2000 Annual Report Cost 64 Cents Per Book to Produce, Which Represents an 11 Percent Decrease from 1999

Table of Contents

Financial Highlights 2 Our vision: Chairman’s Letter to Stockholders 3 Be the safest, Overview of 2000: Meeting the Challenge 5 Norfolk Southern underwent changes and overcame challenges associated most customer-focused with expanding its transportation network and successful Operating Performance Positions System for Growth 8 transportation company NS recognizes the importance of maintaining safe, fluid operations and improving customer service in the world Meeting Customer Needs Through Innovation and Technology 11 NS is enhancing ways in which it will meet customers’ needs electronically

Adding Value Through Growth, Description Service and Asset Utilization 14 of business NS launches systemwide initiatives to improve financial Norfolk Southern Corporation, a efficiency and add value Virginia-based holding company with headquarters in Norfolk, Moving the Goods that Move the Economy 17 Va., owns all the common stock NS is focused on increasing revenues and profitability in each market of and controls a major freight group to realize the potential of its expanded network railroad, Norfolk Southern Railway Co. In addition, it owns Financial Overview 20 a natural resources company, Pocahontas Land Corp., and a Quarterly Financial Data 21 telecommunications company, Thoroughbred Technology and Eleven-Year Financial Review 22 Telecommunications, Inc. The railroad system’s owned Management’s Discussion and Analysis 24 and operated lines extend over approximately 21,800 miles of Consolidated Financial Statements 38 road in 22 states, the District of Columbia and the province of Notes to Consolidated Financial Statements 42 Ontario, Canada. Pocahontas Land Corp. Report of Management 54 manages more than a million acres of coal and natural gas Report of Independent Auditors 55 resources in Alabama, Illinois, Kentucky, Tennessee, Virginia Board of Directors and Officers 56 and West Virginia. Thoroughbred Technology Stockholder Information 57 and Telecommunications, Inc., or T-Cubed, pursues opportunities to use the Corporation’s assets for various technology- related purposes. Financial Highlights

% Increase ($ in millions, except per share amounts) 2000* 1999 (Decrease) Financial Results Railway operating revenues $ 6,159 $ 5,242 17 Income from railway operations $ 633 $ 718 (12) Railway operating ratio 89.7% 86.3% 4 Net income $ 172 $ 239 (28) Earnings per share — diluted $ 0.45 $ 0.63 (29)

Financial Position Total assets $ 18,976 $ 19,250 (1) Total debt $ 7,687 $ 8,182 (6) Stockholders’ equity $ 5,824 $ 5,932 (2) Debt-to-total capitalization 56.9% 58.0% (2) Stockholders’ equity per share $ 15.16 $ 15.50 (2)

Other Information Year-end stock price $ 13.31 $ 20.50 (35) Dividends per share $ 0.80 $0.80 — Price/earnings ratio at year end 29.6 32.5 (9) Number of shareholders at year end 53,194 51,123 4 Shares outstanding at year end 384,057,473 382,681,770 — Number of employees at year end 32,341 35,640 (9)

* 2000 results include costs for work-force reduction programs that reduced income from railway operations by $165 million, net income by $101 million and diluted earnings per share by 26 cents. Excluding these costs, the railway operating ratio was 87.0%. See note 11 on page 52.

Equal Opportunity Policy

Norfolk Southern’s policy is to comply with all applicable laws, regulations and executive orders concerning equal opportunity and nondiscrimination and to offer employment on the basis of qualification and performance, regardless of race, color, creed, national origin, sex, age or veteran status. Additionally, the policy provides employment and equal conditions of employment to qualified individuals with disabilities and disabled veterans within their capabilities to safely perform services with a reasonable accommodation that does not cause the Corporation undue hardship.

