UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
|
|
Washington
,
D.C.
20549
|
|
FORM 10-K
|
|
|
(X)
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
|
|
EXCHANGE ACT OF 1934
For the fiscal year
ended
DEC. 31, 2006
|
|
|
( )
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES
|
|
|
Commission
file number 1-8339
|
|
|
|
NORFOLK
SOUTHERN CORPORATION
|
(Exact
name of registrant as specified in its charter)
|
|
|
Virginia
|
52-1188014
|
(State or other jurisdiction of incorporation)
|
(IRS Employer Identification No.)
|
|
|
Three Commercial Place
|
|
Norfolk
,
Virginia
|
23510-2191
|
(Address of principal executive offices)
|
Zip Code
|
|
|
Registrant's telephone number, including area code
|
(757) 629-2680
|
|
|
No
Change
|
(Former name, former address and former fiscal year, if changed since
last report.)
|
|
Securities registered
pursuant to Section 12(b) of the Act:
|
|
Title of each Class
|
Name of each exchange
|
Norfolk
Southern Corporation
|
on which registered
|
Common Stock (Par
Value $1.00)
|
New York
Stock Exchange
|
|
|
Securities
registered pursuant to Section 12(g) of the Act: NONE
|
|
Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes (X) No ( )
|
|
Indicate
by checkmark if the registrant is not required to file such reports pursuant
to Section 13 or 15(d) of the Act.
Yes ( ) No (X)
|
|
Indicate by check mark whether the registrant:
(1) has filed all reports required to
be filed by Section 13 or Section 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
|
|
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
(
)
|
|
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or
a non-accelerated filer.
See
definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
(X) Accelerated
filer
(
) Non-accelerated
filer
(
)
|
|
Indicate by checkmark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
|
|
The aggregate market value of the voting common
equity held by nonaffiliates as of
June 30, 2006
was $22,023,555,376 (based on the closing
price as quoted on the New York Stock Exchange on that date).
|
|
The number of shares
outstanding of each of the registrant's classes of common stock, as of Jan.
31, 2007:
396,986,263(excluding 20,760,284
shares held by the registrant's consolidated subsidiaries).
|
|
|
|
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the
Registrant's definitive proxy statement to be filed electronically pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year,
are incorporated by reference in Part III.
TABLE OF CONTENTS
NORFOLK
SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
|
|
|
Page
|
|
|
|
|
Part I.
|
Items 1 and 2.
|
Business and Properties
|
K3
|
|
Item 1A.
|
Risk Factors
|
K11
|
|
Item 1B.
|
Unresolved Staff Comments
|
K14
|
|
Item 3.
|
Legal Proceedings
|
K14
|
|
Item 4.
|
Submission of Matters to a Vote of Security
Holders
|
K14
|
|
|
Executive Officers of the Registrant
|
K15
|
|
|
|
|
Part II.
|
Item 5.
|
Market for Registrant's Common Equity, Related
Stockholder Matters and
Issuer Purchases of Equity
Securities
|
K17
|
|
Item 6.
|
Selected Financial Data
|
K18
|
|
Item 7.
|
Management's Discussion and Analysis of Financial
Condition and Results
|
|
|
|
of Operations
|
K20
|
|
Item 7A.
|
Quantitative and Qualitative Disclosures About
Market Risk
|
K38
|
|
Item 8.
|
Financial Statements and Supplementary Data
|
K39
|
|
Item 9.
|
Changes in and Disagreements with Accountants on
Accounting and
|
|
|
|
Financial Disclosure
|
K78
|
|
Item 9A.
|
Controls and Procedures
|
K78
|
|
Item 9B.
|
Other Information
|
K78
|
|
|
|
|
Part III.
|
Item 10.
|
Directors, Executive Officers and Corporate
Governance
|
K79
|
|
Item 11.
|
Executive Compensation
|
K79
|
|
Item 12.
|
Security Ownership of Certain Beneficial Owners
and Management
|
|
|
|
and Related Stockholder
Matters
|
K79
|
|
Item 13.
|
Certain Relationships and Related Transactions,
and Director
Independence
|
K82
|
|
Item 14.
|
Principal Accountant Fees and Services
|
K82
|
|
|
|
|
Part IV.
|
Item 15.
|
Exhibits and Financial Statement Schedules
|
K83
|
|
|
|
|
|
|
Power of Attorney
|
K91
|
|
|
|
|
|
|
Signatures
|
K91
|
PART I
Norfolk
Southern Corporation and
Subsidiaries (NS)
Item
1.
Business.
and Item 2.
Properties
..
GENERAL -
Norfolk Southern Corporation (
Norfolk
Southern) is a
Norfolk
,
Virginia
based company that controls a major freight railroad, Norfolk Southern Railway
Company.
Norfolk Southern Railway
Company is primarily engaged in the rail transportation of raw materials,
intermediate products and finished goods primarily in the Southeast, East and
Midwest and, via interchange with rail carriers, to and from the rest of the
United States
and parts of
Canada
..
Norfolk
Southern also transports overseas freight through several Atlantic and
Gulf
Coast
ports.
Norfolk
Southern provides comprehensive logistics services and offers the most
extensive intermodal network in the eastern half of the
United States
..
The common stock of
Norfolk
Southern is listed on the New York
Stock Exchange (NYSE) under the symbol “NSC.”
Norfolk
Southern was incorporated on
July 23, 1980
, under the
laws of the
Commonwealth
of
Virginia
..
On June l, 1982, Norfolk Southern acquired
control of two major operating railroads, Norfolk and Western Railway Company
(NW) and Southern Railway Company (Southern) in accordance with an Agreement of
Merger and Reorganization dated as of July 31, 1980, and with the approval of
the transaction by the Interstate Commerce Commission
(now the Surface Transportation Board
[STB]).
Effective
Dec. 31, 1990
,
Norfolk
Southern
transferred all the common stock of NW to Southern, and Southern's name was
changed to Norfolk Southern Railway Company (Norfolk Southern Railway or
NSR).
Effective
Sept. 1, 1998
, NW was merged
with and into Norfolk Southern Railway.
As of Dec. 31, 2006, all the common stock of Norfolk Southern Railway
was owned directly by
Norfolk
Southern.
Through a limited liability company,
Norfolk
Southern and CSX
Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary
subsidiary is Consolidated Rail Corporation (CRC).
Norfolk
Southern has a 58% economic and 50% voting interest in the jointly owned
entity, and CSX has the remainder of the economic and voting interests.
CRC owns and operates certain properties
(the Shared Assets Areas) for the joint and exclusive benefit of NSR and CSX
Transportation Inc. (CSXT).
On
June 1, 1999
, NSR and CSXT
began operating separate portions of Conrail’s rail routes and
assets.
On August 27, 2004, NS, CSX
and Conrail completed a corporate reorganization of Conrail (Conrail Corporate
Reorganization), which established direct ownership and control by NSR and CSXT
of two former CRC subsidiaries, Pennsylvania Lines LLC and New York Central
Lines LLC, respectively (see Note 4 to the Consolidated Financial Statements).
Norfolk
Southern makes available free of charge through its website, www.nscorp.com,
its annual report on Form 10‑K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports as soon as
reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission (SEC).
In addition, the following documents are
available on the company’s website and in print to any shareholder who
requests them:
·
Corporate Governance Guidelines
·
Charters of the Committees of the Board of Directors
·
Code of Ethics for employees
·
Code of Ethical Conduct for Senior Financial Officers
·
Categorical
Independence
Standards for Directors
Unless
otherwise indicated,
Norfolk
Southern and its subsidiaries are referred to collectively as NS.
RAILROAD
OPERATIONS –
As of Dec. 31, 2006, NS’ railroads operated approximately
21,000 miles of road in 22 eastern states, the
District
of Columbia
and
Ontario,
Canada
..
The
system’s lines reach many individual industries, electric generating
facilities, mines (in western
Virginia
,
eastern
Kentucky
, southern and northern
West Virginia
and western
Pennsylvania
), distribution centers,
transload facilities and other businesses located in smaller communities in its
service area.
Corridors
with heaviest freight volume:
|
|
|
New York City
area to
Chicago
(via
Allentown
and
Pittsburgh
)
|
|
|
|
Chicago
to
Macon
(via
Cincinnati
,
Chattanooga
and
Atlanta
)
|
|
|
|
Appalachian
coal fields of
Virginia
,
West
Virginia
and
Kentucky
to
Norfolk
and
Sandusky
,
OH
|
|
|
|
Cleveland
to
Kansas City
|
|
|
|
Birmingham
to
Meridian
|
|
|
|
Memphis
to
Chattanooga
|
|
|
The
miles operated, which includes leased lines between
Cincinnati
,
Ohio
, and
Chattanooga
,
Tennessee
,
and trackage rights over property owned by North Carolina Railway Company, were
as follows:
|
Mileage Operated as of
Dec.
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passing
|
|
|
|
|
|
|
|
|
|
|
Track,
|
|
|
|
|
|
|
Miles
of Road
|
|
Second
and Other Main Track
|
|
Crossovers
and Turnouts
|
|
Way
and Yard Switching
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Owned
|
|
16,194
|
|
2,808
|
|
2,084
|
|
8,569
|
|
29,655
|
Operated
under lease,
|
|
|
|
|
|
|
|
|
|
|
contract
or trackage rights
|
|
4,947
|
|
1,978
|
|
417
|
|
969
|
|
8,311
|
Total
|
|
21,141
|
|
4,786
|
|
2,501
|
|
9,538
|
|
37,966
|
Triple
Crown Operations
– Triple Crown Services Company (TCSC), NS’
subsidiary, offers door-to-door intermodal service using RoadRailer®
equipment and domestic containers.
RoadRailer® units are enclosed vans that can be pulled over highways
in tractor-trailer configuration and over the rails by locomotives.
TCSC provides intermodal service in
major traffic corridors, including those between the Midwest and the Northeast,
the Midwest and the Southeast, and the Midwest and
Texas
..
The
following table sets forth certain statistics relating to NS railroads'
operations for the past 5 years:
Rail Operating Statistics
|
|
|
|
Years Ended Dec.
31,
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
|
|
|
|
|
Revenue
ton miles (billions)
|
204
|
203
|
198
|
183
|
179
|
Freight
train miles traveled (millions)
|
84.2
|
81.2
|
77.7
|
73.9
|
72.6
|
Revenue
per ton mile
|
$0.0462
|
$0.0421
|
$0.0369
|
$0.0353
|
$0.0350
|
Revenue
ton miles per
|
|
|
|
|
|
man-hour
worked
|
3,196
|
3,146
|
3,347
|
3,111
|
3,067
|
Percentage
ratio of railway operating
|
|
|
|
|
|
expenses
to railway operating revenues
|
72.8%
|
75.2%
|
76.7%
|
83.5%1
|
81.5%
|
1
Includes $107 million of costs for a voluntary
separation program, which added 1.6 percentage points to the ratio.
RAILWAY
OPERATING REVENUES --
NS' total railway operating revenues were $9.4 billion
in 2006.
See the financial
information by traffic segment in Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
COAL
TRAFFIC
- --
Coal,
coke and iron ore -- most of which is bituminous coal -- is NS'
railroads' largest commodity group as measured by revenues.
The railroads handled a total of 190.6 million
tons in 2006, most of which originated on NS' lines in
West
Virginia
,
Virginia
,
Pennsylvania
and
Kentucky
..
Revenues from coal, coke and iron ore
accounted for about 25% of NS' total railway operating revenues in 2006.
Total
coal handled through all system ports in 2006 was 33.8 million tons.
Of this total, 10.8 million tons
(including coastwise traffic) moved through
Norfolk
,
Virginia
, 2.4 million tons moved through the
Baltimore Terminal, 13.0 million tons moved to various docks on the Ohio
River, and 7.6 million tons moved to various
Lake Erie
ports.
Other than coal for export,
virtually all coal handled by NS' railroads was terminated in states east of
the
Mississippi River
..
See
the discussion of coal traffic, by type of coal, in Part II, Item 7,
“Management's Discussion and Analysis of Financial Condition and Results
of Operations.”
GENERAL
MERCHANDISE
TRAFFIC
-
General merchandise
traffic is composed of five major commodity groupings: automotive;
chemicals; metals and construction; agriculture, consumer products and
government; and paper, clay and forest products.
The automotive group includes finished
vehicles for BMW, DaimlerChrysler, Ford Motor Company, General Motors, Honda,
Isuzu, Jaguar, Land Rover, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Saab,
Subaru, Suzu
ki
,
Toyota
and Volkswagen, and auto parts for Ford Motor Company, General Motors,
Mercedes-Benz and
Toyota
..
The chemicals group includes sulfur and
related chemicals, petroleum products, chlorine and bleaching compounds,
plastics, rubber, industrial chemicals, chemical wastes and municipal wastes.
The metals and construction group
includes steel, aluminum products, machinery, scrap metals, cement, aggregates,
bricks and minerals.
The
agriculture, consumer products and government group includes soybeans, wheat,
corn, fertilizer, animal and poultry feed, food oils, flour, beverages, canned
goods, sweeteners, consumer products, ethanol and items for the military.
The paper, clay and forest products
group includes lumber and wood products, pulp board and paper products, wood
fibers, wood pulp, scrap paper and clay.
In 2006, 147 million tons of general
merchandise freight, or approximately 66% of total general merchandise tonnage
handled by NS, originated online.
The balance of general merchandise traffic was received from
connecting carriers at interterritorial gateways.
The principal interchange points for
NS-received traffic included
Chicago
,
Memphis
,
New Orleans
,
Cincinnati
,
Kansas
City,
Detroit
,
Hagerstown
, St.
Louis/East St. Louis and
Louisville
..
General merchandise carloads handled in
2006 were 2.9 million, the revenue from which accounted for 54% of
NS’ total railway operating revenues in 2006.
See
the discussion of general merchandise rail traffic by commodity group in
Part II, Item 7, “Management's Discussion and Analysis of
Financial Condition and Results of Operations.”
INTERMODAL
TRAFFIC
-
The intermodal market
consists of shipments moving in trailers, domestic and international
containers, and Roadrailer® equipment.
These shipments are handled on behalf of intermodal marketing companies,
international steamship lines, truckers and other shippers.
Intermodal units handled in 2006 were 3.3 million,
the revenues from which accounted for 21% of NS’ total railway operating
revenues for the year.
See
the discussion of intermodal traffic in Part II, Item 7, “Management's
Discussion and Analysis of Financial Condition and Results of
Operations.”
FREIGHT
RATES -
In
2006, NS' railroads continued their reliance on private contracts and exempt
price quotes as their predominant pricing mechanisms.
Thus, a major portion of NS' railroads'
freight business is not currently economically regulated by the
government.
In general, market
forces have been substituted for government regulation and now are the primary
determinant of rail service prices.
In 2006, NS' railroads were found by the STB to be
“revenue adequate” based on results for the year 2005.
A railroad is “revenue
adequate” under the applicable law when its return on net investment
exceeds the rail industry's composite cost of capital.
This determination is made pursuant to a
statutory requirement.
PASSENGER
OPERATIONS
·
Regularly scheduled passenger trains are operated by Amtrak on
NS' lines between the following locations:
- -
Alexandria
and
New
Orleans
- -
Greensboro
and
Selma
,
North Carolina
- -
Chicago
,
Illinois
,
and
Detroit
,
Michigan
- -
Chicago
and
Harrisburg
,
Pennsylvania
·
Commuter trains are operated on the NS line between
Manassas
and
Alexandria
in accordance with contracts with
two transportation commissions of the
Commonwealth
of
Virginia
·
NS leases the
Chicago
to
Manhattan
,
Illinois
,
line to the Commuter Rail Division of the Regional Transportation Authority of
Northeast Illinois
·
NS provides freight service over lines with significant ongoing Amtrak
and commuter passenger operations, and is conducting freight operations over
some trackage owned by:
- -
Amtrak
- -
New Jersey
Transit
- -
Southeastern Pennsylvania
Transportation Authority
- -
Metro-North Commuter Railroad Company
- -
Maryland
DOT
·
Passenger operations are conducted either by Amtrak or by the commuter
agencies over trackage owned by Conrail in the Shared Assets Areas.
NONCARRIER
OPERATIONS -
NS' noncarrier
subsidiaries engage principally in the acquisition, leasing and management of
coal, oil, gas and minerals; the development of commercial real estate;
telecommunications; and the leasing or sale of rail property and
equipment.
In 2006, no such
noncarrier subsidiary or industry segment grouping of noncarrier subsidiaries
met the requirements for a reportable business segment set forth in Statement of
Financial Accounting Standards No. 131.
RAILWAY PROPERTY
The NS railroad system
extends across 22 states, the
District of Columbia
and portions of
Canada
..
The railroad infrastructure makes the
company capital intensive with total property of approximately $21 billion.
Capital
Expenditures -
Capital expenditures for road, equipment and other property for the past five
years were as follows (including capitalized leases):
|
Capital Expenditures
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
($ in millions)
|
Road
|
$
|
756
|
$
|
741
|
$
|
612
|
$
|
502
|
$
|
521
|
Equipment
|
|
422
|
|
284
|
|
429
|
|
218
|
|
174
|
Total
|
$
|
1,178
|
$
|
1,025
|
$
|
1,041
|
$
|
720
|
$
|
695
|
Capital
spending and maintenance programs are and have been designed to assure the
ability to provide safe, efficient and reliable transportation services.
For 2007, NS has budgeted $1.34 billion
of capital spending.
On May 1,
2006, NS and Kansas City Southern (KCS) formed a joint venture (MSLLC) pursuant
to which NS intends to contribute $300 million in cash, substantially all of
which will be used for capital improvements over a period of approximately
three years, in exchange for a 30% interest in the joint venture.
See the discussion following “Cash
used for investing activities,” in Part II, Item 7,
“Management's Discussion and Analysis of Financial Condition and Results
of Operations.”
Equipment
- -
As of
Dec. 31, 2006, NS owned or leased the following units of equipment:
|
Number of Units
|
Capacity
|
|
|
Owned*
|
|
Leased**
|
|
Total
|
of Equipment
|
|
|
|
|
|
|
|
|
|
Locomotives:
|
|
|
|
|
|
|
(Horsepower)
|
Multiple
purpose
|
|
3,505
|
|
132
|
|
3,637
|
|
12,563,600
|
Switching
|
|
207
|
|
- --
|
|
207
|
|
303,700
|
Auxiliary
units
|
|
74
|
|
- --
|
|
74
|
|
- --
|
Total
locomotives
|
|
3,786
|
|
132
|
|
3,918
|
|
12,867,300
|
|
|
|
|
|
|
|
|
|
Freight cars:
|
|
|
|
|
|
|
(Tons)
|
Hopper
|
|
18,839
|
|
808
|
|
19,647
|
|
2,086,249
|
Box
|
|
17,555
|
|
2,346
|
|
19,901
|
|
1,590,557
|
Covered hopper
|
|
9,042
|
|
3,019
|
|
12,061
|
|
1,317,822
|
Gondola
|
|
29,806
|
|
8,283
|
|
38,089
|
|
4,093,356
|
Flat
|
|
2,708
|
|
1,336
|
|
4,044
|
|
316,712
|
Caboose
|
|
191
|
|
- --
|
|
191
|
|
- --
|
Other
|
|
4,028
|
|
20
|
|
4,048
|
|
303,650
|
Total
freight cars
|
|
82,169
|
|
15,812
|
|
97,981
|
|
9,708,346
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
Work equipment
|
|
5,337
|
|
3
|
|
5,340
|
|
|
Vehicles
|
|
3,547
|
|
- --
|
|
3,547
|
|
|
Highway
trailers and
|
|
|
|
|
|
|
|
|
containers
|
|
184
|
|
11,496
|
|
11,680
|
|
|
RoadRailer®
|
|
6,828
|
|
192
|
|
7,020
|
|
|
Miscellaneous
|
|
1,356
|
|
18,686
|
|
20,042
|
|
|
Total
other
|
|
17,252
|
|
30,377
|
|
47,629
|
|
|
|
|
|
|
|
|
|
|
|
*
Includes equipment leased to outside parties and equipment subject to
equipment trusts, conditional sale agreements and capitalized leases.
|
**
Includes 6,437 freight cars leased from CRC.
|
The
following table indicates the number and year built for locomotives and freight
cars owned at Dec. 31, 2006.
|
Year Built
|
|
|
|
|
|
|
1995-
|
1990-
|
1989
&
|
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
2001
|
1994
|
Before
|
Total
|
Locomotives:
|
|
|
|
|
|
|
|
|
|
No.
of units
|
143
|
89
|
207
|
100
|
- --
*
|
1,073
|
395
|
1,779
|
3,786
|
%
of fleet
|
4%
|
2%
|
5%
|
3%
|
- --%
|
28%
|
11%
|
47%
|
100%
|
|
|
|
|
|
|
|
|
|
|
Freight
cars:
|
|
|
|
|
|
|
|
|
|
No.
of units
|
404
|
89
|
- --
|
- --
|
- --
|
6,536
|
5,065
|
70,075
|
82,169
|
%
of fleet
|
1%
|
- --%
|
- --%
|
- --%
|
- --%
|
8%
|
6%
|
85%
|
100%
|
*
Fifty of the locomotives
built in 2001 were purchased in 2002.
The
following table shows the average age of NS’ locomotive and freight car
fleets at
Dec. 31, 2006
,
and the number of retirements in 2006:
|
Locomotives
|
Freight
Cars
|
|
|
|
Average
age – in service
|
17.7 years
|
30.0 years
|
Retirements
|
2 units
|
2,520 units
|
Average
age – retired
|
35.0 years
|
38.7 years
|
Between
1988 and 2000, about 29,000 coal cars were rebodied.
As a result, the remaining serviceability
of the freight car fleet is greater than may be inferred from the high
percentage of freight cars built in earlier years.
|
Annual Average Bad Order
Ratio
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
|
|
|
|
|
Freight
cars
|
6.4%
|
6.3%
|
7.4%
|
7.4%
|
8.1%
|
Locomotives
|
5.7%
|
6.2%
|
6.3%
|
6.2%
|
6.3%
|
Ongoing freight car and locomotive maintenance
programs are intended to ensure the highest standards of safety, reliability,
customer satisfaction and equipment marketability.
The declines in 2006, 2005 and 2003 reflected
an increase in maintenance activity as well as the retirement of unserviceable
units.
The locomotive bad order
ratio includes units out of service for required inspections every 92 days and
program work such as overhauls.
Encumbrances
- -
Certain
railroad equipment is subject to the prior lien of equipment financing
obligations amounting to approximately $534 million as of Dec. 31, 2006, and $650
million as of
Dec. 31,
2005
..
Track
Maintenance -
Of the approximately 38,000 total miles of track operated, NS had
responsibility for maintaining about 30,000 miles of track with the remainder
being operated under trackage rights.
Over
75% of the main line trackage (including first, second, third and branch main
tracks, all excluding trackage rights) has rail ranging from 131 to 155 pounds
per yard with the standard installation currently at 136 pounds per yard.
Approximately 45% of NS lines carried 20
million or more gross tons per track mile during 2006.
The
following table summarizes several measurements regarding NS' track roadway
additions and replacements during the past five years:
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
|
|
|
|
|
Track
miles of rail installed
|
327
|
302
|
246
|
233
|
235
|
Miles
of track surfaced
|
4,871
|
4,663
|
5,055
|
5,105
|
5,270
|
New
crossties installed (millions)
|
2.7
|
2.5
|
2.5
|
2.8
|
2.8
|
Microwave
System - The NS microwave system, consisting of approximately 7,400 radio
route miles, 424 core stations, 14 secondary stations and 5 passive
repeater stations, provides communications between most operating
locations.
The microwave system is
used primarily for voice communications, VHF radio control circuits, data and
facsimile transmissions, traffic control operations and AEI data transmissions.
Traffic
Control -
Of the approximately 16,200 route miles owned by NS, about 11,000 miles are
signalized, including 8,000 miles of centralized traffic control (CTC) and 3,000 miles
of automatic block signals.
Of the 8,000 miles of CTC, approximately 3,000 miles are controlled
by data radio originating at 244 base station radio sites.
Computers -
A computer network
consisting of a centralized data center in
Atlanta
,
Georgia
,
and various distributed computers throughout the company connects the yards,
terminals, transportation offices, rolling stock repair points, sales offices
and other key system locations.
Operating and traffic data are processed and stored to provide customers
with information on their shipments throughout the system.
Computer systems provide current
information on the location of every train and each car on line, as well as
related waybill and other train and car movement data.
In addition, the computer systems are
utilized to assist management in the performance of a variety of functions and
services including payroll, car and revenue accounting, billing, material
management activities and controls, and special studies.
ENVIRONMENTAL MATTERS -
Compliance with federal,
state and local laws and regulations relating to the protection of the
environment is a principal NS goal.
To date, such compliance has not affected materially NS' capital
additions, earnings, liquidity or competitive position.
See “Legal Proceedings,”
Part I, Item 3; “Personal Injury, Environmental and Legal Liabilities”
in Part II, Item 7, “Management's Discussion and Analysis of
Financial Condition and Results of Operations;” and Note 17 to the
Consolidated Financial Statements.
EMPLOYEES –
The following table shows
the average number of employees and the average cost per employee for wages and
benefits:
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
|
|
|
|
|
Average
number of employees
|
30,541
|
30,294
|
28,475
|
28,753
|
28,970
|
|
|
|
|
|
|
Average
wage cost per employee
|
$62,000
|
$61,000
|
$59,000
|
$58,000
|
$54,000
|
|
|
|
|
|
|
Average
benefit cost per employee
|
$32,000
|
$29,000
|
$28,000
|
$28,000
|
$24,000
|
Approximately
85% of NS' railroad employees are covered by collective bargaining agreements
with various labor unions.
See the
discussion of “Labor Agreements” in Part II, Item 7,
“Management's Discussion and Analysis of Financial Condition and Results
of Operations.”
GOVERNMENT
REGULATION -
In addition to environmental, safety, securities and other
regulations generally applicable to all businesses, NS' railroads are subject
to regulation by the STB.
The STB
has jurisdiction over some rates, routes, conditions of service and the
extension or abandonment of rail lines.
The STB also has jurisdiction over the consolidation, merger or
acquisition of control of and by rail common carriers.
The Federal Railroad Administration
regulates certain track and mechanical equipment standards.
The
relaxation of economic regulation of railroads, begun over two decades ago
under the Staggers Rail Act of 1980, has continued.
Significant exemptions are TOFC/COFC
(i.e., “piggyback”) business, rail boxcar traffic, lumber,
manufactured steel, automobiles and certain bulk commodities such as sand, gravel,
pulpwood and wood chips for paper manufacturing.
Transportation contracts on regulated shipments
effectively remove those shipments from regulation as well for the duration of
the contract.
About 84% of NS'
freight revenues come from either exempt traffic or traffic moving under
transportation contracts.
Efforts may be made in 2007 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 will oppose efforts to
reimpose unwarranted economic regulation.
COMPETITION -
There is continuing
strong competition among rail, water and highway carriers.
Price is usually only one factor of
importance as shippers and receivers choose a transport mode and specific
hauling company.
Inventory carrying
costs, service reliability, ease of handling and the desire to avoid loss and
damage during transit are also important considerations, especially for
higher-valued finished goods, machinery and consumer products.
Even for raw materials, semifinished
goods and work-in-process, users are increasingly sensitive to transport
arrangements that minimize problems at successive production stages.
NS'
primary rail competitor is the CSX system; both operate throughout much of the
same territory.
Other railroads
also operate in parts of the territory.
NS also competes with motor carriers, water carriers and with shippers
who have the additional option of handling their own goods in private carriage.
Certain
marketing strategies among railroads and between railroads and motor carriers
enable carriers to compete more effectively in specific markets.
Item 1A.
Risk Factors.
NS is subject
to significant governmental regulation and legislation over commercial,
environmental and operating matters.
Railroads are
subject to commercial regulation by the Surface Transportation Board, which has
jurisdiction over some rates, routes, fuel surcharges, conditions of service
and the extension or abandonment of rail lines.
The STB also has jurisdiction over the
consolidation, merger or acquisition of control of and by rail common
carriers.
Occasional efforts are made
to re-subject the rail industry to unwarranted federal economic
regulation.
In addition, Congress
could enact re-regulation legislation.
Economic re-regulation of the rail industry could have a significant negative
impact on NS’ ability to determine prices for rail services, reduce
capital spending on its rail network, and result in a material adverse effect
on NS’ financial position, results of operations or liquidity in a
particular year or quarter.
NS’
operations are subject to extensive federal, state, and local environmental
laws and regulations concerning, among other things, emissions to the air;
discharges to water ways or ground water supplies; handling, storage,
transportation, and disposal of waste and other materials; and the cleanup of
hazardous material or petroleum releases. The risk of incurring environmental
liability – for acts and omissions, past, present and future – is
inherent in the railroad business. Several of NS’ subsidiaries own,
or have owned, land used as operating property or held for sale, or which is
leased or may have been leased and operated by others. Environmental
problems that are latent or undisclosed may exist on these properties, and NS
could incur environmental liabilities or costs, the amount and materiality of
which cannot be estimated reliably at this time, with respect to one or more of
these properties. Moreover, lawsuits and claims involving other
unidentified environmental sites and matters are likely to arise from time to
time, and the resulting liabilities could have a significant effect on
financial position, results of operations or liquidity in a particular year or
quarter.
The
Federal Railroad Administration regulates a host of operations matters
including track and mechanical equipment standards; signaling systems; testing
and inspection of grade crossing warning devices, hours of service of operating
employees; drug and alcohol testing; locomotive engineer certification; and
reporting of employee injuries, among other areas.
NS’ unintentional failure to
comply with applicable laws and regulations could have a material adverse
effect on NS, and changes in the legislative or regulatory frameworks within
which NS operates could adversely affect its business.
NS, as a common carrier by rail, must
offer to transport hazardous materials, regardless of risk.
Transportation of certain hazardous materials could create catastrophic
losses in terms of personal injury and property damage costs, and compromise
critical parts of our rail network.
Legislation introduced in Congress in early 2005 would give federal
regulators increased authority to conduct investigations and levy substantial
fines and penalties in connection with railroad accidents.
Federal regulators also would be
required to prescribe new regulations governing railroads’ transportation
of hazardous materials.
Legislation
proposed in 2006 would require the Department of Homeland Security (DHS) to
develop rail security plans and the railroads to submit vulnerability
assessments, security plans and employee training programs to DHS for
approval.
If enacted, such
legislation and regulations could impose significant additional costs on
railroads.
Regulations proposed in
late 2006 by DHS mandating chain of custody and security measures likely will
cause service degradation and higher costs for the transportation of toxic
inhalation hazard materials.
Further,
certain local governments have sought to enact ordinances banning hazardous
materials moving by rail within their borders.
Some legislators have contemplated
pre-notification requirements for hazardous materials shipments.
If promulgated such ordinances could
require the re-routing of hazardous materials shipments, with the potential for
significant additional costs and network inefficiencies.
NS
may be affected by terrorism or war.
Any terrorist
attack, or other similar event, any government response thereto, and war or
risk of war could cause significant business interruption and may adversely
affect NS’ results of operations, financial position, and liquidity.
Because NS plays a critical role in the
nation’s transportation system, it could become the target of such an
attack or have a significant role in the government’s preemptive approach
or response to an attack or war.
Although NS
currently maintains insurance coverage for third-party liability arising out of
war and acts of terrorism, it maintains only limited insurance coverage for
first-party property damage and damage to property in NS’ care, custody
or control caused by certain acts of terrorism.
In addition, premiums for some or all of
NS’ current insurance programs covering these losses could increase
dramatically, or insurance coverage for certain losses may not be available to
NS in the future.
NS may be
affected by general economic conditions.
Prolonged negative
changes in domestic and global economic conditions affecting the producers and
consumers of the commodities NS carries may have an adverse effect on its
operating results, financial position, and liquidity.
Economic conditions resulting in
bankruptcies of one or more large customers could have a significant impact on NS’
financial position, results of operations or liquidity in a particular year or quarter.
NS
faces competition from other transportation providers.
