<PAGE 1>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-K405
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 numbers 1-743; 1-3744; 1-4793; 1-5462
NORFOLK SOUTHERN RAILWAY COMPANY
- ------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 53-6002016
- ------------------------------------------------ ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Three Commercial Place, Norfolk, Virginia 23510-2191
- ------------------------------------------------ ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (757) 629-2680
----------------------
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS SO REGISTERED. EACH CLASS REGISTERED ON NEW YORK
STOCK EXCHANGE:
Norfolk and Western Railway Company 4.85% Subordinated Income
Debentures, due November 15, 2015; Guarantee of Norfolk Southern Railway
Company with respect to $1,754,900 principal amount of Norfolk and
Western Railway Company 4.85% Subordinated Income Debentures due
November 15, 2015; The Virginian Railway Company 6% Subordinated Income
Debentures, due August 1, 2008; Guarantee of Norfolk Southern Railway
Company with respect to $4,466,000 principal amount of The Virginian
Railway Company 6% Subordinated Income Debentures due August 1, 2008;
Norfolk Southern Railway Company $2.60 Cumulative Preferred Stock,
Series A (No Par Value, $50 Stated Value).
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K405 or any amendment to this Form 10-K405. (X)
The aggregate market value of the voting stock held by
nonaffiliates as of January 31, 2000: $34,737,626.
The number of shares outstanding of each of the registrant's
classes of Common Stock, as of January 31, 2000: 16,668,997.
<PAGE> PAGE 2
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive proxy statement (to be
dated April 14, 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 RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Page
----
Part I. 1. Business 4
2. Properties 4
3. Legal Proceedings 16
4. Submission of Matters to a Vote of Security Holders 16
Executive Officers of the Registrant 17
Part II. 5. Market for Registrant's Common Stock and
Related Stockholder Matters 23
6. Selected Financial Data 24
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 25
7A. Quantitative and Qualitative Disclosures
About Market Risk 39
8. Financial Statements and Supplementary Data 40
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 66
Part III.10. Directors and Executive Officers of the Registrant 67
11. Executive Compensation 67
12. Security Ownership of Certain Beneficial Owners
and Management 67
13. Certain Relationships and Related Transactions 67
Part IV. 14. Exhibits, Financial Statement Schedule and
Reports on Form 8-K 68
Index to Consolidated Financial Statement Schedule 68
Power of Attorney 73
Signatures 73
Exhibit Index 77
<PAGE> PAGE 4
PART I
------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Item 1. Business.
- ------ --------
and
Item 2. Properties.
- ------ ----------
GENERAL - Norfolk Southern Railway Company (Norfolk Southern
Railway) was incorporated in 1894 under the name Southern Railway
Company (Southern) in the Commonwealth of Virginia and, together with
its consolidated subsidiaries (collectively NS Rail), is primarily
engaged in the transportation of freight by rail.
On June 1, l982, Southern and Norfolk and Western Railway Company
(N&W) became subsidiaries of Norfolk Southern Corporation (NS), a
transportation holding company. Effective Dec. 31, 1990, NS
transferred all the common stock of N&W to Southern, and Southern's
name was changed to Norfolk Southern Railway Company. Effective
Sept. 1, 1998, N&W was merged with and into Norfolk Southern Railway.
All the common stock of Norfolk Southern Railway (16,668,997 shares)
is owned directly by NS. NS common stock is publicly held and listed
on the New York Stock Exchange.
There remain issued and outstanding as of Dec. 31, 1999,
1,197,027 shares of Norfolk Southern Railway's $2.60 Cumulative
Preferred Stock, Series A (Series A Stock), of which 1,096,907 shares
were held by other than subsidiaries. The Series A Stock is entitled
to one vote per share, is nonconvertible and is traded on the New York
Stock Exchange. As of Dec. 31, 1999, NS held a total of 176,705 shares
of Series A Stock; consequently, as of the same date, NS held
94.8 percent of the voting stock of Norfolk Southern Railway.
OPERATION OF A PORTION OF THE CONRAIL RAIL ASSETS - On June 1,
1999, Norfolk Southern Railway and CSX Corporation (CSX), through its
railroad subsidiary, began operating separate portions of Conrail's
rail routes and assets. Substantially all such assets are owned by
two wholly owned subsidiaries of Consolidated Rail Corporation (CRC);
one of those subsidiaries, Pennsylvania Lines LLC (PRR), has entered
into various operating and leasing arrangements, more particularly
described in Note 2 on Page 48, 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.
OPERATIONS - As of Dec. 31, 1999, NS Rail 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,
NS Rail operates almost 17,000 miles of passing, industrial, yard and
side tracks.
In addition to the lines leased from Conrail previously
discussed, NS Rail has major leased lines between Cincinnati, Ohio,
and Chattanooga, Tennessee, and operates over trackage owned by North
Carolina Railway Company (NCRR).
The Cincinnati-Chattanooga lease, covering about 335 miles,
expires in 2026, and is subject to an option to extend the lease for
an additional 25 years, at terms to be agreed upon.
Operations over the approximately 330 miles of tracks of NCRR,
previously under a 100-year lease which expired on Dec. 31, 1994, are
now under a trackage rights agreement. The term of the agreement is
15 years with NS Rail having the right to renew for two additional
15-year periods. The new arrangement resolved all outstanding
litigation between NS Rail and NCRR and settled a number of contested
real property issues. The agreement also includes very broad dispute
resolution provisions.
NS Rail's lines carry raw materials, intermediate products and
finished goods primarily in the Southeast, East and Midwest, and to
and from the rest of the United States and parts of Canada. These
lines also transport overseas freight through several Atlantic and
Gulf Coast ports. Atlantic ports served by NS Rail include: Norfolk,
Virginia; Morehead City, North Carolina; Charleston, South Carolina;
Savannah and Brunswick, Georgia; Jacksonville, Florida; Baltimore,
Maryland; Philadelphia, Pennsylvania/Camden, New Jersey; Wilmington,
Delaware; and the Ports of New York/New Jersey. Gulf Coast ports
served include Mobile, Alabama, and New Orleans, Louisiana.
NS Rail's lines reach most of the larger industrial and trading
centers of the Southeast, 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 with Florida East Coast
Railway Company allows NS Rail to provide single-line service to and
<PAGE> PAGE 6
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.
<TABLE>
RAILWAY OPERATING REVENUES - NS Rail's total railway operating
revenues were $5.1 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 26% 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
<PAGE> PAGE 7
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)
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
INTERMODAL
(Trailers, Containers
and RoadRailers)
Revenues $ 749 $ 539 $ 547 $ 487 $ 474
% of total revenues 15% 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 $ 395 $ 374 $ 372 $ 366 $ 376
Total Railway
Operating Revenues $5,114 $4,221 $4,223 $4,101 $4,012
Total Railway
Shipments 5,961 4,813 4,759 4,553 4,449
Railway Revenue
Yield $ 858 $ 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 8
COAL TRAFFIC - Coal, coke and iron ore -- most of which is
bituminous coal -- is NS Rail's largest commodity group as measured by
revenues. NS Rail originated 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 26 percent of NS Rail's 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
NS Rail's lines 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 Rail's 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 Rail 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 Rail was terminated in states situated east of the
Mississippi River.
<PAGE> PAGE 9
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 Rail 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 Rail, originated online. The balance of merchandise traffic was
received from connecting carriers, usually at interterritorial
gateways. The principal interchange points for NS Rail-received
traffic included Chicago, Memphis, New Orleans, Cincinnati, Kansas
City, Detroit, Hagerstown, St. Louis/East St. Louis and Louisville.
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 10
<TABLE>
OPERATING STATISTICS - The following table sets forth certain
statistics relating to NS Rail's operations for the past five years,
including operations in the Northern Region that commenced June 1,
1999:
<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 Rail continued its reliance on
private contracts and exempt price quotes as the predominant pricing
mechanism. Thus, a major portion of NS Rail's freight business is not
currently economically regulated by the government. In general,
market forces have been substituted for government regulation and now
are the primary determinant of rail service prices.
In 1999, NS Rail was 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 Rail's 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 Rail line between
Manassas and Alexandria under contract with two transportation
commissions of the Commonwealth of Virginia. NS Rail also leases the
Chicago to Manhattan, Illinois, line to the Commuter Rail Division of
the Regional Transportation Authority of Northeast Illinois. Since
June 1, 1999, Norfolk Southern Railway Company has operated former
Conrail lines on which Amtrak conducts regularly scheduled passenger
operations between Chicago, Illinois, and Detroit, Michigan, and
between Chicago and Harrisburg, Pennsylvania. All of these services
are under contracts providing for reimbursement of related expenses
incurred by NS Rail.
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 11
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.
RAILWAY PROPERTY:
<TABLE>
EQUIPMENT - As of December 31, 1999, NS Rail 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 28,591 12,534 41,125 4,380,293
Flat 4,181 1,035 5,216 392,663
Caboose 190 78 268 --
Other 793 -- 793 63,656
------ ------ ------- ----------
Total freight cars 85,426 28,837 114,263 11,236,194
====== ====== ======= ==========
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
Miscellaneous 1,497 6,404 7,901
------ ------ -------
Total other 13,058 15,594 28,652
====== ====== =======
</TABLE>
* 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.
<PAGE> PAGE 12
In addition, NS Rail has leased locomotives to meet immediate
needs. As of Dec. 31, 1999, NS Rail 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 438 1,167 531 787 1,036 6,610 1,335 73,522 85,426
Percent of
fleet 1 1 1 1 1 8 1 86 100%
</TABLE>
The average age of the freight car fleet at Dec. 31, 1999, was
24.4 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 13
<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 Rail 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> <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 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 Rail 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 14
TRAFFIC CONTROL - Of a total of 21,800 road miles operated by
NS Rail, 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 $ 583 $ 580 $ 428 $ 379
Equipment 356 419 304 326 333
Other property -- -- -- -- 1
------ ------ ------ ------ ------
Total $ 915 $1,002 $ 884 $ 754 $ 713
====== ====== ====== ====== ======
</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 Rail has budgeted approximately
$747 million of capital spending. In addition, NS Rail plans to enter
into a lease financing arrangement for 150 new locomotives, and
NS Rail expects to lease 475 articulated bilevels for automotive
service.
