Thoroughbred
Annual Report
Norfolk Southern
System Map
Financial Highlights
Norfolk Southern Corporation & Subsidiaries
Rouses Point
Waterville
($ in millions, except per-share amounts)
2007
2006
2005
Des Moines
Moberly
Kansas City
Grand
Rapids
Detroit
Buffalo
Albany
Ayer
Chicago
Elkhart
Cleveland
Corning
Binghamton
Toledo
Bellevue
Youngstown
Peoria
Decatur
Ft. Wayne
Columbus
Pittsburgh
Harrisburg
Allentown
New York/
Northern New Jersey
Wilmington
Baltimore
Philadelphia/
Southern New Jersey
Indianapolis
Cincinnati
St. Louis
Louisville
Lexington
Bluefield
Roanoke
Washington, D.C.
Richmond
Lynchburg
Norfolk
Fulton
Knoxville
Winston-
Salem
Greensboro
Raleigh
Memphis
Chattanooga
Huntsville
Asheville
Spartanburg
Birmingham
Charlotte
Columbia
Morehead City
Dallas
Meridian
Columbus
Atlanta
Augusta
Macon
Charleston
Albany
Mobile
Savannah
Brunswick
Jacksonville
Lake City
New
Orleans
Norfolk Southern System
Trackage/Haulage Rights
Gateway Cities to
Western Railroads
For the Year
Railway operating revenues
Income from railway operations
Net income
Per share — basic
Per share — diluted
Dividends per share
Dividend pay-out ratio
Cash provided by operating activities
Property additions
Free cash flow2
At Year End
Total assets
Total debt
Stockholders’ equity
Shares outstanding
Stockholders’ equity per share
Financial Ratios (%)
Operating ratio
Debt to total capitalization
$
$
$
$
$
$
$
$
$
9,432
2,585
1,464
3.74
3.68
.96
26%
2,333
1,341
992
$
$
$
$
26,144
6,368
9,727
379,297,891
25.64
$
9,407
$ 2,557
1,481
$
3.63
$
3.57
$
.68
$
19%
$ 2,206
$ 1,178
$ 1,028
1
$
$
$
$
$
$
8,527
2,117
1,281
1
3.17
1
3.11
.48
15%
$ 2,105
$ 1,025
$ 1,080
$ 26,028
$ 6,600
$ 9,615
397,419,601
$ 24.19
$ 25,859
$ 6,930
$ 9,276
409,885,788
$ 22.63
72.6%
39.6%
72.8%
40.7%
75.2%
42.8%
(1) Results in 2005 include a $96 million reduction of NS’ deferred income tax liabilities resulting from tax legislation enacted by Ohio, which increased net income by $96 million, or 23 cents
per diluted share.
(2) Free cash flow as used here is defined as cash provided by operating activities minus property additions and is a measure of cash available for other investing activities and financing
activities, including repurchases of common stock and dividends.
Miami
Description of Business
Norfolk Southern Corporation (NYSE: NSC) is one of the nation’s premier transportation companies. Its
Norfolk Southern Railway subsidiary operates approximately 21,000 route miles in 22 states and the District
of Columbia, serving every major port in the eastern United States and providing superior connections
to western rail carriers. Norfolk Southern operates the most extensive intermodal network in the East
and is North America’s largest rail carrier of metals and automotive products.
On the cover: Heavy machinery drills through layers of rock as a railroad tunnel near Cowan, Va., gets its roof raised to
accommodate double-stacked containers.
2
$350
$300
$250
$200
$150
$100
$ 50
$ 0
Total Stockholder Returns
(dollars)
Railway Operating
Revenue (in millions)
Income from Railway
Operations (in millions)
Free Cash Flow2
(in millions)
$9,407 $9,432
$2,557 $2,585
$1,080
$1,028 $992
$8,527
$2,117
Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07
05
06
07
05
06
07
05
06
07
Norfolk Southern Corp. Common Stock S&P Railroad Stock Price Index
S&P Composite-500 Stock Price Index
*Assumes that the value of the investment in Norfolk Southern Corporation
common stock and each index was $100 on Dec. 31, 2002, and that all
dividends were reinvested. Data furnished by Bloomberg Financial Markets.
1
Norfolk Southern
System Map
Financial Highlights
Norfolk Southern Corporation & Subsidiaries
Rouses Point
Waterville
($ in millions, except per-share amounts)
2007
2006
2005
Des Moines
Moberly
Kansas City
Grand
Rapids
Detroit
Buffalo
Albany
Ayer
Chicago
Elkhart
Cleveland
Corning
Binghamton
Toledo
Bellevue
Youngstown
Peoria
Decatur
Ft. Wayne
Columbus
Pittsburgh
Harrisburg
Allentown
New York/
Northern New Jersey
Wilmington
Baltimore
Philadelphia/
Southern New Jersey
Indianapolis
Cincinnati
St. Louis
Louisville
Lexington
Bluefield
Roanoke
Washington, D.C.
Richmond
Lynchburg
Norfolk
Fulton
Knoxville
Winston-
Salem
Greensboro
Raleigh
Memphis
Chattanooga
Huntsville
Asheville
Spartanburg
Birmingham
Charlotte
Columbia
Morehead City
Dallas
Meridian
Columbus
Atlanta
Augusta
Macon
Charleston
Albany
Mobile
Savannah
Brunswick
Jacksonville
Lake City
New
Orleans
Norfolk Southern System
Trackage/Haulage Rights
Gateway Cities to
Western Railroads
For the Year
Railway operating revenues
Income from railway operations
Net income
Per share — basic
Per share — diluted
Dividends per share
Dividend pay-out ratio
Cash provided by operating activities
Property additions
Free cash flow2
At Year End
Total assets
Total debt
Stockholders’ equity
Shares outstanding
Stockholders’ equity per share
Financial Ratios (%)
Operating ratio
Debt to total capitalization
$
$
$
$
$
$
$
$
$
9,432
2,585
1,464
3.74
3.68
.96
26%
2,333
1,341
992
$
$
$
$
26,144
6,368
9,727
379,297,891
25.64
$
9,407
$ 2,557
1,481
$
3.63
$
3.57
$
.68
$
19%
$ 2,206
$ 1,178
$ 1,028
1
$
$
$
$
$
$
8,527
2,117
1,281
1
3.17
1
3.11
.48
15%
$ 2,105
$ 1,025
$ 1,080
$ 26,028
$ 6,600
$ 9,615
397,419,601
$ 24.19
$ 25,859
$ 6,930
$ 9,276
409,885,788
$ 22.63
72.6%
39.6%
72.8%
40.7%
75.2%
42.8%
(1) Results in 2005 include a $96 million reduction of NS’ deferred income tax liabilities resulting from tax legislation enacted by Ohio, which increased net income by $96 million, or 23 cents
per diluted share.
(2) Free cash flow as used here is defined as cash provided by operating activities minus property additions and is a measure of cash available for other investing activities and financing
activities, including repurchases of common stock and dividends.
Miami
Description of Business
Norfolk Southern Corporation (NYSE: NSC) is one of the nation’s premier transportation companies. Its
Norfolk Southern Railway subsidiary operates approximately 21,000 route miles in 22 states and the District
of Columbia, serving every major port in the eastern United States and providing superior connections
to western rail carriers. Norfolk Southern operates the most extensive intermodal network in the East
and is North America’s largest rail carrier of metals and automotive products.
On the cover: Heavy machinery drills through layers of rock as a railroad tunnel near Cowan, Va., gets its roof raised to
accommodate double-stacked containers.
2
$350
$300
$250
$200
$150
$100
$ 50
$ 0
Total Stockholder Returns
(dollars)
Railway Operating
Revenue (in millions)
Income from Railway
Operations (in millions)
Free Cash Flow2
(in millions)
$9,407 $9,432
$2,557 $2,585
$1,080
$1,028 $992
$8,527
$2,117
Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07
05
06
07
05
06
07
05
06
07
Norfolk Southern Corp. Common Stock S&P Railroad Stock Price Index
S&P Composite-500 Stock Price Index
*Assumes that the value of the investment in Norfolk Southern Corporation
common stock and each index was $100 on Dec. 31, 2002, and that all
dividends were reinvested. Data furnished by Bloomberg Financial Markets.
1
Dear Fellow Stockholders
In the past few years, Norfolk Southern and the rest of the rail industry saw an
unprecedented period of both traffic and revenue growth, resulting in a very strong
financial performance and superior shareholder returns. These years of growth
were driven by a strong economy and fundamental changes in the transportation
marketplace — among them higher fuel costs, increased highway congestion, and
continued shortages of long-distance truck drivers — that played to the strengths
of our industry.
2007 was, in my opinion, a watershed year for us in that it answered the question
of how real and long-lasting our improved performance would be in the face of
an economic downturn. The answer was a strong affirmation that our prospects
remain very bright.
Railway operating revenues, income from railway operations, and diluted earnings
per share set records, even as the downturn in housing, softness in the automotive
sector, and increased motor carrier capacity made for a year in which our volumes
were down 4 percent and our net income was essentially flat.
Earnings per share increased 3 percent, driven by our re-purchase of 24 million
shares. For most of the year and for the beginning of 2008 as well, we believed
our shares were trading at a price that made re-purchasing a good way to return
money to investors while providing a superior return for our remaining shareholders.
We also increased our dividend for the sixth consecutive year, this time by an
aggregate 41 percent, a clear sign of our confidence in Norfolk Southern’s future.
There was a lot of other good news in 2007. Our overall service metrics improved,
and we continued to be recognized as a leading service provider in the industry.
But while it’s nice to be recognized, we know how much more we can still do to
improve service, and we remain dedicated to the idea that superior service is the
key to growing volumes and revenues, and delivering exceptional financial results.
To reinforce that, we are for the first time making service improvement part of our
broad-based incentive compensation program.
Despite some weakness in the economy, we continued our strong programs to
maintain our assets and infrastructure and to add capacity for future growth. A
great example of that growth was the announcement by ThyssenKrupp that they
will construct a major new steel plant on our railroad near Mobile, Ala. This will
be a significant new customer for us when it comes on line in 2010 and exemplifies
the work that our second-to-none industrial development group, supported by
teams of people throughout the company, can do.
The keys to this success, along with all of our other
Like every year, 2008 will have its challenges and
successes, are the people of Norfolk Southern. No
opportunities, but the demand for high-quality rail
better or more important illustration of that is the fact
transportation will continue to be strong. It is telling
that for the 18th consecutive year they earned the E. H.
that more and more public leaders are recognizing
Harriman Gold Medal Award for Employee Safety. While
the benefits that we offer in keeping the economy
it’s good to win awards, our objective every year is to
competitive while reducing highway congestion and
have zero injuries or accidents, and we won’t rest until
environmental degradation.
we achieve it.
The future remains bright for our company. Your
This annual report shows just a small part of what
management team, and all the people who run the
goes on across Norfolk Southern on any given day. It
railroad around the clock, are excited to be part of
illustrates the breadth and complexity of our business
that future.
and the skills and dedication of Norfolk Southern people
as they go about their work of providing transportation
service to our nation’s businesses and industries,
Sincerely,
24 hours a day, 7 days a week.
Chairman, President and Chief Executive Officer
Norfolk Southern’s executive management
team is led by (left to right): Jim Hixon,
executive vice president law and corporate
relations; Deborah Butler, executive vice
president planning and chief information
officer; Steve Tobias, vice chairman and
chief operating officer; Wick Moorman,
chairman, president and chief executive
officer; John Rathbone, executive vice
president administration; Mark Manion,
executive vice president operations;
Don Seale, executive vice president
and chief marketing officer; and Jim
Squires, executive vice president finance
and chief financial officer.
2
3
Dear Fellow Stockholders
In the past few years, Norfolk Southern and the rest of the rail industry saw an
unprecedented period of both traffic and revenue growth, resulting in a very strong
financial performance and superior shareholder returns. These years of growth
were driven by a strong economy and fundamental changes in the transportation
marketplace — among them higher fuel costs, increased highway congestion, and
continued shortages of long-distance truck drivers — that played to the strengths
of our industry.
2007 was, in my opinion, a watershed year for us in that it answered the question
of how real and long-lasting our improved performance would be in the face of
an economic downturn. The answer was a strong affirmation that our prospects
remain very bright.
Railway operating revenues, income from railway operations, and diluted earnings
per share set records, even as the downturn in housing, softness in the automotive
sector, and increased motor carrier capacity made for a year in which our volumes
were down 4 percent and our net income was essentially flat.
Earnings per share increased 3 percent, driven by our re-purchase of 24 million
shares. For most of the year and for the beginning of 2008 as well, we believed
our shares were trading at a price that made re-purchasing a good way to return
money to investors while providing a superior return for our remaining shareholders.
We also increased our dividend for the sixth consecutive year, this time by an
aggregate 41 percent, a clear sign of our confidence in Norfolk Southern’s future.
There was a lot of other good news in 2007. Our overall service metrics improved,
and we continued to be recognized as a leading service provider in the industry.
But while it’s nice to be recognized, we know how much more we can still do to
improve service, and we remain dedicated to the idea that superior service is the
key to growing volumes and revenues, and delivering exceptional financial results.
To reinforce that, we are for the first time making service improvement part of our
broad-based incentive compensation program.
Despite some weakness in the economy, we continued our strong programs to
maintain our assets and infrastructure and to add capacity for future growth. A
great example of that growth was the announcement by ThyssenKrupp that they
will construct a major new steel plant on our railroad near Mobile, Ala. This will
be a significant new customer for us when it comes on line in 2010 and exemplifies
the work that our second-to-none industrial development group, supported by
teams of people throughout the company, can do.
The keys to this success, along with all of our other
Like every year, 2008 will have its challenges and
successes, are the people of Norfolk Southern. No
opportunities, but the demand for high-quality rail
better or more important illustration of that is the fact
transportation will continue to be strong. It is telling
that for the 18th consecutive year they earned the E. H.
that more and more public leaders are recognizing
Harriman Gold Medal Award for Employee Safety. While
the benefits that we offer in keeping the economy
it’s good to win awards, our objective every year is to
competitive while reducing highway congestion and
have zero injuries or accidents, and we won’t rest until
environmental degradation.
we achieve it.
The future remains bright for our company. Your
This annual report shows just a small part of what
management team, and all the people who run the
goes on across Norfolk Southern on any given day. It
railroad around the clock, are excited to be part of
illustrates the breadth and complexity of our business
that future.
and the skills and dedication of Norfolk Southern people
as they go about their work of providing transportation
service to our nation’s businesses and industries,
Sincerely,
24 hours a day, 7 days a week.
Chairman, President and Chief Executive Officer
Norfolk Southern’s executive management
team is led by (left to right): Jim Hixon,
executive vice president law and corporate
relations; Deborah Butler, executive vice
president planning and chief information
officer; Steve Tobias, vice chairman and
chief operating officer; Wick Moorman,
chairman, president and chief executive
officer; John Rathbone, executive vice
president administration; Mark Manion,
executive vice president operations;
Don Seale, executive vice president
and chief marketing officer; and Jim
Squires, executive vice president finance
and chief financial officer.
2
3
A locomotive pulls flat cars for loading at Atlanta’s Inman Yard. Over the
next 24 hours, 83 trains will pass through Inman, one of Norfolk Southern’s
busiest yards.
Twenty-four hours a day, seven days a week, Norfolk Southern trains
move across 21,000 route miles in 22 states, reaching every major
eastern port and linking customers to markets all over the world.
On one of those days, Oct. 23, 2007, 1,705 trains operated on the network.
Eighty-two trains hauled 1 million tons of utility coal, enough to provide
power for nearly every household in Virginia for a month. Seventy-six
trains transported 51,000 new cars and trucks; others carried everything
from wind turbines to 56 million pounds of granulated sugar.
For the 2007 annual report, we made a photographic record of some of
what took place on Norfolk Southern that day.
In the pages that follow, we invite you to travel with Norfolk Southern for
a day — from midnight in Atlanta to daybreak in Baltimore to sunset in
Homer, Ill. Oct. 23, 2007, a day on which Norfolk Southern and its more
than 30,000 employees worked hard to demonstrate their commitment
to operate the safest and most efficient railroad in North America, day
after day, 365 days a year.
4
4
5
A locomotive pulls flat cars for loading at Atlanta’s Inman Yard. Over the
next 24 hours, 83 trains will pass through Inman, one of Norfolk Southern’s
busiest yards.
Twenty-four hours a day, seven days a week, Norfolk Southern trains
move across 21,000 route miles in 22 states, reaching every major
eastern port and linking customers to markets all over the world.
On one of those days, Oct. 23, 2007, 1,705 trains operated on the network.
Eighty-two trains hauled 1 million tons of utility coal, enough to provide
power for nearly every household in Virginia for a month. Seventy-six
trains transported 51,000 new cars and trucks; others carried everything
from wind turbines to 56 million pounds of granulated sugar.
For the 2007 annual report, we made a photographic record of some of
what took place on Norfolk Southern that day.
In the pages that follow, we invite you to travel with Norfolk Southern for
a day — from midnight in Atlanta to daybreak in Baltimore to sunset in
Homer, Ill. Oct. 23, 2007, a day on which Norfolk Southern and its more
than 30,000 employees worked hard to demonstrate their commitment
to operate the safest and most efficient railroad in North America, day
after day, 365 days a year.
4
4
5
At the Eastman Chemical plant, a Norfolk Southern train prepares to move
chemicals used in making everything from packaging and personal care
products to fabric, paint, and home furnishings.
Chemicals are an essential ingredient in millions of
Norfolk Southern’s service to chemical customers
consumer products and have a myriad of industrial
is not only safe, but efficient — with more on-time
applications. When it comes to shipping them, no
deliveries recorded in 2007 than ever before. Quality
mode of transportation is safer than rail, and no rail-
service is important because rising energy and
road in North America is safer than Norfolk Southern.
feedstock costs are placing pressure on American
Safety is especially critical when it involves
transporting hazardous materials. For Norfolk Southern,
nothing is more important than ensuring that these
manufacturers to compete in the global marketplace.
By providing excellent service, Norfolk Southern is
helping customers remain competitive.
shipments arrive safely at their destinations.
In addition to carrying chemicals for Eastman,
In 2007, Norfolk Southern carried about 427,000
carloads of chemicals, serving shippers and
receivers of petroleum products, plastics, bleaching
compounds, industrial chemicals, and hazardous
and nonhazardous wastes.
Norfolk Southern also delivers coal, which the
company uses in an innovative coal gasification
process at its Kingsport complex. The carbon-
capturing technology transforms coal into chemical
raw materials and energy.
Trains carrying ethanol arrive and unload at the Thoroughbred Bulk
Transfer Terminal in Baltimore. Ethanol is transferred from trains to trucks
and delivered to gasoline blending terminals throughout the mid-Atlantic.
U.S. production of ethanol is soaring and producers rely on Norfolk Southern to
transport it. Because of its water-soluble nature, ethanol does not lend itself to
pipeline movements, making rail the most efficient mode of transport.
Norfolk Southern moves more than a billion gallons of ethanol a year from plants
west of the Mississippi to eastern destinations. Eleven additional plants now being
built on the Norfolk Southern line and on connecting short-line railroads will
produce another 850 million gallons.
Most of the ethanol Norfolk Southern handles moves through terminals, where it is
stored and blended with gasoline. Baltimore’s Thoroughbred Bulk Transfer Terminal
is one of 20 ethanol terminals that Norfolk Southern serves. With new terminals
set to open next year in Florida, Georgia, New Jersey, North Carolina, and Virginia,
Norfolk Southern will be able to provide even more efficient service to customers,
and will help meet the growing demand for ethanol.
6
6
7
At the Eastman Chemical plant, a Norfolk Southern train prepares to move
chemicals used in making everything from packaging and personal care
products to fabric, paint, and home furnishings.
Chemicals are an essential ingredient in millions of
Norfolk Southern’s service to chemical customers
consumer products and have a myriad of industrial
is not only safe, but efficient — with more on-time
applications. When it comes to shipping them, no
deliveries recorded in 2007 than ever before. Quality
mode of transportation is safer than rail, and no rail-
service is important because rising energy and
road in North America is safer than Norfolk Southern.
feedstock costs are placing pressure on American
Safety is especially critical when it involves
transporting hazardous materials. For Norfolk Southern,
nothing is more important than ensuring that these
manufacturers to compete in the global marketplace.
By providing excellent service, Norfolk Southern is
helping customers remain competitive.
shipments arrive safely at their destinations.
In addition to carrying chemicals for Eastman,
In 2007, Norfolk Southern carried about 427,000
carloads of chemicals, serving shippers and
receivers of petroleum products, plastics, bleaching
compounds, industrial chemicals, and hazardous
and nonhazardous wastes.
Norfolk Southern also delivers coal, which the
company uses in an innovative coal gasification
process at its Kingsport complex. The carbon-
capturing technology transforms coal into chemical
raw materials and energy.
Trains carrying ethanol arrive and unload at the Thoroughbred Bulk
Transfer Terminal in Baltimore. Ethanol is transferred from trains to trucks
and delivered to gasoline blending terminals throughout the mid-Atlantic.
U.S. production of ethanol is soaring and producers rely on Norfolk Southern to
transport it. Because of its water-soluble nature, ethanol does not lend itself to
pipeline movements, making rail the most efficient mode of transport.
Norfolk Southern moves more than a billion gallons of ethanol a year from plants
west of the Mississippi to eastern destinations. Eleven additional plants now being
built on the Norfolk Southern line and on connecting short-line railroads will
produce another 850 million gallons.
Most of the ethanol Norfolk Southern handles moves through terminals, where it is
stored and blended with gasoline. Baltimore’s Thoroughbred Bulk Transfer Terminal
is one of 20 ethanol terminals that Norfolk Southern serves. With new terminals
set to open next year in Florida, Georgia, New Jersey, North Carolina, and Virginia,
Norfolk Southern will be able to provide even more efficient service to customers,
and will help meet the growing demand for ethanol.
6
6
7
A train loaded with coiled steel makes its way from an AK Steel facility in
Middletown, Ohio, to AK Steel’s Rockport Works in Rockport, Ind. Norfolk Southern
hauls more than 40,000 carloads of steel a year to and from Rockport Works.
Norfolk Southern continues to lead the industry in the transportation of steel
and other metals. The railroad serves 19 integrated mills, 17 minimills, more
than 38 major steel processors, and more than 75 steel distribution facilities.
Built in 1998, AK Steel’s Rockport Works steel finishing facility was one of the
largest industrial development projects in the railroad’s history. Norfolk Southern
runs a daily unit train of semifinished steel from AK’s Middletown, Ohio, complex
to its Rockport plant. From there, the railroad moves finished steel to automotive
assembly plants and appliance manufacturers.
Norfolk Southern is working with German steel manufacturer ThyssenKrupp to
support a new processed steel plant being built in Mount Vernon, Ala., in what is
expected to be Norfolk Southern’s largest industrial development project ever
and one of the largest new plant investments in the United States.
For more than two years, a team of Norfolk Southern experts in marketing, industrial
development, finance, ports, and transportation worked with ThyssenKrupp and
state and local authorities to select the site for the state-of-the-art plant. The facility
will use import slabs from ThyssenKrupp’s Brazilian slab mill to produce sheet steel
for the automotive and appliance markets. When production begins in 2010, Thyssen-
Krupp expects to produce more than 5 million tons of processed steel per year.
Norfolk Southern cars carrying John Deere tractors bound for export
and sale to customers overseas move through Altoona. Norfolk Southern
transports thousands of tractors a year from the John Deere plant in
Waterloo, Iowa, to the port of Baltimore.
Anticipating a growing international demand for U.S.-made tractors and other heavy machinery, Norfolk
Southern five years ago began to put a transportation plan in place to handle the traffic. Today, Norfolk
Southern moves tractors, combines, and other agricultural equipment to the port of Baltimore for John Deere,
Case New Holland, and other customers. Norfolk Southern also moves industrial machinery to the port of
Savannah, Ga., for Caterpillar. Since 2002, annual revenue from movements of heavy machinery, mainly
from the Midwest, has increased eightfold.
8
9
9
A train loaded with coiled steel makes its way from an AK Steel facility in
Middletown, Ohio, to AK Steel’s Rockport Works in Rockport, Ind. Norfolk Southern
hauls more than 40,000 carloads of steel a year to and from Rockport Works.
Norfolk Southern continues to lead the industry in the transportation of steel
and other metals. The railroad serves 19 integrated mills, 17 minimills, more
than 38 major steel processors, and more than 75 steel distribution facilities.
Built in 1998, AK Steel’s Rockport Works steel finishing facility was one of the
largest industrial development projects in the railroad’s history. Norfolk Southern
runs a daily unit train of semifinished steel from AK’s Middletown, Ohio, complex
to its Rockport plant. From there, the railroad moves finished steel to automotive
assembly plants and appliance manufacturers.
Norfolk Southern is working with German steel manufacturer ThyssenKrupp to
support a new processed steel plant being built in Mount Vernon, Ala., in what is
expected to be Norfolk Southern’s largest industrial development project ever
and one of the largest new plant investments in the United States.
For more than two years, a team of Norfolk Southern experts in marketing, industrial
development, finance, ports, and transportation worked with ThyssenKrupp and
state and local authorities to select the site for the state-of-the-art plant. The facility
will use import slabs from ThyssenKrupp’s Brazilian slab mill to produce sheet steel
for the automotive and appliance markets. When production begins in 2010, Thyssen-
Krupp expects to produce more than 5 million tons of processed steel per year.
Norfolk Southern cars carrying John Deere tractors bound for export
and sale to customers overseas move through Altoona. Norfolk Southern
transports thousands of tractors a year from the John Deere plant in
Waterloo, Iowa, to the port of Baltimore.
Anticipating a growing international demand for U.S.-made tractors and other heavy machinery, Norfolk
Southern five years ago began to put a transportation plan in place to handle the traffic. Today, Norfolk
Southern moves tractors, combines, and other agricultural equipment to the port of Baltimore for John Deere,
Case New Holland, and other customers. Norfolk Southern also moves industrial machinery to the port of
Savannah, Ga., for Caterpillar. Since 2002, annual revenue from movements of heavy machinery, mainly
from the Midwest, has increased eightfold.
8
9
9
Michael Smith uses a locomotive simulator at the McDonough training
center to sharpen his locomotive operating skills. Each year, nearly 5,000
Norfolk Southern employees attend classes at the training center, where
they learn the fundamentals of operating the railroad.
Training is essential to Norfolk Southern’s operations.
18 consecutive years. At the training facility, safety
For every new hire in the agreement (union) work
is not only taught, it is practiced; McDonough has
force, that training begins in McDonough. New
been injury-free for the last two consecutive years.
employees spend between 40 and 320 hours at
Norfolk Southern’s training facility south of Atlanta.
Trainees in the company’s management and
operations supervisor programs also attend classes
at McDonough.
Training and development does not begin and end with
new hires. Thoroughbred School, Norfolk Southern’s
innovative approach to work-force development,
opened in February 2007. Management employees
from across the country gather in Norfolk for four-day
Safety is a key component of training at McDonough
sessions that help them gain a broader understanding
and a core value that drives Norfolk Southern’s
of the company — from financials to operations to the
success. Norfolk Southern is committed to operating
global economy’s impact on the business. In 2007,
the nation’s safest railroad and takes pride in receiving
2,191 employees — nearly half of all management
the industry’s top award for employee safety for
employees — attended Thoroughbred School.
At the Toyota assembly plant, new vehicles roll onto Norfolk Southern cars.
Norfolk Southern transports 1,500 Toyota Avalons, Camrys, and Solaras a day
from the plant in Georgetown, one of three Toyota plants served by the railroad.
More than 70 percent of automobiles manufactured in North America move via rail.
In 2007, Norfolk Southern moved more than 5 million vehicles from the assembly line
for delivery to dealers. Norfolk Southern serves 28 assembly plants for manufacturers,
including BMW, Chrysler, Ford, GM, Honda, Mercedes-Benz, Mitsubishi, Subaru, and
Toyota. The railroad also is North America’s largest carrier of automotive products,
including vehicles and parts for assembly and the after-market, with 13 of the last
23 assembly plants built in the United States located on Norfolk Southern lines.
Norfolk Southern on the Job: A View from Centralized Yard Operations
Early Tuesday morning, Jim Vance answers a call that comes in to the fourth floor of the
David R. Goode Building in Atlanta. “Norfolk Southern CYO. This is Jim. How may I help you?”