NS is subject to competition from motor carriers, railroads, and
to a lesser extent, ships, barges, and pipelines, on the basis of transit time,
pricing, and the quality and reliability of service.
While NS has used primarily internal
resources to build or acquire and maintain its rail system, trucks and barges
have been able to use public rights-of-way maintained by public entities. Any
future improvements or expenditures materially increasing the quality or
reducing the cost of alternative modes of transportation in the regions in
which NS operates, or legislation granting materially greater latitude for
motor carriers with respect to size or weight limitations, could have a
material adverse effect on its financial position, results of operations or liquidity
in a particular year or quarter.
The operations of carriers with which NS
interchanges may adversely affect its operations.
NS’ ability to provide rail service to customers in the
U.S.
and
Canada
depends in large part upon its
ability to maintain cooperative relationships with connecting carriers with
respect to, among other matters, freight rates, revenue divisions, car supply,
reciprocal switching, interchange, trackage rights and locomotive
availability.
Deterioration in the
operations of, or service provided by connecting carriers, or in our
relationship with those connecting carriers,
could result in NS’ inability to meet its customers’
demands or require NS to use alternate train routes, which could result in
significant additional costs and network inefficiencies.
NS
relies on technology and technology improvements in its business operations.
If NS experiences significant disruption or failure of one or more
of its information technology systems, including computer hardware, software,
and communications equipment, NS could experience a service interruption,
security breach, or other operational difficulties, which could have a material
adverse impact on its results of operations, financial condition, and
liquidity.
Additionally, if NS does
not have sufficient capital to acquire new technology or if it is unable to implement
new technology, NS may suffer a competitive disadvantage within the rail
industry and with companies providing other modes of transportation service,
which could have a material adverse effect on its financial position, results
of operations or liquidity in a particular year or quarter.
The vast
majority of NS employees belong to labor unions, and labor agreements, strikes,
or work stoppages could adversely affect its operations.
A
pproximately 26,000, or
about 85%, of NS railroad employees are covered by collective bargaining
agreements with various labor unions.
If
unionized workers were to engage in a strike, work stoppage, or other slowdown,
NS could experience a significant disruption of its operations.
Additionally, future national labor agreements,
or renegotiation of labor agreements or provisions of labor agreements, could
significantly increase NS’ costs for healthcare, wages, and other
benefits.
Any of these factors
could have a material adverse impact on NS’ financial position, results of
operations or liquidity in a particular year or quarter.
NS may be
subject to various claims and lawsuits that could result in significant
expenditures.
The nature of NS’ business exposes it
to the potential for various claims and litigation related to labor and
employment, personal injury, freight loss and other property damage, and other
matters.
Job-related personal injury and occupational claims
are subject to the Federal Employers’ Liability Act (FELA), which is
applicable only to railroads. FELA’s fault-based tort system
produces results that are unpredictable and inconsistent as compared with a
no-fault worker’s compensation system.
The variability inherent in this system
could result in actual costs being very different from the liability recorded.
Any material
changes to current litigation trends or a catastrophic rail accident involving
any or all of freight loss or property damage, personal injury, and
environmental liability could have a material adverse effect on NS’
operating results, financial condition, and liquidity to the extent not covered
by insurance.
NS has obtained
insurance for potential losses for third-party liability and first-party
property damages.
Specified levels
of risk are retained on a self-insurance basis (currently up to $25 million per
occurrence for bodily injury and property damage to third parties and $25
million per occurrence for property owned by NS or in its care, custody or
control).
Insurance is available
from a limited number of insurers and may not continue to be available or, if
available, may not be obtainable on terms acceptable to NS.
Severe weather could result
in significant business interruptions and expenditures.
Severe weather conditions and other natural phenomena, including
hurricanes and floods, may cause significant business interruptions and result
in increased costs, increased liabilities, and decreased revenues, which could
have an adverse effect on NS’ financial position, results of operations
or liquidity in a particular year or quarter.
Unpredictability
of demand for rail services resulting in the unavailability of qualified
personnel could adversely affect NS’ operational efficiency and ability
to meet demand.
Workforce demographics, training
requirements, and the availability of qualified personnel, particularly
engineers and trainmen, could each have a negative impact on NS’ ability
to meet demand for rail service. Unpredictable increases in demand for rail
services may exacerbate such risks, which could have a negative impact on NS’
operational efficiency and otherwise have a material adverse effect on its financial
position, results of operations or liquidity in a particular year or quarter.
NS may be affected by supply constraints
resulting from disruptions in the fuel markets or the nature of some of its
supplier markets.
NS
consumes over 500 million gallons of diesel fuel each year.
Fuel availability could be affected by
any limitation in the fuel supply or by any imposition of mandatory allocation
or rationing regulations.
If a
severe fuel supply shortage arose from production curtailments, disruption of
oil imports, disruption of domestic refinery production, damage to refinery or
pipeline infrastructure, political unrest, war or otherwise, NS’ financial
position, results of operations or liquidity in a particular year or quarter
could be affected.
Also, such an
event would impact NS as well as its customers and other transportation
companies.
Due to the capital intensive nature and industry-specific
requirements of the rail industry, there are high barriers of entry for
potential new suppliers of core railroad items, such as locomotives and rolling
stock equipment.
Additionally, NS
competes with other industries for available capacity and raw materials used in
the production of certain track materials, such as rail and ties.
Changes in the competitive landscapes of
these limited-supplier markets could result in increased prices or material
shortages that could materially affect NS’ financial position, results of
operations or liquidity in a particular year or quarter.
Item 1B.
Unresolved
Staff Comments.
NS has no unresolved SEC staff comments.
Item
3.
Legal Proceedings
..
On
Oct. 19, 2006, the Pennsylvania Department of Environmental Protection (PDEP) issued
an assessment of civil penalties against NS and filed a complaint for civil
penalties with the Pennsylvania Environmental Hearing Board (EHB) requesting
that the EHB impose civil penalties upon NS for alleged violations of state
environmental laws and regulations resulting from a discharge of sodium
hydroxide which occurred as a result of the derailment of a NS train in Norwich
Township, Pennsylvania, on June 30, 2006.
The PDEP’s actions seek to impose combined penalties of $8,890,000
for alleged past violations and $46,420 per day for alleged ongoing violations
of state environmental laws and regulations.
NS believes that the monetary penalties
sought by the PDEP are excessive.
Accordingly, NS intends to vigorously defend the action and has appealed
the fines to the EHB.
In addition,
NS expects the Pennsylvania Fish and Boat Commission to impose a monetary
penalty on NS for damages alleged to have been caused by this accident.
NS does not believe that the outcome of
these proceedings will have a material effect on its financial position,
results of operations, or liquidity.
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 2006.
Executive
Officers of the Registrant.
Norfolk
Southern's executive
officers generally are elected and designated annually by the Board of
Directors at its first meeting held after the annual meeting of stockholders,
and they hold office until their successors are elected.
Executive officers also may be elected
and designated throughout the year as the Board of Directors considers
appropriate.
There are no family
relationships among the officers, nor any arrangement or understanding between
any officer and any other person pursuant to which the officer was
selected.
The following table sets
forth certain information, as of
January 31, 2007
, relating to the executive officers.
Name,
Age, Present Position
|
Business
Experience During Past Five Years
|
|
|
Charles
W. Moorman, 54,
|
Present
position since
February 1,
2006
..
|
Chairman,
President and
|
Served
as President and Chief Executive Officer from
|
Chief Executive Officer
|
November 1, 2005
to
February 1, 2006
; as
President from
|
|
October 1, 2004
to
November 1, 2005
; as Senior Vice
|
|
President
– Corporate Planning and Services from
|
|
December 1, 2003
to
October 1, 2004
; Senior
Vice President –
|
|
Corporate
Services from
February 1,
2003
to
December
1, 2003
;
|
|
also
served as President – Thoroughbred Technology and
|
|
Telecommunications,
Inc. since October 1999 and prior thereto
|
|
was
Vice President – Information Technology.
|
|
|
Stephen
C. Tobias, 62,
|
Present
position since August 1998.
|
Vice
Chairman and
|
|
Chief
Operating Officer
|
|
|
|
Henry
C. Wolf, 64,
|
Present
position since August 1998.
|
Vice
Chairman and
|
|
Chief
Financial Officer
|
|
|
|
James
A. Hixon, 53,
|
Present
position since
October 1,
2005
..
|
Executive
Vice President –
|
Served
as Executive Vice President – Finance and Public Affairs
|
Law
and Corporate Relations
|
From
October 1, 2004
,
to
October 1, 2005
;
Senior Vice
|
|
President
– Legal and Government Affairs from December 1,
|
|
2003 to
October 1, 2004
; Senior Vice President
– Administration
|
|
from
February 1, 2001
to
December 1, 2003
;
and prior thereto
|
|
was
Senior Vice President – Employee Relations.
|
|
|
Mark
D. Manion, 54,
|
Present
position since
October 1,
2004
..
|
Executive
Vice President –
|
Served
as Senior Vice President – Transportation Operations
|
Operations
|
from
December 1, 2003
to
October 1, 2004
;
Vice President –
|
|
Transportation
Services and Mechanical from
February
1, 2001
|
|
to
December 1, 2003
;
and prior thereto was Vice President –
|
|
Mechanical.
|
|
|
Kathryn
B. McQuade, 50,
|
Present
position since
October 1,
2004
..
|
Executive
Vice President –
|
Served
as Senior Vice President – Finance from December 1,
|
Planning
and Chief Information
|
2003
to
October 1, 2004
;
and prior thereto was Senior Vice
|
Officer
|
President
– Financial Planning.
|
|
|
John
P. Rathbone, 54,
|
Present
position since
October 1,
2004
..
|
Executive
Vice President –
|
Served
as Senior Vice President – Administration from
|
Administration
|
December 1, 2003
to
October 1, 2004
; Senior
Vice President
|
|
and
Controller from April 2000 to
December
1, 2003
and prior
|
|
thereto
was Vice President and Controller.
|
|
|
Donald
W.
Seale, 54,
|
Present
position since
April 1,
2006
..
|
Executive
Vice President
|
Served
as Executive Vice President – Sales and Marketing from
|
and
Chief Marketing Officer
|
October 1, 2004
to
April 1, 2006
; as Senior
Vice President -
|
|
Marketing
Services from
December 1,
2003
to October 1,
|
|
2004;
and prior thereto was Senior Vice President –
|
|
Merchandise
Marketing.
|
|
|
Dan
iel D. Smith, 54,
|
Present
position since
December 1,
2003
..
|
Senior
Vice President –
|
Served
as
President-
NS
Development from
February 1, 2001
to
|
Energy
and Properties
|
December 1, 2003
..
|
|
|
James
A. Squires, 45,
|
Present
position since
April 1,
2006
..
|
Senior
Vice President –
|
Served
as Senior Vice President – Law from
October 1, 2004
to
|
Financial
Planning
|
April 1, 2006
; as Vice
President – Law from
December
1, 2003
|
|
to
October 1, 2004
;
Senior General Counsel from February 1,
|
|
2002
to
December 1, 2003
;
and prior thereto was General Counsel.
|
|
|
Marta R. Stewart
, 49,
|
Present
position since
December 1,
2003
..
|
Vice
President and Controller
|
Prior
thereto was Assistant Vice President Corporate Accounting.
|
PART II
NORFOLK
SOUTHERN CORPORATION AND
SUBSIDIARIES (NS)
Item 5.
|
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases
|
|
of Equity Securities.
|
NORFOLK
SOUTHERN CORPORATION AND SUBSIDIARIES
STOCK PRICE AND DIVIDEND
INFORMATION
The
Common Stock of Norfolk Southern Corporation, owned by 38,900 stockholders
of record as of Dec. 31, 2006, is traded on the New York Stock
Exchange with the symbol NSC.
The
following table shows the high and low sales prices as reported by Bloomberg
L.P. on its internet-based service and dividends per share, by quarter, for 2006
and 2005.
|
Quarter
|
2006
|
|
1st
|
|
2nd
|
|
3rd
|
|
4th
|
Market
price
|
|
|
|
|
|
|
|
|
High
|
$
|
54.93
|
$
|
57.71
|
$
|
54.00
|
$
|
55.07
|
Low
|
|
41.22
|
|
46.17
|
|
39.10
|
|
42.80
|
Dividends
per share
|
$
|
0.16
|
$
|
0.16
|
$
|
0.18
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
2005
|
|
1st
|
|
2nd
|
|
3rd
|
|
4th
|
Market
price
|
|
|
|
|
|
|
|
|
High
|
$
|
38.99
|
$
|
37.78
|
$
|
40.93
|
$
|
45.81
|
Low
|
|
33.21
|
|
29.60
|
|
30.70
|
|
38.01
|
Dividends
per share
|
$
|
0.11
|
$
|
0.11
|
$
|
0.13
|
$
|
0.13
|
ISSUER PURCHASES OF EQUITY SECURITIES
Period
|
(a) Total Number of Shares (or Units) Purchased
|
(b) Average Price Paid per Share
(or Unit
)
|
(c) Total Number of Shares (or Units) Purchased as
Part of Publicly Announced Plans or Programs(2)
|
(d) Maximum Number (or Approximate Dollar Value) of
Shares (or Units) that may yet be Purchased Under the Plans or Programs(2)
|
Oct. 1-31, 2006
|
985,889
|
$46.09
|
983,995
|
28,279,067
|
Nov. 1-30, 2006
|
1,889
|
$52.96
|
- --
|
28,279,067
|
Dec. 1-31, 2006
|
53,239
|
$49.56
|
51,500
|
28,227,567
|
Total
|
1,041,017(1)
|
$46.28
|
|
|
|
|
|
|
|
(1)
Of this amount 5,522
represent s
hares tendered by employees in connection with the
exercise of stock options under the Long-Term Incentive Plan.
(2)
On
Nov. 22, 2005
, the Board
of Directors authorized a share repurchase program, pursuant to which up to 50
million of the NS’ common stock may be purchased through
Dec. 31, 2015
..
Item
6.
Selected Financial Data
..
NORFOLK
SOUTHERN CORPORATION AND
SUBSIDIARIES
FIVE-YEAR FINANCIAL REVIEW
2002-2006
|
2006
|
2005
1
|
2004
2
|
20033
|
2002
|
|
($ in millions, except per
share amounts)
|
RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Railway
operating revenues
|
$
|
9,407
|
$
|
8,527
|
$
|
7,312
|
$
|
6,468
|
$
|
6,270
|
Railway
operating expenses
|
|
6,850
|
|
6,410
|
|
5,610
|
|
5,404
|
|
5,112
|
Income
from railway
operations
|
|
2,557
|
|
2,117
|
|
1,702
|
|
1,064
|
|
1,158
|
|
|
|
|
|
|
|
|
|
|
|
Other
income – net
|
|
149
|
|
74
|
|
76
|
|
19
|
|
66
|
Interest
expense on debt
|
|
476
|
|
494
|
|
489
|
|
497
|
|
518
|
Income
from continuing
operations
before income
taxes
and accounting changes
|
|
2,230
|
|
1,697
|
|
1,289
|
|
586
|
|
706
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
749
|
|
416
|
|
379
|
|
175
|
|
246
|
Income
from continuing
operations
before accounting
|
|
|
|
|
|
|
|
|
|
|
changes
|
|
1,481
|
|
1,281
|
|
910
|
|
411
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations4
|
|
- --
|
|
- --
|
|
- --
|
|
10
|
|
- --
|
Cumulative
effect of changes in
accounting
principles, net of
taxes5
|
|
- --
|
|
- --
|
|
- --
|
|
114
|
|
- --
|
Net
income
|
$
|
1,481
|
$
|
1,281
|
$
|
910
|
$
|
535
|
$
|
460
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
before accounting
changes
– basic
|
$
|
3.63
|
$
|
3.17
|
$
|
2.31
|
$
|
1.05
|
$
|
1.18
|
–
diluted
|
$
|
3.57
|
$
|
3.11
|
$
|
2.28
|
$
|
1.05
|
$
|
1.18
|
Net
income – basic
|
$
|
3.63
|
$
|
3.17
|
$
|
2.31
|
$
|
1.37
|
$
|
1.18
|
– diluted
|
$
|
3.57
|
$
|
3.11
|
$
|
2.28
|
$
|
1.37
|
$
|
1.18
|
Dividends
|
$
|
0.68
|
$
|
0.48
|
$
|
0.36
|
$
|
0.30
|
$
|
0.26
|
Stockholders'
equity at year end
|
$
|
24.19
|
$
|
22.63
|
$
|
19.92
|
$
|
17.83
|
$
|
16.71
|
|
|
FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
26,028
|
$
|
25,859
|
$
|
24,748
|
$
|
20,596
|
$
|
19,956
|
Total
long-term debt, including
|
|
|
|
|
|
|
|
|
|
|
current
maturities6
|
$
|
6,600
|
$
|
6,930
|
$
|
7,525
|
$
|
7,160
|
$
|
7,364
|
Stockholders'
equity
|
$
|
9,615
|
$
|
9,276
|
$
|
7,977
|
$
|
6,976
|
$
|
6,500
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
$
|
1,178
|
$
|
1,025
|
$
|
1,041
|
$
|
720
|
$
|
695
|
|
|
|
|
|
|
|
|
|
|
|
Average
number of shares
outstanding
(thousands)
|
|
405,988
|
|
404,170
|
|
394,201
|
|
389,788
|
|
388,213
|
Number
of stockholders at year end
|
|
38,900
|
|
48,180
|
|
51,032
|
|
52,091
|
|
51,418
|
Average
number of employees:
|
|
|
|
|
|
|
|
|
|
|
Rail
|
|
30,079
|
|
29,851
|
|
28,057
|
|
28,363
|
|
28,587
|
Nonrail
|
|
462
|
|
443
|
|
418
|
|
390
|
|
383
|
Total
|
|
30,541
|
|
30,294
|
|
28,475
|
|
28,753
|
|
28,970
|
1
|
2005 provision for income taxes includes a $96
million benefit related to the reduction of NS’ deferred income tax
liabilities resulting from tax legislation enacted by
Ohio
..
This benefit increased net income by $96 million, or 23 cents per
diluted share.
|
2
|
2004 other income – net includes a $40 million
net gain from the Conrail Corporate Reorganization.
This gain increased net income by $40
million or 10 cents per diluted share.
|
3
|
2003 operating expenses
include a $107 million charge for a voluntary separation program.
Other income – net includes an
$84 million charge to recognize the impaired value of certain
telecommunications assets.
These
charges reduced net income by $119 million, or 30 cents per diluted share.
|
4
|
NS
sold all the common stock of its motor carrier subsidiary, North American Van
Lines, Inc. in 1998.
Results in
2003 include an additional after-tax gain of $10 million, or 3 cents per
diluted share, resulting from resolution of tax issues related to the
transaction.
|
5
|
Net
income in 2003 reflects two accounting changes, the cumulative effect of
which increased net income by $114 million, or 29 cents per diluted
share:
a change in accounting for
the cost to remove railroad crossties, which increased net income by $110
million, and a change in accounting related to a special-purpose entity that
leases certain locomotives to NS, which increased net income by $4 million.
|
6
|
Excludes
notes payable to Conrail of $716 million in 2003 and $513 million in 2002.
|
|
See
accompanying Consolidated Financial Statements and notes thereto.
|
Item
7
..
Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Norfolk
Southern Corporation and
Subsidiaries
Management's Discussion and
Analysis of
Financial Condition and
Results of Operations
The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes and the Selected Financial Data.
OVERVIEW
NS’ 2006 results reflect
substantial increases in revenues (up $880 million, or 10%) resulting primarily
from higher pricing, including increased fuel surcharges.
Traffic volume in 2006 rose modestly as
increases in the first half of the year were largely offset by declines in the
second half, particularly during the fourth quarter.
Operating expenses rose 7%, resulting in
a 21% improvement in income from railway operations and a lower operating ratio
(a measure of the amount of operating revenues consumed by operation expenses) of
72.8% compared with 75.2% in 2005.
Higher operating income
for the year translated into increased cash flows, which, combined with
substantial proceeds from employee stock option exercises, were used to fund
increased capital expenditures, purchase and retire common stock, increase
dividends and pay maturing debt.
At
Dec. 31, 2006, the cash and short-term investment balance was $918
million.
Loo
ki
ng ahead, NS expects
revenue increases to continue but at a more moderate pace, reflecting lower
volume growth and comparison with a strong 2006.
NS plans to continue its focus on
improving service levels and maintaining a market-based approach to
pricing.
Approximately one-half of NS’ revenue base is
subject to renegotiation or repricing in 2007.
During 2006, NS purchased
and retired 21.8 million shares of common stock at a total cost of $964 million
under the share repurchase program approved by the Board of Directors on Nov.
22, 2005.
Under the program, the
Board has authorized the repurchase of up to 50 million shares of NS common
stock through Dec. 31, 2015.
SUMMARIZED
RESULTS OF OPERATIONS
2006 Compared with 2005
Net income in 2006 was $1.5
billion, or $3.57 per diluted share, up $200 million, or 16%, compared with $1.3 billion,
or $3.11 per diluted share, in 2005.
The increase in net income was primarily due to higher income from
railway operations, offset in part by the absence of the $96 million income tax
benefit recorded in 2005 because of
Ohio
tax law changes (see Note 3).
Railway operating revenues increased $880 million, reflecting higher
rates, including fuel surcharges that accounted for about 40% of the increase and
modestly higher traffic volume.
Railway operating expenses rose $440 million, or 7%, principally due to
higher diesel fuel prices and increased compensation and benefit costs.
2005 Compared with 2004
Net income in 2005 was $1.3
billion, or $3.11 per diluted share, up $371 million, or 41%, compared with $910 million,
or $2.28 per diluted share, in 2004.
Results in 2005 reflected a $96 million second quarter income tax
benefit related to Ohio tax law changes (see Note 3), while results in 2004 included
a $40 million net gain related to the Conrail Corporate Reorganization (see
Note 4).
The remaining $315 million
increase in net income was primarily due to higher income from railway
operations.
Railway operating
revenues increased $1.2 billion, reflecting higher rates (including the
favorable effects of the coal rate cases settled in the second quarter –
see below), fuel surcharges and increased traffic volume.
Railway operating expenses rose $800
million, or 14%, principally due to higher diesel fuel prices, increased
volume-related expenses and casualty claims costs.
DETAILED
RESULTS OF OPERATIONS
Railway
Operating Revenues
Railway
operating revenues were $9.4 billion in 2006, $8.5 billion in 2005 and $7.3
billion in 2004.
The following
table presents a three-year comparison of revenues, volume and average revenue
per unit by market group (prior period amounts for the chemicals,
agriculture/consumer products/government and paper/clay/forest groups have been
reclassified to conform to the current year presentation).
|
Revenues
|
Units
|
Revenue
per Unit
|
|
2006
|
2005
|
2004
|
2006
|
2005
|
2004
|
2006
|
2005
|
2004
|
|
($ in
millions)
|
(in
thousands)
|
($ per unit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coal
|
$
|
2,330
|
$
|
2,115
|
$
|
1,728
|
1,760.0
|
1,735.4
|
1,690.8
|
$
|
1,324
|
$
|
1,219
|
$
|
1,022
|
General merchandise:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metals/construction
|
|
1,168
|
|
978
|
|
818
|
835.3
|
794.2
|
781.1
|
|
1,398
|
|
1,231
|
|
1,048
|
Chemicals
|
|
1,079
|
|
978
|
|
868
|
426.4
|
442.1
|
444.7
|
|
2,530
|
|
2,212
|
|
1,953
|
Agr./cons.
prod./govt.
|
|
994
|
|
832
|
|
716
|
594.1
|
571.8
|
559.8
|
|
1,673
|
|
1,454
|
|
1,279
|
Automotive
|
|
974
|
|
997
|
|
954
|
561.9
|
615.9
|
634.6
|
|
1,734
|
|
1,620
|
|
1,503
|
Paper/clay/forest
|
|
891
|
|
801
|
|
691
|
466.7
|
472.2
|
461.7
|
|
1,909
|
|
1,697
|
|
1,496
|
General merchandise
|
|
5,106
|
|
4,586
|
|
4,047
|
2,884.4
|
2,896.2
|
2,881.9
|
|
1,770
|
|
1,583
|
|
1,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intermodal
|
|
1,971
|
|
1,826
|
|
1,537
|
3,256.5
|
3,154.9
|
2,891.5
|
|
605
|
|
579
|
|
531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
9,407
|
$
|
8,527
|
$
|
7,312
|
7,900.9
|
7,786.5
|
7,464.2
|
$
|
1,191
|
$
|
1,095
|
$
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
increased $880 million, or 10%, in 2006 and $1.2 billion, or 17%, in 2005.
As shown in the following table, both revenue
improvements were the result of increased average revenues per unit, including
fuel surcharges, and, to a lesser extent in 2006 than for 2005, higher traffic
volumes.
Revenue Variance Analysis
|
Increases
|
|
|
|
|
2006 vs. 2005
|
2005 vs. 2004
|
|
($ in millions)
|
|
|
|
|
|
Revenue
per unit/mix
|
$
|
755
|
$
|
899
|
Traffic
volume (units)
|
|
125
|
|
316
|
Total
|
$
|
880
|
$
|
1,215
|
Both comparisons reflect
large increases in average revenue per unit, a result of higher rates and
increased fuel surcharges.
All
market groups collected significant fuel surcharges, which accounted for
approximately 40% of the 2006 increase in revenues and about one-third of the
2005 increase.
At year-end 2006,
fuel surcharge provisions covered approximately 91% of total revenues compared
with about 85% at the end of 2005.
Traffic
volume increased 1% in 2006, principally due to higher intermodal and
metals/construction shipments.
In
2005, traffic volume rose 4%, reflecting a 9% increase in intermodal
shipments.
The favorable revenue
per unit/mix variance in 2005 included an unfavorable mix component reflecting the
9% rise in intermodal traffic, which has a lower average revenue per unit.
On
April 24, 2006
, NS announced that it was revising its fuel
surcharge program for non-intermodal traffic originating and moving on
NS-issued tariffs and public quotes issued on or after
July 1, 2006
..
While the mechanics of the new fuel
surcharge are generally the same as the previous fuel surcharge, the trigger
price was raised from $23 to $64 per barrel of West Texas Intermediate (WTI) Crude
Oil and the percentage by which the line haul rate is increased when oil
exceeds the trigger price was decreased from 0.4% to 0.3% for each dollar or
portion thereof in excess of the trigger price.
Tariff prices and public quotes have
been adjusted to reflect this change.
The fuel surcharge is based on the monthly average price of WTI in the
second calendar month prior to the month in which the fuel surcharge is
applied.
Application of the new
fuel surcharge across tariff and public quotes as well as contracts now
approximates 15% of NS’ total revenue base.
On January 26, 2007, the
Surface Transportation Board (STB) issued a decision that the type of fuel
surcharge imposed by NS and most other large railroads – a fuel surcharge
based on a percentage of line haul revenue – would no longer be permitted
for regulated traffic that moves under public (tariff) rates.
The STB gave the railroads a 90‑day
transition period to adjust their fuel surcharge programs.
NS does not expect that compliance with
these new regulations will have a material effect on its financial condition,
results of operations or liquidity.
COAL
revenues increased $215 million, or 10%, compared
with 2005, which reflected higher average revenue per unit and slightly higher
traffic volume.
Coal average
revenue per unit was up 9% compared with 2005, reflecting increased fuel
surcharges and higher rates, tempered by the absence of the $55 million benefit
from the coal rate settlements in the second quarter of 2005 (see below).
Coal represented 25% of NS’
revenues in 2006, and 79% of shipments handled originated on NS’ lines.
Traffic volumes rose 1% primarily because
of increased shipments of utility coal, domestic metallurgical coal and coke
that offset lower export and iron ore shipments.
NS is currently involved in
litigation with Virginia Electric and Power Company/Old Dominion Electric
Cooperative (Virginia Power) regarding rate adjustment provisions in a
transportation contract between them.
During the third quarter of 2006, a court order was entered in favor of
NS, and in the fourth quarter Virginia Power filed a petition with the
Virginia Supreme Court appealing this order.
Future developments and the ultimate
resolution of this matter could result in NS recognizing additional
revenues related to this dispute, which could have a favorable impact on
results of operations in a particular year or quarter.
In 2005, coal
revenues increased $387 million, or 22%, compared
with 2004, reflecting higher average revenue per unit and increased traffic
volume.
Coal average revenue per
unit was up 19% compared with 2004, reflecting higher rates, the favorable
effects of fuel surcharges, longer-haul business and the rate cases settled in
the second quarter (see below).
Coal represented 25% of NS’ revenues in 2005, and 83% of shipments
handled originated on NS’ lines.
Traffic volumes rose 3% primarily because of increased shipments of
utility coal that offset lower export and domestic metallurgical coal, coke and
iron ore shipments.
During the second quarter of
2005, NS entered into settlement agreements with two utility customers that
resolved their rail transportation rate cases before the STB.
In 2002, these customers each filed rate
reasonableness complaints with the STB.
In October 2004, the STB found NS’ rates to be reasonable in both
cases.
As a result of the
settlement of these cases, NS recognized $55 million of additional coal revenue
in 2005 related to the period in dispute.
Total Coal, Coke and
Iron
Ore
Tonnage
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
(Tons in thousands)
|
|
|
|
|
|
|
Utility
|
148,078
|
|
142,522
|
|
134,085
|
Domestic
metallurgical
|
20,878
|
|
20,076
|
|
20,686
|
Export
|
12,409
|
|
14,531
|
|
16,583
|
Industrial
|
9,202
|
|
9,524
|
|
9,799
|
Total
|
190,567
|
|
186,653
|
|
181,153
|
Utility
coal
tonnage increased 4%, compared with 2005, reflecting the rebuilding of
stockpiles by customers, more shipments from the
Powder
River Basin
in the West and higher
shipments of import coal through
Charleston
,
SC.
In 2005, utility coal tonnage
increased 6% compared to
2004, in response to increased coal-fired generation to meet the heavier
electricity demand of a strong economy, limited nuclear power generation
capacity, higher natural gas prices and utility coal stockpiles which were
below target levels across NS’ service area.
Supply constraints dampened shipments
while the increased demand for Eastern U.S. coal prompted some customers to
shift to coal from non-traditional sources in
Wyoming
and
Colorado
and imported coal.
Appalachian coal
production increased modestly and Western coal production was up 2% in 2005.
While
natural gas prices are expected to remain higher in 2007, demand for utility
coal could be tempered by persistent mild winter weather in the East and above
average stockpiles.
Additionally,
in November 2006, Virginia Power announced it intends to switch from domestic
coal to imported coal for its
Chesapeake
,
Virginia
,
Energy
Center
..
Since NS would not transport the imported
coal, this change would result in the loss of approximately 1.6 million
tons annually.
A
number of evolving environmental issues could affect the utility coal
market.
These include potential
regional programs aimed at capping and reducing power plant CO
2
emissions, and ongoing efforts at addressing
climate change.
In response to
changes in environmental regulations, certain utilities have begun adding or
are planning to add emissions control technologies to their electric generating
units, allowing them to utilize their existing coal-fired power plants.
Domestic
metallurgical
coal, coke and iron ore tonnage increased 4% in 2006 compared
with 2005.
The increase was
driven by higher domestic metallurgical coal and coke shipments in the first
half of the year in response to steel-ma
ki
ng
demand, which more than offset a decline in iron ore volume caused by the
shutdown of a blast furnace at a major customer location.
For 2005, domestic metallurgical
coal, coke and iron ore tonnage
was down 3%, compared with 2004.
Declines in domestic coke and iron ore volumes, principally due to the
idling of a major steel blast furnace, were partially offset by an 8% increase in
metallurgical coal.
Demand
for domestic metallurgical coal and coke is expected to decline slightly with a
softening in the steel industry in 2007, whereas new business is expected to
modestly increase iron ore shipments.
Export coal
tonnage decreased 15% in
2006 compared to 2005, reflecting weaker demand for
U.S.
coal as Europe and
Asia
continued to increase purchases
from other countries.
Baltimore
volume was down approximately 13,500 cars, or
37%, and
Norfolk
volume declined by approximately 3,000 cars, or 3%.
