stock Plan and 456,706 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
K76
Committee (Committee) may grant incentive stock options, nonqualified stock options, stock 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 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.
K77
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.
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 whose equivalent value is between five and eight
shares of Norfolk Southern Common Stock. Awards for the 2003 calendar year were payable in shares of
Norfolk Southern Common Stock. SIP was amended effective Jan. 1, 2004, to provide for safety awards
for calendar years beginning on or after Jan.1, 2004, to be made in the form of stock units payable in cash
on the date of the award, so shares of Norfolk Southern Common Stock will no longer be awarded.
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 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 Item 13, 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 13, 2004, which definitive Proxy Statement will be filed
electronically with the Commission pursuant to Regulation 14A.
Item 14. Principal Accountant Fees and Services.
In accordance with General Instruction G(3), information called for by Item 14, Part III is incorporated
herein by reference from the information appearing under the caption “Ratification of Appointment of
Independent Public Accountants” in Norfolk Southern’s definitive Proxy Statement, for the Norfolk
Southern Annual Meeting of Stockholders to be held on May 13, 2004, which definitive proxy statement
will be filed electronically with the Commission pursuant to Regulation 14A.
K78
PART IV
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(A)
The following documents are filed as part of this report:
1.
Index to Consolidated Financial Statements
Independent Auditors' Report
Independent Accountants’ Report on Internal Control Over Financial Reporting
Consolidated Statements of Income, Years ended Dec. 31, 2003, 2002 and 2001
Consolidated Balance Sheets As of Dec. 31, 2003 and 2002
Consolidated Statements of Cash Flows, Years ended Dec. 31, 2003, 2002
and 2001
Consolidated Statements of Changes in Stockholders' Equity, Years ended
Dec. 31, 2003, 2002 and 2001
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
K41
K42
K43
K44
K45
K46
K47
Page
K88
3.
Exhibits
Exhibit
Number
Description
3
3(i)
3(ii)
Articles of Incorporation and Bylaws -
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 November 25, 2003, are filed
herewith.
K79
4
Instruments Defining the Rights of Security Holders, Including Indentures:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
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.
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.
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.
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.
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.
K80
(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.
In accordance with Item 601(b)(4)(iii) of Regulation S-K, copies of other instruments of
Norfolk Southern Corporation and its subsidiaries with respect to the rights of holders of
long-term debt are not filed herewith, or incorporated by reference, but will be furnished to
the Commission upon request.
10
Material Contracts -
(a)
(b)
(c)
(d)
(e)
(f)
(g)
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 incorporated herein by reference to Exhibit 10(a) to Norfolk Southern
Corporation’s Form 10-K filed on February 24, 2003.
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.
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.
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.
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.
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.
K81
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
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.
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.
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.
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
incorporated herein by reference to Exhibit 10(k) to Norfolk Southern Corporation’s Form
10-K filed on February 24, 2003.
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.
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.
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.
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.
The Norfolk Southern Corporation Long-Term Incentive Plan, as amended effective
January 28, 2003, is incorporated herein by reference to Exhibit 10(p) to Norfolk Southern
Corporation’s Form 10-K filed on February 24, 2003.
K82
(q)
(r)
(s)
(t)
(u)
(v)
(w)
(x)
(y)
(z)
(aa)
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.
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.
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.
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.
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.
The Norfolk Southern Corporation Outside Directors' Deferred Stock Unit Program, as
amended effective January 28, 2003, is incorporated herein by reference to Exhibit 10(x) to
Norfolk Southern Corporation’s Form 10-K filed on February 24, 2003.
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.
The Norfolk Southern Corporation Thoroughbred Stock Option Plan, as amended effective
January 28, 2003, is incorporated herein by reference to Exhibit 10(z) to Norfolk Southern
Corporation’s Form 10-K filed on February 24, 2003.
The Norfolk Southern Safety Incentive Plan for Operating Agreement Employees and For
Non-Operating Agreement Employees, as amended effective January 1, 2004, is filed
herewith.
K83
(bb)
(cc)
The Norfolk Southern Corporation Restricted Stock Unit Plan, effective January 28, 2003,
is incorporated herein by reference to Exhibit 10(bb) to Norfolk Southern Corporation’s
Form 10-K filed on February 24, 2003.
The Norfolk Southern Corporation Executive Life Insurance Plan, as amended, effective
October 1, 2003, is incorporated herein by reference to Exhibit 10 to Norfolk Southern
Corporation’s Form 10-Q filed on October 31, 2003.
Statement re: Computation of Ratio of Earnings to Fixed Charges.
Subsidiaries of the Registrant.
Consents of Experts -
(a)
(b)
Consent of KPMG LLP.
Consent of KPMG LLP and Ernst & Young LLP.
Rule 13a-14(a)/15d-14(a) Certifications.
Section 1350 Certifications.
Conrail Inc. 2003 Annual Report to Stockholders.
