Norfolk Southern Corporation 2003 Form 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.   20549

 

FORM 10-K

 

 

(X)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

EXCHANGE ACT OF 1934      For the fiscal year ended DECEMBER 31, 2003

 

 

( )

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

EXCHANGE ACT OF 1934      For the transition period from _________ to _________

Commission file number 1-8339

NORFOLK SOUTHERN CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Virginia

52-1188014

(State or other jurisdiction of incorporation)

(IRS Employer 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

 

 

No Change

(Former name, former address and former fiscal year, if changed since last report.)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class

Name of each exchange

Norfolk Southern Corporation

on which registered

Common Stock (Par Value $1.00)

New York Stock Exchange

 

 

Securities registered pursuant to Section 12(g) of the Act: NONE

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes (X)   No (  )

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.            (   )

 

The number of shares outstanding of each of the registrant's classes of common stock, as of January 31, 2004:

391,852,750 (excluding 21,016,125 shares held by registrant's consolidated subsidiaries).

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ( X ) No ( )

 

The aggregate market value of the voting common equity held by nonaffiliates as of June 30, 2003 was $7,491,970,330 (based on the closing price as quoted on the New York Stock Exchange on that date).

 

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's definitive proxy statement to be filed electronically pursuant to Regulation 14A not later than 120 days after the end of the fiscal year, are incorporated by reference in Part III.


TABLE OF CONTENTS

 

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)

 

 


 

Page

 

 

 

Part I.

1.      Business

K3

 

2.      Properties

K3

 

3.      Legal Proceedings

K14

 

4.      Submission of Matters to a Vote of Security Holders

K14

 

        Executive Officers of the Registrant

 

 

 

 

Part II.

5.      Market for Registrant's Common Equity and Related Stockholders Matters

K16

 

6.      Selected Financial Data

K17

 

7.      Management's Discussion and Analysis of Financial Condition and Results

 

 

        of Operations

K19

 

7A.   Quantitative and Qualitative Disclosures About Market Risk

K38

 

8.      Financial Statements and Supplementary Data

K39

 

9.      Changes in and Disagreements with Accountants on Accounting and

 

 

        Financial Disclosure

K74

 

9A.   Controls and Procedures

K74

 

 

 

Part III.

10.   Directors and Executive Officers of the Registrant

K75

 

11.   Executive Compensation

K75

 

12.   Security Ownership of Certain Beneficial Owners and Management

 

 

       and Related Stockholder Matters

K75

 

13.   Certain Relationships and Related Transactions

K78

 

 

 

 

14.    Principal Accountant Fees and Services

K78

 

 

 

Part IV.

15.   Exhibits, Financial Statement Schedule and Reports on Form 8-K

K79

 

       Index to Consolidated Financial Statement Schedule

 

 

 

 

 

Power of Attorney

K86

 

 

 

 

Signatures

K86

 

 

 

 

Exhibit Index

K89


 

 

 

 

 

K2


PART I

 

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)

 

 

Item 1.   Business.   and Item 2.   Properties .

 

GENERAL -  Norfolk Southern Corporation (Norfolk Southern) was incorporated on July 23, 1980, under the laws of the Commonwealth of Virginia.   On June l, 1982, Norfolk Southern acquired control of two major operating railroads, Norfolk and Western Railway Company (NW) and Southern Railway Company (Southern) in accordance with an Agreement of Merger and Reorganization dated as of July 31, 1980, and with the approval of the transaction by the Interstate Commerce Commission (ICC) (now the Surface Transportation Board [STB]).

 

Effective Dec. 31, 1990, Norfolk Southern transferred all the common stock of NW to Southern, and Southern's name was changed to Norfolk Southern Railway Company (Norfolk Southern Railway or NSR).   Effective Sept. 1, 1998, NW was merged with and into Norfolk Southern Railway.   As of Dec. 31, 2003, all the common stock of Norfolk Southern Railway was owned directly by Norfolk Southern.

 

Through a jointly owned entity, Norfolk Southern and CSX Corporation (CSX) own the stock of Conrail Inc., which owns the major freight railroad in the Northeast.   Norfolk Southern has a 58% economic and 50% voting interest in the jointly owned entity.   See also the discussion concerning operation of a portion of Conrail's rail assets, below.

 

On March 28, 1998, Norfolk Southern closed the sale of its motor carrier company, North American Van Lines, Inc.   (NAVL) (see “Discontinued Operations” and Note 17).   NAVL's results are presented as “Discontinued operations” in the accompanying financial information.

 

Norfolk Southern makes available free of charge through its website, www.nscorp.com, its annual report on Form 10‑K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC).   Additionally, Norfolk Southern’s corporate governance guidelines, board committee charters, code of ethics and code of ethical conduct for senior financial officers are available on the company’s website and in print to any shareholder who requests them.

 

Unless indicated otherwise, Norfolk Southern and its subsidiaries are referred to collectively as NS.

 

OPERATION OF A PORTION OF THE CONRAIL RAIL ASSETS -  On June 1, 1999, Norfolk Southern and CSX, through their respective railroad subsidiaries, began operating separate portions of Conrail's rail routes and assets.   Substantially all such assets are owned by two wholly owned subsidiaries of Consolidated Rail Corporation (CRC); one of those subsidiaries, Pennsylvania Lines LLC (PRR), has entered into various operating and leasing arrangements, more particularly described in Note 2, with Norfolk Southern Railway.   The other subsidiary, New York Central Lines LLC (NYC) has entered into similar arrangements with CSX Transportation, Inc. (CSXT).   Certain rail assets (Shared Assets Areas) still are owned by CRC, which operates them for joint and exclusive use by Norfolk Southern Railway and CSXT.

 

Operation of the PRR routes and assets increased the size of the system over which Norfolk Southern Railway provides service by nearly 50% and afforded access to the New York metropolitan area, to much of the Northeast and to most of the major East Coast ports north of Norfolk, Virginia.   Also, leasing

K3

 

arrangements with PRR augmented Norfolk Southern Railway's locomotive, freight car and intermodal fleet.

 

Conrail Corporate Reorganization

 

NS, CSX and Conrail are jointly seeking to reorganize Conrail and establish direct ownership and control by NSR and CSXT of PRR and NYC, respectively.   The proposed reorganization would replace the operating agreements described above and allow NSR and CSXT to directly own and operate PRR and NYC, respectively.   Consummation of the reorganization requires a ruling from the Internal Revenue Service (IRS), the approval of the STB and filings with the   SEC.   In addition, NS, CSX and Conrail must obtain the consent of Conrail’s debt holders to carry out the transaction and will obtain a valuation of PRR and of NYC.

 

In 2003, the IRS issued a ruling that the reorganization would qualify as a tax-free distribution.   Also in 2003, the STB granted its authorization to carry out the reorganization, subject to a condition requiring NS, CSX and Conrail to either:   (i) obtain the voluntary consent of the Conrail debt holders; or (ii) propose further proceedings to determine whether the terms offered to the Conrail debt holders are fair, just and reasonable.   In 2004, NS, CSX and Conrail intend to file registration statements on Form S-4 with the SEC to allow a proposed exchange offer relating to Conrail’s unsecured debt (see below).   In order to implement the reorganization approved by the IRS, the companies have engaged an investment banking firm to provide a valuation.   The results of the valuation could impact NS’ carrying amount of its investment in Conrail and the recording of the corporate reorganization.

 

As a part of the proposed reorganization, Conrail would undertake a restructuring of its existing unsecured and secured public indebtedness.   There are currently two series of unsecured public debentures with an outstanding principal amount of $800 million and 13 series of secured debt with an outstanding principal amount of approximately $321 million.   It is currently contemplated that guaranteed debt securities of two newly formed corporate subsidiaries of NSR and CSXT would be offered in a 58%/42% ratio in exchange for Conrail’s unsecured debentures.   Upon completion of the proposed transaction, the new debt securities would become direct unsecured obligations of NSR and CSXT, respectively, and would rank equally with all existing and future senior unsecured debt obligations, if any, of NSR and CSXT.   These new debt securities will have maturity dates, interest rates and principal and interest payment dates identical to those of the respective series of Conrail’s unsecured debentures.   In addition, these new debt securities will have covenants substantially similar to those of the publicly traded debt securities of NS and CSX, respectively.

 

Conrail’s secured debt and lease obligations will remain obligations of Conrail and are expected to be supported by new leases and subleases which, upon completion of the proposed transaction, would be the direct lease and sublease obligations of NSR or CSXT.

 

NS, CSX and Conrail are diligently working to complete all steps necessary to consummate the Conrail corporate reorganization in 2004.   Upon consummation of the proposed transaction, NS’ investment in Conrail will no longer include amounts related to PRR and NYC.   Instead, the assets and liabilities of PRR will be reflected in their respective line items in NS’ Consolidated Balance Sheet, and any amounts owed to PRR would be extinguished.

 

RAILROAD OPERATIONS -  As of Dec. 31, 2003, NS' railroads operated approximately 21,500 miles of road in the states of Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, the District of Columbia and in the Province of Ontario, Canada.   The miles operated were as follows:

 

K4

 

 

Mileage Operated as of Dec.   31, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Passing

 

 

 

 

 

 

 

 

 

 

Track,

 

 

 

 

 

 

Miles of Road

 

Second and Other Main Track

 

Crossovers and Turnouts

 

Way and Yard Switching

 

Total

 

 

 

 

 

 

 

 

 

 

 

Owned

 

11,707

 

1,383

 

1,623

 

5,972

 

20,685

Operated under lease,

 

 

 

 

 

 

 

 

 

 

  contract or trackage rights

 

9,813

 

3,435

 

891

 

3,647

 

17,786

      Total

 

21,520

 

4,818

 

2,514

 

9,619

 

38,471

 

In addition to the lines leased from Conrail previously discussed, NS' railroads have major leased lines between Cincinnati, Ohio, and Chattanooga, Tennessee, and operate over trackage owned by North Carolina Railway Company (NCRR).   The Cincinnati-Chattanooga lease, covering about 335 miles of road, expires in 2026, and is subject to an option to extend the lease for an additional 25 years, at terms to be agreed upon.   The trackage rights over NCRR cover approximately 315 miles of road under an agreement through 2014 with the right to renew for two additional 15-year periods.

 

NS' railroads carry raw materials, intermediate products and finished goods primarily in the Southeast, East and Midwest, and via interchange with other rail carriers, to and from the rest of the United States and parts of Canada.   They also transport overseas freight through several Atlantic and Gulf Coast ports.   Atlantic ports served by NS include: Norfolk, Virginia; Morehead City, North Carolina; Charleston, South Carolina; Savannah and Brunswick, Georgia; Jacksonville, Florida; Baltimore, Maryland; Philadelphia, Pennsylvania/Camden, New Jersey; Wilmington, Delaware; and the Ports of New York/New Jersey.   Gulf Coast ports served include Mobile, Alabama and New Orleans, Louisiana.

 

The lines of NS' railroads reach most of the larger industrial and trading centers of the Southeast, Northeast, Mid-Atlantic region and Midwest.   Chicago, Norfolk, Detroit, Atlanta, Metropolitan New York City, Jacksonville, Kansas City (Missouri), Baltimore, Buffalo, Charleston, Cleveland, Columbus, Philadelphia, Pittsburgh, Toledo, Greensboro, Charlotte and Savannah are among the leading centers originating and terminating freight traffic on the system.   In addition, haulage arrangements with connecting carriers allow NS' railroads to provide single-line service to and from additional markets, including haulage provided by Florida East Coast Railway Company to serve southern and eastern Florida, including the port cities of Miami, West Palm Beach and Fort Lauderdale; and haulage provided by The Kansas City Southern Railway Company to provide transcontinental intermodal service via a connection with the Burlington Northern and Santa Fe Railway Company.   Service is provided to New England, including the Port of Boston, via haulage, trackage rights and interline arrangements with Canadian Pacific Railway Company and Guilford Transportation Industries.   The system's lines also reach many individual industries, electric generating facilities, mines (in western Virginia, eastern Kentucky, southern and northern West Virginia and western Pennsylvania), distribution centers, transload facilities and other businesses located in smaller communities in its service area.   The traffic corridors carrying the heaviest volumes of freight include those from the New York City area to Chicago (via Allentown and Pittsburgh); Chicago to Jacksonville (via Cincinnati, Chattanooga and Atlanta); Appalachian coal fields of Virginia, West Virginia and Kentucky to Norfolk, Virginia and Sandusky, Ohio; Cleveland to Kansas City; and Knoxville to Chattanooga.   Chicago, Memphis, Sidney/Salem, New Orleans, Kansas City, Buffalo, St. Louis and Meridian are major gateways for interterritorial system traffic.

 

K5

 

Triple Crown Operations  - Until April 1993, NS' intermodal subsidiary, Triple Crown Services, Inc.   (TCS), offered intermodal service using RoadRailer® equipment and domestic containers.   RoadRailer® units are enclosed vans that can be pulled over highways in tractor-trailer configuration and over the rails by locomotives.   On April 1, 1993, the business, name and operations of TCS were transferred to Triple Crown Services Company (TCSC), a partnership in which subsidiaries of NS and Conrail are equal partners.   From April 1, 1993, to June 1, 1999, the revenues of TCSC were not consolidated with the results of NS; however, effective June 1, 1999, NS gained control of TCSC and, therefore, now includes TCSC's results in its consolidated financial statements.   TCSC offers door-to-door intermodal service using RoadRailer® equipment in major traffic corridors, including those between the Midwest and the Northeast, the Midwest and the Southeast and the Midwest and Texas/Mexico.

 

The following table sets forth certain statistics relating to NS railroads' operations for the past 5 years, including operations in the Northern Region that commenced June 1, 1999:

 

Rail Operating Statistics

 

 

 

Year Ended Dec.   31,

 

2003

2002

2001

2000

1999

 

 

 

 

 

 

Revenue ton miles (billions)

183   

179   

182   

197   

167   

Freight train miles traveled (millions)

73.9   

72.6   

70.0   

74.4   

61.5   

Revenue per ton mile

$0.0353   

$0.0350   

$0.0339   

$0.0312   

$0.0315   

Revenue ton miles per

 

 

 

 

 

  man-hour worked

3,111   

3,067   

3,023   

2,888   

2,577   

Percentage ratio of railway operating

 

 

 

 

 

  expenses to railway operating revenues

83.5%1

81.5%

83.7%

89.7%2

86.3%

 

1 Includes $107 million of costs for a voluntary separation program, which added 1.6 percentage points to the ratio.

 

2 Includes $165 million of costs for early retirement and separation programs, which added 2.7 percentage points to the ratio.

