UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K405
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file numbers 1-743; 1-3744; 1-4793; 1-5462
NORFOLK SOUTHERN RAILWAY COMPANY
- ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 53-6002016
- ----------------------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Three Commercial Place, Norfolk, Virginia 23510-2191
- ----------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (757) 629-2680
-------------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS SO REGISTERED. EACH CLASS REGISTERED ON NEW YORK
STOCK EXCHANGE:
Norfolk and Western Railway Company 4.85% Subordinated Income Debentures,
due November 15, 2015; Guarantee of Norfolk Southern Railway Company with
respect to $1,754,900 principal amount of Norfolk and Western Railway
Company 4.85% Subordinated Income Debentures due November 15, 2015; The
Virginian Railway Company 6% Subordinated Income Debentures, due August 1,
2008; Guarantee of Norfolk Southern Railway Company with respect to
$4,466,000 principal amount of The Virginian Railway Company 6% Subordinated
Income Debentures due August 1, 2008; Norfolk Southern Railway Company
$2.60 Cumulative Preferred Stock, Series A (No Par Value, $50 Stated Value).
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K405 or any
amendment to this Form 10-K405. (X)
The aggregate market value of the voting stock held by nonaffiliates as
of January 31, 2002: $46,618,548.
The number of shares outstanding of each of the registrant's classes of
Common Stock, as of January 31, 2002: 16,668,997.
2
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.
3
TABLE OF CONTENTS
-----------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Page
----
Part I. 1. Business 4
2. Properties 4
3. Legal Proceedings 15
4. Submission of Matters to a Vote of
Security Holders 15
Executive Officers of the Registrant 15
Part II. 5. Market for Registrant's Common Stock and
Related Stockholder Matters 19
6. Selected Financial Data 20
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
7A. Quantitative and Qualitative Disclosures
About Market Risk 39
8. Financial Statements and Supplementary Data 40
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 69
Part III. 10. Directors and Executive Officers of the Registrant 70
11. Executive Compensation 70
12. Security Ownership of Certain Beneficial Owners
and Management 70
13. Certain Relationships and Related Transactions 70
Part IV. 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K 71
Index to Consolidated Financial Statement Schedule 71
Power of Attorney 75
Signatures 75
Exhibit Index 78
4
PART I
- ------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Item 1. Business.
- ------ --------
and
Item 2. Properties.
- ------ ----------
GENERAL - Norfolk Southern Railway Company (Norfolk Southern Railway)
was incorporated in 1894 under the name Southern Railway Company (Southern)
in the Commonwealth of Virginia and, together with its consolidated
subsidiaries (collectively NS Rail), is primarily engaged in the
transportation of freight by rail.
On June 1, l982, Southern and Norfolk and Western Railway Company (N&W)
became subsidiaries of Norfolk Southern Corporation (NS), a transportation
holding company. Effective Dec. 31, 1990, NS transferred all the common
stock of N&W to Southern, and Southern's name was changed to Norfolk
Southern Railway Company. Effective Sept. 1, 1998, N&W was merged with and
into Norfolk Southern Railway. All the common stock of Norfolk Southern
Railway (16,668,997 shares) is owned directly by NS. NS common stock is
publicly held and listed on the New York Stock Exchange.
There remain issued and outstanding as of Jan. 31, 2001, 1,197,027
shares of Norfolk Southern Railway's $2.60 Cumulative Preferred Stock,
Series A (Series A Stock), of which 1,096,907 shares were held by other
than subsidiaries. The Series A Stock is entitled to one vote per share,
is nonconvertible and is traded on the New York Stock Exchange. As of
Jan. 31, 2002, NS held a total of 246,355 shares of Series A Stock;
consequently, as of the same date, NS held 95.2 percent of the voting
stock of Norfolk Southern Railway.
OPERATION OF A PORTION OF THE CONRAIL RAIL ASSETS - On June 1, 1999,
Norfolk Southern Railway and CSX Corporation (CSX), through its railroad
subsidiary, began operating separate portions of Conrail's rail routes and
assets. Substantially all such assets are owned by two wholly owned
subsidiaries of Consolidated Rail Corporation (CRC); one of those
subsidiaries, Pennsylvania Lines LLC (PRR), has entered into various
operating and leasing arrangements, more particularly described in Note 2
of NS Rail's Consolidated Financial Statements, with Norfolk Southern
Railway. Certain rail assets (Shared Assets Areas) still are owned by CRC,
which operates them for joint and exclusive use by Norfolk Southern Railway
and the rail subsidiary of CSX.
Operation of the PRR routes and assets increased the size of the system
over which Norfolk Southern Railway provides service by nearly 50% and
afforded access to the New York metropolitan area, to much of the Northeast
and to most of the major East Coast ports north of Norfolk, Va. Also, the
leasing arrangements with PRR augmented Norfolk Southern Railway's locomotive,
freight car and intermodal fleet.
OPERATIONS - As of Dec. 31, 2001, NS Rail operated approximately 21,500
miles of road in the states of Alabama, Delaware, Florida, Georgia, Illinois,
Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Mississippi, Missouri,
New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina,
Tennessee, Virginia and West Virginia, and in the Province of Ontario,
Canada. Of this total, about 12,000 miles are owned with the balance
operated under lease or trackage rights; most of this total is main line
track. In addition, NS Rail operates almost 17,000 miles of passing,
industrial, yard and side tracks.
5
In addition to the lines leased from Conrail previously discussed,
NS Rail has major leased lines between Cincinnati, Ohio, and Chattanooga,
Tennessee, and operates over trackage owned by North Carolina Railway
Company (NCRR).
The Cincinnati-Chattanooga lease, covering about 335 miles, expires in
2026, and is subject to an option to extend the lease for an additional
25 years, at terms to be agreed upon.
Operations over the approximately 330 miles of tracks of NCRR,
previously under a 100-year lease which expired on Dec. 31, 1994, are now
under a trackage rights agreement. The term of the agreement is 15 years
with NS Rail having the right to renew for two additional 15-year periods.
NS Rail's lines carry raw materials, intermediate products and finished
goods primarily in the Southeast, East and Midwest, and to and from the rest
of the United States and parts of Canada. These lines also transport
overseas freight through several Atlantic and Gulf Coast ports. Atlantic
ports served by NS Rail include: Norfolk, Virginia; Morehead City, North
Carolina; Charleston, South Carolina; Savannah and Brunswick, Georgia;
Jacksonville, Florida; Baltimore, Maryland; Philadelphia, Pennsylvania/Camden,
New Jersey; Wilmington, Delaware; and the Ports of New York/New Jersey.
Gulf Coast ports served include Mobile, Alabama, and New Orleans, Louisiana.
NS Rail's lines reach most of the larger industrial and trading centers
of the Southeast, Northeast, Mid-Atlantic region and Midwest. Chicago,
Norfolk, Detroit, Atlanta, Metropolitan New York City, Jacksonville, Kansas
City (Missouri), Baltimore, Buffalo, Charleston, Cleveland, Columbus,
Philadelphia, Pittsburgh, Toledo, Greensboro, Charlotte and Savannah are
among the leading centers originating and terminating freight traffic on the
system. In addition, haulage arrangements with connecting carriers allow
NS Rail to provide single-line service to and from additional markets,
including haulage provided by Florida East Coast Railway Company to serve
south Florida, including the port cities of Miami, West Palm Beach and
Fort Lauderdale; and The Kansas City Southern Railway Company to provide
transcontinental intermodal service via a connection with the Burlington
Northern and Santa Fe Railway Company. Service is provided to New England,
including the Port of Boston, via haulage and interline arrangements with
Canadian Pacific Railway Company and Guilford Transportation Industries.
The system's lines also reach many individual industries, electric generating
facilities, mines (in western Virginia, eastern Kentucky, southern and
northern West Virginia and western Pennsylvania), distribution centers,
transload facilities and other businesses located in smaller communities in
its service area. The traffic corridors carrying the heaviest volumes of
freight include those from the New York City area to Chicago (via Allentown
and Pittsburgh); Chicago to Jacksonville (via Cincinnati, Chattanooga and
Atlanta); Appalachian coal fields of Virginia, West Virginia and Kentucky,
to Norfolk and Sandusky, Ohio; Buffalo to Chicago and Kansas City; and
Memphis to Chattanooga. Chicago, Memphis, Sidney/Salem, New Orleans, Kansas
City, Buffalo, St. Louis and Meridian are major gateways for
interterritorial system traffic.
6
RAILWAY OPERATING REVENUES - NS Rail's total railway operating revenues were $6.0 billion
in 2001. Revenue, shipments and revenue yield by principal railway operating revenue sources
for the past five years are set forth in the following table.
Year Ended December 31,
Principal Sources of --------------------------------------------------------
Railway Operating
Revenues 2001 2000 1999 1998 1997
- -------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars per shipment)
COAL
Revenues $ 1,521 $ 1,435 $ 1,322 $ 1,252 $ 1,301
% of total revenues 25% 24% 26% 29% 31%
Shipments 1,695 1,687 1,519 1,310 1,324
% of total shipments 26% 25% 25% 27% 28%
Revenue Yield $ 897 $ 850 $ 870 $ 955 $ 983
AUTOMOTIVE
Revenues $ 885 $ 921 $ 746 $ 577 $ 492
% of total revenues 15% 15% 15% 13% 11%
Shipments 622 692 611 487 361
% of total shipments 9% 10% 10% 10% 7%
Revenue Yield $ 1,423 $ 1,331 $ 1,220 $ 1,186 $ 1,364
CHEMICALS
Revenues $ 752 $ 756 $ 641 $ 492 $ 504
% of total revenues 13% 13% 12% 12% 12%
Shipments 432 453 394 315 316
% of total shipments 6% 6% 7% 7% 7%
Revenue Yield $ 1,742 $ 1,668 $ 1,627 $ 1,559 $ 1,595
METALS/CONSTRUCTION
Revenues $ 674 $ 689 $ 567 $ 375 $ 369
% of total revenues 11% 11% 11% 9% 9%
Shipments 703 757 587 372 374
% of total shipments 11% 11% 10% 8% 8%
Revenue Yield $ 959 $ 911 $ 965 $ 1,008 $ 987
PAPER/CLAY/FOREST
Revenues $ 612 $ 630 $ 578 $ 535 $ 539
% of total revenues 10% 11% 11% 13% 13%
Shipments 450 491 465 445 457
% of total shipments 7% 7% 8% 9% 10%
Revenue Yield $ 1,357 $ 1,285 $ 1,243 $ 1,202 $ 1,178
AGR./CONSUMER PRODUCTS/GOVT.
Revenues $ 603 $ 609 $ 539 $ 468 $ 476
% of total revenues 10% 10% 10% 11% 11%
Shipments 509 525 489 441 455
% of total shipments 8% 8% 8% 9% 9%
Revenue Yield $ 1,185 $ 1,160 $ 1,103 $ 1,063 $ 1,046
7
Year Ended December 31,
Principal Sources of --------------------------------------------------------
Railway Operating
Revenues 2001 2000 1999 1998 1997
- -------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars per shipment)
INTERMODAL
(Trailers, Containers
and RoadRailers)
Revenues $ 962 $ 972 $ 768 $ 555 $ 568
% of total revenues 16% 16% 15% 13% 13%
Shipments 2,214 2,242 1,896 1,443 1,472
% of total shipments 33% 33% 32% 30% 31%
Revenue Yield $ 435 $ 434 $ 405 $ 385 $ 386
Total Railway Operating
Revenues $ 6,009 $ 6,012 $ 5,161 $ 4,254 $ 4,249
Total Railway Shipments 6,625 6,847 5,961 4,813 4,759
Railway Revenue Yield $ 907 $ 878 $ 866 $ 884 $ 893
COAL TRAFFIC - Coal, coke and iron ore -- most of which is bituminous
coal -- is NS Rail's largest commodity group as measured by revenues. NS Rail
originated 155 million tons of coal, coke and iron ore in 2001 and handled a
total of 178 million tons. Revenues from coal, coke and iron ore accounted
for about 25 percent of NS Rail's total railway operating revenues in 2001.
The following table shows total coal, coke and iron ore tonnage
originated on line, received from connections and handled for the past
five years:
Tons of Coal, Coke and Iron Ore (Millions)
--------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Originated 155 156 138 119 119
Received 23 19 20 15 15
---- ---- ---- ---- ----
Handled 178 175 158 134 134
==== ==== ==== ==== ====
8
Of the 155 million tons of coal, coke and iron ore originated on
NS Rail's lines in 2001, the approximate breakdown by origin state was
as follows:
Origin State Millions of Tons
------------ ----------------
West Virginia 49
Virginia 32
Pennsylvania 26
Kentucky 24
Ohio 8
Indiana 7
Alabama 4
Illinois 4
Other 1
---
155
===
Of the 178 million tons handled, NS Rail moved approximately 14 million
tons for export, primarily through NS Rail's pier facilities at Norfolk
(Lamberts Point), Virginia; 20 million tons to domestic and Canadian steel
industries; 133 million tons of steam coal to electric utilities; and
11 million tons to other industrial and miscellaneous users.
Total coal handled through all system ports in 2001 was 37 million
tons. Of this total, 14 million tons (including coastwise traffic) moved
through Lamberts Point, 3 million tons moved through the Baltimore Terminal,
10 million tons moved to various docks on the Ohio River, and 10 million
tons moved to various Lake Erie ports. Other than coal for export,
virtually all coal handled by NS Rail was terminated in states situated
east of the Mississippi River.
The quantities of NS Rail export coal handled through Lamberts Point
for the past five years were as follows:
Export Coal through Lamberts Point
(Millions of tons)
------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
12 16 17 24 28
See the discussion of coal traffic, by type of coal, in Part II,
Item 7, "Management's Discussion and Analysis."
9
MERCHANDISE TRAFFIC - The merchandise traffic group consists of
intermodal and general merchandise, which consists of five major commodity
groupings: automotive; chemicals; paper, clay and forest products; metals
and construction; and agriculture, consumer products and government.
Total merchandise revenues in 2001 were $4.5 billion, a 2 percent decrease,
compared with 2000. Merchandise carloads and intermodal units handled in
2001 were 4.93 million, compared with 5.16 million handled in 2000, a
decrease of 4 percent. Revenues and carloads in all general merchandise
groups declined, a result of the weak economy. Intermodal revenues were
down $10 million on a 1 percent decline in traffic volume.
In 2001, 156 million tons of merchandise freight, or approximately
68 percent of total merchandise tonnage handled by NS Rail, originated
online. The balance of merchandise traffic was received from connecting
carriers, usually at interterritorial gateways. The principal interchange
points for NS Rail-received traffic included Chicago, Memphis, New Orleans,
Cincinnati, Kansas City, Detroit, Hagerstown, St. Louis/East St. Louis
and Louisville.
See the discussion of general merchandise rail traffic by commodity
group and intermodal rail traffic in Part II, Item 7, "Management's
Discussion and Analysis."
OPERATING STATISTICS - The following table sets forth certain statistics
relating to NS Rail's operations for the past five years, including operations
in the Northern Region that commenced June 1, 1999:
Year Ended December 31,
----------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenue ton miles (billions) 182 197 167 135 137
Freight train miles
traveled (millions) 70.0 74.4 61.5 53.0 49.7
Revenue per ton mile $0.0330 $0.0304 $0.0310 $0.0316 $0.0310
Revenue tons per train 2,604 2,653 2,710 2,539 2,755
Revenue ton miles
per man-hour worked 3,023 2,888 2,577 2,659 2,930
Percentage ratio of
railway operating
expenses to railway
operating revenues 86.2% 91.8% 90.3% 75.5% 71.5%
FREIGHT RATES - In 2001, NS Rail continued its reliance on private
contracts and exempt price quotes as the predominant pricing mechanism. Thus,
a major portion of NS Rail's 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 2001, NS Rail was found by the STB not to be "revenue adequate" based
on results for the year 2000. A railroad is "revenue adequate" under the
applicable law when its return on net investment exceeds the rail industry's
composite cost of capital.
10
PASSENGER OPERATIONS - Regularly scheduled passenger trains are operated
by Amtrak on NS Rail's lines between Alexandria and New Orleans, and between
Greensboro and Selma, North Carolina. Commuter trains are operated on the
NS Rail line between Manassas and Alexandria under contract with two
transportation commissions of the Commonwealth of Virginia. NS Rail also
leases the Chicago to Manhattan, Illinois, line to the Commuter Rail Division
of the Regional Transportation Authority of Northeast Illinois. Since
June 1, 1999, Norfolk Southern Railway Company has operated former Conrail
lines on which Amtrak conducts regularly scheduled passenger operations
between Chicago, Illinois, and Detroit, Michigan, and between Chicago and
Harrisburg, Pennsylvania.
Also since June 1, 1999, through its operation of PRR's routes,
Norfolk Southern Railway has been providing freight service over former
Conrail lines with significant ongoing Amtrak and commuter passenger
operations, and is conducting freight operations over some trackage owned
by Amtrak or by New Jersey Transit, the Southeastern Pennsylvania
Transportation Authority, Metro-North Commuter Railway Company and Maryland
DOT. Finally, passenger operations are conducted either by Amtrak or by
the commuter agencies over trackage owned by Pennsylvania Lines LLC, or by
Conrail in the Shared Assets Areas.