In 2005, export coal tonnage decreased 12% compared
to 2004, due to both coal supply constraints and a weak European steel
market.
Volume through
Norfolk
and
Baltimore
decreased.
Norfolk
was down approximately 16,000 carloads, or 14%, and
Baltimore
was down approximately
2,000 carloads, or 6%.
U.S.
exports in 2005 were constrained by several factors:
(1) the tight coal supply from Eastern
coal mines caused primarily by the sporadic closure of a major coal mine,
(2) the idling of production by European steel manufacturers in order to
manage finished goods inventory, and (3) the abundant supply of Chinese coke on
the world market lowering the price and ma
ki
ng
it more economical to buy coke rather than import metallurgical coal from the
U.S. and convert it.
Export
coal tonnage for 2007 is expected to weaken as higher mining costs offset
potential gains from favorable ocean freight rates from the
U.S.
versus
Australia
..
Other
coal
tonnage (principally steam coal shipped to industrial plants) decreased 3%
versus 2005, primarily due to plant closures and mine production problems.
In 2005, other coal tonnage decreased 3%
versus 2004, primarily due to the diversion of coal to the utility market.
GENERAL
MERCHANDISE
revenues increased $520 million, or 11%, in 2006 compared with 2005, as all
market groups posted higher average revenue per unit driven by increased rates
and fuel surcharges.
Traffic volume
declined slightly as improved metals and construction and agriculture volumes
were offset by declines in the other business groups.
In 2005, general merchandise revenues
increased 13% due to higher average rates and fuel surcharges.
Traffic volume was up modestly in 2005 compared
with 2004 as decreases in automotive and chemicals traffic partially offset
increases in other business groups.
Metals and construction
revenue increased 19% and
traffic volume increased 5% in 2006 compared with 2005 as declines in the
fourth quarter were offset by higher volumes through the rest of the year.
Revenue per unit rose 14% because of increased
rates and fuel surcharges.
The increase
in traffic volume was driven primarily by higher import slab business to
NS-served steel mills, more scrap metal shipments and higher sand, gravel and cement
traffic for commercial and highway construction projects.
In 2005, metals and construction
revenue increased 20% and
traffic volume increased 2% compared with 2004.
Revenue per unit rose 17% because of
higher rates and fuel surcharges.
The volume improvements were due primarily to continued strength at
NS-served integrated and electric arc mills and higher aluminum product
shipments, which were partially offset by lower scrap metal carloads.
Construction traffic volume benefited
from increased residential, commercial and highway construction.
Metals
and construction volume is expected to be tempered in the first quarter of 2007,
reflecting a softening in domestic steel production affecting iron and steel
shipments, with improving conditions expected in the second half of the year.
Aggregate and cement shipments are
expected to increase driven by highway projects and new stone terminals
locating on NS’ lines.
Chemicals
revenue increased 10%, despite a 4% drop in traffic
volume, reflecting increased rates and fuel surcharges.
Petroleum, industrial and plastics traffic
volumes were down as a result of lower inventories arising from post-Katrina
conditions, the closure of several plants on NS lines and the weaker housing
and automotive markets.
In 2005, chemicals
revenues increased 13%,
reflecting higher prices and fuel surcharges, while traffic volume was down
slightly as a result of production curtailment in the
Gulf
Coast
region and as compared with a strong 2004.
Volume increases for plastic and petroleum products were offset by
decreases in industrial and miscellaneous chemicals.
Chemical
volume is expected to improve in 2007, supported by new and expanded business
as the year progresses.
However,
volume could be adversely affected by the price of natural gas and crude oil,
which accounts for more than 50% of the cost of many chemical products and
presents a significant competitive challenge that could cause domestic chemical
producers to move production overseas.
Agriculture,
consumer products and government
revenue increased 19% and traffic volume increased 4%
in 2006 compared with 2005.
Average
revenue per unit rose 15%, a result of higher rates and fuel surcharges.
Traffic volume growth resulted from increased
ethanol, military and corn shipments.
Military traffic growth was primarily due to the continued support of
military operations in
Iraq
..
In 2005, agriculture, consumer products and
government
revenue increased 16% and traffic volume increased 2% compared with 2004.
Average revenue per unit rose 14%, a result
of higher rates and fuel surcharges.
Traffic growth resulted from sweeteners, government traffic and
fertilizer.
Government traffic
growth was primarily due to the support of military operations in
Iraq
as well as shipments of temporary housing to hurricane-damaged areas.
Ethanol traffic increased 38% due to
higher shipments from current customers in addition to new business in
Georgia
and
South Carolina
..
Agriculture volume is expected to continue to grow
in 2007, benefiting from increasing demand for ethanol as a replacement for
MTBE which was banned by the Federal Government as a fuel additive.
However, declines in consumer products
and government volumes are expected to offset this growth.
Automotive
revenues declined 2% in
2006 compared with 2005 as lower volumes offset increased average revenues per
unit, including fuel surcharges.
Volume
decreased 9% primarily due to substantial production cuts at Ford, General
Motors and Daimler-Chrysler assembly plants, including two NS-served plant closures
at Ford and one at General Motors during 2006.
Ford and General Motors combined operate
15 of 29 assembly plants served by NS.
Reduced production at Honda and BMW also
contributed to the volume decrease.
In 2005, automotive revenues
rose 5%, compared with
2004, the result of an 8% increase in average revenue per unit that reflected
pricing improvements and higher fuel surcharges.
In contrast, traffic volume decreased 3%
primarily due to reduced production at Ford and General Motors, with General Motors
closing NS-served assembly plants in
Michigan
,
Maryland
and
New Jersey
..
These reductions were partially offset
by increased production at Honda, Mercedes-Benz and
Toyota
..
For
2007, NS expects automotive revenues to continue to decline as a result of
automotive production cutbacks.
Decreases
by
U.S.
automotive manufacturers are expected to be partially offset by higher domestic
production by foreign manufacturers.
Paper, clay and forest products
revenue increased 11% in 2006
compared with 2005 due to higher average revenues per unit, including fuel
surcharges, despite a 1% decrease in traffic volume.
Higher solid waste and debris traffic, and
growth in traffic from the import of printing paper, partially offset reduced
pulp and pulp board shipments.
In 2005, paper, clay and forest products
revenue increased 16% and
traffic volume increased 2% compared with 2004.
Average revenue per unit rose 13% due to
higher rates and fuel surcharges.
Pulp board, printing paper, newsprint and woodchip produced volume gains
despite consolidations within the industry and mill shutdowns.
In 2007, paper, clay and forest product revenues are
expected to be up slightly and benefit from continued growth in waste and
debris transportation.
INTERMODAL
revenues increased $145 million, or 8%, compared with
2005, largely because of higher fuel surcharges, increased rates and improved
traffic volume.
Traffic volume for
the year rose 3% notwithstanding a 3% decline in the fourth quarter.
International
traffic volume rose 9% reflecting growth in imported goods from
Asia
and exported goods through NS-served East Coast
ports, as well as West Coast ports.
Truckload volume increased 8% reflecting continued expansion of business
with traditional truckload companies.
Triple Crown Services Company, a service with rail-to-highway trailers,
had flat volume compared with 2005 as higher consumer product shipments were
offset by weaker automotive-related shipments.
Domestic intermodal marketing companies
(IMC) volume declined 9% reflecting declines in the housing, construction and
automotive markets.
Premium
business, which includes parcel and LTL (less-than-truckload) carriers, was
down 3% reflecting lower LTL shipper traffic that offset modest gains in parcel
shipments.
Intermodal revenue
per unit increased 4%, principally a result of higher fuel surcharges as well
as increased rates and longer-haul international traffic, which was offset in
part by the ongoing shift of shipments from higher revenue per unit,
rail-provided assets (trailers and containers) to lower revenue per unit
shipments in shipper-provided equipment.
In 2005, intermodal revenues
increased $289 million, or 19% compared with 2004, reflecting improved traffic
volume, higher fuel surcharges, and increased rates.
Despite moderated growth in domestic
business, traffic volume increased 9% reflecting
strength in the international, truckload and Triple Crown Services lines
of business
..
International traffic volume grew by 16%
reflecting strength in
U.S.
consumer markets and growth in the movement of import and export goods through
NS-served East Coast ports, as well as West Coast ports.
Truckload volume increased 10% compared
with 2004, reflecting additional business with traditional truckload
companies.
Premium business grew 6%
due primarily to new business in the Northern region.
Triple Crown Services volume grew 6%
reflecting expanded geographic coverage and increased trailer fleet size to
meet higher demand.
Domestic volume
decreased 3% compared with 2004, principally due to the continued reduction in
transloading of West Coast international freight into domestic containers.
Intermodal revenue per unit
increased 9%, a result of fuel surcharges and rate increases.
In
2007, NS expects moderate growth in its intermodal markets, with continued
strength in the international markets.
Future growth may, however, be tempered by economic conditions in the
U.S.
Railway
Operating Expenses
Railway
operating expenses in 2006 were $6.9 billion, up $440 million, or 7%, compared
to 2005, which were up $800 million compared to 2004.
The 2006 increase was principally due to
higher diesel fuel prices and increased compensation and benefits.
The increase in 2005 was principally due
to a sharp rise in the price of diesel fuel, volume-related expense increases,
more maintenance activities and higher casualty costs.
Carloads rose 1% in 2006 compared to 2005
and 4% in 2005 compared to 2004.
The
railway operating ratio, which measures the percentage of railway operating
revenues consumed by railway operating expenses, improved to 72.8% in 2006,
compared with 75.2% in 2005 and 76.7% in 2004.
The following table shows the changes in railway
operating expenses summarized by major classifications.
Operating Expense
Variances
|
Increases (Decreases)
|
|
|
|
|
2006 vs. 2005
|
2005 vs. 2004
|
|
($ in millions)
|
|
|
|
|
|
Compensation
and benefits
|
$
|
144
|
$
|
221
|
Materials,
services and rents
|
|
86
|
|
208
|
Conrail
rents and services
|
|
(3)
|
|
(190)
|
Depreciation
|
|
(36)
|
|
176
|
Diesel
fuel
|
|
250
|
|
278
|
Casualties
and other claims
|
|
(4)
|
|
73
|
Other
|
|
3
|
|
34
|
Total
|
$
|
440
|
$
|
800
|
Compensation
and benefits
,
which represents nearly 40% of total railway operating expenses, increased $144 million,
or 6%, compared with 2005, and increased $221 million in 2005, or 10%, compared
with 2004.
Expenses in 2006
included the effect of the implementation of Statement of Accounting Standards
No. 123(R) “Share-Based Payment,” which increased stock-based
compensation expense by $27 million.
Most of the increase was reflected in the first quarter which included
the effect of accelerated recognition of costs related to grants to
retirement-eligible employees.
This
up front recognition of costs will occur in the first quarter of 2007 and is
expected to be somewhat higher reflecting a higher proportion of retirement
eligible grantees.
The remaining
increase was attributable to increased salaries and wages (up $44 million),
higher health and welfare benefit costs (up $29 million), higher payroll taxes
(up $17 million), retirement and waiver agreements entered into in the first
quarter (up $13 million) and the cost of the regular stock-based grant to the
former chief executive officer who retired in the first quarter ($11 million).
NS
employment averaged 30,541 in 2006 compared with 30,294 in 2005 and 28,475 in
2004.
The increased number of employees
has come almost exclusively in operating department personnel to meet the
increased volume and service needs, as well as expected retirements.
NS continues to hire and train
additional workers in order to meet the requirements of forecasted volumes in
light of the demographics of its work force.
The increase in compensation and benefits for 2005
reflected increased hours for train operations, including trainees, and
equipment maintenance (up $70 million); increased wage rates (up $46
million); increased pension, postretirement and health and welfare benefit
costs (up $43 million); higher stock-based compensation (up $22 million); and
higher payroll taxes (up $12 million).
The Railroad Retirement and Survivors’
Improvement Act, which took effect Jan. 1, 2002, allows for investment of Tier
II assets in a diversified portfolio through the National Railroad Retirement
Investment Trust.
The law also
provides a mechanism for automatic adjustment of Tier II payroll taxes should
the trust assets fall below a four-year reserve or exceed a six-year
reserve.
As a result, the
employers’ portion of Tier II retirement payroll taxes has been
reduced from 13.1% in 2004 to 12.6% in 2005 and 2006, and to 12.1% for 2007.
However, these savings are
expected to continue to be substantially offset by higher payroll taxes on
increased wages and a higher wage base.
Materials,
services and rents
includes costs related to items used for the maintenance of railroad
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 $86
million, or 5%, in 2006 compared to 2005, and increased 13% in 2005 compared to
2004.
For 2006, materials expense
was up $39 million due to increased maintenance activities, purchased services
was up $39 million reflecting increased intermodal traffic volume and equipment
rents rose $8 million.
The
increase in 2005 reflected higher volume-related purchased services (up $82
million) and higher maintenance expense (up $74 million).
Equipment rents rose $28 million,
reflecting higher traffic volume as well as leases from the Conrail Corporate
Reorganization (see Note 4).
Locomotive and freight car repair costs increased in
2006 and in 2005, due to more maintenance activity related to higher usage from
increased traffic volumes coupled with the age of the fleet.
This level of expense is expected to
continue and may increase depending on traffic volumes.
Equipment
rents, which includes the cost to NS of using equipment (mostly freight cars)
owned by other railroads or private owners less the rent paid to NS for the use
of its equipment, rose 2% in 2006 and increased 11% in 2005.
The increase in 2006 was principally due
to a reduction in rents received on automotive equipment as a result of
decreased shipments.
The increase in
2005 was principally due to additional lease expense for a full year from the
Conrail Corporate Reorganization and increased volume-related intermodal shipments.
Conrail rents and services
decreased $3 million, or 2%,
in 2006 compared to 2005, and decreased 60% in 2005 compared to 2004.
For 2006 and 2005 this item includes
amounts due to Conrail for operation of the Shared Assets Areas.
Before the Conrail Corporate
Reorganization in 2004 this item included amounts due to PRR for use of its
operating properties and equipment, NS’ equity in Conrail’s net
earnings and the additional amortization related to the difference between
NS’ investment in Conrail and its underlying equity (see Note 4).
The decline in 2005 was primarily driven
by the Conrail Corporate Reorganization, which resulted in the consolidated
reporting of individual components of Conrail equity earnings, principally
depreciation, equipment rents and interest expense (see Note 4).
NS’ share of equity earnings after
the Conrail Corporate Reorganization is a component of “Other
income-net” (see Note 2).
Depreciation
expense decreased $36 million, or 5%, in 2006
compared with 2005, reflecting the results of an equipment depreciation study
from an independent firm of engineers and an analysis of the assets received in
the Conrail Corporation Reorganization completed in 2006.
Depreciation expense increased 29% in
2005 compared to 2004 primarily a result of the Conrail Corporate
Reorganization (see Note 4).
In
addition, substantial capital investments and improvements resulted in higher
depreciation expense.
Diesel fuel
expense increased $250 million, or 34%, in 2006
compared with 2005 and increased 62% in 2005 compared with 2004.
Diesel fuel expense is recorded net of
hedge benefits, although there have been no such benefits since May 2006 when
the program wound down (see “Market Risks and Hedging Activities,”
below and Note 16).
Expense in 2006
included hedge benefits of $20 million compared with benefits of
$148 million in 2005, and $140 million in 2004, and reflected a 13% rise
in the average price per gallon with a 1% increase in consumption.
The increase in 2005 reflected a 43%
rise in the average price per gallon and a 2% increase in consumption.
Legislation enacted in the first quarter of 2005
repealed the 4.3 cents per gallon excise tax on railroad diesel fuel for 2007,
with the following phased reductions in 2005 and 2006: 1 cent per gallon from
Jan. 1, 2005 through June 30, 2005; 2 cents per gallon from July 1, 2005
through Dec. 31, 2006; and by the full 4.3 cents thereafter.
NS consumes about 520 million gallons of
diesel fuel per year.
Casualties
and other claims
expenses (including the estimates of costs related to personal injury,
property damage and environmental matters) decreased $4 million, or 2%, in 2006
compared to 2005 and increased 48% in 2005 compared to 2004.
The decrease in 2006 reflected the
absence of $38 million of costs associated with a derailment in
Graniteville
,
South
Carolina
(see discussion below), and an unfavorable jury
verdict in an employee injury case, partially offset by higher expenses arising
from derailments and insurance costs.
The increase in 2005 was attributable to the costs associated with the
Graniteville derailment, $16 million for an unfavorable jury verdict rendered
in an employee injury case, $9 million of higher insurance costs, and $4 million
for the portion of the $12.5 million self-insured retention related to
Hurricane Katrina expenses.
On
Jan. 6, 2005
, a
collision in
Graniteville
,
South Carolina
, between two NS trains caused
the release of chlorine gas from a ruptured tank car.
NS’ liability related to this
accident includes a current and long-term portion which represents NS’
best estimate based on current facts and circumstances.
The estimate includes amounts related to
business property damage and other economic losses, personal injury and
individual property damage claims as well as third-party response costs.
NS’ commercial insurance policies
are expected to cover substantially all expenses related to this derailment
above NS’ self-insured retention, including NS’ response costs and
legal fees.
Accordingly, the
Consolidated Balance Sheets reflect a current and long-term receivable for
estimated recoveries from NS’ insurance carriers.
The expense recorded in 2005 represents
NS’ retention under its insurance policies and other uninsured
costs.
While it is reasonable to
expect that the liability for covered losses could differ from the amount
recorded, such a change would be offset by a corresponding change in the
insurance receivable.
As a result,
NS does not believe that it is reasonably likely that its net loss (the
difference between the liability and future recoveries) will be materially
different than the loss recorded in 2005.
NS expects at this time that insurance coverage is adequate to cover
potential claims and settlements above its self-insurance retention.
During the third quarter of 2005, NS’
operations were adversely affected by Hurricane Katrina, and to a lesser
extent, Hurricane Rita, both of which struck the
Gulf
Coast
..
NS sustained damage to its facilities in
the region as a result of Hurricane Katrina but restored rail freight service
into and around
New Orleans
in a relatively short period of time.
The damage sustained to NS facilities as a result of Hurricane Katrina
did not materially impact NS’ financial condition or results of
operations and is covered by insurance above the self-insurance retention
limit.
The largest component of casualties and other claims
expense is personal injury costs.
Cases involving occupational injuries comprised about two-thirds of
total employee injury cases resolved and about one-third of total payments
made.
With its long-established
commitment to safety, NS continues to work actively to eliminate all employee
injuries and to reduce the associated costs.
With respect to occupational injuries,
which are not caused by a specific accident or event, but result from a claimed
exposure over time, the benefits of any existing safety initiatives may not be
realized immediately.
These types
of claims are being asserted by former or retired employees, some of whom have
not been actively employed in the rail industry for decades.
The
rail industry remains uniquely susceptible to litigation involving job-related
accidental injury and occupational claims because of the Federal Employers'
Liability Act (FELA), which is applicable only to railroads.
FELA’s fault-based system, which
covers employee claims for job-related injuries, produces results that are
unpredictable and inconsistent as compared with a no-fault workers'
compensation system.
NS maintains substantial amounts of insurance for
potential third-party liability and property damage claims.
It also retains reasonable levels of
risk through self-insurance (see Note 17).
NS expects insurance costs to be slightly higher in 2007.
Other
expenses
increased
$3 million, or 1%, in 2006 compared to 2005, and increased $34 million, or 15%,
in 2005 compared to 2004.
The increase
in 2006 was primarily due to higher employee travel and relocation costs offset
in part by lower property taxes.
The increase in 2005 reflected higher property and sales and use taxes.
Other Income – Net
Other income – net
was $149 million in 2006
and $74 million in 2005 (see Note 2).
Results in 2006 reflected lower expense associated with tax credit
investments primarily due to synthetic fuel related investments (see discussion
under heading “Income Taxes”), greater interest income, and higher
returns from corporate-owned life insurance, that were partially offset by
lower equity in Conrail earnings.
In 2005, other income – net decreased by $2
million which reflected the absence of the $40 million gain recognized in 2004
for the Conrail Corporate Reorganization.
The results in 2005 also reflected:
(1) higher interest income, (2) equity in earnings of Conrail subsequent
to the Conrail Corporate Reorganization, (3) additional coal royalties (up
$12 million), and (4) lower interest accruals related to tax liabilities (down $9 million).
These income improvements were partially
offset by more expense associated with tax credit investments.
Income
Taxes
Income
tax expense in 2006 was $749 million for an effective rate of 34%, compared
with effective rates of 25% in 2005 and 29% in 2004.
The increase in the rate for 2006 was
largely the result of the absence of an
Ohio
tax law change which lowered the effective rate in 2005 as well as fewer tax
credits from synthetic fuel related investments (see below).
The 2005 effective rate benefited from a
$96 million reduction in deferred taxes resulting from the
Ohio
tax legislation,
which lowered the rate by six percentage points (see Note 3).
NS’
consolidated federal income tax returns for 2004 and 2005 are being audited by
the Internal Revenue Service (IRS).
The IRS completed its examination of the 2002 and 2003 consolidated
federal income tax returns during the third quarter of 2006 and NS has appealed
certain adjustments proposed by the IRS.
The results of the examination had a negligible effect on the effective
tax rate.
NS’
synthetic fuel tax credits are subject to reduction if the Reference Price of a
barrel of oil for the year falls within an inflation-adjusted phase-out range
specified by the tax code.
The Reference Price for a year is the annual average
wellhead price per barrel of unregulated domestic crude oil as determined by
the Secretary of the Treasury by April 1 of the following year.
In 2005, the phase-out range was $53.20
to $66.79, and the phase-out range is adjusted annually for inflation.
While NS cannot predict with certainty
the Reference Price for the year, NS estimated a 35
% phase-out of synthetic fuel
credits in 2006 based on actual oil prices during the year.
Net
income in 2006 reflects $18 million less in net benefits from these credits, as
compared with the same period of 2005, as shown below:
|
2006
|
2005
|
2004
|
|
($ in millions)
|
Effect
in “Other income – net:”
|
|
|
|
|
|
|
Expenses
on synthetic fuel related investments
|
$
|
62
|
$
|
102
|
$
|
58
|
Effect
in “Provision for income taxes:”
|
|
|
|
|
|
|
Tax
credits
|
|
56
|
|
98
|
|
60
|
Tax
benefit of expenses on synthetic fuel
|
|
|
|
|
|
|
related
investments
|
|
24
|
|
40
|
|
21
|
Total
reduction of income tax expense
|
|
80
|
|
138
|
|
81
|
Effect
in “Net income:”
|
|
|
|
|
|
|
Net
benefit from synthetic fuel related investments
|
$
|
18
|
$
|
36
|
$
|
23
|
Subject
to the uncertainty associated with these tax credits, the effective tax rate in
2007 is expected to be comparable to that of 2006.
The tax credits generated by NS’
synthetic fuel related investments expire at the end of 2007 and, accordingly,
the effective tax rate may increase thereafter.
FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities,
NS' principal source of
liquidity, was $2.2 billion in 2006, compared with $2.1 billion in 2005 and $1.7
billion in 2004.
The improvement in
2006 reflected the $440 million increase in income from railway operations
offset in part by higher income tax payments.
The increase in 2005 reflected the $415
million increase in income from railway operations as well as the effects of
the Conrail Corporate Reorganization (see below), offset in part by higher
income tax payments, including a payment made upon settlement of a federal audit
cycle.
Prior to the August 2004 Conrail Corporate
Reorganization (see Note 4), a significant portion of the payments made to PRR
under the operating and lease agreements (which were included in “Conrail
rents and services” and, therefore, were a use of cash in “Net cash
provided by operating activities”), was borrowed back from a subsidiary
of PRR under a note due in 2032 and, therefore, was a source of cash in
“Proceeds from borrowings.”
NS’ net cash flow from these borrowings amounted to $118 million
in 2004.
This note was effectively
extinguished by the reorganization in 2004.
Subsequent to the Conrail Corporate
Reorganization, 2005 payments under “Conrail rents and services”
declined, depreciation charges increased and those net borrowings were
terminated.
Accordingly, NS’
cash provided by operating activities after the Conrail Corporate
Reorganization has increased.
NS had wor
ki
ng
capital of $307 million at Dec. 31, 2006, compared with wor
ki
ng capital of $729 million at Dec. 31, 2005.
The reduction was largely due to share
repurchases made in 2006 (see Note 13) and higher current maturities of
long-term debt.
NS’ cash,
cash equivalents and short-term investment balances totaled $918 million
and $1.3 billion at
Dec. 31, 2006 and 2005, respectively.
Contractual
obligations
at Dec. 31, 2006, comprised of NS' long-term debt (including capital leases)
(see Note 7), operating leases (see Note 8), agreements with CRC (see Note
4), unconditional purchase obligations (see Note 17) and long-term
advances from Conrail (see Note 4) were as follows:
|
Payments Due By Period
|
|
|
|
2008-
|
2010-
|
2012 and
|
|
Total
|
2007
|
2009
|
2011
|
Subsequent
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt and
|
|
|
|
|
|
|
|
|
|
|
capital
lease principal
|
$
|
6,600
|
$
|
491
|
$
|
843
|
$
|
676
|
$
|
4,590
|
Operating
leases
|
|
1,087
|
|
166
|
|
274
|
|
189
|
|
458
|
Agreements
with CRC
|
|
448
|
|
26
|
|
52
|
|
52
|
|
318
|
Unconditional
purchase
|
|
|
|
|
|
|
|
|
|
|
obligations
|
|
276
|
|
238
|
|
33
|
|
5
|
|
- --
|
Long-term
advances
|
|
|
|
|
|
|
|
|
|
|
from
Conrail
|
|
133
|
|
- --
|
|
- --
|
|
- --
|
|
133
|
Total
|
$
|
8,544
|
$
|
921
|
$
|
1,202
|
$
|
922
|
$
|
5,499
|
Off
balance sheet arrangements
consist of obligations related to operating leases, which are included
in the table of contractual obligations above and disclosed in Note 8.
NS did not renew its accounts receivable
securitization program which expired in May 2005.
Cash
used for investing activities
was $684 million in 2006, compared with $1.8 billion in 2005 and
$1.2 billion in 2004.
The decrease
in 2006 reflected higher proceeds from short-term investment sales, principally
to fund share repurchases reflected in financing activities, offset in part by
the $100 million investment in Meridian Speedway LLC (MSLLC) (see discussion
below) and increased property additions.
The increase in 2005 was principally the result of larger purchases
of short-term investments
..
Property
additions account for most of the recurring spending in this category.
The following tables show capital
spending (including capital leases) and track and equipment statistics for the
past five years.
Capital Expenditures
|
|
|
|
|
|
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Road
and other
property
|
$
|
756
|
$
|
741
|
$
|
612
|
$
|
502
|
$
|
521
|
Equipment
|
|
422
|
|
284
|
|
429
|
|
218
|
|
174
|
Total
|
$
|
1,178
|
$
|
1,025
|
$
|
1,041
|
$
|
720
|
$
|
695
|
Track Structure Statistics
(Capital and Maintenance)
|
|
|
|
|
|
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Track
miles of rail installed
|
|
327
|
|
302
|
|
246
|
|
233
|
|
235
|
Miles
of track surfaced
|
|
4,871
|
|
4,663
|
|
5,055
|
|
5,105
|
|
5,270
|
New
crossties installed (millions)
|
|
2.7
|
|
2.5
|
|
2.5
|
|
2.8
|
|
2.8
|
Average Age of Owned Railway Equipment
|
|
|
|
|
|
|
|
2006
|
2005
|
2004
|
2003
|
2002
|
|
|
|
|
|
(years)
|
|
|
|
Freight
cars
|
|
30.0
|
|
29.4
|
|
28.6
|
|
27.8
|
|
27.0
|
Locomotives
|
|
17.7
|
|
17.4
|
|
16.9
|
|
15.3
|
|
16.1
|
Retired
locomotives
|
|
35.0
|
|
27.4
|
|
22.9
|
|
28.7
|
|
28.2
|
The higher average age of locomotives in 2006
reflects the retirement of two locomotives compared with 52 retired in 2005.
For 2007, NS has budgeted $1.34 billion for capital
expenditures.
The anticipated
spending includes $884 million for roadway projects, $401 million for
equipment and $55 million for small projects and real estate.
In roadway projects, $610 million is for
track and bridge program work, including $73 million in infrastructure
investments for increased main line and terminal capacity.
Also included are projects for
communications, signal and electrical systems, as well as projects for
environmental and public improvements such as grade crossing separations and
signal upgrades.
Other roadway
projects include marketing and industrial development initiatives, including
increasing track capacity and access to coal receivers and vehicle production
and distribution facilities, and continuing investments in intermodal
infrastructure.
Planned equipment
spending of $401 million includes the purchase of 53 locomotives and upgrades
to existing units, the purchase of 1,300 new higher capacity coal cars as part
of a multi-year program to replace the existing coal car fleet, the purchase of
739 freight cars as their lease expires, improvements to multilevel automobile
racks, and projects related to computers and information technology, including
additional security and backup systems.
NS expects to make all of its capital expenditures with internally
generated funds.
On May 1, 2006, NS and Kansas City Southern (KCS)
formed a joint venture (MSLLC) pursuant to which NS intends to contribute $300
million in cash, substantially all of which will be used for capital
improvements over a period of approximately three years, in exchange for a 30%
interest in the joint venture.
At
the formation of
MSLLC
,
NS
contributed $100 million and KCS contributed its 320 mile rail line between
Meridian
,
Mississippi
and
Shreveport
,
Louisiana
(the Meridian Speedway).
NS is recognizing its pro rata share of
the joint venture’s earnings or loss as required under the equity method
of accounting.
NS’ total
investment in MSLLC is supported by the fair value of the rail line as well as
intangible assets obtained through the transaction.
The transaction is expected to be
modestly dilutive in the early years of the venture due to lost interest income
on the cash contributed to the joint venture.
However, NS expects that the dilution
from the lost interest income will be offset from additional traffic as the
investment is made and improvements are completed.
The joint venture is expected to
increase capacity and improve service over the Meridian Speedway into the
Southeast.
During the third quarter of 2006, NS and the states
of
Ohio
,
West Virginia
and
Virginia
each entered into a Memorandum of Agreement with the Federal Highway
Administration that governs the release of up to $95 million in federal
funding and up to $11 million in state funding for the Heartland Corridor rail
double-stack clearance project.
NS
expects to spend about $60 million over a five-year period in connection with
this project.
The Heartland
Corridor is a package of proposed clearance improvements and other facilities
that will create a seamless high-capacity intermodal route across
Virginia
and
West Virginia
to
Midwest
markets.
NS and other
railroads have agreed to participate in the Chicago Region Environmental and
Transportation Efficiency (CREATE) project in
Chicago
..
The intent of the proposed public-private partnership is to reduce rail
and highway congestion and add freight and passenger capacity in the
metropolitan
Chicago
area.
A portion of the public
funding has been approved and the parties are wor
ki
ng
to develop a list of projects to be included in Phase I of the project.
Funding requirements will be determined
by the selection of Phase I projects.
The railroads expect to complete Phase I over the next four years.
Cash
used for financing activities
was $1.3 billion in 2006, compared with $456 million in 2005 and
$233 million in 2004.
Financing activity in 2006 included $964 million for the purchase and
retirement of common stock as part of NS’ ongoing share repurchase
program (see discussion below).
Financing activities for 2006 also included $212 million of proceeds and
$85 million of tax benefits from employee exercises of stock options (see Note 11).
In
2005, financing activity included: (1) the issuance of $300 million aggregate
principal amount of 6% unsecured notes due March 2105, and (2) the
issuance of $717 million of unsecured notes ($350 million at 5.64% due
2029 and $367 million at 5.59% due 2025) and payment of $218 million
of premium in exchange for $717 million of previously issued unsecured notes
($350 million at 7.8% due 2027, $200 million at 7.25% due 2031, and
$167 million at 9.0% due 2021) (see Note 7).
The $218 million cash premium payment is
reflected as a reduction of debt in the Consolidated Balance Sheets and
Statement of Cash Flows and will be amortized as additional interest expense
over the terms of the new debt.
