10-K 1 nsc12.htm



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K

 

(X)       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended DECEMBER 31, 2012

 

(   )      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from ___________ to___________

 

Commission file number 1-8339

 

 

NORFOLK SOUTHERN CORPORATION
(Exact name of registrant as specified in its charter)

 

Virginia
(State or other jurisdiction of incorporation)

52-1188014
(IRS Employer Identification No.)

Three Commercial Place
Norfolk, Virginia
(Address of principal executive offices)


23510-2191
Zip Code

Registrant’s telephone number, including area code:

(757) 629-2680

 

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

 

 

Title of each Class

Name of each exchange on which registered

Norfolk Southern Corporation

 

Common Stock (Par Value $1.00)

New York Stock Exchange

 

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

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (X)  No (  )

 

Indicate by check mark if the registrant is not required to file 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months.  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 the Form 10-K or any amendment to this Form 10-K.  (X)

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or smaller reporting company. See definitions of  “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (X)        Accelerated filer (  )        Non-accelerated filer (  )        Smaller reporting company (  )

 

Indicate by check mark 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 non-affiliates at June 30, 2012, was $22,858,970,932 (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, at January 31, 2013: 314,516,374 (excluding 20,320,777 shares held by the registrant's consolidated subsidiaries).

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

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



 

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

 

 

 

 

 

 

 

 

 

 

 

Page

Part I.

Items 1 and 2.

Business and Properties

 

K3

 

Item 1A.

Risk Factors

 

K13

 

Item 1B.

Unresolved Staff Comments

 

K16

 

Item 3.

Legal Proceedings

 

K16

 

Item 4.

Mine Safety Disclosures

 

K16

 

 

Executive Officers of the Registrant

 

K17

 

 

 

 

 

Part II.

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and

 

K18

 

 

  Issuer Purchases of Equity Securities

 

 

 

Item 6.

Selected Financial Data

 

K19

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and

 

K20

 

 

  Results of Operations

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

 

K37

 

Item 8.

Financial Statements and Supplementary Data

 

K38

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and

 

K78

 

 

  Financial Disclosure

 

 

 

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

 

K80

 

 

  and Related Stockholder Matters

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

K83

 

Item 14.

Principal Accountant Fees and Services

 

K83

 

 

 

 

 

Part IV.

Item 15.

Exhibits and Financial Statements Schedules

 

K84

 

 

 

 

 

 

 

Power of Attorney

 

K99

 

 

 

 

 

 

 

Signatures

 

K99

 




PART I

 

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

 

Item 1.  Business and Item 2.  Properties

 

GENERAL – Norfolk Southern Corporation is a Norfolk, Virginia based company that owns a major freight railroad, Norfolk Southern Railway Company.  Norfolk Southern Corporation was incorporated on July 23, 1980, under the laws of the Commonwealth of Virginia.  Our common stock (Common Stock) is listed on the New York Stock Exchange (NYSE) under the symbol “NSC.”

 

Unless indicated otherwise, Norfolk Southern Corporation and its subsidiaries, including Norfolk Southern Railway Company, are referred to collectively as NS, we, us, and our. 

 

We are 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.  We also transport overseas freight through several Atlantic and Gulf Coast ports.  We provide comprehensive logistics services and offer the most extensive intermodal network in the eastern half of the United States.

 

We make available free of charge through our website, www.nscorp.com, our 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 U.S. Securities and Exchange Commission (SEC).  In addition, the following documents are available on our website and in print to any shareholder who requests them:

         Corporate Governance Guidelines

         Charters of the Committees of the Board of Directors

         The Thoroughbred Code of Ethics

         Code of Ethical Conduct for Senior Financial Officers

         Categorical Independence Standards for Directors

 



RAILROAD OPERATIONSAt December 31, 2012, our railroads operated approximately 20,000 miles of road in 22 states and the District of Columbia.

 

Our system reaches 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 our 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, Virginia and Sandusky, Ohio

         Cleveland to Kansas City

         Birmingham to Meridian

         Memphis to Chattanooga



The miles operated, which include major leased lines between Cincinnati, Ohio, and Chattanooga, Tennessee, and an exclusive operating agreement for trackage rights over property owned by North Carolina Railroad Company, were as follows:

 

 

Mileage Operated at December 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Second

 

Passing

 

 

 

 

 

 

 

and

 

Track,

 

 

 

 

 

Miles

 

Other

 

Crossovers

 

Way and

 

 

 

of

 

Main

 

and

 

Yard

 

 

 

Road

 

Track

 

Turnouts

 

Switching

 

Total 

 

 

 

 

 

 

 

 

 

 

Owned

15,375 

 

2,780 

 

2,001 

 

8,292 

 

28,448 

Operated under lease, contract or trackage rights

4,648 

 

1,881 

 

381 

 

802 

 

7,712 

 

 

 

 

 

 

 

 

 

 

Total

20,023 

 

4,661 

 

2,382 

 

9,094 

 

36,160 

 

 

 

 

 

 

 

 

 

 

Triple Crown Operations - Triple Crown Services Company (Triple Crown), one of our subsidiaries, provides bimodal truckload transportation service utilizing RoadRailer® trailers, a hybrid technology that facilitates both over-the-road and on-the-rail transportation utilizing enclosed trailers that are pulled over the highways in tractor-trailer configuration and over the rails by locomotives.  In addition, Triple Crown utilizes conventional trailers that are also moved on rail flatcars.  Triple Crown provides service in the eastern United States as well as Ontario and Quebec through a network of terminals strategically located in 13 cities.

 

The following table sets forth certain statistics relating to our railroads’ operations for the past 5 years:

 

 

Years ended December 31,

 

2012

 

2011

 

2010

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

Revenue ton miles (billions)

186 

 

192 

 

182 

 

159 

 

195 

Freight train miles traveled (millions)

76.3 

 

75.7 

 

72.6 

 

67.5 

 

80.0 

Revenue per ton mile

$0.0595 

 

$0.0582 

 

$0.0523 

 

$0.0503 

 

$0.0546 

Revenue ton miles per employee-hour worked

3,153 

 

3,207 

 

3,218 

 

2,900 

 

3,075 

Ratio of railway operating expenses to railway operating revenues

71.7% 

 

71.2% 

 

71.9% 

 

75.4% 

 

71.1% 

 

RAILWAY OPERATING REVENUES Total railway operating revenues were $11.0 billion in 2012.  Following is an overview of our three major market groups.

 

COAL Coal is our largest commodity group as measured by revenues.  Revenues from coal accounted for about 26% of our total railway operating revenues in 2012.  We handled a total of 156.1 million tons, or 1.4 million carloads, in 2012, most of which originated on our lines from major eastern coal basins, with the balance from major western coal basins via Memphis and Chicago gateways.  Our coal franchise supports the electric generation market, serving approximately 100 coal generation plants, as well as the export, metallurgical and industrial markets primarily through direct rail and river, lake, and coastal facilities, including various terminals on the Ohio River, Lambert’s Point in Norfolk, Virginia, the Port of Baltimore, and Lake Erie.