It is one of 10,046 calls that 400 Centralized Yard Operations representatives will receive
or make on behalf of Norfolk Southern’s customers that day. “Our main goal is to keep
freight moving,” says Vance, a 32-year veteran of the railroad.
He takes another call. “Good morning,” Vance says to a customer who asks about a
particular carload. He clicks his mouse, and the information pops up instantly. “Looks
like it departed Birmingham this morning at 8 a.m.,” he tells the customer.
The calls keep coming, and Vance is on a roll. “Did I give my customers the best service
I could? At the end of the day, I can say, ‘Yes, I did.’”
10
10
11
Michael Smith uses a locomotive simulator at the McDonough training
center to sharpen his locomotive operating skills. Each year, nearly 5,000
Norfolk Southern employees attend classes at the training center, where
they learn the fundamentals of operating the railroad.
Training is essential to Norfolk Southern’s operations.
18 consecutive years. At the training facility, safety
For every new hire in the agreement (union) work
is not only taught, it is practiced; McDonough has
force, that training begins in McDonough. New
been injury-free for the last two consecutive years.
employees spend between 40 and 320 hours at
Norfolk Southern’s training facility south of Atlanta.
Trainees in the company’s management and
operations supervisor programs also attend classes
at McDonough.
Training and development does not begin and end with
new hires. Thoroughbred School, Norfolk Southern’s
innovative approach to work-force development,
opened in February 2007. Management employees
from across the country gather in Norfolk for four-day
Safety is a key component of training at McDonough
sessions that help them gain a broader understanding
and a core value that drives Norfolk Southern’s
of the company — from financials to operations to the
success. Norfolk Southern is committed to operating
global economy’s impact on the business. In 2007,
the nation’s safest railroad and takes pride in receiving
2,191 employees — nearly half of all management
the industry’s top award for employee safety for
employees — attended Thoroughbred School.
At the Toyota assembly plant, new vehicles roll onto Norfolk Southern cars.
Norfolk Southern transports 1,500 Toyota Avalons, Camrys, and Solaras a day
from the plant in Georgetown, one of three Toyota plants served by the railroad.
More than 70 percent of automobiles manufactured in North America move via rail.
In 2007, Norfolk Southern moved more than 5 million vehicles from the assembly line
for delivery to dealers. Norfolk Southern serves 28 assembly plants for manufacturers,
including BMW, Chrysler, Ford, GM, Honda, Mercedes-Benz, Mitsubishi, Subaru, and
Toyota. The railroad also is North America’s largest carrier of automotive products,
including vehicles and parts for assembly and the after-market, with 13 of the last
23 assembly plants built in the United States located on Norfolk Southern lines.
Norfolk Southern on the Job: A View from Centralized Yard Operations
Early Tuesday morning, Jim Vance answers a call that comes in to the fourth floor of the
David R. Goode Building in Atlanta. “Norfolk Southern CYO. This is Jim. How may I help you?”
It is one of 10,046 calls that 400 Centralized Yard Operations representatives will receive
or make on behalf of Norfolk Southern’s customers that day. “Our main goal is to keep
freight moving,” says Vance, a 32-year veteran of the railroad.
He takes another call. “Good morning,” Vance says to a customer who asks about a
particular carload. He clicks his mouse, and the information pops up instantly. “Looks
like it departed Birmingham this morning at 8 a.m.,” he tells the customer.
The calls keep coming, and Vance is on a roll. “Did I give my customers the best service
I could? At the end of the day, I can say, ‘Yes, I did.’”
10
10
11
Workmen record track dimensions inside the Cowan Tunnel — one of 28
tunnels where vertical clearances will be raised to accommodate double-
stacked container traffic from the East Coast to the Midwest.
Aging highways, increasing roadway congestion, and
surging global trade will require new investment in
rail capacity to keep the nation’s economy growing.
To ensure better service for customers, Norfolk
Southern is partnering with federal, state, and local
governments to design and build major infrastructure
projects that will provide a safer, higher-capacity,
and more fuel-efficient transportation network.
In October 2007, Norfolk Southern began the first
phase of tunnel work on the Heartland Corridor in
partnership with the federal government and the
states of Virginia, Ohio, and West Virginia. In the photo
at right, Norfolk Southern’s Bob Billingsley inspects
track outside the Cowan Tunnel.
In early 2008, work will begin on three other tunnels
in Virginia and on eight tunnels in West Virginia. In
addition, the company plans to increase clearances
on more than a dozen bridges, signals, and sets of
overhead wires in those states and Ohio. When the
project is completed in 2010, trains carrying freight in
double-stacked containers will be able to cut more
than 200 miles and up to a day’s transit time between
As part of the Heartland Corridor project, Norfolk
Southern and the Columbus (Ohio) Regional Airport
Authority together developed the Rickenbacker
Intermodal Terminal. Opening in 2008, the terminal
will increase freight capacity in the region by more
than 40 percent. The CRAA’s adjacent warehouse and
distribution complex will serve as Norfolk Southern’s
first fully integrated intermodal logistics park.
Another proposed public-private partnership with
state and federal governments — the Crescent
Corridor — would link underserved markets in the
12
12
12
the East Coast and the Midwest. The project will provide
Northeast, the mid-Atlantic, and central Southeast with
communities along the corridor with greater access
intermodal rail services. Stretching from Louisiana to
to world markets, divert freight from highways, and
reduce congestion and fuel emissions.
New Jersey, the route could divert in excess of
1 million trucks a year from highways to rail lines.
13
Workmen record track dimensions inside the Cowan Tunnel — one of 28
tunnels where vertical clearances will be raised to accommodate double-
stacked container traffic from the East Coast to the Midwest.
Aging highways, increasing roadway congestion, and
surging global trade will require new investment in
rail capacity to keep the nation’s economy growing.
To ensure better service for customers, Norfolk
Southern is partnering with federal, state, and local
governments to design and build major infrastructure
projects that will provide a safer, higher-capacity,
and more fuel-efficient transportation network.
In October 2007, Norfolk Southern began the first
phase of tunnel work on the Heartland Corridor in
partnership with the federal government and the
states of Virginia, Ohio, and West Virginia. In the photo
at right, Norfolk Southern’s Bob Billingsley inspects
track outside the Cowan Tunnel.
In early 2008, work will begin on three other tunnels
in Virginia and on eight tunnels in West Virginia. In
addition, the company plans to increase clearances
on more than a dozen bridges, signals, and sets of
overhead wires in those states and Ohio. When the
project is completed in 2010, trains carrying freight in
double-stacked containers will be able to cut more
than 200 miles and up to a day’s transit time between
As part of the Heartland Corridor project, Norfolk
Southern and the Columbus (Ohio) Regional Airport
Authority together developed the Rickenbacker
Intermodal Terminal. Opening in 2008, the terminal
will increase freight capacity in the region by more
than 40 percent. The CRAA’s adjacent warehouse and
distribution complex will serve as Norfolk Southern’s
first fully integrated intermodal logistics park.
Another proposed public-private partnership with
state and federal governments — the Crescent
Corridor — would link underserved markets in the
12
12
12
the East Coast and the Midwest. The project will provide
Northeast, the mid-Atlantic, and central Southeast with
communities along the corridor with greater access
intermodal rail services. Stretching from Louisiana to
to world markets, divert freight from highways, and
reduce congestion and fuel emissions.
New Jersey, the route could divert in excess of
1 million trucks a year from highways to rail lines.
13
A train carrying coal from Pennsylvania’s Monongahela Valley snakes its way
along the Horseshoe Curve for delivery to Constellation Energy in Baltimore.
Norfolk Southern trains transport 27 million tons of coal from the Mon each year.
Norfolk Southern trains moved 143 million tons of
In 2007, service to coal shippers and receivers improved
utility coal in 2007 — enough to power more than
with the introduction of regularly scheduled service
32 million homes in the United States for a year.
and the addition of higher-capacity coal cars to the
Norfolk Southern delivers coal to utilities as well as
Norfolk Southern system. In another development,
steel producers, industrial users, and to the ports of
electronically controlled brakes were installed on coal
Baltimore and Norfolk, Va., for export to foreign countries.
trains operating between coal mines in southwestern
In 2007, the weaker U.S. dollar, congestion at Australian
Pennsylvania and the Keystone Generating Station
ports, and rising global demand led to increased
in Shelocta, Pa. The brakes improve train handling,
volumes of export coal, while temperate weather in
safety, and efficiency.
the United States lessened the domestic demand.
Norfolk Southern on the Job:
A View from the Dispatch Center
In the Pittsburgh Dispatch Center, one of 11 dispatch
centers on the Norfolk Southern network, Brenda
Watkins helps ensure that trains carrying coal from the
Monongahela Valley operate safely and efficiently.
As one of 50 dispatchers in Pittsburgh, Brenda’s job is a
complex balancing act of directing the movements of 20
trains in a typical eight-hour shift. Constant communication,
she says, is the critical link to doing her job well.
With more than 15 years of experience on the railroad,
Brenda says her job gives her the opportunity to “put all of
my knowledge together.” Dispatching is a demanding job,
but one that Brenda clearly enjoys. “It’s like playing with the
world’s largest train system.”
Throughout the network, new technologies are helping
dispatchers perform their jobs even more effectively. One such
technology, Unified Train Control System, will provide for
seamless management of the railroad’s transportation network.
14
15
A train carrying coal from Pennsylvania’s Monongahela Valley snakes its way
along the Horseshoe Curve for delivery to Constellation Energy in Baltimore.
Norfolk Southern trains transport 27 million tons of coal from the Mon each year.
Norfolk Southern trains moved 143 million tons of
In 2007, service to coal shippers and receivers improved
utility coal in 2007 — enough to power more than
with the introduction of regularly scheduled service
32 million homes in the United States for a year.
and the addition of higher-capacity coal cars to the
Norfolk Southern delivers coal to utilities as well as
Norfolk Southern system. In another development,
steel producers, industrial users, and to the ports of
electronically controlled brakes were installed on coal
Baltimore and Norfolk, Va., for export to foreign countries.
trains operating between coal mines in southwestern
In 2007, the weaker U.S. dollar, congestion at Australian
Pennsylvania and the Keystone Generating Station
ports, and rising global demand led to increased
in Shelocta, Pa. The brakes improve train handling,
volumes of export coal, while temperate weather in
safety, and efficiency.
the United States lessened the domestic demand.
Norfolk Southern on the Job:
A View from the Dispatch Center
In the Pittsburgh Dispatch Center, one of 11 dispatch
centers on the Norfolk Southern network, Brenda
Watkins helps ensure that trains carrying coal from the
Monongahela Valley operate safely and efficiently.
As one of 50 dispatchers in Pittsburgh, Brenda’s job is a
complex balancing act of directing the movements of 20
trains in a typical eight-hour shift. Constant communication,
she says, is the critical link to doing her job well.
With more than 15 years of experience on the railroad,
Brenda says her job gives her the opportunity to “put all of
my knowledge together.” Dispatching is a demanding job,
but one that Brenda clearly enjoys. “It’s like playing with the
world’s largest train system.”
Throughout the network, new technologies are helping
dispatchers perform their jobs even more effectively. One such
technology, Unified Train Control System, will provide for
seamless management of the railroad’s transportation network.
14
15
At the Whitaker Intermodal Terminal, a crane transfers a container from truck
to rail. Over the last five years, intermodal has been the fastest-growing part
of Norfolk Southern’s business.
A growing world population, an increasingly global
economy, mounting congestion on U.S. highways, and
the need for improved fuel efficiency — all are factors
that are expected to help Norfolk Southern’s intermodal
business continue to grow. In 2007, volumes fell slightly
because of slowing housing and automotive markets and
excess truck capacity. In the future, Norfolk Southern
expects increasing demand for transportation of
containerized freight as Asian economies continue to
develop, the United States returns to a pattern of robust
consumption, and U.S. exports continue to increase.
Anticipating that growth, Norfolk Southern is
working continually to improve service and expand
intermodal capacity.
In 2007, Norfolk Southern joined with Union Pacific
to introduce a shorter and faster route between Los
Angeles and the Southeast. The new route moves
over the Meridian Speedway and through Shreveport,
La. It is almost 150 miles shorter than the previous
route and faster than any other service offering in the
market. The two railroads plan to expand this already-
reliable service and further reduce transit times.
Improvements to the Meridian Speedway, a joint venture
between Norfolk Southern and Kansas City Southern,
will create additional capacity that is expected to allow
the route to handle international traffic as well.
16
16
17
At the Whitaker Intermodal Terminal, a crane transfers a container from truck
to rail. Over the last five years, intermodal has been the fastest-growing part
of Norfolk Southern’s business.
A growing world population, an increasingly global
economy, mounting congestion on U.S. highways, and
the need for improved fuel efficiency — all are factors
that are expected to help Norfolk Southern’s intermodal
business continue to grow. In 2007, volumes fell slightly
because of slowing housing and automotive markets and
excess truck capacity. In the future, Norfolk Southern
expects increasing demand for transportation of
containerized freight as Asian economies continue to
develop, the United States returns to a pattern of robust
consumption, and U.S. exports continue to increase.
Anticipating that growth, Norfolk Southern is
working continually to improve service and expand
intermodal capacity.
In 2007, Norfolk Southern joined with Union Pacific
to introduce a shorter and faster route between Los
Angeles and the Southeast. The new route moves
over the Meridian Speedway and through Shreveport,
La. It is almost 150 miles shorter than the previous
route and faster than any other service offering in the
market. The two railroads plan to expand this already-
reliable service and further reduce transit times.
Improvements to the Meridian Speedway, a joint venture
between Norfolk Southern and Kansas City Southern,
will create additional capacity that is expected to allow
the route to handle international traffic as well.
16
16
17
A Graphic Packaging employee drives a load of rolled paper into a boxcar.
Norfolk Southern hauls finished paper, wood chips, scrap paper, and kaolin
clay to and from Graphic Packaging mills.
In addition to serving paper mills, paper distribution centers, and sawmills, as well as
transporting lumber, Norfolk Southern’s paper, clay, and forest products business
includes the transportation of construction and demolition debris and moving municipal
solid waste to certified disposal sites. Norfolk Southern serves more than 60 paper mills
and more than 250 paper distribution centers, saw mills, and other construction-related
facilities. In 2007, freight volumes for the group were pressured by a weak housing market,
the falling U.S. dollar, and increased trucking capacity available to paper customers.
Despite these challenges, Norfolk Southern gained new export pulp business and
increased calcium carbonate shipments to paper manufacturers. Additional new lumber
business came from the opening of a Menards distribution center in northwest Ohio.
Norfolk Southern also realized additional revenue and more volume from the opening
of two landfills in Ohio and West Virginia for municipal solid waste and demolition and
debris shipments.
A Norfolk Southern locomotive equipped with state-of-the-art “gen-set”
engines, which save fuel and help reduce carbon emissions, begins work
at Conway Yard.
Norfolk Southern’s continuing commitment to
that saves fuel, reduces emissions, and provides
environmental excellence is enhancing the
for greater efficiency.
company’s position as an industry leader in
corporate sustainability.
Another way the railroad is helping to save fuel and
achieve the most efficient train operations is with
The company in 2007 named its first-ever corporate
a technology known as LEADER®, which uses an
sustainability officer to measure and minimize the
on-board computer to calculate the optimum speed
railroad’s environmental footprint and to strengthen
at which a train should travel.
relationships with environmental stakeholders.
The goal is to achieve industry leadership in fuel
conservation, emissions reduction, efficient energy
use, recycling, use of renewable materials, and
environmental partnerships.
Railroads are three times more fuel-efficient
than trucks, making them the cleaner and greener
choice for moving goods.
In addition to increasing fuel efficiency, the railroad
is dramatically reducing the amount of electricity it
uses in lighting its entire operation.
The company has a long-standing commitment to
recycle metals, oils, batteries, and cross ties and has
partnered with communities to relieve congestion on
key transportation corridors. These represent just
some of the many ways Norfolk Southern is working
Norfolk Southern is equipping some of its locomo-
to conduct its business in accordance with the highest
tives with generator-set engines — a technology
sustainability practices for the benefit of communities,
customers, investors, and employees.
18
19
19
A Graphic Packaging employee drives a load of rolled paper into a boxcar.
Norfolk Southern hauls finished paper, wood chips, scrap paper, and kaolin
clay to and from Graphic Packaging mills.
In addition to serving paper mills, paper distribution centers, and sawmills, as well as
transporting lumber, Norfolk Southern’s paper, clay, and forest products business
includes the transportation of construction and demolition debris and moving municipal
solid waste to certified disposal sites. Norfolk Southern serves more than 60 paper mills
and more than 250 paper distribution centers, saw mills, and other construction-related
facilities. In 2007, freight volumes for the group were pressured by a weak housing market,
the falling U.S. dollar, and increased trucking capacity available to paper customers.
Despite these challenges, Norfolk Southern gained new export pulp business and
increased calcium carbonate shipments to paper manufacturers. Additional new lumber
business came from the opening of a Menards distribution center in northwest Ohio.
Norfolk Southern also realized additional revenue and more volume from the opening
of two landfills in Ohio and West Virginia for municipal solid waste and demolition and
debris shipments.
A Norfolk Southern locomotive equipped with state-of-the-art “gen-set”
engines, which save fuel and help reduce carbon emissions, begins work
at Conway Yard.
Norfolk Southern’s continuing commitment to
that saves fuel, reduces emissions, and provides
environmental excellence is enhancing the
for greater efficiency.
company’s position as an industry leader in
corporate sustainability.
Another way the railroad is helping to save fuel and
achieve the most efficient train operations is with
The company in 2007 named its first-ever corporate
a technology known as LEADER®, which uses an
sustainability officer to measure and minimize the
on-board computer to calculate the optimum speed
railroad’s environmental footprint and to strengthen
at which a train should travel.
relationships with environmental stakeholders.
The goal is to achieve industry leadership in fuel
conservation, emissions reduction, efficient energy
use, recycling, use of renewable materials, and
environmental partnerships.
Railroads are three times more fuel-efficient
than trucks, making them the cleaner and greener
choice for moving goods.
In addition to increasing fuel efficiency, the railroad
is dramatically reducing the amount of electricity it
uses in lighting its entire operation.
The company has a long-standing commitment to
recycle metals, oils, batteries, and cross ties and has
partnered with communities to relieve congestion on
key transportation corridors. These represent just
some of the many ways Norfolk Southern is working
Norfolk Southern is equipping some of its locomo-
to conduct its business in accordance with the highest
tives with generator-set engines — a technology
sustainability practices for the benefit of communities,
customers, investors, and employees.
18
19
19
Bushels of corn are loaded from a grain elevator into Norfolk Southern cars.
When assembled, the 75-car train will make its way to Forsyth, Ga., carrying
295,112 bushels of corn for poultry feed.
A core part of Norfolk Southern’s agriculture business
is the shipment of corn from the Midwest to the
animal feeding, processing, and export markets in
the East and Southeast. In the Midwest, Norfolk
Southern also runs a brisk business carrying
corn and soybeans from grain elevators to large
processing plants that make everything from corn
syrup and various feed ingredients to biodiesel
products and ethanol.
The country’s increasing demand for ethanol and
other renewable fuels is driving business for
Norfolk Southern — in the transport of ethanol as
well as the corn and soybeans needed for its
production, and the fertilizer to grow these crops.
Oct. 23, 2007. It was one day in the operation of
Norfolk Southern — a day on which the railroad
moved tons of commodities across its network
without a single reportable employee injury. While
only a snapshot, the success of that one day
multiplied by 365 captures a picture of the superior
performance and strong financial results achieved
by the company in 2007. It was a good year for the
Thoroughbred, a year that saw increased new
business, increased revenue, and increased
dividends; a year in which the railroad operated
more efficiently than ever before on its way to
becoming the safest, most customer-focused, and
successful transportation company in the world.
20
21
Bushels of corn are loaded from a grain elevator into Norfolk Southern cars.
When assembled, the 75-car train will make its way to Forsyth, Ga., carrying
295,112 bushels of corn for poultry feed.
A core part of Norfolk Southern’s agriculture business
is the shipment of corn from the Midwest to the
animal feeding, processing, and export markets in
the East and Southeast. In the Midwest, Norfolk
Southern also runs a brisk business carrying
corn and soybeans from grain elevators to large
processing plants that make everything from corn
syrup and various feed ingredients to biodiesel
products and ethanol.
The country’s increasing demand for ethanol and
other renewable fuels is driving business for
Norfolk Southern — in the transport of ethanol as
well as the corn and soybeans needed for its
production, and the fertilizer to grow these crops.
Oct. 23, 2007. It was one day in the operation of
Norfolk Southern — a day on which the railroad
moved tons of commodities across its network
without a single reportable employee injury. While
only a snapshot, the success of that one day
multiplied by 365 captures a picture of the superior
performance and strong financial results achieved
by the company in 2007. It was a good year for the
Thoroughbred, a year that saw increased new
business, increased revenue, and increased
dividends; a year in which the railroad operated
more efficiently than ever before on its way to
becoming the safest, most customer-focused, and
successful transportation company in the world.
20
21
Thoroughbred Values
SPIRIT
Safety. Performance. Integrity.
Respect. Innovation. Teamwork.
Safety We put safety first by taking care of the people around us and following the rules.
Performance We are performance driven and committed to providing quality customer
service. We act on facts and are accountable for results.
Integrity We do the right thing. We are open, fair, honest, and straightforward.
Respect We believe in the importance of all of our stakeholders.
We value the ideas and beliefs of our co-workers.
Innovation We constantly seek new ideas and creative solutions to business challenges.
Teamwork We believe that working together always produces the best results.
Officers
(as of Dec. 31, 2007)
Charles W. Moorman
Chairman, President and
Chief Executive Officer
Stephen C. Tobias
Vice Chairman and
Chief Operating Officer
Deborah H. Butler
Executive Vice President Planning
and Chief Information Officer
James A. Hixon
Executive Vice President Law
and Corporate Relations
Mark D. Manion
Executive Vice President Operations
John P. Rathbone
Executive Vice President Administration
Donald W. Seale
Executive Vice President
and Chief Marketing Officer
James A. Squires
Executive Vice President Finance
and Chief Financial Officer
Daniel D. Smith
Senior Vice President Energy
and Properties
James E. Carter, Jr.
Vice President Internal Audit
Joseph C. Dimino
Vice President Compliance
Timothy J. Drake
Vice President Engineering
Mark R. MacMahon
Vice President Labor Relations
Bruno Maestri
Vice President Government Relations
Cindy C. Earhart
Vice President Human Resources
Robert E. Martínez
Vice President Business Development
Fredric M. Ehlers
Vice President Customer Service
Daniel M. Mazur
Vice President Strategic Planning
Terry N. Evans
Vice President Operations
Planning and Budget
William A. Galanko
Vice President Law
Tim A. Heilig
Vice President Mechanical
Robert E. Huffman
Vice President Intermodal Operations
Robert M. Kesler, Jr.
Vice President Taxation
David T. Lawson
Vice President Industrial Products
H. Craig Lewis
Vice President Corporate Affairs,
Philadelphia
Michael R. McClellan
Vice President Intermodal
and Automotive Marketing
William J. Romig
Vice President and Treasurer
Marta R. Stewart
Vice President and Controller
Gerhard A. Thelen
Vice President Operations
Planning and Support
Charles J. Wehrmeister
Vice President Safety and Environmental
Thomas G. Werner
Vice President Information Technology
F. Blair Wimbush
Vice President Real Estate and
Corporate Sustainability Officer
Dezora M. Martin
Corporate Secretary
Equal Employment Opportunity Policy
Norfolk Southern Corporation’s policy is to comply with all applicable laws, regulations and executive orders
concerning equal employment opportunity and nondiscrimination and to offer employment on the basis of
qualification and performance, regardless of race, religion, color, national origin, gender, age, sexual orientation,
veteran status, the presence of a disability, or any other legally protected status.
22
22
23
Thoroughbred Values
SPIRIT
Safety. Performance. Integrity.
Respect. Innovation. Teamwork.
Safety We put safety first by taking care of the people around us and following the rules.
Performance We are performance driven and committed to providing quality customer
service. We act on facts and are accountable for results.
Integrity We do the right thing. We are open, fair, honest, and straightforward.
Respect We believe in the importance of all of our stakeholders.
We value the ideas and beliefs of our co-workers.
Innovation We constantly seek new ideas and creative solutions to business challenges.
Teamwork We believe that working together always produces the best results.
Officers
(as of Dec. 31, 2007)
Charles W. Moorman
Chairman, President and
Chief Executive Officer
Stephen C. Tobias
Vice Chairman and
Chief Operating Officer
Deborah H. Butler
Executive Vice President Planning
and Chief Information Officer
James A. Hixon
Executive Vice President Law
and Corporate Relations
Mark D. Manion
Executive Vice President Operations
John P. Rathbone
Executive Vice President Administration
Donald W. Seale
Executive Vice President
and Chief Marketing Officer
James A. Squires
Executive Vice President Finance
and Chief Financial Officer
Daniel D. Smith
Senior Vice President Energy
and Properties
James E. Carter, Jr.
Vice President Internal Audit
Joseph C. Dimino
Vice President Compliance
Timothy J. Drake
Vice President Engineering
Mark R. MacMahon
Vice President Labor Relations
Bruno Maestri
Vice President Government Relations
Cindy C. Earhart
Vice President Human Resources
Robert E. Martínez
Vice President Business Development
Fredric M. Ehlers
Vice President Customer Service
Daniel M. Mazur
Vice President Strategic Planning
Terry N. Evans
Vice President Operations
Planning and Budget
William A. Galanko
Vice President Law
Tim A. Heilig
Vice President Mechanical
Robert E. Huffman
Vice President Intermodal Operations
Robert M. Kesler, Jr.
Vice President Taxation
David T. Lawson
Vice President Industrial Products
H. Craig Lewis
Vice President Corporate Affairs,
Philadelphia
Michael R. McClellan
Vice President Intermodal
and Automotive Marketing
William J. Romig
Vice President and Treasurer
Marta R. Stewart
Vice President and Controller
Gerhard A. Thelen
Vice President Operations
Planning and Support
Charles J. Wehrmeister
Vice President Safety and Environmental
Thomas G. Werner
Vice President Information Technology
F. Blair Wimbush
Vice President Real Estate and
Corporate Sustainability Officer
Dezora M. Martin
Corporate Secretary
Equal Employment Opportunity Policy
Norfolk Southern Corporation’s policy is to comply with all applicable laws, regulations and executive orders
concerning equal employment opportunity and nondiscrimination and to offer employment on the basis of
qualification and performance, regardless of race, religion, color, national origin, gender, age, sexual orientation,
veteran status, the presence of a disability, or any other legally protected status.
22
22
23
Board of Directors
(as of Dec. 31, 2007)
Gerald L. Baliles, 67, of Charlottesville, Va., has been director of
the Miller Center of Public Affairs at the University of Virginia since
April 2006. He is a former governor and attorney general of Virginia.
His board service began in 1990; his current term expires in 2008.
Committees: Executive, Finance (chairman), Governance and Nominating
Daniel A. Carp, 59, of Naples, Fla., is nonexecutive chairman
of Delta Air Lines, Inc., and formerly served as chairman and chief
executive officer of Eastman Kodak Company. His board service
began in January 2006; his current term expires in 2009.
Committees: Audit, Compensation
Gene R. Carter, 68, of Spotsylvania, Va., is executive director
and chief executive officer of the Association for Supervision and
Curriculum Development, one of the world’s largest international
education associations. His board service began in 1992; his
current term expires in 2008.
Committee: Audit, Compensation (chairman), Executive
Alston D. Correll, 66, of Atlanta, became chairman of Atlanta
Equity Investors, LLC, a private equity firm, in September 2007,
and is chairman emeritus of Georgia-Pacific Corporation. His board
service began in 2000; his current term expires in 2010.
Committees: Compensation, Governance and Nominating
Landon Hilliard, 68, of Oyster Bay Cove, N.Y., is a partner of
Brown Brothers Harriman & Co., a private bank in New York City.
His board service began in 1992; his current term expires in 2010.
Committees: Executive, Finance, Governance and Nominating
(chairman)
Burton M. Joyce, 65, of South Pasadena, Fla., is former
chairman of IPSCO Inc., a leading steel producer. His board service
began in November 2003; his current term expires in 2010.
Committees: Audit, Compensation
Steven F. Leer, 55, of St. Louis, is chairman and chief executive
officer of Arch Coal, Inc., one of the nation’s largest coal
producers. His board service began in 1999; his current term
expires in 2009.