Financing
activities in 2005 included $194 million in proceeds relating to employee
exercises of stock options.
NS’ debt-to-total capitalization ratio was 40.7% at Dec. 31, 2006,
and 42.8% at Dec. 31, 2005.
In
November 2005, NS’ Board of Directors authorized the repurchase of up to
50 million shares of NS common stock through Dec. 31, 2015.
The timing and volume of any purchases
will be guided by management’s assessment of market conditions and other
factors.
Near-term purchases under
the program are expected to be made with internally generated cash; however,
future funding sources could include proceeds from the sale of commercial paper
notes or the issuance of long-term debt.
NS currently has in place and available a $1
billion, five-year credit agreement that expires in 2009, which provides for
borrowings at prevailing rates and includes financial covenants.
There were no amounts outstanding under this
facility at
Dec. 31, 2006
,
and NS is in compliance with all of the financial covenants.
NS also has in place a shelf
registration statement on Form S-3 filed with the SEC in September 2004 with $700
million of available capacity
(see Note 7).
On
July 18, 2005
, Standard &
Poor’s (S&P) upgraded its ratings on NS’ unsecured debt from
BBB to BBB+.
Moody’s rating
remains at Baa1, comparable to S&P’s.
APPLICATION
OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in
accordance with
U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting
period.
These estimates and
assumptions may require significant judgment about matters that are inherently
uncertain, and future events are likely to occur that may require management to
change them.
Accordingly,
management regularly reviews these estimates and assumptions based on
historical experience, changes in the business environment and other factors
that management believes to be reasonable under the circumstances.
Management discusses the development,
selection and disclosures concerning critical accounting estimates with the
Audit Committee of its Board of Directors.
Pensions
and Other Postretirement Benefits
Accounting for pensions and other postretirement
benefit plans requires management to make several estimates and assumptions
(see Note 10).
These include the
expected rate of return from investment of the plans' assets, projected
increases in medical costs and the expected retirement age of employees as well
as their projected earnings and mortality.
In addition, the amounts recorded are affected by changes in the
interest rate environment because the associated liabilities are discounted to
their present value.
Management
makes these estimates based on the company's historical experience and other
information that it deems pertinent under the circumstances (for example,
expectations of future stock market performance).
Management engages an independent
consulting actuarial firm to assist it in selecting appropriate assumptions and
valuing its related liabilities.
NS' net pension benefit, which is included in
“Compensation and benefits” on its Consolidated Statements of Income,
was $29 million for the year ended Dec. 31, 2006.
In recording this amount, NS assumed a
long-term investment rate of return of 9%.
Investment experience of the pension fund over the past 10-, 15- and
20-year periods has been a rate of return in excess of 10% and supports the
current rate of return assumption.
A one percentage point change to this rate of return assumption would
result in a $19 million change to the pension credit and, as a result, an equal
change in “Compensation and benefits” expense.
Changes that are reasonably likely to
occur in assumptions concerning retirement age, projected earnings and
mortality would not be expected to have a material effect on NS' net pension
benefit or net pension asset in the future.
The net pension asset is recorded at its
net present value using a discount rate that is based on the current interest
rate environment in light of the timing of expected benefit payments.
Specifically, NS refers to Moody’s
seasoned Aa corporate bond yields and the changes in such yields; therefore,
management has little discretion in this assumption.
NS' net cost for other postretirement benefits,
which is also included in “Compensation and benefits,” was $70
million for the year ended Dec. 31, 2006.
In recording this expense and valuing the net liability for other
postretirement benefits, which is included in “Other postretirement benefits”
as disclosed in Note 10, management estimated future increases in health-care
costs.
These assumptions, along
with the effect of a one percentage point change in them, are described in Note
10.
Properties
and Depreciation
Most
of NS' total assets are comprised of long-lived railway properties (see Note 5).
As disclosed in Note 1, NS'
properties are depreciated using group depreciation.
Rail is depreciated primarily on the
basis of use measured by gross-ton miles.
Other properties are depreciated generally using the straight-line
method over the lesser of estimated service or lease lives.
NS reviews the carrying amount of
properties whenever events or changes in circumstances indicate that such
carrying amount may not be recoverable based on future undiscounted cash
flows.
Assets that are deemed
impaired as a result of such review are recorded at the lesser of carrying
amount or fair value.
NS'
depreciation expense is based on management's assumptions concerning service
lives of its properties as well as the expected net salvage that will be
received upon their retirement.
These assumptions are the product of periodic depreciation studies that
are performed by an outside firm of consulting engineers.
These studies analyze NS' historical
patterns of asset use and retirement and take into account any expected change
in operation or maintenance practices.
NS' recent experience with these studies has been that while they do
result in changes in the rates used to depreciate its properties, these changes
have not caused a significant effect to its annual depreciation expense.
The studies may also indicate that the
recorded amount of accumulated depreciation is deficient (or in excess) of the
amount indicated by the study.
Any
such deficiency (or excess) is amortized as a component of depreciation expense
over the remaining service lives of the affected class of property.
NS' depreciation expense for the year
ended Dec. 31, 2006, amounted to $738 million.
NS' weighted-average depreciation rates
for 2006 are disclosed in Note 5; a one-tenth percentage point increase (or
decrease) in these rates would have resulted in a $26 million increase (or
decrease) to NS' depreciation expense.
Personal
Injury, Environmental and Legal Liabilities
NS'
expense for “Casualties and other claims” amounted to $220 million
for the year ended Dec. 31, 2006.
Most of this expense was composed of NS' accrual related to personal
injury liabilities.
Job-related
personal injury and occupational claims are subject to FELA, which is
applicable only to railroads.
FELA’s
fault-based tort system produces results that are unpredictable and
inconsistent as compared with a no-fault worker’s compensation
system.
The variability inherent in
this system could result in actual costs being very different from the
liability recorded.
In all cases,
NS records a liability when the expected loss for the claim is both probable
and estimable.
NS
engages an independent consulting actuarial firm to aid in valuing its personal
injury liability and determining the amount to accrue during the year.
For employee personal injury cases, the
actuarial firm studies NS' historical patterns of reserving for claims and
subsequent settlements, ta
ki
ng into
account relevant outside influences.
An estimate of the ultimate amount of the liability, which includes
amounts for incurred but unasserted claims, is based on the results of this
analysis.
For occupational injury
claims, the actuarial firm studies NS’ history of claim filings,
severity, payments and other relevant facts.
Additionally, the estimate of the
ultimate loss for occupational injuries includes a provision for those claims
that have been incurred but not reported by projecting NS’ experience
into the future as far as can be reasonably determined.
NS has recorded this actuarially determined
liability.
The liability is
dependent upon many individual judgments made as to the specific case reserves
as well as the judgments of the consulting actuary and management in the
periodic studies.
Accordingly,
there could be significant changes in the liability, which NS would recognize
when such a change became known.
The most recent actuarial study, completed in the fourth quarter of 2006,
resulted in a slight increase to NS' personal injury liability during the
fourth quarter.
While the liability
recorded is
support
ed by the most
recent study, it is reasonably possible that the liability could be
higher or lower.
NS
is subject to various jurisdictions' environmental laws and regulations.
It is NS' policy to record a liability
where such liability or loss is probable and its amount can be estimated
reasonably (see Note 17).
Claims, if any, against third parties for recovery of cleanup costs
incurred by NS, are reflected as receivables (when collection is probable) in
the Consolidated Balance Sheets and are not netted against the associated NS
liability.
Environmental engineers
regularly participate in ongoing evaluations of all known sites and in
determining any necessary adjustments to liability estimates.
NS also has established an Environmental
Policy Council, composed of senior managers, to oversee and interpret its
environmental policy.
Operating
expenses for environmental matters totaled approximately $19 million in 2006, $16
million in 2005 and $11 million in 2004, and capital expenditures totaled
approximately $6 million in 2006, and $9 million in each of 2005 and
2004.
Capital expenditures in 2007
are expected to be comparable to those in 2006.
NS'
Consolidated Balance Sheets included liabilities for environmental exposures in
the amount of $54 million at Dec. 31, 2006, and $58 million at
Dec. 31, 2005
(of
which $12 million was accounted for as a current liability at
Dec. 31, 2006
, and 2005).
At Dec. 31, 2006, the liability
represented NS' estimate of the probable cleanup and remediation costs based on
available information at 172 identified locations.
On that date, 15 sites accounted
for $29 million of the liability, and no individual site was considered to
be material.
NS anticipates that
much of this liability will be paid out over five years; however, some costs
will be paid out over a longer period.
At
some of the 172 locations, certain NS subsidiaries, usually in conjunction with
a number of other parties, have been identified as potentially responsible
parties by the Environmental Protection Agency (EPA) or similar state
authorities under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, or comparable state statutes, which often impose joint
and several liability for cleanup costs.
With respect to known environmental sites (whether
identified by NS or by the EPA or comparable state authorities), estimates of
NS' ultimate potential financial exposure for a given site or in the aggregate
for all such sites are necessarily imprecise because of the widely varying
costs of currently available cleanup techniques, the likely development of new
cleanup technologies, the difficulty of determining in advance the nature and
full extent of contamination and each potential participant's share of any estimated
loss (and that participant's ability to bear it), and evolving statutory and
regulatory standards governing liability.
NS estimates its environmental remediation liability on a site-by-site
basis, using assumptions and judgments that management deems appropriate for
each site.
As a result, it is not
practical to quantitatively describe the effects of changes in these many
assumptions and judgments.
NS has
consistently applied its methodology of estimating its environmental
liabilities.
Based on its assessment of the facts and
circumstances now known, management believes that it has recorded the probable
costs for dealing with those environmental matters of which NS is aware.
Further, management believes that it is
unlikely that any known matters, either individually or in the aggregate,
will have a material adverse effect on NS' financial position, results of
operations or liquidity.
Norfolk
Southern and certain
subsidiaries are defendants in numerous lawsuits and other claims relating
principally to railroad operations.
When management concludes that it is probable that a liability has been
incurred and the amount of the liability can be reasonably estimated, it is
accrued through a charge to expenses.
While the ultimate amount of liability incurred in any of these lawsuits
and claims is dependent on future developments, in management's opinion the
recorded liability, if any, is adequate to cover the future payment of such
liability and claims.
However, the
final outcome of any of these lawsuits and claims cannot be predicted with
certainty, and unfavorable or unexpected outcomes could result in additional
accruals that could be significant to results of operations in a particular
year or quarter.
Any adjustments to
recorded liabilities will be reflected in expenses in the periods in which such
adjustments are known.
On Oct. 19, 2006, the
Pennsylvania Department of Environmental Protection (PDEP) issued an assessment
of civil penalties against NS and filed a complaint for civil penalties with the
Pennsylvania Environmental Hearing Board (EHB) requesting that the EHB impose
civil penalties upon NS for alleged violations of state environmental laws and
regulations resulting from a discharge of sodium hydroxide which occurred as a
result of the derailment of a NS train in Norwich Township, Pennsylvania, on
June 30, 2006.
The PDEP’s
actions seek to impose combined penalties of $8,890,000 for alleged past
violations and $46,420 per day for alleged ongoing violations of state
environmental laws and regulations.
NS believes that the monetary penalties sought by the PDEP are
excessive.
Accordingly, NS intends
to vigorously defend the action and has appealed the fines to the EHB.
In addition, NS expects the Pennsylvania
Fish and Boat Commission to impose a monetary penalty on NS for damages alleged
to have been caused by this accident.
NS does not believe that the outcome of these proceedings will have a
material effect on its financial position, results of operations, or liquidity.
Income
Taxes
NS'
net long-term deferred tax liability totaled $6.4 billion at Dec. 31, 2006 (see
Note 3).
This liability is
estimated based on the expected future tax consequences of items recognized in
the financial statements.
After
application of the federal statutory tax rate to book income, judgment is
required with respect to the timing and deductibility of expenses in the
corporate income tax
returns
..
For state income and other taxes,
judgment is also required with respect to the apportionment among the various jurisdictions.
A valuation allowance is recorded if
management expects that it is more likely than not that its deferred tax assets
will not be realized.
NS had a $9 million
valuation allowance on $637 million of deferred tax assets as of Dec. 31,
2006, reflecting the expectation that most of these assets will be
realized.
In addition, NS has a
recorded liability for its estimate of potential income tax exposures.
Management believes this liability for
potential exposure to be adequate.
Income tax expense is adjusted to the extent the final outcome of these
matters differs from the amounts recorded.
For every one half percent change in the 2006 effective rate net income
would have changed by $11 million.
OTHER
MATTERS
Labor
Agreements
Approximately
26,000, or about 85%, of NS' railroad employees are covered by collective
bargaining agreements with various labor unions. These agreements remain
in effect until changed pursuant to the Railway Labor Act (RLA). NS
largely bargains in concert with other major railroads.
Moratorium provisions in the labor
agreements govern when the railroads and the unions may propose labor agreement
changes.
The current bargaining
round began in late 2004.
Industry
issues include contracting out of certain work and employee contributions for medical
and other benefits.
After a period of direct negotiations, either party
may file for mediation if it believes insufficient progress is being made.
The status quo is preserved during
mediation while a federal mediator assists the parties in their efforts to
reach agreement.
The railroads are
currently in mediation with all of the involved labor unions.
If the National Mediation Board, a
federal agency, were to terminate mediation, it would, at that time, propose
that the parties arbitrate their differences.
A strike could occur 30 days thereafter
if the parties did not accept arbitration. However, if arbitration is rejected
by either party the President of the
United States of America
could then
appoint an Emergency Board which would delay any strike for a further 60 days
while the Board made recommendations and the parties engaged in further
negotiations.
The outcome of the
negotiations cannot be determined at this point.
Market
Risks and Hedging Activities
NS
has used derivative financial instruments to reduce the risk of volatility in
its diesel fuel costs and to manage its overall exposure to fluctuations in
interest rates.
In
2001, NS began a program to hedge a portion of its diesel fuel
consumption.
The intent of the
program was to assist in the management of NS' aggregate risk exposure to fuel
price fluctuations, which can significantly affect NS' operating margins and
profitability, through the use of one or more types of derivative instruments.
No new hedges have been entered into
since May of 2004, and the last remaining contracts were settled in the second
quarter of 2006, bringing an end to the benefits from the program.
Diesel fuel costs represented 14% of NS'
operating expenses for 2006, 11% for 2005 and 8% for 2004.
NS manages its overall exposure to fluctuations in
interest rates by issuing both fixed- and floating-rate debt instruments and by
entering into interest-rate hedging transactions to achieve an appropriate mix
within its debt portfolio.
At Dec. 31, 2006, NS' debt subject to interest rate
fluctuations totaled $237 million.
A 1% point increase in interest rates would increase NS' total
annual interest expense related to all its variable debt by approximately $2
million.
Management considers it
unlikely that interest rate fluctuations applicable to these instruments
will result in a material adverse effect on NS' financial position, results of
operations or liquidity.
Some of NS' capital leases, which carry an average
fixed rate of 7%, were effectively converted to variable rate obligations using
interest rate swap agreements.
On
Dec. 31, 2006, the average pay rate under these agreements was 6%, and the
average receive rate was 7%.
During
2006 and 2005, the effect of the swaps was to reduce interest expense by $1
million and $2
million, respectively
..
A portion of the lease
obligations is payable in Japanese yen.
NS eliminated the associated exchange rate risk at the inception of each
lease with a yen deposit sufficient to fund the yen-denominated
obligation.
Most of these deposits
are held by foreign banks, primarily Japanese.
As a result, NS is exposed to financial
market risk relative to
Japan
..
Counterparties to the interest rate
swaps and Japanese banks holding yen deposits are major financial institutions
believed by management to be creditworthy.
New
Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. (FIN)
48, “Accounting for Uncertainty in Income Taxes.”
This Interpretation clarifies accounting
for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109, “Accounting for Income
Taxes.”
FIN 48 prescribes a
recognition threshold and measurement attribute for a tax position taken or
expected to be taken in a tax return.
Under the guidelines of FIN 48, an entity should recognize the financial
statement benefit of a tax position if it determines that it is more likely
than not that the position will be sustained on examination.
NS will adopt this Interpretation in the
first quarter of 2007 and expects it will not have a material effect on
NS’ consolidated financial statements.
In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans.”
This
statement requires an employer to recognize in its statement of financial
position the overfunded or underfunded status of defined benefit pension and
postretirement plans measured as the difference between the fair value of plan
assets and the benefit obligation.
Employers must also recognize as a component of other comprehensive
income, net of tax, the actuarial gains and losses and the prior service costs,
credits and transition costs that arise during the period.
NS adopted this statement in the fourth
quarter of 2006 (see Note 10).
In December 2004, the FASB issued SFAS No. 123(R), “Share-Based
Payment.”
This statement
establishes standards for accounting for transactions in which an entity
exchanges its equity instruments for goods or services, such as stock-based
compensation plans.
NS adopted this
standard in the first quarter of 2006 (see Note 1).
Inflation
In
preparing financial statements,
U.S.
generally accepted accounting principles require the use of historical cost
that disregards the effects of inflation on the replacement cost of
property.
NS, a capital-intensive
company, has most of its capital invested in such assets.
The replacement cost of these assets, as
well as the related depreciation expense, would be substantially greater than
the amounts reported on the basis of historical cost.
Proposed Legislation and Regulations on Safety and
Transportation of Hazardous Materials
Regulations proposed by the
Department of Homeland Security in late 2006 would mandate that railroads adopt
chain of custody and security measures.
If enacted, such regulations could cause service degradation and higher
costs for the transportation of toxic inhalation hazard materials. In
addition, certain local governments have sought to enact ordinances banning
hazardous materials moving by rail within their borders. Some legislators
have contemplated pre-notification requirements for hazardous material shipments.
If promulgated, such ordinances could require the re-routing of hazardous
materials shipments, with the potential for significant additional costs and
network inefficiencies.
Accordingly,
NS will oppose efforts to impose unwarranted regulation in this area.
FORWARD-LOOKING
STATEMENTS
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-loo
ki
ng
statements that may be identified by the use of words like
“believe,” “expect,” “anticipate” and
“project.” Forward-loo
ki
ng
statements reflect management's good-faith evaluation of information currently
available.
However, such statements
are dependent on and, therefore, can be influenced by, a number of external
variables over which management has little or no control, including:
domestic and international economic
conditions; interest rates; the business environment in industries that produce
and consume rail freight; competition and consolidation within the
transportation industry; the operations of carriers with which NS interchanges;
acts of terrorism or war; fluctuation in prices of key materials, in particular
diesel fuel; labor difficulties, including strikes and work stoppages;
legislative and regulatory developments; changes in securities and capital
markets; disruptions to NS’ technology infrastructure including computer
systems; and natural events such as severe weather, hurricanes and floods.
For more discussion about each risk
factor, see Part I, Item 1A “Risk Factors.”
Forward-loo
ki
ng
statements are not, and should not be relied upon as a guarantee of future
performance or results, nor will they necessarily prove to be accurate
indications of the times at or by which any such performance or results will be
achieved.
As a result, actual outcomes
and results may differ materially from those expressed in forward-loo
ki
ng statements.
NS undertakes no obligation to update or
revise forward-loo
ki
ng statements.
Item
7A
..
Quantitative and Qualitative
Disclosures about Market Risk.
The
information required by this item is included in Part II, Item 7,
“Management's Discussion and Analysis of Financial Condition and Results
of Operations” under the heading “Market Risks and Hedging
Activities.”
Item
8
..
Financial Statements and
Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
Page
|
|
|
Report
of Management
|
K40
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
K41
|
|
|
Consolidated
Statements of Income
|
K44
|
Years
ended
Dec. 31, 2006
,
2005 and 2004
|
|
|
|
Consolidated
Balance Sheets
|
K45
|
As
of
Dec. 31, 2006
and 2005
|
|
|
|
Consolidated
Statements of Cash Flows
|
K46
|
Years
ended
Dec. 31, 2006
,
2005 and 2004
|
|
|
|
Consolidated
Statements of Changes in Stockholders' Equity
|
K47
|
Years
ended
Dec. 31, 2006
,
2005 and 2004
|
|
|
|
Notes
to Consolidated Financial Statements
|
K48
|
|
|
The
Index to Consolidated Financial Statement Schedule in Item 15
|
K83
|
Report of Management
February
20, 2007
To
the Stockholders
Norfolk
Southern Corporation
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting.
In order to
ensure that the Corporation's internal control over financial reporting is
effective, management regularly assesses such controls and did so most recently
for its financial reporting as of December 31, 2006.
This assessment was based on criteria
for effective internal control over financial reporting described in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Based on this assessment, management has concluded that the Corporation
maintained effective internal control over financial reporting as of
December 31, 2006
..
KPMG
LLP, independent registered public accounting firm, has audited the
Corporation's financial statements and has reported on management's assessment
of the effectiveness of the Corporation's internal control over financial
reporting as of
December
31, 2006
..
/s/
Charles W. Moorman
|
/s/
Henry C. Wolf
|
/s/
Marta R. Stewart
|
Charles
W. Moorman
|
Henry
C. Wolf
|
Marta R. Stewart
|
Chairman,
President and
|
Vice
Chairman and
|
Vice
President and
|
Chief
Executive Officer
|
Chief
Financial Officer
|
Controller
|
Report of Independent
Registered Public Accounting Firm
The
Board of Directors and Stockholders
Norfolk
Southern Corporation:
We have audited
management’s assessment, included in the accompanying Report of
Management, that Norfolk Southern Corporation maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control – Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Norfolk Southern Corporation’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management’s assessment
and an opinion on the effectiveness of Norfolk Southern Corporation’s
internal control over financial reporting based on our audit.
We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(
United States
).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with
U.S.
generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion,
management’s assessment that Norfolk Southern Corporation maintained
effective internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on criteria established in Internal
Control – Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also in our
opinion, Norfolk Southern Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal
Control – Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Report of Independent Registered Public Accounting
Firm
Page
2
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Norfolk Southern
Corporation and subsidiaries as of December 31, 2006 and 2005, and the related
consolidated statements of income, changes in stockholders’ equity and
cash flows for each of the years in the three-year period ended December 31,
2006. In connection with our audits of the consolidated financial statements,
we have also audited the financial statement schedule as listed in Item 15(A)2.
Our report dated February 20, 2007, expressed an unqualified opinion on the
consolidated financial statements and financial statement schedule.
/s/
KPMG LLP
Norfolk
,
Virginia
February
20, 2007
Report of
Independent Registered Public Accounting Firm
The
Board of Directors and Stockholders
Norfolk
Southern Corporation:
We have audited the
accompanying consolidated balance sheets of Norfolk Southern Corporation and
subsidiaries as of December 31, 2006 and 2005, and the related consolidated
statements of income, changes in stockholders’ equity and cash flows for
each of the years in the three-year period ended December 31, 2006. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in Item 15(A)2. These
consolidated financial statements and financial statement schedule are the
responsibility of Norfolk Southern Corporation’s management. Our
responsibility is to express an opinion on these consolidated financial statements
and financial statement schedule based on our audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(
United States
).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Norfolk Southern Corporation and
subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in note 1 to the
consolidated financial statements, Norfolk Southern Corporation adopted
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, effective
January 1, 2006, and Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, effective December 31,
2006.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Norfolk Southern Corporation’s
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control – Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 20, 2007, expressed an unqualified
opinion on management’s assessment of, and the effective operation of,
internal control over financial reporting.
/s/
KPMG LLP
Norfolk
,
Virginia
February
20, 2007
Norfolk
Southern Corporation and
Subsidiaries
Consolidated Statements of
Income
|
Years ended Dec. 31,
|
|
2006
|
2005
|
2004
|
|
($ in millions, except
earnings per share)
|
|
|
|
|
|
|
|
Railway
operating revenues
|
$
|
9,407
|
$
|
8,527
|
$
|
7,312
|
|
|
|
|
|
|
|
Railway
operating expenses:
|
|
|
|
|
|
|
Compensation
and benefits
|
|
2,637
|
|
2,493
|
|
2,272
|
Materials,
services and rents
|
|
1,895
|
|
1,809
|
|
1,601
|
Conrail
rents and services
|
|
126
|
|
129
|
|
319
|
Depreciation
|
|
738
|
|
774
|
|
598
|
Diesel
fuel
|
|
977
|
|
727
|
|
449
|
Casualties
and other claims
|
|
220
|
|
224
|
|
151
|
Other
|
|
257
|
|
254
|
|
220
|
|
|
|
|
|
|
|
Total
railway operating expenses
|
|
6,850
|
|
6,410
|
|
5,610
|
|
|
|
|
|
|
|
Income
from railway operations
|
|
2,557
|
|
2,117
|
|
1,702
|
|
|
|
|
|
|
|
Other
income – net
|
|
149
|
|
74
|
|
76
|
Interest
expense on debt
|
|
476
|
|
494
|
|
489
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
2,230
|
|
1,697
|
|
1,289
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
749
|
|
416
|
|
379
|
|
|
|
|
|
|
|
Net
income
|
$
|
1,481
|
$
|
1,281
|
$
|
910
|
|
|
|
|
|
|
|
Per share amounts:
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
Basic
|
$
|
3.63
|
$
|
3.17
|
$
|
2.31
|
Diluted
|
$
|
3.57
|
$
|
3.11
|
$
|
2.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
Norfolk
Southern Corporation and Subsidiaries
Consolidated Balance Sheets
|
As of Dec.
31,
|
|
2006
|
2005
|
|
($ in millions)
|
Assets
|
|
|
|
|
Current
assets:
|
|
|
|
|
Cash
and cash equivalents
|
$
|
527
|
$
|
289
|
Short-term
investments
|
|
391
|
|
968
|
Accounts
receivable – net
|
|
992
|
|
931
|
Materials
and supplies
|
|
151
|
|
132
|
Deferred
income taxes
|
|
186
|
|
167
|
Other
current assets
|
|
153
|
|
163
|
Total
current assets
|
|
2,400
|
|
2,650
|
|
|
|
|
|
Investments
|
|
1,755
|
|
1,558
|
Properties
less accumulated depreciation
|
|
21,098
|
|
20,735
|
Other
assets
|
|
775
|
|
916
|
Total assets
|
$
|
26,028
|
$
|
25,859
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Accounts
payable
|
$
|
1,181
|
$
|
1,163
|
Income
and other taxes
|
|
205
|
|
231
|
Other
current liabilities
|
|
216
|
|
213
|
Current
maturities of long-term debt
|
|
491
|
|
314
|
Total
current liabilities
|
|
2,093
|
|
1,921
|
|
|
|
|
|
Long-term
debt
|
|
6,109
|
|
6,616
|
Other
liabilities
|
|
1,767
|
|
1,415
|
Deferred
income taxes
|
|
6,444
|
|
6,631
|
Total
liabilities
|
|
16,413
|
|
16,583
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
Common
stock $1.00 per share par value, 1,350,000,000 shares
|
|
|
|
|
authorized;
issued 418,200,239 and 430,718,913 shares,
|
|
|
|
|
Respectively
|
|
418
|
|
431
|
Additional
paid-in capital
|
|
1,303
|
|
992
|
Unearned
restricted stock
|
|
- --
|
|
(17)
|
Accumulated
other comprehensive loss
|
|
(369)
|
|
(77)
|
Retained
income
|
|
8,283
|
|
7,967
|
Less
treasury stock at cost, 20,780,638 and 20,833,125 shares,
Respectively
|
|
(20)
|
|
(20)
|
|
|
|
|
|
Total
stockholders' equity
|
|
9,615
|
|
9,276
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
$
|
26,028
|
$
|
25,859
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
|
|
Norfolk
Southern Corporation and Subsidiaries
Consolidated Statements of
Cash Flows
|
Years Ended Dec.
31,
|
|
2006
|
2005
|
2004
|
|
($ in millions)
|
Cash
flows from operating activities
|
|
|
|
|
|
|
Net
income
|
$
|
1,481
|
$
|
1,281
|
$
|
910
|
Reconciliation
of net income to net cash
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
750
|
|
787
|
|
609
|
Deferred
income taxes
|
|
(8)
|
|
80
|
|
200
|
Equity
in earnings of Conrail
|
|
(25)
|
|
(37)
|
|
(54)
|
Gain
on Conrail Corporate Reorganization
|
|
- --
|
|
- --
|
|
(40)
|
Gains
and losses on properties and investments
|
|
(54)
|
|
(51)
|
|
(46)
|
Changes
in assets and liabilities affecting operations:
|
|
|
|
|
|
|
Accounts
receivable
|
|
(60)
|
|
(94)
|
|
(71)
|
Materials
and supplies
|
|
(19)
|
|
(28)
|
|
(12)
|
Other
current assets
|
|
(11)
|
|
20
|
|
(18)
|
Current
liabilities other than debt
|
|
38
|
|
55
|
|
126
|
Other
– net
|
|
114
|
|
92
|
|
57
|
Net
cash provided by operating activities
|
|
2,206
|
|
2,105
|
|
1,661
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
Property
additions
|
|
(1,178)
|
|
(1,025)
|
|
(1,041)
|
Property
sales and other transactions
|
|
119
|
|
110
|
|
75
|
Investments,
including short-term
|
|
(1,804)
|
|
(1,822)
|
|
(396)
|
Investment
sales and other transactions
|
|
2,179
|
|
910
|
|
117
|
Net
cash used for investing activities
|
|
(684)
|
|
(1,827)
|
|
(1,245)
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
Dividends
|
|
(278)
|
|
(194)
|
|
(142)
|
Common
stock issued – net
|
|
297
|
|
194
|
|
162
|
Purchase
and retirement of common stock
|
|
(964)
|
|
- --
|
|
- --
|
Proceeds
from borrowings
|
|
- --
|
|
433
|
|
202
|
Debt
repayments
|
|
(339)
|
|
(889)
|
|
(455)
|
Net
cash used for financing activities
|
|
(1,284)
|
|
(456)
|
|
(233)
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
238
|
|
(178)
|
|
183
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
At
beginning of year
|
|
289
|
|
467
|
|
284
|
|
|
|
|
|
|
|
At
end of year
|
$
|
527
|
$
|
289
|
$
|
467
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
Interest
(net of amounts capitalized)
|
$
|
473
|
$
|
485
|
$
|
483
|
Income
taxes (net of refunds)
|
$
|
692
|
$
|
271
|
$
|
146
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
Norfolk
Southern Corporation and Subsidiaries
Consolidated Statements of
Changes in Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accum.
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Additional
|
Unearned
|
Compre-
|
|
|
|
|
|
Common
|
Paid-in
|
Restricted
|
hensive
|
Retained
|
Treasury
|
|
|
|
Stock
|
Capital
|
Stock
|
Loss
|
Income
|
Stock
|
Total
|
|
($ in millions, except per
share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Dec.
31, 2003
|
$
|
412
|
$
|
521
|
$
|
(5)
|
$
|
(44)
|
$
|
6,112
|
$
|
(20)
|
$
|
6,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
910
|
|
|
|
910
|
Other
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
20
|
Total
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
930
|
Dividends
on Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock,
$0.36 per share
|
|
|
|
|
|
|
|
|
|
(142)
|
|
|
|
(142)
|
Stock-based
compensation,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including tax benefit of $30
|
|
9
|
|
204
|
|
(3)
|
|
|
|
|
|
|
|
210
|
Other
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Dec.
31, 2004
|
|
421
|
|
728
|
|
(8)
|
|
(24)
|
|
6,880
|
|
(20)
|
|
7,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
1,281
|
|
|
|
1,281
|
Other
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss
|
|
|
|
|
|
|
|
(53)
|
|
|
|
|
|
(53)
|
Total
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,228
|
Dividends
on Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock,
$0.48 per share
|
|
|
|
|
|
|
|
|
|
(194)
|
|
|
|
(194)
|
Stock-based
compensation,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including tax benefit of $47
|
|
10
|
|
260
|
|
(9)
|
|
|
|
|
|
|
|
261
|
Other
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Dec.