 

RAILWAY OPERATING REVENUES -  NS' total railway operating revenues were $6.5 billion in 2003.   Revenue, shipments and revenue yield by principal railway operating revenue sources for the past five years are set forth in the following table (prior year amounts have been reclassified to conform to the current market groupings).

 

Principal Sources of Railway Operating Revenues

 

 

 

 

 

Year Ended Dec.   31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2002

 

2001

 

2000

 

1999

(Revenues in millions, shipments in thousands, revenue yield in dollars per shipment)

 

 

 

 

 

 

 

 

 

 

 

 

 

COAL

 

 

 

 

 

 

 

 

 

 

 

  Revenues

$

1,500   

$

1,441   

$

1,521   

$

1,435   

$

1,322   

 

    % of total revenues

 

23%

 

23%

 

25%

 

23%

 

25%

 

  Shipments

 

1,615   

 

1,610   

 

1,695   

 

1,687   

 

1,519   

 

    % of total shipments

 

24%

 

24%

 

26%

 

25%

 

25%

 

  Revenue Yield

$

929   

$

895   

$

897   

$

851   

$

870   

 

 

K6

 

 

 

 

 

 

 

 

 

 

 

Principal Sources of Railway Operating Revenues (continued)

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended Dec. 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

2003

 

2002

 

2001

 

2000

 

1999

(Revenues in millions, shipments in thousands, revenue yield in dollars per shipment)

 

 

 

 

 

 

 

 

 

 

 

AUTOMOTIVE

 

 

 

 

 

 

 

 

 

 

  Revenues

$

936   

$

961   

$

885   

$

921   

$

746   

    % of total revenues

 

14%

 

15%

 

14%

 

15%

 

14%

  Shipments

 

645   

 

662   

 

622   

 

692   

 

611   

    % of total shipments

 

9%

 

10%

 

9%

 

10%

 

10%

  Revenue Yield

$

1,450   

$

1,450   

$

1,423   

$

1,331   

$

1,220   

 

 

 

 

 

 

 

 

 

 

 

CHEMICALS

 

 

 

 

 

 

 

 

 

 

  Revenues

$

772   

$

755   

$

738   

$

743   

$

633   

    % of total revenues

 

12%

 

12%

 

12%

 

12%

 

12%

  Shipments

 

426   

 

423   

 

422   

 

443   

 

387   

    % of total shipments

 

6%

 

6%

 

6%

 

6%

 

7%

  Revenue Yield

$

1,815   

$

1,783   

$

1,750   

$

1,678   

$

1,635   

 

 

 

 

 

 

 

 

 

 

 

METALS/CONSTRUCTION

 

 

 

 

 

 

 

 

 

 

  Revenues

$

699   

$

692   

$

674   

$

689   

$

567   

    % of total revenues

 

11%

 

11%

 

11%

 

11%

 

11%

  Shipments

 

710   

 

716   

 

703   

 

757   

 

587   

    % of total shipments

 

10%

 

11%

 

11%

 

11%

 

10%

  Revenue Yield

$

984   

$

966   

$

959   

$

911   

$

966   

 

 

 

 

 

 

 

 

 

 

 

AGR./CONSUMER

 

 

 

 

 

 

 

 

 

 

  PRODUCTS/GOVT.

 

 

 

 

 

 

 

 

 

 

  Revenues

$

688   

$

637   

$

617   

$

622   

$

547   

    % of total revenues

 

11%

 

10%

 

10%

 

10%

 

11%

  Shipments

 

556   

 

518   

 

519   

 

535   

 

496   

    % of total shipments

 

8%

 

8%

 

8%

 

8%

 

8%

  Revenue Yield

$

1,238   

$

1,231   

$

1,188   

$

1,161   

$

1,104   

 

 

 

 

 

 

 

 

 

 

 

PAPER/CLAY/FOREST

 

 

 

 

 

 

 

 

 

 

  Revenues

$

634   

$

603   

$

612   

$

630   

$

578   

    % of total revenues

 

10%

 

10%

 

10%

 

11%

 

11%

  Shipments

 

443   

 

438   

 

450   

 

491   

 

465   

    % of total shipments

 

7%

 

6%

 

7%

 

7%

 

8%

  Revenue Yield

$

1,431   

$

1,378   

$

1,357   

$

1,285   

$

1,243   

 

 

 

 

 

 

 

 

 

 

 

INTERMODAL

 

 

 

 

 

 

 

 

 

 

  Revenues

$

1,239   

$

1,181   

$

1,123   

$

1,119   

$

849   

    % of total revenues

 

19%

 

19%

 

18%

 

18%

 

16%

  Shipments

 

2,466   

 

2,354   

 

2,214   

 

2,242   

 

1,896   

    % of total shipments

 

36%

 

35%

 

33%

 

33%

 

32%

  Revenue Yield

$

502   

$

502   

$

507   

$

499   

$

448   

 

 

 

 

 

 

 

 

 

 

 

TOTALS

 

 

 

 

 

 

 

 

 

 

  Railway Operating  Revenues

$

6,468  

$

6,270   

$

6,170   

$

6,159   

$

5,242   

  Railway Shipments

 

6,861  

 

6,721   

 

6,625   

 

6,847   

 

5,961   

  Railway Revenue Yield

$

943  

$

933   

$

931   

$

900   

$

879   

K7

 

COAL TRAFFIC - Coal, coke and iron ore -- most of which is bituminous coal -- is NS' railroads' largest commodity group as measured by revenues.   The railroads handled a total of 172 million tons in 2003, most of which originated on NS' lines in West Virginia, Virginia, Pennsylvania and Kentucky.   Revenues from coal, coke and iron ore accounted for about 23% of NS' total railway operating revenues in 2003.

 

Coal, coke and iron ore tonnage by market for the past five years are set forth in the following table.

 

Coal, Coke and Iron Ore Tonnage by Market

 

 

 

Year Ended December 31,

 

2003

 

2002

 

2001

 

2000

 

1999

 

(tons in thousands)

 

 

 

 

 

 

 

 

 

 

Utility

129,904

 

127,747

 

132,325

 

119,284

 

107,381

Domestic Metallurgical

20,486

 

21,578

 

20,457

 

25,003

 

21,399

Export

12,312

 

11,342

 

13,872

 

19,845

 

18,373

Other

9,624

 

9,733

 

11,377

 

10,781

 

10,348

 

172,326

 

170,400

 

178,031

 

174,913

 

157,501

 

Total coal handled through all system ports in 2003 was 35 million tons.   Of this total, 11 million tons (including coastwise traffic) moved through Norfolk, Virginia, 2 million tons moved through the Baltimore Terminal, 13 million tons moved to various docks on the Ohio River, and 9 million tons moved to various Lake Erie ports.   Other than coal for export, virtually all coal handled by NS' railroads was terminated in states east of the Mississippi River.

 

See the discussion of coal traffic, by type of coal, in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

 

GENERAL MERCHANDISE TRAFFIC -  General merchandise traffic is composed of five major commodity groupings:  automotive; chemicals; metals and construction; agriculture, consumer products and government; and paper, clay and forest products.   The automotive group includes finished vehicles for BMW, DaimlerChrysler, Ford Motor Company, General Motors, Honda, Isuzu, Jaguar, Land Rover, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru, Suzuki, Toyota and Volkswagen, and auto parts for Ford Motor Company, General Motors, Mercedes-Benz and Toyota.   The chemicals group includes sulfur and related chemicals, petroleum products, chlorine and bleaching compounds, plastics, rubber, industrial chemicals, chemical wastes and municipal wastes.   The metals and construction group includes steel, aluminum products, machinery, scrap metals, cement, aggregates, bricks and minerals.   The agriculture, consumer products and government group includes soybeans, wheat, corn, fertilizer, animal and poultry feed, food oils, flour, beverages, canned goods, sweeteners, consumer products, ethanol and items for the military.   The paper, clay and forest products group includes lumber and wood products, pulpboard and paper products, woodfibers, woodpulp, scrap paper and clay.   General merchandise carloads handled in 2003 were 2.78 million, compared with 2.76 million handled in 2002, an increase of 1%.

 

In 2003, 134 million tons of general merchandise freight, or approximately 66% of total general merchandise tonnage handled by NS, originated online.   The balance of general merchandise traffic was received from connecting carriers at interterritorial gateways.   The principal interchange points for NS-received traffic included Chicago, Memphis, New Orleans, Cincinnati, Kansas City, Detroit, Hagerstown, St. Louis/East St. Louis and Louisville.

 

K8

 

See the discussion of general merchandise rail traffic by commodity group in Part II, Item 7, “Management's Discussion and Analysis.”

 

INTERMODAL TRAFFIC - The intermodal market consists of shipments moving in trailers, domestic and international containers, and Roadrailer® equipment.   These shipments are handled on behalf of intermodal marketing companies, international steamship lines, truckers and other shippers.   Intermodal units handled in 2003 were 2.47 million, compared with 2.35 million handled in 2002, an increase of 5%.

 

See the discussion of intermodal traffic in Part II, Item 7, “Management's Discussion and Analysis of Financial Conditions and Results of Operations.”

 

FREIGHT RATES -  In 2003, NS' railroads continued their reliance on private contracts and exempt price quotes as their predominant pricing mechanisms.   Thus, a major portion of NS' railroads' freight business is not currently economically regulated by the government.   In general, market forces have been substituted for government regulation and now are the primary determinant of rail service prices.   However, in 2003 there were significant coal movements moving under common carrier (tariff) rates that had previously moved under rates contained in transportation contracts.   Beginning Jan. 1, 2002, coal moving to Duke Energy's (Duke) Belew's Creek, Allen, Buck and Dan River generating stations moved under common carrier rates and beginning April 1, 2002, coal moving to Carolina Power and Light's (CP&L) Hyco and Mayo plants moved under common carrier rates.   In 2002, Duke and CP&L filed rate reasonableness complaints at the STB alleging that NS’ tariff rates for the transportation of coal were unreasonable.   In the Duke proceeding the STB initially found NS’ rates to be reasonable in November 2003, but subsequently issued technical corrections in February 2004 finding that in certain years some portion of the rates was unreasonable.   The case is currently stayed because both parties have indicated that they intend to file petitions for reconsideration, and the STB has not yet ordered any rate relief.   In the CP&L proceeding the STB found NS’ rates to be unreasonable in December 2003, but upheld a significant portion of NS’ tariff increase.   Both of the STB’s rate decisions remain subject to petitions for rehearing and appeals.   Future developments in the two cases could result in additional adjustments, and could have a significant impact on results of operations in a particular quarter.

 

In 2003, NS' railroads were found by the STB not to be “revenue adequate” based on results for the year 2002.   A railroad is “revenue adequate” under the applicable law when its return on net investment exceeds the rail industry's composite cost of capital.   This determination is made pursuant to a statutory requirement and does not adversely impact NS' liquidity or capital resources.

 

PASSENGER OPERATIONS -  Regularly scheduled passenger trains are operated by Amtrak on NS' lines between Alexandria and New Orleans, and between Greensboro and Selma, North Carolina.   Commuter trains are operated on the NS line between Manassas and Alexandria in accordance with contracts with two transportation commissions of the Commonwealth of Virginia.   NS also leases the Chicago to Manhattan, Illinois, line to the Commuter Rail Division of the Regional Transportation Authority of Northeast Illinois.   Since June 1, 1999, Norfolk Southern Railway has operated former Conrail lines on which Amtrak conducts regularly scheduled passenger operations between Chicago, Illinois, and Detroit, Michigan, and between Chicago and Harrisburg, Pennsylvania.

 

Also since June 1, 1999, through its operation of PRR's routes, Norfolk Southern Railway has been providing freight service over former Conrail lines with significant ongoing Amtrak and commuter passenger operations, and is conducting freight operations over some trackage owned by Amtrak or by New Jersey Transit, the Southeastern Pennsylvania Transportation Authority, Metro-North Commuter Railroad Company and Maryland DOT.   Finally, passenger operations are conducted either by Amtrak or by the commuter agencies over trackage owned by Pennsylvania Lines LLC, or by Conrail in the Shared Assets Areas.

 

K9

 

NONCARRIER OPERATIONS -  NS' noncarrier subsidiaries engage principally in the acquisition, leasing and management of coal, oil, gas and minerals; the development of commercial real estate; telecommunications; and the leasing or sale of rail property and equipment.   In 2003, no such noncarrier subsidiary or industry segment grouping of noncarrier subsidiaries met the requirements for a reportable business segment set forth in Statement of Financial Accounting Standards No. 131.

 

 

RAILWAY PROPERTY

 

The NS railroad system extends across 22 states, the District of Columbia and portions of Canada.   The railroad infrastructure makes the company very capital intensive with total property of approximately $12 billion and investment in Conrail of approximately $6 billion.

 

Capital Expenditures - Capital expenditures for road, equipment and other property for the past five years were as follows (including capitalized leases):

 

 

Capital Expenditures

 

 

2003

 

2002

 

2001

 

2000

 

1999

 

($ in millions)

Road

$

495

$

519

$

505

$

557

$

559

Equipment

 

218

 

174

 

233

 

146

 

349

Other property

 

7

 

2

 

8

 

28

 

4

  Total

$

720

$

695

$

746

$

731

$

912

 

Capital spending and maintenance programs are and have been designed to assure the ability to provide safe, efficient and reliable transportation services.   For 2004, NS has budgeted $810 million of capital spending.   See the discussion following “Cash used for investing activities,” in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

 

K10
Equipment -
As of Dec. 31, 2003, NS owned or leased the following units of equipment:

 

 

Number of Units

Capacity

 

 

Owned*

 

Leased**

 

Total

of Equipment

 

 

 

 

 

 

 

 

 

Locomotives:

 

 

 

 

 

 

(Horsepower)

  Multiple purpose

 

2,412

 

777

 

3,189

 

10,951,550

  Switching

 

104

 

101

 

205

 

300,700

  Auxiliary units

 

56

 

18

 

74

 

--

     Total locomotives

 

2,572

 

896

 

3,468

 

11,252,250

 

 

 

 

 

 

 

 

 

Freight cars:

 

 

 

 

 

 

(Tons)

  Hopper

 

16,099

 

5,014

 

21,113

 

2,232,141

  Box

 

16,644

 

4,810

 

21,454

 

1,694,590

  Covered hopper

 

9,369

 

3,084

 

12,453

 

1,359,205

  Gondola

 

26,850

 

11,217

 

38,067

 

4,085,456

  Flat

 

3,111

 

1,435

 

4,546

 

343,587

  Caboose

 

162

 

50

 

212

 

--

  Other

 

3,250

 

--

 

3,250

 

162,514

     Total freight cars

 

75,485

 

25,610

 

101,095

 

9,877,493

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

  Work equipment

 

4,479

 

1,022

 

5,501

 

 

  Vehicles

 

3,629

 

959

 

4,588

 

 

  Highway trailers and

 

 

 

 

 

 

 

 

    containers

 

877

 

7,345

 

8,222

 

 

  RoadRailer®

 

5,549

 

--

 

5,549

 

 

  Miscellaneous

 

1,422

 

13,380

 

14,802

 

 

     Total other

 

15,956

 

22,706

 

38,662

 

 

 

 

 

 

 

 

 

 

 

* Includes equipment leased to outside parties and equipment subject to equipment trusts, conditional sale agreements and capitalized leases.