<PAGE> PAGE 15
ENVIRONMENTAL MATTERS - Compliance with federal, state and local
laws and regulations relating to the protection of the environment is
a principal NS Rail goal. To date, such compliance has not affected
materially NS Rail's capital additions, earnings, liquidity or
competitive position. See the discussion of "Environmental Matters"
on Page 37 in Part II, Item 7, "Management's Discussion and Analysis,"
and in Note 15 to the Consolidated Financial Statements on Page 62.
EMPLOYEES - NS Rail employed an average of 30,897 employees in
1999, compared with an average of 24,185 in 1998 (including Norfolk
Southern Corporation's employees whose primary duties relate to rail
operations). The increase reflects the substantial number of Conrail
employees that became NS Rail employees on June 1, 1999. The
approximate average cost per employee during 1999 was $48,600 in wages
and $17,400 in employee benefits.
Approximately 85 percent of NS Rail's employees are represented
by labor unions under collective bargaining agreements with 14
different labor organizations. See the discussion of "Labor
Agreements" on Page 38 in Part II, Item 7, "Management's Discussion
and Analysis."
GOVERNMENT REGULATION - In addition to environmental, safety,
securities and other regulations generally applicable to all
businesses, NS Rail is subject to regulation by the STB, which
succeeded the ICC on Jan. 1, 1996. The STB has jurisdiction over some
rates, routes, conditions of service and the extension or abandonment
of rail lines. The STB also has jurisdiction over the consolidation,
merger or acquisition of control of and by rail common carriers. The
Department of Transportation regulates certain track and mechanical
equipment standards.
The relaxation of economic regulation of railroads, begun over 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 Rail's 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 Rail 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
<PAGE> PAGE 16
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.
Even for raw materials, semi-finished goods and work-in-process, users
are increasingly sensitive to transport arrangements which minimize
problems at successive production stages.
NS Rail's primary rail competitor is the CSX system; both operate
throughout much of the same territory. Other railroads also operate
in parts of the territory. NS Rail also competes with motor carriers,
water carriers and with shippers who have the additional option of
handling their own goods in private carriage.
Certain cooperative strategies between railroads and between
railroads and motor carriers enable carriers to compete more
effectively in specific markets.
Item 3. Legal Proceedings.
- ------ -----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
There were no matters submitted to a vote of security
holders during the fourth quarter of 1999.
<PAGE> PAGE 17
Executive Officers of the Registrant.
- ------------------------------------
Norfolk Southern Railway's officers are elected 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 these officers:
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
David R. Goode, 59, Present position since September
President and 1992. Also, Chairman, President,
Chief Executive Officer and Chief Executive Officer of
Norfolk Southern Corporation since
September 1992.
L. I. Prillaman, 56, Present position since August 1998.
Vice President and Also, Vice Chairman and Chief
Chief Marketing Officer Marketing Officer of Norfolk
Southern Corporation since August
1998. Served as Vice President and
Chief Traffic Officer of Norfolk
Southern Railway and Executive Vice
President-Marketing of Norfolk
Southern Corporation from October
1995 to August 1998, and prior
thereto was Vice President-
Properties.
Stephen C. Tobias, 55, Present position since August 1998.
Vice President and Also, Vice Chairman and Chief
Chief Operating Officer Operating Officer of Norfolk
Southern Corporation since August
1998, and prior thereto was Vice
President of Norfolk Southern
Railway and Executive Vice
President-Operations of Norfolk
Southern Corporation.
Henry C. Wolf, 57, Present position since August 1998.
Vice President and Also, Vice Chairman and Chief
Chief Financial Officer Financial Officer of Norfolk
Southern Corporation since August
1998, and prior thereto was Vice
President-Finance of Norfolk
Southern Railway and Executive Vice
President-Finance of Norfolk
Southern Corporation.
<PAGE> PAGE 18
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
Paul N. Austin, 56, Present position since September
Vice President-Human Resources 1998. Also, Vice President and
Assistant to Chairman, President
and Chief Executive Officer of
Norfolk Southern Corporation since
November 1, 1999. Served as Vice
President-Human Resources and
Assistant to Chairman of Norfolk
Southern Corporation from September
1998 to November 1999, and prior
thereto was Vice President-
Personnel and Assistant to
Chairman.
James C. Bishop, Jr., 63, Present position since March 1996.
Vice President-Law Also, Executive Vice President-Law
of Norfolk Southern Corporation
since March 1996, and prior thereto
was Vice President-Law.
R. Alan Brogan, 59, Present position since April 1998.
Vice President-Corporate Also, Executive President Norfolk
Southern Intermodal since
December 1, 1999, and prior thereto
was Vice President-Transportation
Logistics of Norfolk Southern
Railway and Executive Vice
President-Corporate of Norfolk
Southern Corporation.
David A. Cox, 64, Present position since December
Vice President-Properties 1995. Also, Senior Vice President-
Properties and Development of
Norfolk Southern Corporation since
October 1, 1999, and prior thereto
was Vice President-Properties.
Timothy P. Dwyer, 50, Present position since August 1998.
Vice President-Marketing Services Also, Vice President-Marketing
Services of Norfolk Southern
Corporation since August 1998.
Served as Senior Vice President-
Operations of Conrail from June
1998 to August 1998, and prior
thereto was Senior Vice President-
Unit Train Service Group of
Conrail.
Nancy S. Fleischman, 52, Present position since August 1997.
Vice President Also, Vice President of Norfolk
Southern Corporation since August
1997, and prior thereto was
Assistant Vice President-Strategic
Planning.
<PAGE> PAGE 19
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
Robert C. Fort, 55, Present position since December 1996.
Vice President-Public Relations Also, Vice President-Public
Relations of Norfolk Southern
Corporation since December 1996,
and prior thereto was Assistant
Vice President-Public Relations.
John W. Fox, Jr., 52, Present position since October 1995.
Vice President-Coal Marketing Also, Senior Vice President-Coal
Marketing of Norfolk Southern
Corporation since December 1, 1999,
and prior thereto was Vice
President-Coal Marketing.
William A. Galanko, 43 Present position since January 15,
Vice President 2000. Also Vice President-Taxation
of Norfolk Southern Corporation
since November 1, 1999, and prior
thereto was Tax Counsel.
Lewis D. Hale, Jr., 53, Present position since August 1998.
Vice President-Transportation Also, Vice President-Transportation
of Norfolk Southern Corporation
since August 1998. Served as
Assistant Vice President-Mechanical
from December 1995 to August 1998,
and prior thereto was General
Manager Western Region.
James A. Hixon, 46, Present position since June 1993.
Vice President-Taxation Also, Senior Vice President-
Employee Relations of Norfolk
Southern Corporation since
November 1, 1999, and prior thereto
was Vice President-Taxation.
Thomas C. Hostutler, 63, Present position since August 1998.
Vice President-Internal Audit Also, Vice President-Internal Audit
of Norfolk Southern Corporation
since August 1998, and prior
thereto was Senior Assistant Vice
President-Corporate Accounting.
H. Craig Lewis, 55, Present position since August 1998.
Vice President-Corporate Affairs Also, Vice President-Corporate
Affairs of Norfolk Southern
Corporation since August 1998.
Served as Regional Vice President
from August 1997 to August 1998,
and prior thereto was a partner in
a Pennsylvania law firm.
<PAGE> PAGE 20
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
Jon L. Manetta, 61, Present position since June 2, 1999.
Vice President-Operations Also, Senior Vice President-
Operations of Norfolk Southern
Corporation since August 1998.
Served as Senior Vice President-
Operations from August 1998 to
June 2, 1999, of Norfolk Southern
Railway and Vice President-
Transportation & Mechanical of
Norfolk Southern Corporation from
December 1995 to August 1998, and
prior thereto was Vice President-
Transportation.
Mark D. Manion, 47, Present position since August 1998.
Vice President-Mechanical Also, Vice President-Mechanical of
Norfolk Southern Corporation since
August 1998. Served as General
Manager Western Region from
December 1995 to August 1998, and
prior thereto was Assistant Vice
President-Transportation.
Harold C. Mauney, Jr., 61, Present position since August 1997.
Vice President-Public Affairs Also, Vice President-Public Affairs
of Norfolk Southern Corporation
since August 1997. Served as Vice
President-Operations Planning and
Budget of Norfolk Southern Railway
and Norfolk Southern Corporation
from December 1996 to August 1997,
and prior thereto was Vice
President-Quality Management.
Donald W. Mayberry, 56, Present position since December 1995.
Vice President-Research and Tests Also, Vice President-Research and
Tests of Norfolk Southern
Corporation since December 1995,
and prior thereto was Vice
President-Mechanical.
James W. McClellan, 60, Present position since June 2, 1999.
Vice President-Planning Also, Senior Vice President-
Planning of Norfolk Southern
Corporation since August 1, 1998.
Served as Senior Vice President-
Planning of Norfolk Southern
Railway from August 1998 to June 2,
1999, and prior thereto was Vice
President-Strategic Planning.
<PAGE> PAGE 21
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
Kathryn B. McQuade, 43, Present position since August 1998.
Vice President-Financial Planning Also, Vice President-Financial
Planning of Norfolk Southern
Corporation since August 1998, and
prior thereto was Vice President-
Internal Audit.
Charles W. Moorman, 48, Present position since October 1993.
Vice President-Information Also, President Thoroughbred
Technology Technology and Communications, Inc.
of Norfolk Southern Corporation
since October 1, 1999, and prior
thereto was Vice President-
Information Technology.
Phillip R. Ogden, 59, Present position since June 2, 1999.
Vice President-Engineering Also, Senior Vice President-
Engineering of Norfolk Southern
Corporation since August 1, 1998.
Served as Senior Vice President-
Engineering of Norfolk Southern
Railway from August 1998 to June 2,
1999, and prior thereto was Vice
President-Engineering.
John P. Rathbone, 48, Present position since December 1992.
Vice President and Controller Also, Vice President and Controller
of Norfolk Southern Corporation
since December 1992.
Stephen P. Renken, 56, Present position since January 15,
Vice President 2000. Also Vice President-
Information Technology of Norfolk
Southern Corporation since
October 1, 1999. Served as
Assistant Vice President-Program
Management from January 1998 to
October 1, 1999, and prior thereto
was employed by Burlington Northern
Santa Fe.
William J. Romig, 55, Present position since December 1992.
Vice President Also, Vice President and Treasurer
of Norfolk Southern Corporation
since December 1992.
<PAGE> PAGE 22
Business Experience During Past
Name, Age, Present Position Five Years
- --------------------------- -------------------------------
John M. Samuels, 56, Present position since January 1998.