Reports on Form 8-K.
12
21
23
31
32
99
(B)
A report on Form 8-K was filed December 23, 2003, advising of the Corporation’s review
of the Surface Transportation Board’s decision in Carolina Power & Light Company v.
Norfolk Southern Railway Company and attaching as an exhibit the related press release.
A report on Form 8-K was filed December 17, 2003, advising that the Corporation would
record a pretax charge of approximately $80 million to its fourth-quarter earnings to
recognize the impaired value of certain telecommunications assets and attaching as an
exhibit the related press release.
A report on Form 8-K was filed December 1, 2003, advising of a series of senior-level
executive and organizational changes following the completion of the Corporation’s
voluntary separation program for non-agreement employees and attaching as an exhibit the
related press release.
A report on Form 8-K was filed November 24, 2003, advising that Norfolk Southern
Railway Company would redeem on December 29, 2003, all publicly held shares of its
$2.60 Cumulative Preferred Stock, Series A and attaching as an exhibit the related press
release.
A report on Form 8-K was filed November 10, 2003, advising that the Corporation had
reviewed the Surface Transportation Board’s ruling in Duke Energy Corp. v. Norfolk
Southern Railway Company and concluded that the impact of the decision on earnings
could not be determined at the time and attaching as an exhibit the related press release.
K84
A report on Form 8-K was filed November 6, 2003, advising of the Corporation’s review
of the Surface Transportation Board’s ruling in Duke Energy Corp. v. Norfolk Southern
Railway Company and attaching as an exhibit the related press release.
A report on Form 8-K was filed November 5, 2003, advising that the Corporation had
expected to record a $107 million charge against fourth-quarter 2003 earnings related to
the completion of its voluntary separation program for non-agreement employees and
attaching as an exhibit the related press release.
A report on Form 8-K was filed October 29, 2003, advising of the Corporation’s third-
quarter 2003 results and attaching as an exhibit the related press release, which included
the following financial statements for the Corporation and its subsidiaries: Consolidated
Statements of Income (Unaudited) for the three months and nine months ended
September 30, 2003 and 2002; Consolidated Balance Sheets (Unaudited) for September 30,
2003, and December 31, 2002; and Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 2003 and 2002.
(C)
Exhibits.
The Exhibits required by Item 601 of Regulation S-K as listed in Item 15(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 15(A)2 or are otherwise not required or are not applicable.
K85
POWER OF ATTORNEY
Each person whose signature appears below under “SIGNATURES” hereby authorizes Henry C. Wolf
and James A. Hixon, 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 James A. Hixon, 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 12th day of February, 2004.
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 12th day of February, 2004, 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/ Marta R. Stewart
(Marta R. Stewart)
Vice President and Controller
(Principal Accounting Officer)
/s/ Gerald L. Baliles
(Gerald L. Baliles)
/s/ Gene R. Carter
(Gene R. Carter)
Director
Director
K86
/s/ Alston D. Correll
(Alston D. Correll)
/s/ Landon Hilliard
(Landon Hilliard)
/s/ George D. Johnson, Jr.
(George D. Johnson, Jr.)
/s/ Burton M. Joyce
(Burton M. Joyce)
/s/ Steven F. Leer
(Steven F. Leer)
/s/ Jane Margaret O’Brien
(Jane Margaret O'Brien)
/s/ Harold W. Pote
(Harold W. Pote)
/s/ J. Paul Reason
(J. Paul Reason)
Director
Director
Director
Director
Director
Director
Director
Director
K87
Schedule II
Norfolk Southern Corporation and Subsidiaries
Valuation and Qualifying Accounts
Years Ended December 31, 2001, 2002 and 2003
(In millions of dollars)
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
Year ended December 31, 2003
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
Beginning
Balance
Additions charged to:
Other
Accounts
Expenses
Deductions
Ending
Balance
$
$
12
262
$
223
$
$
18
265
$
192
$
$
24
254
$
207
$
$
$
$
$
$
$
$
$
6
110
22
6
119
32
--
134
34
$
$
$
$
$
$
$
$
$
--
201
1421
--
91
1241
--
61
1251
$
$
$
$
$
$
$
$
$
--
1272
$
$
18
265
1953
$
192
--
1392
$
$
24
254
1413
$
207
2
1243
$
$
22
270
1484
$
218
1Includes revenue refunds and overcharges provided through deductions from operating revenues and
transfers from other accounts.
2Reclassifications to/from other assets.
3Payments and reclassifications to/from accounts payable.
4Payments and reclassifications to/from other liabilities.
K88
EXHIBIT INDEX
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Description
The Bylaws of Norfolk Southern Corporation, as amended November 25, 2003, are filed
herewith.
The Norfolk Southern Safety Incentive Plan for Operating Agreement Employees and For
Non-Operating Agreement Employees, as amended effective January 1, 2004, is filed
herewith.
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.
Rule 13a-14(a)/15d-14(a) Certifications.
