<PAGE 1>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K405
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
( ) 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 (I.R.S. Employer
incorporation or organization) Identification No.)
Three Commercial Place, Norfolk, Virginia 23510-2191
- ------------------------------------------------ --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (757) 629-2680
-------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each Class on which registered
------------------- ---------------------
Norfolk Southern Corporation
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-K405 or any amendment to this Form 10-K405. (X)
The aggregate market value of the voting stock held by nonaffiliates
as of January 31, 2000: $6,507,265,729.
The number of shares outstanding of each of the registrant's classes
of common stock, as of January 31, 2000: 382,780,337 (excluding
21,627,902 shares held by registrant's consolidated subsidiaries).
<PAGE> PAGE 2
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement (to be
dated March 31, 2000), 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.
<PAGE> PAGE 3
TABLE OF CONTENTS
-----------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Page
----
Part I. 1. Business 4
2. Properties 4
3. Legal Proceedings 17
4. Submission of Matters to a Vote of Security Holders 17
Executive Officers of the Registrant 18
Part II. 5. Market for Registrant's Common Stock and
Related Stockholder Matters 20
6. Selected Financial Data 21
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 28
7A. Quantitative and Qualitative Disclosures
About Market Risk 47
8. Financial Statements and Supplementary Data 48
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 79
Part III. 10. Directors and Executive Officers of the Registrant 80
11. Executive Compensation 80
12. Security Ownership of Certain Beneficial Owners
and Management 80
13. Certain Relationships and Related Transactions 80
Part IV. 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K 81
Index to Consolidated Financial Statement Schedule 81
Power of Attorney 88
Signatures 88
Exhibit Index 92
<PAGE> PAGE 4
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).
Effective Sept. 1, 1998, NW was merged with and into Norfolk Southern
Railway. As of Dec. 31, 1999, all the common stock of Norfolk
Southern Railway and 16.1 percent of its voting preferred stock
(resulting in 94.8 percent voting control) 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
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" on Page 39 and Note 15 on Page 75). NAVL's
results of operations, financial position and cash flows are presented
as "Discontinued operations" in the accompanying financial statements.
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, NS 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 on Page 58, with Norfolk Southern Railway. Certain rail assets
(Shared Assets Areas) still are owned by CRC, which operates them for
joint and exclusive use by Norfolk Southern Railway and the rail
subsidiary of CSX.
<PAGE> PAGE 5
Operation of the PRR routes and assets increased the size of the
system over which Norfolk Southern Railway provides service by nearly
50% and afforded access to the New York metropolitan area, to much of
the Northeast and to most of the major East Coast ports north of
Norfolk, Va. Also, the leasing arrangements with PRR augmented
Norfolk Southern Railway's locomotive, freight car and intermodal
fleet.
CONTINUING OPERATIONS:
RAILROAD OPERATIONS - As of Dec. 31, 1999, NS' railroads operated
approximately 21,800 miles of road in the states of Alabama, Delaware,
Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana,
Maryland, Michigan, Mississippi, Missouri, New Jersey, New York, North
Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and
West Virginia, and in the Province of Ontario, Canada. Of this total,
about 12,000 miles are owned with the balance operated under lease or
trackage rights; most of this total is main line track. In addition,
its railroads operate almost 17,000 miles of passing, industrial, yard
and side tracks.
In addition to the lines leased from Conrail previously
discussed, NS' railroads have major leased lines between Cincinnati,
Ohio, and Chattanooga, Tennessee, and operates over trackage owned by
North Carolina Railway Company (NCRR).
The Cincinnati-Chattanooga lease, covering about 335 miles,
expires in 2026, and is subject to an option to extend the lease for
an additional 25 years, at terms to be agreed upon.
Operations over the approximately 330 miles of tracks of NCRR,
previously under a 100-year lease which expired on Dec. 31, 1994, are
now under a trackage rights agreement. The term of the agreement is
15 years with NS' railroads having the right to renew for two
additional 15-year periods. The new arrangement resolved all
outstanding litigation between NS' railroads and NCRR and settled a
number of contested real property issues. The agreement also includes
very broad dispute resolution provisions.
NS' railroads carry raw materials, intermediate products and
finished goods primarily in the Southeast, East and Midwest, and to
and from the rest of the United States and parts of Canada. 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, East and Midwest, with the
exception of those in central and southern Florida. Atlanta,
Birmingham, New Orleans, Memphis, St. Louis, Kansas City (Missouri),
Chicago, Detroit, Cincinnati, Buffalo, Norfolk, Charleston, Savannah,
Jacksonville, Cleveland, Newark, Pittsburgh, Philadelphia and
Baltimore are among the leading centers originating and terminating
freight traffic on the system. In addition, a haulage arrangement
<PAGE> PAGE 6
with Florida East Coast Railway Company allows NS' railroads to provide
single-line service to and from south Florida, including the port cities
of Miami, West Palm Beach and Fort Lauderdale. The system's lines also
reach many individual industries, mines (in western Virginia, eastern
Kentucky, southern and northern West Virginia and western Pennsylvania)
and businesses located in smaller communities in its service area. The
traffic corridors carrying the heaviest volumes of freight include
those from the Appalachian coal fields of Virginia, West Virginia and
Kentucky, to Norfolk and Sandusky, Ohio; Buffalo to Chicago and Kansas
City; Chicago to Jacksonville (via Cincinnati, Chattanooga and
Atlanta); and Washington, D.C./Hagerstown, Maryland, to New Orleans
(via Atlanta and Birmingham); and the New Jersey area to Chicago (via
Allentown and Pittsburgh).
Buffalo, Chicago, Hagerstown, Jacksonville, Kansas City, Memphis,
New Orleans and St. Louis are major gateways for interterritorial
system traffic.
TRIPLE CROWN OPERATIONS - Until April 1993, NS' intermodal
subsidiary, Triple Crown Services, Inc. (TCS), offered intermodal
service using RoadRailer (Registered Trademark hereinafter abbreviated
RT) equipment and domestic containers. RoadRailer(RT) units are
enclosed vans which 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. RoadRailer(RT) equipment owned or leased
by TCS (which was renamed TCS Leasing, Inc.) is operated by TCSC.
Since April 1, 1993, 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(RT) equipment and domestic containers in the corridors
previously served by TCS, as well as service to the New York and New
Jersey markets via Conrail. Major traffic corridors include those
between New York and Chicago, Chicago and Atlanta, and Atlanta and New
York.
<PAGE> PAGE 7
<TABLE>
RAILWAY OPERATING REVENUES - NS' total railway operating revenues
were $5.2 billion in 1999. Revenue, shipments and revenue yield by
principal railway operating revenue sources for the past five years
are set forth in the following table:
<CAPTION>
Year Ended December 31,
Principal Sources of ---------------------------------------------------
Railway Operating
Revenues 1999 1998 1997 1996 1995
- -------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipment)
<S> <C> <C> <C> <C> <C>
COAL
Revenues $1,315 $1,252 $1,301 $1,305 $1,268
% of total
revenues 25% 30% 31% 32% 32%
Shipments 1,519 1,310 1,324 1,310 1,267
% of total
shipments 25% 27% 28% 29% 29%
Revenue Yield $ 866 $ 956 $ 983 $ 996 $1,001
AUTOMOTIVE
Revenues $ 740 $ 566 $ 492 $ 489 $ 449
% of total
revenues 14% 13% 11% 12% 11%
Shipments 612 487 361 354 328
% of total
shipments 10% 10% 8% 8% 7%
Revenue Yield $1,209 $1,162 $1,364 $1,379 $1,368
CHEMICALS
Revenues $ 720 $ 574 $ 585 $ 560 $ 541
% of total
revenues 14% 13% 14% 14% 14%
Shipments 475 401 405 385 374
% of total
shipments 8% 8% 8% 8% 8%
Revenue Yield $1,516 $1,431 $1,446 $1,456 $1,447
PAPER/CLAY/FOREST
Revenues $ 575 $ 534 $ 539 $ 513 $ 537
% of total
revenues 11% 13% 13% 12% 13%
Shipments 465 445 457 438 459
% of total
shipments 8% 9% 9% 10% 10%
Revenue Yield $1,237 $1,200 $1,178 $1,171 $1,170
METALS/CONSTRUCTION
Revenues $ 562 $ 373 $ 368 $ 354 $ 349
% of total
revenues 11% 9% 9% 9% 8%
Shipments 587 372 374 359 367
% of total
shipments 10% 8% 8% 8% 8%
Revenue Yield $ 957 $1,003 $ 985 $ 986 $ 951
AGR./CONSUMER PRODUCTS/GOVT.
Revenues $ 453 $ 383 $ 391 $ 393 $ 394
% of total
revenues 9% 9% 9% 9% 10%
Shipments 407 355 366 376 391
% of total
shipments 7% 8% 8% 8% 9%
Revenue Yield $1,113 $1,079 $1,065 $1,045 $1,007
<PAGE> PAGE 8
Year Ended December 31,
Principal Sources of -------------------------------------------------
Railway Operating
Revenues 1999 1998 1997 1996 1995
- -------------------- ---- ---- ---- ---- ----
(Revenues in millions, shipments in thousands, revenue yield in dollars
per shipment)
INTERMODAL
(Trailers, Containers
and RoadRailers)
Revenues $ 830 $ 539 $ 547 $ 487 $ 474
% of total
revenues 16% 13% 13% 12% 12%
Shipments 1,896 1,443 1,472 1,331 1,263
% of total
shipments 32% 30% 31% 29% 29%
Revenue Yield $ 438 $ 374 $ 372 $ 366 $ 376
Total Railway
Operating Revenues $5,195 $4,221 $4,223 $4,101 $4,012
Total Railway
Shipments 5,961 4,813 4,759 4,553 4,449
Railway Revenue
Yield $ 871 $ 877 $ 887 $ 901 $ 902
</TABLE>
Note: Other railway revenues (principally switching and demurrage)
have been allocated to revenues reported for each commodity group.
Shipments include general merchandise and coal rail carloads and
intermodal rail and RoadRailer(RT) units.
<PAGE> PAGE 9
COAL TRAFFIC - Coal, coke and iron ore -- most of which is
bituminous coal -- is NS' railroads' largest commodity group as
measured by revenues. They originated 138 million tons of coal, coke
and iron ore in 1999 and handled a total of 158 million tons.
Originated tonnage and total tons handled increased due to the
commencement of operations in the Northern Region. Revenues from
coal, coke and iron ore account for about 25 percent of NS' total
railway operating revenues.
The following table shows total coal, coke and iron ore tonnage
originated on line, received from connections and handled for the past
five years:
<TABLE>
Tons of Coal, Coke and Iron Ore (Millions)
--------------------------------------------
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Originated 138 119 119 117 114
Received 20 15 15 13 11
--- --- --- --- ---
Handled 158 134 134 130 125
=== === === === ===
</TABLE>
<TABLE>
Of the 138 million tons of coal, coke and iron ore originated on
lines operated by NS' railroads in 1999, the approximate breakdown by
origin state was as follows:
<CAPTION>
Origin State Millions of Tons
------------ ----------------
<S> <C>
West Virginia 45
Virginia 31
Kentucky 24
Pennsylvania 15
Indiana 7
Ohio 6
Alabama 4
Illinois 3
Tennessee 1
Other 2
---
138
===
</TABLE>
Of the 158 million tons handled, approximately 18 million moved
for export, principally through NS' pier facilities at Norfolk
(Lamberts Point), Virginia; 22 million moved to domestic and Canadian
steel industries; 108 million of steam coal moved to electric
utilities; and 10 million moved to other industrial and miscellaneous
users.
NS' railroads moved 9 million tons of originated coal, coke and
iron ore to various docks on the Ohio River, and 7 million tons to
various Lake Erie ports. Other than coal for export, virtually all
coal handled by NS' railroads was terminated in states situated east
of the Mississippi River.
<PAGE> PAGE 10
Total coal handled through all system ports in 1999 was
38 million tons. Of this total, 53 percent, or 20 million tons
(including coastwise traffic), moved through Lamberts Point, a
26 percent decrease compared with the 27 million tons handled in 1998.
The quantities of NS export coal handled through Lamberts Point
for the past five years were as follows:
<TABLE>
Export Coal through Lamberts Point
(Millions of tons)
----------------------------------
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
17 24 28 26 25
</TABLE>
See the discussion of coal traffic, by type of coal, in Part II,
Item 7, "Management's Discussion and Analysis."
MERCHANDISE TRAFFIC - The merchandise traffic group consists of
intermodal and general merchandise, which consists of five major
commodity groupings: automotive; chemicals; paper, clay and forest
products; metals and construction; and agriculture, consumer products
and government. Total merchandise revenues in 1999 were $3.9 billion,
a 31 percent increase, compared with 1998. Merchandise carloads and
intermodal units handled in 1999 were 4.44 million, compared with
3.50 million handled in 1998, an increase of 27 percent. The
increases in revenues and carloads reflect the commencement of
operations in the Northern Region.
In 1999, 136 million tons of merchandise freight, or
approximately 67 percent of total merchandise tonnage handled by NS,
originated online. The balance of merchandise traffic was received
from connecting carriers, usually 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.
Revenues in all six market groups comprising merchandise traffic
increased in 1999, due to the commencement of operations in the
Northern Region.
See the discussion of general merchandise rail traffic by
commodity group and intermodal rail traffic in Part II, Item 7,
"Management's Discussion and Analysis."
<PAGE> PAGE 11
<TABLE>
RAIL OPERATING STATISTICS - The following table sets forth
certain statistics relating to NS' railroads' operations for the past
five years, including operations in the Northern Region that commenced
June 1, 1999:
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue ton miles (billions) 165 133 136 130 127
Freight train miles
traveled (millions) 61.5 53.0 49.7 49.4 48.5
Revenue per ton mile $0.0314 $0.0316 $0.0311 $0.0316 $0.0317
Revenue tons per train 2,691 2,517 2,732 2,625 2,611
Revenue ton miles
per man-hour worked 2,560 2,635 2,905 2,764 2,679
Percentage ratio of
railway operating
expenses to railway
operating revenues 86.2% 75.1% 71.3% 71.6% 73.5%
</TABLE>
FREIGHT RATES - In 1999, NS' railroads continued their reliance
on private contracts and exempt price quotes as their predominant
pricing mechanisms. Thus, a major portion of NS' railroads' freight
business is not currently economically regulated by the government.
In general, market forces have been substituted for government
regulation and now are the primary determinant of rail service prices.
In 1999, NS' railroads were found by the STB not to be "revenue
adequate" based on results for the year 1998. A railroad is "revenue
adequate" under the applicable law when its return on net investment
exceeds the rail industry's composite cost of capital.
PASSENGER OPERATIONS - Regularly scheduled passenger operations
on NS' lines consist of Amtrak trains operating between Alexandria and
New Orleans, and between Charlotte and Selma, North Carolina.
Commuter trains are operated on the NS line between Manassas and
Alexandria under contract 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. All of these services are under contracts
providing for reimbursement of related expenses incurred by NS.
Also since June 1, 1999, Norfolk Southern Railway has been
providing freight service over former Conrail lines with significant
ongoing Amtrak and commuter passenger operations, and is conducting
freight operations over some trackage owned by Amtrak or by New Jersey
Transit, the Southeastern Pennsylvania Transportation Authority, Metro-
North Commuter Railway Company and Maryland DOT. Finally, passenger
operations are conducted either by Amtrak or by the commuter agencies
over trackage owned by Pennsylvania Lines LLC, or by Conrail in the
Shared Assets Areas.
<PAGE> PAGE 12
In addition, through its operation of PRR's routes, Norfolk
Southern Railway provides freight service over lines with significant
ongoing Amtrak and commuter passenger operations, and conducts freight
operations over some trackage owned by Amtrak or by commuter entities.
NONCARRIER OPERATIONS - NS' noncarrier subsidiaries engage
principally in the acquisition and subsequent leasing of coal, oil,
gas and timberlands, the development of commercial real estate and the
leasing or sale of rail property and equipment. In 1999, 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:
<TABLE>
EQUIPMENT - As of Dec. 31, 1999, NS owned or leased the following
units of equipment:
<CAPTION>
Number of Units
---------------------------- Capacity
Owned* Leased** Total of Equipment
----- ------ ----- ------------
<S> <C> <C> <C> <C>
Type of Equipment
- -----------------
Locomotives: (Horsepower)
Multiple purpose 2,232 949 3,181 10,315,300
Switching 110 113 223 325,800
Auxiliary units 59 18 77 --
------ ------ ------- ----------
Total locomotives 2,401 1,080 3,481 10,641,100
====== ====== ======= ==========
Freight Cars: (Tons)
Hopper 20,605 5,796 26,401 2,773,704
Box 18,993 5,657 24,650 1,914,567
Covered Hopper 12,073 3,737 15,810 1,711,311
Gondola 28,592 12,534 41,126 4,380,406
Flat 4,181 1,035 5,216 392,663
Caboose 190 78 268 --
Other 3,956 -- 3,956 218,540
------ ------ ------- ----------
Total freight cars 88,590 28,837 117,427 11,391,191
====== ====== ======= ==========
Other:
Work equipment 6,005 2,151 8,156
Vehicles 3,685 1,720 5,405
Highway trailers
and containers 1,871 5,319 7,190
RoadRailers(RT) 5,593 -- 5,593
Miscellaneous 1,497 6,404 7,901
------ ------ -------
Total other 18,651 15,594 34,245
====== ====== =======
</TABLE>
<PAGE> PAGE 13
* Includes equipment leased to outside parties and equipment
subject to equipment trusts, conditional sale agreements
and capitalized leases.
** Includes 1,020 locomotives, 20,351 freight cars and 3,880
units of other equipment leased from PRR.
In addition, NS has leased locomotives to meet immediate needs.
As of Dec. 31, 1999, NS had 555 units under several short-term leases,
most of which expire in the first quarter of 2000.
<TABLE>
The following table indicates the number and year built for
locomotives and freight cars owned at Dec. 31, 1999:
<CAPTION>
Year Built
--------------------------------------------------------
1989- 1983- 1982 &
1999 1998 1997 1996 1995 1994 1988 Before Total
---- ---- ---- ---- ---- ---- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Locomotives:
Number of
units 147 119 120 119 125 289 327 1,155 2,401
Percent of
fleet 6 5 5 5 6 12 13 48 100%
Freight cars:
Number of
units 439 1,567 1,076 987 1,036 8,128 1,835 73,522 88,590
Percent of
fleet 1 2 1 1 1 9 2 83 100%
</TABLE>
The average age of the freight car fleet at Dec. 31, 1999, was
23.8 years. During 1999, 423 freight cars were retired. As of
Dec. 31, 1999, the average age of the locomotive fleet was 15.4 years.
During 1999, 13 locomotives, the average age of which was 22.7 years,
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.
Ongoing freight car and locomotive maintenance programs are
intended to ensure the highest standards of safety, reliability,
customer satisfaction and equipment marketability. In past years, the
freight car bad order ratio reflected the storage of certain types of
cars which were not in high demand. The ratio has declined more
recently as a result of a disposition program for underutilized,
unserviceable and overage revenue cars. In this connection, an
orderly disposition of 17,000 freight cars, begun in October 1994, was
completed in 1997. The locomotive bad order ratio rose in 1997,
particularly in the early months of the year, as older units required
additional servicing and some new units were out-of-service related to
warranty work. By year-end 1997, the locomotive bad order ratio had
returned to a level nearer that of prior years. The increase in the
locomotive bad order ratio in 1999 was primarily due to the maintenance
requirements of units being rented to meet short-term needs and to
weather-related failures.
<PAGE> PAGE 14
<TABLE>
Annual Average Bad Order Ratio
-----------------------------------
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Freight Cars (excluding cabooses):
NS Rail 3.3% 4.1% 4.6% 4.8% 5.8%
Locomotives:
NS Rail 5.3% 4.3% 5.0% 4.5% 4.7%
</TABLE>
TRACKAGE - All NS trackage is standard gauge, and the rail in
approximately 96 percent of the main line trackage (including first,
second, third and branch main tracks, all excluding trackage rights)
ranges from 100 to 140 pounds per yard. Of the approximately
31,900 miles of track maintained as of Dec. 31, 1999, about 21,800
were laid with welded rail.
<TABLE>
The density of traffic on running tracks (main line trackage plus
passing tracks) during 1999 was as follows:
<CAPTION>
Gross tons of
freight carried
per track mile Track miles of Percent
(Millions) running tracks* of total
--------------- -------------- --------
<S> <C> <C>
0-4 9,070 39
5-19 6,561 29
20 and over 7,372 32
------ ---
23,003 100
====== ===
</TABLE>
* Excludes trackage rights and includes track in the Northern
Region, where operations commenced June 1, 1999.
<TABLE>
The following table summarizes certain information about NS'
track roadway additions and replacements during the past five years:
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Track miles of rail
installed 403 429 451 401 403
Miles of track surfaced 5,087 4,715 4,703 4,686 4,668
New crossties installed
(millions) 2.3 2.0 2.2 1.9 2.0
</TABLE>
MICROWAVE SYSTEM - The NS microwave system, consisting of
8,140 radio path miles, 430 active stations and 4 passive repeater
stations, provides communications between most operating locations.
The microwave system is used primarily for voice communications, VHF
radio control circuits, data and facsimile transmissions, traffic
control operations, AEI data transmissions and relay of intelligence
from defective equipment detectors.
<PAGE> PAGE 15
TRAFFIC CONTROL - Of a total of 21,800 road miles operated by NS,
excluding trackage rights over foreign lines, 8,370 road miles are
governed by centralized traffic control systems (of which 1,000 miles
are controlled by data radio from 78 microwave site locations and
460 miles are cab-signal only) and 3,070 road miles are equipped for
automatic block system operation.
COMPUTERS - Data processing facilities connect the yards,
terminals, transportation offices, rolling stock repair points, sales
offices and other key system locations to the central computer complex
in Atlanta, Georgia. Operating and traffic data are compiled and
stored to provide customers with information on their shipments
throughout the system. Data processing facilities are capable of
providing current information on the location of every train and each
car on line, as well as related waybill and other train and car
movement data. Additionally, these facilities afford substantial
capacity for, and are utilized to assist management in the performance
of, a wide variety of functions and services, including payroll, car
and revenue accounting, billing, material management activities and
controls, and special studies.
OTHER - The railroads have extensive facilities for support of
operations, including freight depots, car construction shops,
maintenance shops, office buildings, and signals and communications
facilities.
ENCUMBRANCES - Certain railroad equipment is subject to the prior
lien of equipment financing obligations amounting to approximately
$930 million as of Dec. 31, 1999, and $728 million at Dec. 31, 1998.
CAPITAL EXPENDITURES - Capital expenditures for road, equipment
and other property for the past five years were as follows (including
capitalized leases):
<TABLE>
Capital Expenditures
-------------------------------------------
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
Road $ 559 $ 612 $ 599 $ 438 $ 386
Equipment 349 442 306 326 338
Other property 4 6 24 25 33
------ ------ ------ ------ ------
Total $ 912 $1,060 $ 929 $ 789 $ 757
====== ====== ====== ====== ======
</TABLE>
Capital spending and maintenance programs are and have been
designed to assure the ability to provide safe, efficient and reliable
transportation services. For 2000, NS has budgeted $747 million of
capital spending. In addition, NS plans to enter into a lease
financing arrangement for 150 new locomotives, and NS expects to lease
475 articulated bilevels for automotive service.
<PAGE> PAGE 16
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" on Page 44 in
Part II, Item 7, "Management's Discussion and Analysis," and in
Note 16 to the Consolidated Financial Statements on Page 76.
EMPLOYEES - NS employed an average of 31,166 employees in 1999,
compared with an average of 24,300 in 1998. The increase reflects the
substantial number of Conrail employees that became NS employees on
June 1, 1999. The approximate average cost per employee during 1999
was $48,500 in wages and $17,300 in employee benefits.
Approximately 85 percent of NS' railroad employees are
represented by labor unions under collective bargaining agreements
with 14 different labor organizations. See the discussion of "Labor
Agreements" on Page 46 in Part II, Item 7, "Management's Discussion
and Analysis."
GOVERNMENT REGULATION - In addition to environmental, safety,
securities and other regulations generally applicable to all
businesses, NS' railroads are subject to regulation by the STB, which
succeeded the ICC on Jan. 1, 1996. The STB has jurisdiction over some
rates, routes, conditions of service and the extension or abandonment
of rail lines. The STB also has jurisdiction over the consolidation,
merger or acquisition of control of and by rail common carriers. The
Department of Transportation regulates certain track and mechanical
equipment standards.
The relaxation of economic regulation of railroads, begun over a
decade ago by the ICC under the Staggers Rail Act of 1980, has
continued under the STB, and additional rail business could be
exempted from regulation in the future. 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 percent of NS'
freight revenues come from either exempt traffic or traffic moving
under transportation contracts.
Efforts may be made in 2000 to re-subject the rail industry to
unwarranted federal economic regulation. The Staggers Rail Act of
1980, which substantially reduced such regulation, encouraged and
enabled rail carriers to innovate and to compete for business, thereby
contributing to the economic health of the nation and to the
revitalization of the industry. Accordingly, NS and other rail
carriers vigorously will oppose these counterproductive efforts to
reimpose or to authorize reimposing such 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 increasingly important considerations, especially
for higher-valued finished goods, machinery and consumer products.
<PAGE> PAGE 17
Even for raw materials, semi-finished goods and work-in-process, users
are increasingly sensitive to transport arrangements which minimize
problems at successive production stages.
NS' 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 cooperative strategies between railroads and between
railroads and motor carriers enable carriers to compete more
effectively in specific markets.
Item 3. Legal Proceedings.
- ------ -----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security
holders during the fourth quarter of 1999.
<PAGE> PAGE 18
Executive Officers of the Registrant.
- ------------------------------------
Norfolk Southern's executive officers 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. 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,
2000, relating to the officers.
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- ------------------------------------
David R. Goode, 59, Present position since September
Chairman, President and 1992.
Chief Executive Officer
L. I. Prillaman, 56, Present position since August 1998.
Vice Chairman and Served as Executive Vice
Chief Marketing Officer President-Marketing from October
1995 to August 1998, and prior
thereto was Vice President-
Properties.
Stephen C. Tobias, 55, Present position since August 1998;
Vice Chairman and prior thereto was Executive Vice
Chief Operating Officer President-Operations.
Henry C. Wolf, 57, Present position since August 1998;
Vice Chairman and prior thereto was Executive Vice
Chief Financial Officer President-Finance.
James C. Bishop, Jr., 63, Present position since March 1996;
Executive Vice President-Law prior thereto was Vice President-
Law.
R. Alan Brogan, 59, Present position since December 1,
President Norfolk Southern 1999. Served as Executive Vice
Intermodal President-Corporate from April
1998 to December 1, 1999, and
prior thereto was Executive Vice
President-Transportation
Logistics.
John F. Corcoran, 59, Present position since August 1997;
Senior Vice President- prior thereto was Vice President-
Public Affairs Public Affairs.
David A. Cox, 64, Present position since October 1,
Senior Vice President- 1999. Served as Vice President-
Properties and Development Properties from December 1995 to
October 1, 1999, and prior
thereto was Assistant Vice
President-Industrial Development.
<PAGE> PAGE 19
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- ------------------------------------
John W. Fox, Jr., 52, Present position since December 1,
Senior Vice President- 1999. Served as Vice President-
Coal Marketing Coal Marketing from October 1995
to December 1, 1999, and prior
thereto was Assistant Vice
President-Coal Marketing.
James A. Hixon, 46, Present position since November 1,
Senior Vice President- 1999; prior thereto was Vice
Employee Relations President-Taxation.
Jon L. Manetta, 61, Present position since August 1998.
Senior Vice President- Served as Vice President-
Operations Transportation & Mechanical from
December 1995 to August 1998, and
prior thereto was Vice President-
Transportation.
James W. McClellan, 60, Present position since August 1998;
Senior Vice President- prior thereto was Vice President-
Planning Strategic Planning.
Phillip R. Ogden, 59, Present position since August 1998;
Senior Vice President- prior thereto was Vice President-
Engineering Engineering.
Donald W. Seale, 47, Present position since December 1,
Senior Vice President- 1999; prior thereto was Vice
Merchandise Marketing President-Merchandise Marketing.
Paul N. Austin, 56, Present position since November 1,
Vice President and Assistant 1999. Served as Vice President-
to Chairman, President Human Resources and Assistant to
and Chief Executive Chairman from September 1998 to
November 1, 1999, Vice President-
Personnel and Assistant to
Chairman from September 1, 1998,
to September 21, 1998, and prior
thereto was Vice President-
Personnel.
John P. Rathbone, 48, Present position since December
Vice President and Controller 1992.
<PAGE> PAGE 20
PART II
-------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 5. Market for Registrant's Common Stock and Related
- ------ ------------------------------------------------
Stockholder Matters.
-------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
STOCK PRICE AND DIVIDEND INFORMATION
(Unaudited)
<TABLE>
The Common Stock of Norfolk Southern Corporation, owned by 51,123
stockholders of record as of Dec. 31, 1999, is traded on the New York
Stock Exchange with the symbol NSC. The following table shows the
high and low sales prices and dividends per share, by quarter, for
1999 and 1998.
<CAPTION>
Quarter
----------------------------------------------
1999 1st 2nd 3rd 4th
---- --- --- --- ---
<S> <C> <C> <C> <C>
Market price
High $ 32-3/16 $ 36-7/16 $ 31-5/16 $ 25-3/8
Low 26-1/4 25-1/2 24-1/8 19-5/8
Dividends per share $ 0.20 $ 0.20 $ 0.20 $ 0.20
1998 1st 2nd 3rd 4th
---- --- --- --- ---
Market price
High $ 41-3/4 $ 39-1/16 $ 31-1/2 $ 34-15/16
Low 29-1/2 28-5/8 27-7/16 27-7/16
Dividends per share $ 0.20 $ 0.20 $ 0.20 $ 0.20
</TABLE>
<PAGE> PAGE 21
Item 6. Selected Financial Data.
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1996 - 1999
Page One
<CAPTION>
1999(1) 1998 1997 1996
---- ---- ---- ----
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Railway operating revenues $ 5,195 $ 4,221 $ 4,223 $ 4,101
Railway operating expenses 4,477 3,169 3,010 2,936
--------- --------- --------- ---------
Income from
railway operations 718 1,052 1,213 1,165
Other income - net 164 309 170 117
Interest expense on debt 531 516 385 116
--------- --------- --------- ---------
Income from continuing
operations before
income taxes 351 845 998 1,166
Provision for income taxes 112 215 299 413
--------- --------- --------- ---------
Income from continuing
operations before
accounting changes 239 630 699 753
Discontinued operations (2) -- 104 22 17
Cumulative effect
of accounting changes -- -- -- --
--------- --------- --------- ---------
Net income $ 239 $ 734 $ 721 $ 770
========= ========= ========= =========
PER SHARE DATA
Net income - basic $ 0.63 $ 1.94 $ 1.91 $ 2.03
Net income - diluted $ 0.63 $ 1.93 $ 1.90 $ 2.01
Dividends $ 0.80 $ 0.80 $ 0.80 $0.74-2/3
Stockholders' equity
at year end $ 15.50 $ 15.61 $ 14.44 $ 13.26
</TABLE>
<PAGE> PAGE 22
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1996 - 1999
Page Two
<CAPTION>
1999(1) 1998 1997 1996
---- ---- ---- ----
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
FINANCIAL POSITION
Total assets $ 19,250 $ 18,180 $ 17,350 $ 11,234
Total long-term debt,
including current
maturities $ 8,059 $ 7,624 $ 7,459 $ 1,856
Stockholders' equity $ 5,932 $ 5,921 $ 5,445 $ 4,977
OTHER
Capital expenditures $ 912 $ 1,060 $ 929 $ 789
Average number of shares
outstanding (thousands) 380,606 378,749 376,593 379,372
Number of stockholders
at year end 51,123 51,727 50,938 50,748
Average number of employees:
Rail 30,897 24,185 23,323 23,361
Nonrail (2) 269 115 2,494 2,469
--------- --------- --------- ---------
Total 31,166 24,300 25,817 25,830
========= ========= ========= =========
</TABLE>
NOTES
(1) 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.
(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 ($105 million, or
28 cents per diluted share, after-tax) gain. Accordingly, NAVL's
results of operations, financial position and cash flows are
presented as "Discontinued operations."
<PAGE> PAGE 23
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1992 - 1995
Page One
<CAPTION>
1995 1994 1993(3) 1992
---- ---- ---- ----
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Railway operating revenues $ 4,012 $ 3,918 $ 3,746 $ 3,777
Railway operating expenses 2,950 2,875 2,831 2,851
-------- -------- -------- --------
Income from
railway operations 1,062 1,043 915 926
Other income - net 140 86 135 97
Interest expense on debt 113 101 98 109
-------- -------- -------- --------
Income from continuing
operations before
income taxes 1,089 1,028 952 914
Provision for income taxes 391 372 370 328
-------- -------- -------- --------
Income from continuing
operations before
accounting changes 698 656 582 586
Discontinued operations (2) 15 12 (33) (28)
Cumulative effect
of accounting changes -- -- 223 --
-------- -------- -------- --------
Net income $ 713 $ 668 $ 772 $ 558
======== ======== ======== ========
PER SHARE DATA
Net income - basic $ 1.81 $ 1.63 $ 1.85 $ 1.31
Net income - diluted $ 1.80 $ 1.62 $ 1.83 $ 1.30
Dividends $0.69-1/3 $ 0.64 $ 0.62 $ 0.60
Stockholders' equity
at year end $ 12.47 $ 11.73 $ 11.12 $ 10.05
</TABLE>
<PAGE> PAGE 24
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1992 - 1995
Page Two
<CAPTION>
1995 1994 1993(3) 1992
---- ---- ---- ----
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
FINANCIAL POSITION
Total assets $ 10,718 $ 10,403 $ 10,301 $ 10,188
Total long-term debt,
including current
maturities $ 1,638 $ 1,619 $ 1,594 $ 1,648
Stockholders' equity $ 4,829 $ 4,685 $ 4,621 $ 4,233
OTHER
Capital expenditures $ 757 $ 707 $ 639 $ 628
Average number of shares
outstanding (thousands) 392,987 408,904 418,243 424,378
Number of stockholders
at year end 53,401 52,442 51,884 51,200
Average number of employees:
Rail 24,488 24,710 25,531 25,650
Nonrail 2,456 2,458 3,773 4,485
-------- -------- -------- --------
Total 26,944 27,168 29,304 30,135
======== ======== ======== ========
</TABLE>
NOTES
(3) 1993 results include an increase in the provision for income
taxes reflecting a 1% increase in the federal income tax rate,
which reduced net income by $54 million, or 13 cents per diluted
share. "Discontinued operations" includes a $50 million pretax
restructuring charge for the disposition of two NAVL businesses.
Net income also reflects two accounting changes, the cumulative
effect of which increased 1993 net income by $223 million, or
53 cents per diluted share: a change in accounting for income
taxes increased net income by $467 million, with a corresponding
reduction in deferred taxes, and changes in accounting for
postretirement and postemployment benefits decreased net income
by $244 million.
<PAGE> PAGE 25
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1989 - 1991
Page One
<CAPTION>
1991(4) 1990 1989
---- ---- ----
($ in millions, except per share amounts)
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Railway operating revenues $ 3,654 $ 3,786 $ 3,694
Railway operating expenses 3,345 2,969 2,864
--------- --------- ---------
Income from
railway operations 309 817 830
Other income - net 131 142 155
Interest expense on debt 99 78 50
--------- --------- ---------
Income from continuing
operations before
income taxes 341 881 935
Provision for income taxes 112 316 323
--------- --------- ---------
Income from continuing
operations before
accounting changes 229 565 612
Discontinued operations (2 and 4) (199) (9) (6)
Cumulative effect
of accounting changes -- -- --
--------- --------- ---------
Net income $ 30 $ 556 $ 606
========= ========= =========
PER SHARE DATA
Net income - basic $ 0.07 $ 1.14 $ 1.16
Net income - diluted $ 0.07 $ 1.14 $ 1.15
Dividends $0.53-1/3 $0.50-2/3 $ 0.46
Stockholders' equity
at year end $ 9.55 $ 10.52 $ 10.15
</TABLE>
<PAGE> PAGE 26
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
ELEVEN-YEAR FINANCIAL REVIEW
1989 - 1991
Page Two
<CAPTION>
1991(4) 1990 1989
---- ---- ----
($ in millions, except per share amounts)
<S> <C> <C> <C>
FINANCIAL POSITION
Total assets $ 9,959 $ 10,326 $ 10,049
Total long-term debt,
including current
maturities $ 1,387 $ 1,122 $ 838
Stockholders' equity $ 4,093 $ 4,912 $ 5,169
OTHER
Capital expenditures $ 688 $ 605 $ 620
Average number of shares
outstanding (thousands) 443,276 486,284 523,109
Number of stockholders
at year end 53,725 56,187 61,630
Average number of employees:
Rail 27,366 28,697 29,667
Nonrail 4,586 4,584 4,645
-------- -------- --------
Total 31,952 33,281 34,312
======== ======== ========
</TABLE>
NOTES
(4) 1991 operating expenses include a $483 million special charge
primarily for labor force reductions. "Discontinued operations"
includes a $197 million charge primarily for the write-down of
the goodwill portion of NS' investment in NAVL. These charges
reduced net income by $498 million, or $1.12 per diluted share.
<PAGE> PAGE 27
Item 6. Selected Financial Data. (continued)
- ------ -----------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Table of Graphs
Included with the Eleven-Year Financial Review
<TABLE>
The following financial information appears as four (4) separate
graphs with the Eleven-Year Financial Review in the 1999 Norfolk Southern
Corporation Annual Report to Stockholders.
<CAPTION>
(millions) 1999 1998 1997 1996 1995* 1994
- ---------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET INCOME $ 239 $ 734 $ 721 $ 770 $ 733 $ 668
(dollars) 1999 1998 1997 1996 1995* 1994
- --------- ---- ---- ---- ---- ---- ----
EARNINGS PER SHARE-
DILUTED $0.63 $1.93 $1.90 $2.01 $1.86 $1.62
</TABLE>
* 1995 excludes an early retirement charge that reduced net
income by $20 million and diluted EPS by 6 cents.
1999's net income and diluted earnings per share were down 62%
compared with income from continuing operations in 1998,
reflecting the difficulties encountered in the commencement of
operations in the Northern Region and a sharp decline in
export coal.
<TABLE>
<CAPTION>
(dollars) 1999 1998 1997 1996 1995 1994
- --------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
DIVIDENDS PER SHARE $0.80 $0.80 $0.80 $0.74-2/3 $0.69-1/3 $0.64
</TABLE>
Since 1983, NS' first full year after consolidation, the annual
dividend has grown at a compound annual rate of 6.1%.
Stockholders received a dividend yield of 3.9% in 1999,
compared with an average of 1.1% for all S&P 500 stocks.
<TABLE>
<CAPTION>
(millions) 1999 1998 1997 1996 1995 1994
- ---------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES $912 $1,060 $929 $789 $757 $ 707
</TABLE>
NS had made more than $5 billion of capital expenditures since
1994 -- demonstrating commitment to make the investments
necessary to support safe, efficient operations and revenue
growth.
<PAGE> PAGE 28
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 beginning on
Page 50 and the Eleven-Year Financial Review beginning on Page 21.
COMMENCEMENT OF OPERATIONS OVER CONRAIL'S LINES
On June 1, 1999 (the "Closing Date"), NS' railroad subsidiary
(Norfolk Southern Railway Company [NSR]) began operating a substantial
portion of Conrail's properties (NSR's new "Northern Region") under
various agreements with Pennsylvania Lines LLC (PRR), a wholly owned
subsidiary of Consolidated Rail Corporation (CRC) (see Note 2 on
Page 58). As a result, both the railroad route miles operated by NSR
and the number of its railroad employees increased by approximately
50% on that date. Results for 1999 reflect five months (January
through May) of operating the former Norfolk Southern railroad system
and seven months (June through December) of operations that include
the Northern Region.
Difficulties encountered in the assimilation of the Northern
Region into NSR's existing system resulted in system congestion, an
increase in cars on line, increased terminal dwell time and reduced
system velocity. These service issues and actions taken to address
them increased operating expenses, primarily labor costs and equipment
costs, including car hire and locomotive rentals. Moreover, revenues
were lower than expected as some customers diverted traffic to other
modes of transportation. Income from railway operations is expected to
continue to be adversely affected until these revenue and expense
issues have been resolved. A prolonged continuation of these
operational difficulties could have a substantial adverse impact on
NS' financial position, results of operations and liquidity.
SUMMARIZED RESULTS OF OPERATIONS
1999 Compared with 1998
- -----------------------
Net income in 1999 was $239 million, a decrease of 67%. Net
income in 1998 included the $105 million gain from the sale of NS'
former motor carrier subsidiary (see Note 15 on Page 75). Income from
continuing operations, which excludes both the motor carrier's results
of operations prior to its sale and the gain from its sale, declined
62%. The decrease resulted from lower income from railway operations
and from lower Conrail earnings before the Closing Date. The decline
in income from railway operations reflected the difficulties in
integrating the Northern Region and a sharp decline in export coal
traffic.
Diluted earnings per share of 63 cents were down 67%. Diluted
earnings per share from continuing operations were down 62%.
1998 Compared with 1997
- -----------------------
Net income in 1998 was $734 million, an increase of 2%,
reflecting the $105 million gain from the sale of the former motor
carrier subsidiary. Income from continuing operations was
$630 million, a decrease of 10%. The decline was principally due to
Conrail-related integration expenses and additional expenses related
to the start-up of the Ford mixing centers.
Diluted earnings per share of $1.93 were up 2%. Diluted earnings
per share from continuing operations of $1.65 were down 10%.
<PAGE> PAGE 29
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
<TABLE>
INCOME FROM RAILWAY OPERATIONS
(Shown as a graph in the Annual Report to Stockholders)
(millions)
<CAPTION>
1999 1998 1997 1996 1995* 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 718 $1,052 $1,213 $1,165 $1,096 $1,043
</TABLE>
Income from railway operations decreased 32% in 1999,
reflecting both service issues that arose after the Closing
Date and a sharp decline in export coal revenues.
* 1995 excludes a $34 million charge for an early retirement
program.
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
- --------------------------
Railway operating revenues were $5.2 billion in 1999 and were
$4.2 billion in both 1998 and 1997. Revenues in 1999 reflect the
commencement of operations in the Northern Region on June 1. Revenues
were lower than expected because of service issues associated with the
expansion of the network and a sharp decline in export coal traffic.
The following table presents a three-year comparison of revenues by
market group.
<TABLE>
RAILWAY OPERATING REVENUES BY MARKET GROUP
<CAPTION>
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
<S> <C> <C> <C>
Coal $1,315 $1,252 $1,301
General merchandise:
Automotive 740 566 492
Chemicals 720 574 585
Paper/clay/forest 575 534 539
Metals/construction 562 373 368
Agriculture/consumer
products/
government 453 383 391
------ ------ ------
General merchandise 3,050 2,430 2,375
Intermodal 830 539 547
------ ------ ------
Total $5,195 $4,221 $4,223
====== ====== ======
</TABLE>
In 1999, revenues increased for all market groups as a result of
traffic handled in the Northern Region. Prior to the Closing Date,
revenues for all commodity groups, except automotive, were below or
even with those of the prior year. As shown in the following table,
the full-year volume gains attributable to expanded operations
produced the revenue increase. Revenue per unit improved principally
due to the effects of the consolidation of Triple Crown Services
Company's revenues and Northern Region traffic; however, the effects
of changes in the mix of traffic, most notably the reduced export coal
traffic, more than offset the effects of the revenue-per-unit
improvements.
In 1998, revenue increases in the automotive and metals and
construction groups were offset by revenue decreases in the other
market groups. Volume gains were more than offset by lower revenue per
unit. However, almost all of the volume increase and revenue per unit
<PAGE> PAGE 30
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
decrease were mixing-center related (see the discussion under the
"Automotive" caption, below). Revenues for the remaining market groups
declined $76 million, $60 million of which resulted from lower traffic
volume and $16 million of which resulted from lower revenue per unit that
was mitigated by favorable effects from changes in traffic mix.
<TABLE>
RAILWAY OPERATING REVENUE VARIANCE ANALYSIS
Increases (Decreases)
<CAPTION>
($ in millions) 1999 vs. 1998 1998 vs. 1997
--------------- ------------- -------------
<S> <C> <C>
Volume $ 1,007 $ 48
Revenue per unit/mix (33) (50)
------- -------
Total $ 974 $ (2)
======= =======
</TABLE>
COAL tonnage increased 18% in 1999, but revenues increased by
only 5%. The positive revenue effects of tonnage handled in the
Northern Region were largely offset by significantly lower export coal
tonnage. In addition, a larger proportion of the Northern Region
traffic is shorter-haul (lower average revenue) traffic. Coal revenues
represented 25% of total railway operating revenues in 1999, and 88%
of coal shipments originated on lines operated by NS. In 1998, coal
tonnage was unchanged compared with 1997, but revenues decreased 4%.
An increase in utility tonnage, especially shorter-haul traffic,
helped offset decreases in longer-haul (higher average revenue) export
and domestic metallurgical traffic.
<TABLE>
TOTAL COAL, COKE AND IRON ORE TONNAGE
<CAPTION>
(In millions of tons) 1999 1998 1997
--------------------- ---- ---- ----
<S> <C> <C> <C>
Utility 108 83 76
Export 18 25 29
Domestic metallurgical 22 18 21
Other 10 8 8
--- --- ---
Total 158 134 134
=== === ===
</TABLE>
Utility coal traffic increased 30% in 1999, due to the expansion
of operations into the Northern Region.
In 1998, utility coal traffic increased 9%, due to rising
electricity production, the return of some traffic to rail and
increased business from several customers.
The near-term outlook for utility coal remains positive. U.S.
demand for electricity continues to increase at a rate greater than
generation capacity is being added, and coal-fired generation
continues to be the cheapest marginal source of electricity. Many
underutilized coal-fired power plants are making the transition from
peak-only generation to full-time generation. NS also could benefit
from access to several utility coal customers not now receiving coal
by rail. However, competitive pressures on utilities to reduce costs
could put price pressure on generation source fuels, including NS-
delivered coal. NS continues to work with utility customers to reduce
the delivered price of coal by developing more efficient coal handling
facilities, which lead to more efficient train operations.
Many of the mines served by NS produce coals that satisfy the
Phase II requirements of the Clean Air Act Amendments. In the Northern
<PAGE> PAGE 31
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Region, NS now has access to high-quality, low-cost coal that can be
blended with coal from the Powder River Basin to meet the Phase II
requirements. In addition, substantial banks of sulfur dioxide allowances
held by many NS-served utilities should continue to provide a market for
other NS-served mines for nearly a decade. However, more stringent
environmental rules have been promulgated and are scheduled to be
implemented during the next decade, some as early as 2003. Most of
these rules are being challenged in court; but, if they survive and
are implemented, they could increase the cost of coal-fired
generation. Also, the Kyoto Protocol, if ratified and implemented,
could put additional cost pressures on some coal-fired generation.
A recent decision by a federal district court judge in West
Virginia holds that some common mountaintop mining practices in the
coal industry are illegal. There are a small number of mountaintop
mining operations on NS' lines; however, if sustained, the decision
could have an adverse effect on these coal mining operations and on
NS' coal traffic, revenues and royalties (see Note 3 on Page 61,
"Royalties from coal").
Export coal tonnage decreased 28% in 1999, despite additional
traffic handled in the Northern Region. The lower traffic resulted
from reduced demand for U.S. coking coal (in part, the result of a
strong U.S. dollar), productivity gains made by foreign producers,
lower ocean transportation rates and lower foreign royalties. Steam
coal exports continued to be noncompetitive on price, making domestic
markets more attractive for U.S. producers.
In 1998, export coal tonnage decreased 14%, due to weak economies
in Asia and a strong U.S. dollar. The dollar gained 20% or more
compared with the currencies of other countries (such as Australia,
South Africa and Indonesia) that provide the primary competition for
U.S. export coal. A significant decline in Asian demand for coal
created supplies that competed at deeply discounted prices with U.S.
export coal in Europe and South America. Steam coal exports declined
to 0.4 million tons in 1998, compared with 1.7 million tons in 1997.
U.S. low-sulfur coals were not price-competitive due to lower-cost
foreign production and the strength of the dollar.
Export coal tonnage is expected to continue to suffer from the
effects of strong global competition. Despite rising steel production,
continued pricing pressure from foreign producers is expected to keep
demand for U.S. coking coal weak. In addition, the Kyoto Protocol, if
implemented, could increase pressure to reduce the use of carbon-based
fuels.
Domestic metallurgical coal, coke and iron ore traffic increased
22% in 1999, as the addition of Northern Region traffic more than
offset the effects of reduced U.S. steel production. Lower-priced
steel imports led to reduced production levels at integrated steel
manufacturers, especially through the first three quarters of 1999,
thereby dampening demand for raw materials.
In 1998, domestic metallurgical coal, coke and iron ore traffic
declined 14%, due to plant closures, reduced blast furnace operations
and the continuation of aggressive producer pricing of high-volatile
metallurgical coals not located on NS' lines.
Domestic metallurgical coal, coke and iron ore traffic is
expected to benefit from recent strengthening of domestic and foreign
steel markets. Several domestic blast furnaces are expected to resume
production in 2000. However, long-term demand is expected to continue
to decline, due to advanced technologies that allow production of
steel using less coal.
Other coal traffic, primarily steam coal shipped to manufacturing
plants, increased 25% in 1999, due to the expansion of operations in
the Northern Region, and was flat in 1998.
<PAGE> PAGE 32
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
<TABLE>
COAL
(Shown as a graph in the Annual Report to Stockholders)
(millions)
<CAPTION>
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Export $ 204 $ 314 $ 380 $ 374 $ 353 $ 340
Domestic 1,111 938 921 931 915 950
------ ------ ------ ------ ------ ------
$1,315 $1,252 $1,301 $1,305 $1,268 $1,290
====== ====== ====== ====== ====== ======
</TABLE>
Revenues increased $63 million, or 5%, in 1999 as the
effects of Northern Region traffic were largely offset by a
sharp decline in export coal traffic. This group includes
utility coal, export coal, domestic metallurgical coal and
industrial coal, coke and iron ore.
GENERAL MERCHANDISE traffic volume (carloads) increased 24%, and
revenues increased 26%, in 1999, due to the addition of Northern
Region traffic. Service issues resulted in traffic diversions in all
market groups. In 1998, traffic volume increased 5%, and revenues
increased 2%, driven by higher automotive revenues.
Automotive traffic volume increased 26%, and revenues increased
31%, in 1999, largely reflecting the expansion of operations in the
Northern Region and record vehicle production. The new NS-served
Toyota plant in Princeton, Ind., and the new vehicle parts
distribution center in Dayton, Ohio, also contributed to the increase.
NS' mixing center network is not yet fully utilized due to network
design and service issues and equipment shortages caused by extended
cycle times. In addition, service issues after the Closing Date
resulted in significant traffic diversions.
In 1998, automotive carloads increased 35%, and revenues
increased 15%. Finished vehicles led the growth, as carloads increased
54% and revenues increased 19%, primarily due to new business through
the Ford mixing centers. Full production volume at the Mercedes-Benz
plant in Vance, Ala., and the Toyota minivan line at Georgetown, Ky.,
also contributed to the increases. Vehicle parts traffic volume and
revenues remained steady despite the effects of the mid-year strike at
General Motors.