Committees: Finance, Governance and Nominating
Charles W. Moorman, 55, of Virginia Beach, Va., is
chairman, president and chief executive officer of Norfolk Southern
Corporation. His board service began in 2005; his current term
expires in 2009.
Committee: Executive (chairman)
Jane Margaret O’Brien, 54, of St. Mary’s City, Md., is
president of St. Mary’s College of Maryland. Her board service
began in 1994; she resigned from the board effective Jan. 31, 2008.
Committees: Audit (chairwoman), Executive, Finance
J. Paul Reason, 66, Admiral, USN, retired, of Washington,
D.C., is a member of the Naval Studies Board at the National
Academy of Sciences. His board service began in 2002; his
current term expires in 2008.
Committees: Audit, Finance
Members of the board of directors of Norfolk Southern are (left to right): Daniel A. Carp; Steven F. Leer; Alston D. Correll; J. Paul Reason;
Charles W. Moorman; Burton M. Joyce; Landon Hilliard; Gene R. Carter; Gerald L. Baliles; Jane Margaret O’Brien.
Stockholder Information
Common Stock
Ticker symbol: NSC
Common stock of Norfolk Southern Corporation is listed and traded
on the New York Stock Exchange.
Publications
Upon written request, the corporation’s annual and quarterly
reports on Forms 10-K and 10-Q will be furnished free to
stockholders. Write to: Corporate Communications Department,
Norfolk Southern Corporation, Three Commercial Place, Norfolk,
Va. 23510-9227.
A notice and proxy statement for the annual meeting of stockholders
are furnished to stockholders in advance of the meeting.
Upon request, a stockholder may receive a printed copy of the
Corporate Governance Guidelines, board committee charters,
Code of Ethics, and Code of Ethical 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.
Ethics & Compliance Hotline
High ethical standards always have been key to Norfolk 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, accounting,
internal controls or auditing matters is encouraged to report such
information to the Ethics & Compliance Hotline, 800.732.9279.
Reports may be made anonymously and without fear of retaliation.
Dividends
At its January 2008 meeting, the corporation’s board of directors
declared a quarterly dividend of 29 cents per share on its
common stock, payable on March 10, 2008, to stockholders
of record on Feb. 1, 2008.
Norfolk Southern Corporation usually pays quarterly dividends
on its common stock on or about March 10, June 10, Sept. 10
and Dec. 10, when and if declared by the board of directors to
stockholders of record. The corporation has paid 102 consecutive
quarterly dividends since its inception in 1982.
Annual Meeting
May 8, 2008, at 10 a.m. EDT
Kaufman Theatre, Chrysler Museum of Art
245 West Olney Road
Norfolk, Va. 23510
Account Assistance
For assistance with lost stock certificates, transfer requirements
and the Dividend Reinvestment Plan, contact:
Registrar and Transfer Agent
The Bank of New York
101 Barclay St.—11E
New York, N.Y. 10286
866.272.9472
For assistance with address changes, dividend checks and direct
deposit of dividends, contact:
Assistant Corporate Secretary Stockholder Records
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Va. 23510-9219
800.531.6757
Dividend Reinvestment Plan
Stockholders whose names appear on their stock certificates (not
a street or broker name) are eligible to participate in the Dividend
Reinvestment Plan.
The plan provides a convenient, economical and systematic method
of acquiring additional shares of the corporation’s common stock by
permitting eligible stockholders of record to reinvest dividends. The
plan’s administrator is The Bank of New York.
For additional information, dial 866.272.9472.
Financial Inquiries
James A. Squires
Executive Vice President
Finance and
Chief Financial Officer
Norfolk Southern Corp.
Three Commercial Place
Norfolk, Va. 23510-9215
757.629.2845
Investor Inquiries
Leanne D. Marilley
Director Investor Relations
Norfolk Southern Corp.
Three Commercial Place
Norfolk, Va. 23510-9215
757.629.2861
Corporate Offices
Executive Offices
Norfolk Southern Corp.
Three Commercial Place
Norfolk, Va. 23510-9227
757.629.2600
Regional Offices
1200 Peachtree St. N.E.
Atlanta, Ga. 30309
110 Franklin Road S.E.
Roanoke, Va. 24042
Annual Report
Requests & Information
800.531.6757
24
25
Board of Directors
(as of Dec. 31, 2007)
Gerald L. Baliles, 67, of Charlottesville, Va., has been director of
the Miller Center of Public Affairs at the University of Virginia since
April 2006. He is a former governor and attorney general of Virginia.
His board service began in 1990; his current term expires in 2008.
Committees: Executive, Finance (chairman), Governance and Nominating
Daniel A. Carp, 59, of Naples, Fla., is nonexecutive chairman
of Delta Air Lines, Inc., and formerly served as chairman and chief
executive officer of Eastman Kodak Company. His board service
began in January 2006; his current term expires in 2009.
Committees: Audit, Compensation
Gene R. Carter, 68, of Spotsylvania, Va., is executive director
and chief executive officer of the Association for Supervision and
Curriculum Development, one of the world’s largest international
education associations. His board service began in 1992; his
current term expires in 2008.
Committee: Audit, Compensation (chairman), Executive
Alston D. Correll, 66, of Atlanta, became chairman of Atlanta
Equity Investors, LLC, a private equity firm, in September 2007,
and is chairman emeritus of Georgia-Pacific Corporation. His board
service began in 2000; his current term expires in 2010.
Committees: Compensation, Governance and Nominating
Landon Hilliard, 68, of Oyster Bay Cove, N.Y., is a partner of
Brown Brothers Harriman & Co., a private bank in New York City.
His board service began in 1992; his current term expires in 2010.
Committees: Executive, Finance, Governance and Nominating
(chairman)
Burton M. Joyce, 65, of South Pasadena, Fla., is former
chairman of IPSCO Inc., a leading steel producer. His board service
began in November 2003; his current term expires in 2010.
Committees: Audit, Compensation
Steven F. Leer, 55, of St. Louis, is chairman and chief executive
officer of Arch Coal, Inc., one of the nation’s largest coal
producers. His board service began in 1999; his current term
expires in 2009.
Committees: Finance, Governance and Nominating
Charles W. Moorman, 55, of Virginia Beach, Va., is
chairman, president and chief executive officer of Norfolk Southern
Corporation. His board service began in 2005; his current term
expires in 2009.
Committee: Executive (chairman)
Jane Margaret O’Brien, 54, of St. Mary’s City, Md., is
president of St. Mary’s College of Maryland. Her board service
began in 1994; she resigned from the board effective Jan. 31, 2008.
Committees: Audit (chairwoman), Executive, Finance
J. Paul Reason, 66, Admiral, USN, retired, of Washington,
D.C., is a member of the Naval Studies Board at the National
Academy of Sciences. His board service began in 2002; his
current term expires in 2008.
Committees: Audit, Finance
Members of the board of directors of Norfolk Southern are (left to right): Daniel A. Carp; Steven F. Leer; Alston D. Correll; J. Paul Reason;
Charles W. Moorman; Burton M. Joyce; Landon Hilliard; Gene R. Carter; Gerald L. Baliles; Jane Margaret O’Brien.
Stockholder Information
Common Stock
Ticker symbol: NSC
Common stock of Norfolk Southern Corporation is listed and traded
on the New York Stock Exchange.
Publications
Upon written request, the corporation’s annual and quarterly
reports on Forms 10-K and 10-Q will be furnished free to
stockholders. Write to: Corporate Communications Department,
Norfolk Southern Corporation, Three Commercial Place, Norfolk,
Va. 23510-9227.
A notice and proxy statement for the annual meeting of stockholders
are furnished to stockholders in advance of the meeting.
Upon request, a stockholder may receive a printed copy of the
Corporate Governance Guidelines, board committee charters,
Code of Ethics, and Code of Ethical 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.
Ethics & Compliance Hotline
High ethical standards always have been key to Norfolk 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, accounting,
internal controls or auditing matters is encouraged to report such
information to the Ethics & Compliance Hotline, 800.732.9279.
Reports may be made anonymously and without fear of retaliation.
Dividends
At its January 2008 meeting, the corporation’s board of directors
declared a quarterly dividend of 29 cents per share on its
common stock, payable on March 10, 2008, to stockholders
of record on Feb. 1, 2008.
Norfolk Southern Corporation usually pays quarterly dividends
on its common stock on or about March 10, June 10, Sept. 10
and Dec. 10, when and if declared by the board of directors to
stockholders of record. The corporation has paid 102 consecutive
quarterly dividends since its inception in 1982.
Annual Meeting
May 8, 2008, at 10 a.m. EDT
Kaufman Theatre, Chrysler Museum of Art
245 West Olney Road
Norfolk, Va. 23510
Account Assistance
For assistance with lost stock certificates, transfer requirements
and the Dividend Reinvestment Plan, contact:
Registrar and Transfer Agent
The Bank of New York
101 Barclay St.—11E
New York, N.Y. 10286
866.272.9472
For assistance with address changes, dividend checks and direct
deposit of dividends, contact:
Assistant Corporate Secretary Stockholder Records
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Va. 23510-9219
800.531.6757
Dividend Reinvestment Plan
Stockholders whose names appear on their stock certificates (not
a street or broker name) are eligible to participate in the Dividend
Reinvestment Plan.
The plan provides a convenient, economical and systematic method
of acquiring additional shares of the corporation’s common stock by
permitting eligible stockholders of record to reinvest dividends. The
plan’s administrator is The Bank of New York.
For additional information, dial 866.272.9472.
Financial Inquiries
James A. Squires
Executive Vice President
Finance and
Chief Financial Officer
Norfolk Southern Corp.
Three Commercial Place
Norfolk, Va. 23510-9215
757.629.2845
Investor Inquiries
Leanne D. Marilley
Director Investor Relations
Norfolk Southern Corp.
Three Commercial Place
Norfolk, Va. 23510-9215
757.629.2861
Corporate Offices
Executive Offices
Norfolk Southern Corp.
Three Commercial Place
Norfolk, Va. 23510-9227
757.629.2600
Regional Offices
1200 Peachtree St. N.E.
Atlanta, Ga. 30309
110 Franklin Road S.E.
Roanoke, Va. 24042
Annual Report
Requests & Information
800.531.6757
24
25
Our Vision
Be the safest, most customer-focused, and
successful transportation company in the world
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Va. 23510-9217
www.nscorp.com
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, 2007
( )
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 checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (X) No ( )
Indicate by checkmark if the registrant is not required to file such reports pursuant to Section 13 or 15(d) of the Act. Yes ( ) No (X)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 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. ( )
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (X) Accelerated filer ( ) Non-accelerated filer ( )
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
The aggregate market value of the voting common equity held by nonaffiliates as of June 29, 2007 was $20,633,804,749 (based on the closing price
as quoted on the New York Stock Exchange on that date).
The number of shares outstanding of each of the registrant's classes of common stock, as of Jan. 31, 2008: 376,332,668 (excluding 20,672,924
shares held by the registrant's consolidated subsidiaries).
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.
Items 1 and 2. Business and Properties
Item 1A.
Item 1B.
Item 3.
Item 4.
Risk Factors
Unresolved Staff Comments
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Executive Officers of the Registrant
Part II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Controls and Procedures
Other Information
Part III. Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director
Independence
Principal Accountant Fees and Services
Part IV. Item 15.
Exhibits and Financial Statement Schedules
Power of Attorney
Signatures
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Page
K3
K13
K15
K16
K16
K17
K19
K20
K22
K39
K40
K77
K77
K77
K78
K78
K78
K81
K81
K82
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K92
PART I
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 1. Business. and Item 2. Properties.
GENERAL - Norfolk Southern Corporation (Norfolk Southern) is a Norfolk, Virginia based company that
controls a major freight railroad, Norfolk Southern Railway Company. Norfolk Southern Railway Company is
primarily engaged in the rail transportation of raw materials, intermediate products and finished goods primarily
in the Southeast, East and Midwest and, via interchange with rail carriers, to and from the rest of the United
States. Norfolk Southern also transports overseas freight through several Atlantic and Gulf Coast ports. Norfolk
Southern provides comprehensive logistics services and offers the most extensive intermodal network in the
eastern half of the United States. The common stock of Norfolk Southern is listed on the New York Stock
Exchange (NYSE) under the symbol “NSC.”
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 (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, 2007, 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) (see Note 4 to the Consolidated Financial Statements).
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). In addition, the following documents are available on the company’s website and
in print to any shareholder who requests them:
•
•
•
•
•
Corporate Governance Guidelines
Charters of the Committees of the Board of Directors
The Thoroughbred Code of Ethics for employees
Code of Ethical Conduct for Senior Financial Officers
Categorical Independence Standards for Directors
Unless otherwise indicated, Norfolk Southern and its subsidiaries are referred to collectively as NS.
K3
RAILROAD OPERATIONS – As of Dec. 31, 2007, NS’ railroads operated approximately 21,000 miles of road
in 22 eastern states and the District of Columbia.
The system’s lines 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.
Corridors with heaviest freight volume:
New York City area to Chicago (via Allentown and Pittsburgh)
Chicago to Macon (via Cincinnati, Chattanooga and Atlanta)
Appalachian coal fields of Virginia, West Virginia and Kentucky to Norfolk and Sandusky, OH
Cleveland to Kansas City
Birmingham to Meridian
Memphis to Chattanooga
K4
The miles operated, which include major 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, 2007
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
15,943
4,948
20,891
2,808
1,977
4,785
2,045
417
2,462
8,492
29,288
970
9,462
8,312
37,600
Triple Crown Operations – Triple Crown Services Company (TCSC), NS’ 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
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
2007
196
81.9
$0.0481
Years Ended Dec. 31,
2005
2004
2006
2003
204
84.2
$0.0462
203
81.2
$0.0421
198
77.7
$0.0369
183
73.9
$0.0353
3,066
3,196
3,146
3,347
3,111
72.6%
72.8%
75.2%
76.7%
83.5%1
1Includes $107 million of costs for a voluntary separation program, which added 1.6 percentage points to the ratio.
RAILWAY OPERATING REVENUES -- NS' total railway operating revenues were $9.4 billion in 2007. 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 186.0 million tons in 2007, most of
which originated on NS' lines in West Virginia, Virginia, Pennsylvania and Kentucky. Revenues from coal, coke
and iron ore accounted for about 25% of NS' total railway operating revenues in 2007.
Total coal handled through all system ports in 2007 was 34.1 million tons. Of this total, 13.4 million tons
(including coastwise traffic) moved through Norfolk, Virginia, 2.9 million tons moved through the Baltimore
Terminal, 10.9 million tons moved to various docks on the Ohio River, and 6.9 million tons moved to various
K5
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, Chrysler, Ford Motor
Company, General Motors, Honda, Isuzu, Jaguar, Land Rover, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Saab,
Subaru, Suzuki, Toyota and Volkswagen, and auto parts for Ford Motor Company, General Motors, Mercedes-
Benz and Toyota. The chemicals group includes sulfur and related chemicals, petroleum products, chlorine and
bleaching compounds, plastics, rubber, industrial chemicals, chemical wastes and municipal wastes. The metals
and construction group includes steel, aluminum products, machinery, scrap metals, cement, aggregates, bricks
and minerals. The agriculture, consumer products and government group includes soybeans, wheat, corn,
fertilizer, animal and poultry feed, food oils, flour, beverages, canned goods, sweeteners, consumer products,
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 2007, 142 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 2007 were 2.8 million, the revenue from which accounted for
55% of NS’ total railway operating revenues in 2007.
See the discussion of general merchandise rail traffic by commodity group in Part II, Item 7, “Management's
Discussion and Analysis of Financial Condition and Results of Operations.”
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
2007 were 3.1 million, the revenues from which accounted for 20% 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
Condition and Results of Operations.”
FREIGHT RATES - In 2007, NS' railroads continued their reliance on private contracts and exempt price quotes
as their predominant pricing mechanisms. Thus, a major portion of NS' railroads' freight business is not currently
economically regulated by the government. In general, market forces have been substituted for government
regulation and now are the primary determinant of rail service prices.
In 2006, NS' railroads were found by the STB to be “revenue adequate” based on results for the year 2005. The
STB has not made its revenue adequacy determination for the year 2006. 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.
K6
PASSENGER OPERATIONS
•
Regularly scheduled passenger trains are operated by Amtrak on NS' lines between the following
locations:
- Alexandria, Virginia, and New Orleans, Louisiana
- Raleigh and Charlotte, North Carolina
- Selma and Charlotte, North Carolina
- Chicago, Illinois, and Porter, Indiana
- Chicago, Illinois, and Battle Creek, Michigan
- Chicago, Illinois, and Pittsburgh, Pennsylvania
- Chicago, Illinois, and Detroit, Michigan
- Pittsburgh 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 leases the Chicago to Manhattan, Illinois, line to the Commuter Rail Division of the Regional
Transportation Authority of Northeast Illinois
NS operates freight service over lines with significant ongoing Amtrak and commuter passenger
operations, and is conducting freight operations over trackage owned by:
- Amtrak
- New Jersey Transit
- Southeastern Pennsylvania Transportation Authority
- Metro-North Commuter Railroad Company
- Maryland Department of Transportation
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 2007, no such noncarrier subsidiary or industry segment
grouping of noncarrier subsidiaries met the requirements for a reportable business segment set forth in Statement
of Financial Accounting Standards No. 131.
RAILWAY PROPERTY
The NS railroad system extends across 22 states and the District of Columbia. The railroad infrastructure makes
the company capital intensive with total property of approximately $22 billion.
Capital Expenditures - Capital expenditures for road, equipment and other property for the past five years were
as follows (including capitalized leases):
2007
2006
2005
2004
2003
Capital Expenditures
($ in millions)
$
$
894 $
447
1,341 $
756 $
422
1,178 $
741 $
284
1,025 $
612 $
429
1,041 $
502
218
720
Road and other
property
Equipment
Total
K7
Capital spending and maintenance programs are and have been designed to assure the ability to provide safe,
efficient and reliable transportation services. For 2008, NS has budgeted $1.43 billion of capital expenditures.
On May 1, 2006, NS and Kansas City Southern (KCS) formed a joint venture (MSLLC) pursuant to which NS
intends to contribute $300 million in cash, substantially all of which will be used for capital improvements over a
period of approximately three years, in exchange for a 30% interest in the joint venture. Through Dec. 31, 2007,
NS has contributed $240 million, 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.”
Equipment - As of Dec. 31, 2007, 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
3,593
149
74
3,816
17,153
16,145
8,830
31,335
2,656
177
4,236
80,532
5,274
4,164
171
7,035
1,314
17,958
132
--
--
132
808
2,078
2,805
7,959
1,335
--
20
15,005
3
--
11,413
193
15,826
27,435
(Horsepower)
3,725
149
74
3,948
12,888,500
216,700
--
13,105,200
(Tons)
1,916,374
1,465,342
1,274,667
4,231,932
313,570
--
212,311
9,414,196
17,961
18,223
11,635
39,294
3,991
177
4,256
95,537
5,277
4,164
11,584
7,228
17,140
45,393
* Includes equipment leased to outside parties and equipment subject to equipment trusts,
conditional sale agreements and capitalized leases.
** Includes 60 locomotives and 5,776 freight cars leased from CRC.
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The following table indicates the number and year built for locomotives and freight cars owned at Dec. 31, 2007.
2007 2006
2005
2004
2003
1996-
2002
1991-
1995
1990 &
Before
Total
Year Built
Locomotives:
No. of units
% of fleet
Freight cars:
No. of units
% of fleet
90
2%
143
4%
89
2%
207
5%
1,200
1%
404
1%
89
--%
--
--%
100
3%
--
--%
906
24%
487
13%
1,794
47%
3,816
100%
5,620
7%
5,008
6%
68,211
85%
80,532
100%
The following table shows the average age of NS’ locomotive and freight car fleets at Dec. 31, 2007, and the
number of retirements in 2007:
Average age – in service
Retirements
Average age – retired
Locomotives
Freight Cars
18.1 years
64 units
30.0 years
30.1 years
3,598 units
38.9 years
Between 1988 and 2000, about 29,000 coal cars were rebodied. As a result, the remaining serviceability of the
freight car fleet is greater than may be inferred from the high percentage of freight cars built in earlier years.
Ongoing freight car and locomotive maintenance programs are intended to ensure the highest standards of safety,
reliability, customer satisfaction and equipment marketability. The locomotive bad order ratio includes units out of
service for required inspections every 92 days and program work such as overhauls.
Annual Average Bad Order Ratio
2007
2006
2005
2004
2003
Freight cars
Locomotives
4.9%
5.7%
6.4%
5.7%
6.3%
6.2%
7.4%
6.3%
7.4%
6.2%
Encumbrances - Certain railroad equipment is subject to the prior lien of equipment financing obligations
amounting to approximately $389 million as of Dec. 31, 2007, and $534 million as of Dec. 31, 2006.
Track Maintenance - Of the approximately 38,000 total miles of track operated, NS had responsibility for
maintaining about 29,300 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 136 pounds per
yard. Approximately 45% of NS lines carried 20 million or more gross tons per track mile during 2007.
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The following table summarizes several measurements regarding NS' track roadway additions and replacements
during the past five years:
2007
2006
2005
2004
2003
Track miles of rail installed
Miles of track surfaced
New crossties installed (millions)
401
5,014
2.7
327
4,871
2.7
302
4,663
2.5
246
5,055
2.5
233
5,105
2.8
Microwave System - The NS microwave system, consisting of approximately 7,400 radio route miles, 424 core
stations, 14 secondary stations and 5 passive repeater stations, provides communications between most operating
locations. The microwave system is used primarily for voice communications, VHF radio control circuits, data and
facsimile transmissions, traffic control operations and AEI data transmissions.
Traffic Control - Of the approximately 15,900 route miles owned by NS, about 11,000 miles are signalized,
including 8,000 miles of centralized traffic control (CTC) and 3,000 miles of automatic block signals. Of the
8,000 miles of CTC, approximately 3,000 miles are controlled by data radio originating at 258 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 “Legal Proceedings,” Part I, Item 3; “Personal
Injury, Environmental and Legal Liabilities” in Part II, Item 7, “Management's Discussion and Analysis of
Financial Condition and Results of Operations;” and Note 17 to the Consolidated Financial Statements.
EMPLOYEES – The following table shows the average number of employees and the average cost per employee
for wages and benefits:
2007
2006
2005
2004
2003
Average number of employees
30,806
30,541
30,294
28,475
28,753
Average wage cost per employee
$62,000
$62,000
$61,000
$59,000
$58,000
Average benefit cost per employee
$30,000
$32,000
$29,000
$28,000
$28,000
Approximately 85% of NS' railroad employees are covered by collective bargaining agreements with various
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
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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 Federal Railroad Administration 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, includes exemptions of intermodal business (trailer-on-flat-car, container-on-flat-car), 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 for the duration of the contract. About 87% of NS' freight revenues come from
either exempt traffic or traffic moving under transportation contracts.
Efforts were made in 2007 to re-subject the rail industry to unwarranted federal economic regulation and such
efforts are expected to continue in 2008. 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 continue to
oppose efforts to reimpose unwarranted economic regulation.
COMPETITION - There is continuing strong competition among rail, water and highway carriers. Price is
usually only one factor of importance as shippers and receivers choose a transport mode and specific hauling
company. Inventory carrying costs, service reliability, ease of handling and the desire to avoid loss and damage
during transit are also important considerations, especially for higher-valued finished goods, machinery and
consumer products. Even for raw materials, semifinished goods and work-in-process, users are increasingly
sensitive to transport arrangements that minimize problems at successive production stages.
NS' primary rail competitor is the CSX system; both operate throughout much of the same territory. Other
railroads also operate in parts of the territory. NS also competes with motor carriers, water carriers and with
shippers who have the additional option of handling their own goods in private carriage.
Certain marketing strategies among railroads and between railroads and motor carriers enable carriers to compete
more effectively in specific markets.
SECURITY OF OPERATIONS - NS has taken significant steps to provide enhanced security for the NS rail
system. In particular, NS has developed and implemented a comprehensive security plan that is modeled on and
was developed in conjunction with the security plan prepared by the Association of American Railroads (AAR)
post September 11, 2001. The AAR Security Plan defines four Alert Levels and details the actions and
countermeasures that are being applied across the railroad industry, as the terrorist threat increases or decreases.
The Alert Level actions include countermeasures that will be applied in three general areas: (1) operations
(including transportation, engineering, and mechanical); (2) information technology and communications; and (3)
railroad police. Although security concerns preclude public disclosure of its contents, the NS Departmental
Security Plan outlines the protocol within NS for all concerned to be notified of AAR Alert Level changes. All
NS Operations Division employees are advised by their supervisors or train dispatchers, as appropriate, of any
change in Alert Level and any additional responsibilities they may incur due to such change.
The NS plan also effectively addresses and complies with Department of Transportation security regulations
pertaining to training and security plans with respect to the transportation of hazardous materials. Among more
focused elements of the plan, security awareness training is given to all railroad employees who directly affect
hazardous material transportation safety, and this training is integrated into recurring hazardous material training
and re-certification programs. Toward that end, NS, working closely with the National Transit Institute at Rutgers
University, developed a four-module uniform national training program. More in-depth security training has been
given to those select NS employees who have been given specific security responsibilities, and additional,
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location-specific security plans have been developed for certain metropolitan areas and each of six port facilities
served by NS. With respect to the ports, each facility plan has been approved by the applicable Captain of the
Port and subject to inspection by the U.S. Coast Guard.
Additionally, NS engages in close and regular coordination with numerous federal and state agencies, including the
U.S. Department of Homeland Security (DHS), the Transportation Security Administration (TSA), the Federal
Bureau of Investigation (FBI), the Federal Railroad Administration (FRA), the U.S. Coast Guard, U.S. Customs and
Border Protection and various state Homeland Security offices. As one notable example, an NS Police Special
Agent, under the auspices of the AAR, has been assigned to the National Joint Terrorism Task Force (NJTTF)
operating out of FBI Headquarters in Washington, D.C. to represent and serve as liaison to the North American rail
industry. This arrangement improves logistical flow of vital security and law enforcement information with respect
to the rail industry as a whole, while having the post filled by an NS Special Agent has served to foster a strong
working relationship between NS and the FBI. NS also has become a member of the Customs-Trade Partnership
Against Terrorism (C-TPAT) program sponsored by U.S. Customs. C-TPAT allows NS to work closely with U.S.
Customs and its customers to develop measures that will help ensure the integrity of freight shipments moving on
NS, particularly those moving to or from a foreign country. Based on participation in C-TPAT, NS has ensured that
its plan meets all current applicable security recommendations made by U.S. Customs.
Similarly, NS is guided in its operations by various supplemental security action items issued by DHS and U.S.
Department of Transportation (DOT), U.S. Coast Guard Maritime Security requirements, as well as voluntary
security action items developed in collaboration with TSA, DOT, and the freight railroads in 2006. Many of the
action items are based on lessons learned from DHS and DOT security assessments of rail corridors in High
Threat Urban Areas (HTUA) begun in 2004. Particular attention is paid to: (1) the establishment of secure
storage areas for rail cars carrying toxic-by-inhalation (TIH) materials; (2) the expedited movement of trains
transporting rail cars carrying TIH materials; (3) the minimization of unattended loaded tank cars carrying TIH
materials; and (4) cooperation with federal, state, local and tribal governments to identify, through risk
assessments, those locations where security risks are the highest. These action items and NS’ compliance
initiatives are outlined in the various departmental sections of the NS Departmental Security Plan.
In 2007, through participation in the Transportation Community Awareness and Emergency Response
(TRANSCAER) Program, NS provided rail accident response training to approximately 5,000 emergency
responders, such as local police and fire personnel, representing over 22,000 man-hours of emergency response
training. NS’ other training efforts throughout 2007 included participation in a major security drill with Amtrak
and the State of Delaware in New Castle County, as well as coordinating table-top exercises involving the
“staged” release of TIH shipments with various local, state, and federal agencies. NS also has ongoing programs
to sponsor local emergency responders at tank car emergency response training programs conducted at the AAR
Transportation Technology Center in Pueblo, Colorado, and its annual TRANSCAER Whistle-Stop train makes
stops in numerous cities, its special training cars serving as a resource to an audience of nearly 1,000 emergency
responders annually.
Improvements in equipment design also are expected to play a role in enhancing rail security. The AAR has
developed new tank car specifications for chlorine and anhydrous ammonia which are scheduled to become
effective on March 31, 2008. In the near future, the FRA is also expected to issue a proposed regulation
addressing the redesign of pressurized tank cars used for the transportation of TIH gases and liquids. A
consortium of chemical companies is also studying improvements in tank car head, shell, fittings, and thermal
protection in order to improve the survivability of current tank cars.