RAILWAY PROPERTY:
EQUIPMENT - As of Dec. 31, 2001, NS Rail owned or leased the following
units of equipment:
Number of Units
---------------------------- Capacity
Owned* Leased** Total of Equipment
----- ------ ----- ------------
Type of Equipment
- -----------------
Locomotives: (Horsepower)
Multiple purpose 2,260 1,048 3,308 11,031,600
Switching 106 113 219 319,800
Auxiliary units 59 18 77 --
------ ------ ------- ----------
Total locomotives 2,425 1,179 3,604 11,351,400
====== ====== ======= ==========
Freight Cars: (Tons)
Hopper 19,868 4,987 24,855 2,613,619
Box 17,629 4,666 22,295 1,735,275
Covered Hopper 10,439 3,035 13,474 1,468,158
Gondola 27,997 10,362 38,359 4,107,519
Flat 3,711 1,495 5,206 379,822
Caboose 174 77 251 --
Other 229 -- 229 18,697
------ ------ ------- ----------
Total freight cars 80,047 24,622 104,669 10,323,090
====== ====== ======= ==========
11
Number of Units
----------------------------
Owned* Leased** Total
----- ------ -----
Other:
Work equipment 4,971 1,642 6,613
Vehicles 3,391 1,306 4,697
Highway trailers
and containers 403 8,053 8,456
Miscellaneous 1,441 9,698 11,139
------ ------ ------
Total other 10,206 20,699 30,905
====== ====== ======
* Includes equipment leased to outside parties and equipment subject to
equipment trusts, conditional sale agreements and capitalized leases.
** Includes 982 locomotives, 17,640 freight cars and 2,957 units of other
equipment leased from PRR.
The following table indicates the number and year built for locomotives
and freight cars owned at Dec. 31, 2001:
Year Built
-----------------------------------------------------------------------
1991- 1985- 1984 &
2001 2000 1999 1998 1997 1996 1990 Before Total
---- ---- ---- ---- ---- ---- ---- ------ -----
Locomotives:
Number of units 110 60 147 119 120 407 381 1,081 2,425
Percent of fleet 4% 2% 6% 5% 5% 17% 16% 45% 100%
Freight cars:
Number of units -- 106 502 1,167 531 4,626 4,632 68,483 80,047
Percent of fleet -- -- 1% 1% 1% 6% 6% 85% 100%
As of Dec. 31, 2001, the average age of the locomotive fleet was 15.7
years. During 2001, 126 locomotives, the average age of which was 22.4 years,
were retired. The average age of the freight car fleet at Dec. 31, 2001, was
26.1 years. During 2001, 4,407 freight cars were retired. Since 1988, about
29,000 coal cars have been rebodied. As a result, the remaining service
ability of the freight car fleet is greater than may be inferred from the
high percentage of freight cars built in earlier years.
12
Annual Average Bad Order Ratio
------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Freight Cars (excluding cabooses):
NS Rail 6.9% 5.7% 3.7% 4.1% 4.6%
Locomotives:
NS Rail 5.8% 5.5% 5.3% 4.3% 5.0%
Ongoing freight car and locomotive maintenance programs are intended to
ensure the highest standards of safety, reliability, customer satisfaction
and equipment marketability. In past years, the freight car bad order ratio
reflected the storage of certain types of cars which were not in high demand.
The ratio had declined more recently as a result of a disposition program for
underutilized, unserviceable and overage revenue cars. The ratio rose in
2000 and 2001 as a result of decreased maintenance activity. The locomotive
bad order ratio also includes units out of service for routine maintenance
and modifications. The increase in the locomotive bad order ratio in 1999
was primarily due to the maintenance requirements of units being rented to
meet short-term needs and to weather-related failures. The ratio remained
high in 2000 as maintenance activities were curtailed in response to a
slowing economy. The higher ratio in 2001 reflected units out of service
related to the resumption of maintenance and modification activities.
TRACKAGE - All NS Rail trackage is standard gauge, and the rail in
approximately 97 percent of the main line trackage (including first, second,
third and branch main tracks, all excluding trackage rights) ranges from
100 to 155 pounds per yard. Of the approximately 31,300 miles of track
maintained as of Dec. 31, 2001, about 21,200 were laid with welded rail.
The density of traffic on running tracks (including passing tracks but
excluding trackage rights) during 2001 was as follows:
Gross tons of
freight carried
per track mile Track miles of Percent
(Millions) running tracks* of total
--------------- -------------- --------
0-4 6,044 27
5-19 7,769 35
20 and over 8,629 38
------ ---
22,442 100
====== ===
* Excludes trackage rights.
13
The following table summarizes certain information about track roadway
additions and replacements during the past five years:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Track miles of rail installed 254 390 403 429 451
Miles of track surfaced 3,836 3,687 5,087 4,715 4,703
New crossties installed (millions) 1.5 1.5 2.3 2.0 2.2
MICROWAVE SYSTEM - The NS Rail microwave system, consisting of 7,282
radio route miles, 442 active stations and 4 passive repeater stations,
provides communications between most operating locations. The microwave
system is used primarily for voice communications, VHF radio control
circuits, data and facsimile transmissions, traffic control operations and
AEI data transmissions.
TRAFFIC CONTROL - Of a total of 21,500 road miles operated by NS Rail,
excluding trackage rights over foreign lines, 11,486 miles are signalized
including 8,521 miles of centralized traffic control (CTC) and 2,965 miles
of automatic block signals. Of the 8,521 miles of CTC, 1,870 miles are
controlled by data radio originating at 147 base radio sites.
COMPUTERS - Data processing facilities connect the yards, terminals,
transportation offices, rolling stock repair points, sales offices and other
key system locations to the central computer complex in Atlanta, Georgia.
Operating and traffic data are compiled and stored to provide customers
with information on their shipments throughout the system. Data processing
facilities are capable of providing 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. Additionally, these facilities afford substantial
capacity for, and are utilized to assist management in the performance of,
a wide variety of functions and services, including payroll, car and revenue
accounting, billing, material management activities and controls, and
special studies.
OTHER - The railroads have extensive facilities for support of
operations, including freight depots, car construction shops, maintenance
shops, office buildings, and signals and communications facilities.
ENCUMBRANCES - Certain railroad equipment is subject to the prior lien
of equipment financing obligations amounting to approximately $895 million as
of Dec. 31, 2001, and $816 million as of Dec. 31, 2000.
CAPITAL EXPENDITURES - Capital expenditures for road and equipment for
the past five years were as follows (including capitalized leases):
14
Capital Expenditures
------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In millions of dollars)
Road $ 462 $ 518 $ 559 $ 583 $ 580
Equipment 263 110 356 419 304
------ ------ ------ ------ ------
Total $ 725 $ 628 $ 915 $ 1,002 $ 884
====== ====== ====== ====== ======
Capital spending and maintenance programs are and have been designed to
assure the ability to provide safe, efficient and reliable transportation
services. For 2002, NS Rail has budgeted almost $700 million of capital
spending. See the discussion following "Cash used for investing activities,"
on Page 33 in Part II, Item 7, "Management's Discussion and Analysis."
ENVIRONMENTAL MATTERS - Compliance with federal, state and local laws
and regulations relating to the protection of the environment is a principal
NS Rail goal. To date, such compliance has not affected materially NS Rail's
capital additions, earnings, liquidity or competitive position. See the
discussion of "Environmental Matters" on Page 35 in Part II, Item 7,
"Management's Discussion and Analysis," and in Note 16 to the Consolidated
Financial Statements on Page 66.
EMPLOYEES - NS Rail employed an average of 30,510 employees in 2001,
compared with an average of 33,344 in 2000 (including NS' employees who
provide management services to NS Rail). The decrease reflects the effects
of the early retirement and work-force reduction programs in 2000. The
approximate average cost per employee during 2001 was $52,000 in wages and
$21,000 in employee benefits.
Substantially all of NS Rail's non-management employees are covered by
collective bargaining agreements with 15 different labor unions. See the
discussion of "Labor Agreements" on Page 34 in Part II, Item 7, "Management's
Discussion and Analysis."
GOVERNMENT REGULATION - In addition to environmental, safety, securities
and other regulations generally applicable to all businesses, NS Rail is
subject to regulation by the STB, which succeeded the ICC on Jan. 1, 1996.
The STB has jurisdiction over some rates, routes, conditions of service and
the extension or abandonment of rail lines. The STB also has jurisdiction
over the consolidation, merger or acquisition of control of and by rail
common carriers. The Department of Transportation regulates certain track
and mechanical equipment standards.
The relaxation of economic regulation of railroads, begun over two
decades ago by the ICC under the Staggers Rail Act of 1980, has continued
under the STB. Significant exemptions are TOFC/COFC (i.e., "piggyback")
business, rail boxcar traffic, lumber, manufactured steel, automobiles and
certain bulk commodities such as sand, gravel, pulpwood and wood chips for
paper manufacturing. Transportation contracts on regulated shipments
effectively remove those shipments from regulation as well. About 75 percent
of NS Rail's freight revenues come from either exempt traffic or traffic
moving under transportation contracts.
15
Efforts may be made in 2002 to re-subject the rail industry to
unwarranted federal economic regulation. The Staggers Rail Act of 1980, which
substantially reduced such regulation, encouraged and enabled rail carriers
to innovate and to compete for business, thereby contributing to the economic
health of the nation and to the revitalization of the industry. Accordingly,
NS Rail will oppose efforts to reimpose unwarranted economic regulation.
COMPETITION - There is continuing strong competition among rail, water
and highway carriers. Price is usually only one factor of importance as
shippers and receivers choose a transport mode and specific hauling company.
Inventory carrying costs, service reliability, ease of handling and the
desire to avoid loss and damage during transit are also important
considerations, especially for higher-valued finished goods, machinery and
consumer products. Even for raw materials, semi-finished goods and work-in-
process, users are increasingly sensitive to transport arrangements which
minimize problems at successive production stages.
NS Rail's 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 Rail also competes with motor carriers, water carriers
and with shippers who have the additional option of handling their own goods
in private carriage.
Certain cooperative strategies between railroads and between railroads
and motor carriers enable carriers to compete more effectively in
specific markets.
Item 3. Legal Proceedings.
- ------ -----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of 2001.
Executive Officers of the Registrant.
- ------------------------------------
Norfolk Southern Railway'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, 2002, relating to the executive officers:
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
David R. Goode, 61, Present position since September
President and 1992. Also, Chairman, President,
Chief Executive Officer and Chief Executive Officer of
Norfolk Southern Corporation since
September 1992.
16
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
L. I. Prillaman, 58, Present position since May 2000.
Vice President Also, Vice Chairman and Chief Marketing
Officer of Norfolk Southern Corporation
since August 1998. Served as Vice
President and Chief Marketing Officer of
Norfolk Southern Railway from August 1998
to May 2000, and prior thereto was Vice
President and Chief Traffic Officer of
Norfolk Southern Railway and Executive
Vice President-Marketing of Norfolk
Southern Corporation.
Stephen C. Tobias, 57, Present position since May 2000.
Vice President Also, Vice Chairman and Chief Operating
Officer of Norfolk Southern Corporation
since August 1998. Served as Vice
President and Chief Operating Officer
of Norfolk Southern Railway from August
1998 to May 2000, and prior thereto was
Vice President of Norfolk Southern
Railway and Executive Vice President-
Operations of Norfolk Southern
Corporation.
Henry C. Wolf, 59, Present position since May 2000.
Vice President Also, Vice Chairman and Chief
Financial Officer of Norfolk Southern
Corporation since August 1998. Served
as Vice President-Finance of Norfolk
Southern Railway from August 1998 to
May 2000, and prior thereto was Vice
President and Chief Financial Officer
of Norfolk Southern Railway and
Executive Vice President-Finance of
Norfolk Southern Corporation.
John F. Corcoran, 61, Present position since July 2001. Also,
Vice President Senior Vice President - Public Affairs
of Norfolk Southern Corporation since
August 1997, and prior thereto was
Vice President - Public Affairs.
John W. Fox, Jr., 54, Present position since May 2000. Also,
Vice President Senior Vice President - Coal Services
of Norfolk Southern Corporation since
April 2001. Served as Senior Vice
President - Coal Marketing from
December 1999 to April 2001, and
prior thereto was Vice President
Coal Marketing.
James A. Hixon, 48, Present position since May 2000.
Vice President Also, Senior Vice President-
Administration of Norfolk Southern
Corporation since February 2000.
Served as Senior Vice President-
Employee Relations from November 1999
to February 1, 2001, and prior
thereto was Vice President-Taxation.
17
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
Henry D. Light, 61, Present position since May 2000.
Vice President Also, Senior Vice President-Law of
Norfolk Southern Corporation since
Jan. 22, 2002. Served as Vice
President-Law of Norfolk Southern
Corporation from April 2000 to
Jan. 22, 2002, and prior thereto was
General Counsel-Operations.
James W. McClellan, 62, Present position since May 2000.
Vice President Also, Senior Vice President-Planning
of Norfolk Southern Corporation
since August 1998. Served as Vice
President-Planning of Norfolk Southern
Railway Company from June 1999 to May
2000, Senior Vice President-Planning
from August 1998 to June 1999, and
prior thereto was Vice President-
Strategic Planning.
Kathryn B. McQuade, 45, Present position since May 2000.
Vice President Also, Senior Vice President-Financial
Planning of Norfolk Southern
Corporation since April 2000. Served
as Vice President-Financial Planning
of Norfolk Southern Corporation and
Norfolk Southern Railway Company since
August 1998, and prior thereto was
Vice President-Internal Audit.
Charles W. Moorman, 50, Present position since May 2000.
Vice President Also, President Thoroughbred
Technology and Communications, Inc.
of Norfolk Southern Corporation since
October 1999, and prior thereto was
Vice President-Information Technology.
John P. Rathbone, 50, Present position since December 1992.
Vice President and Controller Also, Senior Vice President and
Controller of Norfolk Southern
Corporation since April 2000 and
prior thereto was Vice President
and Controller.
Stephen P. Renken, 58, Present position since January 2000.
Vice President Also Senior Vice President-
Information Officer of Norfolk
Southern Corporation since Feb. 1,
2001. Served as Vice President-
Information Technology from October
1999 to Feb. 1, 2001, Assistant Vice
President-Program Management from
January 1998 to October 1999, and
prior thereto was employed by
Burlington Northern Santa Fe.
18
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
John M. Samuels, 58, Present position since May 2000. Also,
Vice President Senior Vice President-Operations
Planning and Support of Norfolk
Southern Corporation since April 2000.
Served as Vice President-Operations
Planning and Budget of Norfolk
Southern Corporation and Norfolk
Southern Railway Company from January
1998 to April 2000, and prior thereto
was Vice President-Operating Assets
of Conrail.
Donald W. Seale, 49, Present position since May 2000. Also,
Vice President Senior Vice President-Merchandise
Marketing of Norfolk Southern
Corporation since December 1999, and
prior thereto was Vice President-
Merchandise Marketing.
19
PART II
-------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Item 5. Market for the Registrant's Common Stock and Related
- ------ ----------------------------------------------------
Stockholder Matters.
-------------------
COMMON STOCK
Since June 1, 1982, NS has owned all the common stock of Norfolk
Southern Railway Company. The common stock is not publicly traded.
PREFERRED STOCK INFORMATION
There are 10,000,000 shares of no par value serial preferred stock
authorized. This stock may be issued in series from time to time at the
discretion of the Board of Directors with any series having such voting and
other powers, designations, dividends and other preferences as deemed
appropriate at the time of issuance.
The $2.60 Cumulative Preferred Stock, Series A (Series A Stock), of
which 1,197,027 shares were issued and 1,096,907 shares were held other than
by subsidiaries, including 246,355 shares held by NS, as of Dec. 31, 2001,
has no par value but has a $50 per share stated value. As indicated in the
title, the stock pays a dividend of $2.60 per share annually, payable
quarterly on March 15, June 15, Sept. 15 and Dec. 15. Dividends on this
stock are cumulative and in preference to dividends on all other classes of
stock. Except for any shares held by Norfolk Southern Railway Company
subsidiaries and/or in a fiduciary capacity, each share is entitled to one
vote per share on all matters, voting as a single class with holders of
other stock. Should dividends become delinquent for six quarters, this
class of stock, voting as a class, may elect two directors so long as any
default in dividend payments continues. The stock is redeemable at the
option of Norfolk Southern Railway Company at $50 per share plus accrued
dividends. On liquidation, the stock is entitled to $50 per share plus
accrued dividends before any amounts are paid on any other class of stock.
20
Item 6. Selected Financial Data.
- ------ -----------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Five-Year Financial Review
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
($ in millions)
RESULTS OF OPERATIONS:
Railway operating revenues $ 6,009 $ 6,012 $ 5,161 $ 4,254 $ 4,249
Railway operating expenses 5,178 5,521 4,658 3,211 3,036
------- ------- ------- ------- -------
Income from railway operations 831 491 503 1,043 1,213
Other income (expense) - net (243) (169) 42 90 (49)
Interest expense on debt (37) (37) (39) (25) (30)
------- ------- ------- ------- -------
Income before income taxes 551 285 506 1,108 1,134
Provision for income taxes 202 99 174 383 380
------- ------- ------- ------- -------
Net income $ 349 $ 186 $ 332 $ 725 $ 754
======= ======= ======= ======= =======
FINANCIAL POSITION:
Total assets $ 12,541 $ 12,017 $ 12,632 $ 12,017 $ 11,827
Total long-term debt,
including current maturities $ 868 $ 771 $ 866 $ 760 $ 606
Stockholders' equity $ 4,821 $ 5,106 $ 5,385 $ 6,137 $ 6,392
OTHER:
Capital expenditures $ 725 $ 628 $ 915 $ 1,002 $ 884
Number of stockholders
at year-end 1,774 1,927 2,109 2,317 2,519
Average number
of employees (1) 30,510 33,344 30,897 24,185 23,323
(1) The employee count includes NS' employees whose primary duties relate
to rail operations.
