Annual Report 2004
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
Norfolk Southern System Map
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Norfolk Southern Railway and its Railroad Operating Subsidiaries
NS Trackage/Haulage Rights
(cid:10)(cid:13)(cid:7)(cid:30)(cid:13)
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 approximately 21,300 route miles in 22 eastern states, the District of Columbia and Ontario, Canada,
serves all major eastern 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 off ers the most extensive intermodal network in the East.
CASH PROVIDED BY OPERATING ACTIVITIES
LONG TERM DEBT
DEBT TO TOTAL CAPITALIZATION RATIO
DIVIDENDS PER SHARE
INCOME from CONT. OPER. BEFORE ACC CHANGES
02
$7,3641
03
$7,1601
04
$7,525
$774
$8,1382
$733
$7,8932
02
53.11
03
50.71
04
48.5
0.0
2.5
55.62
2.4
53.12
02
$0.26
03
$0.30
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
04
$0.36
diluted earnings per share before cont operations
Switching Performance 2004
Financial Highlights
on time train performance
connection Performance 2004
($ in millions, except per share amounts)
2003
2004
% Increase
(Decrease)
02
$803
03
$1,054
04
$1,661
02
$1.18
03
$1.051
04
$2.312
02
$637
03
$688
04
$727
02
$1,441
03
$1,500
04
$1,728
02
6,262
03
6,456
04
7,067
$0.30
$1.35
$2.18
$0.13
agriculture revenue
paper revenue
02
$603
03
$634
04
$684
02
$6,270
03
$6,468
04
$7,312
02
379
03
388
04
395
coal revenue
railway operating revenues
02
03
04
Revenue ton miles per employee
Revenue ton miles per gallon of diesel fuel
83.6
84.3
02
FINANCIAL RESULTS
Railway operating revenues
03
Income from railway operations
Railway operating ratio
04
Income from continuing operations
00.0
2Q
03
65
3Q
03
68
4Q
03
74
1Q
04
70
2Q
04
77
3Q
04
74
4Q
04
73
before accounting changes
Earnings per share from continuing operations
before accounting changes
Basic
Diluted
$
$
$
$
$
6,468
1,0642
83.5%2
2Q
03
77.1
3Q
4112
03
76.9
4Q
03
75.7
1.052
1.052
$
$
$
$
$
$
$
$
$
$
$
7,312
1,702
76.7%
1Q
04
77.5
2Q
9231
04
83.8
3Q
04
85.8
2.341
2.311
24,750
7,525
7,990
48.5%
19.95
36.19
0.36
15.7
51,032
13
60
(8)
4Q
125
04
83.1
123
120
20
5
15
(4)
12
53
20
(9)
(2)
2
3
chemicals revenue
$
$
$755
$
02
03
$772
$
04
$864
$
$
20,596
7,1603
6,976
50.7%3
17.83
23.65
0.30
17.3
income from railway operation
52,091
02
$1,158
391,152,863
28,160
400,438,982
28,986
FINANCIAL POSITION
automotive revenue
Total assets
Total debt
Stockholders’ equity
Debt to total capitalization ratio
Stockholders’ equity per share
02
03
04
$961
$936
$954
OTHER INFORMATION
Year-end stock price
Dividends per share
Price/earnings ratio at year end
railway operating expenses
Number of shareholders at year end
Shares outstanding at year end
Number of employees at year end
$5,112
$119
$530
$870
$53
02
$460
03
$4111
04
$9232
intermodal revenue
02
$1,181
03
$1,239
04
$1,537
metals and construction revenue
02
$692
03
$699
04
$818
railway operating ratio
02
81.5
03
83.51
04
76.7
81.9
1.6
1 Results in 2004 include a $53 million net gain from the Conrail corporate reorganization. This gain increased income from continuing operations before accounting
$5,4041
changes by $53 million or 13 cents per diluted share.
2 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.
$5,610
3 Excludes notes payable to Conrail of $716 million as of Dec. 31, 2003.
$1,0641
$1,702
$1,171
$5,297
$107
$107
04
03
on time train performance
Contents
2 Chairman’s Letter to Stockholders
4 President’s Letter to Stockholders
6 Norfolk Southern Achieves Record Success
10 Volume Increases Lead to Record Revenue
15 Rail Network Keeps Operating Smoothly
18 Financial Overview
19 Five-Year Financial Review
20 Income Statement
21 Balance Sheet
2Q
3Q
4Q
1Q
22 Quarterly Financial Data
02
02
02
03
23 Board of Directors
24 Officers and Board Committees
K1 Form 10-K Report
INSIDE BACK COVER Stockholder Information
2Q
04
3Q
03
4Q
03
1Q
04
2Q
03
1Q
02
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
STOCK PRICE
High Low Close
system dwell
$26.98
$19.99
$17.20
$24.62
$23.65
$17.35
$36.69
$36.19
$20.38
02
22.6
03
22.9
04
22.6
3Q
04
4Q
04
02
03
04
train speed
02
23.3
03
23.2
04
22.8
Credits: DESIGN Mary McNeeley, Amber Nussbaum, Frank Wright
editorial Allison Enedy, Rick Harris, Andrea Just photography Wes Cheney,
Leon Guanzon printing & manufacturing Progress Press, Inc., Roanoke, Va.
1
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
Dear fellow
Shareholders
The story of 2004 is Norfolk Southern’s ability to respond to
unusual — indeed unprecedented — demand growth and to
produce excellent returns for our investors.
It is a story with several points. First is the ability and willing-
We had a number of accomplishments for our in-
ness of Norfolk Southern people to get the job done. When
vestors in 2004. For example, we improved our operat-
customers needed us at a rate that surpassed all our predic-
ing ratio, the basic indicator of our efficiency, by 6.8
tions, our people stepped up and provided service for the
percentage points, clearly a significant year-over-year
business our shippers brought us. We were able to handle
improvement. Our earnings per share were up 69 per-
increases of 8.8 percent in unit volume and 7.5 percent in
cent, we increased our dividends by 2 cents per share or
gross ton miles with an average of 1 percent fewer em-
25 percent, and we repaid $371 million of debt.
ployees than last year. We should congratulate our people for
Our statistics for 2004 confirm in my mind the funda-
an enviable but necessary improvement in productivity.
mental transformation – indeed, the structural change –
We also should recognize that handling the increased
that is taking place in the North American transportation
traffic depends on the consistent and systematic investments
market. A combination of trends – increasing congestion
we have made over the last few years in infrastructure,
on the highways, demand for better transportation options
equipment and, perhaps most significantly, in adding peo-
in environmental terms, fuel price pressures and regulatory
ple where necessary and training them in a timely manner.
changes affecting the trucking industry – are coming to-
We benefited from a shift in transportation focus
gether to result in significantly increased demand for rail
and rapidly escalating demand for rail service in 2004.
freight. The successful rail companies will be prepared with
Among many economic and global factors creating this
adequate capacity and with the ability to offer customers
shift were steady growth in U.S. industrial production,
the products they want. Norfolk Southern succeeded in
high fuel prices, the dollar’s relation to international
2004 and will continue to do so. We are at the threshold of
currencies, the dramatic growth of China, and the rap-
a new growth-oriented, growth-driven business model for
id increase of transcontinental import business.
the railroad industry. Norfolk Southern will be prepared
What marked the year for us was our ability to han-
and is determined to seize the opportunity.
dle the business. We had challenges, but in the end, we
The explosive growth of intermodal is a very im-
were able to get the job done. Increasing the value of
portant part of the growth story. In intermodal, we
our services to customers enabled us to raise the yield
most clearly see the increasing desire of the best truck
for our business. Adding in our improving productivity
companies to do more business with us, which repre-
and efficiency spelled good results in the bottom line,
sents a meaningful shift. We see this trend in other com-
and our stock value improved.
modities as well. We also are favored increasingly by an
2
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
openness in public policy to fuller consideration of freight
rail as a component of a balanced transportation system.
Fortunately, Norfolk Southern has expanded in the last
few years. Our geographic coverage matches population
density. We cover the industrial heartland, the growing south-
land and the eastern metropolitan areas. We can go where
the traffic wants to go. Our transcontinental connections
and our enviable port position put us where we need to be.
And we made investments since 1999 in intermodal facil-
ities, track capacity and equipment to be in position for
growth. Even more important, we have instituted systems
and technology to provide service for the business.
Norfolk Southern showed this past year that we are po-
sitioned to handle the growth that the changing economy
is bringing. We need to prove continually that we have the
David Goode
capacity and ability to handle the growth. Our manage-
people in the community. Our people responded to this
ment team and I are confident that we can do so. We will
accident and the aftermath in a very skillful and professional
be aggressive but selective as business develops to make
manner. They were recognized favorably by many, and I am
certain we are taking on business we can handle well, be-
very proud of the way the whole company acted in most
cause we want to make sure we are providing the highest-
difficult times. We will continue to take all appropriate ac-
value transportation service and being compensated ac-
tions to remediate the situation and to learn from the event
cordingly. We also recognize that our investors expect and
to improve and make our entire operation safer. While we
deserve to have us provide fair returns. We have made im-
cannot change what has happened, Norfolk Southern and
portant progress on our returns, but we still have a way
all our people are rededicating our efforts to be, as our vi-
to go. We will improve.
sion says, the safest transportation company in the world.
The year also saw significant progress in creating the
As 2005 began, we saw a continuation of the strong
future management structure for the Thoroughbred. The
business levels of 2004. To prepare for more volume, we
board of directors named C.W. “Wick” Moorman as presi-
remain committed to investing prudently in the business
dent and also named key leaders as executive vice presidents
to keep the network operating as it should. Our people
to make up a senior management team for the company.
are eager to meet the challenges presented by the oppor-
As I head toward 65 in January 2006, it is clear that Norfolk
tunity to sustain the powerful growth of our transporta-
Southern will have the strongest kind of future leadership.
tion franchise. I am very confident that the talented and
I cannot end this letter without recognizing the tragic
professional people of Norfolk Southern will lead the
accident we had in Graniteville, S.C., in January that result-
transportation business into a very bright future.
ed in the deaths of nine people, a number of injuries
and the evacuation of the affected area. We are sad-
dened by the losses and have tried to take care of the
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
FEBRUARY 28, 2005
3
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
Dear fellow
Shareholders
On Christmas Day 1830, a tiny steam locomo-
tive named the “Best Friend of Charleston” pulled
the first regularly scheduled passenger train over the
six completed miles of the South Carolina Canal and
Rail Road Company. In 2005, the 175th anniversary of
that historic run, the line is part of Norfolk Southern’s
transportation network linking the port of Charles-
ton and communities in 22 states, our nation’s capital
and Ontario, Canada, with markets around the world.
It is a remarkable tribute to the underlying efficiency
of railroad technology that after 175 years, Norfolk
Southern and the rail industry are vital and dynamic
components of our economy. Even more remarkable is
CHARLES W. “WICK” MOORMAN
became president of Norfolk Southern Corporation
effective Oct. 1, 2004.
Moorman is a native of Hattiesburg, Miss., and
a graduate of Georgia Tech and Harvard Busi-
ness School. He joined Norfolk Southern in 1970.
He served in senior positions in the corpora-
tion’s transportation, personnel, labor relations,
information technology and strategic planning ar-
eas. He was named president of NS’ Thoroughbred
Technology and Telecommunications subsidiary in
1999 and senior vice president corporate planning and
services in 2003.
David Goode, chairman and chief executive officer,
announced the elections of Moorman and five execu-
tive vice presidents (see Page 24). “Norfolk Southern
is extremely fortunate to have such a talented execu-
tive team, and Wick Moorman is a seasoned, dynamic
leader. This is the team that will help us take full ad-
vantage of the opportunities presented by our expand-
ing markets and efficient transportation network.”
“We have the luxury,” Moorman said, “to have a
transition that still has the leadership of the chairman
to help us steer through the next year.”
that the concept of reg-
ularly scheduled opera-
tions, implemented in
our Thoroughbred Op-
erating Plan, is driving
unparalleled growth at
our company.
I believe that 2004,
as
this report
illus-
trates, marked
the
beginning of a new era
at Norfolk Southern in
terms of growth and profitability. Market shifts in glob-
al trade, along with highway transportation constraints
here in the United States, are creating unprecedented
opportunities for us to provide transportation services
for more and more customers, and to capture the value
that we provide. In 2005, we should see the affirmation
and acceleration of these opportunities.
The year also will mark a management transition
at Norfolk Southern. Our company and its predecessors
have a long history of outstanding management lead-
ership. We have a senior leadership team that is second
to none and, with them, an entire work force that truly
is a group of thoroughbreds. I feel very honored and
fortunate to have the opportunity to be part of that
Wick Moorman
leadership team. While undoubtedly challenges lie
ahead, we share our Chairman David Goode’s belief
that the future is very bright for our company, and we
are excited to embrace it.
PRESIDENT
FEBRUARY 28, 2005
4
A unit coal train makes its way around Pennsylvania’s Horse-
shoe Curve near Altoona. Norfolk Southern’s coal revenue in-
creased 15 percent to a record $1.7 billion in 2004.
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
Norfolk Southern
Achieves Record Success
Focused on two big goals for revenue and operating efficiency, Norfolk
Southern surpassed both targets in 2004.
Revenues exceeded $7 billion for the first time. The op-
increases in intermodal traffic led growth in all ma-
erating ratio, a key efficiency measurement, improved
jor sectors, including coal and general merchandise.
to 76.7 percent, the best in six years. Achieving the dual
Moving the goods that move the economy, Norfolk
“7 and 7” targets faster than expected crowned a suc-
Southern excelled in safety, operating performance and
cessful year for the Thoroughbred of Transportation.
financial results.
As the industrial economy surged in 2004, Norfolk
Southern demonstrated the vitality of a safe, efficiently
operated freight rail network linking communities to
the marketplaces of the world.
The company’s prudent investments in people,
technology, infrastructure and equipment prepared it
to handle unprecedented levels of shipments. Record
Safety
Norfolk Southern people earned their 15th consecutive
Harriman gold medal award for employee safety. The
rail industry leader in workplace safety, Norfolk South-
ern’s safety performance has improved 72 percent since
the 15-year winning streak began, based on a ratio of
injuries per 200,000 hours worked.
Employees at the Decatur, Ill., locomotive service facility conduct a safety audit. Attention to safety throughout the system led Norfolk Southern
people to earn their 15th consecutive gold Harriman Award in 2004. Pictured left to right are Kris Carson, conductor trainee; Jerry Mitchell, terminal
superintendent; David Johnson, yardmaster; Gary Nelson, senior general foreman; and Cortez Mason, mechanical supervisor.
6
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
A Fourth of July
light show celebrated the 150th
anniversary of Horseshoe Curve near Altoona, Pa. The
railway curve scaling the Allegheny Mountains was
considered a major engineering marvel when it opened
in 1854. It operates today as a vital link on the Norfolk
Southern railway network.
Operating Performance
CASH PROVIDED BY OPERATING ACTIVITIES
Norfolk Southern improved its operating ratio, a key
$803
measurement of performance, to 76.7 percent, its best
since 1998.
$1,054
Proprietary technology for measuring and managing
Financial Results
LONG TERM DEBT
Norfolk Southern posted record-setting numbers for 2004.
Revenues reached a record $7.3 billion, $844 mil-
$8,1382
02
$7,3641
$774
lion higher than 2003.
$7,1601
$7,8932
03
Income from railway operations reached a record
$733
operations and service improved operating efficiency,
$1,661
helping to create capacity for handling traffic growth.
$1.7 billion.
$7,525
04
Net income increased to a record $923 million.
The company’s Thoroughbred Operating Plan en-
Earnings per share reached a record high $2.31.
hanced service reliability and consistency, enabling Nor-
Cash provided by operating activities reached
folk Southern to offer premium service to customers.
$1.7 billion.
02
03
04
CASH PROVIDED BY OPERATING ACTIVITIES
LONG TERM DEBT
DEBT TO TOTAL CAPITALIZATION RATIO
diluted earnings per share before cont operations
DILUTED EARNINGS PER SHARE FROM CONTINUING
OPERATIONS BEFORE ACCOUNTING CHANGES (DOLLARS)
DIVIDENDS PER SHARE
Switching Performance 2004
INCOME from CONT. OPER. BEFORE ACC CHANGES
INCOME FROM CONTINUING OPERATIONS
BEFORE ACCOUNTING CHANGES ($ MILLIONS)
DEBT TO TOTAL CAPITALIZATION RATIO
DIVIDENDS PER SHARE
INCOME from CONT. OPER. BEFORE ACC CHANGES
02
53.11
03
50.71
04
48.5
0.0
2.5
55.62
2.4
53.12
02
$0.26
03
$0.30
04
$0.36
on time train performance
connection Performance 2004
$119
$530
$870
$53
02
$7,3641
03
$7,1601
04
$7,525
$774
$8,1382
$733
$7,8932
2.5
55.62
02
$1.18
02
$0.26
2.4
53.12
03
$1.051
03
$0.30
$0.30
$1.35
02
$460
03
$4111
$119
$530
02
83.6
03
84.3
04
$2.312
04
$0.36
$2.18
$0.13
04
$9232
$870
$53
04
00.0
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 telecom-
munications assets. Together, these items reduced income from continuing operations before accounting changes by $119 million or 30 cents per diluted share.
2 2004 results include a $53 million gain from the Conrail corporate reorganization, which increased income from continuing operations before accounting
changes by $53 million or 13 cents per diluted share.
intermodal revenue
2Q
03
65
3Q
03
68
4Q
03
74
1Q
04
70
2Q
04
77
3Q
04
74
4Q
04
73
2Q
03
77.1
3Q
03
76.9
4Q
03
75.7
1Q
04
77.5
2Q
04
83.8
3Q
04
85.8
4Q
04
83.1
2Q
03
65
3Q
03
68
4Q
03
74
1Q
04
70
2Q
04
77
3Q
04
74
4Q
04
73
2Q
03
77.1
3Q
03
76.9
4Q
03
75.7
1Q
04
77.5
2Q
04
83.8
3Q
04
85.8
4Q
04
83.1
railway operating revenues
railway operating expenses
income from railway operation
railway operating ratio
agriculture revenue
paper revenue
automotive revenue
metals and construction revenue
$5,297
$107
03
$1,0641
$107
$1,171
81.9
1.6
coal revenue
railway operating revenues
railway operating expenses
income from railway operation
railway operating ratio
Revenue ton miles per employee
Revenue ton miles per gallon of diesel fuel
on time train performance
High Low Close
system dwell
$26.98
$19.99
$17.20
$24.62
$23.65
$17.35
$36.69
$36.19
$20.38
02
22.6
03
22.9
04
22.6
train speed
02
23.3
03
23.2
04
22.8
$5,297
$107
$107
$1,171
81.9
1.6
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
02
03
04
automotive revenue
chemicals revenue
metals and construction revenue
02
$961
03
$936
04
$954
02
$5,112
03
$5,4041
04
$5,610
02
$755
03
$772
04
$864
02
$1,158
04
$1,702
connection Performance 2004
agriculture revenue
02
$637
03
$688
04
$727
coal revenue
02
$1,441
chemicals revenue
03
$1,500
02
$755
04
$1,728
03
$772
04
$864
02
6,262
03
6,456
02
$1,158
04
7,067
03
$1,0641
04
$1,702
$1,181
02
paper revenue
03
$603
$1,239
02
7
03
04
$634
$1,537
04
$684
02
$6,270
03
$6,468
02
04
$692
$7,312
03
$699
04
$818
02
379
03
388
02
81.5
04
395
03
83.51
04
76.7
diluted earnings per share before cont operations
Switching Performance 2004
on time train performance
$0.30
$1.35
$2.18
$0.13
02
$803
03
$1,054
04
$1,661
02
$1.18
03
$1.051
04
$2.312
02
$637
03
$688
04
$727
02
$1,441
03
$1,500
04
$1,728
02
6,262
03
6,456
04
7,067
02
$603
03
$634
04
$684
02
$6,270
03
$6,468
04
$7,312
02
379
03
388
04
395
02
53.11
03
50.71
04
48.5
0.0
02
83.6
03
84.3
04
00.0
02
$961
03
$936
04
$954
02
$5,112
03
$5,4041
04
$5,610
Revenue ton miles per employee
Revenue ton miles per gallon of diesel fuel
on time train performance
High Low Close
system dwell
$26.98
$19.99
$17.20
$24.62
$23.65
$17.35
$36.69
$36.19
$20.38
02
22.6
03
22.9
04
22.6
train speed
02
23.3
03
23.2
04
22.8
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
02
03
04
02
$460
03
$4111
04
$9232
intermodal revenue
02
$1,181
03
$1,239
04
$1,537
02
$692
03
$699
04
$818
02
81.5
03
83.51
04
76.7
CASH PROVIDED BY OPERATING ACTIVITIES
LONG TERM DEBT
DEBT TO TOTAL CAPITALIZATION RATIO
DIVIDENDS PER SHARE
INCOME from CONT. OPER. BEFORE ACC CHANGES
CASH PROVIDED BY OPERATING ACTIVITIES
LONG TERM DEBT
DEBT TO TOTAL CAPITALIZATION RATIO
Switching Performance 2004
DIVIDENDS PER SHARE
on time train performance
INCOME from CONT. OPER. BEFORE ACC CHANGES
connection Performance 2004
intermodal revenue
02
$803
03
$1,054
04
$1,661
diluted earnings per share before cont operations
02
$7,3641
$774
$8,1382
02
$1.18
03
$7,1601
$733
$7,8932
02
$7,3641
03
$7,1601
04
$7,525
02
53.11
03
50.71
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
03
$1.051
04
$7,525
$0.30
$1.35
04
$2.312
$2.18
$0.13
04
48.5
0.0
$774
$8,1382
$733
$7,8932
2.5
55.62
2.4
53.12
02
53.11
03
50.71
04
48.5
0.0
02
$0.26
02
03
03
04
83.6
$0.30
84.3
$0.36
04
00.0
CASH PROVIDED BY OPERATING ACTIVITIES
LONG TERM DEBT
DEBT TO TOTAL CAPITALIZATION RATIO
DIVIDENDS PER SHARE
INCOME from CONT. OPER. BEFORE ACC CHANGES
intermodal revenue
2Q
03
65
3Q
03
68
4Q
03
74
1Q
04
70
2Q
04
77
3Q
04
74
4Q
04
73
diluted earnings per share before cont operations
02
$7,3641
$774
$8,1382
02
$1.18
03
$7,1601
$733
$7,8932
03
$1.051
04
$7,525
$0.30
$1.35
04
$2.312
$2.18
$0.13
For the third consecutive year, Norfolk Southern
Switching Performance 2004
on time train performance
DIVIDENDS PER SHARE (DOLLARS)
connection Performance 2004
02
03
increased the quarterly dividend on its common
2.5
55.62
53.11
stock, from 8 cents to 10 cents. Since 2001, the divi-
agriculture revenue
53.12
50.71
2.4
dend has increased by 67 percent.
02
$0.26
paper revenue
83.6
$0.30
02
03
02
$460
automotive revenue
02
$637
04
48.5
Norfolk Southern’s long-term debt of $7.5 billion
03
04
at the end of 2004 is $111 million lower than it was
$688
0.0
four years ago, even including $728 million of addi-
$727
tional debt from the Conrail corporate reorganiza-
4Q
04
73
2Q
3Q
03
03
68
65
tion in 2004.
2Q
04
77
1Q
04
70
4Q
03
74
3Q
04
74
02
$603
03
04
84.3
$0.36
03
$634
04
00.0
04
$684
02
$961
03
$936
04
$954
03
$4111
04
$9232
$119
$530
2Q
03
77.1
3Q
03
76.9
4Q
03
75.7
1Q
04
77.5
2Q
04
83.8
3Q
04
85.8
4Q
04
04
83.1
$864
intermodal revenue
LONG TERM DEBT
DEBT TO TOTAL CAPITALIZATION RATIO
diluted earnings per share before cont operations
Switching Performance 2004
agriculture revenue
$0.30
$1.35
02
$637
For the fifth consecutive year, Norfolk Southern re-
on time train performance
duced its debt to total capitalization ratio, lowering
coal revenue
it to 48.5 percent as of the end of 2004.
02
$1,441
paper revenue
The company strengthened its credit-rating po-
83.6
02
sition, which is among the best in the industry,
$1,500
$603
02
03
reflecting emphasis on solid financial performance.