A substantial portion of the 1998 increase in carloads resulted
from the nature of the mixing centers. Previously, carloads of
vehicles went from plant to distribution center, where vehicles were
classified and loaded onto trucks for transport to dealers. Now,
carloads of vehicles, mostly in unit-train service, go from plant to
the mixing centers, where vehicles are sorted by destination and
loaded onto other trains in a mix suitable for direct transport to
dealers. As a result, carload counts have increased; each vehicle that
is handled through the centers arrives on one carload and departs on
another carload. This hub-and-spoke method of distribution is intended
to improve Ford's delivery logistics and reduce its inventory costs
and order-to-delivery times.
Light vehicle production in 2000 is expected to decline 3% from
the record level of 1999. However, NS expects to recapture diverted
traffic as its service improves and to benefit from increased
shipments of finished vehicles from Ford's Norfolk, Va., assembly
plant and from the introduction of new sport utility vehicles at BMW's
Greer, S.C., assembly plant and at Toyota's second plant in Princeton,
Ind., and increased parts business from General Motors.
<PAGE> PAGE 33
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
<TABLE>
AUTOMOTIVE
(Shown as a graph in the Annual Report to Stockholders)
(millions)
<CAPTION>
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 740 $ 566 $ 492 $ 489 $ 449 $ 429
</TABLE>
Revenues increased $174 million, or 31%, in 1999, due to
the expansion of operations into the Northeast, new
vehicles and parts business and record vehicle
production. This 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.
Chemicals traffic volume increased 18%, and revenues increased
25%, in 1999, due to the addition of Northern Region traffic. Chemical
production increased slightly during the year, but fertilizer
production declined. In addition, significant production cutbacks at
plants served by NS affected shipments of both sulfur and fertilizer.
Shipments of chlorine, caustic soda and PVC plastics rebounded from
1998 levels, benefiting from an improved Asian economy. The location
of new and expanded processing plants on lines NS serves improved
shipments of plastic pellets. Chemicals shipments also increased
through NS' Thoroughbred Bulk Transfer (TBT) facilities that handle
chemicals and bulk commodities for customers not located on lines it
serves.
In 1998, chemicals traffic volume decreased 1%, and revenues
decreased 2%, the first decline since 1989. The weak economies in Asia
and softness in certain domestic markets adversely affected shipments
of products for the vinyl, polyester and pulp markets. In addition,
nationwide rail service issues, particularly early in the year, caused
some customers to divert traffic to truck and barge. However, several
NS-served facilities with new and expanded plant capacity increased
shipments of plastics and petroleum products, somewhat offsetting
these reductions. NS also increased traffic through its TBT
facilities.
Chemicals revenues in 2000 are expected to benefit from plant
expansions, increases in U.S. chemical production and extended market
reach through the TBT facilities.
<TABLE>
CHEMICALS
(Shown as a graph in the Annual Report to Stockholders)
(millions)
<CAPTION>
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 720 $ 574 $ 585 $ 560 $ 541 $ 538
</TABLE>
Revenues increased $146 million, or 25%, in 1999,
reflecting the addition of Northern Region traffic. This
group includes fertilizers, sulfur and related chemicals,
petroleum products, chlorine and bleaching compounds,
plastics, industrial chemicals, chemical wastes and
municipal wastes.
<PAGE> PAGE 34
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Paper, clay and forest products traffic volume increased 4%, and
revenues increased 8%, in 1999, principally due to the expansion of
operations into the Northern Region. The closure of four major paper
mills and some chip mills late in 1998, coupled with the effects of
continued consolidation and weak demand within the paper industry, had
a negative impact on 1999 traffic volume.
In 1998, paper, clay and forest products traffic volume decreased
3%, and revenues declined 1%. Traffic volume increases in the first
three quarters were offset by a sudden and pronounced weakness in the
paper industry in the fourth quarter, adversely affecting shipments of
paper, wood fiber and kaolin clay. Decreased domestic and foreign
demand resulted in both widespread paper mill downtime late in the
year and indefinite closure of several NS-served paper mills. Record
carloads and revenues from shipments of lumber and wood products to
meet demand in the housing construction industry partially offset the
effects of these declines.
The paper industry is expected to continue to experience weak
demand during 2000.
<TABLE>
PAPER, CLAY AND FOREST PRODUCTS
(Shown as a graph in the Annual Report to Stockholders)
(millions)
<CAPTION>
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 575 $ 534 $ 539 $ 513 $ 537 $ 522
</TABLE>
Revenues increased $41 million, or 8%, in 1999,
principally due to the expansion of operations into the
Northern Region. This group includes lumber and wood
products, pulpboard and paper products, wood fibers,
woodpulp, scrap paper and clay. NS serves 83 paper mills,
94 paper distribution centers and more than 100 lumber
reload centers.
Metals and construction traffic volume increased 57%, and
revenues increased 51%, in 1999, due to the addition of Northern
Region traffic. NS' expanded operations give it access to numerous
steel mills, processors and distribution facilities. Continued growth
from new mini-mills and steel processors locating in NS' service
territory offset the effects of a weaker scrap market. Construction
traffic benefited from continued strength in housing starts and
highway construction in the Southeast. Agricultural limestone
shipments were higher in the first half of the year, due to an early
planting season as a result of the mild winter. In addition, new
cement terminals on NS' lines generated additional traffic.
In 1998, metals and construction traffic volume was unchanged,
and revenues increased 1%. The strong performance in the metals market
during 1997 was repeated in the first half of 1998, due to improved
efficiency at integrated mills and the continued growth of new mini-
mills and steel processors in NS' service territory. However, the
domestic metals market weakened in the second half of 1998, due to an
increase in the supply of lower-priced, imported steel. Construction
traffic and revenues increased, due to increased highway and housing
construction activity in the Southeast.
Metals revenues are expected to show the benefits of continued
strength in the steel and construction industries.
<PAGE> PAGE 35
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
<TABLE>
METALS AND CONSTRUCTION
(Shown as a graph in the Annual Report to Stockholders)
(millions)
<CAPTION>
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 562 $ 373 $ 368 $ 354 $ 349 $ 330
</TABLE>
Revenues increased $189 million, or 51%, in 1999, due to
the addition of traffic in the Northern Region. This
group includes steel, aluminum products, machinery, scrap
metals, cement, aggregates, bricks and minerals.
Agriculture, consumer products and government traffic volume
increased 15%, and revenues increased 18%, in 1999, reflecting new
access to the large Northeast consumer markets. Service issues that
arose early in the year due to harsh weather conditions and continued
during efforts to integrate the Northern Region had an adverse effect
on traffic volume. In addition, soybean traffic was negatively
affected by low-priced imports from South America.
In 1998, agriculture, consumer products and government traffic
volume decreased 3%, and revenues declined 2%. Weak export and soybean
meal markets adversely affected shipments. Sweeteners volume and
revenues declined, as a strong beet sugar crop negatively affected
cane sugar shipments out of the South. Increased revenues from grain,
soybeans and feed ingredients from the longer-haul Southeast feed and
corn processing markets somewhat offset the effects of the declines.
Moderate growth is expected in 2000 as service levels improve and
more benefits are realized from NS' expanded operations. Continued low
prices and abundant supply are expected to increase consumption of
corn for feed and processing. However, the export market for other
grain products is expected to remain weak.
<TABLE>
AGRICULTURE, CONSUMER PRODUCTS AND GOVERNMENT
(Shown as a graph in the Annual Report to Stockholders)
(millions)
<CAPTION>
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 453 $ 383 $ 391 $ 393 $ 394 $ 380
</TABLE>
Revenues increased $70 million, or 18%, in 1999,
reflecting the addition of Northern Region traffic. This
group includes soybeans, wheat, corn, animal and poultry
feed, food oils, flour, beverages, canned goods,
sweeteners, consumer products and items for the military.
INTERMODAL traffic volume increased 31%, and revenues increased
54%, in 1999, due to the addition of Northern Region traffic and the
consolidation of Triple Crown Services Company (TCS) revenues,
beginning June 1 (see Note 2 on Page 58). More than half of the
increase in revenue per unit resulted from the effects of
consolidating TCS. Prior to June 1, NS' revenues included only the
amounts for rail services it performed under contract to TCS, but NS'
volume included most TCS units. NS was awarded the majority of
Conrail's postal business, which it handles through a new subsidiary,
Thoroughbred Direct Intermodal Services (TDIS), a logistics company
headquartered in Plymouth Meeting, Pa. Intermodal traffic volume
<PAGE> PAGE 36
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
declined in the first five months of 1999, reflecting the network
redesign implemented in August 1998 which pared a significant number
of lanes and associated volumes. Service issues following the integration
of the Northern Region also negatively affected volume and revenues.
In 1998, intermodal traffic volume decreased 2%, and revenues
decreased 1%. The decline, the first in 12 years, was due to the
service network redesign that was implemented in August. As a result,
trailer traffic volume declined 16%, but this decrease was largely
offset by increases in both container traffic volume and revenues
(respectively, 2% and 5%) and TCS traffic volume and revenues
(respectively, 5% and 9%).
Intermodal revenues are expected to continue to benefit from the
expansion of operations in the Northeast, as well as terminal and line
capacity expansions and equipment additions. However, APL, which
generated 247,000 units of annualized volume on NS, moved almost all
of this volume to CSX after their strategic alliance. Most of this
traffic had been shifted by December 1999.
<TABLE>
INTERMODAL
(Shown as a graph in the Annual Report to Stockholders)
(millions)
<CAPTION>
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 830 $ 539 $ 547 $ 487 $ 474 $ 429
</TABLE>
Revenues increased $291 million, or 54%, in 1999, due to
the addition of Northern Region traffic and the
consolidation of Triple Crown Services Company's
revenues. This group handles trailers, domestic and
international containers, Triple Crown Services equipment
and equipment for intermodal marketing companies,
international steamship lines, truckers and other
shippers.
Railway Operating Expenses
- --------------------------
Railway operating expenses increased 41% in 1999, while
carloadings increased 24%. The expense increase was attributable to
the commencement of operations in the Northern Region, and includes
significant costs arising from the service issues experienced after
the Closing Date.
Railway operating expenses increased 5% in 1998, while
carloadings increased 1%. The expense increase was mostly attributable
to Conrail-related integration expenses, and additional expenses,
including start-up costs, related to the Ford mixing centers.
As a result, the railway operating ratio, which measures the
percentage of railway revenues consumed by railway expenses, was 86.2%
in 1999, compared with 75.1% in 1998 and the record-low 71.3% in 1997.
Management estimates that the integration-related service issues
in the Northern Region, including estimated traffic diversions,
resulted in more than half of the increase in the railway operating
ratio in 1999. The remaining increase was principally attributable to
the change in traffic mix (more resource-intensive traffic, such as
automotive and intermodal) and the new traffic in the Northern Region,
coupled with the decrease in export coal traffic.
In 1998, the railway operating ratio was adversely affected by
Conrail-related integration expenses and a change in traffic mix
related to the growth in automotive traffic coupled with the change in
coal traffic mix. Automotive traffic includes some of NS' most time-
sensitive and resource-intensive business, requiring more trains,
increased handling costs and higher equipment rents.
<PAGE> PAGE 37
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
The railway operating ratio is not expected to return to pre-
Closing Date levels in the near term, due to changes in NS' traffic
mix and the higher cost structure of the Conrail properties now
operated by NSR. However, the railway operating ratio is expected to
show favorable year-to-year comparisons after the first quarter of
2000.
The following table shows the changes in railway operating
expenses summarized by major classifications.
<TABLE>
RAILWAY OPERATING EXPENSES
Increases (Decreases)
<CAPTION>
($ in millions) 1999 vs. 1998 1998 vs. 1997
--------------- ------------- -------------
<S> <C> <C>
Compensation and benefits $ 363 $ 87
Materials, services and rents 421 121
Conrail rents and services 311 --
Depreciation 38 16
Diesel fuel 81 (53)
Casualties and other claims 43 (28)
Other 51 16
------ ------
Total $1,308 $ 159
====== ======
</TABLE>
Compensation and benefits, which represented 41% of total railway
operating expenses in 1999, increased 24% in 1999 and 6% in 1998.
In 1999, the increase resulted largely from the almost 50%
increase in the railroad work force following commencement of
operations in the Northern Region. The service issues encountered
after the expansion of operations also contributed to the increase,
including $49 million for the Special Work Incentive Program available
to union employees during much of the third quarter. These increases
were mitigated by reduced stock-based incentive compensation, the
absence of bonus accruals and reduced pension and other postretirement
benefits expenses. NS has substantial unrecognized gains relating to
its over-funded pension plan; amortization of these gains will
continue to be included in "Compensation and benefits" expenses (see
Note 10 on Page 68).
In 1998, higher wages and salaries -- results of additional
staffing in anticipation of the Closing Date and union wage increases,
including the effect of an increase in the bonus fund for locomotive
engineers -- were offset somewhat by lower expenses for pension
benefits, due to favorable investment returns on pension plan assets.
Also contributing to the increase were new FRA train inspection
requirements and a higher Railroad Unemployment Tax rate.
In January 2000, NS announced a voluntary early retirement
program that included enhancements to pension benefits for eligible
nonunion employees. Approximately 1,180 employees, or 20% of NS'
nonunion work force, were eligible for the program; and 916 accepted
and retired effective March 1. Benefits will be paid out of NS' over-
funded pension plan. Actions also were taken in the first quarter of
2000 to reduce the size of the union work force. These work force
reduction efforts were taken to resize employment levels and reduce
operating expenses in response to changes in NS' business. The cost of
these work force reductions will be reflected in expenses in the first
quarter of 2000.
<PAGE> PAGE 38
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Materials, services and rents includes items used for the
maintenance of the railroads' lines, structures and equipment; the
costs of services purchased from outside contractors, including the
net costs of operating joint (or leased) facilities with other
railroads; and the net cost of equipment rentals. This category of
expenses increased 52% in 1999 and 18% in 1998.
The 1999 increase reflected the expanded operations in the
Northern Region; additional costs attributable to the service issues,
including costs for alternate transportation to meet the needs of
customers; and the effects of consolidating TCS.
The 1998 increase was principally due to Conrail-related
integration costs and higher-than-anticipated mixing center costs
associated with the increase in automotive traffic. Higher equipment
rents and locomotive repair expenses also contributed to the increase.
Equipment rents, which represent the cost to NS of using
equipment (mostly freight cars) owned by other railroads or private
owners, less the rent paid to NS for the use of its equipment,
increased 93% in 1999 and 18% in 1998. The 1999 increase principally
was due to: (1) increased volume attributable to expanded operations,
(2) higher rental costs for freight cars, as service issues increased
car cycle times and (3) costs for short-term locomotive leases to
improve system fluidity. In addition, Conrail historically rented a
higher percentage of its freight cars than has NS, resulting in higher
equipment rents in the Northern Region. The 1998 increase was due to:
(1) rents for equipment needed to support the increase in automotive
traffic, (2) reduced rents received from the leasing of owned
locomotives and (3) increased lease expenses for equipment obtained to
meet anticipated demand after the Closing Date. These 1998 increases
were somewhat offset by higher receipts on NS-owned freight cars and
auto racks.
Locomotive and car repair costs increased in 1999 due to the
expansion of operations and to the higher repair costs associated with
the leased locomotives. Locomotive repair costs increased in 1998 due
to the higher traffic levels and an increase in the average number of
locomotives in service, reflecting the retention of older units.
Conrail rents and services, a new category of expense arising
from the expansion of operations on June 1, amounted to $311 million
in 1999. This item includes amounts due to PRR and CRC for: (1) use of
their operating properties and equipment, (2) CRC's operation of the
Shared Assets Areas and (3) CRC's operation of certain transition
facilities. Also included is NS' equity in Conrail's net earnings
since June 1, plus additional amortization related to the difference
between NS' investment in Conrail and its underlying equity (see
Note 2 on Page 58).
Depreciation expense (see Note 1, "Properties," on Page 57 for
NS' depreciation policy) was up 9% in 1999 and 4% in 1998. Increases
in both years were due to property additions, reflecting substantial
levels of capital spending.
Diesel fuel expenses increased 47% in 1999, but declined 23% in
1998. The increase in 1999 resulted from a 19% increase in the average
price per gallon, due to a sharp rise in the last half of the year,
and higher consumption, primarily the result of the additional
Northern Region traffic. The 1998 decrease was due to a 26% drop in
the average price per gallon, which was the lowest since 1988,
somewhat offset by a 3% increase in consumption.
Casualties and other claims expenses (including the estimates of
costs related to personal injury, property damage and environmental
matters) increased 45% in 1999, but decreased 23% in 1998. The 1999
increase principally resulted from higher personal injury accruals
related to the increased size of the work force as well as higher
environmental expenses. The 1998 decrease was due to cost recoveries
from third parties and lower accruals for environmental remediation
costs and to reduced personal injury expenses.
<PAGE> PAGE 39
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
The largest component of casualties and other claims expense is
personal injury costs. Costs related to so-called "occupational"
injuries continued to increase. Within the past decade, there has been
a dramatic increase in the number of these types of claims. In 1999,
about two-thirds of the total employee injury cases settled and one-
quarter of settlement payments made were related to occupational
claims. These claims generally do not relate to a specific accident or
event, but rather result from a claimed exposure over time to some
condition of employment. As a result, many of these claims are
asserted by former or retired employees. NS continues to work actively
to eliminate all accidents and exposure risks and to control
associated costs.
The rail industry remains uniquely susceptible to litigation
involving job-related accidental injury and occupational claims
because of an outmoded law, the Federal Employers' Liability Act
(FELA), originally passed in 1908 and applicable only to railroads.
This law, which covers employee claims for job-related injuries,
promotes an adversarial claims environment and produces results that
are unpredictable and inconsistent, at a far greater cost to the rail
industry than the no-fault workers' compensation system to which
nonrail competitors and other employers are universally subject. The
railroads have been unsuccessful so far in efforts to persuade
Congress to replace FELA with a no-fault workers' compensation system.
NS maintains substantial amounts of commercial insurance for
potential third-party liability and property damage claims. It also
retains reasonable levels of risk through self-insurance.
Other expenses increased 31% in 1999 and 11% in 1998. The 1999
increase resulted from the expansion of operations, including property
and other taxes related to the Northern Region, and to costs arising
from the service issues. The 1998 increase principally resulted from:
(1) higher property and other taxes, due to the effects of favorable
adjustments in prior years resulting from settlements with taxing
authorities; and (2) increased travel expenses, mostly attributable to
planning in advance of the Closing Date.
Income Taxes
- ------------
Income tax expense in 1999 was $112 million, for an effective
rate of 32%, compared with an effective rate of 25% in 1998 and 30% in
1997. Excluding the equity in Conrail's after-tax earnings, the
effective rate was 34% in 1999, 33% in 1998 and 34% in 1997.
The effective rates in all three years were below the statutory
federal and state rates -- results of investments in coal-seam gas
properties, favorable adjustments upon filing the prior year tax
returns and favorable adjustments to state tax liabilities. In
addition, 1998 and 1997 benefited from investments in corporate-owned
life insurance, and 1998 benefited from favorable adjustments
resulting from settlement of federal income tax years 1993 and 1994.
Discontinued Operations
- -----------------------
Income from discontinued operations in 1998 included the
$105 million after-tax gain from the sale of NS' motor carrier
subsidiary (see Note 15 on Page 75). Motor carrier operations in 1998
(through March 28) produced a $1 million loss; these same operations
produced income of $22 million in 1997.
<PAGE> PAGE 40
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities, NS' principal source of
liquidity, decreased $357 million, or 40%, in 1999, and $260 million,
or 23%, in 1998. Both declines reflected the reductions in income from
operations, mitigated somewhat by lower income tax payments. In 1998,
higher interest payments related to the debt issued in mid-1997 in
connection with the Conrail transaction also contributed to the
decline in operating cash flow. The large change in "Accounts
receivable" and "Current liabilities other than debt" in the 1999 cash
flow statement primarily resulted from the commencement of operations
in the Northern Region. In addition, collection of accounts receivable
has slowed.
NS' working capital deficit of $553 million at Dec. 31, 1999,
included $400 million of notes due May 1, 2000. NS currently has the
capability to issue commercial paper to meet its more immediate
working capital needs (see the discussion of financing activities,
below).
<TABLE>
CASH PROVIDED BY OPERATIONS
(Shown as a graph in the Annual Report to Stockholders)
(millions)
<CAPTION>
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
$ 533 $ 890 $1,150 $1,198 $1,234 $1,144
</TABLE>
Cash provided by operations declined significantly in 1999
and 1998, reflecting lower income from railway
operations. Cash provided by operations is NS' principal
source of liquidity.
Cash used for investing activities in 1999 decreased 11%,
compared with 1998. Investing activities in 1999 included
approximately $160 million more of borrowings against the net cash
surrender value of company-owned life insurance, compared with 1998.
In addition, 1999 included $60 million in proceeds from the sale of
certain licensing arrangements and the sale of NS' signboard business.
Investing activities in 1998 included the $207 million of
proceeds from the sale of NS' motor carrier subsidiary. Investing
activities in 1997 included the costs of NS' acquisition of its
interest in Conrail. Property additions account for most of the
recurring spending in this category.
The following tables show capital spending, track and equipment
statistics for the past five years. Capital expenditures include
amounts relating to capital leases, which are excluded from the
Consolidated Statements of Cash Flows (see Note 7, "Capital Lease
Obligations," on Page 66).
<TABLE>
CAPITAL EXPENDITURES
<CAPTION>
($ in millions) 1999 1998 1997 1996 1995
--------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Road $ 559 $ 612 $ 599 $ 438 $ 386
Equipment 349 442 306 326 338
Other property 4 6 24 25 33
------ ------ ------ ------ ------
Total $ 912 $1,060 $ 929 $ 789 $ 757
====== ====== ====== ====== ======
</TABLE>
Capital expenditures decreased 14% in 1999, but increased 14% in
1998. Both variances were largely attributable to significant outlays
in 1998 for roadway projects and equipment in anticipation of the
Closing Date. In addition, 1997 and 1998 included significant
expenditures for automotive-related projects.
<PAGE> PAGE 41
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
<TABLE>
TRACK STRUCTURE STATISTICS (CAPITAL AND MAINTENANCE)
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Track miles of
rail installed 403 429 451 401 403
Miles of track
surfaced 5,087 4,715 4,703 4,686 4,668
New crossties
installed
(millions) 2.3 2.0 2.2 1.9 2.0
</TABLE>
<TABLE>
AVERAGE AGE OF OWNED RAILWAY EQUIPMENT
<CAPTION>
(Years) 1999 1998 1997 1996 1995
------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Freight cars 23.8 23.6 23.0 22.3 22.0
Locomotives 15.4 15.4 15.3 15.4 15.7
Retired locomotives 22.7 20.6 23.3 24.4 22.6
</TABLE>
In addition to NS-owned equipment, approximately 20% of the
freight car fleet and 30% of the locomotive fleet is leased from PRR
(see Note 2 on Page 58).
The 1998 decrease in the average age of retired locomotives
resulted from a disproportionate share of early retirements due to
casualties and service failures and retention of older units in
anticipation of the Closing Date.
Since 1988, NS has rebodied about 29,000 coal cars, and plans to
continue that program at least through the first half of 2000. This
work, performed at NS' Roanoke Car Shop, converts 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 2000, NS has budgeted $747 million for capital expenditures.
In addition, NS plans to enter into a lease financing arrangement for
150 new locomotives. The anticipated spending includes $576 million
for roadway projects, of which $284 million is for track and bridge
program work. Also included are projects to increase track and
terminal capacity. Equipment spending includes the rebodying of coal
and coke hoppers, the purchase of 255 multilevel automobile racks, the
upgrading of existing locomotives and the modification of open coil
steel cars. NS also plans to lease 475 articulated bilevels for
automobile service.
Cash provided by financing activities was $90 million in 1999 and
included proceeds from the sale of notes, commercial paper and
equipment trust certificates as well as $149 million of borrowings
from a PRR subsidiary (see Note 2 on Page 58). Proceeds from
borrowings in 1998 included amounts received from the sale of
commercial paper and equipment trust certificates, and in 1997
included debt issued to finance NS' share of the cost of acquiring
Conrail stock. Debt repayments in all three years included repayment
of some commercial paper. Financing activities in 1997 also included
$72 million of credit facility costs related to certain now-terminated
commitments under credit agreements that were in place to support NS'
tender offer for all shares of Conrail. NS' debt-to-total
capitalization ratio was 58% at the end of 1999 and 56% at the end of
1998.
NS currently has in place a $2.8 billion credit facility to
support its commercial paper program. In addition, NS has issued only
$400 million of debt under its November 1998 $1 billion shelf
registration. NS expects to issue additional debt in 2000 to refinance
the Senior Notes maturing in May.
<PAGE> PAGE 42
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
NS is subject to various financial covenants with respect to its
debt and under its credit agreement, including a maximum leverage
ratio restriction (see Note 7, "Debt Covenants," on Page 66). The
maximum leverage ratio tightens in the first quarter of 2001.
CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY
Through May 31, 1999, Conrail's results of operations include
freight line-haul revenues and related expenses. After the Closing
Date, June 1, 1999, its results reflect its new structure and
operations (see Note 2 on Page 58). Conrail's major sources of
operating revenues are now from operating fees and rents from NSR and
CSXT. The composition of Conrail's operating expenses also has
changed.
Conrail's net income was $26 million in 1999, compared with
$267 million in 1998 and $7 million in 1997 (see Note 2 on Page 58).
Conrail's operating revenues were $2.2 billion in 1999,
$3.9 billion in 1998 and $3.8 billion in 1997. The decline in 1999 was
attributable to the change in operations and a 2% decrease in freight
revenues prior to the Closing Date. The increase in 1998 was due to a
4% increase in traffic volume, as all market groups except automotive
posted gains for the year.
Conrail's operating expenses were $2.0 billion in 1999,
$3.3 billion in 1998 and $3.4 billion in 1997. Operating expenses in
1999 included $180 million of expenses ($121 million after taxes),
principally to increase certain components of its casualty reserves
based on an actuarial valuation, to adjust certain litigation and
environmental reserves related to settlements and completion of site
reviews, and a credit adjustment related to the assumption of a lease
obligation by CSX. Operating expenses in 1998 included a $170 million
charge ($105 million after taxes) for severance benefits covering
nonunion employees and $132 million ($82 million after taxes) of other
charges and reserves. Operating expenses in 1997 included a
$221 million charge in conjunction with the termination of the Conrail
ESOP (which had no related income tax effect) and a $173 million
charge ($142 million after taxes) for stock compensation and executive
severance costs related to the change in ownership. In addition,
Conrail's operating expenses reflect transition-related expenses of
$60 million in 1999 and $149 million in 1998 (principally technology
integration costs and employee stay bonuses) and $114 million in 1997
(principally investment banking, legal and consulting fees and
employee stay bonuses). Excluding the effects of the acquisition-
related compensation and transition costs, operating expenses
decreased 34% in 1999, but increased 3% in 1998. The 1999 decreases
reflected the change in operations, somewhat offset by higher casualty
and other claims expenses. The 1998 increase resulted from volume-
related expense increases and higher casualty and other claims
expenses, somewhat offset by lower diesel fuel costs.
Conrail's cash provided by operations decreased by $331 million,
or 46%, in 1999, and by $157 million, or 18%, in 1998. The 1999
decrease was principally due to the change in operations. The decline
in 1998 reflected higher incentive compensation payments and
transition-related costs. Cash generated from operations is the
principal source of liquidity and is primarily used for debt
repayments and capital expenditures. Debt repayments totaled
$112 million in 1999 and $119 million in 1998. Capital expenditures
totaled $176 million in 1999 and $550 million in 1998; the decline
reflected the change in operations.
Conrail had a working capital deficit of $194 million at Dec. 31,
1999, compared with a deficit of $202 million at Dec. 31, 1998. The
deficit at Dec. 31, 1999, resulted from reclassifying as a current
liability $250 million of long-term debt due in June 2000.
<PAGE> PAGE 43
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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 $17
million in 1999, $194 million in 1998 and $117 million in 1997.
OTHER MATTERS
Proposed CN-BNSF Combination
- ----------------------------
On Dec. 20, 1999, Canadian National Railway Company and
Burlington Northern Santa Fe Corporation announced plans to combine
their companies under common control, thereby forming the largest
railroad in North America. Norfolk Southern and other Class I
railroads have expressed strong concerns about both the timing and the
implications for the railroad industry of the proposed combination;
moreover, the Surface Transportation Board (which would have to
approve the combination) has indicated that the carriers will be
expected to address the "cumulative impacts and crossover effects" of
the transaction. Management will monitor developments and take
appropriate actions to protect the interests of NS stockholders.
Market Risks and Hedging Activities
- -----------------------------------
NS does not engage in the trading of derivatives. 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 a targeted mix within
its debt portfolio.
Of NS' total debt outstanding (see Note 7 on Page 65), all is
fixed-rate debt, except for commercial paper and most capital leases.
As a result, NS' debt subject to interest rate exposure totaled
$2.0 billion on Dec. 31, 1999. A 1% increase in interest rates would
increase NS' total annual interest expense related to all its variable
debt by approximately $20 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.
The average interest rate on commercial paper was 6.4% on
Dec. 31, 1999, and 6.0% on Dec. 31, 1998. During 1999, interest rates
on NS' commercial paper ranged from 5.1% to 6.5%.
The capital leases, which carry an average fixed rate of 7.1%,
were effectively converted to variable rate obligations using interest
rate swap agreements. On Dec. 31, 1999, the average pay rate under
these agreements was 6.3%, and the average receive rate was 7.1%.
During 1999, the effect of the swaps was to reduce interest expense by
$4 million. A portion of the lease obligations is payable in Japanese
yen. NS hedged 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 Japanese banks. 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.
Accounting Changes and New Pronouncements
- -----------------------------------------
As discussed in Note 1 under "Required Accounting Changes" on
Page 57, NS adopted AICPA Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use"
in 1999.
<PAGE> PAGE 44
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
During 1999, the Financial Accounting Standards Board deferred
the effective date of Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." NS expects to adopt SFAS No. 133 effective Jan. 1, 2001.
This adoption is not expected to have a material effect on NS'
consolidated financial statements.
Lawsuits
- --------
Norfolk Southern and certain subsidiaries are defendants in
numerous lawsuits relating principally to railroad operations.
The Corporation is the defendant in a class action suit filed in
federal district court in Birmingham, Ala., on behalf of African
Americans currently employed or working since Dec. 16, 1989, who
allege that the Corporation has discriminated against them in
promotion to nonagreement positions because of their race. The nonjury
trial on liability, which the Corporation vigorously defended,
concluded in June 1997, and the matter is with the court for
requesting briefs and decision. In the meantime, the parties are
participating in mediation of the case.
On Sept. 8, 1997, a state court jury in New Orleans returned a
verdict awarding $175 million in punitive damages against The Alabama
Great Southern Railroad Company (AGS), a subsidiary of NSR, all of the
common stock of which is owned by NS. The verdict was returned in a
class action suit involving some 8,000 individuals who claim to have
been damaged as the result of an explosion and fire that occurred in
New Orleans on Sept. 9, 1987, when a chemical called butadiene leaked
from a tankcar.
The jury verdict awarded a total of nearly $3.2 billion in
punitive damages against four other defendants in the same case: two
rail carriers, the owner of the car and the shipper. Previously, the
jury had awarded nearly $2 million in compensatory damages to 20 of
the more than 8,000 individual plaintiffs. Prior to the trial court's
ruling on the post trial motions, AGS and four other defendants agreed
to settle their liability in this case for a total payment of
approximately $150 million, of which AGS' share was $15 million. The
settlement has been given preliminary approval by the trial court, and
the money has been paid into an escrow account maintained by Bank One
Trust Company in New Orleans. Final approval of the settlement and
distribution of the settlement proceeds to qualified members of the
class are subject to a fairness hearing scheduled for March 22, 2000.
While it is possible that the trial court will decline to give
final approval to the settlement, or that the settlement may be
overturned on appeal, Management believes that the settlement is a
fair resolution of this controversy and that disapproval by the courts
is unlikely.
While the final outcome of these matters and other lawsuits
cannot be predicted with certainty, it is the opinion of Management,
based on known facts and circumstances, that the amount of NS'
ultimate liability is unlikely to have a material adverse effect on
NS' financial position, results of operations or liquidity.
Environmental Matters
- ---------------------
NS is subject to various jurisdictions' environmental laws and
regulations. It is NS' policy to record a liability where such
liability or loss is probable and its amount can be estimated
reasonably. Claims, if any, against third parties for recovery of
cleanup costs incurred by NS are reflected as receivables (when
collection is probable) in the balance sheet and are not netted
against the associated NS liability. Environmental engineers regularly
participate in ongoing evaluations of all identified sites and in
determining any necessary adjustments to initial liability estimates.
NS also has established an Environmental Policy Council, composed of
senior managers, to oversee and interpret its environmental policy.
<PAGE> PAGE 45
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Operating expenses for environmental matters totaled
approximately $12 million in 1999, $4 million in 1998 and $21 million
in 1997, and capital expenditures totaled approximately $8 million in
1999, $7 million in 1998 and $6 million in 1997. The increase in
operating expenses in 1999 compared with 1998 was principally due to a
combination of unfavorable development experience on identified sites
during 1999, and higher recoveries in 1998 from third parties of
amounts paid by NS in prior years for environmental cleanup and
remediation. Capital expenditures in 2000 are expected to be
comparable with 1999.
As of Dec. 31, 1999, NS' balance sheet included a reserve for
environmental exposures in the amount of $41 million (of which
$8 million is accounted for as a current liability), which is NS'
estimate of the probable cleanup and remediation costs based on
available information at 126 identified locations. On that date,
12 sites accounted for $20 million of the reserve, 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 126 locations, certain NS subsidiaries, usually in
conjunction with a number of other parties, have been identified as
potentially responsible parties by the Environmental Protection Agency
(EPA) or similar state authorities under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, or
comparable state statutes, which often impose joint and several
liability for cleanup costs.
With respect to known environmental sites (whether identified by
NS or by the EPA or comparable state authorities), estimates of NS'
ultimate potential financial exposure for a given site or in the
aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available cleanup techniques, the
likely development of new cleanup technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it), and evolving statutory and
regulatory standards governing liability.
The risk of incurring environmental liability -- for acts and
omissions, past, present and future -- is inherent in the railroad
business. Some of the commodities in NS' traffic mix, particularly
those classified as hazardous materials, can pose special risks that
NS and its subsidiaries work diligently to minimize. In addition,
several NS subsidiaries own, or have owned, land used as operating
property, or which is leased or may have been leased and operated by
others, or held for sale.
Because environmental problems that are latent or undisclosed may
exist on these properties, there can be no assurance that NS will not
incur environmentally related liabilities or costs with respect to one
or more of them, the amount and materiality of which cannot be
estimated reliably at this time. Moreover, lawsuits and claims
involving these and other now-unidentified environmental sites and
matters are likely to arise from time to time. The resulting
liabilities could have a significant effect on financial condition,
results of operations or liquidity in a particular year or quarter.
However, based on its assessments of the facts and circumstances
now known, Management believes that it has recorded the probable costs
for dealing with those environmental matters of which the Corporation
is aware. Further, Management believes that it is unlikely that any
identified matters, either individually or in the aggregate, will have
a material adverse effect on NS' financial position, results of
operations or liquidity.
<PAGE> PAGE 46
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Labor Agreements
- ----------------
Approximately 85% of NS' railroad employees are represented by
labor unions under collective bargaining agreements with 14 different
labor organizations. Moratorium provisions of the agreements currently
in force expired Dec. 31, 1999; however, the agreements remain in
effect until amendments are agreed to or until the Railway Labor Act's
procedures are exhausted. In late 1999, negotiations began at the
national level on agreements with major labor organizations. The
outcome of these negotiations is uncertain at this time. However, a
tentative agreement was reached with the Brotherhood of Locomotive
Engineers which represents approximately 5,000 of NS' locomotive
engineers. The settlement requires ratification by the members before
acceptance. Negotiations with the other unions are progressing.
Inflation
- ---------
Generally accepted accounting principles require the use of
historical cost in preparing financial statements. This approach
disregards the effects of inflation on the replacement cost of
property. NS, a capital-intensive company, has most of its capital
invested in such assets. The replacement cost of these assets, as well
as the related depreciation expense, would be substantially greater
than the amounts reported on the basis of historical cost.
Trends
- ------
- Federal Economic Regulation -- Efforts may be made in 2000
to re-subject the rail industry to unwarranted federal economic
regulation. The Staggers Rail Act of 1980, which substantially reduced
such regulation, encouraged and enabled rail carriers to innovate and
to compete for business, thereby contributing to the economic health
of the nation and to the revitalization of the industry. Accordingly,
NS and other rail carriers vigorously will oppose these
counterproductive efforts to reimpose or to authorize reimposing such
economic regulation.
- Reduction of "Greenhouse" Gases -- In December 1997,
international environmental officials meeting in Kyoto, Japan, agreed
to reduce substantially the emission of so-called "greenhouse" gases
by 2010. Agreement on such reductions was reached on the basis of
questionable scientific evidence and in spite of the fact that the
burden of the reduction regimen will be borne disproportionally by
developed nations such as the United States. NS, the rail industry and
a wide variety of other affected constituencies in the United States
expect to assure that, prior to a Senate vote on the proposed treaty,
the public and governmental authorities have available to them
additional scientific information and data concerning other effects
that are likely to result from implementation.
- 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 far-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
and is working diligently to assure that its customers remain
competitive in this evolving environment.
<PAGE> PAGE 47
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Forward-Looking Statements
- --------------------------
This Management's Discussion and Analysis of Financial Condition
and Results of Operations and other sections of this Annual Report
contain forward-looking statements that are based on current
expectations, estimates and projections. Such forward-looking
statements reflect Management's good-faith evaluation of information
currently available. However, because such statements are based upon
and, therefore, can be influenced by, a number of external variables
over which Management has no, or incomplete, control, they are not,
and should not be read as being, guarantees of future performance or
of actual future results; nor will they necessarily prove to be
accurate indications of the times at or by which any such performance
or result will be achieved. Accordingly, actual outcomes and results
may differ materially from those expressed in such forward-looking
statements. This caveat has particular importance in the context of
all such statements that relate to the resolution of the service
issues, the recapture of diverted business, the addition of new
business and the ability to reduce expenses.
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" on Page 43 under the heading "Market Risks
and Hedging Activities."
<PAGE> PAGE 48
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(Unaudited)
<CAPTION>
Three Months Ended
----------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In millions of dollars, except per share amounts)
<S> <C> <C> <C> <C>
1999
----
Railway operating
revenues $ 1,030 $ 1,194 $ 1,500 $ 1,471
Income from railway
operations 237 198 146 137
Income from continuing
operations 112 77 19 31
Net income 112 77 19 31
Earnings per share
- Basic $ 0.30 $ 0.20 $ 0.05 $ 0.08
- Diluted $ 0.30 $ 0.20 $ 0.05 $ 0.08
1998
----
Railway operating
revenues $ 1,066 $ 1,079 $ 1,048 $ 1,028
Income from railway
operations 251 293 258 250
Income from continuing
operations 132 187 151 160
Net income 229 187 158 160
Earnings per share
- Basic $ 0.61 $ 0.49 $ 0.42 $ 0.42
- Diluted $ 0.61 $ 0.48 $ 0.42 $ 0.42
</TABLE>
<PAGE> PAGE 49
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997 50
Consolidated Balance Sheets
As of December 31, 1999 and 1998 51
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997 53
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997 55
Notes to Consolidated Financial Statements 56
Independent Auditors' Report 78
The Index to Consolidated Financial Statement Schedule appears in
Item 14 on Page 81.
<PAGE> PAGE 50
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
<CAPTION>
Years ended December 31,
1999 1998 1997
---- ---- ----
($ in millions, except earnings per share)
<S> <C> <C> <C>
RAILWAY OPERATING REVENUES $ 5,195 $ 4,221 $ 4,223
RAILWAY OPERATING EXPENSES
Compensation and benefits 1,855 1,492 1,405
Materials, services and rents 1,227 806 685
Conrail rents and services (Note 2) 311 -- --
Depreciation 475 437 421
Diesel fuel 255 174 227
Casualties and other claims 138 95 123
Other 216 165 149
------- ------- -------
Total railway operating expenses 4,477 3,169 3,010
------- ------- -------
Income from railway operations 718 1,052 1,213
Equity in earnings of Conrail (Note 2) 49 194 117
Charge for credit facility costs -- -- (77)
Other income - net (Note 3) 115 115 130
Interest expense on debt (Note 5) (531) (516) (385)
------- ------- -------
Income from continuing
operations before income taxes 351 845 998
Provision for income taxes (Note 4) 112 215 299
------- ------- -------
Income from continuing operations 239 630 699
Discontinued operations (Note 15):
Income (loss) from motor carrier
operations, net of taxes -- (1) 22
Gain on sale of motor carrier,
net of taxes -- 105 --
------- ------- -------
Income from discontinued
operations -- 104 22
------- ------- -------
NET INCOME $ 239 $ 734 $ 721
======= ======= =======
EARNINGS PER SHARE (Note 13)
Income from continuing operations
-Basic $ 0.63 $ 1.66 $ 1.85
-Diluted $ 0.63 $ 1.65 $ 1.84
Net income
-Basic $ 0.63 $ 1.94 $ 1.91
-Diluted $ 0.63 $ 1.93 $ 1.90
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> PAGE 51
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
As of December 31,
1999 1998
---- ----
($ in millions)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 37 $ 5
Short-term investments 14 58
Accounts receivable, net of allowance for
doubtful accounts of $5 million and
$4 million, respectively 857 519
Due from Conrail (Note 2) 77 --
Materials and supplies 100 59
Deferred income taxes (Note 4) 134 141
Other current assets 152 131
------- -------
Total current assets 1,371 913
------- -------
Investment in Conrail (Note 2) 6,132 6,210
Properties less accumulated depreciation
(Note 5) 10,956 10,477
Other assets 791 580
------- -------
TOTAL ASSETS $19,250 $18,180
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note 6) $ 818 $ 600
Income and other taxes 163 151
Notes and accounts payable to Conrail (Note 2) 184 --
Other current liabilities (Note 6) 256 225
Current maturities of long-term debt (Note 7) 503 141
------- -------
Total current liabilities 1,924 1,117
------- -------
Long-term debt (Note 7) 7,556 7,483
Other liabilities (Note 9) 1,101 1,065
Minority interests 50 49
Deferred income taxes (Note 4) 2,687 2,545
------- -------
TOTAL LIABILITIES 13,318 12,259
------- -------
<PAGE> PAGE 52
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
As of December 31,
1999 1998
---- ----
($ in millions)
Stockholders' equity:
Common stock $1.00 per share par value,
1,350,000,000 shares authorized;
issued 404,309,672 shares and
401,031,994 shares, respectively 404 401
Additional paid-in capital 372 296
Accumulated other comprehensive income (Note 12) (11) (8)
Retained income 5,187 5,252
Less treasury stock at cost, 21,627,902 shares (20) (20)
------- -------
TOTAL STOCKHOLDERS' EQUITY 5,932 5,921
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,250 $18,180
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> PAGE 53
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<CAPTION>
Years ended December 31,
1999 1998 1997
---- ---- ----
($ in millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 239 $ 734 $ 721
Reconciliation of net income to
net cash provided by continuing
operations:
Depreciation 489 450 432
Deferred income taxes 85 114 75
Equity in earnings of Conrail (17) (194) (117)
Charge for credit facility costs -- -- 77
Nonoperating gains and losses
on properties and investments (62) (51) (63)
Income from discontinued operations -- (104) (22)
Changes in assets and liabilities
affecting continuing operations:
Accounts receivable (322) 33 (23)
Materials and supplies (40) (1) 3
Other current assets and due from
Conrail (50) (16) (8)
Current liabilities other than debt 259 (23) 115
Other - net (48) (50) (44)
------- ------- -------
Net cash provided by continuing
operations 533 892 1,146
Net cash provided by (used for)
discontinued operations -- (2) 4
------- ------- -------
Net cash provided by operating
activities 533 890 1,150
CASH FLOWS FROM INVESTING ACTIVITIES
Property additions (912) (956) (875)
Property sales and other transactions 104 83 74
Investment in Conrail (3) (40) (5,741)
Investments, including short-term (123) (116) (185)
Investment sales and other transactions 343 155 217
Proceeds from sale of motor carrier -- 207 --
------- ------- -------
Net cash used for investing
activities (591) (667) (6,510)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (304) (303) (301)
Common stock issued - net 14 34 24
Credit facility costs paid -- -- (72)
Proceeds from borrowings 1,110 196 5,781
Debt repayments (730) (179) (245)
------- ------- -------
Net cash provided by (used for)
financing activities 90 (252) 5,187
Net increase (decrease) in cash
and cash equivalents 32 (29) (173)
<PAGE> PAGE 54
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Years ended December 31,
1999 1998 1997
---- ---- ----
($ in millions)
CASH AND CASH EQUIVALENTS
At beginning of year 5 34 207
------- ------- -------
At end of year $ 37 $ 5 $ 34
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest (net of amounts capitalized) $ 520 $ 519 $ 379
Income taxes $ 16 $ 76 $ 209
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> PAGE 55
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
Accumu-
lated
Addi- Other
tional Compre-
Common Paid-In hensive Retained Treasury
Stock Capital Income Income Stock Total
------ ------- ------- -------- -------- -----
($ in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31,
1996 $ 132 $ 462 $ 3 $4,401 $ (21) $4,977
Comprehensive income -
1997
Net income 721 721
Other comprehensive
income (Note 12) 2 2
------
Total comprehensive
income 723
Dividends on Common Stock,
$0.80 per share (301) (301)
3-for-1 stock split,
effective Sept. 5 266 (266) -- --
Other 1 45 46
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1997 399 241 5 4,821 (21) 5,445
Comprehensive income -
1998
Net income 734 734
Other comprehensive
income (Note 12) (13) (13)
------
Total comprehensive
income 721
Dividends on Common Stock,
$0.80 per share (303) (303)
Other 2 55 1 58
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1998 401 296 (8) 5,252 (20) 5,921
Comprehensive income -
1999
Net income 239 239
Other comprehensive
income (Note 12) (3) (3)
------
Total comprehensive
income 236
Dividends on Common Stock,
$0.80 per share (304) (304)
Other 3 76 79
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1999 $ 404 $ 372 $ (11) $5,187 $ (20) $5,932
====== ====== ====== ====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> PAGE 56
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following Notes are an integral part of the Consolidated Financial
Statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
- -----------------------
Norfolk Southern Corporation is a Virginia-based holding company
engaged principally in the transportation of freight by rail,
operating approximately 21,800 route miles primarily in the East and
Midwest. These financial statements include Norfolk Southern
Corporation (Norfolk Southern) and its majority-owned and controlled
subsidiaries (collectively NS) on a consolidated basis. Norfolk
Southern's major subsidiary is Norfolk Southern Railway Company (NSR).
Financial results of a former motor carrier subsidiary, North American
Van Lines, Inc. (NAVL), are reflected as "Discontinued Operations"
(see Note 15). All significant intercompany balances and transactions
have been eliminated in consolidation.
The railroad transports raw materials, intermediate products and
finished goods classified in the following market groups: coal;
automotive; chemicals; paper/clay/forest products;
metals/construction; agriculture/consumer products/government; and
intermodal. Except for coal, all groups are approximately equal in
size based on revenues; coal accounts for about 25% of total railway
operating revenues. Ultimate points of origination or destination for
some of the freight (particularly coal bound for export and intermodal
containers) are outside the United States.
Through a jointly owned entity, Norfolk Southern and CSX
Corporation own the stock of Conrail Inc., which owns the major
railroad in the Northeast. Norfolk Southern has a 58% economic and 50%
voting interest in the jointly owned entity (see Note 2).
Use of Estimates
- ----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires Management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash Equivalents
- ----------------
"Cash equivalents" are highly liquid investments purchased three
months or less from maturity.
Investments
- -----------
Marketable equity and debt securities are reported at amortized
cost or fair value, depending upon their classification as securities
"held-to-maturity," "trading" or "available-for-sale." On Dec. 31,
1999 and 1998, all "Short-term investments," consisting primarily of
United States government and federal agency securities, were
designated as "available-for-sale." Accordingly, unrealized gains and
losses, net of taxes, are recognized in "Accumulated other
comprehensive income."
Investments where NS has the ability to exercise significant
influence over, but does not control, the entity are accounted for
using the equity method in accordance with APB Opinion No. 18, "The
Equity Method of Accounting for Investments in Common Stock."
<PAGE> PAGE 57
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Materials and Supplies
- ----------------------
"Materials and supplies," consisting mainly of fuel oil and items
for maintenance of property and equipment, are stated at the lower of
average cost or market. The cost of materials and supplies expected to
be used in capital additions or improvements is included in
"Properties."
Properties
- ----------
"Properties" are stated principally at cost and are depreciated
using group depreciation. Rail is depreciated primarily on the basis
of use measured by gross ton-miles. Other properties are depreciated
generally using the straight-line method over the lesser of estimated
service or lease lives. NS capitalizes interest on major capital
projects during the period of their construction. Additions to
properties, including those under lease, are capitalized. Maintenance
expense is recognized when repairs are performed. When properties
other than land and nonrail assets are sold or retired in the ordinary
course of business, the cost of the assets, net of sale proceeds or
salvage, is charged to accumulated depreciation rather than recognized
through income. Gains and losses on disposal of land and nonrail
assets are included in "Other Income" (see Note 3).
NS reviews the carrying amount of properties whenever events or
changes in circumstances indicate that such carrying amount may not be
recoverable based on future undiscounted cash flows or estimated net
realizable value. Assets that are deemed impaired as a result of such
review are recorded at the lower of carrying amount or fair value.
Revenue Recognition
- -------------------
Revenue is recognized proportionally as a shipment moves from
origin to destination.
Derivatives
- -----------
NS does not engage in the trading of derivatives. NS has entered
into a limited number of derivative agreements to hedge interest rate
exposures on certain components of its debt portfolio. All of these
derivative instruments are designated as hedges, have high correlation
with the underlying exposure and are highly effective in offsetting
underlying price movements. Accordingly, payments made or received
under interest rate swap agreements are recorded in the income
statement with the corresponding interest expense. Payments made to
hedge interest rate exposure related to the anticipated issuance of
debt were deferred as a reduction of the debt proceeds and are being
amortized to interest expense over the life of the underlying debt.
Required Accounting Changes
- ---------------------------
Effective Jan. 1, 1999, NS adopted AICPA Statement of Position 98-
1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Adoption of this pronouncement had no
material effect on NS' consolidated financial statements.
Reclassifications
- -----------------
Certain amounts in the financial statements and notes thereto
have been reclassified to conform to the 1999 presentation.
<PAGE> PAGE 58
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. INVESTMENT IN CONRAIL AND OPERATIONS OVER ITS LINES
Overview
- --------
NS and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail),
whose primary subsidiary is Consolidated Rail Corporation (CRC), the
major railroad in the Northeast. From May 23, 1997, the date NS and
CSX completed their acquisition of Conrail stock, until June 1, 1999,
Conrail's operations continued substantially unchanged while NS and
CSX awaited regulatory approvals and prepared for the integration of
the respective Conrail routes and assets to be leased to their
railroad subsidiaries, NSR and CSX Transportation, Inc. (CSXT). From
time to time, NS and CSX, as the indirect owners of Conrail, may need
to make capital contributions, loans or advances to Conrail.
Commencement of Operations
- --------------------------
On June 1, 1999 (the "Closing Date"), NSR and CSXT began
operating as parts of their rail systems the separate Conrail routes
and assets leased to them pursuant to operating and lease agreements.