21
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes beginning on Page 41 and the
Five-Year Financial Review on Page 20.
SUMMARIZED RESULTS OF OPERATIONS
2001 Compared with 2000
- -----------------------
Net income in 2001 was $349 million, up 88%. Results in 2000 included
$165 million of costs related to actions taken to reduce the size of the work
force, which reduced net income by $101 million. Excluding these costs, net
income increased $62 million, or 22%, in 2001. The improvement resulted from
higher income from railway operations, which was up $175 million, or 27%, that
more than offset lower nonoperating income, which was down $74 million (see
Note 3).
2000 Compared with 1999
- -----------------------
Results for 2000 reflected the first full year of operations over
Conrail's lines. On June 1, 1999 (the Closing Date), NS Rail began operating
a substantial portion of Conrail's properties (substantiall all of which
comprise NS Rail's Northern Region) under various agreements with
Pennsylvania Lines LLC (PRR), a wholly owned subsidiary of Consolidated Rail
Corporation (CRC) (see Note 2). As a result, both the railroad route miles
operated by NS Rail and the number of its employees increased by
approximately 50% on that date. Results for 1999 reflect five months (January
through May) of operating the former NS Rail system and seven months (June
through December) of operating the present system, which includes the
Northern Region.
Results in 1999 were adversely affected by difficulties encountered in
the assimilation of the Northern Region into NS Rail's existing system that
resulted in system congestion, an increase in cars on line, increased terminal
dwell time and reduced system velocity. These service issues and actions taken
to address them increased operating expenses, primarily labor costs and
equipment costs, including car hire and locomotive rentals. Moreover, revenues
were lower than expected as some customers diverted traffic to other modes
of transportation.
Net income in 2000 was $186 million, down 44%. Results in 2000 included
$101 million of after-tax work-force reduction costs. Results in 1999 included
$168 million of costs incurred on the Closing Date for contractual obligations,
principally to former Conrail employees, which reduced net income by $103
million. Excluding these costs, net income in 2000 would have been
$287 million, down 34%. The decline principally resulted from higher
nonoperating expenses, largely the result of the sale of accounts receivable.
22
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
RAILWAY OPERATING REVENUES AND EXPENSES
(Shown as a graph in the Annual Report to Stockholders)
($ in millions) 2001 2000 1999 1998 1997
- -------------- ---- ---- ---- ---- ----
Revenues $ 6,009 $ 6,012 $ 5,161 $ 4,254 $ 4,249
Expenses 5,178 5,521 4,658 3,211 3,036
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
- --------------------------
Railway operating revenues were $6.0 billion in both 2001 and 2000, and
were $5.2 billion in 1999. Revenues in 1999 include results of operations in
the Northern Region for seven months. The following table presents a three-
year comparison of revenues by market group.
RAILWAY OPERATING REVENUES BY MARKET GROUP
($ in millions) 2001 2000 1999
-------------- ---- ---- ----
Coal $ 1,521 $ 1,435 $ 1,322
General merchandise:
Automotive 885 921 746
Chemicals 752 756 641
Metals/construction 674 689 567
Paper/clay/forest 612 630 578
Agriculture/consumer products/
government 603 609 539
------- ------- -------
General merchandise 3,526 3,605 3,071
Intermodal 962 972 768
------- ------- -------
Total $ 6,009 $ 6,012 $ 5,161
======= ======= =======
In 2001, revenues fell for all the general merchandise market groups.
However, a 6% increase in coal revenues offset the effects of the lower
general merchandise revenues. As shown in the following table, higher
revenue yields largely offset the effects of lower traffic volume.
RAILWAY OPERATING REVENUE VARIANCE ANALYSIS
Increases (Decreases)
($ in millions) 2001 vs. 2000 2000 vs. 1999
-------------- ------------- -------------
Volume $ (195) $ 767
Revenue per unit/mix 192 84
-------- --------
Total $ (3) $ 851
======== ========
23
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Revenue per unit increased in all market groups, principally due to rate
increases, use of higher-capacity equipment and favorable changes in the mix
of traffic.
In 2000, revenues increased for all market groups, reflecting a full
year of handling Northern Region traffic. Revenues improved for the last seven
months, a comparison that fully includes the Northern Region in both years,
reflecting recovery of most of the diverted traffic and new business. However,
weakness in the economy resulted in lower revenues very late in the year.
Revenue per unit improved in most market groups, principally due to the
effects of Northern Region traffic and increased rates.
COAL tonnage increased 2% in 2001 and revenues increased 6%. Revenue per
unit increased 6%, a result of rate increases, including lower volume-related
refunds on export coal shipments, gains in tonnage per car and favorable
changes to the mix of traffic (less shorter-haul business). Coal, coke and
iron ore revenues represented 25% of total railway operating revenues in 2001,
and 83% of NS Rail's coal shipments originated on lines it operated.
In 2000, coal tonnage increased 11%, and revenues increased 9%,
reflecting a full year of Northern Region traffic. Revenue per unit declined,
a result of a higher proportion of traffic with a shorter length of haul,
principally attributable to a full year of Northern Region operations.
TOTAL COAL, COKE AND IRON ORE TONNAGE
(In millions of tons) 2001 2000 1999
-------------------- ---- ---- ----
Utility 133 119 108
Export 14 20 18
Domestic metallurgical 20 25 22
Other 11 11 10
---- ---- ----
Total 178 175 158
==== ==== ====
Utility coal traffic increased 11% in 2001, reflecting higher demand for
coal-fired electricity and the effects of very high natural gas prices early
in the year. High demand for electricity, a volatile market for natural gas
and production problems at a number of large mines in the East late in 2000
combined to increase the demand for coal early in 2001 with a resulting
increase in coal prices. Utility coal traffic volume also benefited from the
shifting of coal that traditionally would have been bound for export to the
domestic market.
In 2000, utility coal traffic increased 11%, reflecting a full year of
Northern Region operations. The effects of expanded operations were somewhat
offset by coal production problems at several NS Rail-served mines,
unanticipated outages at some NS Rail-served utility plants, large stockpiles
at the beginning of the year and mild summer weather in portions of NS Rail's
service territory.
The near-term outlook for utility coal remains positive. U.S. demand for
electricity continues to grow rapidly, and coal-fired generation remains the
cheapest marginal source of electricity. Several underutilized coal-fired
power plants are making the transition from peak-only generation to full-time
generation. In addition, although natural gas prices have returned to more
normal levels, the volatility of natural gas prices may improve the long-term
competitive position of coal-fired generation.
24
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Phase II of Title IV of the Clean Air Act Amendments of 1990, which
imposes more stringent limits on sulfur dioxide emissions, took effect on
Jan. 1, 2000. Many of the mines served by NS Rail produce coals that satisfy
Phase II requirements. In addition, substantial banks of sulfur dioxide
allowances held by many NS Rail-served utilities should continue to provide a
market for other NS Rail-served mines for many years. However, several federal
environmental regulatory initiatives continued to be pursued during 2001,
including "new source review" for older coal-fired plants. Many of the rules
that have been promulgated to date are in litigation. If the rules survive
litigation and are implemented, they could increase the cost of coal-fired
generation and potentially adversely affect the value of the sulfur dioxide
allowance bank.
The Bush Administration rejected in 2001 the Kyoto Protocol and
withdrew U.S. participation in that process. If implemented, the proposed
Kyoto limits on greenhouse gases could have put additional cost pressures
on coal-fired generation. The U.S. withdrawal from the Kyoto process has
renewed interest in building coal-fired generation plants.
The 1999 decision by a federal district court judge in West Virginia
holding that some common mountaintop mining practices in the coal industry
are illegal was overturned in April 2001 by the U.S. Fourth Circuit Court
of Appeals. In January 2002, the U.S. Supreme Court refused to hear an
appeal of the case.
Export coal tonnage declined 30% in 2001. The rapid rise of domestic
utility coal prices early in the year enticed many foreign-market suppliers
to place much of their 2001 production in the domestic utility markets. In
addition, production difficulties at several large NS Rail-served mines and
flooding in West Virginia in July significantly reduced the supply of low
volatile coal. The combination of these factors resulted in most of the
decline in shipments of export coal. Steam coal exported through Baltimore
declined 32%, and export metallurgical coals through Norfolk declined by 30%.
Demand for steam coal to export strengthened in the last half of 2001;
however, the strong U.S. demand limited NS Rail's participation in this
market. Demand for coking coal to export continued to soften, as steel
production moved from traditional NS Rail markets in Europe to Asia, which
in recent years has been supplied by Australian or Canadian coals.
In 2000, export coal tonnage increased 8%, a result of a full year of
access to Baltimore through the Northern Region, mitigated by lower tonnage
through Norfolk. Several additional factors also adversely affected export
coal traffic volume. Delayed settlements between buyers and sellers in the
spring postponed shipments of some export tonnage. Foreign buyers
ultimately intended to purchase additional U.S. metallurgical coal, but
production capacity available for export had been diminished by two years
of dramatically lower prices. Toward the end of 2000, production
difficulties at several large NS Rail-served mines significantly reduced
tonnage available for export. Limited supplies overall prevented other coal
producers from providing substitute coal.
Export coal tonnage is expected to continue to be limited by supply and
subject to the fluctuations of the world market. While the consolidation of
Australian producers should help stabilize that supply channel, new
Australian production could displace U.S. volumes to Europe absent any
increase in demand. Moreover, Chinese participation in Pacific Rim markets
could displace Australian coals there and force that tonnage to Europe.
25
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Domestic metallurgical coal, coke and iron ore traffic decreased 18% in
2001, due to a decline in the market for domestic steel. The softening
economy and an increase in steel imports drastically cut blast furnace
production, sharply reducing the demand for coking coal, iron ore and coke.
The increase in imported steel also resulted in lower prices that put
pressure on the U.S. steel industry and led to plant closures and
bankruptcies that included some NS Rail customers.
In 2000, domestic metallurgical coal, coke and iron ore traffic
increased 17%, due to a full year of Northern Region operations. In addition,
increased production in the first half of the year and gains in NS Rail
market share contributed to the higher traffic. However, the softening
economy and increased steel imports diminished blast furnace production
rates, sharply reducing demand for raw materials.
Domestic metallurgical coal, coke and iron ore traffic is expected to
continue to suffer from the decline in demand for domestically produced
steel. However, the United States has applied a tariff on imported coke,
which has reduced its entry to the U.S. market. Moreover, the U.S.
International Trade Commission has recommended that President Bush take
similar action on imported steel. But long-term demand is expected to
continue to decline, due to advanced technologies that allow production
of steel using less coke.
Other coal traffic, principally steam coal shipped to manufacturing
plants, increased 6% in 2001 and 4% in 2000. The gain in 2001 resulted from
new and increased business from industrial customers. The increase in 2000
reflected a full year of handling Northern Region traffic; however, this
was mitigated by the loss of some traffic to competitors.
GENERAL MERCHANDISE traffic volume (carloads) decreased 7% in 2001,
and revenues decreased 2%, principally due to the effects of the weak
economy. In 2000, traffic volume increased 15%, and revenues increased 17%,
reflecting a full year of operating the Northern Region.
Automotive traffic volume decreased 10%, and revenues declined 4% in
2001, principally due to a 10% drop in vehicle production. Revenue per unit
increased 7%, principally due to rate increases, efficiencies gained
from the redesign of the mixing center network and use of higher
capacity equipment.
In 2000, automotive traffic volume increased 13%, and revenues
increased 23%, reflecting a full year of Northern Region operations, record
vehicle production and the recapture of business diverted because of service
issues after the Closing Date. The carload increase was less than the
revenue increase principally due to the effects of a redesign of the mixing
center network. This redesign improves vehicle velocity through the network
and includes changes in traffic flows that resulted in a decline in
carloads, with no corresponding decrease in revenues.
Ford Motor Company, NS Rail's largest customer, has announced potential
reductions in vehicle production which could affect NS Rail volumes. However,
automotive revenues in 2002 are expected to be comparable to those of 2001,
as light vehicle production is predicted to be flat.
Chemicals traffic volume decreased 5%, and revenues decreased 1% in
2001. The weak economy depressed shipments of petroleum, plastics, industrial
and miscellaneous chemicals. These declines were partially offset by new
business through NS Rail's Thoroughbred Bulk Transfer (TBT) facilities that
handle chemicals and bulk commodities for customers not located on NS Rail-
served lines. Revenue per unit increased due to higher rates and a favorable
change in the mix of traffic (more longer-haul moves).
26
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
In 2000, chemicals traffic volume increased 15%, and revenues increased
18%, due to a full year of Northern Region operations and the return of
traffic that had been diverted because of service issues after the Closing
Date. Shipments of miscellaneous chemicals, chlorine, caustic soda and
plastics continued to rebound, but sulfur carloads were down due to weak
fertilizer markets. Chemicals shipments continued to increase through NS
Rail's TBT facilities.
Chemicals revenues are expected to continue to be adversely affected
until the economy recovers. However, NS Rail expects to benefit from new
business and improved yields.
Metals and construction traffic volume decreased 7%, and revenues
declined 2% in 2001, reflecting weakness in the steel and construction
industries. The steel industry recession, which began in 2000, has resulted
in excess capacity and the closing of numerous steel mills. Revenue per
unit increased due to higher rates and favorable changes in the mix
of traffic.
In 2000, metals and construction traffic volume increased 29%, and
revenues increased 22%, reflecting a full year of operations over the
expanded system. Revenue per unit declined, largely due to a change in the
mix of traffic. Metals traffic benefited from increased shipments of sheet
steel, imported slab steel and ferrous scrap; however, this was tempered by
a significant slowdown in the steel industry in the last half of the year.
Construction traffic benefited from continued strength in housing starts
and highway construction.
Metals and construction revenues are expected to suffer from the
effects of a continued softness in the steel market. However, increased
highway construction in NS Rail's service area is expected to mitigate the
drop in metals demand.
Paper, clay and forest products traffic volume declined 8%, and
revenues decreased 3%, in 2001, primarily due to a weakened paper market.
Paper shipments were adversely affected by reduced production at many
NS Rail-served paper mills, a result of sluggish newspaper advertising and
soft demand for paper. Lumber traffic began the year weak, improved in
late summer, but softened late in the year due to short-term weakness in
housing starts. Revenue per unit increased principally due to higher rates.
In 2000, paper, clay and forest products traffic volume increased 5%,
and revenues increased 9%, principally due to the effects of a full year of
Northern Region operations. Consolidation in the paper industry and a
weakening paper market in the second half of the year contributed to lower
carloads during the summer months and into the fall. Weak demand for paper
production inputs, such as scrap paper and wood pulp, was tempered by
stronger demand for newsprint and printing paper.
Paper, clay and forest products revenues are expected to continue to be
adversely affected by weak demand in 2002, due to continued consolidations
and little anticipated capacity expansion through 2003. NS Rail is pursuing
new business using MODALGISTICS(SM), its supply-chain focused business unit
formed in February 2001.
Agriculture, consumer products and government traffic volume decreased 3%,
and revenues declined 1% in 2001, primarily due to reduced shipments of
fertilizer. This decline was due to soft farm demand, record high natural gas
prices early in the year (which curtailed production of certain fertilizers)
and increased imports. This was mitigated by traffic volume increases for
grain, flour, wheat and canned goods. The revenue per unit increase was
primarily due to favorable changes in the mix of traffic.
27
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
In 2000, agriculture, consumer products and government traffic volume
increased 7%, and revenues increased 13%, due to the effects of a full year
of Northern Region traffic and modest growth in the Southeast markets. Rate
increases and more longer-haul (higher revenue-per-unit) traffic also
contributed to the revenue increase. Grain traffic benefited from new
shuttle-train service that improved service to new and expanded Southeast
feed mills. In addition, traffic increased for Midwest grain and sweeteners
and consumer goods from the West.
Agriculture, consumer products and government revenues in 2002 are
expected to be comparable to those of 2001. Continued weakness in the
fertilizer market is expected to offset gains in the Southeast feed markets
and new business.
INTERMODAL traffic volume decreased 1% and revenues declined 1% in
2001. Domestic traffic volume was up in the first half of the year, but
demand increasingly weakened as the year progressed, which eroded NS Rail's
base of traffic. New business supported by the opening of three new
terminals and other initiatives mitigated the effects of the weakened
economy. International traffic, which accounts for about half of intermodal
volume, grew slightly as U.S. imports slowed with the economy. Traffic
volume handled for Triple Crown Services Co. (TCS) increased 1% despite
economic conditions, as TCS continued to benefit from reliable, trucklike
service. Intermodal revenue per unit dropped later in the year, reflecting
the expiration of fuel surcharges that were implemented late in 2000 and the
introduction of new shorter-haul business.
In 2000, intermodal traffic volume increased 18%, and revenues increased
27%, primarily due to a full year of Northern Region traffic. Revenue per
unit benefited from rate increases throughout the year on domestic business and
the implementation of fuel surcharges later in the year. In addition, increased
demand, new business and improved service contributed to the gains, as major
customers, including UPS, JB Hunt, Hub Group and Maersk, increased volumes.