** Includes locomotives, freight cars and units of other equipment leased from PRR.

 

The following table indicates the number and year built for locomotives and freight cars owned at Dec. 31, 2003.

 

 

Year Built

 

 

 

 

 

 

1992-

1987-

1986 &

 

 

2003

2002

2001

2000

1999

1998

1991

Before

Total

Locomotives:

 

 

 

 

 

 

 

 

 

  No. of units

100

-- *    

160   

200  

147   

592

238

1,135

2,572

  % of fleet

4%

--%

6%

8%

6%

23%

9%

44%

100%

 

 

 

 

 

 

 

 

 

 

Freight cars:

 

 

 

 

 

 

 

 

 

  No. of units

--

--   

--   

112   

515   

8,193

5,530

61,135

75,485

  % of fleet

--%

--%

--%

--%

1%

11%

7%

81%

100%

 

             * Fifty of the locomotives built in 2001 were purchased in 2002.

 

K11

 

As of Dec. 31, 2003, the average age of the locomotive fleet was 15.3 years.   During 2003, 91 locomotives, the average age of which was 28.7 years, were retired.   The average age of the freight car fleet at Dec. 31, 2003, was 26.6 years.   During 2003, 4,855 freight cars were retired.

 

Since 1988, about 29,000 coal cars have been rebodied.   As a result, the remaining serviceability of the freight car fleet is greater than may be inferred from the high percentage of freight cars built in earlier years.

 

 

Annual Average Bad Order Ratio

 

2003

2002

2001

2000

1999

 

 

 

 

 

 

Freight cars:

 

 

 

 

 

     NS Rail

7.4%

8.1%

6.9%

5.7%

3.7%

Locomotives:

 

 

 

 

 

      NS Rail

6.2%

6.3%

5.8%

5.5%

5.3%

 

Ongoing freight car and locomotive maintenance programs are intended to ensure the highest standards of safety, reliability, customer satisfaction and equipment marketability.   In past years, the freight car bad order ratio reflected the storage of certain types of cars that were not in high demand.   The ratio rose in 2000, 2001 and 2002 as a result of decreased maintenance activity.   The decline in 2003 reflected an increase in maintenance activity as well as the retirement of unserviceable units.   The locomotive bad order ratio includes units out of service for required inspections every 92 days and program work such as overhauls.   The ratio rose slightly in 2000 as maintenance activities were curtailed in response to a slowing economy.   The elevated ratio through 2003 reflected units out of service related to the resumption of maintenance and modification activities.

 

Track Maintenance - Of the approximately 38,500 total miles of track operated, NS had responsibility for maintaining about 31,000 miles of track with the remainder being operated under trackage rights.   Over 75% of the main line trackage (including first, second, third and branch main tracks, all excluding trackage rights) has rail ranging from 131 to 155 pounds per yard with the standard installation currently at 141 pounds per yard.   Approximately 40% of NS lines carried 20 million or more gross tons per track mile.

 

The following table summarizes several measurements regarding NS' track roadway additions and replacements during the past five years:

 

 

2003

2002

2001

2000

1999

 

 

 

 

 

 

Track miles of rail installed

233

235

254

390

403

Miles of track surfaced

5,105

5,270

3,836

3,687

5,087

New crossties installed (millions)

2.8

2.8

1.5

1.5

2.3

 

Microwave System -  The NS microwave system, consisting of approximately 7,400 radio route miles, 424 core stations, 14 secondary stations and 5 passive repeater stations, provides communications between most operating locations.   The microwave system is used primarily for voice communications, VHF radio control circuits, data and facsimile transmissions, traffic control operations and AEI data transmissions.

 

Traffic Control - Of a total of 21,500 route miles operated by NS, excluding trackage rights over foreign lines, 10,978 miles are signalized, including 8,091 miles of centralized traffic control (CTC) and 2,887

 

K12

 

miles of automatic block signals.   Of the 8,091 miles of CTC, 2,487 miles are controlled by data radio originating at 183 base station radio sites.

 

Computers -  A computer network consisting of a centralized data center in Atlanta, Georgia, and various distributed computers throughout the company connects the yards, terminals, transportation offices, rolling stock repair points, sales offices and other key system locations.   Operating and traffic data are processed and stored to provide customers with information on their shipments throughout the system.   Computer systems provide current information on the location of every train and each car on line, as well as related waybill and other train and car movement data.   In addition, the computer systems are utilized to assist management in the performance of a variety of functions and services including payroll, car and revenue accounting, billing, material management activities and controls, and special studies.

 

Other - The railroads have extensive facilities for support of operations, including freight depots, car construction shops, maintenance shops, office buildings, and signals and communications facilities.

 

Encumbrances - Certain railroad equipment is subject to the prior lien of equipment financing obligations amounting to approximately $910 million as of Dec. 31, 2003, and $864 million at Dec. 31, 2002.

 

Environmental Matters - Compliance with federal, state and local laws and regulations relating to the protection of the environment is a principal NS goal.   To date, such compliance has not affected materially NS' capital additions, earnings, liquidity or competitive position.   See the discussion of “Environmental Matters” in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and in Note 18 to the Consolidated Financial Statements.

 

EMPLOYEES -  NS employed an average of 28,753 employees in 2003, compared with an average of 28,970 in 2002.   The approximate average cost per employee during 2003 was $58,000 in wages and $28,000 in employee benefits.

 

Approximately 85% of NS' railroad employees are covered by collective bargaining agreements with 14 different labor unions.   See the discussion of “Labor Agreements” in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

 

GOVERNMENT REGULATION -  In addition to environmental, safety, securities and other regulations generally applicable to all businesses, NS' railroads are subject to regulation by the STB.   The STB has jurisdiction over some rates, routes, conditions of service and the extension or abandonment of rail lines.   The STB also has jurisdiction over the consolidation, merger or acquisition of control of and by rail common carriers.   The Department of Transportation regulates certain track and mechanical equipment standards.

 

The relaxation of economic regulation of railroads, begun over two decades ago under the Staggers Rail Act of 1980, has continued.   Significant exemptions are TOFC/COFC (i.e., “piggyback”) business, rail boxcar traffic, lumber, manufactured steel, automobiles and certain bulk commodities such as sand, gravel, pulpwood and wood chips for paper manufacturing.   Transportation contracts on regulated shipments effectively remove those shipments from regulation as well.   About 80% of NS' freight revenues come from either exempt traffic or traffic moving under transportation contracts.

 

Efforts may be made in 2004 to re-subject the rail industry to unwarranted federal economic regulation.   The Staggers Rail Act of 1980, which substantially reduced such regulation, encouraged and enabled rail carriers to innovate and to compete for business, thereby contributing to the economic health of the nation

 

K13

 

and to the revitalization of the industry.   Accordingly, NS will oppose efforts to reimpose unwarranted economic regulation.

 

COMPETITION -  There is continuing strong competition among rail, water and highway carriers.   Price is usually only one factor of importance as shippers and receivers choose a transport mode and specific hauling company.   Inventory carrying costs, service reliability, ease of handling and the desire to avoid loss and damage during transit are also important considerations, especially for higher-valued finished goods, machinery and consumer products.   Even for raw materials, semifinished goods and work-in-process, users are increasingly sensitive to transport arrangements that minimize problems at successive production stages.

 

NS' primary rail competitor is the CSX system; both operate throughout much of the same territory.   Other railroads also operate in parts of the territory.   NS also competes with motor carriers, water carriers and with shippers who have the additional option of handling their own goods in private carriage.

 

Certain marketing strategies among railroads and between railroads and motor carriers enable carriers to compete more effectively in specific markets.

 

 

Item 3.   Legal Proceedings .

 

None.

 

 

Item 4.   Submission of Matters to a Vote of Security Holders .

 

There were no matters submitted to a vote of security holders during the fourth quarter of 2003.

 

  Executive Officers of the Registrant.

 

Norfolk Southern's executive officers generally are elected and designated annually by the Board of Directors at its first meeting held after the annual meeting of stockholders, and they hold office until their successors are elected.   Executive officers also may be elected and designated throughout the year as the Board of Directors considers appropriate.   There are no family relationships among the officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected.   The following table sets forth certain information, as of February 1, 2004, relating to the executive officers.

 

Name, Age, Present Position

Business Experience During Past Five Years

 

 

David R. Goode, 63,

Present position since September 1992.

   Chairman, President and

 

   Chief Executive Officer

 

 

 

L. I. Prillaman, 60,

Present position since August 1998.

   Vice Chairman and

 

   Chief Marketing Officer

 

 

 

Stephen C. Tobias, 59,

Present position since August 1998.

   Vice Chairman and

 

   Chief Operating Officer

 

 

K14

Henry C. Wolf, 61,

Present position since August 1998.

   Vice Chairman and

 

   Chief Financial Officer

 

 

 

James A. Hixon, 50,

Present position since December 1, 2003.   Served as Senior

   Senior Vice President

   Vice President Administration from February 2001 to

   Legal and Government Affairs

   December 1, 2003, Senior Vice President Employee

 

   Relations from November 1999 to February 2001, and prior

 

   thereto was Vice President Taxation.

 

 

Henry D. Light, 63,

Present position since January 2002.   Served as Vice

   Senior Vice President Law

   President Law from April 2000 to January 2002, and

 

   prior thereto was General Counsel Operations.

 

 

Kathryn B. McQuade, 47,

Present position since December 1, 2003.   Served as Senior

   Senior Vice President

   Vice President Financial Planning from April 2000 to

   Finance

   December 1, 2003, Vice President Financial Planning from

 

   August 1998 to April 2000, and prior thereto was Vice

 

   President Internal Audit.

 

 

Charles W. Moorman, 52,

Present position since December 1, 2003.   Served as Senior

   Senior Vice President

   Vice President Corporate Services from February 1, 2003, to

   Corporate Planning and Services

   December 1, 2003; also served as President Thoroughbred

 

   Technology and Telecommunications, Inc. since October

 

   1999, and prior thereto was Vice President Information

 

   Technology.

 

 

John P. Rathbone, 52,

Present position since December 1, 2003.   Served as Senior

   Senior Vice President

   Vice President and Controller from April 2000 to December 1,

   Administration

   2003; prior thereto was Vice President and Controller.

 

 

Donald W.   Seale, 51,

Present position since December 1, 2003.   Served as Senior

   Senior Vice President

   Vice President Merchandise Marketing from December 1999 to

   Marketing Services

   December 1, 2003; prior thereto was Vice President

 

   Merchandise Marketing.

 

 

Daniel D. Smith, 52,

Present position since December 1, 2003.   Served as President

   Senior Vice President

   NS Development; prior thereto was President Pocahontas

   Energy and Properties

   Land Corporation.

 

 

Marta R. Stewart, 46,

Present position since December 1, 2003; prior thereto was

   Vice President and Controller

   Assistant Vice President Corporate Accounting.

 

 

 

K15


PART II

 

 

Item 5.   Market for Registrant's Common Stock and Related Stockholder Matters .

 

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

STOCK PRICE AND DIVIDEND INFORMATION

 

The Common Stock of Norfolk Southern Corporation, owned by 52,091 stockholders of record as of Dec. 31, 2003, is traded on the New York Stock Exchange with the symbol NSC.   The following table shows the high and low sales prices as reported by Bloomberg L.P. on its internet-based service and dividends per share, by quarter, for 2003 and 2002.

 

 

Quarter

2003

 

1st

 

2nd

 

3rd

 

4th

Market price

 

 

 

 

 

 

 

 

   High

$

20.89

$

22.39

$

20.20

$

24.62

   Low

 

17.35

 

18.31

 

18.00

 

18.32

Dividends per share

$

0.07

$

0.07

$

0.08

$

0.08

 

 

 

 

 

 

 

 

 

2002

 

 

 

 

 

 

 

 

Market price

 

 

 

 

 

 

 

 

   High

$

26.98

$

24.45

$

23.90

$

22.54

   Low

 

18.26

 

19.85

 

17.20

 

18.70

Dividends per share

$

0.06

$

0.06

$

0.07

$

0.07

 

K16


Item 6.   Selected Financial Data .

 

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

FIVE-YEAR FINANCIAL REVIEW 1999-2003

 

 

20031

2002

2001

20005

19996

 

($ in millions, except per share amounts)

RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

Railway operating revenues

$

6,468

$

6,270

$

6,170

$

6,159 

$

5,242

Railway operating expenses

 

5,404

 

5,112

 

5,163

 

5,526 

 

4,524

   Income from railway

     operations

 

1,064

 

1,158

 

1,007

 

633 

 

718

 

 

 

 

 

 

 

 

 

 

 

Other income – net

 

19

 

66

 

99

 

168 

 

164

Interest expense on debt

 

497

 

518

 

553

 

551

 

531

   Income from continuing

     operations before income

     taxes and accounting changes

 

586

 

706

 

553

 

250

 

351

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

175

 

246

 

191

 

78

 

112

   Income from continuing

     operations before accounting

 

 

 

 

 

 

 

 

 

 

     changes

 

411

 

460

 

362

 

172

 

239

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations2

 

10

 

--

 

13

 

--

 

--

Cumulative effect of changes in

   accounting principles, net of

   taxes3

 

114

 

--

 

--

 

--

 

--

        Net income

$

535

$

460

$

375

$

172

$

239

 

 

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

 

 

Income from continuing

   operations before accounting

   changes – basic and diluted

$

1.05

$

1.18

$

0.94

$

0.45

$

0.63

Net income – basic and diluted

$

1.37

$

1.18

$

0.97

$

0.45

$

0.63

Dividends

$

0.30

$

0.26

$

0.24

$

0.80

$

0.80

Stockholders' equity at year end

$

17.83

$

16.71

$

15.78

$

15.16

$

15.50

 

 

FINANCIAL POSITION

 

 

 

 

 

 

 

 

 

 

Total assets

$

20,596

$

19,956

$

19,418

$

18,976

$

19,250

Total long-term debt, including

 

 

 

 

 

 

 

 

 

 

   current maturities4

$

7,160

$

7,364

$

7,632

$

7,636

$

8,059

Stockholders' equity

$

6,976

$

6,500

$

6,090

$

5,824

$

5,932

 

 

 

 

 

 

 

 

 

 

 

OTHER

 

 

 

 

 

 

 

 

 

 

Capital expenditures

$

720

$

695

$

746

$

731

$

912

 

 

 

 

 

 

 

 

 

 

 

Average number of shares

   outstanding (thousands)

 

389,788

 

388,213

 

385,158

 

383,358

 

380,606

Number of stockholders at year

   end

 

52,091

 

51,418

 

53,042

 

53,194

 

51,123

Average number of employees:

 

 

 

 

 

 

 

 

 

 

   Rail

 

28,363

 

28,587

 

30,510

 

33,344

 

30,897

   Nonrail

 

390

 

383

 

384

 

394

 

269

      Total

 

28,753

 

28,970

 

30,894

 

33,738

 

31,166

 

K17

1

2003 operating expenses include a $107 million charge for a voluntary separation program.   Other income – net includes an $84 million charge to recognize the impaired value of certain telecommunications assets.   These charges reduced net income by $119 million, or 30 cents per diluted share.