84.3
02
03
02
$6,270
automotive revenue
$1,054
03
$961
03
$6,468
04
$1,661
CASH PROVIDED BY OPERATING ACTIVITIES
CASH PROVIDED BY OPERATING ACTIVITIES ($ MILLIONS)
connection Performance 2004
railway operating revenues
02
$803
$2.18
$0.13
03
$688
04
03
$1,728
$634
04
00.0
03
$936
04
$7,312
railway operating expenses
02
$1,181
02
$7,3641
02
$5,112
chemicals revenue
$1,239
03
03
$7,1601
03
02
$755
$5,4041
04
$1,537
04
$7,525
04
03
$772
$5,610
04
$727
2Q
03
65
3Q
03
68
4Q
03
74
1Q
04
70
2Q
04
77
3Q
04
74
4Q
04
73
04
$684
04
$954
2Q
03
77.1
3Q
03
76.9
4Q
03
75.7
1Q
04
77.5
2Q
04
83.8
3Q
04
85.8
4Q
04
04
83.1
$864
CASH PROVIDED BY OPERATING ACTIVITIES
Revenue ton miles per employee
REVENUE TON-MILES PER EMPLOYEE
02
$803
02
6,262
railway operating revenues
02
LONG TERM DEBT
Revenue ton miles per gallon of diesel fuel
LONG-TERM DEBT ($ MILLIONS)
diluted earnings per share before cont operations
railway operating expenses
379
02
$7,3641
on time train performance
DEBT TO TOTAL CAPITALIZATION RATIO
Switching Performance 2004
$774
$8,1382
income from railway operation
02
53.11
03
02
$1,054
03
automotive revenue
$6,270
6,456
02
04
$961
$1,661
03
04
$6,468
7,067
03
$936
04
$7,312
04
$954
02
03
chemicals revenue
$5,112
$7,1601
388
03
$1.18
02
$733
$7,8932
02
$1,158
03
metals and construction revenue
50.71
2.4
53.12
02
03
$755
$5,4041
395
04
04
03
$7,525
$1.051
03
04
$772
$5,610
04
$2.312
04
$864
$5,297
$107
$0.30
$1.35
$2.18
03
$692
02
$1,0641
48.5
04
1Q
02
$699
0.0
03
$1,702
04
$0.13
2Q
02
3Q
02
4Q
02
1Q
03
$107
2Q
03
3Q
03
$1,171
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
CASH PROVIDED BY OPERATING ACTIVITIES
Revenue ton miles per employee
02
$803
02
6,262
railway operating revenues
LONG TERM DEBT
Revenue ton miles per gallon of diesel fuel
REVENUE TON-MILES PER GALLON OF DIESEL FUEL
diluted earnings per share before cont operations
railway operating expenses
02
379
$7,3641
02
$774
$8,1382
on time train performance
DEBT TO TOTAL CAPITALIZATION RATIO
DEBT TO TOTAL CAPITALIZATION RATIO (PERCENT)
Switching Performance 2004
income from railway operation
53.11
02
02
02
03
$5,112
$1.18
03
388
$7,1601
03
03
04
$5,4041
$1.051
04
395
$7,525
04
04
$5,610
$2.312
$0.30
$1.35
$5,297
$107
$2.18
$0.13
$733
$7,8932
02
$1,158
03
50.71
agriculture revenue
04
$818
2Q
03
65
High Low Close
DIVIDENDS PER SHARE
3Q
03
68
4Q
03
74
1Q
04
70
2Q
04
77
3Q
04
74
4Q
04
73
on time train performance
railway operating ratio
02
02
02
03
03
03
02
04
$0.26
83.6
81.5
$0.30
$26.98
paper revenue
$19.99
$17.20
84.3
83.51
$603
$0.36
02
03
04
04
04
03
00.0
76.7
$634
04
$684
system dwell
02
connection Performance 2004
22.6
railway operating revenues
03
22.9
automotive revenue
2.5
55.62
2.4
53.12
03
04
8
$637
2Q
02
$1,0641
02
48.5
04
1Q
02
0.0
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
$1,702
03
1 Excludes notes payable to Conrail
2 Includes 58 percent of Conrail debt
$1,171
4Q
1Q
03
04
$107
2Q
03
$688
1Q
03
4Q
04
3Q
04
4Q
02
3Q
03
2Q
04
3Q
02
04
2Q
3Q
03
03
$727
65
68
High Low Close
4Q
03
74
1Q
04
70
2Q
04
77
3Q
04
74
4Q
04
73
on time train performance
coal revenue
$26.98
02
paper revenue
83.6
$1,441
$36.69
$36.19
$20.38
$24.62
$23.65
$17.35
03
04
Revenue ton miles per employee
Revenue ton miles per gallon of diesel fuel
diluted earnings per share before cont operations
on time train performance
Switching Performance 2004
agriculture revenue
2.5
55.62
2.4
53.12
02
$0.26
03
$0.30
04
$0.36
$119
$530
$870
$53
02
$460
03
$4111
04
$9232
02
$1,181
03
$1,239
04
$1,537
02
$460
03
$4111
04
$9232
$119
$530
$870
$53
2Q
03
77.1
3Q
03
76.9
4Q
03
75.7
1Q
04
77.5
2Q
04
83.8
3Q
04
85.8
4Q
04
83.1
02
$1,181
chemicals revenue
03
$1,239
$870
$53
04
$1,537
02
$755
03
$772
$774
$8,1382
income from railway operation
metals and construction revenue
$733
$5,297
$107
02
$1,158
$7,8932
03
02
$692
$1,0641
02
53.11
03
50.71
04
48.5
04
03
$699
$1,702
0.0
04
$818
High Low Close
DIVIDENDS PER SHARE
2.5
55.62
02
$0.26
railway operating ratio
on time train performance
02
03
03
04
81.5
$0.30
02
$26.98
83.6
$19.99
$17.20
83.51
$0.36
84.3
03
02
04
76.7
04
00.0
$24.62
$23.65
$17.35
03
metals and construction revenue
02
$692
03
$699
04
$818
DIVIDENDS PER SHARE
railway operating ratio
2.5
55.62
2.4
53.12
02
$0.26
03
$0.30
04
$0.36
02
81.5
03
83.51
04
76.7
$107
$1,171
81.9
1.6
INCOME from CONT. OPER. BEFORE ACC CHANGES
$119
$530
$870
$53
system dwell
INCOME from CONT. OPER. BEFORE ACC CHANGES
connection Performance 2004
train speed
intermodal revenue
$36.69
$36.19
$20.38
81.9
1.6
04
02
22.6
02
$460
22.9
03
03
$4111
22.6
04
04
$9232
$119
$530
$870
$53
2Q
03
77.1
3Q
03
76.9
4Q
03
75.7
1Q
04
77.5
2Q
04
83.8
3Q
04
85.8
4Q
04
83.1
metals and construction revenue
income from railway operation
metals and construction revenue
02
$1,158
railway operating ratio
$5,297
$107
02
$692
03
$1,0641
$107
$1,171
81.9
1.6
$24.62
$23.65
$17.35
$36.69
$36.19
$20.38
81.9
1.6
system dwell
INCOME from CONT. OPER. BEFORE ACC CHANGES
02
connection Performance 2004
22.6
automotive revenue
$119
$530
train speed
intermodal revenue
02
23.3
02
$1,181
03
23.2
03
chemicals revenue
$1,239
$870
$53
04
22.8
02
04
$755
$1,537
3Q
03
76.9
4Q
03
75.7
1Q
04
77.5
2Q
04
83.8
3Q
04
85.8
4Q
04
83.1
03
$772
04
$864
02
$460
03
22.9
03
$4111
04
22.6
02
04
$961
$9232
03
$936
2Q
03
04
77.1
$954
intermodal revenue
train speed
02
23.3
02
$1,181
railway operating expenses
03
23.2
chemicals revenue
03
02
$1,239
$5,112
02
$755
04
22.8
04
03
$1,537
$5,4041
04
$5,610
03
$772
4Q
04
04
83.1
$864
03
$699
04
$1,702
04
$818
02
81.5
03
4Q
04
04
83.51
76.7
02
$460
03
$4111
04
$9232
02
23.3
02
$1,181
03
23.2
03
$1,239
04
22.8
04
$1,537
02
$692
03
$699
04
$818
02
81.5
03
83.51
04
76.7
train speed
02
23.3
03
23.2
04
22.8
Revenue ton miles per employee
Revenue ton miles per gallon of diesel fuel
railway operating expenses
income from railway operation
railway operating ratio
on time train performance
High Low Close
system dwell
metals and construction revenue
$5,297
$107
$107
$1,171
02
$1,158
02
$692
$1,0641
03
03
$699
$1,702
04
04
$818
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
02
03
04
$26.98
$19.99
$17.20
$24.62
$23.65
$17.35
$36.69
$36.19
$20.38
81.9
1.6
02
22.6
03
22.9
04
22.6
train speed
02
23.3
03
23.2
04
22.8
$0.30
$1.35
02
$637
$2.18
$0.13
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
03
$688
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
03
$634
04
04
$727
2Q
03
65
3Q
03
68
4Q
03
74
1Q
04
70
2Q
04
77
3Q
04
74
4Q
04
73
04
$684
02
$19.99
$17.20
02
$603
03
84.3
03
$1,500
02
00.0
04
$1,728
2Q
03
77.1
3Q
03
76.9
4Q
03
75.7
1Q
04
77.5
2Q
04
83.8
3Q
04
85.8
agriculture revenue
coal revenue
02
paper revenue
$1,441
02
04
03
$6,270
22.6
$6,468
04
$7,312
02
$961
03
$936
04
$954
02
chemicals revenue
$5,112
02
379
03
388
04
395
02
03
$755
$5,4041
03
04
$772
$5,610
04
$864
02
$1,158
railway operating revenues
02
6,262
02
automotive revenue
$6,270
03
6,456
02
$961
03
$6,468
03
$936
04
$7,312
04
7,067
04
$954
02
379
02
03
$5,112
388
03
04
$5,4041
395
04
$5,610
coal revenue
railway operating revenues
railway operating expenses
income from railway operation
railway operating ratio
Revenue ton miles per employee
Revenue ton miles per gallon of diesel fuel
on time train performance
High Low Close
system dwell
$5,297
$107
03
$1,0641
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
2Q
04
3Q
04
4Q
04
04
$1,702
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
$107
$1,171
4Q
03
1Q
04
$26.98
$19.99
$17.20
$24.62
$23.65
$17.35
02
03
04
02
81.5
03
83.51
04
76.7
$36.69
$36.19
$20.38
81.9
1.6
02
22.6
03
22.9
04
22.6
Revenue ton miles per employee
Revenue ton miles per gallon of diesel fuel
on time train performance
High Low Close
system dwell
$26.98
$19.99
$17.20
$24.62
$23.65
$17.35
$36.69
$36.19
$20.38
02
22.6
03
22.9
04
22.6
train speed
02
23.3
03
23.2
04
22.8
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
02
03
04
02
03
$603
$1,500
03
04
$634
$1,728
04
$684
02
6,262
02
03
03
04
$6,270
6,456
$6,468
7,067
04
$7,312
02
379
03
388
04
395
agriculture revenue
02
$803
03
$1,054
04
$1,661
02
$1.18
03
$1.051
04
$2.312
02
$637
03
$688
04
$727
coal revenue
02
$1,441
03
$1,500
04
$1,728
02
6,262
03
6,456
04
7,067
02
$803
03
$1,054
04
$1,661
coal revenue
02
paper revenue
$1,441
02
03
$603
$1,500
03
04
$634
$1,728
04
$684
03
02
$1,054
$6,270
03
6,456
04
03
$1,661
$6,468
04
7,067
04
$7,312
02
379
02
03
$1.18
388
03
04
$1.051
395
04
$2.312
02
$637
03
$688
04
$727
02
$1,441
03
$1,500
04
$1,728
02
6,262
03
6,456
04
7,067
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
A changing industry sees accelerated growth
Freight transportation is undergoing
immense change, and it favors railroads.
Demand for rail transportation is expanding in
converting business to rail, accelerating growth
in intermodal traffic. Norfolk Southern mean-
while has built the most extensive intermodal
all major business sectors: coal, intermodal and gen-
network in the East.
eral merchandise.
Changing ocean shipping patterns have led to a
Norfolk Southern set record revenues in 2004 for
surge of intermodal traffic at East Coast ports.
all three sectors. Intermodal volume also set a record,
Traditionally, Asian imports have moved by ship
and coal and general merchandise volumes were the
to the U.S. West Coast, and then by rail inland.
second highest ever.
Now, more and more freight from Asia is routed
A dynamic convergence of circumstances is driv-
through the Panama Canal to East Coast ports.
ing this demand while shaping a structural change in
Both coasts have seen triple-digit growth of
the basic nature of the transportation business.
Rising freight volumes have strained the capacity
imports from Asia.
Norfolk Southern has positioned itself to take
of highways, increasing congestion.
on additional business and handle it effectively
Driver and equipment shortages are increasing
and efficiently. New systems have enhanced op-
costs for trucking companies.
erating efficiency, service and capacity.
Fuel prices favor the inherent efficiency advan-
The Thoroughbred Operating Plan and the Coal
tages of railroads. One intermodal train pulled
Transportation Management System are driving
by two locomotives can haul the equivalent
improved service and capacity for Norfolk South-
of up to 300 trucks. Trucking companies are
ern’s general merchandise and coal networks.
Coal loadings at Norfolk’s Lamberts Point Pier 6 were up
16 percent in 2004, and Norfolk Southern’s total export
coal carloads increased by 35 percent.
9
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
in all
Volume Increases
Major Sectors
toRecord Revenue
Norfolk Southern delivered value to customers with a network
prepared for the year’s surging demand for rail freight service, and revenue
Lead
grew to $7.3 billion, a 13 percent increase over 2003.
Higher volumes, value-based pricing and fuel surcharges
led to the revenue growth. Intermodal, coal, metals
and construction, and chemicals all posted double-digit
Intermodal
Intermodal revenue surged 24 percent on a vol-
ume increase of 17 percent or approximately
revenue increases. Revenues from highway-to-rail con-
425,000 loads.
versions increased by an estimated 78 percent.
Industrial development projects expanded NS’ cus-
A 6 percent increase in revenue per unit stemmed
from improved pricing, changes in traffic mix and
tomer base by contributing to the establishment of 67
fuel surcharges.
new industries and the expansion of 34 in 2004. These
Traffic grew in all segments: 15 percent for interna-
new facilities are expected to create an estimated 4,300
jobs in those industries and generate more than 100,000
tional, 21 percent in domestic, 15 percent in premi-
um and 8 percent for Triple Crown Services. Triple
carloads annually.
Awards
cite
Service Excellence
Continued gains in operating efficiency allowed
recognizes service quality, ease of doing business,
creativity and customer service.
Owens Corning honored NS with its Service Ex-
Norfolk Southern to provide quality service in 2004.
cellence Award and named Triple Crown Services
NS provided customer United Parcel Service with 200
Carrier of the Year – Intermodal Provider.
consecutive error-free days, doubling the length of its
C.H. Robinson awarded NS the Intermodal Rail
2003 streak and setting a record.
Following are some NS honors:
Carrier of the Year for 2004 based on customer ser-
vice, ease of doing business and quality of service.
Toyota presented NS with its President’s Award for
Logistics Management magazine named NS the
exemplary service and two Logistics Excellence
winner of its Quest for Quality Rail Service Award.
awards for quality and on-time performance.
Railway Age magazine named NS Chairman and
Schneider National Carriers named NS a Part-
Chief Executive Officer David R. Goode 2005
ner in Quality – 2004 Carrier of the Year, which
Railroader of the Year.
10
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
CASH PROVIDED BY OPERATING ACTIVITIES
LONG TERM DEBT
DEBT TO TOTAL CAPITALIZATION RATIO
DIVIDENDS PER SHARE
INCOME from CONT. OPER. BEFORE ACC CHANGES
02
$803
03
$1,054
04
$1,661
02
$7,3641
03
$7,1601
04
$7,525
$774
$8,1382
$733
$7,8932
2.5
55.62
2.4
53.12
02
$0.26
03
$0.30
04
$0.36
$119
$530
$870
$53
CASH PROVIDED BY OPERATING ACTIVITIES
LONG TERM DEBT
DEBT TO TOTAL CAPITALIZATION RATIO
DIVIDENDS PER SHARE
INCOME from CONT. OPER. BEFORE ACC CHANGES
02
$7,3641
03
$7,1601
04
$7,525
$774
$8,1382
$733
$7,8932
2.5
55.62
2.4
53.12
02
$0.26
03
$0.30
04
$0.36
02
$460
03
$4111
04
$9232
$119
$530
diluted earnings per share before cont operations
Switching Performance 2004
on time train performance
connection Performance 2004
$870
$53
02
Business is brisk at Norfolk Southern’s intermodal facility
$1.18
at Austell, Ga. Norfolk Southern’s intermodal business set
03
$1.051
$0.30
$1.35
records for revenue and volume in 2004.
04
$2.312
$2.18
$0.13
intermodal revenue
INTERMODAL REVENUE ($ MILLIONS)
02
$1,181
03
$1,239
04
$1,537
by 159 percent and at Norfolk’s Lamberts Point by
16 percent.
High demand for steam coal and tight supply from
central and northern Appalachian mines led to longer
hauls, resulting in an 11 percent increase in ton-miles
agriculture revenue
as receivers sourced coal from more distant points.
2Q
03
65
3Q
03
68
4Q
03
74
1Q
04
70
2Q
04
77
3Q
04
74
4Q
04
73
2Q
03
77.1
3Q
03
76.9
4Q
03
75.7
1Q
04
77.5
2Q
04
83.8
3Q
04
85.8
4Q
04
83.1
paper revenue
automotive revenue
chemicals revenue
metals and construction revenue
The market for coal remained strong throughout
02
$637
the year as production gradually expanded to meet
03
$688
increased demand.
A new coke production plant at Haverhill, Ohio,
04
$727
will generate additional inbound coal and out-
02
$603
03
$634
04
$684
bound coke shipments in 2005.
coal revenue
COAL REVENUE ($ MILLIONS)
railway operating revenues
railway operating expenses
income from railway operation
railway operating ratio
Crown entered new markets, including Minneapolis.
All segments were bolstered by higher consumer
spending, growth of trade and industrial produc-
tion, and a significant volume of new business with
traditional truckload companies.
metals and construction revenue
Coal
Coal revenue increased by 15 percent, and carloads
02
$692
03
$699
04
$818
were up 5 percent over 2003.
A 35 percent increase in export coal carloads and
03
$1,500
a revitalized steel market, with its demand for
metallurgical coal, drove up loadings at Baltimore
04
$1,728
02
$1,441
02
$6,270
03
$6,468
04
$7,312
$5,297
$107
03
$1,0641
$107
$1,171
81.9
1.6
02
53.11
03
50.71
04
48.5
0.0
02
83.6
03
84.3
04
00.0
02
$961
03
$936
04
$954
02
$5,112
03
$5,4041
04
$5,610
02
$755
03
$772
04
$864
02
$1,158
04
$1,702
02
$460
03
$4111
04
$9232
intermodal revenue
02
$1,181
03
$1,239
04
$1,537
02
$692
03
$699
04
$818
02
81.5
03
83.51
04
76.7
$26.98
$19.99
$17.20
$24.62
$23.65
$17.35
$36.69
$36.19
$20.38
02
22.6
03
22.9
04
22.6
train speed
02
23.3
03
23.2
04
22.8
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
02
03
04
diluted earnings per share before cont operations
Switching Performance 2004
on time train performance
connection Performance 2004
$0.30
$1.35
$2.18
$0.13
2Q
03
65
3Q
03
68
4Q
03
74
1Q
04
70
2Q
04
77
3Q
04
74
4Q
04
73
2Q
03
77.1
3Q
03
76.9
4Q
03
75.7
1Q
04
77.5
2Q
04
83.8
3Q
04
85.8
4Q
04
83.1
agriculture revenue
paper revenue
automotive revenue
chemicals revenue
02
$803
03
$1,054
04
$1,661
02
$1.18
03
$1.051
04
$2.312
02
$637
03
$688
04
$727
02
$1,441
03
$1,500
04
$1,728
02
6,262
03
6,456
04
7,067
02
$603
03
$634
04
$684
02
$6,270
03
$6,468
04
$7,312
02
379
03
388
04
395
02
53.11
03
50.71
04
48.5
0.0
02
83.6
03
84.3
04
00.0
02
$961
03
$936
04
$954
02
$5,112
03
$5,4041
04
$5,610
02
$755
03
$772
04
$864
02
$1,158
04
$1,702
coal revenue
railway operating revenues
railway operating expenses
income from railway operation
railway operating ratio
Revenue ton miles per employee
Revenue ton miles per gallon of diesel fuel
on time train performance
High Low Close
system dwell
$5,297
$107
03
$1,0641
$107
$1,171
02
81.5
03
83.51
04
76.7
81.9
1.6
02
6,262
11
03
6,456
04
7,067
02
379
03
388
04
395
Revenue ton miles per employee
Revenue ton miles per gallon of diesel fuel
on time train performance
High Low Close
system dwell
$26.98
$19.99
$17.20
$24.62
$23.65
$17.35
$36.69
$36.19
$20.38
02
22.6
03
22.9
04
22.6
train speed
02
23.3
03
23.2
04
22.8
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
02
03
04
02
$803
03
$1,054
04
$1,661
02
$1.18
03
$1.051
04
$2.312
02
$637
03
$688
04
$727
02
$1,441
03
$1,500
04
$1,728
02
6,262
03
6,456
04
7,067
02
53.11
03
50.71
04
48.5
0.0
02
83.6
03
84.3
04
00.0
02
$961
03
$936
04
$954
02
$5,112
03
$5,4041
04
$5,610
$0.30
$1.35
$2.18
$0.13
agriculture revenue
paper revenue
automotive revenue
coal revenue
railway operating revenues
railway operating expenses
Revenue ton miles per employee
Revenue ton miles per gallon of diesel fuel
on time train performance
02
$603
03
$634
04
$684
02
$6,270
03
$6,468
04
$7,312
02
379
03
388
04
395
CASH PROVIDED BY OPERATING ACTIVITIES
LONG TERM DEBT
DEBT TO TOTAL CAPITALIZATION RATIO
DIVIDENDS PER SHARE
INCOME from CONT. OPER. BEFORE ACC CHANGES
02
$7,3641
03
$7,1601
04
$7,525
$774
$8,1382
$733
$7,8932
2.5
55.62
2.4
53.12
02
$0.26
03
$0.30
04
$0.36
$119
$530
$870
$53
diluted earnings per share before cont operations
Switching Performance 2004
on time train performance
connection Performance 2004
02
$460
03
$4111
04
$9232
intermodal revenue
02
$1,181
03
$1,239
04
$1,537
2Q
03
65
3Q
03
68
4Q
03
74
1Q
04
70
2Q
04
77
3Q
04
74
4Q
04
73
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
2Q
03
77.1
3Q
03
76.9
4Q
03
75.7
1Q
04
77.5
2Q
04
83.8
3Q
04
85.8
4Q
04
83.1
metals and construction revenue
METALS & CONSTRUCTION REVENUE ($ MILLIONS)
02
$692
03
$699
04
$818
Scrap metal shipments grew by 20 percent with a
32 percent increase in revenue. NS also saw signifi-
railway operating ratio
cant growth in pig iron shipments in 2004.
Aggregate shipments were up 13 percent with a
02
81.5
20 percent increase in revenue. Success in the mar-
1.6
83.51
ket resulted from an expanded stone unit train
81.9
03
network.
76.7
04
An emerging market for NS, machinery volume
grew by 72 percent as NS began providing service
from the Midwest to Baltimore, Md.
system dwell
02
22.6
03
22.9
04
22.6
train speed
02
23.3
03
23.2
04
22.8
chemicals revenue
General Merchandise
Greater volumes and higher revenue per unit that
$755
reflected improved pricing and fuel surcharges resulted
$772
in merchandise revenue of $4 billion for 2004, a 9 per-
cent increase over 2003. Merchandise volume grew by
$864
102,000 carloads, an increase of 4 percent.
02
03
04
General merchandise comprises five commodity
groups, highlighted as follows.
income from railway operation
Metals and Construction
02
Metals and construction posted a 17 percent gain in
$1,158
$5,297
$107
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
revenue and a 10 percent increase in volume.
$1,0641
03
Iron and steel carloads increased by 22 percent, and
$1,171
$107
04
revenue improved by 25 percent. NS continues to
$1,702
succeed in capturing new market share from trucks
in the steel plate and structural steel markets.
High Low Close
New steel distribution facilities in Missouri and
Georgia expanded market reach and contributed to
$36.69
$36.19
volume growth.
$26.98
$24.62
$23.65
Paula Stiffler is assistant shop manager of the
$17.35
$19.99
$17.20
Chattanooga, Tenn., Diesel Shop. Norfolk Southern
02
03
purchased 207 locomotives in 2004 as business
volume increased.
$20.38
04
12
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
Norfolk Southern moves tractors from Waterloo, Iowa,
to Baltimore for export.