Despite weak demand in the first quarter and the loss in December 1999 of a
major customer, NS Rail had regained its market share by the second quarter.
Domestic and premium business volumes benefited from service improvements and
expansion initiatives. International traffic, which accounts for about half of
intermodal volume, grew 5%, notwithstanding the loss of business from a
major customer.
Intermodal revenues are expected to benefit from continued improvements in
service and the terminal capacity added in 2001.
Railway Operating Expenses
- --------------------------
Railway operating expenses decreased 6% in 2001, but increased 19% in
2000. Expenses in 2000 included $165 million of costs related to actions taken
to reduce the size of the work force. Expenses in 1999 included $168 million
of contractual obligations incurred on the Closing Date. Excluding these
costs, railway operating expenses decreased 3% in 2001, while carloads
dropped 3%; and increased 19% in 2000 on carloads that were 15% higher. The
higher expense increase in 2000 reflected a full year of Northern Region
operations and sharply higher diesel fuel prices.
The railway operating ratio, which measures the percentage of railway
operating revenues consumed by railway operating expenses, was 86.2% in 2001,
compared with 91.8% in 2000 (including the work-force reduction costs, which
increased the ratio 2.7 percentage points) and 90.3% in 1999 (including the
contractual obligations, which increased the ratio 3.3 percentage points).
28
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
The decline in the 2001 ratio reflected the increase in revenue per
unit as well as reduced expenses that resulted from gains in efficiency. The
increase in the 2000 ratio reflected the effects of a full year of Northern
Region operations and the sharp increase in diesel fuel prices, which more
than offset the absence of the significant costs incurred in 1999 related
to the service issues after the Closing Date. In addition, the ratio was
adversely affected by a change in traffic mix (more resource-intensive
traffic, such as automotive and intermodal) and the new traffic in the
Northern Region, coupled with the decrease in export coal traffic.
RAILWAY OPERATING RATIO
(Shown as a graph in the Annual Report to Stockholders)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
86.2% 91.8% 90.3% 75.5% 71.5%
The following table shows the changes in railway operating expenses
summarized by major classifications.
RAILWAY OPERATING EXPENSES
Increases (Decreases)
($ in millions) 2001 vs. 2000 2000 vs. 1999
-------------- ------------- -------------
Compensation and benefits $ (372) $ (67)
Materials, services and rents 159 451
Conrail rents and services (35) 221
Depreciation 11 23
Diesel fuel (66) 223
Casualties and other claims 3 4
Other (43) 8
------- -------
Total $ (343) $ 863
======= =======
Compensation and benefits represented 30% of total railway operating
expenses and decreased 20% in 2001 and 3% in 2000. Excluding the
$165 million of work-force reduction costs in 2000, compensation and
benefits decreased 12% in 2001.
The decline in 2001 reflected the effects of management fee charged
by NS (see the discussion in Note 2 under the heading "General") as well
as savings attributable to the reduced size of the work force. These
savings were somewhat offset by higher wages and benefit costs for union
employees and reduced pension income.
The 3% decrease in 2000 was primarily due to the effects of the
management fee charged by NS, higher pension income and the absence of
the $49 million incurred in 1999 for the Special Work Incentive Program
(SWIP) for union employees in the third quarter of 1999. Pension income
was higher in 2000 largely due to the transfer of assets from the Conrail
pension plan after the Closing Date. NS Rail has substantial unrecognized
gains related to its participation in NS' overfunded pension plan;
amortization of these gains will continue to be included in "Compensation
and benefits" expenses (see Note 13). These decreases were mitigated by a
full year of expanded operations and higher wages and benefit costs for
union employees. The comparison was also affected by the work-force reduction
costs in 2000 and the contractual obligations assumed in 1999 on the
Closing Date.
29
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
The Railroad Retirement and Survivors' Improvement Act, which took effect
on Jan. 1, 2002, provides for a phased reduction of the employers' portions
of Tier II Railroad Retirement payroll taxes. The phase-in calls for a
reduction from 16.1% in 2001 to 15.6% in 2002, 14.2% in 2003 and 13.1% in 2004.
In addition, the supplemental annuity tax was eliminated. These changes are
expected to result in a $21 million reduction to payroll tax expenses in 2002
(some of which will be reflected in a lower management fee from NS). The new
law allows for investment of Tier II assets in a diversified portfolio through
the newly established National Railroad Retirement Investment Trust. The law
also provides a mechanism for automatic adjustment of Tier II payroll taxes
should the trust assets fall below a four-year reserve or exceed a six-year
reserve.
Materials, services and rents includes items used for the maintenance of
the railroad's lines, structures and equipment; the costs of services
purchased from outside contractors, including the net costs of operating joint
(or leased) facilities with other railroads; the management fee charged by NS
(see Note 2); and the net cost of equipment rentals. This category of expenses
increased 9% in 2001 and 37% in 2000.
In 2001, the effects of the management fee charged by NS and higher
costs for purchased services, including expenses for software, consulting and
legal fees were partially offset by lower equipment rents. The increase in
2000 was mostly attributable to the effects of a full year of Northern Region
operations and the NS management fee and was mitigated by the absence of
significant costs incurred in 1999 related to the service issues encountered
after the Closing Date.
Equipment rents, which includes the cost to NS Rail of using equipment
(mostly freight cars) owned by other railroads or private owners, less the
rent paid to NS Rail for the use of its equipment, decreased 11% in 2001,
but increased 22% in 2000. The decline in 2001 was principally due to
shorter car cycle times that resulted in fewer car days on line and fewer
freight car and locomotive leases. The 2000 increase was principally due
to the effects of a full year of expanded operations but was mitigated by
a favorable comparison for the last seven months, as expenses in 1999 were
high due to the service issues encountered after the Closing Date.
Locomotive and equipment repair costs increased in 2001, principally
due to renewed maintenance activity. This trend is expected to continue in
2002, driven by higher expenses for freight car repairs. In 2000,
maintenance costs increased, reflecting a full year of Northern Region
operations; however, the increase was tempered by reduced maintenance
activities, a result of cost control efforts.
Conrail rents and services, a new category of expense beginning in
1999, arose from the expansion of operations on the Closing Date and
amounted to $465 million in 2001, $500 million in 2000 and $279 million in
1999. This item includes amounts due to PRR and CRC for use of their
operating properties and equipment and CRC's operation of the Shared Assets
Areas. The decline in 2001 reflected lower expenses in the Shared Assets
Areas. Expenses in 2000 included a full year of operations over Conrail's
lines, compared with seven months in 1999.
Depreciation expense was up 2% in 2001 and 5% in 2000. Increases in
both years were due to property additions, reflecting substantial levels
of capital spending (see Note 1, "Properties," for NS Rail's depreciation
policy). A periodic review of depreciation rates is being finalized, and
rates are expected to be somewhat lower.
30
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Diesel fuel expenses decreased 14% in 2001, but increased 87% in 2000.
The decline in 2001 was the result of an 8% drop in consumption and a 7%
decline in the average price per gallon. Expenses in 2001 include $8 million
related to the hedging program initiated in the second quarter (see "Market
Risks and Hedging Activities," below and Note 15). The increase in 2000
expenses resulted from a 61% rise in the average price per gallon and higher
consumption that reflected a full year of Northern Region operations.
Casualties and other claims expenses (including the estimates of costs
related to personal injury, property damage and environmental matters)
increased 2% in 2001 and 3% in 2000.
The largest component of casualties and other claims expense is personal
injury costs. In 2001, cases involving occupational injuries comprised about
31% of the total employee injury cases settled and 15% of the total settlement
payments made. Injuries of this type are not generally caused by a specific
accident or event, but, rather, result from a claimed exposure over time.
Many such claims are being asserted by former or retired employees, some of
whom have not been actively employed in the rail industry for decades. NS Rail
continues to work actively to eliminate all employee injuries and to reduce
the associated costs.
The rail industry remains uniquely susceptible to litigation involving
job-related accidental injury and occupational claims because of an outmoded
law, the Federal Employers' Liability Act (FELA), originally passed in 1908
and applicable only to railroads. This law, which covers employee claims for
job-related injuries, promotes an adversarial claims environment and produces
results that are unpredictable and inconsistent. The railroads have been
unsuccessful so far in efforts to persuade Congress to replace FELA with a
no-fault workers' compensation system.
NS Rail maintains substantial amounts of commercial insurance for
potential third-party liability and property damage claims. It also retains
reasonable levels of risk through self-insurance.
Other expenses decreased 13% in 2001, but increased 2% in 2000. The
decline in 2001 was principally due to lower bad debt costs, reduced
franchise and property taxes, lower travel and employee-relocation expenses
and the effects of the NS management fee (see Note 2). The increase in 2000
reflected a full year of Northern Region operations and higher bad debt
expense, which was mitigated by the absence of costs incurred in 1999 related
to service issues.
Other Income (Expense) - Net
- ----------------------------
Other income (expense) - net was an expense of $243 million in 2001 and
$169 million in 2000, but was income of $42 million in 1999. The increase in
2001 and the change from income to expense in 2000 reflected the effects of
sales of account receivable (see Note 2, "Sale of Accounts Receivable"). The
decline in dividends from NS reflected the reduction in January 2001 to its
quarterly dividend from 20 cents to six cents.
Income Taxes
- ------------
Income tax expense in 2001 was $202 million, for an effective rate of 37%,
compared with effective rates of 35% in 2000 and 34% in 1999.
31
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
The effective rates in all three years were below the statutory federal
and state rates because of favorable adjustments upon filing the prior year
tax returns and in 2000 and 1999 because of favorable adjustments to state
tax liabilities.
In January 1995, the United States Tax Court issued a preliminary
decision that disallowed some of the tax benefits a subsidiary of NS Rail
purchased from a third party pursuant to a safe harbor lease agreement in
1981. In January 2001, NS Rail received payment from the third party in
accordance with indemnification provisions of the lease agreement.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities, NS Rail's principal source of
liquidity, was $737 million in 2001 compared with $1.05 billion in 2000 and
$566 million in 1999. Results in 2000 reflect the sale of accounts
receivable, proceeds of which were advanced to NS (see Note 2, "Sale of
Accounts Receivable"). Excluding the cash infusion from that accounts
receivable sale program, operating cash flow declined $106 million in 2001.
The decrease primarily resulted from higher tax payments including amounts
applicable to prior years, bonus payments in 2001 (no such payments in 2000)
and the timing of payrolls. A significant portion of payments made to PRR
(which are included in "Conrail rents and services" and, therefore, are a
use of cash in "Cash provided by operating activities") are borrowed back
from a PRR subsidiary and, therefore, are a source of cash in "Proceeds from
borrowings." In 2001, NS Rail's net cash flow from these borrowings amounted
to $250 million. The improvement to cash provided by operating activities in
2000 reflected the 1999 accounts receivable dividend to NS (see Note 2,
"Noncash Dividends"). The comparison was also affected by the sale of
accounts receivable (see Note 2, "Sale of Accounts Receivable").
The large changes in "Accounts receivable" and "Other short-term
liabilities" in the 1999 cash flow statement primarily resulted from the
commencement of operations in the Northern Region.
NS Rail's working capital deficit was $1.5 billion at Dec. 31, 2001,
compared with $978 million at Dec. 31, 2000. The increase was principally
due to a $491 million rise in the net amount due to NS. Part of the working
capital deficit arises from a $373 million balance in "Notes and accounts
payable to Conrail" that is not expected to be repaid in 2002.
NS Rail looks to NS to provide needed funding. NS currently has the
capability to increase the amount of accounts receivable being sold under
its revolving sale program. During 2001, the amount of receivables NS could
sell under this program ranged from $345 million to $468 million, and the
amount of receivables NS sold ranged from $300 million to $402 million.
Moreover, NS has the capability to issue up to $1 billion of commercial
paper; however, any reduction in its credit rating could limit NS' ability
to access the commercial paper markets.
As the major NS subsidiary, NS Rail provides funding to service NS' debt.
NS' debt at Dec. 31, 2001, totaled $6.7 billion. Of this debt, $1.5 billion
is due between 2002 and 2006.
NS Rail expects to generate sufficient cash flow from operations to meet
its ongoing obligations, as well as to advance amounts to NS to service its
debt. This expectation is based on a view that the economy will remain flat
for the first half of 2002 and resume growth in the third and fourth quarters.
32
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
NS Rail's contractual obligations related to its long-term debt
(including capital leases), operating leases and agreements with CRC are
as follows:
2003- 2005- 2007 and
($ in millions) Total 2002 2004 2006 Subsequent
- -------------- ----- ---- ---- ---- ----------
Long-term debt
and capital leases $ 868 $ 88 $ 182 $ 190 $ 408
Operating leases 886 112 171 116 487
Agreements with CRC 775 27 62 68 618
------ ----- ----- ----- ------
Total $ 2,529 $ 227 $ 415 $ 374 $ 1,513
====== ===== ===== ===== ======
NS Rail also has contractual obligations to PRR as disclosed in Note 2.
However, NS Rail has the ability to borrow back funds from PRR to the extent
they aren't needed to fund contractual obligations at Conrail. The following
table represents 58% (NS' economic ownership interest in Conrail) of
Conrail's contractual obligations for long-term debt (including capital
leases) and operating leases.
2003- 2005- 2007 and
($ in millions) Total 2002 2004 2006 Subsequent
- -------------- ----- ---- ---- ---- ----------
Long-term debt
and capital leases $ 705 $ 35 $ 62 $ 48 $ 560
Operating leases 369 36 61 64 208
------ ----- ----- ----- -----
Total $ 1,074 $ 71 $ 123 $ 112 $ 768
====== ===== ===== ===== =====
NS Rail also has two transactions not included in the balance sheets or
in the previous table of its contractual obligations consisting of an accounts
receivable sale program (see Note 2) and an operating lease covering 140
locomotives (see Note 9).
Under the accounts receivable sale program, NS Rail sells without recourse
accounts receivable to a bankruptcy-remote special-purpose subsidiary of NS.
There is no existing obligation for NS Rail to repurchase sold receivables.
The special-purpose subsidiary sells undivided ownership interests in the
receivables to two unrelated buyers. NS Rail has no ownership interest in the
unrelated buyers. The unrelated buyers issued debt to fund their initial
purchase, and NS Rail has no obligation related to this debt. Upon termination
of the program between the NS subsidiary and the unrelated buyers, the buyers
would cease purchasing new receivables and collections related to the sold
receivables would be retained by the buyers.
The operating lease covering the 140 locomotives is renewable annually at
NS Rail's option and expires in 2008. The lessor is not related to NS Rail and
its owner has a substantive residual equity capital investment at risk in the
entity. The lessor owns the locomotives and issued debt to finance their
purchase. NS Rail has no obligation related to the debt. NS Rail has the
option to purchase the locomotives, but also can return them to the lessor.
The return provisions of the lease are not so onerous as to preclude this
option. If NS Rail does not purchase the locomotives at the end of the maximum
lease term, it is liable for any shortfall in the then fair value of the
locomotives and a specified residual value. NS Rail does not expect to be
required to make any payments under this provision.
33
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Cash used for investing activities increased 29% in 2001, but decreased
16% in 2000. Property additions were up 15% in 2001, following a 31% decline
in 2000. Both comparisons reflected the absence of significant locomotive
purchases in 2000, as fleet additions were accomplished by operating lease.
Investing activities in 1999 included approximately $140 million more of
borrowings against the net cash surrender value of corporate-owned life
insurance. Property additions account for most of the recurring spending
in this category.
The following tables show capital spending and track and equipment
statistics for the past five years.
CAPITAL EXPENDITURES
(Also shown as a graph in the Annual Report to Stockholders)
($ in millions) 2001 2000 1999 1998 1997
- --------------- ---- ---- ---- ---- ----
Road $ 462 $ 518 $ 559 $ 583 $ 580
Equipment 263 110 356 419 304
------ ------ ------ ------ ------
Total $ 725 $ 628 $ 915 $ 1,002 $ 884
====== ====== ====== ====== ======
Capital expenditures increased 15% in 2001, but decreased 31% in 2000.
Outlays in 2001 included amounts for locomotive purchases that were somewhat
offset by lower expenditures for freight car purchases and roadway projects.
The decline in 2000 reflected lower capital expenditures for locomotives
as a result of the operating lease.
TRACK STRUCTURE STATISTICS (CAPITAL AND MAINTENANCE)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Track miles of rail
installed 254 390 403 429 451
Miles of track surfaced 3,836 3,687 5,087 4,715 4,703
New crossties installed
(millions) 1.5 1.5 2.3 2.0 2.2
AVERAGE AGE OF OWNED RAILWAY EQUIPMENT
(In years) 2001 2000 1999 1998 1997
- ---------- ---- ---- ---- ---- ----
Freight cars 26.1 25.3 24.4 23.6 23.0
Locomotives 15.7 16.1 15.4 15.4 15.3
Retired locomotives 22.4 24.5 22.7 20.6 23.3
The table above excludes equipment leased from PRR (see Note 2), which
comprises 16% of the freight car fleet and 27% of the locomotive fleet.
The higher average age of owned locomotives in 2000 reflects the fact
that locomotives leased in 2000 are not included in the statistic. The 1998
decrease in the average age of retired locomotives resulted from a
disproportionate share of early retirements as well as retention of older
units in anticipation of the Closing Date.
Through its coal car rebody program, which was suspended in 2000,
NS Rail converted about 29,000 hopper cars into high-capacity steel gondolas
or hoppers. As a result, the remaining service life of the freight-car fleet
is greater than may be inferred from the increasing average age shown in the
table above.