 

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

 



GENERAL MERCHANDISE Our general merchandise market group is composed of five major commodity groupings:  chemicals; agriculture, consumer products and government; metals and construction; automotive; and paper, clay and forest products.  

         Chemicals includes sulfur and related chemicals, petroleum products, chlorine and bleaching compounds, plastics, rubber, industrial chemicals, chemical wastes, and municipal wastes.  

         Agriculture, consumer products, and government includes soybeans, wheat, corn, fertilizer, livestock and poultry feed, food oils, flour, beverages, canned goods, sweeteners, consumer products, ethanol, and items for the military.  

         Metals and construction includes steel, aluminum products, machinery, scrap metals, cement, aggregates, bricks, and minerals

         Automotive includes finished vehicles for BMW, Chrysler, Ford, General Motors, Honda, Hyundai, Mercedes-Benz, Mitsubishi, Subaru, Toyota and Volkswagen, and auto parts for Chrysler, Ford, General Motors, Honda, Mazda, Mitsubishi, Nissan, Subaru, and Toyota. 

         Paper, clay and forest products includes lumber and wood products, pulp board and paper products, wood fibers, wood pulp, scrap paper, and clay.

 

In 2012, 119 million tons of general merchandise freight, or approximately 65% of total general merchandise tonnage we handled, originated online.  The balance of general merchandise freight was received from connecting carriers at interterritorial gateways.  Our principal interchange points for received freight included Chicago, New Orleans, East St. Louis, Memphis, Buffalo, and Detroit.  General merchandise carloads handled in 2012 were 2.3 million, the revenues from which accounted for 54% of our total railway operating revenues.

 

See the discussion of general merchandise revenues by commodity group in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

INTERMODAL Our intermodal market group 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 2012 were 3.4 million, the revenues from which accounted for 20% of our total railway operating revenues.

 

See the discussion of intermodal revenues in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

FREIGHT RATES In 2012, we continued our reliance on private contracts and exempt price quotes as the predominant pricing mechanisms.  Thus, a major portion of our 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 2012, our railroads were found by the Surface Transportation Board (STB), the regulatory board that has broad jurisdiction over railroad practices, to be “revenue adequate” on an annual basis based on results for the year 2011The STB has not made its revenue adequacy determination for the year 2012A railroad is “revenue adequate” on an annual basis 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 Amtrak operates regularly scheduled passenger trains on our lines between the following locations:

         Alexandria and Lynchburg, Virginia

         Alexandria and Orange, Virginia

         Petersburg and Norfolk, Virginia

         Raleigh and Charlotte, North Carolina

         Selma and Charlotte, North Carolina

         Chicago, Illinois, and Porter, Indiana

         Chicago, Illinois, and Cleveland, Ohio

         Chicago, Illinois, and Pittsburgh, Pennsylvania

         Kalamazoo and Battle Creek, Michigan

         Kalamazoo and Detroit, Michigan

         Pittsburgh and Harrisburg, Pennsylvania

 

Two transportation commissions of the Commonwealth of Virginia operate commuter trains on our line between Manassas and Alexandria.

 

We lease the Chicago to Manhattan, Illinois, line to the Commuter Rail Division of the Regional Transportation Authority of Northeast Illinois (METRA).

 

We operate freight service over lines with significant ongoing Amtrak and commuter passenger operations, and conduct freight operations over trackage owned or leased by:

         Amtrak

         New Jersey Transit

         Southeastern Pennsylvania Transportation Authority

         Metro-North Commuter Railroad Company

         Maryland Department of Transportation

 

Amtrak and various commuter agencies conduct passenger operations over trackage owned by Conrail in the Shared Assets Areas (Note 5 to the Consolidated Financial Statements).

 

NONCARRIER OPERATIONS Our 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 2012, no such noncarrier subsidiary or industry segment grouping of noncarrier subsidiaries met the requirements for a reportable business segment under relevant authoritative accounting guidance. 

 

RAILWAY PROPERTY

 

Our railroad system extends across 22 states and the District of Columbia.  The railroad infrastructure makes us capital intensive with net property of approximately $26 billion on a historical cost basis. 

 

Property Additions Property additions for the past five years were as follows (including capitalized leases):

 

 

2012

 

2011

 

2010

 

2009

 

2008

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Road and all other property

$

1,465 

 

$

1,222 

 

$

1,153 

 

$

1,128 

 

$

1,070 

Equipment

 

776 

 

 

938 

 

 

317 

 

 

171 

 

 

488 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

2,241 

 

$

2,160 

 

$

1,470 

 

$

1,299 

 

$

1,558 

  



Our capital spending and replacement programs are and have been designed to assure the ability to provide safe, efficient, and reliable rail transportation services.  For 2013, we have budgeted $2.0 billion of property additions.

 

We have invested and will continue to invest in various projects and corridor initiatives to expand our rail network to increase capacity and improve transit times, while returning value to shareholders.  Initiatives include the following:

         The MidAmerica Corridor is a proposed arrangement between us and Canadian National Railway (CN) to share track between Chicago, St. Louis, Kentucky, and Mississippi in order to establish more efficient routes for shipments moving between the Midwest and Southeast, including potential shipments from CN-served Illinois Basin coal producers to southeastern utility plants we serve.

         Pan Am Southern LLC, a joint venture with Pan Am Railways, Inc., is a 155-mile main line track that runs between Mechanicville, New York and Ayer, Massachusetts, along with 281 miles of secondary and branch lines, including trackage rights in New York, Connecticut, Massachusetts, New Hampshire, and Vermont designed to increase intermodal and automotive capacity.

         The Crescent Corridor consists of a program of projects for infrastructure and other facility improvements geared toward creating seamless, high-capacity intermodal routes spanning 11 states from New Jersey to Louisiana and offering truck-competitive service along several major interstate highway corridors, including I-81, I-85, I-20, I-40, I-59, I-78, and I-75.

         The Heartland Corridor, which opened in 2010, was a package of clearance improvements and other facilities that created a seamless, high-capacity intermodal route across Virginia and West Virginia to Midwest markets.

         Meridian Speedway LLC, a joint venture with Kansas City Southern, is a 320-mile rail line between Meridian, Mississippi and Shreveport, Louisiana designed to increase capacity and improve service.

         The CREATE project is a public-private partnership to reduce rail and highway congestion and add freight and passenger capacity in the metropolitan Chicago area.  We and other railroads have agreed to participate in CREATE.