Vice President-Operations Also, Vice President-Operations
Planning and Budget Planning and Budget of Norfolk
Southern Corporation since January
1998. Previously served as Vice
President-Operating Assets of
Conrail from January 1996 to
January 1998, and prior thereto was
Vice President-Mechanical of
Conrail.
Donald W. Seale, 47, Present position since August 1993.
Vice President- Also, Senior Vice President-
Merchandise Marketing Merchandise Marketing of Norfolk
Southern Corporation since
December 1, 1999, and prior thereto
was Vice President-Merchandise
Marketing.
Rashe W. Stephens, Jr., 58, Present position since December
Vice President-Quality Management 1996. Also, Vice President-Quality
Management of Norfolk Southern
Corporation since December 1996,
and prior thereto was Assistant
Vice President-Public Affairs.
Charles J. Wehrmeister, 50, Present position since August 1998.
Vice President- Also, Vice President-Safety and
Safety and Environmental Environmental of Norfolk Southern
Corporation since August 1998.
Served as Assistant Vice President-
Safety and Environmental from
January 1995 to August 1998, and
prior thereto was Division
Superintendent, Virginia Division.
William C. Wooldridge, 57, Present position since February 1997.
Vice President Also, Vice President-Law of Norfolk
Southern Corporation since March
1996, and prior thereto was General
Counsel-Corporate.
Sandra T. Pierce, 45, Present position since June 1995.
Corporate Secretary Also, Assistant Corporate Secretary
of Norfolk Southern Corporation
since June 1995, and prior thereto
was Assistant Corporate Secretary-
Planning.
Ronald E. Sink, 57, Present position since September 1987.
Treasurer
<PAGE> PAGE 23
PART II
-------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Item 5. Market for the Registrant's Common Stock and Related
- ------ ----------------------------------------------------
Stockholder Matters.
-------------------
COMMON STOCK
Since June 1, 1982, NS has owned all the common stock of Norfolk
Southern Railway Company. The common stock is not publicly traded.
PREFERRED STOCK INFORMATION
There are 10,000,000 shares of no par value serial preferred
stock authorized. This stock may be issued in series from time to
time at the discretion of the Board of Directors with any series
having such voting and other powers, designations, dividends and other
preferences as deemed appropriate at the time of issuance.
The $2.60 Cumulative Preferred Stock, Series A (Series A Stock),
of which 1,197,027 shares were issued and 1,096,907 shares were held
other than by subsidiaries, including 176,705 shares held by NS, as of
Dec. 31, 1999, has no par value but has a $50 per share stated value.
As indicated in the title, the stock pays a dividend of $2.60 per
share annually, payable quarterly on March 15, June 15, Sept. 15 and
Dec. 15. Dividends on this stock are cumulative and in preference to
dividends on all other classes of stock. Except for any shares held
by Norfolk Southern Railway Company subsidiaries and/or in a fiduciary
capacity, each share is entitled to one vote per share on all matters,
voting as a single class with holders of other stock. Should
dividends become delinquent for six quarters, this class of stock,
voting as a class, may elect two directors so long as any default in
dividend payments continues. The stock is redeemable at the option of
Norfolk Southern Railway Company at $50 per share plus accrued
dividends. On liquidation, the stock is entitled to $50 per share
plus accrued dividends before any amounts are paid on any other class
of stock.
<PAGE> PAGE 24
Item 6. Selected Financial Data.
- ------ -----------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Five-Year Financial Review
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
($ in millions)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Railway operating
revenues $ 5,114 $ 4,221 $ 4,223 $ 4,101 $ 4,012
Railway operating
expenses 4,611 3,178 3,010 2,936 2,949
------- ------- ------- ------- -------
Income from
railway operations 503 1,043 1,213 1,165 1,063
Other income (expense)
- net 42 90 (49) 39 44
Interest expense on
debt (39) (25) (30) (34) (33)
------- ------- ------- ------- -------
Income before
income taxes 506 1,108 1,134 1,170 1,074
Provision for income
taxes 174 383 380 401 372
------- ------- ------- ------- -------
Net income $ 332 $ 725 $ 754 $ 769 $ 702
======= ======= ======= ======= =======
FINANCIAL POSITION:
Total assets $12,632 $12,017 $11,827 $11,053 $10,752
Total long-term debt,
including current
maturities $ 866 $ 760 $ 606 $ 598 $ 574
Stockholders' equity $ 5,385 $ 6,137 $ 6,392 $ 5,772 $ 5,645
OTHER:
Capital expenditures $ 915 $ 1,002 $ 884 $ 754 $ 713
Number of stockholders
at year-end 2,109 2,317 2,519 2,763 3,025
Average number
of employees (1) 30,897 24,185 23,323 23,361 24,488
</TABLE>
(1) The employee count includes NS' employees whose primary duties relate
to rail operations.
<PAGE> PAGE 25
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations.
-----------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and Notes beginning on Page 41 and
the Five-Year Financial Review on Page 24.
COMMENCEMENT OF OPERATIONS OVER CONRAIL'S LINES
On June 1, 1999 (the "Closing Date"), NS Rail began operating a
substantial portion of Conrail's properties (NS Rail'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 48). As a result, both the railroad route miles operated
by NS Rail and the number of its employees increased by approximately 50%
on that date. Results for 1999 reflect five months (January through May)
of operating the former NS Rail system and seven months (June through
December) of operations that include the Northern Region.
Difficulties encountered in the assimilation of the Northern Region
into NS Rail'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 Rail's financial position,
results of operations and liquidity.
SUMMARIZED RESULTS OF OPERATIONS
1999 Compared with 1998
- -----------------------
Net income in 1999 was $332 million, a decrease of 54%. The decline
was largely the result of a 52% decrease in income from railway
operations, which reflected the difficulties in integrating the Northern
Region and a sharp decline in export coal traffic. In addition, railway
operating expenses included $168 million ($103 million after taxes) of
costs incurred on the Closing Date for contractual obligations,
principally to former Conrail employees, and expenses arising from the
license of intangible assets owned by NS (see Note 2 on Page 48). Lower
nonoperating income (see Note 3 on Page 52) and higher interest expense
on debt (a result of increased debt and lower capitalized interest) also
contributed to the decline in net income.
1998 Compared with 1997
- -----------------------
Net income in 1998 was $725 million, a decrease of 4%, compared with
1997. The decline was principally due to a 14% decline in income from
railway operations, somewhat offset by higher nonoperating income (see
Note 3 on Page 52).
<TABLE>
RAILWAY OPERATING REVENUES AND EXPENSES
(Shown as a graph in the Annual Report to Stockholders)
<CAPTION>
($ in millions) 1999 1998 1997 1996 1995
--------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $5,114 $4,221 $4,223 $4,101 $4,012
Expenses 4,611 3,178 3,010 2,936 2,949
</TABLE>
<PAGE> PAGE 26
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
- --------------------------
Railway operating revenues were $5.1 billion in 1999, compared with
$4.2 billion in both 1998 and 1997. Revenues in 1999 reflect the
commencement of operations in the Northern Region on June 1. Revenues
were lower than expected because of service issues associated with the
expansion of the network and a sharp decline in export coal traffic. The
following table presents a three-year comparison of revenues by market
group.
<TABLE>
RAILWAY OPERATING REVENUES BY MARKET GROUP
<CAPTION>
($ 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 749 539 547
------- ------- -------
Total $ 5,114 $ 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 for most market groups
principally due to the effects of the 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 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 (114) (50)
------- -------
Total $ 893 $ (2)
======= =======
</TABLE>
<PAGE> PAGE 27
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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 26% of
total railway operating revenues in 1999, and 88% of coal shipments
originated on lines operated by NS Rail. 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 Rail 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 Rail-delivered coal.
NS Rail 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 Rail produce coals that satisfy the
Phase II requirements of the Clean Air Act Amendments. In the Northern
Region, NS Rail 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 Rail-served utilities should continue to provide a market
for other NS Rail-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 Rail's lines; however, if sustained, the decision could have an
adverse effect on these coal mining operations and on NS Rail's coal
traffic and revenues.
<PAGE> PAGE 28
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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 Rail's 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.
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 Rail-served Toyota plant
in Princeton, Ind., and the new vehicle parts distribution center in
Dayton, Ohio, also contributed to the increase. NS Rail's 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.
<PAGE> PAGE 29
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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 Rail 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.
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 Rail 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 Rail serves improved shipments of
plastic pellets. Chemicals shipments also increased through NS Rail's
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 Rail-served facilities with new and expanded plant capacity increased
shipments of plastics and petroleum products, somewhat offsetting these
reductions. NS Rail 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.
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 Rail-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.
Metals and construction traffic volume increased 57%, and revenues
increased 51%, in 1999, due to the addition of Northern Region traffic.
NS Rail's 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 Rail's service territory offset
<PAGE> PAGE 30
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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 Rail's
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 Rail's 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.
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 Rail's 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.
INTERMODAL traffic volume increased 31%, and revenues increased 39%,
in 1999, due to the addition of Northern Region traffic. NS was awarded
the majority of Conrail's postal business, and NS Rail provides the rail
service related to that business. Intermodal traffic volume 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 Rail, moved almost all
of this volume to CSX after their strategic alliance. Most of this
traffic had been shifted by December 1999.
<PAGE> PAGE 31
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Railway Operating Expenses
- --------------------------
Railway operating expenses increased 45% in 1999, while carloadings
increased 24%. The expense increase was principally attributable to the
commencement of operations in the Northern Region, and includes
significant costs arising from the service issues experienced after the
Closing Date and the contractual obligations incurred on the Closing
Date. In addition, a licensing fee for the use of certain intangible
assets owned by NS that became effective Nov. 1, 1998, also contributed
to the increase in expenses (see Note 2, "General," on Page 48).
Railway operating expenses increased 6% 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 90.2% in
1999, compared with 75.3% 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
almost half of the increase in the railway operating ratio in 1999. The
$168 million of contractual obligations incurred on the Closing Date
increased the railway operating ratio by 3.3 percentage points. The
remaining increase was attributable to: (1) the change in traffic mix
(more resource-intensive traffic, such as automotive and intermodal) and
the new traffic in the Northern Region, coupled with the decrease in
export coal traffic; and (2) the NS licensing fee.
In 1998, the railway operating ratio was adversely affected by
Conrail-related integration expenses and a change in traffic mix related
to the growth in automotive traffic coupled with the change in coal
traffic mix. Automotive traffic includes some of NS Rail's most time-
sensitive and resource-intensive business, requiring more trains,
increased handling costs and higher equipment rents.