31, 2005
|
|
431
|
|
992
|
|
(17)
|
|
(77)
|
|
7,967
|
|
(20)
|
|
9,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
1,481
|
|
|
|
1,481
|
Other
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
2
|
Total
comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,483
|
Adoption
of SFAS 158,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
of tax
|
|
|
|
|
|
|
|
(294)
|
|
|
|
|
|
(294)
|
Dividends
on Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock,
$0.68 per share
|
|
|
|
|
|
|
|
|
|
(278)
|
|
|
|
(278)
|
Share
repurchases
|
|
(22)
|
|
(63)
|
|
|
|
|
|
(879)
|
|
|
|
(964)
|
Stock-based
compensation,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including
tax benefit of $85
|
|
9
|
|
372
|
|
17
|
|
|
|
(8)
|
|
|
|
390
|
Other
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Dec.
31, 2006
|
$
|
418
|
$
|
1,303
|
$
|
- -
|
$
|
(369)
|
$
|
8,283
|
$
|
(20)
|
$
|
9,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
Norfolk
Southern Corporation and
Subsidiaries
Notes to Consolidated
Financial Statements
The
following Notes are an integral part of the Consolidated Financial Statements.
1.
Summary of Significant Accounting
Policies
Description
of Business
Norfolk
Southern Corporation is a Virginia-based holding company engaged principally in
the rail transportation business, operating approximately 21,000 route miles
primarily in the East and
Midwest
..
These consolidated financial statements
include Norfolk Southern Corporation (
Norfolk
Southern) and its majority-owned and controlled subsidiaries (collectively,
NS).
Norfolk
Southern's major subsidiary is
Norfolk Southern Railway Company (NSR).
All significant intercompany balances and transactions have been
eliminated in consolidation.
The
railroad transports raw materials, intermediate products and finished goods
classified in the following market groups (percent of total railway operating
revenues in 2006): coal (25%); intermodal (21%); metals/construction (12%); chemicals
(12%); agriculture/consumer products/government (11%); automotive (10%); and
paper/clay/forest products (9%).
Although most of NS’ customers are domestic, ultimate points of
origination or destination for some of the products transported (particularly
coal bound for export and some intermodal containers) may be outside the
United States
..
Approximately 85% of NS' railroad
employees are covered by collective bargaining agreements with various labor
unions.
Use
of Estimates
The
preparation of financial statements in accordance with
U.S.
generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Management reviews its estimates,
including those related to the recoverability and useful lives of assets, as
well as liabilities for litigation, environmental remediation, casualty claims,
income taxes, and pension and other postretirement benefits.
Changes in facts and circumstances may
result in revised estimates.
Revenue
Recognition
Transportation revenue is recognized proportionally
as a shipment moves from origin to destination and related expenses are
recognized as incurred.
Refunds
(which are primarily volume-based incentives) are recorded as a reduction to
revenues on the basis of management's best estimate of projected liability,
which is based on historical activity, current traffic counts and the
expectation of future activity.
NS
regularly monitors its contract refund liability, and historically, the
estimates have not differed significantly from the amounts ultimately
refunded.
Switching, demurrage and
other incidental service revenues are recognized when the services are
performed.
Derivatives
NS
does not engage in the trading of derivatives.
NS uses derivative financial instruments
to reduce the risk of volatility in its diesel fuel costs and in the management
of its mix of fixed and floating-rate debt.
Management has determined that these
derivative instruments qualify as either fair-value or cash-flow hedges, having
values that highly correlate with the underlying hedged exposures, and has
designated such instruments as hedging transactions.
Income and expense related to the
derivative financial instruments are recorded in the same category as generated
by the underlying asset or liability.
Credit risk related to the derivative financial instruments is
considered to be minimal and is managed by requiring high credit standards for
counterparties and periodic settlements (see Note 16).
Stock-Based
Compensation
NS
has stock-based employee compensation plans, which are more fully described in
Note 11.
Through Dec. 31, 2005,
NS applied the intrinsic value recognition and measurement principles of APB
Opinion No. 25, “Accounting for Stock Issued to Employees” (APB
Opinion 25), and related interpretations in accounting for these plans
(See “Required Accounting Changes in 2006,” below).
The
following table illustrates the effect on net income and earnings per share if
NS had applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (SFAS 123), to stock-based employee compensation:
|
2005
|
2004
|
|
|
|
($ in
millions except per share)
|
|
|
|
|
|
Net
income, as reported
|
$
|
1,281
|
$
|
910
|
Add:
Stock-based employee compensation expense
|
|
|
|
|
as
reported
|
|
46
|
|
32
|
Deduct:
Stock-based employee compensation
|
|
|
|
|
expense
determined under fair value method
|
|
(45)
|
|
(44)
|
Pro
forma net income
|
$
|
1,282
|
$
|
898
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
As
reported
|
|
|
|
|
Basic
|
$
|
3.17
|
$
|
2.31
|
Diluted
|
$
|
3.11
|
$
|
2.28
|
|
|
|
|
|
Pro
forma
|
|
|
|
|
Basic
|
$
|
3.17
|
$
|
2.28
|
Diluted
|
$
|
3.10
|
$
|
2.25
|
|
|
|
|
|
|
|
Required Accounting Changes
in 2006
Effective January 1, 2006, NS
adopted Statement of Financial Accounting Standards, No. 123(R), “Share-Based
Payment,” [SFAS 123(R)].
This
statement applies to awards granted, modified, repurchased or cancelled after
the effective date as well as awards that are unvested at the effective date
and includes, among other things, the requirement to expense the fair value of
stock options.
The standard also
requires that awards to be settled in cash be measured at fair value at each
reporting date until ultimate settlement.
NS adopted SFAS 123(R) using the modified prospective method, which requires
application of the standard to all awards granted, modified, repurchased or
cancelled on or after January 1, 2006, and to all awards for which the
requisite service has not been rendered as of such date.
In accordance with the modified
prospective approach, prior period financial statements have not been restated
to reflect the impact of SFAS 123(R).
As compared to amounts that would have been recognized under APB Opinion
25, the adoption of SFAS 123(R) resulted in $27
million
of additional compensation expense for 2006, including the immediate expensing
of 2006 grants made to retirement-eligible employees, which reduced net income
by $20 million, or 5 cents per basic and diluted share.
Under SFAS 123(R), all new awards granted to
retirement eligible employees must be expensed immediately.
Under APB Opinion No. 25 and related
interpretations, such awards were amortized over the stated service
period.
Such awards were treated
similarly under SFAS 123 in the pro forma amounts disclosed in the preceding
table.
Effective Dec. 31, 2006, NS
adopted Statement of Financial Accounting Standards (SFAS) No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” (see Note 10).
Cash
Equivalents
“Cash
equivalents” are highly liquid investments purchased three months or less
from maturity.
Allowance for Doubtful Accounts
NS'
allowance for doubtful accounts was $5 million at Dec. 31, 2006, and $6 million
at
Dec. 31, 2005
..
To determine its allowance for doubtful
accounts, NS evaluates historical loss experience (which has not been
significant), the characteristics of current accounts, as well as general
economic conditions and trends.
Materials
and Supplies
“Materials
and supplies,” consisting mainly of fuel oil and items for maintenance of
property and equipment, are stated at the lower of average cost or market.
The cost of materials and supplies
expected to be used in capital additions or improvements is included in
“Properties.”
Investments
Debt securities classified as
“held-to-maturity” are reported at amortized cost and marketable
equity and debt securities classified as “trading” or
“available-for-sale” are recorded at fair value.
Unrealized after-tax gains and losses
for investments designated as “available-for-sale,” are recognized
in “Accumulated other comprehensive loss.”
Investments
where NS has the ability to exercise significant influence over but does not
control the entity are accounted for using the equity method in accordance with
APB Opinion No. 18, “The Equity Method of Accounting for Investments in
Common Stock.”
Properties
“Properties”
are stated principally at cost and are depreciated using group
depreciation.
Rail is depreciated
primarily on the basis of use measured by gross ton-miles.
Other properties are depreciated
generally using the straight-line method over the lesser of estimated service
or lease lives.
Depletion of
natural resources (see Note 2) is based on units of production.
Depreciation in the Consolidated
Statements of Cash Flows includes depreciation and depletion.
NS capitalizes interest on major capital
projects during the period of their construction.
Expenditures, including those on leased
assets that extend an asset's useful life or increase its utility, are capitalized.
Costs related to repairs and maintenance
activities that do not extend an asset’s useful life or increase its
utility are expensed when such repairs are performed.
When properties other than land and
nonrail assets are sold or retired in the ordinary course of business, the cost
of the assets, net of sale proceeds or salvage, is charged to accumulated
depreciation, and no gain or loss is recognized through income.
Gains and losses on disposal of land and
nonrail assets are included in “Other income - net” (see Note 2)
since such income is not a product of NS’ railroad operations.
NS
reviews the carrying amount of properties whenever events or changes in
circumstances indicate that such carrying amount may not be recoverable
based on future undiscounted cash flows.
Assets that are deemed impaired as a result of such review are recorded
at the lower of carrying amount or fair value.
Reclassifications
Certain
comparative prior year amounts have been reclassified to conform to the current
year presentation.
2.
Other Income - Net
|
2006
|
2005
|
2004
|
|
($ in millions)
|
Income from natural resources:
|
|
|
|
|
|
|
Royalties from coal
|
$
|
55
|
$
|
54
|
$
|
42
|
Nonoperating depletion and
depreciation
|
|
(12)
|
|
(13)
|
|
(11)
|
Subtotal
|
|
43
|
|
41
|
|
31
|
|
|
|
|
|
|
|
Interest income
|
|
76
|
|
41
|
|
13
|
Gains and losses from sale of properties and
investments
|
|
54
|
|
49
|
|
46
|
Rental income
|
|
45
|
|
42
|
|
40
|
Equity in earnings of Conrail (Note 4)
|
|
25
|
|
37
|
|
11
|
Corporate-owned life insurance – net
|
|
24
|
|
4
|
|
8
|
Gain from Conrail Corporate Reorganization (Note 4)
|
|
- --
|
|
- --
|
|
40
|
Equity in losses of partnerships
|
|
(68)
|
|
(108)
|
|
(61)
|
Other interest expense
|
|
(17)
|
|
(6)
|
|
(17)
|
Taxes on nonoperating property
|
|
(9)
|
|
(9)
|
|
(8)
|
Charitable contributions
|
|
(4)
|
|
(4)
|
|
(4)
|
Other
|
|
(20)
|
|
(13)
|
|
(23)
|
Total
|
$
|
149
|
$
|
74
|
$
|
76
|
“Other
income - net” includes income and costs not part of rail operations and the
income generated by the activities of NS' noncarrier subsidiaries as well as
the costs incurred by those subsidiaries in their operations.
NS has a 40.5% interest in a limited
liability company that owns and operates facilities that produce synthetic fuel
from coal.
The production of
synthetic fuel results in tax credits as well as expenses related to the
investments.
The expenses are included
in “Equity in losses of partnerships” above.
“Other
current assets” in the Consolidated Balance Sheets includes prepaid
interest of $50 million at Dec. 31, 2006, and $47 million at Dec. 31,
2005, arising from corporate-owned life insurance borrowings.
3.
Income Taxes
Provision
for Income Taxes
|
2006
|
2005
|
2004
|
|
($ in millions)
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
666
|
$
|
283
|
$
|
133
|
State
|
|
91
|
|
53
|
|
46
|
Total
current taxes
|
|
757
|
|
336
|
|
179
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
3
|
|
220
|
|
181
|
State
|
|
(11)
|
|
(140)
|
|
19
|
Total
deferred taxes
|
|
(8)
|
|
80
|
|
200
|
|
|
|
|
|
|
|
Provision
for income taxes
|
$
|
749
|
$
|
416
|
$
|
379
|
Reconciliation
of Statutory Rate to Effective Rate
The
“Provision for income taxes” in the Consolidated Statements of
Income differs from the amounts computed by applying the statutory federal
corporate tax rate as follows:
|
2006
|
2005
|
2004
|
|
Amount
|
|
%
|
Amount
|
|
%
|
Amount
|
|
%
|
|
($ in millions)
|
Federal
income tax at
|
|
|
|
|
|
|
|
|
|
|
|
|
statutory
rate
|
$
|
780
|
|
35
|
$
|
594
|
|
35
|
$
|
451
|
|
35
|
State
income taxes, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
federal
tax effect
|
|
52
|
|
2
|
|
40
|
|
2
|
|
42
|
|
3
|
Tax
credits
|
|
(62)
|
|
(3)
|
|
(104)
|
|
(6)
|
|
(80)
|
|
(7)
|
Ohio
rate change, net of
|
|
|
|
|
|
|
|
|
|
|
|
|
federal
tax effect
|
|
- --
|
|
- --
|
|
(96)
|
|
(6)
|
|
- --
|
|
- --
|
Equity
in earnings of Conrail
|
|
(7)
|
|
- --
|
|
(10)
|
|
- --
|
|
(18)
|
|
(1)
|
Gain
from Conrail Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
Reorganization
|
|
- --
|
|
- --
|
|
- --
|
|
- --
|
|
(14)
|
|
(1)
|
Other
– net
|
|
(14)
|
|
- --
|
|
(8)
|
|
- --
|
|
(2)
|
|
- --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
$
|
749
|
|
34
|
$
|
416
|
|
25
|
$
|
379
|
|
29
|
In
June 2005,
Ohio
enacted tax legislation that phases out its Corporate Franchise Tax, which was
generally based on federal taxable income, and phases in a new gross receipts
tax called the Commercial Activity Tax, which is based on current year sales
and rentals.
The phased elimination
of the Corporate Franchise Tax resulted in a reduction in NS’ deferred
income tax liability, as required by Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes,” which, as
noted above, decreased deferred tax expense by $96 million.
Deferred
Tax Assets and Liabilities
Certain
items are reported in different periods for financial reporting and income tax
purposes.
Deferred tax assets and
liabilities are recorded in recognition of these differences.
The tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and deferred
tax liabilities are as follows:
|
Dec. 31,
|
|
2006
|
2005
|
|
($ in millions)
|
Deferred
tax assets:
|
|
|
|
|
Compensation
and benefits, including post-retirement
|
$
|
382
|
$
|
160
|
Accruals,
including casualty and other claims
|
|
211
|
|
207
|
Other
|
|
44
|
|
49
|
Total
gross deferred tax assets
|
|
637
|
|
416
|
Less
valuation allowance
|
|
(9)
|
|
(10)
|
Net
deferred tax asset
|
|
628
|
|
406
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
Property
|
|
(6,659)
|
|
(6,632)
|
Other
|
|
(227)
|
|
(238)
|
Total
gross deferred tax liabilities
|
|
(6,886)
|
|
(6,870)
|
|
|
|
|
|
Net
deferred tax liability
|
|
(6,258)
|
|
(6,464)
|
Net
current deferred tax asset
|
|
186
|
|
167
|
|
|
|
|
|
Net
long-term deferred tax liability
|
$
|
(6,444)
|
$
|
(6,631)
|
Except
for amounts for which a valuation allowance has been provided, management
believes that it is more likely than not that future taxable income will be
sufficient to realize the deferred tax assets.
The valuation allowance at the end
of each year relates to subsidiary state income tax net operating losses that
may not be utilized prior to their expiration.
The total valuation allowance decreased $1 million
in 2006, $3 million in 2005 and $1 million in 2004.
Internal
Revenue Service (IRS) Reviews
Consolidated
federal income tax
returns
have been
examined and Revenue Agent Reports have been received for all years up to and
including 2003.
In 2004, the
favorable resolution of the IRS audit of a synthetic fuel-related investment is
reflected in the “Tax credits” line of the reconciliation of
statutory rate to the effective rate.
The consolidated federal income tax
returns
for 2004 and 2005 are being audited by the IRS.
Management believes that adequate
provision has been made for any additional taxes and interest thereon that
might arise as a result of IRS examinations.
4.
Investments
|
Dec. 31,
|
|
2006
|
2005
|
|
($ in millions)
|
|
|
|
|
|
Short-term investments with average maturities at
Dec. 31, 2006
:
|
|
|
|
|
Federal government
notes, 5 months
|
$
|
124
|
$
|
348
|
Corporate notes, 4
months
|
|
117
|
|
290
|
Commercial paper, 2
months
|
|
74
|
|
251
|
Municipal debt, 1
month
|
|
22
|
|
43
|
Other short-term
investments, less than one month
|
|
54
|
|
36
|
Total
short-term investments
|
$
|
391
|
$
|
968
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
Investment in Conrail
Inc.
|
$
|
849
|
$
|
812
|
Other equity method
investments
|
|
451
|
|
331
|
Company-owned life
insurance at net cash
surrender value
|
|
310
|
|
276
|
Other investments
|
|
145
|
|
139
|
Total
long-term investments
|
$
|
1,755
|
$
|
1,558
|
The $391 million in “Short-term
investments” is classified as available-for-sale, of which approximately
three-quarters mature within six months.
Unrealized gains from short-term investments were approximately $1 million
at Dec. 31, 2006, and unrealized losses from short-term investments were
approximately $1 million at Dec. 31, 2005.
Other
equity method investments, shown above, includes NS’ $100 million
investment in MSLLC, a joint venture formed with
Kansas City
Southern, made in 2006.
Investment
in Conrail and Operations Over Its Lines
Overview
Through a limited liability company,
Norfolk
Southern and CSX Corporation (CSX)
jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated
Rail Corporation (CRC).
NS has a
58% economic and 50% voting interest in the jointly owned entity, and CSX has
the remainder of the economic and voting interests.
CRC owns and operates certain properties
(the Shared Assets Areas) for the joint and exclusive benefit of NSR and CSX
Transportation Inc. (CSXT).
The
costs of operating the Shared Assets Areas are borne by NSR and CSXT based on
usage.
In addition, NSR and CSXT pay
CRC a fee for access to the Shared Assets Areas.
Conrail
Corporate Reorganization
On
August
27, 2004
, NS, CSX and Conrail completed a reorganization of Conrail
(Conrail Corporate Reorganization), which established direct ownership and
control by NSR and CSXT of two former CRC subsidiaries, Pennsylvania Lines LLC
(PRR) and New York Central Lines LLC (NYC), respectively.
Prior to the Conrail Corporate
Reorganization, NSR operated the routes and assets of PRR and CSXT operated the
routes and assets of NYC, each in accordance with operating and lease
agreements.
Pursuant to the Conrail
Corporate Reorganization, the operating and lease agreements were terminated
and PRR and NYC were merged into NSR and CSXT, respectively.
The reorganization did not involve the
Shared Assets Areas and did not affect the competitive rail service provided in
the Shared Assets Areas.
Conrail
continues to own, manage and operate the Shared Assets Areas as previously
approved by the Surface Transportation Board (STB).
As a part of the Conrail Corporate Reorganization,
Conrail restructured its existing unsecured and secured public indebtedness,
with the consent of Conrail’s debtholders.
Prior to the restructuring, there were
two series of unsecured public debentures with an outstanding principal amount
of approximately $800 million and 13 series of secured debt with an outstanding
principal amount of approximately $300 million.
Guaranteed debt securities were offered
in an approximate 58%/42% ratio in exchange for Conrail’s unsecured
debentures.
Of the $800 million
unsecured public debentures, $779 million were tendered and accepted for
exchange, and NSR issued unsecured public debentures with a total principal of
$452 million and an issue-date fair value of $595 million.
Conrail’s secured debt and lease
obligations remain obligations of Conrail and are
support
ed
by leases and subleases which are the direct lease and sublease obligations of
NSR or CSXT.
Substantially all of
these NSR obligations are capital leases and, accordingly, are a component of
NS’ capital lease obligations (see Note 7).
NS accounted for the transaction at fair value,
which resulted in the recognition of a $40 million net gain (reported in
“Other income – net”) in 2004 from the tax-free distribution
to NS of a portion of its investment in Conrail.
Originally in 2004, the gain was
calculated and reported as $53 million.
However, in December 2006, CSX determined that the value for a portion
of a rail yard transferred from Conrail to CSX had been omitted.
Accordingly, the gain was adjusted in
the accompanying Consolidated Statement of Income for 2004 to reflect an
immaterial correction of $13 million.
In addition, the Consolidated Balance Sheet as of December 31, 2005
reflects corresponding adjustments to the amounts previously reported for
Investments (reduction of $32 million), Properties (increase of $30 million),
Deferred income tax liabilities (increase of $11 million) and Retained income
(decrease of $13 million).
NS concluded that fair value was the appropriate
measurement for 42% of PRR because the transaction resulted in the complete
ownership and control of PRR.
The
remaining 58% of PRR was recorded at NS’ carryover basis.
As a result of the transaction,
NS’ investment in Conrail does not include amounts related to PRR and NYC
beginning in 2005.
Instead the
assets and liabilities of PRR are reflected in their respective line items in
NS’ Consolidated Balance Sheet and amounts due to PRR were extinguished.
The
following summarizes the effect of this 2004 transaction, as adjusted for the
immaterial correction described above ($ in millions):
Properties
|
$
|
8,398
|
Extinguishment of amounts due to PRR
|
|
870
|
Other assets and liabilities, net
|
|
177
|
Deferred income taxes
|
|
(3,124)
|
Long-term debt, including current maturities
|
|
(734)
|
Net assets received
|
|
5,587
|
Investment in Conrail
|
|
(5,547)
|
Gain from Conrail
Corporate Reorganization
|
$
|
40
|
The amounts shown above for the net assets received
reflect the fair value of such assets.
Properties were valued based on information received from an independent
valuation consultant.
The assets of
PRR included the note due from NSR discussed below under the heading
“Related Party Transactions,” which resulted in its effectively
being extinguished.
Debt was
recorded at fair value based on interest rates at the time of the reorganization.
The reduction to NS’ investment in
Conrail represented the removal of amounts related to NS’ equity
interests in PRR and NYC as well as amounts related to the Conrail debt that
was exchanged or effectively assumed by the leases and subleases entered into
to
support
those obligations.
On the Consolidated Statements of Income,
“Conrail rents and services” was reduced as a result of the 2004
transaction.
After the Conrail
Corporate Reorganization, “Conrail rents and services” reflects
only the expenses associated with the Shared Assets Areas, and other expenses
(primarily the depreciation related to the PRR assets) are reflected in their
respective line items in the Consolidated Statements of Income.
The transaction’s impact on 2004 net
income was the $40 million gain discussed above.
Prospectively, the transaction will have
no effect on revenues and will not have a significant ongoing effect on net
income.
Had the transaction been
consummated before the periods presented, there would have been no change in
revenues and no significant change to net income.
NS is continuing to apply
the equity method of accounting to its remaining investment in Conrail in
accordance with APB Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock."
NS is amortizing the excess of the purchase price over Conrail's net
equity using the principles of purchase accounting, based primarily on the
estimated remaining useful lives of Conrail's depreciable property and
equipment, including the related deferred tax effect of the differences in tax
and accounting bases for certain assets, as all of the purchase price at
acquisition was allocable to Conrail’s tangible assets and
liabilities.
At Dec. 31, 2006, the
difference between NS' investment in Conrail and its share of Conrail's
underlying net equity was $556 million.
Related-Party Transactions
CRC
owns and operates the Shared Assets Areas for the joint and exclusive benefit
of NSR and CSXT.
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.
Future minimum lease payments due to CRC
under the Shared Assets Areas agreements are as follows: $26 million
in each of 2007 through 2011 and $318 million thereafter.
The components of
"Conrail rents and services" are as follows:
|
Years Ended Dec. 31,
|
|
2006
|
2005
|
2004
|
|
($ in millions)
|
|
|
|
|
|
|
|
Expenses
for amounts due to CRC for operation of
|
|
|
|
|
|
|
the
Shared Assets Areas
|
$
|
126
|
$
|
129
|
$
|
129
|
Amounts
due to PRR for use by NSR of operating
|
|
|
|
|
|
|
properties and equipment (prior to the
Conrail
|
|
|
|
|
|
|
Corporate Reorganization)
|
|
- --
|
|
- --
|
|
233
|
NS’
equity in the earnings of Conrail, net of
|
|
|
|
|
|
|
amortization
(prior to the Conrail Corporate
|
|
|
|
|
|
|
Reorganization)*
|
|
- --
|
|
- --
|
|
(43)
|
Conrail rents and services
|
$
|
126
|
$
|
129
|
$
|
319
|
|
|
|
|
|
|
|
|
*After the reorganization,
NS’ equity in the earnings of Conrail, net of amortization, is included
in “Other income – net,” (see Note 2).
Prior to the Conrail
Corporate Reorganization, a significant portion of the payments made to PRR was
borrowed back from a subsidiary of PRR under a note due in 2032.
Amounts outstanding under this note
comprised the long‑term balance of “Due to Conrail,” and this
note was effectively extinguished by the reorganization.
"Due to Conrail" included in “Accounts
payable” (see Note 6) is composed principally of amounts related to
expenses included in "Conrail rents and services," as discussed
above.
“Long-term advances
from Conrail,” included in “Other liabilities” (see Note 9),
bear interest at an average rate of 4.4% and are due in 2035.
NS provides certain general
and administrative
support
functions
to Conrail, the fees for which are billed in accordance with several
service-provider arrangements and amount to approximately $7 million
annually.
Summary Financial
Information – Conrail
As a result of the Conrail
Corporate Reorganization discussed above, two CRC subsidiaries, PRR and NYC,
were distributed to NS and CSX, respectively, and CRC’s public
indebtedness was restructured.
The
results of the operations of these subsidiaries are presented in the following 2004
financial information as “Discontinued Operations.”
The 2006, 2005 and 2004 summarized
information was derived from unaudited financial statements.
Summarized Income Statement
Information - Conrail
|
Years Ended Dec. 31,
|
|
2006
|
2005
|
2004
|
|
($ in millions)
|
|
|
|
|
|
|
|
Operating revenues
|
$
|
373
|
$
|
378
|
$
|
352
|
Operating income (loss)
|
$
|
16
|
$
|
32
|
$
|
(18)
|
Income from continuing
operations
|
$
|
47
|
$
|
85
|
$
|
22
|
Discontinued operations
(PRR and NYC)
|
$
|
- --
|
$
|
- --
|
$
|
119
|
Net income
|
$
|
47
|
$
|
85
|
$
|
140
|
|
|
|
|
|
|
|
|
Note:
Conrail adopted FIN No. 46
“Consolidation of Variable Interest Entities,” effective Jan. 1,
2004, and recorded a $1 million net adjustment for the cumulative effect of
this change in accounting on years prior to 2004.
Summarized Balance Sheet
Information - Conrail
|
As of Dec. 31,
|
|
2006
|
2005
|
|
($ in millions)
|
Assets:
|
|
|
|
|
Current
assets
|
$
|
280
|
$
|
233
|
Noncurrent
assets
|
|
1,043
|
|
1,242
|
Total
assets
|
$
|
1,323
|
$
|
1,475
|
|
|
|
|
|
Liabilities and
stockholders' equity:
|
|
|
|
|
Current
liabilities
|
$
|
263
|
$
|
233
|
Noncurrent
liabilities
|
|
555
|
|
807
|
Stockholders'
equity
|
|
505
|
|
435
|
Total
liabilities and stockholders' equity
|
$
|
1,323
|
$
|
1,475
|
Note:
Current assets include amounts due from
NS and CSX totaling $173 million at Dec. 31, 2006, and $134 million at
Dec. 31, 2005.
Noncurrent assets
include amounts due from NS and CSX totaling $351 million at Dec. 31, 2006, and
$413 million at
Dec. 31,
2005
..
Current
liabilities include amounts payable to NS and CSX totaling $4 million at Dec.
31, 2006, and $6 million at
Dec.
31, 2005
..
5.
Properties
|
Dec. 31,
|
Depreciation
|
|
2006
|
2005
|
Rate for 2006
|
|
($ in millions)
|
|
|
|
|
|
|
Land
|
$
|
2,082
|
$
|
2,088
|
|
Railway
property:
|
|
|
|
|
|
Road
|
|
18,725
|
|
18,161
|
2.6%
|
Equipment
|
|
7,085
|
|
6,838
|
3.7%
|
Other
property
|
|
471
|
|
469
|
2.6%
|
|
|
28,363
|
|
27,556
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
(7,265)
|
|
(6,821)
|
|
|
|
|
|
|
|
Net
properties
|
$
|
21,098
|
$
|
20,735
|
|
|
|
|
|
|
|
|
Railway
property includes $602 million at Dec. 31, 2006 and 2005, of assets recorded
pursuant to capital leases with accumulated amortization of $192 million and $170
million at Dec. 31, 2006 and 2005, respectively.
Other property includes the costs of
obtaining rights to natural resources of $337 million at Dec. 31, 2006 and 2005,
with accumulated depletion of $165 million and $157 million at Dec. 31, 2006
and 2005, respectively.
Capitalized
Interest
Total
interest cost incurred on debt in 2006, 2005 and 2004 was $489 million, $505
million and $499 million, respectively, of which $13 million, $11 million
and $10 million was capitalized.
6.
Current Liabilities
|
Dec. 31,
|
|
2006
|
2005
|
|
($ in millions)
|
Accounts
payable:
|
|
|
|
|
Accounts
and wages payable
|
$
|
569
|
$
|
571
|
Casualty
and other claims
|
|
301
|
|
291
|
Vacation
liability
|
|
120
|
|
119
|
Equipment
rents payable – net
|
|
96
|
|
101
|
Due
to Conrail
|
|
68
|
|
56
|
Other
|
|
27
|
|
25
|
Total
|
$
|
1,181
|
$
|
1,163
|
|
|
|
|
|
Other
current liabilities:
|
|
|
|
|
Interest
payable
|
$
|
88
|
$
|
100
|
Retiree
benefit obligations (Note 10)
|
|
53
|
|
45
|
Liabilities
for forwarded traffic
|
|
50
|
|
47
|
Other
|
|
25
|
|
21
|
Total
|
$
|
216
|
$
|
213
|
7.
Long-term Debt
|
Dec. 31,
|
|
2006
|
2005
|
|
($ in millions)
|
Notes and debentures at average rates and
maturities as follows:
|
|
|
|
|
7.01%, maturing to 2011
|
$
|
1,540
|
$
|
1,740
|
6.67%, maturing 2014 and 2017
|
|
981
|
|
991
|
8.25%, maturing 2020 to 2025
|
|
764
|
|
764
|
7.12%, maturing 2027 to 2031
|
|
1,290
|
|
1,300
|
7.21%, maturing 2037 and 2043
|
|
855
|
|
855
|
7.02%, maturing 2097 and 2105
|
|
650
|
|
650
|
Equipment obligations at an average rate of 6.02%,
maturing to 2014
|
|
306
|
|
363
|
Capitalized leases at an average rate of 4.87%,
maturing to 2024
|
|
231
|
|
290
|
Other debt at an average rate of 7.31%, maturing
to 2019
|
|
113
|
|
113
|
Discounts and premiums, net
|
|
(130)
|
|
(136)
|
Total
long-term debt
|
|
6,600
|
|
6,930
|
Less current
maturities
|
|
(491)
|
|
(314)
|
Long-term debt
excluding current maturities
|
$
|
6,109
|
$
|
6,616
|
|
|
|
|
|
Long-term debt maturities subsequent to 2007 are
as follows:
|
|
|
|
|
2008
|
$
|
368
|
|
|
2009
|
|
475
|
|
|
2010
|
|
339
|
|
|
2011
|
|
337
|
|
|
2012 and subsequent years
|
|
4,590
|
|
|
Total
|
$
|
6,109
|
|
|
In
May 2005, NS issued $717 million of unsecured notes ($350 million at 5.64% due
2029 and $367 million at 5.59% due 2025) and paid $218 million of premium
in exchange for $717 million of its previously issued unsecured notes ($350
million at 7.8% due 2027, $200 million at 7.25% due 2031, and $167 million at
9.0% due 2021).
The $218 million
cash premium payment is reflected as a reduction of debt in the Consolidated
Balance Sheet and Statement of Cash Flows and is included in “Discounts
and premiums, net.”
The
premium is being amortized as additional interest expense over the terms of the
new debt, resulting in effective interest rates of 8.7% for the 2029 notes and
9.0% for the 2025 notes.
In
August 2004, pursuant to the Conrail Corporate Reorganization (see Note 4), NSR
issued unsecured public debentures with a total principal of $452 million ($314
million at 9.75% due 2020 and $138 million at 7.875% due 2043) and fair
value of $595 million.