 



Equipment At December 31, 2012, we owned or leased the following units of equipment:

 

 

 

 

 

 

 

 

Capacity of

 

Owned*

 

Leased**

 

Total

 

Equipment

 

 

 

 

 

 

 

(Horsepower)

Locomotives:

 

 

 

 

 

 

 

Multiple purpose

3,763 

 

79 

 

3,842 

 

13,606,600 

Auxiliary units

122 

 

- 

 

122 

 

- 

Switching

110 

 

- 

 

110 

 

165,250 

 

 

 

 

 

 

 

 

Total locomotives

3,995 

 

79 

 

4,074 

 

13,771,850 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Tons)

Freight cars:

 

 

 

 

 

 

 

Gondola

33,820 

 

3,839 

 

37,659 

 

4,098,830 

Hopper

15,234 

 

521 

 

15,755 

 

1,737,636 

Box

12,356 

 

1,470 

 

13,826 

 

1,151,821 

Covered hopper

10,558 

 

158 

 

10,716 

 

1,182,466 

Flat

2,506 

 

1,133 

 

3,639 

 

335,196 

Other

4,608 

 

87 

 

4,695 

 

225,067 

 

 

 

 

 

 

 

 

Total freight cars

79,082 

 

7,208 

 

86,290 

 

8,731,016 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

Highway trailers and containers

8,199 

 

8,179 

 

16,378 

 

 

RoadRailer®

6,378 

 

27 

 

6,405 

 

 

Work equipment

4,525 

 

313 

 

4,838 

 

 

Vehicles

4,011 

 

- 

 

4,011 

 

 

Miscellaneous

12,765 

 

9,031 

 

21,796 

 

 

 

 

 

 

 

 

 

 

Total other

35,878 

 

17,550 

 

53,428 

 

 

 

*

 

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

**

Includes short-term and long-term operating leases. Freight cars include 521 leased from Consolidated Rail    Corporation (CRC). 

 

The following table indicates the number and year built for locomotives and freight cars owned at December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

2003-

 

1998-

 

1997&

 

 

 

2012

 

2011

 

2010

 

2009

 

2008

 

2007

 

2002

 

Before

 

Total

Locomotives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No. of units

60 

 

90 

 

42 

 

- 

 

40 

 

628 

 

648 

 

2,487 

 

3,995 

% of fleet

2% 

 

2% 

 

1% 

 

-% 

 

1% 

 

16% 

 

16% 

 

62% 

 

100% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Freight cars:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No. of units

2,025 

 

3,840 

 

150 

 

514 

 

2,349 

 

1,691 

 

3,317 

 

65,196 

 

79,082 

% of fleet

3% 

 

5% 

 

-% 

 

1% 

 

3% 

 

2% 

 

4% 

 

82% 

 

100% 

 




The following table shows the average age of our owned locomotive and freight car fleets at December 31, 2012, and information regarding 2012 retirements:

 

 

Locomotives

 

Freight Cars

Average age – in service

21.6 years 

 

30.2 years 

Retirements

49 units 

 

2,482 cars 

Average age – retired

41.2 years 

 

42.4 years 

 

 

 

 

Our ongoing locomotive and freight car maintenance programs are intended to ensure the highest standards of safety, reliability, customer satisfaction, and equipment availability.  The locomotive bad order ratio includes all units (owned and leased) out of service for required periodic inspections, unscheduled maintenance and program work which includes such activity as overhauls.

 

 

Annual Average Bad Order Ratio

 

2012

 

2011

 

2010

 

2009

 

2008

Locomotives

7.1% 

 

7.3% 

 

6.7% 

 

6.1% 

 

5.8% 

Freight cars

5.3% 

 

5.7% 

 

5.8% 

 

4.5% 

 

4.5% 

 

 

 

 

 

 

 

 

 

 

Encumbrances Certain railroad equipment is subject to the prior lien of equipment financing obligations totaling $34 million at December 31, 2012.

 

Track Maintenance Of the approximately 36,160 total miles of track we operate, we are responsible for maintaining about 29,220 miles, with the remainder being operated under trackage rights from other parties responsible for maintenance.

 

Over 81% of the main line trackage (including first, second, third, and branch main tracks, all excluding rail operated pursuant to trackage rights) has rail ranging from 131 to 155 pounds per yard with the standard installation currently at 136 pounds per yard.  Approximately 42% of our lines, excluding rail operated pursuant to trackage rights, carried 20 million or more gross tons per track mile during 2012.

 

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

 

 

2012

 

2011

 

2010

 

2009

 

2008

Track miles of rail installed

509 

 

484 

 

422 

 

434 

 

459 

Miles of track surfaced

5,642 

 

5,441 

 

5,326 

 

5,568 

 

5,209 

New crossties installed (millions)

2.6 

 

2.7 

 

2.6 

 

2.7 

 

2.7 

 

Microwave System Our microwave system, consisting of approximately 6,968 radio route miles, 421 core stations, 30 secondary stations, and four passive repeater stations, provides communications between most operating locations.  We use the microwave system primarily for voice communications, VHF radio control circuits, data and facsimile transmissions, traffic control operations, and AEI data transmissions.

 

Traffic Control Of the approximately 16,500 route miles we dispatch, about 11,025 miles are signalized, including 8,150 miles of centralized traffic control (CTC) and 2,875 miles of automatic block signals.  Of the 8,150 miles of CTC, approximately 5,100 miles are controlled by data radio originating at 340 base station radio sites.

 

Computers A computer network consisting of a centralized production and backup data center near 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, our computer systems assist us 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 goal of ours.  To date, such compliance has not had a material effect on our financial position, results of operations, 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 16 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:

 

 

2012

 

2011

 

2010

 

2009

 

2008

Average number of employees

 

30,943 

 

 

30,329 

 

 

28,559 

 

 

28,593 

 

 

30,709 

Average wage cost per employee

$

69,000 

 

$

71,000 

 

$

69,000 

 

$

63,000 

 

$

66,000 

Average benefit cost per employee

$

38,000 

 

$

39,000 

 

$

37,000 

 

$

32,000 

 

$

31,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

More than 80% of our 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 business, our railroads are subject to regulation by the STB.  The STB 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.  The Federal Railroad Administration (FRA) regulates certain track and mechanical equipment standards.

 

The relaxation of economic regulation of railroads, following the Staggers Rail Act of 1980, included exemption from STB regulation of the rates and most service terms for intermodal business (trailer-on-flat-car, container-on-flat-car), rail boxcar shipments, lumber, manufactured steel, automobiles, and certain bulk commodities such as sand, gravel, pulpwood, and wood chips for paper manufacturing.  Further, all shipments that we have under contract are effectively removed from regulation for the duration of the contract.  About 86% of our revenues comes from either exempt shipments or shipments moving under transportation contracts; the remainder comes from shipments moving under public tariff rates.

 

Efforts have been made over the past several years to re-subject the rail industry to increased federal economic regulation, and such efforts are expected to continue in 2013.  The Staggers Rail Act of 1980, which substantially balanced such regulation, encouraged and enabled rail carriers to innovate, invest in their infrastructure, and compete for business, thereby contributing to the economic health of the nation and to the revitalization of the industry.  Accordingly, we will continue to oppose efforts to reimpose increased economic regulation. 

 

Government regulations concerning the safety and security of our railroads are discussed within the “Security of Operations” section contained herein. 

 

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

 



Our primary rail competitor is CSX Corporation; both railroads operate throughout much of the same territory.  Other railroads also operate in parts of the territory.  We also compete with motor carriers, water carriers, and with shippers who have the additional options of handling their own goods in private carriage, sourcing products from different geographic areas, and using substitute products.