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Item 1A. Risk Factors.
NS is subject to significant governmental regulation and legislation over commercial, environmental and
operating matters.
Railroads are subject to commercial regulation by the STB, which has jurisdiction over some routes, fuel
surcharges, 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. In addition, Congress could
enact re-regulation legislation. Economic re-regulation of the rail industry by Congress could have a significant
negative impact on NS’ ability to determine prices for rail services, reduce capital spending on its rail network, and
result in a material adverse effect in the future on NS’ financial position, results of operations or liquidity in a
particular year or quarter.
Railroads are subject to safety and security regulation by the DOT and the DHS, which regulate most aspects of
NS’ operations. Proposed amendments to federal rail safety statutes, if enacted, could add significantly to
operating costs and increase the number of employees NS and other railroads employ. In addition, NS’ failure to
comply with applicable laws and regulations could have a material adverse effect on NS.
NS’ operations are subject to extensive federal, state, and local environmental laws and regulations concerning,
among other things, emissions to the air; discharges to water ways or ground water supplies; handling, storage,
transportation, and disposal of waste and other materials; and the cleanup of hazardous material or petroleum
releases. The risk of incurring environmental liability – for acts and omissions, past, present and future – is
inherent in the railroad business. Several of NS’ subsidiaries own, or have owned, land used as operating
property or held for sale, or which is leased or may have been leased and operated by others. Environmental
problems that are latent or undisclosed may exist on these properties, and NS could incur environmental liabilities
or costs, the amount and materiality of which cannot be estimated reliably at this time, with respect to one or more
of these properties. Moreover, lawsuits and claims involving other unidentified environmental sites and matters
are likely to arise from time to time, and the resulting liabilities could have a significant effect on financial
position, results of operations or liquidity in a particular year or quarter.
NS, as a common carrier by rail, must offer to transport hazardous materials, regardless of risk.
Transportation of certain hazardous materials could create catastrophic losses in terms of personal injury and
property damage costs, and compromise critical parts of our rail network. Legislation introduced in Congress
would give federal regulators increased authority to conduct investigations and levy substantial fines and
penalties in connection with railroad accidents. Under provisions enacted in August 2007, federal regulators are
required to prescribe new regulations governing railroads’ transportation of hazardous materials, including
annual routing analyses, security risk assessments and employee security training. Regulations proposed in late
2006 by DHS mandating chain of custody and security measures likely will cause service degradation and
higher costs for the transportation of toxic inhalation hazard materials. Further, certain local governments have
sought to enact ordinances banning hazardous materials moving by rail within their borders. Some legislators
have contemplated pre-notification requirements for hazardous materials shipments. If promulgated such
ordinances could require the re-routing of hazardous materials shipments, with the potential for significant
additional costs and network inefficiencies.
NS may be affected by terrorism or war. Any terrorist attack, or other similar event, any government response
thereto, and war or risk of war could cause significant business interruption and may adversely affect NS’ results
of operations, financial position, and liquidity in a particular year or quarter. Because NS plays a critical role in
the nation’s transportation system, it could become the target of such an attack or have a significant role in the
government’s preemptive approach or response to an attack or war.
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Although NS currently maintains insurance coverage for third-party liability arising out of war and acts of
terrorism, it maintains only limited insurance coverage for first-party property damage and damage to property
in NS’ care, custody or control caused by certain acts of terrorism. In addition, premiums for some or all of NS’
current insurance programs covering these losses could increase dramatically, or insurance coverage for certain
losses may not be available to NS in the future.
NS may be affected by general economic conditions. Prolonged negative changes in domestic and global
economic conditions affecting the producers and consumers of the commodities NS carries may have an adverse
effect on its operating results, financial position, and liquidity. Economic conditions resulting in bankruptcies of
one or more large customers could have a significant impact on NS’ financial position, results of operations or
liquidity in a particular year or quarter.
NS faces competition from other transportation providers. NS is subject to competition from motor carriers,
railroads, and to a lesser extent, ships, barges, and pipelines, on the basis of transit time, pricing, and the quality
and reliability of service. While NS has used primarily internal resources to build or acquire and maintain its rail
system, trucks and barges have been able to use public rights-of-way maintained by public entities. Any future
improvements or expenditures materially increasing the quality or reducing the cost of alternative modes of
transportation in the regions in which NS operates, or legislation granting materially greater latitude for motor
carriers with respect to size or weight limitations, could have a material adverse effect on its financial position,
results of operations or liquidity in a particular year or quarter.
The operations of carriers with which NS interchanges may adversely affect its operations. NS’ ability to
provide rail service to customers in the U.S. and Canada depends in large part upon its ability to maintain
cooperative relationships with connecting carriers with respect to, among other matters, freight rates, revenue
divisions, car supply and locomotive availability, data exchange and communications, reciprocal switching,
interchange and trackage rights. Deterioration in the operations of, or service provided by connecting carriers,
or in our relationship with those connecting carriers, could result in NS’ inability to meet its customers’
demands or require NS to use alternate train routes, which could result in significant additional costs and
network inefficiencies.
NS relies on technology and technology improvements in its business operations. If NS experiences
significant disruption or failure of one or more of its information technology systems, including computer
hardware, software, and communications equipment, NS could experience a service interruption, security breach,
or other operational difficulties, which could have a material adverse impact on its results of operations, financial
condition, and liquidity in a particular year or quarter. Additionally, if NS does not have sufficient capital to
acquire new technology or if it is unable to implement new technology, NS may suffer a competitive disadvantage
within the rail industry and with companies providing other modes of transportation service, which could have a
material adverse effect on its financial position, results of operations or liquidity in a particular year or quarter.
The vast majority of NS employees belong to labor unions, and labor agreements, strikes, or work
stoppages could adversely affect its operations. Approximately 26,000, or about 85%, of NS railroad
employees are covered by collective bargaining agreements with various labor unions. If unionized workers
were to engage in a strike, work stoppage, or other slowdown, NS could experience a significant disruption of
its operations. Additionally, future national labor agreements, or renegotiation of labor agreements or
provisions of labor agreements, could significantly increase NS’ costs for healthcare, wages, and other benefits.
Any of these factors could have a material adverse impact on NS’ financial position, results of operations or
liquidity in a particular year or quarter.
NS may be subject to various claims and lawsuits that could result in significant expenditures. The nature
of NS’ business exposes it to the potential for various claims and litigation related to labor and employment,
personal injury, commercial disputes, freight loss and other property damage, and other matters. Job-related
K14
personal injury and occupational claims are subject to the Federal Employers’ Liability Act (FELA), which is
applicable only to railroads. FELA’s fault-based tort system produces results that are unpredictable and
inconsistent as compared with 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.
Any material changes to current litigation trends or a catastrophic rail accident involving any or all of freight
loss or property damage, personal injury, and environmental liability could have a material adverse effect on
NS’ operating results, financial condition, and liquidity to the extent not covered by insurance. NS has obtained
insurance for potential losses for third-party liability and first-party property damages. Specified levels of risk
are retained on a self-insurance basis (currently up to $25 million and above $1 billion per occurrence for bodily
injury and property damage to third parties and $25 million and above $175 million per occurrence for property
owned by NS or in its care, custody or control). Insurance is available from a limited number of insurers and
may not continue to be available or, if available, may not be obtainable on terms acceptable to NS.
Severe weather could result in significant business interruptions and expenditures. Severe weather
conditions and other natural phenomena, including hurricanes and floods, may cause significant business
interruptions and result in increased costs, increased liabilities, and decreased revenues, which could have an
adverse effect on NS’ financial position, results of operations or liquidity in a particular year or quarter.
Unpredictability of demand for rail services resulting in the unavailability of qualified personnel could
adversely affect NS’ operational efficiency and ability to meet demand. Workforce demographics, training
requirements, and the availability of qualified personnel, particularly engineers and trainmen, could each have a
negative impact on NS’ ability to meet demand for rail service. Unpredictable increases in demand for rail
services may exacerbate such risks, which could have a negative impact on NS’ operational efficiency and
otherwise have a material adverse effect on its financial position, results of operations or liquidity in a particular
year or quarter.
NS may be affected by supply constraints resulting from disruptions in the fuel markets or the nature of
some of its supplier markets. NS consumes about 500 million gallons of diesel fuel each year. Fuel availability
could be affected by any limitation in the fuel supply or by any imposition of mandatory allocation or rationing
regulations. If a severe fuel supply shortage arose from production curtailments, disruption of oil imports,
disruption of domestic refinery production, damage to refinery or pipeline infrastructure, political unrest, war or
otherwise, NS’ financial position, results of operations or liquidity in a particular year or quarter could be adversely
affected. Also, such an event would impact NS as well as its customers and other transportation companies.
Due to the capital intensive nature and industry-specific requirements of the rail industry, there are high barriers
of entry for potential new suppliers of core railroad items, such as locomotives and rolling stock equipment.
Additionally, NS competes with other industries for available capacity and raw materials used in the production of
certain track materials, such as rail and ties. Changes in the competitive landscapes of these limited-supplier
markets could result in increased prices or material shortages that could materially affect NS’ financial position,
results of operations or liquidity in a particular year or quarter.
Item 1B. Unresolved Staff Comments.
None.
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Item 3. Legal Proceedings.
As of Feb. 14, 2008, 28 antitrust class actions have been filed against NS and other Class 1 railroads in various
Federal district courts regarding fuel surcharges. On November 6, 2007, these actions were consolidated in the
District of Columbia by the Judicial Panel on Multidistrict Litigation. NS believes the allegations in the
complaints are without merit and intends to vigorously defend the cases. In addition, NS received a subpoena
from a state grand jury on July 13, 2007, requesting documents and materials relating to the setting of fuel
surcharges. NS is cooperating with the state in its investigation. NS does not believe that the outcome of these
proceedings will have a material effect on its financial position, results of operations, or liquidity.
On November 30, 2007, NS received notice from the United States Department of Justice (DOJ) that the DOJ is
prepared to bring an action against NS for alleged violations of federal environmental laws resulting from the
discharge of chlorine and oil that occurred as a result of the Jan. 6, 2005 derailment in Graniteville, SC, including
claims for civil penalties as well as injunctive relief. The notice further indicates that the State of South Carolina
may also join in any action against NS. NS is in discussions with the DOJ in an effort to settle the DOJ's claims.
NS does not believe that the resolution of these claims will have a material adverse effect on its financial position,
results of operations or liquidity.
On Oct. 19, 2006, the Pennsylvania Department of Environmental Protection (PDEP) issued an assessment of
civil penalties against NS and filed a complaint for civil penalties with the Pennsylvania Environmental Hearing
Board (EHB) requesting that the EHB impose civil penalties upon NS for alleged violations of state
environmental laws and regulations resulting from a discharge of sodium hydroxide that occurred as a result of
the derailment of a NS train in Norwich Township, Pennsylvania, on June 30, 2006. PDEP’s actions sought to
impose combined penalties of $8,890,000 for alleged past violations and $46,420 per day for alleged continuing
violations of state environmental laws and regulations. NS appealed the fines to the EHB. The Pennsylvania Fish
and Boat Commission sought financial restitution for damages alleged to have been caused by this accident. In
addition, the Pennsylvania Attorney General and the McKean County District Attorney filed three misdemeanor
charges for alleged violations of state environmental and aquatic resource protection laws and regulations. NS
has entered into a settlement agreement with all Commonwealth of Pennsylvania parties, pursuant to which all
claims by the Commonwealth for civil liability resulting from the derailment and spill were resolved, with NS
agreeing to pay approximately $7.35 million in restitution to compensate for all natural resource damages and the
agencies’ response costs caused by the derailment and spill. NS has also pled no contest to the three
misdemeanor charges and has paid fines in the amount of $250,000 to resolve them.
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 2007.
K16
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 Feb. 1, 2008, relating to the executive officers.
Name, Age, Present Position
Business Experience During Past Five Years
Charles W. Moorman, 55,
Chairman, President and
Chief Executive Officer
Stephen C. Tobias, 63,
Vice Chairman and
Chief Operating Officer
Deborah H. Butler, 54,
Executive Vice President –
Planning and Chief
Information Officer
James A. Hixon, 54,
Executive Vice President –
Law and Corporate Relations
Present position since Feb. 1, 2006.
Served as President and Chief Executive Officer from
Nov. 1, 2005 to Feb. 1, 2006; as President from
Oct. 1, 2004 to Nov. 1, 2005; as Senior Vice
President – Corporate Planning and Services from
Dec. 1, 2003 to Oct. 1, 2004; Senior Vice President –
Corporate Services from Feb. 1, 2003 to Dec. 1, 2003
and prior thereto served as President – Thoroughbred Technology
and Telecommunications, Inc.
Present position since Aug. 1, 1998.
Present position since June 1, 2007.
Prior thereto served as Vice President – Customer Service.
Present position since Oct. 1, 2005.
Served as Executive Vice President – Finance and Public Affairs
From Oct. 1, 2004, to Oct. 1, 2005; Senior Vice President –
Legal and Government Affairs from Dec. 1, 2003 to Oct. 1,
2004 and prior thereto served as Senior Vice President –
Administration.
Mark D. Manion, 55,
Executive Vice President –
Operations
Present position since Oct. 1, 2004.
Served as Senior Vice President – Transportation Operations
from Dec. 1, 2003 to Oct. 1, 2004 and prior thereto served as
Vice President – Transportation Services and Mechanical.
John P. Rathbone, 55,
Executive Vice President –
Administration
Present position since Oct. 1, 2004.
Served as Senior Vice President – Administration from
Dec. 1, 2003 to Oct. 1, 2004 and prior thereto served as Senior
Vice President and Controller.
Donald W. Seale, 55,
Executive Vice President
and Chief Marketing Officer
Present position since April 1, 2006.
Served as Executive Vice President – Sales and Marketing from
Oct. 1, 2004 to April 1, 2006; as Senior Vice President –
Marketing Services from Dec. 1, 2003 to Oct. 1, 2004 and prior
thereto was Senior Vice President – Merchandise Marketing.
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James A. Squires, 46,
Executive Vice President –
Finance and Chief Financial
Officer
Present position since July 1, 2007.
Served as Executive Vice President – Finance from April 1,
2007 to July 1, 2007, Senior Vice President – Financial Planning
from April 1, 2006 to April 1, 2007, Senior Vice President – Law
from Oct. 1, 2004 to April 1, 2006, as Vice President – Law from
Dec. 1, 2003 to Oct. 1, 2004 and prior thereto was Senior
General Counsel.
Daniel D. Smith, 55,
Senior Vice President –
Energy and Properties
Present position since Dec. 1, 2003.
Prior thereto served as President- NS Development.
Marta R. Stewart, 50,
Vice President and Controller
Present position since Dec. 1, 2003.
Prior thereto was Assistant Vice President Corporate Accounting.
K18
PART II
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
STOCK PRICE AND DIVIDEND INFORMATION
The Common Stock of Norfolk Southern Corporation, owned by 36,955 stockholders of record as of Dec. 31,
2007, is traded on the New York Stock Exchange under 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 2007 and 2006.
2007
Market price
High
Low
Dividends per share
2006
Market price
High
Low
Dividends per share
1st
2nd
Quarter
3rd
4th
$
$
$
$
53.84 $
45.38
0.22 $
59.19 $
49.70
0.22 $
59.77 $
46.42
0.26 $
54.58
48.03
0.26
1st
2nd
3rd
4th
54.93 $
41.22
0.16 $
57.71 $
46.17
0.16 $
54.00 $
39.10
0.18 $
55.07
42.80
0.18
ISSUER PURCHASES OF EQUITY SECURITIES
(a) Total Number
of Shares (or Units)
Purchased (1)
(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(2)
(d) Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
may yet be Purchased
Under the Plans or
Programs(2)
Oct. 1-31, 2007
1,497,874
Nov. 1-30, 2007
3,877,808
Dec. 1-31, 2007
3,064,884
Total
8,440,566
52.16
50.16
50.82
1,496,000
3,868,000
3,063,000
8,427,000
36,603,355
32,735,355
29,672,355
(1)
(2)
Of this amount 13,566 represent shares tendered by employees in connection with the exercise of stock
options under the Long-Term Incentive Plan.
On Nov. 22, 2005, the Board of Directors authorized a share repurchase program, pursuant to
which up to 50 million shares of Common Stock could be purchased through Dec. 31, 2015. On
March 27, 2007, the Board of Directors amended the program and increased the number of
shares that may be repurchased to 75 million, and shortened the repurchase term by five years to
Dec. 31, 2010.
K19
Item 6. Selected Financial Data.
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
FIVE-YEAR FINANCIAL REVIEW
2007
20042
20051
2006
($ in millions, except per share amounts)
20033
$
9,432 $
6,847
9,407 $
6,850
8,527 $
6,410
7,312 $
5,610
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 operations4
Cumulative effect of changes in
accounting principles, net of
taxes5
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 maturities6
Stockholders' equity
OTHER
Capital expenditures
$
$
$
$
$
$
$
$
$
$
$
2,585
93
441
2,237
773
1,464
--
2,557
2,117
1,702
149
476
2,230
749
74
494
1,697
416
1,481
1,281
--
--
76
489
1,289
379
910
--
--
1,464 $
--
1,481 $
--
1,281 $
--
910 $
3.74 $
3.68 $
3.74 $
3.68 $
0.96 $
25.64 $
3.63 $
3.57 $
3.63 $
3.57 $
0.68 $
24.19 $
3.17 $
3.11 $
3.17 $
3.11 $
0.48 $
22.63 $
2.31 $
2.28 $
2.31 $
2.28 $
0.36 $
19.92 $
6,468
5,404
1,064
19
497
586
175
411
10
114
535
1.05
1.05
1.37
1.37
0.30
17.83
26,144 $
26,028 $
25,859 $
24,748 $
20,596
6,368 $
9,727 $
6,600 $
9,615 $
6,930 $
9,276 $
7,525 $
7,977 $
7,160
6,976
1,341 $
1,178 $
1,025 $
1,041 $
720
Average number of shares
outstanding (thousands)
Number of stockholders at year end
Average number of employees:
Rail
Nonrail
Total
389,626
36,955
30,336
470
30,806
405,988
38,900
30,079
462
30,541
404,170
48,180
29,851
443
30,294
394,201
51,032
28,057
418
28,475
389,788
52,091
28,363
390
28,753
K20
1
2
3
4
5
6
2005 provision for income taxes includes a $96 million benefit related to the reduction of NS’ deferred income
tax liabilities resulting from tax legislation enacted by Ohio. This benefit increased net income by $96 million,
or 23 cents per diluted share.
2004 other income – net includes a $40 million net gain from the Conrail Corporate Reorganization. This gain
increased net income by $40 million or 10 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.
2003 discontinued operations relate to the 1998 sale of the common stock of motor carrier subsidiary, North
American Van Lines, Inc. 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.
2003 net income 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.
2003 long-term debt excludes notes payable to Conrail of $716 million.
See accompanying Consolidated Financial Statements and notes thereto.
K21
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’ 2007 results reflected softness in the overall economy that resulted in reduced traffic volumes. Despite this,
railway operating revenues increased slightly as improved average revenue per unit offset the volume declines.
Railway operating expenses were about even, resulting in a railway operating ratio (a measure of the amount of
revenues consumed by operating expenses) of 72.6%, which improved modestly from 2006.
Cash provided by operating activities exceeded $2 billion for the third consecutive year and, along with a
reduction in cash and short-term investment balances, provided funding for increased capital expenditures,
significant share repurchases and higher dividends.
Looking ahead, NS expects revenues to continue to grow, reflecting higher average revenue per unit and modestly
higher traffic volume, particularly later in 2008 provided the overall economy improves. NS plans to continue to
improve service and maintain a market-based approach to pricing.
During 2007, NS purchased and retired 23.6 million shares of NS common stock at a total cost of $1.2 billion
under the share repurchase program approved by the Board of Directors on Nov. 22, 2005. The Board of
Directors amended the program in March 2007 and authorized the repurchase of up to 75 million shares of NS
common stock through Dec. 31, 2010. In total, NS has purchased and retired 45.3 million shares under this
program at a total cost of $2.2 billion.
SUMMARIZED RESULTS OF OPERATIONS
2007 Compared with 2006
Net income in 2007 was $1.5 billion, down $17 million, or 1%, compared with 2006. Diluted earnings per share
were $3.68, up $0.11, or 3%, reflecting fewer shares outstanding as a result of NS’ share repurchase program (see
Note 13). The decrease in net income was primarily due to higher income taxes and lower non-operating items
that offset higher income from railway operations. Railway operating revenues increased $25 million, as higher
average revenue per unit overshadowed lower traffic volumes. Railway operating expenses decreased $3 million,
principally due to lower volume-related expenses that offset higher fuel expense.
2006 Compared with 2005
Net income in 2006 was $1.5 billion, or $3.57 per diluted share, up $200 million, or 16%, compared with
$1.3 billion, or $3.11 per diluted share, in 2005. The increase in net income was primarily due to higher income
from railway operations, offset in part by the absence of the $96 million income tax benefit recorded in 2005
because of Ohio tax law changes (see Note 3). Railway operating revenues increased $880 million, reflecting
higher rates, including fuel surcharges that accounted for about 40% of the increase, and modestly higher traffic
volume. Railway operating expenses rose $440 million, or 7%, principally due to higher fuel prices and increased
compensation and benefit costs.
K22
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
Railway operating revenues were $9.4 billion in 2007 and 2006, and $8.5 billion in 2005. The following table
presents a three-year comparison of revenues, volume and average revenue per unit by market group.
2007
Revenues
2006
($ in millions)
2005
2007
Units
2006
(in thousands)
2005
2007
Revenue per Unit
2006
($ per unit)
2005
Coal
General merchandise:
Chemicals
Metals/construction
Agr./cons. prod./govt.
Automotive
Paper/clay/forest
General merchandise
Intermodal
Total
$ 2,315 $ 2,330 $ 2,115
1,699.4
1,760.0
1,735.4 $
1,363 $ 1,324 $
1,219
1,166
1,149
1,047
974
860
5,196
1,079
1,168
994
974
891
5,106
978
978
832
997
801
4,586
426.7
783.6
601.5
533.0
428.1
2,772.9
426.4
835.3
594.1
561.9
466.7
2,884.4
442.1
794.2
571.8
615.9
472.2
2,896.2
2,732
1,467
1,740
1,827
2,010
1,874
2,530
1,398
1,673
1,734
1,909
1,770
2,212
1,231
1,454
1,620
1,697
1,583
1,921
1,971
1,826
3,120.7
3,256.5
3,154.9
615
605
579
$ 9,432 $ 9,407 $ 8,527
7,593.0
7,900.9
7,786.5 $
1,242 $ 1,191 $
1,095
Revenues increased $25 million in 2007 and $880 million in 2006. Automotive revenue in 2007 included
$26 million related to a contract volume settlement. As shown in the following table, the increase in 2007 was
due to higher average revenue per unit that more than offset decreased traffic volumes, whereas the
improvement in 2006 was the result of increased average revenue per unit and higher traffic volumes.
Revenue Variance Analysis
Increases
Revenue per unit/mix
Traffic volume (units)
Total
2007 vs. 2006
2006 vs. 2005
($ in millions)
$
$
392
(367)
25
$
$
755
125
880
Both comparisons reflect large increases in average revenue per unit, a result of higher rates. In 2006 about
40% of the revenue increase was attributable to higher fuel surcharges. Traffic volume decreased in 2007,
reflecting declines in all commodity groups except agriculture/consumer products/government, and chemicals.
In 2006, traffic volume rose 1%, principally due to higher intermodal and metals/construction shipments.
On January 26, 2007, the Surface Transportation Board (STB) issued a decision that the type of fuel surcharge
imposed by NS and most other large railroads – a fuel surcharge based on a percentage of line haul revenue –
would no longer be permitted for regulated traffic that moves under public (tariff) rates. The STB gave the
railroads a 90-day transition period to adjust their fuel surcharge programs. During the second quarter, NS
discontinued assessing fuel surcharges on its published (non-intermodal) public rates. Future adjustments to
public prices will reflect ongoing market conditions. NS does not expect that compliance with the new STB
regulations will have a material effect on its financial condition, results of operations or liquidity. The traffic
moving under these tariffs and public quotes comprised less than 10% of Norfolk Southern’s total revenue base.
K23
COAL revenues decreased $15 million, or 1%, compared with 2006, as a 2% reduction in tonnage handled more
than offset a 3% increase in average revenue per unit. Carloads declined 3%, a higher percentage than the change
in tonnage handled because of increased average tonnage per car. Coal represented 25% of NS’ revenues in 2007,
and 78% of shipments handled originated on NS’ lines. As shown in the following table, decreased shipments of
utility and domestic metallurgical coal more than offset higher export and industrial shipments.
Total Coal, Coke and Iron Ore Tonnage
Utility
Domestic metallurgical
Export
Industrial
Total
2007
2006
(Tons in thousands)
2005
142,734
17,873
15,564
9,794
185,965
148,078
20,878
12,409
9,202
190,567
142,522
20,076
14,531
9,524
186,653
Coal revenues in 2006 increased $215 million, or 10%, compared with 2005, which reflected higher average
revenue per unit and slightly higher traffic volume. Coal average revenue per unit was up 9% compared with
2005, reflecting increased fuel surcharges and higher rates, tempered by the absence of a $55 million benefit
from coal rate settlements in the second quarter of 2005. Coal represented 25% of NS’ revenues in 2006, and
79% of shipments handled originated on NS’ lines. Traffic volumes rose 1%, primarily because of increased
shipments of utility and domestic metallurgical coal that offset lower export and iron ore shipments.
NS is currently involved in litigation with Virginia Electric and Power Company/Old Dominion Electric
Cooperative (Virginia Power) regarding rate adjustment provisions in a transportation contract between them.
During the second quarter of 2007, the Virginia Supreme Court issued a decision that remanded the case to the
trial court on the grounds that neither of its prior decisions constituted a final order. Future developments and the
ultimate resolution of this matter could result in NS recognizing additional revenues related to this dispute, which
could have a favorable impact on results of operations in a particular year or quarter.
Utility coal tonnage decreased 4%, compared with 2006, reflecting high stockpile levels (particularly in the
Southeast) that led to reduced shipments, despite fairly strong electric generation (up 4%) in the NS service
region. In addition, the temporary closure of a major coal mine as well as the loss of business to barge
transportation contributed to the decline.
In 2006, utility coal tonnage increased 4%, compared with 2005, reflecting the rebuilding of stockpiles by
customers, more shipments from the Powder River Basin in the West and higher shipments of import coal through
Charleston, SC.
A number of evolving environmental issues could affect the utility coal market. These include potential regional
programs aimed at capping and reducing power plant CO2 emissions, and ongoing efforts at addressing climate
change. In response to changes in environmental regulations, certain utilities have begun adding or are planning
to add emissions control technologies to their electric generating units, allowing them to utilize their existing coal-
fired power plants.
In 2008, demand for utility coal is expected to be mixed, with declining utility inventories in the Northeast
stimulating growth but above normal stockpiles in the Southeast mitigating the growth.
Domestic metallurgical coal, coke and iron ore tonnage decreased 14% in 2007 compared with 2006. The
decrease was primarily due to coke furnace outages, mine production outages and reduced spot iron ore traffic.
K24
Domestic metallurgical coal, coke and iron ore tonnage increased 4% in 2006 compared with 2005. The increase
was driven by higher domestic metallurgical coal and coke shipments in the first half of the year in response to
steel-making demand, which more than offset a decline in iron ore volume caused by the shutdown of a blast
furnace at a major customer location.
In 2008, domestic metallurgical coal, coke and iron ore demand is expected to be comparable to 2007 for the first
half of the year; however, demand is expected to increase in the second half due to plant expansions.
Export coal tonnage in 2007 increased 25% compared to 2006, primarily due to increased demand reflecting a
lower valued dollar as well as loading delays at Australian ports. Norfolk volume increased by approximately
26,000 cars, or 25%, and Baltimore volume was up approximately 4,500 cars, or 19%.
In 2006, export coal tonnage decreased 15% compared to 2005, reflecting weaker demand for U.S. coal as Europe
and Asia continued to increase purchases from other countries. Baltimore volume was down approximately
13,500 cars, or 37%, and Norfolk volume declined by approximately 3,000 cars, or 3%.
In 2008, export coal tonnage is expected to increase, reflecting increased global demand.