2

In 1998, NS sold all the common stock of its motor carrier subsidiary, North American Van Lines, Inc.   (NAVL), for $207 million and recorded a $90 million pretax ($105 million, or 28 cents per diluted share, after-tax) gain.   Accordingly, NAVL's results of operations, financial position and cash flows are presented as “Discontinued operations.”   Results in 2001 include an additional after-tax gain of $13 million, or 3 cents per diluted share, that resulted from the expiration of certain indemnity obligations contained in the sales agreement.   Results in 2003 include an additional after-tax gain of $10 million, or 3 cents per diluted share, resulting from resolution of tax issues related to the transaction.

3

Net income in 2003 reflects two accounting changes, the cumulative effect of which increased net income by $114 million, or 29 cents per diluted share:   a change in accounting for the cost to remove railroad crossties, which increased net income by $110 million, and a change in accounting related to a special-purpose entity that leases certain locomotives to NS, which increased net income by $4 million.   This entity’s assets and liabilities, principally the locomotives and debt related to their purchase, are now reflected in NS’ Consolidated Balance Sheet.

4

Excludes notes payable to Conrail of $716 million in 2003, $513 million in 2002, $301 million in 2001, $51 million in 2000 and $123 million in 1999.

5

2000 operating expenses include $165 million in work force reduction costs for early retirement and separation programs.   These costs reduced net income by $101 million or 26 cents per diluted share.

6

On June 1, 1999, NS began operating a substantial portion of Conrail's properties.   As a result, both its railroad route miles and the number of its railroad employees increased by approximately 50% on that date.

 

K18


Item 7 .   Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of

Financial Condition and Results of Operations

 

 

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes and the Five-Year Financial Review.

 

 

SUMMARIZED RESULTS OF OPERATIONS

 

2003 Compared with 2002

 

Net income was $535 million, or $1.37 per diluted share, in 2003, up $75 million, or 16%.   Results in 2003 included a $10 million, or 3 cents per share, gain from discontinued operations (see Note 17) and a $114 million, or 29 cents per share, benefit related to the cumulative effect of changes in accounting principles (see Note 1).   Income from continuing operations before accounting changes, which excludes these items, was $411 million, or $1.05 per diluted share, down $49 million, or 11%, compared with 2002, reflecting higher compensation and benefits costs, which included the costs of a voluntary separation program (see Note 11), and lower nonoperating income that reflected the impairment of certain telecommunications assets (see Note 6).   The costs of the voluntary separation program and the asset impairment combined to reduce income by $119 million, or 30 cents per share.

 

2002 Compared with 2001

 

Net income was $460 million, or $1.18 per diluted share, in 2002, up $85 million, or 23%.   Net income in 2001 was $375 million and included a $13 million, or 3 cents per share, gain from discontinued operations (see Note 17); accordingly, income from continuing operations was $362 million, or 94 cents per diluted share.   Results in 2002 were $98 million, or 27%, above 2001’s income from continuing operations.   The improvement was primarily the result of a $151 million, or 15%, increase in income from railway operations.

 

 

DETAILED RESULTS OF OPERATIONS

 

Railway Operating Revenues

 

Railway operating revenues were $6.5 billion in 2003, $6.3 billion in 2002 and $6.2 billion in 2001.   The following table presents a three-year comparison of revenues by market group (prior year amounts have been reclassified to conform to the current market groupings).

 

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Revenues by Market Group

 

 

 

 

 

 

 

 

2003

2002

2001

 

($ in millions)

Coal

$

1,500

$

1,441

$

1,521

General merchandise:

 

 

 

 

 

 

   Automotive

 

936

 

961

 

885

   Chemicals

 

772

 

755

 

738

   Metals/construction

 

699

 

692

 

674

   Agriculture/consumer products/

 

 

 

 

 

 

      government

 

688

 

637

 

617

   Paper/clay/forest

 

634

 

603

 

612

General merchandise

 

3,729

 

3,648

 

3,526

Intermodal

 

1,239

 

1,181

 

1,123

          Total

$

6,468

$

6,270

$

6,170

 

In 2003, revenues increased 3%, reflecting a 2% rise in general merchandise revenues, a 4% improvement in coal revenues, and a 5% increase in intermodal revenues.   All but automotive within the general merchandise market group posted increases over 2002.   As shown in the following table, most of the revenue improvement was the result of higher traffic volumes.   The favorable revenue per unit/mix variance was driven by higher average revenue per unit, offset in part by the effects of unfavorable changes in the mix of traffic, particularly a 5% increase in lower-priced intermodal traffic volume.

 

Revenue Variance Analysis

Increases (Decreases)

 

 

 

 

2003 vs.   2002

2002 vs.   2001

 

($ in millions)

 

 

 

 

 

Volume

$

131

$

89

Revenue per unit/mix

 

67

 

11

     Total

$

198

$

100

 

In 2002, revenues increased 2%, as a 3% rise in general merchandise revenues coupled with a 5% improvement in intermodal revenues offset a 5% decline in coal revenues. All but one of the general merchandise market groups (paper, clay and forest products) posted increases over 2001.

 

Beginning March 1, 2004, NS will modify its fuel surcharge program for its merchandise and coal traffic.   The fuel surcharge program in effect until that time applies a 2% fuel surcharge to line haul freight charges when the WTI crude oil price, as published in the Wall Street Journal, exceeds $28.00 per barrel for 30 consecutive business days.   For each $5.00 per barrel increase, an additional 2% fuel surcharge applies.   The revised fuel surcharge will be based on the monthly average price of West Texas Intermediate (WTI) crude oil.   Line haul freight charges will be adjusted by 0.4% for every dollar the average price exceeds $23 per barrel in the second calendar month prior to the month in which the fuel surcharge is applied.   The modification in the fuel surcharge program will cause the amount charged to more closely reflect fuel price fluctuations in today’s volatile market.  

 

COAL tonnage increased 1% in 2003 and revenues increased 4% versus 2002.   Revenue per unit increased 4%, reflecting favorable developments in the coal rate reasonableness proceedings before the STB, as discussed below, as well as increases resulting from more longer haul business and loading

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productivity improvements that led to more tons per car.   Coal, coke and iron ore revenues represented 23% of total railway operating revenues in 2003, and 86% of NS' coal shipments originated on lines it operates.

 

In 2002, two of NS’ utility customers, Duke Energy (Duke) and Carolina Power & Light (CP&L), filed rate reasonableness complaints at the STB alleging that NS’ tariff rates for the transportation of coal were unreasonable.   In the Duke proceeding the STB initially found NS’ rates to be reasonable in November 2003, but subsequently issued technical corrections in February 2004 finding that in certain years some portion of the rates was unreasonable.   The case is currently stayed because both parties have indicated that they intend to file petitions for reconsideration, and the STB has not yet ordered any rate relief.   In the CP&L proceeding the STB found NS’ rates to be unreasonable in December 2003, but upheld a significant portion of NS’ tariff increase.   Both of the STB’s rate decisions remain subject to petitions for rehearing and appeals.   Future developments in the two cases could result in additional adjustments and could have a significant impact on results of operations in a particular quarter.   Over the long term, Management believes the STB decisions in the Duke and CP&L proceedings will help support improved pricing for coal transportation services.

 

In 2002, coal tonnage decreased 4% and revenues declined 5%.   Revenue per unit declined slightly, reflecting unfavorable changes in the mix of traffic (more shorter-haul business) that offset the effects of rate increases and gains in tonnage per car.

 


Total Coal, Coke and Iron Ore Tonnage

 

 

 

 

 

 

 

2003

 

2002

 

2001

 

(In millions of tons)

 

 

 

 

 

 

Utility

130

 

128

 

132

Export

12

 

11

 

14

Domestic metallurgical

20

 

21

 

21

Other

10

 

10

 

11

     Total

172

 

170

 

178

 

Utility coal tonnage increased 2%, compared to 2002, primarily due to a 6% gain in tonnage moving to the Northeast.   These gains were led by a full year’s operation of two projects completed in 2002 that captured traffic from truck and barge.

 

In the first quarter of 2003, higher natural gas prices and colder temperatures caused coal-fired generating stations to run at near capacity in the Northeast, reducing the high stockpiles that were carried forward from 2002.   However, the mild temperatures through the remainder of the year diminished seasonal demand for coal.   Volumes to utilities in the South decreased 4% due to milder weather and extended power plant outages for the installation of environmental emission-control technology.

 

In 2002, utility coal tonnage decreased 3%, a result of lower demand that reflected the weak economy, high coal stockpile levels entering the year, mild temperatures in the first quarter, reduced stockpile targets set by utility companies and increased generation from new natural gas-fired plants.   Licensing requirements for these new plants resulted in additional generation that temporarily displaced coal-fired generation.

 

The outlook for utility coal remains positive.   Coal-fired generation continues to be the lowest-cost source for electric generation that has additional growth capacity above current levels.   Management expects

 

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utilities to use coal-fired plants to meet increased electricity demand because of coal’s low generating cost and the strengthening economy.   As always, demand will be influenced by the weather.

 

There remain a number of evolving environmental issues that have the potential to increase or ease cost pressures on the utility coal market, depending upon their outcome.   These include a new national energy policy, proposed multi-emissions legislation, mercury emissions standard, new source review and the fate of the United States participation in the Kyoto Protocol.   Although developments with these environmental issues could potentially increase cost pressures on coal-fired generation, the outlook remains positive for maintaining coal’s position in the power generation mix for regions served by NS.   Favorable developments with these issues could actually ease cost pressures on coal-fired generation, further strengthening coal’s position.

 

Export coal tonnage increased 9% in 2003, compared to 2002.   Export coal through Norfolk, primarily metallurgical coal, increased by 24% in 2003, benefiting from a decline in exports from China.   Strong steel production in China increased demand for metallurgical coal and coke and shifted Chinese exports of these commodities to domestic consumption.   Also, ocean freight rates are at an all time high.   Spot vessel rates from Australia to Europe have more than tripled, while transatlantic rates have increased less dramatically.   The combination of the resulting gap in ocean freight rates and the shorter sailing times has given the United States a competitive advantage in European markets.   Last, the decline in the value of the dollar against the Euro and Australian Dollar also increased demand for United States metallurgical coal abroad.   Coal exported through Baltimore, primarily steam coal, declined 41% due to strong domestic demand for utility coal, as discussed above.

 

In 2002, export coal tonnage declined 18% compared to 2001.   Steam coal exports through Baltimore declined 4%, and export metallurgical coals through Norfolk declined 22%.   During the first half of 2002, demand for U.S. coal was soft as international buyers focused their purchases toward other, lower-priced sources.   Market uncertainty resulted in late contract settlements and delayed shipments.   Late in 2002, demand for U.S. coking coals increased, reflecting a shift in the market as exports from China, Australia and Poland declined.   As a result, shipments through Norfolk increased in the fourth quarter of 2002.

 

Strong domestic steam coal prices and reduced metallurgical coal production have limited export growth in the United States.   The stage is set for further recovery in export volumes in 2004.   Export growth will depend, however, upon the availability of coal supply from key metallurgical mines on NS.   Pricing is also expected to strengthen.

 

Domestic metallurgical coal, coke and iron ore volumes decreased 5% in 2003, when compared to 2002, due to the temporary closing of a large mine that produced low-volatile coal, the continuing consolidation of the steel industry, and fewer blast furnaces operating than in the past.

 

In 2002, domestic metallurgical coal, coke and iron ore tonnage increased 5%, reflecting higher U.S. steel production, aided by the imported steel tariff program implemented in 2002.   In addition, continued strong vehicle production resulted in demand for steel.   

 

Future demand for domestic metallurgical coal, coke and iron ore is uncertain but may increase in 2004 due to the shortage that exists in the world market.   Continuation of the anticipated rationalization of the steel industry is expected, resulting in fewer blast furnaces in operation; however, the furnaces that remain are expected to run near capacity.   Growth may be limited by the availability of coal supply from a key metallurgical mine on NS that was idled in 2003 but is expected to reopen sometime in the second half of 2004.   In addition, the end of the steel tariff in December 2003 could mean lower steel prices worldwide and may lead to further consolidations in the industry.

 

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Other coal volumes, principally steam coal shipped to manufacturing plants, finished the year down 1%, when compared to 2002.   In 2002, other coal traffic decreased 14%, a result of the weak economy.

 

GENERAL MERCHANDISE traffic volume (carloads) increased 1% in 2003, and revenues increased 2%, principally due to higher average revenues in most business groups and higher agriculture traffic volume.   In 2002, traffic volume increased 2%, and revenues increased 3%, reflecting a 9% improvement in automotive revenues.

 

Automotive traffic volume and revenues decreased 3% in 2003, principally due to reduced vehicle production.

 

In 2002, automotive traffic volume increased 7%, and revenues increased 9%, principally due to a rise in vehicle production and new business.   Revenue per unit increased 2%, reflecting some pricing improvements, extended length of haul, special ancillary services and the settlement of a disputed charge.

 

Automotive revenues in 2004 are expected to be somewhat higher than those of 2003, due to several factors:   light vehicle production is predicted to be slightly above the 2003 level, NS has increased rail service to a major customer with a second plant opening towards the end of 2004, and the addition of several new products.

 

Chemicals traffic volume increased 1% and revenue increased 2% compared to 2002.   Traffic volume benefited from higher shipments of industrial intermediates, petroleum and environmental products, and plastics.   Also contributing to 2003 growth, approximately 2,000 annual carloads of new traffic were diverted from the waterways and highways.   Revenue per unit reflected improved pricing to meet market conditions, as well as favorable changes in mix.