 

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

 

SECURITY OF OPERATIONS We have taken significant steps to provide enhanced security for our rail system. In particular, we have developed and implemented a comprehensive security plan that is modeled on and was developed in conjunction with the security plan prepared by the Association of American Railroads (AAR) post September 11, 2001.  The AAR Security Plan defines four Alert Levels and details the actions and countermeasures that are being applied across the railroad industry as a terrorist threat increases or decreases.  The Alert Level actions include countermeasures that will be applied in three general areas:  (1) operations (including transportation, engineering, and mechanical); (2) information technology and communications; and, (3) railroad police.  Although security concerns preclude public disclosure of its contents, our System Security Plan outlines the protocol within our company for all concerned to be notified of AAR Alert Level changes.  All of our Operations Division employees are advised by their supervisors or train dispatchers, as appropriate, of any change in Alert Level and any additional responsibilities they may incur due to such change.

 

Our plan also effectively addresses and complies with U.S. Department of Transportation (DOT) security regulations pertaining to training and security plans with respect to the transportation of hazardous materials.  As part of the plan, security awareness training is given to all railroad employees who directly affect hazardous material transportation safety, and this training is integrated into recurring hazardous material training and re-certification programs.  Toward that end, we, working closely with the National Transit Institute at Rutgers University, have developed a four-module uniform national training program.  We have also worked with the Transportation Security Administration (TSA) in developing other industry training programs.  More in-depth security training has been given to select employees of ours who have been given specific security responsibilities, and additional, location-specific security plans have been developed for certain metropolitan areas and each of the six port facilities we serve.  With respect to the ports, each facility plan has been approved by the applicable Captain of the Port and is subject to inspection by the U.S. Coast Guard.

 

Additionally, we engage in close and regular coordination with numerous federal and state agencies, including the U.S. Department of Homeland Security (DHS), the TSA, the Federal Bureau of Investigation (FBI), the FRA, the U.S. Coast Guard, U.S. Customs and Border Protection, and various state Homeland Security offices.  As one notable example, one of our Police Special Agents in Charge (SAC), under the auspices of the AAR, has been assigned to the National Joint Terrorism Task Force (NJTTF) operated by the FBI, and located at the National Counter Terrorism Center (NCTC) in Arlington, Virginia to represent and serve as liaison to the North American rail industry.  This arrangement improves logistical flow of vital security and law enforcement information with respect to the rail industry as a whole, while having the post filled by one of our SACs has also served to foster a strong working relationship between us and the FBI.  We also have become a member of the Customs-Trade Partnership Against Terrorism (C-TPAT) program sponsored by U.S. Customs.  C-TPAT allows us to work closely with U.S. Customs and our customers to develop measures that will help ensure the integrity of freight shipments moving on our railroads, particularly those moving to or from a foreign country.  Based on participation in C-TPAT, we have ensured that our plan meets all current applicable security recommendations made by U.S. Customs.

 

Similarly, we are guided in our operations by various supplemental security action items issued by DHS and DOT, U.S. Coast Guard Maritime Security requirements, as well as voluntary security action items developed in collaboration with TSA, DOT, and the freight railroads. Many of the action items are based on lessons learned from DHS and DOT security assessments of rail corridors in High Threat Urban Areas (HTUA). Particular attention is aimed at reducing risk in HTUA by:  (1) the establishment of secure storage areas for rail cars carrying toxic-by-inhalation (TIH) materials; (2) the expedited movement of trains transporting rail cars carrying TIH materials; (3) the minimization of unattended loaded tank cars carrying TIH materials; and (4) cooperation with



federal, state, local and tribal governments to identify, through risk assessments, those locations where security risks are the highest.  These action items and our compliance initiatives are outlined in the various departmental sections of our System Security Plan.  We have taken appropriate actions to be compliant with the TSA Final Security Rule addressing Rail Security Sensitive Materials (RSSM) to ensure these shipments are properly inspected and that positive chain-of-custody is maintained when required.  We are in compliance with the Pipeline and Hazardous Materials Safety Administration (PHMSA) rail-routing regulations outlined in Docket HM-232E.  We conduct ongoing route evaluations.  In 2011, as part of the FRA’s bi-annual review, this methodology and selected routes were found to be compliant with the regulation.  The next review by the FRA is expected mid-year 2013.

 

In 2012, through participation in the Transportation Community Awareness and Emergency Response (TRANSCAER) Program, we provided rail accident response training to approximately 5,087 emergency responders, such as local police and fire personnel, representing over 19,023 hours of emergency response training.  We also conducted railroad operations classes for FBI agents and the railroad liaison agents from NJTTF and participated in four drills for local, state, and federal agencies.  We also have ongoing programs to sponsor local emergency responders at the Security and Emergency Response Training Course conducted at the AAR Transportation Technology Center in Pueblo, Colorado.

 

Improvements in equipment design also are expected to play a role in enhancing rail security.  PHMSA, in coordination with the FRA, has amended the Hazardous Materials Regulations to prescribe enhanced safety for rail transportation of TIH materials, has provided interim design standards for railroad tank cars.  The rule mandates commodity-specific improvements in safety features and design standards for newly manufactured DOT specification tank cars and an improved top fittings performance standard.  The interim standards established in this rule will enhance the accident survivability of TIH tank cars. 

 

Item 1A. Risk Factors

 

We are subject to significant governmental legislation and regulation over commercial, operating and environmental matters.  Railroads are subject to the enactment of laws by Congress that could increase economic regulation of the industry.  Railroads presently are subject to commercial regulation by the STB, 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.  Additional economic regulation of the rail industry by Congress or the STB, whether under new or existing laws, could have a significant negative impact on our ability to determine prices for rail services and result in a material adverse effect in the future on our financial position, results of operations, or liquidity in a particular year or quarter.  This potential material adverse effect could also result in reduced capital spending on our rail network or abandonment of lines.

 

Railroads are subject to safety and security regulation by DOT and DHS, which regulate most aspects of our operations.  Compliance with the Rail Safety Improvement Act of 2008 will result in additional operating costs associated with the statutorily mandated implementation of positive train control by 2015.  In addition to increased capital expenditures, implementation may result in reduced operational efficiency and service levels, as well as increased compensation and benefits expenses, and increased claims and litigation costs.

 

Our operations are subject to extensive federal and state environmental laws and regulations concerning, among other things, emissions to the air; discharges to waterways or groundwater 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.  This risk includes property owned by us, whether currently or in the past, that is or has been subject to a variety of uses, including our railroad operations and other industrial activity by past owners or our past and present tenants.

 

Environmental problems that are latent or undisclosed may exist on these properties, and we 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 our financial position, results of operations, or liquidity in a particular year or quarter.

 

As a common carrier by rail, we 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.

 

We 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 our financial position, results of operations, or liquidity in a particular year or quarter.  Because we play a critical role in the nation’s transportation system, we 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 we currently maintain insurance coverage for third-party liability arising out of war and acts of terrorism, we maintain only limited insurance coverage for first-party property damage and damage to property in our care, custody, or control caused by certain acts of terrorism.  In addition, premiums for some or all of our current insurance programs covering these losses could increase dramatically, or insurance coverage for certain losses could be unavailable to us in the future.