The Operating Agreement between NSR and Pennsylvania Lines LLC
(PRR), a wholly owned subsidiary of CRC, governs substantially all
nonequipment assets to be operated by NSR and has an initial 25-year
term, renewable at the option of NSR for two five-year terms. Payments
under the Operating Agreement are subject to adjustment every six
years to reflect changes in values. NSR also has leased or subleased
for varying terms from PRR a number of equipment assets. Costs
necessary to operate and maintain the PRR assets, including leasehold
improvements, are borne by NSR. CSXT has entered into comparable
arrangements, for the operation and use of certain other CRC routes
and assets, with another wholly owned CRC subsidiary.
NSR and CSXT also have entered into agreements with CRC governing
other Conrail properties that continue to be owned and operated by
Conrail (the "Shared Assets Areas"). NSR and CSXT pay CRC a fee for
joint and exclusive access to the Shared Assets Areas. In addition,
NSR and CSXT pay, based on usage, the costs incurred by CRC to operate
the Shared Assets Areas.
<TABLE>
Future minimum lease payments due to PRR under the Operating
Agreement and lease agreements and to CRC under the Shared Assets
Areas (SAA) agreements are as follows:
<CAPTION>
PRR Oper. PRR Lease SAA
($ in millions) Agmt. Agmts. Agmts.
--------------- -------- --------- ------
<S> <C> <C> <C>
2000 $ 166 $ 154 $ 22
2001 178 129 24
2002 196 122 27
2003 217 110 30
2004 238 92 32
2005 and
subsequent years 5,022 367 687
------ ------ ------
Total $6,017 $ 974 $ 822
====== ====== ======
</TABLE>
Operating lease expense related to the agreements, which is
included in "Conrail rents and services," amounted to $273 million in
1999.
On the Closing Date, both NS' railroad route miles and its
railroad employees increased by approximately 50 percent. NSR and CSXT
now provide substantially all rail freight services on Conrail's route
system, perform or are responsible for performing most services
incident to customer freight contracts and employ the majority of
Conrail's former work force. Consequently, NSR began to receive all
freight revenues and incur all expenses on the PRR lines.
<PAGE> PAGE 59
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. INVESTMENT IN CONRAIL AND OPERATIONS OVER ITS LINES (continued)
Since June 1, 1999, difficulties in integrating the PRR routes
and assets have affected adversely both NSR's revenues and expenses.
These higher expenses included the cost of a special incentive program
available to unionized employees for much of the third quarter, higher
labor costs and equipment rents and service alteration costs to meet
the needs of shippers. A long-term failure by NSR to integrate
successfully these PRR properties could have a substantial adverse
impact on NS' financial position, results of operations and liquidity.
Investment in Conrail
- ---------------------
NS is applying the equity method of accounting to its investment
in Conrail in accordance with APB Opinion No. 18, "The Equity Method
of Accounting for Investments in Common Stock."
<TABLE>
On the effective date of the STB decision approving the Conrail
transaction, NS' 58% investment in Conrail exceeded Conrail's net
equity by $4.1 billion. This excess has been allocated to the fair
values of Conrail's assets and liabilities, using the principles of
purchase accounting, as follows:
<CAPTION>
($ in millions)
---------------
<S> <C>
Property, equipment and investments in railroads $ 6,708
Other assets, principally pension and other
employee benefit plans and trusts 224
Debt revaluation and other liabilities (209)
Deferred taxes (2,585)
-------
Total $ 4,138
=======
</TABLE>
NS is amortizing the excess of the purchase price over Conrail's
net equity using the principles of purchase accounting, based
primarily on the estimated remaining useful lives of Conrail's
property and equipment, including the related deferred tax effect of
the differences in tax and accounting bases for certain assets. At
Dec. 31, 1999, the difference between NS' investment in Conrail and
its share of Conrail's underlying net equity was $3.9 billion.
NS' investment in Conrail includes $187 million ($115 million
after taxes) of costs that will be paid by NSR. These costs consist
principally of: (1) contractual obligations to Conrail employees
imposed by the STB when it approved the transaction and (2) costs to
relocate Conrail employees. Most of these costs are expected to be
paid in the two years following the Closing Date; $52 million is
classified on NS' balance sheet as "Current liabilities." However,
certain contractual obligations by their terms will be paid out over a
longer period and are classified as "Other liabilities" on NS' balance
sheet. Through Dec. 31, 1999, NS has paid $33 million of these costs.
Had NS acquired its investment in Conrail on Jan. 1, 1997, NS'
net income and diluted earnings per share for the year ended Dec. 31,
1997, would have been $671 million and $1.77, respectively. These pro
forma results reflect only the application of the equity method of
accounting and the specific financing costs of the transaction. They
do not reflect revenues from or costs of operating PRR's assets nor do
they include integration costs.
Effective June 1, 1999, NS' consolidated financial statements
include the consolidated financial position and results of Triple
Crown Services Company (TCS), a partnership in which subsidiaries of
NS and PRR are partners. As a result, NS' total assets increased by
approximately $140 million (including $121 million of properties,
mostly RoadRailer (RT) equipment), and NS' total liabilities increased
by approximately $130 million (including $109 million of long-term
debt).
<PAGE> PAGE 60
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. INVESTMENT IN CONRAIL AND OPERATIONS OVER ITS LINES (continued)
Related-Party Transactions
- --------------------------
Until the Closing Date, NSR and CRC had transactions with each
other in the customary course of handling interline traffic. As of
Dec. 31, 1999, most of the amounts receivable or payable related to
these transactions have been satisfied.
NS provides certain general and administrative support functions
to Conrail, the fees for which are billed in accordance with several
service-provider arrangements.
"Conrail rents and services," a new line on the income statements
beginning June 1, 1999, includes: (1) expenses for amounts due to PRR
and CRC for use by NSR of operating properties and equipment,
operation of the Shared Assets Areas and continued operation of
certain facilities during a transition period; and (2) NS' equity in
the earnings (or loss) of Conrail, net of amortization.
"Due from Conrail" includes $39 million for vacation liability
related to the portion of CRC's work force that became NS employees on
the Closing Date. NS increased its vacation liability accordingly, and
will pay these employees as they take vacation.
"Notes and accounts payable to Conrail" includes $123 million of
interest-bearing loans made to NS by a PRR subsidiary, payable on
demand. The interest rate for these loans is variable and was 5.6% at
Dec. 31, 1999. Also included is $61 million due to PRR and CRC related
to expenses included in "Conrail rents and services," as discussed
above.
Summary Financial Information - Conrail
- ---------------------------------------
The following summary financial information should be read in
conjunction with Conrail's audited financial statements, included as
Exhibit 99 with this Annual Report on Form 10-K.
Conrail's results of operations include freight line-haul
revenues and related expenses through May 31, 1999, but reflect its
new structure and operations since June. Conrail's major sources of
operating revenues are now from NSR and CSXT. The composition of
Conrail's operating expenses also has changed.
<TABLE>
Summarized Consolidated Statements of Income - Conrail
- ------------------------------------------------------
<CAPTION>
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
<S> <C> <C> <C>
Operating revenues $2,174 $3,863 $3,765
Operating expenses 2,046 3,348 3,443
------ ------ ------
Operating income 128 515 322
Other - net (83) (81) (87)
------ ------ ------
Income before income taxes 45 434 235
Provision for income taxes 19 167 228
------ ------ ------
Net income $ 26 $ 267 $ 7
====== ====== ======
</TABLE>
<PAGE> PAGE 61
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. INVESTMENT IN CONRAIL AND OPERATIONS OVER ITS LINES (continued)
Note: Conrail's results in 1999 included after-tax expenses of
$121 million, principally: (1) to increase certain components of
its casualty reserves based on an actuarial valuation, (2) to
adjust certain litigation and environmental reserves related to
settlements and completion of site reviews and (3) to adjust a
credit related to the assumption of a lease obligation by CSX.
Conrail's results in 1998 included a $187 million after-tax
charge, primarily for estimated severance obligations to nonunion
employees. Conrail's results in 1997 included a $221 million (no
related tax effect) charge in conjunction with the termination of
the Conrail ESOP and a $142 million after-tax charge for
transaction-related stock compensation costs and change-in-
control benefits. These items were considered in the allocation
of NS' investment in Conrail to the fair values of Conrail's
assets and liabilities and, accordingly, were excluded in
determining NS' equity in Conrail's net income.
<TABLE>
Summarized Consolidated Balance Sheets - Conrail
- ------------------------------------------------
<CAPTION>
December 31,
($ in millions) 1999 1998
--------------- ---- ----
<S> <C> <C>
Assets:
Current assets $ 669 $1,005
Noncurrent assets 7,714 8,039
------ ------
Total assets $8,383 $9,044
====== ======
Liabilities and
stockholders' equity:
Current liabilities $ 863 $1,207
Noncurrent liabilities 3,701 4,037
Stockholders' equity 3,819 3,800
------ ------
Total liabilities and
stockholders' equity $8,383 $9,044
====== ======
</TABLE>
<TABLE>
3. OTHER INCOME - NET
<CAPTION>
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
<S> <C> <C> <C>
Gains from sale of properties
and investments $ 62 $ 51 $ 56
Royalties from coal 59 57 58
Rental income 34 26 22
Interest income 8 12 30
Gain from partial redemption
of partnership interest -- -- 7
Other interest expense (30) (21) (27)
Nonoperating depletion
and depreciation (14) (13) (11)
Taxes on nonoperating property (7) (4) (5)
Corporate-owned
life insurance - net (3) 11 7
Other - net 6 (4) (7)
------- ------- -------
Total $ 115 $ 115 $ 130
======= ======= =======
</TABLE>
<PAGE> PAGE 62
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
4. INCOME TAXES
<TABLE>
Provision for Income Taxes
- --------------------------
<CAPTION>
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 18 $ 89 $ 197
State 9 12 27
------ ------ ------
Total current taxes 27 101 224
Deferred:
Federal 78 100 78
State 7 14 (3)
------ ------ ------
Total deferred taxes 85 114 75
------ ------ ------
Provision for income
taxes $ 112 $ 215 $ 299
====== ====== ======
</TABLE>
Reconciliation of Statutory Rate to Effective Rate
- --------------------------------------------------
<TABLE>
Total income taxes as reflected in the Consolidated Statements of
Income differ from the amounts computed by applying the statutory
federal corporate tax rate as follows:
<CAPTION>
1999 1998 1997
($ in millions) Amount % Amount % Amount %
--------------- ------ -- ------ -- ------ --
<S> <C> <C> <C>
Federal income tax
at statutory rate $ 123 35 $ 296 35 $ 349 35
State income taxes,
net of federal tax
benefit 10 3 17 2 16 2
Equity in earnings
of Conrail (6) (2) (68) (8) (41) (4)
Corporate-owned
life insurance 1 -- (11) (1) (10) (1)
Other - net (16) (4) (19) (3) (15) (2)
------ --- ------ --- ------ ---
Provision for
income taxes $ 112 32 $ 215 25 $ 299 30
====== === ====== === ====== ===
</TABLE>
<PAGE> PAGE 63
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
4. INCOME TAXES (continued)
Deferred Tax Assets and Liabilities
- -----------------------------------
Certain items are reported in different periods for financial
reporting and income tax purposes. Deferred tax assets and liabilities
were recorded in recognition of these differences.
<TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows:
<CAPTION>
December 31,
($ in millions) 1999 1998
--------------- ---- ----
<S> <C> <C>
Deferred tax assets:
Reserves, including casualty
and other claims $ 168 $ 157
Employee benefits 111 209
Retiree health and death
benefit obligation 127 127
Taxes, including state and property 174 173
Other 42 41
-------- --------
Total gross deferred tax
assets 622 707
Less valuation allowance (9) (3)
-------- --------
Net deferred tax assets 613 704
-------- --------
Deferred tax liabilities:
Property (3,093) (3,023)
Other (73) (85)
-------- --------
Total gross deferred
tax liabilities (3,166) (3,108)
-------- --------
Net deferred tax liability (2,553) (2,404)
Net current deferred tax
assets 134 141
-------- --------
Net long-term deferred
tax liability $ (2,687) $ (2,545)
======== ========
</TABLE>
Except for amounts for which a valuation allowance has been
provided, Management believes the other deferred tax assets will be
realized. The total valuation allowance increased $6 million in 1999
and $1 million in 1998.
Internal Revenue Service (IRS) Reviews
- ---------------------------------------
Consolidated federal income tax returns have been examined and
Revenue Agent Reports have been received for all years up to and
including 1994. The consolidated federal income tax returns for 1995
and 1996 are being audited by the IRS. Management believes that
adequate provision has been made for any additional taxes and interest
thereon that might arise as a result of IRS examinations.
<PAGE> PAGE 64
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
5. PROPERTIES
<CAPTION>
December 31, Depreciation
($ in millions) 1999 1998 Rate for 1999
--------------- ---- ---- -------------
<S> <C> <C> <C>
Railway property:
Road $ 9,681 $ 9,267 2.8%
Equipment 5,577 5,157 4.2%
Other property 627 639 3.4%
------- -------
15,885 15,063
Less: Accumulated
depreciation 4,929 4,586
------- -------
Net properties $10,956 $10,477
======= =======
</TABLE>
Equipment includes $593 million at Dec. 31, 1999 and 1998, of
assets recorded pursuant to capital leases.
Capitalized Interest
- --------------------
Total interest cost incurred on debt in 1999, 1998 and 1997 was
$546 million, $537 million and $402 million, respectively, of which
$15 million, $21 million and $17 million was capitalized.
<TABLE>
6. CURRENT LIABILITIES
<CAPTION>
December 31,
($ in millions) 1999 1998
--------------- ---- ----
<S> <C> <C>
Accounts payable:
Accounts and wages payable $ 354 $ 283
Casualty and other claims 181 144
Equipment rents payable - net 135 72
Vacation liability 124 81
Other 24 20
------- -------
Total $ 818 $ 600
======= =======
Other current liabilities:
Interest payable $ 123 $ 91
Accrued Conrail-related costs
(Note 2) 56 67
Liabilities for forwarded traffic 37 27
Retiree health and death
benefit obligation (Note 10) 24 24
Other 16 16
------- -------
Total $ 256 $ 225
======= =======
</TABLE>
<PAGE> PAGE 65
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
7. DEBT
Shelf Registration
- ------------------
In November 1998, NS filed with the Securities and Exchange
Commission a shelf registration statement on Form S-3 covering the
issuance of up to $1 billion of securities. In April 1999, NS issued
$400 million of 6.2% 10-year term Senior Notes under this
registration.
<TABLE>
Long-Term Debt
- --------------
<CAPTION>
December 31,
($ in millions) 1999 1998
--------------- ---- ----
<S> <C> <C>
Commercial paper at an average
rate of 6.4% $ 1,722 $ 1,889
Notes at average rates and
maturities as follows:
6.85%, maturing 2000 to 2002 1,100 1,100
7.14%, maturing 2004 to 2009 1,600 1,200
8.10%, maturing 2017 to 2021 800 800
7.80%, maturing 2027 800 800
7.05%, maturing 2037 750 750
7.90%, maturing 2097 350 350
Railroad equipment obligations
at an average rate of 6.8%,
maturing to 2014 548 379
Capitalized leases at an
average rate of 6.3%,
maturing to 2015 382 349
Other debt at an average rate
of 5.4%, maturing to 2015 35 35
Discounts and premiums, net (28) (28)
------- -------
Total long-term debt 8,059 7,624
Current maturities (503) (141)
------- -------
Long-term debt less
current maturities $ 7,556 $ 7,483
======= =======
Long-term debt matures as follows:
2001 $ 297
2002 593
2003 92
2004 335
2005 and subsequent years 6,239
-------
Total $ 7,556
=======
</TABLE>
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.
The railroad equipment obligations and the capitalized leases are
secured by liens on the underlying equipment.
<PAGE> PAGE 66
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
7. DEBT (continued)
Commercial Paper
- ----------------
Commercial paper debt is due within one year, but has been
classified as long-term because NS has the ability through a
$2.8 billion credit agreement to convert this obligation into longer-
term debt. The credit agreement expires in 2002 and provides for
interest on borrowings at prevailing rates. NS intends to refinance
the commercial paper either by issuing additional commercial paper or
by replacing commercial paper notes with long-term debt.
Capital Lease Obligations
- -------------------------
During 1998 and 1997, NSR entered into capital leases covering
new locomotives. The related capital lease obligations, totaling
$127 million in 1998 and $64 million in 1997, were reflected in the
Consolidated Balance Sheets as debt and, because they were noncash
transactions, were excluded from the Consolidated Statements of Cash
Flows.
These and certain other lease obligations carry an average stated
interest rate of 7.1%, but were effectively converted to variable rate
obligations using interest rate swap agreements. The interest rates on
the swap obligations are based on the six-month London Interbank
Offered Rate and are reset every six months with changes in interest
rates accounted for as an adjustment of interest expense over the
terms of the leases. As of Dec. 31, 1999, the notional amount of the
swap agreements was $281 million, and the average interest rate was
6.3%. As a result, NS is exposed to the market risk associated with
fluctuations in interest rates. To date, the effects of the rate
fluctuations have been favorable and not material. Counterparties to
the interest rate swap agreements are major financial institutions
believed by Management to be creditworthy.
Debt Covenants
- --------------
NS is subject to various financial covenants with respect to its
debt and under its credit agreement, including a minimum net worth
requirement, a maximum leverage ratio restriction and certain
restrictions on issuance of further debt. At Dec. 31, 1999, NS was in
compliance with all debt covenants.
8. LEASE COMMITMENTS
NS is committed under long-term lease agreements, which expire on
various dates through 2067, for equipment, lines of road and other
property. The following amounts do not include payments to PRR under
the Operating Agreement and lease agreements or to CRC under the SAA
agreements (see Note 2). Future minimum lease payments other than to
PRR and CRC are as follows:
<PAGE> PAGE 67
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
8. LEASE COMMITMENTS (continued)
<CAPTION>
Operating Capital
($ in millions) Leases Leases
--------------- --------- -------
<S> <C> <C>
2000 $ 97 $ 47
2001 75 47
2002 62 47
2003 59 46
2004 50 46
2005 and subsequent years 555 245
------ ------
Total $ 898 478
======
Less imputed interest on capital
leases at an average rate of 7.1% 96
------
Present value of minimum
lease payments included
in debt $ 382
======
</TABLE>
<TABLE>
Operating Lease Expense
- -----------------------
<CAPTION>
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
<S> <C> <C> <C>
Minimum rents $ 118 $ 75 $ 68
Contingent rents 61 40 43
------ ------ ------
Total $ 179 $ 115 $ 111
====== ====== ======
</TABLE>
<TABLE>
9. OTHER LIABILITIES
<CAPTION>
December 31,
($ in millions) 1999 1998
--------------- ---- ----
<S> <C> <C>
Casualty and other claims $ 275 $ 271
Retiree health and death
benefit obligation (Note 10) 261 268
Accrued Conrail-related costs
(Note 2) 102 100
Net pension obligations (Note 10) 74 72
Other 389 354
------- -------
Total $ 1,101 $ 1,065
======= =======
</TABLE>
<PAGE> PAGE 68
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
<TABLE>
Norfolk Southern and certain subsidiaries have both funded and
unfunded defined benefit pension plans covering principally salaried
employees. Norfolk Southern and certain subsidiaries also provide
specified health care and death benefits to eligible retired employees
and their dependents. Under the present plans, which may be amended or
terminated at NS' option, a defined percentage of health care expenses
is covered, reduced by any deductibles, co-payments, Medicare payments
and, in some cases, coverage provided under other group insurance
policies.
<CAPTION>
Pension Benefits Other Benefits
($ in millions) 1999 1998 1999 1998
--------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT
OBLIGATIONS
Benefit obligation at
beginning of year $ 1,063 $ 956 $ 362 $ 360
Increase related to
former Conrail
employees 68 -- -- --
Service cost 17 13 11 10
Interest cost 73 67 23 24
Amendment -- 40 -- --
Actuarial (gains) losses (92) 61 (33) (9)
Benefits paid (71) (74) (23) (23)
------- ------- ------- -------
Benefit obligation
at end of year 1,058 1,063 340 362
------- ------- ------- -------
CHANGE IN PLAN ASSETS
Fair value of plan
assets at beginning
of year 1,544 1,360 139 111
Transfer of assets from
Conrail plan 352 -- -- --
Actual return on plan
assets 250 253 21 28
Employer contribution 4 5 15 23
401(h) account transfer (7) -- -- --
Benefits paid (71) (74) (23) (23)
------- ------- ------- -------
Fair value of plan
assets at end of
year 2,072 1,544 152 139
------- ------- ------- -------
Funded status 1,014 481 (188) (223)
Unrecognized initial
net asset (10) (16) -- --
Unrecognized (gain)
loss (799) (517) (97) (57)
Unrecognized prior
service cost (benefit) 40 44 -- (12)
------- ------- ------- -------
Net amount
recognized $ 245 $ (8) $ (285) $ (292)
======= ======= ======= =======
Amounts recognized in
the Consolidated
Balance Sheets
consist of:
Prepaid benefit cost $ 298 $ 41 $ -- $ --
Accrued benefit
liability (74) (72) (285) (292)
Accumulated other
comprehensive
income 21 23 -- --
------- ------- ------- -------
Net amount
recognized $ 245 $ (8) $ (285) $ (292)
======= ======= ======= =======
</TABLE>
<PAGE> PAGE 69
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
Of the pension plans included above, the nonqualified pension
plans were the only plans with an accumulated benefit obligation in
excess of plan assets. These plans' accumulated benefit obligations
were $74 million at Dec. 31, 1999, and $72 million at Dec. 31, 1998.
These plans' projected benefit obligations were $76 million at
Dec. 31, 1999, and $77 million at Dec. 31, 1998. Because of the nature
of such plans, there are no plan assets.
During 1999, a Section 401(h) account transfer of $7 million was
made, transferring a portion of pension assets to fund 1999 medical
payments for retirees.
As a result of the commencement of operations over Conrail's
lines (see Note 2), NS hired a substantial portion of Conrail's former
work force. In August 1999, NS assumed certain pension obligations
related to those employees. These obligations, along with pension plan
assets in excess of the obligations, were transferred to the NS plans
in 1999. This transfer resulted in an increase to NS' pension plan
asset and a corresponding decrease to NS' investment in Conrail.
NS has amended its qualified pension plan to conform certain
provisions of its plan with the Conrail plan and to provide prior
service credit to Conrail employees for benefits under the NS plan.
The amendment, as it relates to NS employees, increased the pension
benefit obligation at Dec. 31, 1998, by $40 million.
In January 2000, NS announced a voluntary early retirement
program that included enhancements to pension benefits for eligible
nonunion employees. Approximately 1,180 employees, or 20% of NS'
nonunion work force, were eligible for the program. Benefits will be
paid out of NS' over-funded pension plan.
<TABLE>
Pension and other postretirement benefit costs are determined
based on actuarial valuations that reflect appropriate assumptions as
of the measurement date, ordinarily the beginning of each year. The
funded status of the plans is determined using appropriate assumptions
as of each year end. During 1999, NS received assets from the Conrail
pension plan and assumed certain related liabilities. As a result, the
measurement dates for determining pension costs were Jan. 1, 1999, and
Aug. 31, 1999, and reflect discount rates of 6.75% and 7.75%,
respectively, and other assumptions appropriate at those dates. A
summary of the major assumptions follows:
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Funded status:
Discount rate 7.75% 6.75% 7.25%
Future salary increases 5% 5% 5.25%
Pension cost:
Discount rate 6.75% 7.25% 7.75%
Return on assets in plans 10% 9% 9%
Future salary increases 5% 5.25% 5.25%
</TABLE>
<PAGE> PAGE 70
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
<TABLE>
Pension and Other Postretirement Benefit Costs Components
- ---------------------------------------------------------
<CAPTION>
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
<S> <C> <C> <C>
PENSION BENEFITS
Service cost $ 17 $ 13 $ 11
Interest cost 73 67 66
Expected return on
plan assets (152) (106) (90)
Amortization of prior
service cost 4 1 1
Amortization of initial
net asset (7) (7) (6)
Recognized net actuarial
(gain) loss (22) (12) (7)
------ ------ ------
Net cost (benefit) $ (87) $ (44) $ (25)
====== ====== ======
OTHER POSTRETIREMENT BENEFITS
Service cost $ 11 $ 10 $ 9
Interest cost 23 24 25
Expected return on plan
assets (12) (9) (7)
Amortization of prior
service cost (12) (12) (12)
Recognized net actuarial
(gain) loss (2) (2) --
------ ------ ------
Net cost $ 8 $ 11 $ 15
====== ====== ======
</TABLE>
For measurement purposes, increases in the per capita cost of
covered health care benefits were assumed to be 7.5% for 2000 and 8.0%
for 1999. The rate was assumed to decrease gradually to an ultimate
rate of 5.0% for 2003 and remain at that level thereafter.
<TABLE>
Assumed health care cost trend rates have a significant effect on
the amounts reported in the financial statements. To illustrate, a one-
percentage-point change in assumed health care cost trend would have
the following effects:
<CAPTION>
One percentage point
($ in millions) Increase Decrease
--------------- -------- --------
<S> <C> <C>
Increase (decrease) in:
Total service and interest cost
components $ 4 $ (3)
Postretirement benefit obligation $ 28 $(24)
</TABLE>
Under collective bargaining agreements, NS and certain
subsidiaries participate in a multi-employer benefit plan, which
provides certain postretirement health care and life insurance
benefits to eligible agreement employees. Premiums under this plan are
expensed as incurred and amounted to $5 million in 1999, $5 million in
1998 and $4 million in 1997.
<PAGE> PAGE 71
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
10. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
401(k) Plans
- ------------
Norfolk Southern and certain subsidiaries provide 401(k) savings
plans for employees. Under the plans, NS matches a portion of employee
contributions, subject to applicable limitations. In 1999, NS issued
shares of Common Stock to fund its contributions. NS' expenses under
these plans were $12 million in 1999, $10 million in 1998 and
$9 million in 1997.
In November 1999, NS issued and contributed to eligible
participants' accounts approximately 2 million shares of Norfolk
Southern common stock in connection with a temporary special work
incentive program available to its unionized employees during much of
the third quarter. The cost of the program, which was charged to
compensation and benefits expenses, was $49 million.
11. STOCK-BASED COMPENSATION
Under the stockholder-approved Long-Term Incentive Plan (LTIP), a
committee of nonemployee directors of the Board may grant stock
options, stock appreciation rights (SARs), restricted stock and
performance share units (PSUs), up to a maximum 53,025,000 shares of
Norfolk Southern common stock ("Common Stock"). Under the Board-
approved Thoroughbred Stock Option Plan (TSOP), the committee may
grant stock options up to a maximum of 6,000,000 shares of Common
Stock. Options may be granted for a term not to exceed 10 years, but
may not be exercised prior to the first anniversary of the date of
grant. Options are exercisable at the fair market value of Common
Stock on the date of grant.
The LTIP also permits the payment -- on a current or a deferred
basis and in cash or in stock -- of dividend equivalents on shares of
Common Stock covered by options or PSUs in an amount commensurate with
dividends paid on Common Stock. Tax absorption payments also are
authorized, in amounts estimated to equal the federal and state income
taxes applicable to shares of Common Stock issued subject to a share
retention agreement.
Accounting Method
- -----------------
NS applies APB Opinion 25 and related interpretations in
accounting for awards made under the plans. Accordingly, PSUs,
restricted stock, dividend equivalents, tax absorption payments and
SARs result in charges to net income, while stock options have no
effect on net income. Related compensation costs were $2 million in
1999, $25 million in 1998 and $29 million in 1997. Had such
compensation costs been determined in accordance with SFAS 123, net
income would have been $210 million in 1999, $718 million in 1998 and
$714 million in 1997; basic earnings per share would have been $0.55
in 1999, $1.90 in 1998 and $1.90 in 1997; and diluted earnings per
share would have been $0.55 in 1999, $1.89 in 1998 and $1.89 in 1997.
These pro forma amounts include compensation costs as calculated using
the Black-Scholes option-pricing model with average expected option
lives of four years for 1999 grants and five years for grants made in
1998 and 1997; average risk-free interest rates of 5.2% in 1999, 5.5%
in 1998 and 6.3% in 1997; average stock-price volatilities of 21% in
1999, 15% in 1998 and 16% in 1997; and dividend yields ranging from 0%
to 3%.
<PAGE> PAGE 72
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
11. STOCK-BASED COMPENSATION (continued)
<TABLE>
Stock Option Activity
- ---------------------
<CAPTION>
Weighted Average
Option Shares Exercise Price
------------- ---------------
<S> <C> <C>
Balance 12/31/96 10,884,537 $ 20.38
Granted 1,986,000 29.46
Exercised (1,477,226) 17.62
Surrendered for SAR (6,393) 7.42
Canceled (13,500) 29.46
----------
Balance 12/31/97 11,373,418 22.32
Granted 3,625,000 32.16
Exercised (1,908,370) 19.22
Canceled (31,000) 29.46
----------
Balance 12/31/98 13,059,048 25.48
Granted 9,150,400 30.09
Exercised (859,085) 17.10
Canceled (234,000) 29.84
----------
Balance 12/31/99 21,116,363 $ 27.77
==========
</TABLE>
Except for those granted during 1999, all outstanding options
were exercisable on Dec. 31, 1999. The difference between the weighted
average exercise prices for all outstanding options and those
exercisable on Dec. 31, 1999, was not significant.
<TABLE>
Stock Options Outstanding
- -------------------------
<CAPTION>
Exercise Price Number Weighted Average
---------------------------------- Outstanding Remaining
Range Weighted Average at 12/31/99 Contractual Life
----- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
$12.56 to $14.25 $14.12 619,163 1.0 years
18.81 to 21.08 20.44 3,170,450 3.7 years
24.31 to 27.69 26.78 8,123,100 7.6 years
29.46 to 33.25 32.10 9,203,650 8.3 years
----------
$12.56 to $33.25 $27.77 21,116,363 7.1 years
==========
</TABLE>
Performance Share Units
- -----------------------
PSUs provide for awards based upon achievement of certain
predetermined corporate performance goals at the end of a three-year
cycle. PSU grants and average grant-date fair market values were
850,000 and $27.72 in 1999; 565,500 and $32.16 in 1998; and 529,500
and $29.46 in 1997, respectively. PSUs may be paid in the form of
shares of Common Stock, cash or a combination. Shares earned and
issued may be subject to share retention agreements and held by NS for
up to five years.
<PAGE> PAGE 73
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
11. STOCK-BASED COMPENSATION (continued)
Shares Available and Issued
- ---------------------------
<TABLE>
Shares of stock available for future grants and issued in
connection with all features of the LTIP and TSOP are as follows:
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Available for future
grants 12/31:
LTIP 10,512,997 16,233,600 19,928,853
TSOP 2,349,600 -- --
Shares of Common Stock
issued:
LTIP 1,086,288 2,212,323 1,933,703
TSOP -- -- --
</TABLE>
12. STOCKHOLDERS' EQUITY
Accumulated Other Comprehensive Income
- --------------------------------------
<TABLE>
"Accumulated other comprehensive income" reported in
"Stockholders' equity" included unrealized gains on securities, net of
taxes, of $2 million at Dec. 31, 1999, and $6 million at Dec. 31,
1998, and minimum pension liability of $13 million at Dec. 31, 1999,
and $14 million at Dec. 31, 1998. "Other comprehensive income"
reported in the Consolidated Statements of Changes in Stockholders'
Equity consisted of the following:
<CAPTION>
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
<S> <C> <C> <C>
Unrealized gains on securities $ (6) $ 1 $ 4
Minimum pension liability 2 (23) --
Income taxes 1 9 (2)
----- ----- -----
Other comprehensive
income $ (3) $ (13) $ 2
===== ===== =====
</TABLE>
"Unrealized gains on securities" included reclassification
adjustments for gains realized in income from the sale of the
securities of less than $1 million in each year.
Undistributed Earnings of Equity Investees
- ------------------------------------------
"Retained income" includes undistributed earnings of equity
investees, principally attributable to NS' equity in the earnings of
Conrail, of $330 million at Dec. 31, 1999, $314 million at Dec. 31,
1998, and $120 million at Dec. 31, 1997.
Stock Split
- -----------
On July 22, 1997, the Board of Directors approved an amendment of
the Articles of Incorporation increasing the number of authorized
shares of Common Stock from 450 million to 1,350 million in connection
with a three-for-one split to stockholders of record on Sept. 5, 1997.
This stock split, with no change in the par value of $1 per share,
resulted in the issuance of approximately 266 million additional
shares of Common Stock. All share and per share amounts in this report
have been restated to reflect the split.
<PAGE> PAGE 74
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. EARNINGS PER SHARE
<TABLE>
The following table sets forth the calculation of basic and
diluted earnings per share:
<CAPTION>
($ in millions except per
share, shares in millions) 1999 1998 1997
--------------------------- ---- ---- ----
<S> <C> <C> <C>
Basic earnings per share:
Income available to common
stockholders for basic
and diluted computations $ 239 $ 734 $ 721
------ ------ ------
Weighted-average shares
outstanding 381 379 377
------ ------ ------
Basic earnings per
share $ 0.63 $ 1.94 $ 1.91
------ ------ ------
Diluted earnings per share:
Weighted-average shares
outstanding per above 381 379 377
Dilutive effect of
outstanding options,
PSUs and SARs (as
determined by the
application of the
treasury stock method) 1 2 3
------ ------ ------
Adjusted weighted-
average shares
outstanding 382 381 380
------ ------ ------
Diluted earnings
per share $ 0.63 $ 1.93 $ 1.90
====== ====== ======
</TABLE>
These calculations exclude options the exercise price of which
exceeded the average market price of Common Stock as follows: in 1999,
17 million in the fourth quarter, 9 million in the third quarter,
7 million in the second quarter and 5 million in the first quarter;
and in 1998, 4 million in the fourth and third quarters.
There are no adjustments to "Net income" or "Income from
continuing operations" for the diluted earnings per share
computations.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of "Cash and cash equivalents," "Short-term
investments," "Accounts receivable," "Short-term debt" and "Accounts
payable" approximate carrying values because of the short maturity of
these financial instruments. The fair value of corporate-owned life
insurance approximates carrying value. The carrying amounts and
estimated fair values for the remaining financial instruments,
excluding investments accounted for under the equity method in
accordance with APB Opinion No. 18, consisted of the following at
December 31:
<PAGE> PAGE 75
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
14. FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
<CAPTION>
1999 1998
---- ----
Carrying Fair Carrying Fair
($ in millions) Amount Value Amount Value
--------------- ------ ----- ------ -----
<S> <C> <C> <C> <C>
Investments $ 49 $ 54 $ 100 $ 105
Long-term debt (8,058) (7,980) (7,624) (8,182)
Interest rate swaps -- 4 -- 20
</TABLE>
Quoted market prices were used to determine the fair value of
marketable securities; underlying net assets were used to estimate the
fair value of other investments. The fair values of debt were
estimated based on quoted market prices or discounted cash flows using
current interest rates for debt with similar terms, company rating and
remaining maturity. The fair value of interest rate swaps were
estimated based on discounted cash flows, reflecting the difference
between estimated future variable-rate payments and future fixed-rate
receipts.
Carrying amounts of marketable securities reflect unrealized
holding gains of $3 million on Dec. 31, 1999, and $9 million on
Dec. 31, 1998. Sales of "available-for-sale" securities were
immaterial for years ended Dec. 31, 1999 and 1998.
15. DISCONTINUED OPERATIONS - MOTOR CARRIER
On March 28, 1998, NS sold all the common stock of North American
Van Lines, Inc. (NAVL), its motor carrier subsidiary. Total proceeds
from the sale were $207 million, resulting in a $90 million pretax
gain ($105 million, or 28 cents per basic and diluted share, after
taxes). The higher after-tax gain was the result of differences
between book and tax bases and the realization of deferred tax
benefits.
<TABLE>
NAVL's results of operations, financial position and cash flows
are presented as "Discontinued operations" in the accompanying
financial statements. A summary of NAVL's results of operations
follows:
<CAPTION>
($ in millions) 1998 1997
--------------- ---- ----
<S> <C> <C>
Motor carrier revenues $ 207 $ 942
Motor carrier expenses 208 907
Provision for income taxes -- 13
------- -------
Income (loss) from operations (1) 22
Gain on sale, net of taxes 105 --
------- -------
Income from
discontinued operations $ 104 $ 22
------- -------
Earnings per share (basic and
diluted) from discontinued
operations $ 0.28 $ 0.06
======= =======
</TABLE>
<PAGE> PAGE 76
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
16. COMMITMENTS AND CONTINGENCIES
Lawsuits
- --------
Norfolk Southern and certain subsidiaries are defendants in
numerous lawsuits relating principally to railroad operations. While
the final outcome of these lawsuits cannot be predicted with
certainty, it is the opinion of Management, based on known facts and
circumstances, that the amount of NS' ultimate liability is unlikely
to have a material adverse effect on NS' financial position, results
of operations or liquidity.
Environmental Matters
- ---------------------
NS is subject to various jurisdictions' environmental laws and
regulations. It is NS' policy to record a liability where such
liability or loss is probable and its amount can be estimated
reasonably. Claims, if any, against third parties for recovery of
cleanup costs incurred by NS are reflected as receivables in the
balance sheet and are not netted against the associated NS liability.
Environmental engineers regularly participate in ongoing evaluations
of all identified sites and in determining any necessary adjustments
to initial liability estimates. NS also has established an
Environmental Policy Council, composed of senior managers, to oversee
and interpret its environmental policy.
As of Dec. 31, 1999, NS' balance sheet included a reserve for
environmental exposures in the amount of $41 million (of which
$8 million is accounted for as a current liability), which is NS'
estimate of the probable cleanup and remediation costs based on
available information at 126 identified locations. On that date,
12 sites accounted for $20 million of the reserve, 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 126 locations, certain NS subsidiaries, usually in
conjunction with a number of other parties, have been identified as
potentially responsible parties by the Environmental Protection Agency
(EPA) or similar state authorities under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, or
comparable state statutes, which often impose joint and several
liability for cleanup costs.
With respect to known environmental sites (whether identified by
NS or by the EPA or comparable state authorities), estimates of NS'
ultimate potential financial exposure for a given site or in the
aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available cleanup techniques, the
likely development of new cleanup technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it), and evolving statutory and
regulatory standards governing liability.
The risk of incurring environmental liability -- for acts and
omissions, past, present and future -- is inherent in the railroad
business. Some of the commodities in NS' traffic mix, particularly
those classified as hazardous materials, can pose special risks that
NS and its subsidiaries work diligently to minimize. In addition,
several NS subsidiaries own, or have owned, land used as operating
property, or which is leased or may have been leased and operated by
others, or held for sale. Because environmental problems may exist on
these properties that are latent or undisclosed, there can be no
assurance that NS will not incur environmentally related liabilities
or costs with respect to one or more of them, the amount and
materiality of which cannot be estimated reliably at this time.
Moreover, lawsuits and claims involving these and other now-
unidentified environmental sites and matters are likely to arise from
time to time. The resulting liabilities could have a significant
effect on financial condition, results of operations or liquidity in a
particular year or quarter.
<PAGE> PAGE 77
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
16. COMMITMENTS AND CONTINGENCIES (continued)
However, based on its assessments of the facts and circumstances
now known, Management believes that it has recorded the probable costs
for dealing with those environmental matters of which the Corporation
is aware. Further, Management believes that it is unlikely that any
identified matters, either individually or in the aggregate, will have
a material adverse effect on NS' financial position, results of
operations or liquidity.
Tax Benefit Leases
- ------------------
In January 1995, the United States Tax Court issued a preliminary
decision that disallowed some of the tax benefits a subsidiary of NS
purchased from a third party pursuant to a safe harbor lease agreement
in 1981. The Tax Court finalized this decision in February 1997, and
all avenues of appeal have been exhausted. NS has requested payment
and filed suit to collect from the third party in accordance with
indemnification provisions of the lease agreement, and Management
believes that this receivable will be collected.
Change-In-Control Arrangements
- ------------------------------
Norfolk Southern has compensation agreements with officers and
certain key employees that become operative only upon a change in
control of the Corporation, as defined in those agreements. The
agreements provide generally for payments based on compensation at the
time of a covered individual's involuntary or other specified
termination and for certain other benefits.
Debt Guarantees
- ---------------
As of Dec. 31, 1999, certain Norfolk Southern subsidiaries are
contingently liable as guarantors with respect to $8 million of
indebtedness of related entities.
<PAGE> PAGE 78
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Norfolk Southern Corporation:
We have audited the consolidated financial statements of Norfolk
Southern Corporation and subsidiaries as listed in the index in
Item 8. In connection with our audits of the consolidated financial
statements, we have also audited the consolidated financial statement
schedule listed in Item 14(a)2. These consolidated financial
statements and this consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and this
consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. 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,
1999 and 1998, and the results of their operations and their cash
flows for each of the years in the three-year period ended December
31, 1999, in conformity with generally accepted accounting principles.
Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Norfolk, Virginia
January 25, 2000
<PAGE> PAGE 79
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------ -----------------------------------------------------------
and Financial Disclosure.
------------------------
None.
<PAGE> PAGE 80
PART III
--------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
Item 11. Executive Compensation.
- ------- ----------------------
Item 12. Security Ownership of Certain Beneficial Owners and
- ------- ---------------------------------------------------
Management.
----------
and
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
In accordance with General Instruction G(3), the information
called for by Part III is incorporated herein by reference from
Norfolk Southern's definitive Proxy Statement, to be dated March 31,
2000, for the Norfolk Southern Annual Meeting of Stockholders to be
held on May 11, 2000, which definitive Proxy Statement will be filed
electronically with the Commission pursuant to Regulation 14A. The
information regarding executive officers called for by Item 401 of
Regulation S-K is included in Part I hereof beginning on Page 18 under
"Executive Officers of the Registrant."
<PAGE> PAGE 81
PART IV
-------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Item 14. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K.
-------------------
(A) The following documents are filed as part of this report:
1. Index to Consolidated Financial Statements: Page
------------------------------------------ ----
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997 50
Consolidated Balance Sheets
As of December 31, 1999 and 1998 51
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997 53
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997 55
Notes to Consolidated Financial Statements 56
Independent Auditors' Report 78
2. Financial Statement Schedule:
The following consolidated financial statement schedule
should be read in connection with the consolidated financial
statements:
Index to Consolidated Financial Statement Schedule Page
-------------------------------------------------- ----
Schedule II - Valuation and Qualifying Accounts 90
Schedules other than the one listed above are omitted
either because they are not required or are inapplicable,
or because the information is included in the consolidated
financial statements or related notes.
<PAGE> PAGE 82
Item 14. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits
Exhibit
Number Description
- ------- ------------------------------------------------------------
3 Articles of Incorporation and Bylaws -
3(i) The Restated Articles of Incorporation of Norfolk Southern
Corporation are filed herewith.
3(ii) The Bylaws of Norfolk Southern Corporation, as amended
May 13, 1999, are filed herewith.
4 Instruments Defining the Rights of Security Holders,
Including Indentures -
(a) Indentures related to the issuance of notes in the
principal amount of $4.3 billion are incorporated
herein by reference from Exhibits 4.1 and 4.2 to
Norfolk Southern Corporation's Amendment No. 3 to Form
S-3, Registration No. 333-24051, filed on May 12, 1997.
(b) Indentures related to the issuance of notes in the
principal amount of $400 million are incorporated
herein by reference from Exhibits 4.1 and 4.2 to
Norfolk Southern Corporation's Form S-3, Registration
No. 333-67937, filed on November 25, 1998.
In accordance with Item 601(b)(4)(iii) of Regulation S-K,
copies of other instruments of Norfolk Southern Corporation
and its subsidiaries with respect to the rights of holders
of long-term debt are not filed herewith, or incorporated by
reference, but will be furnished to the Commission upon
request.
10 Material Contracts -
(a) The Transaction Agreement, dated as of June 10, 1997,
by and among CSX, CSX Transportation, Inc., Registrant,
Norfolk Southern Railway Company, Conrail Inc.,
Consolidated Rail Corporation and CRR Holdings LLC,
with certain schedules thereto, is incorporated herein
by reference from Exhibit 10 to Norfolk Southern
Corporation's Form 8-K filed electronically on June 30,
1997.
<PAGE> PAGE 83
Item 14. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
- ------- ------------------------------------------------------------
10 Material Contracts (continued) -
(b) Amendment No. 1, dated as of August 22, 1998, to the
Transaction Agreement, dated as of June 10, 1997, by
and among CSX Corporation, CSX Transportation, Inc.,
Norfolk Southern Corporation, Norfolk Southern Railway
Company, Conrail Inc., Consolidated Rail Corporation
and CRR Holdings LLC is incorporated herein by
reference from Exhibit 10.1 to Norfolk Southern
Corporation's Form 10-Q Report for the period ended
June 30, 1999.
(c) Amendment No. 2, dated as of June 1, 1999, to the
Transaction Agreement, dated June 10, 1997, by and
among CSX Corporation, CSX Transportation, Inc.,
Norfolk Southern Corporation, Norfolk Southern Railway
Company, Conrail Inc., Consolidated Rail Corporation
and CRR Holdings LLC is incorporated herein by
reference from Exhibit 10.2 to Norfolk Southern
Corporation's Form 10-Q Report for the period ended
June 30, 1999.
(d) Operating Agreement, dated as of June 1, 1999, by and
between Pennsylvania Lines LLC and Norfolk Southern
Railway Company is incorporated herein by reference
from Exhibit 10.3 to Norfolk Southern Corporation's
Form 10-Q Report for the period ended June 30, 1999.
(e) Shared Assets Area Operating Agreement for North
Jersey, dated as of June 1, 1999, by and among
Consolidated Rail Corporation, CSX Transportation, Inc.
and Norfolk Southern Railway Company, with exhibit
thereto, is incorporated herein by reference from
Exhibit 10.4 to Norfolk Southern Corporation's Form
10-Q Report for the period ended June 30, 1999.
(f) Shared Assets Area Operating Agreement for South
Jersey/Philadelphia, dated as of June 1, 1999, by and
among Consolidated Rail Corporation, CSX
Transportation, Inc. and Norfolk Southern Railway
Company, with exhibit thereto, is incorporated herein
by reference from Exhibit 10.5 to Norfolk Southern
Corporation's Form 10-Q Report for the period ended
June 30, 1999.
<PAGE> PAGE 84
Item 14. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
- ------- ------------------------------------------------------------
10 Material Contracts (continued) -
(g) Shared Assets Area Operating Agreement for Detroit,
dated as of June 1, 1999, by and among Consolidated
Rail Corporation, CSX Transportation, Inc. and Norfolk
Southern Railway Company, with exhibit thereto, is
incorporated herein by reference from Exhibit 10.6 to
Norfolk Southern Corporation's Form 10-Q Report for the
period ended June 30, 1999.
(h) Monongahela Usage Agreement, dated as of June 1, 1999,
by and among CSX Transportation, Inc., Norfolk Southern
Railway Company, Pennsylvania Lines LLC and New York
Central Lines LLC, with exhibit thereto, is
incorporated herein by reference from Exhibit 10.7 to
Norfolk Southern Corporation's Form 10-Q Report for the
period ended June 30, 1999.
(i) The Agreement, entered into as of July 27, 1999,
between North Carolina Railroad Company and Norfolk
Southern Railway Company, is filed herewith.
(j) The Supplementary Agreement, entered into as of
January 1, 1987, between the Trustees of the Cincinnati
Southern Railway and The Cincinnati, New Orleans and
Texas Pacific Railway Company (the latter a wholly
owned subsidiary of Norfolk Southern Railway Company) -
extending and amending a Lease, dated as of October 11,
1881 (both the Lease and Supplementary Agreement,
formerly incorporated by reference with Exhibit 10(b)
to Southern's 1987 Annual Report on Form 10-K) - is
incorporated herein by reference from Exhibit 10(a) to
Norfolk Southern Corporation's 1994 Annual Report on
Form 10-K.
Management Compensation Plans
-----------------------------
(k) The Norfolk Southern Corporation Management Incentive
Plan, as amended effective January 25, 2000, is filed
herewith.
(l) The Norfolk Southern Corporation Executive Management
Incentive Plan, effective January 25, 2000, is filed
herewith.
<PAGE> PAGE 85
Item 14. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
- ------- ------------------------------------------------------------
10 Material Contracts (continued) -
Management Compensation Plans (continued)
-----------------------------
(m) The Norfolk Southern Corporation Long-Term Incentive
Plan, as amended effective January 25, 2000, is filed
herewith.
(n) The Norfolk Southern Corporation Officers' Deferred
Compensation Plan, as amended effective May 13, 1999,
is filed herewith.
(o) The Directors' Deferred Fee Plan of Norfolk Southern
Corporation, as amended effective May 9, 1996, is
incorporated herein by reference from Exhibit 10(f) to
Norfolk Southern Corporation's Form 10-Q Report for the
quarter ended June 30, 1996.
(p) The Norfolk Southern Corporation Directors' Restricted
Stock Plan, effective January 1, 1994, as restated
November 24, 1998, is incorporated herein by reference
from Exhibit 10(h) to Norfolk Southern Corporation's
1998 Annual Report on Form 10-K.
(q) Form of Severance Agreement, dated as of June 1, 1996,
between Norfolk Southern Corporation and certain
executive officers (including those defined as "named
executive officers" and identified in the Corporation's
Proxy Statement for the 1997 and 1998 Annual Meeting of
Stockholders) is incorporated herein by reference from
Exhibit 10 to Norfolk Southern Corporation's Form 10-Q
Report for the quarter ended June 30, 1996.
(r) Norfolk Southern Corporation Supplemental (formerly,
Excess) Benefit Plan, effective as of August 22, 1999,
is filed herewith.
(s) The Norfolk Southern Corporation Directors' Charitable
Award Program, effective February 1, 1996, is
incorporated herein by reference from Exhibit 10(j) to
Norfolk Southern Corporation's Form 10-Q Report for the
quarter ended June 30, 1996.
<PAGE> PAGE 86
Item 14. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
- ------- ------------------------------------------------------------
10 Material Contracts (continued) -
Management Compensation Plans (continued)
-----------------------------
(t) The Norfolk Southern Corporation Directors' Pension
Plan, as amended effective June 1, 1996, is
incorporated herein by reference from Exhibit 10(k) to
Norfolk Southern Corporation's Form 10-Q Report for the
quarter ended June 30, 1996.
(u) The Norfolk Southern Corporation Outside Directors'
Deferred Stock Unit Program, as amended on
September 23, 1997, is incorporated herein by reference
from Exhibit 10(m) to Norfolk Southern Corporation's
1997 Annual Report on Form 10-K.
(v) The Excess Long-Term Disability Plan of Norfolk
Southern Corporation and Participating Subsidiary
Companies, effective October 1, 1995, is incorporated
herein by reference from Exhibit 10(m) to Norfolk
Southern Corporation's Form 10-Q Report for the quarter
ended June 30, 1996.
12 Statement re: Computation of Ratio of Earnings to Fixed
Charges.
21 Subsidiaries of the Registrant.
23 Consents of Experts and Counsel -
(a) Consent of KPMG LLP.
(b) Consent of KPMG LLP and Ernst & Young LLP.
(c) Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule.
99 Conrail Inc. 1999 Annual Report to Stockholders.
<PAGE> PAGE 87
Item 14. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
(B) Reports on Form 8-K.
The Registrant filed no reports on Form 8-K for the three
months ended December 31, 1999.
(C) Exhibits.
The Exhibits required by Item 601 of Regulation S-K as
listed in Item 14(a)3 are filed herewith or incorporated
herein by reference.
(D) Financial Statement Schedules.
Financial statement schedules and separate financial
statements specified by this Item are included in
Item 14(a)2 or are otherwise not required or are not
applicable.