 

In 2002, chemicals traffic volume increased slightly and revenues increased 2%.   Higher traffic volume for plastics and a small increase for miscellaneous chemicals offset a decline for petroleum products.   Demand for plastics was supported by increases in light vehicle production and housing starts.   Traffic volume also benefited from increased shipments through NS' Thoroughbred Bulk Transfer (TBT) facilities that handle chemicals and bulk commodities for customers not located on NS-served lines.   Revenue per unit increased as a result of a favorable change in the mix of traffic (more higher-rated business) and market-driven rate increases.

 

Chemical volume is expected to improve in 2004, primarily due to expectations for a stronger economy and growth from new or expanded plastics plants.   However, volume could be adversely affected by the price of energy in North America, particularly that of natural gas and crude oil.   Both of these commodities account for more than 50% of the cost of most chemical products, and high North American prices are causing chemical producers increasingly to look off shore for production.

 

Metals and construction traffic volume decreased 1%, but revenues increased 1% in 2003 compared with 2002.   The decline in volume resulted from reduced metals volume (mostly iron and steel), offset in part by higher construction traffic.   Revenue per unit improved 2%, reflecting favorable pricing and traffic mix changes.

 

In 2002, metals and construction traffic volume increased 2%, and revenues improved 3%, reflecting improvement in the steel industry, aided by the two-year imported steel tariff program.   Metals volume benefited from resumption of production at some mills that closed in 2001 and increased volume from new mills.   Construction traffic declined, primarily as a result of reductions in highway projects due to state government budget pressures.

 

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Metals and construction revenues in 2004 are expected to benefit from an improved economic environment and converting motor carrier traffic to rail, although further consolidation in the steel industry is expected.   New stone terminals on NS lines in Florida, Georgia and Tennessee will generate additional aggregate business, and new access to existing cement facilities will increase traffic.

 

Agriculture, consumer products and government traffic volume increased 7% and revenues increased 8% compared with 2002.   Commodities contributing most to these increases were corn, fertilizer, military, sweeteners and wheat.   Only feed, food products and beverages showed a slight decrease.   Corn shipments increased 4% in 2003 and revenue was up 8%.   Due to the drought of 2002, which caused a depletion of inventories, there was a significant increase in demand for corn to Southeast feed mill customers and poultry producers in eastern Pennsylvania, Maryland, and Delaware, resulting in long haul rail movements from Midwest suppliers to these areas.   Higher fertilizer traffic resulted from the re-opening of a large phosphate fertilizer plant.   Shipments of military vehicles and military equipment increased 36% over 2002 levels due to the war in Iraq.   

 

In 2002, agriculture, consumer products and government traffic volume decreased slightly compared to 2001, but revenues increased 3%.   Traffic volume increases for corn, food products and beverages largely offset declines for soybeans and feed.   Corn volume benefited from increased shipments from the Midwest to drought-stricken areas in the East.   The increase for food products was primarily the result of new business.   Soybean and feed volumes were adversely affected by lower domestic and export demand.   Revenue per unit increased because of higher rates, increased length of haul and favorable changes in the mix of traffic.

 

Agriculture, consumer products and government revenues in 2004 are expected to remain steady, reflecting a more normalized 2003 crop, and the overall strong performance of the other commodities.   Traffic levels should benefit from new southeastern feed mills that are expected to come on line by late 2004, as well as more shipments of corn, ethanol and transcontinental shipments of fresh and frozen foods.

 

Paper, clay and forest products traffic increased 1% and revenues increased 5% compared to 2002, principally due to improved domestic demand for paper products.   Paper traffic benefited from increased domestic orders for consumer products packaging and from the advertising sector, as well as new business.   Newsprint shipments continued to remain soft, largely due to a prolonged decline in demand.   Woodchip volume increased significantly as NS-served paper mills experienced shortages and were forced to source wood fiber from more distant suppliers due to wet weather in the Southeast.   NS clay revenue was up compared to 2002 due to a strong increase in revenue per carload and a more positive mix as NS handled more long-haul domestic traffic.   Lumber business was soft in early 2003 despite strong demand due in part to wet weather and several mill closures.   Lumber business was up in the fourth quarter as weather in the Southeast and commodity prices improved.

 

In 2002, paper, clay and forest products traffic volume declined 3%, and revenues decreased 1%, primarily due to continued weakness in the paper market, especially in the first half of the year.   Traffic volume improved later in the year as the paper market strengthened.   In addition, NS gained business from conversion of truck shipments to rail and from continued strength in housing starts.   Revenue per unit benefited from rate increases and a decline in shorter-haul business.

 

In 2004, paper, clay and forest product revenues are expected to experience modest growth consistent with the general outlook for the domestic economy.   NS revenue growth initiatives will focus on converting motor carrier traffic to rail and offering more transload or rail/truck bundled services to non-rail served customers.

 

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INTERMODAL volume increased 5% and revenues increased 5% compared to 2002.   Volume growth was driven by improved service performance that enabled the conversion of truck business to rail.   Shipments for asset-based truckload carriers increased 14% as these trucking companies used intermodal to reduce their exposure to driver shortages and the need for larger fleets.   International volume, which represents 45% of intermodal’s volume, grew 9%, primarily a result of strong import trade and new business driven by enhanced service.   Triple Crown Services Company (TCS) grew 1% in 2003, hampered by a fleet at full capacity.   NS is expanding this fleet in 2004.

 

In 2002, intermodal traffic volume increased 6%, and revenues increased 5%, compared to 2001.   Volume growth was principally the result of new and improved services that resulted in new business, including the conversion of truck business to rail.   International traffic, which accounts for about half of intermodal volume, increased 10%, supported by growth in trade activity and new business.   Domestic shipments grew 6%, primarily because of new business gained from the conversion of truck shipments.   TCS volume increased 4%.   Revenue per unit declined as a result of an increase in shorter-haul business and the absence of fuel surcharges that were in place in 2001, which were partially offset by some rate increases.

 

In 2004, intermodal revenues are expected to benefit from unfavorable forces affecting trucking companies, including changes to the highway hours of service laws, driver shortages, new truck emission standards and, accordingly, higher truck prices.   These forces are expected to accelerate truck to rail conversion in addition to creating an environment conducive to rail price increases.

 

Railway Operating Expenses

 

Railway operating expenses increased 6% in 2003, while carloads increased 2%.   Expenses in 2003 included $107 million of costs related to a voluntary separation program to reduce the size of the work force, which resulted in 2% of the 6% expense increase.   In 2002, railway operating expenses declined 1%, while carloads increased 1%.

 

The railway operating ratio, which measures the percentage of railway operating revenues consumed by railway operating expenses, was 83.5% in 2003, compared with 81.5% in 2002 and 83.7% in 2001.   The voluntary separation costs added 1.6 percentage points to the 2003 ratio.

 

The following table shows the changes in railway operating expenses summarized by major classifications.

 

Operating Expense Variances

Increases (Decreases)

 

 

 

 

2003 vs.   2002

2002 vs.   2001

 

($ in millions)

 

 

 

 

 

Compensation and benefits*

$

253 

$

Materials, services and rents

 

(30)

 

13 

Conrail rents and services

 

 

(9)

Depreciation

 

(2)

 

Diesel fuel

 

38 

 

(70)

Casualties and other claims

 

10 

 

28 

Other

 

16 

 

(22)

     Total

$

292 

$

(51)

 

* Includes $107 million of voluntary separation costs in 2003.

 

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Compensation and benefits represented 42% of total railway operating expenses and increased 13% in 2003.   Almost half of the increase was the result of the $107 million voluntary separation program.   The remaining increase was principally due to higher wage rates (including the BLE bonus in lieu of wage increases), which added $45 million, increased health and welfare benefits costs, which were up $44 million, and reduced pension income down $34 million (see Note 11).   Approximately $25 million of the increase in health and welfare benefit costs was attributable to retirees, reflecting a higher estimated medical inflation rate.   NS expects these costs to be down slightly in 2004, a result of a recent plan amendment and changes in Medicare coverage (see Note 11).   However, NS anticipates that this reduction will largely be offset by lower pension income.   Therefore, total pension and postretirement expenses in 2004 are expected to be comparable to 2003.

 

In 2002, compensation and benefits increased slightly and represented 40% of total railway operating expenses.   Higher wage rates, reduced pension income (see Note 11) and increased health and welfare benefits costs more than offset savings from reduced employment levels and lower payroll taxes (see the discussion of the Railroad Retirement and Survivors' Improvement Act, below).

 

The Railroad Retirement and Survivors' Improvement Act, which took effect on Jan. 1, 2002, provides for a phased reduction of the employers' portions of Tier II Railroad Retirement payroll taxes.   The phase-in calls for a reduction from 14.2% in 2003 to 13.1% in 2004 and thereafter.   In addition, the supplemental annuity tax was eliminated.   These changes resulted in an estimated $21 million reduction in payroll taxes in 2003 and are expected to result in savings of $16 million in 2004, compared with 2003.   However, these savings are expected to continue to be offset by an increase in the railroad unemployment tax rate, higher payroll taxes on increased wages and a higher wage base.   The new law allows for investment of Tier II assets in a diversified portfolio through the newly established National Railroad Retirement Investment Trust.   The law also provides a mechanism for automatic adjustment of future Tier II payroll taxes should the trust assets fall below a four-year reserve or exceed a six-year reserve.

 

Materials, services and rents includes items used for the maintenance of the railroad's lines, structures and equipment; the costs of services purchased from outside contractors, including the net costs of operating joint (or leased) facilities with other railroads; and the net cost of equipment rentals.   This category of expenses decreased 2% in 2003 and increased 1% in 2002.

 

The 2003 decline reflected lower equipment rents costs, down $26 million, and reduced purchased services, down $20 million, including lower expenses for intermodal, automotive and bulk transfer services, and professional and legal fees.

 

The increase in 2002 was the result of higher volume-related expenses for automotive and intermodal traffic, increased material costs for locomotives, higher expenses for roadway and bridge repairs and increased derailment costs.   These higher costs were largely offset by a significant reduction in equipment rents.

 

Equipment rents, which includes the cost to NS of using equipment (mostly freight cars) owned by other railroads or private owners, less the rent paid to NS for the use of its equipment, decreased 7% in 2003 and 14% in 2002.   The decline in 2003 was principally the result of lower automotive traffic volume in addition to adjustments relating to periodic studies of equipment rents and favorable settlements of recent bills.   In addition, the change in accounting related to certain leased locomotives (see Notes 1 and 6) also reduced equipment rents.   The decline in 2002 was principally the result of continued improvement in cycle times, reflecting efficiency gains and, for intermodal equipment, service design and process changes implemented during the year.

 

K26

 

Locomotive repair costs increased in 2003 and 2002, due to more maintenance activity.   Locomotive and freight car maintenance costs are expected to increase further in 2004.

 

Conrail rents and services increased 2% in 2003 and decreased 2% in 2002.   This item includes amounts due to PRR and CRC for use of their operating properties and equipment and CRC's operation of the Shared Assets Areas.   Also included is NS' equity in Conrail's net earnings, plus the additional amortization related to the difference between NS' investment in Conrail and its underlying equity (see Note 2).   The increase in 2003 reflects lower Conrail earnings and higher expenses in the Shared Assets Areas, whereas the decline in 2002 reflected higher Conrail earnings and lower expenses in the Shared Assets Areas (see “Conrail's Results of Operations, Financial Condition and Liquidity,” below).

 

Depreciation expense was down slightly in 2003 and up slightly in 2002.   Substantial levels of capital spending affected both years; however, expense in 2003 benefited from a change in accounting for the cost to remove crossties (see Note 1), and expenses in 2002 benefited from lower rates implemented early in the year following completion of a periodic study (see Note 1, “Properties,” for NS' depreciation policy).

 

Diesel fuel expenses increased 11% in 2003 and decreased 17% in 2002.   The increase in 2003 reflects an 11% rise in the average price per gallon and essentially flat consumption.   The decline in 2002 reflected a 16% drop in the average price per gallon and slightly lower consumption.   Expenses in 2003 and 2002 included benefits of $59 million and $10 million, respectively, from the diesel fuel hedging program (see “Market Risks and Hedging Activities,” below and Note 16).     NS has hedged approximately 63% of expected 2004 diesel fuel requirements as of December 31, 2003, at an average price of 78 cents per gallon.   Accordingly, if diesel fuel prices are volatile during 2004 it is unlikely that NS will experience the same degree of volatility in its diesel fuel expense.

 

Casualties and other claims expenses (including the estimates of costs related to personal injury, property damage and environmental matters) increased 6% in 2003 and 20% in 2002.   The higher expense in 2003 was due to adverse personal injury claims development and derailments earlier in the year as well as higher insurance costs.   The increase in 2002 reflected adverse personal injury claims development and higher expenses for loss and damage to lading, as well as higher insurance and environmental remediation costs.

 

The largest component of casualties and other claims expense is personal injury costs.   In 2003, cases involving occupational injuries comprised about 40% of the total employee injury cases settled and 31% of the total settlement payments made.   Injuries of this type are often not caused by a specific accident or event, but rather, result from a claimed exposure over time.   Many such claims are being asserted by former or retired employees, some of whom have not been actively employed in the rail industry for decades.   NS continues to work actively to eliminate all employee injuries and to reduce the associated costs.

 

The rail industry remains uniquely susceptible to litigation involving job-related accidental injury and occupational claims because of the Federal Employers' Liability Act (FELA), which is applicable only to railroads.   FELA, which covers employee claims for job-related injuries, produces results that are unpredictable and inconsistent as compared with a no-fault workers' compensation system.

 

NS, like many other businesses in the U.S., has experienced difficulty obtaining property and casualty insurance on reasonable terms after the September 11 terrorist attacks.   NS has been successful in maintaining a substantial amount of commercial insurance for third-party personal injury, property damage and FELA claims, although both the cost of this insurance and the amount of risk that NS retains

 

K27

 

through self-insurance have more than doubled since the attacks.   The magnitude of the premium increases that NS experienced in 2002 began to subside in 2003, however.

 

Other expenses increased 8% in 2003 but decreased 10% in 2002.   The increase in 2003 was primarily attributable to higher state franchise and sales and use taxes, the absence of a favorable bad debt settlement that benefited 2002 and higher union employee travel expenses.   The decline in 2002 reflected lower expenses for property and sales and use taxes.

 

Other Income – Net

 

Other income – net was $19 million in 2003, $66 million in 2002 and $99 million in 2001 (see Note 3).   The decline in 2003 was primarily due to the $84 million telecommunications assets impairment charge that offset increased gains from the sale of properties, higher corporate-owned life insurance returns and lower interest accruals related to tax liabilities.   The decline in 2002 was primarily the result of higher interest accruals on federal income tax liabilities, lower gains from the sale of properties and investments, and the absence of a $13 million gain from a nonrecurring settlement that benefited 2001.   These reductions were partially offset by reduced discount from the sales of receivables (due to a lower amount of receivables sold and a lower interest rate environment, which favorably affects the amount of discount).