 

We may be affected by general economic conditions.  Prolonged negative changes in domestic and global economic conditions affecting the producers and consumers of the commodities we carry may have an adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter.  Economic conditions resulting in bankruptcies of one or more large customers could have a significant impact on our financial position, results of operations, or liquidity in a particular year or quarter.

 

We may be affected by climate change legislation or regulation.  Concern over climate change has led to significant federal, state, and international legislative and regulatory efforts to limit greenhouse gas (GHG) emissions.  Moreover, even without such legislation or regulation, government incentives and adverse publicity relating to GHGs could affect certain of our customers and the markets for certain of the commodities we carry.  Restrictions, caps, taxes, or other controls on GHG emissions, including diesel exhaust, could significantly increase our operating costs, decrease the amount of traffic handled, and decrease the value of coal reserves we own, and thus could have an adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter.  Such restrictions could affect our customers that (1) use commodities that we carry to produce energy, including coal, (2) use significant amounts of energy in producing or delivering the commodities we carry, or (3) manufacture or produce goods that consume significant amounts of energy.

 

We face competition from other transportation providers.  We are subject to competition from motor carriers, railroads and, to a lesser extent, ships, barges, and pipelines, on the basis of transit time, pricing, and quality and reliability of service.  While we have used primarily internal resources to build or acquire and maintain our 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 we operate, or legislation granting materially greater latitude for motor carriers with respect to size or weight limitations, could have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter.

 

The operations of carriers with which we interchange may adversely affect our operations.  Our ability to provide rail service to customers in the U.S. and Canada depends in large part upon our ability to maintain cooperative relationships with connecting carriers with respect to, among other matters, freight rates, revenue division, car supply and locomotive availability, data exchange and communications, reciprocal switching, interchange, and trackage rights. Deterioration in the operations of or service provided by connecting carriers, or in our relationship with those connecting carriers, could result in our inability to meet our customers’ demands or require us to use alternate train routes, which could result in significant additional costs and network inefficiencies.



 

We rely on technology and technology improvements in our business operations.  If we experience significant disruption or failure of one or more of our information technology systems, including computer hardware, software, and communications equipment, we could experience a service interruption, a security breach, or other operational difficultiesAdditionally, if we do not have sufficient capital to acquire new technology or we are unable to implement new technology, we may suffer a competitive disadvantage within the rail industry and with companies providing other modes of transportation service.  Any of these factors could have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter.

 

The vast majority of our employees belong to labor unions, and labor agreements, strikes, or work stoppages could adversely affect our operations.  More than 80% of our 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, we could experience a significant disruption of our operations.  Additionally, future national labor agreements, or renegotiation of labor agreements or provisions of labor agreements, could significantly increase our costs for healthcare, wages, and other benefits.  Any of these factors could have a material adverse impact on our financial position, results of operations, or liquidity in a particular year or quarter.

 

We may be subject to various claims and lawsuits that could result in significant expenditures.  The nature of our business exposes us to the potential for various claims and litigation related to labor and employment, personal injury, commercial disputes, freight loss and other property damage, and other matters.  Job-related personal injury and occupational claims are subject to the Federal Employer’s 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  property damage, personal injury, and environmental liability could have a material adverse effect on our financial position, results of operations, or liquidity to the extent not covered by insurance.  We have 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 $50 million and above $1 billion per occurrence for bodily injury and property damage to third parties and up to $25 million and above $175 million per occurrence for property owned by us or in our 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 us.

 

Severe weather could result in significant business interruptions and expenditures.  Severe weather conditions and other natural phenomena, including hurricanes, floods, fires, and earthquakes, may cause significant business interruptions and result in increased costs, increased liabilities, and decreased revenues, which could have an adverse effect on our 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 our 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 our 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 our operational efficiency and otherwise have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter.

 

We may be affected by supply constraints resulting from disruptions in the fuel markets or the nature of some of our supplier markets.  We consumed about 460 million gallons of diesel fuel in 2012.  Fuel availability could be affected by any limitation in the fuel supply or by any imposition of mandatory allocation or rationing regulations.  A severe fuel supply shortage arising from production curtailments, increased demand in existing or emerging foreign markets, disruption of oil imports, disruption of domestic refinery production, damage to



refinery or pipeline infrastructure, political unrest, war or other factors, could have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter.  Also, such an event could impact us as well as our customers and other transportation companies.

 

Due to the capital intensive nature and industry-specific requirements of the rail industry, high barriers of entry exist for potential new suppliers of core railroad items, such as locomotives and rolling stock equipment.   Additionally, we compete 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 significant shortages of materials that could have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter.

 

The state of capital markets could adversely affect our liquidity.  From time-to-time we rely on the capital markets to provide some of our capital requirements, including the issuance of long-term debt instruments and commercial paper, as well as the sale of certain receivables.  Significant instability or disruptions of the capital markets, including the credit markets, or deterioration of our financial condition due to internal or external factors could restrict or eliminate our access to, and/or significantly increase the cost of, various financing sources, including bank credit facilities and issuance of corporate bonds.  Instability or disruptions of the capital markets and deterioration of our financial condition, alone or in combination, could also result in a reduction in our credit rating to below investment grade, which could prohibit or restrict us from accessing external sources of short- and long-term debt financing and/or significantly increase the associated costs.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 3. Legal Proceedings

 

On November 6, 2007, various antitrust class actions filed against us and other Class I railroads in various Federal district courts regarding fuel surcharges were consolidated in the District of Columbia by the Judicial Panel on Multidistrict Litigation.  On June 21, 2012, the court certified the case as a class action.  The defendant railroads have appealed such certification, and a decision by the court to either reject the appeal outright or proceed with ruling on its merits is pending.  We believe the allegations in the complaints are without merit and intend to vigorously defend the cases.  We do not believe the outcome of these proceedings will have a material effect on our financial position, results of operations, or liquidity.  A lawsuit containing similar allegations against us and four other major railroads that was filed on March 25, 2008, in the U.S. District Court for the District of Minnesota was voluntarily dismissed by the plaintiff subject to a tolling agreement entered into in August 2008.

 

We received a Notice of Violation (NOV) issued by the Tennessee Department of Environmental Conservation concerning soil runoff in connection with construction of the Memphis Regional Intermodal Facility in Rossville, Tennessee.  Although we will contest liability and the imposition of any penalties, this matter is described here consistent with SEC rules and requirements concerning governmental proceedings with respect to environmental laws and regulations.  We do not believe that the outcome of this proceeding will have a material effect on our financial position, results of operations, or liquidity.

 

Item 4. Mine Safety Disclosures

 

Not applicable.




Executive Officers of the Registrant

 

Our 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 our 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, at February 1, 2013, relating to our officers.

 

Name, Age, Present Position

 

Business Experience During Past Five Years

 

 

 

Charles W. Moorman, 60,
  Chairman, President and
  Chief Executive Officer

 

Present position since February 1, 2006.