Other coal tonnage (principally steam coal shipped to industrial plants) increased 6% versus 2006, primarily due
to new business and stronger demand. In 2006, other coal tonnage decreased 3% versus 2005, primarily due to
plant closures and mine production problems.
GENERAL MERCHANDISE revenues increased $90 million, or 2%, in 2007 compared with 2006, as a 6%
increase in average revenue per unit, reflecting continued market-based pricing in all groups, more than offset a
4% decline in traffic volume. Revenue in 2007 included $26 million related to a volume-related contract
settlement with an automotive customer.
In 2006, general merchandise revenues increased $520 million, or 11%, compared with 2005, as all market
groups posted higher average revenue per unit driven by increased rates and fuel surcharges. Traffic volume
declined slightly as improved metals and construction and agriculture volumes were offset by declines in the
other business groups.
Chemicals revenue increased 8% compared with 2006, reflecting higher rates in all groups. Traffic volume
rose modestly as more shipments of industrial intermediates offset fewer shipments in the petroleum,
miscellaneous chemicals and plastics markets, which continued to reflect weakness in housing-related demand.
In 2006, chemicals revenues increased 10%, despite a 4% drop in traffic volume, reflecting increased rates and
fuel surcharges. Petroleum, industrial and plastics traffic volumes were down as a result of lower inventories
arising from post-Katrina conditions, the closure of several plants on NS lines and the weaker housing and
automotive markets.
In 2008, chemicals revenue is expected to improve, principally due to increased average revenue per unit as
volumes are expected to be comparable to 2007.
Metals and construction revenue decreased 2% in 2007 as a 5% increase in average revenue per unit that
resulted from higher rates was more than offset by the effects of a 6% decrease in traffic volume. The decline in
volume was principally due to lower iron, steel and coil shipments and reduced demand for construction
materials, both reflecting the soft automotive and housing sectors.
In 2006, metals and construction revenue increased 19% and traffic volume increased 5% compared with 2005 as
declines in the fourth quarter were offset by higher volumes through the rest of the year. Revenue per unit rose
K25
14% because of increased rates and fuel surcharges. The increase in traffic volume was driven primarily by
higher import slab business to NS-served steel mills, more scrap metal shipments and higher sand, gravel and
cement traffic for commercial and highway construction projects.
In 2008, metals and construction revenues are expected to grow as a result of higher traffic volumes, principally
due to new business, and improved average revenue per unit. However, growth could be somewhat dampened by
the continued softness of the automotive and housing markets.
Agriculture, consumer products and government revenue increased 5% in 2007 compared with 2006. The
revenue improvement resulted from higher average revenue per unit, which reflected higher rates. Traffic volume
rose modestly as more corn, fertilizer and ethanol shipments were mitigated by less government and consumer
product volume.
In 2006, agriculture, consumer products and government revenue increased 19% and traffic volume increased 4%
compared with 2005. Average revenue per unit rose 15%, a result of higher rates and fuel surcharges. Traffic
volume growth resulted from increased ethanol, military and corn shipments. Military traffic growth was
primarily due to the continued support of military operations in Iraq.
Agriculture revenue is expected to continue to grow in 2008, benefiting from increasing demand for biofuel
products including corn, soybeans and ethanol, as well as higher rates. However, lower volumes in consumer
products are expected to partially offset this growth.
Automotive revenues were flat in 2007 compared with 2006 as lower traffic volumes offset higher average revenue
per unit. Revenue in 2007 included a $26 million volume-related contract settlement. Volume decreased 5%,
reflecting softness in demand for vehicles as well as parts, and the closure in June 2007 of an NS-served plant.
In 2006, automotive revenues declined 2% compared with 2005 as lower volumes offset increased average
revenue per unit, including fuel surcharges. Volume decreased 9% primarily due to substantial production cuts
at Ford, General Motors and Daimler-Chrysler assembly plants, including two NS-served plant closures at Ford
and one at General Motors during 2006. Reduced production at Honda and BMW also contributed to the
volume decrease.
For 2008, automotive revenues are expected to be lower, reflecting continued production cutbacks and
weak demand.
Paper, clay and forest products revenue decreased 3% in 2007 compared with 2006 as the effects of higher
average revenue per unit were more than offset by an 8% decrease in traffic volume reflecting the continued
housing slowdown and decline in conventional paper markets.
In 2006, paper, clay and forest products revenue increased 11% compared with 2005 due to higher average
revenue per unit, including fuel surcharges, despite a 1% decrease in traffic volume. Higher solid waste and
debris traffic, and growth in traffic from the import of printing paper, partially offset reduced pulp and pulp
board shipments.
In 2008, paper, clay and forest products revenues are expected to be about even as growth in waste and debris
transportation and higher revenue per unit are expected to be tempered by continued weakness in housing-
related markets.
INTERMODAL revenues decreased $50 million, or 3%, compared with 2006, as a 4% reduction in traffic
volumes offset a 2% increase in average revenue per unit. Truckload volume decreased 10% compared with
K26
2006 and domestic intermodal marketing companies (IMC) volume declined 4%. Traffic volume for Triple
Crown Services Company (Triple Crown), a service with rail-to-highway trailers, dropped 3%. The declines
for truckload, IMC and Triple Crown were primarily due to lower national demand for dry van shipments
resulting from continued weakness in the housing and automotive markets and increased over-the-road
competition. International traffic volume decreased 4% reflecting reduced shipments of empty containers and
less inland rail transportation of West Coast port traffic, which offset volume growth from East Coast port
traffic. Premium business, which includes parcel and LTL (less-than-truckload) carriers, was up 2%
reflecting gains in parcel shipments that offset modest declines in LTL shipper traffic.
In 2006, intermodal revenues increased $145 million, or 8%, compared with 2005, largely because of higher fuel
surcharges, increased rates and improved traffic volume. Traffic volume for the year rose 3% notwithstanding a
3% decline in the fourth quarter. Truckload volume increased 8% reflecting continued expansion of business with
traditional truckload companies. IMC volume declined 9%, a result of declines in the housing, construction and
automotive markets. Triple Crown Services Company had flat volume compared with 2005 as higher consumer
product shipments were offset by weaker automotive-related shipments. International traffic volume rose 9%
reflecting growth in imported goods from Asia and exported goods through NS-served East Coast ports, as well as
West Coast ports. Premium business was down 3% as lower LTL shipper traffic offset modest gains in parcel
shipments. Intermodal revenue per unit increased 4%, principally a result of higher fuel surcharges as well as
increased rates and longer-haul international traffic, which was offset in part by the ongoing shift of shipments
from higher revenue per unit, rail-provided assets (trailers and containers) to lower revenue per unit shipments in
shipper-provided equipment.
For 2008, intermodal revenue is expected to show improvement bolstered by higher average revenue per unit and
modest improvement in volumes.
Railway Operating Expenses
Railway operating expenses in 2007 were $6.8 billion, about even with expenses in 2006, which were up
$440 million compared to 2005. The 2007 comparison reflected volume-related decreases offset by higher fuel
expense. The increase in 2006 was due to higher fuel prices and increased compensation and benefits.
The railway operating ratio, which measures the percentage of railway operating revenues consumed by railway
operating expenses, improved to 72.6% in 2007, compared with 72.8% in 2006 and 75.2% in 2005.
The following table shows the changes in railway operating expenses summarized by major classifications (prior
year amounts have been reclassified to conform to the current year presentation).
Operating Expense Variances
Increases (Decreases)
2007 vs. 2006
2006 vs. 2005
($ in millions)
Compensation and benefits
Purchased services and rents
Fuel
Depreciation
Materials and other
Total
$
$
144
31
274
(36)
27
440
(85)
(27)
74
37
(2)
(3)
$
$
K27
Compensation and benefits, which represents 37% of total railway operating expenses, decreased $85 million,
or 3%, compared with 2006, primarily due to lower incentive compensation (down $48 million), lower volume-
related payroll (down $37 million), the absence of the prior year retirement and waiver agreements with former
executives as well as the cost of the regular stock-based grant to the former Chief Executive Officer ($24 million),
lower stock-based compensation (down $13 million), and lower payroll taxes (down $12 million), that were
partially offset by increased wage rates (up $27 million) and higher medical costs (up $27 million).
In 2006, compensation and benefits increased $144 million, or 6%, compared with 2005. Expenses in 2006
included the effect of the implementation of Statement of Accounting Standards No. 123(R) “Share-Based
Payment,” which increased stock-based compensation expense by $27 million. Most of the increase was reflected
in the first quarter which included the effect of accelerated recognition of costs related to grants to retirement-
eligible employees. The remaining increase was attributable to increased salaries and wages (up $44 million),
higher health and welfare benefit costs (up $29 million), retirement and waiver agreements entered into in the first
quarter as well as the cost of the regular stock-based grant to the former chief executive officer who retired (up
$24 million), and higher payroll taxes (up $17 million).
NS employment averaged 30,806 in 2007 compared with 30,541 in 2006 and 30,294 in 2005. The increased
number of employees was almost exclusively in operating department personnel to meet service needs, as well as
to prepare for expected retirements. NS continues to hire and train additional workers in order to meet the
requirements of forecasted volumes in light of the demographics of its work force.
Purchased services and rents includes the costs of services purchased from outside contractors, including the net
costs of operating joint (or leased) facilities with other railroads and the net cost of equipment rentals. This
category of expenses decreased $27 million, or 2%, in 2007 compared to 2006, but increased $31 million, or 2%,
in 2006 compared to 2005. The decline in 2007 was principally due to lower equipment rents, while the 2006
increase reflected increased maintenance activities.
Purchased services costs were $1,172 million in 2007, $1,165 million in 2006 and $1,142 million in 2005. In
2007, higher expenses for maintenance activities were largely offset by volume-related declines. The increase in
2006 reflected higher intermodal volume-related expenses.
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, amounted to $379 million, $413 million
and $405 million for 2007, 2006 and 2005, respectively. The decrease in 2007 was principally due to lower
shipment volumes. The increase in 2006 was primarily due to a reduction in rents received on automotive
equipment as a result of decreased shipments.
Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations,
increased $74 million, or 7%, in 2007 compared with 2006, and increased $274 million, or 33%, in 2006
compared with 2005. Fuel expense is recorded net of hedge benefits, although there have been no such benefits
since May 2006 when the program wound down (see “Market Risks and Hedging Activities,” below and
Note 16). The increase in 2007 reflected a 9% increase in the price per gallon of locomotive fuel as well as the
absence of hedge benefits offset in part by a 4% decline in consumption. Expense in 2006 included hedge
benefits of $20 million compared with benefits of $148 million in 2005, and reflected a 13% rise in the average
price per gallon with a 1% increase in consumption.
Legislation enacted in the first quarter of 2005 repealed the 4.3 cents per gallon excise tax on railroad diesel fuel for
2007, with the following phased reductions in 2005 and 2006: 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
about 500 million gallons of locomotive diesel fuel per year.
K28
Depreciation expense increased $37 million, or 5%, in 2007 compared to 2006, but decreased $36 million, or
5%, in 2006 compared with 2005. In both years, substantial capital investments and improvements resulted in
higher depreciation expense. The net decrease in 2006 reflected the results of an equipment depreciation study
and an analysis of the assets received in the Conrail Corporation Reorganization completed in 2006.
Materials and other expenses (including the estimates of costs related to personal injury, property damage and
environmental matters) decreased $2 million in 2007 compared with 2006, but increased $27 million, or 3%, in
2006 compared to 2005, as shown in the following table.
2007
2006
($ in millions)
2005
Materials
Casualties and other claims
Other
$
359 $
171
270
346 $
220
236
315
224
236
$
800 $
802 $
775
The decline in 2007 was primarily due to lower derailment and personal injury costs, offset in part by higher
property and other taxes, and increased materials costs for maintenance activities.
The increase in 2006 reflected increased locomotive and freight car repair costs due to more maintenance activity
related to higher usage from increased traffic volumes coupled with the age of the fleet, as well as higher expenses
arising from derailments and insurance costs. These increases were partially offset by the absence of $38 million of
costs associated with the 2005 derailment in Graniteville, South Carolina, and an unfavorable jury verdict in an
employee injury case.
In 2005, NS recorded a liability related to the Jan. 6, 2005 derailment in Graniteville, SC. The liability, which
includes a current and long-term portion, represents NS’ best estimate based on current facts and circumstances.
The estimate includes amounts related to business property damage and other economic losses, personal injury
and individual property damage claims as well as third-party response costs. NS’ commercial insurance policies
are expected to cover substantially all expenses related to this derailment above NS’ self-insured retention,
including NS’ response costs and legal fees. Accordingly, the Consolidated Balance Sheets reflect a current and
long-term receivable for estimated recoveries from NS’ insurance carriers. While it is reasonable to expect that
the liability for covered losses could differ from the amount recorded, such a change would be offset by a
corresponding change in the insurance receivable. As a result, NS does not believe that it is reasonably likely that
its net loss (the difference between the liability and future recoveries) will be materially different than the loss
previously recorded. NS expects at this time that insurance coverage is adequate to cover potential claims and
settlements above its self-insurance retention.
The largest component of casualties and other claims expense is personal injury costs. Cases involving
occupational injuries comprised about 60% of total employee injury cases resolved and about 40% of 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 whom 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.
K29
NS maintains substantial amounts of insurance for potential third-party liability and property damage claims. It
also retains reasonable levels of risk through self-insurance (see Note 17). NS expects insurance costs to be
slightly higher in 2008.
Other Income – Net
Other income – net was $93 million in 2007, $149 million in 2006 and $74 million in 2005 (see Note 2). The
decrease in 2007 reflected lower interest income ($31 million), higher expenses associated with synthetic fuel-
related tax credit investments ($15 million) and lower returns from corporate-owned life insurance ($15 million)
that combined to offset higher equity in earnings of Conrail ($20 million).
NS has membership interests representing ownership in companies that owned and operated facilities that
produced synthetic fuel from coal. In addition, NS purchased two facilities that produced synthetic fuel from
coal in 2007. The production of synthetic fuel resulted in tax credits as well as expenses related to the
investments. 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 “Provision for income taxes” (see discussion below).
Results in 2006 reflected lower expense associated with tax credit investments primarily due to synthetic fuel
related investments, greater interest income, and higher returns from corporate-owned life insurance, that were
partially offset by lower equity in Conrail earnings.
Income Taxes
Income tax expense in 2007 was $773 million for an effective rate of 35%, compared with effective rates of 34%
in 2006 and 25% in 2005. The increase in the rate for 2007 largely resulted from Illinois tax legislation which
increased deferred taxes by $19 million (see Note 3). The increase in the rate for 2006 was primarily due to the
absence of an Ohio tax law change that lowered the effective rate in 2005 as well as fewer tax credits from
synthetic fuel-related investments. Synthetic fuel tax credits were available through the end of 2007.
Synthetic fuel credits are subject to reduction if the Reference Price of a barrel of oil for the year falls within an
inflation-adjusted phase-out range specified by the tax code. The Reference Price for a year is the annual
average wellhead price per barrel of unregulated domestic crude oil as determined by the Secretary of the
Treasury by April 1 of the following year. In 2006, the phase-out range was $55.06 to $69.12, and the phase-
out range is adjusted annually for inflation. While NS cannot predict with certainty the Reference Price for the
year, NS estimated a 66% phase-out of synthetic fuel credits in 2007 based on actual oil prices during the year.
Net income in 2007 reflects $5 million less in net benefits from these credits, as compared with the same period of
2006, as shown below:
Effect in “Other income – net:”
Expenses on synthetic fuel related investments
Effect in “Provision for income taxes:”
Tax credits
Tax benefit of expenses on synthetic fuel
related investments
Total reduction of income tax expense
Effect in “Net income:”
Net benefit from synthetic fuel related investments
2007
2006
($ in millions)
2005
77
60
30
90
13
$
62 $
102
56
24
80
$
18 $
98
40
138
36
$
$
K30
The tax credits generated by NS’ synthetic fuel related investments, which reduced the effective tax rate by 3% in
2007 and 2006, and 6% in 2005, expired at the end of 2007 and, accordingly, the effective tax rate is expected to
increase in 2008 (see Note 3).
NS’ consolidated federal income tax returns for 2004 and 2005 are being audited by the Internal Revenue Service
(IRS). The IRS completed its examination of the 2002 and 2003 consolidated federal income tax returns during
the third quarter of 2006 and NS has appealed certain adjustments proposed by the IRS. The results of the
examination had a negligible effect on the effective tax rate.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities, NS' principal source of liquidity, was $2.3 billion in 2007, compared
with $2.2 billion in 2006 and $2.1 billion in 2005. The improvement in 2007 resulted from favorable changes
in working capital as well as the modest improvement in income from railway operations. In 2006, higher
income from railway operations was partially offset by higher income tax payments. NS had a working capital
deficit of $273 million at Dec. 31, 2007, compared with working capital of $307 million at Dec. 31, 2006. The
change was largely the result of reduced cash and short-term investments that were used to repurchase stock.
NS expects that cash on hand combined with cash flow provided by operating activities will be sufficient to
meet its ongoing obligations. NS’ cash, cash equivalents and short-term investment balances totaled
$206 million and $918 million at Dec. 31, 2007 and 2006, respectively.
Contractual obligations at Dec. 31, 2007, comprised of NS' long-term debt (including capital leases) (see Note 7),
operating leases (see Note 8), agreements with CRC (see Note 4), unconditional purchase obligations (see Note 17),
long-term advances from Conrail (see Note 4) and unrecognized tax benefits (see Note 3) were as follows:
Total
2008
Payments Due By Period
2009-
2010
2011-
2012
($ in millions)
2013 and
Subsequent
Long-term debt and
capital lease principal
Operating leases
Agreements with CRC
Unconditional purchase
obligations
Unrecognized tax
benefits*
Long-term advances
from Conrail
Total
$
6,368 $
937
457
369 $
138
28
817 $
243
56
$
369
151
56
4,813 $
405
317
298
167
201
36
97
--
--
--
--
--
133
8,360 $
$
--
772 $
--
1,213 $
--
576
$
133
5,668 $
Other
--
--
--
--
131
--
131
* When the amount and timing of liabilities for unrecognized tax benefits can be reasonably estimated, the
amount is shown in the table under the appropriate period. When the year of settlement cannot be reasonably
estimated, the amount is shown in the Other column.
Off balance sheet arrangements consist of obligations related to operating leases, which are included in the
table of contractual obligations above and disclosed in Note 8.
K31
Cash used for investing activities was $1 billion in 2007, compared with $684 million in 2006 and $1.8 billion in
2005. The increase in 2007 primarily reflected lower net proceeds from short-term investment sales and purchases
and increased property additions. The decrease in 2006 reflected higher proceeds from short-term investment sales,
principally to fund share repurchases reflected in financing activities, offset in part by the $100 million investment
in Meridian Speedway LLC (MSLLC) (see discussion below) and increased property additions.
Property additions account for most of the recurring spending in this category. The following tables show capital
spending (including capital leases) and track and equipment statistics for the past five years.
Capital Expenditures
2007
2006
2005
($ in millions)
2004
2003
Road and other property
Equipment
Total
$
$
894 $
447
1,341 $
756 $
422
1,178 $
741 $
284
1,025 $
612 $
429
1,041 $
502
218
720
Track Structure Statistics (Capital and Maintenance)
2007
2006
2005
2004
2003
Track miles of rail installed
Miles of track surfaced
New crossties installed (millions)
401
5,014
2.7
327
4,871
2.7
302
4,663
2.5
246
5,055
2.5
233
5,105
2.8
Average Age of Owned Railway Equipment
Freight cars
Locomotives
Retired locomotives
2007
2006
30.1
18.1
30.0
30.0
17.7
35.0
2005
(years)
29.4
17.4
27.4
2004
2003
28.6
16.9
22.9
27.8
15.3
28.7
For 2008, NS has budgeted $1.43 billion for capital expenditures. The anticipated spending includes $613
million for rail, crosstie, ballast and bridge programs, and $339 million is provided for infrastructure and
expansion investments, including increased mainline capacity, track upgrades and expansions to accommodate
new customers or traffic and large network public/private partnership investments such as the Heartland
Corridor and Chicago CREATE programs (see discussion below). Norfolk Southern expects to spend
approximately $143 million on intermodal terminals and equipment to add capacity to the intermodal network,
increased access and capacity for coal and merchandise traffic, and bulk transfer facilities. Planned equipment
spending of $264 million provides $119 million for locomotives, including the purchase of 15 new units and
continued spending on improvements to the locomotive fleet. Approximately $145 million will be spent on
freight cars, including the acquisition of 1,330 new higher capacity coal cars as part of a multi-year program to
replace the existing coal car fleet, the purchase of 321 freight cars upon their lease expiration, 163 multi-level
automobile racks and improvements to multi-level racks. Norfolk Southern also expects to spend $66 million
related to computers, systems and information technology. NS expects to make all of its capital expenditures
with internally generated funds.
K32
The Meridian Speedway is a 320 mile rail line between Meridian, Mississippi and Shreveport, Louisiana. On
May 1, 2006, NS and Kansas City Southern (KCS) formed a joint venture (MSLLC) pursuant to which NS
expects to contribute $300 million in cash, substantially all of which will be used for capital improvements over
a period of approximately three years, in exchange for a 30% interest in the joint venture. To date, NS has
contributed $240 million. At the formation of MSLLC, KCS contributed the Meridian Speedway. NS is
recognizing its pro rata share of the joint venture’s earnings or loss as required under the equity method of
accounting. NS’ total investment in MSLLC is supported by the fair value of the rail line as well as intangible
assets obtained through the transaction. The joint venture is expected to increase capacity and improve service
over the Meridian Speedway into the Southeast.
The Heartland Corridor is a package of proposed clearance improvements and other facilities that will create a
seamless high-capacity intermodal route across Virginia and West Virginia to Midwest markets. During 2006,
with respect to the tunnel clearance component of the Heartland Corridor, NS and the states of Ohio, West
Virginia and Virginia each entered into a Memorandum of Agreement with the Federal Highway
Administration that governs the release of up to $95 million in authorized federal funding. In 2006, NS also
entered into agreements with two states governing the use of up to $11 million in state funding for the
Heartland Corridor rail double-stack clearance project. NS expects to spend about $60 million in connection
with this project. NS began work on the Heartland Corridor tunnel clearances in October 2007 and the entire
project is expected to be completed by 2010.
The Chicago Region Environmental and Transportation Efficiency (CREATE) project is a public-private
partnership to reduce rail and highway congestion and add freight and passenger capacity in the metropolitan
Chicago area. NS and other railroads have agreed to participate in CREATE. A portion of the public funding has
been approved and the parties have developed a list of projects to be included in Phase I of the project. A total of
$100 million in public funding has been secured for Phase I and the railroads have contributed an additional
$100 million. The railroads expect to complete Phase I over the next three years. As currently planned, the total
project is estimated to cost $1.5 billion with city, state and federal support. If additional public funding is
secured, the railroads are expected to contribute a total of $232 million towards the entire project with NS’ share
slated to be $34 million.
Cash used for financing activities was $1.6 billion in 2007, compared with $1.3 billion in 2006 and $456 million
in 2005. The increases reflected higher share repurchases as a part of NS’ ongoing share repurchase program (see
Note 13), as well as higher debt repayments and increased dividend payments. Financing activities in 2007
include $250 million of proceeds from NS’ receivable securitization facility (see Note 7).
Share repurchases totaled $1.2 billion in 2007 and $964 million in 2006 for the purchase and retirement of
23.6 million shares and 21.7 million shares, respectively, of common stock as part of NS’ ongoing share repurchase
program. In March 2007, NS’ Board of Directors amended NS’ share repurchase program by increasing the
authorized amount of share repurchases from 50 million to 75 million shares and shortening the authorized period
from 2015 to 2010. The timing and volume of purchases is guided by management’s assessment of market
conditions and other pertinent facts. To date, almost all of the purchases under the program have been made with
internally generated cash. However, future funding sources are expected to include proceeds from the issuance of
debt, including the use of the receivable securitization program (see Note 7). Dependent on economic and market
conditions, NS expects to purchase and retire a similar amount of shares in 2008.
NS has in place and available a $1 billion, five-year credit agreement expiring in 2012, which provides for
borrowings at prevailing rates and includes financial covenants. There were no amounts outstanding under this
facility at Dec. 31, 2007, and NS is in compliance with all of the financial covenants. NS also has in place two
shelf registration statements on Form S-3 filed with the SEC in March 2001 and September 2004 under which up to
$700 million of additional debt or equity securities could be issued (see Note 7).
K33
Looking forward, NS expects to refinance maturing debt over the next several years and modestly increase current
debt levels. Overall, NS’ goal is to maintain a capital structure with appropriate leverage to support NS’ business
strategy and provide flexibility through business cycles.
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 regularly discusses the development, selection and disclosures
concerning critical accounting estimates with the Audit Committee of its Board of Directors. There have been no
significant changes to the Application of Critical Accounting Estimates disclosure contained in NS’ Form 10-K as
of Dec. 31, 2007, with the exception of the adoption of Financial Accounting Standards Board Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes,” which is discussed below in “New Accounting
Pronouncements” and in Note 3.
Pensions and Other Postretirement Benefits
Accounting for pensions and other postretirement benefit plans requires management to make several estimates
and assumptions (see Note 10). These include the expected rate of return from investment of the plans' assets,
projected increases in medical costs and the expected retirement age of employees as well as their projected
earnings and mortality. In addition, the amounts recorded are affected by changes in the interest rate environment
because the associated liabilities are discounted to their present value. Management makes these estimates based
on the company's historical experience and other information that it deems pertinent under the circumstances (for
example, expectations of future stock market performance). Management utilizes an independent consulting
actuarial firm’s studies to assist it in selecting appropriate assumptions and valuing its related liabilities.
NS' net pension benefit, which is included in “Compensation and benefits” on its Consolidated Statements of
Income, was $40 million for the year ended Dec. 31, 2007. 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 a rate of return in excess of 10% and supports the current rate of return assumption. A one
percentage point change to this rate of return assumption would result in a $19 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 in light of the timing of
expected benefit payments. In 2007, NS utilized an analysis in which the projected annual cash flows from the
pension and postretirement benefit plans were matched with a yield curve based on an appropriate universe of high-
quality corporate bonds. NS used the results of the yield curve to select the discount rate that matches the payment
stream of the benefits in these plans. Previously, NS referred to Moody’s seasoned Aa corporate bond yields and
the changes in such yields in establishing the discount rate.
NS' net cost for other postretirement benefits, which is also included in “Compensation and benefits,” was
$76 million for the year ended Dec. 31, 2007. In recording this expense and valuing the net liability for other
postretirement benefits, which is included in “Other postretirement benefits” as disclosed in Note 10,
K34
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 10.
Properties and Depreciation
Most of NS' total assets are comprised of long-lived railway properties (see Note 5). 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. In developing these assumptions, NS’
management utilizes periodic depreciation studies that are performed by an outside 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, 2007, amounted to $775 million. NS' weighted-
average depreciation rates for 2007 are disclosed in Note 5; 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, included in “Materials and other,” amounted to $171 million for the
year ended Dec. 31, 2007. Most of this expense was composed of NS' accrual related to personal injury liabilities.
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 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.
To aid in valuing its personal injury liability and determining the amount to accrue during the year, NS’
management utilizes studies prepared by an independent consulting actuarial firm. 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, completed in the fourth
quarter of 2007, resulted in a 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 ultimate liability could be
higher or lower.
K35
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 17). Claims, if any,
against third parties for recovery of cleanup costs incurred by NS, are reflected as receivables (when collection is
probable) in the Consolidated Balance Sheets 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.
Operating expenses for environmental matters totaled approximately $16 million in 2007, $19 million in 2006 and
$16 million in 2005, and capital expenditures totaled approximately $7 million in 2007, $6 million in 2006 and
$9 million in 2005. Capital expenditures in 2008 are expected to be comparable to those in 2007.
NS' Consolidated Balance Sheets included liabilities for environmental exposures in the amount of $46 million at
Dec. 31, 2007, and $54 million at Dec. 31, 2006 (of which $12 million was accounted for as a current liability at
Dec. 31, 2007 and 2006). At Dec. 31, 2007, the liability represented NS' estimate of the probable cleanup and
remediation costs based on available information at 155 identified locations. On that date, 13 sites accounted for
$25 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 32 locations, one or more NS subsidiaries, usually in conjunction with a number of other parties, have been
identified as potentially responsible parties by the Environmental Protection Agency (EPA) or similar state
authorities under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or
comparable state statutes, which often impose joint and several liability for cleanup costs.