34
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
For 2002, NS Rail has budgeted almost $700 million for capital
expenditures. The anticipated spending includes $482 million for roadway
projects, of which $366 million is for track and bridge program work. Also
included are projects for marketing and industrial development initiatives
and continuing investments in intermodal infrastructure. Equipment spending
of $173 million includes the purchase of 50 locomotives and upgrades to
existing units, and projects related to computers and information technology,
including additional security and backup systems. NS Rail issued in
February 2002 debt secured by the locomotives.
Cash flows from financing activities in 2001 was $134 million. Financing
activities included loan transactions with a PRR subsidiary that resulted in
net borrowings of $250 million in 2001 and net repayments of $72 million in
2000 (see Note 2). Advances to NS typically account for most of the cash used
for financing activities and reflect NS' requirements (see Note 2, "Cash
required for NS Debt").
NS is subject to various financial covenants with respect to its credit
agreement, including a minimum net worth requirement, a maximum leverage ratio
restriction and certain restrictions on issuance of furhter debt. As the major
NS subsidiary, NS Rail is subject to certain of these restrictions.
OTHER MATTERS
Labor Arbitration
- -----------------
Several hundred claims have been filed on behalf of NSR employees
furloughed after June 1, 1999, for various periods of time, alleging that
the furloughs were a result of the Conrail transaction and seeking "New York
Dock" income protection benefits. One labor organization has initiated
arbitration on behalf of approximately 100 of these claimants. Management
believes, based on known facts and circumstances, including the availability
of legal defenses, that the amount of liability for these claims should not
have a material adverse effect on NS Rail's financial position, results of
operations or liquidity. Depending on the outcome of the arbitration, other
claims may be filed or progressed to arbitration. Should all such claimants
prevail, there could be a significant effect on results of operations in a
particular quarter.
Labor Agreements
- ----------------
Substantially all of NS Rail's employees are covered by collective
bargaining agreements with 15 different labor unions. These agreements remain
in effect until changed pursuant to the Railway Labor Act. Moratorium
provisions in these agreements permitted NS Rail and the unions to propose
such changes in late 1999; negotiations at the national level commenced
shortly thereafter. The outcome of these negotiations is uncertain. However,
agreements have been reached with the Brotherhood of Maintenance of Way
Employes, which represents about 4,400 NS Rail employees, and with the
Brotherhood of Locomotive Engineers, which represents about 5,000 NS Rail
employees. In addition, a tentative national agreement (subject to
ratification) has been reached with the United Transportation Union, which
represents about 7,000 NS Rail employees. The tentative national agreement
reached with the International Brotherhood of Electrical Workers, which
represents about 1,000 NS Rail employees, was not ratified.
35
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Market Risks and Hedging Activities
- -----------------------------------
NS Rail uses derivative financial instruments to reduce the risk of
volatility in its diesel fuel costs and to manage its overall exposure to
fluctuations in interest rates.
In 2001, NS Rail began a program to hedge a portion of its diesel fuel
consumption. The intent of the program is to assist in the management of NS
Rail's aggregate risk exposure to fuel price fluctuations, which can
significantly affect NS Rail's operating margins and profitability, through
the use of one or more types of derivative instruments.
Diesel fuel costs represented 8 percent of NS Rail's operating expenses
for 2001. The program provides that NS Rail will not enter into any fuel
hedges with a duration of more than 36 months, and that no more than
80 percent of NS Rail's average monthly fuel consumption will be hedged for
each month within any 36-month period.
As of Dec. 31, 2001, through swap transactions and advance purchases,
NS Rail has hedged approximately 40% of expected 2002 diesel fuel
requirements. The effect of the hedges is to yield an average cost of
70 cents per hedged gallon, including federal taxes and transportation.
A 10% decrease in diesel fuel prices would increase NS Rail's liability
related to the swaps by approximately $15 million.
NS Rail manages its overall exposure to fluctuations in interest rates
by issuing both fixed- and floating-rate debt instruments and by entering
into interest-rate hedging transactions to achieve an appropriate mix within
its debt portfolio.
Of NS Rail's total debt outstanding (see Note 8), about half is fixed-
rate debt. Most of the capital leases and $174 million of equipment
obligations have variable rates. As a result, NS Rail's debt subject to
interest rate exposure totaled $425 million at Dec. 31, 2001. A 1% increase
in interest rates would increase NS' total annual interest expense related
to all its variable debt by approximately $4 million. Management considers
it unlikely that interest rate fluctuations applicable to these instruments
will result in a material adverse effect on NS Rail's financial position,
results of operations or liquidity.
The capital leases, which carry an average fixed rate of 7.1%, were
effectively converted to variable rate obligations using interest rate swap
agreements. On Dec. 31, 2001, the average pay rate under these agreements
was 2.8%, and the average receive rate was 7.1%. During 2001, the effect of
the swaps was to reduce interest expense by $3 million. A portion of the
lease obligations is payable in Japanese yen. NS Rail 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 Rail
is exposed to financial market risk relative to Japan.
Counterparties to the interest rate swaps and Japanese banks holding
yen deposits are major financial institutions believed by management to
be creditworthy.
Environmental Matters
- ---------------------
NS Rail is subject to various jurisdictions' environmental laws and
regulations. It is NS Rail's policy to record a liability where such
liability or loss is probable and its amount can be estimated reasonably.
Claims, if any, against third parties for recovery of cleanup costs incurred
by NS Rail are reflected as receivables (when collection is probable) in the
balance sheet and are not netted against the associated
36
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
NS Rail liability. Environmental engineers regularly participate in ongoing
evaluations of all identified sites and in determining any necessary
adjustments to initial liability estimates. NS Rail 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
$10 million in 2001, $11 million in 2000 and $12 million in 1999, and
capital expenditures totaled approximately $10 million in each of 2001
and 2000 and $8 million in 1999. Capital expenditures in 2002 are
expected to be comparable to those in 2001.
NS Rail's balance sheets included liabilities for environmental
exposures in the amount of $33 million at Dec. 31, 2001, and $36 million
at Dec. 31, 2000 (of which $8 million was accounted for as a current
liability in each year). At Dec. 31, 2001, the liability represented
NS Rail's estimate of the probable cleanup and remediation costs based
on available information at 126 identified locations. On that date,
10 sites accounted for $17 million of the liability, and no individual
site was considered to be material. NS Rail anticipates that much of
this liability will be paid out over five years; however, some costs
will be paid out over a longer period.
At some of the 126 locations, certain NS Rail 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 Rail
or by the EPA or comparable state authorities), estimates of NS Rail's
ultimate potential financial exposure for a given site or in the aggregate
for all such sites are unavoidably imprecise because of the widely varying
costs of currently available cleanup techniques, the likely 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 Rail's traffic mix, particularly those classified as
hazardous materials, can pose special risks that NS Rail and its subsidiaries
work diligently to minimize. In addition, several NS Rail subsidiaries own,
or have owned, land used as operating property, or which is leased or may
have been leased and operated by others, or held for sale.
Because environmental problems that are latent or undisclosed may exist
on these properties, there can be no assurance that NS Rail will not incur
environmental liabilities or costs with respect to one or more of them, the
amount and materiality of which cannot be estimated reliably at this time.
Moreover, lawsuits and claims involving these and other unidentified
environmental sites and matters are likely to arise from time to time.
The resulting liabilities could have a significant effect on financial
condition, results of operations or liquidity in a particular year
or quarter.
However, based on 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 Rail's financial position, results of operations or liquidity.
37
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
New Accounting Pronouncement
- ----------------------------
In October 2001, the Financial Accounting Standards Board issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Statement No. 144 supersedes Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," but it retains many of the fundamental provisions of that Statement.
Statement No. 144 also broadens the presentation of discontinued operations
to include more disposal transactions. NS Rail's adoption of Statement
No. 144, effective Jan. 1, 2002, did not have a material effect on its
financial statements.
Inflation
- ---------
Generally accepted accounting principles require the use of historical
cost in preparing financial statements. This approach disregards the effects
of inflation on the replacement cost of property. NS Rail, a capital-
intensive company, has most of its capital invested in such assets. The
replacement cost of these assets, as well as the related depreciation expense,
would be substantially greater than the amounts reported on the basis of
historical cost.
Trends
- ------
- - Federal Economic Regulation - Efforts may be made in 2002 to reimpose
unwarranted federal economic regulation on the rail industry. The
Staggers Rail Act of 1980, which substantially reduced such regulation,
encouraged and enabled rail carriers to innovate and to compete for
business. NS Rail and other rail carriers will oppose any efforts to
reimpose unwarranted economic regulation.
- - Utility Deregulation - Deregulation of the electrical utility industry
is expected to increase competition among electric power generators;
deregulation over time would permit wholesalers and possibly retailers
of electric power to sell or purchase increasing quantities of power to
or from distant parties. The effects of deregulation on NS Rail and on
its customers cannot be predicted with certainty; however, NS Rail
serves a number of efficient power producers and is working diligently
to ensure that its customers remain competitive in this
evolving environment.
- - Carbon-Based Fuel - There is growing concern in some quarters that
emissions resulting from burning carbon-based fuel, including coal, are
contributing to global warming and causing other environmental changes.
To the extent that these concerns evolve into a consensus among policy-
makers, the impact could be either a reduction in the demand for coal or
imposition of more stringent regulations on emissions, which might
result in making coal a less economical source of power generation or
make permitting of coal-fired facilities even more difficult. The
revenues and net income of NS Rail and other railroads that move large
quantities of coal could be affected adversely.
38
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Forward-Looking Statements
- --------------------------
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that may be
identified by the use of words like "believe," "expect," "anticipate" and
"project." Forward-looking statements reflect management's good-faith
evaluation of information currently available. However, such statements
are dependent on and, therefore, can be influenced by, a number of external
variables over which management has little or no control, including:
domestic and international economic conditions; the business environment
in industries that produce and consume rail freight; competition and
consolidation within the transportation industry; fluctuation in prices of
key materials, in particular diesel fuel; labor difficulties, including
strikes and work stoppages; legislative and regulatory developments;
changes in securities and capital markets; and natural events such as
severe weather, floods and earthquakes. Forward-looking statements are not,
and should not be relied upon as, a guaranty of future performance or
results. Nor will they necessarily prove to be accurate indications of the
times at or by which any such performance or results will be achieved. As
a result, actual outcomes and results may differ materially from those
expressed in forward-looking statements. The Company undertakes no
obligation to update or revise forward-looking statements.
39
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 Conditions and Results
of Operations," on Page 35 under the heading "Market Risks and
Hedging Activities."
40
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Quarterly Financial Data
(Unaudited)
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
($ in millions, except per share amounts)
2001
----
Railway operating revenues $ 1,502 $ 1,550 $ 1,469 $ 1,488
Income from railway operations 152 234 206 239
Net income 62 83 95 109
Dividends per serial preferred share $ 0.65 $ 0.65 $ 0.65 $ 0.65
2000
----
Railway operating revenues $ 1,472 $ 1,554 $ 1,500 $ 1,486
Income (loss) from railway operations (6) 249 175 73
Net income (loss) (30) 115 80 21
Dividends per serial preferred share $ 0.65 $ 0.65 $ 0.65 $ 0.65
Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 2001, 2000 and 1999 41
Consolidated Balance Sheets
As of December 31, 2001 and 2000 42
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999 44
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999 46
Notes to Consolidated Financial Statements 47
Independent Auditors' Report 68
The Index to Consolidated Financial Statement Schedule appears in
Item 14 on Page 71.
41
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Income
Years ended December 31,
2001 2000 1999
---- ---- ----
($ in millions)
RAILWAY OPERATING REVENUES $ 6,009 $ 6,012 $ 5,161
RAILWAY OPERATING EXPENSES:
Compensation and benefits 1,528 1,900 1,967
Materials, services and rents 1,838 1,679 1,228
Conrail rents and services (Note 2) 465 500 279
Depreciation 497 486 463
Diesel fuel 412 478 255
Casualties and other claims 145 142 138
Other 293 336 328
------- ------- -------
Railway operating expenses 5,178 5,521 4,658
------- ------- -------
Income from railway operations 831 491 503
Other income (expense) - net (Note 3) (243) (169) 42
Interest expense on debt (Note 6) (37) (37) (39)
------- ------- -------
Income before income taxes 551 285 506
Provision for income taxes (Note 4) 202 99 174
------- ------- -------
NET INCOME $ 349 $ 186 $ 332
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
42
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets
As of December 31,
2001 2000
---- ----
($ in millions)
ASSETS
Current assets:
Cash and cash equivalents $ 167 $ --
Short-term investments -- 1
Accounts receivable net of allowance for doubtful accounts
of $5 million and $7 million, respectively (Note 2) 152 146
Due from Conrail (Note 2) 8 31
Materials and supplies 87 89
Deferred income taxes (Note 4) 153 173
Other current assets 98 125
------- -------
Total current assets 665 565
Investments (Notes 5 and 14) 631 486
Properties less accumulated depreciation (Note 6) 10,672 10,483
Other assets 573 483
------- -------
TOTAL ASSETS $ 12,541 $ 12,017
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note 7) $ 819 $ 902
Income and other taxes 236 221
Due to NS - net (Note 2) 517 26
Notes and accounts payable to Conrail (Note 2) 373 155
Other current liabilities (Note 7) 134 159
Current maturities of long-term debt (Note 8) 88 80
------- -------
Total current liabilities 2,167 1,543
Long-term debt (Note 8) 780 691
Other liabilities (Note 10) 1,024 1,061
Minority interests 3 3
Deferred income taxes (Note 4) 3,746 3,613
------- -------
TOTAL LIABILITIES 7,720 6,911
------- -------
43
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets (continued)
As of December 31,
2001 2000
---- ----
($ in millions)
Stockholders' equity:
Serial preferred stock (Note 11) 55 55
Common Stock (Note 11) 167 167
Additional paid-in capital 706 695
Accumulated other comprehensive income (Note 12) 215 157
Retained income 3,678 4,032
------- -------
TOTAL STOCKHOLDERS' EQUITY 4,821 5,106
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,541 $ 12,017
======= =======
See accompanying Notes to Consolidated Financial Statements.
44
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
Years ended December 31,
2001 2000 1999
---- ---- ----
($ in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 349 $ 186 $ 332
Reconciliation of net income to net cash
provided by operating activities:
Depreciation 499 487 465
Deferred income taxes 71 16 5
Nonoperating gains on properties and investments (13) (18) (44)
Accounts receivable dividend to NS (Note 2) -- -- (491)
Changes in assets and liabilities
affecting operations:
Accounts receivable (6) 39 (173)
Materials and supplies 2 9 (40)
Other current assets and due from Conrail 49 60 (49)
Income tax liabilities 72 79 162
Other short-term liabilities (131) 178 269
Other - net (155) 14 130
------ ------ ------
Net cash provided by operating activities 737 1,050 566
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (725) (628) (915)
Property sales and other transactions 52 72 65
Investments, including short-term (89) (71) (105)
Investment sales and other transactions 58 83 311
------ ------ ------
Net cash used for investing activities (704) (544) (644)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (Note 2) (3) (3) (3)
Advances to NS (Note 2) (213) (396) (105)
Advances and repayments from NS (Note 2) 5 50 17
Proceeds from borrowings 480 244 337
Debt repayments (135) (401) (168)
------ ------ ------
Net cash provided by (used for)
financing activities 134 (506) 78
------ ------ ------
Net increase in cash and
cash equivalents 167 -- --
CASH AND CASH EQUIVALENTS:
At beginning of year -- -- --
------ ------ ------
At end of year $ 167 $ -- $ --
====== ====== ======
(continued)
45
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows (continued)
Years ended December 31,
2001 2000 1999
---- ---- ----
($ in millions)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 70 $ 115 $ 70
Income taxes $ 65 $ 4 $ 5
See accompanying Notes to Consolidated Financial Statements.
46
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Changes in Stockholders' Equity
Addi- Accumulated
Serial tional Other
Preferred Common Paid-In Comprehensive Retained
Stock Stock Capital Income Income Total
--------- ------ ------- ------------- -------- -----
($ in millions)
BALANCE DECEMBER 31, 1998 $ 55 $ 167 $ 548 $ 414 $ 4,953 $ 6,137
Comprehensive income - 1999
Net income 332 332
Other comprehensive loss
(Note 12) (155) (155)
------
Total comprehensive income 177
Serial preferred stock,
$2.60 per share cash dividend (3) (3)
Noncash dividends on
Common Stock (Note 2) (1,051) (1,051)
Capital contribution (Note 2) 125 125
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31, 1999 55 167 673 259 4,231 5,385
Comprehensive income - 2000
Net income 186 186
Other comprehensive loss
(Note 12) (102) (102)
------
Total comprehensive income 84
Serial preferred stock,
$2.60 per share cash dividend (3) (3)
Noncash dividends on
Common Stock (Note 2) (382) (382)
Capital contribution (Note 2) 22 22
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31, 2000 55 167 695 157 4,032 5,106
Comprehensive income - 2001
Net income 349 349
Other comprehensive income
(Note 12) 58 58
------
Total comprehensive income 407
Serial preferred stock,
$2.60 per share cash dividend (3) (3)
Noncash dividends on
Common Stock (Note 2) (700) (700)
Capital contribution (Note 2) 11 11
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31, 2001 $ 55 $ 167 $ 706 $ 215 $ 3,678 $ 4,821
====== ====== ====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements.