Section 1350 Certifications.
Conrail, Inc. 2003 Annual Report to Stockholders.
Electronic
Submission
Exhibit
Number
3 (ii)
10 (aa)
12
21
23
31
32
99
Exhibits 23(a), 23(b), 31 and 32 are included; remaining exhibits are not included in copies assembled for
public dissemination. These exhibits are included in the 2003 Form 10-K posted on our website at
www.nscorp.com under “Investors” and “SEC Filings” or you may request copies by writing to:
Office of Corporate Secretary
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Virginia 23510-9219
K89
EXHIBIT 23(a), Page 1 of 1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Norfolk Southern Corporation:
We consent to the incorporation by reference in Registration Statements Nos. 33-52031, 333-109069, 333-
60722, 333-71321 and 333-100936 on Form S-8 and Registration Statements Nos. 333-57872 and 333-57872-
01 on Form S-3 of Norfolk Southern Corporation of our report dated January 27, 2004, with respect to the
consolidated balance sheets of Norfolk Southern Corporation and subsidiaries as of December 31, 2003 and
2002, 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, 2003, and the related financial statement
schedule, which report appears in the December 31, 2003 Annual Report on Form 10-K of Norfolk Southern
Corporation. Our report refers to the adoption by the Company of Financial Accounting Standards Board
Statement No. 143, Accounting for Asset Retirement Obligations, and Financial Accounting Standards Board
Interpretation No. 46, Consolidation of Variable Interest Entities, effective January 1, 2003.
/s/ KPMG LLP
Norfolk, Virginia
February 11, 2004
EXHIBIT 23(b), Page 1 of 1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Norfolk Southern Corporation:
We consent to the incorporation by reference in Registration Statements Nos. 33-52031, 333-109069, 333-
60722, 333-71321 and 333-100936 on Form S-8 and Registration Statements Nos. 333-57872 and 333-57872-
01 on Form S-3 of Norfolk Southern Corporation of our report dated January 27, 2004, with respect to the
consolidated balance sheets of Conrail Inc. and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year
period ended December 31, 2003, which report appears in the December 31, 2003 Annual Report on Form 10-K
of Norfolk Southern Corporation. Our report refers to the adoption by the Company of Financial Accounting
Standards Board Statement No. 143, Accounting for Asset Retirement Obligations, effective January 1, 2003.
/s/ KPMG LLP
KPMG LLP
Norfolk, Virginia
February 11, 2004
/s/ Ernst & Young LLP
Ernst & Young LLP
Jacksonville, Florida
February 11, 2004
EXHIBIT 31, Page 1 of 2
CERTIFICATIONS OF CEO AND CFO PURSUANT TO
EXCHANGE ACT RULE 13a-14(a) OR RULE 15d-14(a)
I, David R. Goode, certify that:
1.
2.
3.
4.
5.
I have reviewed this annual report on Form 10-K of Norfolk Southern Corporation;
Based on my knowledge, this 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
report;
Based on my knowledge, the financial statements, and other financial information included in this
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 report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, 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 report is being prepared;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
b.
c.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant's internal control over financial reporting.
b.
Date: Feb. 12, 2004
/s/ David R. Goode
David R. Goode
Chairman, President and Chief Executive Officer
I, Henry C. Wolf, certify that:
EXHIBIT 31, Page 2 of 2
1.
2.
3.
4.
5.
I have reviewed this annual report on Form 10-K of Norfolk Southern Corporation;
Based on my knowledge, this 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
report;
Based on my knowledge, the financial statements, and other financial information included in this
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 report;
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, 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 report is being prepared;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
b.
c.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant's internal control over financial reporting.
b.
Date: Feb. 12, 2004
/s/ Henry C. Wolf
Henry C. Wolf
Vice Chairman and Chief Financial Officer
EXHIBIT 32
CERTIFICATIONS OF CEO AND CFO REQUIRED BY RULE 13a-14(b) OR RULE 15d-14(b) AND
SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE U. S. CODE
I certify, to the best of my knowledge, that the Annual Report on Form 10-K for the year ended Dec. 31, 2003 of
Norfolk Southern Corporation fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that the information contained in the Form 10-K fairly presents, in all material
respects, the financial condition and results of operations of Norfolk Southern Corporation.
Signed:
/s/ David R. Goode
David R. Goode
Chairman, President and Chief Executive Officer
Norfolk Southern Corporation
Dated: Feb. 12, 2004
I certify, to the best of my knowledge, that the Annual Report on Form 10-K for the year ended Dec. 31, 2003 of
Norfolk Southern Corporation fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that the information contained in the Form 10-K fairly presents, in all material
respects, the financial condition and results of operations of Norfolk Southern Corporation.
Signed:
/s/ Henry C. Wolf
Henry C. Wolf
Vice Chairman and Chief Financial Officer
Norfolk Southern Corporation
Dated: Feb. 12, 2004