This
difference is included in “Discounts and premiums, net” and is
being amortized as a reduction of interest expense over the terms of the
notes, resulting in effective interest rates of 6.0% for the 2020 notes and 6.2%
for the 2043 notes.
The
railroad equipment obligations and the capitalized leases are secured by liens
on the underlying equipment.
Certain lease obligations require the maintenance of yen-denominated
deposits, which are pledged to the lessor to satisfy yen-denominated lease
payments.
These deposits are included
in “Other assets” on the balance sheet and totaled $85 million at
Dec. 31, 2006, and $87 million at Dec. 31, 2005.
Shelf
Registration
NS has
on file with the Securities and Exchange Commission a Form S-3 shelf
registration statement, covering the issuance of registered debt or equity
securities, with $700 million of available capacity.
In 2005, NS issued $300 million of 6%
senior notes due March 2105 under this shelf registration statement.
Credit
Agreement, Debt Covenants and Commercial Paper
NS has
in place a five-year $1 billion credit facility expiring in 2009.
Any borrowings under the credit
agreement are contingent on the continuing effectiveness of the representations
and warranties made at the inception of the agreement.
NS is subject to various financial
covenants with respect to its debt and under its credit agreement, including a
minimum net worth requirement, a maximum leverage ratio restriction, certain
restrictions on the issuance of further debt by NS or its subsidiaries and the
consolidation, merger or sale of substantially all of NS’ assets.
At
Dec. 31, 2006
, NS was in compliance with all
financial covenants.
NS
has the ability to issue commercial paper
support
ed
by its $1 billion credit agreement.
At
Dec. 31, 2006
,
and
Dec. 31, 2005
,
NS had no outstanding commercial paper or borrowings under the credit agreement.
8.
Lease Commitments
NS is committed under long-term lease agreements,
which expire on various dates through 2067, for equipment, lines of road and
other property.
The following
amounts do not include payments to CRC under the Shared Assets Areas agreements
(see Note 4).
Future minimum lease
payments and operating lease expense are as follows:
|
Operating
|
Capital
|
|
Leases
|
Leases
|
|
($ in millions)
|
|
|
2007
|
$
|
166
|
$
|
77
|
2008
|
|
146
|
|
46
|
2009
|
|
128
|
|
58
|
2010
|
|
110
|
|
24
|
2011
|
|
79
|
|
21
|
2012
and subsequent years
|
|
458
|
|
23
|
Total
|
$
|
1,087
|
$
|
249
|
Less
imputed interest on capital leases at an average rate of 5.2%
|
|
|
|
(18)
|
Present
value of minimum lease payments included in debt
|
|
|
$
|
231
|
Operating Lease Expense
|
2006
|
2005
|
2004
|
|
($ in millions)
|
|
|
|
|
|
|
|
Minimum
rents
|
$
|
197
|
$
|
190
|
$
|
151
|
Contingent
rents
|
|
79
|
|
75
|
|
65
|
Total
|
$
|
276
|
$
|
265
|
$
|
216
|
Contingent rents is primarily
comprised of rent paid to other railroads for joint facility operations and are
based on usage.
9.
Other Liabilities
|
Dec. 31,
|
|
2006
|
2005
|
|
($ in millions)
|
|
|
|
|
|
Retiree
health and death benefit obligations (Note 10)
|
$
|
621
|
$
|
364
|
Casualty
and other claims (Note 17)
|
|
471
|
|
421
|
Deferred
compensation
|
|
149
|
|
143
|
Net
pension obligations (Note 10)
|
|
144
|
|
106
|
Long-term
advances from Conrail (Note 4)
|
|
133
|
|
133
|
Other
|
|
249
|
|
248
|
Total
|
$
|
1,767
|
$
|
1,415
|
10.
Pensions and Other Postretirement
Benefits
Norfolk
Southern and certain subsidiaries have both funded
and unfunded defined benefit pension plans covering principally salaried
employees.
Norfolk
Southern and certain subsidiaries
also provide specified health care and death benefits to eligible retired
employees and their dependents.
Under the present plans, which may be amended or terminated at NS'
option, a defined percentage of health care expenses is covered, reduced by any
deductibles, copayments, Medicare payments and, in some cases, coverage
provided under other group insurance policies.
Required Accounting Change
As
of Dec. 31, 2006, NS adopted SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158).
This statement requires an employer to
recognize in its statement of financial position the overfunded or underfunded
status of defined benefit pension and postretirement plans measured as the
difference between the fair value of plan assets and the benefit
obligation.
Employers must also
recognize as a component of other comprehensive income, net of tax, the
actuarial gains and losses and the prior service costs, credits and transition
costs that arise during the period.
As a result of adopting this standard, NS
reduced its pension asset by $217 million and increased its pension and
postretirement liabilities by $258 million in its Consolidated Balance Sheet,
with a corresponding reduction to stockholders’ equity of $292 million (net
of tax) reflected as an increase to accumulated other comprehensive loss.
The adoption of SFAS 158 has no impact
on years prior to 2006 and has no effect on the calculation of expenses for
pensions and post-retirement benefits.
The
following table illustrates the incremental effect of applying SFAS 158 to
NS’ pension and postretirement plans on individual line items in NS’
Consolidated Balance Sheet at Dec. 31, 2006.
|
Before application
of SFAS 158
at Dec. 31, 2006
|
Adjustments
|
After
application
of SFAS
158
at Dec.
31, 2006
|
|
($ in millions)
|
|
|
|
|
|
|
|
Noncurrent pension asset
|
$
|
658
|
$
|
(217)
|
$
|
441
|
Total assets
|
|
26,245
|
|
(217)
|
|
26,028
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Postretirement benefits liability
|
|
45
|
|
- --
|
|
45
|
Pension liability
|
|
- --
|
|
8
|
|
8
|
|
|
|
|
|
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
Post-retirement benefits liability
|
|
390
|
|
231
|
|
621
|
Pension liability
|
|
125
|
|
19
|
|
144
|
Deferred income taxes
|
|
6,627
|
|
(183)
|
|
6,444
|
|
|
|
|
|
|
|
Total liabilities
|
|
16,338
|
|
75
|
|
16,413
|
|
|
|
|
|
|
|
Accumulated
other comprehensive loss
|
|
23
|
|
292
|
|
315
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
$
|
9,907
|
$
|
(292)
|
$
|
9,615
|
|
|
|
|
|
|
|
NS’ adoption of SFAS 158 in 2006, as reflected
in the Consolidated Statements of Changes in Stockholders’ Equity, includes
a $2 million loss related to NS’ proportionate share of Conrail’s
adoption of SFAS 158.
Pension
and Other Postretirement Benefit Obligations and Plan Assets
|
Pension Benefits
|
Other Postretirement Benefits
|
|
2006
|
2005
|
2006
|
2005
|
|
($ in millions)
|
Change in benefit obligations
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
$
|
1,642
|
$
|
1,574
|
$
|
754
|
$
|
701
|
Service
cost
|
|
27
|
|
23
|
|
19
|
|
17
|
Interest
cost
|
|
88
|
|
87
|
|
42
|
|
40
|
Settlement
|
|
- --
|
|
- --
|
|
- --
|
|
(12)
|
Actuarial
losses
|
|
6
|
|
72
|
|
14
|
|
60
|
Benefits
paid
|
|
(113)
|
|
(114)
|
|
(44)
|
|
(52)
|
Benefit
obligation at end of year
|
|
1,650
|
|
1,642
|
|
785
|
|
754
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
1,824
|
|
1,806
|
|
108
|
|
105
|
Actual
return on plan assets
|
|
220
|
|
126
|
|
11
|
|
3
|
Employer
contribution
|
|
8
|
|
6
|
|
44
|
|
52
|
Benefits
paid
|
|
(113)
|
|
(114)
|
|
(44)
|
|
(52)
|
Fair
value of plan assets at end of year
|
|
1,939
|
|
1,824
|
|
119
|
|
108
|
|
|
|
|
|
|
|
|
|
Funded
status at end of year
|
$
|
289
|
$
|
182
|
$
|
(666)
|
$
|
(646)
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in the Consolidated
Balance
Sheets consist of:
|
|
|
|
|
|
|
|
|
Noncurrent
assets
|
$
|
441
|
$
|
612
|
$
|
- --
|
$
|
- --
|
Current
liabilities
|
|
(8)
|
|
- --
|
|
(45)
|
|
(45)
|
Noncurrent
liabilities
|
|
(144)
|
|
(106)
|
|
(621)
|
|
(364)
|
Accumulated
other comprehensive loss
|
|
- --
|
|
26
|
|
- --
|
|
- --
|
Net
amount recognized
|
$
|
289
|
$
|
532
|
$
|
(666)
|
$
|
(409)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other
comprehensive loss (pretax) consist
of:
|
|
|
|
|
|
|
|
|
Impact of implementation of SFAS
158
|
$
|
244
|
$
|
- --
|
$
|
231
|
$
|
- --
|
Minimum pension liability
|
|
- --
|
|
26
|
|
- --
|
|
- --
|
During
2005, NS distributed split dollar life insurance policies to eligible retired
employees, which resulted in a $12 million reduction of the postretirement
benefit obligation.
NS’
unfunded pension plans, included above, which in all cases have no assets and
therefore have an accumulated benefit obligation in excess of plan assets, had
projected benefit obligations of $152 million at Dec. 31, 2006, and $134 million
at Dec. 31, 2005, and had accumulated benefit obligations of $125 million at
Dec. 31, 2006, and $106 million at Dec. 31, 2005.
Pension
and Other Postretirement Benefit Cost Components
|
2006
|
2005
|
2004
|
|
($ in millions)
|
Pension benefits
|
|
|
|
|
|
|
Service
cost
|
$
|
27
|
$
|
23
|
$
|
18
|
Interest
cost
|
|
88
|
|
87
|
|
89
|
Expected
return on plan assets
|
|
(159)
|
|
(149)
|
|
(149)
|
Amortization
of prior service cost
|
|
2
|
|
2
|
|
3
|
Amortization
of net losses
|
|
13
|
|
14
|
|
3
|
Net
benefit
|
$
|
(29)
|
$
|
(23)
|
$
|
(36)
|
|
|
|
|
|
|
|
Other postretirement benefits
|
|
|
|
|
|
|
Service
cost
|
$
|
19
|
$
|
17
|
$
|
15
|
Interest
cost
|
|
42
|
|
40
|
|
39
|
Expected
return on plan assets
|
|
(10)
|
|
(9)
|
|
(12)
|
Amortization
of prior service benefit
|
|
(8)
|
|
(8)
|
|
(9)
|
Amortization
of net losses
|
|
27
|
|
22
|
|
16
|
Net
cost
|
$
|
70
|
$
|
62
|
$
|
49
|
The estimated net loss and prior service cost for
the defined benefit pension plans that will be amortized from accumulated other
comprehensive loss into net periodic benefit cost over the next year are $9
million and $2 million, respectively.
The estimated net loss and prior service benefit for the other defined
benefit postretirement plans that will be amortized from accumulated other
comprehensive loss into net periodic benefit cost over the next year are $23
million and $8 million, respectively.
Pension
Assumptions
Pension and other postretirement benefit costs are
determined based on actuarial valuations that reflect appropriate assumptions
as of the measurement date, ordinarily the beginning of each year.
The funded status of the plans is
determined using appropriate assumptions as of each year end.
A summary of the major assumptions
follows:
|
2006
|
2005
|
2004
|
Funded status:
|
|
|
|
Discount
rate
|
5.75%
|
5.50%
|
5.75%
|
Future
salary increases
|
4.5%
|
4.5%
|
4.5%
|
Pension cost:
|
|
|
|
Discount
rate
|
5.50%
|
5.75%
|
6.25%
|
Return
on assets in plans
|
9%
|
9%
|
9%
|
Future
salary increases
|
4.5%
|
4.5%
|
4.5%
|
Health
Care Cost Trend Assumptions
For
measurement purposes at Dec. 31, 2006 increases in the per capita cost of
covered health care benefits were assumed to be 10% for 2006 and 9% for
2007.
It is assumed the rate will
decrease gradually to an ultimate rate of 5% for 2011 and remain at that level
thereafter.
Assumed
health care cost trend rates have a significant effect on the amounts reported
in the financial statements.
To
illustrate, a one-percentage-point change in the assumed health care cost trend
would have the following effects:
|
One percentage point
|
|
Increase
|
Decrease
|
|
($ in millions)
|
Increase
(decrease) in:
|
|
|
|
|
Total
service and interest cost components
|
$
|
8
|
$
|
(7)
|
Postretirement
benefit obligation
|
$
|
89
|
$
|
(75)
|
Asset Management
Eleven investment firms
manage NS’ defined benefit pension plan’s assets under investment
guidelines approved by the Board of Directors.
Investments are restricted to domestic
fixed income securities, international fixed income securities, domestic and
international equity investments and unleveraged exchange-traded options and
financial futures.
Limitations
restrict investment concentration and use of certain derivative
instruments.
The target asset
allocation for equity is 75% of the pension plan’s assets.
Fixed income investments must have an average
rating of “AA” or better and all fixed income securities must be
rated “A” or better except bond index funds.
Equity investments must be in liquid
securities listed on national exchanges.
No investment is permitted in the securities of Norfolk Southern
Corporation or its subsidiaries (except through commingled pension trust
funds).
Investment managers’
returns
are expected to meet or exceed selected
market indices by prescribed margins.
NS’
pension plan weighted-average asset allocations at Dec. 31, 2006 and 2005, by
asset category, were as follows:
|
Percentage of
|
|
plan assets at Dec. 31,
|
Asset Category
|
2006
|
|
2005
|
|
|
|
|
Equity
securities
|
77%
|
|
76%
|
Debt
securities
|
23%
|
|
24%
|
Total
|
100%
|
|
100%
|
International
equity securities
|
|
|
|
included
in equity securities above
|
10%
|
|
11%
|
The
postretirement benefit plan assets consist primarily of trust-owned variable
life insurance policies with an asset allocation at Dec. 31, 2006, of 67% in
equity securities and 33% in debt securities compared with 66% in equity
securities and 34% in debt securities at Dec. 31, 2005.
The target asset allocation for equity
is between 50% and 75% of the plan’s assets.
The plans’ assumed
future
returns
are based principally
on the asset allocation and on the historic
returns
for the plans’ asset classes determined from both actual plan
returns
and, over longer time periods, market
returns
for those asset classes.
Contributions and Estimated Future Benefit Payments
In 2007, NS expects to
contribute approximately $8 million to its unfunded pension plans for payments
to pensioners and $45 million to its other postretirement benefit plans for
retiree health benefits.
Benefit payments, which
reflect expected future service, as appropriate, are expected to be paid
as follows:
|
|
Other
|
|
Pension
|
Postretirement
|
|
Benefits
|
Benefits
|
|
($ in millions)
|
|
|
|
|
|
2007
|
$
|
113
|
$
|
45
|
2008
|
|
112
|
|
48
|
2009
|
|
113
|
|
50
|
2010
|
|
114
|
|
53
|
2011
|
|
116
|
|
54
|
Years
2012-2016
|
|
620
|
|
290
|
The
other benefit payments include an estimated annual reduction due to the
Medicare Part D Subsidy of about $5 million.
Other Postretirement Coverage
Under collective bargaining
agreements, NS and certain subsidiaries participate in a multi-employer benefit
plan, which provides certain postretirement health care and life insurance
benefits to eligible union employees.
Premiums under this plan are expensed as incurred and amounted to $26
million in 2006 and 2005, and $20 million in 2004.
Section
401(k) Plans
Norfolk
Southern and certain
subsidiaries provide Section 401(k) savings plans for employees.
Under the plans, NS matches a portion of
employee contributions, subject to applicable limitations.
NS' expenses under these plans were $14
million in 2006, $13 million in 2005 and $12 million in 2004.
11.
Stock-Based Compensation
Under
the stockholder-approved Long-Term Incentive Plan (LTIP), a committee of
nonemployee directors of the Board or the chief executive officer (if delegated
such authority by the committee) may grant stock options, stock appreciation
rights (SARs), restricted shares, restricted stock units, performance shares
and performance share units (PSUs), up to a maximum of 88,025,000 shares of
Norfolk Southern Common Stock (Common Stock).
Of these shares, 5,000,000 were approved
by the Board for issuance to non-officer participants; as a broad-based
issuance, stockholder approval was not required.
In May 2005, the stockholders approved
an amended LTIP which provided that 8,500,000 shares of stock previously
approved for issuance under LTIP could be granted as restricted shares,
restricted stock unit shares or performance shares.
Under the Board-approved Thoroughbred
Stock Option Plan (TSOP), the committee may grant stock options up to a maximum
of 6,000,000 shares of Common Stock.
Options may be granted for a term not to exceed 10 years and are subject
to a vesting period of at least one year.
Option exercise prices are at not less than the fair market value of
Common Stock on the effective date of the grant.
The
LTIP also permits the payment – on a current or a deferred basis and in
cash or in stock – of dividend equivalents on shares of Common Stock
covered by options, PSUs or restricted stock units in an amount commensurate
with dividends paid on Common Stock.
Tax absorption payments also are authorized for any awards under LTIP in
amounts estimated to equal the federal and state income taxes applicable to
shares of Common Stock issued subject to a share retention agreement.
During the first quarter of 2006, a committee of
nonemployee directors of NS’ Board granted stock options, restricted
shares, restricted stock units and PSUs pursuant to the LTIP and granted stock
options pursuant to the TSOP.
Accounting
Method
As disclosed in Note 1, prior to the adoption of
SFAS 123(R), NS applied APB Opinion 25 and related interpretations in
accounting for awards made under the plans.
Accordingly, grants of PSUs, restricted
shares, restricted share units, dividend equivalents, tax absorption payments
and SARs resulted in charges to net income, while grants of stock options had
no effect on net income.
Under SFAS
123(R), all awards will result in charges to net income while dividend
equivalents are charged to retained earnings.
Related compensation costs were $129 million
in 2006, $75 million in 2005 and $53 million in 2004.
The total tax effect recognized in
income in relation to stock-based compensation was a benefit of $44 million in
2006, $27 million in 2005 and $19 million in 2004.
Stock Options
In
the first quarter of 2006, 1,188,700 options were granted under the LTIP and
238,000 options were granted under the TSOP.
In each case, the grant price was
$49.425, which was the fair market value of Common Stock on the date of grant,
and the options have a term of ten years but may not be exercised prior to the
first anniversary of the date of grant.
Holders of the options granted under LTIP receive cash dividend
equivalent payments for five years commensurate with dividends paid on Common
Stock.
The fair value of each option award in 2006 was
measured on the date of grant using a lattice-based option valuation
model.
Expected volatilities are
based on implied volatilities from traded options on Common Stock and
historical volatility of Common Stock.
NS uses historical data to estimate option exercises and employee
terminations within the valuation model.
The average expected option life is derived from the output of the
valuation model and represents the period of time that options granted are
expected to be outstanding.
The
average risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of grant.
For
options granted that include dividend equivalent payments, a dividend yield of
zero was used.
For purposes of pro
forma information required under SFAS 123, the fair value of the option awards
in 2005 and 2004 was determined using the Black-Scholes option-pricing
model.
The assumptions for 2006,
2005 and 2004 are shown in the following table:
|
2006
|
2005
|
2004
|
|
|
|
|
Expected volatility range
|
23.5% - 34.5%
|
n/a
|
n/a
|
Average expected volatility
|
27%
|
33%
|
35%
|
Average expected option
life
|
3.7 years
|
5 years
|
5 years
|
Average risk-free interest rate
|
4.5%
|
3.7%
|
3.2%
|
Per-share grant-date fair
value
|
$13.47
|
$12.19
|
$7.95
|
Options granted
|
1,427,400
|
1,353,600
|
4,580,500
|
A summary of options outstanding as of Dec. 31, 2006
and changes during the twelve months then ended is presented below:
|
|
|
|
Option
|
Weighted
Avg.
|
|
Shares
|
Exercise
Price
|
|
|
|
|
Outstanding
at Dec. 31, 2005
|
29,545,680
|
$
|
24.35
|
Granted
|
1,427,400
|
|
49.43
|
Exercised
|
(8,677,254)
|
|
25.02
|
Forfeited
|
(19,300)
|
|
41.00
|
Outstanding
at
Dec. 31, 2006
|
22,276,526
|
$
|
25.68
|
|
|
|
|
Exercisable
at
Dec. 31, 2006
|
20,858,826
|
$
|
24.07
|
The aggregate intrinsic value of options outstanding
at Dec. 31, 2006, was $548 million and had a weighted-average remaining life of
4.9 years.
Of these options
outstanding, 20,858,826 were exercisable and had an aggregate intrinsic value
of $547 million with a weighted average remaining contractual life of 4.7 years.
The
following table provides information related to options exercised as of Dec. 31
for the respective years:
|
2006
|
2005
|
2004
|
|
($ in millions)
|
|
|
|
|
|
|
|
Total
intrinsic value
|
$
|
226
|
$
|
139
|
$
|
85
|
Cash
received upon exercise of options
|
$
|
212
|
$
|
194
|
$
|
162
|
Related
tax benefit realized
|
$
|
79
|
$
|
47
|
$
|
30
|
Prior
to the adoption of SFAS 123(R), NS presented tax benefits generated from tax
deductions in excess of compensation costs recognized for share-based awards
(excess tax benefits) as operating cash flows in the Consolidated Statement of
Cash Flows.
Beginning in 2006, SFAS
123(R) requires excess tax benefits to be classified as financing cash
flows.
Accordingly, “Common
stock issued – net” in the Consolidated Statement of Cash Flows for
the year ended Dec. 31, 2006, included $85 million of such tax benefits.
In
November of 2005, the Board of Directors of NS changed the vesting periods on
options granted in January 2005 from three years to one year in order to reduce
future compensation expense.
At the
time, each of these options had an intrinsic value of approximately $9 and the
modification resulted in less than $1 million of compensation expense.
Restricted Shares and Restricted Stock Units
Restricted share and
restricted stock unit grants were 332,150 and 332,150, respectively, in 2006,
with a grant-date fair value of $49.60 and a three-year restriction period, and
were 576,240 and 384,160, respectively, in 2005, with a grant-date fair value
of $34.10 and a five-year restriction period (that may, for restricted shares,
be accelerated to a three-year restriction period upon achievement of specified
performance measures), and were 359,040 and 239,360, respectively, in 2004 with
a grant-date fair value of $22.02 and a three-year restriction period.
A summary of the status of
restricted shares and restricted stock units as of Dec. 31, 2006, and changes
during the twelve months then ended is presented below:
|
|
|
|
Weighted - Average
|
|
|
|
|
Grant-Date
|
|
Shares
|
Units
|
|
Fair Value
|
Nonvested at
Dec. 31, 2005
|
1,262,776
|
|
841,852
|
$
|
26.80
|
|
Granted
|
332,150
|
|
332,150
|
|
49.60
|
|
Vested
|
(473,294)
|
|
(319,696)
|
|
21.03
|
|
Forfeited
|
(2,950)
|
|
(2,350)
|
|
40.75
|
|
Nonvested at
Dec. 31, 2006
|
1,118,682
|
|
851,956
|
$
|
36.78
|
|
|
|
|
|
|
|
|
|
At Dec. 31, 2006, there
was $11
million of total unrecognized compensation related to
restricted shares and restricted stock units.
That cost is expected to be recognized
over a weighted-average period of approximately 1.7 years.
The total fair value of the restricted
shares vested and restricted stock units paid in cash during the twelve months
ended Dec. 31, 2006, 2005 and 2004 was $40 million, $2
million and zero,
respectively.
The total related tax
benefit realized was $6 million in 2006.
Performance Share Units
PSUs provide for awards based
on achievement of certain predetermined corporate performance goals (total
shareholder return, return on average invested capital and operating ratio) at
the end of a three-year cycle.
PSU
grants and average grant-date fair values were 1,163,600 and $49.425 in 2006; 1,344,400
and $34.10 in 2005; and 831,000 and $22.02 in 2004.
One-half of any PSUs earned will be paid
in the form of shares of Common Stock with the other half to be paid in cash.
A summary of the status of
PSUs as of Dec. 31, 2006, and changes during the twelve months then ended is
presented below:
|
|
|
Weighted - Average
|
|
Performance
|
|
Grant-Date
|
|
Share Units
|
|
Fair Value
|
Balance
Dec. 31, 2005
|
3,118,400
|
|
$
|
26.49
|
Granted
|
1,163,600
|
|
|
49.43
|
Earned
|
(345,290)
|
|
|
19.63
|
Paid
in cash
|
(345,290)
|
|
|
19.63
|
Unearned
|
(255,420)
|
|
|
19.63
|
Forfeited
|
(34,200)
|
|
|
34.38
|
Balance
Dec. 31, 2006
|
3,301,800
|
|
$
|
36.46
|
|
|
|
|
|
|
As
of Dec. 31, 2006, there was $30
million of total
unrecognized compensation related to PSUs granted under the LTIP which is
expected to be recognized over a weighted-average period of 1.2
years.
The
total fair value of PSUs earned and paid in cash during the twelve months ended
Dec. 31, 2006, 2005 and 2004 was $34
million,
$18
million and $10 million, respectively.
Shares Available and
Issued
Shares of stock available for
future grants and issued in connection with all features of the LTIP and TSOP as
of Dec. 31, were as follows:
|
2006
|
2005
|
2004
|
Available
for future grants:
|
|
|
|
LTIP
|
9,288,283
|
11,321,573
|
14,033,053
|
TSOP
|
2,538,700
|
2,771,400
|
2,773,300
|
Shares
of Common Stock issued:
|
|
|
|
LTIP
|
8,517,911
|
9,078,717
|
8,764,021
|
TSOP
|
836,783
|
410,750
|
8,700
|
12.
Stockholders' Equity
Other Comprehensive Income
(Loss)
“Other
comprehensive income (loss)” reported in the Consolidated Statements of
Changes in Stockholders' Equity consisted of the following:
|
|
Tax
|
|
|
Pretax
|
(Expense)
|
Net-of-Tax
|
|
Amount
|
Benefit
|
Amount
|
|
($ in millions)
|
Year ended Dec.
31, 2006
|
|
|
|
|
|
|
Net
gain (loss) arising during the year:
|
|
|
|
|
|
|
Cash
flow hedges
|
$
|
(1)
|
$
|
1
|
$
|
- --
|
Reclassification
adjustments for gains
|
|
|
|
|
|
|
included
in net income
|
|
(20)
|
|
8
|
|
(12)
|
Subtotal
|
|
(21)
|
|
9
|
|
(12)
|
Unrealized
gains on securities
|
|
1
|
|
- --
|
|
1
|
Minimum
pension liability
|
|
(10)
|
|
4
|
|
(6)
|
Other
comprehensive income of equity investees
|
|
15
|
|
4
|
|
19
|
Other
comprehensive income (loss)
|
$
|
(15)
|
$
|
17
|
$
|
2
|
|
|
|
|
|
|
|
Year ended Dec.
31, 2005
|
|
|
|
|
|
|
Net
gain (loss) arising during the year:
|
|
|
|
|
|
|
Cash
flow hedges
|
$
|
92
|
$
|
(37)
|
$
|
55
|
Reclassification
adjustments for gains
|
|
|
|
|
|
|
included
in net income
|
|
(148)
|
|
58
|
|
(90)
|
Subtotal
|
|
(56)
|
|
21
|
|
(35)
|
Unrealized
losses on securities
|
|
(1)
|
|
- --
|
|
(1)
|
Minimum pension liability
|
|
(6)
|
|
2
|
|
(4)
|
Other
comprehensive loss of equity investees
|
|
(13)
|
|
- --
|
|
(13)
|
Other
comprehensive income (loss)
|
$
|
(76)
|
$
|
23
|
$
|
(53)
|
|
|
|
|
|
|
|
Year ended Dec.
31, 2004
|
|
|
|
|
|
|
Net
gain (loss) arising during the year:
|
|
|
|
|
|
|
Cash
flow hedges
|
$
|
171
|
$
|
(67)
|
$
|
104
|
Reclassification
adjustments for gains
|
|
|
|
|
|
|
included
in net income
|
|
(140)
|
|
55
|
|
(85)
|
Subtotal
|
|
31
|
|
(12)
|
|
19
|
Unrealized
gains on securities
|
|
1
|
|
- --
|
|
1
|
Other
comprehensive income (loss)
|
$
|
32
|
$
|
(12)
|
$
|
20
|
Accumulated
Other Comprehensive Loss
“Accumulated
other comprehensive loss” reported in the Consolidated Statements of
Changes in Stockholders' Equity consisted of the following:
|
Balance
|
Net
|
|
Balance
|
|
|
at Beginning
|
Gain
|
Reclassification
|
at End
|
|
|
of Year
|
(Loss)
|
Adjustments
|
of Year
|
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, 2006
|
|
|
|
|
|
|
|
|
Unrealized
gains on securities
|
$
|
- --
|
$
|
1
|
$
|
- --
|
$
|
1
|
Cash
flow hedges
|
|
12
|
|
- --
|
|
(12)
|
|
- --
|
Minimum
pension liability
|
|
(17)
|
|
17
|
|
- --
|
|
- --
|
Pension
and other postretirement liabilities
|
|
- --
|
|
(315)
|
|
- --
|
|
(315)
|
Other
comprehensive loss of equity investees
|
|
(72)
|
|
17
|
|
- --
|
|
(55)
|
Accumulated
other
|
|
|
|
|
|
|
|
|
comprehensive
loss
|
$
|
(77)
|
$
|
(280)
|
$
|
(12)
|
$
|
(369)
|
|
|
|
|
|
|
|
|
|
Dec. 31, 2005
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on securities
|
$
|
1
|
$
|
(1)
|
$
|
- --
|
$
|
- --
|
Cash
flow hedges
|
|
47
|
|
55
|
|
(90)
|
|
12
|
Minimum
pension liability
|
|
(13)
|
|
(4)
|
|
- --
|
|
(17)
|
Other
comprehensive loss of equity investees
|
|
(59)
|
|
(13)
|
|
- --
|
|
(72)
|
Accumulated
other
|
|
|
|
|
|
|
|
|
comprehensive
loss
|
$
|
(24)
|
$
|
37
|
$
|
(90)
|
$
|
(77)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
..
Stock Purchase Program
In November 2005, NS’ Board of Directors
authorized the repurchase of up to 50 million shares of Common Stock through
the end of 2015.
The timing and
volume of purchases is guided by management’s assessment of market
conditions and other pertinent facts.
Near-term purchases under the program are expected to be made with
internally generated cash; however, future funding sources could include proceeds
from the sale of commercial paper notes or the increase of long-term debt.
NS purchased and retired 21.8 million
shares of its common stock under this program in 2006 at a cost of $964
million.
14.
Earnings Per Share
The
following tables set forth the calculation of basic and diluted earnings per
share:
|
2006
|
2005
|
2004
|
|
($ in millions except per
share, shares in millions)
|
|
|
|
|
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
Income
available to common stockholders
|
$
|
1,475
|
$
|
1,281
|
$
|
910
|
Weighted-average
shares outstanding
|
|
406.0
|
|
404.2
|
|
394.2
|
Basic
earnings per share
|
$
|
3.63
|
$
|
3.17
|
$
|
2.31
|
Income
available to common stockholders for 2006 reflects a $6 million reduction for
the after-tax effect of dividend equivalent payments made to holders of vested
stock options.
|
2006
|
2005
|
2004
|
|
($ in millions except per
share, shares in millions)
|
|
|
|
|
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
Income
available to common stockholders
|
$
|
1,481
|
$
|
1,281
|
$
|
910
|
Weighted-average
shares outstanding per above
|
|
406.0
|
|
404.2
|
|
394.2
|
Dilutive
effect of outstanding options, PSUs and
|
|
|
|
|
|
|
restricted
shares (as determined by the
|
|
|
|
|
|
|
application
of the treasury stock method)
|
|
8.7
|
|
8.1
|
|
5.1
|
Adjusted
weighted-average shares outstanding
|
|
414.7
|
|
412.3
|
|
399.3
|
Diluted
earnings per share
|
$
|
3.57
|
$
|
3.11
|
$
|
2.28
|
The
diluted calculations exclude options whose exercise price exceeded the average
market price of Common Stock as follows:
1 million in 2006, 1 million in 2005 and 13 million in 2004.