The railway operating ratio is not expected to return to pre-Closing
Date levels in the near term, due to changes in NS Rail's traffic mix and
the higher cost structure of the Conrail properties it now operates.
However, the railway operating ratio is expected to show favorable year-
to-year comparisons after the first quarter of 2000.
<TABLE>
RAILWAY OPERATING RATIO
(Shown as a graph in the Annual Report to Stockholders)
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
90.2% 75.3% 71.3% 71.6% 73.5%
</TABLE>
The following table shows the changes in railway operating expenses
summarized by major classifications.
<TABLE>
RAILWAY OPERATING EXPENSES
Increases (Decreases)
<CAPTION>
($ in millions) 1999 vs. 1998 1998 vs. 1997
--------------- ------------- -------------
<S> <C> <C>
Compensation and benefits $ 475 $ 87
Materials, services and rents 373 118
Conrail rents and services 279 --
Depreciation 29 18
Diesel fuel 81 (53)
Casualties and other claims 43 (28)
Other 153 26
------- -------
Total $ 1,433 $ 168
======= =======
</TABLE>
<PAGE> PAGE 32
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Compensation and benefits, which represented 43% of total railway
operating expenses, increased 32% 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. In addition, the contractual obligations
incurred in employing a substantial portion of Conrail's work force also
contributed to the increase. 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 NS Rail's
"Compensation and benefits" expenses (see Note 13 on Page 58).
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 Rail's business. The cost of these work force
reductions will be reflected in NS Rail's expenses in the first quarter
of 2000.
Materials, services and rents expenses include 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 46% in
1999 and 17% in 1998.
The 1999 increase reflected the expanded operations in the Northern
Region and additional costs attributable to the service issues, including
costs for alternate transportation to meet the needs of customers.
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 Rail of using
equipment (mostly freight cars) owned by other railroads or private
owners, less the rent paid to NS Rail for the use of its equipment,
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 Rail, 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 Rail-owned freight cars and auto
racks.
<PAGE> PAGE 33
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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 $279 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.
Depreciation expense (see Note 1, "Properties," on Page 48 for NS
Rail's depreciation policy) was up 7% in 1999 and 4% in 1998. Increases
in both years were due to property additions, reflecting recent
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.
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 Rail 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 Rail maintains substantial amounts of commercial insurance for
potential third-party liability and property damage claims. It also
retains reasonable levels of risk through self-insurance.
<PAGE> PAGE 34
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Other expenses increased 87% in 1999 and 17% in 1998. The 1999
increase resulted from: (1) a licensing fee for the use of certain
intangible assets owned by NS that became effective Nov. 1, 1998 (see
Note 2, "General," on Page 48); (2) the expansion of operations,
including property and other taxes related to the Northern Region; and
(3) costs arising from the service issues. The 1998 increase principally
resulted from: (1) the licensing fee charged by NS; (2) higher property
and other taxes, due to the effects of favorable adjustments in prior
years resulting from settlements with taxing authorities; and
(3) increased travel expenses, mostly attributable to planning for the
Conrail transaction.
Income Taxes
- ------------
Income tax expense in 1999 was $174 million, for an effective rate
of 34%, compared with an effective rate of 35% in 1998 and 34% in 1997.
The effective rates in all three years were below the statutory
federal and state rates -- results of 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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities, NS Rail's principal source of
liquidity, decreased $821 million, or 59%, in 1999, and $30 million, or
2%, in 1998. Both declines reflected the reductions in income from
operations, mitigated somewhat by lower income tax payments. In addition,
1999 was affected by NS Rail's dividend of accounts receivable to NS (see
Note 2, "Noncash Dividends," on Page 50). The large changes in "Accounts
receivable" and "Other short-term liabilities" in the 1999 cash flow
statement reflect the commencement of operations in the Northern Region.
Cash used for investing activities in 1999 decreased 19%, but
increased slightly in 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 $60 million in proceeds from the sale of certain
licensing arrangements and the sale of NS Rail's signboard business.
Property additions account for most of the spending in this category.
The following tables show capital spending, track and equipment
statistics for the past five years. Capital expenditures include amounts
relating to capitalized leases, which are excluded from the Consolidated
Statements of Cash Flows (see Note 8, "Capital Lease Obligations," on
Page 56).
<TABLE>
CAPITAL EXPENDITURES
(Also shown as a graph in the Annual Report to Stockholders)
<CAPTION>
($ in millions) 1999 1998 1997 1996 1995
--------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Road $ 559 $ 583 $ 580 $ 428 $ 379
Equipment 356 419 304 326 333
Other property -- -- -- -- 1
------- ------- ------- ------- -------
Total $ 915 $ 1,002 $ 884 $ 754 $ 713
======= ======= ======= ======= =======
</TABLE>
<PAGE> PAGE 35
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
Capital expenditures decreased 9% in 1999, but increased 13% 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.
<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
AVERAGE AGE OF OWNED RAILWAY EQUIPMENT
(In years) 1999 1998 1997 1996 1995
---------- ---- ---- ---- ---- ----
Freight cars 24.4 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 Rail-owned equipment, approximately 20% of the
freight car fleet and 30% of the locomotive fleet is leased from PRR (see
Note 2 on Page 48).
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 Rail 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 Rail's 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 Rail has budgeted $747 million for capital
expenditures. In addition, NS Rail 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 Rail also plans to lease 475 articulated bilevels for automobile
service.
Cash flows from financing activities in 1999 were significantly
affected by NS Rail's dividend of accounts receivable to NS: absent this
dividend, NS Rail likely would have advanced to NS the cash received for
collection of those receivables. "Advances to NS" typically account for
most of the cash used for financing activities and reflect NS'
requirements (see Note 2 on Page 48). Proceeds from borrowings included
amounts received in 1999 and 1998 from the sale of equipment trust
certificates and $149 million of borrowings in 1999 from a PRR subsidiary
(see Note 2 on Page 48).
NS is subject to various financial covenants with respect to its
debt and under its credit agreement, including a minimum net worth
requirement, a maximum leverage ratio restriction and certain
restrictions on issuance of further debt. As the major NS subsidiary, NS
Rail is subject to certain of those covenants.
<PAGE> PAGE 36
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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. NS Rail 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.
Market Risks and Hedging Activities
- -----------------------------------
NS Rail does not engage in the trading of derivatives. NS Rail
manages its overall exposure to fluctuations in interest rates by issuing
both fixed- and floating-rate debt instruments and by entering into
interest-rate hedging transactions to achieve a targeted mix within its
debt portfolio.
Of NS Rail's total debt outstanding (see Note 8 on Page 55), all is
fixed-rate debt, except for most capital leases. As a result, NS Rail's
debt subject to interest rate exposure was $281 million on Dec. 31, 1999.
A 1% increase in interest rates would increase NS Rail's total annual
interest expense related to all its variable debt by approximately $3
million. Management considers it unlikely that interest rate fluctuations
applicable to these instruments will result in a material adverse effect
on NS Rail's financial position, results of operations or liquidity.
The capital leases, which carry an average fixed rate of 7.1%, were
effectively converted to variable rate obligations using interest rate
swap agreements. On Dec. 31, 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 Rail
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 Rail
is exposed to financial market risk relative to Japan. Counterparties to
the interest rate swaps and Japanese banks holding yen deposits are major
financial institutions believed by Management to be creditworthy.
Accounting Changes and New Pronouncements
- -----------------------------------------
As discussed in Note 1 under "Required Accounting Changes" on
Page 48, NS Rail adopted AICPA Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use" in 1999.
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
Rail expects to adopt SFAS No. 133 effective Jan. 1, 2001. This adoption
is not expected to have a material effect on NS Rail's consolidated
financial statements.
Lawsuits
- --------
Norfolk Southern Railway Company and certain subsidiaries are
defendants in numerous lawsuits relating principally to railroad
operations.
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 Norfolk Southern
Railway Company. The verdict was returned in a class action suit
<PAGE> PAGE 37
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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 this matter 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 Rail's ultimate liability
is unlikely to have a material adverse effect on NS Rail's financial
position, results of operations or liquidity.
Environmental Matters
- ---------------------
NS Rail is subject to various jurisdictions' environmental laws and
regulations. It is NS Rail's policy to record a liability where such
liability or loss is probable and its amount can be estimated reasonably.
Claims, if any, against third parties for recovery of cleanup costs
incurred by NS Rail are reflected as receivables (when collection is
probable) in the balance sheet and are not netted against the associated
NS Rail liability. Environmental engineers regularly participate in
ongoing evaluations of all identified sites and in determining any
necessary adjustments to initial liability estimates. NS Rail also has
established an Environmental Policy Council, composed of senior managers,
to oversee and interpret its environmental policy.
Operating expenses for environmental matters totaled approximately
$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 Rail
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 Rail's 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 Rail's 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 Rail anticipates that much of this liability will be paid
out over five years; however, some costs will be paid out over a longer
period.
At some of the 126 locations, certain NS Rail subsidiaries, usually
in conjunction with a number of other parties, have been identified as
potentially responsible parties by the Environmental Protection Agency
(EPA) or similar state authorities under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, or comparable state
statutes, which often impose joint and several liability for cleanup
costs.
<PAGE> PAGE 38
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
With respect to known environmental sites (whether identified by NS
Rail or by the EPA or comparable state authorities), estimates of NS
Rail's ultimate potential financial exposure for a given site or in the
aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available cleanup techniques, the
likely development of new cleanup technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it), and evolving statutory and regulatory
standards governing liability.
The risk of incurring environmental liability -- for acts and
omissions, past, present and future -- is inherent in the railroad
business. Some of the commodities in NS Rail's traffic mix, particularly
those classified as hazardous materials, can pose special risks that NS
Rail and its subsidiaries work diligently to minimize. In addition,
several NS Rail subsidiaries own, or have owned, land used as operating
property, or which is leased or may have been leased and operated by
others, or held for sale.
Because environmental problems that are latent or undisclosed may
exist on these properties, there can be no assurance that NS Rail will
not incur environmentally related liabilities or costs with respect to
one or more of them, the amount and materiality of which cannot be
estimated reliably at this time. Moreover, lawsuits and claims involving
these and other now-unidentified environmental sites and matters are
likely to arise from time to time. The resulting liabilities could have a
significant effect on financial condition, results of operations or
liquidity in a particular year or quarter.