CASH PROVIDED BY OPERATING ACTIVITIES
LONG TERM DEBT
DEBT TO TOTAL CAPITALIZATION RATIO
DIVIDENDS PER SHARE
INCOME from CONT. OPER. BEFORE ACC CHANGES
$1,239
$119
$530
$870
$53
02
$460
03
$4111
04
$9232
intermodal revenue
02
$1,181
02
$7,3641
03
$7,1601
04
$7,525
$774
$8,1382
$733
$7,8932
2.5
55.62
2.4
53.12
02
$0.26
03
$0.30
04
$0.36
diluted earnings per share before cont operations
Switching Performance 2004
on time train performance
connection Performance 2004
Chemicals
Chemicals revenue increased by 12 percent on
5 percent volume growth. Improved pricing, chang-
es in traffic mix, and fuel surcharges drove higher
2Q
3Q
revenue per car.
03
03
76.9
77.1
4Q
03
75.7
One component of business growth was the expan-
1Q
04
77.5
2Q
04
83.8
3Q
04
85.8
sion of existing plants, which generated 2,500 new
carloads. Plastic facility expansions contributed 1,500
carloads.
chemicals revenue
CHEMICALS REVENUE ($ MILLIONS)
$0.30
$1.35
$2.18
$0.13
2Q
03
65
3Q
03
68
4Q
03
74
1Q
04
70
2Q
04
77
3Q
04
74
4Q
04
73
agriculture revenue
paper revenue
automotive revenue
02
53.11
03
50.71
04
48.5
0.0
02
83.6
03
84.3
04
00.0
02
$961
03
$936
04
$954
02
$5,112
03
$5,4041
04
$5,610
02
$803
03
$1,054
04
$1,661
02
$1.18
03
$1.051
04
$2.312
02
$637
03
$688
04
$727
02
$1,441
03
$1,500
04
$1,728
02
6,262
03
6,456
04
7,067
02
$755
03
$772
04
$864
02
Service, a 75-car grain shuttle train, will service the
$692
mill at Monetta, S.C.
03
$699
04
$818
coal revenue
railway operating revenues
railway operating expenses
income from railway operation
railway operating ratio
02
$1,158
$5,297
$107
03
$1,0641
$107
$1,171
04
$1,702
02
81.5
03
83.51
13
04
76.7
81.9
1.6
Revenue ton miles per employee
Revenue ton miles per gallon of diesel fuel
on time train performance
High Low Close
system dwell
$26.98
$19.99
$17.20
$24.62
$23.65
$17.35
$36.69
$36.19
$20.38
02
22.6
03
22.9
04
22.6
train speed
02
23.3
03
23.2
04
22.8
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
02
03
04
02
$603
03
$634
04
$684
02
$6,270
03
$6,468
04
$7,312
02
379
03
388
04
395
2 percent increase in volume.
4Q
04
83.1
A 59 percent jump in ethanol shipments, with an
80 percent increase in revenue, was the result of the
opening of the Northeast market to ethanol as a
gasoline additive.
NS reached an agreement for the construction of
Agriculture, Consumer Products
03
and Government
04
Agriculture revenue increased by 6 percent with a
a new feed mill, the ninth in five years located in
the Southeastern grain train network. NS Mercury
metals and construction revenue
$1,537
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
AGRICULTURE, CONSUMER PRODUCTS
AND GOVERNMENT REVENUE ($ MILLIONS)
$637
02
03
$688
04
$727
Automotive
(cid:1) Automotive revenue improved by 2 percent while
volume declined by 2 percent because of domestic
automotive production cuts.
(cid:1) Ford Motor Co. successfully launched the new Five
Hundred, Freestyle and Mercury Montego models
from its NS-served Chicago assembly plant.
(cid:1) New business included a unit train service for
(cid:1) Completing a recent expansion, Toyota operated
cattle feed launched from Lafayette, Ind., to Ama-
rillo, Texas. The 65-car private trains operate as a
shuttle between those points.
Paper, Clay and Forest Products
(cid:1) Paper, clay and forest products revenue set a
record, increasing 8 percent on a volume growth
of 1 percent.
(cid:1) Printing paper and newsprint shipments increased
by 11 percent to meet the demands of U.S. advertisers.
(cid:1) Refl ecting increased construction activity, con-
struction and debris volume doubled over 2003,
primarily from Pennsylvania and New Jersey, with
potential for continued growth.
(cid:1) Lumber remained strong as housing starts and in-
terest rates stayed at favorable levels.
both of its assembly plants at Princeton, Ind., for
the entire year. Honda shipped vehicles at full pro-
duction throughout the year from its fi rst plant at
Lincoln, Ala., and began production midyear at its
second assembly plant there.
AUTOMOTIVE REVENUE ($ MILLIONS)
02
$961
03
$936
$954
04
PAPER, CLAY AND FOREST PRODUCTS
REVENUE ($ MILLIONS)
(cid:1) New business included a Thoroughbred Bulk
Terminal that opened in Greer, S.C., extending dis-
02
$603
tribution options for shippers in North Carolina,
$634
03
South Carolina and Georgia.
04
$684
14
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
Rail Network
Operating
Solid planning and investments in people, equipment and infrastructure
Smoothly
Keeps
enabled Norfolk Southern to improve its operating performance and
to continue consistent, reliable service to customers in 2004, even as
volume growth put significantly more traffic on the network.
The Thoroughbred Operating Plan, or TOP, con-
shipment connection performance. The system uses
tinued to provide a foundation for growth. Further
a trip plan for each rail car on the system and moni-
refinements of TOP and new technologies brought
tors connection performance to measure if each
solid results to NS’ operating metrics.
car makes its connections correctly and on time.
The Coal Transportation Management System,
CASH PROVIDED BY OPERATING ACTIVITIES
Volume increases affected on-time train perfor-
LONG TERM DEBT
mance for the year; however, a focus on making
$733
02
03
$7,8932
$7,3641
$7,1601
02
$803
$0.26
$1,054
02
$460
03
DIVIDENDS PER SHARE
work operations, respectively.
INCOME from CONT. OPER. BEFORE ACC CHANGES
helped improve coal unit train and intermodal net-
and the Strategic Intermodal Management System
service consistency and overall velocity improve,
which also includes grain train traffic information,
2.5
55.62
2.4
53.12
02
03
03
04
connections helped ensure individual shipment
$8,1382
performance. When planned connections are met,
$774
Local Operating Plan Adherence, or LOPA, a ser-
$0.30
$1,661
vice measurement tool, was refined. LOPA oper-
$4111
04
even with increased carloads.
$530
The company advanced its order for locomotives,
$7,525
$119
04
$0.36
ates through the Thoroughbred Yard Enterprise
04
$9232
purchasing 207 in 2004.
$870
$53
System to plan and measure local switching opera-
NS continued to use remote control locomotive
tions at origin and destination terminals.
technology in local switching operations to im-
Another measurement
tool, Operating Plan
prove safety and efficiency.
DEBT TO TOTAL CAPITALIZATION RATIO
DIVIDENDS PER SHARE
INCOME from CONT. OPER. BEFORE ACC CHANGES
02
53.11
03
50.71
04
48.5
0.0
2.5
55.62
2.4
53.12
02
$0.26
03
$0.30
04
$0.36
$119
$530
$870
$53
CASH PROVIDED BY OPERATING ACTIVITIES
LONG TERM DEBT
DEBT TO TOTAL CAPITALIZATION RATIO
02
$7,3641
03
$7,1601
04
$7,525
$774
$8,1382
$733
$7,8932
diluted earnings per share before cont operations
Switching Performance 2004
on time train performance
$0.30
$1.35
$2.18
$0.13
02
53.11
03
50.71
04
48.5
0.0
02
83.6
03
84.3
04
00.0
02
$961
03
$936
04
$954
02
$5,112
03
$5,4041
04
$5,610
02
$803
03
$1,054
04
$1,661
02
$1.18
03
$1.051
04
$2.312
02
$637
03
$688
04
$727
02
$1,441
03
$1,500
04
$1,728
02
6,262
03
6,456
04
7,067
Adherence, was enhanced to better measure
diluted earnings per share before cont operations
connection Performance 2004
CONNECTION PERFORMANCE (PERCENT)
02
$1.18
03
$1.051
04
$2.312
$0.30
$1.35
$2.18
$0.13
intermodal revenue
Switching Performance 2004
SWITCHING PERFORMANCE (PERCENT)
on time train performance
connection Performance 2004
02
$1,181
03
$1,239
04
$1,537
02
83.6
03
84.3
04
00.0
2Q
03
65
3Q
03
68
4Q
03
74
1Q
04
70
2Q
04
77
3Q
04
74
4Q
04
73
2Q
03
77.1
3Q
03
76.9
4Q
03
75.7
1Q
04
77.5
2Q
04
83.8
3Q
04
85.8
4Q
04
83.1
2Q
03
65
3Q
03
68
4Q
03
74
1Q
04
70
2Q
04
77
3Q
04
74
4Q
04
73
2Q
03
77.1
3Q
03
76.9
4Q
03
75.7
1Q
04
77.5
2Q
04
83.8
3Q
04
85.8
4Q
04
83.1
agriculture revenue
paper revenue
automotive revenue
agriculture revenue
chemicals revenue
15
metals and construction revenue
paper revenue
automotive revenue
chemicals revenue
metals and construction revenue
coal revenue
railway operating revenues
railway operating expenses
coal revenue
income from railway operation
railway operating revenues
railway operating ratio
railway operating expenses
income from railway operation
railway operating ratio
$5,297
$107
$107
$1,171
81.9
1.6
$5,297
$107
03
$1,0641
$107
$1,171
81.9
1.6
Revenue ton miles per employee
Revenue ton miles per gallon of diesel fuel
on time train performance
High Low Close
Revenue ton miles per employee
system dwell
Revenue ton miles per gallon of diesel fuel
02
6,262
03
6,456
04
7,067
$26.98
$19.99
$17.20
$24.62
$23.65
$17.35
$36.69
$36.19
$20.38
on time train performance
train speed
02
23.3
03
23.2
04
22.8
High Low Close
system dwell
$26.98
$19.99
$17.20
$24.62
$23.65
$17.35
$36.69
$36.19
$20.38
02
22.6
03
22.9
04
22.6
train speed
02
23.3
03
23.2
04
22.8
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
02
03
04
1Q
02
2Q
02
3Q
02
4Q
02
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
80.9 81.9 85.1 83.5 74.5 89.4 87.8 82.6 78.9 81.7 79.3 66.3
02
03
04
02
$637
02
$755
03
$688
03
$772
04
$727
04
$864
02
$1,441
02
$1,158
03
$1,500
03
$1,0641
04
$1,728
04
$1,702
02
$603
02
$692
03
$634
03
$699
04
$684
04
$818
02
$6,270
02
81.5
03
$6,468
03
83.51
04
$7,312
04
76.7
02
02
22.6
379
03
03
22.9
388
04
04
22.6
395
02
$961
03
$936
04
$954
02
$5,112
03
$5,4041
04
$5,610
02
$755
03
$772
04
$864
02
$1,158
04
$1,702
02
$603
03
$634
04
$684
02
$6,270
03
$6,468
04
$7,312
02
379
03
388
04
395
02
$460
03
$4111
04
$9232
intermodal revenue
02
$1,181
03
$1,239
04
$1,537
02
$692
03
$699
04
$818
02
81.5
03
83.51
04
76.7
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
NS hired more than 2,000 train and engine crew
A pilot program using LEADER, or Locomotive
members in 2004 to prepare for increased traffic
Engineer Assist Display and Event Recorder® tech-
volume and work force attrition. Several hundred
nology, began in 2004 on the Winston Salem, N.C.,
mechanical and other employees also were hired to
line. The pilot is a partnership among NS, New
handle the additional locomotive and car programs
York Air Brake Corp., General Electric Transporta-
planned for 2005. Training at McDonough, Ga.,
tion Systems and the Federal Railroad Administra-
was expanded, with classes running 24 hours a day,
tion. LEADER works by continuously logging the
seven days a week.
operating state of a train in its memory, creating a
NS began testing its Unified Train Control System,
statistical profile of the operation over a number of
or UTCS. Jointly developed by NS and Gen-
trips. That information is used to develop the most
eral Electric, UTCS will replace existing sys-
efficient trip – called the “golden run” – and to help
tems with networked, computer-aided dis-
engineers repeat it on subsequent trips in real time
patching workstations that, together with feeds
by adjusting the throttle and brakes.
from current tactical NS information systems,
will provide a seamless transportation man-
agement system. Phased installation of UTCS
began in December 2004.
Engineer Jeff Blasco of Crewe, Va., operates the controls
of a Dash-9 locomotive. Norfolk Southern is installing
advanced technology aboard locomotives to maximize
operating efficiency.
16
A trainload of trilevels for hauling vehicles moves across
the countryside at Johnstown, Pa. Norfolk Southern is
North America’s largest rail carrier of automotive parts and
finished vehicles.
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
Financial Overview
Norfolk Southern posted record results
in 2004, driven by strong business demand and effi -
share, up $340 million or 64 percent. The improvement
was the result of higher income from railway operations.
cient operating performance. Net income for 2004 was
Railway operating revenues were a record $7.3 bil-
$923 million or $2.31 per diluted share. Results for 2004
lion, up $844 million or 13 percent compared with 2003,
compare with net income of $535 million or $1.37 per
a result of higher traffi c volumes and increased average
diluted share for 2003.
revenue per carload.
Results
in 2004
included a $53 million or
Railway operating expenses were $5.6 billion, up
13 cents per share noncash gain from the Conrail
$206 million or 4 percent, refl ecting volume-related ex-
corporate reorganization, while 2003 results includ-
pense increases and higher diesel fuel prices, which were
ed: (1) a $114 million or 29 cents per share increase
off set in part by the absence of the $107 million volun-
to net income for the cumulative eff ect of required
tary separation costs incurred in 2003.
changes in accounting principles; (2) $66 million or
Income from railway operations was a record
17 cents per share of costs for a voluntary separation
$1.7 billion compared with $1.1 billion in 2003. Exclud-
program; (3) $53 million or 13 cents per share for the
ing the costs of the voluntary separation program from
impairment of certain telecommunications assets;
2003 results, income from railway operations increased
and (4) a $10 million or 3 cents per share discontinued
by $531 million or 45 percent.
operations gain.
The railway operating ratio was 76.7 percent, com-
Excluding all of these items, net income in 2004
pared with 83.5 percent in 2003. Absent the cost of the
would have been $870 million or $2.18 per diluted
2003 voluntary separation program, the ratio improved
by 5.2 percentage points.
RAILWAY OPERATING REVENUES ($ MILLIONS)
INCOME FROM RAILWAY OPERATIONS ($ MILLIONS)
02
$6,270
03
$6,468
04
$7,312
02
$1,158
03
$1,0641
04
$1,702
$107
$1,171
RAILWAY OPERATING EXPENSES ($ MILLIONS)
RAILWAY OPERATING RATIO (PERCENT)
$5,112
02
03
$5,4041
04
$5,610
02
81.5
$5,297
$107
03
83.51
81.9
1.6
04
76.7
1 2003 results include $107 million of costs related to a voluntary separation program that increased the railway operating ratio by 1.6 percentage points.
18
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
Five-Year Financial Review — Norfolk Southern Corporation and Subsidiaries
($ in millions, except per-share amounts)
RESULTS OF OPERATIONS
Railway operating revenues
Railway operating expenses
Income from railway operations
6,170
5,163
1,007
6,468
5,404
1,064
6,270
5,112
1,158
7,312
5,610
1,702
20032
20041
2001
2002
$
$
$
$
$
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 operations3
Cumulative effect of changes in accounting
principles, net of taxes4
Net income
PER SHARE DATA
Income from continuing operations before
accounting changes
Basic
Diluted
Net income
Basic
Diluted
Dividends
Stockholders’ equity at year end
FINANCIAL POSITION
Total assets
Total long-term debt, including
current maturities5
Stockholders’ equity
OTHER
Capital expenditures
Average number of shares outstanding (thousands)
Number of stockholders at year end
Average number of employees
89
489
1,302
379
923
—
—
923
2.34
2.31
2.34
2.31
0.36
19.95
24,750
7,525
7,990
1,041
394,201
51,032
28,475
$
$
$
$
$
$
$
$
$
$
$
19
497
586
175
411
10
114
535
1.05
1.05
1.37
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
1.18
1.18
0.26
16.71
19,956
7,364
6,500
695
388,213
51,418
28,970
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
20006
6,159
5,526
633
168
551
250
78
172
—
—
172
99
553
553
191
362
13
—
375
$
0.94
0.94
0.97
0.97
0.24
15.78
19,418
7,632
6,090
746
385,158
53,042
30,894
$
$
$
$
$
$
$
$
$
$
0.45
0.45
0.45
0.45
0.80
15.16
18,976
7,636
5,824
731
383,358
53,194
33,738
NOTES
1 2004 other income — net includes a $53 million net gain from the Conrail corporate reorganization. This gain increased net income by $53 million or 13 cents per
diluted share.
2 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.
3 NS sold all the common stock of its motor carrier subsidiary, North American Van Lines, Inc. (NAVL), in 1998. 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.
4 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.
5 Excludes notes payable to Conrail of $716 million in 2003, $513 million in 2002, $301 million in 2001 and $51 million in 2000.
6 2000 operating expenses include $165 million in work force reduction costs for early retirement and separation programs. These costs reduced net income by
$101 million, or 26 cents per diluted share.
19
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
Years ended December 31,
2004
2003
2002
($ in millions, except earnings per share)
$
7,312
$
6,468
$
6,270
2,272
1,601
319
598
449
151
220
5,610
1,702
89
(489)
1,302
379
923
—
—
923
2.34
2.31
2.34
2.31
2,275
1,427
419
513
380
181
209
5,404
1,064
19
(497)
586
175
411
10
114
535
1.05
1.05
1.37
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
1.18
1.18
Income Statement
RAILWAY OPERATING REVENUES
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
Income from continuing operations
before accounting changes
Basic
Diluted
Net income
Basic
Diluted
$
$
$
$
$
See Form 10-K report beginning on page K1 for full financial statements and footnotes
20
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
Balance Sheet
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
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
Deferred income taxes
TOTAL LIABILITIES
Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares authorized;
issued 421,346,107 and 412,168,988 shares, respectively
Additional paid-in capital
Unearned restricted stock
Accumulated other comprehensive loss
Retained income
Less treasury stock at cost, 20,907,125 and 21,016,125 shares, respectively
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See Form 10-K report beginning on page K1 for full financial statements and footnotes
21
As of December 31,
2004
2003
($ in millions)
$
$
$
$
$
$
579
90
767
104
187
240
1,967
805
20,526
1,452
24,750
1,012
210
78
239
662
2,201
6,863
1,146
—
6,550
16,760
421
728
(8)
(24)
6,893
(20)
7,990
$
$24,750
$
284
2
695
92
189
163
1,425
6,259
11,779
1,133
20,596
948
199
81
213
360
1,801
6,800
1,080
716
3,223
13,620
412
521
(5)
(44)
6,112
(20)
6,976
20,596
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
Quarterly Financial Data
March 31
Three Months Ended
June 30
Sept. 30
Dec. 31
(In millions of dollars, except per share amounts)
2004
Railway operating revenues
Income from railway operations
Net income
Earnings per share:
Basic
Diluted
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
$
$
$
$
$
$
1,693
346
158
0.40
0.40
1,561
231
85
2092
0.22
0.542
$
1,813
425
213
0.55
0.54
1,633
298
137
137
0.35
0.35
$
$
$
$
$
$
$
$
$
$
$
1,857
469
2881
0.731
0.721
1,598
311
137
137
0.35
0.35
$
1,949
462
264
0.66
0.65
1,676
224
523
523
0.133
0.133
$
$
$
$
$
1 Includes a $53 million or 13 cents per share gain from the Conrail corporate reorganization
2 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
3 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 51,032 stockholders of record as of Dec. 31, 2004, 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 2004 and 2003.
2004
Market price
High
Low
Dividends per share
2003
Market price
High
Low
Dividends per share
1st
2nd
3rd
4th
Quarter
$
$
$
$
24.06
20.38
0.08
20.89
17.35
0.07
$
$
$
$
26.60
21.54
0.08
22.39
18.31
0.07
$
$
$
$
29.79
24.77
0.10
20.20
18.00
0.08
$
$
$
$
36.69
29.88
0.10
24.62
18.32
0.08
22
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
Board
ofDirectorsAs of February 1, 2005
Left to right: Harold W. Pote, Landon Hilliard, Jane Margaret O’Brien, Steven F. Leer, Charles W. Moorman, David R. Goode, Alston D. Correll, J. Paul Reason,
Burton M. Joyce, Gene R. Carter, Gerald L. Baliles
Gerald L. Baliles, 64, 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 inter-
national offices in Bangkok, Brussels, London, Hong
Kong and Singapore. His board service began in 1990;
his current term expires in 2005.
Gene R. Carter, 65, of Alexandria, Va., is executive
director and chief executive officer of the Association
for Supervision and Curriculum Development, among
the world’s largest international education associa-
tions. His board service began in 1992; his current term
expires in 2005.
Alston D. Correll, 63, of Atlanta, is chairman and
chief executive officer of Georgia-Pacific Corpora-
tion. His board service began in 2000; his current term
expires in 2006.
David R. Goode, 64, of Norfolk, Va., is chairman
and chief executive officer of Norfolk Southern Cor-
poration. He joined Norfolk and Western Railway in
1965 and was named chief executive officer of Norfolk
Southern in 1992. His board service began in 1992; his
current term expires in 2006.
Landon Hilliard, 65, 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 2007.
Burton M. Joyce, 62, of Penhook, Va., is chairman of
IPSCO, a leading steel producer. His board service began
in November 2003; his current term expires in 2007.
Steven F. Leer, 52, 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.
Charles W. Moorman, 52, of Virginia Beach, Va., is
president of Norfolk Southern Corporation. He joined
Norfolk Southern in 1970 and was named president on
Oct. 1, 2004. His board service began Jan. 25, 2005; his
current term expires in 2005.
Jane Margaret O’Brien, 51, 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 2007.
Harold W. Pote, 58, of New York City, is vice chairman,
Retail Financial Services of JPMorgan Chase & Co. His
board service began in 1988; his current term expires in 2006.
J. Paul Reason, 63, Admiral, USN, retired, of Norfolk,
Va., is president and chief operating officer of Metro Ma-
chine Corporation, a ship repair company. His board ser-
vice began in 2002; his current term expires in 2005.
23
Stockholder Information
Common Stock
Ticker symbol: NSC
Common stock of Norfolk Southern Corporation is listed
and traded on the New York Stock Exchange.
Annual Meeting
May 12, 2005, at 10 a.m. EDT
The Roper Performing Arts Center
340 Granby St.
Norfolk, Va.
Publications
Upon written request, the corporation’s annual and
quarterly reports on Forms 10-K and 10-Q will be fur-
nished 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 Governance Guidelines, board
committee charters, Code of Ethics, and Code of Ethi-
cal Conduct for Senior Financial Officers. Contact the
Corporate Secretary, Norfolk Southern Corporation,
Three Commercial Place, Norfolk, Va. 23510-9219.
This information also is available on the NS Web site.
Internal Audit Hotline
High ethical standards always have been key to Nor-
folk Southern’s success. Anyone who may be aware
of a violation of the corporation’s ethical standards
or a conflict of interest, or has a concern or complaint
regarding the corporation’s financial reporting, ac-
counting, internal controls or auditing matters is en-
couraged to report such information to the Internal
Audit Hotline, (800) 732-9279. Reports may be made
anonymously and without fear of retaliation.
Annual Report Requests
and Information
(800) 531-6757
World Wide Web
Address
www.nscorp.com
Dividends
At its January 2005 meeting, the corporation’s board of
directors declared a quarterly dividend of 11 cents per
share on its common stock, payable on March 10, 2005,
to stockholders of record on Feb. 4, 2005.
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 90 consecutive quarterly dividends since its incep-
tion in 1982. C.
Financial Inquiries
Henry C. Wolf
Vice Chairman and
Chief Financial Officer
Norfolk Southern Corp.
Three Commercial Place
Norfolk, Va. 23510-9215
(757) 629-2650
Corporate Offices
Executive Offices
Norfolk Southern Corp.
Three Commercial Place
Norfolk, Va. 23510-9227
(757) 629-2600
Stockholder Inquiries
Leanne D. Marilley
Director Investor Relations
Norfolk Southern Corp.
Three Commercial Place
Norfolk, Va. 23510-9215
(757) 629-2861
Regional Offices
110 Franklin Road S.E.
Roanoke, Va. 24042
99 Spring St. S.W.
Atlanta, Ga. 30303
Account Assistance
For assistance with lost stock certificates, transfer
requirements and the Dividend Reinvestment Plan,
contact:
Registrar and Transfer Agent
The Bank of New York
101 Barclay St.—11E
New York, N.Y. 10286
(866) 272-9472
For assistance with address changes, dividend
checks and direct deposit of dividends, contact:
Assistant Corporate Secretary Stockholder Records
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Va. 23510-9219
(800) 531-6757
Dividend Reinvestment Plan
Stockholders whose names appear on their stock cer-
tificates (not a street or broker name) are eligible to
participate in the Dividend Reinvestment Plan.