With respect to known environmental sites (whether identified by NS or by the EPA or comparable state
authorities), estimates of NS' ultimate potential financial exposure for a given site or in the aggregate for all
such sites are necessarily imprecise because of the widely varying costs of currently available cleanup
techniques, the likely development of new cleanup technologies, the difficulty of determining in advance the
nature and full extent of contamination and each potential participant's share of any estimated loss (and that
participant's ability to bear it), and evolving statutory and regulatory standards governing liability. NS
estimates its environmental remediation liability on a site-by-site basis, using assumptions and judgments that
management deems appropriate for each site. As a result, it is not practical to quantitatively describe the effects
of changes in these many assumptions and judgments. NS has consistently applied its methodology of
estimating its environmental liabilities.
Based on an assessment of known facts and circumstances, management believes that it is unlikely that any known
matters, either individually or in the aggregate, will have a material adverse effect on NS' financial position, results
of operations or liquidity.
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.
K36
Income Taxes
NS' net long-term deferred tax liability totaled $6.4 billion at Dec. 31, 2007 (see Note 3). 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 had a
$10 million valuation allowance on $685 million of deferred tax assets as of Dec. 31, 2007, reflecting the
expectation that most of these assets will be realized.
In addition, NS has a recorded liability for its estimate of uncertain tax positions taken or expected to be taken
in a tax return. Judgment is required in evaluating the application of federal and state tax laws and assessing
whether it is more likely than not that a tax position will be sustained on examination and, if so, judgment is
also required as to the measurement of the amount of tax benefit that will realized upon settlement with the
taxing authority. Management believes this liability for uncertain tax positions to be adequate. Income tax
expense is adjusted in the period in which new information about a tax position becomes available or the final
outcome differs from the amounts recorded. For every one half percent change in the 2007 effective rate net
income would have changed by $11 million.
OTHER MATTERS
Labor Agreements
Approximately 26,000, or about 85%, of NS' railroad employees are covered by labor agreements with various
labor unions. These agreements remain in effect until changed pursuant to the Railway Labor Act (RLA). NS
largely bargains in concert with other major railroads. Moratorium provisions in the labor agreements govern
when the railroads and the unions may propose changes. The most recent bargaining round began in late 2004.
Since that time, the railroads have finalized agreements that extend through 2009 with all of the major rail
unions except the United Transportation Union (UTU) and the International Association of Machinists (IAM).
A tentative agreement has been reached with the UTU that is subject to ratification by employees.
NS previously reached separate agreements with the Brotherhood of Locomotive Engineers and Trainmen
(BLET) and the American Train Dispatchers Association (ATDA) through 2009. Thus, only the health and
welfare provisions from the national agreements will apply to NS’ locomotive engineers and ATDA-represented
dispatchers. NS recently reached a tentative agreement with BLET that would have further extended its contract
with that union through 2014. However, that agreement was not ratified by employees.
A tentative national agreement with IAM was not ratified by employees. Negotiations with IAM are being
mediated by the National Mediation Board (NMB), a federal agency. The status quo is preserved during
mediation (that is, the union may not strike and management may not change the labor agreements) while the
NMB assists the parties in their efforts to reach agreement. If the NMB were to terminate mediation, it would, at
that time, propose that the parties arbitrate their differences. A strike could occur 30 days thereafter if the parties
did not accept arbitration. However, the President of the United States of America could then appoint an
Emergency Board which would delay any strike for a further 60 days while the Board made recommendations and
the parties engaged in further negotiations. The outcome of the negotiations cannot be determined at this time.
K37
Market Risks and Hedging Activities
NS has used 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 was 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. No new
hedges have been entered into since May of 2004, and the last remaining contracts were settled in the second
quarter of 2006, bringing an end to the benefits from the program. Locomotive diesel fuel costs represented 14%
of NS' operating expenses for 2006 and 11% for 2005.
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, 2007, NS' debt subject to interest rate fluctuations totaled $413 million. A 1% point increase in
interest rates would increase NS' total annual interest expense related to all its variable debt by approximately
$4 million. Management considers it unlikely that interest rate fluctuations applicable to these instruments will
result in a material adverse effect on NS' financial position, results of operations or liquidity.
Some of NS' capital leases, which carry an average fixed rate of 7%, were effectively converted to variable rate
obligations using interest rate swap agreements. On Dec. 31, 2007, the average pay rate under these agreements
was 5%, and the average receive rate was 7%. During 2007 and 2006, the effect of the swaps was to reduce interest
expense by $1 million and $1 million, respectively. 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 September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements. This statement, effective for interim or annual reporting periods
beginning after Nov. 15, 2007, establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. NS will adopt the statement in the first quarter
of 2008 and expects it will not have a material effect on NS’ consolidated financial statements.
FASB Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes,” issued in June 2006, clarifies
accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with
SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement
attribute for a tax position taken or expected to be taken in a tax return. Under the guidelines of FIN 48, an entity
should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that
the position will be sustained on examination. NS adopted this Interpretation in the first quarter of 2007 (see
Notes 1 and 3).
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
K38
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.
Proposed Legislation and Regulations on Safety and Transportation of Hazardous Materials
Regulations proposed by the Department of Homeland Security in late 2006 would mandate that railroads adopt
chain of custody and security measures. If enacted, such regulations could cause service degradation and higher
costs for the transportation of toxic inhalation hazard materials. In addition, certain local governments have
sought to enact ordinances banning hazardous materials moving by rail within their borders. Some legislators
have contemplated pre-notification requirements for hazardous material shipments. If promulgated, 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.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-
looking statements that may be identified by the use of words like “believe,” “expect,” “anticipate” and “project.”
Forward-looking statements reflect management's good-faith evaluation of information currently available.
However, such statements are dependent on and, therefore, can be influenced by, a number of external variables
over which management has little or no control, including: domestic and international economic conditions;
interest rates; the business environment in industries that produce and consume rail freight; competition and
consolidation within the transportation industry; the operations of carriers with which NS interchanges; acts of
terrorism or war; fluctuation in prices of key materials, in particular diesel fuel; labor difficulties, including strikes
and work stoppages; legislative and regulatory developments; results of litigation; changes in securities and
capital markets; disruptions to NS’ technology infrastructure, including computer systems; and natural events
such as severe weather, hurricanes and floods. For a discussion of significant risk factors applicable to NS, see
Part I, Item 1A “Risk Factors.” Forward-looking statements are not, and should not be relied upon as, a guarantee
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.”
K39
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 Dec. 31, 2007, 2006 and 2005
Consolidated Balance Sheets
As of Dec. 31, 2007 and 2006
Consolidated Statements of Cash Flows
Years ended Dec. 31, 2007, 2006 and 2005
Consolidated Statements of Changes in Stockholders' Equity
Years ended Dec. 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
The Index to Consolidated Financial Statement Schedule in Item 15
Page
K41
K42
K44
K45
K46
K47
K48
K82
K40
Report of Management
Feb. 15, 2008
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 Dec. 31, 2007. 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 Dec. 31, 2007.
KPMG LLP, independent registered public accounting firm, has audited the Corporation's financial statements
and issued an attestation report on the Corporation's internal control over financial reporting as of Dec. 31, 2007.
/s/ Charles W. Moorman
Charles W. Moorman
Chairman, President and
Chief Executive Officer
/s/ James A. Squires
James A. Squires
Executive Vice President Finance and
Chief Financial Officer
/s/ Marta R. Stewart
Marta R. Stewart
Vice President and
Controller
K41
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Norfolk Southern Corporation:
We have audited Norfolk Southern Corporation’s internal control over financial reporting as of December 31,
2007, 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, included in the accompanying Report of Management.
Our responsibility is to express an opinion on the Company’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, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audit also included 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 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 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, Norfolk Southern Corporation maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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 as of December 31, 2007 and
2006, 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, 2007, and our report dated February 15, 2008 expressed
an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Norfolk, Virginia
February 15, 2008
K42
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Norfolk Southern Corporation:
We have audited the accompanying consolidated balance sheets of Norfolk Southern Corporation and subsidiaries
as of December 31, 2007 and 2006, 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, 2007. In connection with
our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed
in Item 15(A)2. These consolidated financial statements and financial statement schedule are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with 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, 2007 and 2006, and the
results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2007, 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, Norfolk Southern Corporation adopted Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, effective
January 1, 2007, Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment,
effective January 1, 2006, and Statement of Financial Accounting Standards No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, effective December 31, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), Norfolk Southern Corporation’s internal control over financial reporting as of December 31,
2007, 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 15, 2008
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Norfolk, Virginia
February 15, 2008
K43
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
Years ended Dec. 31,
2006
($ in millions, except earnings per share)
2007
2005
Railway operating revenues
$
9,432
$
9,407
$
8,527
Railway operating expenses:
Compensation and benefits
Purchased services and rents
Fuel
Depreciation
Materials and other
Total railway operating expenses
Income from railway operations
Other income – net
Interest expense on debt
Income before income taxes
Provision for income taxes
Net income
Per share amounts:
Net income
Basic
Diluted
2,552
1,551
1,169
775
800
6,847
2,585
93
441
2,237
773
2,637
1,578
1,095
738
802
6,850
2,557
149
476
2,493
1,547
821
774
775
6,410
2,117
74
494
2,230
1,697
749
416
$
$
$
1,464
$
1,481
$
1,281
3.74
3.68
$
$
3.63
3.57
$
$
3.17
3.11
See accompanying notes to consolidated financial statements.
K44
Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
As of Dec. 31,
2007
2006
($ in millions)
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
Investments
Properties less accumulated depreciation
Other assets
Total assets
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
Income and other taxes
Other current liabilities
Current maturities of long-term debt
Total current liabilities
Long-term debt
Other liabilities
Deferred income taxes
Total liabilities
Stockholders' equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 379,297,891 and 397,419,601 shares,
respectively, net of treasury shares
Additional paid-in capital
Accumulated other comprehensive loss
Retained income
Total stockholders' equity
$
$
$
206 $
--
942
176
190
161
1,675
1,974
21,583
912
26,144 $
1,139 $
203
237
369
1,948
5,999
2,039
6,431
16,417
380
1,466
(399)
8,280
9,727
527
391
992
151
186
153
2,400
1,755
21,098
775
26,028
1,181
205
216
491
2,093
6,109
1,767
6,444
16,413
398
1,303
(369)
8,283
9,615
Total liabilities and stockholders' equity
$
26,144 $
26,028
See accompanying notes to consolidated financial statements.
K45
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Cash flows from operating activities
Net income
Reconciliation of net income to net cash
provided by operating activities:
Depreciation
Deferred income taxes
Gains and losses on properties and investments
Changes in assets and liabilities affecting operations:
Accounts receivable
Materials and supplies
Other current assets
Current liabilities other than debt
Other – net
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
Purchase and retirement of common stock
Proceeds from borrowings
Debt repayments
Net cash used for financing activities
2007
Years Ended Dec. 31,
2006
($ in millions)
2005
$
1,464 $
1,481 $
1,281
786
125
(51)
30
(25)
(17)
38
(17)
2,333
(1,341)
124
(635)
827
(1,025)
(377)
183
(1,196)
250
(489)
(1,629)
750
(8)
(54)
(60)
(19)
(11)
38
89
2,206
(1,178)
119
(1,804)
2,179
(684)
(278)
297
(964)
--
(339)
(1,284)
787
80
(51)
(94)
(28)
20
55
55
2,105
(1,025)
110
(1,822)
910
(1,827)
(194)
194
--
433
(889)
(456)
(178)
Net increase (decrease) in cash and cash equivalents
(321)
238
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 (net of refunds)
See accompanying notes to consolidated financial statements.
527
289
467
$
206 $
527 $
289
$
$
441 $
603 $
473 $
692 $
485
271
K46
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Common
Stock
Additional
Paid-in
Capital
Unearned
Restricted
Stock
Accum.
Other
Compre-
hensive
Loss
Retained
Income
Total
($ in millions, except per share amounts)
Balance Dec. 31, 2004
$
401
$
728
$
(8) $
(24)
$
6,880
$
7,977
Comprehensive income
Net income
Other comprehensive loss
Total comprehensive
income
Dividends on Common
Stock, $0.48 per share
Stock-based compensation,
including tax benefit of $47
Other
Balance Dec. 31, 2005
Comprehensive income
Net income
Other comprehensive
income
Total comprehensive
income
Adoption of SFAS 158,
net of tax
Dividends on Common
Stock, $0.68 per share
Share repurchases
Stock-based compensation,
including tax benefit of $85
Other
1,281
(53)
1,281
(53)
1,228
(194)
(194)
261
4
(9)
(17)
(77)
7,967
9,276
1,481
1,481
10
411
260
4
992
2
(294)
2
1,483
(294)
(278)
(964)
390
2
(278)
(879)
(8)
(22)
9
(63)
372
2
17
Balance Dec. 31, 2006
$
398
$
1,303
$
-- $
(369)
$
8,283
$
9,615
Comprehensive income
Net income
Other comprehensive
loss
Total comprehensive
income
Adoption of FIN 48,
net of tax
Dividends on Common
Stock, $0.96 per share
Share repurchases
Stock-based compensation,
including tax benefit of $57
Other
(24)
6
(81)
238
6
(30)
1,464
1,464
(30)
1,434
10
10
(377)
(1,091)
(9)
(377)
(1,196)
235
6
Balance Dec. 31, 2007
$
380
$
1,466
$
-- $
(399)
$
8,280
$
9,727
See accompanying notes to consolidated financial statements.
K47
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 21,000 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.
NSR and its railroad subsidiaries transport raw materials, intermediate products and finished goods classified in
the following market groups (percent of total railway operating revenues in 2007): coal (25%); intermodal (20%);
chemicals (13%); metals/construction (12%); agriculture/consumer products/government (11%); automotive
(10%); and paper/clay/forest products (9%). Although most of NS’ customers are domestic, ultimate points of
origination or destination for some of the products transported (particularly coal bound for export and some
intermodal containers) may be outside the United States. Approximately 85% of NS' railroad employees are
covered by collective bargaining agreements with various 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 periodically 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 other postretirement benefits. Changes in facts and
circumstances may result in revised estimates.
Revenue Recognition
Transportation revenue is recognized proportionally as a shipment moves from origin to destination and related
expenses are recognized as incurred. Refunds (which are primarily volume-based incentives) are recorded as a
reduction to revenues on the basis of management's best estimate of projected liability, which is based on historical
activity, current traffic counts and the expectation of future activity. NS regularly monitors its contract refund
liability, and historically, the estimates have not differed significantly from the amounts ultimately refunded.
Switching, demurrage and other incidental service revenues are 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 has designated such instruments as hedging
K48
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 11. Through Dec. 31,
2005, NS applied the intrinsic value recognition and measurement principles of APB Opinion No. 25,
“Accounting for Stock Issued to Employees” (APB Opinion 25), and related interpretations in accounting for
these plans (See “Required Accounting Changes,” below).
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 123), to stock-based employee compensation:
Net income, as reported
Add: Stock-based employee compensation expense
as reported
Deduct: Stock-based employee compensation
expense determined under fair value method
Pro forma net income
Earnings per share:
As reported
Basic
Diluted
Pro forma
Basic
Diluted
Required Accounting Changes
2005
($ in millions,
except per share)
$
$
$
$
$
$
1,281
46
(45)
1,282
3.17
3.11
3.17
3.10
Effective Jan. 1, 2007, NS adopted Financial Accounting Standards Board Interpretation No. 48 (FIN 48),
“Accounting for Uncertainty in Income Taxes,” which clarifies accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income
Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for a tax position taken or expected
to be taken in a tax return. Under the guidelines of FIN 48, an entity should recognize the financial statement
benefit of a tax position if it determines that it is more likely than not that the position will be sustained on
examination (see Note 3).
Effective Dec. 31, 2006, NS adopted Statement of Financial Accounting Standards (SFAS) No. 158, “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans” (see Note 10).
Effective January 1, 2006, NS adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based
Payment,” [SFAS 123(R)]. This statement applies to awards granted, modified, repurchased or cancelled after the
K49
effective date as well as awards that are unvested at the effective date and includes, among other things, the
requirement to expense the fair value of stock options. The standard also requires that awards to be settled in cash
be measured at fair value at each reporting date until ultimate settlement. NS adopted SFAS 123(R) using the
modified prospective method, which requires application of the standard to all awards granted, modified,
repurchased or cancelled on or after January 1, 2006, and to all awards for which the requisite service has not
been rendered as of such date. In accordance with the modified prospective approach, prior period financial
statements have not been restated to reflect the impact of SFAS 123(R). As compared to amounts that would
have been recognized under APB Opinion 25, the adoption of SFAS 123(R) resulted in $27 million of additional
compensation expense for 2006, including the immediate expensing of 2006 grants made to retirement-eligible
employees, which reduced net income by $20 million, or 5 cents per basic and diluted share. Under SFAS
123(R), all new awards granted to retirement eligible employees must be expensed immediately. Under APB
Opinion No. 25 and related interpretations, such awards were amortized over the stated service period. Such
awards were treated similarly under SFAS 123 in the pro forma amounts disclosed in the preceding table.
Cash Equivalents
“Cash equivalents” are highly liquid investments purchased three months or less from maturity.
Allowance for Doubtful Accounts
NS' allowance for doubtful accounts was $5 million at Dec. 31, 2007 and 2006. 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.
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.”
Investments
Debt securities classified as “held-to-maturity” are reported at amortized cost and marketable equity and debt
securities classified as “trading” or “available-for-sale” are recorded at fair value. Unrealized after-tax gains
and losses for investments designated as “available-for-sale,” 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.”
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. Depletion of natural resources (see Note 2)
is based on units of production. Depreciation in the Consolidated Statements of Cash Flows includes depreciation
and depletion. 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. Costs related to repairs and maintenance activities that do not extend an asset’s useful life or increase
its utility are expensed when such repairs are performed. When properties other than land and nonrail assets are
K50
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 2) since such income is not a product of
NS’ railroad operations.
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.
Reclassifications
Certain comparative prior year amounts presented in “Railway operating expenses” have been reclassified to conform
to the current year presentation. Amounts previously presented as “Diesel fuel” (used in locomotives) have been
combined with other fuel and related costs and are now presented as “Fuel.” Additionally, certain other groupings of
costs within “Railway operating expenses” have been changed.
2. Other Income - Net
Income from natural resources:
Royalties from coal
Nonoperating depletion and depreciation
Subtotal
Gains and losses from sale of properties and investments
Rental income
Equity in earnings of Conrail (Note 4)
Interest income
Corporate-owned life insurance – net
Expenses related to synthetic fuel investments
Other interest expense
Taxes on nonoperating property
Other
Total
2007
2006
($ in millions)
2005
$
$
52 $
(11)
41
51
46
45
45
9
(77)
(27)
(10)
(30)
93 $
55 $
(12)
43
54
45
25
76
24
(62)
(17)
(9)
(30)
149 $
54
(13)
41
49
42
37
41
4
(102)
(6)
(9)
(23)
74
“Other income - net” includes income and costs not part of rail operations and 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 owned and operated facilities that produced synthetic fuel
from coal. In addition, in 2007 NS purchased two facilities that produced synthetic fuel from coal. The
production of synthetic fuel resulted in tax credits as well as expenses related to the investments. The expenses
are included in “Expenses related to synthetic fuel investments” above.
“Other current assets” in the Consolidated Balance Sheets includes prepaid interest of $58 million at Dec. 31,
2007, and $50 million at Dec. 31, 2006, arising from corporate-owned life insurance borrowings.
K51
3. Income Taxes
Provision for Income Taxes
Current:
Federal
State
Total current taxes
Deferred:
Federal
State
Total deferred taxes
2007
2006
($ in millions)
2005
$
570 $
78
648
666 $
91
757
77
48
125
3
(11)
(8)
283
53
336
220
(140)
80
Provision for income taxes
$
773 $
749 $
416
Reconciliation of Statutory Rate to Effective Rate
The “Provision for income taxes” in the Consolidated Statements of Income differs from the amounts computed
by applying the statutory federal corporate tax rate as follows:
2007
2006
2005
Amount
%
Amount
%
Amount
%
($ in millions)
Federal income tax at
statutory rate
State income taxes, net of
Federal tax effect
Tax credits
Ohio rate change, net of
Federal tax effect
Illinois tax law change, net of
Federal tax effect
Other – net
Provision for income taxes
$
$
783
35 $
780
35 $
594
63
(65)
--
19
(27)
773
3
(3)
--
1
(1)
35 $
52
(62)
--
--
(21)
749
2
(3)
--
--
--
34 $
40
(104)
(96)
--
(18)
416
35
2
(6)
(6)
--
--
25
In August 2007, Illinois enacted tax legislation that modifies the way in which transportation companies
apportion their taxable income to the state. The change resulted in an increase in NS’ deferred income tax
liability in the third quarter, as required by Statement of Financial Accounting Standards No. 109, “Accounting
for Income Taxes,” which increased deferred tax expense by $19 million.
In June 2005, Ohio enacted tax legislation that phases out its Corporate Franchise Tax, which was generally based
on federal taxable income, and phases in a new gross receipts tax called the Commercial Activity Tax, which is
based on current year sales and rentals. The phased elimination of the Corporate Franchise Tax resulted in a
reduction in NS’ deferred income tax liability, as required by Statement of Financial Accounting Standards
No. 109, “Accounting for Income Taxes,” which, as noted above, decreased deferred tax expense by $96 million.
K52
Deferred Tax Assets and Liabilities
Certain items are reported in different periods for financial reporting and income tax purposes. Deferred tax
assets and liabilities are recorded in recognition of these differences. The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
Deferred tax assets:
Compensation and benefits, including post-retirement
Accruals, including casualty and other claims
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,
2007
2006
($ in millions)
417
219
49
685
(10)
675
(6,683)
(233)
(6,916)
(6,241)
190
$
382
211
44
637
(9)
628
(6,659)
(227)
(6,886)
(6,258)
186
Net long-term deferred tax liability
$
(6,431)
$
(6,444)
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 state income tax net operating
losses that may not be utilized prior to their expiration. The total valuation allowance increased $1 million in
2007, and decreased $1 million in 2006 and $3 million in 2005.
Uncertain Tax Positions
As a result of the implementation of FIN 48 on Jan. 1, 2007 (see Note 1), NS recognized a $10 million increase
to stockholders’ equity, $2 million of which related to investments accounted for under the equity method of
accounting. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows
($ in millions):
Balance at January 1, 2007
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Settlements with taxing authorities
Lapse of statutes of limitations
Balance at December 31, 2007
$179
65
9
(84)
--
(2)
$167
K53
Included in the balance of unrecognized tax benefits at December 31, 2007, are potential benefits of
$56 million that would affect the effective tax rate if recognized. Unrecognized tax benefits are adjusted in
the period in which new information about a tax position becomes available or the final outcome differs from
the amount recorded.
NS expects that the total amount of unrecognized tax benefits at Dec. 31, 2007, will decrease by between
$30 million and $35 million in 2008 due to tax positions for which there was an uncertainty about the timing of
deductibility in earlier years but deductibility may become certain by the close of 2008. NS’ consolidated
federal income tax returns for 2004 and 2005 are being audited by the Internal Revenue Service (IRS). NS
anticipates that the IRS will complete its examination of the 2004 and 2005 years within the next twelve
months. It is reasonably possible that the amount of unrecognized tax benefits will change due to the
completion of the IRS examination of the 2004 and 2005 years, but an estimate of the change cannot be made.
The IRS completed its examination of the 2002 and 2003 consolidated federal income tax returns during the
third quarter of 2006 and NS appealed certain adjustments proposed by the IRS. State income tax returns
generally are subject to examination for a period of three to four years after filing of the return. In addition, NS
is generally obligated to report changes in taxable income arising from federal income tax examinations to the
states within a period of up to two years from the date the federal examination is final. NS has various state
income tax returns either under examination, administrative appeals, or litigation. It is reasonably possible that
the amount of unrecognized tax benefits will decrease in 2008 as a result of the lapse of state statutes of
limitations, but the amount is not expected to be significant. NS does not expect that any of the above potential
changes in unrecognized tax benefits will have a material effect on NS’ financial position, results of operations
or liquidity.
Interest related to unrecognized tax benefits, which is included in “Other income – net,” amounted to
$12 million of expense in 2007 and income of $2 million in 2006 and $12 million in 2005. Penalties related to
tax matters are included in “Provision for income taxes” and totaled zero in each of 2007, 2006 and 2005. NS
has recorded a liability of $28 million at Dec. 31, 2007, and $17 million at Jan. 1, 2007, for the payment of
interest on unrecognized tax benefits. NS has no liability recorded at Dec. 31, 2007, and Jan. 1, 2007, for the
payment of penalties on unrecognized tax benefits.
4. Investments
Short-term investments with average maturities:
Federal government notes, 5 months
Corporate notes, 4 months
Commercial paper, 2 months
Municipal debt, 1 month
Other short-term investments, less than one month
Total short-term investments
Long-term investments:
Investment in Conrail Inc.
Other equity method investments
Company-owned life insurance at net cash
surrender value
Other investments
Total long-term investments
Dec. 31,
2007
2006
($ in millions)
--
--
--
--
--
--
899
594
327
154
1,974
$
$
$
$
124
117
74
22
54
391
849
451
310
145
1,755
$
$
$
$
K54
Other equity method investments includes $240 million at Dec. 31, 2007, and $100 million at Dec. 31, 2006,
related to NS’ investment in Meridian Speedway LLC, a joint venture formed with Kansas City Southern in 2006.
Investment in Conrail
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. NS is applying 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 useful lives of Conrail’s depreciable property and equipment,
including the related deferred tax effect of the differences in tax accounting bases for such assets, as all of the
purchase price at acquisition was allocable to Conrail’s tangible assets and liabilities. At Dec. 31, 2007, the
difference between NS’ investment in Conrail and its share of Conrail’s underlying net equity was
$555 million.
CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of 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. "Purchased
services and rents" includes expenses for amounts due to CRC for operation of the Shared Assets Areas of $126
million in 2007 and 2006, and $129 million in 2005. Future minimum lease payments due to CRC under the Shared
Assets Areas agreements are as follows: $28 million in each of 2008 through 2012 and $317 million thereafter. 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.
“Accounts payable” includes $78 million at Dec. 31, 2007, and $68 million at Dec. 31, 2006, due to Conrail for
the operation of the Shared Assets Areas. In addition, “Other liabilities” includes $133 million at Dec. 31, 2007
and 2006 for long-term advances from Conrail, maturing 2035, entered into in 2005 that bear interest at an
average rate of 4.4%.
5. Properties
Land
Railway property:
Road
Equipment
Other property
Less accumulated depreciation
Dec. 31,
2007
2006
($ in millions)
Depreciation
Rate for 2007
$
2,085 $
2,082
19,420
7,413
471
29,389
(7,806)
18,725
7,085
471
28,363
(7,265)
2.7%
3.7%
2.3%
Net properties
$
21,583 $
21,098
Railway property includes $504 million at Dec. 31, 2007, and $602 million at Dec. 31, 2006, of assets recorded
pursuant to capital leases with accumulated amortization of $175 million and $192 million at Dec. 31, 2007 and
2006, respectively. Other property includes the costs of obtaining rights to natural resources of $337 million at
K55
Dec. 31, 2007 and 2006, with accumulated depletion of $172 million and $165 million at Dec. 31, 2007 and
2006, respectively.
Capitalized Interest
Total interest cost incurred on debt in 2007, 2006 and 2005 was $455 million, $489 million and $505 million,
respectively, of which $14 million, $13 million and $11 million was capitalized.