47
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
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 Railway Company (NSR), together with its consolidated
subsidiaries (collectively NS Rail), is engaged principally in the
transportation of freight by rail, operating approximately 21,500 route
miles, primarily in the East and Midwest. These financial statements include
NSR and its majority-owned and controlled subsidiaries on a consolidated
basis. All significant intercompany balances and transactions have been
eliminated in consolidation.
NS Rail transports raw materials, intermediate products and finished
goods classified in the following market groups (percent of total railway
operating revenues): coal (25%); automotive (15%); chemicals (13%); metals/
construction (11%); paper/clay/forest products (10%); agriculture/consumer
products/government (10%); and intermodal (16%). Ultimate points of
origination or destination for some of the freight (particularly coal bound
for export and intermodal containers) are outside of the United States.
Substantially all of NS Rail's employees are covered by collective
bargaining agreements with 15 different labor unions.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Management reviews its estimates, including
those related to the recoverability and useful lives of assets, as well
as liabilities for litigation, environmental remediation, casualty claims,
income taxes, pensions and postretirement benefits. Changes in facts and
circumstances may result in revised estimates.
Cash Equivalents
- ----------------
"Cash equivalents" are highly liquid investments purchased three months
or less from maturity.
Investments
- -----------
Marketable equity and debt securities are reported at amortized cost or
fair value, depending upon their classification as securities "held-to-
maturity," "trading," or "available-for-sale." All marketable equity
securities consisting principally of NS Common Stock are designated as
"available-for-sale." Accordingly, unrealized gains and losses, net of taxes,
are recognized in "Accumulated Other Comprehensive Income" (see Note 12).
Investments where NS Rail 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."
48
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Materials and Supplies
- ----------------------
"Materials and supplies," consisting mainly of fuel oil and items for
maintenance of property and equipment, are stated at the lower of average
cost or market. The cost of materials and supplies expected to be used in
capital additions or improvements is included in "Properties."
Properties
- ----------
"Properties" are stated principally at cost and are depreciated using
group depreciation. Rail is depreciated primarily on the basis of use
measured by gross ton-miles. Other properties are depreciated generally
using the straight-line method over estimated service or lease lives. NS Rail
capitalizes interest on major capital projects during the period of their
construction. Expenditures, including those on leased assets, that extend an
asset's useful life or increase its utility are capitalized. Maintenance
expense is recognized when repairs are performed. When properties other than
land and nonrail assets are sold or retired in the ordinary course of
business, the cost of the assets, net of sale proceeds or salvage, is charged
to accumulated depreciation rather than recognized through income. Gains and
losses on disposal of land and nonrail assets are included in "Other Income
(Expense) - Net" (see Note 3).
NS Rail reviews the carrying amount of properties whenever events or
changes in circumstances indicate that such carrying amount may not be
recoverable based on future undiscounted cash flows or estimated net
realizable value. Assets that are deemed impaired as a result of such review
are recorded at the lower of carrying amount or fair value.
Revenue Recognition
- -------------------
Revenue is recognized proportionally as a shipment moves from origin to
destination. Refunds due in accordance with transportation contracts are
recorded as a reduction to revenues during the life of the contract, based
on Management's best estimate of projected liability.
Derivatives
- -----------
NS Rail does not engage in the trading of derivatives. NS Rail uses
derivative financial instruments to reduce the risk of volatility in its
diesel fuel costs and in the management of its mix of fixed- and floating-
rate debt. Management has determined that these derivative instruments
qualify as either fair-value or cash-flow hedges, having values that highly
correlate with the underlying hedged exposures and have designated such
instruments as hedging transactions. 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.
Required Accounting Changes
- ---------------------------
Effective Jan. 1, 2001, NS Rail adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" (see Note 15).
49
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Reclassifications
- -----------------
Certain amounts in the consolidated financial statements and notes
thereto have been reclassified to conform to the 2001 presentation.
2. RELATED PARTIES
General
- -------
Norfolk Southern Corporation (NS) is the parent holding company of NSR.
Rail operations are coordinated at the holding company level by the NS Vice
Chairman and Chief Operating Officer. Effective June 1, 2000, NS charges
NS Rail a fee for management services it performs for NS Rail (which totaled
$521 million and included a $35 million markup in 2001, and totaled
$347 million, and included a $17 million markup in 2000). Previously, the
costs of functions performed by NS were charged to NS Rail. As a result,
costs that were previously included in "Compensation and benefits" and
"Other" are reflected in "Materials, services and rents." In addition,
NS charges NS Rail a revenue-based licensing fee (which totaled $90 million
in 2001, $91 million in 2000 and $77 million in 1999) for use of certain
intangible assets owned by NS.
NS Rail owns 21,169,125 shares of NS common stock.
Operations Over Conrail's Lines
- -------------------------------
Overview -- NS and CSX Corporation (CSX) jointly own Conrail Inc.
(Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC),
the major freight railroad in the Northeast. From May 23, 1997, the date NS
and CSX completed their acquisition of Conrail stock, until June 1, 1999,
Conrail's operations continued substantially unchanged while NS and CSX
awaited regulatory approvals and prepared for the integration of the
respective Conrail routes and assets to be leased to their railroad
subsidiaries, NSR and CSX Transportation, Inc. (CSXT).
Operations of Conrail's Lines -- On June 1, 1999 (the Closing Date),
NSR and CSXT began operating as parts of their rail systems the separate
Conrail routes and assets leased to them pursuant to operating and
lease agreements.
The Operating Agreement between NSR and Pennsylvania Lines LLC (PRR),
a wholly owned subsidiary of CRC, governs substantially all nonequipment
assets to be operated by NSR and has an initial 25-year term, renewable
at the option of NSR for two five-year terms. Payments under the
Operating Agreement are subject to adjustment every six years to reflect
changes in values. NSR also has leased or subleased for varying terms
from PRR a number of equipment assets. Costs necessary to operate and
maintain the PRR assets, including leasehold improvements, are borne by
NSR. CSXT has entered into comparable arrangements, for the operation and
use of certain other CRC routes and assets, with another wholly owned
CRC subsidiary.
NSR and CSXT also have entered into agreements with CRC governing other
Conrail properties that continue to be owned and operated by Conrail (the
Shared Assets Areas). NSR and CSXT pay CRC a fee for joint and exclusive
access to the Shared Assets Areas. In addition, NSR and CSXT pay, based on
usage, the costs incurred by CRC to operate the Shared Assets Areas.
50
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Future minimum lease payments due to PRR under the Operating Agreement
and lease agreements and to CRC under the Shared Assets Areas (SAA)
agreements are as follows:
PRR Oper. PRR Lease SAA
($ in millions) Agmt. Agmts. Agmts.
-------------- -------- --------- ------
2002 $ 196 $ 131 $ 27
2003 217 109 30
2004 238 93 32
2005 246 72 34
2006 246 57 34
2007 and subsequent years 4,530 171 618
------ ------ -----
Total $ 5,673 $ 633 $ 775
====== ====== =====
Operating lease expense related to the agreements, which is included in
"Conrail rents and services," amounted to $467 million in 2001, $502 million
in 2000 and $273 million in 1999.
On the Closing Date, both NS Rail's route miles and its employees
increased approximately 50 percent. NS Rail and CSXT now provide
substantially all rail freight services on Conrail's route system, perform
or are responsible for performing most services incident to customer freight
contracts and employ the majority of Conrail's former work force. As a
result, NS Rail began to receive all freight revenues and incur all expenses
on the PRR lines.
NS Rail's railway operating expenses in 1999 included $168 million
($103 million after taxes) related to the Conrail transaction, principally
for contractual obligations to Conrail employees imposed by the STB when it
approved the transaction. NS Rail's consolidated balance sheet at Dec. 31,
2001, includes $78 million of liabilities for these obligations. Through
Dec. 31, 2001, NS Rail had paid $91 million of these costs.
Until the Closing Date, NS Rail and CRC had transactions with each
other in the customary course of handling interline traffic. As of Dec. 31,
2001, substantially all of the amounts receivable or payable related to
these transactions had been satisfied.
NS Rail provides certain general and administrative support functions
to Conrail, the fees for which are billed in accordance with several service-
provider arrangements and totaled $6 million in 2001, $7 million in 2000 and
$10 million in 1999.
"Conrail rents and services," a new line on the income statements
beginning June 1, 1999, includes expenses for amounts due to PRR and CRC for
use by NS Rail of operating properties and equipment, operation of the Shared
Assets Areas and continued operation of certain facilities during a
transition period.
"Notes and accounts payable to Conrail" includes $301 million at
Dec. 31, 2001, and $51 million at Dec. 31, 2000, of interest-bearing loans
made to NS Rail by a PRR subsidiary that are payable on demand. The interest
rate for these loans is variable and was 2.45% at Dec. 31, 2001. Also
included is $72 million at Dec. 31, 2001, and $104 million at Dec. 31, 2000,
due to PRR and CRC related to expenses included in "Conrail rents and
services," as discussed above.
Noncash Dividends
- -----------------
NSR declared and issued to NS noncash dividends of $700 million in 2001,
$382 million in 2000 and $1.1 billion in 1999. The 1999 amount included a
$491 million dividend of accounts receivable declared December 1. The
remainder of the 1999 dividends and all of the 2001 and 2000 dividends were
settled by reduction of NSR's interest-bearing advances due from NS.
Noncash dividends are excluded from the Consolidated Statements of
Cash Flows.
51
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Intercompany Accounts
- ---------------------
December 31,
-----------
2001 2000
---- ----
Average Average
Interest Interest
($ in millions) Balance Rate Balance Rate
-------------- ------- -------- ------- --------
Due from NS:
Advances $ 68 2% $ 261 6%
Due to NS:
Advances and notes (585) 3% (287) 8%
----- -----
Due to NS - net $ (517) $ (26)
===== =====
Interest is applied to certain advances at the average NS yield on
short-term investments and to the notes at specified rates. "Interest income"
includes interest on amounts due from NS of $22 million in 2001, $18 million
in 2000 and $13 million in 1999.
"Other interest expense" includes interest on amounts due to NS
$15 million in 2001, $74 million in 2000 and $31 million in 1999.
Sale of Accounts Receivable
- ---------------------------
From Dec. 1, 1999 through April 30, 2000, NS Rail sold certain of its
rail accounts receivable, on a nonrecourse basis, to NS. Based on the terms
of the sale agreement, these sales were accounted for as secured borrowings.
The discount is included in "Other income - net" in the Consolidated
Statements of Income and is a component of "Other interest expense" in Note 3.
Accordingly, at Dec. 31, 1999, "Accounts receivable, net" included
$388 million of such sold receivables, and "Due to NS - net" included the
related liability.
Effective May 2000, NS and NS Rail sold, without recourse, to a
bankruptcy-remote special-purpose NS subsidiary, a pool of accounts receivable
totaling approximately $700 million. The pool consisted of receivables NS
earlier had purchased from NS Rail (as described above), and certain
additional NS Rail receivables. NS Rail services and collects all of the sold
receivables on behalf of the buyers; however, no servicing asset or liability
has been recognized because the benefits of servicing are estimated to be just
adequate to compensate NS Rail for its responsibilities. Payments collected
from sold receivables are remitted to the special-purpose NS subsidiary, which,
in turn, reinvests the amounts by purchasing new receivables from NS Rail. NS
Rail has no retained interest in the sold receivables.
Under the terms of the sale agreement, the receivables are treated as sold
and, accordingly, $534 million of sold receivables at Dec. 31, 2001 are not
included on the balance sheet of NS Rail. The transition to the new program in
May 2000 resulted in a $495 million noncash reduction of receivables and
Intercompany Accounts, which was excluded from the Consolidated Statements of
Cash Flows. Fees associated with the sale, which are based on historical
dilution and prevailing interest rates, are included in "Other income (expense)
- - net" (see Note 3).
Intercompany Federal Income Tax Accounts
- ----------------------------------------
In accordance with the NS Tax Allocation Agreement, intercompany federal
income tax accounts are recorded between companies in the NS consolidated
group. NS Rail had long-term intercompany federal income tax payables (which
are included in "Deferred income taxes" in the Consolidated Balance Sheets)
of $871 million at Dec. 31, 2001, and $819 million at Dec. 31, 2000.
52
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Capital Contributions
- ---------------------
In each of 2001, 2000 and 1999, NS Rail recognized capital contributions
for benefits it received related to tax credits generated by a nonrail
subsidiary of NS. In 1999, NS Rail recognized a capital contribution for a
transfer of pension assets NS received from the Conrail pension plan.
Cash Required for NS Debt
- -------------------------
To finance the cost of the Conrail transaction, NS issued and sold
commercial paper and $4.3 billion of unsecured notes. A significant portion
of the funding for the interest and repayments on this and other NS debt is
expected to be provided by NS Rail.
NS is subject to various financial covenants with respect to its debt
and under its credit agreement, including a minimum net worth requirement, a
maximum leverage ratio restriction and certain restrictions on issuance of
further debt. As a major NS subsidiary, NS Rail is subject to certain of
those covenants.
3. OTHER INCOME (EXPENSE) - NET
($ in millions) 2001 2000 1999
-------------- ---- ---- ----
Rental income $ 44 $ 35 $ 32
Interest income (Note 2) 29 26 20
Gains from sales of properties
and investments 13 18 44
Dividends from NS 5 17 17
Sale of accounts receivable (314) (145) --
Other interest expense (Note 2) (10) (109) (58)
Corporate-owned life insurance - net 7 -- (3)
Taxes on nonoperating property (6) (6) (3)
Other - net (11) (5) (7)
------ ------ ------
Total $ (243) $ (169) $ 42
====== ====== ======
"Other current assets" in the Consolidated Balance Sheets includes
prepaid interest on corporate-owned life insurance borrowings of $42 million
at Dec. 31, 2001, and $40 million at Dec. 31, 2000.
4. INCOME TAXES
Provision for Income Taxes
- --------------------------
($ in millions) 2001 2000 1999
-------------- ---- ---- ----
Current:
Federal $ 113 $ 75 $ 159
State 18 8 10
------ ------ ------
Total current taxes 131 83 169
------ ------ ------
Deferred:
Federal 56 14 8
State 15 2 (3)
------ ------ ------
Total deferred taxes 71 16 5
------ ------ ------
Provision for income taxes $ 202 $ 99 $ 174
====== ====== ======
53
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Reconciliation of Statutory Rate to Effective Rate
- --------------------------------------------------
Total income taxes as reflected in the Consolidated Statements of
Income differ from the amounts computed by applying the statutory federal
corporate tax rate as follows:
2001 2000 1999
($ in millions) Amount % Amount % Amount %
-------------- ------ -- ------ -- ------ --
Federal income tax
at statutory rate $ 193 35 $ 100 35 $ 177 35
State income taxes, net
of federal tax benefit 21 4 7 2 4 1
Corporate-owned life
insurance (3) -- (2) -- -- --
Other - net (9) (2) (6) (2) (7) (2)
----- -- ----- -- ----- --
Provision for
income taxes $ 202 37 $ 99 35 $ 174 34
===== == ===== == ===== ==
Inclusion in Consolidated Return
- --------------------------------
NS Rail is included in the consolidated federal income tax return of NS.
The provision for current income taxes in the Consolidated Statements of
Income reflects NS Rail's portion of NS' consolidated tax provision. Tax
expense or tax benefit is recorded on a separate company basis.
Deferred Tax Assets and Liabilities
- -----------------------------------
Certain items are reported in different periods for financial reporting
and income tax purposes. Deferred tax assets and liabilities were 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:
54
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
December 31,
-----------
($ in millions) 2001 2000
-------------- ---- ----
Deferred tax assets:
Reserves, including casualty
and other claims $ 156 $ 156
Employee benefits 57 103
Retiree health and death benefit
obligation 135 138
Taxes, including state and property 204 182
------ ------
Deferred tax assets 552 579
------ ------
Deferred tax liabilities:
Property (3,112) (3,077)
Unrealized holding gains (134) (95)
Other (28) (28)
------ ------
Deferred tax liabilities (3,274) (3,200)
Intercompany federal tax payable - net (871) (819)
------ ------
Net deferred tax liability (3,593) (3,440)
Net current deferred tax assets 153 173
------ ------
Net long-term deferred tax
liability $(3,746) $(3,613)
====== ======
Except for amounts for which a valuation allowance has been provided,
management believes the other deferred tax assets will be realized.
Internal Revenue Service (IRS) Reviews
- --------------------------------------
Consolidated federal income tax returns have been examined and Revenue
Agent Reports have been received for all years up to and including 1996. The
consolidated federal income tax returns for 1997, 1998 and 1999 are being
audited by the IRS. Management believes that adequate provision has been
made for any additional taxes and interest thereon that might arise as a
result of IRS examinations.
55
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
5. INVESTMENTS
December 31,
-----------
($ in millions) 2001 2000
- -------------- ---- ----
Marketable equity securities at
fair value (Note 14) $ 389 $ 286
Corporate-owned life insurance at
net cash surrender value 214 182
Other 28 18
------ ------
Total $ 631 $ 486
====== ======
6. PROPERTIES
December 31, Depreciation
($ in millions) 2001 2000 Rate for 2001
- -------------- ---- ---- -------------
Railway property:
Road $ 10,384 $ 10,014 2.9%
Equipment 5,378 5,374 4.2%
Other property 94 81 2.7%
-------- --------
15,856 15,469
Less: Accumulated depreciation 5,184 4,986
-------- --------
Net properties $ 10,672 $ 10,483
======== ========
Equipment includes $474 million at Dec. 31, 2001 and 2000, of assets
recorded pursuant to capital leases.