<PAGE> PAGE 88
POWER OF ATTORNEY
-----------------
Each person whose signature appears below under "SIGNATURES"
hereby authorizes Henry C. Wolf and J. Gary Lane, or either
of them, to execute in the name of each such person, and to file,
any amendment to this report and hereby appoints Henry C. Wolf and
J. Gary Lane, or either of them, as attorneys-in-fact to
sign on his or her behalf, individually and in each capacity stated
below, and to file, any and all amendments to this report.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Norfolk Southern Corporation has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on this 6th day of March, 2000.
NORFOLK SOUTHERN CORPORATION
By /s/ David R. Goode
----------------------------------
(David R. Goode, Chairman, President
and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on this 6th day of March,
2000, by the following persons on behalf of Norfolk Southern
Corporation and in the capacities indicated.
Signature Title
- --------- -----
/s/ David R. Goode
- ------------------------------ Chairman, President and Chief
(David R. Goode) Executive Officer and Director
(Principal Executive Officer)
/s/ Henry C. Wolf
- ------------------------------ Vice Chairman and
(Henry C. Wolf) Chief Financial Officer
(Principal Financial Officer)
/s/ John P. Rathbone
- ------------------------------ Vice President and Controller
(John P. Rathbone) (Principal Accounting Officer)
<PAGE> PAGE 89
Signature Title
- --------- -----
/s/ Gerald L. Baliles
- ------------------------------ Director
(Gerald L. Baliles)
/s/ Carroll A. Campbell, Jr.
- ------------------------------ Director
(Carroll A. Campbell, Jr.)
/s/ Gene R. Carter
- ------------------------------ Director
(Gene R. Carter)
/s/ L. E. Coleman
- ------------------------------ Director
(L. E. Coleman)
/s/ Landon Hilliard
- ------------------------------ Director
(Landon Hilliard)
/s/ Steven F. Leer
- ------------------------------ Director
(Steven F. Leer)
/s/ Arnold B. McKinnon
- ------------------------------ Director
(Arnold B. McKinnon)
/s/ Jane Margaret O'Brien
- ------------------------------ Director
(Jane Margaret O'Brien)
/s/ Harold W. Pote
- ------------------------------ Director
(Harold W. Pote)
<PAGE> PAGE 90
Schedule II
Page 1 of 2
<TABLE>
Norfolk Southern Corporation and Subsidiaries
---------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1998 and 1999
(In millions of dollars)
<CAPTION>
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
- ----------------------------
Valuation allowance
(included net in
deferred tax liability)
for deferred tax assets $ 2 $ -- $ -- $ -- $ 2
Casualty and other claims
included in other
liabilities $ 248 $ 108 $ 2 (1) $ 105 (2) $ 253
Current portion of
casualty and other
claims included in
accounts payable $ 166 $ 14 $ 170 (1) $ 178 (3) $ 172
Year ended December 31, 1998
- ----------------------------
Valuation allowance
(included net in
deferred tax liability)
for deferred tax assets $ 2 $ 1 $ -- $ -- $ 3
Casualty and other claims
included in other
liabilities $ 253 $ 86 $ 22 (1) $ 90 (2) $ 271
Current portion of
casualty and other
claims included in
accounts payable $ 172 $ 11 $ 149 (1) $ 188 (3) $ 144
(1) Includes revenue overcharges provided through charges to operating
revenues and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
Note: Prior year amounts have been conformed with the current year
presentation, which excludes valuation and qualifying accounts
of discontinued operations.
(continued)
<PAGE> PAGE 91
Schedule II
Page 2 of 2
Norfolk Southern Corporation and Subsidiaries
---------------------------------------------
Valuation and Qualifying Accounts
Years Ended December 31, 1997, 1998 and 1999 (continued)
(In millions of dollars)
Additions charged to
--------------------
Beginning Other Ending
Balance Expenses Accounts Deductions Balance
--------- -------- -------- ---------- -------
Year ended December 31, 1999
- ----------------------------
Valuation allowance
(included net in
deferred tax liability)
for deferred tax assets $ 3 $ 6 $ -- $ -- $ 9
Casualty and other
claims included in
other liabilities $ 271 $ 114 $ 9 (1) $ 119 (2) $ 275
Current portion of
casualty and other
claims included in
accounts payable $ 144 $ 19 $ 191 (1) $ 173 (3) $ 181
</TABLE>
(1) Includes revenue overcharges provided through charges to operating
revenues and transfers from other accounts.
(2) Payments and reclassifications to/from accounts payable.
(3) Payments and reclassifications to/from other liabilities.
Note: Prior year amounts have been conformed with the current year
presentation, which excludes valuation and qualifying accounts
of discontinued operations.
<PAGE> PAGE 92
EXHIBIT INDEX
-------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Electronic
Submission
Exhibit
Number Description Page
- --------- ------------------------------------------------- ----
3 (i) The Restated Articles of Incorporation of
Norfolk Southern Corporation. 94
3 (ii) The Bylaws of Norfolk Southern Corporation,
as amended May 13, 1999. 103
10 (i) The Agreement, entered into as of July 27, 1999,
between North Carolina Railroad Company and
Norfolk Southern Railway Company. 111
10 (k) The Norfolk Southern Corporation Management
Incentive Plan, as amended effective
January 25, 2000. 155
10 (l) The Norfolk Southern Corporation Executive
Management Incentive Plan, effective
January 25, 2000. 161
10 (m) The Norfolk Southern Corporation Long-Term
Incentive Plan, as amended effective
January 25, 2000. 165
10 (n) The Norfolk Southern Corporation Officers'
Deferred Compensation Plan, as amended effective
May 13, 1999. 180
10 (r) Norfolk Southern Corporation Supplemental
(formerly, Excess) Benefit Plan, effective as
of August 22, 1999. 188
12 Statement re: Computation of Ratio of Earnings
to Fixed Charges. 194
21 Subsidiaries of Norfolk Southern Corporation. 195
23 Consent of Experts and Counsel -
(a) Consent of KPMG LLP. 197
(b) Consent of KPMG LLP and Ernst & Young LLP. 198
(c) Consent of PricewaterhouseCoopers LLP. 199
<PAGE> PAGE 93
EXHIBIT INDEX
-------------
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
Electronic
Submission
Exhibit
Number Description Page
- --------- ------------------------------------------------- ----
27 Financial Data Schedule. 200
(This exhibit is required to be submitted
electronically pursuant to the rules and
regulations of the Securities and Exchange
Commission and shall not be deemed filed
for purposes of Section 11 of the
Securities Act of 1933 or Section 18 of the
Securities Exchange Act of 1934.)
99 Conrail Inc. 1999 Annual Report to Stockholders. 201
Exhibits 3(i), 3(ii), 10(i), 10(k), 10(l), 10(m), 10(n), 10(r) and 27
are not included in copies assembled for public dissemination.
If you have a need for this type of information,
we will be pleased to send it to you.
Write to:
Office of Corporate Secretary
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Virginia 23510-9219
<PAGE> PAGE 94
EXHIBIT 3(i), Page 1 of 9
NORFOLK SOUTHERN CORPORATION
ARTICLES OF RESTATEMENT
The following restatement of the Corporation's Articles of
Incorporation, which contains as an amendment not requiring shareholder
approval a new Article 111, was adopted by the Corporation's Board of
Directors at a meeting held on July 22, 1997.
RESTATED ARTICLES OF INCORPORATION
OF
NORFOLK SOUTHERN CORPORATION
ARTICLE I
The name of the Corporation is NORFOLK SOUTHERN CORPORATION.
ARTICLE II
The purpose for which the Corporation is organized is to
transact any lawful business not required to be specifically stated in
the Articles of Incorporation.
ARTICLE III
The Corporation shall have authority to issue one billion,
three hundred fifty million (1,350,000,000) shares of Common Stock, par
value $1 per share, and twenty-five million (25,000,000) shares of
Serial Preferred Stock, without par value.
A. SERIAL PREFERRED STOCK
1. ISSUANCE IN SERIES. The Board of Directors is hereby
empowered to cause the Serial Preferred Stock of the Corporation to be
issued in series with such of the variations permitted by clauses (a)-
(h), both inclusive, of this Section 1 as shall have been fixed and
determined by the Board of Directors with respect to any series prior to
the issue of any shares of such series.
The shares of the Serial Preferred Stock of different series
may vary as to:
<PAGE> PAGE 95
EXHIBIT 3(i), Page 2 of 9
(a) the number of shares constituting such series and
the designation of such series, which shall be such as to distinguish
the shares thereof from the shares of all other series and classes:
(b) the rate of dividend, the time of payment and, if
cumulative, the dates from which dividends shall be cumulative, and the
extent of participation rights, if any;
(c) any right to vote with holders of shares of any
other series or class and any right to vote as a class, either generally
or as a condition to specified corporate action;
(d) the price at and the terms and conditions on which
shares may be redeemed;
(e) the amount payable upon shares in event of
involuntary liquidation;
(f) the amount payable upon shares in event of voluntary
liquidation;
(g) any sinking fund provisions for the redemption or
purchase of shares; and
(h) the terms and conditions on which shares may be
converted, if the shares of any series are issued with the privilege of
conversion.
The shares of all series of Serial Preferred Stock shall be
identical except as, within the limitations set forth above in this
Section 1, shall have been fixed and determined by the Board of
Directors prior to the issuance thereof.
2. DIVIDENDS. The holders of the Serial Preferred Stock of
each series shall be entitled to receive, if and when declared payable
by the Board of Directors, dividends in lawful money of the United
States of America, at the dividend rate for such series, and not
exceeding such rate except to the extent of any participation right.
Such dividends shall be payable on such dates as shall be fixed for such
series. Dividends, if cumulative and in arrears, shall not bear
interest.
No dividends shall be declared or paid upon or set apart for
the Common Stock or for stock of any other class hereafter created
ranking junior to the Serial Preferred Stock in respect of dividends or
assets (hereinafter called Junior Stock), and no shares of Serial
Preferred Stock, Common Stock or Junior Stock shall be purchased,
redeemed or otherwise reacquired for a consideration, nor shall any
funds be set aside for or paid to any sinking fund therefor, unless and
until (i) full dividends on the outstanding Serial Preferred Stock at
the dividend rate or rates therefor, together with the full additional
amount required by any participation right, shall have been paid or
declared and set apart for payment with respect to all past dividend
periods, to the extent that the holders of the Serial Preferred Stock
<PAGE> PAGE 96
EXHIBIT 3(i), Page 3 of 9
are entitled to dividends with respect to any past dividend period,
and the current dividend period, and (ii) all mandatory sinking fund
payments that shall have become due in respect of any series of the
Serial Preferred Stock shall have been made. Unless full dividends
with respect to all past dividend periods on the outstanding Serial
Preferred Stock at the dividend rate or rates therefor, to the extent
that holders of the Serial Preferred Stock are entitled to dividends
with respect to any particular past dividend period, together with
the full additional amount required by any participation right, shall
have been paid or declared and set apart for payment and all mandatory
sinking fund payments that shall have become due in respect of any series
of the Serial Preferred Stock shall have been made, no distributions
shall be made to the holders of the Serial Preferred Stock of any series
unless distributions are made to the holders of the Serial Preferred
Stock of all series then outstanding in proportion to the aggregate
amounts of the deficiencies in payments due to the respective series,
and all payments shall be applied, first, to dividends accrued and in
arrears, next, to any amount required by any participation right, and,
finally, to mandatory sinking fund payments. The terms "current dividend
period" and "past dividend period" mean, if two or more series of Serial
Preferred Stock having different dividend periods are at the time
outstanding, the current dividend period or any past dividend period,
as the case may be, with respect to each such series.
3. PREFERENCE ON LIQUIDATION. In the event of any
liquidation, dissolution or winding up of the Corporation, the holders
of the Serial Preferred Stock of each series shall be entitled to
receive, for each share thereof, the fixed liquidation price for such
series, plus, in case such liquidation, dissolution or winding up shall
have been voluntary, the fixed liquidation premium for such series, if
any, together in all cases with a sum equal to all dividends accrued or
in arrears thereon and the full additional amount required by any
participation right, before any distribution of the assets shall be made
to holders of the Common Stock or Junior Stock; but the holders of the
Serial Preferred Stock shall be entitled to no further participation in
such distribution. If, upon any such liquidation, dissolution or
winding up, the assets distributable among the holders of the Serial
Preferred Stock shall be insufficient to permit the payment of the full
preferential amounts aforesaid, then such assets shall be distributed
among the holders of the Serial Preferred Stock then outstanding ratably
in proportion to the full preferential amounts to which they are
respectively entitled. For the purposes of this Section 3, the
expression "dividends accrued or in arrears" means, in respect of each
share of the Serial Preferred Stock of any series at a particular time,
an amount equal to the product of the rate of dividend per annum
applicable to the shares of such series multiplied by the number of
years and any fractional part of a year that shall have elapsed from the
date when dividends on such shares became cumulative to the particular
time in question less the total amount of dividends actually paid on the
shares of such series or declared and set apart for payment thereon;
provided, however, that, if the dividends on such shares shall not be
fully cumulative, such expression shall mean the dividends, if any,
cumulative in respect of such shares for the period stated in the
articles of serial designation creating such shares less all dividends
paid in or with respect to such period.
<PAGE> PAGE 97
EXHIBIT 3(i), Page 4 of 9
B. COMMON STOCK
1. Subject to the provisions of law and the rights of
holders of shares at the time outstanding of all classes of stock having
prior rights as to dividends, the holders of Common Stock at the time
outstanding shall be entitled to receive such dividends at such times
and in such amounts as the Board of Directors may deem advisable.
2. In the event of any liquidation, dissolution or winding
up (whether voluntary or involuntary) of the Corporation, after the
payment or provision for payment in full of all debts and other
liabilities of the Corporation and all preferential amounts to which the
holders of shares at the time outstanding of all classes of stock having
prior rights thereto shall be entitled, the remaining net assets of the
Corporation shall be distributed ratably among the holders of the shares
at the time outstanding of Common Stock.
3. The holders of Common Stock shall be entitled to one vote
per share on all matters.
ARTICLE IV
No holder of capital stock of the Corporation of any class
shall have any preemptive right to subscribe to or purchase (i) any
shares of capital stock of the Corporation, (ii) any securities
convertible into such shares or (iii) any options, warrants or rights to
purchase such shares or securities convertible into such shares.
ARTICLE V
The number of directors, unless otherwise fixed by the bylaws,
shall be sixteen. The directors shall be divided into three classes,
one of which shall be composed of six directors and two of which shall
be composed of five directors. At each annual meeting of stockholders,
the number of directors to be elected shall be equal to the number of
directors whose terms of office then expire, except that, if the total
number of directors shall have been increased or decreased, the number
of directors then to be elected shall be as nearly as possible one third
of the total number of directors, and each director shall hold office
until the third succeeding annual meeting after his election; provided,
however, that at no election shall a greater number of directors be
elected than the number of vacancies then existing, and provided further
that, upon any increase in the total number of directors, the additional
vacancies shall be so assigned by the Board of Directors to classes that
the number of directors of each class shall be as nearly equal as
possible and the vacancies shall be filled for terms corresponding to
the classes to which the vacancies are so assigned. Each director shall
hold office until his successor shall have been elected, and the terms
of office of directors elected by the Board of Directors to succeed
former directors shall expire at the next stockholders' meeting at which
directors are elected.
<PAGE> PAGE 98
EXHIBIT 3(i), Page 5 of 9
ARTICLE VI
1. in this Article:
"expenses" includes, without limitation, counsel fees.
"liability" means the obligation to pay a judgment,
settlement, penalty, fine (including any excise tax assessed with
respect to an employee benefit plan), or reasonable expenses incurred
with respect to a proceeding.
"party" includes, without limitation, an individual who was,
is, or is threatened to be made a named defendant or respondent in a
proceeding.
"proceeding" means any threatened, pending, or completed
action, suit, or proceeding whether civil, criminal, administrative, or
investigative and whether formal or informal.
2. To the full extent that the Virginia Stock Corporation
Act, as it exists on the date hereof or as hereafter amended, permits
the limitation or elimination of the liability of directors and
officers, no director or officer of the Corporation made a party to any
proceeding shall be liable to the Corporation or its stockholders for
monetary damages arising out of any transaction, occurrence or course of
conduct, whether occurring prior or subsequent to the effective date of
this Article.
3. To the full extent permitted by the Virginia Stock
Corporation Act, as it exists on the date hereof or as hereafter
amended, the Corporation shall indemnify any person who was or is a
party to any proceeding, including a proceeding brought by or in the
right of the Corporation, by reason of the fact that he is or was a
director or officer of the Corporation, or while serving as such
director or officer, is or was serving at the request of the Corporation
as a director, trustee, partner or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other
enterprise, against any liability incurred by him in connection with
such proceeding. A person shall be considered to be serving an employee
benefit plan at the Corporation's request if his duties to the
Corporation also impose duties on, or otherwise involve services by, him
to the plan or to participants in or beneficiaries of the plan. To the
same extent, the Board of Directors is hereby empowered, by a majority
vote of a quorum of disinterested directors, to enter into a contract to
indemnify any director or officer against liability and/or to advance or
reimburse his expenses in respect of any proceedings arising from any
act of omission, whether occurring before or after the execution of such
contract.
4. The provisions of this Article shall be applicable to all
proceedings commenced after it becomes effective, arising from any act
or omission, whether occurring before or after such effective date. No
amendment or repeal of this Article shall impair or otherwise diminish
the rights provided under this Article (including those created by
<PAGE> PAGE 99
EXHIBIT 3(i), Page 6 of 9
contract) with respect to any act or omission occurring prior to such
amendment or repeal. The Corporation shall promptly take all such actions
and make all such determinations and authorizations as shall be necessary
or appropriate to comply with its obligation to make any indemnity against
liability, or to advance any expenses, under this Article and shall
promptly pay or reimburse all reasonable expenses, including attorneys'
fees, incurred by any such director or officer in connection with such
actions and determinations or proceedings of any kind arising therefrom.
5. The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not of itself create a presumption that the director
or officer did not meet any standard of conduct that is a prerequisite
to the limitation or elimination of liability provided in Section 2 or
to his entitlement to indemnification under Section 3 of this Article.
6. Any indemnification under Section 3 of this Article
(unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that
indemnification is proper in the circumstances because the proposed
indemnitee has met any standard of conduct that is a prerequisite to his
entitlement to indemnification under Section 3 of this Article.
The determination shall be made:
(a) By the Board of Directors by a majority vote of a
quorum consisting of directors not at the time parties to the
proceeding;
(b) If a quorum cannot be obtained under subsection
(a) of this section, by majority vote of a committee duly designated by
the Board of Directors (in which designation directors who are parties
may participate), consisting solely of two or more directors not at the
time parties to the proceeding;
(c) By special legal counsel:
(i) Selected by the Board of Directors or its
committee in the manner prescribed in subsection (a) or (b) of this
section; or
(ii) If a quorum of the Board of Directors cannot be
obtained under subsection (a) or this section and a committee cannot be
designated under subsection (b) of this section, selected by a majority
vote of the full Board of Directors, in which selection directors who
are parties may participate; or
(d) By the stockholders, but shares owned by or voted
under the control of directors who are at the time parties to the
proceeding may not be voted on the determination.
Authorization of indemnification and evaluation as to
reasonableness of expenses shall be made in the same manner as the
determination that indemnification is appropriate, except that if the
<PAGE> PAGE 100
EXHIBIT 3(i), Page 7 of 9
determination is made by special legal counsel, such authorizations and
evaluations shall be made by those entitled under subsection (c) of this
section to select counsel.
Notwithstanding the foregoing, in the event there has been a
change in the composition of a majority of the Board of Directors after
the date of the alleged act or omission with respect to which
indemnification, an advance or reimbursement is claimed, any
determination as to such indemnification, advance or reimbursement shall
be made by special legal counsel agreed upon by the Board of Directors
and the proposed indemnitee, If the Board of Directors and the proposed
indemnitee are unable to agree upon such special legal counsel, the
Board of Directors and the proposed indemnitee each shall select a
nominee, and the nominees shall select such special legal counsel.
7. (a) The Corporation shall pay for or reimburse the
reasonable expenses incurred by a director or officer (and may do so for
a person referred to in Section 8 of this Article) who is a party to a
proceeding in advance of final disposition of the proceeding or the
making of any determination under Section 3 if the director, officer or
person furnishes the Corporation:
(i) a written statement, executed personally, of
his good faith belief that he has met any standard of conduct that is a
prerequisite to his entitlement to indemnification under Section 3 of
this Article; and
(ii) a written undertaking, executed personally or
on his behalf, to repay the advance if it is ultimately determined that
he did not meet such standard of conduct.
(b) The undertaking required by paragraph (ii) of
subsection (a) of this section shall be an unlimited general obligation
but need not be secured and may be accepted without reference to
financial ability to make repayment.
(c) Authorizations of payments under this section shall
be made by the persons specified in Section 6.
8. The Board of Directors is hereby empowered, by majority
vote of a quorum consisting of disinterested directors, to cause the
Corporation to indemnify or contract to indemnify any person not
specified in Section 3 of this Article who was, is or may become a party
to any proceeding, by reason of the fact that he is or was an employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, to the same or a lesser extent as if such person were
specified as one to whom indemnification is granted in Section 3. The
provisions of Sections 4 through 6 of this Article shall be applicable
to any indemnification provided hereafter pursuant to this section.
<PAGE> PAGE 101
EXHIBIT 3(i), Page 8 of 9
9. The Corporation may purchase and maintain insurance to
indemnify it against the whole or any portion of the liability assumed
by it in accordance with this Article and may also procure insurance, in
such amounts as the Board of Directors may determine, on behalf of any
person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other
enterprise, against any liability asserted against or incurred by him in
any such capacity or arising from his status as such, whether or not the
Corporation would have power to indemnify him against such liability
under the provisions of this Article.
10. Every reference herein to directors, officers, employees
or agents shall include former directors, officers, employees and agents
and their respective heirs, executors and administrators. The
indemnification hereby provided and provided hereafter pursuant to the
power hereby conferred by this Article on the Board of Directors shall
not be exclusive of any other rights to which any person may be
entitled, including any right under policies of insurance that may be
purchased and maintained by the Corporation or others, with respect to
claims, issues or matters in relation to which the Corporation would not
have the power to indemnify such person under the provisions of this
Article. Nothing herein shall prevent or restrict the power of the
Corporation to make or provide for any further indemnity, or provisions
for determining entitlement to indemnity, pursuant to one or more
indemnification agreements, bylaws, or other, arrangements (including,
without limitation, creation of trust funds or security interests funded
by letters of credit or other means) approved by the Board of Directors
(whether or not any of the directors of the Corporation shall be a party
to or beneficiary of any such agreements, bylaws or arrangements);
provided, however, that any provision of such agreements, bylaws or
other arrangements shall not be effective if and to the extent that it
is determined to be contrary to this Article or applicable laws of the
Commonwealth of Virginia, but other provisions of any such agreements,
bylaws or other arrangements shall not be affected by any such
determination.
11. Each provision of this Article shall be severable, and an
adverse determination as to any such provision shall in no way affect
the validity of any other provision.
ARTICLE VII
The shareholder vote required, of each voting group entitled
to vote thereon, to approve an amendment to the Corporation's Articles
of Incorporation is a majority of all votes entitled to be cast by that
voting group, unless the Board of Directors conditions approval of such
an amendment upon a greater vote.
<PAGE> PAGE 102
EXHIBIT 3(i), Page 9 of 9
Dated: September 5, 1997
NORFOLK SOUTHERN CORPORATION
By: /s/ David R. Goode
-------------------------------
David R. Goode
Chairman of the Board, President
and Chief Executive Officer
[SEAL] Attest: /s/ Sandra T. Pierce
-------------------------------
Sandra T. Pierce
Assistant Corporate Secretary
<PAGE> PAGE 103
EXHIBIT 3(ii), Page 1 of 8
B Y L A W S
OF
NORFOLK SOUTHERN CORPORATION
AS AMENDED
MAY 13, 1999
<PAGE> PAGE 104
EXHIBIT 3(ii), Page 2 of 8
BYLAWS
OF
NORFOLK SOUTHERN CORPORATION
ARTICLE I
STOCKHOLDERS' MEETINGS
SECTION 1. ANNUAL MEETING. The annual meeting of the
stockholders of the corporation shall be held on such date in March,
April, May or June as the board of directors may designate. If the date
of the annual meeting shall be a legal holiday, the meeting shall be
held on the next succeeding day not a legal holiday.
SECTION 2. SPECIAL MEETINGS. Special meetings of the
stockholders shall be held whenever called by the chief executive
officer or by a majority of the directors.
SECTION 3. TIME AND PLACE. All meetings of the stockholders
shall be held at the time and place stated in the notice of meeting.
SECTION 4. QUORUM. The holders of a majority of the
outstanding shares of capital stock entitled to vote, represented in
person or by proxy, shall constitute a quorum at any meeting of the
stockholders. If less than a quorum is present at an annual or special
meeting, then a majority in interest of the stockholders present in
person or by proxy may from time to time adjourn the meeting to a fixed
time and place, no further notice of any adjourned meeting being
required. Each stockholder shall be entitled to one vote in person or
by proxy for each share entitled to vote then outstanding in his name on
the books of the corporation.
SECTION 5. RECORD DATE. The board of directors may fix in
advance a date as the record date for a determination of stockholders
for any purpose, such date to be not more than seventy days before the
meeting or action requiring a determination of stockholders.
SECTION 6. CONDUCT OF MEETINGS. The chief executive officer,
or any officer or director he may designate, shall preside over all
meetings of the stockholders. The secretary of the corporation, or an
assistant secretary, shall act as secretary of all the meetings, if
present. If the secretary or an assistant secretary is not present, the
chairman of the meeting shall appoint a secretary.
The board of directors, prior to the annual meeting of the
stockholders each year, shall appoint one or more inspectors of election
to act at such annual meeting and at all other meetings of stockholders
held during the ensuing year. In the event of the failure of the board
to make such appointment or if any inspector of election shall for any
reason fail to attend and to act at such meeting, an inspector or
<PAGE> PAGE 105
EXHIBIT 3(ii), Page 3 of 8
inspectors of election, as the case may be, may be appointed by the
chairman of the meeting. The inspectors of election shall determine
the qualification of voters, the validity of proxies and the results
of ballots.
SECTION 7. PROPOSALS BY STOCKHOLDERS. No business may be
transacted at an annual or special meeting of stockholders other than
business that is either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the board of
directors, (b) otherwise properly brought before the meeting by or at
the direction of the board of directors or (c) otherwise properly
brought before the meeting by a stockholder (i) who is a stockholder on
the date of the giving of the notice provided for in this Section 7 and
on the record date for the determination of stockholders entitled to
vote at such meeting and (ii) who gives to the corporation notice in
writing of the proposal, provided that such written notice is received
at the principal executive office of the corporation, addressed to the
Corporate Secretary, (A) in the case of an annual meeting, not less than
ninety (90) nor more than one hundred sixty (160) calendar days prior to
the anniversary date of the immediately preceding annual meeting and,
(B) in the case of a special meeting, not later than the tenth calendar
day next following the date on which notice of the holding of the
special meeting is mailed to stockholders or public disclosure of the
date of the special meeting was made, whichever first occurs. The
written notice given to the corporation shall include (i) the specific
language on which stockholders will be asked to vote, (ii) the name and
address of such stockholder, (iii) the class or series and number of
shares of the capital stock of the corporation which are owned
beneficially and/or of record by such stockholder, (iv) a representation
as to the existence and nature of any agreement or understanding between
the proposing stockholder and any other person or persons (including
their identities) in connection with bringing the proposal, and (v) a
representation as to any material interest of the proposing stockholder
(and the other person or persons) in the subject matter of the proposal.
The requirements of this Section 7 are in addition to any other
applicable requirements.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. ELECTION, NUMBER AND TERM. The board of directors
shall be chosen at the annual meeting of the stockholders. The number
of directors shall be ten, and the directors shall be classified and
shall hold office for terms as provided in the articles of
incorporation. This number may be increased or decreased at any time by
amendment of these bylaws, but shall always be a number of not less than
three. Directors need not be stockholders. Directors shall hold office
until their successors are elected.
SECTION 2. QUORUM. A majority of the number of directors
fixed by these bylaws shall constitute a quorum. If less than a quorum
is present at a meeting, then a majority of those present may adjourn
the meeting to a fixed time and place, no further notice of any
adjourned meeting being required.
<PAGE> PAGE 106
EXHIBIT 3(ii), Page 4 of 8
SECTION 3. VACANCIES. Any vacancy arising among the
directors, including a vacancy resulting from an increase by not more
than thirty percent in the number of directors last elected by the
stockholders, may be filled by a majority vote of the remaining
directors though less than a quorum unless sooner filled by the
stockholders.
SECTION 4. MEETINGS. Meetings of the board of directors
shall be held at times fixed by resolution of the board or upon the call
of the chief executive officer or of one-third of the members of the
board. Notice of any meeting not held at a time fixed by a resolution
of the board shall be given to each director at least two days before
the meeting at his residence or business address or by delivering such
notice to him or by telephoning or telegraphing it to him at least one
day before the meeting. Any such notice shall contain the time and
place of the meeting. Meetings may be held without notice if all the
directors are present or those not present waive notice before or after
the meeting. The chief executive officer, or any director he may
designate, shall preside over all meetings.
SECTION 5. COMMITTEES. The board of directors may by
resolution designate an executive committee and one or more other
committees, each of which shall consist of two or more directors. Any
such committee, to the extent provided in the resolution of the board of
directors and except as otherwise provided by law, shall have and may
exercise the powers and authority of the board of directors in the
management of the business and affairs of the corporation.
SECTION 6. NOMINATIONS OF DIRECTORS. Except as otherwise
provided in the Articles of Incorporation, only persons who are
nominated in accordance with the following procedures shall be eligible
for election as directors. Nominations of persons for election to the
board of directors may be made at any annual meeting of the stockholders
(a) by or at the direction of the board of directors or (b) by any
stockholder (i) who is a stockholder on the date of the giving of the
notice provided for in this Section 6 and on the record date for the
determination of stockholders entitled to vote at such meeting and (ii)
who gives to the corporation notice in writing of the nomination,
provided that such written notice is received at the principal executive
office of the corporation, addressed to the Corporate Secretary, not
less than ninety (90) nor more than one hundred sixty (160) calendar
days prior to the anniversary date of the immediately preceding annual
meeting. The written notice given to the corporation shall include all
the information about the nominee that would be required by applicable
rules and regulations of the Securities and Exchange Commission to be
included for nominees listed in the proxy statement for such meeting and
shall include (i) the name and address of such stockholder and (ii) the
class or series and number of shares of the capital stock of the
corporation which are owned beneficially and/or of record by such
stockholder. Such notice must be accompanied by a written consent of
each proposed nominee to being named as a nominee and to serve as a
director if elected.
<PAGE> PAGE 107
EXHIBIT 3(ii), Page 5 of 8
ARTICLE III
OFFICERS
SECTION 1. ELECTION, NUMBER AND TERM. The board of
directors, promptly after its election in each year, may elect a
chairman of the board and shall elect a president (one of whom shall be
designated chief executive officer), a secretary and a treasurer, and
may elect one or more vice chairmen and vice presidents and may appoint
such other officers as it may deem proper. Any officer may hold more
than one office except that the same person shall not be president and
secretary. Each officer shall hold office until his successor is
elected or until his death or until he resigns or is removed in the
manner hereinafter provided.
SECTION 2. REMOVAL. Any officer may be removed at any time
by the vote of the board of directors and any officer or agent appointed
otherwise than by the board of directors may be removed by any officer
having authority to appoint that officer or agent.
SECTION 3. VACANCIES. Vacancies among the officers elected
by the board of directors shall be filled by the directors.
SECTION 4. THE CHIEF EXECUTIVE OFFICER. The chief executive
officer, subject to the control of the board of directors, shall in
general supervise and control all of the business and affairs of the
corporation. All officers and agents, other than officers or agents
elected or appointed by the board of directors, shall be appointed by
the chief executive officer or by the heads of departments, subject to
the approval of the chief executive officer. Unless otherwise
specifically provided in these bylaws or by direction of the board of
directors, the chief executive officer or, at his direction, any
officer, employee or agent of the corporation designated by him, may
sign and execute all representations, securities, conveyances of real
and personal property, leases, licenses, releases, contracts and other
obligations and instruments in the name of the corporation.
SECTION 5. THE VICE CHAIRMEN AND VICE PRESIDENTS. The vice
chairmen and the vice presidents shall perform such duties as from time
to time may be assigned to them by the chief executive officer or by the
board of directors. In the absence of the chief executive officer, or
in the event of his death, inability or refusal to act, the officer
designated by the chief executive officer or the board of directors
shall perform the duties of the chief executive officer, and, when so
acting, shall have all the powers of and be subject to all the
restrictions upon the chief executive officer. Any vice chairman or
vice president may sign, with the secretary or an assistant secretary,
certificates for shares of the corporation.
SECTION 6. THE SECRETARY. The secretary shall: (a) keep the
minutes of the meetings of the stockholders and the board of directors
in one or more books provided for that purpose; (b) see that all notices
are duly given in accordance with the provisions of these bylaws or as
required by law; (c) be custodian of the corporate records and of the
seal of the corporation and see that the seal of the corporation is
<PAGE> PAGE 108
EXHIBIT 3(ii), Page 6 of 8
affixed to all documents the execution of which on behalf of the
corporation under its seal is duly authorized; (d) keep a register of
the post office address of each stockholder which shall be furnished to
the secretary by such stockholders; (e) sign with the chairman of the
board, a vice chairman, the president, or a vice president, certificates
for shares of the corporation, the issuance of which shall have been
authorized by resolution of the board of directors; (f) have general
charge of the stock transfer books of the corporation; and (g) in general
perform all duties incident to the office of secretary and such other
duties as from time to time may be assigned to him by the chief executive
officer or by the board of directors.
SECTION 7. THE TREASURER. If required by the board of
directors, the treasurer shall give a bond for the faithful discharge of
his duties in such sum and with such surety or sureties as the board of
directors shall determine. He shall: (a) have charge and custody of
and be responsible for all funds and securities of the corporation;
receive and give receipts for moneys due and payable to the corporation
from any source whatsoever, and deposit all such moneys in the name of
the corporation in such banks, trust companies or other depositaries as
shall be selected in accordance with the provisions of Article IV of
these bylaws; (b) when duly authorized, disperse all moneys belonging or
coming to the corporation; and (c) in general perform all the duties
incident to the office of treasurer and such other duties as from time
to time may be assigned to him by the chief executive officer or by the
board of directors.
SECTION 8. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS.
The assistant secretaries, when authorized by the board of directors,
may sign with the chairman of the board, a vice chairman, the president
or a vice president certificates for shares of the corporation the
issuance of which shall have been authorized by a resolution of the
board of directors. The assistant treasurers shall respectively, if
required by the board of directors, give bonds for the faithful
discharge of their duties in such sums and with such sureties as the
board of directors shall determine. The assistant secretaries and
assistant treasurers, in general, shall perform such duties as shall be
assigned to them by the secretary or the treasurer, respectively, or by
the chief executive officer or the board of directors.
SECTION 9. SALARIES. The salaries of the officers elected by
the board of directors shall be fixed by the board of directors. The
salaries of all other officers shall be fixed by the chief executive
officer or by the heads of departments, subject to the approval of the
chief executive officer.
<PAGE> PAGE 109
EXHIBIT 3(ii), Page 7 of 8
ARTICLE IV
CHECKS AND DEPOSITS
SECTION 1. CHECKS AND DRAFTS. All checks, drafts or other
orders for the payment of money, notes or other evidences of
indebtedness issued in the name of the corporation, shall be signed by
such officer or officers, agent or agents of the corporation and in such
manner as shall from time to time be determined by resolution of the
board of directors.
SECTION 2. DEPOSITS. All funds of the corporation not
otherwise employed shall be deposited from time to time to the credit of
the corporation in such banks, trust companies or other depositories as
may be selected in a manner authorized by the board of directors.
ARTICLE V
CERTIFICATE OF STOCK
Each stockholder shall be entitled to a certificate or
certificates of stock in such form as may be approved by the board of
directors signed by the chairman of the board, a vice chairman, the
president or a vice president and by the secretary or an assistant
secretary or the treasurer or any assistant treasurer.
All transfers of stock of the corporation shall be made upon
its books by surrender of the certificate for the shares transferred
accompanied by an assignment in writing by the holder and may be
accomplished either by the holder in person or by a duly authorized
attorney in fact.
In case of the loss, mutilation or destruction of a
certificate of stock, a duplicate certificate may be issued upon such
terms not in conflict with law as the board of directors may prescribe.
The board of directors may also appoint one or more transfer
agents and registrars and may require stock certificates to be
countersigned by a transfer agent or registered by a registrar or may
require stock certificates to be both countersigned by a transfer agent
and registered by a registrar. If certificates of capital stock of the
corporation are signed by a transfer agent or by a registrar (other than
the corporation itself or one of its employees), the signature thereon
of the officers of the corporation and the seal of the corporation
thereon may be facsimiles, engraved or printed. In case any officer or
officers who shall have signed, or whose facsimile signature or
signatures shall have been used on, any such certificate or certificates
shall cease to be such officer or officers of the corporation, whether
because of death, resignation or otherwise, such certificate or
certificates may nevertheless be issued and delivered as though the
person or persons who signed such certificate or certificates or whose
facsimile signature or signatures shall have been used thereon had not
ceased to be such officer or officers of the corporation.
<PAGE> PAGE 110
EXHIBIT 3(ii), Page 8 of 8
ARTICLE VI
SEAL
The seal of the corporation shall be a flat-faced circular
die, of which there may be any number of counterparts, with the word
"SEAL" and the name of the corporation and the state and year of
incorporation engraved thereon.
ARTICLE VII
FISCAL YEAR
The fiscal year of the corporation shall begin on the first
day of January and end on the thirty-first day of December in each year.
ARTICLE VIII
VOTING OF STOCK HELD
Unless otherwise ordered by the board of directors, the chief
executive officer, or his designee, shall have full power and authority
in behalf of the corporation to attend and to act and to vote at any
meetings of stockholders of any corporation in which the corporation may
hold stock, and at any such meeting shall possess and may exercise any
and all the rights and powers incident to the ownership of such stock,
which, as the owner thereof, the corporation might have possessed and
exercised if present, and may sign proxies on behalf of the corporation
with respect to any such meeting or sign consents on behalf of the
corporation with respect to corporate actions permitted without a
meeting of stockholders. The board of directors, by resolution, from
time to time, may confer like powers upon any other person or persons.
ARTICLE IX
AMENDMENTS
These bylaws may be altered, amended or repealed and new
bylaws may be adopted by the board of directors at any regular or
special meeting of the board of directors.
<PAGE> PAGE 111
EXHIBIT 10(i), Page 1 of 44
AGREEMENT
---------
THIS AGREEMENT (hereinafter "Agreement" or "Master Agreement") dated the
27th day of July, 1999, by and between NORTH CAROLINA RAILROAD COMPANY
(hereinafter "NCRR"), a North Carolina corporation, and NORFOLK SOUTHERN
RAILWAY COMPANY (hereinafter "NSR"), a Virginia corporation:
WHEREAS, NCRR and Southern Railway Company (hereinafter "Southern")
entered into a lease dated August 16, 1895 ("the 1895 agreement");
WHEREAS, NCRR and Southern entered into certain supplements or
amendments to the 1895 agreement;
WHEREAS, Atlantic and North Carolina Railroad Company (hereinafter
"ANC"), as lessor, a North Carolina corporation, and Atlantic & East
Carolina Railway Company ("A&EC"), now a wholly owned subsidiary of NSR,
as lessee, entered into a Lease and Indenture dated August 30, 1939
("the 1939 agreement");
WHEREAS, ANC and A&EC entered into certain supplements or amendments to
the 1939 agreement, the last of which supplements provided A&EC the
option to continue the 1939 agreement through the end of 1994, and that
option was properly exercised;
WHEREAS, effective September 29, 1989, ANC was merged into NCRR;
WHEREAS, effective December 31, 1990, Southern changed its name to NSR;
WHEREAS, the 1895 agreement and the 1939 agreement (together, as
supplemented and amended, referred to herein as the "Old Leases") were
to expire on January 1, 1995 and December 31, 1994, respectively, and
have not been and will not be renewed and NSR has continued to operate
the property of NCRR under the provisions of federal and/or state law;
WHEREAS, while the parties had negotiated an agreement to extend the Old
Leases (the Lease Extension Agreement or "LEA"), the LEA was declared to
be invalid by the U.S. District Court for the Eastern District of North
Carolina for want of a quorum at the NCRR shareholders meeting called
for the purpose of approving the LEA on December 15, 1995 and the Court
entered an order enjoining the LEA. Before the LEA had been enjoined,
NSR made certain payments to NCRR under the terms of the LEA consisting
of payments as consideration for a release of certain claims for return
of personalty (the "Release Payment"), and payments of rental under the
LEA (the "Rental Payments"), and NSR has made additional payments to
NCRR pursuant to an order of the U.S. Surface Transportation Board (the
"Interim Payments");
WHEREAS, NCRR and NSR desire by these terms to provide for NSR's
continued use of the property of NCRR which was the subject of the Old
Leases for the operation of freight rail services thereon;
<PAGE> PAGE 112
EXHIBIT 10(i), Page 2 of 44
NOW THEREFORE, in consideration of the commitments and undertakings
recited below, the parties hereto do hereby covenant and agree as
follows:
Section 1. INDEX OF TERMS
TERM SECTION
---- -------
(a) NCRR-inclusive Preamble
(b) NSR-inclusive Preamble
(c) CSXT 2
(d) Old Leases 6
(e) Release Payment 6
(f) Rental Payments 6
(g) Interim Payments 6
(h) Cap 4
(i) Line of Road 24
(j) High Speed Passenger Trains 13
(k) Amtrak/NSR Direct Service Agreement 2
(l) Effective Date 27
(m) Period of Continued Occupancy 4
(n) Right of Way 15
(o) Return Date 18
(p) Designated Returned Property 18
(q) Designated NSR Facility Property 18
(r) Environmental Occurrence 24
(s) Contaminating Substance 24
(t) Leased Properties 24
(u) Trackage Rights Agreement 2
GENERAL PRINCIPLES OF INTERPRETATION
The following general principles will apply throughout this Agreement
unless specifically stated to the contrary:
(a) Safety considerations will be paramount;
(b) For any operating scenario, NCRR and NSR intend to jointly work to
make changes in a manner that will: (1) minimize capital and
operating costs, and (2) minimize disruption to existing service so
as to maximize the value of both freight and passenger services;
(c) Cross subsidization of costs will not occur between passenger and
freight operations or between NSR freight and third-party freight
operations, including but not limited to operating and maintenance
expenses and capital expenditures;
(d) All costs, including but not limited to operating and maintenance
expenses and capital expenditures, will be borne by the party
hereto who requests the expenditure or the addition to capacity;
and
(e) "Costs" or "expenses" will be defined by the PPC/Dispute Resolution
provisions hereof.
<PAGE> PAGE 113
EXHIBIT 10(i), Page 3 of 44
Section 2. RIGHTS GRANTED BY NCRR
(a) Subject to any applicable regulatory approval, NCRR hereby grants
to NSR, under the terms set forth in the attached Trackage Rights
Agreement of even date herewith, exclusive freight trackage rights
over the lines and properties of NCRR owned by NCRR as of the date
hereof, thereby extending to NSR the exclusive right to conduct
freight operations over the NCRR lines and properties, including
performance of local freight service on those lines and properties.
NCRR hereby also grants to NSR such operating rights over the lines
of NCRR as will permit continuation of the existing operations of
National Railroad Passenger Corporation ("Amtrak") over the lines
of NCRR pursuant to the "Basic Agreement" between Southern Railway
Company and The Alabama Great Southern Railroad Company and
National Railroad Passenger Corporation dated January 2, 1979, as
amended (hereinafter referred to as the "Amtrak/NSR Direct Service
Agreement" or the "Basic Agreement"), together with such additional
operating rights over lines of NCRR operated by NSR as may from
time to time during the term of this Agreement be required for the
continuation or modification of Amtrak's intercity rail passenger
service over the NCRR lines pursuant to the Basic Agreement and
Amtrak's franchise under federal law. It is the intent of the
parties, with respect to the operational facilities of NCRR
operated by NSR, that Amtrak and NSR shall continue to enjoy and be
able to fulfill their respective rights and obligations to each
other under the Basic Agreement (including the duty to make and the
right to receive payments thereunder) and under federal law for the
term of this Agreement. NCRR shall be consulted in advance of any
proposed extensions or modifications to the Basic Agreement that
could have a material effect upon the dispatching or maintenance of
the lines of NCRR operated by NSR or upon the facilities of NCRR
operated by NSR.
(b) NSR will fulfill freight common carrier duties of NCRR on the NCRR
segments for which NSR holds the exclusive freight trackage rights
from NCRR until such time as NSR's exclusive freight trackage
rights over the line or any segment thereof are terminated, and
until the federal Surface Transportation Board or any successor
agency has granted any approval that may be required by law for any
cessation of NSR's common carrier duties pursuant to Section 17
hereof.
(c) The exclusive freight trackage rights shall continue unless and
until there is initiation of service by a qualified third-party
freight operator on segments over which NSR ceases operations
pursuant to the terms and provisions set forth in Section 17
hereof.
(d) That interest in the portion of the "R" Line in Charlotte, North
Carolina which lies between the point of connection between said
"R" Line and CSX Transportation, Inc. ("CSXT") near 12th Street and
the easterly line of Second Street which remained a part of the Old
Leases upon their expiration will not be operated by NSR. Either
NSR or NCRR may seek discontinuance of its common carrier
obligation imposed by federal and state laws regulating the
<PAGE> PAGE 114
EXHIBIT 10(i), Page 4 of 44
operation of a railroad on such portion and each party will
cooperate with the other in any such proceedings. Nothing in this
Agreement shall be construed to affect the terms and obligations of
the agreement dated December 31, 1968 between NCRR and Southern
regarding certain property in Charlotte, North Carolina.
(e) The rights granted to NSR do not eliminate, modify or diminish the
rights of CSXT to operate and to serve customers between Fetner and
Raleigh (Boylan) or NSR's and CSXT's reciprocal operating rights
and obligations to each other relating thereto.
(f) Except as provided in Section 2(a), NCRR does not grant to NSR the
right to grant trackage or other rights to any carrier not at the
time of grant affiliated with NSR over the lines or property of
NCRR, and NCRR will not grant to others such rights on lines or
property over which NSR maintains the status of exclusive freight
operator without NSR's approval. Any grant of trackage or other
rights by NSR to a carrier affiliated with NSR shall not be
effective beyond the expiration of this Agreement, including
extensions or renewals, or with respect to segments over which NSR
ceases freight services hereunder the date of any cessation of NSR
service pursuant to Section 17 hereof. NSR will provide NCRR with
copies of any such proposed trackage or other rights documents not
less than 15 days prior to execution by NSR and its affiliate.
Section 3. TERM
(a) The term of the Agreement shall commence on the Effective Date and
end on December 31, 2014.
(b) NSR shall have the option to renew the Agreement for two additional
fifteen-year terms, provided NSR notifies NCRR in writing of its
intention to renew at least two years prior to the expiration of
the Agreement or, with respect to the second renewal period, two
years prior to the expiration of the first renewal period.
Section 4. COMPENSATION
(a) Beginning on January 1, 2000, and during the term of this Agreement
and any renewal thereof, or during any Period of Continued
Occupancy (as defined in this Section), NSR shall pay to NCRR an
"Annual Trackage Rights Fee." For the period January 1, 2000,
through December 31, 2000, the Annual Trackage Rights Fee payable
to NCRR shall be ELEVEN MILLION DOLLARS ($11,000,000).
(b) For each calendar year thereafter the Agreement continues in effect
and during any Period of Continued Occupancy, the Annual Trackage
Rights Fee shall be adjusted in accordance with the following
formula except that in no event will any increase or decrease in
such Annual Trackage Rights Fee for any year exceed an amount equal
<PAGE> PAGE 115
EXHIBIT 10(i), Page 5 of 44
to four-and-one-half percent (4-1/2%) of the Annual Trackage Rights
Fee applicable to the previous year (hereinafter the "Cap"). The
formula is:
For 2001 and subsequent calendar years the Annual Trackage Rights
Fee shall be an amount calculated by multiplying the prior year's
Annual Trackage Rights Fee by the "Factor" obtained by dividing the
Implicit Price Deflator for Gross Domestic Product ("IPD-GDP") for
the calendar year preceding the prior calendar year by the IPD-GDP
for the calendar year preceding that calendar year. For any given
calendar year, the denominator of the fraction used to calculate
the Factor will be the same as the numerator of the fraction used
to calculate the immediately prior year's Factor. The calculation
of the Factor to be applied to the immediately prior year's Annual
Trackage Rights Fee shall be carried out to five places to the
right of the decimal and rounded. Presently, IPD-GDP is developed
by the United States Department of Commerce, Bureau of Economic
Analysis and is reported in the publication of ECONOMIC INDICATORS
prepared for the Joint Economic Committee by the Council of
Economic Advisors. The denominator of the initial Factor will
utilize the IPD-GDP for 1998, as published in the December 1999
issue of ECONOMIC INDICATORS. The numerator will be the IPD-GDP
for 1999 as published in the December 2000 issue of ECONOMIC
INDICATORS.
(c) If during the term of this Agreement, including any renewal period,
the IPD-GDP is no longer published, the parties will attempt in
good faith to agree upon a replacement index, using the PPC/Dispute
Resolution procedures herein if necessary.
(d) The parties will renegotiate the Cap if over any seven consecutive
year period the average rate of inflation as measured by the IPD-
GDP exceeds four and one-half percent (4-1/2%) with the matter to
be resolved through the PPC/Dispute Resolution procedures herein if
the parties are unable to agree on a new cap.
(e) In no event will the Annual Trackage Rights Fee, through
deflationary adjusters, as applicable to the entirety of the NCRR,
go below ELEVEN MILLION DOLLARS ($11,000,000). In the event that
the Annual Trackage Rights Fee is adjusted under the provisions of
Section 17(d) of this Agreement, the $11,000,000 minimum Annual
Trackage Rights Fee set forth in the preceding sentence will be
adjusted by the same percentage used to adjust the Annual Trackage
Rights Fee pursuant to Section 17(d) hereof.
(f) In the event NSR does not extend the Agreement or at the end of the
extended terms, the payment provisions of the Agreement at that
time will continue to apply and payments may not be withheld by NSR
so long as NSR continues to operate over any portion of the NCRR
lines (other than the line between Pomona and Elm described in
Section 21(b) hereof) (referred to herein as a "Period of Continued
Occupancy").
<PAGE> PAGE 116
EXHIBIT 10(i), Page 6 of 44
(g) The Annual Trackage Rights Fee will be paid by NSR to NCRR, without
set-off or reduction, in monthly installments not later than the
15th day of each month. If any such payment is not paid within a
grace period of seven (7) days after such due date, a late payment
penalty charge shall be charged to NSR. The late payment penalty
charge shall be in the amount of one and one-half percent (1-1/2%)
per month (simple interest) for each month, or part thereof, after
such grace period as the Annual Trackage Rights Fee shall remain
unpaid. If owed, NSR will pay such late payment penalty charge
together with the Annual Trackage Rights Fee due. Nothing in this
Section 4 pertaining to or calling for the payment of the late
payment penalty charge or for an overdue payment of the Annual
Trackage Rights Fee shall be construed to be a waiver or acceptance
by NCRR for such payment to be overdue, and NCRR retains all rights
it has for payment of trackage rights fees.