6. Current Liabilities
Accounts payable:
Accounts and wages payable
Casualty and other claims (Note 17)
Vacation liability
Equipment rents payable – net
Due to Conrail (Note 4)
Other
Total
Other current liabilities:
Interest payable
Retiree benefit obligations (Note 10)
Liabilities for forwarded traffic
Other
Total
Dec. 31,
2007
2006
($ in millions)
$
$
$
$
568
259
123
87
78
24
1,139
90
57
53
37
237
$
$
$
$
569
301
120
96
68
27
1,181
88
53
50
25
216
K56
7. Long-term Debt
Long-term debt as of Dec. 31, 2007, with weighted average interest rates and maturities is presented below:
Notes and debentures:
6.91%, maturing to 2011
6.66%, maturing 2014 and 2017
8.23%, maturing 2020 to 2025
7.12%, maturing 2027 to 2031
7.21%, maturing 2037 and 2043
7.02%, maturing 2097 and 2105
Securitization borrowings, 5.57%
Equipment obligations, 6.13%, maturing to 2014
Capitalized leases, 4.84%, maturing to 2024
Other debt, 7.18%, 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 2008 are as follows:
2009
2010
2011
2012
2013 and subsequent years
Total
Dec. 31,
2007
2006
($ in millions)
1,540
981
764
1,290
855
650
--
306
231
113
(130)
6,600
(491)
6,109
$
$
$
$
1,200 $
981
764
1,290
855
650
250
226
165
113
(126)
6,368
(369)
5,999 $
477
340
338
31
4,813
5,999
In November 2007, NS entered into a $500 million receivables securitization facility under which NSR sells
substantially all of its eligible third-party receivables to an NS subsidiary, which in turn may transfer beneficial
interests in the receivables to various commercial paper vehicles. Amounts received under the facility are
accounted for as borrowings. The facility has a 364-day term; however, NS intends to refinance these borrowings
by issuing long-term debt, which is supported by its $1 billion credit agreement (see below). Accordingly,
amounts outstanding are included in the line item “Long-term debt” in the Consolidated Balance Sheet. At
Dec. 31, 2007, the amount of receivables included in “Accounts receivable – net” serving as collateral for these
borrowings was $778 million.
In May 2005, NS issued $717 million of unsecured notes ($350 million at 5.64% due 2029 and $367 million at
5.59% due 2025) and paid $218 million of premium in exchange for $717 million of its previously issued
unsecured notes ($350 million at 7.8% due 2027, $200 million at 7.25% due 2031, and $167 million at 9.0% due
2021). The $218 million cash premium payment is reflected as a reduction of debt in the Consolidated Balance
Sheet and Statement of Cash Flows and is included in “Discounts and premiums, net.” The premium is being
amortized as additional interest expense over the terms of the new debt, resulting in effective interest rates of
8.7% for the 2029 notes and 9.0% for the 2025 notes.
“Discounts and premiums, net” at Dec. 31, 2007 and 2006, includes $126 million and $130 million,
respectively, related to $314 million face amount of 9.75% notes due in 2020 and $138 million face amount
of 7.875% notes due 2043, which is being amortized as a reduction of interest expense over the terms of the
notes, resulting in effective interest rates of 6.0% and 6.2%, respectively.
K57
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 $80 million at Dec. 31, 2007, and $85 million at Dec. 31, 2006.
Shelf Registration
NS has on file with the Securities and Exchange Commission two Form S-3 shelf registration statements, under
which up to $700 million of additional debt or equity securities could be issued.
Credit Agreement, Debt Covenants and Commercial Paper
NS has in place a five-year $1 billion credit facility expiring in 2012. Any borrowings under the credit agreement
are contingent on the continuing effectiveness of certain 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 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, 2007, NS was in
compliance with all financial covenants.
NS has the ability to issue commercial paper supported by its $1 billion credit agreement. At Dec. 31, 2007, and
Dec. 31, 2006, NS had no outstanding commercial paper or borrowings under the credit agreement.
8. Lease Commitments
NS is committed under long-term lease agreements, which expire on various dates through 2067, for equipment,
lines of road and other property. The following amounts do not include payments to CRC under the Shared Assets
Areas agreements (see Note 4). Future minimum lease payments and operating lease expense are as follows:
2008
2009
2010
2011
2012
2013 and subsequent years
Total
Less imputed interest on capital leases at an average rate of 5.4%
Present value of minimum lease payments included in debt
Operating Lease Expense
Operating
Leases
Capital
Leases
($ in millions)
$
$
138
130
113
81
70
405
937
$
$
$
46
60
25
22
15
8
176
(11)
165
Minimum rents
Contingent rents
Total
2007
2006
($ in millions)
2005
$
$
191
79
270
$
$
197
79
276
$
$
190
75
265
Contingent rents is primarily comprised of usage-based rent paid to other railroads for joint facility operations.
K58
9. Other Liabilities
Retiree health and death benefit obligations (Note 10)
Casualty and other claims (Note 17)
Net pension obligations (Note 10)
Deferred compensation
Long-term advances from Conrail (Note 4)
Federal and state income taxes
Other
Total
10. Pensions and Other Postretirement Benefits
Dec. 31,
2007
2006
($ in millions)
$
$
635 $
588
150
148
133
131
254
2,039 $
621
471
144
149
133
--
249
1,767
Norfolk Southern and certain subsidiaries have both funded and unfunded defined benefit pension plans
covering principally salaried employees. Norfolk Southern and certain subsidiaries also provide specified
health care and death benefits to eligible retired employees and their dependents. Under the present plans,
which may be amended or terminated at NS' option, a defined percentage of health care expenses is covered,
reduced by any deductibles, co-payments, Medicare payments and, in some cases, coverage provided under
other group insurance policies.
Required Accounting Change
As of Dec. 31, 2006, NS adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” (SFAS 158). This statement requires an employer to recognize in its statement of financial
position the overfunded or underfunded status of defined benefit pension and postretirement plans measured as
the difference between the fair value of plan assets and the benefit obligation. Employers must also recognize as a
component of other comprehensive income, net of tax, the actuarial gains and losses and the prior service costs,
credits and transition costs that arise during the period. As a result of adopting this standard, NS reduced its
pension asset by $217 million and increased its pension and postretirement liabilities by $258 million in its
Consolidated Balance Sheet, with a corresponding reduction to stockholders’ equity of $292 million (net of tax)
reflected as an increase to accumulated other comprehensive loss. In addition, NS recognized a $2 million
reduction to stockholders’ equity related to its proportionate share of Conrail’s adoption of SFAS 158. The
adoption of SFAS 158 has no impact on years prior to 2006 and has no effect on the calculation of expenses for
pensions and post-retirement benefits.
K59
Pension and Other Postretirement Benefit Obligations and Plan Assets
Other Postretirement
Benefits
Pension Benefits
2006
2007
($ in millions)
2007
Change in benefit obligations
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gains) losses
Benefits paid
Benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid
Fair value of plan assets at end of year
$
1,650 $
24
92
(12)
(110)
1,644
1,642 $
27
88
6
(113)
1,650
785 $
21
46
53
(46)
859
1,939
125
9
(110)
1,963
1,824
220
8
(113)
1,939
119
6
97
(46)
176
2006
754
19
42
14
(44)
785
108
11
44
(44)
119
Funded status at end of year
$
319 $
289 $
(683) $
(666)
Amounts recognized in the Consolidated
Balance Sheets consist of:
Noncurrent assets
Current liabilities
Noncurrent liabilities
Net amount recognized
Amounts recognized in accumulated other
comprehensive loss (pretax) consist of:
Net loss
Prior service cost (benefit)
Impact of implementation of SFAS 158
$
$
$
478 $
(9)
(150)
319 $
441 $
(8)
(144)
289 $
-- $
(48)
(635)
(683) $
--
(45)
(621)
(666)
290 $
9
--
-- $
--
244
279 $
(10)
--
--
--
231
NS’ unfunded pension plans, included above, which in all cases have no assets and therefore have an accumulated
benefit obligation in excess of plan assets, had projected benefit obligations of $159 million at Dec. 31, 2007, and
$152 million at Dec. 31, 2006, and had accumulated benefit obligations of $137 million at Dec. 31, 2007, and
$125 million at Dec. 31, 2006.
K60
Pension and Other Postretirement Benefit Cost Components
Pension benefits
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net losses
Net benefit
Other postretirement benefits
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service benefit
Amortization of net losses
Net cost
2007
2006
($ in millions)
2005
$
$
$
$
24 $
92
(167)
2
9
(40) $
21 $
46
(11)
(8)
28
76 $
27 $
88
(159)
2
13
(29) $
19 $
42
(10)
(8)
27
70 $
23
87
(149)
2
14
(23)
17
40
(9)
(8)
22
62
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Loss
Net loss arising during the year
Amortization of prior service cost
Amortization of net loss
Total recognized in other comprehensive loss
Total recognized in net periodic (benefit) cost
and other comprehensive loss
2007
Pension
Benefits
Other
Postretirement
Benefits
($ in millions)
$
$
$
30 $
(2)
(9)
19 $
58
8
(28)
38
(21) $
114
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from
accumulated other comprehensive loss into net periodic benefit cost over the next year are $7 million and
$3 million, respectively. The estimated net loss and prior service benefit for the other defined benefit
postretirement plans that will be amortized from accumulated other comprehensive loss into net periodic benefit
cost over the next year are $30 million and $8 million, respectively.
K61
Pension Assumptions
Pension and other postretirement benefit costs are determined based on actuarial valuations that reflect appropriate
assumptions as of the measurement date, ordinarily the beginning of each year. The funded status of the plans is
determined using appropriate assumptions as of each year end. A summary of the major assumptions follows:
Funded status:
Discount rate
Future salary increases
Pension cost:
Discount rate
Return on assets in plans
Future salary increases
2007
6.25%
4.5%
5.75%
9%
4.5%
2006
5.75%
4.5%
5.50%
9%
4.5%
2005
5.50%
4.5%
5.75%
9%
4.5%
To determine the discount rate in 2007, NS utilized an analysis in which the projected annual cash flows from the
pension and postretirement benefit plans were matched with a yield curve based on an appropriate universe of
high-quality corporate bonds. NS used the results of the yield curve to select the discount rate that matches the
payment stream of the benefits in these plans. Previously, NS referred to Moody’s seasoned Aa corporate bond
yields and the changes in such yields in establishing the discount rate.
Health Care Cost Trend Assumptions
For measurement purposes at Dec. 31, 2007, increases in the per capita cost of covered health care benefits were
assumed to be 9% for 2007 and 8.5% for 2008. It is assumed the rate will decrease gradually to an ultimate rate
of 5% for 2012 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported in the financial
statements. To illustrate, a one-percentage-point change in the assumed health care cost trend would have the
following effects:
Increase (decrease) in:
Total service and interest cost components
Postretirement benefit obligation
Asset Management
One percentage point
Increase
Decrease
($ in millions)
$
$
9 $
100 $
(7)
(84)
Eleven investment firms manage NS’ 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 meet or exceed selected market indices by prescribed margins.
K62
NS’ pension plan weighted-average asset allocations at Dec. 31, 2007 and 2006, by asset category, were
as follows:
Asset Category
Percentage of
plan assets at Dec. 31,
2006
2007
Equity securities
Debt securities
Total
International equity securities
included in equity securities above
75%
25%
100%
10%
77%
23%
100%
10%
The postretirement benefit plan assets consist primarily of trust-owned variable life insurance policies with an
asset allocation at Dec. 31, 2007, of 65% in equity securities and 35% in debt securities compared with 67% in
equity securities and 33% in debt securities at Dec. 31, 2006. 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.
Contributions and Estimated Future Benefit Payments
In 2008, NS expects to contribute approximately $9 million to its unfunded pension plans for payments to
pensioners and $48 million to its other postretirement benefit plans for retiree health benefits.
Benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
2008
2009
2010
2011
2012
Years 2013-2017
Pension
Benefits
Other
Postretirement
Benefits
($ in millions)
$
$
111
112
114
117
120
636
48
51
54
57
59
322
The other postretirement benefit payments include an estimated annual reduction due to the Medicare Part D
Subsidy of about $6 million.
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 $27 million in 2007 and $26 million in 2006
and 2005.
K63
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 $14 million in 2007 and 2006, and $13 million in 2005.
11. Stock-Based Compensation
Under the stockholder-approved Long-Term Incentive Plan (LTIP), a committee of nonemployee directors of the
Board or the chief executive officer (if delegated such authority by the committee) may grant stock options, stock
appreciation rights (SARs), restricted shares, restricted stock units, performance shares and performance share
units (PSUs), up to a maximum of 88,025,000 shares of Norfolk Southern Common Stock (Common Stock). Of
these shares, 5,000,000 were approved by the Board for issuance to non-officer participants; as a broad-based
issuance, stockholder approval was not required. In May 2005, the stockholders approved an amended LTIP
which provided that 8,500,000 shares of stock previously approved for issuance under LTIP could be granted as
restricted shares, restricted stock unit shares or performance shares. 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; as a broad-based stock option plan, stockholder approval of TSOP was not required. NS uses
newly issued shares to satisfy any exercises and awards under LTIP and TSOP.
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, PSUs or restricted stock units in an amount
commensurate with dividends paid on Common Stock. Tax absorption payments also are authorized for any
awards under LTIP in amounts estimated to equal the federal and state income taxes applicable to shares of
Common Stock issued subject to a share retention agreement.
During the first quarter of 2007, a committee of nonemployee directors of NS’ Board granted stock options,
restricted stock units and PSUs pursuant to the LTIP and granted stock options pursuant to the TSOP.
Receipt of an award under LTIP was made contingent upon the awardee’s execution of a non-compete
agreement, and all awards under LTIP were made subject to forfeiture in the event the awardee “engages in
competing employment” for a period of time following retirement.
Accounting Method
As disclosed in Note 1, prior to the adoption of SFAS 123(R), NS applied APB Opinion 25 and related
interpretations in accounting for awards made under the plans. Accordingly, grants of PSUs, restricted shares,
restricted share units, dividend equivalents, tax absorption payments and SARs resulted in charges to net
income, while grants of stock options had no effect on net income. Under SFAS 123(R), all awards will result
in charges to net income while dividend equivalents are charged to retained earnings. Related compensation
costs were $96 million in 2007, $129 million in 2006 and $75 million in 2005. The total tax effect recognized
in income in relation to stock-based compensation was a benefit of $32 million in 2007, $44 million in 2006 and
$27 million in 2005.
Stock Options
Options may be granted for a term not to exceed 10 years and are subject to a vesting period of at least one year.
Option exercise prices are at not less than the fair market value of Common Stock on the effective date of the
grant. In the first quarter of 2007, 1,203,300 options were granted under the LTIP and 251,000 options were
granted under the TSOP. In each case, the grant price was $49.555, which was the fair market value of Common
Stock on the date of grant, and the options have a term of ten years but may not be exercised prior to the third
K64
anniversary of the date of grant. Holders of the options granted under LTIP who remain employed by NS receive
cash dividend equivalent payments for five years commensurate with dividends paid on Common Stock.
In the first quarter of 2006, 1,188,700 options were granted under the LTIP and 238,000 options were granted
under the TSOP. In each case, the grant price was $49.425, which was the fair market value of Common
Stock on the date of grant, and the options have a term of ten years but may not be exercised prior to the first
anniversary of the date of grant.
The fair value of each option award in 2007 and 2006 was measured on the date of grant using a lattice-based
option valuation model. Expected volatilities are based on implied volatilities from traded options on
Common Stock and historical volatility of Common Stock. NS uses historical data to estimate option
exercises and employee terminations within the valuation model. The average expected option life is derived
from the output of the valuation model and represents the period of time that options granted are expected to
be outstanding. The average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the
time of grant. For options granted that include dividend equivalent payments, a dividend yield of zero was
used. For purposes of pro forma information required under SFAS 123, the fair value of the option awards in
2005 was determined using the Black-Scholes option-pricing model. The assumptions for 2007, 2006 and
2005 are shown in the following table:
Expected volatility range
Average expected volatility
Average expected option term
Average risk-free interest rate
Per-share grant-date fair value
Options granted (LTIP and TSOP)
2007
2006
2005
26.1% - 33.3% 23.5% - 34.5%
27%
3.7 years
4.5%
$13.47
1,427,400
33%
5.6 years
4.9%
$19.82
1,454,300
n/a
33%
5 years
3.7%
$12.19
1,353,600
The grant date fair value of the 2007 TSOP grant was $17.88 using the same assumptions as the 2007 LTIP grant,
except a dividend yield of 1.5% was used because no dividend equivalents are paid on these options and the
average expected option term was 6.5 years.
A summary of options outstanding as of Dec. 31, 2007, and changes during the twelve months then ended is
presented below:
Option
Shares
Weighted Avg.
Exercise Price
Outstanding at Dec. 31, 2006
Granted
Exercised
Forfeited
Outstanding at Dec. 31, 2007
22,276,526 $
1,454,300
(5,110,334)
(40,600)
18,579,892
Exercisable at Dec. 31, 2007
17,165,692
25.68
49.56
25.65
49.55
27.51
25.69
The aggregate intrinsic value of options outstanding at Dec. 31, 2007, was $426 million and had a weighted-
average remaining contractural term of 4.7 years. Of these options outstanding, 17,165,692 were exercisable and
had an aggregate intrinsic value of $425 million with a weighted average remaining contractual term of 4.4 years.
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The following table provides information related to options exercised as of Dec. 31 for the respective years:
2007
2006
($ in millions)
2005
Total intrinsic value
Cash received upon exercise of options
Related tax benefit realized
$
$
$
145 $
126 $
52 $
226 $
212 $
79 $
139
194
47
Prior to the adoption of SFAS 123(R), NS presented tax benefits generated from tax deductions in excess of
compensation costs recognized for share-based awards (excess tax benefits) as operating cash flows in the
Consolidated Statements of Cash Flows. Beginning in 2006, SFAS 123(R) requires excess tax benefits to be
classified as financing cash flows. Accordingly, “Common stock issued – net” in the Consolidated Statements of
Cash Flows for the years ended Dec. 31, 2007 and 2006, included $57 million and $85 million of such tax
benefits, respectively.
In November of 2005, the Board of Directors of NS changed the vesting periods on options granted in January
2005 from three years to one year in order to reduce future compensation expense. At the time, each of these
options had an intrinsic value of approximately $9 and the modification resulted in less than $1 million of
compensation expense.
Restricted Shares and Restricted Stock Units
Restricted share and restricted stock unit grants were zero and 321,450, respectively, in 2007, with a grant-date
fair value of $50.01 and a 5-year restriction period, and were 332,150 and 332,150, respectively, in 2006, with a
grant-date fair value of $49.60 and a three-year restriction period, and were 576,240 and 384,160, respectively, in
2005, with a grant-date fair value of $34.10 and a five-year restriction period. Restricted stock units granted in
2007 will be settled through issuance of shares of Common Stock. The restricted stock unit grants include cash
dividend equivalent payments during the restriction period commensurate with dividends paid on Common Stock.
A summary of the status of restricted shares and restricted stock units as of Dec. 31, 2007, and changes during the
twelve months then ended is presented below:
Nonvested at Dec. 31, 2006
Granted
Vested
Forfeited
Nonvested at Dec. 31, 2007
Shares
1,118,682
--
(272,482)
(34,600)
811,600
Units
851,956
321,450
(181,654)
(34,400)
957,352
$
Weighted - Average
Grant-Date
Fair Value
36.78
50.01
23.18
35.96
42.53
$
At Dec. 31, 2007, there was $16 million of total unrecognized compensation related to restricted shares and
restricted stock units. That cost is expected to be recognized over a weighted-average period of approximately
2.1 years. The total fair value of the restricted shares vested and restricted stock units paid in cash during the
twelve months ended Dec. 31, 2007, 2006 and 2005 was $22 million, $40 million and $2 million, respectively.
The total related tax benefit realized was $3 million in 2007 and $6 million in 2006.
Performance Share Units
PSUs provide for awards based on achievement of certain predetermined corporate performance goals (total
shareholder return, return on average invested capital and operating ratio) at the end of a three-year cycle. PSU
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grants and average grant-date fair values were 1,203,300 and $49.555 in 2007; 1,163,600 and $49.425 in 2006;
and 1,344,400 and $34.10 in 2005. One-half of any PSUs earned will be paid in the form of shares of Common
Stock with the other half to be paid in cash.
A summary of the status of PSUs as of Dec. 31, 2007, and changes during the twelve months then ended is
presented below:
Balance Dec. 31, 2006
Granted
Earned
Paid in cash
Unearned
Forfeited
Balance Dec. 31, 2007
Performance
Share Units
3,301,800
1,203,300
(358,764)
(358,790)
(103,446)
(81,000)
3,603,100
$
Weighted -
Average
Grant-Date
Fair Value
36.46
49.56
22.02
22.02
22.02
45.89
43.91
As of Dec. 31, 2007, there was $19 million of total unrecognized compensation related to PSUs granted under the
LTIP which is expected to be recognized over a weighted-average period of 1.0 year. The total fair value of PSUs
earned and paid in cash during the twelve months ended Dec. 31, 2007, 2006 and 2005 was $18 million, $34 million
and $18 million, respectively. The total related tax benefit realized was $2 million in 2007 and zero in 2006.
Shares Available and Issued
Shares of stock available for future grants and issued in connection with all features of the LTIP and TSOP as of
Dec. 31, were as follows:
Available for future grants:
LTIP
TSOP
Shares of Common Stock issued:
LTIP
TSOP
2007
2006
2005
8,937,651
2,290,700
5,199,060
540,877
9,288,283
2,538,700
11,321,573
2,771,400
8,517,911
836,783
9,078,717
410,750
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12. Stockholders' Equity
Common Stock
Common stock is reported net of shares held by consolidated subsidiaries (Treasury Shares) of Norfolk Southern.
Treasury Shares at Dec. 31, 2007 and 2006, amounted to 20,683,686 and 20,780,638 shares, respectively, with a
cost of $20 million in both years.
Accumulated Other Comprehensive Loss
“Accumulated other comprehensive loss” reported in the Consolidated Statements of Changes in Stockholders'
Equity consisted of the following:
Balance
at Beginning
of Year
Net
Gain
(Loss)
Reclassification
Adjustments
Balance
at End
of Year
($ in millions)
Dec. 31, 2007
Pension and other postretirement liabilities
Other comprehensive loss of equity investees
Unrealized gains on securities
Accumulated other
comprehensive loss
Dec. 31, 2006
Pension and other postretirement liabilities
Other comprehensive loss of equity investees
Unrealized gains on securities
Cash flow hedges
Minimum pension liability
Accumulated other
comprehensive loss
$
$
$
$
$
$
$
(315) $
(55)
1
(54)
5
--
(369) $
(49)
-- $
(72)
--
12
(17)
(315)
17
1
--
17
20 $
--
(1)
(349)
(50)
--
19 $
(399)
-- $
--
--
(12)
--
(315)
(55)
1
--
--
(77) $
(280)
$
(12) $
(369)
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Other Comprehensive Income (Loss)
“Other comprehensive income (loss)” reported in the Consolidated Statements of Changes in Stockholders' Equity
consisted of the following:
Pretax
Amount
Tax
(Expense)
Benefit
($ in millions)
Net-of-Tax
Amount
Year ended Dec. 31, 2007
Net gain (loss) arising during the year:
Pensions and other postretirement benefits
Reclassification adjustments for costs
included in net income
Subtotal
Other comprehensive income of equity investees
Reclassification adjustment for unrealized gains
on securities included in net income
Other comprehensive income (loss)
Year ended Dec. 31, 2006
Net gain (loss) arising during the year:
Cash flow hedges
Reclassification adjustments for gains
included in net income
Subtotal
Unrealized gains on securities
Minimum pension liability
Other comprehensive income of equity investees
Other comprehensive income (loss)
Year ended Dec. 31, 2005
Net gain (loss) arising during the year:
Cash flow hedges
Reclassification adjustments for gains
included in net income
Subtotal
Unrealized losses on securities
Minimum pension liability
Other comprehensive loss of equity investees
Other comprehensive income (loss)
(54)
20
(34)
5
(1)
(30)
--
(12)
(12)
1
(6)
19
2
55
(90)
(35)
(1)
(4)
(13)
(53)
$
(88)
$
34 $
31
(57)
5
(2)
(54)
(11)
23
--
$
1
24 $
(1)
$
1 $
(20)
(21)
1
(10)
15
(15)
8
9
--
4
4
$
17 $
92
$
(37) $
(148)
(56)
(1)
(6)
(13)
(76)
$
58
21
--
2
--
23 $
$
$
$
$
$
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13. Stock Purchase Program
In March 2007, NS’ Board of Directors amended NS’ share repurchase program and increased the authorized
amount of share repurchases from 50 million to 75 million shares and shortened the authorized period from 2015
to 2010. The timing and volume of purchases is guided by management’s assessment of market conditions and
other pertinent facts. Near-term purchases under the program are expected to be made with internally generated
cash; however, future funding sources could include proceeds from the sale of commercial paper notes or the
increase of long-term debt. NS purchased and retired 23.6 million shares and 21.7 million shares of its common
stock under this program in 2007 and 2006, respectively, at a cost of $1.2 billion and $964 million, respectively.
14. Earnings Per Share
The following tables set forth the calculation of basic and diluted earnings per share:
2007
2006
($ in millions except per share, shares in millions)
2005
Basic earnings per share:
Income available to common stockholders
Weighted-average shares outstanding
Basic earnings per share
$
$
1,459
389.6
3.74
$
$
1,475 $
406.0
3.63 $
1,281
404.2
3.17
Income available to common stockholders for 2007 and 2006 reflects a $5 million and $6 million reduction,
respectively, for the after-tax effect of dividend equivalent payments made to holders of vested stock options.
2007
2006
($ in millions except per share, shares in millions)
2005
Diluted earnings per share:
Income available to common stockholders
Weighted-average shares outstanding per above
Dilutive effect of outstanding options and
share-settled awards (as determined by the
application of the treasury stock method)
Adjusted weighted-average shares outstanding
Diluted earnings per share
$
$
1,464
389.6
8.2
397.8
3.68
$
$
1,481 $
406.0
8.7
414.7
3.57 $
1,281
404.2
8.1
412.3
3.11
The diluted calculations exclude options whose exercise price exceeded the average market price of Common
Stock as follows: zero in 2007, 1 million in 2006 and 1 million in 2005.
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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 and investments accounted for under the equity
method in accordance with APB Opinion No. 18, consisted of the following at Dec. 31:
Investments
Long-term debt
2007
2006
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
($ in millions)
$
$
154
(6,368)
$
$
173
(6,935)
$
$
145 $
(6,600) $
166
(7,370)
Underlying net assets were used to estimate the fair value of 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 zero on Dec. 31, 2007, and $1
million on Dec. 31, 2006. Sales of “available-for-sale” securities were immaterial for the years ended Dec. 31,
2007, 2006 and 2005; most short-term investments were redeemed at maturity.
16. Derivative Financial Instruments
All derivatives are recognized in the financial statements as either assets or liabilities and are measured at fair
value. Changes in fair value are recorded as adjustments to the assets or liabilities being hedged in “Other
comprehensive loss,” or in current earnings, depending on whether the derivative is designated and qualifies for
hedge accounting, the type of hedge transaction represented and the effectiveness of the hedge.
NS has used derivative financial instruments to reduce the risk of volatility in its diesel fuel costs and to manage
its overall exposure to fluctuations in interest rates. NS does not engage in the trading of derivatives.
Management has determined that its derivative financial instruments qualify as either fair-value or cash-flow
hedges, having values that highly correlate with the underlying hedged exposures, and has designated such
instruments as hedging transactions. Credit risk related to the derivative financial instruments is considered to be
minimal and is managed by requiring high credit standards for counterparties and periodic settlements.
Diesel Fuel Hedging
From 2001 until May 2004, NS entered into contracts that hedged a portion of its diesel fuel consumption. The
intent of the program was 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. The goal of this hedging strategy was to reduce the variability of fuel costs over an
extended period of time while minimizing the incremental cost of hedging. The program provided that NS would
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 would be hedged for any month within any 36-month period. After taking into
account the effect of the hedging, diesel fuel costs represented 14% and 11% of NS’ operating expenses for the
years ended Dec. 31, 2006 and 2005, respectively. The last remaining contracts were settled in the second quarter
of 2006, bringing an end to this program. NS' fuel hedging activity resulted in decreases in diesel fuel expenses
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of $20 million in 2006 and $148 million in 2005. 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 a
$1 million expense in 2006 and a $5 million expense in 2005.
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 to achieve an appropriate mix within its debt
portfolio. NS had $59 million and $83 million, or about 1%, of its fixed rate debt portfolio hedged as of Dec. 31,
2007, and Dec. 31, 2006, 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 $1 million for
2007 and 2006, and $2 million for 2005. These swaps have been effective in hedging the changes in fair value of
the related debt arising from changes in interest rates and there has been no impact on earnings resulting from
ineffectiveness associated with these derivative transactions.
Fair Values
Fair values of interest rate swaps at Dec. 31, 2007, and Dec. 31, 2006, were determined based upon the present
value of expected future cash flows discounted at the appropriate implied spot rate from the spot rate yield curve.
Fair value adjustments are noncash transactions and, accordingly, are excluded from the Consolidated Statements
of Cash Flows. The total net asset position of NS’ outstanding derivative financial instruments was comprised of
a gross fair value asset position of $1 million at both Dec. 31, 2007, and Dec. 31, 2006.