Capitalized Interest
- --------------------
Total interest cost incurred on debt in 2001, 2000 and 1999 was
$54 million, $55 million and $54 million, respectively, of which $17 million,
$18 million and $15 million was capitalized.
56
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
7. CURRENT LIABILITIES
December 31,
-----------
($ in millions) 2001 2000
- -------------- ---- ----
Accounts payable:
Accounts and wages payable $ 357 $ 406
Casualty and other claims 191 222
Equipment rents payable - net 130 134
Vacation liability 118 117
Other 23 23
------ ------
Total $ 819 $ 902
====== ======
Other current liabilities:
Accrued Conrail-related costs
(Note 2) $ 32 $ 42
Interest payable 15 42
Liabilities for forwarded
traffic 35 40
Retiree health and death
benefit obligation (Note 13) 24 24
Derivative instruments 17 --
Other 11 11
------ ------
Total $ 134 $ 159
====== ======
8. DEBT
Long-Term Debt
- --------------
December 31,
-----------
($ in millions) 2001 2000
- -------------- ---- ----
Equipment obligations at an
average rate of 5.3%
maturing to 2014 $ 518 $ 394
Capitalized leases at an average
rate of 2.8% maturing to 2015 316 343
Other debt at an average rate
of 2.7% maturing to 2015 34 34
------ ------
Total long-term debt 868 771
Current maturities (88) (80)
------ ------
Long-term debt
less current maturities $ 780 $ 691
====== ======
(continued)
57
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Long-term debt maturities subsequent to 2002 are as follows:
2003 93
2004 89
2005 92
2006 98
2007 and subsequent years 408
------
Total $ 780
======
The equipment obligations and the capitalized leases are secured by
liens on the underlying equipment.
Certain lease obligations require the maintenance of yen-denominated
deposits, which are pledged to the lessor to satisfy yen-denominated lease
payments. These deposits are included in "Other assets" on the balance sheet
and totaled $78 million at Dec. 31, 2001, and $90 million at Dec. 31, 2000.
9. LEASE COMMITMENTS
NS Rail is committed under long-term lease agreements, which expire on
various dates through 2067, for equipment, lines of road and other property.
The following amounts do not include payments to PRR under the Operating
Agreement and lease agreements or to CRC under the SAA agreements (see
Note 2). Future minimum lease payments and operating lease expenses, other
than to PRR and CRC, are as follows:
58
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Operating Capital
($ in millions) Leases Leases
- -------------- --------- -------
2002 $ 112 $ 47
2003 97 49
2004 74 48
2005 65 51
2006 51 57
2007 and subsequent years 487 123
------ -----
Total $ 886 375
======
Less imputed interest on
capital leases at an average
rate of 7.1% 59
-----
Present value of minimum
lease payments included
in debt $ 316
=====
Operating Lease Expense
- -----------------------
($ in millions) 2001 2000 1999
-------------- ---- ---- ----
Minimum rents $ 148 $ 167 $ 117
Contingent rents 55 61 61
------ ------ ------
Total $ 203 $ 228 $ 178
====== ====== ======
During 2000, NS Rail entered into an operating lease for 140
locomotives, which is renewable annually, has a maximum term of eight
years and includes purchase options. Because the fixed, noncancellable
term of the lease is one year, future minimum lease payments in the table
above do not include amounts related to this lease. However, operating
lease expense for 2001 in the table above does include $18 million related
to this lease. If NS Rail does not purchase the locomotives at the end of
the maximum lease term, it is liable for any shortfall in the then fair-
value of the locomotives and a specified residual value. NS Rail does not
expect to be required to make any payments under this provision.
10. OTHER LIABILITIES
December 31,
-----------
($ in millions) 2001 2000
-------------- ---- ----
Retiree health and death
benefit obligation (Note 13) $ 286 $ 286
Casualty and other claims 264 262
Net pension obligation (Note 13) 79 83
Accrued Conrail-related
costs (Note 2) 46 71
Other 349 359
------ ------
Total $ 1,024 $ 1,061
====== ======
59
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
11. STOCK
Preferred
- ---------
There are 10,000,000 shares of no par value serial preferred stock
authorized. This stock may be issued in series from time to time at the
discretion of the Board of Directors with any series having such voting and
other powers, designations, dividends and other preferences as deemed
appropriate at the time of issuance. On Dec. 31, 2001 and 2000, 1,197,027
shares of $2.60 Cumulative Preferred Stock, Series A (Series A Stock) were
issued, and 1,096,907 shares were held other than by subsidiaries, including
246,355 shares held by NS at Dec. 31, 2001. The Series A Stock has a $50 per
share stated value. The Series A Stock is callable at any time at $50 per
share plus accrued dividends and has one vote per share on all matters,
voting as a single class with holders of other stock.
Preference
- ----------
There are 10,000,000 shares of no par value serial preference stock
authorized. None of these shares has been issued.
Common
- ------
There are 50,000,000 shares of no par value common stock with a stated
value of $10 per share authorized. NS owned all 16,668,997 shares issued and
outstanding at Dec. 31, 2001 and 2000.
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
"Accumulated other comprehensive income" reported in the Consolidated
Statements of Changes in Stockholders' Equity consisted of the following:
Balance Net Balance
at Beginning Gain Reclassification at End
($ in millions) of Year (Loss) Adjustments of Year
- -------------- ------- ---- ----------- -------
December 31, 2001
- -----------------
Unrealized gains on securities $ 170 $ 65 $ -- $ 235
Cash flow hedges -- (16) 5 (11)
Minimum pension liability (13) 4 -- (9)
------- ------ ----- -------
Accumulated other
comprehensive income $ 157 $ 53 $ 5 $ 215
======= ====== ===== =======
December 31, 2000
- -----------------
Unrealized gains on securities $ 272 $ (102) $ -- $ 170
Minimum pension liability (13) -- -- (13)
------- ------ ----- -------
Accumulated other
comprehensive income $ 259 $ (102) $ -- $ 157
======= ====== ===== =======
60
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
"Other comprehensive income (loss)" reported in the Consolidated
Statements of Changes in Stockholders' Equity consisted of the following:
Pretax Tax (Expense) Net-of-Tax
($ in millions) Amount Benefit Amount
- -------------- ------ ------- ------
Year ended 12/31/01
- -------------------
Net gain (loss) arising during the year:
Cash flow hedges $ (27) $ 11 $ (16)
Less reclassification adjustments 8 (3) 5
------ ----- -----
Subtotal (19) 8 (11)
Unrealized gains (losses) on securities 103 (38) 65
Minimum pension liability 6 (2) 4
------ ----- -----
Other comprehensive income (loss) $ 90 $ (32) $ 58
====== ===== =====
Year ended 12/31/00
- -------------------
Net gain (loss) arising during the year:
Unrealized gains (losses) on securities $ (159) $ 57 $ (102)
------ ----- -----
Other comprehensive income (loss) $ (159) $ 57 $ (102)
====== ===== =====
Year ended 12/31/99
- -------------------
Net gain (loss) arising during the year:
Unrealized gains (losses) on securities $ (242) $ 85 $ (157)
Minimum pension liability 2 -- 2
------ ----- -----
Other comprehensive income (loss) $ (240) $ 85 $ (155)
====== ===== =====
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
NS Rail provides defined pension benefits, principally for salaried
employees, through participation in NS' funded and unfunded defined benefit
pension plans. NS Rail also provides specified health care and death benefits
to eligible retired employees and their dependents by participating in
welfare benefit plans sponsored by NS. Under the present plans, which may be
amended or terminated at NS' option, a defined percentage of health care
expenses is covered, reduced by any deductibles, copayments, Medicare payments
and, in some cases, coverage provided under other group insurance policies.
The following data relate to the combined NS plans:
61
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Early Retirement Programs
- -------------------------
During 2000, NS offered two voluntary early retirement programs to its
salaried employees. The principal incentives offered in these programs were
enhanced pension benefits, the cost for most of which will be paid from NS'
overfunded pension plan. A February program was accepted by 919 of 1,180
eligible employees, and a December program was accepted by 370 of 846 eligible
employees. The total cost of these programs, which is included in
"Compensation and benefits," was $133 million. The resulting noncash reduction
to NS Rail's pension plan asset is included in "Other - net" in the
Consolidated Statement of Cash Flows.
Pension Benefits Other Benefits
($ in millions) 2001 2000 2001 2000
-------------- ---- ---- ---- ----
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation at
beginning of year $ 1,312 $ 1,058 $ 445 $ 340
Cost of early retirement benefits -- 119 -- 14
Service cost 15 18 14 15
Interest cost 94 79 33 27
Amendment 6 21 -- --
Legislative changes (19) -- -- --
Actuarial (gains) losses 36 120 21 79
Benefits paid (120) (103) (34) (30)
------- ------- ------- -------
Benefit obligation at
end of year 1,324 1,312 479 445
------- ------- ------- -------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year 1,999 2,072 126 152
Actual return on plan assets (74) 30 (8) (5)
Employer contribution 7 8 34 9
401(h) account transfer (14) (8) -- --
Benefits paid (120) (103) (34) (30)
------- ------- ------- -------
Fair value of plan
assets at end of year 1,798 1,999 118 126
------- ------- ------- -------
Funded status 474 687 (361) (319)
Unrecognized initial net asset -- (3) -- --
Unrecognized (gain) loss (142) (478) 46 4
Unrecognized prior service
cost (benefit) 30 47 -- --
------- ------- ------- -------
Net amount recognized $ 362 $ 253 $ (315) $ (315)
======= ======= ======= =======
(continued)
62
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Pension Benefits Other Benefits
($ in millions) 2001 2000 2001 2000
-------------- ---- ---- ---- ----
Amounts recognized in the
Consolidated Balance Sheets
consist of:
Prepaid benefit cost $ 426 $ 315 $ -- $ --
Accrued benefit liability (79) (83) (315) (315)
Accumulated other
comprehensive income 15 21 -- --
------- ------- ------- -------
Net amount recognized $ 362 $ 253 $ (315) $ (315)
======= ======= ======= =======
Of the pension plans included above, the unfunded pension plans were the
only plans with an accumulated benefit obligation in excess of plan assets.
These plans' accumulated benefit obligations were $79 million at Dec. 31,
2001, and $83 million at Dec. 31, 2000. These plans' projected benefit
obligations were $89 million at Dec. 31, 2001 and 2000. Because of the
nature of such plans, there are no plan assets.
NS received Section 401(h) account transfers, from pension plan assets,
of $14 million in 2001 and $8 million in 2000 as reimbursement for medical
payments for retirees.
Legislative changes primarily resulting from the December 2001 amendment
to the Railroad Retirement Act ("The Act") increased benefits payable to
certain retirees covered by The Act. Since employees' pension benefits paid
by NS are offset by a portion of benefits paid under The Act, the amendment
served to reduce NS' obligation by approximately $19 million at Dec. 31, 2001.
During 2001, NS amended its qualified and nonqualified pension plans to
enhance benefits to certain NS employees. The amendments increased the pension
benefit obligation by $6 million at Dec. 31, 2001.
During 2000, NS amended its qualified pension plan to allow for the
payment of qualifying disability benefits. The amendment increased the pension
benefit obligation by $21 million at Dec. 31, 2000.
Pension and other postretirement benefit costs are determined based on
actuarial valuations that reflect appropriate assumptions as of the
measurement date, ordinarily the beginning of each year. The funded status
of the plans is determined using appropriate assumptions as of each year end.
During 1999, NS received assets from the Conrail pension plan and assumed
certain related liabilities. As a result, the measurement dates for
determining pension costs were Jan. 1, 1999, and Aug. 31, 1999, and reflect
discount rates of 6.75% and 7.75%, respectively, and other assumptions
appropriate at those dates. A summary of the major assumptions follows:
2001 2000 1999
---- ---- ----
Funded status:
Discount rate 7.25% 7.50% 7.75%
Future salary increases 5% 5% 5%
Pension cost:
Discount rate 7.50% 7.75% 6.75%
Return on assets in plans 10% 10% 10%
Future salary increases 5% 5% 5%
63
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Pension and Other Postretirement Benefit Costs
- ----------------------------------------------
($ in millions) 2001 2000 1999
- -------------- ---- ---- ----
PENSION BENEFITS
Service cost $ 15 $ 18 $ 17
Interest cost 94 79 73
Cost of early retirement programs -- 119 --
Expected return on plan assets (202) (192) (152)
Amortization of prior service cost 4 4 4
Amortization of initial net asset (3) (7) (7)
Recognized net actuarial (gain) loss (24) (38) (22)
------ ------ ------
Net cost (benefit) $ (116) $ (17) $ (87)
====== ====== ======
OTHER POSTRETIREMENT BENEFITS
Service cost $ 14 $ 15 $ 11
Interest cost 33 27 23
Cost of early retirement programs -- 14 --
Expected return on plan assets (13) (14) (12)
Amortization of prior service cost -- -- (12)
Recognized net actuarial (gain) loss -- (4) (2)
------ ------ ------
Net cost $ 34 $ 38 $ 8
====== ====== ======
For measurement purposes, increases in the per capita cost of covered
health care benefits were assumed to be 7.0% for 2002 and 6.0% for 2003.
It is assumed the rate will decrease gradually to an ultimate rate of 5.0%
for 2004 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported in the financial statements. To illustrate, a one-
percentage-point change in assumed health care cost trend would have the
following effects:
One percentage point
($ in millions) Increase Decrease
- -------------- -------- --------
Increase (decrease) in:
Total service and interest cost components $ 5 $ (4)
Postretirement benefit obligation $ 42 $ (36)
Under collective bargaining agreements, NS Rail participates in a
multi-employer benefit plan, which provides certain postretirement health
care and life insurance benefits to eligible union employees. Premiums under
this plan are expensed as incurred and amounted to $10 million in 2001,
$7 million in 2000 and $5 million in 1999.
401(k) Plans
- ------------
NS Rail provides 401(k) savings plans for employees. Under the plans,
NS Rail matches a portion of employee contributions, subject to applicable
limitations. Since 1999, NS has issued shares of its Common Stock to fund
NS Rail's contributions. NS Rail's expenses under these plans were
$11 million in 2001 and $12 million in both 2000 and 1999.
64
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
In November 1999, NS issued and contributed to eligible participants'
accounts approximately 2 million shares of its Common Stock in connection
with a temporary special work incentive program available to NS Rail's
unionized employees during much of the third quarter of 1999. The cost of
the program, which was charged to compensation and benefits expenses, was
$49 million.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of "Cash and cash equivalents," "Accounts receivable"
and "Accounts payable" approximate carrying values because of the short
maturity of these financial instruments. The fair value of corporate-owned
life insurance approximates carrying value. The carrying amounts and
estimated fair values for the remaining financial instruments, excluding
investments accounted for under the equity method in accordance with
APB No. 18, consisted of the following at December 31:
2001 2000
---- ----
Carrying Fair Carrying Fair
($ in millions) Amount Value Amount Value
- -------------- -------- ----- -------- -----
Investments $ 435 $ 442 $ 332 $ 340
Long-term debt 868 868 771 763
Quoted market prices were used to determine the fair value of marketable
securities; underlying net assets were used to estimate the fair value of
other investments. The fair values of 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, which consist almost entirely
of shares of NS Common Stock, reflect unrealized holding gains of $369 million
on Dec. 31, 2001, and $265 million on Dec. 31, 2000. Sales of "available-for-
sale securities" were immaterial for years ended Dec. 31, 2001 and 2000.
15. Derivative Financial Instruments
On Jan. 1, 2001, NS Rail adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), as amended by Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" (SFAS 138). The Statements establish accounting
and reporting standards for derivative instruments and hedging activities,
requiring that all derivatives be recognized in the financial statements as
either assets or liabilities and that they be measured at fair value.
Changes in fair value are recorded as adjustments to the assets or
liabilities being hedged in "Other comprehensive income," or in current
earnings, depending on whether the derivative is designated and qualifies
for hedge accounting, the type of hedge transaction represented and the
effectiveness of the hedge. The adoption of SFAS 133 and SFAS 138 resulted
in the recognition of a $5 million asset and a $5 million increase in
long-term debt as of Jan. 1, 2001.
NS Rail uses derivative financial instruments to reduce the risk of
volatility in its diesel fuel costs and to manage its overall exposure to
fluctuations in interest rates. NS Rail 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.
65
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Diesel Fuel Hedging
- -------------------
In the second quarter of 2001, NS Rail began a program to hedge a
portion of its diesel fuel consumption. The intent of the program is to
assist in the management of NS Rail's aggregate risk exposure to fuel price
fluctuations, which can significantly affect NS Rail's operating margins
and profitability. In order to minimize this risk, NS Rail instituted a
continuous hedging strategy for a portion of its estimated future fuel
needs by entering into a series of forward purchases and swaps in order to
lock in the purchase prices of some of its diesel fuel. Hedges are placed
each month by competitive bid among selected counterparties. The goal of
this hedging strategy is to average fuel costs over an extended period of
time while minimizing the incremental cost of hedging.
The program provides that NS Rail will not enter into any fuel hedges
with a duration of more than 36 months, and that no more than 80 percent of
NS Rail's average monthly fuel consumption will be hedged for each month
within any 36-month period. Diesel fuel costs represented 8%, 9% and 6% of
NS Rail's operating expenses for the years ended Dec. 31, 2001, 2000 and
1999, respectively.