 

Income Taxes

 

Income tax expense in 2003 was $175 million for an effective rate of 30%, compared with effective rates of 35% in 2002 and 2001.   Excluding NS’ equity in Conrail's after-tax earnings, the effective rate was 33% in 2003, and 38% in 2002 and 2001.

 

In 2003, the effective rate was reduced by the favorable resolution of prior years’ tax audits.   The effective rates in all three years benefited from favorable adjustments upon filing the prior year tax returns and favorable adjustments to state tax liabilities (see Note 4).

 

In May 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 was signed into law.   The law increased from 30% to 50% the additional first-year depreciation allowance for property acquired after May 5, 2003, and before January 1, 2005.   The 30% additional first-year depreciation allowance was an element of earlier tax legislation.   The acceleration of tax depreciation deductions allowed by these laws reduces current taxes and increases deferred tax levels by significant amounts.

 

Discontinued Operations

 

Income from discontinued operations in 2003 consisted of a $10 million after-tax gain related to the resolution of tax issues arising from the sale of NS' motor carrier subsidiary.   Income from discontinued operations in 2001 consisted of a $13 million after-tax gain resulting from the expiration of certain indemnities contained in the sales agreement (see Note 17).

 

 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

 

Cash provided by operating activities, NS' principal source of liquidity, was $1,054 million in 2003, compared with $803 million in 2002 and $654 million in 2001.   The increase in 2003 reflected a smaller change in the amount of accounts receivables sold; declines in receivables sold amounted to $30 million in 2003 and $270 million in 2002 (see Note 5).   In 2002, the improvement was the result of higher income

 

K28

 

from railway operations and favorable changes in working capital, which were offset, in part, by fewer accounts receivable sold (see Note 5).

 

Payments made to PRR (which are included in “Conrail Rents and Services” and, therefore, are a use of cash in “Cash provided by operating activities”) are largely cash neutral because a significant portion are borrowed back from a PRR subsidiary and, therefore, are a source of cash in “Proceeds from borrowings.”   NS' net cash flow from these borrowings amounted to $203 million in 2003, $212 million in 2002 and $250 million in 2001.

 

NS' working capital deficit was $376 million at Dec. 31, 2003, compared with $554 million at Dec. 31, 2002.   The improvement resulted principally from an increase in cash flow from operations and a reduction in federal income taxes due within one year.   Debt due in 2004 is expected to be paid using cash generated from operations (including sales of accounts receivable) and cash on hand.

 

NS currently has the capability to increase the amount of accounts receivable being sold under the revolving sale program to meet its more immediate working capital needs.   During 2003, the amount of receivables NS could sell under this program ranged from $358 million to $433 million, and the amount of receivables NS sold ranged from zero to $150 million.   Moreover, NS has a $1 billion credit facility, which expires in 2006, that it can borrow under or use to support commercial paper debt; however, reductions in its credit rating could limit NS' ability to access the commercial paper markets (see also the discussion of financing activities, below).

 

NS expects to generate sufficient cash flow from operations to meet its ongoing obligations.   This expectation is based on a view that the economy will continue a moderate growth rate through 2004.

 

Contractual obligations at Dec. 31, 2003, related to NS' long-term debt (including capital leases) (see Note 8), operating leases (see Note 9), agreements with CRC (see Note 2), unconditional purchase obligations (see Note 18) and other long-term obligations (see Note 18), are as follows:

 

 

Payments Due By Period

 

 

 

2005-

2007-

2009 and

 

Total

2004

2006

2008

Subsequent

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and

 

 

 

 

 

 

 

 

 

 

   capital leases

$

7,160

$

360

$

811

$

1,338

$

4,651

Operating leases

 

837

 

111

 

164

 

109

 

453

Agreements with CRC

 

718

 

32

 

67

 

68

 

551

Unconditional purchase

 

 

 

 

 

 

 

 

 

 

   obligations

 

166

 

166

 

--

 

--

 

--

Other long-term obligations

 

30

 

8

 

16

 

6

 

--

      Total

$

8,911

$

677

$

1,058

$

1,521

$

5,655

 

NS also has a contractual obligation related to a lease covering 140 locomotives.   The lessor is a special-purpose entity formed to enter into this transaction, but it is not related to NS and its owner has a substantive residual equity capital investment at risk in the entity.   The lessor owns the locomotives and issued debt to finance their purchase; however, NS has no obligation related to the debt.   NS has the option to purchase the locomotives, but also can return them to the lessor.   If NS does not purchase the locomotives at the end of the maximum lease term, it is liable for any shortfall in the then fair value of the locomotives and a specified residual value.   NS does not expect to be required to make any payments under this provision (see Note 9).   As the primary beneficiary of the business of the lessor, effective

 

K29

 

Jan. 1, 2003, NS consolidated the assets (locomotives) and liabilities (debt) of this special-purpose entity when it implemented Financial Accounting Standards Board Interpretation No.   46 (see Note 1, “New Accounting Pronouncements”).

 

In addition, NS has contractual obligations to PRR as disclosed in Note 2.   However, NS has the ability to borrow back funds from PRR to the extent they are not needed to fund contractual obligations at Conrail.   As an indirect owner of Conrail, NS may need to make capital contributions, loans or advances to Conrail to fund its contractual obligations.   The following table presents 58% of Conrail's contractual obligations for long-term debt (including capital leases) and operating leases.   Conrail has no unconditional purchase or other long-term obligations.

 

 

Payments Due by Period

 

 

 

2005-

2007-

2009 and

 

Total

2004

2006

2008

Subsequent

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and

 

 

 

 

 

 

 

 

 

 

   capital leases

$

676

$

43

$

60

$

60

$

513

Operating leases

 

318

 

34

 

66

 

61

 

157

      Total

$

994

$

77

$

126

$

121

$

670

 

Off balance sheet arrangements consist of an accounts receivable sale program (see Note 5).   Under the program, NS sells without recourse undivided ownership interests in a pool of accounts receivable to two unrelated buyers.   NS has no ownership interest in the buyers.   The buyers issued debt to fund their initial purchase, and NS used the proceeds it received from the initial purchase primarily to pay down its outstanding debt.   NS has no obligation related to the buyers' debt, and there is no existing obligation to repurchase sold receivables.   Upon termination of the program, the buyers would cease purchasing new receivables and would retain collections related to the previously sold receivables (see Note 5).   As of Dec. 31, 2003, there were no accounts receivable sold, however, NS has the capability to increase the amounts sold, as discussed above.

 

Cash used for investing activities decreased 5% in 2003 and increased 12% in 2002.   Property additions, which account for most of the recurring spending in this category, were up 4% in 2003 and down 8% in 2002.   Property sales were higher in 2003, which resulted in the net decrease in cash used for investing activities.   The following tables show capital spending (including capital leases) and track and equipment statistics for the past five years.

 

Capital Expenditures

 

 

 

 

 

 

 

2003

2002

2001

2000

1999

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

Road

$

495

$

519

$

505

$

557

$

559

Equipment

 

218

 

174

 

233

 

146

 

349

Other property

 

7

 

2

 

8

 

28

 

4

      Total

$

720

$

695

$

746

$

731

$

912

 

Capital expenditures increased 4% in 2003 and decreased 7% in 2002 (which included $6 million of capitalized leases).   The increase in 2003 reflects higher locomotive purchases offset, in part, by lower spending on signal and electrical projects and computers.   The decline in 2002 reflected higher spending

 

K30

 

on track program work that was offset by fewer locomotive purchases (50 in 2002 compared with 100 in 2001) and lower spending for intermodal facilities.

 

NS and six other railroads (five Class I railroads and a commuter railroad) have agreed to participate in the Chicago Region Environmental and Transportation Efficiency (CREATE) project in Chicago.   The project is a proposed public-private partnership between the railroads and city, state and federal governments to design and implement a comprehensive plan to keep passenger and freight trains moving on schedule through the metropolitan Chicago area, the largest rail transportation hub in the U.S.   The intent is to reduce rail and highway congestion and add freight and passenger capacity.   The project is estimated to cost $1.5 billion with city, state and federal support.   The railroads’ financial contribution to the project is contingent upon a binding commitment that establishes the availability, on terms and conditions satisfactory to the railroads, of all required public funding and of third-party properties necessary to complete the entire project.   If public funding is secured, the railroads will contribute a total of $232 million towards the project with NS’ share slated to be $34 million over an estimated six-year period.

 


Track Structure Statistics (Capital and Maintenance)

 

 

 

 

 

 

 

2003

2002

2001

2000

1999

 

 

 

 

 

 

 

 

 

 

 

Track miles of rail installed

 

233

 

235

 

254

 

390

 

403

Miles of track surfaced

 

5,105

 

5,270

 

3,836

 

3,687

 

5,087

New crossties installed (millions)

 

2.8

 

2.8

 

1.5

 

1.5

 

2.3

  

Average Age of Owned Railway Equipment

 

 

 

 

 

 

 

2003

2002

2001

2000

1999

 

 

 

 

 

(years)

 

 

 

Freight cars

 

26.6

 

25.9

 

25.4

 

24.6

 

23.8

Locomotives

 

15.3

 

16.1

 

15.7

 

16.1

 

15.4

Retired locomotives

 

28.7

 

28.2

 

22.4

 

24.5

 

22.7

 

The table above excludes equipment leased from PRR (see Note 2), which comprises 17% of the freight car fleet and 22% of the locomotive fleet.

 

Through its coal car rebody program, which was suspended in 2000, NS converted about 29,000 hopper cars into high-capacity steel gondolas or hoppers.   As a result, the remaining service life of the freight-car fleet is greater than may be inferred from the increasing average age shown in the table above.

 

For 2004, NS has budgeted $810 million for capital expenditures.   The anticipated spending includes $517 million for roadway projects, of which $384 million is for track and bridge program work.   Also included are projects for communications, signal and electrical systems, as well as projects for environmental and public improvements such as grade crossing separations and signal upgrades.   Other roadway projects include marketing and industrial development initiatives, including increasing track capacity and access to coal receivers and vehicle production and distribution facilities, and continuing investments in intermodal infrastructure.   Equipment spending of $220 million includes the purchase of 100 locomotives and upgrades to existing units, improvements to multilevel automobile racks, and projects related to computers and information technology, including additional security and backup systems.

 

K31

 

Cash used for financing activities was $314 million in 2003 and $150 million in 2002.   Financing activities provided cash of $151 million in 2001.   The comparisons reflect net reductions of debt in 2003 and 2002 and a net increase in 2001.   Financing activities include loan transactions with a subsidiary of PRR that resulted in net borrowings of $203 million in 2003, $212 million in 2002 and $250 million in 2001 (see Note 2).   Excluding these borrowings, debt was reduced $370 million in 2003, $303 million in 2002 and $20 million in 2001.   NS' debt-to-total capitalization ratio (excluding notes payable to the PRR subsidiary) at year end was 50.7% in 2003 and 53.1% in 2002.

 

In 2003, NS redeemed all publicly held shares of Norfolk Southern Railway’s $2.60 Cumulative Preferred Stock, Series A for a redemption price of $50 per share plus accrued and unpaid dividends, for an aggregate redemption price of $50.2066.   The total use of cash was $43 million.

 

NS currently has in place and available a $1 billion, five-year credit agreement, which provides for borrowings at prevailing rates and includes financial covenants (see Note 8).

 

NS has outstanding $717 million of its 7.05% notes due May 1, 2037.   Each holder of a 2037 note may require NS to redeem all or part of the note at face value, plus accrued and unpaid interest, on May 1, 2004.   NS will not know the amount of 2037 notes that it may be required to redeem until April 1, 2004.   Should it be necessary, NS has the ability and intent to refinance such notes properly presented.

 

 

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.   These estimates and assumptions may require significant judgment about matters that are inherently uncertain, and future events are likely to occur that may require management to change them.   Accordingly, management regularly reviews these estimates and assumptions based on historical experience, changes in the business environment and other factors that management believes to be reasonable under the circumstances.   Management discusses the development, selection and disclosures concerning critical accounting estimates with the Audit Committee of its Board of Directors.

 

Pensions and Other Postretirement Benefits

 

Accounting for pensions and other postretirement benefit plans requires management to make several estimates and assumptions (see Note 11).   These include the expected rate of return from investment of the plans' assets, projected increases in medical costs and the expected retirement age of employees as well as their projected earnings and mortality.   In addition, the amounts recorded are affected by changes in the interest rate environment because the associated liabilities are discounted to their present value.   Management makes these estimates based on the company's historical experience and other information that it deems pertinent under the circumstances (for example, expectations of future stock market performance).   Management engages an independent consulting actuarial firm to aid it in selecting appropriate assumptions and valuing its related liabilities.

 

NS' net pension benefit, which is included in “Compensation and benefits” on its Consolidated Income Statement, was $25 million for the year ended Dec. 31, 2003, including $19 million related to the voluntary separation program.   In recording this amount, NS assumed a long-term investment rate of return of 9%.   Investment experience of the pension fund over the past 10-, 15- and 20-year periods has

 

K32

 

been in excess of 10%.   A one percentage point change to this rate of return assumption would result in a $17 million change to the pension credit and, as a result, an equal change in “Compensation and benefits” expense.   Changes that are reasonably likely to occur in assumptions concerning retirement age, projected earnings and mortality would not be expected to have a material effect on NS' net pension benefit or net pension asset in the future.   The net pension asset is recorded at its net present value using a discount rate that is based on the current interest rate environment; therefore, management has little discretion in this assumption.

 

NS' net cost for other postretirement benefits, which is also included in “Compensation and benefits,” was $80 million for the year ended Dec. 31, 2003, which included $22 million related to the voluntary separation program.   In recording this expense and valuing the net liability for other postretirement benefits, which is included in “Other benefits” as disclosed in Note 11, management estimated future increases in health-care costs.   These assumptions, along with the effect of a one percentage point change in them, are described in Note 11.   Additionally, as discussed in Note 11, recent changes to Medicare are expected to reduce NS’ postretirement benefit costs.

 

Properties and Depreciation

 

Most of NS' total assets are comprised of long-lived railway properties (see Note 6) and its investment in Conrail (see Note 2).   Most of Conrail's assets are long-lived railway properties.   As disclosed in Note 1, NS' properties are depreciated using group depreciation.   Rail is depreciated primarily on the basis of use measured by gross-ton miles.   Other properties are depreciated generally using the straight-line method over the lesser of estimated service or lease lives.   NS reviews the carrying amount of properties whenever events or changes in circumstances indicate that such carrying amount may not be recoverable based on future undiscounted cash flows or estimated net realizable value.   Assets that are deemed impaired as a result of such review are recorded at the lesser of carrying amount or fair value.   NS is amortizing the excess of the purchase price paid for its investment in Conrail over its share of Conrail's net equity using the principles of purchase accounting, based primarily on the estimated remaining useful lives of Conrail's properties.