17. 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, all
exclusive of legal costs. To aid in valuing its personal injury liability and determining the amount to accrue
during the year, NS’ management utilizes studies prepared by an independent consulting actuarial firm. 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 different from the liability recorded. While the ultimate amount of claims
incurred is dependent on future developments, in management’s opinion, the recorded liability is adequate to
cover the future payments of claims 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.
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In 2005, NS recorded a liability related to the Jan. 6, 2005 derailment in Graniteville, SC. The liability, which
includes a current and long-term portion, represents NS’ best estimate based on current facts and circumstances.
The estimate includes amounts related to business property damage and other economic losses, personal injury
and individual property damage claims as well as third-party response costs. NS’ commercial insurance policies
are expected to cover substantially all expenses related to this derailment above NS’ self-insured retention,
including NS’ response costs and legal fees. Accordingly, the Consolidated Balance Sheets reflect a current and
long-term receivable for estimated recoveries from NS’ insurance carriers. While it is reasonable to expect that
the liability for covered losses could differ from the amount recorded, such a change would be offset by a
corresponding change in the insurance receivable. As a result, NS does not believe that it is reasonably likely that
its net loss (the difference between the liability and future recoveries) will be materially different than the loss
recorded in 2005. NS expects at this time that insurance coverage is adequate to cover potential claims and
settlements above its self-insurance retention. Expenses in 2005 included $41 million related to this incident,
representing NS’ retention under its insurance policies and other uninsured costs.
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 quarterly based
upon management’s assessment and the results of the study. 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 loss may vary from the amount recorded.
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
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. This provision is derived by analyzing
industry data and projecting NS’ experience into the future as far as can be reasonably determined. NS adjusts
its liability quarterly based upon management’s assessment and the results of the study. 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 based upon management’s
assessment and the results of the study. Given the inherent uncertainty in regard to 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
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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 an Environmental Policy Council, composed of senior managers, to oversee
and interpret its environmental policy.
NS' Consolidated Balance Sheets included liabilities for environmental exposures in the amount of $46 million at
Dec. 31, 2007, and $54 million at Dec. 31, 2006 (of which $12 million was accounted for as a current liability at
Dec. 31, 2007 and 2006). At Dec. 31, 2007, the liability represented NS' estimate of the probable cleanup and
remediation costs based on available information at 155 known locations compared with 172 locations at Dec. 31,
2006. On that date, 13 sites accounted for $25 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 32 locations, one or more 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 position, 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 NS 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 insurance for potential losses for third-party liability and first-
party property damages. NS is currently self-insured up to $25 million and above $1 billion per occurrence for
bodily injury and property damage to third parties and up to $25 million and above $175 million per occurrence
for property owned by NS or in NS’ care, custody or control.
K74
Purchase Commitments
At Dec. 31, 2007, NSR had outstanding purchase commitments of approximately $298 million primarily for
coal hoppers, locomotives, RoadRailer® trailers, and track material in connection with its capital programs
through 2009.
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 Norfolk Southern, 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. 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 position, 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.
As of Dec. 31, 2007, certain Norfolk Southern subsidiaries are contingently liable as guarantors with respect to
$8 million of indebtedness of an entity in which they have an ownership interest, the Terminal Railroad
Association of St. Louis, due in 2019. Four other railroads are also jointly and severally liable as guarantors for
this indebtedness. No liability has been recorded related to this guaranty.
* * * * *
K75
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(Unaudited)
2007
Railway operating revenues
Income from railway operations
Net income
Earnings per share:
Basic
Diluted
2006
Railway operating revenues
Income from railway operations
Net income
Earnings per share:
Basic
Diluted
March 31
Three Months Ended
Sept. 30
June 30
Dec. 31
($ in millions, except per share amounts)
$
$
$
$
$
$
2,247
528
285
0.72
0.71
2,303
551
305
0.74
0.72
$
$
$
$
$
$
2,378
690
394
1.00
0.98
2,392
677
375
0.91
0.89
$
$
$
$
$
$
2,353
681
386
0.99
0.97
2,393
715
416
1.04
1.02
$
$
$
$
$
$
2,454
686
399
1.04
1.02
2,319
614
385
0.97
0.95
K76
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, with the assistance of management,
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 Dec. 31, 2007.
Based on such evaluation, such officers have concluded that, as of Dec. 31, 2007, NS' disclosure controls and
procedures were effective to ensure that information required to be disclosed in NS’ reports under the Exchange Act
is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to management, including the Chief Executive Officer and
the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
The management of Norfolk Southern is responsible for establishing and maintaining adequate internal control
over financial reporting. Norfolk Southern’s internal control over financial reporting includes those policies and
procedures that pertain to its 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 Norfolk Southern’s internal control over financial reporting is effective, management
regularly assesses such controls and did so most recently for its financial reporting as of Dec. 31, 2007. 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 Norfolk Southern maintained effective internal control
over financial reporting as of Dec. 31, 2007.
The Board of Directors, acting through its Audit Committee, is responsible for the oversight of Norfolk Southern'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 an attestation report on Norfolk
Southern’s internal controls over financial reporting as of Dec. 31, 2007. These reports appear in Part II, Item 8
of this report on Form 10-K.
During the fourth quarter of 2007, management has not identified any changes in internal controls over financial
reporting that have materially affected, or are reasonably likely to materially affect, NS’ internal control over
financial reporting.
Item 9B. Other Information.
None.
K77
PART III
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 10. Directors, Executive Officers and Corporate Governance.
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 caption “Section
16(a) Beneficial Ownership Reporting Compliance,” under the caption “Corporate Governance,” and under the
caption “Committees” in Norfolk Southern's definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on May 8, 2008, which definitive Proxy Statement will be filed electronically with the Securities and
Exchange Commission (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,
including the “2007 Non-Employee Director Compensation Table” and the “Narrative to Non-Employee
Director Compensation Table;”
appearing under the caption “Executive Compensation” for executives, including the “Compensation
Discussion and Analysis,” the information appearing in the “Summary Compensation Table” and the
“2007 Grants of Plan-Based Awards” table, including the narrative to such tables, the “Outstanding
Equity Awards at Fiscal Year-End 2007” and “Option Exercises and Stock Vested in 2007” tables and
the tabular and narrative information appearing under the subcaptions “Retirement Benefits,” “Deferred
Compensation,” and “Potential Payments Upon a Change in Control or Other Termination of
Employment;” and
appearing under the captions “Compensation Committee Interlocks and Insider Participation” and
“Compensation Committee Report,”
in each case included in Norfolk Southern's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on May 8, 2008, 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 on security ownership of certain beneficial owners and
management called for by Item 12, Part III, Item 403 of Regulation S-K, 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 Annual Meeting of Stockholders to be held on May 8, 2008, which definitive Proxy
Statement will be filed electronically with the Commission pursuant to Regulation 14A.
K78
Equity Compensation Plan Information (as of Dec. 31, 2007)
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)
18,782,702(3)
$
25.71(5)
8,937,651(6)
Plan
Category
Equity compensation
plans approved by
security holders1
Equity compensation
plans not approved by
security holders2
Total
21,350,477
2,567,775(4)
$
32.10
2,326,700(7)
11,264,351
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, restricted stock units and performance share units granted under the Long-Term Incentive Plan that
may be settled in shares of stock.
4 Includes options granted under the Long-Term Incentive Plan on 655,585 shares for non-officers and options granted
under the Thoroughbred Stock Option Plan.
5 Calculated without regard to 2,115,000 outstanding restricted stock units and performance share units at Dec. 31, 2007.
6 Of the shares remaining available for grant under plans approved by stockholders, 6,703,196 are available for grant
as restricted shares, performance shares or restricted stock unit shares under the Long-Term Incentive Plan.
7 Of the shares remaining available for grant under plans not approved by stockholders, 36,000 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 stockholders at their Annual Meeting held on May 10, 1984, LTIP
was adopted to promote the success of Norfolk Southern by providing an opportunity for non-employee directors,
officers and other key employees to acquire a proprietary interest in the Corporation. On Jan. 23, 2001, the Board
of Directors further amended LTIP and 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 Jan. 23, 2001, the Board amended LTIP, which amendment was approved by shareholders
on May 10, 2001, that included the reservation for issuance of an additional 30,000,000 shares of authorized but
unissued Norfolk Southern Common Stock.
Pursuant to another amendment approved by stockholders on May 12, 2005, not more than 8,500,000 of the
shares remaining available for issuance under LTIP may be awarded as restricted shares, performance shares or
restricted stock unit shares. Cash payments of restricted stock units, stock appreciation rights and performance
share units will not be applied against the maximum number of shares issuable under LTIP. Any shares of
K79
Common Stock subject to options, performance share units or restricted stock units which are not issued as
Common Stock will again be available for award under LTIP after the expiration or forfeiture of an award.
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, restricted stock units and performance
share units. In addition, dividend equivalents may be awarded for options, restricted stock units and performance
share units. The Committee may make awards under LTIP subject to forfeiture under certain circumstances and may
establish such other terms and conditions for the awards as provided in LTIP.
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 entitle a recipient to receive performance-based compensation at the end of a three-year
performance cycle based on Norfolk Southern’s performance during that three-year period. For the 2007
performance share unit awards, corporate performance will be measured using three equally weighted standards
established by the Committee: (1) three-year average return on average capital invested, (2) three-year average
operating ratio and (3) three-year total return to stockholders as compared with the average total return on all
stocks comprising the S&P 500 composite stock price index. Performance share units may be payable in either
shares of Norfolk Southern Common Stock or cash.
Restricted stock units are payable in cash or in shares of Norfolk Southern Common Stock at the end of a
restriction period of not less than 36 months and not more than 60 months. During the restriction period, the
holder of the restricted stock units has no beneficial ownership interest in the Norfolk Southern Common Stock
represented by the restricted stock units and has no right to vote the shares represented by the units or to receive
dividends (except for dividend equivalent rights that may be awarded with respect to the restricted stock units).
The Committee at its discretion may waive the restriction period.
Norfolk Southern Corporation Thoroughbred Stock Option Plan
The Board adopted the Norfolk Southern Corporation Thoroughbred Stock Option Plan (“TSOP”) on Jan. 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. TSOP has not been and is not required to have been approved by stockholders.
There are 6,000,000 shares of authorized but unissued Common Stock 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 Committee may grant nonqualified stock options subject to such terms and
conditions as provided in TSOP.
The option price will not be less than 100% of the fair market value of Norfolk Southern's Common Stock on the
effective date the options are 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. Options awarded in 2007 are subject to a three-year vesting period.
TSOP specifically prohibits option repricing without stockholder approval, except for capital adjustments.
K80
Norfolk Southern Corporation Directors' Restricted Stock Plan
The Norfolk Southern Corporation Directors' Restricted Stock Plan (“Plan”) was adopted on Jan. 1, 1994, and is
designed to increase ownership of Norfolk Southern 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 and is not
required to have been approved by stockholders. Currently, a maximum of 66,000 shares of Norfolk Southern
Common Stock may be granted under the Plan. To make 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 Norfolk Southern Common Stock already owned by one or
more of Norfolk Southern's subsidiary companies.
Only non-employee directors who are not and never have been employees of Norfolk Southern are eligible to
participate in the Plan. Upon becoming a director, each eligible director receives a one-time grant of 3,000
restricted shares of Norfolk Southern Common Stock. No individual member of the Board exercises discretion
concerning the eligibility of any director or the number of shares granted.
The restriction period applicable to restricted shares granted under the Plan begins on the date of the grant and
ends on the earlier of the recipient’s death or six months after the recipient ceases to be a director by reason of
disability or retirement. During the restriction period shares may not be sold, pledged or otherwise encumbered.
Directors will forfeit 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, and Director Independence.
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 “Transactions with Related Persons” and under the
caption “Director Independence” in Norfolk Southern's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 8, 2008, 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 Annual Meeting of
Stockholders to be held on May 8, 2008, 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 and Financial Statement Schedules.
Page
(A)
The following documents are filed as part of this report:
1.
Index to Consolidated Financial Statements
K41
Report of Management
K42
Reports of Independent Registered Public Accounting Firm
K44
Consolidated Statements of Income, Years ended Dec. 31, 2007, 2006 and 2005
Consolidated Balance Sheets as of Dec. 31, 2007 and 2006
K45
Consolidated Statements of Cash Flows, Years ended Dec. 31, 2007, 2006 and 2005 K46
Consolidated Statements of Changes in Stockholders' Equity, Years ended
Dec. 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
K47
K48
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
K94
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 effective Feb. 1, 2008, are
incorporated by reference to Exhibit 3 to Norfolk Southern Corporation’s Form 8-K filed
on Jan. 25, 2008.
K82
4
Instruments Defining the Rights of Security Holders, Including Indentures:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
Indenture, dated as of Jan. 15, 1991, from Norfolk Southern Corporation to First Trust of
New York, National Association, as Trustee, is 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 Feb. 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 Feb. 7, 2001.
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.
Eighth Supplemental Indenture, dated as of Sept. 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 Sept. 23, 2004.
Indenture, dated Aug. 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
Oct. 28, 2004.
First Supplemental Indenture, dated Aug. 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 Oct. 28, 2004.
K83
(j)
(k)
(l)
Ninth Supplemental Indenture, dated as of March 11, 2005, between Norfolk Southern
Corporation and U.S. Bank Trust National Association, as Trustee, relating to the issuance
of notes in the principal amount of $300 million, is incorporated herein by reference to
Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on March 15, 2005.
Tenth Supplemental Indenture, dated as of May 17, 2005, between Norfolk Southern
Corporation and U.S. Bank Trust National Association, as Trustee, relating to the issuance
of notes in the principal amount of $366.6 million, is incorporated herein by reference to
Exhibit 99.1 to Norfolk Southern Corporation’s Form 8-K filed on May 18, 2005.
Eleventh Supplemental Indenture, dated as of May 17, 2005, between Norfolk Southern
Corporation and U.S. Bank Trust National Association, as Trustee, relating to the issuance
of notes in the principal amount of $350 million, is incorporated herein by reference to
Exhibit 99.2 to Norfolk Southern Corporation’s Form 8-K filed on May 18, 2005.
In accordance with Item 601(b)(4)(iii) of Regulation S-K, copies of other instruments of
Norfolk Southern Corporation and its subsidiaries with respect to the rights of holders of
long-term debt are not filed herewith, or incorporated by reference, but will be furnished to
the Commission upon request.
10
Material Contracts -
(a)
(b)
(c)
(d)
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 Feb. 24, 2003.
Amendment No. 1, dated as of Aug. 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 Aug. 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 Aug. 11, 1999.
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.
K84
(e)
(f)
(g)
(h)
(i)
(j)
(k)
Amendment No. 5 to the Transaction Agreement, dated as of Aug. 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 Sept. 2, 2004.
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 Aug. 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 Aug. 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 Jan. 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 Feb. 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 Feb. 24, 2003.
Amendment No. 4, dated as of June 1, 2005, and executed in late June 2005, 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 exhibits thereto, is
incorporated herein by reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K
filed on July 1, 2005.
(l) Monongahela Usage Agreement, dated as of June 1, 1999, by and among CSX
Transportation, Inc., Norfolk Southern Railway Company, Pennsylvania Lines LLC and
New York Central Lines LLC, with exhibit thereto, is incorporated herein by reference from
Exhibit 10.7 to Norfolk Southern Corporation's Form 10-Q filed on Aug. 11, 1999.
K85
(m)
(n)
(o)
*(p)
*(q)
*(r)
*(s)
*(t)
*(u)
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.
First Amendment dated March 19, 2007, to the Master Agreement dated July 27, 1999,
by and between North Carolina Railroad Company and Norfolk Southern Railway
Company is incorporated herein by reference to Exhibit 10.3 to Norfolk Southern
Corporation’s Form 10-Q filed on July 27, 2007.
The Supplementary Agreement, entered into as of Jan. 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 Oct. 11, 1881 - is incorporated
by reference to Exhibit 10(k) to Norfolk Southern Corporation's Form 10-K filed on
March 5, 2001.
The Norfolk Southern Corporation Executive Management Incentive Plan, effective
Jan. 25, 2005, is incorporated by reference herein from Exhibit 99 to Norfolk Southern
Corporation's Form 8-K filed on May 13, 2005.
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 Jan. 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
Jan. 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 Jan. 1,
1994, as restated Nov. 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 to Exhibit 10(t) to
Norfolk Southern Corporation's Form 10-K filed on Feb. 21, 2002.
*,**(v) Norfolk Southern Corporation Supplemental (formerly, Excess) Benefit Plan, as
amended effective as of May 2, 2005.
*(w)
The Norfolk Southern Corporation Directors' Charitable Award Program, as amended
effective July 2007, is incorporated herein by reference to Exhibit 10.6 to Norfolk
Southern Corporation's Form 10-Q filed on July 27, 2007.
K86
*(x)
*(y)
(z)
*(aa)
*(bb)
(cc)
(dd)
(ee)
*(ff)
*(gg)
The Norfolk Southern Corporation Outside Directors' Deferred Stock Unit Program, as
amended effective Jan. 22, 2008, is incorporated herein by reference to Exhibit 10.1 to
Norfolk Southern Corporation’s Form 8-K filed on Jan. 25, 2008.
Form of Agreement, dated as of Oct. 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 Nov. 9, 2001. The agreement was
entered into with L. Ike Prillaman, former Vice Chairman and Chief Marketing Officer;
Stephen C. Tobias, Vice Chairman and Chief Operating Officer; and Henry C. Wolf,
former Vice Chairman and Chief Financial Officer.
The Norfolk Southern Corporation Thoroughbred Stock Option Plan, as amended
effective Jan. 28, 2003, is incorporated herein by reference to Exhibit 10(z) to Norfolk
Southern Corporation’s Form 10-K filed on Feb. 24, 2003.
The Norfolk Southern Corporation Restricted Stock Unit Plan, effective Jan. 28, 2003, is
incorporated herein by reference to Exhibit 10(bb) to Norfolk Southern Corporation’s
Form 10-K filed on Feb. 24, 2003.
The Norfolk Southern Corporation Executive Life Insurance Plan, as amended, effective
Oct. 1, 2003, is incorporated herein by reference to Exhibit 10 to Norfolk Southern
Corporation’s Form 10-Q filed on Oct. 31, 2003.
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 Sept. 2, 2004.
Tax Allocation Agreement, dated as of Aug. 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 Sept. 2, 2004.
Amended and Restated Credit Agreement dated as of June 26, 2007, with respect to the
Registrant’s $1 billion unsecured revolving credit facility, is incorporated herein by
reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K filed on June 27,
2007.
The description of Norfolk Southern Corporation’s executive physical reimbursement
for non-employee directors and certain executives is incorporated herein by reference to
Norfolk Southern Corporation’s Form 8-K filed on July 28, 2005.
Form of 2006 Incentive Stock Option and Non-Qualified Stock Option Agreement
under the Norfolk Southern Long-Term Incentive Plan, is incorporated herein by
reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K/A filed on Dec. 7,
2005.
K87
*(hh)
*(ii)
(jj)
(kk)
(ll)
*(mm)
*(nn)
*(oo)
*(pp)
*(qq)
Form of 2006 Restricted Share and Restricted Stock Unit Agreement 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/A filed on Dec. 7, 2005.
Form of 2005 Performance Share Unit Award 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/A filed on Dec. 7, 2005.
The Transaction Agreement, dated as of Dec. 1, 2005, by and among Norfolk Southern
Corporation, The Alabama Great Southern Railroad Company, Kansas City Southern and
The Kansas City Southern Railway Company (Exhibits, annexes and schedules omitted.
The Registrant will furnish supplementary copies of such materials to the SEC upon
request).
Amendment No. 1, dated as of Jan. 17, 2006, by and among Norfolk Southern
Corporation, The Alabama Great Southern Railroad Company, Kansas City Southern
and the Kansas City Southern Railroad.
Amendment No. 2, dated as of May 1, 2006, to the Transaction Agreement, dated as of
Dec. 1, 2005, by and among Norfolk Southern Corporation, The Alabama Great
Southern Railroad Company, Kansas City Southern and The Kansas City Southern
Railway Company is incorporated herein by reference to Exhibit 10.1 to Norfolk
Southern Corporation’s Form 8-K filed on May 4, 2006.
The retirement agreement, dated Jan. 27, 2006, between Norfolk Southern Corporation
and David R. Goode, is incorporated herein by reference to Exhibit 10.1 to Norfolk
Southern Corporation’s Form 8-K filed on Jan. 27, 2006.
The waiver agreement, dated Jan. 27, 2006, between Norfolk Southern Corporation and
David R. Goode, providing for the waiver of forfeiture provisions otherwise applicable
to certain restricted shares and restricted stock units upon retirement, is incorporated
herein by reference to Exhibit 10.2 to Norfolk Southern Corporation’s Form 8-K filed
on Jan. 27, 2006.
Revised fees for outside directors are incorporated herein by reference to Norfolk
Southern Corporation’s Form 8-K filed on Jan. 27, 2006.
The retirement agreement, dated Mar. 28, 2006, between Norfolk Southern Corporation
and L. Ike Prillaman, is incorporated herein by reference to Exhibit 10.1 to Norfolk
Southern Corporation’s Form 8-K filed on Mar. 31, 2006.
The waiver agreement, dated Mar. 28, 2006, between Norfolk Southern Corporation and
L. Ike Prillaman, providing for the waiver of forfeiture provisions otherwise applicable
to certain restricted shares and restricted stock units upon retirement, is incorporated
herein by reference to Exhibit 10.2 to Norfolk Southern Corporation’s Form 8-K filed
on Mar. 31, 2006.
K88
(rr)
*(ss)
*(tt)
Limited Liability Company Agreement of Meridian Speedway, LLC, dated as of May 1,
2006, by and among The Alabama Great Southern Railroad Company and Kansas City
Southern is incorporated herein by reference to Exhibit 10.2 to Norfolk Southern
Corporation’s Form 8-K filed on May 4, 2006.
The Norfolk Southern Corporation Long-Term Incentive Plan, as amended effective July
25, 2006, is incorporated herein by reference to Exhibit 10.3 to Norfolk Southern
Corporation’s Form 10-Q filed on July 28, 2006.
Form of Norfolk Southern Corporation Long-Term Incentive Plan, 2007 Award
Agreement is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern
Corporation’s Form 8-K filed on Jan. 11, 2007.
*,**(uu) Retirement Plan of Norfolk Southern Corporation and Participating Subsidiary
Companies effective June 1, 1982, amended effective Dec. 31, 2007.
*(vv)
The retirement agreement between Norfolk Southern Corporation and Henry C. Wolf is
incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s
Form 8-K filed on May 11, 2007.
*(ww)
The waiver agreement between Norfolk Southern Corporation and Henry C. Wolf is
incorporated herein by reference to Exhibit 10.2 to Norfolk Southern Corporation’s
Form 8-K filed on May 11, 2007.
(xx)
* (yy)
(zz)
(aaa)
*(bbb)
*(ccc)
Transfer and Administration Agreement dated as of Nov. 8, 2007, with respect to the
Registrant’s $500 million receivables securitization facility is incorporated herein by
reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K filed on Nov. 14,
2007.
Form of Norfolk Southern Corporation Long-Term Incentive Plan 2008 Award
Agreement is incorporated herein by reference to Exhibit 99 to Norfolk Southern
Corporation’s Form 8-K filed on Nov. 20, 2007.
Dealer Agreement dated as of Jan. 23, 2008, between the Registrant and J. P. Morgan
Securities Inc. is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern
Corporation’s Form 8-K filed on Jan. 25, 2008.
Dealer Agreement dated as of Jan. 23, 2008, between the Registrant and Goldman, Sachs
& Co. is incorporated herein by reference to Exhibit 10.2 to Norfolk Southern
Corporation’s Form 8-K filed on Jan. 25, 2008.
2008 Award Agreement between Norfolk Southern Corporation and Gerald L. Baliles,
dated Jan. 24, 2008, is incorporated herein by reference to Exhibit 10.2 to Norfolk
Southern Corporation’s Form 8-K filed on Jan. 25, 2008.
2008 Award Agreement between Norfolk Southern Corporation and Daniel A. Carp,
dated Jan. 24, 2008, is incorporated herein by reference to Exhibit 10.3 to Norfolk
Southern Corporation’s Form 8-K filed on Jan. 25, 2008.
K89
*(ddd)
*(eee)
*(fff)
*(ggg)
*(hhh)
*(iii)
*(jjj)
**12
**21
**23
**31
**32
**99
2008 Award Agreement between Norfolk Southern Corporation and Gene R. Carter,
dated Jan. 24, 2008, is incorporated herein by reference to Exhibit 10.4 to Norfolk
Southern Corporation’s Form 8-K filed on Jan. 25, 2008.
2008 Award Agreement between Norfolk Southern Corporation and Alston D. Correll,
dated Jan. 24, 2008, is incorporated herein by reference to Exhibit 10.5 to Norfolk
Southern Corporation’s Form 8-K filed on Jan. 25, 2008.
2008 Award Agreement between Norfolk Southern Corporation and Landon Hilliard,
dated Jan. 24, 2008, is incorporated herein by reference to Exhibit 10.6 to Norfolk
Southern Corporation’s Form 8-K filed on Jan. 25, 2008.
2008 Award Agreement between Norfolk Southern Corporation and Burton M. Joyce,
dated Jan. 24, 2008, is incorporated herein by reference to Exhibit 10.7 to Norfolk
Southern Corporation’s Form 8-K filed on Jan. 25, 2008.
2008 Award Agreement between Norfolk Southern Corporation and Steven F. Leer,
dated Jan. 24, 2008, is incorporated herein by reference to Exhibit 10.8 to Norfolk
Southern Corporation’s Form 8-K filed on Jan. 25, 2008.
2008 Award Agreement between Norfolk Southern Corporation and Jane M. O’Brien,
dated Jan. 24, 2008, is incorporated herein by reference to Exhibit 10.9 to Norfolk
Southern Corporation’s Form 8-K filed on Jan. 25, 2008.
2008 Award Agreement between Norfolk Southern Corporation and J. Paul Reason,
dated Jan. 24, 2008, is incorporated herein by reference to Exhibit 10.10 to Norfolk
Southern Corporation’s Form 8-K filed on Jan. 25, 2008.
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).
* Management contract or compensatory arrangement.
** Filed herewith.
K90
(B)
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.
(C)
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.
Exhibits 23, 31, 32 and 99 are included in copies assembled for public dissemination. All exhibits are
included in the 2007 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
K91
POWER OF ATTORNEY
Each person whose signature appears below under “SIGNATURES” hereby authorizes James A. Hixon and
James A. Squires or one of them, to execute in the name of each such person, and to file, any amendment to this
report and hereby appoints 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 15th day of February 2008.
NORFOLK SOUTHERN CORPORATION
By: Charles W. Moorman
(Chairman, President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this
15th day of February 2008, by the following persons on behalf of Norfolk Southern Corporation and in the
capacities indicated.
Signature
Title
/s/ Charles W. Moorman
(Charles W. Moorman)
Chairman, President and Chief Executive Officer and Director
(Principal Executive Officer)
/s/ James A. Squires
(James A. Squires)
Executive Vice President Finance and Chief Financial Officer
(Principal Financial Officer)
/s/ Marta R. Stewart
(Marta R. Stewart)
Vice President and Controller
(Principal Accounting Officer)
/s/ Gerald L. Baliles
(Gerald L. Baliles)
/s/ Daniel A. Carp
(Daniel A. Carp)
/s/ Gene R. Carter
(Gene R. Carter)
Director
Director
Director
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/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/ J. Paul Reason
(J. Paul Reason)
Director
Director
Director
Director
Director
K93
Schedule II
Norfolk Southern Corporation and Subsidiaries
Valuation and Qualifying Accounts
Years Ended December 31, 2005, 2006 and 2007
($ in millions)
Year ended December 31, 2005
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, 2006
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, 2007
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
$
$
$
$
$
$
$
$
$
13
315
222
10
421
291
9
471
301
$
$
$
$
$
$
$
$
$
--
311
92
--
217
40
1
113
17
$
$
$
$
$
$
$
$
$
--
--
114 1
--
--
124 1
--
162 3,4
122 1
$
$
$
$
$
$
$
$
$
3 2
205 3
137 4
1 2
167 3
154 4
--
158 3
181 4
$
$
$
$
$
$
$
$
$
10
421
291
9
471
301
10
588
259
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.
K94