Section 5. INTERIM COMPENSATION
Within three business days of the execution of this Agreement, NSR will
pay to NCRR one-half of the remaining compensation to be paid to NCRR as
back rental for the period ending December 31, 1999, pursuant to the
Memorandum of Understanding dated April 27, 1999, and shall pay the
remainder of such back rental not later than December 31, 1999.
Section 6. RELEASE
(a) For and in consideration of the receipt and retention of the
Release Payment by NCRR, NCRR hereby agrees that each and every
obligation NSR or A&EC may have under the Old Leases with respect
to or in any manner connected with the use, depreciation,
maintenance, repair, renewal, replacement or return to NCRR of (i)
locomotives and railroad cars and (ii) any other items of personal
property which are not customarily located or used on property
owned or determined to be owned by NCRR during any part of at least
10 months of any consecutive 12 month period during the 10 years
preceding the termination of this Agreement and any renewal will be
of no further force or effect, and NCRR hereby releases and
discharges NSR from all such claims relating to such property.
(b) For and in consideration of the receipt and retention of the Rental
Payments, the Interim Payments and the payments by NSR set forth in
this Agreement, NCRR hereby agrees that each and every obligation
NSR or A&EC may have to pay rent or other forms of periodic
compensation to NCRR for the use of NCRR's property under the Old
Leases and from January 1, 1995 through December 31, 1999 has been
fully satisfied and paid, and NCRR hereby releases and discharges NSR
from all claims for the payment of rent or other forms of periodic
compensation under the Old Leases.
<PAGE> PAGE 117
EXHIBIT 10(i), Page 7 of 44
Section 7. DISPATCHING
(a) NSR will dispatch all NCRR lines except for the segment between
Boylan and Fetner presently dispatched by CSXT and any segments for
which NCRR and NSR subsequently agree in writing that NSR will not
dispatch. NSR will dispatch the NCRR lines with the same diligence
and safety considerations as it dispatches lines of its ownership
with similar train densities and operating characteristics.
(b) NSR will exercise operational control over NCRR line segments which
NSR dispatches, including controlling all access to the property
within 25 feet of the tracks over which it has trackage rights. In
accessing such property, NCRR and those accessing such property
with permission from NCRR will be required by NCRR to comply with
all NSR safety, access, and insurance processes and procedures.
Except with respect to any access by NCRR in the ordinary course of
the management of its property, NSR may charge reasonable costs to
accommodate requests for such access.
(c) NSR will not dispatch any NCRR line segment on which a third-party
operator begins operations in accordance with the provisions of
this Agreement.
(d) NSR will not provide dispatching services on lines where passenger
speeds exceed 90 mph.
(e) NSR will give priority to scheduled passenger trains over freight
trains, and will establish priority protocols to be applied between
scheduled passenger trains as requested by NCRR.
(f) Should any dispute arise over NSR's dispatching of passenger
trains, or the priority they are given, NCRR will describe in
writing the method by which it seeks to have the passenger trains,
or freight trains affecting passenger trains, dispatched. If NSR
does not agree with the proposed method requested by NCRR, any
unresolved issues shall be resolved pursuant to PPC/Dispute
Resolution procedure herein.
(g) NCRR reserves the right to terminate NSR's contract hereunder to
perform dispatching for failure by NSR to abide by the PPC/Dispute
Resolution procedures herein or any decision made pursuant to such
procedures. NSR shall have 30 days from the date of any final
decision or award made pursuant to the PPC/Dispute Resolution
procedure to remedy such dispatching deficiencies and to document
such remedy to NCRR in writing. If the time periods are not
adequate for NSR to make the changes, such schedule shall be
reviewed and addressed pursuant to the PPC/Dispute Resolution
procedure herein.
<PAGE> PAGE 118
EXHIBIT 10(i), Page 8 of 44
Section 8. MAINTENANCE
(a) NSR will maintain the lines of NCRR over which it serves as the
exclusive freight operator.
(b) The standard of maintenance of any line segment shall be the FRA
track classifications as of July 1, 1999, consistent with timetable
and track profile speed restrictions and any other restrictions
therein that affect the speed of operation. The effective
timetables and track profiles are attached hereto as EXHIBIT A.
(c) Any routine slow orders in effect on January 1, 2000 will be
eliminated by October 1, 2000, and any routine slow orders
subsequently imposed will be eliminated within 90 days of
imposition. A list of show orders in effect will be provided on or
about January 1, 2000.
(d) In the event of slow orders necessitated by unusual events or
requiring major construction or capital expenditure, the
PPC/Dispute Resolution procedure will be employed to establish a
reasonable time frame for NSR to make the necessary repairs.
(e) NCRR will bear all initial and future costs for any upgrades it
requests.
(f) NSR will not maintain any NCRR line segment on which a third-party
operator begins operations under the provisions of the Agreement.
(g) NSR will not maintain any line on which passenger speeds exceed
90 mph.
(h) NSR will submit to NCRR in writing not less than 30 days in advance
a description of any changes it intends to make to the maintenance
levels affecting the lines of NCRR; if NCRR objects to such changes
the PPC/Dispute Resolution procedure described herein will be
utilized to review such proposed changes wherein such changes may
be approved as submitted by NSR or modified.
(i) NCRR reserves the right to terminate NSR's contract hereunder to
perform maintenance for failure by NSR to abide by the PPC/Dispute
Resolution procedures herein or any decision made pursuant to such
procedures. NSR shall have 270 days from the date of any final
decision or award made pursuant to the PPC/Dispute Resolution
procedure set forth herein to remedy such maintenance deficiencies
and to document such remedy to NCRR in writing. If the time
periods are not adequate for NSR to make the changes, such schedule
shall be reviewed and addressed pursuant to the PPC/Dispute
Resolution procedure herein.
<PAGE> PAGE 119
EXHIBIT 10(i), Page 9 of 44
Section 9. CAPITAL IMPROVEMENTS
(a) Capital Improvements at the Request of NSR:
(i) NSR may, at its sole cost, make capital improvements to the
property of NCRR to render the property more amenable to its
freight railroad operations.
(ii) Such improvements will not be made without the prior approval
of NCRR, which approval will not be unreasonably withheld.
(iii) NCRR shall own all capital improvements made by NSR to
the property of NCRR hereunder upon expiration or termination
of the Agreement, or with regard to improvements made to any
segment which NSR ceases to operate, upon the cessation of
service by NSR on such segment pursuant to Section 17 hereof.
(b) Capital Improvements at the Request of NCRR:
(i) NCRR (or NCRR on behalf of passenger operators) may, at its
sole cost, make capital improvements to the NCRR property.
(ii) All such capital improvements on lines over which NSR operates
or will operate shall be performed by NSR unless NSR has
expressly agreed to the contrary. However, if a shortage of
available manpower would delay implementation beyond a
reasonable completion date, NSR and NCRR agree to cooperate to
jointly seek concurrence from the appropriate labor
organizations representing NSR's employees, if such
concurrence is required, for such work to be done by qualified
contractors selected in accordance with the PPC/Dispute
Resolution procedure and to be engaged by NSR.
(iii) Payments required of NCRR under the terms of this
Agreement may be paid by NCDOT or by other passenger service
operators.
(iv) NSR will not be required to begin construction on any such
project(s) until all necessary capital funds are set aside for
the project, and mechanisms are in place to pay other costs or
expenses associated with the project identified in the
separate agreement required by the provisions of paragraph (f)
below.
(c) Any track, signal, bridge, or structure constructed on the lines of
NCRR, whether by NCRR (on its own behalf or on behalf of a
passenger operator) or NSR, must be built, maintained and operated
consistent with the following goals:
(i) Such construction must not interfere with or disadvantage NSR
freight operations or the utility or capacity of the line for
freight operations;
<PAGE> PAGE 120
EXHIBIT 10(i), Page 10 of 44
(ii) Such construction must not preclude eventual double-tracking
of the line between Greensboro and Raleigh;
(iii) Such construction must not preclude capacity expansion to
accommodate growth of intercity/regional passenger and freight
traffic; and
(iv) Access by NSR to its present and future customers on both
sides of the tracks on which NSR has or will have trackage
rights will be maintained at no cost to NSR.
(d) Should one party determine it has a need for additional capacity,
the additional capacity shall be added in consultation with the
other party utilizing the PPC/Dispute Resolution procedure, at the
cost and expense of the party that needs the capacity.
(e) Should NSR and NCRR mutually determine that each needs additional
capacity, the parties shall jointly plan, through the PPC/Dispute
Resolution procedure, for the necessary additional capacity to meet
the needs. The costs of such additional joint capacity will be
prorated on the relative additional capacity needs of the parties.
Best efforts shall be made in the planning process to achieve
economies of scale in the addition of such improvements, such that
both parties receive maximum value for their capacity investments
through capacity sharing.
(f) If NCRR adds shared trackage under the provisions hereof, or if
NCRR approves, makes or funds any other improvements which increase
freight or passenger utility/capacity or passenger speeds,
including but not limited to improvements to track, signals,
structures or the adding of super-elevation under provisions hereof
and including but not limited to the "Rail Impact" program
described in Section 12 hereof, NCRR, NSR (and any other
appropriate parties, including NCDOT) will enter into a separate
written agreement prior to the commencement of any construction.
NSR will dispatch and maintain the line segment as improved and
NCRR will reimburse NSR for any and all additional dispatching and
maintenance costs, including but not limited to costs of additional
employees required to dispatch and maintain the line on account of
such improvements, incurred by NSR, except as provided in Section
10 hereof. Any disputes over the causal relationship between such
construction projects and such additional dispatching and
maintenance costs billed to NCRR by NSR will be referred to the
PPC/Dispute Resolution procedure.
(g) NCRR and NSR will develop the design and phasing of double-tracking
and other investments for the line between Greensboro and
Charlotte, the cost of preparing such plans to be at NCRR expense,
so that freight and passenger services can both be accommodated and
so that any intermediate investments made will conform with a long-
term infrastructure plan.
<PAGE> PAGE 121
EXHIBIT 10(i), Page 11 of 44
(h) In advance of installing double track or other investments made by
NCRR, NCRR and NSR, at NCRR expense, will jointly conduct a study
to determine the additional capacity provided by such investments.
Should NCRR determine that additional passenger trains and/or
increased train speeds are desirable and that the funds are
available to make the necessary investments to increase passenger
train speed or capacity, NCRR will plan for the additional capacity
necessary to support more passenger service and/or greater speeds,
in conjunction with NSR through the PPC/Dispute Resolution
procedure.
(i) If NCRR adds dedicated separate infrastructure on the right-of-way
for passenger operations above 90 mph as required by Section 13
hereof, NCRR shall have such dedicated separate facilities
dispatched and maintained by a party other than NSR.
(j) NCRR and NSR will each keep the other informed of matters involving
present and prospective passenger and freight traffic on the line,
the operation of the line, or any other matter relating to the NCRR
lines with which they may be involved during the term of the
Agreement. In all matters involving NCDOT or regulatory bodies
where the parties' interests are in common, the parties shall work
cooperatively to accomplish the purposes of this Agreement in a
timely fashion.
(k) Any capital expenses or other improvements will abide by and be
subject to the principle of no cross subsidization between the
services operated on the lines.
Section 10. EASTERN SEGMENT TRACK IMPROVEMENTS
In order to promote economic development along the NCRR corridor and
greatly improve the current track condition of the line, the parties
agree to implement a project to upgrade the Raleigh to Morehead City
line segment in order to improve the condition of the segment closer to
the condition of other segments of the NCRR line.
NSR (under contract to NCDOT utilizing NCRR dividend proceeds from NCRR
interim compensation), agrees to perform work, such as a timber and
surfacing project, of up to $10 million on such segments of the NCRR
line between Boylan (Raleigh) to the Port Terminal (at Morehead City,
including the tracks maintained by NSR at the Port Terminal) as are
determined by NCRR to be most effective. Notwithstanding the provisions
of Section 9(f) hereof, to the extent that such work increases the FRA
classification of the following NCRR track segments, NCRR shall not be
responsible for reimbursing NSR for any additional dispatching or
maintenance costs, including any costs of any additional employees
required on account of such work:
<PAGE> PAGE 122
EXHIBIT 10(i), Page 12 of 44
Milepost EC 1.5 to EC 9.0;
Milepost EC 71.0 to EC 94.0;
Milepost H 119.7 to H 120.0;
Milepost H 126.0 to H 126.8.
NSR will begin implementation of the project within 60 days of the
finalization of the project scope and the availability of funding and
will complete the project as expeditiously as possible, with a date
certain for completion to be established by the PPC/Dispute Resolution
provisions herein.
Section 11. PROCESS FOR REVIEWING ADDITIONAL PASSENGER CAPACITY
ON NCRR LINES
(a) The NCRR trackage will be operated on a shared-use basis with
passenger operations for passenger or commuter trains with speeds
of 90 mph or less. NSR will present to NCRR its analysis of the
number of additional freight trains that could be operated on the
line as of January 1, 2000, without adding capacity to the NCRR
line. If NCRR does not concur, the issue will be resolved pursuant
to the PPC/Dispute Resolution procedure herein.
(b) NSR will have use of the freight capacity as determined above.
(c) NCRR will pay for any increased costs for operations, maintenance
or capital expenditures necessary to accommodate increasing the
number of passenger trains above that currently operated on NCRR
tracks, or to permit increased passenger speeds above the present
passenger train speeds, except for the additional passenger train
set permitted pursuant to Section 12(e) hereof.
(d) If any passenger service or any third-party passenger operations
are added to the NCRR line, the passenger service operator or other
third-party passenger operator will be required to make and pay for
capital improvements on the line adequate to assure that none of
NSR's capacity, either the capacity NSR is currently using or
unused capacity that is available to NSR, determined as described
above, is diminished or disadvantaged.
(e) All FRA regulations must be complied with in advance of initiating
any passenger operations in excess of 79 mph. The administrative
costs of obtaining such regulatory approval, including but not
limited to any expense of performing an environmental impact
statement or environmental assessment, if required to comply with
environmental regulations, shall be borne by NCRR.
(f) NCRR and NSR agree to cooperate in the following long range
planning studies, at NCRR's expense, to determine whether
additional capacity would be required to handle additional
passenger or commuter trains proposed on segments of NCRR:
<PAGE> PAGE 123
EXHIBIT 10(i), Page 13 of 44
(i) Passenger Train Studies:
NCRR and NSR agree to several studies that are designed to
allow NCRR to plan more effectively for the long-term
utilization of the valuable asset NCRR has in the NCRR right-
of-way:
(A) Passenger Train Transit Time Improvement:
These studies will include the following considerations
in its analysis of potential passenger service related
expenditures:
(I) Reduced passenger train stops and reduced duration
of stops;
(II) Reduced highway grade crossings, whether equipped
with active or passive warning devices;
(III) Increased speeds through towns and localities with
speed restriction ordinances;
(IV) Improvements to increase speed at various
restrictions, such as crossings with railroads at
grade;
(V) Improvements to reduce the required safety margins
or clearing times for passenger/freight and
passenger/passenger meets or passes;
(VI) Revisions to passenger train and freight train
schedules;
(VII) Reductions in transit times by using FRA-approved
tilt train equipment;
(VIII) Improvements to dispatching systems;
(IX) Improvements to signal systems; and
(X) Track improvements such as adding double track,
sidings, double power crossovers, turnouts and
curve improvements including super elevation of
curves.
NCRR will request NCDOT, not at NSR's expense, to
jointly work with appropriate NSR operations and
engineering staff to determine which investments
yield the highest returns in terms of speed and
capacity.
<PAGE> PAGE 124
EXHIBIT 10(i), Page 14 of 44
(B) Passenger Train Operating Speed Study (79 to 90 mph):
The study will address the safety and other issues
related to increasing maximum passenger speeds from 79
mph to 90 mph and the economic issues related to
installing cab signals and operating trains in cab signal
territory.
(C) High Speed Study (maximum speeds in excess of 90 mph):
The study will address what will be needed to safely and
economically transition toward separate freight and
passenger operations at the point when passenger train
speeds exceed 90 mph; the study will address interim
capital investments to assure that the investments are
made in conjunction with a long-term transition plan and
will continue to be useful in the ultimate plan; the
study will address safety issues related to migrating
from shared-use operations to separate operations for
passenger services operated in excess of 90 mph.
The study will also investigate whether it is possible
and desirable that incremental improvements may proceed
in such a way that portions of the Raleigh - Charlotte
route may achieve greater than 90 mph, with the required
separate track structure, while other segments remain at
less than 90 mph and continue as shared-use segments.
(ii) Alternative Routing Study:
NCRR and NSR will perform a joint study of the operational and
economic considerations involved in operating through freight
trains between Greensboro and Raleigh over other NSR routes
rather than over the NCRR route. NCRR will study, at NCRR
expense, the differences in the investment required, the
maintenance expenses, and the operations if the NCRR line
between Greensboro and Raleigh were operated with or without
through freight trains. NSR will determine, at NSR expense,
the capital investment required to upgrade any alternate route
to accommodate the through freight trains operated on the
NCRR route between Greensboro and Raleigh. Any decision by
NCRR or NCDOT to cooperate and/or participate in the cost of
NSR's use of the alternative route would be based on producing
the lowest net capital cost to the NCDOT and Triangle Transit
Authority (TTA) run passenger trains while still affording to
NSR existing levels of freight service capacity, and would
take into account community impacts on both lines. It is
understood that in the event that through freight trains are
operated over an alternate route, NSR will need to be able to
continue to serve present and future customers on the NCRR
line, including those which might be accessible only by
<PAGE> PAGE 125
EXHIBIT 10(i), Page 15 of 44
crossing TTA tracks. However, nothing in the Agreement will
serve to cause any delay in TTA and NSR continuing to work
together in making final plans and implementation of TTA
facilities and service.
(g) In connection with the studies referred to herein, NCRR and NSR
will employ analytical techniques to: (1) determine the impact of
passenger trains on the operations and capacity of NSR, and (2) to
determine the capital improvements that would be necessary to avoid
adverse impacts on NSR's freight operations or capacity. Any
capital improvements or other costs or expenses will abide by and
be subject to the principle of no cross subsidization between the
services operated on the lines.
(h) NCRR and NSR may engage consultants and outside experts to analyze
construction, maintenance or dispatching issues. Consultants may
be involved in data gathering, data analysis, and presentation of
recommendations, but NSR agrees that senior level NSR officers will
be involved in the decision-making process.
(i) Intercity passenger operations may use equipment such as tilt-train
equipment as long as the use of such equipment on NCRR commingled
with NSR operations is approved by FRA or FRA grants a specific
waiver or approval allowing operation of such equipment commingled
with NSR operations on the NCRR.
Section 12. IMPLEMENTATION OF THE NCDOT'S UPDATED "RAIL IMPACT" PROGRAM
(a) NSR agrees to implement the NCDOT's updated "Rail IMPACT" program.
(b) NSR and NCRR will reevaluate with NCDOT the elements included in
NCDOT's original Rail Impact program, to develop an updated program
of rail improvements totaling $20 million which will provide
increased passenger speeds while at the same time not adversely
impacting the freight operations of NSR.
(c) When funds for the updated Rail Impact program are available to
NCRR or NCDOT, NSR agrees to then implement as expeditiously as
possible.
(d) If a shortage of available manpower would delay implementation
beyond a reasonable completion date, NSR and NCRR agree to
cooperate to jointly seek concurrence from the appropriate labor
organizations representing NSR's employees, if such concurrence is
required, for such work to be done by qualified contractors
selected in accordance with the PPC/Dispute Resolution procedure
and to be engaged by NSR.
(e) NCDOT may add one daily passenger train set to operate at or below
a maximum speed of 79 mph to the line between Raleigh and Charlotte
subsequent to the completion of the construction of the updated
Rail Impact program.
<PAGE> PAGE 126
EXHIBIT 10(i), Page 16 of 44
Section 13. HIGH SPEED PASSENGER OPERATIONS
(a) NCRR may grant operating authority within the NCRR corridor for
intercity passenger trains to be operated in excess of 90 miles per
hour ("high speed passenger trains") only if such trains or
systems are operated on a dedicated separate new infrastructure.
(b) After approval by FRA, high speed passenger trains may use the
shared-use tracks for low speed access to and from stations and/or
for operations at conventional passenger train speeds in areas in
which adequate right-of-way for separate tracks is not available.
Section 14. OTHER PASSENGER OPERATIONS OVER NSR LINES
NSR will negotiate in good faith with NCDOT regarding passenger service
to Asheville, N.C., it being understood that NSR will not be responsible
for any capital and operating costs and/or expenses associated with or
related to such operations, and the addition of passenger trains to the
line will be accompanied by sufficient State investment to maintain
NSR's current or future freight capacity/utility and service standards
on the route, as determined by NSR.
Section 15. REGIONAL RAIL OPERATIONS WITHIN NCRR RIGHT OF WAY
(a) NCRR reserves the right to allow rail service such as that proposed
by the Triangle Transit Authority or other light rail operations on
separately dedicated infrastructure within NCRR's right-of-way,
consistent with the terms of this Agreement.
(b) If any FRA approvals or plan reviews are necessary, the passenger
operator would be responsible for obtaining such approvals or
reviews.
(c) NCRR will require the service provider to assure that reasonable
and efficient access by NSR to its present and future customers on
both sides of the track(s) over which NSR has trackage rights is
maintained at no cost to NSR.
(d) NCRR will require the service provider to have in place before
beginning operations, and to maintain at all times while such
operations are conducted, indemnity agreements and liability
insurance as described in Section 23 hereof.
(e) The proximity of light rail operations to NCRR tracks and the
related maintenance and operation issues shall be addressed under
the PPC/Dispute Resolution provisions herein and in conformity
with all federal regulations.
<PAGE> PAGE 127
EXHIBIT 10(i), Page 17 of 44
Section 16. TRAFFIC INFORMATION AND FORECASTS
Subject to the confidentiality provisions of Section 34 hereof, NSR and
NCRR will jointly examine traffic information and develop and share near-
and long-term traffic forecasts of freight and passenger traffic volumes
to evaluate safety, capacity and speed issues relating to the use of the
various segments for freight and passenger operations.
Section 17. CESSATION OF FREIGHT SERVICE ON ANY SEGMENT
(a) At any time during the term of this Agreement or any renewal
period, NSR may seek to abandon its operation over the segment
between Charlotte and Greensboro, or the segment between Greensboro
and Raleigh, or the segment between Raleigh and Morehead City, or
any two of those segments, or all three of those segments.
(b) No subdivision of the segments will be permitted, i.e., NSR may
seek to abandon its operations on the entire segment between
Charlotte and Greensboro or on the entire segment between
Greensboro and Raleigh or the entire segment between Raleigh and
Morehead City, or combinations of those segments, but it cannot
abandon service on any sub-segments of those segments unless agreed
to by NCRR, in NCRR's sole discretion.
(c) In the event of such abandonment of service on such segment or
segments, the following transition provisions shall apply to the
segment or segments being abandoned by NSR:
(i) NSR will continue to operate, dispatch, and maintain the line
until initiation of service by a qualified operator. A
qualified operator is one with demonstrated successful
experience in operation of railroad lines previously operated
by Class I railroads.
(ii) NSR will assure that if operation of the line is handed over
to a third-party operator, the line must retain for at least
a six-month period its maintenance level to then-current FRA
track classifications consistent with current timetable and
current track profile speed restrictions and any other
restrictions therein that affect the speed of operation,
consistent with any FRA track classification increases and/or
elimination of timetable or track profile speed restrictions
or other restrictions that affect the speed of operation
resulting from work performed pursuant to Section 10 hereof.
(iii) All conditions requiring routine slow orders will be
corrected in advance of the line being handed over to a third-
party operator. In the event of slow orders necessitated by
unusual events or requiring major construction or capital
expenditures which occur prior to the line being handed over
<PAGE> PAGE 128
EXHIBIT 10(i), Page 18 of 44
to a third-party operator, the PPC/Dispute Resolution process
will be employed to establish a reasonable time frame for NSR
to make the necessary repairs.
(iv) NSR will not be responsible for correcting slow orders
resulting from unusual events that occur subsequent to the
line being handed over to a third-party operator.
(v) NSR will assist NCRR in securing a qualified third party
operator. NSR's assistance to NCRR shall include but shall
not be limited to the following: (1) identify qualified
operators from previous experience with other operators,
(2) assist in preparation and review of the Request for
Proposal, and (3) assist in preparation of an operating
agreement with the third party.
(vi) Any business package offered to potential third-party
operators will be developed in consultation with significant
customers on the line and significant customers not on the
NCRR line which would be substantially affected (positively
or negatively) by a change in operators.
(vii) The third party operator will provide all service on the
line. NSR shall be entitled to negotiate haulage rights with
such third party for all or portions of the line at standard
eastern region haulage agreement rates and conditions
applicable at the time of haulage.
(viii) NSR will assist in seeking shipper satisfaction for any
transition to third party operation. NSR will provide
railroad cars to customers of the third-party operator on the
same basis it does for other third-party operators connected
to its line.
(ix) Prior to initiation of service by a third-party operator, NSR
will operate a rail flaw detector car over the line and will
replace any rails or rail segments determined to have
defects.
(ix) Each party shall cooperate with the other in obtaining any
necessary regulatory approval to accomplish any termination
of NSR trackage rights and initiation of trackage rights by a
third party operator.
(d) Should NSR cease operations over either the Charlotte/Greensboro
segment or the Greensboro/Raleigh segment, the annual trackage
rights fee will be subject to adjustment through the PPC/Dispute
Resolution procedures. The adjustment will be based on the
percentage of total car miles operated on each of the two segments.
<PAGE> PAGE 129
EXHIBIT 10(i), Page 19 of 44
Section 18. RETURN OF REAL PROPERTY
(a) Non-operating Property
(i) NCRR and NSR hereby agree that the term "Designated Returned
Property" as used herein means those non-operating properties
owned by NCRR and described on EXHIBIT B attached hereto and
incorporated herein by reference.
(ii) The Designated Returned Property will be released by NSR and
A&EC to NCRR as of January 1, 2000 or the date such property
is accepted by NCRR, whichever date is later, or a date as
otherwise agreed between the parties (the "Return Date").
NSR shall continue to have use of the Designated Returned
Property until the Return Date.
(iii) For each such parcel the Return Date of which is within
9 months of the date NSR provides NCRR with the information
described in Section 19 (e) hereof, NSR shall pay to NCRR
within thirty business days of the Return Date one-half (1/2)
of all rents received by NSR or A&EC for such parcel of
Designated Returned Property from January 1, 1995, through
the Return Date, subtracting any property taxes, assessments
of any type and normal maintenance paid or to be paid by NSR,
its parents or any affiliate and/or A&EC with respect to
Designated Returned Property applicable to the period from
January 1, 1995 to the Return Date.
(iv) Any parcel of Designated Returned Property that is released
by NSR or A&EC to NCRR shall be returned to NCRR free of any
obligation of NCRR, NSR or A&EC to operate that parcel as a
part of its or their line(s) of railroad unless otherwise
agreed between the parties.
(b) Operating Property:
(i) Operating property will be considered by the parties to have
been released from the leasehold or other interest of NSR or
A&EC to NCRR and to be subject to this Agreement and the
Trackage Rights Agreement as of the Effective Date.
(ii) From and after the Effective Date, NSR and A&EC will have no
ownership or leasehold interest in the properties of NCRR or
the right-of-way of NCRR, and will look solely to this
Agreement and to its rights and obligations under federal
and/or state law for its authority to operate upon or to
enter or remain upon the properties of NCRR.
(iii) On or before October 1, 2000, NCRR and NSR, through the ad
hoc property committee described in Section 19 hereof, shall
determine the properties (except the property discussed in
Section 7(b) hereof) which are necessary for NSR, by itself
<PAGE> PAGE 130
EXHIBIT 10(i), Page 20 of 44
or through an affiliate of NSR, to fulfill NSR's obligations
as operator of exclusive freight trackage rights under this
Agreement (the "Designated NSR Facility Property"). Upon
such determination, NSR shall provide to NCRR drawings of
Designated NSR Facility Property that depict the shape and
dimensions in feet of each such parcel of Designated NSR
Facility Property, and shall note, in feet, the distance of
the parcel to the nearest railroad milepost and also to the
center line of the main track. NCRR and NSR shall then enter
into a non-assignable (except as provided in Section 31)
license or other written agreement for the continued NSR
possession of such property for so long as (a) NSR has
exclusive freight trackage rights under this Agreement or
any renewal thereof, and (b) such property continues to be
needed by NSR for its identified purpose. Such license or
other written agreement shall be entered into consistent with
and subject to the terms and conditions of this Agreement and
the Trackage Rights Agreement as consideration for this
Agreement and without additional consideration to be paid to
NCRR by NSR. NSR shall be responsible for the management and
condition of such property and any ad valorem taxes,
assessments, and any other costs related directly or
indirectly to such property.
(iv) The parties acknowledge that there may be parcels which are
subject to leases to third parties which are located within
the limits of the right of way ( "3PL Parcels"). The parties
intend that 3PL Parcels be treated in a manner similar to the
Designated Returned Properties with respect to the allocation
of rentals, both those received between January 1, 1995 and
the date such parcels are returned to NCRR and those received
after such parcels are returned to NCRR, and with respect to
the duties of the parties regarding the return of such
parcels to the management of NCRR and the obligations to pay
property taxes and assume environmental responsibility,
except that the parties agree that the indemnity provisions
of Section 24(c) will not apply to such parcels.
Section 19. AGREEMENTS WITH USERS, LICENSEES AND/OR THIRD
PARTIES REGARDING THE RIGHT OF WAY
(a) NSR and NCRR shall cooperate with each other in the transition of
responsibility to NCRR, or shared responsibility between NCRR and
NSR, as outlined herein and in EXHIBIT C, of the management,
administration, and control of new and existing third party
license, lease and other agreements that concern NCRR-owned
property or right of way previously subject to the Old Leases.
(b) NCRR and NSR shall appoint an ad hoc property committee (the
"Committee" for purposes of this section) to address the orderly
transition of the management of such agreements, with a target date
of October 1, 2000 for completion of such transition.
<PAGE> PAGE 131
EXHIBIT 10(i), Page 21 of 44
(c) The Committee shall address the following types of existing NSR
agreements and any other agreements the parties agree must be
addressed:
(i) leases, licenses, wire line agreements, pipeline agreements,
and other longitudinal or perpendicular encroachments;
(ii) private and public grade crossing agreements and agreements
concerning public projects;
(iii) track lease agreements;
(iv) spur tracks owned by third parties;
(v) real property matters relating to trackage rights and other
operating agreements with other railroad companies (other
than with Amtrak and the agreement covering CSXT's operations
between Fetner and Raleigh (Boylan)), including operations
between Goldsboro and the CP&L lead;
(vi) agreements with Amtrak for stations, parking, or other
passenger facilities and related properties (other than
tracks, platforms, and signals).
(d) Within nine (9) months of receipt of the information from NSR
described in section (e) below, NCRR will request an assignment
from NSR of management of any active third party agreement,
terminate any such agreement, request NSR or A&EC to terminate such
agreement, substitute new agreements for existing agreements, or
request that NSR retain management responsibility for such
agreement for the remaining term of such agreement. If NSR
declines to accept such responsibility for a particular matter at a
particular time, the matter shall be addressed by the PPC/Dispute
Resolution procedure herein. It is the intention of the parties
that NCRR will assume responsibility for the management of all
properties of NCRR not needed by NSR in its freight operations, but
that the timing of such assumption will be subject to the agreement
of the parties on a case by case basis.
It is understood that it may be that parties to certain agreements
can no longer be readily located, and that such agreements may be
terminated by NSR by mailing notice to the last known address, if
any, of the party. The parties shall work cooperatively and in
good faith in reviewing the existing agreements. Rentals from
third party agreements other than rentals of Designated Returned
Properties or 3PL Parcels received by NSR from January 1, 1995
shall be divided as agreed by the Committee or if the Committee
fails to agree, the matter shall be resolved pursuant to the
PPC/Dispute Resolution procedure herein. As a general rule, the
parties agree that the party entitled to the rental of Designated
Returned Properties or 3PL Parcels shall from the date of such
entitlement be responsible for the management of such property, for
<PAGE> PAGE 132
EXHIBIT 10(i), Page 22 of 44
payment of any ad valorem taxes (if taxed as non-system property or
separately assessed as set forth in Section 26 hereof) and, as
between the parties, for any environmental harm to such property
not caused by the other party occurring after the Return Date and
any environmental reporting, if any, for such property.
(e) NSR shall be responsible for providing to NCRR file documents or
copies of the following records, if any, relating to Designated
Returned Property and 3PL parcels: (1) photocopies of all
applicable leases, licenses, or agreements relating to such
property, including supplements and assignments, correspondence,
and indexes or lists relating thereto; (2) the status of the rental
for any such property, including billing statements or rental
notice records for such rent; (3) the status of property taxes and
all other expenses for such property, (4) photocopies of non-
privileged materials found in the paper files of NSR's
Environmental Protection Department; and (5) photocopies of non-
privileged materials found in the paper files of the NSR Real
Estate and Contract Services Department for all such property. NSR
shall be responsible for providing to NCRR file documents or copies
of the above described records to the extent they are available for
all other agreements under Section 19(c) above. NSR shall use its
best efforts not to destroy such records of third party agreements
and records relating to any agreements. Neither NCRR nor NSR,
including their affiliates, shall be required to provide any
proprietary or licensed application software, including without
limitation any such software dealing with real estate.
(f) With respect to properties used by Amtrak, NSR and NCRR will work
together to seek Amtrak's acquiescence in any change of management
and control. Amtrak passenger station platforms shall be included
in Designated NSR Facility Property as set forth above unless
otherwise agreed between NCRR and NSR.
(g) Any dispute arising under this section if not resolved within
60 days of first being raised by either party shall be addressed
pursuant to the PPC/Dispute Resolution provision of this Agreement.
(h) If any agreement covers both NCRR property and properties owned by
NSR and/or A&EC, and NCRR determines that the agreement is to be
assigned, terminated or substituted with respect to the NCRR
portion of the property, the action taken by NCRR will only cover
the portion of the property owned by NCRR and rents, taxes and
other costs or services will be prorated appropriately.
(i) NSR and NCRR in contacts with third parties will make referrals to
the other party in a manner that is consistent with this Section 19
and in such a manner as to encourage timely and efficient handling.
<PAGE> PAGE 133
EXHIBIT 10(i), Page 23 of 44
Section 20. VERTICAL AND LATERAL CLEARANCES AND SUPPORT
During the term of this Agreement and any extension or renewals, NCRR
will not impair vertical and horizontal clearances and the structural
support of the track structures and other railroad facilities and
appurtenances thereto needed by NSR to conduct its freight operations,
consistent with the then current system-wide practices of NSR. Any
proposal by NCRR or those claiming rights through NCRR which will have
the effect of reducing any clearances or support present on the date
hereof will be submitted to the PPC/Dispute Resolution procedure for
resolution.
Section 21. OTHER PROPERTY ISSUES
(a) NCRR hereby releases all claims to Linwood Yard on the Effective
Date hereof.
(b) Upon termination of this Agreement, as an equal value exchange, NSR
will be granted by NCRR a permanent exclusive easement over a
continuous main track, satisfactory to both parties, with
connections, between Pomona and Elm and NCRR will be granted by NSR
a one-half interest, with connections, in Pomona Yard, the terms of
which shall be addressed according to the PPC/Dispute Resolution
provisions.
(c) All other property issues shall be deferred until the expiration or
termination of the Agreement. If a cessation of service by NSR
occurs on a segment pursuant to Section 17 hereof, all property
issues relating to such segment shall be resolved in connection
with such cessation. Each party agrees that in advance of
termination of the Agreement, or any proposed cessation of service
on a segment pursuant to Section 17 hereof, the parties will
negotiate in good faith regarding any interim access agreements
necessary for efficient operation of each party's terminal,
interchange, or yard facilities until the deferred property issues
are finally resolved.
Section 22. INDUSTRIAL DEVELOPMENT
NSR and NCRR will work cooperatively with the North Carolina Departments
of Commerce and Transportation and with regional economic development
interests to enhance economic development in the areas served by NSR on
the NCRR track segments. NSR will make special efforts on the eastern
segment of the line and will cooperate with industrial development
efforts to identify and secure long term railroad users to locate
adjacent to such NCRR line.
<PAGE> PAGE 134
EXHIBIT 10(i), Page 24 of 44
Section 23. LIABILITY
NCRR and NSR hereby establish or provide for future consideration of
certain criteria for liability, indemnity and insurance provisions and
other related financial considerations which will apply to the several
types of passenger operations which are currently or may in the future
be conducted on or near the tracks over which NSR has trackage rights,
and to establish a mechanism for handling future negotiations pertaining
to liability issues as contemplated herein, and for resolving any future
disagreements between the parties concerning such provisions. The term
"financial consideration" as used in this Section 23 relates to
financial agreements with Amtrak relating only to liability and
indemnity concerns. For example, the term "financial consideration"
shall not be deemed to include incentive payments provided to NSR for
performance of Amtrak passenger trains. The types of passenger
operations contemplated by the parties, and the criteria applicable to
each, are set forth below.
(a) Current or expanded Amtrak intercity passenger operations at
scheduled speeds at or below 90 mph.
Amtrak currently operates intercity passenger service on NCRR
tracks over which NSR has trackage rights, and in connection
therewith, Amtrak provides to NSR certain indemnities and financial
considerations related to those indemnities under its Basic
Agreement with NSR. (The "Basic Agreement" between Amtrak and NSR
shall be defined as the Agreement between Southern Railway Company
and The Alabama Great Southern Railroad Company and National
Railroad Passenger Corporation, dated January 2, 1979, as revised
effective June 1, 1999.) To the extent Amtrak operates intercity
passenger service on such tracks at scheduled speeds of 90 mph or
less, whether under a contract with NSR or a contract with NCRR,
and whether at its current or at some expanded future level, NSR's
rights and obligations pertaining to indemnity and related
financial considerations shall be those provided by Amtrak to NSR
under its Basic Agreement.
(b) High speed passenger operations
Passenger operations of any type at scheduled speeds in excess of
90 mph ("high speed" operations) will not be undertaken by NCRR or
any other operator on or in close proximity to the tracks on which
NSR has trackage rights, unless an appropriate type and level of
liability, indemnity and insurance protection covering such
operations has been agreed upon and implemented. Upon notice by
NCRR to NSR that NCRR proposes such high speed passenger
operations, NCRR and NSR shall, for a period not longer than six
months, attempt to agree on what constitutes "close proximity," and
on appropriate liability, indemnity and insurance protections for
the proposed high speed passenger operations. Upon failure to
agree within that six month period upon what constitutes "close
proximity" or upon types and levels of liability, indemnity and
insurance protection, the unresolved issues shall then be resolved
<PAGE> PAGE 135
EXHIBIT 10(i), Page 25 of 44
pursuant to the PPC/Dispute Resolution provisions of this Agreement.
NCRR and NSR agree that high speed passenger operations will require
different types and levels of liability and indemnity protection,
and that the liability, indemnity and insurance provisions of the
1998 Amended and Restated Operating Access Agreement Between
Norfolk Southern Railway Company and Northern Virginia Transportation
Commission & Potomac and Rappahannock Transportation Commission
(VRE Agreement) is one example of the types and levels of liability,
indemnity and insurance protection appropriate for high speed
operations.
(c) Additional passenger operations
No passenger operations other than those described in Sections 23
(a) and (b) above (for example, non-Amtrak intercity passenger
operations, commuter or light rail passenger operations) shall be
operated, whether by NCRR or any other party, on or in close
proximity to the tracks on which NSR has trackage rights, unless an
appropriate type and level of liability, indemnity and insurance
protection covering such operations has been agreed upon by all
parties. Upon notice by NCRR to NSR that such passenger operations
are proposed, NCRR and NSR shall, for a period not longer than six
months, attempt to agree, if necessary, on what constitutes "close
proximity," and on appropriate liability, indemnity and insurance
protection for the proposed passenger operations. Upon failure to
agree within that six month period upon what constitutes "close
proximity" or upon types and levels of liability, indemnity and
insurance protection, the unresolved issues shall then be resolved
pursuant to the PPC/Dispute Resolution provisions of this
Agreement. The principles set forth in subparagraphs (i) through
(iv) below shall be applied in determining liability, indemnity and
insurance obligations for such passenger operations, and to the
extent lawful under the laws of the State of North Carolina, shall
be applied without regard to the fault or negligence of any party:
(i) In case of an accident involving only the trains or equipment
of the operator of such passenger service, the operator shall
be solely responsible for all injuries to its employees and
passengers, all damages to track, equipment, lading or other
property, and for all liability to third parties.
(ii) In the case of an accident involving only the trains or
equipment of NSR, NSR shall be responsible for all injuries
to its employees, all damages to track, equipment, lading or
other property, and for all liability to third parties.
(iii) In case of an accident involving the trains of both NSR and
the operator of such passenger service:
1. NSR and the operator shall be separately responsible for,
and each shall separately bear, all liability for injuries
<PAGE> PAGE 136
EXHIBIT 10(i), Page 26 of 44
to its own passengers and employees, and for damages to
its own property, including property and lading in its
possession.
2. NSR and the operator shall be jointly responsible for and
shall equally bear all liability for injuries and damages
not covered in subparagraph (iii) 1 above.
(iv) Except as provided in Sections 23 (a) and (b) above, all
passenger operators shall provide and maintain commercial
liability insurance or equivalent protection sufficient to
cover the risks to which they are subjected by the provisions
of this Section 23 (c).
(d) Passenger operator qualifications
No passenger service of any type shall be operated unless the
proposed operator is fully qualified pursuant to federal law to
operate such passenger service. Amtrak will not be permitted by
NCRR to operate additional intercity passenger service trains on
the trackage over which NSR has trackage rights hereunder unless
NSR is first consulted regarding any such plans.
(e) Notice regarding matters in this section
Any notice given by NCRR to NSR with respect to new passenger
operations shall be in writing and shall specify that such notice
is being given pursuant to Section 23 of this Agreement.
(f) Cooperation in securing legislation
NCRR and NSR acknowledge and agree that the types and levels of
liability, indemnification and insurance protection the parties may
deem appropriate as they pertain to certain passenger operations
may not be possible without legislation. The parties agree that
should legislation be necessary to accomplish their goals, they
shall cooperate in seeking such legislation.
Section 24. ENVIRONMENTAL PROVISIONS
(a) Environmental Definitions
(i) "Environmental Occurrence" means (1) any violation of
applicable federal, state or local environmental laws,
regulations, administrative orders or judicial decrees, as
they apply to any part of the Leased Properties; (2) any
noise, vibration or the deposit, spill, discharge, or other
release of a Contaminating Substance on or from any part of
the Leased Properties; or (3) any failure to provide
<PAGE> PAGE 137
EXHIBIT 10(i), Page 27 of 44
information, make all appropriate submissions, and fulfill
all applicable legal obligations of the owner and/or operator
of the Leased Properties.
(ii) "Contaminating Substance" means oil, petroleum or any
substance declared to be hazardous or toxic or treated as a
pollutant or contaminant under any law or regulation now or
hereafter enacted or promulgated by any governmental
authority.
(iii) "Designated Returned Property" means those parcels identified
in EXHIBIT B.
(iv) "Leased Properties" means the properties leased to NSR and/or
A&EC that (1) were included within the leaseholds as of
December 31, 1994, under the 1895 Lease or the 1939 Lease
(including the Designated Returned Property and the Line of
Road); or (2) which then or thereafter became additions to
the properties leased under the 1895 Lease or the 1939 Lease
before the Effective Date.
(v) "Line of Road" means the property over which NSR is the
exclusive freight operator under the Trackage Rights
Agreement and this Agreement, as well as Designated NSR
Facility Property as determined pursuant to Section 18 of
this Agreement.
(b) Responsibility for Environmental Occurrences on the Leased
Properties During the Leasehold Period and Until the Effective
Date.
(i) NSR agrees to indemnify, defend and hold harmless NCRR and
its respective officers, directors, beneficiaries,
shareholders, partners, agents, and employees from all fines,
suits, procedures, claims, liabilities, damages (including
without limitation diminution in property value and other
economic loss) and actions of every kind, and all reasonable
costs and expenses associated therewith (including attorneys'
and consultants' fees) if NCRR is a named or charged party
arising from any Environmental Occurrence that occurred on
the Leased Properties during the leasehold period and until
the Effective Date.
(ii) If NSR's responsibility with respect to a specific parcel is
triggered by Section 24(b)(i), NSR reserves the right upon
written notice to NCRR to undertake site investigation,
cleanup and remediation itself in a reasonable and prompt
manner.
(iii) NCRR will provide NSR with reasonable access to any properties
of NCRR on which NSR takes action under Section 24(b)(ii) to
investigate, clean up or remediate environmental harm, or on
which NSR desires to undertake any other related action the
performance of which is rendered more efficient or less costly
when performed on such property, or which is needed by NSR to
access any such properties.
<PAGE> PAGE 138
EXHIBIT 10(i), Page 28 of 44
(c) Responsibility for Environmental Occurrences on the Designated
Returned Property On and After the Effective Date or Return Date
(i) NCRR agrees to indemnify, defend, and hold harmless NSR and
its officers, directors, beneficiaries, shareholders,
partners, agents, and employees from all fines, suits,
procedures, claims, liabilities, damages and actions of every
kind, and all reasonable costs and expenses associated
therewith (including attorneys' and consultants' fees) if NSR
is a named or charged party arising from any Environmental
Occurrence, other than an Environmental Occurrence for which
NSR is responsible under Section 24(d)(i) below, that occurs
on any Designated Returned Property after the Effective Date
or the Return Date, whichever comes later.
(ii) If an Environmental Occurrence for which NCRR is responsible
under Section 24(c)(i) is related to any Environmental
Occurrence for which NSR is responsible under Section
24(b)(i), NCRR will be responsible only to the extent that
contamination that was present prior to the Effective Date or
Return Date is exacerbated by the later Environmental
Occurrence.
(iii) If NCRR's responsibility with respect to a specific parcel is
triggered by Section 24(c)(i), NCRR reserves the right upon
written notice to NSR to undertake site investigation,
cleanup and remediation itself in a reasonable and prompt
manner.
(iv) NSR will provide NCRR, at no charge to NCRR, with reasonable
access to any property controlled by NSR on which NCRR takes
action under Section 24(c)(i) to investigate, clean up or
remediate environmental harm, or on which NCRR desires to
undertake any other related action the performance of which
is rendered more efficient or less costly when performed on
such property, or which is needed by NCRR to access any such
properties.
(d) Responsibility for Environmental Occurrences Resulting From NSR
Operations On and After the Effective Date
(i) NSR agrees to indemnify, defend, and hold harmless NCRR and
its officers, directors, beneficiaries, shareholders,
partners, agents, and employees from all fines, suits,
procedures, claims, liabilities, damages (including without
limitation diminution in property value and other economic
loss) and actions of every kind, and all reasonable costs and
expenses associated therewith (including attorneys' and
consultants' fees) if NCRR is a named or charged party
arising from any Environmental Occurrence that occurs on
property owned by NCRR on or after the Effective Date, but
only to the extent such Environmental Occurrence results from
<PAGE> PAGE 139
EXHIBIT 10(i), Page 29 of 44
the operations of NSR, its agents or any party with a direct
contractual relationship with NSR relating to NSR's operations,
including Amtrak under an Amtrak/NSR Direct Service Agreement.
(ii) NSR will be responsible for (1) overseeing its own
environmental operations, (2) responding to notices, claims,
lawsuits, or orders pertaining to environmental issues or
incidents arising out of its freight operations or Amtrak/NSR
Direct Services and occurring on or adjacent to the Line of
Road or adjacent properties, and (3) complying with and
performing all environmental obligations of the freight
operator of the Line of Road during the term of the Trackage
Rights Agreement and any renewals. NSR will not allow the
release, discharge or disposal of any wastes of any kind,
whether hazardous or not, on the properties of NCRR. For
purposes of the preceding sentence only, the agreement of NSR
not to allow the release, discharge or disposal of any wastes
on the properties of NCRR will not apply to the temporary
storage of wastes in tanks or containers or to the discharge
of waste water or other effluent subject to a valid permit
in accordance with all applicable environmental laws and
regulations. Should NSR inadequately perform any action
required under applicable environmental laws, rules,
regulations, ordinances or judgments, NCRR or its represen-
tative shall have the right to take whatever reasonable
corrective action NCRR deems necessary to perform the work,
at the sole expense of NSR.
(iii) NCRR will provide NSR with reasonable access to any
properties of NCRR on which NSR is required by this Section
24(d) to take action to investigate or remediate
environmental harm, or on which NSR is required hereunder to
take any other related action the performance of which is
rendered more efficient or less costly when performed on such
property, or which is needed by NSR to access any such
properties.
(iv) To the extent permitted by applicable laws and regulations,
the following will be provided to NCRR or to NSR within
30 days of the receipt or submission thereof by NSR or by
NCRR, as the case may be:
(A) Any administrative or judicial investigation, complaint,
order or demand filed, served on or delivered to NCRR or
NSR by any governmental agency at any time during the
term of this Agreement because of or arising from the
deposit, spill, discharge or other release of a
Contaminating Substance which occurred on any part of the
Leased Properties before the Effective Date, or the Line
of Road, or any parcel in which the other party has an
interest on and after the Effective Date;
<PAGE> PAGE 140
EXHIBIT 10(i), Page 30 of 44
(B) Notice of any claims, lawsuits or other actions against
NCRR or NSR at any time during the term of this Agreement
for injunctive relief or recovery of losses sustained
because of or arising from the deposit, spill, discharge
or other release of a Contaminating Substance which
occurred on any part of the Leased Properties before the
Effective Date, or the Line of Road, or any parcel in
which the other party has an interest on and after the
Effective Date;
(C) A copy of any analytical results, correspondence or
report pertaining to underground storage tanks, above
ground storage tanks, wetlands or any environmental
investigation of any part of the Line of Road, which is
submitted to NCRR or NSR by any third party (excluding
NCRR's or NSR's contractors and consultants, but
including governmental agencies) or submitted by NCRR or
NSR to any governmental agency at any time during the
term of this Agreement;
(D) A copy of the results of environmental tests performed by
or on behalf of a governmental agency at any time during
the term of this Agreement because of or related to any
deposit, spill, discharge or other release of a
Contaminating Substance occurring on any part of the Line
of Road; and
(E) A copy of all environmental reports, notices and
correspondence submitted by NCRR or NSR to any
governmental agency after the effective date of this
Agreement pursuant to any applicable federal, state, or
local law, ordinance or regulation pertaining to the Line
of Road at any time during the term of this Agreement.
(v) If there is an Environmental Occurrence which NCRR has a
reasonable good faith belief may constitute a risk of
liability, expense or criminal exposure to NCRR, NCRR will be
given full access to and opportunity to copy any relevant
environmental reports, studies or data pertaining to such
Environmental Occurrence in the possession of NSR (excepting
privileged communications with counsel for NSR), upon 30 days
prior written notice to NSR.
(d) Remediation Standards
No cleanup or remediation will be required pursuant to this
Agreement unless Contaminating Substances are present in amounts
requiring reporting to state or federal environmental agencies and
in amounts requiring cleanup or remediation under applicable
environmental laws and regulations. If a cleanup or remediation
work is required on any parcel of Leased Properties that is used
for non-residential purposes as of July 1, 1999, the indemnifying
party under Sections 24(b), (c) or (d) will not be required to meet
more stringent standards due to existing or possible future
<PAGE> PAGE 141
EXHIBIT 10(i), Page 31 of 44
development of the parcel for residential uses. The obligation to
indemnify for cleanup and remediation expenses or the undertaking
of such work shall not be increased based upon any development
requiring excavation of the surface or subsurface of the given
parcel for the construction of underground garages, basements, or
subsurface occupation. The parties agree that the cleanup standard
applicable to such parcel may be based upon a site specific risk
assessment, if such approach complies with applicable environmental
laws and regulations or is accepted by the environmental agency
having jurisdiction over the parcel.