The plan provides a convenient, economical and
systematic method of acquiring additional shares of
the corporation’s common stock by permitting eligible
stockholders of record to reinvest dividends.
The plan’s administrator is The Bank of New York.
For additional information, dial (866) 272-9472.
NORFOLK SOUTHERN CORPORATION — ANNUAL REPORT 2004
Officers and Board
Committees
David R. Goode CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Bruno Maestri VICE PRESIDENT PUBLIC AFFAIRS
Charles W. Moorman PRESIDENT
Robert E. MartÍnez VICE PRESIDENT BUSINESS DEVELOPMENT
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
James A. Hixon EXECUTIVE VICE PRESIDENT FINANCE AND PUBLIC AFFAIRS
Mark D. Manion EXECUTIVE VICE PRESIDENT OPERATIONS
Kathryn B. McQuade EXECUTIVE VICE PRESIDENT PLANNING
Michael R. McClellan VICE PRESIDENT INTERMODAL
AND AUTOMOTIVE MARKETING
Thomas H. Mullenix, Jr. VICE PRESIDENT HUMAN RESOURCES
William J. Romig VICE PRESIDENT AND TREASURER
Marta R. Stewart VICE PRESIDENT AND CONTROLLER
Gerhard A. Thelen VICE PRESIDENT MECHANICAL
AND CHIEF INFORMATION OFFICER
Charles J. Wehrmeister VICE PRESIDENT SAFETY AND ENVIRONMENTAL
John P. Rathbone EXECUTIVE VICE PRESIDENT ADMINISTRATION
F. Blair Wimbush VICE PRESIDENT REAL ESTATE
Donald W. Seale EXECUTIVE VICE PRESIDENT SALES AND MARKETING
Gary W. Woods VICE PRESIDENT ENGINEERING
John F. Corcoran SENIOR VICE PRESIDENT PUBLIC AFFAIRS
Dezora M. Martin CORPORATE SECRETARY
Henry D. Light SENIOR VICE PRESIDENT LAW
John M. Samuels SENIOR VICE PRESIDENT OPERATIONS PLANNING
AND SUPPORT
Daniel D. Smith SENIOR VICE PRESIDENT ENERGY AND PROPERTIES
James A. Squires SENIOR VICE PRESIDENT LAW
David A. Brown VICE PRESIDENT STRATEGIC PLANNING
Deborah H. Butler VICE PRESIDENT CUSTOMER SERVICE
James E. Carter, Jr. VICE PRESIDENT INTERNAL AUDIT
Joseph C. Dimino SENIOR GENERAL COUNSEL
Cynthia 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
David T. Lawson VICE PRESIDENT INDUSTRIAL PRODUCTS
H. Craig Lewis VICE PRESIDENT CORPORATE AFFAIRS
Mark R. MacMahon VICE PRESIDENT LABOR RELATIONS
Committees of the Board of Directors
Executive
H.W. Pote, chair
G.L. Baliles
G.R. Carter
D.R. Goode
L. Hilliard
J.M. O’Brien
Compensation
G.R. Carter, chair
B.M. Joyce
J.M. O’Brien
H.W. Pote
Finance
G.L. Baliles, chair
A.D. Correll
L. Hilliard
S.F. Leer
J.P. Reason
Governance
and Nominating
L. Hilliard, chair
G.L. Baliles
A.D. Correll
S.F. Leer
H.W. Pote
Audit
J.M. O’Brien, chair
G.R. Carter
B.M. Joyce
J.P. Reason
24
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 DEC. 31, 2004
( ) 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 Jan. 31, 2005: 400,276,939 excluding 20,907,125
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, 2004 was $10,440,582,263 (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
K11
K11
K14
K15
K17
K36
K37
K77
K77
K78
K78
K78
K81
K81
K82
K90
K90
K93
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,
2004, all the common stock of Norfolk Southern Railway was owned directly by Norfolk Southern.
Through a limited liability company, Norfolk Southern and CSX Corporation (CSX) jointly own
Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC). Norfolk
Southern has a 58% economic and 50% voting interest in the jointly owned entity, and CSX has the
remainder of the economic and voting interests. CRC owns and operates certain properties (the Shared
Assets Areas) for the joint and exclusive benefit of NSR and CSX Transportation Inc. (CSXT). On
June 1, 1999, NSR and CSXT, began operating separate portions of Conrail’s rail routes and assets. As
described below, on August 27, 2004, NS, CSX and Conrail completed a reorganization of Conrail.
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 otherwise indicated, Norfolk Southern and its subsidiaries are referred to collectively as NS.
CONRAIL CORPORATE REORGANIZATION – On August 27, 2004, NS, CSX and Conrail
completed a reorganization of Conrail (Conrail Corporate Reorganization), which established direct
ownership and control by NSR and CSX Transportation, Inc. (CSXT) of two former CRC subsidiaries,
Pennsylvania Lines LLC (PRR) and New York Central Lines LLC (NYC), respectively. Prior to the
Conrail Corporate Reorganization, NSR operated the routes and assets of PRR and CSXT operated the
routes and assets of NYC, each in accordance with operating and lease agreements. Pursuant to the
Conrail Corporate Reorganization, the operating and lease agreements were terminated and PRR and
NYC were merged into NSR and CSXT, respectively. The reorganization did not involve the Shared
Assets Areas and did not affect the competitive rail service provided in the Shared Assets Areas.
Conrail continues to own, manage and operate the Shared Assets Areas as previously approved by the
STB. In connection with the Conrail Corporate Reorganization, NS, CSX and Conrail obtained a
ruling from the Internal Revenue Service (IRS) regarding certain tax matters, and the STB approved
the transaction. As a part of the Conrail Corporate Reorganization, Conrail restructured its existing
K3
unsecured and secured public indebtedness, with the consent of Conrail’s debtholders. See Note 2 to
the Consolidated Financial Statements.
RAILROAD OPERATIONS – As of Dec. 31, 2004, NS’ railroads operated approximately
21,300 miles of road. The miles operated, which includes leased lines between Cincinnati, Ohio, and
Chattanooga, Tennessee, and trackage rights over property owned by North Carolina Railway Company,
were as follows:
Mileage Operated as of Dec. 31, 2004
Miles
of
Road
Second and
Other Main
Track
Passing
Track,
Crossovers
and
Turnouts
Way and
Yard
Switching
Total
Owned
Operated under lease,
contract or trackage rights
Total
16,389
4,947
21,336
2,808
1,978
4,786
2,095
417
2,512
8,632
29,924
969
9,601
8,311
38,235
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: the Ports of New York/New Jersey; Philadelphia, Pennsylvania/
Camden, New Jersey; Baltimore, Maryland; Wilmington, Delaware; Norfolk, Virginia; Morehead City,
North Carolina; Charleston, South Carolina; Savannah and Brunswick, Georgia; and Jacksonville,
Florida. 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 in Dallas, Texas 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, Illinois, New Orleans, Kansas City, Buffalo, St. Louis and Meridian, MS, are major
gateways for interterritorial system traffic.
K4
Triple Crown Operations – Triple Crown Services Company (TCSC), NS’ intermodal subsidiary, offers
door-to-door 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. TCSC provides intermodal service in major traffic corridors, including those between
the Midwest and the Northeast, the Midwest and the Southeast, and the Midwest and Texas.
The following table sets forth certain statistics relating to NS railroads' operations for the past 5 years:
Rail Operating Statistics
2004
Year Ended Dec. 31,
2002
2001
2003
2000
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
198
77.7
$0.0369
183
73.9
$0.0353
179
72.6
$0.0350
182
70.0
$0.0339
197
74.4
$0.0312
3,347
3,111
3,067
3,023
2,888
76.7%
83.5%1
81.5%
83.7%
89.7%2
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 $7.3 billion
in 2004. See the financial information by traffic segment in Part II, Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”
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 181 million tons in
2004, most of which originated on NS' lines in West Virginia, Virginia, Pennsylvania and Kentucky.
Revenues from coal, coke and iron ore accounted for about 24% of NS' total railway operating revenues
in 2004.
Total coal handled through all system ports in 2004 was 38 million tons. Of this total, 13 million tons
(including coastwise traffic) moved through Norfolk, Virginia, 4 million tons moved through the
Baltimore Terminal, 14 million tons moved to various docks on the Ohio River, and 7 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
K5
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, pulp board and paper products, wood fibers, wood pulp, scrap paper and clay.
In 2004, 141 million tons of general merchandise freight, or approximately 67% of total general
merchandise tonnage handled by NS, originated online. The balance of general merchandise traffic was
received from connecting carriers at interterritorial gateways. The principal interchange points for NS-
received traffic included Chicago, Memphis, New Orleans, Cincinnati, Kansas City, Detroit, Hagerstown,
St. Louis/East St. Louis and Louisville. General merchandise carloads handled in 2004 were 2.9 million,
the revenue from which accounted for 55% of NS’ total railway operating revenues in 2004.
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 2004 were 2.9 million, the revenues from which accounted for 21% of NS’ total railway
operating revenues for the year.
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 2004, 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 2004 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. On October 20, 2004, in a consolidated decision the STB found NS’ rates to be reasonable
in both cases. At the STB’s invitation, Duke and CP&L have each initiated proceedings to determine
whether phasing constraints should apply. Although management has made an estimate of the ultimate
resolution of these cases, the uncertainty of future developments in the Duke case and(or) the CP&L case
may result in adjustments that could have a favorable or unfavorable material impact on results of
operations in a particular quarter or year. See the discussion of the rate cases in Part II, Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In 2004, NS' railroads were found by the STB not to be “revenue adequate” based on results for the year
2003. 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.
K6
PASSENGER OPERATIONS - Regularly scheduled passenger trains are operated by Amtrak on
NS' lines between Alexandria and New Orleans, between Greensboro and Selma, North Carolina,
between Chicago, Illinois, and Detroit, Michigan, and between Chicago and Harrisburg, Pennsylvania.
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. NS operates lines on which Amtrak conducts regularly scheduled
passenger operations. In addition, NS provides freight service over 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 Conrail in the Shared Assets Areas.
NONCARRIER OPERATIONS - NS' noncarrier subsidiaries engage principally in the acquisition,
leasing and management of coal, oil, gas and minerals; the development of commercial real estate;
telecommunications; and the leasing or sale of rail property and equipment. In 2004, 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 capital intensive with total property of approximately
$21 billion.
Capital Expenditures - Capital expenditures for road, equipment and other property for the past five
years were as follows (including capitalized leases):
2004
2003
2002
2001
2000
Capital Expenditures
($ in millions)
Road
Equipment
Other property
Total
$
$
607 $
429
5
1,041 $
495 $
218
7
720 $
519 $
174
2
695 $
505 $
233
8
746 $
557
146
28
731
Capital spending and maintenance programs are and have been designed to assure the ability to provide
safe, efficient and reliable transportation services. For 2005, NS has budgeted $938 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.”
K7
Equipment - As of Dec. 31, 2004, 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
3,323
207
74
3,604
19,911
18,712
9,399
30,300
2,928
251
3,701
85,202
5,612
4,761
877
6,498
1,546
19,294
151
--
--
151
822
2,175
2,678
8,010
1,342
--
--
15,027
3
--
9,987
--
16,256
26,246
(Horsepower)
11,902,650
303,700
--
12,206,350
3,474
207
74
3,755
(Tons)
2,183,236
1,641,530
1,316,489
4,093,691
328,376
--
184,599
9,747,921
20,733
20,887
12,077
38,310
4,270
251
3,701
100,229
5,615
4,761
10,864
6,498
17,802
45,540
* Includes equipment leased to outside parties and equipment subject to equipment trusts,
conditional sale agreements and capitalized leases.
** Includes 18 locomotives and 6,813 freight cars leased from CRC.
The following table indicates the number and year built for locomotives and freight cars owned at
Dec. 31, 2004.
2004 2003
2002
2001
2000
1993-
1999
1988-
1992
1987 &
Before
Year Built
207
6%
100
3%
--*
--%
160 200
4%
6%
920
25%
344
10%
1,673
46%
Total
3,604
100%
--
--%
--
--%
--
--%
44
--%
112
--%
10,741
13%
6,310
7%
67,995
80%
85,202
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.
K8
As of Dec. 31, 2004, the average age of the locomotive fleet was 16.8 years. During 2004,
50 locomotives, the average age of which was 22.9 years, were retired. The average age of the
freight car fleet at Dec. 31, 2004, was 27.6 years. Between 1988 and 2000, about 29,000 coal cars
were rebodied. As a result, the remaining servicibility of the freight car fleet is greater than may be
inferred from the high percentage of freight cars built in earlier years. During 2004, 1,829 freight
cars were retired.
Freight cars:
NS Rail
Locomotives:
NS Rail
Annual Average Bad Order Ratio
2004
2003
2002
2001
2000
7.4%
7.4%
8.1%
6.9%
5.7%
6.3%
6.2%
6.3%
5.8%
5.5%
Ongoing freight car and locomotive maintenance programs are intended to ensure the highest standards of
safety, reliability, customer satisfaction and equipment marketability. The freight car bad order 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 elevated ratio through 2004 reflected units out of service related to the resumption of
maintenance and modification activities.
Encumbrances - Certain railroad equipment is subject to the prior lien of equipment financing
obligations amounting to approximately $930 million as of Dec. 31, 2004, and $910 million at
Dec. 31, 2003.
Track Maintenance - Of the approximately 38,200 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:
2004
2003
2002
2001
2000
Track miles of rail installed
Miles of track surfaced
New crossties installed (millions)
246
5,055
2.5
233
5,105
2.8
235
5,270
2.8
254
3,836
1.5
390
3,687
1.5
Microwave System - The NS microwave system, consisting of approximately 7,400 radio route miles,
423 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 the approximately 16,400 route miles owned by NS, 11,052 miles are signalized,
including 8,030 miles of centralized traffic control (CTC) and 3,022 miles of automatic block signals.
K9
Of the 8,030 miles of CTC, 2,565 miles are controlled by data radio originating at 197 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.
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 28,475 employees in 2004, compared with an average of
28,753 employees in 2003. The approximate average cost per employee during 2004 was $59,000 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 75% of NS' freight
revenues come from either exempt traffic or traffic moving under transportation contracts.
Efforts may be made in 2005 to re-subject the rail industry to unwarranted federal economic regulation.
The Staggers Rail Act of 1980, which substantially reduced such regulation, encouraged and enabled rail
carriers to innovate and to compete for business, thereby contributing to the economic health of the nation
and to the revitalization of the industry. Accordingly, NS will oppose efforts to reimpose unwarranted
economic regulation.
COMPETITION - There is continuing strong competition among rail, water and highway carriers. Price
is usually only one factor of importance as shippers and receivers choose a transport mode and specific
hauling company. Inventory carrying costs, service reliability, ease of handling and the desire to avoid
loss and damage during transit are also important considerations, especially for higher-valued finished
goods, machinery and consumer products. Even for raw materials, semifinished goods and work-in-
K10
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 2004.
K11
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, 2005, relating to the
executive officers.
Name, Age, Present Position
Business Experience During Past Five Years
David R. Goode, 64,
Chairman and
Chief Executive Officer
Charles W. Moorman, 52,
President
L. I. Prillaman, 61,
Vice Chairman and
Chief Marketing Officer
Stephen C. Tobias, 60,
Vice Chairman and
Chief Operating Officer
Henry C. Wolf, 62,
Vice Chairman and
Chief Financial Officer
James A. Hixon, 51,
Executive Vice President
Finance and Public Affairs
Mark D. Manion, 52,
Executive Vice President
Operations
Present position since October 1, 2004.
Served as Chairman, President and Chief Executive
Officer since 1992.
Present position since October 1, 2004.
Served as Senior Vice President – Corporate Planning and
Services from December 1, 2003 to October 1, 2004;
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 August 1998.
Present position since August 1998.
Present position since August 1998.
Present position since October 1, 2004.
Served as Senior Vice President Legal and Government Affairs
from December 1, 2003 to October 1, 2004; Senior Vice
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.
Present position since October 1, 2004.
Served as Senior Vice President Transportation Operations
from December 1, 2003 to October 1, 2004; Vice President
Transportation Services and Mechanical from February 2001
to December 1, 2003 and prior thereto was Vice President
Mechanical.
K12
Kathryn B. McQuade, 48,
Executive Vice President
Planning and Chief Information
Officer
Present position since October 1, 2004.
Served as Senior Vice President Finance from December 1,
2003 to October 1, 2004; Senior Vice President Financial
Planning from April 2000 to December 1, 2003 and prior
thereto was Vice President Financial Planning.
John P. Rathbone, 53,
Executive Vice President
Administration
Donald W. Seale, 52,
Executive Vice President
Sales and Marketing
Present position since October 1, 2004.
Served as Senior Vice President Administration from
December 1, 2003 to October 1, 2004; Senior Vice President
and Controller from April 2000 to December 1, 2003 and prior
thereto was Vice President and Controller.
Present position since October 1, 2004.
Served as Senior Vice President Marketing Services from
December 1, 2003 to October 1, 2004 and prior thereto was
Senior Vice President Merchandise Marketing.
Henry D. Light, 64,
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.
Daniel D. Smith, 52,
Senior Vice President
Energy and Properties
James A. Squires, 43,
Senior Vice President Law
Present position since December 1, 2003.
Served as President NS Development from February 2001 to
December 1, 2003 and prior thereto was President
Pocahontas Land Corporation.
Present position since October 1, 2004.
Served as Vice President Law from December 1, 2003 to
October 1, 2004; Senior General Counsel from February 2002
to December 1, 2003 and prior thereto was General Counsel.
Marta R. Stewart, 47,
Vice President and Controller
Present position since December 1, 2003.
Prior thereto was Assistant Vice President Corporate Accounting.
K13
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 51,032 stockholders of record as of
Dec. 31, 2004, 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 2004 and 2003.
2004
Market price
High
Low
Dividends per share
2003
Market price
High
Low
Dividends per share
1st
2nd
Quarter
3rd
4th
$
$
$
$
24.06 $
20.38
0.08 $
26.60 $
21.54
0.08 $
29.79 $
24.77
0.10 $
20.89 $
17.35
0.07 $
22.39 $
18.31
0.07 $
20.20 $
18.00
0.08 $
36.69
29.88
0.10
24.62
18.32
0.08
ISSUER REPURCHASES OF EQUITY SECURITIES
(a) Total Number
of Shares (or
Units) Purchased
(b) Average
Price Paid per
Share (or Unit)
Period
(c) Total Number
of Shares (or
Units) Purchased
as Part of
Publicly
Announced Plans
or Programs
(d) Maximum Number (or
Approximate Dollar
Value) of Shares (or Units)
that may yet be Purchased
Under the Plans or
Programs
Oct. 1-31, 2004
--
Nov. 1-30, 2004
Dec. 1-31, 2004
Total
3,503(1)
4,732(1)
8,235
--
$34.86
$35.23
$35.07
--
--
--
--
--
--
(1)
Shares tendered by employees in connection with the exercise of stock options under the
Long-Term Incentive Plan.
K14
Item 6. Selected Financial Data.
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
FIVE-YEAR FINANCIAL REVIEW 2000-2004
RESULTS OF OPERATIONS
Railway operating revenues
Railway operating expenses
Income from railway
operations
Other income – net
Interest expense on debt
Income from continuing
operations before income
taxes and accounting changes
Provision for income taxes
Income from continuing
operations before accounting
changes
Discontinued operations3
Cumulative effect of changes in
accounting principles, net of
taxes4
Net income
PER SHARE DATA
Income from continuing
operations before accounting
changes – basic
– diluted
Net income – basic
– diluted
Dividends
Stockholders' equity at year end
FINANCIAL POSITION
Total assets
Total long-term debt, including
current maturities5
Stockholders' equity
OTHER
Capital expenditures
Average number of shares
outstanding (thousands)
Number of stockholders at year
end
Average number of employees:
Rail
Nonrail
Total
20041
20032
2001
2002
($ in millions, except per share amounts)
20006
$
7,312 $
5,610
6,468 $
5,404
6,270 $
5,112
6,170 $
5,163
6,159
5,526
1,702
89
489
1,302
379
923
--
1,064
19
497
586
175
411
10
1,158
66
518
706
246
460
--
1,007
99
553
553
191
362
13
--
923 $
114
535 $
--
460 $
--
375 $
633
168
551
250
78
172
--
--
172
2.34 $
2.31 $
2.34 $
2.31 $
0.36 $
19.95 $
1.05 $
1.05 $
1.37 $
1.37 $
0.30 $
17.83 $
1.18 $
1.18 $
1.18 $
1.18 $
0.26 $
16.71 $
0.94 $
0.94 $
0.97 $
0.97 $
0.24 $
15.78 $
0.45
0.45
0.45
0.45
0.80
15.16
24,750 $
20,596 $
19,956 $
19,418 $
18,976
7,525 $
7,990 $
7,160 $
6,976 $
7,364 $
6,500 $
7,632 $
6,090 $
7,636
5,824
1,041 $
720 $
695 $
746 $
731
394,201
389,788
388,213
385,158
383,358
51,032
28,057
418
28,475
52,091
51,418
53,042
53,194
28,363
390
28,753
28,587
383
28,970
30,510
384
30,894
33,344
394
33,738
K15
$
$
$
$
$
$
$
$
$
$
$
1
2
3
4
5
6
2004 other income – net includes a $53 million net gain from the Conrail Corporate Reorganization. This gain
increased net income by $53 million or 13 cents per diluted share.
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). 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, and
$51 million in 2000.
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.
See accompanying Consolidated Financial Statements and notes thereto.
K16
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 Selected Financial Data.
OVERVIEW
NS’ results in 2004 reflect substantial increases in traffic volumes as the U.S. economy recovered and
demand for transportation grew. The U.S. economy grew an estimated 4.4%, and the manufacturing
sector expanded throughout the year. The higher demand, coupled with the combination of trucking
capacity constraints and the continuing fluidity of the NS network resulted in a substantial increase in
volume and revenues. Carloadings were up 603,000 units, or 9%, in 2004 driven by intermodal,
metals and construction, and coal, which together accounted for 95% of this increase, and revenues
increased $844 million, or 13%. Improved performance and service levels allowed NS to meet increased
demand and led to the ability to raise rates in response to market demand. The fluidity and efficiency of
NS’ system enabled it to handle the record levels of traffic volume and control expenses. Operating
expenses grew less than the 9% increase in carloadings, and the operating ratio, a measure of the amount
of operating revenues consumed by operating expenses, improved to 76.7% in 2004.
Looking ahead NS expects business levels to continue to grow in 2005 but at a more modest pace than
seen in 2004.
SUMMARIZED RESULTS OF OPERATIONS
2004 Compared with 2003
Net income was $923 million, or $2.31 per diluted share, in 2004, up $388 million, or 73%, compared
with net income of $535 million, or $1.37 per diluted share, in 2003. 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 was $923 million, or $2.31 per
diluted share, in 2004, compared with $411 million, or $1.05 per diluted share, in 2003. The increase in
2004 was the result of higher income from railway operations and also included a $53 million net noncash
gain from the Conrail Corporate Reorganization reported in “Other income – net” (see Notes 2 and 3). In
addition, the comparisons were affected by the costs of a voluntary separation program (see Note 11) and
the impairment of certain telecommunications assets (see Note 6), which combined to reduce income by
$119 million, or 30 cents per diluted share, in 2003.
2003 Compared with 2002
Net income was $535 million, or $1.37 per diluted share, in 2003, up $75 million, or 16%. Income from
continuing operations before accounting changes 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 the voluntary separation program, and lower nonoperating income that reflected the
impairment of the telecommunications assets.
K17
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
Railway operating revenues were $7.3 billion in 2004, $6.5 billion in 2003 and $6.3 billion in 2002. The
following table presents a three-year comparison of revenues, volume and average revenue per unit by
market group.
2004
Revenues
2003
($ in millions)
2002
2004
Units
2003
(in thousands)
Revenue per Unit
2002
2004
2003
($ per unit)
2002
$ 1,728 $ 1,500 $
1,441
1,691
1,615
1,610
$
1,022 $
929 $
895
954
864
818
727
684
4,047
936
772
699
688
634
3,729
961
755
692
637
603
3,648
635
448
781
569
449
2,882
645
426
710
556
443
2,780
662
423
716
518
438
2,757
1,503
1,927
1,048
1,278
1,524
1,404
1,450
1,815
984
1,238
1,431
1,341
1,450
1,783
966
1,231
1,378
1,323
1,537
1,239
1,181
2,891
2,466
2,354
531
502
502
$ 7,312 $ 6,468 $
6,270
7,464
6,861
6,721
$
980 $
943 $
933
Coal
General merchandise:
Automotive
Chemicals
Metals/construction
Agr./cons. prod./govt.