 

 

 

Deborah H. Butler, 58,
  Executive Vice President –
  Planning and Chief
  Information Officer

 

Present position since June 1, 2007.
  

 

 

 

James A. Hixon, 59,
  Executive Vice President –
  Law and Corporate Relations

 

Present position since October 1, 2005.

 

 

 

Mark D. Manion, 60,
  Executive Vice President and
  Chief Operating Officer

 

Present position since April 1, 2009.
  Served as Executive Vice President – Operations from

  October 1, 2004  to April 1, 2009.

 

 

 

John P. Rathbone, 60,
  Executive Vice President –
  Finance and Chief Financial Officer

 

Present position since August 1, 2012.

  Served as Executive Vice President – Administration from    

  October 1, 2004 to August 1, 2012.

 

 

 

Donald W. Seale, 60,
  Executive Vice President and
  Chief Marketing Officer

 

Present position since April 1, 2006.

 

 

 

James A. Squires, 51,
  Executive Vice President –
  Administration

 

Present position since August 1, 2012.
  Served as Executive Vice President – Finance and Chief

  Financial Officer from July 1, 2007 to August 1, 2012.

 

 

 

Clyde H. Allison, Jr., 49,
  Vice President and Controller

 

Present position since April 1, 2009.
  Served as Assistant Vice President Corporate Accounting 

  from February 1, 2008 to April 1, 2009.




PART II

 

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

STOCK PRICE AND DIVIDEND INFORMATION

 

Common Stock is owned by 32,347 stockholders of record as of December 31, 2012 and is traded on the New York Stock Exchange under 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 2012 and 2011.

 

 

Quarter

 

 

 

 

 

 

 

 

 

 

 

 

2012

1st

 

2nd

 

3rd

 

4th

Market Price

 

 

 

 

 

 

 

 

 

 

 

High

$

78.24 

 

$

74.41 

 

$

75.10 

 

$

67.71 

Low

 

64.45 

 

 

63.67 

 

 

63.63 

 

 

56.34 

Dividends per share

 

0.47 

 

 

0.47 

 

 

0.50 

 

 

0.50 

 

 

 

 

 

 

 

 

 

 

 

 

2011

1st

 

2nd

 

3rd

 

4th

Market Price

 

 

 

 

 

 

 

 

 

 

 

High

$

69.56 

 

$

74.93 

 

$

76.99 

 

$

75.75 

Low

 

60.38 

 

 

66.27 

 

 

60.44 

 

 

60.01 

Dividends per share

 

0.40 

 

 

0.40 

 

 

0.43 

 

 

0.43 

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

 

 

 

 

Total

 

Maximum Number

 

 

 

 

 

 

 

Number of

 

(or Approximate

 

 

 

 

 

 

 

Shares (or Units)

 

Dollar Value)

 

 

 

Total Number

 

Average

 

Purchased as

 

of Shares (or Units)

 

 

 

of Shares

 

Price Paid

 

Part of Publicly

 

that may yet be

 

 

 

(or Units)

 

per Share

 

Announced Plans

 

Purchased under

 

Period

 

Purchased

(1)

 

(or Unit)

 

or Programs

(2)

 

the Plans or Programs

(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 1-31, 2012

 

 

310,189 

 

 

$

62.31 

 

 

307,000 

 

 

48,616,759 

 

November 1-30, 2012

 

 

2,029,148 

 

 

 

58.70 

 

 

2,029,148 

 

 

46,587,611 

 

December 1-31, 2012

 

 

2,917 

 

 

 

61.55 

 

 

- 

 

 

46,587,611 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

2,342,254 

 

 

 

 

 

 

2,336,148 

 

 

 

 

 

(1)

Of this amount, 6,106 represents shares tendered by employees in connection with the exercise of stock options under the stockholder-approved Long-Term Incentive Plan.

(2)

Our Board of Directors authorized a share repurchase program, pursuant to which up to 125 million shares of Common Stock could be purchased through December 31, 2014.  On August 1, 2012, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2017.




Item 6. Selected Financial Data

 

FIVE-YEAR FINANCIAL REVIEW

 

 

2012

 

2011

 

2010

 

2009

 

2008

 

($ in millions, except per share amounts)

RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Railway operating revenues

$

11,040 

 

$

11,172 

 

$

9,516 

 

$

7,969 

 

$

10,661 

Railway operating expenses

 

7,916 

 

 

7,959 

 

 

6,840 

 

 

6,007 

 

 

7,577 

Income from railway operations

 

3,124 

 

 

3,213 

 

 

2,676 

 

 

1,962 

 

 

3,084 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income – net

 

129 

 

 

160 

 

 

153 

 

 

127 

 

 

110 

Interest expense on debt

 

495 

 

 

455 

 

 

462 

 

 

467 

 

 

444 

Income before income taxes

 

2,758 

 

 

2,918 

 

 

2,367 

 

 

1,622 

 

 

2,750 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

1,009 

 

 

1,002 

 

 

871 

 

 

588 

 

 

1,034 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Net income

$

1,749 

 

$

1,916 

 

$

1,496 

 

$

1,034 

 

$

1,716 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income 

– basic

$

5.42 

 

$

5.52 

 

$

4.06 

 

$

2.79 

 

$

4.58 

 

– diluted

 

5.37 

 

 

5.45 

 

 

4.00 

 

 

2.76 

 

 

4.52 

Dividends

 

1.94 

 

 

1.66 

 

 

1.40 

 

 

1.36 

 

 

1.22 

Stockholders' equity at year end

 

31.08 

 

 

30.00 

 

 

29.85 

 

 

28.06 

 

 

26.23 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL POSITION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

30,342 

 

$

28,538 

 

$

28,199 

 

$

27,369 

 

$

26,297 

Total debt

 

8,682 

 

 

7,540 

 

 

7,025 

 

 

7,153 

 

 

6,667 

Stockholders' equity

 

9,760 

 

 

9,911 

 

 

10,669 

 

 

10,353 

 

 

9,607 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property additions

$

2,241 

 

$

2,160 

 

$

1,470 

 

$

1,299 

 

$

1,558 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of shares outstanding (thousands)

 

320,864 

 

 

345,484 

 

 

366,522 

 

 

367,077 

 

 

372,276 

Number of stockholders at year end

 

32,347 

 

 

33,381 

 

 

35,416 

 

 

37,486 

 

 

35,466 

Average number of employees:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rail

 

30,543 

 

 

29,933 

 

 

28,160 

 

 

28,173 

 

 

30,241 

Nonrail

 

400 

 

 

396 

 

 

399 

 

 

420 

 

 

468 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Total

 

30,943 

 

 

30,329 

 

 

28,559 

 

 

28,593 

 

 

30,709 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

We are one of the nation’s premier transportation companies.  Our Norfolk Southern Railway Company subsidiary operates approximately 20,000 miles of road in 22 states and the District of Columbia, serves every major container port in the eastern United States, and provides efficient connections to other rail carriers.  We operate the most extensive intermodal network in the East and are a major transporter of coal, automotive, and industrial products.  In 2012, as part of our Crescent Corridor initiative, we opened the new Memphis Regional Intermodal Facility in Rossville, TN as well as the new Birmingham Regional Intermodal Facility in McCalla, AL, in order to position ourselves to handle increased intermodal volumes faster and more reliably.