(e) Retention of Rights
In addition to the rights conveyed by this Section 24, NCRR and NSR
each retains all statutory and common law rights and causes of
action against the other, including but not limited to its rights
under federal and state environmental laws, arising out of
Environmental Occurrences.
(f) Termination of Indemnification Obligations
(i) The parties' indemnification and defense obligations under
Sections 24(b), (c) and (d) of this Agreement arising out of
an Environmental Occurrence will terminate seven (7) years
after the party seeking indemnification has actual knowledge
or receives proper notice from the other party or a third
party of the Environmental Occurrence, and in any event such
obligations will terminate seven (7) years after the
termination of this Agreement and any extensions thereof. If
the party seeking indemnification for an Environmental
Occurrence submits a valid claim in writing to the other
party within this time period, the indemnifying party's
obligations under this Agreement will continue indefinitely
with respect to that Environmental Occurrence until the
matter is resolved. For purposes of this Section 24(f)(i),
any notice or claim must meet the following additional
requirements:
(1) In the case of a notice by either NSR or NCRR to each
other, it must refer to this Section 24(f)(i) and must be
delivered either by hand; by registered or certified
mail, return receipt requested; by next-day delivery,
with written evidence of receipt; or by fax, with
confirmation by registered or certified mail, return
receipt requested.
(2) It must specifically describe the suspected Environmental
Occurrence, the nature and scope of the contamination,
the property affected, any claims that have been made and
plans for investigation or remediation, to the extent
such information is available.
<PAGE> PAGE 142
EXHIBIT 10(i), Page 32 of 44
(ii) Unless the parties' obligations have terminated under
Section 24(f)(i), NCRR and NSR each agrees to waive and not
to assert as a defense to its indemnification obligations
under this Section 24 any statute of limitations, statute of
repose, laches or other time related defense with respect to
any Environmental Occurrence.
(g) Environmental Information for Designated Returned Property
With respect to the Designated Returned Properties, on or before
October 1, 1999, NSR will identify any contamination of which it
has knowledge and will provide to NCRR all information and reports
pertaining thereto, and NCRR will have the right to inspect such
properties before their return. Such right of inspection will
include the right to perform an environmental site assessment.
(h) Dispute Resolution
Any dispute arising under this Section 24, if not resolved within
90 days of being raised by either party, shall be addressed
pursuant to the PPC/Dispute Resolution provision of this Agreement.
Section 25. "REIT" COOPERATION
(a) NSR will cooperate with NCRR in maintaining NCRR's status as a Real
Estate Investment Trust ("REIT") for income tax purposes.
(b) NCRR and NSR intend that, to the extent permitted by law, the
payments by NSR for trackage rights be treated as rents from real
property for purposes of NCRR's continued qualification as a REIT.
Section 26. PROPERTY TAXES
(a) NSR shall continue to pay property (ad valorem) taxes assessed
against NSR as a result of the allocation of a portion of its
system value to the taxing jurisdiction in which NCRR owns property
over which NSR serves as the exclusive freight operator pursuant to
the Agreement.
(b) NSR: (i) shall be responsible for property (ad valorem) taxes, if
any, determined pursuant to the North Carolina General Statutes and
related rules and regulations of the North Carolina Department of
Revenue on Non-operating Property that is owned by NCRR and which
NSR has the exclusive right to use under the Agreement and
(ii) shall be responsible for any property taxes, assessments, or
liens with respect to Designated Returned Property not paid by NSR
or any of its subtenants/licensees for all periods prior to the
Return Date. NCRR shall be responsible for property (ad valorem)
taxes on all other Non-operating Property; provided, however, where
NSR has the non-exclusive right to use Non-operating Property under
<PAGE> PAGE 143
EXHIBIT 10(i), Page 33 of 44
the Agreement, then NSR shall be responsible for its pro rata share
of the property taxes on such property based on NSR's usage of such
property. For purposes of this Section 26, Non-operating Property
shall mean property that is appraised as non-system property by the
North Carolina Department of Revenue or separately assessed by the
local assessor as non-public service company property.
(c) NSR or NCRR will not be required to pay any tax it is obligated to
pay under the provisions of this Section during the time it shall
reasonably and in good faith and by appropriate legal or
administrative proceedings contest the validity or the amount
thereof.
(d) NSR and NCRR and their respective assignees and designees shall
have the right to control and defend at their expense any audit or
examination by any taxing authority, or any judicial proceeding,
relating to any taxes required to be paid by them respectively
under this Section.
(e) If during the term of the Agreement, including any renewal period,
the manner in which property (ad valorem) taxes are assessed
against railroads is changed, or if improvements are made by NCRR
or any other party hereunder that are not used by NSR and that
affect the amount of property taxes assessed against NSR, the
parties will attempt in good faith to agree upon any changes which
may be necessary to this Section 26, using the PPC/Dispute
Resolution procedures herein if necessary; it being the parties'
understanding that the amount of property taxes payable by NSR
under this Section 26 shall not be increased by property taxes
attributable: (i) to the portion of property owned by NCRR that is
not used by NSR or (ii) to expenditures or additions to capacity
that are not used by NSR.
Section 27. REGULATORY APPROVAL AND EFFECTIVE DATE
(a) The grant of trackage rights hereunder and any renewals are subject
to prior approval or exemption from prior approval by the Surface
Transportation Board ("STB") or any successor agency of the
undertakings of NSR herein, as may be required or appropriate under
49 U.S.C. Section 11323, or any successor federal legislation and
such approval or exemption action becoming final.
(b) After (i) all requisite governmental and corporate approvals for
this grant of rights have become effective or have been satisfied;
(ii) this Agreement and all associated documents have been fully
executed and delivered; and (iii) any court orders enjoining the
implementation of this Agreement have expired or are no longer in
effect, this Agreement and the Trackage Rights Agreement shall be
effective contemporaneously (the "Effective Date").
<PAGE> PAGE 144
EXHIBIT 10(i), Page 34 of 44
Section 28. RESOLUTION OF LITIGATION
NCRR and NSR agree that the STB compensation and federal court
proceedings will be voluntarily dismissed by the parties without
prejudice within twenty days of execution of this Agreement and all
necessary approvals have been obtained.
(a) NCRR and NSR agree that the STB compensation and federal court
proceedings will be voluntarily dismissed by the parties without
prejudice within twenty days of execution of this Agreement and all
necessary approvals have been obtained.
(b) Except with respect to (i) personal property claims released as set
forth in Section 6, "Release" and (ii) property claims resolved as
set forth in Section 21, "Other Property Issues," none of NCRR's
claims for improvements, additions, betterments, improvements to
real property, property rights, franchises or privileges under the
Old Leases are waived or affected by virtue of the execution and
delivery of this Agreement.
(c) The terms of the Old Leases create potential claims that NSR and/or
A&EC would owe and be obligated to deliver to NCRR additional
properties (hereinafter "Claims for Additions"). The parties
acknowledge that to the extent Claims for Additions exist, the
circumstance that such additional properties and/or rights may have
been acquired or now be held in the name of a company affiliated
with NSR or A&EC will not, of itself, be determinative of the issue
of whether the Claims for Additions are valid.
(d) No claim or demand contemplated by the Old Leases for the return of
real property and related railroad facilities otherwise to be
determined at the expiration or termination thereof may be made
until, and therefore each of them is postponed to, the termination
of this Agreement or any renewal (or any cessation of service over
a segment pursuant to Section 17 hereof with respect to such
segment). NCRR and NSR agree that nothing in this Agreement shall
abridge, estop, compromise, release or waive any such claims
deferred under this Agreement and that no defense of waiver,
latches, acquiescence, release, estoppel, or the like arising on or
after December 31, 1994 with respect to any such claims existing on
that date may be asserted by reason of NCRR's agreement not to
assert such claims at this time.
Section 29. POLICY PLANNING COMMITTEE/DISPUTE RESOLUTION
NCRR and NSR will establish a joint senior-level Policy Planning
Committee ("PPC" or "Committee").
The PPC will serve as a planning resource to the various issues which
are properly before it, including but not limited to dispatching
matters, maintenance levels and the implementation of third-party
operations on NCRR lines.
<PAGE> PAGE 145
EXHIBIT 10(i), Page 35 of 44
There will be three representatives from each of NSR and NCRR on the
committee. Those appointed shall be empowered to act within the
parameters of the committee's area of concern, subject to necessary
management approvals of expenditures.
The PPC will meet not less than twice a year on a scheduled basis. If
either party desires an additional meeting or meetings, it shall provide
a proposed agenda and a thirty-day notice to the other party. The other
party may either agree to the proposed meeting date or request a
fifteen-day extension, at which time the meeting will take place. The
parties will alternate sites of the scheduled meetings or may agree to
meet at a site convenient to both parties. The party requesting the
special meeting will travel to the other party's headquarters location.
Any special meeting may be held via telephone conference.
DISPUTE RESOLUTION - PPC
The PPC shall also address and attempt to resolve Disputes. As used in
this section, a "Dispute" is any controversy, claim, issue, or other
dispute between NCRR and NSR that arises out of, in connection with, or
in relation to this Agreement or the Trackage Rights Agreement, whether
it arises in contract, in tort, by statute, or otherwise. "Dispute"
includes, but is not limited to: (a) any failure to agree on matters as
to which this Agreement expressly or implicitly contemplates subsequent
agreement by the parties (except for any matters left to the sole
discretion of a party); (b) any question about the parties' relationship
under this Agreement or the Trackage Rights Agreement; (c) any question
about the interpretation, performance, breach, validity, scope,
duration, enforceability or termination of the provisions in this
Agreement or the Trackage Rights Agreement; and (d) any question of
arbitrability that arises under this Agreement or the Trackage Rights
Agreement.
If a Dispute between the parties cannot be resolved by the parties in
the ordinary course of business, that Dispute shall be resolved as
follows:
(a) The Dispute shall be submitted to the PPC for resolution. Either
party shall have the right to submit the Dispute to the PPC by
providing the other party with written notice to that effect in the
manner set forth later in this Agreement for the giving of notices.
The notice (the "Notice") shall describe the Dispute and indicate
that the party providing the Notice wishes to resolve the Dispute
pursuant to the dispute resolution provisions in this section. The
submitted Dispute shall be addressed at the next regularly
scheduled meeting of the PPC unless the party providing the Notice
declares that the Dispute is urgent and requests that a special
meeting be held to address the submitted Dispute, provided that the
party exercising that right has complied with the Notice
requirements for meetings and agenda items described above.
(b) If the PPC fails to resolve a Dispute properly submitted to it
pursuant to the provisions set forth above at the meeting scheduled
pursuant to the Notice (or if such meeting is not held, on or
<PAGE> PAGE 146
EXHIBIT 10(i), Page 36 of 44
before the date such meeting is scheduled to be held), the Dispute
shall then be submitted to NSR's Chief Operating Officer and NCRR's
President for resolution.
(c) If NSR's Chief Operating Officer and NCRR's President fail to
resolve a Dispute properly submitted to them pursuant to the
provisions set forth above within 90 days following the date the
meeting scheduled pursuant to the Notice is held (or, if such
meeting is not held, the date such meeting is scheduled to be
held), the Dispute shall then be arbitrated as set forth below.
DISPUTE RESOLUTION - ARBITRATION
Notice of Arbitration. Either NCRR or NSR shall have the right to
initiate arbitration of any Dispute not resolved as provided above by
providing a notice of arbitration to the other party in the manner set
forth later in this Agreement for the giving of notices. This notice
shall clearly describe the Dispute to be arbitrated and indicate whether
the party initiating arbitration wishes to submit the dispute to one
arbitrator or to three arbitrators.
Number of Arbitrators. If the party initiating the arbitration
indicates a desire to submit the Dispute to only one arbitrator, and the
party receiving the notice gives notice of its consent to the use of a
single arbitrator within ten business days in the manner set forth later
in this Agreement for the giving of notices, then one-arbitrator
arbitration shall be used. Otherwise, three-arbitrator arbitration
shall be used.
Arbitration Site. The arbitration hearing shall be conducted at a
neutral location of the arbitrator's or arbitrators' choosing.
Arbitration Rules. The arbitration shall be conducted pursuant to the
American Arbitration Association's Commercial Arbitration Rules (or
their successor) (the "Arbitration Rules"). The use of the Commercial
Arbitration Rules shall not require the actual submission of the Dispute
to the American Arbitration Association. The Arbitration Rules shall
apply except to the extent they are inconsistent with the requirements
of this Agreement. Other arbitration rules or any arbitration forum may
be used if agreed to by the parties.
Three-Arbitrator Arbitration. Under this procedure, the Dispute shall
be resolved by a panel of three arbitrators. These arbitrators shall be
knowledgeable about the subject matter of the Dispute. For example,
with regard to railroad operational matters, arbitrators knowledgeable
in Class I railroad operations and rail passenger operations shall be
selected. These arbitrators shall comply with the Code of Ethics for
Arbitrators in Commercial Disputes issued by the American Bar
Association and the American Arbitration Association. These arbitrators
shall not be current or previous employees of the parties, nor shall
they within the past ten years have received regular remuneration from
either party other than for arbitration services.
<PAGE> PAGE 147
EXHIBIT 10(i), Page 37 of 44
The party who submits the Dispute to arbitration shall select and
identify the first of these arbitrators in the notice of arbitration.
The other party shall identify the second in a notice to be given not
more than 45 days after it receives the notice of arbitration. Within
30 days of the second arbitrator's selection, the two arbitrators shall
select a third, from nominations by the parties or otherwise, and notify
the parties of the selection. If the two selected arbitrators cannot
agree on a third within 90 days of the notice of arbitration, the
parties shall submit the Dispute to the American Arbitration Association
and the third arbitrator shall be chosen in accordance with the
Arbitration Rules or, if those Rules provide no means to make the
selection, pursuant to the Federal Arbitration Act, currently codified
as 9 U.S.C. Sec. 1 et seq.
The decision of the majority of the arbitrators shall constitute their
award. Their award shall be rendered in writing within 90 days of the
selection of the third arbitrator unless otherwise agreed between the
parties, and it shall contain a brief description of the rationale for
the award. The award shall be final and binding on the parties.
One-Arbitrator Arbitration. Under this procedure, the Dispute shall be
resolved by a single arbitrator. The arbitrator shall be knowledgeable
about the subject matter of the Dispute. For example, with regard to
railroad operational matters, an arbitrator knowledgeable in Class I
railroad operations and rail passenger operations shall be selected.
The arbitrator shall comply with the Code of Ethics for Arbitrators in
Commercial Disputes issued by the American Bar Association and the
American Arbitration Association. The arbitrator shall not be a current
or previous employee of the parties, nor shall he or she within the past
ten (10) years have received regular remuneration from either party
other than for arbitration services.
The parties will meet by telephone within ten days of receipt of the
notice of arbitration and seek agreement on the identity of the
arbitrator. If the parties are unable to reach agreement on the
identity of the arbitrator within 30 days of the notice of arbitration,
either (i) the parties shall submit the Dispute to the American
Arbitration Association and the arbitrator shall be chosen in accordance
with the Arbitration Rules or, if those rules provide no means to make
the selection, pursuant to the Federal Arbitration Act, currently
codified as 9 U.S.C. Sec. 1 et seq., or (ii) either party may initiate
three-arbitrator arbitration to resolve the Dispute by resubmitting an
appropriate notice of arbitration.
The award shall be rendered in writing within 45 days of the selection
of the arbitrator unless otherwise agreed between the parties, and it
shall contain a brief description of the rationale for the award. The
award shall be final and binding on the parties.
<PAGE> PAGE 148
EXHIBIT 10(i), Page 38 of 44
General Provisions.
The decision of the arbitrator(s) shall be final and binding. Judgment
to enforce the decision or award of the arbitrator(s) may be entered in
any court having jurisdiction, and the Parties shall not object to the
jurisdiction of the North Carolina General Court of Justice for that
purpose.
All proceedings relating to any such arbitration, and all testimony,
written submissions and awards of the Arbitrator(s) therein, shall be
private and confidential as among the parties and shall not be disclosed
to any other person, except that NCRR or NSR may disclose them to third
parties if (1) the information is publicly available; (2) disclosure is
recommended or required under applicable laws, rules, or regulations,
including, without limitation, securities laws; or (3) disclosure is
reasonably necessary to prosecute or defend any judicial action to
enforce, vacate, or modify such arbitration award.
The arbitrator(s) shall resolve all questions of state law by application
of the substantive law of North Carolina. They shall not apply North
Carolina's choice of law rules.
The arbitrator(s) shall not be authorized to award punitive damages,
regardless of the otherwise applicable substantive law they apply to
resolve the Dispute. The Arbitrator(s) shall have the power to require
the performance of acts found to be required by this Agreement, and to
require the cessation or non-performance of acts found to be prohibited
by this Agreement.
In an appropriate case, either party (or both) may request a temporary
restraining order, preliminary injunction, declaratory judgment or other
interim measure from a court or administrative body of competent
jurisdiction while arbitration proceedings are pending. Such a request
shall not be deemed incompatible with an agreement to arbitrate or a
waiver of the right to arbitrate.
Each party shall pay the compensation, costs, fees and expenses of its
own witnesses, experts and counsel. The compensation and any costs and
expenses of the arbitrator(s) and all other costs of the arbitration
shall be equally divided between the parties.
In any judicial proceeding to enforce this Agreement to arbitrate, the
only issues to be determined shall be the existence (but not the scope)
of an agreement to arbitrate or the failure of NCRR or NSR to comply
with that agreement. All other issues shall be decided by the
Arbitrator(s), whose decision thereon shall be final and binding. There
may be no appeal of an order compelling arbitration except as part of an
appeal concerning confirmation of the decision of the Arbitrator(s).
<PAGE> PAGE 149
EXHIBIT 10(i), Page 39 of 44
No party to this Agreement shall initiate a lawsuit or any
administrative proceeding (a "lawsuit") against another party to this
Agreement if that lawsuit involves a Dispute that could otherwise be
arbitrated under this section, except to the extent that the lawsuit
seeks (i) to compel an arbitration permitted by this section; (ii) to
confirm (and have judgment entered on) or to vacate an arbitration award
made pursuant to this section; (iii) to stay the running of any statute
of limitations; or (iv) to prevent any other occurrence (including,
without limitation, the passing of time) that would give rise to a
defense such as laches, estoppel, or waiver that initiating a lawsuit
may be necessary to avoid. If a lawsuit is brought for the purposes
described in (iii) or (iv), no party shall pursue such litigation beyond
such action as is necessary to prevent prejudice to its cause of action
pending ultimate resolution by arbitration under this section.
If a third party initiates a lawsuit against a party to this Agreement
(the "Defendant"), and this gives rise to a Dispute, neither party to
this Agreement shall pursue a claim in the lawsuit against the other
without the other's consent except as provided in the preceding
paragraph.
The parties acknowledge that this Agreement is a "contract evidencing a
transaction involving commerce" as that phrase is used in the Federal
Arbitration Act at 9 U.S.C. Sec. 2. The parties agree that the
arbitrators shall be guided by the terms of the Agreement and the
General Principles set forth herein.
Section 30. NOTICES
Any notices given hereunder shall be effective if sent by registered or
certified mail (United States Mail) and addressed as follows:
If to NSR:
Senior Vice President-Operations
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Virginia 23510
If to NCRR:
President
North Carolina Railroad Company
3200 Atlantic Avenue, Suite 110
Raleigh, North Carolina 27604
or to such other official and/or address as any of the parties hereto
may specify in a written notice to the other parties hereto, sent as
stated above.
<PAGE> PAGE 150
EXHIBIT 10(i), Page 40 of 44
Section 31. SUCCESSORS AND ASSIGNS
Neither party hereto shall transfer or assign this Agreement, or any of
its rights, interests or obligations hereunder, to any person, firm, or
corporation which is not affiliated with such party without obtaining
the prior written consent of the other party to this Agreement;
provided, however, that neither party shall be required to obtain the
prior approval of the other party in connection with any assignment
effected by a merger, consolidation or corporate reorganization or other
transaction where substantially all of the rail assets and liabilities
of such party are brought under common control with the assets of
another party.
Section 32. MISCELLANEOUS
(a) Except to the extent controlled by federal laws and regulations,
this Agreement shall in all respects be governed by the laws of the
State of North Carolina.
(b) This Agreement, together with its attachments and exhibits,
contains all the agreements of the parties hereto and supersedes
any previous negotiations.
(c) There have been no representations made by or on behalf of the NCRR
or NSR or understandings made between or among the parties hereto
other than those set forth in this Agreement. This Agreement may
not be modified except by a written instrument signed by the
parties hereto.
(d) All obligations of the parties hereunder not fully performed as of
the expiration or earlier termination of the term of this Agreement
and any renewal shall survive such expiration or earlier
termination of the term hereof and any renewal.
(e) If any clause, phrase, provision or portion of this Agreement or
the application thereof to any party or circumstance shall be
invalid or unenforceable under applicable law, such event shall not
affect, impair or render invalid or unenforceable the remainder of
this Agreement or any other clause, phrase, provision or portion
hereof, nor shall it affect the application of any other clause,
phrase, provision or portion hereof to other parties or
circumstances.
(f) The section headings herein are for convenience of reference and
shall in no way define, increase, limit, or describe the scope or
intent of any provision of this Agreement.
(g) Neither party shall be liable to the other in damages nor shall
this Agreement be terminated nor a default be deemed to have
occurred because of any failure to perform hereunder caused by a
"Force Majeure." Each party will be excused from performance of
any of its obligations hereunder, except obligations involving the
payment hereunder of money to the other party or to a third party,
<PAGE> PAGE 151
EXHIBIT 10(i), Page 41 of 44
where such non-performance is occasioned by Force Majeure.
Force Majeure shall mean fire not caused by NSR operations,
earthquake, flood, explosion, a wreck not involving NSR trains,
strike, riot, insurrection, civil disturbance, act of public enemy,
embargo, war, act of God, inability to obtain labor, materials or
supplies, any governmental regulation, restriction or prohibition,
or any other similar cause beyond the party's reasonable control.
Section 33. INSPECTIONS AND RECORDS; AUDIT
(a) Audit and reporting records (including but not limited to payment
amounts, cost and payment calculations, real estate records,
engineering data, freight and passenger traffic data, etc.) will be
exchanged by the parties on a periodic basis.
(b) NSR will maintain written records of the delays to passenger and,
if any, commuter trains and NSR shall provide those records to NCRR
on a monthly basis. These records will include the length and
cause of delay, including those which are caused by circumstances
which are beyond the NSR control. NSR shall provide any
information in its possession on circumstances that cause delay
outside of NSR control.
(c) NSR will provide NCRR with the following annual reports, records or
documents on or before June 1 of the following year:
(i) Rail, signal, and bridge program maintenance improvements
reports showing improvements made on the NCRR lines during
the previous calendar year, including, without limitation,
the number of new ties installed, miles surfaced, and length
of new or used rail installed, by line segment;
(ii) Updated track profiles;
(iii) Previous calendar year's car loads originated and terminated
by station, and number of car miles by line segment (Raleigh-
Morehead City, Raleigh-Greensboro, and Greensboro-Charlotte)
as available in NSR's records or systems in use;
(iv) Scheduled program maintenance for the then-current calendar
year.
(v) Copies of the previous calendar year's annual reports filed
with the North Carolina Utilities Commission and the Surface
Transportation Board ("STB") or its successor (currently
designated as Form R1 for the STB);
(d) By January 1, 2000, and not less than every three years thereafter,
NSR will furnish to NCRR copies of the following records then in
use by NSR: (i) changes to valuation or similar maps of NCRR
<PAGE> PAGE 152
EXHIBIT 10(i), Page 42 of 44
including intersection points with other lines, and (ii) a bridge
inventory (including but not limited to date of construction, type,
and condition on the NCRR lines operated and/or maintained by NSR).
(e) Up to two NCRR designated inspectors may inspect NCRR trackage
operated by NSR not less than every two years, traveling by high
rail vehicle with NSR supervisors or other NSR-designated personnel
during their regular inspection trips, and over the track sections
routinely scheduled by NSR for inspection. It is the intention of
the parties that NCRR have the opportunity to inspect its lines in
their entirety annually, subject however, to NSR's availability to
schedule such inspection trips over a reasonable period of time in
order to minimize disruption of NSR operations and use of NSR
personnel.
(f) If NSR incurs costs or expenses associated with providing the
information required in this Section 33 other than for copies of
records and reports ordinarily maintained by NSR in the course of
its business, the allocation of such costs between the parties
shall be addressed by the PPC/Dispute Resolution provision of this
Agreement.
Section 34. CONFIDENTIALITY
(a) Except as may be otherwise agreed between NCRR and NSR, any
documents and records (the "information") shared between the
parties pursuant to this Agreement shall not be disclosed to third
parties without first obtaining the written consent of the party
providing the information to the other party hereto.
(b) NCRR or NSR may disclose the information to third parties if the
information is publicly available or if disclosure is recommended
or required under applicable laws, rules, or regulations,
including, without limitation, securities laws.
<PAGE> PAGE 153
EXHIBIT 10(i), Page 43 of 44
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
WITNESS NORFOLK SOUTHERN RAILWAY COMPANY
/s/ Henry D. Light By: /s/ R. A. Brogan
----------------------------------
Title:
----------------------------------
WITNESS NORTH CAROLINA RAILROAD COMPANY
/s/ Najla J. Silek By: /s/ Sam Hunt
----------------------------------
Title:
----------------------------------
Subject to necessary corporate and governmental approvals.
<PAGE> PAGE 154
EXHIBIT 10(i), Page 44 of 44
EXHIBIT INDEX
--------------
Exhibit No. Document
---------- --------
A Timetable and Track Profiles as of July 1, 1999
B Designated Returned Properties
C Third Party Property/Agreement Request Chart
ATTACHMENT
-----------
Trackage Rights Agreement
<PAGE> PAGE 155
EXHIBIT 10(k), Page 1 of 6
NORFOLK SOUTHERN CORPORATION
MANAGEMENT INCENTIVE PLAN
AS AMENDED EFFECTIVE JANUARY 25, 2000
Section I. PURPOSE OF THE PLAN
It is the purpose of the Norfolk Southern Corporation Management
Incentive Plan (Plan) to enhance increased profitability for Norfolk
Southern Corporation by rewarding executive personnel of Norfolk Southern
Corporation and its affiliates with a bonus for collectively striving to
attain and surpass financial objectives.
Section II. ADMINISTRATION OF THE PLAN
The Compensation and Nominating Committee or any other committee of
the Board of Directors of Norfolk Southern Corporation which is
authorized to determine bonus awards under the Plan (Committee) shall
administer and interpret this Plan and, from time to time, adopt such
rules and regulations and make such recommendations to the Board of
Directors concerning Plan changes as are deemed necessary to insure
effective implementation of this Plan.
No executive may simultaneously participate in more than one Norfolk
Southern Corporation Incentive Group. An executive must reside in the
United States or Canada in order to participate in the Plan.
Section III. ESTABLISHMENT OF PERFORMANCE STANDARDS
The Committee shall establish:
A. The Incentive Groups for the incentive year,
B. The bonus level for each Incentive Group for the incentive
year, and
C. The performance standards for Pre-Tax Net Income and
operating ratio with resultant Corporate Performance
Factors (Corporate Performance Table).
Section IV. TYPE OF INCENTIVE BONUS
By December 22 of the year prior to the incentive year, each
participant must elect to receive any incentive bonus which may be
awarded to him or her for the incentive year either 100% cash or deferred
in whole or in part. A participant shall be permitted to defer only 25%,
50%, 75% or 100% of the bonus for any incentive year. If the participant
elects to receive 100% cash, the entire amount of the bonus for the
incentive year shall be distributed to the participant, or his or her
<PAGE> PAGE 156
EXHIBIT 10(k), Page 2 of 6
beneficiary, as hereinafter defined on or before March 1 of the year
following the incentive year. If deferred in whole or in part, the
amount deferred shall be allocated to the participant's deferred
savings account on or before March 1 of the year following the
incentive year and the remainder, if any, shall be distributed in
cash to the participant or his or her beneficiary on or before March 2
of the year following the incentive year. However, all amounts
deferred under this Plan shall be allocated to the Norfolk Southern
Corporation Officers' Deferred Compensation Plan and such deferrals
will be governed by the provisions of that plan.
Failure on the part of the participant to elect a deferral by
December 22 of the year prior to the incentive year, either in whole or
in part for the incentive year, shall be deemed to constitute an election
by such participant to receive the entire incentive bonus for the
incentive year as a cash bonus.
The Board of Directors shall have the right to reject all deferral
elections if, in its sole discretion, it shall determine prior to the
close of an incentive year that deferral has become inadvisable, and, if
such right shall be exercised, all incentive bonuses earned under the
Plan for such year shall be payable in cash, as provided for in the third
sentence of this Article IV.
Section V. BONUS AWARDS
At the end of the incentive year, the Committee shall determine the
Corporate Performance Factor from the Corporate Performance Table based
on the operating ratio and Pre-tax Net Income (Norfolk Southern's income
before state and federal income taxes as reported in the annual
consolidated financial statements for the incentive year). In computing
Pre-tax Net Income and operating ratio, special charges and restructuring
charges, and unusual or infrequent accounting adjustments which are
significant, and restatements or reclassifications, all as determined in
accordance with Generally Accepted Accounting Principles, which would
have the effect of reducing Pre-tax Net Income or increasing the
operating ratio, shall be excluded, unless the Committee shall determine
otherwise.
A participant's bonus award shall be determined by multiplying the
Corporate Performance Factor by the participant's bonus level, with the
result multiplied by the participant's total salary paid during the
incentive year. The Chief Executive Officer may review and adjust the
bonus award of any Incentive Group participant between 0% and 125% based
on the individual's performance. In no event, however, may the total
bonus award to all Incentive Groups for an incentive year exceed the
maximum bonus levels for all Incentive Groups as determined by the
Committee.
If the employment of a participant who is employed by Norfolk
Southern Corporation or its affiliates during the incentive year
terminates prior to the end of such year by reason of (1) death, or (2)
normal retirement, early retirement or total disability under applicable
Norfolk Southern Corporation plans and policies, then the phrase "total
<PAGE> PAGE 157
EXHIBIT 10(k), Page 3 of 6
salary paid during the incentive year" means base salary paid to the
participant during that portion of such year of employment prior to his
or her termination and through the end of the calendar month or payroll
period in which employment terminates but excludes any cash paid with
respect to such participant's unused vacation. No incentive bonus for
any incentive year shall be awarded or paid to any participant whose
employment with Norfolk Southern Corporation and all its affiliates
terminates before the end of such incentive year for a reason other
than one of those specifically stated in the preceding sentence.
If a participant becomes eligible for the Plan during the year or
becomes eligible for a different Incentive Group, then the amount of the
award shall be adjusted proportionally to reflect such changes.
Section VI. CALCULATION OF CREDITS TO BE ALLOCATED
The credit allocated to a participant's deferred savings account for
any incentive year is calculated by dividing the actual dollar value of
the deferred bonus for such year by the average of the closing prices for
Norfolk Southern Corporation Common Stock on the New York Stock Exchange
for all of the trading days in December of such year. Such credits were
calculated to the nearest one hundredth of a credit.
However, solely at the discretion of the Committee, the calculation
of all credits allocated to the deferred savings account of a participant
in active service on January 1, 1987, may be changed from a credit based
on the price of Norfolk Southern Corporation Common Stock to a cash
credit. A one-time request for such a change in the method of
calculating credits may be made by the participant by March 16, 1987,
and, if approved by the Committee, the balance of the participant's
deferred savings account as of February 28, 1987, including amounts
deferred for incentive year 1986, shall be converted to a cash credit
based on the New York Stock Exchange closing price for Norfolk Southern
Corporation Common Stock on February 27, 1987, and shall thereafter
accrue an amount equivalent to interest (Interest), compounded annually,
at the rate of fifteen percent (15%).
All amounts deferred under this Plan are allocated to the Norfolk
Southern Corporation Officers' Deferred Compensation Plan and are
governed by the provisions thereof.
Section VII. NATURE OF DEFERRED SAVINGS ACCOUNT
The deferred savings account is merely a bookkeeping account
maintained by Norfolk Southern Corporation for the express purpose of
recording a participant's deferred bonus credits and determining the
amounts payable by Norfolk Southern Corporation under this Plan. The
deferred savings account for a participant shall not be deemed to
constitute either in whole or in part a trust fund for the benefit of
such participant.
<PAGE> PAGE 158
EXHIBIT 10(k), Page 4 of 6
Section VIII. RESTRICTIONS ON DEFERRED SAVINGS ACCOUNT
The credits allocated to a participant's deferred savings account
under this Plan are restricted in that they shall not be sold, assigned,
transferred or pledged as collateral for a loan or as security for the
performance of any other obligation or for any other purpose, or
exchanged or otherwise disposed of.
Section IX. CHANGES IN CREDIT
Unless the Committee has changed the calculation of credit under
Article VI to an amount equivalent to Interest, if at any time a cash
dividend is paid, or if a stock dividend, a stock split, a combination or
other change occurs with respect to Norfolk Southern Corporation Common
Stock, the number of credits in a participant's deferred savings account
shall be increased or decreased so as to give effect to such cash
dividend, stock dividend, stock split, combination or other change. Any
such change shall be reflected in each such account during the calendar
year in which it occurs. Any new or changed credits resulting therefrom
shall be calculated to the nearest one hundredth of a credit and shall be
subject to the restrictions and provisions set forth herein applicable
thereto.
Section X. DISTRIBUTION WITH RESPECT TO DEFERRED CREDITS
During the first 10 years following a participant's termination of
employment, the credits in his or her deferred savings account shall be
periodically converted into cash, as provided for below, and distributed
to that participant, or to his or her beneficiary as hereinafter defined,
pursuant to the following provisions. In any event, distribution of such
cash to the participant shall be completed by the end of the 10-year
period.
For the purpose of this Plan, a beneficiary shall be either (1) the
named beneficiary or beneficiaries designated as hereinafter provided for
by the participant, or (2) in the absence of any such designation,
including absence by revocation of any previous designation, a legal
representative of the participant, duly appointed in the case of
incompetency or death of the participant. A participant may designate
both primary and contingent named beneficiaries. A participant may
revoke or change any designation. To be effective, the designation of a
named beneficiary or beneficiaries, or any change in or revocation of any
designation, must be on a form provided by Norfolk Southern Corporation
signed by the participant and filed with the Senior Vice President
Employee Relations, or an officer in a successor position, Norfolk
Southern Corporation, prior to the death of such participant. Any such
designation, change or revocation shall be ineffective to invalidate any
cash payment made or other action taken by Norfolk Southern Corporation
pursuant to this Plan prior to the receipt of same by Norfolk Southern
Corporation. The determination by Norfolk Southern Corporation of a
beneficiary or beneficiaries, or the identity thereof, or the rights of
<PAGE> PAGE 159
EXHIBIT 10(k), Page 5 of 6
same, based on proof by affidavit or other written evidence satisfactory
to Norfolk Southern Corporation shall be conclusive as to the liability
of Norfolk Southern Corporation and any payment made in accordance
therewith shall discharge Norfolk Southern Corporation of its obligation
under this Plan for such payment.
Norfolk Southern Corporation shall make a payment each calendar
month within the 10-year period to the participant or his or her
beneficiary, computed as follows:
Upon termination of employment, the number of credits in the
deferred savings account of such participant shall be ascertained.
Thereafter, there shall be added to such account the number of additional
credits, if any, due to be allocated thereto as a result of any incentive
bonus awarded such participant for any incentive year, or portion of such
year, preceding termination of employment. Any change in credits
referred to in Article IX occurring between such participant's
termination of employment and the end of the 10-year period will be
reflected in such account. Each monthly payment payable in any calendar
year shall be an amount equal to the number of credits in such account as
of January 1 that year, multiplied by the average of the closing prices
for Norfolk Southern Corporation Common Stock on the New York Stock
Exchange for all of the days in December of the previous calendar year
for which there is a closing price, multiplied by a fraction the
numerator of which is "1" and the denominator of which is the number of
monthly payments remaining to be paid in the 10-year period as of January
1 of the calendar year. The number of credits in such account shall be
reduced effective January 1 of each year during the 10-year period by the
credit equivalent of the payments made during the previous year.
However, in the event the calculation of the credit allocated to the
deferred savings account of a participant is changed from a credit based
on the price of Norfolk Southern Corporation Common Stock to a cash
credit based on Interest, then the monthly payment shall be an amount
sufficient to amortize the participant's deferred savings account
together with Interest over the 10-year period. If the deferred savings
account on January 1 of the year following termination contains a value
as calculated above of less than $10,000, the entire amount will be paid
in full within 45 days in lieu of payment over a 10-year period as
outlined in the preceding paragraph.
Section XI. DISTRIBUTION IN CASE OF TERMINATION
The Board of Directors, in its sole discretion, may authorize and
direct Norfolk Southern Corporation to make payments after termination of
employment of a participant to such participant or his or her beneficiary
in a lump sum or over a period other than that provided for in Article X,
and to charge such payments against the participant's deferred savings
account. Such accelerated distribution may be made only (1) in the event
of a financial emergency which is beyond the control of the participant
if disallowance of the accelerated distribution would result in severe
financial hardship to the participant or beneficiary, and only in an
amount necessary to satisfy the financial emergency, or (2) if in the
<PAGE> PAGE 160
EXHIBIT 10(k), Page 6 of 6
written opinion of counsel, payment in accordance with Article X could
create a conflict of interest for the participant or beneficiary;
provided, that all amounts due to the participant or beneficiary under
this Plan shall in all events be paid to the participant or beneficiary
by the end of the 10-year period referred to in Article X. No participant
or beneficiary who is also a member of the Board of Directors shall
participate in any decision of the Board to make accelerated payments
under this Article XI.
Section XII. NO GUARANTEE OF CONTINUANCE OF EMPLOYMENT
Nothing contained in this Plan or in any designation of a
participant hereunder shall constitute or be deemed to constitute any
evidence of an agreement or obligation on the part of Norfolk Southern
Corporation or its affiliates to continue to employ any such participant
for any period whatsoever.
Section XIII. AMENDMENT TO AND TERMINATION OF PLAN
Norfolk Southern Corporation reserves the right at any time by a
resolution duly adopted by its Board of Directors to amend this Plan in
any manner or to terminate it at any time, except that no such amendment
or termination shall deprive a participant or beneficiary of any rights
hereunder theretofore legally accrued, and no such termination shall be
effective for the year in which such resolution is adopted.
Section XIV. RECALCULATION EVENTS
Norfolk Southern Corporation's commitment to accrue and pay Interest
as provided in Article VI is facilitated by the purchase of
corporate-owned life insurance. If the Committee, in its sole
discretion, determines that any change whatsoever in Federal, State or
local law, or in its application or interpretation, has materially
affected, or will materially affect, the ability of Norfolk Southern
Corporation to recover the cost of providing the benefits otherwise
payable under the Plan, then if the Committee so elects, a Recalculation
Event shall be deemed to have occurred. If a Recalculation Event occurs,
then Interest shall be recalculated and restated using a lower rate of
Interest determined by the Committee, but which shall be not less than
seven and one-half percent (7-1/2%).
<PAGE> PAGE 161
EXHIBIT 10(l), Page 1 of 4
NORFOLK SOUTHERN CORPORATION
EXECUTIVE MANAGEMENT INCENTIVE PLAN
AS AMENDED EFFECTIVE JANUARY 25, 2000
Section I. PURPOSE OF THE PLAN
It is the purpose of the Norfolk Southern Corporation Executive
Management Incentive Plan (Plan) to enhance increased profitability for
Norfolk Southern Corporation by rewarding certain officers elected by the
Board of Directors of Norfolk Southern Corporation and its affiliates
with a bonus for collectively striving to attain and surpass financial
objectives.
Section II. ADMINISTRATION OF THE PLAN
The Compensation and Nominating Committee or any other committee of
the Board of Directors of Norfolk Southern Corporation which is
authorized to determine bonus awards under the Plan (Committee) shall
administer and interpret this Plan and, from time to time, adopt such
rules and regulations and make such recommendations to the Board of
Directors concerning Plan changes as are deemed necessary to insure
effective implementation of this Plan.
No executive may simultaneously participate in more than one Norfolk
Southern Corporation Incentive Group. An executive must reside in the
United States or Canada in order to participate in the Plan.
Section III. ESTABLISHMENT OF PERFORMANCE STANDARDS
The Committee shall establish:
A. The Incentive Groups for the incentive year, which Groups shall
consist of Board-elected officers at the level of Vice
President and above,
B. The bonus level for each Incentive Group for the incentive
year, and
C. The performance standards for Pre-Tax Net Income and operating
ratio with resultant Corporate Performance Factors (Corporate
Performance Table).
Section IV. TYPE OF INCENTIVE BONUS
By December 22 of the year prior to the incentive year, each
participant must elect to receive any incentive bonus which may be
awarded to him or her for the incentive year either 100% cash or deferred
in whole or in part. A participant shall be permitted to defer only 25%,
<PAGE> PAGE 162
EXHIBIT 10(l), Page 2 of 4
50%, 75% or 100% of the bonus for any incentive year. If the participant
elects to receive 100% cash, the entire amount of the bonus for the
incentive year shall be distributed to the participant, or his or her
beneficiary, as hereinafter defined on or before March 1 of the year
following the incentive year. If deferred in whole or in part, the amount
deferred shall be allocated to the Norfolk Southern Corporation Officers'
Deferred Compensation Plan (and such deferrals will be governed by the
provisions of that plan) on or before March 1 of the year following the
incentive year and the remainder, if any, shall be distributed in cash
to the participant or his or her beneficiary on or before March 2 of the
year following the incentive year.
Failure on the part of the participant to elect a deferral by
December 22 of the year prior to the incentive year, either in whole or
in part for the incentive year, shall be deemed to constitute an election
by such participant to receive the entire incentive bonus for the
incentive year as a cash bonus.
The Board of Directors shall have the right to reject all deferral
elections if, in its sole discretion, it shall determine prior to the
close of an incentive year that deferral has become inadvisable, and, if
such right shall be exercised, all incentive bonuses earned under the
Plan for such year shall be payable in cash, as provided for in the third
sentence of this Article IV.
Section V. BONUS AWARDS
At the end of the incentive year, the Committee shall determine the
Corporate Performance Factor from the Corporate Performance Table based
on the operating ratio and Pre-tax Net Income (Norfolk Southern's income
before state and federal income taxes as reported in the annual
consolidated financial statements for the incentive year). In computing
Pre-tax Net Income and operating ratio, special charges and restructuring
charges, and unusual or infrequent accounting adjustments which are
significant, and restatements or reclassifications, all as determined in
accordance with Generally Accepted Accounting Principles, which would
have the effect of reducing Pre-tax Net Income or increasing the
operating ratio, shall be excluded, unless the Committee shall determine
otherwise. A participant's bonus award shall be determined by multiplying
the Corporate Performance Factor by the participant's bonus level, with the
result multiplied by the participant's total salary paid during the
incentive year. The Committee may review the performance of the Plan
participants and may, at its discretion, reduce the bonus award of any
such participant between 0% and 100%, based on the individual's
performance.
If the employment of a participant who is employed by Norfolk
Southern Corporation or its affiliates during the incentive year
terminates prior to the end of such year by reason of (1) death, or (2)
normal retirement, early retirement or total disability under applicable
Norfolk Southern Corporation plans and policies, then the phrase "total
salary paid during the incentive year" means base salary paid to the
<PAGE> PAGE 163
EXHIBIT 10(l), Page 3 of 4
participant during that portion of such year of employment prior to his
or her termination and through the end of the calendar month or payroll
period in which employment terminates but excludes any cash paid with
respect to such participant's unused vacation. No incentive bonus for
any incentive year shall be awarded or paid to any participant whose
employment with Norfolk Southern Corporation and all its affiliates
terminates before the end of such incentive year for a reason other than
one of those specifically stated in the preceding sentence.
If a participant becomes eligible for the Plan during the year or
becomes eligible for a different Incentive Group, then the amount of the
award shall be adjusted proportionally to reflect such changes.
Section VI. DESIGNATION OF BENEFICIARY
For the purpose of this Plan, a beneficiary shall be either (1) the
named beneficiary or beneficiaries designated as hereinafter provided for
by the participant, or (2) in the absence of any such designation,
including absence by revocation of any previous designation, a legal
representative of the participant, duly appointed in the case of
incompetency or death of the participant. A participant may designate
both primary and contingent named beneficiaries. A participant may
revoke or change any designation. To be effective, the designation of a
named beneficiary or beneficiaries, or any change in or revocation of any
designation, must be on a form provided by Norfolk Southern Corporation
signed by the participant and filed with the Senior Vice President
Employee Relations, or an officer in a successor position, Norfolk
Southern Corporation, prior to the death of such participant. Any such
designation, change or revocation shall be ineffective to invalidate any
cash payment made or other action taken by Norfolk Southern Corporation
pursuant to this Plan prior to the receipt of same by Norfolk Southern
Corporation. The determination by Norfolk Southern Corporation of a
beneficiary or beneficiaries, or the identity thereof, or the rights of
same, based on proof by affidavit or other written evidence satisfactory
to Norfolk Southern Corporation shall be conclusive as to the liability
of Norfolk Southern Corporation and any payment made in accordance
therewith shall discharge Norfolk Southern Corporation of its obligation
under this Plan for such payment.
Section VII. NO GUARANTEE OF CONTINUANCE OF EMPLOYMENT
Nothing contained in this Plan or in any designation of a
participant hereunder shall constitute or be deemed to constitute any
evidence of an agreement or obligation on the part of Norfolk Southern
Corporation or its affiliates to continue to employ any such participant
for any period whatsoever.
<PAGE> PAGE 164
EXHIBIT 10(l), Page 4 of 4
Section VIII. AMENDMENT TO AND TERMINATION OF PLAN
Norfolk Southern Corporation reserves the right at any time by a
resolution duly adopted by its Board of Directors to amend this Plan in
any manner or to terminate it at any time, except that no such amendment
or termination shall deprive a participant or beneficiary of any rights
hereunder theretofore legally accrued, and no such termination shall be
effective for the year in which such resolution is adopted.
<PAGE> PAGE 165
EXHIBIT 10(m), Page 1 of 15
NORFOLK SOUTHERN CORPORATION
LONG-TERM INCENTIVE PLAN
AS AMENDED EFFECTIVE JANUARY 25, 2000
Section 1. PURPOSE
The purpose of the Long-Term Incentive Plan, as amended (the "Plan"), is
to promote the success of Norfolk Southern Corporation (the
"Corporation") and to provide an opportunity for officers and other key
employees of the Corporation and its Subsidiary Companies (as hereinafter
defined) to acquire or increase a proprietary interest in the Corporation
and thereby to provide an additional incentive to officers and other key
employees to devote their maximum efforts and skills to the advancement,
betterment, and prosperity of the Corporation and its shareholders. The
Plan provides for the grant of incentive stock options, non-qualified
stock options, stock appreciation rights, performance share units,
performance shares, and shares of the Corporation's common stock
(restricted pursuant to the provisions of Section 9 of the Plan), in
accordance with the terms and conditions set forth below.
Section 2. DEFINITIONS
The terms used herein shall have the following meanings unless otherwise
specified or unless a different meaning is clearly required by the
context:
Award Any one or more of the following: Incentive Stock Option;
Non-qualified Stock Option; Stock Appreciation Right;
Restricted Shares; Performance Share Units; and
Performance Shares.
Beneficiary The person or persons designated in writing by the
Participant as his Beneficiary in respect of Awards or, in
the absence of such a designation or if the designated
person or persons predecease the Participant, the person
or persons who shall acquire the Participant's rights in
respect of Awards by bequest or inheritance in accordance
with the applicable laws of descent and distribution. In
order to be effective, a Participant's designation of a
Beneficiary must be on file with the Corporation before
the Participant's death. Any such designation may be
revoked and a new designation substituted therefor by the
Participant at any time before his death without the
consent of the previously designated Beneficiary.
Board of The Board of Directors of the Corporation.
Directors
Code The Internal Revenue Code of 1986, as amended from time to
time.
<PAGE> PAGE 166
EXHIBIT 10(m), Page 2 of 15
Committee The Compensation and Nominating Committee or any other
committee of the Board of Directors which is authorized to
grant Awards under this Plan.
Common Stock The Common Stock of the Corporation.
Disability A disability that enables the Participant to be eligible
for and receive a disability benefit under the Long-Term
Disability Plan of the Corporation or a long-term
disability plan of a Subsidiary Company (whichever is
applicable), as amended from time to time.
Exercise With respect to a Stock Appreciation Right, all of the
Gain Shares shares of Common Stock received upon exercise of the Stock
Appreciation Right.
With respect to an Option, the portion of the shares of
Common Stock received upon exercise of the Option equal to
the excess of the Fair Market Value, as of the exercise
date, over the Option price, multiplied by the number of
shares purchased under the Option on the exercise date,
divided by such Fair Market Value, and rounded down to the
nearest whole number of shares.
Fair Market The value of Common Stock on a particular date as measured
Value by the mean of the high and low prices at which it is
traded on such date as reported in the Composite
Transactions for such date by The Wall Street Journal, or,
if Common Stock was not traded on such date, on the next
preceding day on which Common Stock was traded.
Incentive An Option that complies with the terms and conditions set
Stock forth in Section 422(b) of the Code and is designated by
Option the Committee as an Incentive Stock Option.
Non-qualified An Option granted under the Plan other than an Incentive
Stock Option Stock Option.
Option Any option to purchase Common Stock granted pursuant to the
provisions of Section 6 or Section 7 of the Plan.
Optionee A Participant who is the holder of an Option.
Participant Any officer or key employee of the Corporation or a
Subsidiary Company selected by the Committee to
participate in the Plan.
Performance The period of time, designated by the Committee, over which
Cycle Performance Shares may be earned.
<PAGE> PAGE 167
EXHIBIT 10(m), Page 3 of 15
Performance Shares of Common Stock granted pursuant to Section 10 of
Shares the Plan, which may be made subject to the restrictions
and other terms and conditions prescribed in Section 11 of
the Plan.
Performance Contingent rights to receive Performance Shares pursuant to
Share Units Section 10 of the Plan.
Restricted Shares of Common Stock granted pursuant to Section 9 of the
Shares Plan and subject to the restrictions and other terms and
conditions set forth therein.
Restriction A period of time not less than twenty-four (24) nor more
Period than sixty (60) months, to be determined within those
limits by the Committee in its sole discretion, commencing
on the date as of which Restricted Shares are granted,
during which the restrictions imposed by paragraph (b) of
Section 9 of the Plan shall apply. The Committee shall
determine the length of the Restriction Period at the time
that the Restricted Shares are granted.
Retirement Retirement from the Corporation or a Subsidiary Company
pursuant to the provisions of the Retirement Plan of the
Corporation or a retirement plan of a Subsidiary Company
(whichever is applicable), as amended from time to time.
Share An agreement entered into pursuant to Section 11 of the
Retention Plan.
Agreement
Stock The right, granted pursuant to the provisions of Section 8
Appreciation of the Plan, to receive a payment equal to the excess of
Right the Fair Market Value of Common Stock over the Option
price of such Common Stock, as specified in Section 8 of
the Plan.
Subsidiary A corporation of which at least eighty percent (80%) of the
Company total combined voting power of all classes of stock
entitled to vote is owned, directly or indirectly, by the
Corporation.