Paper/clay/forest
General merchandise
Intermodal
Total
In 2004, revenues increased $844 million, or 13%, reflecting a $318 million, or 9%, rise in general
merchandise revenues, a $298 million, or 24%, increase in intermodal revenues and a $228 million, or
15%, improvement in coal revenues. All general merchandise market groups except automotive posted
volume increases over 2003. As shown in the following table, the revenue improvement was the result of
higher traffic volumes and increased average revenues. The favorable revenue per unit/mix variance was
driven by higher average revenue per unit that reflected higher rates and increased fuel surcharges, offset
in part by the effects of a 17% increase in lower-priced intermodal traffic volume.
Revenue Variance Analysis
Increases (Decreases)
Volume
Revenue per unit/mix
Total
2004 vs. 2003
2003 vs. 2002
($ in millions)
$
$
569
275
844
$
$
131
67
198
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 revenue increases over 2002. 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 intermodal traffic volume.
Beginning March 1, 2004, NS modified its fuel surcharge program for its merchandise and coal traffic.
The fuel surcharge program in effect until that time applied a 2% fuel surcharge to line haul freight
charges when the West Texas Intermediate (WTI) crude oil price, as published in the Wall Street Journal,
exceeded $28.00 per barrel for 30 consecutive business days. For each $5.00 per barrel increase, an
K18
additional 2% fuel surcharge applied. The revised fuel surcharge is based on the monthly average price of
WTI crude oil. Line haul freight charges are 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 causes the amount charged to more closely reflect fuel
price fluctuations in today’s volatile market. Higher average WTI crude oil prices resulted in an increase
in fuel surcharges in 2004; however, this was offset by the effect of higher prices for diesel fuel
(excluding hedge benefits).
COAL revenues increased $228 million, or 15%, versus 2003. Traffic volume (carloads) increased 5%
primarily due to higher export, utility and metallurgical coal volumes, which offset declines in coke and
iron ore. Revenue per unit increased 10%, reflecting higher rates, fuel surcharges, a favorable change in
the mix of traffic (the rate of increase in longer haul traffic exceeded that of short haul traffic) and
improved loading productivity (increased tons per car). Coal, coke and iron ore revenues represented
24% of total railway operating revenues in 2004, and 83% of NS' coal shipments originated on lines it
operates.
NS is involved in rate cases with two of its utility customers, Duke Energy (Duke) and Carolina Power &
Light (CP&L). 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. On Oct. 20, 2004, in a consolidated
decision, the STB found NS’ rates to be reasonable in both cases. At the STB’s invitation, Duke and
CP&L each initiated proceedings to determine whether phasing constraints should apply. As the STB has
explained, the phasing constraint is an independent constraint relating not to the reasonableness of a rate,
but to the reasonableness of collecting it immediately. The Interstate Commerce Commission (the
predecessor to the STB) had previously issued guidelines for phasing. These guidelines indicate that
phasing of a rate increase will only be required where the party seeking such relief demonstrates the need
for it with specificity. In balancing the equities of the particular phasing request, the STB will consider
factors including the requirements of the railroads, the magnitude of the proposed increase, the magnitude
of past increases, the dependence of the utility on coal, the economic conditions in the final destination
market and the economic conditions in the coal supply area.
The phasing constraint has never been invoked by a complainant utility in a rate case, and the STB has
never applied it. Therefore, it is unknown how the STB would balance the above factors, whether it
would find the phasing constraint applicable, and if it did, whether phasing would be ordered retroactively
or prospectively or both. Additionally, Duke and CP&L have appealed the October 2004 STB decision
on reconsideration to the D.C. Circuit Court of Appeals. Although management has made an estimate of
the ultimate resolution of these cases, due to these uncertainties, future developments in the Duke case
and(or) the CP&L case may result in adjustments that could have a favorable or unfavorable material
impact on results of operations in a particular quarter or year. 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.
Coal carloads were flat in 2003 while revenues increased 4% versus 2002. Revenue per unit increased
4%, reflecting favorable developments in 2003 of the coal rate reasonableness proceedings before the
STB, as well as increases resulting from more longer haul business and loading 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.
K19
Total Coal, Coke and Iron Ore Carloads
Utility
Export
Domestic metallurgical
Industrial
Total
2004
2003
(Cars in thousands)
2002
1,222.4
157.0
214.0
97.4
1,690.8
1,188.5
116.5
213.8
95.8
1,614.6
1,175.0
108.8
228.1
97.7
1,609.6
Utility coal volume increased 3%, compared to 2003, as electricity production was up almost 2% in NS’
service region responding to higher demand driven by a rebounding U.S. economy. Utilities increased
burn to meet the heavier electricity demand and a new rail unloading facility began operating in April
2004 at a northern utility. Utility coal stockpiles were below target levels across NS’ service area due in
part to the increased demand for coal-fired electric generation. Increased demand for Eastern U.S. coal
prompted some customers to ship coals from non-traditional coal fields in Wyoming and Colorado in
addition to more imported coal. In response, Appalachian coal production increased slightly in 2004
following declines in 2003 and 2002.
For 2003, utility coal volume increased 1%, 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 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.
The outlook for utility coal remains positive. The continued growth in demand for electricity and lower-
than-targeted coal stockpiles at the utilities should support increased coal carloads in 2005. Domestic
western origin and imported coals are expected to continue to be an important source of additional coal
supply to overcome the supply imbalance created by increased utility demand and the supply constraints
of traditional coal sources. Natural gas prices are expected to remain higher and more volatile than coal
energy prices. As always, demand will be influenced by the weather.
A number of evolving environmental issues remain that have the potential to affect the utility coal market,
depending upon their outcome. These include a national energy policy, proposed multi-emissions
legislation, mercury emissions standards, new source review and ongoing efforts at addressing climate
change. Certain utilities have chosen to add emissions control technologies to their electric generating
units in advance of governmental requirements and are advancing their plans to more fully utilize their
existing coal-fired power plants.
Export coal volume increased 35% in 2004, compared to 2003, due to sustained strong global demand
for high quality metallurgical coal and China’s continued growing consumption of coal for steel
production and electricity generation. The devaluation of the dollar resulted in lower U.S. coal prices
relative to Australian and Canadian coal prices which made U.S. coals more economical in traditional
European markets. In addition, ocean vessel rates continued to favor U.S. coals. Volume through
Baltimore and Norfolk increased dramatically. Baltimore was up approximately 24,000 carloads, or
K20
159%, and Norfolk was up approximately 16,000 carloads, or 16%. However, U.S. exports in 2004 were
constrained by the tight coal supply from Eastern coal mines.
Export coal volume increased 7% 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 shifted Chinese exports of metallurgical coal to its own domestic consumption.
Also, ocean freight rates were at an all time high. Spot vessel rates from Australia to Europe more than
tripled, while transatlantic rates increased less dramatically. The combination of the gap in ocean freight
rates and the shorter sailing times gave the U.S. a competitive advantage in European markets. Lastly, the
decline in the value of the dollar against the Euro and Australian Dollar also increased demand for U.S.
metallurgical coal abroad. Coal exported through Baltimore, primarily steam coal, declined 41% due to
strong domestic demand for utility coal.
Export coal volume for 2005 is expected to continue to show improvement with strong international
demand for metallurgical coal, in addition to a weaker dollar and higher shipping costs making U.S. coal
more competitive.
Domestic metallurgical coal, coke and iron ore volume was flat in 2004, when compared with 2003.
Metallurgical coal volume was up 12%. However, this was offset by declines in domestic coke and iron
ore volumes, principally due to reduced production at an NS-served producer.
Domestic metallurgical coal, coke and iron ore volumes decreased 6% 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.
Demand for domestic metallurgical coal, coke and iron ore is expected to improve in 2005. Blast
furnaces are expected to run near capacity as domestic demand for metallurgical coal continues to grow.
Other coal volumes increased 2% versus 2003, primarily due to new business and the recovery of the
U.S. economy. In 2003, steam coal shipped to manufacturing plants finished the year down 2% when
compared to 2002.
GENERAL MERCHANDISE traffic volume increased 4% in 2004 compared to 2003, and revenues
increased 9%, principally due to improved volumes in all but the automotive business group, higher
average revenues across all business groups and increased fuel surcharges. In 2003, general merchandise
traffic volume increased 1% compared to 2002, and revenues increased 2%, principally due to higher
average revenues in most business groups and higher agriculture traffic volume.
Automotive traffic volume decreased 2% in 2004 compared to 2003, primarily due to reduced
automotive production at Ford and GM, partially offset by increased production at Toyota and Honda. In
contrast, revenues increased 2%, reflecting pricing improvements and fuel surcharge increases.
In 2003, automotive traffic volume and revenues decreased 3% compared to 2002, principally due to
reduced vehicle production.
For 2005, automotive revenues are expected to increase, supported by a projected 2% rise in light vehicle
production and volume from two plants that opened late in 2004.
Chemicals traffic volume increased 5% and revenues increased 12% in 2004, compared with 2003,
reflecting manufacturers’ increased demand across all chemical business groups. Feedstocks and plastic
shipments were up as inventories were restocked in anticipation of higher product prices related to
K21
increased natural gas costs and new propane and asphalt terminals in the Southeast added carloads.
Revenue per unit reflected higher prices to meet market conditions and fuel surcharges.
Chemicals traffic volume increased 1% and revenue increased 2% in 2003 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.
Chemical volume is expected to grow in 2005, with several propane and plastic plant expansions planned
and the continued strengthening of the economy. However, volume could be adversely affected by the
price of natural gas and crude oil, which accounts for more than 50% of the cost of most chemical
products and presents a significant competitive challenge that could cause domestic chemical producers to
move production overseas.
Metals and construction traffic volume increased 10% and revenue increased 17% in 2004 compared
with 2003. The improvement was primarily due to increased production at NS-served integrated mills
and mini-mills, the conversion of truck business to rail resulting from a shortage of flatbed trucks as well
as higher scrap metal volumes resulting from expanded alliances with key scrap metal shippers and access
to new scrap processors and steel mills. Construction traffic volume benefited from increased residential,
commercial and highway construction.
In 2003, metals and construction traffic volume decreased 1%, but revenues increased 1% 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.
The outlook for 2005 remains strong for iron and steel markets with new import slab business and growth
in plate, structural, bar/rod and steel rail for both integrated mills and mini-mills. Construction traffic
volume is expected to reflect continued strength in residential and commercial construction.
Agriculture, consumer products and government traffic volume increased 2% and revenue increased
6% in 2004 compared with 2003, driven by ethanol and fertilizer shipments. Ethanol traffic increased
59% primarily due to the opening of the Northeast market to ethanol as a gasoline additive. Fertilizer was
up 7% year-over-year, reflecting higher domestic shipments to industrial customers and increased exports
of phosphates, principally to China. Revenue per unit improved 3% as a result of changes in traffic mix
such as increased ethanol traffic and more long haul feed shipments as well as higher prices.
In 2003, 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.
Agriculture, consumer products and government volume is expected to be higher in 2005, benefiting from
the record grain crop in 2004, expanding markets for ethanol and improving feed mill business.
K22
Paper, clay and forest products traffic volume increased 1% and revenue increased 8% in 2004
compared with 2003, reflecting yield improvements in all segments except newsprint, together with
higher printing paper, newsprint, pulp board and kaolin shipments as U.S. paper production and demand
for paper products strengthened in 2004. Revenue per unit improved 6% principally as a result of price
increases but also aided by increased fuel surcharges.
In 2003, 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 2005, paper, clay and forest product revenues are expected to grow modestly with the addition of
several new lumber distribution centers on NS lines.
INTERMODAL volume increased 17% and revenue increased 24% in 2004 compared with 2003.
Strong demand was driven by an expanding economy led by higher consumer spending, industrial
production and international trade, in addition to constraints in truck and other railroads’ capacity.
International steamship volume was up 15%, tied to the growth in U.S. trade volumes through east and
west coast ports. Truckload volume increased 28% as a result of new business with traditional truckload
companies. Premium business, which includes parcel and LTL carriers, grew 15% principally due to new
parcel service between Chicago and New Jersey. Triple Crown Services Company increased volume by
8% through an expanded trailer fleet and growth in its geographic coverage. Revenue per unit improved
6%, reflecting value-based pricing and fuel surcharges.
In 2003, 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’s growth was limited to 1% in
2003, hampered by a fleet at full capacity.
In 2005, intermodal revenues are expected to grow with higher levels of truck to rail conversions as prices
for motor carrier services continue to increase as a result of continuing driver and equipment shortages
and high fuel prices. NS expects to build new terminals in Ohio, Kentucky, Virginia and Pennsylvania in
addition to expanding existing intermodal terminals. Strong international trade is expected to create
growth opportunities in NS’ international business segment and available capacity should help grow NS’
domestic and premium segments. Future growth may, however, be tempered by operating improvements
at other railroads, as well as constraints in the drayage market.
Railway Operating Expenses
Railway operating expenses increased 4% in 2004 compared to 2003 and 6% in 2003 compared to 2002.
Expenses in 2003 included $107 million of costs related to a voluntary separation program to reduce the
size of the work force, while there was no such program in either 2004 or 2002. Accordingly, the absence
K23
of the voluntary separation program in 2004 and 2002 resulted in a 2% reduction in the 2004 to 2003
year-over-year comparison and a 2% increase in the 2003 to 2002 year-over-year comparison. Carloads
rose 9% in 2004 compared to 2003 and 2% in 2003 compared to 2002.
The railway operating ratio, which measures the percentage of railway operating revenues consumed by
railway operating expenses, was 76.7% in 2004, compared with 83.5% in 2003 and 81.5% in 2002. The
voluntary separation costs added 1.6 percentage points to the 2003 ratio.
The following table shows the changes in railway operating expenses summarized by major
classifications.
Operating Expense Variances
Increases (Decreases)
2004 vs. 2003
2003 vs. 2002
($ in millions)
Compensation and benefits*
Materials, services and rents
Conrail rents and services
Depreciation
Diesel fuel
Casualties and other claims
Other
Total
$
$
(3)
174
(100)
85
69
(30)
11
206
$
$
253
(30)
7
(2)
38
10
16
292
* Includes $107 million of voluntary separation costs in 2003.
Compensation and benefits represented 40% of total railway operating expenses and was flat in 2004
compared to 2003, but increased 13% in 2003 compared to 2002. Both comparisons reflect the $107
million costs of the voluntary separation program in 2003. Expenses in 2004 reflected higher volume-
related train and engine payroll expenses, up $39 million; higher wage rates, which added $37 million;
increased stock-based compensation, up $24 million; and higher management and locomotive engineer
performance-based incentive compensation, which was up $20 million. These increases were offset by
lower nonagreement workforce levels, saving $24 million, as well as the absence of the $107 million
expense of the 2003 voluntary separation program.
In the third quarter of 2005, NS will adopt Statement of Financial Accounting Standards No. 123
(revised), which requires expensing of stock options. See New Accounting Pronouncements (below) and
Note 1.
Almost half of the increase in 2003 was the result of the voluntary separation program. The remainder
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.
The Railroad Retirement and Survivors’ Improvement Act, which took effect Jan. 1, 2002, allows for
investment of Tier II assets in a diversified portfolio through the National Railroad Retirement Investment
Trust. The law also provides a mechanism for automatic adjustment of Tier II payroll taxes should the
trust assets fall below a four-year reserve or exceed a six-year reserve. As a result, the employers’ portion
K24
of Tier II retirement payroll taxes have been reduced from 14.2% in 2003 to 13.1% in 2004 and 12.6% in
2005 and thereafter. However, these savings are expected to continue to be substantially offset by higher
payroll taxes on increased wages and a higher wage base.
Materials, services and rents includes items used for the maintenance of railroad lines, structures and
equipment; the costs of services purchased from outside contractors, including the net costs of operating
joint (or leased) facilities with other railroads; and the net cost of equipment rentals. This category of
expenses increased 12% in 2004 compared to 2003 and decreased 2% in 2003 compared to 2002.
The 2004 increase was the result of higher purchased services, up $100 million, including higher costs for
volume-related intermodal services such as loading of containers and trailers and drayage. In addition,
locomotive and freight car maintenance expenses rose $23 million, and equipment rents increased $33
million. The 2003 decline reflected lower equipment rents, 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.
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, increased 9% in 2004
and decreased 7% in 2003 compared to 2002. The increase in 2004 was principally due to increased
volume-related intermodal shipments and the absence of favorable settlements that benefited 2003.
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 Note 1) also reduced
equipment rents.
Locomotive repair costs increased in 2004 and 2003, due to more maintenance activity related to the
increase in business coupled with the age of the fleet. Locomotive and freight car maintenance costs are
expected to increase further in 2005.
Conrail rents and services decreased 24% in 2004 compared to 2003 and increased 2% in 2003
compared to 2002. This item includes amounts due to CRC for operation of the Shared Assets Areas (see
Note 2). Prior to the Conrail Corporate Reorganization, this category also included amounts due to PRR
for use of its operating properties and equipment as well as NS’ equity in Conrail’s net earnings, and the
additional amortization related to the difference between NS’ investment in Conrail and its underlying
equity (see Note 2). The decline was primarily driven by the Conrail Corporate Reorganization, which
resulted in the consolidated reporting of individual components of Conrail equity earnings, principally
depreciation, equipment rents and interest expense (see Note 2). NS’ share of equity earnings post-
Conrail Corporate Reorganization is now shown within “Other income-net.” The increase in 2003
reflects lower Conrail earnings and higher expenses in the Shared Assets Areas.
Depreciation expense increased 17% in 2004 compared to 2003 and decreased slightly in 2003
compared to 2002. The increase in 2004 was primarily a result of the Conrail Corporate Reorganization
(see Note 2). In addition, substantial levels of capital spending affected all years; however, depreciation
expense in 2003 benefited from a change in accounting for the cost to remove crossties (see Note 1,
“Properties,” for NS' depreciation policy).
In 2004, NS received the results of a depreciation study from an independent firm of engineers. The
results of the study, which were implemented in September 2004, prospectively reduced depreciation
expense by approximately $17 million annually.
K25
Diesel fuel expenses increased 18% in 2004 compared with 2003 and 11% in 2003 compared to 2002.
The increase in 2004 reflects a 13% increase in the average price per gallon (which includes hedge
benefits) and a 6% increase in consumption. The increase in 2003 reflects an 11% rise in the average
price per gallon including hedge benefits and essentially flat consumption. Expenses in 2004 included a
benefit of $140 million compared with benefits of $59 million in 2003 and $10 million in 2002 from the
diesel fuel hedging program (see “Market Risks and Hedging Activities,” below and Note 16). NS has
hedged approximately 36% of expected 2005 diesel fuel requirements as of December 31, 2004, at an
average price of 83 cents per gallon. No new hedges have been entered into since May 2004.
Accordingly, if diesel fuel prices remain at their current levels, or increase further, diesel fuel expense
will be higher going forward.
Recently enacted legislation will repeal the 4.3 cents per gallon excise tax on railroad diesel fuel and
inland waterway fuel by 2007, with the following phased reductions in 2005 and 2006: by 1 cent per
gallon from Jan. 1, 2005 through June 30, 2005; 2 cents per gallon from July 1, 2005 through Dec. 31,
2006; and by the full 4.3 cents thereafter. NS consumes approximately 500 million gallons of diesel fuel
per year.
Casualties and other claims expenses (including the estimates of costs related to personal injury,
property damage and environmental matters) decreased 17% in 2004 compared to 2003 and increased 6%
in 2003 compared to 2002. The decline reflected favorable personal injury and freight claims
development and higher insurance settlements, partially offset by increased derailment expenses. The
higher expense in 2003 was due to adverse personal injury claims development and derailments expense
as well as higher insurance costs.
On Jan. 6, 2005, a derailment occurred in Graniteville, SC. NS expects the first quarter of 2005 to reflect
operating expenses related to this incident of between $30 million and $40 million (pretax). The amount
includes NS’ self-insured retention under its insurance policies, as well as other uninsured costs.
Although potential losses may exceed self-insured retention amounts, NS expects at this time that
insurance coverage is adequate to cover such potential claims or settlements. This amount does not
include any fines or penalties that could be imposed.
The largest component of casualties and other claims expense is personal injury costs. In 2004, cases
involving occupational injuries comprised about one-third of total employee injury cases resolved and
24% of the total payments made. With its long-established commitment to safety, NS continues to work
actively to eliminate all employee injuries and to reduce the associated costs. With respect to
occupational injuries, which are not caused by a specific accident or event, but result from a claimed
exposure over time, the benefits of any existing safety initiatives may not be realized immediately. These
types of claims are being asserted by former or retired employees, some of which have not been actively
employed in the rail industry for decades.
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’s fault-based system, 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 maintains substantial amounts of commercial insurance for potential third-party liability and property
damage claims. It also retains reasonable levels of risk through self-insurance (see Note 18). NS expects
insurance costs to be higher in 2005.
Other expenses increased 5% in 2004 compared to 2003 and 8% in 2003 compared to 2002. The
increase in 2004 reflected higher property and sales and use taxes. The increase in 2003 was primarily
K26
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.
Other income – net was $89 million in 2004, $19 million in 2003 and $66 million in 2002 (see Note 3).
The increase in 2004 reflected the absence of the $84 million telecommunications assets impairment
charge that burdened 2003 (see Note 6) and the gain in 2004 recognized on the Conrail Corporate
Reorganization (see Note 2) that combined to more than offset losses generated by an investment in a
limited liability company that owns and operates facilities that produce synthetic fuel from coal (see the
discussion of tax credit investments below). The decline in 2003 was primarily due to the $84 million
charge that offset increased gains from the sale of properties, higher corporate-owned life insurance
returns and lower interest accruals related to tax liabilities.
In June 2004, NS purchased a membership interest in a limited liability company that owns and operates
facilities that produce synthetic fuel from coal. The production of synthetic fuel results in expenses
related to the investments as well as tax credits. The expenses are recorded as a component of “Other
income – net,” and the tax credits, as well as tax benefits related to the expenses, are reflected in the
provision for income taxes. The synthetic fuel tax credits are subject to reduction if the average price of
oil for a year exceeds a certain amount under the tax laws. Given current market conditions, it is possible
that these tax credits could be reduced in 2005. Such a reduction in tax credits would be accompanied by
a reduction in the expense related to the investment, although the net effect would be to reduce the
projected return on the investment.
Income Taxes
Income tax expense in 2004 was $379 million for an effective rate of 29%, compared with effective rates
of 30% in 2003 and 35% in 2002. Excluding NS’ equity in Conrail's after-tax earnings and the gain on
the Conrail Corporate Reorganization, the effective rate was 31% in 2004, 33% in 2003 and 38% in 2002.
In 2004, the effective rate was reduced by tax credits from synthetic fuel related investments and the
favorable resolution of an IRS audit of a synthetic fuel related investment (see Note 4). 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.
For the last four years, 30% and 50% bonus depreciation has been allowed for federal income tax
purposes. After 2004, bonus depreciation will not be available. In addition, the Conrail Corporate
Reorganization resulted in NS receiving assets with less future tax depreciation than book depreciation.
As a result, current taxes have been lower in prior years than might be expected in future years.
NS has interests in synthetic fuel related investments that result in tax credits. These synthetic fuel tax
credits expire at the end of 2007. In addition, synthetic fuel tax credits are subject to reduction if the
average price of oil for a year exceeds a certain amount under the tax laws. Given current market
conditions, it is possible that these tax credits could be reduced in 2005.
Discontinued Operations
In 2003, income from discontinued operations consisted of a $10 million after-tax gain related to the
resolution of tax issues arising from the sale of NS' motor carrier subsidiary.
K27
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities, NS' principal source of liquidity, was $1,661 million in 2004,
compared with $1,054 million in 2003 and $803 million in 2002. The improvement in 2004 was
primarily due to increased railway operating income. In 2003, the increase 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).
Prior to the Conrail Corporate Reorganization, a significant portion of payments made to PRR (which
were included in “Conrail Rents and Services” and, therefore, were a use of cash in “Cash provided by
operating activities”) was borrowed back from a PRR subsidiary under a note due in 2032, and, therefore,
was a source of cash in “Proceeds from borrowings.” Amounts outstanding under this note comprised the
long-term balance of “Due to Conrail”, and this note was effectively extinguished by the Conrail
Corporate Reorganization. Subsequent to the Conrail Corporate Reorganization, payments under
“Conrail rents and services” have declined, depreciation charges have increased, and the net borrowings
have been terminated. Accordingly, NS’ cash provided by operating activities after the Conrail Corporate
Reorganization has increased. NS' net cash flow from these borrowings amounted to $118 million in
2004, $203 million in 2003 and $212 million in 2002.
NS' working capital deficit was $234 million at Dec. 31, 2004, compared with $376 million at Dec. 31,
2003. The improvement was principally due to an increase in cash flow from operations.
NS expects that cash on hand combined with cash flow from operations will be sufficient to meet its
ongoing obligations including the higher level of debt maturing in 2005. This expectation is based on a
view that the economy will continue at a moderate growth rate through 2005.