However, based on its assessments of the facts and circumstances now
known, Management believes that it has recorded the probable costs for
dealing with those environmental matters of which the Corporation is
aware. Further, Management believes that it is unlikely that any
identified matters, either individually or in the aggregate, will have a
material adverse effect on NS Rail's financial position, results of
operations or liquidity.
Labor Agreements
- ----------------
Approximately 85% of NS Rail's 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 Rail's 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 Rail, a capital-intensive company, has most of its capital invested in
such assets. The replacement cost of these assets, as well as the related
depreciation expense, would be substantially greater than the amounts
reported on the basis of historical cost.
<PAGE> PAGE 39
Item 7. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations. (continued)
-----------------------------------
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 Rail 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 Rail, 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
Rail and on its customers cannot be predicted with certainty; however, NS
Rail serves a number of efficient power producers and is working
diligently to assure that its customers remain competitive in this
evolving environment.
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 Conditions
and Results of Operations," on Page 36 under the heading "Market Risks
and Hedging Activities."
<PAGE> PAGE 40
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Quarterly Financial Data
(Unaudited)
<CAPTION>
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
($ in millions, except per share amounts)
<S> <C> <C> <C> <C>
1999
----
Railway operating revenues $1,030 $1,181 $1,467 $1,436
Income from railway operations 222 22 137 122
Net income 146 13 84 89
Dividends per serial preferred
share $ 0.65 $ 0.65 $ 0.65 $ 0.65
1998
----
Railway operating revenues $1,066 $1,079 $1,048 $1,028
Income from railway operations 251 294 258 240
Net income 168 206 167 184
Dividends per serial preferred
share $ 0.65 $ 0.65 $ 0.65 $ 0.65
</TABLE>
Index to Financial Statements: Page
----------------------------- ----
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997 41
Consolidated Balance Sheets
As of December 31, 1999 and 1998 42
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997 44
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997 46
Notes to Consolidated Financial Statements 47
Independent Auditors' Report 65
The Index to Consolidated Financial Statement Schedule appears in
Item 14 on Page 68.
<PAGE> PAGE 41
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Income
<CAPTION>
Years ended December 31,
1999 1998 1997
---- ---- ----
($ in millions)
<S> <C> <C> <C>
RAILWAY OPERATING REVENUES $ 5,114 $ 4,221 $ 4,223
RAILWAY OPERATING EXPENSES:
Compensation and benefits 1,967 1,492 1,405
Materials, services and rents 1,181 808 690
Conrail rents and services (Note 2) 279 -- --
Depreciation 463 434 416
Diesel fuel 255 174 227
Casualties and other claims 138 95 123
Other 328 175 149
------- ------- -------
Railway operating expenses 4,611 3,178 3,010
------- ------- -------
Income from railway operations 503 1,043 1,213
Charge for credit facility costs -- -- (77)
Other income - net (Note 3) 42 90 28
Interest expense on debt (Note 6) (39) (25) (30)
------- ------- -------
Income before income taxes 506 1,108 1,134
Provision for income taxes (Note 4) 174 383 380
------- ------- -------
NET INCOME $ 332 $ 725 $ 754
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> PAGE 42
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets
<CAPTION>
As of December 31,
1999 1998
---- ----
($ in millions)
<S> <C> <C>
ASSETS
Current assets:
Short-term investments $ 12 $ 44
Accounts receivable net of allowance for
doubtful accounts of $5 million and $4 million,
respectively 681 508
Due from Conrail (Note 2) 77 --
Materials and supplies 98 59
Deferred income taxes (Note 4) 124 110
Other current assets 144 130
------- -------
Total current assets 1,136 851
Due from NS - net (Note 2) -- 43
Investments (Notes 5 and 14) 624 990
Properties less accumulated depreciation (Note 6) 10,390 9,985
Other assets 482 148
------- -------
TOTAL ASSETS $12,632 $12,017
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable (Note 7) $ 787 $ 577
Income and other taxes 132 139
Due to NS - net (Note 2) 483 --
Notes and accounts payable to Conrail (Note 2) 184 --
Other current liabilities (Note 7) 152 73
Current maturities of long-term debt (Note 8) 85 141
------- -------
Total current liabilities 1,823 930
Long-term debt (Note 8) 781 619
Other liabilities (Note 10) 1,044 909
Minority interests 3 2
Deferred income taxes (Note 4) 3,596 3,420
------- -------
TOTAL LIABILITIES 7,247 5,880
------- -------
<PAGE> PAGE 43
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Balance Sheets (continued)
As of December 31,
1999 1998
---- ----
($ in millions)
Stockholders' equity:
Serial preferred stock (Note 11) 55 55
Common Stock (Note 11) 167 167
Additional paid-in capital 673 548
Accumulated other comprehensive income (Note 12) 259 414
Retained income 4,231 4,953
------- -------
TOTAL STOCKHOLDERS' EQUITY 5,385 6,137
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,632 $12,017
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> PAGE 44
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows
<CAPTION>
Years ended December 31,
1999 1998 1997
---- ---- ----
($ in millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 332 $ 725 $ 754
Reconciliation of net income to net cash
provided by operating activities:
Depreciation 465 435 417
Deferred income taxes 5 100 70
Charge for credit facility costs -- -- 77
Nonoperating gains on properties and
investments (44) (31) (9)
Accounts receivable dividend to NS
(Note 2) (491) -- --
Changes in assets and liabilities
affecting operations:
Accounts receivable (173) 31 (23)
Materials and supplies (40) (1) 3
Other current assets and due from
Conrail (49) (15) (8)
Income tax liabilities 162 208 180
Other short-term liabilities 269 (11) (1)
Other - net 130 (54) (43)
------ ------ ------
Net cash provided by operating
activities 566 1,387 1,417
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (915) (898) (838)
Property sales and other transactions 65 54 54
Investments, including short-term (105) (97) (175)
Investment sales and other transactions 311 143 165
------ ------ ------
Net cash used for investing
activities (644) (798) (794)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (Note 2) (3) (3) (3)
Credit facility costs paid -- -- (72)
Advances to NS (Note 2) (105) (603) (760)
Advances and repayments from NS (Note 2) 17 6 101
Proceeds from borrowings 337 67 2
Debt repayments (168) (63) (56)
------ ------ ------
Net cash provided by (used for)
financing activities 78 (596) (788)
------ ------ ------
Net increase (decrease) in cash
and cash equivalents -- (7) (165)
CASH AND CASH EQUIVALENTS:
At beginning of year -- 7 172
------ ------ ------
At end of year $ -- $ -- $ 7
====== ====== ======
(continued)
<PAGE> PAGE 45
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Cash Flows (continued)
Years ended December 31,
1999 1998 1997
---- ---- ----
($ in millions)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 70 $ 61 $ 60
Income taxes $ 5 $ 74 $ 169
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> PAGE 46
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
Accumu-
Addi- lated Other
Serial tional Compre-
Preferred Common Paid-In hensive Retained
Stock Stock Capital Income Income Total
-------- ------ ------- ---------- -------- -----
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31,
1996 $ 55 $ 167 $ 525 $ 398 $4,627 $5,772
Comprehensive income-
1997
Net income 754 754
Other comprehensive
income (Note 12) 16 16
------
Total comprehensive
income 770
Serial preferred stock,
$2.60 per share cash
dividend (3) (3)
Noncash dividends on
Common Stock (Note 2) (147) (147)
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1997 55 167 525 414 5,231 6,392
Comprehensive income-
1998
Net income 725 725
Other comprehensive
income (Note 12) -- --
------
Total comprehensive
income 725
Serial preferred stock,
$2.60 per share cash
dividend (3) (3)
Noncash dividends on
Common Stock (Note 2) (1,000) (1,000)
Capital contribution
(Note 2) 23 23
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1998 55 167 548 414 4,953 6,137
Comprehensive income-
1999
Net income 332 332
Other comprehensive
income (Note 12) (155) (155)
------
Total comprehensive
income 177
Serial preferred stock,
$2.60 per share cash
dividend (3) (3)
Noncash dividends on
Common Stock (Note 2) (1,051) (1,051)
Capital contribution
(Note 2) 125 125
------ ------ ------ ------ ------ ------
BALANCE DECEMBER 31,
1999 $ 55 $ 167 $ 673 $ 259 $4,231 $5,385
====== ====== ====== ====== ====== ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> PAGE 47
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES
(A Majority-Owned Subsidiary of Norfolk Southern Corporation)
Notes to Consolidated Financial Statements
The following Notes are an integral part of the Consolidated Financial
Statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
- -----------------------
Norfolk Southern Railway Company (NSR), together with its
consolidated subsidiaries (collectively NS Rail), is engaged principally
in the transportation of freight by rail, operating approximately 21,800
route miles, primarily in the East and Midwest (see Note 2). These
financial statements include NSR and its majority-owned and controlled
subsidiaries on a consolidated basis. All significant intercompany
balances and transactions have been eliminated in consolidation.
NS Rail transports raw materials, intermediate products and finished
goods classified in the following market groups: 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 26% 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 of the United States.
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 and all marketable equity
securities consisting principally of NS Common Stock, were designated as
"available-for-sale." Accordingly, unrealized gains and losses, net of
taxes, are recognized in "Accumulated Other Comprehensive Income" (see
Note 12).
Investments where NS Rail has the ability to exercise significant
influence over, but does not control, the entity are accounted for using
the equity method in accordance with APB Opinion No. 18, "The Equity
Method of Accounting for Investments in Common Stock."
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."
<PAGE> PAGE 48
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Properties
- ----------
"Properties" are stated principally at cost and are depreciated
using group depreciation. Rail is depreciated primarily on the basis of
use measured by gross ton-miles. Other properties are depreciated
generally using the straight-line method over estimated service or lease
lives. NS Rail capitalizes interest on major capital projects during the
period of their construction. 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 - Net"
(see Note 3).
NS Rail reviews the carrying amount of properties whenever events or
changes in circumstances indicate that such carrying amount may not be
recoverable based on future undiscounted cash flows or estimated net
realizable value. Assets that are deemed impaired as a result of such
review are recorded at the lower of carrying amount or fair value.
Revenue Recognition
- -------------------
Revenue is recognized proportionally as a shipment moves from origin
to destination.
Derivatives
- -----------
NS Rail does not engage in the trading of derivatives. NS Rail 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.
Required Accounting Changes
- ---------------------------
Effective Jan. 1, 1999, NS Rail 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 Rail's consolidated financial statements.
Reclassifications
- -----------------
Certain amounts in the financial statements and Notes thereto have
been reclassified to conform to the 1999 presentation.