NS Rail entered into two types of diesel fuel derivative transactions
in 2001. Management has designated these derivative instruments as cash-flow
hedges of the exposure to variability in expected future cash flows
attributable to fluctuations in diesel fuel prices. In 2001, NS Rail
purchased eight monthly call options at a strike price of 84 cents per
gallon of Nymex No. 2 heating oil. The cost of the monthly options, which
expired serially through Dec. 31, 2001, was amortized as a component of
diesel fuel expense. Because the price of diesel fuel did not reach the
strike price at any time during the period the options were outstanding,
NS Rail did not record any benefit related to these transactions. During
2001, NS Rail entered into 222 fuel swaps for approximately 370 million
gallons at an average price of approximately 68 cents per gallon of Nymex
No. 2 heating oil. As of Dec. 31, 2001, outstanding swaps covered
approximately 32 percent and 21 percent of estimated fuel purchases for the
years 2002 and 2003, respectively.
NS Rail's fuel hedging activity resulted in a net increase in 2001
diesel fuel expense of $8 million. Ineffectiveness related to the use of
diesel fuel hedges in 2001 was less than $1 million.
Interest Rate Hedging
- ---------------------
NS Rail manages its overall exposure to fluctuations in interest rates
by issuing both fixed and floating-rate debt instruments, and by entering into
interest rate hedging transactions. NS Rail had $251 million, or 36.7%, and
$280 million, or 36.3%, of its fixed rate debt portfolio hedged at Dec. 31,
2001 and Dec. 31, 2000, respectively, using interest rate swaps that qualify
for and are designated as fair-value hedge transactions. These swaps have been
effective in hedging the changes in fair value of the related debt arising
from changes in interest rates and, accordingly, there has been no impact on
earnings resulting from ineffectiveness associated with these
derivative transactions.
Fair Values
- -----------
The fair values of NS Rail's diesel fuel derivative instruments at
Dec. 31, 2001, were determined based upon current fair market values as
quoted by third party dealers. Fair values of interest rate swaps were
determined based upon the present value of expected future cash flows
discounted at the appropriate implied spot rate from the spot rate yield
curve. Fair value adjustments are noncash transactions and, accordingly, are
excluded from the Consolidated Statement of Cash Flows. At Dec. 31, 2001,
"Accumulated other comprehensive loss," a component of "Stockholders'
equity," includes $15 million (pretax) relating to the decrease in the fair
value of the derivative fuel hedging transactions that will terminate
within the next 12 months.
66
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
The asset and liability positions of NS Rail's outstanding derivative
financial instruments were as follows:
December 31,
($ in millions) 2001 2000
- -------------- ---- ----
Interest rate hedges:
Gross fair market asset position $ 12 $ 5
Gross fair market (liability) position -- --
Fuel hedges:
Gross fair market asset position -- --
Gross fair market (liability) position (19) --
---- ----
Total net asset (liability) position $ (7) $ 5
==== ====
16. COMMITMENTS AND CONTINGENCIES
Lawsuits
- --------
NSR and certain subsidiaries are defendants in numerous lawsuits relating
principally to railroad operations. When management concludes that it is
probable that a liability has been incurred and the amount of the liability
can be reasonably estimated, it is accrued through a charge to expenses. An
accrual is not made when management's best estimate, based on known facts and
circumstances, is that it is unlikely that a loss has been incurred.
Presently, there are cases involving labor issues where the aggregated
range of loss could be from nothing to $40 million. Management believes that
NS Rail will prevail in these cases; however, an unfavorable outcome could
result in accruals that could be significant to results of operations in a
particular year or quarter.
Casualty Claims
- ---------------
NS Rail is generally self-insured for casualty claims. Claims in excess
of self-insurance levels are insured up to excess coverage limits. The
casualty claims liability is determined actuarially, based upon claims filed
and an estimate of claims incurred but not yet reported. While the ultimate
amount of claims incurred is dependent on future developments, in management's
opinion, the recorded liability is adequate to cover the future payments of
claims. However, it is possible that the recorded liability may not be
adequate to cover the future payments of claims. Adjustments to the recorded
liability will be reflected in operating expenses in the periods in which such
adjustments are known.
Environmental Matters
- ---------------------
NS Rail is subject to various jurisdictions' environmental laws and
regulations. It is NS Rail's policy to record a liability where such
liability or loss is probable and its amount can be estimated reasonably.
Claims, if any, against third parties for recovery of cleanup costs incurred
by NS Rail are reflected as receivables in the balance sheet and are not
netted against the associated NS Rail liability. Environmental engineers
regularly participate in ongoing evaluations of all identified sites and in
determining any necessary adjustments to initial liability estimates.
NS Rail also has established an Environmental Policy Council, composed of
senior managers, to oversee and interpret its environmental policy.
NS Rail's balance sheets included liabilities for environmental
exposures in the amount of $33 million at Dec. 31, 2001, and $36 million
at Dec. 31, 2000 (of which $8 million was accounted for as a current
liability in each year). At Dec. 31, 2001, the liability represented
NS Rail's estimate of the probable cleanup and remediation costs based on
available information at 126 identified locations. On that date, 10 sites
accounted for $17 million of the reserve, and no individual site was
considered to be material. NS Rail anticipates that much of this liability
will be paid out over five years; however, some costs will be paid out over
a longer period.
67
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
At some of the 126 locations, certain NS Rail 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 Rail
or by the EPA or comparable state authorities), estimates of NS Rail's
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 Rail's traffic mix, particularly those classified as
hazardous materials, can pose special risks that NS Rail and its
subsidiaries work diligently to minimize. In addition, several NS Rail
subsidiaries own, or have owned, land used as operating property, or which
is leased or may have been leased and operated by others, or held for sale.
Because environmental problems may exist on these properties that are
latent or undisclosed, there can be no assurance that NS Rail will not
incur environmentally related liabilities or costs with respect to one or
more of them, the amount and materiality of which cannot be estimated
reliably at this time. Moreover, lawsuits and claims involving these and
other now-unidentified environmental sites and matters are likely to arise
from time to time. The resulting liabilities could have a significant effect
on financial condition, results of operations or liquidity in a particular
year or quarter.
However, based on its assessments of the facts and circumstances now
known, Management believes that it has recorded the probable costs for
dealing with those environmental matters of which the Corporation is aware.
Further, Management believes that it is unlikely that any identified matters,
either individually or in the aggregate, will have a material adverse effect
on NS Rail's financial position, results of operations or liquidity.
Purchase Commitment
- -------------------
NS Rail had outstanding purchase commitments of approximately
$150 million in connection with its 2002 capital program. NS Rail has
forward fuel purchase commitments in the first quarter of 2002 covering
38 million gallons of fuel at an average cost of 62 cents per gallon, which
includes federal taxes.
Change-in-Control Arrangements
- ------------------------------
NS has compensation agreements with officers and certain key employees
that become operative only upon a change in control - as defined in those
agreements - of that corporation. The agreements provide generally for
payments based on compensation at the time of a covered individual's
involuntary or other specified termination and for certain other benefits.
Debt Guarantees
- ---------------
As of Dec. 31, 2001, NSR and certain of its subsidiaries are
contingently liable as guarantors with respect to $57 million of
indebtedness of related entities.
68
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Norfolk Southern Railway Company:
We have audited the consolidated financial statements of Norfolk Southern
Railway Company and subsidiaries as listed in the index in Item 8. In
connection with our audits of the consolidated financial statements, we have
also audited the consolidated financial statement schedule listed in Item
14(a)2. These consolidated financial statements and this consolidated
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and this consolidated financial statement schedule based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Norfolk
Southern Railway Company and subsidiaries as of December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
Also in our opinion, the related consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
/s/ KPMG LLP
Norfolk, Virginia
January 21, 2002
69
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------ -----------------------------------------------------------
and Financial Disclosure.
------------------------
None.
70
PART III
--------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
Item 11. Executive Compensation.
- ------- ----------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
and
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
In accordance with General Instruction G(3), the information called for
by Part III is incorporated herein by reference from Norfolk Southern
Railway's definitive Proxy Statement, for the Norfolk Southern Railway Annual
Meeting of Stockholders to be held on May 22, 2001, which definitive Proxy
Statement will be filed electronically with the Commission pursuant to
Regulation 14A. The information regarding executive officers called for by
Item 401 of Regulation S-K is included in Part I hereof beginning on Page 15
under "Executive Officers of the Registrant."
71
PART IV
-------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Item l4. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K.
-------------------
(A) The following documents are filed as part of this report:
1. Index to Consolidated Financial Statements: Page
------------------------------------------ ----
Consolidated Statements of Income
Years ended December 31, 2001, 2000 and 1999 41
Consolidated Balance Sheets
As of December 31, 2001 and 2000 42
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999 44
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 2001, 2000 and 1999 46
Notes to Consolidated Financial Statements 47
Independent Auditors' Report 68
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 Page
-------------------------------------------------- ----
Schedule II - Valuation and Qualifying Accounts 76
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.
72
Item l4. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits
Exhibit
Number Description
- ------- --------------------------------------------------------
3 Articles of Incorporation and Bylaws -
3(i) The amended Restated Articles of Incorporation of Norfolk
Southern Railway Company are incorporated by reference to
Exhibit 3(i) to Norfolk Southern Railway Company's 10-K
filed on March 8, 2001.
3(ii) The Bylaws of Norfolk Southern Railway Company are
incorporated by reference to Exhibit 3(ii) to Norfolk
Southern Railway Company's 10-K filed on March 8, 2001.
4 Instruments Defining the Rights of Security Holders,
Including Indentures -
In accordance with Item 601(b)(4)(iii) of Regulation S-K,
copies of instruments of Norfolk Southern Railway Company 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) 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, is incorporated herein by reference from Exhibit 10
to Norfolk Southern Railway Company's Form 8-K filed
on June 30, 1997.
(b) Amendment No. 1, dated as of August 22, 1998, to the
Transaction Agreement, dated as of June 10, 1997, by and
among CSX Corporation, CSX Transportation, Inc., Norfolk
Southern Corporation, Norfolk Southern Railway Company, Conrail
Inc., Consolidated Rail Corporation and CRR Holdings LLC is
incorporated herein by reference from Exhibit 10.1 to Norfolk
Southern Railway Company's Form 10-Q filed on August 11, 1999.
(c) Amendment No. 2, dated as of June 1, 1999, to the Transaction
Agreement, dated June 10, 1997, by and among CSX Corporation,
CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk
Southern Railway Company, Conrail Inc., Consolidated Rail
Corporation and CRR Holdings LLC is incorporated herein by
reference from Exhibit 10.2 to Norfolk Southern Railway Company's
Form 10-Q filed on August 11, 1999.
(d) Operating Agreement, dated as of June 1, 1999, by and between
Pennsylvania Lines LLC and Norfolk Southern Railway Company is
incorporated herein by reference from Exhibit 10.3 to Norfolk
Southern Railway Company's Form 10-Q filed on August 11, 1999.
(e) Amendment No. 1, dated as of September 29, 2001, to Operating
Agreement, dated as of June 1, 1999, by and between
Pennsylvania Lines LLC and Norfolk Southern Railway Company,
is filed herewith.
(f) 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 Railway Company's Form 10-Q
filed on August 11, 1999.
73
Item l4. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
- ------- --------------------------------------------------------
10 Material Contracts (continued) -
(g) Shared Assets Area Operating Agreement for South Jersey/
Philadelphia, dated as of June 1, 1999, by and among
Consolidated Rail Corporation, CSX Transportation, Inc. and
Norfolk Southern Railway Company, with exhibit thereto, is
incorporated herein by reference from Exhibit 10.5 to Norfolk
Southern Railway Company's Form 10-Q filed on August 11, 1999.
(h) 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 Railway Company's Form 10-Q
filed on August 11, 1999.
(i) Amendment No. 1, dated as of June 1, 2000, 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(h) to Norfolk
Southern Railway Company's 10-K filed on March 8, 2001.
(j) Amendment No. 2, dated as January 1, 2001, to the Shared Assets
Area Operating Agreements for North Jersey, South Jersey/
Philadelphia and Detroit, dated as of June 1, 1999, by and
among Consolidated Rail Corporation, CSX Transportation, Inc.
and Norfolk Southern Railway Company, with exhibit thereto, is
filed herewith.
(k) 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 Railway Company's Form 10-Q filed on
August 11, 1999.
(l) 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 Railway Company's Form 10-K filed on March 6, 2000.
(m) The Supplementary Agreement, entered into as of January 1,
1987, between the Trustees of the Cincinnati Southern Railway
and The Cincinnati, New Orleans and Texas Pacific Railway
Company (the latter a wholly owned subsidiary of Norfolk
Southern Railway Company) - extending and amending a Lease,
dated as of October 11, 1881 - is incorporated by reference
to Exhibit 10(k) to Norfolk Southern Railway Company's Form
10-K filed on March 8, 2001.
74
Item l4. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
- ------- --------------------------------------------------------
21 Subsidiaries of the Registrant.
(B) Reports on Form 8-K.
None.
(C) Exhibits.
The Exhibits required by Item 601 of Regulation S-K as
listed in Item 14(a)3 are filed herewith or incorporated
herein by reference.
(D) Financial Statement Schedules.
Financial statement schedules and separate financial
statements specified by this Item are included in Item 14(a)2 or
are otherwise not required or are not applicable.
75
POWER OF ATTORNEY
- -----------------
Each person whose signature appears below under "SIGNATURES" hereby
authorizes Henry C. Wolf and Henry D. Light, or either of them, to execute
in the name of each such person, and to file, any amendment to this report
and hereby appoints Henry C. Wolf and Henry D. Light, or either of them,
as attorneys-in-fact to sign on his 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 Railway Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on this 22nd day of February, 2002.
NORFOLK SOUTHERN RAILWAY COMPANY
By /s/ David R. Goode
------------------------------------
(David R. Goode, President and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on this 22nd day of February, 2002, by
the following persons on behalf of Norfolk Southern Railway Company and
in the capacities indicated.
Signature Title
- --------- -----
/s/ David R. Goode
- -------------------------- President and Chief Executive Officer
(David R. Goode) and Director (Principal Executive Officer)
/s/ John P. Rathbone
- -------------------------- Vice President and Controller
(John P. Rathbone) (Principal Accounting Officer)
/s/ Henry C. Wolf
- -------------------------- Vice President and Chief Financial Officer
(Henry C. Wolf) and Director (Principal Financial Officer)
/s/ L. I. Prillaman
- --------------------------
(L. I. Prillaman) Director
/s/ Stephen C. Tobias
- --------------------------
(Stephen C. Tobias) Director
76
Schedule II
Page 1 of 2
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1999, 2000 and 2001
(In millions of dollars)
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
Year ended December 31, 1999
- ----------------------------
Valuation allowance (included
net in deferred tax
liability) for deferred tax
assets $ 1 $ -- $ -- $ -- $ 1
Casualty and other claims
included in other
liabilities $ 271 $ 114 $ 9 (1) $ 119 (2) $ 275
Current portion of casualty
and other claims included
in accounts payable $ 143 $ 19 $ 191 (1) $ 173 (3) $ 180
Year ended December 31, 2000
- ----------------------------
Valuation allowance (included
net in deferred tax
liability) for deferred tax
assets $ 1 $ -- $ -- $ -- $ 1
Casualty and other claims
included in other
liabilities $ 275 $ 117 $ 8 (1) $ 138 (2) $ 262
Current portion of casualty
and other claims included
in accounts payable $ 180 $ 19 $ 221 (1) $ 198 (3) $ 222
(1) Includes revenue refunds and overcharges provided through deductions
from operating revenues and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
(continued)
77
Schedule II
Page 1 of 2
Norfolk Southern Railway Company and Subsidiaries
-------------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1999, 2000 and 2001
(In millions of dollars)
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
Year ended December 31, 2001
- ----------------------------
Valuation allowance (included
net in deferred tax
liability) for deferred tax
assets $ 1 $ -- $ -- $ -- $ 1
Casualty and other claims
included in other
liabilities $ 262 $ 109 $ 20 (1) $ 127 (2) $ 264
Current portion of casualty
and other claims included
in accounts payable $ 222 $ 22 $ 142 (1) $ 195 (3) $ 191
(1) Includes revenue refunds and overcharges provided through deductions
from operating revenues and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
78
EXHIBIT INDEX
-------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Electronic
Submission
Exhibit
Number Description Page
- ---------- ----------------------------------------------------------- ----
10(e) Amendment No. 1, dated as of September 29, 2001, to
Operating Agreement, dated as of June 1, 1999, by and
between Pensylvania Lines LLC and Norfolk Southern
Railway Company. 79
10(j) Amendment No. 2, dated as January 1, 2001, to the Shared
Assets Area Operating Agreements for North Jersey, South
Jersey/Philadelphia and Detroit, dated as of June 1, 1999,
by and among Consolidated Rail Corporation, CSX
Transportation, Inc. and Norfolk Southern Railway Company,
with exhibit thereto. 81
21 Subsidiaries of Norfolk Southern Railway Company. 93
Exhibits 10(e) and 10(j) are not included in copies assembled for
public dissemination. If you have a need for this type of
information, we will be pleased to send it to you.
Write to:
Office of Corporate Secretary
Norfolk Southern Railway Company
Three Commercial Place
Norfolk, Virginia 23510-9219