 

Financial results for 2012 were adversely affected as utility coal volumes declined, reflecting competition from low natural gas prices and reduced electrical demand in NS-served regions.  In addition, export coal average revenue per unit dropped, a result of market-based pricing pressure.  These decreases more than offset gains in our intermodal and merchandise sectors, resulting in a 1% decline in railway operating revenues, which more than offset the 1% reduction in railway operating expenses.  As a result, the railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses) rose to 71.7%, as compared with 71.2% in 2011, and net income declined 9%.

 

Cash provided by operating activities totaled $3.1 billion which, along with proceeds from borrowings and cash on hand, allowed for property additions, share repurchases, dividend payments, and debt repayments. During 2012, we repurchased 18.8 million shares of Common Stock at a total cost of $1.3 billion. Since inception of our stock repurchase program in 2006, we have repurchased and retired 128.4 million shares of Common Stock at a total cost of $7.5 billion. At December 31, 2012, cash, cash equivalents, and short-term investments totaled $668 million.

 

In 2013, we expect revenues to increase, reflecting higher volumes.  We plan to continue to focus on safety, cost control, increased productivity, improved serviced levels and operational efficiency, and an ongoing market-based approach to pricing.



SUMMARIZED RESULTS OF OPERATIONS

 

2012 Compared with 2011

 

Net income in 2012 was $1.7 billion, or $5.37 per diluted share, down $167 million, or 9%, compared with $1.9 billion, or $5.45 per diluted share, in 2011.  The decrease in net income was due to lower income from railway operations, lower nonoperating income items, higher interest expense on debt, and a higher effective income tax rate (Note 3).  Railway operating revenues decreased modestly, $132 million, reflecting lower average revenue per unit, including fuel surcharges.  Railway operating expenses also decreased modestly, $43 million, largely driven by the absence of the $58 million unfavorable arbitration ruling in 2011 and declines related to network efficiency and productivity gains, offset by higher depreciation and intermodal volume-related expenses.

 

Oil prices affect our results of operations in a variety of ways and can have an overall favorable or unfavorable impact in any particular period.  In addition to the impact of oil prices on general economic conditions and traffic volume, oil prices directly affect our revenues through market-based fuel surcharges and contract escalators (see “Railway Operating Revenues”) and also affect fuel costs (see “Railway Operating Expenses”).  For 2012, excluding the impact of decreased consumption, the increase in fuel surcharge revenue was less than the increase in fuel expense.  Future changes in oil prices may cause volatility in operating results that could be material to a particular year or quarter.

 

2011 Compared with 2010

 

Net income in 2011 was $1.9 billion, or $5.45 per diluted share, up $420 million, or 28%, compared with

$1.5 billion, or $4.00 per diluted share, in 2010.  The increase in net income was primarily due to higher income from railway operations and a lower effective tax rate (Note 3).  Railway operating revenues increased $1.7 billion, reflecting higher average revenue per unit, including fuel surcharges, and higher volumesRailway operating expenses increased $1.1 billion, primarily due to higher fuel prices and volume-related expenses.

 

DETAILED RESULTS OF OPERATIONS

 

Railway Operating Revenues

 

Railway operating revenues were $11.0 billion in 2012, $11.2 billion in 2011, and $9.5 billion in 2010.  The following table presents a three-year comparison of revenues, volumes, and average revenue per unit by market group.

 

 

Revenues

 

Units

 

Revenue per Unit

 

2012

 

2011

 

2010

 

2012

 

2011

 

2010

 

2012

 

2011

 

2010

 

   ($ in millions)

 

    (in thousands)

 

($ per unit)     

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Coal

$

2,879 

 

$

3,458 

 

$

2,719 

 

1,414.1 

 

1,619.6 

 

1,556.7 

 

$

2,036 

 

$

2,135 

 

$

1,747 

General merchandise:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chemicals

 

1,467 

 

 

1,368 

 

 

1,302 

 

388.8 

 

373.7 

 

406.1 

 

 

3,772 

 

 

3,662 

 

 

3,207 

Agr./consumer/gov’t.

 

1,446 

 

 

1,439 

 

 

1,326 

 

595.9 

 

599.4 

 

627.7 

 

 

2,427 

 

 

2,400 

 

 

2,113 

Metals/construction

 

1,335 

 

 

1,241 

 

 

1,013 

 

669.7 

 

665.0 

 

628.4 

 

 

1,993 

 

 

1,867 

 

 

1,612 

Automotive

 

897 

 

 

780 

 

 

648 

 

374.6 

 

332.2 

 

290.4 

 

 

2,395 

 

 

2,348 

 

 

2,232 

Paper/clay/forest

 

775 

 

 

756 

 

 

712 

 

305.8 

 

314.3 

 

327.7 

 

 

2,536 

 

 

2,404 

 

 

2,171 

General merchandise

 

5,920 

 

 

5,584 

 

 

5,001 

 

2,334.8 

 

2,284.6 

 

2,280.3 

 

 

2,536 

 

 

2,444 

 

 

2,193 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intermodal

 

2,241 

 

 

2,130 

 

 

1,796 

 

3,358.3 

 

3,210.5 

 

2,927.1 

 

 

667 

 

 

663 

 

 

614 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

11,040 

 

$

11,172 

 

$

9,516 

 

7,107.2 

 

7,114.7 

 

6,764.1 

 

$

1,553 

 

$

1,570 

 

$

1,407 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  



Revenues decreased $132 million in 2012, but increased $1.7 billion in 2011.  As reflected in the table below, the decrease in 2012 was due to lower average revenue per unit (as the negative effects of changes in the mix of traffic offset rate increases and slightly higher fuel surcharges) and slightly lower volume.  The increase in 2011 was due to higher average revenue per unit (which was driven by rate increases and higher fuel surcharges, offset in part by the effects of changes in the mix of business) and increased volumes.  Fuel surcharge revenue increased $23 million in 2012 and $531 million in 2011, and totaled $1.3 billion in both years.  If fuel prices remain at or near year-end 2012 levels, fuel surcharge revenue will be lower in 2013.

 

Many of our negotiated fuel surcharges for coal and general merchandise shipments are based on the monthly average price of West Texas Intermediate Crude Oil (WTI Average Price). These surcharges are reset the first day of each calendar month based on the WTI Average Price for the second preceding calendar month. This two-month lag in applying WTI Average Price increased fuel surcharge revenue by approximately $39 million in 2012, but decreased fuel surcharge revenue by approximately $44 million in 2011 and $28 million in 2010.