Contractual obligations at Dec. 31, 2004, related to NS' long-term debt (including capital leases) (see
Note 8), operating leases (see Note 9), agreements with CRC (see Note 2), unconditional purchase
obligations (see Note 18) and other long-term obligations (see Note 18), are as follows:
Total
Payments Due By Period
2006-
2007
($ in millions)
2008-
2009
2005
2010 and
Subsequent
Long-term debt and
capital leases
Operating leases
Agreements with CRC
Unconditional purchase
Obligations
Other long-term obligations
Total
$
$
7,525 $
1,025
686
121
26
9,383 $
662 $
154
33
121
11
981 $
809 $
227
68
--
15
1,119 $
851 $
160
68
--
--
1,079 $
5,203
484
517
--
--
6,204
Off balance sheet arrangements consist of an accounts receivable sale program (see Note 5). While
there were some sales during 2004, there were no accounts receivable sold under this arrangement as of
Dec. 31, 2004. NS does not expect to sell any accounts receivable in 2005.
Cash used for investing activities increased 77% in 2004 and decreased 5% in 2003. Property additions,
which account for most of the recurring spending in this category, were up 45% in 2004 and up 4% in
2003. In addition, investing activities reflect NS’ new investment in a membership interest in a limited
K28
liability company that owns and operates facilities that produce synthetic fuel from coal. The following
tables show capital spending (including capital leases) and track and equipment statistics for the past five
years.
Capital Expenditures
2004
2003
2002
($ in millions)
2001
2000
Road
Equipment
Other property
Total
$
$
607 $
429
5
1,041 $
495 $
218
7
720 $
519 $
174
2
695 $
505 $
233
8
746 $
557
146
28
731
Higher capital expenditures in 2004 were primarily due to increased locomotive purchases and investment
in roadway projects in addition to Triple Crown Services Company equipment and freight cars. The
increase in 2003 reflects higher locomotive purchases offset, in part, by lower spending on signal and
electrical projects and computers.
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
intent of the proposed public-private partnership is to reduce rail and highway congestion and add freight
and passenger capacity in the metropolitan Chicago area. 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)
2004
2003
2002
2001
2000
Track miles of rail installed
Miles of track surfaced
New crossties installed (millions)
246
5,055
2.5
233
5,105
2.8
235
5,270
2.8
254
3,836
1.5
390
3,687
1.5
Average Age of Owned Railway Equipment
Freight cars
Locomotives
Retired locomotives
2004
2003
2002
(years)
2001
2000
27.6
16.8
22.9
26.6
15.3
28.7
25.9
16.1
28.2
25.4
15.7
22.4
24.6
16.1
24.5
Through its coal car rebody program, which was suspended in 2000, NS converted about 29,000 hopper
cars into high-capacity steel gondolas or hoppers. As a result, the remaining service life of the freight-car
fleet is greater than may be inferred from the increasing average age shown in the table above.
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For 2005, NS has budgeted $938 million for capital expenditures. The anticipated spending includes
$671 million for roadway projects, of which $438 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 $225 million includes the purchase of
52 locomotives and upgrades to existing units, improvements to multilevel automobile racks, and projects
related to computers and information technology, including additional security and backup systems.
Cash used for financing activities was $233 million in 2004, $314 million in 2003 and $150 million in
2002. The change in 2004 reflected more proceeds from common stock issued in connection with
employee option exercises as well as the elimination of PRR borrowings that resulted from the Conrail
Corporate Reorganization. The increase in 2003 primarily resulted from a higher net reduction in debt
and the $43 million redemption in 2003 of all publicly held shares of Norfolk Southern Railway’s
preferred stock. Prior to the Conrail Corporate Reorganization financing activities included loan
transactions with a subsidiary of PRR that were net borrowings of $118 million in 2004, $203 million in
2003 and $212 million in 2002 (see Note 2). Debt was reduced $371 million in 2004, compared with a
decrease of $370 million in 2003 and $303 million in 2002. NS’ debt-to-total capitalization ratio at year
end was 48.5% in 2004 and 50.7% (excluding notes payable to the PRR subsidiary) in 2003.
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. Additionally, NS has the ability to issue
up to $1 billion of registered debt or equity securities under its shelf registration statement on Form S-3,
which was filed in September 2004 (see Note 8).
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. 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
K30
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 $36 million for the year ended Dec. 31, 2004. 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 been in excess of 10%. A one percentage point change to this rate of return
assumption would result in a $18 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
$49 million for the year ended Dec. 31, 2004. In recording this expense and valuing the net liability for
other postretirement benefits, which is included in “Other benefits” as disclosed in Note 11, management
estimated future increases in health-care costs. These assumptions, along with the effect of a one
percentage point change in them, are described in Note 11.
Properties and Depreciation
Most of NS' total assets are comprised of long-lived railway properties (see Note 6). 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. Assets that are deemed impaired as a result of such
review are recorded at the lesser of carrying amount or fair value.
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, 2004, amounted to $598 million. NS' weighted-average depreciation rates for 2004 are disclosed
in Note 6; a one-tenth percentage point increase (or decrease) in these rates would have resulted in a $27
million increase (or decrease) to NS' depreciation expense.
Personal Injury, Environmental and Legal Liabilities
NS' expense for “Casualties and other claims” amounted to $151 million for the year ended Dec. 31,
2004. 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” above). Job-related
personal injury and occupational claims are subject to FELA, which is applicable only to railroads.
FELA’s fault-based tort system produces results that are unpredictable and inconsistent as compared with
K31
a no-fault worker’s compensation system. The variability inherent in this system could result in actual
costs being very different from the liability recorded. In all cases, NS records a liability when the
expected loss for the claim is both probable and estimable.
NS engages an independent consulting actuarial firm to aid in valuing its personal injury liability and
determining the amount to accrue during the year. For employee personal injury cases, the actuarial firm
studies NS' historical patterns of reserving for claims and subsequent settlements, taking into account
relevant outside influences. An estimate of the ultimate amount of the liability, which includes amounts
for incurred but unasserted claims, is based on the results of this analysis. For occupational injury claims,
the actuarial firm studies NS’ history of claim filings, severity, payments and other relevant facts.
Additionally, the estimate of the ultimate loss for occupational injuries includes a provision for those
claims that have been incurred but not reported by projecting NS’ experience into the future as far as can
be reasonably determined. 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, 2004, 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 $11 million in 2004, $9 million in
2003 and $15 million in 2002, and capital expenditures totaled approximately $9 million in 2004
and in 2003, and $10 million in 2002. Capital expenditures in 2005 are expected to be comparable to
those in 2004.
NS' balance sheets included liabilities for environmental exposures in the amount of $64 million at
Dec. 31, 2004, and $25 million at Dec. 31, 2003 (of which $12 million was accounted for as a current
liability at Dec. 31, 2004, and $8 million at Dec. 31, 2003). The increase in the liability was the result of
the Conrail Corporate Reorganization and relates to sites on the former PRR properties. At Dec. 31,
2004, the liability represented NS' estimate of the probable cleanup and remediation costs based on
available information at 210 identified locations. On that date, 15 sites accounted for $32 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 210 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
K32
(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
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 $6,550 million at Dec. 31, 2004 (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 $21 million valuation allowance on $668 million of
deferred tax assets as of Dec. 31, 2004, reflecting the expectation that most of these assets will be
realized. In addition, NS has a recorded liability for its estimate of potential income tax exposures.
Management believes this liability for potential exposure to be adequate. Income tax expense is adjusted
to the extent the final outcome of these matters differs from the amounts recorded. For every one half
percent change in the 2004 effective rate net income would have changed by $7 million.
K33
OTHER MATTERS
Labor Agreements
Approximately 24,000 of NS' railroad employees are covered by collective bargaining agreements with
various labor unions. These agreements remain in effect until changed pursuant to the Railway Labor
Act. NS largely bargains in concert with other major railroads. Moratorium provisions in the labor
agreements govern when the railroads and the unions may propose labor agreement changes. Such
proposals were made in late 1999 and, since that time, NS has reached agreements with most of the major
rail labor organizations to settle that round of bargaining. These agreements cover approximately 93% of
NS contract employees. Tentative agreements subject to ratification have also been reached with the
National Conference of Firemen and Oilers and the Sheet Metal Workers International Association. A
1999 bargaining round agreement has not yet been reached with the International Association of
Machinists. On or after November 1, 2004, the railroads and the rail labor unions served new proposals
to begin the next bargaining round. The outcome of the negotiations cannot be determined at this point.
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 8% of NS' operating expenses for 2004. 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, 2004, through swap transactions, NS has hedged approximately 36% of expected 2005
diesel fuel requirements. The effect of these hedges is to yield an average cost of 83 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 $24 million as of Dec. 31, 2004.
However, with fuel prices near historic highs and fuel surcharges being collected under certain tariffs and
contracts, NS has not entered into additional hedges since May 2004. Consequently, the past pattern of
entering into regular monthly swaps may not be indicative of future hedging activity. If diesel fuel prices
remain at their current levels, or increase further, diesel fuel expense will be higher going forward.
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, 2004, NS' debt subject to interest rate fluctuations totaled $576 million. 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.
K34
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, 2004, the average pay rate
under these agreements was 3%, and the average receive rate was 7%. During 2004, the effect of the
swaps was to reduce interest expense by $6 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
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (revised), Share-Based Payment. This statement, effective for interim or annual
reporting periods beginning after June 15, 2005, establishes standards for accounting for transactions in
which an entity exchanges its equity instruments for goods or services, such as stock-based compensation
plans. The statement applies to all awards granted after the effective date and to awards modified,
repurchased, or cancelled after that date. As the amount of expense to be recognized in future periods
will depend on the levels of future grants, the effect of adoption of this statement cannot be predicted with
certainty. However, had NS adopted this statement in prior periods, the effect of adoption on net income
and earnings per share would have approximated the amounts shown in the pro forma information
included in Note 1.
Proposed Legislation and Regulations on Safety and Transportation of Hazardous Materials
Legislation introduced in Congress in early 2005 would give federal regulators increased authority to
conduct investigations and levy substantial fines and penalties in connection with railroad accidents.
Federal regulators would also be required to prescribe new regulations governing railroads' transportation
of hazardous materials. If enacted, such legislation and regulations could impose significant additional
costs on railroads including NS. In addition, certain local governments have sought to enact ordinances
banning, or requiring disclosures with respect to, hazardous materials moving by rail within their borders.
If promulgated and upheld, such ordinances could require the re-routing of hazardous materials
shipments, with the potential for significant additional costs and network inefficiencies. Accordingly, NS
will oppose efforts to impose unwarranted regulation in this area.
Inflation
In preparing financial statements, U.S. generally accepted accounting principles 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 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.
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:
K35
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.
NS 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.”
K36
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Report of Management
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Income
Years ended December 31, 2004, 2003 and 2002
Consolidated Balance Sheets
As of December 31, 2004 and 2003
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003 and 2002
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
The Index to Consolidated Financial Statement Schedule in Item 15
Page
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K39
K42
K43
K44
K45
K46
K82
K37
Report of Management
February 28, 2005
To the Stockholders
Norfolk Southern Corporation
Management is responsible for establishing and maintaining adequate internal control over financial
reporting. 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, 2004. 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 has concluded that
the Corporation maintained effective internal control over financial reporting as of December 31, 2004.
KPMG LLP, independent registered public accounting firm, has audited the Corporation's financial
statements and has reported on management's assessment of the effectiveness of the Corporation's internal
control over financial reporting as of December 31, 2004.
/s/ David R. Goode
David R. Goode
Chairman 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
K38
Report of Independent Registered Public Accounting Firm
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, 2004 and 2003, 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, 2004. 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 Norfolk Southern Corporation’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 the standards of the Public Company Accounting Oversight
Board (United States). 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, 2004
and 2003, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
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, Norfolk
Southern Corporation 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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Norfolk Southern Corporation’s internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 28, 2005, expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Norfolk, Virginia
February 28, 2005
K39
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors
Norfolk Southern Corporation:
We have audited management's assessment, included in the accompanying Report of Management, that
Norfolk Southern Corporation maintained effective internal control over financial reporting as of
December 31, 2004, 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 and for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of
Norfolk Southern Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting,
evaluating management’s assessment, 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 audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls 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 assessment that Norfolk Southern Corporation maintained effective internal
control over financial reporting as of December 31, 2004, 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). Also, in our opinion, Norfolk Southern
Corporation maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control—Integrated Framework, issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
K40
Report of Independent Registered Public Accounting Firm
Page 2
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Norfolk Southern Corporation and subsidiaries
as of December 31, 2004 and 2003, 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,
2004. 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. Our report dated February 28, 2005, expressed an
unqualified opinion on the consolidated financial statements and financial statement schedule.
/s/ KPMG LLP
Norfolk, Virginia
February 28, 2005
K41
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
Years ended Dec. 31,
2003
($ in millions, except earnings per share)
2004
2002
Railway operating revenues
$
7,312
$
6,468 $
6,270
Railway operating expenses
Compensation and benefits (Note 11)
Materials, services and rents
Conrail rents and services (Note 2)
Depreciation (Note 2)
Diesel fuel
Casualties and other claims
Other
Total railway operating expenses
Income from railway operations
Other income – net (Note 3)
Interest expense on debt (Note 6)
Income from continuing operations
before income taxes 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
Per share amounts (Note 14):
Income from continuing operations before
accounting changes
Basic
Diluted
Net income
Basic
Diluted
$
$
$
$
$
2,272
1,601
319
598
449
151
220
5,610
1,702
89
(489)
1,302
379
2,275
1,427
419
513
380
181
209
2,022
1,457
412
515
342
171
193
5,404
5,112
1,064
1,158
19
(497)
586
175
66
(518)
706
246
923
411
460
--
--
10
114
--
--
923
$
535 $
460
2.34
2.31
2.34
2.31
$
$
$
$
1.05 $
1.05 $
1.37 $
1.37 $
1.18
1.18
1.18
1.18
See accompanying notes to consolidated financial statements.
K42
Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
Assets
Current assets:
Cash and cash equivalents
Short-term investments
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 (Notes 2 and 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 (Notes 2 and 8)
Other liabilities (Note 10)
Due to Conrail (Note 2)
Deferred income taxes (Notes 2 and 4)
Total liabilities
Stockholders' equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; issued 421,346,107 and 412,168,988 shares,
respectively
Additional paid-in capital
Unearned restricted stock (Note 12)
Accumulated other comprehensive loss (Note 13)
Retained income
Less treasury stock at cost, 20,907,125 and 21,016,125
shares, respectively
Total stockholders' equity
$
$
$
As of Dec. 31,
2004
2003
($ in millions)
579 $
90
767
104
187
240
1,967
805
20,526
1,452
24,750 $
1,012 $
210
78
239
662
2,201
6,863
1,146
--
6,550
16,760
421
728
(8)
(24)
6,893
(20)
7,990
284
2
695
92
189
163
1,425
6,259
11,779
1,133
20,596
948
199
81
213
360
1,801
6,800
1,080
716
3,223
13,620
412
521
(5)
(44)
6,112
(20)
6,976
Total liabilities and stockholders' equity
$
24,750 $
20,596
See accompanying notes to consolidated financial statements.
K43
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
2004
Years Ended Dec. 31,
2003
($ in millions)
2002
$
923 $
535 $
460
--
609
200
(54)
(53)
(46)
--
(71)
(12)
(18)
126
57
1,661
(1,041)
75
(228)
61
(1,133)
(142)
162
--
202
(455)
(233)
295
(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)
284
184
204
$
579 $
284 $
184
$
$
483 $
146 $
510 $
93 $
525
54
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 (Note 2)
Gain on Conrail Corporate Reorganization (Note 2)
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 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.
K44
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Common
Stock
Additional
Paid-in
Capital
Accum.
Other
Compre-
hensive
Income
Retained
Income
(Loss)
($ in millions, except per share amounts)
Unearned
Restricted
Stock
Treasury
Stock
Total
Balance Dec. 31, 2001
$
407
$
423
$
--
$
(55)
$
5,335
$
(20)
$
6,090
Comprehensive income
Net income
Other comprehensive
loss (Note 13)
Total comprehensive
income
Dividends on Common
Stock, $0.26 per share
Other (Notes 11 and 12)
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)
Balance Dec. 31, 2003
Comprehensive income
Net income
Other comprehensive
income (Note 13)
Total comprehensive
income
Dividends on Common
Stock, $0.36 per share
Other (Notes 11 and 12)
(10)
460
(101)
460
(10)
450
(101)
61
--
(65)
5,694
(20)
6,500
3
410
58
481
21
535
(117)
535
21
556
(117)
37
(44)
6,112
(20)
6,976
20
923
(142)
923
20
943
(142)
213
2
412
40
521
(5)
(5)
9
207
(3)
Balance Dec. 31, 2004
$
421
$
728
$
(8) $
(24)
$
6,893
$
(20)
$
7,990
See accompanying notes to consolidated financial statements.
K45
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 21,300 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 2004): coal (24%); intermodal (21%);
automotive (13%); chemicals (12%); metals/construction (11%); agriculture/consumer products/
government (10%); and paper/clay/forest products (9%). 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.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Management reviews its
estimates, including those related to the recoverability and useful lives of assets, as well as liabilities for
litigation, environmental remediation, casualty claims, income taxes, and pension and postretirement
benefits. Changes in facts and circumstances may result in revised estimates.
Cash Equivalents
“Cash equivalents” are highly liquid investments purchased three months or less from maturity.
Investments
Marketable equity and debt securities are reported at amortized cost or fair value, depending upon their
classification as securities “held-to-maturity,” “trading” or “available-for-sale.” Unrealized gains and
losses for investments designated as “available-for-sale,” net of taxes, are recognized in “Accumulated
other comprehensive loss.”
Investments where NS has the ability to exercise significant influence over but does not control the entity
are accounted for using the equity method in accordance with APB Opinion No. 18, “The Equity Method
of Accounting for Investments in Common Stock.”
K46
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, and no gain or loss is 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. 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
Transportation 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. Switching, demurrage and other incidental service revenue is recognized when the services are
performed.
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 (see Note 16).
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.
K47
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:
2004
2003
($ in millions except per share)
2002
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
Diluted
Pro forma
Basic
Diluted
$
923
$
535
$
460
32
18
14
(44)
911
2.34
2.31
2.31
2.28
$
$
$
$
$
(35)
518
1.37
1.37
1.33
1.33
$
$
$
$
$
(45)
429
1.18
1.18
1.10
1.10
$
$
$
$
$
Required Accounting Changes in 2003
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 (because the depreciation rate for crossties no longer reflects
cost to remove) and increased compensation and benefits and other expenses (for the costs to remove
retired assets). The net effect to total railway operating expenses and net income was not material.
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.
The cumulative effect of these changes amounted to $114 million, or 29 cents per share.
Reclassifications
Certain amounts in the consolidated financial statements and notes thereto have been reclassified to
conform to the 2004 presentation.
K48
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). 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. CRC owns and operates certain properties (the Shared Assets Areas)
for the joint and exclusive benefit of Norfolk Southern Railway Company (NSR) and CSX
Transportation Inc. (CSXT). The costs of operating the Shared Assets Areas are borne by NSR
and CSXT based on usage. In addition, NSR and CSXT pay CRC a fee for access to the Shared
Assets Areas.
Conrail Corporate Reorganization
On August 27, 2004, NS, CSX and Conrail completed a reorganization of Conrail (Conrail Corporate
Reorganization), which established direct ownership and control by NSR and CSXT of two former
CRC subsidiaries, Pennsylvania Lines LLC (PRR) and New York Central Lines LLC (NYC),
respectively. Prior to the Conrail Corporate Reorganization, NSR operated the routes and assets of
PRR and CSXT operated the routes and assets of NYC, each in accordance with operating and lease
agreements. Pursuant to the Conrail Corporate Reorganization, the operating and lease agreements
were terminated and PRR and NYC were merged into NSR and CSXT, respectively. The
reorganization did not involve the Shared Assets Areas and did not affect the competitive rail service
provided in the Shared Assets Areas. Conrail continues to own, manage and operate the Shared Assets
Areas as previously approved by the Surface Transportation Board (STB). In connection with the
Conrail Corporate Reorganization, NS, CSX and Conrail obtained a ruling from the Internal Revenue
Service (IRS) regarding certain tax matters, and the STB approved the transaction.
As a part of the Conrail Corporate Reorganization, Conrail restructured its existing unsecured and
secured public indebtedness, with the consent of Conrail’s debtholders. Prior to the restructuring, there
were two series of unsecured public debentures with an outstanding principal amount of approximately
$800 million and 13 series of secured debt with an outstanding principal amount of approximately
$300 million. Guaranteed debt securities were offered in an approximate 58%/42% ratio in exchange
for Conrail’s unsecured debentures. Of the $800 million unsecured public debentures, $779 million
were tendered and accepted for exchange. Upon completion of the transaction as described in various
SEC filings, the new debt securities became direct unsecured obligations of NSR and CSXT,
respectively, and rank equally with all existing and future senior unsecured debt obligations, if any, of
NSR and CSXT. Except for interest payments made in relation to the consummation of the exchange,
these new debt securities 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 have covenants substantially similar to those of the publicly traded debt securities of NS
and CSX, respectively.
Conrail’s secured debt and lease obligations remain obligations of Conrail and are supported by leases
and subleases which are the direct lease and sublease obligations of NSR or CSXT.
NS accounted for the transaction at fair value, which resulted in the recognition of a $53 million net
gain (reported in “Other income – net”) from the tax-free distribution to NS of a portion of its
investment in Conrail. As a result of the transaction, NS’ investment in Conrail no longer includes
amounts related to PRR and NYC. Instead the assets and liabilities of PRR are reflected in their
respective line items in NS’ Consolidated Balance Sheet and amounts due to PRR were extinguished.
K49
The following summarizes the effect of the transaction on NS’ Consolidated Balance Sheet
($ in millions):
Properties
Extinguishment of amounts due to PRR
Other assets and liabilities, net
Deferred income taxes
Long-term debt, including current maturities
Net assets received
Investment in Conrail
Gain from Conrail Corporate Reorganization
$
$
8,368
870
177
(3,113)
(734)
5,568
(5,515)
53
The amounts shown above for the net assets received reflect the fair value of such assets. Properties
have been valued based on information received from an independent valuation consultant. Debt has
been recorded at fair value based on interest rates at the time of the reorganization.
On the Consolidated Income Statement, “Conrail rents and services” is reduced as a result of the
transaction. After the Conrail Corporate Reorganization, “Conrail rents and services” reflects only the
expenses associated with the Shared Assets Areas, and other expenses (primarily the depreciation
related to the PRR assets) are reflected in their respective line items. The transaction’s impact on net
income was the $53 million gain discussed above. Prospectively, the transaction will not have a
significant ongoing effect on net income.
Investment in Conrail
NS is continuing to apply the equity method of accounting to its remaining 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, 2004, the difference between NS' investment in
Conrail and its share of Conrail's underlying net equity was $595 million.
NS' Consolidated Balance Sheet at Dec. 31, 2004, includes $17 million of liabilities related to the
original Conrail transaction, principally for contractual obligations to Conrail employees imposed by
the STB when it approved the transaction. Through Dec. 31, 2004, NS has paid $186 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 amount to approximately
$7 million annually.
"Conrail rents and services" includes: (1) expenses for amounts due to PRR for use by NSR of
operating properties and equipment prior to the Conrail Corporate Reorganization, (2) NS' equity in the
earnings of Conrail, net of amortization, prior to the Conrail Corporate Reorganization, and (3)
expenses for amounts due to CRC for operation of the Shared Assets Areas. After the Conrail
Corporate Reorganization, “Conrail rents and services” includes only expenses for amounts due to
CRC for operation of the Shared Assets Areas. NS’ equity in the earnings of Conrail, net of
amortization, after the reorganization is included in “Other income – net.”
K50
Prior to the Conrail Corporate Reorganization, a significant portion of the payments made to PRR was
borrowed back from a subsidiary of PRR under a note due in 2032. Amounts outstanding under this
note comprised the long-term balance of “Due to Conrail,” and this note was effectively extinguished
by the reorganization. "Due to Conrail" included in current liabilities is composed principally of
amounts related to expenses included in "Conrail rents and services," as discussed above.
Summary Financial Information - Conrail
As a result of the Conrail Corporate Reorganization discussed above, two CRC subsidiaries, PRR and
NYC, were distributed to NS and CSX, respectively, and CRC’s public indebtedness was restructured.
The results of the operations of these subsidiaries and their net assets are presented in the following
financial information as “Discontinued Operations.”
Summarized Consolidated Statements of Income - Conrail
2004
Years Ended Dec. 31,
2003
($ in millions)
2002
Operating revenues
Operating loss
Income from continuing operations
Discontinued operations (PRR and NYC)
Net income
$
$
$
$
$
352
(18)
22
119
140
$
$
$
$
$
316 $
(36) $
10 $
191 $
203 $
305
(16)
34
146
180
Note: Conrail adopted FIN No. 46 “Consolidation of Variable Interest Entities,” effective Jan. 1, 2004,
and recorded a $1 million net adjustment for the cumulative effect of this change in accounting on
years prior to 2004. 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 (including
$38 million related to discontinued operations). NS excluded this amount from its determination of
equity in earnings of Conrail because an amount related to Conrail is included in NS’ cumulative effect
adjustment for SFAS No. 143.