15.
Fair Values of Financial Instruments
The
fair values of “Cash and cash equivalents,” “Short-term
investments,” “Accounts receivable” and “Accounts
payable” approximate carrying values because of the short maturity of
these financial instruments.
The
fair value of corporate-owned life insurance approximates carrying value.
The carrying amounts and estimated fair
values for the remaining financial instruments, excluding derivatives (see Note
16) and investments accounted for under the equity method in accordance with
APB Opinion No. 18, consisted of the following at Dec. 31:
|
2006
|
2005
|
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|
Amount
|
Value
|
Amount
|
Value
|
|
($ in millions)
|
Investments
|
$
|
145
|
$
|
166
|
$
|
139
|
$
|
160
|
Long-term debt
|
$
|
(6,600)
|
$
|
(7,370)
|
$
|
(6,930)
|
$
|
(7,934)
|
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
notes receivable are based on future discounted cash flows.
The fair values of debt were estimated
based on quoted market prices or discounted cash flows using current interest
rates for debt with similar terms, company rating and remaining maturity.
Carrying amounts of marketable securities reflect
unrealized holding gains of $1 million on Dec. 31, 2006, and less than $1
million on
Dec. 31, 2005
..
Sales of
“available-for-sale” securities were immaterial for the years ended
Dec. 31, 2006
,
2005 and 2004; most short-term investments were redeemed at maturity.
16.
Derivative Financial Instruments
All
derivatives are recognized in the financial statements as either assets or
liabilities and are measured at fair value.
Changes in fair value are recorded as
adjustments to the assets or liabilities being hedged in “Other
comprehensive loss,” or in current earnings, depending on whether the
derivative is designated and qualifies for hedge accounting, the type of hedge
transaction represented and the effectiveness of the hedge.
The settlements of the hedges will
result in the reclassification into diesel fuel expense of the related gains or
losses recorded as a component of “Other comprehensive loss.”
NS has used derivative
financial instruments to reduce the risk of volatility in its diesel fuel costs
and to manage its overall exposure to fluctuations in interest rates.
NS does not engage in the trading of
derivatives.
Management has
determined that its derivative financial instruments qualify as either
fair-value or cash-flow hedges, having values that highly correlate with the
underlying hedged exposures, and has designated such instruments as hedging
transactions.
Credit risk related
to the derivative financial instruments is considered to be minimal and is
managed by requiring high credit standards for counterparties and periodic
settlements.
Diesel Fuel Hedging
In 2001, NS began a program to hedge a
portion of its diesel fuel consumption.
The intent of the program was to assist in the management of NS'
aggregate risk exposure to fuel price fluctuations, which can significantly
affect NS' operating margins and profitability, through the use of one or more
types of derivative instruments.
No
new hedges have been entered into since May 2004, and the last remaining
contracts were settled in the second quarter of this year, bringing an end to
this program.
The
goal of this hedging strategy was to reduce the variability of fuel costs over
an extended period of time while minimizing the incremental cost of
hedging. The program provided that NS would not enter into any fuel hedges with
a duration of more than 36 months, and that no more than 80% of NS'
average monthly fuel consumption would be hedged for any month within any
36-month period.
After ta
ki
ng
into account the effect of the hedging, diesel fuel costs represented 14% of
NS’ operating expenses for the year ended Dec. 31, 2006, 11% for the year
ended
Dec. 31, 2005
and 8% for the year ended
Dec.
31, 2004
..
NS' fuel hedging activity resulted in decreases in
diesel fuel expenses of $20 million, $148 million and $140 million for 2006,
2005 and 2004, respectively.
Ineffectiveness, or the extent to which changes in the fair value of the
heating oil contracts do not offset changes in the fair values of the expected
diesel fuel transactions, was a $1 million expense in 2006, a $5 million expense
in 2005 and a $5 million benefit in 2004.
Interest
Rate Hedging
NS manages its overall exposure to fluctuations in
interest rates by issuing both fixed and floating-rate debt instruments, and by
entering into interest rate hedging transactions to achieve an appropriate mix
within its debt portfolio.
NS had $83
million and $116 million, or less than 2%, of its fixed rate debt portfolio
hedged as of Dec. 31, 2006, and Dec. 31, 2005, respectively, using
interest rate swaps that qualify for and are designated as fair-value hedge
transactions.
NS’ interest
rate hedging activity resulted in decreases in interest expenses of $1 million,
$2 million and $6 million for 2006, 2005 and 2004, respectively.
These swaps have been effective in
hedging the changes in fair value of the related debt arising from changes in
interest rates and there has been no impact on earnings resulting from
ineffectiveness associated with these derivative transactions.
Fair
Values
There
were no diesel fuel derivative instruments outstanding at
Dec. 31, 2006
..
The fair value of NS' diesel fuel
derivative instruments at
Dec.
31, 2005
, was determined based upon current market values as quoted
by independent third party dealers.
Fair values of interest rate swaps were determined based upon the
present value of expected future cash flows discounted at the appropriate
implied spot rate from the spot rate yield curve.
Fair value adjustments are noncash
transactions and, accordingly, are excluded from the Consolidated Statements of
Cash Flows.
“Accumulated
other comprehensive loss,” a component of “Stockholders'
equity,” included unrealized gains of zero at Dec. 31, 2006, and $20
million (pretax) at Dec. 31, 2005, related to the fair value of derivative fuel
hedging transactions that will terminate within twelve months of the respective
dates.
Gains or losses actually
realized were based on the fair value of the derivative fuel hedges at the time
of termination.
The
asset and liability positions of NS' outstanding derivative financial
instruments were as follows:
|
Dec. 31,
|
|
2006
|
2005
|
|
($ in millions)
|
Interest rate hedges:
|
|
|
|
|
Gross
fair value asset position
|
$
|
1
|
$
|
3
|
Gross
fair value (liability) position
|
|
- --
|
|
- --
|
Fuel hedges:
|
|
|
|
|
Gross
fair value asset position
|
|
- --
|
|
20
|
Gross
fair value (liability) position
|
|
- --
|
|
- --
|
Total
net asset (liability) position
|
$
|
1
|
$
|
23
|
17.
Commitments and Contingencies
Lawsuits
Norfolk
Southern and certain subsidiaries are defendants in
numerous lawsuits and other claims relating principally to railroad
operations.
When management
concludes that it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated, it is accrued through a charge to
earnings.
While the ultimate amount
of liability incurred in any of these lawsuits and claims is dependent on
future developments, in management's opinion, the recorded liability is
adequate to cover the future payment of such liability and claims.
However, the final outcome of any of
these lawsuits and claims cannot be predicted with certainty, and unfavorable
or unexpected outcomes could result in additional accruals that could be
significant to results of operations in a particular year or quarter.
Any adjustments to the recorded
liability will be reflected in earnings in the periods in which such
adjustments are known.
NS
was involved in mass tort litigation proceedings arising out of historic
flooding events that occurred in
West
Virginia
in 2001.
In 2005, one of NS’ subsidiaries
was identified as the target defendant for claims related to a specific
sub-watershed.
During the first
quarter of 2006, the parties reached a settlement with respect to NS’
liability in this matter.
The
settlement did not have a material effect on the results of operations in the
first quarter or for the year.
Casualty Claims
Casualty claims include
employee personal injury and occupational claims as well as third-party claims,
all exclusive of legal costs.
NS
engages an independent consulting actuarial firm to aid in valuing its
liability for these claims.
Job-related accidental injury and occupational claims are subject to the
Federal Employers’ Liability Act (FELA), which is applicable only to
railroads.
FELA’s fault-based
system produces results that are unpredictable and inconsistent as compared
with a no-fault workers’ compensation system.
The variability inherent in this system
could result in actual costs being very different from the liability
recorded.
While the ultimate amount
of claims incurred is dependent on future developments, in management’s
opinion, the recorded liability is adequate to cover the future payments of
claims and is
support
ed by the most
recent actuarial study.
In all
cases, NS records a liability when the expected loss for the claim is both
probable and estimable.
In 2005, NS recorded a
liability related to the
Jan.
6, 2005
derailment in
Graniteville
,
SC.
The liability, which includes a current
and long-term portion, represents NS’ best estimate based on
current facts and circumstances.
The estimate includes amounts related to business property damage and
other economic losses, personal injury and individual property damage
claims as well as third-party response costs.
NS’ commercial insurance policies
are expected to cover substantially all expenses related to this derailment
above NS’ self-insured retention, including NS’ response costs and
legal fees.
Accordingly, the Consolidated
Balance Sheets reflect a current and long-term receivable for estimated
recoveries from NS’ insurance carriers.
Expenses in 2005 included $41 million
related to this incident, representing NS’ retention under its insurance
policies and other uninsured costs.
While it is reasonable to expect that the liability for covered losses
could differ from the amount recorded, such a change would be offset by a
corresponding change in the insurance receivable.
As a result, NS does not believe that it
is reasonably likely that its net loss (the difference between the liability
and future recoveries) will be materially different than the loss recorded in
2005.
NS expects at this time that
insurance coverage is adequate to cover potential claims and settlements above
its self-insurance retention.
Employee personal injury claims
– The largest component of casualties and other
claims expense is employee personal injury costs.
The actuarial firm engaged by NS
provides quarterly studies to aid in valuing its employee personal injury
liability and estimating its employee personal injury expense.
The actuarial firm studies NS’
historical patterns of reserving for claims and subsequent settlements, taking
into account relevant outside influences.
The actuary uses the results of these analyses to estimate the ultimate
amount of the liability, which includes amounts for incurred but unasserted
claims.
NS adjusts its liability to
the actuarially determined amount on a quarterly basis.
The estimate of loss liabilities is
subject to inherent limitation given the difficulty of predicting future events
such as jury decisions, court interpretations or legislative changes and as
such the actual loss may vary from the actuarial estimate.
Occupational claims
– Occupational claims (including asbestosis and
other respiratory diseases, as well as repetitive motion) are often not caused
by a specific accident or event but rather result from a claimed exposure over
time.
Many such claims are being
asserted by former or retired employees, some of whom have not been
employed in the rail industry for decades.
The actuarial firm provides an estimate of the occupational claims
liability based upon NS’ history of claim filings, severity, payments and
other pertinent facts.
The liability
is dependent upon management’s judgments made as to the specific case
reserves as well as judgments of the consulting actuarial firm in the
periodic studies.
The actuarial
firm’s estimate of ultimate loss includes a provision for those claims
that have been incurred but not reported.
This provision is derived by analyzing industry data and projecting
NS’ experience into the future as far as can be reasonably determined.
NS adjusts its liability to the
actuarially determined amount on a quarterly basis.
However, it is possible that the
recorded liability may not be adequate to cover the future payment of
claims.
Adjustments to the
recorded liability are reflected in operating expenses in the periods in which
such adjustments become known.
Third-party claims
– NS records a liability for third-party claims
including those for highway crossing accidents, trespasser and other injuries,
automobile liability, property damage and lading damage.
The actuarial firm assists with the
calculation of potential liability for third-party claims, except lading
damage, based upon NS’ experience including number and timing of
incidents, amount of payments, settlement rates, number of open claims and
legal defenses.
The actuarial
estimate includes a provision for claims that have been incurred but have not
yet been reported.
Each quarter NS
adjusts its liability to the actuarially determined amount.
Given the inherent uncertainty in regard
to the ultimate outcome of third-party claims, it is possible that future settlement
costs may differ from the estimated liability recorded.
Environmental Matters
NS
is subject to various jurisdictions' environmental laws and regulations.
It is NS' policy to record a liability
where such liability or loss is probable and its amount can be estimated
reasonably.
Claims, if any, against
third parties for recovery of cleanup costs incurred by NS are reflected as
receivables (when collection is probable) on the balance sheet and are not
netted against the associated NS liability.
Environmental engineers regularly
participate in ongoing evaluations of all known sites and in determining any
necessary adjustments to liability estimates.
NS also has an Environmental Policy
Council, composed of senior managers, to oversee and interpret its
environmental policy.
NS'
Consolidated Balance Sheets included liabilities for environmental exposures in
the amount of $54 million at Dec. 31, 2006, and $58 million at
Dec. 31, 2005
(of which $12
million was accounted for as a current liability at
Dec. 31, 2006
and 2005).
At Dec. 31, 2006, the liability
represented NS' estimate of the probable cleanup and remediation costs based on
available information at 172 known locations compared with 189 locations at
Dec. 31, 2005.
On that date, 15
sites accounted for $29 million of the liability, and no individual site was
considered to be material.
NS
anticipates that much of this liability will be paid out over five years;
however, some costs will be paid out over a longer period.
At some of the 172 locations, certain NS
subsidiaries, usually in conjunction with a number of other parties, have been
identified as potentially responsible parties by the Environmental Protection
Agency (EPA) or similar state authorities under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, or comparable state statutes,
which often impose joint and several liability for cleanup costs.
With respect to known environmental sites (whether
identified by NS or by the EPA or comparable state authorities), estimates of
NS' ultimate potential financial exposure for a given site or in the aggregate
for all such sites are necessarily imprecise because of the widely varying
costs of currently available cleanup techniques, the likely development of
new cleanup technologies, the difficulty of determining in advance the nature
and full extent of contamination and each potential participant's share of any
estimated loss (and that participant's ability to bear it), and evolving
statutory and regulatory standards governing liability.
The risk of incurring environmental liability
– for acts and omissions, past, present and future - is inherent in the
railroad business.
Some of the
commodities in NS' traffic mix, particularly those classified as hazardous
materials, can pose special risks that NS and its subsidiaries work diligently
to minimize.
In addition, several
NS subsidiaries own, or have owned, land used as operating property, or which
is leased and operated by others, or held for sale.
Because environmental problems may exist
on these properties that are latent or undisclosed, there can be no assurance
that NS will not incur environmental liabilities or costs with respect to one
or more of them, the amount and materiality of which cannot be estimated reliably
at this time.
Moreover, lawsuits
and claims involving these and potentially other unidentified environmental
sites and matters are likely to arise from time to time.
The resulting liabilities could have a
significant effect on financial position, results of operations or liquidity in
a particular year or quarter.
However, based on its assessment of the facts and
circumstances now known, management believes that it has recorded the
probable costs for dealing with those environmental matters of which NS is
aware.
Further, management believes
that it is unlikely that any known matters, either individually or in the
aggregate, will have a material adverse effect on NS' financial position,
results of operations or liquidity.
On Oct. 19, 2006, the
Pennsylvania Department of Environmental Protection (PDEP) issued an assessment
of civil penalties against NS and filed a complaint for civil penalties with
the Pennsylvania Environmental Hearing Board (EHB) requesting that the EHB
impose civil penalties upon NS for alleged violations of state environmental
laws and regulations resulting from a discharge of sodium hydroxide that
occurred as a result of the derailment of a NS train in Norwich Township,
Pennsylvania, on June 30, 2006.
The
PDEP’s actions seek to impose combined penalties of $8,890,000 for
alleged past violations and $46,420 per day for alleged ongoing violations of
state environmental laws and regulations.
NS believes that the monetary penalties sought by the PDEP are
excessive.
Accordingly, NS intends
to vigorously defend the action and has appealed the fines to the EHB.
In addition, NS expects the Pennsylvania
Fish and Boat Commission to impose a monetary penalty on NS for damages alleged
to have been caused by this accident.
NS does not believe that the outcome of these proceedings will have a
material effect on its financial position, results of operations, or liquidity.
Insurance
NS obtains on behalf of itself and its subsidiaries
insurance for potential losses for third-party liability and first-party
property damages.
Specified levels
of risk are retained on a self-insurance basis (up to $25 million per
occurrence for bodily injury and property damage to third parties and $25
million per occurrence for property owned by NS or in NS’ care, custody
or control).
Purchase
Commitments
NSR had outstanding purchase commitments of
approximately $276 million primarily in connection with its capital programs
through 2010, including 53 locomotives in 2007.
Change-In-Control
Arrangements
Norfolk
Southern has compensation
agreements with officers and certain key employees that become operative only
upon a change in control of the Corporation, as defined in those
agreements.
The agreements provide
generally for payments based on compensation at the time of a covered
individual's involuntary or other specified termination and for certain other
benefits.
Guarantees
In
a number of instances, NS and its subsidiaries have agreed to indemnify lenders
for additional costs they may bear as a result of certain changes in laws or
regulations applicable to their loans.
Such changes may include impositions or modifications with respect to
taxes, duties, reserves, liquidity, capital adequacy, special deposits, and
similar requirements relating to extensions of credit by, deposits with, or the
assets or liabilities of such lenders.
The nature and timing of changes in laws or regulations applicable to
NS' financings are inherently unpredictable, and therefore NS' exposure in
connection with the foregoing indemnifications cannot be quantified.
No liability has been recorded related
to these indemnifications.
In the
case of one type of equipment financing, NSR's Japanese leveraged leases, NSR
may terminate the leases and ancillary agreements if such a change-in-law
indemnity is triggered.
Such a
termination would require NSR to make early termination payments that would not
be expected to have a material adverse effect on NS' financial position,
results of operations or liquidity.
NS
has indemnified parties in a number of transactions for
U.S.
income tax withholding imposed as a result
of changes in
U.S.
tax law.
In all cases, NS has the
right to unwind the related transaction if the withholding cannot be avoided in
the future.
Because these
indemnities would be triggered and are dependent upon a change in the tax law,
the maximum exposure is not quantifiable.
Management does not believe that it is likely that it will be required
to make any payments under these indemnities.
As
of Dec. 31, 2006, certain
Norfolk
Southern subsidiaries are contingently liable as guarantors with respect to
$8 million of indebtedness of an entity in which they have an ownership
interest, the Terminal Railroad Association of St. Louis, due in 2019.
Four other railroads are also jointly
and severally liable as guarantors for this indebtedness.
No liability has been recorded related
to this guaranty.
* * * * *
NORFOLK
SOUTHERN CORPORATION AND
SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(Unaudited)
|
Three Months Ended
|
|
March 31
|
June 30
|
Sept.
30
|
Dec.
31
|
|
($ in millions, except per
share amounts)
|
2006
|
|
|
|
|
|
|
|
|
Railway
operating revenues
|
$
|
2,303
|
$
|
2,392
|
$
|
2,393
|
$
|
2,319
|
Income
from railway operations
|
|
551
|
|
677
|
|
715
|
|
614
|
Net
income
|
|
305
|
|
375
|
|
416
|
|
385
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.74
|
$
|
0.91
|
$
|
1.04
|
$
|
0.97
|
Diluted
|
$
|
0.72
|
$
|
0.89
|
$
|
1.02
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
Railway
operating revenues
|
$
|
1,961
|
$
|
2,154
|
$
|
2,155
|
$
|
2,257
|
Income
from railway operations
|
|
403
|
|
592
|
|
528
|
|
594
|
Net
income
|
|
194
|
|
424
1
|
|
301
|
|
362
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.48
|
$
|
1.05
1
|
$
|
0.74
|
$
|
0.89
|
Diluted
|
$
|
0.47
|
$
|
1.04
1
|
$
|
0.73
|
$
|
0.87
|
1
Includes a $96 million,
or 23 cents per diluted share, benefit related to a reduction of deferred
income
tax
liabilities resulting from tax legislation enacted by
Ohio
..
|
Item
9.
Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure
..
None.
Item
9A.
Controls and Procedures.
Evaluation of Disclosure
Controls and Procedures
Norfolk Southern’s
Chief Executive Officer and Chief Financial Officer, with the assistance of
management, evaluated the effectiveness of NS' disclosure controls and
procedures (as such term is defined in Rules 13a‑15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of Dec. 31, 2006.
Based on such evaluation, such officers have concluded that, as of Dec.
31, 2006, NS' disclosure controls and procedures were effective to ensure that
information required to be disclosed in NS’ reports under the Exchange
Act is recorded, processed, summarized and reported, within time period
specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to management, including the Chief Executive
Officer and the Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Internal Control over
Financial Reporting
The management of
Norfolk
Southern is
responsible for establishing and maintaining adequate internal control over
financial reporting.
The
Corporation’s internal control over financial reporting includes those
policies and procedures that pertain to its ability to record, process,
summarize and report reliable financial data.
Management recognizes that there are inherent
limitations in the effectiveness of any internal control over financial
reporting, including the possibility of human error and the circumvention or
overriding of internal control.
Accordingly, even effective internal control over financial reporting
can provide only reasonable assurance with respect to financial statement
preparation.
Further, because of
changes in conditions, the effectiveness of internal control over financial
reporting may vary over time.
In order to ensure that the
Corporation’s internal control over financial reporting is effective,
management regularly assesses such controls and did so most recently for its
financial reporting as of Dec. 31, 2006.
This assessment was based on criteria for effective
internal control over financial reporting set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment, management has
concluded that the Corporation maintained effective internal control over
financial reporting as of
Dec.
31, 2006
..
The Board of Directors,
acting through its Audit Committee, is responsible for the oversight of the
Corporation's accounting policies, financial reporting and internal
control.
The Audit Committee of the
Board of Directors is comprised entirely of outside directors who are
independent of management.
The
independent registered public accounting firm and the internal auditors have
full and unlimited access to the Audit Committee, with or without management,
to discuss the adequacy of internal control over financial reporting, and any
other matters which they believe should be brought to the attention of the
Audit Committee.
Norfolk Southern’s
management has issued a report of its assessment of internal control over
financial reporting, and Norfolk Southern’s independent registered public
accounting firm has issued a report on this assessment.
These reports appear in Part II, Item 8
of this report on Form 10-K.
During the fourth quarter
of 2006, management has not identified any changes in NS' internal controls
over financial reporting that have materially affected, or are reasonably
likely to materially affect, NS’ internal control over financial
reporting.
Item
9B.
Other Information
..
None.
PART III
NORFOLK
SOUTHERN CORPORATION AND
SUBSIDIARIES (NS)
Item
10.
Directors, Executive Officers and
Corporate Governance
..
In
accordance with General Instruction G(3), information called for by Item
10, Part III, is incorporated herein by reference from the information
appearing under the caption “Election of Directors,” under the
caption “Section 16(a) Beneficial Ownership Reporting Compliance,”
under the caption “Corporate Governance,” and under the caption
“Committees” in Norfolk Southern's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on May 10, 2007, which
definitive Proxy Statement will be filed electronically with the Securities and
Exchange Commission (Commission) pursuant to Regulation 14A no later than
May 1, 2007.
The information
regarding executive officers called for by Item 401 of Regulation S-K is
included in Part I hereof beginning under “Executive Officers of the
Registrant.”
Item
11.
Executive Compensation
..
In
accordance with General Instruction G(3), information called for by Item
11, Part III, is incorporated herein by reference from the information:
·
appearing under the subcaption “Compensation” under the
caption “Board of Directors” for directors, including the
“2006 Non-Employee Director Compensation Table” and the
“Narrative to Non-Employee Director Compensation Table;”
·
appearing under the caption “Executive Compensation” for
executives, including the “Compensation Discussion and Analysis,”
the information appearing in the “Summary Compensation Table” and the
“Grants of Plan-Based Awards” table including the narrative to such
tables, the “Outstanding Equity Awards at Fiscal Year-End” table
and the “Option Exercises and Stock Vested” table, and the
information appearing under the subcaptions “Retirement Benefits,”
“Deferred Compensation,” and Potential Payments Upon a Change in
Control or Other Termination of Employment;” and
·
appearing under the captions “Compensation Committee Interlocks
and Insider Participation” and “Compensation Committee Report,”
in each
case included in
Norfolk
Southern's definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on May 10, 2007, which definitive Proxy Statement will be filed
electronically with the Commission pursuant to Regulation 14A no later than
May 1, 2007.
Item
12.
Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters
..
In
accordance with General Instruction G(3), information on security
ownership of certain beneficial owners and management called for by Item 12,
Part III, Item 403 of Regulation S-K, is incorporated herein by reference from
the information appearing under the caption “Beneficial Ownership of
Stock” in Norfolk Southern's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 10, 2007, which definitive Proxy
Statement will be filed electronically with the Commission pursuant to
Regulation 14A no later than May 1, 2007.
Equity Compensation Plan Information (as of
Dec. 31, 2006
)
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
|
|
remaining available
|
|
|
|
Number of securities
|
|
|
Weighted-average
|
|
|
for future issuance
under equity
|
|
|
|
to be issued upon
|
|
|
exercise price
|
|
|
compensation plans
|
|
|
|
exercise of
|
|
|
of outstanding
|
|
|
(excluding
|
|
Plan
|
|
outstanding options,
|
|
|
options, warrants
|
|
|
securities reflected
|
|
Category
|
|
warrants and rights
|
|
|
and rights
|
|
|
in column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity
compensation
|
|
|
|
|
|
|
|
|
|
plans
approved by
|
|
|
|
|
|
|
|
|
|
security
holders1
|
|
23,160,692
|
|
$
|
24.68(4)
|
|
|
9,288,283(5)
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation
|
|
|
|
|
|
|
|
|
|
plans
not approved by
|
|
|
|
|
|
|
|
|
|
security
holders2
|
|
2,417,634
(3)
|
|
$
|
33.87(3)
|
|
|
2,574,700
(6)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
25,578,326
|
|
|
|
|
|
11,862,983
|
|
|
|
|
|
|
|
|
|
|
|
1
The
Long-Term Incentive Plan, excluding five million shares for broad-based
issuance to non-officers.
|
2
The
Long-Term Incentive Plan's five million shares for broad-based issuance to
non-officers, the Thoroughbred
|
Stock
Option Plan and the Directors' Restricted Stock Plan.
|
3
Includes
options and performance share units granted under the Long-Term Incentive
Plan on 212,567 shares
|
for
non-officers and options granted under the Thoroughbred Stock Option Plan.
|
4
Calculated
without regard to 3,301,800 outstanding performance share units at Dec. 31,
2006.
|
5
Of
the shares remaining available for grant under plans approved by
stockholders, 7,642,110 are available for grant
|
as
restricted shares, performance shares or restricted stock unit shares under
the Long-Term Incentive Plan.
|
6
Of
the shares remaining available for grant under plans not approved by
stockholders, 36,000 are available for grant
|
as
restricted stock under the Directors' Restricted Stock Plan.
|
Norfolk
Southern Corporation Long-Term Incentive Plan
(“LTIP”)
Established on June 28, 1983,
and approved by stockholders at their Annual Meeting held on May 10, 1984, LTIP
was adopted to promote the success of
Norfolk
Southern by providing an opportunity for non-employee directors, officers and
other key employees to acquire a proprietary interest in the Corporation.
On Jan. 23, 2001, the Board of Directors
further amended LTIP and approved the issuance of an additional 5,000,000
shares of authorized but unissued Common Stock under LTIP to participants who
are not officers of
Norfolk
Southern. The issuance of these shares was broadly-based, and stockholder
approval of these shares was not required. Accordingly, this portion of
LTIP is included in the number of securities available for future issuance for
plans not approved by stockholders. Also on Jan. 23, 2001, the Board
amended LTIP, which amendment was approved by shareholders on May 10, 2001,
that included the reservation for issuance of an additional 30,000,000 shares
of authorized but unissued Norfolk Southern Common Stock.
Pursuant to another amendment
approved by stockholders on May 12, 2005, not more than 8.5 million of the
shares remaining available for issuance under LTIP may be awarded as restricted
shares, performance shares or restricted stock unit shares.
Cash payments of restricted stock units,
stock appreciation rights and performance share units will not be applied
against the maximum number of shares issuable under LTIP.
Any shares of Common Stock subject to
options, performance share units or restricted stock units which are not issued
as Common Stock will again be available for award under LTIP after the
expiration or forfeiture of an award.
Non-employee
directors, officers and other key employees residing in the
United States
or
Canada
are eligible for selection
to receive LTIP awards.
Under LTIP,
the Compensation Committee (Committee) may grant incentive stock options,
nonqualified stock options, stock appreciation rights, restricted shares,
restricted stock units and performance share units.
In addition, dividend equivalents may be
awarded for options, restricted stock units and performance share units. The
Committee may establish such terms and conditions for the awards as provided in
LTIP.
For options, the option price
per share will not be less than 100% of the fair market value of
Norfolk
Southern's Common
Stock on the effective date the option is granted. All options are
subject to a vesting period of at least one year, and the term of the option
will not exceed ten years. LTIP specifically prohibits option repricing
without stockholder approval, except for capital adjustments.
Performance share units
entitle a recipient to receive performance-based compensation at the end of a
three-year performance cycle based on
Norfolk
Southern’s performance during that three-year period. For the 2006
performance share unit awards, corporate performance will be measured using
three equally weighted standards established by the committee: (1) three-year
average return on average capital invested, (2) three-year average operating
ratio and (3) three-year total return to stockholders. Performance share
units may be payable in either shares of Norfolk Southern Common Stock or cash.
Restricted
stock units are payable in cash or in shares of Norfolk Southern Common Stock
at the end of a restriction period of not less than 36 months and not more than
60 months.
During the restriction
period, the holder of the restricted stock units has no beneficial ownership
interest in the Norfolk Southern Common Stock represented by the restricted
stock units and has no right to vote the shares represented by the units or to
receive dividends (except for dividend equivalent rights that may be awarded
with respect to the restricted stock units).
Restricted stock units will be forfeited
immediately if the holder leaves the continuous employment of
Norfolk
Southern before the end of the restriction period, unless such employment is
terminated by reason of retirement, disability or death or unless the restrictions
are waived by
Norfolk
Southern.
Norfolk
Southern Corporation
Thoroughbred Stock Option Plan
The
Board adopted the Norfolk Southern Corporation Thoroughbred Stock Option Plan
(“TSOP”) on Jan. 26, 1999, to promote the success of Norfolk
Southern by providing an opportunity for nonagreement employees to acquire a
proprietary interest in Norfolk Southern and thereby to provide an additional
incentive to nonagreement employees to devote their maximum efforts and s
ki
lls to the advancement, betterment, and prosperity
of Norfolk Southern and its stockholders.
TSOP has not been and is not required to have been approved by
stockholders.
Six million shares of
authorized but unissued Common Stock were reserved for issuance under TSOP.
Active full-time nonagreement employees residing in
the
United States
or
Canada
are eligible for selection to receive TSOP awards.
Under TSOP, the Compensation Committee
of the Board of Directors may grant nonqualified stock options subject to
such terms and conditions as provided in TSOP.
The
option price will not be less than 100% of the fair market value of
Norfolk
Southern's Common
Stock on the effective date the options are granted.
All options are subject to a vesting
period of at least one year, and the term of the option will not exceed ten
years.
TSOP specifically prohibits
option repricing without stockholder approval, except for capital adjustments.
Norfolk
Southern Corporation
Directors' Restricted Stock Plan
The
Norfolk Southern Corporation Directors' Restricted Stock Plan
(“Plan”) was adopted on
Jan. 1, 1994
, and is designed to increase ownership of
Norfolk Southern Common Stock by its non-employee directors so as to further
align their ownership interest in
Norfolk
Southern with that of stockholders.
The Plan has not been and is not required to have been approved by
stockholders.
Currently, a maximum
of 66,000 shares of Corporation Common Stock may be granted under the
Plan.
To make grants to eligible
directors,
Norfolk
Southern purchases, through one
or more subsidiary companies, the number of shares required in open-market
transactions at prevailing market prices, or makes such grants from Norfolk
Southern Common Stock already owned by one or more of
Norfolk
Southern's subsidiary companies.
Only
non-employee directors who are not and never have been employees of
Norfolk
Southern are
eligible to participate in the Plan.
Upon becoming a director, each eligible director receives a one-time
grant of 3,000 restricted shares of Norfolk Southern Common Stock.
No individual member of the Board
exercises discretion concerning the eligibility of any director or the number
of shares granted.
The
restriction period applicable to restricted shares granted under the Plan begins
on the date of the grant and ends on the earlier of the recipient’s death
or six months after the recipient ceases to be a director by reason of
disability or retirement.
During
the restriction period shares may not be sold, pledged or otherwise
encumbered.