 

NS' depreciation expense is based on management's assumptions concerning service lives of its properties as well as the expected net salvage that will be received upon their retirement.   These assumptions are the product of periodic depreciation studies that are performed by a firm of consulting engineers.   These studies analyze NS' historical patterns of asset use and retirement and take into account any expected change in operation or maintenance practices.   NS' recent experience with these studies has been that while they do result in changes in the rates used to depreciate its properties, these changes have not caused a significant effect to its annual depreciation expense.   The studies may also indicate that the recorded amount of accumulated depreciation is deficient (or in excess) of the amount indicated by the study.   Any such deficiency (or excess) is amortized as a component of depreciation expense over the remaining service lives of the affected class of property.   NS' “Depreciation expense” for the year ended Dec.   31, 2003, amounted to $513 million.   NS' weighted-average depreciation rates for 2003 are disclosed in Note 6; a one-tenth percentage point increase (or decrease) in these rates would result in a $18 million increase (or decrease) to NS' depreciation expense.

 

Personal Injury, Environmental and Legal Liabilities

 

NS' expense for “Casualties and other claims” amounted to $181 million for the year ended Dec. 31, 2003.   Most of this expense was composed of NS' accrual related to personal injury liabilities (see discussion of FELA in the discussion captioned “Casualties and other claims” on page K27).   NS engages an independent consulting actuarial firm to aid in valuing its personal injury liability and determining the amount to accrue during the year.   The actuarial firm studies NS' historical patterns of reserving for

 

K33

 

claims and subsequent settlements.   The actuary also takes into account outside influences considered pertinent.   The study uses the results of these analyses to estimate the ultimate amount of the liability, which includes amounts for incurred but unasserted claims.   NS has recorded this actuarially determined liability.   The liability is dependent upon many individual judgments made as to the specific case reserves as well as the judgments of the consulting actuary and management in the periodic studies.   Accordingly, there could be significant changes in the liability, which NS would recognize when such a change became known.   The most recent actuarial study was performed as of Sept. 30, 2003, and resulted in a slight decrease to NS' personal injury liability during the fourth quarter.   While the liability recorded is supported by the most recent study, it is reasonably possible that the liability could be higher or lower.

 

NS is subject to various jurisdictions' environmental laws and regulations.   It is NS' policy to record a liability where such liability or loss is probable and its amount can be estimated reasonably (see Note 18).   Environmental engineers regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates.   NS also has established an Environmental Policy Council, composed of senior managers, to oversee and interpret its environmental policy.

 

Operating expenses for environmental matters totaled approximately $9 million in 2003, $15 million in 2002 and $12 million in 2001, and capital expenditures totaled approximately $9 million in 2003, and $10 million in both 2002 and 2001.   Capital expenditures in 2004 are expected to be comparable to those in 2003.

 

NS' balance sheets included liabilities for environmental exposures in the amount of $25 million at Dec. 31, 2003, and $29 million at Dec. 31, 2002, (of which $8 million was accounted for as a current liability in each year).   At Dec. 31, 2003, the liability represented NS' estimate of the probable cleanup and remediation costs based on available information at 113 identified locations.   On that date, 10 sites accounted for $12 million of the liability, and no individual site was considered to be material.   NS anticipates that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period.

 

At some of the 113 locations, certain NS subsidiaries, usually in conjunction with a number of other parties, have been identified as potentially responsible parties by the Environmental Protection Agency (EPA) or similar state authorities under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or comparable state statutes, which often impose joint and several liability for cleanup costs.

 

With respect to known environmental sites (whether identified by NS or by the EPA or comparable state authorities), estimates of NS' ultimate potential financial exposure for a given site or in the aggregate for all such sites are necessarily imprecise because of the widely varying costs of currently available cleanup techniques, the likely development of new cleanup technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant's share of any estimated loss (and that participant's ability to bear it), and evolving statutory and regulatory standards governing liability.   NS estimates its environmental remediation liability on a site-by-site basis, using assumptions and judgments that management deems appropriate for each site.   As a result, it is not practical to quantitatively describe the effects of changes in these many assumptions and judgments.   NS has consistently applied its methodology of estimating its environmental liabilities.

 

The risk of incurring environmental liability is inherent in the railroad business.   Some of the commodities in NS' traffic mix, particularly those classified as hazardous materials, can pose special risks that NS and its subsidiaries work diligently to minimize.   In addition, several NS subsidiaries own, or have owned, land used as operating property, or which is leased and operated by others, or held for sale.   Because environmental problems may exist on these properties that are latent or undisclosed, there can be

 

K34

 

no assurance that NS will not incur environmentally related liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably at this time.   Moreover, lawsuits and claims involving these and potentially other unidentified environmental sites and matters are likely to arise from time to time.   The resulting liabilities could have a significant effect on financial condition, results of operations or liquidity in a particular year or quarter.

 

However, based on its assessment of the facts and circumstances now known, management believes that it has recorded the probable costs for dealing with those environmental matters of which the Corporation is aware.   Further, management believes that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on NS' financial position, results of operations or liquidity.

 

Norfolk Southern and certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations.   When management concludes that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to expenses.   While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in management's opinion the recorded liability, if any, is adequate to cover the future payment of such liability and claims.   However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter.   Any adjustments to recorded liabilities will be reflected in expenses in the periods in which such adjustments are known.

 

Income Taxes

 

NS' net long-term deferred tax liability totaled $3,223 million at Dec. 31, 2003 (see Note 4).   This liability is estimated based on the expected future tax consequences of items recognized in the financial statements.   After application of the federal statutory tax rate to book income, judgment is required with respect to the timing and deductibility of expenses in the corporate income tax returns.   For state income and other taxes, judgment is also required with respect to the apportionment among the various jurisdictions.   A valuation allowance is recorded if management expects that it is more likely than not that its deferred tax assets will not be realized.   NS has a $22 million valuation allowance on $628 million of deferred tax assets as of Dec. 31, 2003, reflecting the expectation that most of these assets will be realized.   For 2003, 2002 and 2001, the effective tax rates, excluding NS' equity in Conrail's earnings, were 33%, 38% and 38%, respectively.   For every one half percent change in the 2003 effective tax rate, net income would have changed by $3 million.

 

 

CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY

 

Conrail's net income was $203 million in 2003, compared with $180 million in 2002 and $174 million in 2001 (see Note 2).   Results in 2003 included $40 million for the cumulative effect on years prior to 2003 of a change in accounting principles as required by Conrail’s adoption of SFAS No. 143.   NS excluded this amount from its determination of equity in earnings of Conrail because an amount related to Conrail is included in NS’ cumulative effect adjustment for SFAS No. 143.   Conrail’s income before the accounting change was $163 million, $17 million below 2002, reflecting lower income from operations.

 

Conrail's operating revenues were $918 million in 2003, $893 million in 2002 and $903 million in 2001.   The 2003 increase was primarily attributable to higher operating fees related to PRR and NYC.   The decrease in 2002 resulted from the expiration of certain equipment leases and lower operating fees, largely because of reduced operating costs in the Shared Assets Areas.

 

K35

 

Conrail's operating expenses were $659 million in 2003, $623 million in 2002 and $639 million in 2001.   The increase in 2003 was primarily the result of higher expenses for compensation and benefits, and casualties and insurance.   The decrease in 2002 reflected lower expenses for materials, services and rents and compensation and benefits, which were offset, in part, by higher costs for casualties and other claims.

 

Conrail's cash provided by operations decreased $11 million, or 3%, in 2003, and $79 million, or 16%, in 2002.   The decrease in 2003 reflects the absence of an IRS refund received in 2002 that was partially offset by a decreased use of cash for casualty payments.   The decline in 2002 was primarily the result of the absence of two items that benefited 2001: a $50 million cash payment for transferring to a third party certain rights to license, manage and market signboard advertising on Conrail's property for 25 years and proceeds from a favorable insurance settlement.   This was offset, in part, by favorable changes in working capital.   Cash generated from operations is Conrail's principal source of liquidity and is primarily used for debt repayments and capital expenditures.   Debt repayments totaled $57 million in 2003 and $59 million in 2002.   Capital expenditures totaled $35 million in 2003 and $23 million in 2002.

 

Conrail had a working capital deficit of $22 million at Dec. 31, 2003, and $29 million at Dec. 31, 2002.   Conrail is not an SEC registrant and, therefore, presently cannot issue any publicly traded securities.   Conrail is expected to have sufficient cash flow to meet its ongoing obligations.

 

NS' equity in earnings of Conrail, net of amortization, was $58 million in 2003, $54 million in 2002 and $44 million in 2001.   NS' other comprehensive income (loss) for 2003, 2002 and 2001, as shown in the Consolidated Statement of Changes in Stockholders' Equity, included a $14 million gain, a $34 million loss and a $41 million loss, respectively, for its portion of Conrail's other comprehensive loss (see Note 13).

 

 

OTHER MATTERS

 

Labor Agreements

 

Approximately 24,000 of NS' railroad employees are covered by collective bargaining agreements with 14 different labor unions.   These agreements remain in effect until changed pursuant to the Railway Labor Act.   Moratorium provisions in these agreements permitted NS and the unions to propose such changes in late 1999; negotiations at the national level commenced shortly thereafter.

 

Agreements have been reached with the Brotherhood of Maintenance of Way Employes (BMWE), which represents about 4,200 NS employees; the United Transportation Union (UTU), which represents about 6,700 NS employees; the International Brotherhood of Boilermakers and Blacksmiths (IBB), which represents about 100 NS employees; the Transportation Communications International Union (TCU), which represents about 4,400 NS employees; the American Train Dispatchers Department (ATDD), which represents about 400 NS employees; the Brotherhood of Railroad Signalmen (BRS), which represents about 1,100 NS employees; and the Brotherhood of Locomotive Engineers (BLE), which represents about 4,500 NS employees.   The agreement with the BLE was through 2004; NS recently reached a further contract extension with BLE through 2009.   A tentative agreement with the International Brotherhood of Electrical Workers (IBEW), which represents about 900 NS employees, failed ratification.

 

Health and welfare issues have been resolved with BMWE, TCU, BRS, BLE and UTU.   Health and welfare issues with the other organizations have not yet been resolved.

 

K36


Market Risks and Hedging Activities

 

NS uses derivative financial instruments to reduce the risk of volatility in its diesel fuel costs and to manage its overall exposure to fluctuations in interest rates.

 

In 2001, NS began a program to hedge a portion of its diesel fuel consumption.   The intent of the program is to assist in the management of NS' aggregate risk exposure to fuel price fluctuations, which can significantly affect NS' operating margins and profitability, through the use of one or more types of derivative instruments.

 

Diesel fuel costs represented 7% of NS' operating expenses for 2003.   The program provides that NS will not enter into any fuel hedges with a duration of more than 36 months, and that no more than 80% of NS' average monthly fuel consumption will be hedged for any month within any 36-month period.

 

As of Dec. 31, 2003, through swap transactions, NS has hedged approximately 63% of expected 2004 diesel fuel requirements.   The effect of the hedges is to yield an average cost of 78 cents per hedged gallon, including federal taxes and transportation.   A 10% decrease in diesel fuel prices would reduce NS' asset related to the swaps by approximately $38 million as of Dec. 31, 2003.

 

NS manages its overall exposure to fluctuations in interest rates by issuing both fixed- and floating-rate debt instruments and by entering into interest-rate hedging transactions to achieve an appropriate mix within its debt portfolio.

 

At Dec. 31, 2003, NS' debt subject to interest rate fluctuations totaled $636 million (excluding debt due to the PRR subsidiary).   A 1% increase in interest rates would increase NS' total annual interest expense related to all its variable debt by approximately $6 million.   Management considers it unlikely that interest rate fluctuations applicable to these instruments will result in a material adverse effect on NS' financial position, results of operations or liquidity.

 

Some of NS' capital leases, which carry an average fixed rate of 7%, were effectively converted to variable rate obligations using interest rate swap agreements.   On Dec. 31, 2003, the average pay rate under these agreements was 1.6%, and the average receive rate was 7%.   During 2003, the effect of the swaps was to reduce interest expense by $10 million.   A portion of the lease obligations is payable in Japanese yen.   NS eliminated the associated exchange rate risk at the inception of each lease with a yen deposit sufficient to fund the yen-denominated obligation.   Most of these deposits are held by foreign banks, primarily Japanese.   As a result, NS is exposed to financial market risk relative to Japan.   Counterparties to the interest rate swaps and Japanese banks holding yen deposits are major financial institutions believed by management to be creditworthy.

 

New Accounting Pronouncements

 

As discussed in Note 1, effective Jan. 1, 2003, NS adopted Financial Accounting Standards Board (FASB) Statement No.   143, “Accounting for Asset Retirement Obligations,” (SFAS No. 143) and FASB Interpretation No.   46, “Consolidation of Variable Interest Entities,” (FIN No.   46).

 

Inflation

 

In preparing financial statements, accounting principles generally accepted in the United States of America require the use of historical cost that disregards the effects of inflation on the replacement cost of property.   NS, a capital-intensive company, has most of its capital invested in such assets.   The

 

K37

 

replacement cost of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical cost.

 

Trends

 

Federal Economic Regulation -- Efforts may be made in 2004 to reimpose unwarranted federal economic regulation on the rail industry.   The Staggers Rail Act of 1980, which substantially reduced such regulation, encouraged and enabled rail carriers to innovate and to compete for business.   NS and other rail carriers will oppose any efforts to reimpose unwarranted economic regulation.

 

Utility Deregulation -- Deregulation of the electrical utility industry is expected to increase competition among electric power generators; deregulation over time would permit wholesalers and possibly retailers of electric power to sell or purchase increasing quantities of power to or from distant parties.   The effects of deregulation on NS and on its customers cannot be predicted with certainty; however, NS serves a number of efficient power producers who are expected to remain competitive in this evolving environment.

 

Carbon-Based Fuel -- There is growing concern in some quarters that emissions resulting from burning carbon-based fuel, including coal, are contributing to global warming and causing other environmental changes.   To the extent that these concerns evolve into a consensus among policy-makers, the impact could be either a reduction in the demand for coal or imposition of more stringent regulations on emissions, which might result in making coal a less economical source of power generation or make permitting of coal-fired facilities even more difficult.   The revenues and net income of NSR and other railroads that move large quantities of coal could be affected adversely.