K51
Summarized Consolidated Balance Sheets - Conrail
Assets:
Current assets
Noncurrent assets
Assets of discontinued operations (PRR and NYC)
Total assets
Liabilities and stockholders' equity:
Current liabilities
Noncurrent liabilities
Liabilities of discontinued operations (PRR and NYC)
Stockholders' equity
Total liabilities and stockholders' equity
As of Dec. 31,
2004
2003
($ in millions)
$
$
$
$
334 $
1,080
--
1,414 $
241 $
811
--
362
1,414 $
186
952
7,176
8,314
260
849
2,751
4,454
8,314
Note: Current assets include amounts due from NS and CSX totaling $165 million at Dec. 31,
2004, and $136 million at Dec. 31, 2003. Noncurrent assets include amounts due from NS and CSX
totaling $225 million at Dec. 31, 2004, and $1,231 million at Dec. 31, 2003. Current liabilities include
amounts payable to NS and CSX totaling $4 million at Dec. 31, 2004, and $5 million at Dec. 31, 2003.
Shared Assets Areas
CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of
NSR and CSXT. NSR and CSXT pay CRC a fee for joint and exclusive access to the Shared Assets
Areas. In addition, NSR and CSXT pay, based on usage, the costs incurred by CRC to operate the Shared
Assets Areas. Future minimum lease payments due to CRC under the Shared Assets Areas agreements
are as follows ($ in millions):
2005
2006
2007
2008
2009
2010 and subsequent years
Total
$
$
33
34
34
34
34
517
686
Operating lease expense related to the Shared Assets Areas as well as the agreements in place before
the Conrail Corporate Reorganization related to operation of the PRR routes and assets, all of which is
included in “Conrail rents and services,” amounted to $363 million in 2004, $478 million in 2003 and
$468 million in 2002.
K52
3. Other Income - Net
Income from natural resources:
Royalties from coal
Nonoperating depletion and depreciation
Subtotal
Gain from Conrail Corporate Reorganization (Note 2)
Gains from sale of properties and investments
Rental income
Interest income
Equity in earnings of Conrail (Note 2)
Corporate-owned life insurance – net
Equity in losses of partnerships
Other interest expense
Taxes on nonoperating property
Charitable contributions
Discount on sales of accounts receivable (Note 5)
Impairment of telecommunications assets (Note 6)
Other
Total
$
$
2004
2003
($ in millions)
2002
42 $
(11)
31
53
46
40
13
11
8
(61)
(17)
(8)
(4)
(1)
--
(22)
89 $
39 $
(15)
24
--
45
38
10
--
21
--
(4)
(8)
(4)
--
(84)
(19)
19 $
48
(14)
34
--
47
36
12
--
(1)
(1)
(31)
(7)
--
(4)
--
(19)
66
“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. NS has a 40.5% interest in a limited
liability company that owns and operates facilities that produce synthetic fuel from coal. The production
of synthetic fuel results in tax credits as well as expenses related to the investments. The expenses are
recorded as a component of “Other income – net.”
“Other current assets” in the Consolidated Balance Sheets includes prepaid interest of $48 million at
Dec. 31, 2004, and $50 million at Dec. 31, 2003, arising from corporate-owned life insurance borrowings.
K53
4. Income Taxes
Provision for Income Taxes
2004
2003
($ in millions)
2002
Current:
Federal
State
Total current taxes
Deferred:
Federal
State
Total deferred taxes
$
133 $
46
179
32 $
11
43
181
19
200
97
35
132
Provision for income taxes
$
379 $
175 $
Reconciliation of Statutory Rate to Effective Rate
61
7
68
145
33
178
246
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:
2004
2003
2002
Amount
%
Amount
%
Amount
%
($ in millions)
Federal income tax at
statutory rate
State income taxes, net of
federal tax benefit
Gain from Conrail Corporate
Reorganization
Equity in earnings of Conrail
Tax credits
Other – net
Provision for income taxes
$
Deferred Tax Assets and Liabilities
$
456
35 $
205
35 $
247
42
(19)
(18)
(80)
(2)
379
3
(1)
(1)
(7)
--
30
--
(20)
--
(40)
5
--
(3)
--
(7)
26
--
(19)
--
(8)
29 $
175
30 $
246
35
4
--
(3)
--
(1)
35
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
Retiree health and death benefit obligations
Taxes, including state and property
Other
Total gross deferred tax assets
Less valuation allowance
Net deferred tax asset
Deferred tax liabilities:
Property
Other
Total gross deferred tax liabilities
Net deferred tax liability
Net current deferred tax asset
Dec. 31,
2004
2003
($ in millions)
$
181
180
263
44
668
(21)
647
(6,857)
(153)
(7,010)
(6,363)
187
$
194
157
240
55
646
(22)
624
(3,466)
(192)
(3,658)
(3,034)
189
Net long-term deferred tax liability
$
(6,550)
$
(3,223)
Net deferred income tax liabilities increased by $3,113 million in 2004 as a result of the Conrail
Corporate Reorganization (see Note 2). Except for amounts for which a valuation allowance has been
provided, management believes that it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the deferred tax assets. The valuation allowance at the end
of each year relates to subsidiary net operating losses that may not be utilized prior to their expiration.
The total valuation allowance decreased $1 million in 2004, $2 million in 2003 and increased $6 million
in 2002.
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. In 2004, the favorable resolution of the IRS audit of a
synthetic fuel-related investment is reflected in the “Tax credits” line of the reconciliation of statutory rate
to the effective rate. In 2003, 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 comprised most
of that line item. The consolidated federal income tax returns for 2000 through 2003 are being audited by
the IRS. The IRS examination for 2000 and 2001 is expected to be completed in the first half of 2005.
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
NS has in place an accounts receivable sales program. Under this program a bankruptcy-remote special
purpose subsidiary of NS sells without recourse 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 and payments collected from sold receivables can be
K55
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.
While there were some sales during 2004 and 2003, there were no accounts receivable sold under this
arrangement as of Dec. 31, 2004 and 2003. The change in “Accounts receivable” included on the
Consolidated Statements of Cash Flows related to receivable sales was zero for 2004, compared with a
decrease of $30 million in 2003 and a decrease of $270 million in 2002. 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 $9 million at Dec. 31, 2004, and $7 million at Dec. 31, 2003.
To determine its allowance for doubtful accounts NS evaluates historical loss experience, which has
not been significant, the characteristics of current accounts, as well as general economic conditions
and trends.
6. Properties
Railway property:
Road
Equipment
Other property
Less accumulated depreciation
Dec. 31,
2004
2003
($ in millions)
Depreciation
Rate for 2004
$
19,530
6,661
574
26,765
(6,239)
$
11,243
5,779
569
17,591
(5,812)
3.0%
4.2%
2.9%
Net properties
$
20,526
$
11,779
Properties increased $8,368 million in 2004 as a result of the Conrail Corporate Reorganization (see
Note 2). Railway property includes $618 million at Dec. 31, 2004, and $477 million at Dec. 31, 2003, of
assets recorded pursuant to capital leases. Other property includes the costs of obtaining rights to natural
resources of $341 million at Dec. 31, 2004 and 2003.
Impairment of Telecommunications Assets in 2003
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 of 2003 indicated a significant decline in their value. T-Cubed
continues to monitor the carrying value of these assets.
Capitalized Interest
Total interest cost incurred on debt in 2004, 2003 and 2002 was $499 million, $509 million and
$529 million, respectively, of which $10 million, $12 million and $11 million was capitalized.
K56
7. Current Liabilities
Accounts payable:
Accounts and wages payable
Casualty and other claims (Note 18)
Vacation liability
Equipment rents payable – net
Other
Total
Other current liabilities:
Interest payable
Liabilities for forwarded traffic
Retiree health and death benefit obligations (Note 11)
Accrued Conrail-related costs (Note 2)
Other
Total
8. Long-term Debt
Dec. 31,
2004
2003
($ in millions)
$
$
$
$
544
222
115
106
25
1,012
117
46
45
17
14
239
$
$
$
$
491
218
113
103
23
948
104
37
38
21
13
213
Dec. 31,
2004
2003
($ in millions)
Notes and debentures at average rates and maturities as follows:
6.78%, maturing to 2009
6.71%, maturing 2010 to 2014
8.67%, maturing 2017 to 2021
7.54%, maturing 2027 to 2031
7.21%, maturing 2037 and 2043
7.90%, maturing 2097
Equipment obligations at an average rate of 4.32%, maturing to 2014
Capitalized leases at an average rate of 3.51%, maturing to 2024
Other debt at an average rate of 6.51%, 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 2005 are as follows:
2006
2007
2008
2009
2010 and subsequent years
Total
$
$
$
$
1,540 $
1,041
1,114
1,500
855
350
563
370
113
79
7,525
(662)
6,863 $
316
493
370
481
5,203
6,863
2,190
600
800
1,500
717
350
636
274
118
(25)
7,160
(360)
6,800
K57
Pursuant to the Conrail Corporate Reorganization, NSR issued unsecured public debentures with a total
principal of $452 million and fair value of $595 million that mature in 2020 and 2043 (see Note 2). The
fair value write-up is included in “Discounts and premiums, net” and reflects interest rates at the time of
the reorganization. This write-up is being amortized as a reduction to interest expense over the life of the
instruments with a resulting average effective interest rate of 6.2%. The new debt securities have
covenants substantially similar to other NS publicly traded debt securities. In addition, “Capitalized
leases” includes $135 million at Dec. 31, 2004, related to the fair value of equipment sublease obligations
for equipment that remain secured debt and lease obligations of Conrail (see Note 2).
In September 2004, NS exchanged $400 million of its 7.35% notes maturing May 2007 for $442 million
of 5.257% notes maturing September 2014. The $42 million difference is being recognized as additional
interest expense over the life of the new notes and is included in “Discounts and premiums, net.”
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 $100 million at Dec. 31, 2004, and $96 million at Dec. 31, 2003.
Shelf Registration
In September 2004, NS filed on Form S-3 a shelf registration statement with the Securities and Exchange
Commission covering the issuance of up to $550 million of securities. This, together with the
$450 million of securities authorized but unissued from a prior $1 billion shelf registration, allows the
company to issue up to $1 billion of registered debt or equity securities. As of Dec. 31, 2004, NS had not
issued any securities under this shelf registration.
Credit Agreement, Debt Covenants and Commercial Paper
In August 2004, NS renewed its $1 billion credit facility under substantially the same terms and
conditions as the previous facility for a five-year term expiring in 2009. Any borrowings under the credit
agreement are contingent on the continuing effectiveness of the representations and warranties made at
the inception of the agreement. 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, certain restrictions on the issuance of further debt by NS or its subsidiaries and the
consolidation, merger or sale of substantially all of NS’ assets. At Dec. 31, 2004, NS was in compliance
with all financial covenants.
NS has the ability to issue commercial paper supported by its $1 billion credit agreement. At Dec. 31,
2004 and Dec. 31, 2003, NS had no commercial paper outstanding.
K58
9. Lease Commitments
NS is committed under long-term lease agreements, which expire on various dates through 2067, for
equipment, lines of road and other property. The following amounts do not include payments to CRC
under the Shared Assets Areas agreements (see Note 2). Future minimum lease payments and operating
lease expense are as follows:
2005
2006
2007
2008
2009
2010 and subsequent years
Total
Less imputed interest on capital leases at an average rate of 5.5%
Present value of minimum lease payments included in debt
Operating
Leases
Capital
Leases
($ in millions)
$
$
154
120
107
87
73
484
1,025
$
$
$
75
70
80
48
64
74
411
(41)
370
Operating Lease Expense
Minimum rents
Contingent rents
Total
2004
2003
($ in millions)
2002
$
$
151
65
216
$
$
130 $
63
193 $
140
60
200
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 variable
interest entity whose activities are limited to those incident to this particular transaction. As discussed in
Note 1 under the heading “Required Accounting Changes in 2003,” NS has consolidated this entity for
reporting purposes as of Jan. 1, 2003. The table above includes operating lease expense related to this
lease of $13 million in 2002. During December 2004, NS provided an irrevocable notice of election to
exercise the purchase option and pay for the locomotives on June 30, 2005. Accordingly, the
$141 million of debt of the variable interest entity is included in “Current maturities of long-term debt” as
of Dec. 31, 2004.
K59
10. Other Liabilities
Retiree health and death benefit obligations (Note 11)
Casualty and other claims (Note 18)
Deferred compensation
Net pension obligations (Note 11)
Accrued Conrail-related costs (Note 2)
Other
Total
11. Pensions and Other Postretirement Benefits
Dec. 31,
2004
2003
($ in millions)
$
$
354 $
315
143
94
--
240
1,146 $
321
270
143
89
14
243
1,080
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.
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, international fixed income securities, domestic and international equity investments and
unleveraged exchange-traded options and financial futures. Limitations restrict investment concentration
and use of certain derivative instruments. The target asset allocation for equity is 75% of the pension
plan’s assets. 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.
NS’ pension plan weighted-average asset allocations at Dec. 31, 2004 and 2003, by asset category, are
as follows:
Asset Category
Plan assets at Dec. 31,
2004
2003
Equity securities
Debt securities
Total
International equity securities
included in equity securities above
76%
24
100%
10%
75%
25
100%
9%
The postretirement benefit plan assets consist primarily of trust-owned variable life insurance policies
with an asset allocation at Dec. 31, 2004, of 67% in equity securities and 33% in debt securities compared
K60
with 55% in equity securities and 45% in debt securities at Dec. 31, 2003. The target asset allocation for
equity is between 50% and 75% of the plan’s assets.
The plans’ assumed future returns are based principally on the asset allocation and on the historic returns
for the plans’ asset classes determined from both actual plan returns and, over longer time periods, market
returns for those asset classes.
Voluntary Separation Program in 2003
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.
In 2003, NS 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 are reflected as a reduction of $9 million in the net
benefit cost in 2004.
K61
Pension and Other Postretirement Benefit Obligations and Plan Assets
Change in benefit obligations
Benefit obligation at beginning of year
Service cost
Interest cost
Amendment
Legislative changes
Curtailment loss
Special termination benefits
Actuarial losses
Benefits paid
Benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid
Fair value of plan assets at end of year
Funded status
Unrecognized actuarial loss
Unrecognized prior service cost (benefit)
Net amount recognized
Amounts recognized in the Consolidated
Balance Sheets consist of:
Prepaid benefit cost
Accrued benefit liability
Accumulated other comprehensive income
Net amount recognized
Pension Benefits
2003
2004
($ in millions)
Other Benefits
2003
2004
$
1,488 $
18
89
--
--
--
--
96
(117)
1,574
1,370 $
20
89
--
--
17
--
105
(113)
1,488
1,720
197
6
(117)
1,806
232
253
18
1,469
358
6
(113)
1,720
232
208
21
$
503 $
461 $
608 $
15
39
--
--
--
--
83
(44)
701
130
10
9
(44)
105
592
18
40
(51)
(45)
10
17
65
(38)
608
106
24
38
(38)
130
(596)
(478)
232
(35)
(399) $
163
(44)
(359)
$
$
577 $
(94)
20
503 $
532 $
(89)
18
461 $
-- $
(399)
--
(399) $
--
(359)
--
(359)
Following is information for NS’ unfunded pension plans which in all cases have no assets and therefore
have an accumulated benefit obligation in excess of plan assets:
Dec. 31,
2004
2003
($ in millions)
Projected benefit obligation
Accumulated benefit obligation
$
$
120
94
103
89
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
K62
rate similar to that of active nonagreement employees. The amendment decreased the retiree medical
benefit obligation by $51 million.
Pension and Other Postretirement Benefit Costs Components
Pension benefits
Service cost
Interest cost
Curtailment loss
Expected return on plan assets
Amortization of prior service cost
Recognized net actuarial (gains) losses
Net benefit
Other postretirement benefits
Service cost
Interest cost
Curtailment loss
Special termination benefits
Expected return on plan assets
Amortization of prior service cost (benefit)
Amortization of unrecognized losses
Net cost
Pension Assumptions
2004
2003
($ in millions)
2002
$
$
$
$
18 $
89
--
(149)
3
3
(36) $
15 $
39
--
--
(12)
(9)
16
49 $
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
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
2004
5.75%
4.5%
6.25%
9%
4.5%
2003
6.25%
4.5%
6.75%
9%
4.5%
2002
6.75%
4.5%
7.25%
9%
5%
For measurement purposes at Dec. 31, 2004, 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.
K63
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 and Estimated Future Benefit Payments
One percentage point
Increase
Decrease
($ in millions)
$
$
8 $
82 $
(6)
(69)
In 2005, NS expects to contribute approximately $7 million to its unfunded pension plans for payments to
pensioners and $44 million to its other postretirement benefit plans for retiree health benefits.
Benefit payments, which reflect expected future service, as appropriate, are expected to be paid
as follows:
2005
2006
2007
2008
2009
Years 2010-2014
Pension
Benefits
Other
Benefits
($ in millions)
$
$
111
110
107
106
106
564
44
43
44
45
46
249
Beginning in 2006, the other benefit payments include an estimated annual $3 million reduction due to
the Medicare Part D Subsidy.
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 $20 million in
2004, $18 million in 2003 and $11 million in 2002.
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. NS' expenses
under these plans were $12 million in each of 2004, 2003 and 2002.
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
K64
Stock (Common Stock). Of these shares, 5,000,000 were approved by the Board for issuance to non-
officer participants; as a broadly based issuance, stockholder approval was not required. Under the
Board-approved Thoroughbred Stock Option Plan (TSOP), the committee may grant stock options up to a
maximum of 6,000,000 shares of Common Stock. Options may be granted for a term not to exceed 10
years, but may not be exercised prior to the first anniversary of the date of grant. Options are exercisable
at the fair market value of Common Stock on the date of grant.
The LTIP also permits the payment – on a current or a deferred basis and in cash or in stock – of dividend
equivalents on shares of Common Stock covered by options or PSUs in an amount commensurate with
dividends paid on Common Stock. Tax absorption payments also are authorized in amounts estimated to
equal the federal and state income taxes applicable to shares of Common Stock issued subject to a share
retention agreement.
Accounting Method
As disclosed in Note 1, NS applies APB Opinion 25 and related interpretations in accounting for awards
made under the plans. Accordingly, grants of PSUs, restricted 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 $53 million in 2004, $29 million in 2003 and $23
million in 2002. NS recognized additional paid-in capital of $30 million in 2004, $2 million in 2003 and
$6 million in 2002 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 3.2% in 2004, 2.8% in 2003
and 4.6% in 2002; average stock-price volatilities of 35% in 2004, 33% in 2003 and 32% in 2002; and
dividend yields of zero. These assumptions produced per-share grant-date fair values of $7.95 in 2004,
$6.60 in 2003 and $8.26 in 2002.
Stock Option Activity
Balance Dec. 31, 2001
Granted
Exercised
Expired
Balance Dec. 31, 2002
Granted
Exercised
Expired
Balance Dec. 31, 2003
Granted
Exercised
Expired
Balance Dec. 31, 2004
Option Shares
33,413,523
Weighted
Average
Exercise Price
23.21
$
7,384,000
(2,851,538)
(287,341)
37,658,644
5,700,000
(781,610)
(863,219)
41,713,815
4,580,500
(8,203,589)
(1,233,859)
36,856,867
22.49
17.48
26.73
23.47
19.63
16.13
24.37
23.07
22.02
19.60
24.53
23.66
$
$
$
K65
Of the total options outstanding at Dec. 31, 2004, 32 million were vested and have a weighted-average
exercise price of $23.89.
Stock Options Outstanding
Range
$ 15.48
19.63
24.31
29.46
$ 15.48
- $ 16.94
22.49
-
27.69
-
-
33.25
- $ 33.25
Performance Share Units
Exercise Price
Weighted
Average
$ 16.22
21.51
27.44
32.14
$ 23.66
Number
Outstanding
at Dec. 31, 2004
7,493,546
15,752,409
5,495,162
8,115,750
36,856,867
Weighted Average
Remaining
Contractual Life
5.6 years
7.9 years
3.7 years
3.5 years
5.8 years
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 831,000 and
$22.02 in 2004; 946,000 and $19.63 in 2003; and 815,000 and $22.49 in 2002. 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
Restricted share grants were 359,040 in 2004, with a grant-date fair market value of $22.02 and a three-
year restriction period, and were 420,000 in 2003, with a grant date fair market value of $19.63 and a
three-year restriction period. At Dec. 31, 2004 and 2003, the balance of unearned compensation was
$8 million and $5 million, relating to 726,540 restricted shares, and 391,800 shares, respectively.
Shares Available and Issued
Shares of stock available for future grants and issued in connection with all features of the LTIP and
TSOP are as follows:
Available for future grants Dec. 31:
LTIP
TSOP
Shares of Common Stock issued:
LTIP
TSOP
2004
2003
2002
14,033,053
2,773,300
17,994,726
2,737,200
23,645,146
2,568,200
8,764,021
8,700
1,412,749
--
2,917,898
--
K66
13. Stockholders' Equity
Accumulated Other Comprehensive Loss
“Accumulated other comprehensive income (loss)” reported in the Consolidated Statements of Changes in
Stockholders' Equity consisted of the following:
Balance
at Beginning
of Year
Net
Gain
(Loss)
Reclassification
Adjustments
($ in millions)
Balance
at End
of Year
$
$
$
$
-- $
28
(72)
(44) $
1 $
18
(84)
(65) $
1
104
--
105
(1)
46
12
57
$
$
$
$
$
--
(85)
--
(85)
$
$
--
(36)
--
(36)
$
1
47
(72)
(24)
--
28
(72)
(44)
Dec. 31, 2004
Unrealized gains on securities
Cash flow hedges
Minimum pension liability
Accumulated other
comprehensive loss
Dec. 31, 2003
Unrealized gains on securities
Cash flow hedges
Minimum pension liability
Accumulated other
comprehensive loss
K67
“Other comprehensive income (loss)” reported in the Consolidated Statements of Changes in
Stockholders' Equity consisted of the following:
Year ended Dec. 31, 2004
Net gain (loss) arising during the year:
Cash flow hedges
Reclassification adjustments for gains
included in net income
Subtotal
Unrealized gains (losses) on securities
Other comprehensive income (loss)
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)
Pretax
Amount
Tax
(Expense)
Benefit
($ in millions)
Net-of-Tax
Amount
$
171
$
(67) $
(140)
31
55
(12)
1
32
$
--
(12) $
75
$
(29) $
(59)
16
(1)
11
26
$
23
(6)
--
1
(5) $
58
$
(23) $
(10)
48
(9)
(34)
5
$
4
(19)
4
--
(15)
$
$
$
$
$
$
104
(85)
19
1
20
46
(36)
10
(1)
12
21
35
(6)
29
(5)
(34)
(10)
In 2004, 2003 and 2002, Conrail recorded a $3 million gain, a $25 million gain and a $59 million loss,
respectively, in other comprehensive income (loss) related to its minimum pension liability. NS' “Other
comprehensive income (loss)” includes a $2 million gain for 2004, a $14 million gain for 2003 and a
$34 million loss for 2002, arising from the Conrail adjustments.
K68
Undistributed Earnings of Equity Investees
“Retained income” includes undistributed earnings of equity investees, principally attributable to NS'
equity in the earnings of Conrail, of $19 million at Dec. 31, 2004; $455 million at Dec. 31, 2003; and
$375 million at Dec. 31, 2002.
14. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share:
2004
2003
($ in millions except per share, shares in millions)
2002
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
$
$
$
923
$
535 $
460
394.2
2.34
$
389.8
1.37 $
388.2
1.18
394.2
389.8
388.2
5.1
399.3
2.31
$
1.9
391.7
1.37 $
2.3
390.5
1.18
These calculations exclude options whose exercise price exceeded the average market price of Common
Stock as follows: 13 million in 2004, 28 million in 2003 and 24 million in 2002.
There are no adjustments to “Net income” or “Income from continuing operations” for the diluted
earnings per share computations.
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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
2004
2003
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
($ in millions)
$
125 $
93
(7,525)
134 $
107
(8,577)
32 $
93
(7,160)
40
105
(8,101)
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, 2004
and 2003. Sales of “available-for-sale” securities were immaterial for the years ended Dec. 31, 2004,
2003 and 2002.
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. The settlements of the hedges will
result in the reclassification into diesel fuel expense of the related gains or losses recorded as a component
of “Other comprehensive income.”
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.
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Diesel Fuel Hedging
NS has hedged a significant portion of its diesel fuel consumption. The intent of the hedges 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 has entered 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
Percent of estimated future diesel fuel consumption covered
as of Dec. 31, 2004
2005
36%
2004
120
157
2003
286
374
$0.86
$0.76
2006
2007
4%
--
Hedges are entered into periodically by competitive bid among selected counterparties; however, no
hedges have been placed since May 2004. The goal of this hedging strategy is to reduce the variability of
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. After taking into account the effect of the hedging, diesel fuel costs represented 8%
of NS' operating expenses for the year ended Dec. 31, 2004, and 7% for each of the years ended Dec. 31,
2003 and 2002.