 

 

Revenue Variance Analysis

 

Increase (Decrease)

 

 

 

 

 

 

 

 

2012 vs. 2011

 

 

2011 vs. 2010

 

($ in millions)

 

 

 

 

 

 

 

Revenue per unit

$

(120)

 

 

$

1,163 

Traffic volume (units)

 

(12)

 

 

 

493 

 

 

 

 

 

 

 

 

 

Total

$

(132)

 

 

$

1,656 

 

For 2012, the unfavorable revenue per unit variance accounted for 91% of the total revenues decrease, reflecting the negative effect of changes in the mix of business, offset in part by higher rates.  The slightly unfavorable volume variance was a reflection of lower coal, paper/clay/forest products, and agriculture/consumer products/government shipments, which offset gains in the automotive, intermodal, chemicals, and metals/construction commodity groups.  

 

In 2011, the favorable revenue per unit variance accounted for 70% of the total revenues increase, reflecting higher rates and increased fuel surcharges, offset in part by the effects of changes in mix.  The favorable volume variance reflected increases for all commodity groups, except chemicals, agriculture/consumer products/government, and paper/clay/forest products, driven primarily by increased consumer demand.

 

One of our customers, DuPont, has a rate reasonableness complaint pending before the STB alleging that our tariff rates for transportation of regulated movements are unreasonable.  We dispute this allegationSince June 1, 2009, we have been billing and collecting from DuPont amounts based on the challenged tariff rates.  We presently expect resolution of the DuPont case to occur in 2014 and believe the estimate of reasonably possible loss will not have a material effect on our financial position, results of operations, or liquidity.  With regard to rate cases, we record adjustments to revenues in the periods, if and when, such adjustments are probable and estimable.

 

COAL revenues decreased $579 million, or 17%, compared with 2011, reflecting a 13% decrease in carload volume primarily due to fewer shipments of utility coal.  Coal average revenue per unit was down 5%, the result of lower pricing (mainly market-based export metallurgical coal) and decreased fuel surcharge revenue, partially offset by the positive effect of changes in mix.

 

In 2011, coal revenues increased $739 million, or 27%, compared with 2010, reflecting higher average revenue per unit and a 4% increase in volume principally due to a rise in domestic and global steel production.  Coal average revenue per unit was up 22% compared with 2010, reflecting improved pricing and increased fuel surcharge revenue.

 

For 2013, coal revenues are expected to decrease due to lower average revenue per unit driven by continued market-based pricing pressure in the export coal market.  Coal carload volumes are also anticipated to be lower in 2013.  



Coal represented 26% of our revenues in 2012 and 80% of shipments handled originated on our lines.  As shown in the following table, tonnage decreased in each coal market.

 

 

Coal Tonnage by Market

 

 

 

 

 

 

 

2012

 

2011

 

2010

 

(tons in thousands)

 

 

 

 

 

 

Utility

101,636 

 

122,004 

 

120,737 

Export

28,304 

 

28,461 

 

22,750 

Domestic metallurgical

18,793 

 

19,702 

 

19,771 

Industrial

7,376 

 

7,713 

 

7,573 

 

 

 

 

 

 

Total

156,109 

 

177,880 

 

170,831 

 

Utility coal tonnage dropped 17% in 2012, reflecting competition from low natural gas prices and reduced electrical demand in NS-served regions.  Additional tonnage declines resulted from coal plant closures and plant maintenance.

 

In 2011, utility coal tonnage improved a modest 1%, primarily a result of new business and the resumption in the first quarter of shipments to electrical generation units that had been idled in 2009.  These increases were tempered by the effects of increased natural gas generation due to low natural gas prices, reduced electrical demand in NS-served regions, and severe weather disruptions in 2011.

 

For 2013, we expect utility coal tonnage to decrease, reflecting the effects of plant closures, continued low natural gas prices, and higher-than-normal utility stockpiles.

 

Export coal tonnage decreased 1% compared to 2011, a reflection of weaker global demand for metallurgical coal used in steel production in NS-served markets, in addition to the negative impact of the return of Australian supply, offset in part by increased thermal shipments.  Tonnage handled through Norfolk was down 1.3 million tons, or 6%, whereas tonnage through Baltimore increased 0.3 million tons, or 4%.  Other export tonnage handled increased 0.8 million tons.

 

In 2011, export coal tonnage increased 25% compared with 2010, reflecting increased global demand for coal used in steel production and tightened supply from Australia due to flooding in the first half of 2011.  Tonnage handled through Norfolk was up 4.7 million tons, or 30%, and Baltimore tonnage handled increased 0.8 million tons, or 11%.

 

For 2013, export coal tonnage is expected to decrease as a result of sluggish demand from Europe partially offset by improvement in Asia beginning in the second half of 2013.

 

Domestic metallurgical coal tonnage was down 5% in 2012, compared with 2011, as declines in coke and iron ore shipments (primarily due to a plant closure) offset improved domestic steel production experienced in the first half of 2012.

 

Domestic metallurgical coal tonnage was flat in 2011, compared with 2010.

 

For 2013, domestic metallurgical coal tonnage is expected to decrease as domestic steel production continues to decelerate.

 



Industrial coal tonnage decreased 4% in 2012, compared with 2011, as weak industrial demand was partially offset by new business.

 

In 2011, industrial coal tonnage increased 2% compared to 2010, as new business completely offset the impact of tight coal supply and network delays experienced in the early part of the year.

 

For 2013, new business is expected to drive increases in industrial coal tonnage.

 

GENERAL MERCHANDISE revenues in 2012 increased $336 million, or 6%, compared with 2011, reflecting a 4% rise in average revenue per unit as a result of higher rates and fuel surcharges.  Carload volume increased 2%.

 

In 2011, general merchandise revenues increased $583 million, or 12%, compared with 2010, reflecting an 11% rise in average revenue per unit as a result of higher rates and fuel surcharges.  Overall, carload volume was relatively flat. 

 

Chemicals revenues in 2012 increased 7%, compared with 2011, reflecting 4% growth in volume and a 3% increase in average revenue per unit that resulted from higher rates and fuel surchargesThe volume improvement was primarily the result of more carloads of crude oil from the Bakken and Canadian oil fields.  Additionally, there were more carloads of liquefied petroleum gas, as well as higher shipments of plastics driven by greater demand for plastic bottles.  These increases were offset in part by fewer shipments of rock salt as a mild winter resulted in higher inventory levels throughout 2012.

 

In 2011, chemicals revenues grew 5%, compared with 2010, as a 14% increase in average revenue per unit that resulted from higher rates and fuel surcharges more than offset the effects of an 8% decrease in volume.  The decline in volume was primarily a result of reduced shipments of fly ash, due to the completion of the Tennessee Valley Authority ash project in the fourth quarter of 2010.

 

For 2013, chemicals revenues are anticipated to increase as a result of higher shipments of crude oil, as well as more carloads of plastics linked to the projected resurgence of the housing market and continued growth in the automotive market.  Additionally, average revenue per unit is expected to be higher.

 

Agriculture, consumer products, and government revenues were relatively flat in 2012, compared with 2011, as higher average revenue per unit was offset by lower volume.  The volume decline was driven by reduced corn shipments (due to plant closures), fewer carloads of fertilizer (led by certain network classification changes), and reduced shipments of wheat to the eastern U.S. (due to customer sourcing changes).  These volume decl