Directors will forfeit
the restricted shares if they cease to serve as a director of
Norfolk
Southern for reasons other than their
disability, retirement or death.
Item
13.
Certain Relationships and
Related Transactions, and Director
Independence
..
In
accordance with General Instruction G(3), information called for by Item
13, Part III, is incorporated herein by reference from the information
appearing under the caption “Transactions with Related Persons” and
under the caption “Director Independence” in Norfolk Southern's
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 10, 2007, which definitive Proxy Statement will be filed
electronically with the Commission pursuant to Regulation 14A no later
than May 1, 2007.
Item
14.
Principal Accountant Fees and
Services.
In
accordance with General Instruction G(3), information called for by Item 14,
Part III is incorporated herein by reference from the information appearing
under the caption “Ratification of Appointment of Independent Registered
Public Accounting Firm” in Norfolk Southern’s definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 10, 2007,
which definitive proxy statement will be filed electronically with the
Commission pursuant to Regulation 14A no later than May 1, 2007.
PART IV
NORFOLK
SOUTHERN CORPORATION AND
SUBSIDIARIES (NS)
Item
15.
Exhibits and Financial
Statement Schedules
..
|
|
|
Page
|
|
|
|
|
(A)
|
|
The following documents are
filed as part of this report:
|
|
|
|
|
|
|
1.
|
Index to Consolidated
Financial Statements
|
|
|
|
|
|
|
|
Report of Management
|
K40
|
|
|
Reports of Independent
Registered Public Accounting Firm
|
K41
|
|
|
Consolidated Statements of
Income, Years ended Dec.
31,
2006, 2005 and 2004
|
K44
|
|
|
Consolidated Balance Sheets
As of Dec. 31, 2006 and 2005
|
K45
|
|
|
Consolidated Statements of
Cash Flows, Years ended Dec.
31,
2006, 2005 and 2004
|
K46
|
|
|
Consolidated Statements of
Changes in Stockholders' Equity, Years ended
|
|
|
|
Dec. 31,
2006, 2005 and 2004
|
K47
|
|
|
Notes to Consolidated
Financial Statements
|
K48
|
|
|
|
|
|
2.
|
Financial Statement
Schedule:
|
|
|
|
|
|
|
|
The following consolidated
financial statement schedule should be read in
|
|
|
|
connection with the
consolidated financial statements:
|
|
|
|
|
|
|
|
Index to Consolidated
Financial Statement Schedule
|
Page
|
|
|
|
|
|
|
Schedule II - Valuation and
Qualifying Accounts
|
K93
|
|
|
|
|
|
|
Schedules other than the
one listed above are omitted either because they are not required or are
inapplicable, or because the information is included in the consolidated
financial statements or related notes.
|
|
|
|
|
|
|
3.
|
Exhibits
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
Description
|
|
|
|
|
|
3
|
|
Articles of Incorporation
and Bylaws -
|
|
|
|
|
|
3(i)
|
|
The Restated Articles of
Incorporation of Norfolk Southern Corporation are incorporated
|
|
|
|
By reference to Exhibit
3(i) to Norfolk Southern Corporation's 10-K filed on March 5, 2001.
|
|
|
|
|
|
3(ii)
|
|
The Bylaws of Norfolk
Southern Corporation, as amended Jan. 23, 2006, are incorporated
|
|
|
|
by reference to Exhibit
3(ii) to Norfolk Southern Corporation’s Form 8-K filed on
|
|
|
|
Jan. 27, 2006.
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Instruments Defining the
Rights of Security Holders, Including Indentures:
|
|
|
|
|
(a)
|
Indenture, dated as of Jan.
15, 1991, from Norfolk Southern Corporation to First Trust of New York,
National Association, as Trustee, is incorporated by reference to Exhibit 4.1
to Norfolk Southern Corporation's Registration Statement on Form S-3
(No.
33-38595).
|
|
|
|
|
(b)
|
First Supplemental
Indenture, dated May 19, 1997, between Norfolk Southern Corporation and First
Trust of New York, National Association, as Trustee, related to the issuance
of notes in the principal amount of $4.3 billion, is incorporated herein by
reference to Exhibit 1.1(d) to Norfolk Southern Corporation’s Form
8-K filed on May 21, 1997.
|
|
|
|
|
(c)
|
Second Supplemental
Indenture, dated April 26, 1999, between Norfolk Southern Corporation and
U.S. Bank Trust National Association, as Trustee, related to the issuance of
notes in the principal amount of $400 million, is incorporated herein by
reference to Exhibit 1.1(c) to Norfolk Southern Corporation’s Form 8-K
filed on April 30, 1999.
|
|
|
|
|
(d)
|
Third Supplemental
Indenture, dated May 23, 2000, between Norfolk Southern Corporation and U.S.
Bank Trust National Association, as Trustee, related to the issuance of notes
in the principal amount of $600 million, is incorporated herein by reference
to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on May 25,
2000.
|
|
|
|
|
(e)
|
Fourth Supplemental
Indenture, dated as of Feb. 6, 2001, between Norfolk Southern Corporation and
U.S. Bank Trust National Association, as Trustee, related to the issuance of
notes in the principal amount of $1 billion, is incorporated herein by
reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on
Feb. 7, 2001.
|
|
|
|
|
(f)
|
Fifth Supplemental
Indenture, dated as of July 5, 2001, between Norfolk Southern Corporation and
U.S. Bank Trust National Association, as Trustee, related to the issuance of
notes in the principal amount of $250 million, is incorporated herein by
reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on
July 5, 2001.
|
|
|
|
|
(g)
|
Sixth Supplemental
Indenture, dated as of April 30, 2002, between Norfolk Southern Corporation
and U.S. Bank Trust National Association, as Trustee, relating to the
issuance of notes in the principal amount of $200 million, is incorporated
herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K
filed on May 1, 2002.
|
|
|
|
|
(h)
|
Seventh Supplemental
Indenture, dated as of April 30, 2002, between Norfolk Southern Corporation
and U.S. Bank Trust National Association, as Trustee, relating to the
issuance of notes in the principal amount of $100 million, is incorporated
herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K
filed on May 1, 2002.
|
|
|
|
|
(i)
|
Eighth Supplemental
Indenture, dated as of Sept. 17, 2004, between Norfolk Southern Corporation
and U.S. Bank Trust National Association, as Trustee, relating to the
issuance of 5.257% Notes due 2014 (“Securities”) in the aggregate
principal amount of $441.5 million in connection with Norfolk Southern
Corporation’s offer to exchange the Securities and cash for up to $400
million of its outstanding 7.350% Notes due 2007, is incorporated herein by
reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8‑K
filed on Sept. 23, 2004.
|
|
|
|
|
(j)
|
Indenture, dated Aug. 27,
2004, among PRR Newco, Inc., as Issuer, and Norfolk Southern Railway Company,
as Guarantor, and The Bank of New York, as Trustee, is incorporated herein by
reference to Exhibit 4(l) to Norfolk Southern Corporation’s
Form 10-Q filed on Oct. 28, 2004.
|
|
|
|
|
(k)
|
First Supplemental
Indenture, dated Aug. 27, 2004, among PRR Newco, Inc., as Issuer, and Norfolk
Southern Railway Company, as Guarantor, and The Bank of New York, as Trustee,
related to the issuance of notes in the principal amount of approximately
$451.8 million, is incorporated herein by reference to Exhibit 4(m) to
Norfolk Southern Corporation’s Form 10-Q filed on Oct. 28, 2004.
|
|
|
|
|
(l)
|
Ninth Supplemental
Indenture, dated as of March 11, 2005, between Norfolk Southern Corporation
and U.S. Bank Trust National Association, as Trustee, relating to the issuance
of notes in the principal amount of $300 million, is incorporated herein by
reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K
filed on March 15, 2005.
|
|
|
|
|
(m)
|
Tenth Supplemental
Indenture, dated as of May 17, 2005, between Norfolk Southern Corporation and
U.S. Bank Trust National Association, as Trustee, relating to the issuance of
notes in the principal amount of $366.6 million, is incorporated herein by
reference to Exhibit 99.1 to Norfolk Southern Corporation’s Form 8-K filed
on May 18, 2005.
|
|
|
|
|
(n)
|
Eleventh Supplemental
Indenture, dated as of May 17, 2005, between Norfolk Southern Corporation and
U.S. Bank Trust National Association, as Trustee, relating to the issuance of
notes in the principal amount of $350 million, is incorporated herein by
reference to Exhibit 99.2 to Norfolk Southern Corporation’s Form 8-K
filed on May 18, 2005.
|
|
|
|
|
|
In accordance with Item
601(b)(4)(iii) of Regulation S-K, copies of other instruments of Norfolk
Southern Corporation and its subsidiaries with respect to the rights of
holders of long-term debt are not filed herewith, or incorporated by
reference, but will be furnished to the Commission upon request.
|
|
|
|
10
|
|
Material Contracts -
|
|
|
|
|
(a)
|
The Transaction Agreement,
dated as of June 10, 1997, by and among CSX, CSX Transportation, Inc.,
Registrant, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail
Corporation and CRR Holdings LLC, with certain schedules thereto, previously
filed, is incorporated herein by reference to Exhibit 10(a) to Norfolk
Southern Corporation’s Form 10-K filed on Feb. 24, 2003.
|
|
|
|
|
(b)
|
Amendment No. 1, dated as
of Aug. 22, 1998, to the Transaction Agreement, dated as of June 10, 1997, by
and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern
Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated
Rail Corporation and CRR Holdings LLC, is incorporated herein by reference
from Exhibit 10.1 to Norfolk Southern Corporation's Form 10-Q filed on Aug.
11, 1999.
|
|
|
|
|
(c)
|
Amendment No. 2, dated as
of June 1, 1999, to the Transaction Agreement, dated June 10, 1997, by and
among CSX Corporation, CSX Transportation, Inc., Norfolk Southern
Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated
Rail Corporation and CRR Holdings LLC, is incorporated herein by reference
from Exhibit 10.2 to Norfolk Southern Corporation's Form 10-Q filed on Aug.
11, 1999.
|
|
|
|
|
(d)
|
Shared Assets Area
Operating Agreement for
North Jersey
, dated
as of June 1, 1999, by and among Consolidated Rail Corporation, CSX
Transportation, Inc. and Norfolk Southern Railway Company, with exhibit
thereto, is incorporated herein by reference from Exhibit 10.4 to Norfolk
Southern Corporation's Form 10-Q filed on Aug. 11, 1999.
|
|
|
|
|
(e)
|
Shared Assets Area
Operating Agreement for South Jersey/
Philadelphia
,
dated as of June 1, 1999, by and among Consolidated Rail Corporation,
CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit
thereto, is incorporated herein by reference from Exhibit 10.5 to Norfolk
Southern Corporation's Form 10-Q filed on Aug. 11, 1999.
|
|
|
|
|
(f)
|
Shared Assets Area
Operating Agreement for
Detroit
,
dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX
Transportation, Inc. and Norfolk Southern Railway Company, with exhibit
thereto, is incorporated herein by reference from Exhibit 10.6 to Norfolk
Southern Corporation's Form 10-Q filed on Aug. 11, 1999.
|
|
|
|
|
(g)
|
Amendment No. 1, dated as
of June 1, 2000, to the Shared Assets Areas Operating Agreement for North
Jersey, South Jersey/Philadelphia and Detroit, dated as of June 1, 1999, by
and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk
Southern Railway Company, with exhibit thereto, is incorporated herein by
reference to Exhibit 10(h) to Norfolk Southern Corporation's 10-K filed on
March 5, 2001.
|
|
|
|
|
(h)
|
Amendment No.
2, dated as Jan. 1, 2001, to the
Shared Assets Area Operating Agreements for North Jersey, South
Jersey/Philadelphia and Detroit, dated as of June 1, 1999, by and among
Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern
Railway Company, with exhibit thereto, is incorporated herein by reference to
Exhibit 10(j) to Norfolk Southern Corporation's Form 10-K filed on Feb. 21,
2002.
|
|
|
|
|
(i)
|
Amendment No. 3, dated as
of June 1, 2001, and executed in May of 2002, to the Shared Assets Area
Operating Agreement for North Jersey, South Jersey/Philadelphia and Detroit,
dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX
Transportation, Inc. and Norfolk Southern Railway Company, with exhibit
thereto, is incorporated herein by reference to Exhibit 10(k) to Norfolk
Southern Corporation’s Form 10-K filed on Feb. 24, 2003.
|
|
|
|
|
(j)
|
Monongahela Usage
Agreement, dated as of June 1, 1999, by and among CSX Transportation, Inc.,
Norfolk Southern Railway Company, Pennsylvania Lines LLC and New York Central
Lines LLC, with exhibit thereto, is incorporated herein by reference from
Exhibit 10.7 to Norfolk Southern Corporation's Form 10-Q filed on Aug. 11,
1999.
|
|
|
|
|
(k)
|
The Agreement, entered into
as of July 27, 1999, between North Carolina Railroad Company and Norfolk
Southern Railway Company, is incorporated herein by reference from Exhibit
10(i) to Norfolk Southern Corporation's Form 10-K filed on March 6, 2000.
|
|
|
|
|
(l)
|
The Supplementary
Agreement, entered into as of Jan. 1, 1987, between the Trustees of the
Cincinnati Southern Railway and The Cincinnati, New Orleans and Texas Pacific
Railway Company (the latter a wholly owned subsidiary of Norfolk Southern
Railway Company) - extending and amending a Lease, dated as of Oct. 11, 1881
- is incorporated by reference to Exhibit 10(k) to Norfolk Southern
Corporation's Form 10-K filed on March 5, 2001.
|
|
|
|
|
*(m)
|
The Norfolk Southern
Corporation Executive Management Incentive Plan, effective Jan. 25,
2005, is incorporated by reference herein from Exhibit 99 to Norfolk Southern
Corporation's Form 8-K filed on May 13, 2005.
|
|
*(n)
|
The Norfolk Southern
Corporation Long-Term Incentive Plan, as amended effective Jan. 25,
2005, is incorporated herein by reference to Exhibit 99 to Norfolk Southern
Corporation’s Form 8-K filed on May 13, 2005.
|
|
|
|
|
*(o)
|
The Norfolk Southern
Corporation Officers' Deferred Compensation Plan, as amended effective
September 26, 2000, is incorporated herein by reference to Exhibit 10(n) to
Norfolk Southern Corporation's Form 10-K filed on March 5, 2001.
|
|
|
|
|
*(p)
|
The Norfolk Southern
Corporation Executives' Deferred Compensation Plan, as amended effective Jan.
20, 2001, is incorporated herein by reference to Exhibit 10(o) to Norfolk
Southern Corporation's Form 10-K filed on March 5, 2001.
|
|
|
|
|
*(q)
|
The Directors' Deferred Fee
Plan of Norfolk Southern Corporation, as amended effective Jan. 23, 2001, is
incorporated herein by reference to Exhibit 10(p) to Norfolk Southern
Corporation's Form 10-K filed on March 5, 2001.
|
|
|
|
|
*(r)
|
The Norfolk Southern
Corporation Directors' Restricted Stock Plan, effective Jan. 1, 1994, as
restated Nov. 24, 1998, is incorporated herein by reference from Exhibit
10(h) to Norfolk Southern Corporation's Form 10-K filed on March 24, 1999.
|
|
|
|
|
*(s)
|
Form of Severance
Agreement, dated as of June 1, 1996, between Norfolk Southern Corporation and
certain executive officers (including those defined as “named executive
officers” and identified in the Corporation's Proxy Statement for the
1997 through 2001 Annual Meetings of Stockholders), is incorporated herein by
reference to Exhibit 10(t) to Norfolk Southern Corporation's Form 10-K filed
on Feb. 21, 2002.
|
|
|
|
|
*(t)
|
Norfolk Southern
Corporation Supplemental (formerly, Excess) Benefit Plan, effective as of
Aug. 22, 1999, is incorporated herein by reference to Exhibit 10(r) to Norfolk
Southern Corporation's Form 10-K filed on March 6, 2000.
|
|
|
|
|
*(u)
|
The Norfolk Southern
Corporation Directors' Charitable Award Program, effective Feb. 1, 1996, is
incorporated herein by reference to Exhibit 10(v) to Norfolk Southern
Corporation's Form 10-K filed on Feb. 21, 2002.
|
|
|
|
|
*(v)
|
The Norfolk Southern
Corporation Outside Directors' Deferred Stock Unit Program, as amended
effective Jan. 28, 2003, is incorporated herein by reference to Exhibit 10(x)
to Norfolk Southern Corporation’s Form 10-K filed on Feb. 24, 2003.
|
|
|
|
|
*(w)
|
Form of Agreement, dated as
of Oct. 1, 2001, providing enhanced pension benefits to three officers in
exchange for their continued employment with Norfolk Southern Corporation for
two years, is incorporated herein by reference to Exhibit 10(w) to Norfolk
Southern Corporation's Form 10-Q filed on Nov. 9, 2001.
The agreement was entered into with L.
Ike Prillaman, Vice Chairman and Chief Marketing Officer; Stephen C. Tobias,
Vice Chairman and Chief Operating Officer; and Henry C. Wolf, Vice Chairman
and Chief Financial Officer.
|
|
|
|
|
|
|
|
|
|
|
|
(x)
|
The Norfolk Southern
Corporation Thoroughbred Stock Option Plan, as amended effective Jan. 28,
2003, is incorporated herein by reference to Exhibit 10(z) to Norfolk Southern
Corporation’s Form 10-K filed on Feb. 24, 2003.
|
|
|
|
|
|
|
*(y)
|
The Norfolk Southern
Corporation Restricted Stock Unit Plan, effective Jan. 28, 2003, is
incorporated herein by reference to Exhibit 10(bb) to Norfolk Southern
Corporation’s Form 10-K filed on Feb. 24, 2003.
|
|
|
|
|
|
|
*(z)
|
The Norfolk Southern
Corporation Executive Life Insurance Plan, as amended, effective Oct. 1,
2003, is incorporated herein by reference to Exhibit 10 to Norfolk Southern
Corporation’s Form 10-Q filed on Oct. 31, 2003.
|
|
|
|
|
|
|
(aa)
|
Amendment No. 3, dated as
of June 1, 1999, and executed in April 2004, to the Transaction Agreement,
dated June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc.,
Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc.,
Consolidated Rail Corporation and CRR Holdings LLC, is incorporated herein by
reference to Exhibit 10(dd) to Norfolk Southern Corporation’s Form 10-Q
filed on July 30, 2004.
|
|
|
|
|
|
|
(bb)
|
Distribution Agreement,
dated as of July 26, 2004, by and among CSX Corporation, CSX Transportation,
Inc., CSX Rail Holding Corporation, CSX Northeast Holdings Corporation,
Norfolk Southern Corporation, Norfolk Southern Railway Company, CRR Holdings
LLC, Green Acquisition Corp., Conrail Inc., Consolidated Rail Corporation,
New York Central Lines LLC, Pennsylvania Lines LLC, NYC Newco, Inc. and PRR
Newco, Inc., is incorporated herein by reference to Exhibit 2.1 to Norfolk
Southern Corporation’s Form 8-K filed on Sept. 2, 2004.
|
|
|
|
|
|
|
(cc)
|
Amendment No. 5 to the
Transaction Agreement, dated as of Aug. 27, 2004, by and among CSX
Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk
Southern Railway Company, Conrail Inc., Consolidated Rail Corporation and CRR
Holdings LLC, is incorporated herein by reference to Exhibit 10.1 to Norfolk
Southern Corporation’s Form 8-K filed on Sept. 2, 2004.
|
|
|
|
|
|
|
(dd)
|
Tax Allocation Agreement,
dated as of Aug. 27, 2004, by and among Green Acquisition Corp., Conrail
Inc., Consolidated Rail Corporation, New York Central Lines LLC and
Pennsylvania Lines LLC, is incorporated herein by reference to Exhibit 10.2
to Norfolk Southern Corporation’s Form 8-K filed on Sept. 2, 2004.
|
|
|
|
|
|
|
(ee)
|
Credit Agreement dated as
of Aug. 31, 2004, between Norfolk Southern Corporation and various lenders,
is incorporated herein by reference to Exhibit 99 to Norfolk Southern
Corporation’s Form 8-K/A filed on Sept. 7, 2004.
|
|
|
|
|
|
|
(ff)
|
Amendment No. 4, dated as
of June 1, 2005, and executed in late June 2005, to the Shared Assets Area
Operating Agreement for North Jersey, South Jersey/Philadelphia and Detroit,
dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX
Transportation, Inc. and Norfolk Southern Railway Company, with exhibits
thereto, is incorporated herein by reference to Exhibit 99 to Norfolk
Southern Corporation’s Form 8-K filed on July 1, 2005.
|
|
|
|
|
|
|
*(gg)
|
The description of Norfolk
Southern Corporation’s executive physical reimbursement for
non-employee directors and certain executives is incorporated herein by
reference to Norfolk Southern Corporation’s Form 8-K filed on July 28,
2005.
|
|
|
*(hh)
|
Form of 2006 Incentive
Stock Option and Non-Qualified Stock Option Agreement under the Norfolk
Southern Long-Term Incentive Plan, is incorporated herein by reference to
Exhibit 99 to Norfolk Southern Corporation’s Form 8-K/A filed on Dec.
7, 2005.
|
|
|
|
|
|
|
*(ii)
|
Form of 2006 Restricted
Share and Restricted Stock Unit Agreement under the Norfolk Southern
Corporation Long-Term Incentive Plan, is incorporated herein by reference to
Exhibit 99 to Norfolk Southern Corporation’s Form 8-K/A filed on Dec.
7, 2005.
|
|
|
|
|
|
|
*(jj)
|
Form of 2005 Performance
Share Unit Award under the Norfolk Southern Corporation Long-Term Incentive
Plan, is incorporated herein by reference to Exhibit 99 to Norfolk Southern
Corporation’s Form 8-K/A filed on Dec. 7, 2005.
|
|
|
|
|
|
|
*(kk)
|
Revised annual salaries for
certain named executive officers are incorporated herein by reference to
Norfolk Southern Corporation’s Form 8-K/A filed on Dec. 7, 2005.
|
|
|
|
|
|
|
(ll)
|
The Transaction Agreement,
dated as of Dec. 1, 2005, by and among Norfolk Southern Corporation, The
Alabama Great Southern Railroad Company,
Kansas City
Southern and The Kansas City
Southern Railway Company (Exhibits, annexes and schedules omitted.
The Registrant will furnish
supplementary copies of such materials to the SEC upon request).
|
|
|
|
|
|
(mm)
|
Amendment No. 1, dated as
of Jan. 17, 2006, by and among Norfolk Southern Corporation, The Alabama
Great Southern Railroad Company,
Kansas
City
Southern and the Kansas City Southern Railroad.
|
|
|
|
|
|
|
*(nn)
|
The retirement agreement,
dated Jan. 27, 2006, between Norfolk Southern Corporation and David R. Goode,
is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern
Corporation’s Form 8-K filed on Jan. 27, 2006.
|
|
|
|
|
|
|
*(oo)
|
The waiver agreement, dated
Jan. 27, 2006, between Norfolk Southern Corporation and David R. Goode,
providing for the waiver of forfeiture provisions otherwise applicable to
certain restricted shares and restricted stock units upon retirement, is
incorporated herein by reference to Exhibit 10.2 to Norfolk Southern
Corporation’s Form 8-K filed on Jan. 27, 2006.
|
|
|
|
|
|
|
*(pp)
|
Revised fees for outside
directors are incorporated herein by reference to Norfolk Southern
Corporation’s Form 8-K filed on Jan. 27, 2006.
|
|
|
|
|
|
|
*(qq)
|
The retirement agreement,
dated Mar. 28, 2006, between Norfolk Southern Corporation and L. Ike
Prillaman, is incorporated herein by reference to Exhibit 10.1 to Norfolk
Southern Corporation’s Form 8-K filed on Mar. 31, 2006.
|
|
|
|
|
|
|
*(rr)
|
The waiver agreement, dated Mar. 28, 2006, between
Norfolk Southern Corporation and L. Ike Prillaman, providing for the waiver
of forfeiture provisions otherwise applicable to certain restricted shares
and restricted stock units upon retirement, is incorporated herein by
reference to Exhibit 10.2 to Norfolk Southern Corporation’s Form 8-K
filed on Mar. 31, 2006.
|
|
|
|
|
|
|
(ss)
|
Amendment No. 2, dated as
of May 1, 2006, to the Transaction Agreement, dated as of Dec. 1, 2005, by
and among Norfolk Southern Corporation, The Alabama Great Southern Railroad
Company, Kansas City Southern and The Kansas City Southern Railway Company is
incorporated herein by reference to Exhibit 10.1 to Norfolk Southern
Corporation’s Form 8-K filed on May 4, 2006.
|
|
|
(tt)
|
Limited Liability Company
Agreement of Meridian
Speedway
, LLC, dated as
of May 1, 2006, by and among The Alabama Great Southern Railroad Company and
Kansas City
Southern is
incorporated herein by reference to Exhibit 10.2 to Norfolk Southern
Corporation’s Form 8-K filed on May 4, 2006.
|
|
|
|
|
|
|
*(uu)
|
The Norfolk Southern
Corporation Long-Term Incentive Plan, as amended effective July 25, 2006, is
incorporated herein by reference to Exhibit 10.3 to Norfolk Southern
Corporation’s Form 10-Q filed on July 28, 2006.
|
|
|
|
|
|
|
*(vv)
|
Form of Norfolk Southern
Corporation Long-Term Incentive Plan, 2007 Award Agreement is incorporated
herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s
Form 8-K filed on Jan. 11, 2007.
|
|
|
|
|
|
*,
**(ww)
|
Retirement Plan of Norfolk
Southern Corporation and Participating Subsidiary Companies Effective June 1,
1982, amended to and including Dec. 1, 2006.
|
|
|
|
|
|
**12
|
|
Statement re: Computation
of Ratio of Earnings to Fixed Charges.
|
|
|
|
|
|
**21
|
|
Subsidiaries of the
Registrant.
|
|
|
|
|
|
**23
|
|
Consent of Independent
Registered Public Accounting Firm.
|
|
|
|
|
|
**31
|
|
Rule 13a-14(a)/15d-14(a)
Certifications.
|
|
|
|
|
|
**32
|
|
Section 1350
Certifications.
|
|
|
|
|
|
**99
|
|
Annual CEO Certification
pursuant to NYSE Rule 303A.12(a).
|
|
|
|
|
|
*
Management contract or compensatory arrangement.
|
|
**
Filed
herewith.
|
|
|
|
|
|
(B)
|
|
Exhibits.
|
|
|
|
|
|
|
|
The Exhibits required by
Item 601 of Regulation S-K as listed in Item 15(A)3 are filed herewith or
incorporated herein by references.
|
|
|
|
|
|
(C)
|
|
Financial Statement
Schedules.
|
|
|
|
|
|
|
|
Financial statement
schedules and separate financial statements specified by this Item are
included in Item 15(A)2 or are otherwise not required or are not applicable.
|
|
|
|
|
|
Exhibits 23, 31, 32 and 99
are included in copies assembled for public dissemination.
All exhibits are included in the 2006
Form 10-K posted on our website at www.nscorp.com under
“Investors” and “SEC Filings” or you may request
copies by writing to:
|
|
|
|
Office of Corporate
Secretary
Norfolk
Southern Corporation
Three
Commercial Place
Norfolk
,
Virginia
23510-9219
|
|
|
|
|
|
|
|
|
|
|
|
POWER OF ATTORNEY
Each
person whose signature appears below under “SIGNATURES” hereby
authorizes Henry C. Wolf, James A. Hixon and James A. Squires or any one
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, James A.
Hixon and James A. Squires or any one of them, as attorneys-in-fact to
sign on his or her behalf, individually and in each capacity stated
below, and to file, any and all amendments to this report.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, Norfolk Southern Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on this 20th
day of February 2007.
NORFOLK
SOUTHERN CORPORATION
By:
/s/ Charles W. Moorman
Charles W. Moorman
(Chairman,
President and Chief Executive Officer)
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below on this 20th day of February 2007, by the
following persons on behalf of Norfolk Southern Corporation and in the
capacities indicated.
Signature
|
Title
|
|
|
/s/
Charles W. Moorman
|
Chairman,
President and Chief Executive Officer and Director
|
(Charles
W. Moorman)
|
(Principal
Executive Officer)
|
|
|
/s/
Henry C. Wolf
|
Vice
Chairman and Chief Financial Officer
|
(Henry
C. Wolf)
|
(Principal
Financial Officer)
|
|
|
/s/
Marta R. Stewart
|
Vice
President and Controller
|
(
Marta R. Stewart
)
|
(Principal
Accounting Officer)
|
|
|
/s/
Gerald L. Baliles
|
Director
|
(Gerald
L. Baliles)
|
|
|
|
/s/
Daniel A. Carp
|
Director
|
(
Dan
iel A. Carp)
|
|
|
|
/s/
Gene R. Carter
|
Director
|
(Gene
R. Carter)
|
|
|
|
/s/
Alston D. Correll
|
Director
|
(Alston
D. Correll)
|
|
|
|
/s/
Landon Hilliard
|
Director
|
(Landon
Hilliard)
|
|
|
|
/s/
Burton M. Joyce
|
Director
|
(
Burton
M. Joyce)
|
|
|
|
/s/
Steven F. Leer
|
Director
|
(Steven
F. Leer)
|
|
|
|
/s/
Jane Margaret O’Brien
|
Director
|
(Jane
Margaret O'Brien)
|
|
|
|
/s/
J. Paul Reason
|
Director
|
(J.
Paul Reason)
|
|
|
|
|
|
|
|
|
|
|
Schedule
II
|
|
|
|
|
|
|
|
|
|
|
|
Norfolk
Southern Corporation and
Subsidiaries
|
Valuation
and Qualifying Accounts
|
Years
Ended
December 31, 2004
,
2005 and 2006
|
($
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
charged to:
|
|
|
|
|
Beginning
|
|
|
Other
|
|
|
Ending
|
|
Balance
|
Expenses
|
Accounts
|
Deductions
|
Balance
|
Year ended
December
31, 2004
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance (included
net
in deferred tax liability) for
deferred tax assets
|
$
|
14
|
$
|
- --
|
$
|
- --
|
$
|
12
|
$
|
13
|
Casualty
and other claims
included in other liabilities
|
$
|
270
|
$
|
112
|
$
|
481
|
$
|
115 3
|
$
|
315
|
Current
portion of casualty and
other claims included in
accounts payable
|
$
|
218
|
$
|
23
|
$
|
1241
|
$
|
143 4
|
$
|
222
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December
31, 2005
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance (included
net in deferred tax liability) for
deferred tax assets
|
$
|
13
|
$
|
- --
|
$
|
- --
|
$
|
3 2
|
$
|
10
|
Casualty and other claims
included in other liabilities
|
$
|
315
|
$
|
311
|
$
|
- --
|
$
|
205 3
|
$
|
421
|
Current portion of
casualty and
other claims included in
accounts payable
|
$
|
222
|
$
|
92
|
$
|
114 1
|
$
|
137 4
|
$
|
291
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance (included
net in deferred tax liability) for
deferred tax assets
|
$
|
10
|
$
|
- --
|
$
|
- --
|
$
|
1 2
|
$
|
9
|
Casualty
and other claims
included in other liabilities
|
$
|
421
|
$
|
217
|
$
|
- --
|
$
|
167 3
|
$
|
471
|
Current
portion of casualty and
other claims included in
accounts payable
|
$
|
291
|
$
|
40
|
$
|
124 1
|
$
|
154 4
|
$
|
301
|
|
|
|
|
|
|
|
|
|
|
|
Certain comparative prior year amounts have been
reclassified to conform to the current year presentation.
|
|
1
Includes revenue refunds and overcharges provided
through deductions from operating revenues and
transfers
from other accounts.
|
|
|
|
|
|
|
|
|
|
|
|
2Reclassifications
to/from other assets.
|
|
|
|
|
|
|
|
|
|
|
|
3
Payments
and reclassifications to/from accounts payable.
|
|
|
|
|
|
|
|
|
|
|
|
4
Payments
and reclassifications to/from other liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|