2. RELATED PARTIES
General
- -------
Norfolk Southern Corporation (NS) is the parent holding company of
NSR. The costs of functions performed by NS are charged to NS Rail. In
addition, effective Nov. 1, 1998, NS charges NS Rail a revenue-based
licensing fee (which totaled $77 million for 1999) for use of certain
intangible assets owned by NS. Rail operations are coordinated at the
holding company level by the NS Vice Chairman and Chief Operating
Officer.
NS Rail owns 21,627,902 shares of NS common stock.
<PAGE> PAGE 49
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. RELATED PARTIES (continued)
Operations Over Conrail's Lines
- -------------------------------
Overview -- NS and CSX Corporation (CSX) jointly own Conrail Inc.
(Conrail), whose primary subsidiary is Consolidated Rail Corporation
(CRC), the major 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).
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 Rail's route miles and its employees
increased by approximately 50 percent. NS Rail and CSXT now provide
substantially all rail freight services on Conrail's route system,
perform or are responsible for performing most services incident to
customer freight contracts and employ the majority of Conrail's former
work force. Consequently, NS Rail began to receive all freight revenues
and incur all expenses on the PRR lines.
Since June 1, 1999, difficulties in integrating the PRR routes and
assets have affected adversely both NS Rail'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
<PAGE> PAGE 50
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. RELATED PARTIES (continued)
needs of shippers. A long-term failure by NS Rail to integrate successfully
these PRR properties could have a substantial adverse impact on NS Rail's
financial position, results of operations and liquidity.
NS Rail's railway operating expenses in 1999 included $168 million
($103 million after taxes) for contractual obligations, principally to
former Conrail employees. Most of these costs are expected to be paid in
the two years following the Closing Date, and $42 million of such is
classified on NS Rail's 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 Rail's
balance sheet. Through Dec. 31, 1999, NS Rail has paid $24 million of
these costs. In addition, NS Rail has incurred $9 million and expects to
incur an additional $10 million of costs for relocations of former
Conrail employees. As definitive plans are determined and communicated,
costs, if any, for severing or relocating NS Rail employees and for
disposing of NS Rail facilities also will be charged to operating
expenses.
Until the Closing Date, NS Rail and CRC had transactions with each
other in the customary course of handling interline traffic. As of
Dec. 31, 1999, most of the amounts receivable or payable related to these
transactions have been satisfied.
NS Rail provides certain general and administrative support
functions to Conrail, the fees for which are billed in accordance with
several service-provider arrangements.
"Conrail rents and services," a new line on the income statements
beginning June 1, 1999, includes expenses for amounts due to PRR and CRC
for use by NS Rail of operating properties and equipment, operation of
the Shared Assets Areas and continued operation of certain facilities
during a transition period.
"Due from Conrail" includes $39 million for vacation liability
related to the portion of CRC's work force that became NS Rail employees
on the Closing Date. NS Rail 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 Rail 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.
Noncash Dividends
- -----------------
NSR declared and issued to NS noncash dividends of $1.1 billion in
1999, $1.0 billion in 1998 and $147 million in 1997. The 1999 amount
included a $491 million dividend of accounts receivable declared December
1. The remainder of the 1999 dividends and all of the 1998 and 1997
dividends were settled by reduction of NSR's interest-bearing advances
due from NS.
Noncash dividends are excluded from the Consolidated Statements of
Cash Flows.
Sale of Accounts Receivable
- ---------------------------
Effective Dec. 1, 1999, NS Rail sells its rail accounts receivable
to NS. The sales are accounted for as secured borrowings, and the
liability is included in "Due to NS - net" in the Consolidated Balance
Sheet. As of Dec. 31, 1999, "Accounts receivable" included $388 million
of such sold receivables.
NS Rail services the receivables on behalf of NS for a fee that
approximates the costs of servicing. The fee is reflected in the discount
applied to receivables sold. The discount is included in "Other income -
net" in the Consolidated Statement of Income and is a component of "Other
interest expense" in Note 3.
<PAGE> PAGE 51
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
2. RELATED PARTIES (continued)
Intercompany Accounts
- ---------------------
<TABLE>
December 31,
------------
1999 1998
---- ----
<CAPTION>
Average Average
Interest Interest
($ in millions) Balance Rate Balance Rate
--------------- ------- -------- ------- --------
<S> <C> <C> <C> <C>
Due from NS:
Advances $ 75 4% $ 354 5%
Due to NS:
Advances (234) 5% --
Notes (324) 7% (311) 7%
------ ------
Due (to) from
NS - net $ (483) $ 43
====== ======
</TABLE>
Interest is applied to certain advances at the average NS yield on
short-term investments and to the notes at specified rates. "Interest
income" includes interest on amounts due from NS of $13 million in 1999,
$48 million in 1998 and $15 million in 1997.
"Other interest expense" includes interest on amounts due to NS of
$31 million in 1999, $23 million in 1998 and $17 million in 1997.
Intercompany Federal Income Tax Accounts
- ----------------------------------------
In accordance with the NS Tax Allocation Agreement, intercompany
federal income tax accounts are recorded between companies in the NS
consolidated group. NS Rail had long-term intercompany federal income tax
payables (which are included in "Deferred income taxes" in the
Consolidated Balance Sheets) of $809 million at Dec. 31, 1999, and
$633 million at Dec. 31, 1998.
Capital Contributions
- ---------------------
In 1999, NS Rail recognized capital contributions for a transfer of
pension assets NS received from the Conrail pension plan and for benefits
NS Rail received related to tax credits generated by a nonrail subsidiary
of NS.
In 1998, NS Rail recognized a capital contribution for benefits it
received related to tax credits generated by a nonrail subsidiary of NS.
Cash Required for NS Debt
- -------------------------
To finance the cost of the Conrail transaction, NS issued and sold
commercial paper and $4.3 billion of unsecured notes. A significant
portion of the funding for the interest and repayments on this and other
NS debt is expected to be provided by NS Rail.
NS is subject to various financial covenants with respect to its
debt and under its credit agreement, including a minimum net worth
requirement, a maximum leverage ratio restriction and certain
restrictions on issuance of further debt. As a major NS subsidiary,
NS Rail is subject to certain of those covenants.
<PAGE> PAGE 52
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
3. OTHER INCOME - NET
<CAPTION>
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
<S> <C> <C> <C>
Gains from sales of properties
and investments $ 44 $ 31 $ 9
Rental income 32 24 22
Interest income (Note 2) 20 58 31
Dividends from NS 17 17 17
Other interest expense (Note 2) (58) (45) (45)
Corporate-owned life insurance
- net (3) 11 7
Taxes on nonoperating property (3) (2) (2)
Other - net (7) (4) (11)
------- ------- -------
Total $ 42 $ 90 $ 28
======= ======= =======
</TABLE>
4. INCOME TAXES
<TABLE>
Provision for Income Taxes
- --------------------------
<CAPTION>
($ in millions) 1999 1998 1997
--------------- ---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 159 $ 269 $ 279
State 10 14 31
------- ------- -------
Total current taxes 169 283 310
------- ------- -------
Deferred:
Federal 8 87 75
State (3) 13 (5)
------- ------- -------
Total deferred taxes 5 100 70
------- ------- -------
Provision for income
taxes $ 174 $ 383 $ 380
======= ======= =======
</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> <C> <C> <C>
Federal income tax
at statutory rate $ 177 35 $ 388 35 $ 397 35
State income taxes,
net of federal tax
benefit 4 1 18 2 17 2
Corporate-owned life
insurance -- -- (12) (1) (10) (1)
Other - net (7) (2) (11) (1) (24) (2)
----- --- ----- --- ----- ---
Provision for
income taxes $ 174 34 $ 383 35 $ 380 34
===== === ===== === ===== ===
</TABLE>
<PAGE> PAGE 53
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
4. INCOME TAXES (continued)
Inclusion in Consolidated Return
- --------------------------------
NS Rail is included in the consolidated federal income tax return of
NS. The provision for current income taxes in the Consolidated Statements
of Income reflects NS Rail's portion of NS' consolidated tax provision.
Tax expense or tax benefit is recorded on a separate company basis.
Deferred Tax Assets and Liabilities
- -----------------------------------
Certain items are reported in different periods for financial
reporting and income tax purposes. Deferred tax assets and liabilities
were recorded in recognition of these differences.
<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 $ 158
Employee benefits 95 124
Retiree health and death benefit
obligation 125 126
Taxes, including state and
property 160 157
Other 2 --
-------- --------
Deferred tax assets 550 565
-------- --------
Deferred tax liabilities:
Property (3,029) (2,975)
Unrealized holding gains (153) (237)
Other (31) (30)
-------- --------
Deferred tax liabilities (3,213) (3,242)
Intercompany federal tax payable
- net (809) (633)
-------- --------
Net deferred tax liability (3,472) (3,310)
Net current deferred
tax assets 124 110
-------- --------
Net long-term deferred tax
liability $ (3,596) $ (3,420)
======== ========
Except for amounts for which a valuation allowance has been
provided, Management believes the other deferred tax assets will be
realized.
Internal Revenue Service (IRS) Reviews
- --------------------------------------
Consolidated federal income tax returns have been examined and
Revenue Agent Reports have been received for all years up to and
including 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 54
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
</TABLE>
<TABLE>
5. INVESTMENTS
<CAPTION>
December 31,
------------
($ in millions) 1999 1998
--------------- ---- ----
<S> <C> <C>
Marketable equity securities at
fair value (Note 14) $ 445 $ 687
Corporate-owned life insurance at
net cash surrender value 150 282
Other 29 21
----- -----
Total $ 624 $ 990
===== =====
</TABLE>
<TABLE>
6. PROPERTIES
<CAPTION>
December 31, Depreciation
($ in millions) 1999 1998 Rate for 1999
--------------- ---- ---- -------------
<S> <C> <C> <C>
Railway property:
Road $ 9,620 $ 9,228 2.8%
Equipment 5,395 5,117 4.1%
Other property 83 77 2.5%
------- -------
15,098 14,422
Less: Accumulated depreciation 4,708 4,437
------- -------
Net properties $10,390 $ 9,985
======= =======
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
$54 million, $46 million and $47 million, respectively, of which
$15 million, $21 million and $17 million was capitalized.