 

 

FORWARD-LOOKING STATEMENTS

 

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that may be identified by the use of words like “believe,” “expect,” “anticipate” and “project.” Forward-looking statements reflect management's good-faith evaluation of information currently available.   However, such statements are dependent on and, therefore, can be influenced by, a number of external variables over which management has little or no control, including: domestic and international economic conditions; the business environment in industries that produce and consume rail freight; competition and consolidation within the transportation industry; fluctuation in prices of key materials, in particular diesel fuel; labor difficulties, including strikes and work stoppages; legislative and regulatory developments; changes in securities and capital markets; and natural events such as severe weather, floods and earthquakes.   Forward-looking statements are not, and should not be relied upon as, a guaranty of future performance or results.   Nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved.   As a result, actual outcomes and results may differ materially from those expressed in forward-looking statements.   The Company undertakes no obligation to update or revise forward-looking statements.

 

 

Item 7A .   Quantitative and Qualitative Disclosures about Market Risk.

 

The information required by this item is included in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Market Risks and Hedging Activities.”

 

K38

 

Item 8 .   Financial Statements and Supplementary Data.

 

 

INDEX TO FINANCIAL STATEMENTS

 

 

 

Page

 

 

   Report of Management

K40

 

 

   Independent Auditors' Report

K41

 

 

   Independent Accountants' Report on Internal Control over Financial Reporting

K42

 

 

   Consolidated Statements of Income

K43

   Years ended December 31, 2003, 2002 and 2001

 

 

 

   Consolidated Balance Sheets

K44

   As of December 31, 2003 and 2002

 

 

 

   Consolidated Statements of Cash Flows

K45

   Years ended December 31, 2003, 2002 and 2001

 

 

 

   Consolidated Statements of Changes in Stockholders' Equity

K46

   Years ended December 31, 2003, 2002 and 2001

 

 

 

   Notes to Consolidated Financial Statements

K47

 

 

   The Index to Consolidated Financial Statement Schedule in Item 15

K79

 

K39
Report of Management

 

 

January 27, 2004

 

To the Stockholders

Norfolk Southern Corporation

 

Management is responsible for the preparation and fair presentation of the financial statements included in this annual report.   The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management's judgments and estimates concerning effects of events and transactions that are accounted for or disclosed.

 

Management is also responsible for establishing and maintaining effective internal control over financial reporting.   The Corporation's internal control over financial reporting includes those policies and procedures that pertain to the Corporation's ability to record, process, summarize and report reliable financial data.   Management recognizes that there are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control.   Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation.   Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

 

In order to ensure that the Corporation's internal control over financial reporting is effective, management regularly assesses such controls and did so most recently for its financial reporting as of December 31, 2003.   This assessment was based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.   Based on this assessment, management believes the Corporation maintained effective internal control over financial reporting as of December 31, 2003.

 

The Board of Directors, acting through its Audit Committee, is responsible for the oversight of the Corporation's accounting policies, financial reporting and internal control.   The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management.   The Audit Committee is responsible for the appointment and compensation of the independent auditor and approves decisions regarding the appointment or removal of the Vice President-Internal Audit.   It meets periodically with management, the independent auditors and the internal auditors to ensure that they are carrying out their responsibilities.   The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Corporation in addition to reviewing the Corporation's financial reports.   The independent auditors and the internal auditors have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over financial reporting, and any other matters which they believe should be brought to the attention of the Audit Committee.

 

KPMG LLP, independent auditors of the Corporation's financial statements, has reported on management's assertion with respect to the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2003.

  

 

/s/ David R. Goode

/s/ Henry C. Wolf

/s/ Marta R. Stewart

David R.   Goode

Henry C.   Wolf

Marta R. Stewart

Chairman, President and

Vice Chairman and

Vice President and

Chief Executive Officer

Chief Financial Officer

Controller

K40

 

Independent Auditors' Report

 

The Stockholders and Board of Directors

Norfolk Southern Corporation:

 

We have audited the accompanying consolidated balance sheets of Norfolk Southern Corporation and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2003.   In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in Item 15(A)2.   These consolidated financial statements and financial statement schedule are the responsibility of the Company's management.   Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.   Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.   An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.   An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.   We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Norfolk Southern Corporation and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.   Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2003 the Company adopted Financial Accounting Standards Board Statement No. 143, Accounting for Asset Retirement Obligations , and Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities .

 

 

 

 

/s/ KPMG LLP

Norfolk, Virginia

January 27, 2004

 

K41

 


INDEPENDENT ACCOUNTANTS' REPORT ON INTERNAL CONTROL

OVER FINANCIAL REPORTING

 

The Board of Directors

Norfolk Southern Corporation:

 

We have examined management's assertion, included in the accompanying Report of Management, that Norfolk Southern Corporation maintained effective internal control over financial reporting as of December 31, 2003 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).   Norfolk Southern Corporation's management is responsible for maintaining effective internal control over financial reporting.   Our responsibility is to express an opinion on management's assertion based on our examination.

 

Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of internal control over financial reporting, testing, and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances.   We believe that our examination provides a reasonable basis for our opinion.

 

Because of inherent limitations in any internal control, misstatements due to error or fraud may occur and not be detected.   Also, projections of any evaluation of internal control over financial reporting to future periods are subject to the risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management's assertion that Norfolk Southern Corporation maintained effective internal control over financial reporting as of December 31, 2003 is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

 

 

/s/ KPMG LLP

Norfolk, Virginia

January 27, 2004

 

K42


Norfolk Southern Corporation And Subsidiaries

Consolidated Statements of Income

 

 

Years ended December 31,

 

2003

2002

2001

 

($ in millions, except earnings per share)

 

 

 

 

 

 

 

Railway operating revenues

$

6,468 

$

6,270 

$

6,170 

 

 

 

 

 

 

 

Railway operating expenses

 

 

 

 

 

 

  Compensation and benefits (Note 11)

 

2,275 

 

2,022 

 

2,014 

  Materials, services and rents

 

1,427 

 

1,457 

 

1,444 

  Conrail rents and services (Note 2)

 

419 

 

412 

 

421 

  Depreciation

 

513 

 

515 

 

514 

  Diesel fuel

 

380 

 

342 

 

412 

  Casualties and other claims

 

181 

 

171 

 

143 

  Other

 

209 

 

193 

 

215 

 

 

 

 

 

 

 

    Total railway operating expenses

 

5,404 

 

5,112 

 

5,163 

 

 

 

 

 

 

 

    Income from railway operations

 

1,064 

 

1,158 

 

1,007 

 

 

 

 

 

 

 

Other income – net (Note 3)

 

19 

 

66 

 

99 

Interest expense on debt (Note 6)

 

(497)

 

(518)

 

(553)

 

 

 

 

 

 

 

    Income from continuing operations

 

 

 

 

 

 

      before income taxes and accounting changes

 

586 

 

706 

 

553 

 

 

 

 

 

 

 

Provision for income taxes (Note 4)

 

175 

 

246 

 

191 

 

 

 

 

 

 

 

    Income from continuing operations

 

 

 

 

 

 

       before accounting changes

 

411 

 

460 

 

362 

 

 

 

 

 

 

 

Discontinued operations – gain on sale

 

 

 

 

 

 

  of motor carrier, net of taxes (Note 17)

 

10 

 

-- 

 

13 

Cumulative effect of changes in accounting

 

 

 

 

 

 

  principles, net of taxes (Note 1)

 

114 

 

-- 

 

-- 

 

 

 

 

 

 

 

    Net income

$

535 

$

460 

$

375 

 

 

 

 

 

 

 

Earnings per share – basic and diluted (Note 14):

 

 

 

 

 

 

  Income from continuing operations before

 

 

 

 

 

 

    accounting changes

$

1.05 

$

1.18 

$

0.94 

  Discontinued operations 

 

0.03 

 

-- 

 

0.03 

  Cumulative effect of changes in

 

 

 

 

 

 

    accounting principles

 

0.29 

 

-- 

 

-- 

 

 

 

 

 

 

 

    Net income

$

1.37 

$

1.18 

$

0.97 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

K43

 

Norfolk Southern Corporation And Subsidiaries

Consolidated Balance Sheets

 

 

As of Dec.   31,

 

2003

2002

 

($ in millions)

Assets

 

 

 

 

Current assets:

 

 

 

 

  Cash and cash equivalents

$

284 

$

184 

  Accounts receivable-net (Note 5)

 

695 

 

683 

  Materials and supplies

 

92 

 

97 

  Deferred income taxes (Note 4)

 

189 

 

187 

  Other current assets

 

165 

 

148 

    Total current assets

 

1,425 

 

1,299 

 

 

 

 

 

Investment in Conrail (Note 2)

 

6,259 

 

6,178 

Properties less accumulated depreciation (Note 6)

 

11,779 

 

11,370 

Other assets

 

1,133 

 

1,109 

     Total assets

$

20,596 

$

19,956 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

Current liabilities:

 

 

 

 

  Accounts payable (Note 7)

$

948 

$

908 

  Income and other taxes

 

199 

 

269 

  Due to Conrail (Note 2)

 

81 

 

86 

  Other current liabilities (Note 7)

 

213 

 

232 

  Current maturities of long-term debt (Note 8)

 

360 

 

358 

    Total current liabilities

 

1,801 

 

1,853 

 

 

 

 

 

Long-term debt (Note 8)

 

6,800 

 

7,006 

Other liabilities (Note 10)

 

1,071 

 

1,029 

Due to Conrail (Note 2)

 

716 

 

513 

Minority interests

 

 

45 

Deferred income taxes (Note 4)

 

3,223 

 

3,010 

    Total liabilities

 

13,620 

 

13,456 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

  Common stock $1.00 per share par value, 1,350,000,000 shares

 

 

 

 

    authorized; issued 412,168,988 and 410,154,465 shares,

 

 

 

 

    Respectively

 

412 

 

410 

  Additional paid-in capital

 

521 

 

481 

  Unearned restricted stock (Note 12)

 

(5)

 

-- 

  Accumulated other comprehensive loss (Note 13)

 

(44)

 

(65)

  Retained income

 

6,112 

 

5,694 

  Less treasury stock at cost, 21,016,125 and 21,169,125 shares,

    Respectively

 

(20)

 

(20)

 

 

 

 

 

     Total stockholders' equity

 

6,976 

 

6,500 

 

 

 

 

 

     Total liabilities and stockholders' equity

$

20,596 

$

19,956 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

K44
Norfolk Southern Corporation And Subsidiaries

Consolidated Statements of Cash Flows

 

 

Years Ended Dec.   31,

 

2003

2002

2001

 

($ in millions)

Cash flows from operating activities

 

 

 

 

 

 

  Net income

$

535 

$

460 

$

375 

  Reconciliation of net income to net cash

 

 

 

 

 

 

    provided by operating activities:

 

 

 

 

 

 

      Net cumulative effects of changes in accounting principles

 

(114)

 

-- 

 

-- 

      Depreciation

 

528 

 

529 

 

527 

      Deferred income taxes

 

132 

 

178 

 

44 

      Equity in earnings of Conrail

 

(58)

 

(54)

 

(44)

      Gains and losses on properties and investments

 

(45)

 

(47)

 

(59)

      Income from discontinued operations

 

(10)

 

-- 

 

(13)

      Changes in assets and liabilities affecting operations:

 

 

 

 

 

 

          Accounts receivable (Note 5)

 

(12)

 

(208)

 

(74)

          Materials and supplies

 

 

(7)

 

          Other current assets

 

(4)

 

 

46 

          Current liabilities other than debt

 

(25)

 

35 

 

(27)

          Other – net (Notes 6 and 11)

 

122 

 

(84)

 

(122)

            Net cash provided by operating activities

 

1,054 

 

803 

 

654 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

  Property additions

 

(720)

 

(689)

 

(746)

  Property sales and other transactions

 

78 

 

31 

 

156 

  Investments, including short-term

 

(106)

 

(78)

 

(99)

  Investment sales and other transactions

 

108 

 

63 

 

88 

            Net cash used for investing activities

 

(640)

 

(673)

 

(601)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

  Dividends

 

(117)

 

(101)

 

(93)

  Common stock issued – net

 

13 

 

42 

 

14 

  Redemption of minority interest

 

(43)

 

-- 

 

-- 

  Proceeds from borrowings

 

261 

 

672 

 

1,995 

  Debt repayments

 

(428)

 

(763)

 

(1,765)

            Net cash provided by (used for) financing activities

 

(314)

 

(150)

 

151 

 

 

 

 

 

 

 

            Net increase (decrease) in cash and cash equivalents

 

100 

 

(20)

 

204 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

  At beginning of year

 

184 

 

204 

 

-- 

 

 

 

 

 

 

 

  At end of year

$

284 

$

184 

$

204 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

  Cash paid during the year for:

 

 

 

 

 

 

    Interest (net of amounts capitalized)

$

510 

$

525 

$

550 

    Income taxes

$

93 

$

54 

$

74 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

K45
Norfolk Southern Corporation And Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

 

 

 

 

 

 

Accum.

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Additional

Compre-

Unearned

 

 

 

 

 

 

 

Common

Paid-in

hensive

Restricted

Retained

Treasury

 

 

 

Stock

Capital

Loss

Stock

Income

Stock

Total

 

($ in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Dec.   31, 2000

$

405 

$

392 

$

(6) 

$

-- 

$

5,053 

$

(20)

$

5,824 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Net income

 

 

 

 

 

 

 

 

 

375 

 

 

 

375 

  Other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    loss (Note 13)

 

 

 

 

 

(49) 

 

 

 

 

 

 

 

(49)

      Total comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        income

 

 

 

 

 

 

 

 

 

 

 

 

 

326 

Dividends on Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Stock, $0.24 per share

 

 

 

 

 

 

 

 

 

(93) 

 

 

 

(93)

Other (Notes 11 and 12)

 

 

31 

 

 

 

 

 

 

 

 

 

33 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Dec.   31, 2001

 

407 

 

423 

 

(55) 

 

-- 

 

5,335 

 

(20)

 

6,090 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Net income

 

 

 

 

 

 

 

 

 

460 

 

 

 

460 

  Other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    loss (Note 13)

 

 

 

 

 

(10) 

 

 

 

 

 

 

 

(10)

      Total comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        income

 

 

 

 

 

 

 

 

 

 

 

 

 

450 

Dividends on Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Stock, $0.26 per share

 

 

 

 

 

 

 

 

 

(101) 

 

 

 

(101)

Other (Notes 11 and 12)

 

 

58 

 

 

 

 

 

 

 

 

 

61 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Dec.   31, 2002

 

410 

 

481 

 

(65) 

 

-- 

 

5,694 

 

(20)

 

6,500 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Net income

 

 

 

 

 

 

 

 

 

535 

 

 

 

535 

  Other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    income (Note 13)

 

 

 

 

 

21 

 

 

 

 

 

 

 

21 

      Total comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        income