– Norfolk Southern's 2000 Annual Report cost 64 cents per book to produce, which represents an 11 percent decrease from 1999. This is compared with a national average of – $4.38 for annual reports produced by other companies, according to the National Investor Relations Institute. Dear Fellow Stockholders:

Norfolk Southern’s perform- will move us successfully forward. nonagreement work force by almost 25 ance in 2000 met neither our standards Reducing the dividend is one step in a percent from approximately 6,000 to nor yours. strategy we are implementing to further about 4,600. Meanwhile, our agreement While we overcame operating chal- align our company with changing econom- work force has been reduced by almost 7 lenges and improved the condition of our ic realities and sharpen our focus on percent. company as a functioning transportation improving financial performance while Going forward, we will continue to system, we did not achieve acceptable maintaining our commitment to safety review our work-force requirements financial results. and customer service. against business levels and will size our Lower-than-expected railroad carload- The restructuring includes: work force accordingly. Our ability to pro- ings and record-high diesel fuel prices l Improving productivity by a work- vide our product at competitive prices combined to produce disappointing earn- force reduction over the next 12 depends in part on this effort, and we will ings. Pressure on the bottom line was months, which will be in addition to continue to improve. compounded by weakness in the economy programs announced in 2000; At the same time, we will not let up on our commitments to service and safety. In and changes in our transportation mar- l Disposition of at least 12,000 surplus May, Norfolk Southern employees again kets at a time when we were focused on freight cars; recovery from prior service problems. set the industry standard and earned an l A line rationalization program targeting As a result, we recorded net income of unprecedented eleventh consecutive E.H. 3,000 to 4,000 underutilized or $273 million, or 71 cents per diluted Harriman Gold Medal award, a remarkable duplicate track miles over the next share, excluding work-force reduction safety achievement. This is a testament to 24 months; charges of $101 million. Including the the hard work and dedication of all our charges, net income was $172 million, l Continuing investment in technology people, who maintained their focus on or 45 cents per diluted share, down and implementation of state-of-the-art safety during a time of change. It shows 28 percent compared with 1999. transportation systems; what we can do. Our goal now is to improve the l Consolidation or disposition of several A significant milestone was reached in financial performance of our expanded underutilized or redundant facilities; Thoroughbred Quality during the year network. We will do that through a series of and with ISO 9002 registration of our planned restructuring initiatives designed Northern Region transportation opera- l A redesign of Norfolk Southern’s serv- to reduce costs and enhance value for tions, major mechanical shops and the ice network with the assistance of investors, although we now must do so in training group. As a result, all of the MultiModal Applied Systems, a railroad an uncertain economic environment. company’s transportation operations now consulting firm with a successful track As stockholders, you are aware of one meet this internationally recognized record of helping railroads reduce of those actions. Our Board of Directors standard for quality and customer operating costs while improving reduced Norfolk Southern’s quarterly service. This recognition is another real service levels. dividend to 6 cents per share, compared achievement in changing times. with the previously paid quarterly divi- We began attacking our cost structure We completed in November an acceler- dend of 20 cents per share. This was a last year through work-force reductions. ated systemwide rollout of our service- difficult decision but a necessary compo- Since the end of 1999, we have reduced enhancing yard inventory data system, nent of our restructuring. We must the number of employees by 3,300, or 9 the Thoroughbred Yard Enterprise System. manage our costs and create a package of percent of the work force. As part of that We also are making operating system debt repayment and total returns that effort, we have been able to reduce our changes, in development with our consult-