<PAGE> PAGE 55
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
</TABLE>
<TABLE>
7. CURRENT LIABILITIES
<CAPTION>
December 31,
------------
($ in millions) 1999 1998
--------------- ---- ----
<S> <C> <C>
Accounts payable:
Accounts and wages payable $ 324 $ 260
Casualty and other claims 180 143
Equipment rents payable - net 135 72
Vacation liability 123 80
Other 25 22
------- -------
Total $ 787 $ 577
======= =======
Other current liabilities:
Accrued Conrail-related costs
(Note 2) $ 42 $ --
Interest payable 38 13
Liabilities for forwarded
traffic 37 27
Retiree health and death
benefit obligation (Note 13) 24 24
Other 11 9
------- -------
Total $ 152 $ 73
======= =======
</TABLE>
8. DEBT
<TABLE>
Long-Term Debt
- --------------
<CAPTION>
December 31,
------------
($ in millions) 1999 1998
--------------- ---- ----
<S> <C> <C>
Equipment obligations at an
average rate of 6.8%
maturing to 2014 $ 450 $ 377
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 34 34
------- -------
Total long-term debt 866 760
------- -------
Current maturities (85) (141)
------- -------
Long-term debt
less current maturities $ 781 $ 619
======= =======
</TABLE>
<PAGE> PAGE 56
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
8. DEBT (continued)
<CAPTION>
Long-term debt matures as follows:
<S> <C>
2001 $ 80
2002 75
2003 78
2004 76
2005 and subsequent years 472
------
Total $ 781
======
</TABLE>
The equipment obligations and the capitalized leases are secured by
liens on the underlying equipment.
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 $281 million, and the average interest rate was 6.3%. As a result,
NS Rail is exposed to the market risk associated with fluctuations in
interest rates. To date, the effects of the rate fluctuations have been
favorable and not material. Counterparties to the interest rate swap
agreements are major financial institutions believed by Management to be
creditworthy.
9. LEASE COMMITMENTS
NS Rail is committed under long-term lease agreements, which expire
on various dates through 2067, for equipment, lines of road and other
property. The following amounts do not include payments to PRR under the
Operating Agreement and lease agreements or to CRC under the SAA
agreements (see Note 2). Future minimum lease payments other than to PRR
and CRC are as follows:
<PAGE> PAGE 57
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
<TABLE>
9. LEASE COMMITMENTS (continued)
<CAPTION>
Operating Capital
($ in millions) Leases Leases
--------------- --------- -------
<S> <C> <C>
2000 $ 96 $ 47
2001 74 47
2002 62 47
2003 58 46
2004 50 46
2005 and subsequent
years 553 245
------ ------
Total $ 893 478
======
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 $ 117 $ 75 $ 68
Contingent rents 61 40 43
------ ------ ------
Total $ 178 $ 115 $ 111
====== ====== ======
</TABLE>
<TABLE>
10. 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 13) 256 264
Accrued Conrail-related
costs (Note 2) 102 --
Net pension obligation
(Note 13) 74 72
Other 337 302
------- -------
Total $ 1,044 $ 909
======= =======
</TABLE>
<PAGE> PAGE 58
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
11. STOCK
Preferred
- ---------
There are 10,000,000 shares of no par value serial preferred stock
authorized. This stock may be issued in series from time to time at the
discretion of the Board of Directors with any series having such voting
and other powers, designations, dividends and other preferences as deemed
appropriate at the time of issuance. On Dec. 31, 1999 and 1998, 1,197,027
shares of $2.60 Cumulative Preferred Stock, Series A (Series A Stock)
were issued, and 1,096,907 shares were held other than by subsidiaries,
including 176,705 shares held by NS. The Series A Stock has a $50 per
share stated value. The Series A Stock is callable at any time at $50 per
share plus accrued dividends and has one vote per share on all matters,
voting as a single class with holders of other stock.
Preference
- ----------
There are 10,000,000 shares of no par value serial preference stock
authorized. None of these shares has been issued.
Common
- ------
There are 50,000,000 shares of no par value common stock with a
stated value of $10 per share authorized. NS owned all 16,668,997 shares
issued and outstanding at Dec. 31, 1999 and 1998.
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
<TABLE>
"Accumulated other comprehensive income" reported in "Stockholders'
equity" included unrealized gains, net of taxes, on securities of
$272 million at Dec. 31, 1999, and $428 million at Dec. 31, 1998, (see
Note 14) 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 $ (242) $ 22 $ 25
Minimum pension liability 2 (23) --
Income taxes 85 1 (9)
------ ------ ------
Other comprehensive income $ (155) $ -- $ 16
====== ====== ======
</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 1999, $2 million in 1998 and less than
$1 million in 1997.
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
<TABLE>
NS Rail provides defined pension benefits, principally for salaried
employees, through participation in NS' funded and defined benefit
pension plans. NS Rail also provides specified health care and death
benefits to eligible retired employees and their dependents by
participating in welfare benefit plans sponsored by NS. Under the present
plans, which may be amended or terminated at NS' option, a defined
<PAGE> PAGE 59
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
percentage of health care expenses is covered, reduced by any deductibles,
co-payments, Medicare payments and, in some cases, coverage provided under
other group insurance policies. The following data relate to the combined
NS plans:
<CAPTION>
Pension Benefits Other Benefits
($ 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 60
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. 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.
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 $40 million.
In January 2000, NS announced a voluntary early retirement program
that included enhancements to pension benefits for eligible nonunion
employees. Approximately 1,180 employees, or 20% of NS' nonunion work
force, were eligible for the program. Benefits will be paid out of NS'
over-funded pension plan.
<TABLE>
Pension and other postretirement benefit costs are determined based
on actuarial valuations that reflect appropriate assumptions as of the
measurement date, ordinarily the beginning of each year. The funded
status of the plans is determined using appropriate assumptions as of
each year end. During 1999, NS received assets from the Conrail pension
plan and assumed certain related liabilities. As a result, the
measurement dates for determining pension costs were Jan. 1, 1999, and
Aug. 31, 1999, and reflect discount rates of 6.75% and 7.75%,
respectively, and other assumptions appropriate at those dates. A summary
of the major assumptions follows:
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Funded status:
Discount rate 7.75% 6.75% 7.25%
Future salary increases 5% 5% 5.25%
Pension cost:
Discount rate 6.75% 7.25% 7.75%
Return on assets in plans 10% 9% 9%
Future salary increases 5% 5.25% 5.25%
</TABLE>
<PAGE> PAGE 61
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
<TABLE>
Pension and Other Postretirement Benefit Costs
- ----------------------------------------------
<CAPTION>
($ 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 Rail participates 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.
401(k) Plans
- ------------
NS Rail provides 401(k) savings plans for employees. Under the
plans, NS Rail matches a portion of employee contributions, subject to
applicable limitations. In 1999, NS issued shares of its Common Stock to
fund NS Rail's contributions. NS Rail's expenses under these plans were
$12 million in 1999, $10 million in 1998 and $9 million in 1997.
<PAGE> PAGE 62
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
13. PENSIONS AND OTHER POSTRETIREMENT BENEFITS (continued)
In November 1999, NS issued and contributed to eligible
participants' accounts approximately 2 million shares of its Common Stock
in connection with a temporary special work incentive program available
to NS Rail's unionized employees during much of the third quarter. The
cost of the program, which was charged to compensation and benefits
expenses, was $49 million.
Contributions funded with NS Common Stock were excluded from the
Consolidated Statements of Cash Flows because they were noncash
transactions.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
<TABLE>
The fair values of "Cash and cash equivalents," "Accounts
receivable," "Short-term debt," and "Accounts payable" approximate
carrying values because of the short maturity of these financial
instruments. The fair value of corporate-owned life insurance
approximates carrying value. The carrying amounts and estimated fair
values for the remaining financial instruments, excluding investments
accounted for under the equity method in accordance with APB No. 18,
consisted of the following at December 31:
<CAPTION>
1999 1998
---- ----
Carrying Fair Carrying Fair
($ in millions) Amount Value Amount Value
--------------- -------- ----- -------- -----
<S> <C> <C> <C> <C>
Investments $ 502 $ 507 $ 777 $ 782
Long-term debt 866 867 760 779
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, which consist almost
entirely of shares of NS Common Stock, reflect unrealized holding gains
of $424 million on Dec. 31, 1999, and $666 million on Dec. 31, 1998.
Sales of "available-for-sale" securities were immaterial for years ended
Dec. 31, 1999 and 1998.
15. COMMITMENTS AND CONTINGENCIES
Lawsuits
- --------
NSR 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
Rail's ultimate liability is unlikely to have a material adverse effect
on NS Rail's financial position, results of operations or liquidity.
Environmental Matters
- ---------------------
NS Rail is subject to various jurisdictions' environmental laws and
regulations. It is NS Rail's policy to record a liability where such
liability or loss is probable and its amount can be estimated reasonably.
Claims, if any, against third parties for recovery of cleanup costs
incurred by NS Rail are reflected as receivables in the balance sheet
<PAGE> PAGE 63
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
15. COMMITMENTS AND CONTINGENCIES (continued)
and are not netted against the associated NS Rail liability. Environmental
engineers regularly participate in ongoing evaluations of all identified
sites and in determining any necessary adjustments to initial liability
estimates. NS Rail also has established an Environmental Policy Council,
composed of senior managers, to oversee and interpret its environmental
policy.
As of Dec. 31, 1999, NS Rail's 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 Rail's 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 Rail anticipates that much of this liability will be paid
out over five years; however, some costs will be paid out over a longer
period.
At some of the 126 locations, certain NS Rail subsidiaries, usually
in conjunction with a number of other parties, have been identified as
potentially responsible parties by the Environmental Protection Agency
(EPA) or similar state authorities under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, or comparable state
statutes, which often impose joint and several liability for cleanup
costs.
With respect to known environmental sites (whether identified by NS
Rail or by the EPA or comparable state authorities), estimates of NS
Rail's ultimate potential financial exposure for a given site or in the
aggregate for all such sites are necessarily imprecise because of the
widely varying costs of currently available cleanup techniques, the
likely development of new cleanup technologies, the difficulty of
determining in advance the nature and full extent of contamination and
each potential participant's share of any estimated loss (and that
participant's ability to bear it) and evolving statutory and regulatory
standards governing liability.