Section 3. ADMINISTRATION
The Plan shall be administered by the Committee, which, subject to the
limitations set forth herein, shall have the full and complete authority
and sole discretion from time to time to construe and interpret the Plan;
to select the officers and other key employees who shall be granted
Awards under the Plan; to determine the type, size, terms, and conditions
of the Award or Awards to be granted to each such Participant; to
authorize the grant of such Awards pursuant to the Plan; to give a
Participant an election to surrender an Award in exchange for the grant
of a new Award;
<PAGE> PAGE 168
EXHIBIT 10(m), Page 4 of 15
to adopt, amend and rescind rules and regulations relating to the Plan;
and to make all other determinations and take all other action it may
deem necessary or advisable for the implementation and administration of
the Plan. The Committee may authorize the grant of more than one type of
Award, and Awards subject to differing terms and conditions, to any
eligible employee. The Committee's decision to authorize the grant of an
Award to an employee at any time shall not require the Committee to
authorize the grant of an Award to that employee at any other time or to
any other employee at any time; nor shall its determination with respect
to the size, type, or terms and conditions of the Award to be granted to
an employee at any time require it to authorize the grant of an Award of
the same type or size or with the same terms and conditions to that
employee at any other time or to any other employee at any time. The
Committee shall not be precluded from authorizing the grant of an Award
to any eligible employee solely because the employee previously may have
been granted an Award of any kind under the Plan.
All determinations of the Committee shall be by a majority of its members
and shall be final, conclusive and binding. Each member of the Committee,
while serving as such, shall be considered to be acting in his capacity
as a director of the Corporation, and no member of the Committee shall be
liable for any action taken or decision made in good faith with respect
to the implementation or administration of the Plan.
Section 4. ELIGIBILITY
To be eligible for selection by the Committee to participate in the Plan,
an individual must be a full-time salaried officer or key employee of the
Corporation, or of a Subsidiary Company, and must reside in the United
States or Canada, on the date on which the Committee authorizes the grant
to such individual of an Award. A director of the Corporation shall not
be eligible to participate in the Plan unless he is a full-time salaried
officer of the Corporation or a Subsidiary Company.
Section 5. SHARES AVAILABLE
Subject to the provisions of Section 13 of the Plan, no more than an
aggregate of 39,878,604 shares of Common Stock may be issued pursuant to
the Plan. Such shares shall be provided from shares of Common Stock
authorized but not issued. Any shares of Common Stock which were subject
to an Option, a Stock Appreciation Right, or a Performance Share Unit,
and which were not issued prior to the expiration of the Award shall
thereafter again be available for award under the Plan. Upon the
forfeiture of any Restricted Shares, the forfeited shares of Common Stock
shall thereafter be available for award under the Plan. Notwithstanding
any other provision to the contrary, no Participant may be awarded a
grant in any one year, which, when added to any other grant of Options,
Restricted Shares, and Performance Share Units in the same year, shall
exceed 750,000 shares of Common Stock. If an Option is canceled, the
canceled Option continues to count against the maximum number of shares
for which Options may be granted to a Participant in any year.
<PAGE> PAGE 169
EXHIBIT 10(m), Page 5 of 15
Section 6. INCENTIVE STOCK OPTIONS
(a) General -- The Committee may authorize the grant of Incentive
Stock Options subject to the terms and conditions set forth in this
Section 6. The grant of an Incentive Stock Option shall be evidenced by
a written Incentive Stock Option Agreement between the Corporation and
the Optionee, setting forth the number of shares of Common Stock subject
to the Incentive Stock Option evidenced thereby and the terms,
conditions, and restrictions applicable thereto. The issuance of shares
of Common Stock pursuant to an Incentive Stock Option also shall be
subject to the provisions of any Share Retention Agreement that may be
required by the Committee under Section 11 of the Plan.
(b) Option Price -- The Committee shall determine the Option price
for each share of Common Stock purchased under an Option, but, subject to
the provisions of Section 13 of the Plan, in no event shall the Option
price be less than one hundred percent (100%) of the Fair Market Value of
the Common Stock on the date the Option is granted.
(c) Duration of Options -- The Committee shall fix the term or
duration of Options, provided that such term shall not exceed 10 years
from the date the Option is granted, and that such term shall be subject
to earlier termination pursuant to the provisions of paragraph (g) of
this Section 6 or paragraph (e) of Section 8 of the Plan.
(d) Non-transferability of Options -- Options are not transferable
other than by will or the applicable laws of descent and distribution
following the death of the Optionee. Options may be exercised during the
lifetime of the Optionee only by him, and following his death only by his
Beneficiary.
(e) Exercise of Options -- The Committee shall determine the time
or times at which Options may be exercised; provided that such time or
times shall not occur before the latest of:
(i) the first anniversary of the date on which the Option was
granted;
(ii) approval of the Plan, as hereby amended, by the
stockholders of the Corporation in the manner provided under Section
15(a) of the Plan; and
(iii) the effectiveness of any registration statement
required to be filed under the Securities Act of 1933 for the
registration of the Common Stock to be issued upon exercise of the
Option.
(f) Payment of Option Price -- The purchase price of Common Stock
upon exercise of an Option shall be paid in full to the Corporation at
the time of the exercise of the Option in cash or, at the discretion of
the Committee and subject to any limitations or requirements that the
Committee may adopt, by the surrender to the Corporation of shares of
previously acquired Common Stock, which have been held by the Optionee
<PAGE> PAGE 170
EXHIBIT 10(m), Page 6 of 15
for at least twelve (12) months and which shall be valued at Fair Market
Value on the date that the Option is exercised, or, at the discretion of
the Committee, by a combination of cash and such Common Stock.
(g) Termination of Options -- No Option shall be exercisable after
it expires. Each Option shall expire upon the earliest of:
(i) the expiration of the term for which the Option was
granted;
(ii) (A) Except as otherwise provided by the Committee, in the
case of an Optionee whose employment with the Corporation or a Subsidiary
Company is terminated due to Retirement, Disability or death, the
expiration of thirty-six (36) months after such termination of
employment, or
(B) in the case of an Optionee whose employment with the
Corporation or a Subsidiary Company is terminated for any reason other
than Retirement, Disability, or death, at the close of business on the
last day of active service by the Optionee with the Corporation or a
Subsidiary Company, or
(C) in the case of an Optionee who is granted a leave of
absence, at the close of business on the last day of active service by
the Optionee with the Corporation or a Subsidiary Company, unless the
Optionee has and remains eligible for a statutory right to reemployment;
or
(iii) with the Optionee's consent, the grant of a new Award
to replace the Option.
(h) Limitation on Exercisability -- The aggregate Fair Market Value
(determined as of the time the Incentive Stock Option is granted) of the
Common Stock with respect to which Incentive Stock Options (granted on or
after January 1, 1987) are exercisable for the first time by the Optionee
during any calendar year shall not exceed $100,000.
(i) Order of Exercise -- An Incentive Stock Option granted prior to
January 1, 1987, shall not be exercisable while there is outstanding any
Incentive Stock Option which was granted to the Optionee before the grant
of the first-mentioned Incentive Stock Option. For this purpose, an
Incentive Stock Option shall be treated as outstanding until it is
exercised in full or expires in accordance with paragraph (c) of this
Section 6.
As used in paragraphs (h) and (i) of this Section 6, the term
Incentive Stock Option shall mean an option to purchase stock which is
granted pursuant to the provisions of this Plan or of any other plan of
the Corporation or of a parent or subsidiary corporation (as defined by
Section 424(f) of the Code) and which complies with the terms and
conditions set forth in Section 422(b) of the Code.
<PAGE> PAGE 171
EXHIBIT 10(m), Page 7 of 15
Section 7. NON-QUALIFIED STOCK OPTIONS
The Committee may authorize the grant of Non-qualified Stock Options
subject to the terms and conditions specified in this Section 7. The
grant of a Non-qualified Stock Option shall be evidenced by a written
Non-qualified Stock Option Agreement between the Corporation and the
Optionee, setting forth the number of shares of Common Stock subject to
the Non-qualified Stock Option evidenced thereby and the terms,
conditions, and restrictions applicable thereto. Non-qualified Stock
Options granted pursuant to the provisions of this Section 7 shall be
subject to the terms, conditions, and restrictions set forth in
paragraphs (b) and (d) through (g) of Section 6 of the Plan. The
limitations set forth in paragraphs (c), (h) and (i) of Section 6 of the
Plan shall not apply to Non-qualified Stock Options. The issuance of
shares of Common Stock pursuant to a Non-qualified Stock Option also
shall be subject to the provisions of any Share Retention Agreement that
may be required by the Committee under Section 11 of the Plan.
Section 8. STOCK APPRECIATION RIGHTS
(a) General -- The Committee may grant a Stock Appreciation Right
to a Participant in connection with an Option, or portion thereof as
determined by the Committee, subject to the terms and conditions set
forth in this Section 8. The Stock Appreciation Right may be granted at
the time of grant of the related Option and shall be subject to the same
terms and conditions as the related Option, except as this Section 8 may
otherwise provide. The grant of a Stock Appreciation Right shall be
evidenced either by provisions in the Option agreement evidencing the
related Option or by a written Stock Appreciation Right Agreement between
the Corporation and the Optionee, identifying the related Option,
specifying the number of shares of Common Stock subject thereto, and
setting forth the terms and conditions applicable to the Stock
Appreciation Right.
(b) Exercise -- A Stock Appreciation Right shall be exercisable
only at such time or times, to such extent, and by such persons, as the
Option to which it relates shall be exercisable; provided that:
(i) if the Committee determines that all or part of a payment
in respect of a Stock Appreciation Right shall be made in cash, the Stock
Appreciation Right shall not be exercised before the expiration of one
(1) year from the date on which it was granted; provided, however, that
this subparagraph (i) shall not apply if the death or Disability of the
Optionee occurs within one (1) year after the grant of the Stock
Appreciation Right;
(ii) if the Committee determines that all or part of a payment
in respect of a Stock Appreciation Right shall be made in cash, such
exercise may occur only on a day that is at least three (3) and no more
than twelve (12) business days after the date on which the Corporation
first made publicly available its most recent regular quarterly or annual
financial statements; and
<PAGE> PAGE 172
EXHIBIT 10(m), Page 8 of 15
(iii) a Stock Appreciation Right granted in connection with
an Incentive Stock Option may not be exercised on any date on which the
Fair Market Value of a share of Common Stock is less than or equal to the
Option price per share under the related Incentive Stock Option.
A Stock Appreciation Right shall be exercised by surrendering the
related Option, or the portion thereof pertaining to the shares with
respect to which the Stock Appreciation Right is exercised, and providing
the Corporation with a written notice in such form and containing such
information (including the number of shares of Common Stock with respect
to which the Stock Appreciation Right is being exercised) as the
Committee may specify. The date on which the Corporation receives such
notice shall be the date on which the related Option, or portion thereof,
shall be deemed surrendered and the Stock Appreciation Right shall be
deemed exercised.
(c) Payment -- Upon exercise of a Stock Appreciation Right in the
manner provided in paragraph (b) of this Section 8, the Optionee shall be
entitled to receive Exercise Gain Shares equal to the number of shares of
Common Stock that have an aggregate Fair Market Value on the exercise
date equal to the amount by which the Fair Market Value of a share of
Common Stock on the exercise date exceeds the Option price per share of
the related Option, multiplied by the number of shares covered by the
related Option, or portion thereof, surrendered in connection with the
exercise of the Stock Appreciation Right. The Exercise Gain Shares shall
be subject to the provisions of any Share Retention Agreement that may be
required by the Committee under Section 11 of the Plan. In the sole
discretion of the Committee, all or part of the payment in respect of a
Stock Appreciation Right may be made in cash in lieu of Exercise Gain
Shares.
(d) Termination of Right -- A Stock Appreciation Right shall
expire, unless previously exercised or canceled, upon the expiration of
the Option to which it relates.
(e) Effect of Exercise -- A Stock Appreciation Right shall be
canceled when, and to the extent that, the related Option is exercised,
and an Option shall be canceled when, and to the extent that, the Option
is surrendered to the Corporation upon the exercise of a related Stock
Appreciation Right.
Section 9. RESTRICTED SHARES
(a) General -- The Committee, in its sole discretion, may from time
to time authorize the grant of Restricted Shares to a Participant. A
certificate or certificates representing the number of Restricted Shares
granted shall be registered in the name of the Participant. Until the
expiration of the Restriction Period or the lapse of restrictions in the
manner provided in paragraph (d) or paragraph (e) of this Section 9, the
certificate or certificates shall be held by the Corporation for the
account of the Participant, and the Participant shall have beneficial
ownership of the Restricted Shares, including the right to receive
dividends on, and the right to vote, the Restricted Shares.
<PAGE> PAGE 173
EXHIBIT 10(m), Page 9 of 15
(b) Restrictions -- Until the expiration of the Restriction Period
or the lapse of restrictions in the manner provided in paragraph (d) or
paragraph (e) of this Section 9, Restricted Shares shall be subject to
the following restrictions and any additional restrictions that the
Committee, in its sole discretion, may from time to time deem desirable
in furtherance of the objectives of the Plan:
(i) the Participant shall not be entitled to receive the
certificate or certificates representing the Restricted Shares;
(ii) the Restricted Shares may not be sold, transferred,
assigned, pledged, conveyed, hypothecated, or otherwise disposed of; and
(iii) the Restricted Shares may be forfeited immediately as
provided in paragraph (d) of this Section 9.
(c) Distribution of Restricted Shares -- If a Participant to whom
Restricted Shares have been granted remains in the continuous employment
of the Corporation or a Subsidiary Company during the entire Restriction
Period, upon the expiration of the Restriction Period all restrictions
applicable to the Restricted Shares shall lapse, and the certificate or
certificates representing the shares of Common Stock that were granted to
the Participant in the form of Restricted Shares shall be delivered to
the Participant.
(d) Termination of Employment -- If the employment of a Participant
is terminated for any reason other than the Retirement, Disability, or
death of the Participant in service before the expiration of the
Restriction Period, the Restricted Shares shall be forfeited immediately
and all rights of the Participant to such shares shall terminate
immediately without further obligation on the part of the Corporation or
any Subsidiary Company. If the Participant's employment is terminated by
reason of the Retirement, Disability, or death of the Participant in
service before the expiration of the Restriction Period, the number of
Restricted Shares held by the Corporation for the Participant's account
shall be reduced by the proportion of the Restriction Period remaining
after the Participant's termination of employment; the restrictions on
the balance of such Restricted Shares shall lapse on the date the
Participant's employment terminated; and the certificate or certificates
representing the shares of Common Stock upon which the restrictions have
lapsed shall be delivered to the Participant (or, in the event of the
Participant's death, to his Beneficiary).
(e) Waiver of Restrictions -- The Committee, in its sole
discretion, may waive any or all restrictions with respect to Restricted
Shares.
Section 10. PERFORMANCE SHARES
The Committee, in its sole discretion, may from time to time authorize
the grant of Performance Share Units to a Participant. Performance Share
Units shall entitle the Participant to Performance Shares (or cash in
lieu thereof) upon the achievement of such performance goals as may be
<PAGE> PAGE 174
EXHIBIT 10(m), Page 10 of 15
established by the Committee at the time of grant for three equally
weighted performance criteria: (a) the Corporation's total stockholder
return as compared to the S&P 500 Index; (b) the Corporation's operating
ratio; and (c) the Corporation's return on average capital invested. At
such time as it is certified by the Committee that the performance goals
established by the Committee have been attained or otherwise satisfied,
the Committee shall authorize the payment of cash in lieu of Performance
Shares or the issuance of Performance Shares registered in the name of
the Participant, subject to the provisions of any Share Retention
Agreement that may be required by the Committee under Section 11 of the
Plan, or both.
If the Participant's employment with the Corporation or a Subsidiary
Company is terminated before the end of a Performance Cycle for any
reason other than Retirement, Disability, or death, the Participant shall
forfeit all rights with respect to any Performance Shares that were being
earned during the Performance Cycle. If the Participant is granted a
leave of absence before the end of a Performance Cycle, the Participant
shall forfeit all rights with respect to any Performance Shares that were
being earned during the Performance Cycle, unless the Participant has and
remains eligible for a statutory right to reemployment. The Committee,
in its sole discretion, may establish guidelines providing that if a
Participant's employment is terminated before the end of a Performance
Cycle by reason of Disability, or death, the Participant shall be
entitled to a prorated payment with respect to any Performance Shares
that were being earned during the Performance Cycle. If the
Participant's employment is terminated before the end of a Performance
Cycle by reason of Retirement, the Participant's rights with respect to
any Performance Shares being earned during the Performance Cycle shall,
subject to the other provisions of this Section 10, continue as if the
Participant's employment had continued through the end of the Performance
Cycle.
Section 11. SHARE RETENTION AGREEMENTS
(a) General -- The Committee, in its sole discretion, may require
as a condition of an Award of an Option, Stock Appreciation Right, or
Performance Share Unit that the Participant and the Corporation enter
into a Share Retention Agreement, which shall provide that the
certificate or certificates representing any Exercise Gain Shares or
Performance Shares, when issued, shall be held by the Secretary of the
Corporation for the benefit of the Participant until such time as the
retention period specified by the Share Retention Agreement has expired
or has been waived by the Committee, whichever occurs first. Each Share
Retention Agreement may include some or all of the terms, conditions and
restrictions set forth in paragraphs (b) through (g) of this Section 11.
(b) Retention Period -- Exercise Gain Shares and Performance Shares
that are subject to the Share Retention Agreement may not be sold,
transferred, assigned, pledged, conveyed, hypothecated or otherwise
disposed of within such period of time, of not less than twenty-four (24)
<PAGE> PAGE 175
EXHIBIT 10(m), Page 11 of 15
months and not more than sixty (60) months following the date of exercise
(in the case of Exercise Gain Shares) or the date of issuance (in the
case of Performance Shares), as shall be prescribed by the Committee.
(c) Tax Absorption Payment -- The Corporation may make a cash
payment, either directly to the Participant or on the Participant's
behalf, in an amount that the Committee estimates to be equal (after
taking into account any Federal and state taxes that the Committee
estimates to be applicable to such cash payment) to any additional
Federal and state income taxes that are imposed upon the Participant as a
result of the issuance of the Exercise Gain Shares or Performance Shares
that are subject to the Share Retention Agreement. In determining the
amount to be paid pursuant to this paragraph (c), the Committee may adopt
such methods and assumptions as it considers appropriate, and it shall
not be required to examine the individual tax liability of each
Participant who has entered into a Share Retention Agreement.
(d) Termination of Employment -- If a Participant's employment with
the Corporation or a Subsidiary Company is terminated for any reason
other than Retirement, Disability, or death, Exercise Gain Shares or
Performance Shares subject to the Share Retention Agreement shall
continue to be held, following the Participant's termination of
employment, until the expiration of the retention period specified by the
Share Retention Agreement. If the Participant's employment is terminated
by reason of Retirement or Disability, Exercise Gain Shares and
Performance Shares then held subject to the Share Retention Agreement
shall continue to be held until the expiration of the applicable
retention period following termination of employment, but any such
retention period shall cease upon the earlier of the Participant's
attainment of age 65 or the expiration of two (2) years after the
Participant's Retirement or Disability, if either of those events occurs
before the expiration of the applicable retention period. If the
Participant dies while Exercise Gain Shares or Performance Shares are
subject to a retention period under the Share Retention Agreement, such
retention period shall expire immediately at the time of death.
(e) Change in Control -- Upon a Change in Control, the retention
periods specified by all Share Retention Agreements shall immediately
expire.
A Change in Control shall occur if:
(i) any person, other than the Corporation or a Subsidiary
Company or any employee benefit plan sponsored by the Corporation or a
Subsidiary Company, shall become the beneficial owner of, or obtain
voting control over, 20% or more of the Corporation's outstanding Common
Stock;
(ii) the stockholders of the Corporation shall approve (A) any
consolidation or merger of the Corporation in which the Corporation is
not the continuing or surviving corporation or pursuant to which shares
of Common Stock would be converted into cash, securities, or other
property, other than a merger of the Corporation in which holders of
Common Stock immediately prior to the merger have the same proportionate
ownership of common stock of the surviving corporation immediately after
<PAGE> PAGE 176
EXHIBIT 10(m), Page 12 of 15
the merger as immediately before, or (B) any sale, lease, exchange, or
other transfer (in one transaction or a series of related transactions)
of all or substantially all the assets of the Corporation; or
(iii) there shall have been a change in the composition of the
Board of Directors such that within any period of two (2) consecutive
years or less individuals who at the beginning of such period constituted
such Board, together with any new directors whose election, or nomination
for election by the Corporation's stockholders, was approved by a vote of
at least two-thirds of the directors then in office who were directors at
the beginning of such period, shall for any reason no longer constitute a
majority of the directors of the Corporation.
If the expiration of a Share Retention Agreement pursuant to this
paragraph (e) causes a Participant to be subject to an excise tax under
Section 4999 of the Code, or any successor provision thereto (the "Excise
Tax"), the Corporation shall make a cash payment, either directly to the
Participant or on the Participant's behalf, in an amount that the
Committee estimates to be equal (after taking into account any Federal
and state taxes, including interest and penalties, that the Committee
estimates to be applicable to the additional cash payment) to the
additional Excise Tax imposed on the Participant as a result of the
expiration of the Share Retention Agreement. In determining the amount
to be paid pursuant to this subparagraph, the Committee may adopt such
methods and assumptions as it considers appropriate, and it shall not be
required to examine the individual tax liability of each Participant to
whom this subparagraph applies.
(f) Waiver of Requirements -- The Committee, in its sole
discretion, may waive any or all retention periods or other restrictions
in the Share Retention Agreement.
(g) Distribution of Shares -- The Secretary of the Corporation
shall promptly distribute the certificate or certificates representing
the Exercise Gain Shares or Performance Shares subject to a Share
Retention Agreement upon expiration of the retention period or other
termination or waiver of the restrictions under this Section 11.
Section 12. DIVIDEND EQUIVALENT PAYMENTS
The Committee may authorize the immediate or deferred payment of dividend
equivalents on some or all of the shares of Common Stock covered by
Options or Performance Share Units granted after January 1, 1989, in an
amount equal to, and commensurate with, dividends declared by the Board
of Directors and paid on Common Stock. Dividend equivalents payable on
Option shares or on Performance Share Units under this Section 12 may be
paid in cash or in Common Stock at the discretion of the Committee. The
Committee may authorize the immediate payment of dividend equivalents
under this Section 12 with respect to any Option for all or some portion
of its term by including a specific provision, authorizing such immediate
payment, in the Incentive Stock Option Agreement required under Section
6(a) of the Plan or the Non-qualified Stock Option Agreement required
<PAGE> PAGE 177
EXHIBIT 10(m), Page 13 of 15
under Section 7 of the Plan. The Committee may authorize the immediate
payment of dividend equivalents under this Section 12 with respect to any
Performance Share Unit for all or some portion of its term as a term and
condition of the Performance Share Unit grant. The Committee also may
authorize the deferred payment of dividend equivalents under this Section
12 with respect to any Option for all or some portion of its term by
including a specific provision authorizing such deferred payment
(including the manner in which such payment will be credited to Optionees
and subsequently paid) in the Incentive Stock Option Agreement required
under Section 6(a) of the Plan or the Non-qualified Stock Option
Agreement required under Section 7 of the Plan. The Committee may
authorize the deferred payment of dividend equivalents under this Section
12 with respect to any Performance Share Unit for all or some portion of
its term by including a specific provision authorizing such deferred
payment (including the manner in which such deferred payment will be
credited to Optionees and subsequently paid) as a term and condition of
the Performance Share Unit grant.
Section 13. CAPITAL ADJUSTMENTS
In the event of a recapitalization, stock split, stock dividend,
exchange, combination, or reclassification of shares, merger,
consolidation, reorganization, or other change in or affecting the
capital structure or capital stock of the Corporation, the Board of
Directors, upon the recommendation of the Committee, may make appropriate
adjustments in the number of shares of Common Stock authorized for the
Plan and in the annual limitation imposed by Section 5 of this Plan; and
the Committee may make appropriate adjustments in the number of shares
subject to outstanding Options, Stock Appreciation Rights, Restricted
Stock, or Performance Share Unit grants, and in the Option price of any
then outstanding Options, as it deems equitable, in its absolute
discretion, to prevent dilution or enlargement of the rights of
Participants.
Section 14. REGULATORY APPROVALS
The exercise of each Option and Stock Appreciation Right, and the grant
or distribution of Restricted Shares and Performance Shares, shall be
subject to the condition that if at any time the Corporation shall
determine in its discretion that the satisfaction of withholding tax or
other tax liabilities, or the listing, registration, or qualification of
any shares of Common Stock upon any securities exchange or under any
Federal or state law, or the consent or approval of any regulatory body,
is necessary or desirable as a condition of, or in connection with, such
exercise, grant, or distribution, then in any such event such exercise,
grant, or distribution shall not be effective unless such liabilities
have been satisfied or such listing, registration, qualification,
consent, or approval shall have been effected or obtained free of any
conditions not acceptable to the Corporation.
<PAGE> PAGE 178
EXHIBIT 10(m), Page 14 of 15
Section 15. EFFECTIVE DATE AND TERM OF THE PLAN
(a) Effective Date -- The Plan, as hereby amended, shall be
effective when approved by the Board of Directors, and Options, Stock
Appreciation Rights, and Performance Share Units may be granted
immediately thereafter; provided, that no Option or Stock Appreciation
Right may be exercised and no Restricted Shares or Performance Shares may
be granted under the Plan unless and until the Plan, as hereby amended,
is approved by the vote of the holders of a majority of the shares of
Common Stock present or represented and entitled to vote at a meeting of
the stockholders of the Corporation, at which a quorum is present, held
within twelve (12) months after the date of adoption of the Plan, as
hereby amended, by the Board of Directors.
(b) Term of the Plan -- Awards may be granted from time to time
under the terms and conditions of the Plan, but no Incentive Stock Option
may be granted after the expiration of ten (10) years from the date of
adoption of the Plan, as hereby amended, by the Board of Directors;
provided, that any future amendment to the Plan that is approved by the
stockholders of the Corporation in the manner provided under paragraph
(a) of this Section 15 shall be regarded as creating a new Plan, and an
Incentive Stock Option may be granted under such new Plan until the
expiration of ten (10) years from the earlier of the approval by the
Board of Directors, or the approval by the stockholders of the
Corporation, of such new Plan. Incentive Stock Options theretofore
granted may extend beyond the expiration of that ten-year period, and the
terms and conditions of the Plan shall continue to apply thereto and to
shares of Common Stock acquired upon the subsequent exercise of an
Incentive Stock Option or related Stock Appreciation Right.
Section 16. AMENDMENT OR TERMINATION OF THE PLAN
The Corporation may at any time and from time to time alter or amend, in
whole or in part, any or all of the provisions of the Plan, or may at any
time suspend or terminate the Plan, through written action of its chief
executive officer or Board of Directors, provided that no change in any
Awards theretofore granted to any Participant may be made which would
impair or diminish the rights of the Participant without the
Participant's consent, and provided further, that no alteration or
amendment may be made without the approval of the holders of a majority
of the Common Stock then outstanding and entitled to vote if such
stockholder approval is necessary to comply with the requirements of any
rules promulgated under Section 16 of the Securities Exchange Act of 1934
or such other Federal or state laws or regulations as may be applicable.
Section 17. MISCELLANEOUS
(a) Fractional Shares -- The Corporation shall not be required to
issue or deliver any fractional share of Common Stock upon the exercise
of an Option or Stock Appreciation Right, the award of Performance
<PAGE> PAGE 179
EXHIBIT 10(m), Page 15 of 15
Shares, or the payment of a dividend equivalent in Common Stock pursuant to
Section 12 of the Plan, but may pay, in lieu thereof, an amount in cash
equal to the Fair Market Value of such fractional share.
(b) Withholding -- The Corporation and its Subsidiary Companies
shall have the right, to the extent permitted by law, to deduct from any
payment of any kind otherwise due to a Participant any Federal, state or
local taxes of any kind required by law to be withheld with respect to
Awards under the Plan, and to the extent any such withholding
requirements are not satisfied, each Participant shall pay to the
Corporation any Federal, state or local taxes of any kind required by law
to be withheld with respect to Awards under the Plan.
(c) Stockholder Rights -- No person shall have any rights of a
stockholder by virtue of an Option, Stock Appreciation Right, or
Performance Share Unit except with respect to shares of Common Stock
actually issued to him, and the issuance of shares of Common Stock shall
confer no retroactive right to dividends.
(d) No Contract of Employment -- This Plan shall not be deemed to
be an employment contract between the Corporation or any Subsidiary
Company and any Participant or other employee. Nothing contained herein,
or in any agreement, certificate or other document evidencing, providing
for, or setting forth the terms and conditions applicable to any Awards
shall be deemed to confer upon any Participant or other employee a right
to continue in the employment of the Corporation or any Subsidiary
Company, or to interfere with the right of the Corporation or any
Subsidiary Company to terminate the employment of such Participant or
employee at any time.
(e) Unfunded Plan -- Except as may otherwise be provided in the
Plan, the Plan shall be unfunded. Neither the Corporation nor any
Subsidiary Company shall be required to segregate any assets that may be
represented by Options, Stock Appreciation Rights, or Performance Share
Units, and neither the Corporation nor any Subsidiary Company shall be
deemed to be a trustee of any amounts to be paid under an Option, Stock
Appreciation Right, or Performance Share Unit. Any liability of the
Corporation to pay any Participant or Beneficiary with respect to an
Option, Stock Appreciation Right, or Performance Share Unit shall be
based solely upon any contractual obligations created pursuant to the
provisions of the Plan; no such obligation shall be deemed to be secured
by any pledge or encumbrance on any property of the Corporation or a
Subsidiary Company.
(f) Applicable Law -- The Plan, its validity, interpretation, and
administration, and the rights and obligations of all persons having an
interest therein, shall be governed by and construed in accordance with
the laws of the Commonwealth of Virginia, except to the extent that such
laws may be preempted by Federal law.
(g) Gender and Number -- Wherever used in the Plan, words in the
masculine form shall be deemed to refer to females as well as to males,
and words in the singular or plural shall be deemed to refer also to the
plural or singular, respectively, as the context may require.
<PAGE> PAGE 180
EXHIBIT 10(n), Page 1 of 8
NORFOLK SOUTHERN CORPORATION
OFFICERS' DEFERRED COMPENSATION PLAN
ARTICLE I. NAME AND PURPOSE OF THE PLAN
- --------- ----------------------------
The name of the plan is the Norfolk Southern Corporation Officers'
Deferred Compensation Plan (the "Plan"). The purpose of the Plan is to
provide retirement and death benefits to those officers of Norfolk
Southern Corporation (the "Corporation") or a Participating Subsidiary
who elect to participate in the Plan.
ARTICLE II. DEFINITIONS
- ---------- -----------
Account. The total of the amount of Deferrals by a Participant
together with Interest as provided in Article V.
Agreement. The "Deferral Agreement" between each Participant and
the Corporation.
Beneficiary. The person or persons designated as Beneficiary
pursuant to Article XII.
Board of Directors. The Board of Directors of the Corporation.
Committee. The Compensation and Nominating Committee of the
Board of Directors.
Compensation. The fixed salary payable in the form of cash
(including vacation pay) of the Participant before
any reduction for contributions to the Thrift and
Investment Plan of Norfolk Southern Corporation and
Participating Subsidiary Companies, as amended from
time to time, and before any deferrals under this
Plan.
Deferral. A Deferred Bonus and/or a Monthly Deferred Amount.
Deferred Bonus. That amount set forth in the Agreement which shall be
deferred from a Participant's MIP incentive award
(and any other annual cash incentive award payable to
participants in MIP) or EMIP incentive award (and any
other annual cash incentive award approved by the
Board of Directors and payable to participants in
EMIP), or the bonus program of a Participating
Subsidiary, if the deferral of such incentive award
or bonus under the Plan is authorized by the
Corporation.
<PAGE> PAGE 181
EXHIBIT 10(n), Page 2 of 8
Disability. A disability that enables the Participant to be
eligible for a disability benefit under the Long-Term
Disability Plan of Norfolk Southern Corporation and
Participating Subsidiaries, as amended from time to
time, or under any such similar plan of a
Participating Subsidiary.
EMIP. Norfolk Southern Corporation Executive
Management Incentive Plan.
MIP. Norfolk Southern Corporation Management Incentive
Plan.
Monthly Deferred That amount set forth in the Agreement which shall be
Amount. deferred monthly from a Participant's salary pursuant
to the Plan.
Participant. Any employee of the Corporation or a Participating
Subsidiary eligible to participate under Article IV
of the Plan.
Participating Each subsidiary or affiliated company of the
Subsidiary. Corporation which adopts the Plan and is approved for
participation in the Plan as provided in
Article XVIII.
Plan Administrator. The Executive Vice President - Administration of the
Corporation or the successor officer who performs
substantially similar duties.
Plan Year. Any calendar year during which deferrals under this
Plan are made.
Retirement. Retirement from the Corporation or a Participating
Subsidiary pursuant to the provisions of the
retirement plan of the Corporation or of a
Participating Subsidiary (whichever is applicable),
as amended from time to time.
ARTICLE III. ADMINISTRATION
- ----------- --------------
The Plan Administrator shall administer, construe, and interpret
this Plan and, from time to time, adopt such rules and regulations and
make such recommendations to the Committee concerning Plan changes as are
deemed necessary to ensure effective implementation of this Plan. The
administration, construction, and interpretation by the Plan
Administrator may be appealed to the Committee, and the decision of the
Committee shall be final and conclusive, except that any claim for
benefits with respect to a Participant shall be subject to the claims
procedure set forth in Section 503 of the Employee Retirement Income
<PAGE> PAGE 182
EXHIBIT 10(n), Page 3 of 8
Security Act of 1974. The Plan Administrator may correct errors and,
so far as practicable, may adjust any benefit or payment or credit
accordingly. Neither the Plan Administrator nor any member of the
Committee shall be liable for any act done or determination made in
good faith.
ARTICLE IV. ELIGIBILITY AND PARTICIPATION
- ---------- -----------------------------
Any nonagreement employee residing in the United States or Canada
with at least 830 salary administration points assigned to his position
shall be eligible to participate in the Plan. However, only those
Participants with annual Compensation in excess of ninety thousand
dollars ($90,000) shall be eligible to defer Compensation under this
Plan, and only 20% of monthly Compensation in excess of seven thousand
five hundred dollars ($7,500) shall qualify for deferral hereunder. A
nonagreement employee who elects to become a Participant in the Plan and
defer a portion of his monthly Compensation thereby consents to the
reduction in his monthly Compensation by the Monthly Deferred Amount as
specified in the Agreement. An election to participate in the Plan must
be made annually by December 22 of the year prior to each Plan Year.
Benefits payable hereunder shall be in addition to any other compensation
or benefits to which a Participant may be entitled from the Corporation
or a Participating Subsidiary.
A Participant may elect to defer a portion of any incentive bonus
which may be awarded to him pursuant to MIP or EMIP or the authorized
bonus program of a Participating Subsidiary. A Participant who elects to
defer any of his incentive bonus thereby consents to a reduction in his
bonus by the Deferred Bonus as specified in the Agreement, commencing
with the incentive bonus award earned after December 31, 1986. By
December 22 of the year prior to each Plan Year, a Participant may elect
to defer any incentive bonus which may be earned by him during that Plan
Year, either in whole or in part, in increments of twenty-five percent
(25%).
ARTICLE V. INTEREST EQUIVALENT
- --------- -------------------
Unless otherwise stated herein or determined by the Board of
Directors, an amount equivalent to interest ("Interest") shall accrue and
be compounded annually on all Deferrals. For purposes of calculating the
appropriate Interest only, the Deferred Bonus is deemed to occur on the
date on which the incentive bonus is paid. Interest shall accrue and be
compounded annually at rates in accordance with the schedule below on the
basis of the Participant's age attained during the Plan Year for which
the Deferral is made:
Age Rate
--- ----
Up to 45 7%
45 - 54 10%
55 - 60 11%
Over 60 12%
<PAGE> PAGE 183
EXHIBIT 10(n), Page 4 of 8
Interest on each Deferral shall continue to accrue at the rate
determined by the Participant's age attained during the Plan Year for
which the Deferral is made until all benefits payable hereunder have been
distributed to, or with respect to, the Participant.
ARTICLE VI. BENEFITS
- ---------- --------
(a) Retirement: When a Participant ceases active service due to
his Retirement, he shall be paid a monthly annuity commencing in January
of the first calendar year following such Retirement for a period of
years in accordance with the schedule below:
Age at Time of Deferral Distribution Period
----------------------- -------------------
Up to 50 5 Years
50 or Over 10 Years
The amount of the monthly annuity payable under this Article VI(a),
shall be an amount sufficient to amortize the Participant's Account
together with Interest over the applicable period.
(b) Disability: When a Participant ceases active service due to
Disability, he shall be paid a monthly annuity commencing in January of
the first calendar year following such Disability for a period of fifteen
(15) years in an amount sufficient to amortize the Participant's Account
together with Interest over that period.
(c) Death: If a Participant dies while in active service, the
Corporation shall pay the amount of the Participant's Account to the
Participant's Beneficiary in a single payment as soon as practicable
after the date of death. If a Participant dies after Retirement or
Disability but prior to receiving all benefits payable thereunder, the
monthly payments shall be paid to the Participant's Beneficiary for the
scheduled annuity period.
(d) Termination of Employment: If a Participant ceases active
service other than by reason of leave of absence granted pursuant to the
Family and Medical Leave Act, Retirement, Disability or Death, he shall
be paid the balance of his Account as of the date of his separation from
service as soon as practicable after such separation from service.
(e) Lump Sum or Other Settlement: Notwithstanding the foregoing
provisions of this Article VI, the Committee, in its sole discretion, may
authorize and direct the Corporation to make payments after termination
of employment of a Participant to such Participant or his Beneficiary in
a lump sum or over a period other than that provided for in this
Article VI, and to charge such payments against the Participant's
Account. Such accelerated distribution may be made only: (1) in the
event of a financial emergency which is beyond the control of the
Participant if disallowance of the accelerated distribution would result
in severe financial hardship to the Participant or Beneficiary, and only
<PAGE> PAGE 184
EXHIBIT 10(n), Page 5 of 8
in an amount necessary to satisfy the financial emergency, or (2) if in
the written opinion of counsel, payment in accordance with this
Article VI could create a conflict of interest for the Participant or
Beneficiary; provided, that all amounts due to a Participant or
Beneficiary under this Plan shall in all events be paid to the
Participant or Beneficiary by the end of the appropriate period referred
to in this Article VI. No Participant or Beneficiary who is also a
member of the Committee shall participate in any decision of the Committee
to make accelerated payments under this Article VI.
(f) Change in Mandatory Distribution Schedule: Notwithstanding the
foregoing provisions of this Article VI, the Committee may, without the
consent of any Participant or Beneficiary, direct that all benefits
payable thereafter pursuant to paragraph (a), (b), or (c) above
(including benefits that accrued prior to the issuance of the direction)
shall be paid under a schedule that differs from that prescribed by
paragraph (a), (b), or (c). Any such direction shall apply to all
Participants, without differentiating among individual Participants,
except to the extent otherwise provided by paragraph (e), above. No
Participant or Beneficiary who is also a member of the Committee shall
participate in any decision of the Committee to make a change in the
distribution schedule.
ARTICLE VII. NATURE AND SOURCE OF PAYMENTS
- ----------- -----------------------------
The obligation to pay benefits under Article VI with respect to each
Participant shall constitute a liability of the Corporation to the
Participant and any death Beneficiaries in accordance with the terms of
the Plan. All benefits payable hereunder shall be made from the general
funds of the Corporation, and nothing herein shall be deemed to create a
trust of any kind or a fiduciary relationship between the Corporation and
any Participant or other person. No special or separate fund need be
established or other segregation of assets made to assure payments
hereunder, and no Participant or Beneficiary shall have any interest in
any particular asset of the Corporation by virtue of the existence of the
Plan or an Agreement. Participants and Beneficiaries shall stand in the
position of unsecured creditors of the Corporation, and all rights
hereunder are subject to the claims of creditors of the Corporation.
ARTICLE VIII. EXPENSES OF ADMINISTRATION
- ------------ --------------------------
All expenses of administering the Plan shall be borne by the
Corporation, and no part thereof shall be charged against the benefit of
any Participant.
<PAGE> PAGE 185
EXHIBIT 10(n), Page 6 of 8
ARTICLE IX. AMENDMENT TO AND TERMINATION OF PLAN
- ---------- ------------------------------------
The Corporation reserves the right at any time by a resolution duly
adopted by its Board of Directors to amend this Plan in any manner or to
terminate it at any time, except that no such amendment or termination
shall deprive a Participant or his Beneficiary of any rights hereunder
theretofore legally accrued, and no such termination shall be effective
for the year in which such resolution is adopted.
ARTICLE X. RECALCULATION EVENTS
- --------- --------------------
The Corporation's commitment to accrue and pay Interest as provided
in Article V is facilitated by the purchase of corporate-owned life
insurance purchased on the lives of eligible Participants. If the Board
of Directors, in its sole discretion, determines that any change
whatsoever in Federal, State or local law, or in its application or
interpretation, has materially affected, or will materially affect, the
ability of the Corporation to recover the cost of providing the benefits
otherwise payable under the Plan, then, if the Board of Directors so
elects, a Recalculation Event shall be deemed to have occurred. If a
Recalculation Event occurs, then Interest shall be recalculated and
restated using a lower rate of Interest determined by the Board of
Directors, but which shall be not less than one-half (1/2) the rate of
Interest provided for in Article V.
ARTICLE XI. GOVERNING LAW
- ---------- -------------
This Plan and the Agreements are subject to the laws of the
Commonwealth of Virginia.
ARTICLE XII. DESIGNATION OF BENEFICIARY
- ----------- --------------------------
For the purpose of this Plan, a beneficiary shall be either (1) the
named Beneficiary or Beneficiaries designated as hereinafter provided for
by the Participant, or (2) in the absence of any such designation, his
estate. A Participant may designate both primary and contingent
Beneficiaries. A Participant may revoke or change any designation. To
be effective, the designation of a named Beneficiary or Beneficiaries, or
any change in or revocation of any designation, must be on a form
provided by the Corporation, signed by the Participant and filed with the
Office of the Plan Administrator prior to the death of such Participant.
Any such designation, change or revocation shall not invalidate any cash
payment made or other action taken by the Corporation pursuant to the
Plan prior to its receipt by the Corporation. The determination by the
Corporation of a Beneficiary or Beneficiaries, or the identity thereof,
or evidence satisfactory to the Corporation shall be conclusive as to the
<PAGE> PAGE 186
EXHIBIT 10(n), Page 7 of 8
liability of the Corporation and any payment made in accordance therewith
shall discharge the Corporation of all its obligations under the Plan for
such payment.
ARTICLE XIII. SUCCESSORS, MERGERS, CONSOLIDATIONS
- ------------ -----------------------------------
The terms and conditions of this Plan and each Agreement shall inure
to the benefit of and bind the Corporation, the Participants, their
successors, assigns, and personal representatives. If substantially all
the assets of the Corporation are acquired by another corporation or
entity or if the Corporation is merged into, or consolidated with,
another corporation or entity, then the obligations created hereunder and
as a result of the Corporation's acceptance of Agreements shall be
obligations of the successor corporation or entity.
ARTICLE XIV. WITHHOLDING FOR TAXES
- ----------- ---------------------
The Participant agrees as a condition of participation hereunder
that the Corporation may withhold applicable Federal, State, and local
income taxes and Social Security or Railroad Retirement taxes from any
distribution or benefit paid hereunder.
ARTICLE XV. NON-ALIENATION OF BENEFITS
- ---------- --------------------------
No benefit under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance
or charge, and any attempt at such shall be void; nor shall any such
benefit be in any way subject to the debts, contracts, liabilities,
engagements, or torts of the person who shall be entitled to such
benefit; nor shall it be subject to attachment or legal process for or
against such person.
ARTICLE XVI. FACILITY OF PAYMENT
- ----------- -------------------
If the Plan Administrator shall find that any individual to whom any
amount is payable under the Plan is unable to care for his affairs
because of illness or accident, or is a minor or other person under legal
disability, any payment due such individual (unless a prior claim
therefore shall have been made by a duly appointed guardian, committee,
or other legal representative) may be paid to the spouse, a child, a
parent, or a brother or sister of such individual or to any other person
deemed by the Plan Administrator to have incurred expenses of such
individual, in such manner and proportions as the Plan Administrator may
determine. Any such payment shall be a complete discharge of the
liabilities of the Corporation with respect thereto under the Plan or the
Agreement.
<PAGE> PAGE 187
EXHIBIT 10(n), Page 8 of 8
ARTICLE XVII. CONTINUED EMPLOYMENT
- ------------ --------------------
Nothing contained herein or in an Agreement shall be construed as
conferring upon any Participant the right nor imposing upon him the
obligation to continue in the employment of the Corporation or a
Participating Subsidiary in any capacity.
ARTICLE XVIII. PARTICIPATION BY SUBSIDIARY COMPANIES
- ------------- -------------------------------------
Conditional upon prior approval by the Corporation, any company
which is a subsidiary of or affiliated with the Corporation may adopt and
participate in this Plan as a Participating Subsidiary. Each
Participating Subsidiary shall make, execute and deliver such instruments
as the Corporation and/or the Plan Administrator shall deem necessary or
desirable, and shall constitute the Corporation and/or the Plan
Administrators as its agents to act for it in all transactions in which
the Corporation and/or the Plan Administrators believe such agency will
facilitate the administration of this Plan.
ARTICLE XIX. MISCELLANEOUS
- ----------- -------------
Whenever used in the Plan, words in the masculine form shall be
deemed to refer to females as well as to males, and words in the singular
or plural shall be deemed to refer also to the plural or singular,
respectively, as the context may require.
ARTICLE XX. EFFECTIVE DATE
- ---------- --------------
The effective date of the Plan is January 1, 1987, as amended
effective May 13, 1999.
<PAGE> PAGE 188
EXHIBIT 10(r), Page 1 of 6
SUPPLEMENTAL BENEFIT PLAN
OF
NORFOLK SOUTHERN CORPORATION
AND
PARTICIPATING SUBSIDIARY COMPANIES
(As last amended August 22, 1999)
ARTICLE I. INTRODUCTION
This Supplemental Benefit Plan ("Plan"), formerly the Excess Benefit
Plan, was established by Norfolk Southern Corporation effective June 1,
1982, ("Effective Date") to provide retirement benefits to eligible
employees in excess of those provided for by the Retirement Plan of
Norfolk Southern Corporation and Participating Subsidiary Companies.
This Plan is the successor to and supersedes, as of the Effective Date,
the following plans:
-- Excess Benefit Plan of Norfolk and Western Railway Company
-- Southern Railway System Supplemental Retirement Plan
-- Norfolk and Western Railway Company Executives Contingent
Compensation Plan Pension Resolution
ARTICLE II. DEFINITIONS
Conrail Plan Supplemental Pension Plan of Consolidated Rail Corporation.
NSC Norfolk Southern Corporation, a Virginia corporation.
Pension The Pension Committee of the Board of Directors of NSC.
Committee
Retirement Retirement Plan of Norfolk Southern Corporation and
Plan Participating Subsidiary Companies
Member A person entitled to participate in the Retirement Plan.
Participating Each subsidiary or affiliated company of NSC which is
Subsidiary a Participating Subsidiary in the Retirement Plan
shall automatically participate in the Plan.
Participant A Member of the Retirement Plan who is eligible to
participate under Article III.
Deferred Amounts the receipt of which a Participant elects to
Compensation defer under the:
Deferred Compensation Plan of Norfolk and Western
Railway Company
<PAGE> PAGE 189
EXHIBIT 10(r), Page 2 of 6
Southern Railway System Executive, General or Middle
Management Incentive Plan
Norfolk Southern Corporation Management Incentive
Plan
Norfolk Southern Corporation Executive Management
Incentive Plan
Norfolk Southern Corporation Officers' Deferred
Compensation Plan
NW Pension Resolutions adopted by the Board of Directors of
Resolutions Norfolk and Western Railway Company at its meetings held
on January 23, 1968, June 24, 1969, November 25, 1969,
January 26, 1971, and April 23, 1974, authorizing the
respective payments of additional pension benefits to five
Members.
Average Final Compensation as defined in Article II of the Retirement
Compensation Plan.
ARTICLE III. ELIGIBILITY
1. The following Members of the Retirement Plan shall be eligible to
participate in the Plan on or after the Effective Date:
(a) Any Member of the Retirement Plan whose benefit computed under
Article VI of the Retirement Plan without regard to the maximum
limitation on benefits imposed by Section 415 of the Internal
Revenue Code exceeds such maximum limitation on benefits;
(b) Any Member of the Retirement Plan whose benefit computed under
Article VI of the Retirement Plan disregards amounts of
Deferred Compensation in the computation of his Average Final
Compensation;
(c) Any Member of the Retirement Plan entitled to receive a pension
benefit, in excess of the benefit computed under the provisions
of the Retirement Plan, pursuant to an NW Pension Resolution;
(d) Any Member of the Retirement Plan entitled to receive a pension
benefit, in excess of the benefit computed under the provisions
of the Retirement Plan, pursuant to a resolution adopted by the
Board of Directors of NSC;
(e) Any Member of the Retirement Plan whose Compensation exceeds
the limitation contained in Section 401(a)(17) of the Internal
Revenue Code; or
(f) Any Member protected by the Pension Benefits Standard Act of
Canada whose benefit computed under Article VI of the
Retirement Plan exceeds $60,000.
<PAGE> PAGE 190
EXHIBIT 10(r), Page 3 of 6
(g) Any Member of the Retirement Plan entitled to receive a pension
benefit in excess of the benefit computed under the provisions
of the Retirement Plan, pursuant to the provisions of any
agreement between a Participant and NSC providing benefits upon
"Termination" of a Participant's employment following a "Change
in Control" (as the terms "Termination" and "Change in Control"
are defined in any such agreement).
2. Any participant of the Excess Benefit Plan of Norfolk and Western
Railway Company or the Southern Railway System Supplemental
Retirement Plan or any individual covered by the Norfolk and Western
Railway Company Executive Contingent Compensation Plan Pension
Resolution, dated September 24, 1968, shall become a Participant on
the Effective Date. Any participant in the Consolidated Rail
Corporation Supplemental Employee Retirement Plan who transfers
employment to NSC from Consolidated Rail Corporation on or before
August 22, 2001 shall become a Participant on the effective date of
his or her transfer.
ARTICLE IV. SUPPLEMENTAL BENEFIT
1. A Participant shall, upon retirement under the Retirement Plan, be
entitled to receive a monthly benefit equal to the excess of
(a) the monthly benefit under Article VI of the Retirement Plan if
such benefit had been computed
(i) without regard to the limitation imposed by Section 415 of
the Internal Revenue Code and provided for in Section 1 of
Article VII of the Retirement Plan, in Section 7.4 of the
Conrail Plan and in Section 7.4 of the Retirement Plan of
Consolidated Rail Corporation;
(ii) Without regard to the limitation of Compensation imposed
by Section 401(a)(17) of the Internal Revenue Code;
(iii) without regard to the $60,000 limitation on benefits
payable to Members protected by the Pension Benefits
Standard Act of Canada;
(iv) by including in the calculation of Average Monthly Final
Compensation amounts of Deferred Compensation, if any;
(v) by including service credits and applying any offsets
provided for under any NW Pension Resolution, if any; and
(vi) by including the service credits and compensation to which
a Participant is entitled pursuant to the provisions of
any agreement providing the benefits described in Article
III, Section 1(g), hereof; and
<PAGE> PAGE 191
EXHIBIT 10(r), Page 4 of 6
(vii) by excluding the Additional Retirement Benefit
provided under Article VI of the Retirement Plan, as set
forth in Schedule A of the Retirement Plan, over
(b) the sum of
(i) the monthly benefit actually payable under the Retirement
Plan; and
(ii) the monthly benefit (or actuarial equivalent thereof if
payable in a lump sum) payable under the Consolidated Rail
Corporation Supplemental Employee Retirement Plan or its
successor plan.