NS' fuel hedging activity resulted in decreases in diesel fuel expenses of $140 million, $59 million and
$10 million for 2004, 2003 and 2002, respectively. Ineffectiveness, or the extent to which changes in the
fair value of the heating oil contracts do not offset changes in the fair values of the expected diesel fuel
transactions, was approximately $5 million in 2004 and less than $1 million in both 2003 and 2002.
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 $151 million, or 2.2%,
and $186 million, or 2.8%, of its fixed rate debt portfolio hedged as of Dec. 31, 2004, and Dec. 31, 2003,
respectively, using interest rate swaps that qualify for and are designated as fair-value hedge transactions.
NS’ interest rate hedging activity resulted in decreases in interest expenses of $6 million, $10 million and
$9 million for 2004, 2003 and 2002, respectively. 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 as of Dec. 31, 2004 and 2003, were determined
based upon current fair market values as quoted by an independent third party. 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
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transactions and, accordingly, are excluded from the Consolidated Statement of Cash Flows.
“Accumulated other comprehensive income (loss),” a component of “Stockholders' equity,” included
unrealized gains of $75 million (pretax) as of Dec. 31, 2004, and $40 million (pretax) as of Dec. 31, 2003,
related to the fair value of derivative fuel hedging transactions that will terminate within twelve months of
the respective dates. Any future gain or loss actually realized will be based on the fair value of the
derivative fuel hedges at the time of termination.
The asset and liability positions of NS' outstanding derivative financial instruments were as follows:
Interest rate hedges:
Gross fair market asset position
Gross fair market (liability) position
Fuel hedges:
Gross fair market asset position
Gross fair market (liability) position
Total net asset (liability) position
Dec. 31,
2004
2003
($ in millions)
$
$
9 $
--
81
--
90 $
16
--
45
--
61
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 (basic and diluted), that resulted from resolution of tax issues related to the transaction.
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 earnings. 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 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 the recorded liability will be reflected in earnings in the periods in which such adjustments
are known.
Casualty Claims
Casualty claims include employee personal injury and occupational claims as well as third-party claims.
NS engages an independent consulting actuarial firm to aid in valuing its liability for personal injury,
occupational and third-party claims. Job-related accidental injury and occupational claims are subject to
the Federal Employers’ Liability Act (FELA), which is applicable only to railroads. FELA’s fault-based
system produces results that are unpredictable and inconsistent as compared with a no-fault workers’
compensation system. The variability inherent in this system could result in actual costs being very
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different from the liability recorded. While the ultimate amount of claims incurred is dependent on
future developments, in management’s opinion, the recorded liability after considering applicable
insurance coverage is adequate to cover the future payments of claims and is supported by the most recent
actuarial study. In all cases, NS records a liability when the expected loss for the claim is both probable
and estimable.
Employee personal injury claims – The largest component of casualties and other claims expense is
employee personal injury costs. The actuarial firm engaged by NS provides quarterly studies to aid in
valuing its employee personal injury liability and estimating its employee personal injury expense. The
actuarial firm studies NS’ historical patterns of reserving for claims and subsequent settlements, taking
into account relevant outside influences. The actuary uses the results of these analyses to estimate the
ultimate amount of the liability, which includes amounts for incurred but unasserted claims. NS adjusts
its liability to the actuarially determined amount on a quarterly basis. The estimate of loss liabilities is
subject to inherent limitation given the difficulty of predicting future events such as jury decisions, court
interpretations or legislative changes and as such the actual emergence of loss may vary from the actuarial
estimate.
Occupational claims – Occupational claims (including asbestosis and other respiratory diseases, as well
as repetitive motion) 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. The actuarial firm provides an estimate
of the occupational claims liability based upon NS’ history of claim filings, severity, payments and other
pertinent facts. The liability is dependent upon management’s judgments made as to the specific case
reserves as well as judgments of the consulting actuarial firm in the periodic studies. The actuarial firm’s
estimate of ultimate loss includes a provision for those claims that have been incurred but not reported by
analyzing industry data and projecting NS’ experience into the future as far as can be reasonably
determined. NS adjusts its liability to the actuarially determined amount on a quarterly basis. However,
it is possible that the recorded liability may not be adequate to cover the future payment of claims.
Adjustments to the recorded liability are reflected in operating expenses in the periods in which such
adjustments become known.
Third-party claims – NS records a liability for third-party claims including those for highway crossing
accidents, trespasser and other injuries, automobile liability, property damage and lading damage. The
actuarial firm assists with the calculation of potential liability for third-party claims, except lading
damage, based upon NS’ experience including number and timing of incidents, amount of payments,
settlement rates, number of open claims and legal defenses. The actuarial estimate includes a provision
for claims that have been incurred but have not yet been reported. Each quarter NS adjusts its liability to
the actuarially determined amount. Given the inherent uncertainty in the ultimate outcome of third-party
claims, it is possible that future settlement costs may differ from the estimated liability recorded.
Environmental Matters
NS is subject to various jurisdictions' environmental laws and regulations. It is NS' policy to record a
liability where such liability or loss is probable and its amount can be estimated reasonably. Claims, if
any, against third parties for recovery of cleanup costs incurred by NS are reflected as receivables (when
collection is probable) on the balance sheet and are not netted against the associated NS liability.
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.
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NS' Consolidated Balance Sheets included liabilities for environmental exposures in the amount of
$64 million at Dec. 31, 2004, and $25 million at Dec. 31, 2003 (of which $12 million was accounted for
as a current liability at Dec. 31, 2004, and $8 million at Dec. 31, 2003). The increase in the liability was
the result of the Conrail Corporate Reorganization and relates to sites on the former PRR properties. At
Dec. 31, 2004, the liability represented NS' estimate of the probable cleanup and remediation costs based
on available information at 210 known locations. On that date, 15 sites accounted for $32 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 210 locations, certain NS subsidiaries, usually in conjunction with a number of other
parties, have been identified as potentially responsible parties by the Environmental Protection Agency
(EPA) or similar state authorities under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, or comparable state statutes, which often impose joint and several liability for
cleanup costs.
With respect to known environmental sites (whether identified by NS or by the EPA or comparable state
authorities), estimates of NS' ultimate potential financial exposure for a given site or in the aggregate for
all such sites are necessarily imprecise because of the widely varying costs of currently available
cleanup techniques, the likely development of new cleanup technologies, the difficulty of determining in
advance the nature and full extent of contamination and each potential participant's share of any
estimated loss (and that participant's ability to bear it), and evolving statutory and regulatory standards
governing liability.
The risk of incurring environmental liability – for acts and omissions, past, present and future - is inherent
in the railroad business. Some of the commodities in NS' traffic mix, particularly those classified as
hazardous materials, can pose special risks that NS and its subsidiaries work diligently to minimize. In
addition, several NS subsidiaries own, or have owned, land used as operating property, or which is leased
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 environmental liabilities or
costs with respect to one or more of them, the amount and materiality of which cannot be estimated
reliably at this time. Moreover, lawsuits and claims involving these and 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.
Insurance
NS obtains on behalf of itself and its subsidiaries commercial insurance for potential losses for third-party
liability and first-party property damages. Specified levels of risk are retained on a self-insurance basis
(up to $25 million per occurrence for bodily injury and property damage to third parties and $12.5 million
per occurrence for property owned by NS or in NS’ care, custody or control).
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Purchase Commitments
NSR had outstanding purchase commitments of approximately $121 million in connection with its 2005
capital program. In addition, Norfolk Southern has committed to purchase telecommunications services
totaling $26 million through 2007.
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.
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 less than $1 million as of Dec. 31, 2004 and $1 million as of Dec. 31, 2003,
for these warranties.
As of Dec. 31, 2004, 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.
Subsequent Event
On Jan. 6, 2005, a derailment occurred in Graniteville, SC. NS expects the first quarter of 2005 to reflect
operating expenses related to this incident of between $30 million and $40 million (pretax). The amount
includes NS’ self-insured retention under its insurance policies, as well as other uninsured costs.
Although potential losses may exceed self-insured retention amounts NS expects at this time, that
insurance coverage is adequate to cover such potential claims or settlements. This amount does not
include any fines or penalties that could be imposed.
K75
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
March 31
Three Months Ended
Sept. 30
June 30
Dec. 31
(In millions of dollars, except per share amounts)
2004
Railway operating revenues
Income from railway operations
Net income
Earnings per share:
Basic
Diluted
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
$
$
$
$
$
$
$
$
$
$
1,693
346
158
0.40
0.40
1,561
231
85
2092
$
$
$
$
1,813
425
213
0.55
0.54
1,633
298
137
137
$
$
$
$
1,857
469
2881
0.731
0.721
1,598
311
137
137
1,949
462
264
0.66
0.65
1,676
2243
523
523
0.22
0.542
$
$
0.35
0.35
$
$
0.35
0.35
$
$
0.133
0.133
1 Includes a $53 million or 13 cents per share gain from the Conrail Corporate Reorganization (see
Note 2 to the Consolidated Financial Statements).
2 Includes a $114 million, or 29 cents per share, increase related to required accounting changes (see
Note 1 to the Consolidated Financial Statements), and a $10 million, or 3 cents per share, gain from
discontinued operations (see Note 17 to the Consolidated Financial Statements).
3 Includes a $107 million pretax charge for a voluntary separation program (see Note 11 to the
Consolidated Financial Statements), which reduced net income by $66 million or 17 cents per share.
Also includes an $84 million impairment charge (see Note 6 to the Consolidated Financial Statements),
which reduced net income by $53 million or 13 cents per share.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Norfolk Southern’s 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, 2004. Based
on such evaluation, such officers have concluded that, as of December 31, 2004, 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.
Internal Control Over Financial Reporting
The management of Norfolk Southern is responsible for establishing and maintaining adequate 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, 2004. This assessment was based on criteria for effective internal control over financial
reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
in Internal Control-Integrated Framework. Based on our assessment, management has concluded that the
Corporation maintained effective internal control over financial reporting as of December 31, 2004.
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
independent registered public accounting firm 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.
Norfolk Southern’s management has issued a report of its assessment of internal control over financial
reporting, and Norfolk Southern’s independent registered public accounting firm has issued a report on
this assessment. These reports appear in Item II, Part 8 of this report on Form 10-K.
During the fourth quarter of 2004, 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.
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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 12, 2005, 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 12, 2005, 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 12, 2005, which definitive Proxy Statement will be filed electronically with the
Commission pursuant to Regulation 14A.
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Equity Compensation Plan Information (as of Dec. 31, 2004)
Number of
securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted-
average
exercise price
of outstanding
options, warrants
and rights
(b)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding
securities reflected
in column (a))
(c)
34,325,304
23.14 4
13,854,425 5
5,123,563 3
39,448,867
26.91 3
23.66
2,990,928 6
16,845,353
Plan
category
Equity compensation
Plans approved by
security holders1
Equity compensation
Plans not approved by
security holders2
Total
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 and the Directors' Restricted Stock Plan.
3 Includes options and performance share units granted under the Long-Term Incentive Plan on 1,896,863 shares
for non-officers and options granted under the Thoroughbred Stock Option Plan.
4 Calculated without regard to 2,592,000 outstanding performance share units.
5 Of the shares remaining available for grant under plans approved by stockholders, 2,638,378 are available for grant
as restricted shares or performance shares under the Long-Term Incentive Plan.
6 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.
Norfolk Southern Corporation Long-Term Incentive Plan (“LTIP”)
Established on June 28, 1983, and approved by the stockholders at their Annual Meeting 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. Also on that date, the Board adopted an amended
plan 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.
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 Compensation 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
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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.
K80
The restriction period begins on the date of the grant and ends on the earlier of death or six months after
the eligible director ceases to be a director by reason of disability or retirement. 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.
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 12, 2005, 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 Registered Public Accounting Firm” in Norfolk Southern’s definitive Proxy Statement, for
the Norfolk Southern Annual Meeting of Stockholders to be held on May 12, 2005, which definitive
proxy statement will be filed electronically with the Commission pursuant to Regulation 14A.
K81
PART IV
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
Page
(A)
The following documents are filed as part of this report:
1.
Index to Consolidated Financial Statements
K38
Report of Management
K39
Reports of Independent Registered Public Accounting Firm
K42
Consolidated Statements of Income, Years ended Dec. 31, 2004, 2003 and 2002
Consolidated Balance Sheets As of Dec. 31, 2004 and 2003
K43
Consolidated Statements of Cash Flows, Years ended Dec. 31, 2004, 2003 and 2002 K44
Consolidated Statements of Changes in Stockholders' Equity, Years ended
Dec. 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
K45
K46
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
Page
K92
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.
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 Jan. 25, 2005, are incorporated
by reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K filed on
Jan. 25, 2005.
K82
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, 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.
K83
(j)
(k)
(l)
(m)
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.
Eighth Supplemental Indenture, dated as of September 17, 2004, between Norfolk
Southern Corporation and U.S. Bank Trust National Association, as Trustee, relating to the
issuance of 5.257% Notes due 2014 (“Securities”) in the aggregate principal amount of
$441.5 million in connection with Norfolk Southern Corporation’s offer to exchange the
Securities and cash for up to $400 million of its outstanding 7.350% Notes due 2007, is
incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation’s
Form 8-K filed on September 23, 2004.
The Indenture, dated August 27, 2004, among PRR Newco, Inc., as Issuer, and Norfolk
Southern Railway Company, as Guarantor, and The Bank of New York, as Trustee, is
incorporated herein by reference to Exhibit 4(l) to Norfolk Southern Corporation’s
Form 10-Q filed on October 28, 2004.
The First Supplemental Indenture, dated August 27, 2004, among PRR Newco, Inc., as
Issuer, and Norfolk Southern Railway Company, as Guarantor, and The Bank of New
York, as Trustee, related to the issuance of notes in the principal amount of approximately
$451.8 million, is incorporated herein by reference to Exhibit 4(m) to Norfolk Southern
Corporation’s Form 10-Q filed on October 28, 2004.
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)
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.
K84
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
Shared Assets Area Operating Agreement for North Jersey, dated as of June 1, 1999, by
and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk
Southern Railway Company, with exhibit thereto, is incorporated herein by reference from
Exhibit 10.4 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.
Shared Assets Area Operating Agreement for South Jersey/ Philadelphia, dated as of June
1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and
Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by
reference from Exhibit 10.5 to Norfolk Southern Corporation's Form 10-Q filed on August
11, 1999.
Shared Assets Area Operating Agreement for Detroit, dated as of June 1, 1999, by and
among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern
Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit
10.6 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.
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.
K85
(l)
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.
(m)
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.
(n)
(o)
(p)
(q)
(r)
(s)
(t)
(u)
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.
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.
K86
(v)
(w)
(x)
(y)
(z)
(aa)
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 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.
Amendment No. 3, dated as of June 1, 1999, and executed in April 2004, 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 to Exhibit 10(dd) to Norfolk Southern Corporation’s Form 10-Q filed
on July 30, 2004.
(bb) Distribution Agreement, dated as of July 26, 2004, by and among CSX Corporation, CSX
Transportation, Inc., CSX Rail Holding Corporation, CSX Northeast Holdings
Corporation, Norfolk Southern Corporation, Norfolk Southern Railway Company, CRR
Holdings LLC, Green Acquisition Corp., Conrail Inc., Consolidated Rail Corporation, New
York Central Lines LLC, Pennsylvania Lines LLC, NYC Newco, Inc. and PRR Newco,
Inc., is incorporated herein by reference to Exhibit 2.1 to Norfolk Southern Corporation’s
Form 8-K filed on September 2, 2004.
(cc)
(dd)
Amendment No. 5 to the Transaction Agreement, dated as of August 27, 2004, 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 to Exhibit 10.1 to Norfolk
Southern Corporation’s Form 8-K filed on September 2, 2004.
Tax Allocation Agreement, dated as of August 27, 2004, by and among Green Acquisition
Corp., Conrail Inc., Consolidated Rail Corporation, New York Central Lines LLC and
Pennsylvania Lines LLC, is incorporated herein by reference to Exhibit 10.2 to Norfolk
Southern Corporation’s Form 8-K filed on September 2, 2004.
K87
(ee)
(ff)
(gg)
(hh)
(ii)
Credit Agreement dated as of August 31, 2004, between Norfolk Southern Corporation and
various lenders, is incorporated herein by reference to Exhibit 99 to Norfolk Southern
Corporation’s Form 8-K/A filed on September 7, 2004.
Form of 2005 Incentive Stock Option and Non-Qualified Stock Option Agreement, as
amended, under the Norfolk Southern Long-Term Incentive Plan is incorporated herein
by reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K filed on
January 7, 2005.
Form of 2005 Restricted Share Agreement, as amended, under the Norfolk Southern
Corporation Long-Term Incentive Plan is incorporated herein by reference to Exhibit 99 to
Norfolk Southern Corporation’s Form 8-K filed on January 7, 2005.
Form of 2005 Performance Share Unit Award, as amended, under the Norfolk Southern
Corporation Long-Term Incentive Plan is incorporated herein by reference to Exhibit 99 to
Norfolk Southern Corporation’s Form 8-K filed on January 7, 2005.
Form of 2005 Restricted Stock Unit Agreement, as amended, under the Norfolk Southern
Corporation Restricted Stock Unit Plan is incorporated herein by reference to Exhibit 99 to
Norfolk Southern Corporation’s Form 8-K filed on January 7, 2005.
12
21
23
31
32
99
Statement re: Computation of Ratio of Earnings to Fixed Charges.
Subsidiaries of the Registrant.
Consent of Independent Registered Public Accounting Firm.
Rule 13a-14(a)/15d-14(a) Certifications.
Section 1350 Certifications.
Annual CEO Certification pursuant to NYSE Rule 303A.12(a).
(B)
Reports on Form 8-K.
A report on Form 8-K was filed on November 23, 2004, advising that Performance-Based
Compensation Committee of the Norfolk Southern Corporation Board of Directors
approved the Form of 2005 Incentive Stock Option and Non-Qualified Stock Option
Agreement, the Form of 2005 Restricted Share Agreement and Form of 2005 Performance
Share Unit Award under the Norfolk Southern Corporation Long-Term Incentive Plan and
the Form of 2005 restricted Stock Unit Agreement under the Norfolk Southern Corporation
Restricted Stock Unit Plan, and attaching each as exhibits.
K88
A report on Form 8-K/A was filed on November 12, 2004, amending the Corporation’s
Form 8-K previously filed on September 2, 2004, and describing the pro forma effects of
the Conrail Corporate Reorganization on the Corporation’s financial statements and
attaching as an exhibit the following financial statements for Pennsylvania Lines LLC and
its subsidiaries: Consolidated Statements of Income for the years ended December 31,
2003, 2002 and 2001; Consolidated Balance Sheets for the years ended December 31, 2003
and 2002; and Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001; Report of Independent Registered Public Accounting Firm.
A report on Form 8-K was filed on October 22, 2004, advising of the Corporation’s review
of the Surface Transportation Board’s decision in two pending rate cases brought by Duke
Energy Corp. and Carolina Power & Light Company and attaching as an exhibit the related
press release.
A report on Form 8-K was furnished on October 20, 2004, advising of the Corporation’s
third-quarter 2004 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 and nine months ended
September 30, 2004 and 2003; Consolidated Balance Sheets (Unaudited) for September 30,
2004, and December 31, 2003; and Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 2004 and 2003.
A report on Form 8-K was filed October 1, 2004, advising that the Corporation had
announced a series of senior-level executive and organizational changes approved by its
Board of Directors, including the election of a President, and attaching as an exhibit the
related press release.
(C)
Exhibits.
The Exhibits required by Item 601 of Regulation S-K as listed in Item 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.
K89
POWER OF ATTORNEY
Each person whose signature appears below under “SIGNATURES” hereby authorizes Henry C. Wolf,
James A. Hixon and James A. Squires or any one 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, James A. Hixon and James
A. Squires or any one 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 28th day of February, 2005.
NORFOLK SOUTHERN CORPORATION
By: /s/ David R. Goode
(David R. Goode,
Chairman and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on
this 28th day of February, 2005, 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 and Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Charles W. Moorman
(Charles W. Moorman)
President and Director
/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)
Director
K90
/s/ Gene R. Carter
(Gene R. Carter)
/s/ Alston D. Correll
(Alston D. Correll)
/s/ Landon Hilliard
(Landon Hilliard)
/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
K91
Schedule II
Norfolk Southern Corporation and Subsidiaries
Valuation and Qualifying Accounts
Years Ended December 31, 2002, 2003 and 2004
(In millions of dollars)
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
Year ended December 31, 2004
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
Additions charged to:
Beginning
Balance
Expenses
Other
Accounts
Deductions
Ending
Balance
$
$
$
$
$
$
$
$
$
18
265
192
24
254
207
22
270
218
$
$
$
$
$
$
$
$
$
6
119
32
--
134
34
--
112
23
$
$
$
$
$
$
$
$
$
--
91
1241
--
61
1251
--
481
1241
$
$
$
$
$
$
$
$
$
--
1393
1414
2 2
1243
1484
1 2
115 3
143 4
$
$
$
$
$
$
$
$
$
24
254
207
22
270
218
21
315
222
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.
K92
EXHIBIT INDEX
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Electronic
Submission
Exhibit
Number
Description
12
21
23
31
32
99
Statement re: Computation of Ratio of Earnings to Fixed Charges.
Subsidiaries of Norfolk Southern Corporation.
Consent of Independent Registered Public Accounting Firm.
Rule 13a-14(a)/15d-14(a) Certifications.
Section 1350 Certifications.
Annual CEO Certification pursuant to NYSE Rule 303A.12(a).
Exhibits 23, 31, 32 and 99 are included; remaining exhibits are not included in copies assembled for
public dissemination. These exhibits are included in the 2004 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
K93
Exhibit 23
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Norfolk Southern Corporation:
We consent to the incorporation by reference in Registration Statements Nos. 33-52031,
333-71321, 333-60722, 333-100936 and 333-109069 on Form S-8 and 333-119398 on Form S-3
of Norfolk Southern Corporation of our reports dated February 28, 2005, with respect to the
consolidated balance sheets of Norfolk Southern Corporation and subsidiaries as of December 31,
2004 and 2003, 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, 2004,
and the related financial statement schedule, management’s assessment of the effectiveness of
internal control over financial reporting as of December 31, 2004, and the effectiveness of
internal control over financial reporting as of December 31, 2004, which reports appear in the
December 31, 2004, annual report on Form 10-K of Norfolk Southern Corporation. Our report on
the consolidated financial statements and related financial statement schedule refers to the
adoption by Norfolk Southern Corporation 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.
/s/ KPMG LLP
Norfolk, Virginia
February 28, 2005
CERTIFICATIONS OF CEO AND CFO PURSUANT TO
EXCHANGE ACT RULE 13a-14(a) OR RULE 15d-14(a)
EXHIBIT 31
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)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
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;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
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.
d.
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 the
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.
Dated: Feb. 28, 2005
/s/ David R. Goode
David R. Goode
Chairman and Chief Executive Officer
I, Henry C. Wolf, 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)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
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;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
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.
d.
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 the
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.
Dated: Feb. 28, 2005
/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, 2004 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 and Chief Executive Officer
Norfolk Southern Corporation
Dated: Feb. 28, 2005
I certify, to the best of my knowledge, that the Annual Report on Form 10-K for the year ended Dec. 31, 2004 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. 28, 2005
EXHIBIT 99
Annual CEO Certification pursuant to NYSE Rule 303A.12(a)
Annual CEO Certification
(Section 303A.12(a))
As the Chief Executive Officer of Norfolk Southern Corporation, and as required by Section
303A.12(a) of the New York Stock Exchange Listed Company Manual, I hereby certify that as of
the date hereof, I am not aware of any violation by the Company of NYSE’s Corporate
Governance listing standards, other than has been notified to the Exchange pursuant to Section
303A.12(b) and disclosed as an attachment hereto.*
/s/ David R. Goode
By:
Print Name: David R. Goode
Title:
Date:
Chairman, President and Chief Executive Officer
May 24, 2004
* No violations of the New York Stock Exchange corporate governance listing standards were
identified in the attachment.
OUR VISION
Be the Safest,
most
Customer-Focused
Successful Transportation Company
and
in theWorld
OUR CREED
We are responsible to our stockholders,
customers, employees and the communities we serve.
For all our constituencies, we will make safety our highest priority.
For our customers, we will provide quality service, always trying
to reduce our costs in order to offer competitive prices.
For our stockholders, 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.
For our employees, our greatest asset, we will provide fair and dignified
treatment with equal opportunity at every level. We will seek a talented,
diverse work force and management with the highest standards of honesty
and fairness.
For the communities 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.