The risk of incurring environmental liability -- for acts and
omissions, past, present and future -- is inherent in the railroad
business. Some of the commodities in NS Rail's traffic mix, particularly
those classified as hazardous materials, can pose special risks that NS
Rail and its subsidiaries work diligently to minimize. In addition,
several NS Rail subsidiaries own, or have owned, land used as operating
property, or which is leased or may have been leased and operated by
others, or held for sale. Because environmental problems may exist on
these properties that are latent or undisclosed, there can be no
assurance that NS Rail will not incur environmentally related liabilities
or costs with respect to one or more of them, the amount and materiality
of which cannot be estimated reliably at this time. Moreover, lawsuits
and claims involving these and other now-unidentified environmental sites
and matters are likely to arise from time to time. The resulting
liabilities could have a significant effect on financial condition,
results of operations or liquidity in a particular year or quarter.
However, based on its assessments of the facts and circumstances now
known, Management believes that it has recorded the probable costs for
dealing with those environmental matters of which the Corporation is
aware. Further, Management believes that it is unlikely that any
identified matters, either individually or in the aggregate, will have a
material adverse effect on NS Rail's financial position, results of
operations or liquidity.
Tax Benefit Leases
- ------------------
In January 1995, the United States Tax Court issued a preliminary
decision that disallowed some of the tax benefits a predecessor of NSR
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 Rail 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.
<PAGE> PAGE 64
Item 8. Financial Statements and Supplementary Data. (continued)
- ------ -------------------------------------------
15. COMMITMENTS AND CONTINGENCIES (continued)
Change-in-Control Arrangements
- ------------------------------
NS has compensation agreements with officers and certain key
employees that become operative only upon a change in control -- as
defined in those agreements -- of that corporation. The agreements
provide generally for payments based on compensation at the time of a
covered individual's involuntary or other specified termination and for
certain other benefits.
Debt Guarantees
- ---------------
As of Dec. 31, 1999, NSR and certain of its subsidiaries are
contingently liable as guarantors with respect to $104 million of
indebtedness of related entities.
<PAGE> PAGE 65
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Norfolk Southern Railway Company:
We have audited the consolidated financial statements of Norfolk
Southern Railway Company and subsidiaries as listed in the index in
Item 8. In connection with our audits of the consolidated financial
statements, we also have 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 Railway Company 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 66
Item 9. Changes in and Disagreements with Accountants on Accounting
- ------ -----------------------------------------------------------
and Financial Disclosure.
------------------------
None.
<PAGE> PAGE 67
PART III
--------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
Item 11. Executive Compensation.
- ------- ----------------------
Item 12. Security Ownership of Certain Beneficial Owners and
- ------- ---------------------------------------------------
Management.
----------
and
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
In accordance with General Instruction G(3), the information
called for by Part III is incorporated herein by reference from
Norfolk Southern Railway's definitive Proxy Statement, to be dated
April 14, 2000, for the Norfolk Southern Railway 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 17 under "Executive Officers of the Registrant."
<PAGE> PAGE 68
PART IV
-------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Item l4. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K.
-------------------
(A) The following documents are filed as part of this report:
1. Index to Consolidated Financial Statements: Page
------------------------------------------ ----
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997 41
Consolidated Balance Sheets
As of December 31, 1999 and 1998 42
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997 44
Consolidated Statements of Changes in
Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997 46
Notes to Consolidated Financial Statements 47
Independent Auditors' Report 65
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 75
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 69
Item l4. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits
Exhibit
Number Description
- ------- --------------------------------------------------------
3 Articles of Incorporation and Bylaws -
3(i) The amended Restated Articles of Incorporation of
Norfolk Southern Railway Company are incorporated
herein by reference from Exhibit 3(a) of Norfolk
Southern Railway's 1990 Annual Report on Form 10-K.
3(ii) The Bylaws of Norfolk Southern Railway Company, as last
amended March 3, 1993, are incorporated herein by
reference from Exhibit 3(b) of Norfolk Southern
Railway's 1992 Annual Report on Form 10-K.
4 Instruments Defining the Rights of Security Holders,
Including Indentures -
In accordance with Item 601(b)(4)(iii) of
Regulation S-K, copies of instruments of Norfolk
Southern Railway 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., NS,
Registrant, Conrail Inc., Consolidated Rail Corporation
and CRR Holdings LLC, with certain schedules thereto,
is incorporated herein by reference from Exhibit 10 to
Norfolk Southern Railway Company's Form 8-K filed
electronically on June 30, 1997.
(b) Amendment No. 1, dated as of August 22, 1998, to the
Transaction Agreement, dated as of June 10, 1997, by
and among CSX Corporation, CSX Transportation, Inc.,
Norfolk Southern Corporation, Norfolk Southern Railway
Company, Conrail Inc., Consolidated Rail Corporation
and CRR Holdings LLC is incorporated herein by
reference from Exhibit 10.1 to Norfolk Southern
Railway Company's Form 10-Q Report for the period ended
June 30, 1999.
<PAGE> PAGE 70
Item l4. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
- ------- --------------------------------------------------------
10 Material Contracts (continued) -
(c) Amendment No. 2, dated as of June 1, 1999, to the
Transaction Agreement, dated June 10, 1997, by and
among CSX Corporation, CSX Transportation, Inc.,
Norfolk Southern Corporation, Norfolk Southern Railway
Company, Conrail Inc., Consolidated Rail Corporation
and CRR Holdings LLC is incorporated herein by
reference from Exhibit 10.2 to Norfolk Southern
Railway Company's Form 10-Q 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 Railway Company'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 Railway Company'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
Railway Company's Form 10-Q Report for the period ended
June 30, 1999.
(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 Railway Company's Form 10-Q Report for
the period ended June 30, 1999.
<PAGE> PAGE 71
Item l4. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
3. Exhibits (continued)
Exhibit
Number Description
- ------- --------------------------------------------------------
10 Material Contracts (continued) -
(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 Railway Company'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 Railway's 1994 Annual Report on
Form 10-K.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
(B) Reports on Form 8-K.
No reports on Form 8-K were filed 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.
<PAGE> PAGE 72
Item l4. Exhibits, Financial Statement Schedule and
- ------- ------------------------------------------
Reports on Form 8-K. (continued)
-------------------
Exhibit
Number Description
- ------- --------------------------------------------------------
(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 73
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 behalf,
individually and in each capacity stated below, and to file, any and
all amendments to this report.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Norfolk Southern Railway Company has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on this 6th day of March, 2000.
NORFOLK SOUTHERN RAILWAY COMPANY
By /s/ David R. Goode
------------------------------------
(David R. Goode, President and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on this 6th day of March,
2000, by the following persons on behalf of Norfolk Southern Railway
Company and in the capacities indicated.
Signature Title
- --------- -----
/s/ David R. Goode
- -------------------------- President and Chief Executive
(David R. Goode) Officer and Director
(Principal Executive Officer)
/s/ John P. Rathbone
- -------------------------- Vice President and Controller
(John P. Rathbone) (Principal Accounting Officer)
/s/ Henry C. Wolf
- -------------------------- Vice President
(Henry C. Wolf) and Chief Financial Officer
and Director
(Principal Financial Officer)
<PAGE> PAGE 74
Signature Title
- --------- -----
/s/ James C. Bishop, Jr.
- -------------------------- Director
(James C. Bishop, Jr.)
/s/ Jon L. Manetta
- -------------------------- Director
(Jon L. Manetta)
/s/ L. I. Prillaman
- -------------------------- Director
(L. I. Prillaman)
/s/ Stephen C. Tobias
- -------------------------- Director
(Stephen C. Tobias)
<PAGE> PAGE 75
Schedule II
Page 1 of 2
<TABLE>
Norfolk Southern Railway Company 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 $ 1 $ -- $ -- $ -- $ 1
Casualty and other
claims included in
other liabilities $247 $108 $ 2 (1) $105 (2) $252
Current portion of
casualty and other
claims included in
accounts payable $165 $ 14 $170 (1) $178 (3) $171
Year ended December 31, 1998
- ----------------------------
Valuation allowance
(included net in deferred
tax liability) for
deferred tax assets $ 1 $ -- $ -- $ -- $ 1
Casualty and other
claims included in
other liabilities $252 $ 86 $ 22 (1) $ 89 (2) $271
Current portion of
casualty and other
claims included in
accounts payable $171 $ 11 $149 (1) $188 (3) $143
(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.
(continued)
<PAGE> PAGE 76
Schedule II
Page 2 of 2
Norfolk Southern Railway Company 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 $ 1 $ -- $ -- $ -- $ 1
Casualty and other
claims included in
other liabilities $271 $114 $ 9 (1) $119 (2) $275
Current portion of
casualty and other
claims included in
accounts payable $143 $ 19 $191 (1) $173 (3) $180
</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.
<PAGE> PAGE 77
EXHIBIT INDEX
-------------
NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES (NSR)
Electronic
Submission
Exhibit
Number Description Page
- ---------- ---------------------------------------------------- ----
10 (i) The Agreement, entered into as of July 27, 1999,
between North Carolina Railroad Company and
Norfolk Southern Railway Company. 78
21 Subsidiaries of Norfolk Southern Railway. 122
27 Financial Data Schedule. 123
(Required to be electronically submitted for use
by the Securities and Exchange Commission only
and not deemed part of this filing.)
<PAGE> PAGE 122
EXHIBIT 21, Page 1 of 1
NAME AND STATE OF INCORPORATION OF SUBSIDIARIES
OF NORFOLK SOUTHERN RAILWAY COMPANY
AS OF MARCH 1, 2000
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
<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> 0
<SECURITIES> 12
<RECEIVABLES> 686
<ALLOWANCES> 5
<INVENTORY> 98
<CURRENT-ASSETS> 1,136
<PP&E> 15,098
<DEPRECIATION> 4,708
<TOTAL-ASSETS> 12,632
<CURRENT-LIABILITIES> 1,823
<BONDS> 781
<COMMON> 167
0
55
<OTHER-SE> 5,163
<TOTAL-LIABILITY-AND-EQUITY> 12,632
<SALES> 0
<TOTAL-REVENUES> 5,114
<CGS> 0
<TOTAL-COSTS> 4,611
<OTHER-EXPENSES> (42)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39
<INCOME-PRETAX> 506
<INCOME-TAX> 174
<INCOME-CONTINUING> 332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 332
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> PAGE 78
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 79
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 80
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 81
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 82
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 83
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 84
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 85
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 86
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 87
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 88
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 89
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 90
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 91
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 92
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 93
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 94
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 95
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 96
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 97
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 98
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 99
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 100
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 101
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 102
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 103
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 104
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 105
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 106
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 107
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 108
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 109
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 110
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 111
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 112
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 113
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 114
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 115
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 116
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 117
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 118
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 119
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 120
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 121
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