2. A Participant shall, upon retirement under the Retirement Plan, be
entitled to receive a monthly benefit, in excess of the benefit
otherwise payable under the Retirement Plan and in addition to any
amount payable pursuant to Section 1 of this Article IV, in an
amount so provided by a resolution adopted by the Board of Directors
of NSC, if any.
3. Any survivorship option which has been elected or is in force under
Article VIII of the Retirement Plan at the time of a Participant's
death shall be deemed to have been elected or be in force under this
Plan.
4. The payment of excess benefits under the Plan shall be made in a
manner consistent with the provisions of the Retirement Plan, and
shall continue for the same period of time.
ARTICLE V. FUNDING
The benefits under the Plan shall be paid in cash from the general funds
of NSC or its Participating Subsidiary, and no special or separate fund
shall be established or other segregation of assets made to assure such
payments. Nothing contained in the Plan shall create or be construed to
create a trust of any kind. To the extent that any person acquires a
right to receive payments under the terms of the Plan, such right shall
be no greater than the right of an unsecured creditor of NSC or its
Participating Subsidiary.
ARTICLE VI. ADMINISTRATION
1. The Plan shall be administered by the Pension Committee, which is
composed of three or more NSC directors appointed by the NSC Board
who are not eligible to participate in the Plan and who shall serve
at the pleasure of the Board. Each member of the Pension Committee,
while serving as such, shall be considered to be acting in his
capacity as a director of NSC.
<PAGE> PAGE 192
EXHIBIT 10(r), Page 5 of 6
2. The Pension Committee shall from time to time adopt rules and
regulations determined to be necessary to insure the effective
implementation of the Plan.
3. The Pension Committee shall have the power to interpret the Plan.
Any disputed question arising under the Plan, including questions of
construction and interpretation, shall be determined conclusively
and finally by the Pension Committee.
ARTICLE VII. RIGHTS AND RESTRICTIONS
1. Participants in the Plan shall have only those rights in respect of
the Plan specifically set forth herein.
2. This Plan shall not be deemed to constitute a contract between NSC
or any Participating Company and any Participant or surviving spouse
of a deceased Participant, nor shall it be construed to be
consideration for or an inducement or condition of the employment of
any Participant. Nothing contained herein shall be deemed to give
any Participant the right to continued employment.
3. Benefits payable hereunder shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, or charge, and any attempt to accomplish any of these
mentioned acts shall be void. Benefits shall not be subjected to
attachment or other legal process or debts of the retired
Participant or surviving spouse.
ARTICLE VIII. AMENDMENTS AND TERMINATIONS
The Plan may be amended at any time, and retroactively, if deemed
necessary or appropriate, by any proper officer of NSC to effect changes
which are, in his or her sole discretion, ministerial, substantively
administrative, or necessary to comply with statutory or other legally
mandated requirements, and the implementation of which does not result in
a material cost to NSC.
The Board or Directors of NSC, in its sole discretion, may at any time
modify or amend any provisions of the Plan or may suspend or terminate
the Plan, in whole or in part, but no such action shall retroactively
impair or otherwise adversely affect the rights of any person to benefits
under the Plan which have accrued prior to the date of such action, as
determined by the Pension Committee.
<PAGE> PAGE 193
EXHIBIT 10(r), Page 6 of 6
Approved as adopted:
/s/ J. A. Hixon
-------------------------------------
J. A. Hixon
Senior Vice President
Employee Relations
<PAGE> PAGE 194
EXHIBIT 12, Page 1 of 1
<TABLE>
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Millions of Dollars)
<CAPTION>
Year ended December 31
---------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
EARNINGS
Income from continuing
operations before income
taxes as reported $ 351 $ 845 $ 998 $1,166 $1,089
Add:
Total interest expenses
(as detailed below) 708 688 530 182 173
Amortization of
capitalized interest 4 3 3 3 2
Income (loss) of
partially owned
entities (1) 47 165 113 1 --
Subsidiaries' preferred
dividend requirement 2 2 2 2 3
------ ------ ------ ------ ------
Income before
income taxes,
as adjusted $1,112 $1,703 $1,646 $1,354 $1,267
====== ====== ====== ====== ======
FIXED CHARGES
Interest expense on debt $ 531 $ 516 $ 385 $ 116 $ 113
Other interest expense 35 27 32 36 31
Calculated interest
portion of rent expense 35 31 30 30 29
NS' share of Conrail
interest 107 114 83 -- --
------ ------ ------ ------ ------
Total interest
expenses 708 688 530 182 173
Capitalized interest 15 21 17 12 14
Subsidiaries' preferred
dividend requirement
on a pretax basis 4 4 4 4 4
------ ------ ------ ------ ------
Total fixed charges $ 727 $ 713 $ 551 $ 198 $ 191
====== ====== ====== ====== ======
RATIO OF EARNINGS TO
FIXED CHARGES 1.53 2.39 2.99 6.84 6.63
</TABLE>
(1) Includes: (a) the distributed income of 20%-49% owned entities,
net of equity recorded in undistributed income and the minority
income of consolidated entities which have fixed charges; and
(b) NS' share of Conrail's income before income taxes, net of
equity in earnings of Conrail included in NS' income from
continuing operations before taxes as reported.
The computations do not include $0.3 million of interest expense
related to $7.8 million of debt guaranteed for a less than 50%
owned entity.
<PAGE> PAGE 195
EXHIBIT 21, Page 1 of 2
NAME AND STATE OF INCORPORATION OF SUBSIDIARIES
OF NORFOLK SOUTHERN CORPORATION
AS OF MARCH 1, 2000
Agency Media Services, Inc., Indiana
Atlantic Acquisition Corporation, Pennsylvania
Atlantic Investment Company, Delaware
Norfolk Southern Properties, Inc., Virginia
Norfolk Southern Railway Company, Virginia
Northern Horizons Insurance Company, Vermont
Northmont Limited Partnership, Georgia
NS Crown Services, Inc., Virginia
NS Fiber Optics, Inc., Virginia
Pocahontas Development Corporation, Kentucky
Pocahontas Land Corporation, Virginia
TCS Leasing, Inc., Oklahoma
Thoroughbred Direct Intermodal Services, Inc. Pennsylvania
Thoroughbred Technology and Telecommunications, Inc., Virginia
Triple Crown Services Company
Norfolk Southern Railway Company subsidiaries:
Airforce Pipeline, Inc., North Carolina
Alabama Great Southern LLC, Virginia
Alabama Great Southern Railroad Company, The; Alabama
Atlantic and East Carolina Railway Company, North Carolina
Camp Lejeune Railroad Company, North Carolina
Central of Georgia LLC, Virginia
Central of Georgia Railroad Company, Georgia
Chesapeake Western Railway, Virginia
Cincinnati, New Orleans and Texas Pacific Railway Company, The; Ohio
Citico Realty Company, Virginia
Georgia Southern and Florida Railway Company, Georgia
High Point, Randleman, Asheboro and Southern Railroad Company,
North Carolina
Interstate Railroad Company, Virginia
Lamberts Point Barge Company, Inc., Virginia
Memphis and Charleston Railway Company, Mississippi
Mobile and Birmingham Railroad Company, Alabama
Norfolk and Portsmouth Belt Line Railroad Company, Virginia
Norfolk Southern International, Inc., Virginia
North Carolina Midland Railroad Company, The; North Carolina
Rail Investment Company, Delaware
Shenandoah-Virginia Corporation, Virginia
South Western Rail Road Company, The; Georgia
Southern Rail Terminals, Inc., Georgia
Southern Rail Terminals of North Carolina, Inc., North Carolina
Southern Region Coal Transport, Inc., Alabama
Southern Region Materials Supply, Inc., Georgia
Southern Region Motor Transport, Inc., Georgia
State University Railroad Company, North Carolina
Tennessee, Alabama & Georgia Railway Company, Delaware
Tennessee Railway Company, Tennessee
Virginia and Southwestern Railway Company, Virginia
Yadkin Railroad Company, North Carolina
<PAGE> PAGE 196
EXHIBIT 21, Page 2 of 2
Norfolk Southern Properties, Inc. subsidiaries:
Alexandria-Southern Properties, Inc., Virginia
Arrowood-Southern Company, North Carolina
Arrowood Southern Executive Park, Inc., North Carolina
Carlyle CA Corporation, Virginia
Carlyle Development Corporation, Virginia
Charlotte-Southern Corporation, North Carolina
Charlotte-Southern Hotel Corporation, North Carolina
Lambert's Point Docks, Incorporated, Virginia
Nickel Plate Improvement Company, Inc., The; Indiana
NKPI Management, Inc., Indiana
Norfolk Southern Industrial Development Corp., Virginia
Norfolk Southern Tower, LLC, Washington, D.C.
NS-Charlotte Tower Corporation, North Carolina
NS Gas Properties, Inc., Virginia
NS Gas Properties, II, Inc., Virginia
Sandusky Dock Corporation, Virginia
Southern Region Industrial Realty, Inc., Georgia
Virginia Holding Corporation, Virginia
NOTE: Of the above subsidiaries, each of which is more than
50% owned, only Norfolk Southern Railway Company meets the
Commission's "significant subsidiary" test. This list
does not include CRR Holdings, LLC, in which
Norfolk Southern Corporation has 50% voting control;
Conrail Inc. and Consolidated Rail Corporation are
subsidiaries of CRR Holdings, LLC.
<PAGE> PAGE 197
EXHIBIT 23(a), Page 1 of 1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Norfolk Southern Corporation:
We consent to incorporation by reference in Registration Statement
No. 333-67937 on Form S-3 and Registration Statements Nos. 33-61317,
33-52031, 333-40993, 333-78939 and 333-71321 on Form S-8 of Norfolk
Southern Corporation of our report dated January 25, 2000, relating to
the consolidated balance sheets of Norfolk Southern Corporation and
subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity and
cash flows, and the related consolidated financial statement schedule
for each of the years in the three-year period ended December 31, 1999,
which report appears in the December 31, 1999, Annual Report on
Form 10-K405 of Norfolk Southern Corporation.
/s/ KPMG LLP
KPMG LLP
Norfolk, Virginia
March 1, 2000
<PAGE> PAGE 198
EXHIBIT 23(b), Page 1 of 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to incorporation by reference in Registration Statement
No. 333-67937 on Form S-3 and Registration Statements Nos. 33-61317,
33-52031, 333-40993, 333-78939 and 333-71321 on Form S-8 of Norfolk
Southern Corporation of our report dated February 11, 2000, relating to
the consolidated balance sheet of Conrail Inc. and subsidiaries as of
December 31, 1999, and the related consolidated statements of income,
stockholders' equity and cash flows, for the year ended December 31,
1999, which report appears in the December 31, 1999, Annual Report on
Form 10-K405 of Norfolk Southern Corporation. The consolidated
financial statements of Conrail Inc. and subsidiaries as of December 31,
1998, and the related consolidated statements of income, stockholders'
equity and cash flows for the two years then ended were audited by other
auditors whose report thereon dated January 19, 1999, expressed an
unqualified opinion on those statements.
/s/ KPMG LLP /s/ Ernst & Young LLP
KPMG LLP Ernst & Young LLP
Norfolk, Virginia Richmond, Virginia
March 1, 2000 March 1, 2000
<PAGE> PAGE 199
EXHIBIT 23(c), Page 1 of 1
CONSENT OF PRICEWATERHOUSECOOPERS LLP
INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-67937), and in the Registration
Statements on Form S-8 (Nos. 33-52031, 33-61317, 333-40993, 333-71321
and 333-78939) of Norfolk Southern Corporation of our report dated
January 19, 1999, on the consolidated financial statements of
Conrail Inc. and subsidiaries for the year ended December 31, 1998,
which appears in the Annual Report on Form 10-K of Norfolk Southern
Corporation for the year ended December 31, 1999.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
March 1, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 37
<SECURITIES> 14
<RECEIVABLES> 862
<ALLOWANCES> 5
<INVENTORY> 100
<CURRENT-ASSETS> 1,371
<PP&E> 15,885
<DEPRECIATION> 4,929
<TOTAL-ASSETS> 19,250
<CURRENT-LIABILITIES> 1,924
<BONDS> 7,556
0
0
<COMMON> 404
<OTHER-SE> 5,528
<TOTAL-LIABILITY-AND-EQUITY> 19,250
<SALES> 0
<TOTAL-REVENUES> 5,195
<CGS> 0
<TOTAL-COSTS> 4,477
<OTHER-EXPENSES> (164)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 531
<INCOME-PRETAX> 351
<INCOME-TAX> 112
<INCOME-CONTINUING> 239
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 239
<EPS-BASIC> 0.63
<EPS-DILUTED> 0.63
</TABLE>
<PAGE> PAGE 201
EXHIBIT 99, Page 1 of 26
TITLE PAGE
CONRAIL INC.
1999 ANNUAL REPORT TO STOCKHOLDERS
<PAGE> PAGE 202
EXHIBIT 99, Page 2 of 26
REPORT OF MANAGEMENT
THE STOCKHOLDERS
CONRAIL INC.
Management is responsible for the preparation, integrity and objectivity
of the Company's financial statements. The financial statements are
prepared in conformity with generally accepted accounting principles and
include amounts based on management's best estimates and judgment.
The Company's financial statements are audited by its independent
accountants. Their audit is conducted in accordance with generally
accepted auditing standards and includes a study and evaluation of the
Company's system of internal accounting controls to determine the nature,
timing and extent of the auditing procedures required for expressing an
opinion on the Company's financial statements.
The Company's Board of Directors was reconstituted on August 22, 1998,
the effective date of the Surface Transportation Board's written decision
approving the acquisition of the Company by Norfolk Southern Corporation
("NSC") and CSX Corporation ("CSX"). The new Board of Directors, which
is comprised of an equal number of directors from NSC and CSX, pursues
its oversight responsibilities for the financial statements and corporate
conduct through periodic meetings with and written reports from the
Company's management.
/s/ Timothy T. O'Toole
Timothy T. O'Toole
President and Chief
Executive Officer
/s/ John A. McKelvey
John A. McKelvey
Senior Vice President-
Finance & Administration
February 11, 2000
<PAGE> PAGE 203
EXHIBIT 99, Page 3 of 26
INDEPENDENT AUDITORS' REPORT
THE STOCKHOLDERS AND BOARD OF DIRECTORS
CONRAIL INC.:
We have audited the accompanying consolidated balance sheet of Conrail
Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audit. The accompanying consolidated financial statements of Conrail
Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of income, stockholders' equity and cash flows
for the two years then ended were audited by other auditors whose report
thereon dated January 19, 1999, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. These 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 audit
provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Conrail Inc. and subsidiaries as of December 31, 1999, and the results of
their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ KPMG LLP /s/ Ernst & Young LLP
KPMG LLP Ernst & Young LLP
Norfolk, Virginia Richmond, Virginia
February 11, 2000
<PAGE> PAGE 204
EXHIBIT 99, Page 4 of 26
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
Conrail Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position
of Conrail Inc. and subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the two
years in the period ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United
States, which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 19, 1999
<PAGE> PAGE 205
EXHIBIT 99, Page 5 of 26
<TABLE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years ended December 31,
-----------------------
($ In Millions) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues - NSC/CSX (Note 2) $ 549 $ - $ -
Revenues - Third Parties 1,625 3,863 3,765
------ ------ ------
Total operating revenues 2,174 3,863 3,765
------ ------ ------
Operating expenses (Note 3)
Compensation and benefits 645 1,489 1,448
Fuel 63 163 198
Material, services and rents 590 909 952
Depreciation and amortization 328 310 293
Casualties and insurance 228 230 143
Other 192 247 188
ESOP termination charge 221
------ ------ ------
Total operating expenses 2,046 3,348 3,443
------ ------ ------
Income from operations 128 515 322
Interest expense (150) (153) (170)
Other income, net (Note 10) 67 72 83
------ ------ ------
Income before income taxes 45 434 235
Income taxes (Note 7) 19 167 228
------ ------ ------
Net income $ 26 $ 267 $ 7
====== ====== ======
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> PAGE 206
EXHIBIT 99, Page 6 of 26
<TABLE>
CONRAIL INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
-----------
($ In Millions) 1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 22 $ 138
Accounts receivable 51 580
Due from NSC/CSX (Note 2) 196 -
Notes receivable from NSC/CSX (Note 2) 216 -
Material and supplies 29 92
Deferred tax assets (Note 7) 149 182
Other current assets 6 13
------ ------
Total current assets 669 1,005
------ ------
Property and equipment, net (Note 4) 7,143 7,151
Other assets 571 888
------ ------
Total assets $8,383 $9,044
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt (Note 6) 319 113
Accounts payable 59 130
Due to NSC/CSX (Note 2) 159 -
Wages and employee benefits 43 403
Casualty reserves 136 139
Accrued and other current liabilities (Note 5) 147 422
------ ------
Total current liabilities 863 1,207
Long-term debt (Note 6) 1,302 1,609
Casualty reserves 311 215
Deferred income taxes (Note 7) 1,817 1,787
Other liabilities 271 426
------ ------
Total liabilities 4,564 5,244
------ ------
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 2, 8, and 9)
Common stock ($1 par value; 100 shares
authorized, issued and outstanding) - -
Additional paid-in capital 2,229 2,291
Unearned ESOP compensation (20) (75)
Retained earnings 1,610 1,584
------ ------
Total stockholders' equity 3,819 3,800
------ ------
Total liabilities and stockholders' equity $8,383 $9,044
====== ======
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> PAGE 207
EXHIBIT 99, Page 7 of 26
<TABLE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Series A Unearned Additional Employee
($ In Millions Preferred ESOP Com- Common Paid-in Benefits Retained Treasury
Except Per Share Data) Stock pensation Stock Capital Trust Earnings Stock
-------- --------- ------ ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1997 $ 211 $ (222) $ 88 $2,404 $ (384) $1,357 $ (347)
Amortization 2
Net income 7
Common dividends,
$.475 per share
(Note 9) (40)
Preferred dividends,
$.541 per share
(Note 9) (3)
Employee benefits trust
transactions, net (3) 20
Effects of Conrail
acquisition, net
(Notes 2) (209) (82) 594 90 (393)
Employee benefits trust
reclassification
(Note 9) 274
Allocation of unearned
ESOP 65
Other (2) 11 3 (2)
------ ------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31, 1997 - (155) 6 3,006 - 1,324 (742)
Net income 267
Common dividends (7)
Common shares reclassified
as unissued (Note 9) (6) (736) 742
Allocation of unearned
ESOP compensation 80
Other 21
------ ------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31, 1998 - (75) - 2,291 - 1,584 -
Net income 26
Transfer of portion of
prepaid pension assets
to NSC and CSX (Note 8) (54)
Allocation of unearned
ESOP compensation 55
Other (8)
------ ------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31, 1999 $ - $ (20) $ - $2,229 $ - $1,610 $ -
====== ====== ====== ====== ====== ====== ======
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> PAGE 208
EXHIBIT 99, Page 8 of 26
<TABLE>
CONRAIL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31,
-----------------------
($ In Millions) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 26 $ 267 $ 7
Adjustments to reconcile net income
to net cash provided by operating
activities:
Transition and acquisition-related
charges (Note 3) 368 159
ESOP termination charge 221
Depreciation and amortization 328 310 293
Deferred income taxes 48 (30) 89
Gains from sales of property (6) (21) (23)
Pension credit (45) (63) (61)
Changes in (net of effect of
transition and acquisition-related
items):
Accounts receivable 529 33 7
Accounts and wages payable (431) (33) 42
Deferred tax assets 33 (67) 178
Due from NSC/CSX (196)
Due to NSC/CSX 159
Other (49) (37) (28)
------ ------ ------
Net cash provided by operating
activities 396 727 884
------ ------ ------
Cash flows from investing activities
Property and equipment acquisitions (176) (537) (439)
Notes receivable from NSC/CSX (216)
Proceeds from disposals of properties 6 19 25
Other (14) (32) (31)
------ ------ ------
Net cash used in investing
activities (400) (550) (445)
------ ------ ------
Cash flows from financing activities
Payment of long-term debt (112) (119) (238)
Payment of debt consent fees (10)
Net proceeds from (repayments of)
short-term borrowings (99)
Dividends on common stock and preferred
stock (7) (43)
Proceeds from stock options and other 8
------ ------ ------
Net cash used in financing
activities (112) (136) (372)
------ ------ ------
Increase(decrease) in cash and cash
equivalents (116) 41 67
Cash and cash equivalents
Beginning of year 138 97 30
------ ------ ------
End of year $ 22 $ 138 $ 97
====== ====== ======
</TABLE>
See accompanying notes to the consolidated financial statements.
<PAGE> PAGE 209
EXHIBIT 99, Page 9 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
------------------------------------------
Description of Business
-----------------------
Conrail Inc. ("Conrail") is a holding company whose principal
subsidiary is Consolidated Rail Corporation ("CRC"), the major
freight railroad in the Northeast. Norfolk Southern Corporation
("NSC") and CSX Corporation ("CSX"), the major railroads in the
Southeast, jointly control Conrail through their ownership
interests in CRR Holdings LLC ("CRR"), whose primary subsidiary is
Green Acquisition Corporation, which owns Conrail. NSC and CSX have
equity interests in CRR of 58% and 42%, respectively, and voting
interests of 50% each. From May 23, 1997, the date NSC and CSX
completed their acquisition of Conrail stock, until June 1, 1999,
Conrail's operations continued substantially unchanged while NSC
and CSX awaited regulatory approvals and prepared for the
integration of their respective Conrail routes and assets to be
leased to their railroad subsidiaries, Norfolk Southern Railway
Company ("NSR") and CSX Transportation, Inc. ("CSXT"). The
operations of CRC substantially changed beginning June 1, 1999,
when NSC and CSX began operating a portion of the Conrail
properties under operating agreements (the "Closing Date") (Note
2).
Beginning June 1, 1999, Conrail's major sources of operating
revenues are operating fees and lease rentals from NSC and CSX.
The composition of CRC's operating expenses also reflects this
change in operations. As a result, Conrail's 1999 results reflect
the freight railroad operations of CRC through May 31, 1999, and
reflect Conrail's new structure and operations that commenced on
the Closing Date (Note 2).
Principles of Consolidation
---------------------------
The consolidated financial statements include Conrail and majority-
owned subsidiaries. Investments in 20% to 50% owned companies are
accounted for by the equity method.
Cash Equivalents
----------------
Cash equivalents consist of commercial paper, certificates of
deposit and other liquid securities purchased with a maturity of
three months or less, and are stated at cost which approximates
market value.
Material and Supplies
---------------------
Material and supplies prior to June 1, 1999, (Note 2) consist mainly
of fuel oil and items for maintenance of property and equipment,
and were valued at the lower of cost, principally weighted average,
or market. Material and supplies beginning June 1, 1999, consist
of maintenance material valued at the lower of cost or market.
<PAGE> PAGE 210
EXHIBIT 99, Page 10 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property and Equipment
----------------------
Property and equipment are recorded at cost. Additions to
properties, including those under lease, are capitalized.
Maintenance expense is recognized when repairs are performed.
Depreciation is provided using the composite straight-line method
over estimated service lives. In 1999, the overall depreciation
rate averaged 3.0% for roadway and 5.8% for equipment. The cost
(net of salvage) of depreciable property retired or replaced in the
ordinary course of business is charged to accumulated depreciation
and no gain or loss is recognized.
Asset Impairment
----------------
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Expected future cash flows from the
use and disposition of long-lived assets are compared to the
current carrying amounts to determine the potential impairment
loss.
Revenue Recognition
-------------------
Revenue prior to June 1, 1999 was recognized proportionally as a
shipment moved on the Conrail system from origin to destination.
Beginning June 1, 1999, the Company's major sources of revenues are
from NSC and CSX, primarily in the form of rental revenues and
operating fees which are recognized when earned.
New Accounting Standards
------------------------
There were no new accounting standards issued during 1999 which the
Company believes will have a material impact on its consolidated
financial position, results of operations or cash flows.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and 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. Actual results could differ from those estimates.
Reclassifications
-----------------
Certain prior year data have been reclassified to conform to the
1999 presentation.
<PAGE> PAGE 211
EXHIBIT 99, Page 11 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Related Parties Transactions
----------------------------
Background
----------
On May 23, 1997, NSC and CSX completed their joint acquisition of
Conrail stock. On June 17, 1997, NSC and CSX executed an agreement
which generally outlines the methods of governing and operating
Conrail and its subsidiaries ("Transaction Agreement"). On July
23, 1998, the Surface Transportation Board ("STB") issued a written
opinion that permitted NSC and CSX to exercise operating control of
Conrail beginning August 22, 1998. On June 1, 1999, NSC and CSX
began to operate over certain Conrail lines.
Commencement of Operations by NSR and CSXT
------------------------------------------
On June 1,1999, the majority of CRC's routes and assets were
segregated into separate subsidiaries of CRC, Pennsylvania Lines
LLC ("PRR") and New York Central Lines LLC ("NYC"). PRR and NYC
entered into separate but identical operating and lease agreements
with NSR and CSXT, respectively, (the "Operating Agreements" )
which govern substantially all nonequipment assets to be used by
NSR and CSXT and have initial 25-year terms, renewable at the
options of NSR and CSXT for two 5-year terms. Payments made under
the Operating Agreements are based on appraised values that are
subject to adjustment every six years to reflect changes in such
values. NSR and CSXT have also leased or subleased certain
equipment assets at rentals based on appraised values for varying
term lengths from PRR and NYC, respectively, as well as from CRC.
NSC and CSX have also entered into agreements with CRC governing
other Conrail properties that continue to be owned and operated by
Conrail ("the Shared Assets Areas"). NSR and CSXT pay CRC a fee
for joint and exclusive access to the Shared Assets Areas. In
addition, NSR and CSXT pay, based on usage, the costs incurred by
CRC to operate the Shared Assets Areas plus a profit factor.
Payments made by NSR and CSXT to Conrail under the Shared Assets
agreements were $45 million and $43 million, respectively, of which
$7 million and $5 million, were minimum rents.
Payments from NSR and CSXT under the Operating Agreements and lease
agreements to PRR and NYC amounted to $167 million and $124
million, respectively. In addition, costs necessary to operate and
maintain the related assets under these agreements, including
leasehold improvements, will be borne by NSR and CSXT.
<PAGE> PAGE 212
EXHIBIT 99, Page 12 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
Future minimum lease payments to be received from NSR/CSXT are as
follows:
<CAPTION>
NSR NSR CSX CSX
$ in Millions To PRR To CRC To NYC To CRC Total
------------- ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
2000 $ 320 $ 22 $ 231 $ 16 $ 589
2001 307 24 223 17 571
2002 318 27 229 19 593
2003 327 30 235 21 613
2004 330 32 238 23 623
2005 and Beyond 5,389 687 3,902 497 10,475
------ ------ ------ ------ -------
Total $6,991 $ 822 $5,058 $ 593 $13,464
====== ====== ====== ====== =======
</TABLE>
Related Party Balances and Transactions
---------------------------------------
"Due from NSC/CSX" at December 31, 1999, is primarily comprised of
amounts due for the above-described operating and rental
activities. Also included in "Due from NSC/CSX" are amounts paid by
Conrail for separation payments to CRC's agreement employees that
will be reimbursed by NSC and CSX as required by the Transaction
Agreement. As of December 31, 1999, the accrued balances due from
NSC and CSX were $91 million and $105 million, respectively.
PRR and NYC have interest-bearing notes receivable, payable on
demand from NSC and CSX of $123 million and $93 million,
respectively, at December 31, 1999 included in the "Notes
receivable from NSC/CSX" line item on the balance sheet. The
interest rates on the notes receivable from NSC and CSX are
variable and both 5.6% at December 31, 1999.
CRC has entered into service provider agreements with both NSC and
CSX, for such services as accounting and administrative processing,
personal injury and environmental case handling and other
miscellaneous services ("Service Provider Agreements"). Payments
made to NSC under these Service Provider Agreements were $5 million
and are included within the various line items of operating
expenses for 1999. In addition, CRC paid a subsidiary of CSX $5
million during 1999, for rental of various facilities which it
occupied subsequent to May 31, 1999.
"Due to NSC/CSX" includes $64 million and $29 million, to NSC and
CSX, respectively, for the services described above for 1999.
<PAGE> PAGE 213
EXHIBIT 99, Page 13 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
"Due to NSC/CSX" also includes $42 million and $24 million payable
to NSC and CSX, respectively, for CRC's vacation liability related
to the portion of its work force that became NSC and CSX employees
subsequent to May 31, 1999.
From time to time, NSC and CSX, as the indirect owners of Conrail,
may need to provide some of Conrail's cash requirements through
capital contributions, loans, or advances, none of which took place
as of December 31, 1999.
Prior to the Closing Date, the Company interchanged freight with
both NSC and CSX for transport to destinations both within and
outside of Conrail's service region. The Company shares ownership
interests with either one or both railroads in various
transportation-related entities, all of which are immaterial to the
Company's operating results and financial position.
3. Transition, Acquisition-Related and Other Items
-----------------------------------------------
During 1999, the Company recorded net expenses of $138 million
($85 million after taxes) for adjustments to certain litigation and
environmental reserves related to settlements and completion of
site reviews, and in accordance with the Transaction Agreement, for
the method of settlement of certain casualty liabilities based on
an actuarial study and for the assumption of a lease obligation by
a subsidiary of CSX. The effects of these adjustments are
reflected in the "Casualties and insurance" and "Other" operating
expense line items of the income statement for 1999.
During the third quarter of 1998, the Company recorded charges
totaling $302 million ($187 million after income taxes), primarily
for severance benefits of $170 million covering certain non-union
employees, and $132 million of other costs, such as the effect of
changing to an actuarial method of valuing certain components of
the Company's casualty reserves, primarily included in the
"Compensation and benefits" and "Casualties and insurance"
operating expense line items of the 1998 income statement,
respectively.
The charge for non-union separation benefits represents termination
payments made to approximately 1,300 non-union employees whose non-
executive positions were eliminated as a result of the joint
acquisition of Conrail. Most of these termination payments have
been made in the form of supplemental retirement benefits from the
Company's overfunded pension plan. During 1999 and 1998,
termination payments of $77 million and $9 million were made,
respectively.
<PAGE> PAGE 214
EXHIBIT 99, Page 14 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 1998 and 1997, the Company recorded charges totaling
$66 million ($41 million after income taxes) and $49 million
($31 million after income taxes), respectively, representing
amounts paid to certain non-union employees as incentive to
continue their employment with the Company through August 22, 1998,
the effective date of the STB approval of the joint acquisition of
Conrail, and the subsequent transition period.
During 1997, the Company recorded a charge of $221 million (no
related income tax effect) for the termination of its Non-union
Employee Stock Ownership Plan ("ESOP") as a result of the repayment
of the ESOP note payable of $291 million and related accrued
interest to the Company. The Company recorded a long-term
liability of $221 million related to the ESOP termination charge,
which has not required use of the Company's cash for settlement.
Such liability, the balance of which is $20 million at December 31,
1999, is being reduced as the cash proceeds, held by the ESOP as a
result of selling its ESOP preferred stock in the joint tender
offer, are allocated to eligible ESOP participants.
During 1997, the Company recorded a charge of $110 million
($103 million after income taxes) in connection with employment
"change in control" agreements with certain executives, which
became operative as a result of the joint acquisition of Conrail.
A portion of the benefits under these agreements, $68 million, has
been paid in 1998 from the Employee Benefits Trust ("EBT"). These
costs are included in the "Compensation and benefits" line item of
the income statement for 1997.
Also, as a result of the joint acquisition of Conrail, all
outstanding performance shares and all outstanding unvested stock
options, restricted shares and phantom shares vested during 1997.
The Company paid all of the amounts due employees under these
arrangements and recorded a $63 million charge ($39 million after
income taxes). These costs are included in the "Compensation and
benefits" line item of the income statement for 1997.
<PAGE> PAGE 215
EXHIBIT 99, Page 15 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
4. Property and Equipment
----------------------
<CAPTION>
December 31,
-----------
1999 1998
---- ----
(In Millions)
<S> <C> <C>
Roadway $7,410 $7,255
Equipment 1,573 1,593
Less: Accumulated depreciation (2,154) (2,029)
------ ------
6,829 6,819
------ ------
Capital leases (primarily equipment) 696 793
Accumulated amortization (382) (461)
------ ------
314 332
------ ------
$7,143 $7,151
====== ======
</TABLE>
Substantially all assets are leased to NSR or CSXT (Note 2).
Conrail acquired equipment and incurred related long-term debt under
various capital leases of $79 million in 1997.
<TABLE>
5. Accrued and Other Current Liabilities
-------------------------------------
<CAPTION>
December 31,
-----------
1999 1998
---- ----
(In Millions)
<S> <C> <C>
Freight settlements due others $ 3 $ 42
Equipment rents (primarily car hire) 6 78
Unearned freight revenue - 59
Property and corporate taxes 97 33
Other 41 210
------ ------
$ 147 $ 422
====== ======
</TABLE>
<PAGE> PAGE 216
EXHIBIT 99, Page 16 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Long-Term Debt and Leases
-------------------------
<TABLE>
Long-term debt outstanding, including the weighted average interest
rates at December 31, 1999, is composed of the following:
<CAPTION>
December 31,
-----------
1999 1998
---- ----
(In Millions)
<S> <C> <C>
Capital leases $ 331 $ 391
Medium-term notes payable, 6.27%
due 1999 - 30
Notes payable, 9.75%, due 2000 250 250
Debentures payable, 7.88%, due 2043 250 250
Debentures payable, 9.75%, due 2020 550 544
Equipment and other obligations, 6.87% 240 257
------ ------
1,621 1,722
Less current portion (319) (113)
------ ------
$1,302 $1,609
====== ======
</TABLE>
Interest payments were $149 million in 1999, $153 million in 1998
and $163 million in 1997.
Leases
------
<TABLE>
The Company's noncancelable long-term leases generally include
options to purchase at fair value and to extend the terms. Capital
leases have been discounted at rates ranging from 3.09% to 14.26%
and are collateralized by assets with a net book value of $285
million at December 31, 1999.
Minimum commitments, exclusive of executory costs borne by the
Company, are:
<CAPTION>
Capital Operating
Leases Leases
------- ---------
(In Millions)
<S> <C> <C>
2000 $ 74 $ 72
2001 68 61
2002 56 55
2003 51 51
2004 56 53
2005 - 2018 139 474
----- -----
Total 444 $ 766
=====
Less interest portion (113)
-----
Present value $ 331
=====
</TABLE>
<PAGE> PAGE 217
EXHIBIT 99, Page 17 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Equipment and other obligations mature in 2000 through 2043 and are
collateralized by assets with a net book value of $229 million at
December 31, 1999. Maturities of long-term debt other than capital
leases are $268 million in 2000, $19 million in 2001, $18 million
in 2002, $19 million in 2003, $19 million in 2004 and $947 million
in total from 2005 through 2043.
Operating lease rent expense was $120 million in 1999, $121 million
in 1998 and $122 million in 1997.
7. Income Taxes
<TABLE>
The provisions for income taxes are composed of the following:
<CAPTION>
1999 1998 1997
---- ---- ----
(In Millions)
<S> <C> <C> <C>
Current
Federal $ (30) $ 173 $ 122
State 1 24 17
----- ----- -----
(29) 197 139
----- ----- -----
Deferred
Federal 52 (27) 61
State (4) (3) 28
----- ----- -----
48 (30) 89
----- ----- -----
$ 19 $ 167 $ 228
===== ===== =====
</TABLE>
The nondeductibility of the ESOP termination charge and certain
transition and acquisition-related compensation costs for federal
and state income tax purposes, has resulted in a significant
difference between the Company's statutory and effective tax rates
for 1997 (Note 4).
A tax law was enacted during the third quarter of 1997 by a state in
which CRC operates which changed the Company's method of computing
taxes and resulted in a tax rate increase. Income tax expense for
1997 was increased by $22 million representing the effects of
adjusting deferred income taxes for the rate increase as required
by SFAS 109, "Accounting for Income Taxes" ("SFAS 109").
<PAGE> PAGE 218
EXHIBIT 99, Page 18 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
Reconciliations of the U.S. statutory tax rates with the effective
tax rates are as follows:
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit 4.2 3.2 3.2
ESOP termination charge 36.3
Nondeductible transition and
acquisition-related costs 23.9 14.9
Effect of state tax increase
on deferred taxes 9.3
Other (20.9) .3 (1.7)
---- ---- ----
Effective tax rate 42.2% 38.5% 97.0%
==== ==== ====
</TABLE>
The Company has reached final settlements with the Internal Revenue
Service ("IRS") related to all of the audits of the Company's
consolidated federal income tax returns through fiscal year 1992.
The Company's consolidated federal income tax returns for fiscal
years 1993 through 1995 are currently being examined by the IRS.
Federal and state income tax payments were $38 million in 1999,
$196 million in 1998 and $120 million in 1997.
<TABLE>
Significant components of the Company's deferred income tax
liabilities (assets) are as follows:
<CAPTION>
December 31,
-----------
1999 1998
---- ----
(In Millions)
<S> <C> <C>
Current assets $ (8) $ (22)
Current liabilities (133) (152)
Miscellaneous (8) (8)
------ ------
Current deferred tax asset, net $ (149) $ (182)
====== ======
Noncurrent liabilities:
Property and equipment 1,977 1,897
Other long-term assets
(primarily prepaid pension asset) 89 106
Other (mostly equipment obligations) 88 91
------ ------
2,154 2,094
------ ------
Noncurrent assets:
Nondeductible reserves and other
liabilities (221) (239)
Tax benefit transfer receivable (36) (36)
Other (mostly equity investments) (80) (32)
------ ------
(337) (307)
------ ------
Deferred income tax liabilities, net $1,817 $1,787
====== ======
</TABLE>
<PAGE> PAGE 219
EXHIBIT 99, Page 19 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Pension and Postretirement Benefits
-----------------------------------
The Company and its subsidiaries sponsor several qualified and
nonqualified pension plans and other postretirement benefit plans for
its employees.
During 1999, the Company transferred approximately $350 million and
$260 million of pension assets to NSC and CSX, respectively. NSC and
CSX also assumed certain pension obligations related to former
Conrail employees. The net effect on Conrail's financial statements
as detailed in the table below, was to reduce pension assets by $89
million. This transfer resulted in a $35 million reduction of
deferred tax liabilities and is reflected as a capital distribution
of $54 million.
The Company's pension plan was amended during 1998 to include certain
enhanced benefits for qualifying Conrail employees. The effect of
the amendment was to increase the Conrail plan's projected benefit
obligation by $59 million. The Company's pension plan was also
amended during 1998 to allow for payment of non-union supplemental
retirement benefits to the extent consistent with applicable Internal
Revenue Service Tax Code provisions. Both of these liabilities are
accrued as offsets to the prepaid pension asset which is included in
"Other assets" in the balance sheet (Note 3).
<PAGE> PAGE 220
EXHIBIT 99, Page 20 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
The following tables provide a reconciliation of the changes in the
plans' benefit obligations and fair value of assets over the two-year
period ending December 31, 1999, and a statement of the funded status
as of December 31 of both years:
<CAPTION>
Other Postretire-
Pension Benefits ment Benefits
---------------- ----------------
(In Millions) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in benefit obligation
Net benefit obligation
at beginning of year $ 834 $ 707 $ 56 $ 57
Pension obligation
transferred to NSC and
CSX (89) - - -
Service cost 10 13 - -
Interest cost 50 53 3 4
Plan amendments - 59 - -
Curtailment (gains)losses (15) - (4) -
Actuarial (gains)losses (97) 68 (7) 1
Incorporation of special
pension benefit reserves 176 - - -
Gross benefits paid (130) (66) (4) (6)
------ ------ ------ ------
Net benefit obligation
at end of year $ 739 $ 834 $ 44 $ 56
Change in plan assets
Fair value of plan assets
at beginning of year $1,441 $1,308 $ 9 $ 10
Pension assets
transferred to NSC and CSX (610) - - -
Actual return on plan
assets 88 211 - -
Gross benefit payments (128) (78) (1) (1)
------ ------ ------ ------
Fair value of plan assets
at end of year $ 791 $1,441 $ 8 $ 9
Funded status at
end of year $ 52 $ 607 $ (36) $ (47)
Unrecognized transition
asset (3) (54) - -
Unrecognized prior
service cost 10 88 - -
Unrecognized actuarial
(gains)losses (26) (371) (8) -
------ ------ ------ ------
Net amount recognized
at year end $ 33 $ 270 $ (44) $ (47)
====== ====== ====== ======
</TABLE>
<PAGE> PAGE 221
EXHIBIT 99, Page 21 of 26
CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
The following amounts have been recognized in the balance sheets as of
December 31:
<CAPTION>
Other Postretire-
Pension Benefits ment Benefits
---------------- ----------------
(In Millions) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Prepaid pension cost $ 74 $ 278 - -
Accrued benefit cost (41) (8) $(44) $(47)
</TABLE>
All of the Company's plans for postretirement benefits other than
pensions have no plan assets except for the retiree life insurance
plan which has $8 million and $9 million of assets in 1999 and 1998,
respectively. The aggregate benefit obligation for the postretirement
plans other than pensions is $44 million and $56 million at December
31, 1999 and 1998, respectively.
The projected benefit obligations and accumulated benefit obligations
for pension plans with accumulated benefit obligations in excess of
plan assets were $54 million and $38 million, respectively, in 1999;
and $10 million and $9 million, respectively, in 1998. The plans had
no assets in either 1999 or 1998.
<TABLE>
The assumptions used in the measurement of the Company's benefit
obligation are as follows:
<CAPTION>
Other Postretire-
Pension Benefits ment Benefits
---------------- ----------------
(In Millions) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Discount rate 7.75% 6.50% 7.75% 6.50%
Expected return on plan assets 9.00% 9.00% 9.00% 8.00%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
</TABLE>
A 7% annual rate of increase in the per capita cost of covered health
care benefits was assumed for 2000, gradually decreasing to 6% by the
year 2007.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The effect of a one
percentage point increase and (decrease) in the assumed health care
cost trend rate on accumulated postretirement benefit obligation is
$1 million and $(1) million, respectively, and would have an
immaterial effect on the net periodic postretirement benefit cost for
1999.
<PAGE> PAGE 222
EXHIBIT 99, Page 22 of 26
<TABLE>
The components of the Company's net periodic benefit cost for the
plans are as follows:
<CAPTION>
Other Postretirement
Pension Benefits Benefits
------------------- --------------------
(In Millions) 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 10 $ 13 $ 8 $ - $ - $ -
Interest cost 53 53 50 4 4 4
Expected return on assets (94) (109) (98) (1) (1) (1)
Curtailment (gain) loss 19 - - (4) - -
Amortization of:
Transition asset (11) (18) (18) - - -
Prior service cost 4 4 3 - - -
Actuarial gain (8) (5) (6) - (1) (1)
----- ----- ----- ----- ----- -----
$ (27) $ (62) $ (61) $ (1) $ 2 $ 2
===== ===== ===== ===== ===== =====
</TABLE>
Savings Plans
-------------
The Company and certain subsidiaries provide 401(k) savings plans for
union and non-union employees. Under the Company's current non-union
savings plan, 50% of employee contributions are matched for the first
6% of a participating employee's base pay and 25% of employee
contributions are matched in excess of 10% of a participating
employee's base pay. Savings plan expense related to the current non-
union savings plan was $1 million in 1999. There is no Company match
provision under the union employee plan except for certain unions which
negotiated a Company match as part of their contract provisions.
In connection with the close of the NSC-CSX joint tender offer for
Conrail, the Company's Non-union ESOP was terminated with the repayment
of the ESOP note payable of $291 million and related accrued interest
during 1997, resulting in a charge of $221 million (no related income
tax effect) (Notes 2 and 3). Under the Non-union ESOP, 100% of
employee contributions were matched in the form of ESOP preferred stock
for the first 6% of a participating employee's base pay. Savings plan
expense related to the ESOP plan was $1 million in 1997. The Company
had no non-union savings plan in 1998.
In connection with the formation of the Non-union ESOP in 1990, the
Company issued 9,979,562 of the authorized 10 million shares of its
ESOP stock to the Non-union ESOP in exchange for a 20 year promissory
note from the Non-union ESOP in the principal amount of approximately
$290 million. In addition, unearned ESOP compensation in the same
amount was recognized as a charge to stockholders' equity coincident
with the Non-union ESOP's issuance of its promissory note to the
<PAGE> PAGE 223
EXHIBIT 99, Page 23 of 26
Company. The debt of the Non-union ESOP was recorded by the Company
and offset against the promissory note from the Non-union ESOP.
The Company received debt service payments from the Non-union ESOP
of $11 million in 1997.
Prior to the close of the joint tender offer (Notes 2 and 3), unearned
ESOP compensation was charged to expense as shares of ESOP stock were
allocated to participants. An amount equivalent to the preferred
dividends declared on the ESOP stock had partially offset compensation
and interest expense related to the Non-union ESOP through the close of
the joint tender offer.
Interest expense incurred by the Non-union ESOP on its debt to the
Company was $9 million in 1997. Compensation expense related to the
Non-union ESOP was $2 million in 1997.
Prior to its acquisition, the Company made dividend payments at a rate
of 7.51% on the ESOP stock and additional contributions in an aggregate
amount sufficient to enable the Non-union ESOP to make the required
interest and principal payments on its note to the Company. Preferred
dividends declared and paid were $3 million in 1997.
9. Stockholders' equity
--------------------
Common Stock
------------
On May 23, 1997, the NSC-CSX joint tender offer for the remaining
outstanding shares of Conrail's common and preferred stock was
concluded, and on June 2, 1997, Conrail became the surviving
corporation in a merger with Green Merger Corp. and remained the only
subsidiary of Green Acquisition Corp., an entity jointly-owned by NSC
and CSX. As a result, the remaining outstanding capital stock of
Conrail was acquired by NSC and CSX and Green Acquisition was issued
100 shares of Conrail's common stock. Any per share data included in
this report is based on Conrail's outstanding common stock before the
effects of the joint acquisition of the Company.
Employee Benefits Trust
-----------------------
In 1995, the Company established the Conrail Employee Benefits Trust
(the "Trust"). The Trust was intended to fund certain employee benefits
and other forms of compensation. As a result of the joint tender offer
(See Note 2) for the Company's common stock, the Trust received cash
proceeds for the common stock it held at that time. Due to the Trust
holding cash instead of the Company's common stock, the balance of the
Trust at December 31, 1997, was reclassified from the stockholders'
equity section of the Company's balance sheet to the "Other assets"
line item.
<PAGE> PAGE 224
EXHIBIT 99, Page 24 of 26
Treasury Stock
--------------
As a result of the acquisition of Conrail, the Company's common stock
repurchase program was terminated in the fourth quarter of 1996. The
activity for 1997 is related to the repurchase of common stock in
connection with the repayment of $90 million of the Trust promissory
loan described above. The remaining shares of treasury stock at
December 31, 1997, were recorded as canceled and retired during 1998.
<TABLE>
The activity and status of treasury stock follow:
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Shares, beginning of year 6,320,249 5,523,455
Acquired
Effects of Conrail acquisition (6,320,249) 796,794
---------- ---------
Shares, end of year - 6,320,249
========== =========
</TABLE>
Stock Plans
-----------
The Company has applied APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations in accounting for the
Conrail plans. Accordingly, no compensation cost was recognized for
the Conrail fixed stock option plans prior to Conrail's acquisition.
However, in connection with the acquisition of Conrail, all outstanding
performance shares and all outstanding unvested stock options,
restricted shares and phantom shares vested during 1997 (Note 3).
Undistributed Earnings of Equity Investees
------------------------------------------
"Retained earnings" includes undistributed earnings of equity
investees of $188 million, $173 million and $151 million at December
31, 1999, 1998 and 1997, respectively.
<TABLE>
10.Other Income, Net
-----------------
<CAPTION>
1999 1998 1997
---- ---- ----
(In Millions)
<S> <C> <C> <C>
Interest income $ 19 $ 7 $ 13
Rental income 37 42 41
Property sales 6 21 23
Other, net 5 2 6
----- ----- -----
$ 67 $ 72 $ 83
===== ===== =====
</TABLE>
<PAGE> PAGE 225
EXHIBIT 99, Page 25 of 26
11.Commitments and Contingencies
-----------------------------
Environmental
-------------
The Company is subject to various federal, state and local laws and
regulations regarding environmental matters. CRC is a party to various
proceedings brought by both regulatory agencies and private parties
under federal, state and local laws, including Superfund laws, and has
also received inquiries from governmental agencies with respect to
other potential environmental issues. At December 31, 1999, CRC has
received, together with other companies, notices of its involvement as
a potentially responsible party or requests for information under the
Superfund laws with respect to cleanup and/or removal costs due to its
status as an alleged transporter, generator or property owner at 28
locations. However, based on currently available information, the
Company believes CRC may have some potential responsibility at only 25
of these sites. Due to the number of parties involved at many of these
sites, the wide range of costs of possible remediation alternatives,
the changing technology and the length of time over which these matters
develop, it is often not possible to estimate CRC's liability for the
costs associated with the assessment and remediation of contaminated
sites.
Although the Company's operating results and liquidity could be
significantly affected in any quarterly or annual reporting period if
CRC were held principally liable in certain of these actions, at
December 31, 1999, the Company had accrued $94 million, an amount it
believes is sufficient to cover the probable liability and remediation
costs that will be incurred at Superfund sites and other sites based on
known information and using various estimating techniques. The Company
anticipates that much of this liability will be paid out over five
years; however some costs will be paid out over a longer period. The
Company believes the ultimate liability for these matters will not
materially affect its consolidated financial condition.
The Company spent $9 million in 1999, $10 million in 1998 and
$9 million in 1997 for environmental remediation and related costs.
In addition, the Company's capital expenditures for environmental
control and abatement projects were approximately $1 million in 1999,
$8 million in 1998 and $7 million in 1997.
Other
-----
The Company is involved in various legal actions, principally relating
to occupational health claims, personal injuries, casualties, property
damage and damage to lading. The Company has recorded liabilities in
amounts it believes are sufficient to cover the expected payments for
such actions.
CRC had 2,315 employees at December 31, 1999, approximately 78% of whom
are represented by 16 different labor organizations and are covered by
<PAGE> PAGE 226
EXHIBIT 99, Page 26 of 26
16 separate collective bargaining agreements. The Company was not
engaged in any collective bargaining at December 31, 1999.
CRC currently guarantees the principal and interest payments in the
amount of $39 million on Equipment Trust Certificates for Locomotive
Management Services, a general partnership of which CRC holds a
fifty percent interest.
12.Fair Values of Financial Instruments
------------------------------------
The fair values of "Cash and cash equivalents," "Accounts receivable,"
"Notes receivable from NSC/CSX" and "Accounts payable" approximate
carrying values because of the short maturity of these financial
instruments.
Using current market prices when available, or a valuation based on the
yield to maturity of comparable debt instruments having similar
characteristics, credit rating and maturity, the total fair value of
the Company's long-term debt, including the current portion, but
excluding capital leases, is $1,367 million and $1,637 million at
December 31, 1999 and 1998, respectively, compared with carrying values
of $1,290 million and $1,331 million at December 31, 1999 and 1998,
respectively.