3 ing partners, to improve routes, initiatives generate and to create train movement and service added value for our investors, our design. We have announced major customers, our people and the com- e-commerce efforts in partnership munities we proudly serve. with other transportation compa- As we press forward, we will nies to enhance efficiency and continue to listen appreciatively to improve our service. the advice of our critics and sup- On another front, interest in porters alike. In this, we will our Thoroughbred Technology and continue to feel the loss of one of Telecommunications, Inc., or T- our strongest allies, Norfolk Cubed, subsidiary remains strong. Southern director and retired chair- In cooperation with its telecom- man and chief executive officer of munications partners, T-Cubed is The Lubrizol Corporation Lester E. pursuing a unique business plan Coleman Jr., who died in October. and building an eastern U.S. fiber Les had served on our Board of optic network along Norfolk Directors since 1982, and his lega- Southern’s right of way, leveraging the We know that we have the people, track cy is one of long-term dedication, keen physical assets of our network to infrastructure, facilities and technology to business sense and enduring friendship. create added shareholder value. position us as industry leaders and to Les embodied the characteristics that Norfolk Southern reached agreement attract large shares of business from your company represents – integrity, com- this year in a case that ends a class action highways to rail, making our system mitment and vision. lawsuit alleging race discrimination in the thrive over the long term. Admittedly, we have work ahead as we company’s promotion practices. We are While we focus on productivity, we will continue to take decisive steps in all areas pleased to bring closure to this litigation focus just as hard on growth. High fuel of our business to improve service, grow through voluntary mediation, and we are costs, congestion on our nation’s high- our revenue base and drive efficiencies dedicated to building on our continuing ways and environmental concerns spell throughout our organization. We must rise commitment to provide a work place in opportunity for us. We’re focused on to the occasion in an uncertain economy. which all people are treated fairly and leveraging the inherent advantages of However, Norfolk Southern has tremen- given equal opportunity. our industry to encourage public-sector dous power to influence our own destiny I pledge my personal commitment to rail investments to handle more and make ourselves a stronger company. this objective. We will redouble our efforts intercity freight. With the strength of our franchise, we to make Norfolk Southern’s work environ- We are systematically attacking con- have what it takes to deliver the service ment the best for everyone. straints to growth and continue to make our customers deserve and the returns As we move forward, we will continue the investments necessary to keep our our investors expect. to aggressively – but prudently – make system in top serviceable condition. Our In 2001, we will meet the challenge. significant changes in the railroad’s struc- $806 million capital budget for 2001 ture that will improve our financial per- reflects expenditures that have been formance and better position us for the carefully targeted to take advantage of service improvements necessary to con- growth markets. tinue as an important link in the global Our primary goal for 2001 is to build January 23,2001 logistics chain. on the momentum our restructuring

2000 Norfolk Southern Corporation

Annual Report 4 An overview of 2000: Meeting the challenge

During 2000, Norfolk Southern underwent changes and overcame challenges associated with expanding its transportation network. Stabilization of operations and continuing improvement throughout the year is evidence of NS’ ability to manage its expanded network. Norfolk Southern is emerging as an important link in the global logistics chain. The railroad’s network extends over 21,800 route miles, serving 22 states, the District of Columbia and the province of Ontario, Canada. NS provides access to 13 seaports and seven lake ports to handle international trade. Norfolk Southern continues to enhance capacity in key areas that will allow increased traffic volume between markets now connected by single- system service. Despite NS’ growth and operating improvement, financial performance has been disappointing. Pressure on the bottom line has been compounded by weakness in the economy, a change in traffic mix and record-high diesel fuel prices. As a result, improving financial performance is the company’s primary focus. NS is taking steps to meet the challenge and enhance value for customers, investors, employees and communities.

Employee Safety Excellence Continues Employee commitment to safety remained a priority at NS during a time of change and challenge. In May, NS took top honors in the E.H. Harriman Memorial Safety Awards for an unprecedented eleventh consecutive year for having the safest employees among major railroads in 1999. NS in 1999 had 1.25 reportable injuries for every 200,000 employee-hours worked.

2000 Norfolk Southern Corporation

Annual Report 5 Inventory Information System l Transportation Department l Joint NS-CSX teams are working Enhances Service l Research and Tests Department with Woodside Consulting to achieve terminal efficiencies in the Shared In November, NS completed a systemwide l Major Mechanical Shops rollout of its service-enhancing yard Assets Areas through better coordina- l Lamberts Point Coal Terminal inventory information system. tion and communication. Norfolk Southern’s Thoroughbred l Sandusky Dock Coal Terminal Aligning the Work Force Yard Enterprise System (TYES) is a l Wheelersburg Coal Terminal centralized yard inventory system that Along with other initiatives to increase l Automotive Mixing Centers provides accurate, timely reports on car efficiency and reduce operating expens- and train movements. l Triple Crown Services es, NS’ voluntary retirement programs Improved data quality translates into l Training Centers are designed to match the railroad’s more efficient railroad operations that human resources to changing market- enhance customer service. Targeted Team Initiatives place requirements in 2001 and beyond. In February 2000, 919 of 1,180 eligi- The following teams are focused on ble nonagreement employees participated NS Achieves Global improving NS’ performance: in a voluntary retirement program. Quality and Service Standard l Executive Focus Teams supported In December 2000, 370 of 846 eligible NS achieved another quality milestone directly by senior management are nonagreement employees participated in with ISO 9002 registration of its implementing specific profit improve- a second voluntary retirement program. Northern Region transportation ment initiatives. These include train Since 1999, NS’ work force has operations, major Mechanical shops and terminal productivity, track and declined from 35,640 employees to and Human Resources Training Group, freight car utilization and revenue 32,341 at year end. and margin enhance- Staffing needs will continue to be ment programs. reviewed as NS aligns the size of its All of the company’s transportation l Car Action Teams work force with business demands. operations now meet the internation- consist of employees from the Operations, Revenue Enhancement Steps ally recognized ISO 9002 standards Marketing and NS has established tariff rates and is for quality and customer service . Finance departments. negotiating contract rates with cus- These teams monitor, tomers to reflect the current market analyze and deter- value of rail service and associated costs. mine the most productive use of NS’ Reasonable rate adjustments will occur which includes the Training Centers at freight car fleet. as contracts expire. McDonough, Ga., and Conway, Pa. In addition, NS imposed throughout All of the company’s transportation l “NS 21” is a team project assisted by the year a fuel surcharge on all public operations now meet the internationally Mercer Management Consulting to tariffs and open quotes. In October, NS recognized ISO 9002 standards for help NS benchmark core processes. instituted a surcharge on private quotes. quality and customer service. Processes under review include These surcharges will help offset ISO refers to the International customer billing, purchasing, freight record-high diesel fuel prices. Organization of Standardization, created car management, engineering to promote universal industrial, service and mechanical. and quality management standards. Norfolk Southern has achieved ISO 9002 certification in these areas:

6 Investing in Customer Service: l $35 million for signal and NS’ Thoroughbred Technology and NS to Spend $806 Million electrical projects Telecommunications (T-Cubed) subsidiary plans to spend $62 million to complete NS plans to spend $806 million for capi- l $23 million for environmental the installation of fiber optic conduits. tal improvements in 2001. projects and public improvements, In constructing its regional telecom- Anticipated spending includes $449 such as grade-crossing separations munications network, T-Cubed in 2001 million in roadway spending and $256 and crossing signal upgrades million in equipment spending. expects to finish installing conduits and Equipment spending includes the some fiber optics on corridors between Roadway spending includes: purchase of 160 six-axle, high-adhesion Chicago and Washington, between Atlanta l $264 million for rail, crosstie, ballast locomotives and the upgrade of and Jacksonville and between Atlanta and bridge programs existing locomotives. and Chattanooga. – Additional equipment spending also l $63 million for new or improved includes $29 million for computer- intermodal facilities related projects. l $35 million for marketing and industrial development initiatives

Infrastructure Team Improves System Efficiency, Service

As part of Norfolk Southern’s commitment to improve chairman. “Communication and planning are the keys to performance and customer satisfaction, Executive Focus achieving that goal.” Teams were formed to “create a vehicle for communicating and NS committed $50 million for capital expenditures in 2000 making decisions,” according to Dan Mazur, assistant vice for infrastructure investment to eliminate congestion points president Strategic Planning and facilitator of NS’ and to accommodate new business. Infrastructure Team. Some 88 locations were identified, examined and priori- “The team’s primary goal was to eliminate congestion on the tized. Of those, 10 were high priority, and the team focused railroad, thus improving productivity and reducing costs,” he on those routes. said. “This will assure that Norfolk Southern has the ability to By year end, efficiency and fluidity on the majority of handle increased traffic efficiently.” critical areas had improved due, in part, to expenditures on Although NS is focused on attracting new business, the new connections, sidings, signal systems and terminals. railroad also is committed to maintaining system capacity at “The best part about this targeted team initiative is that we optimum levels. The team’s long-term goal is to balance assembled all the necessary players and promptly made the right business with capacity. decisions to keep the railroad fluid,” Mazur said. “This initiative “Together, we want to ensure that we have the right will help Norfolk Southern meet its ultimate goal of providing the capacity, at the right place, at the right time,” said Jim best customer service possible.” – McClellan, senior vice president Strategic Planning and team

2000 Norfolk Southern Corporation

Annual Report 7

Annual Report Norfolk Southern’s operations were fluid throughout 2000. A steady improvement in operating performance was accomplished through continued focus on safety, operating plan execution and cost control. Norfolk Southern continually fine-tunes its operating plan to balance system fluidity and capacity while enhancing efficiency. Improvement in standard operating measurements – number of cars on line, average train speed and terminal dwell time – is evidence of the operating efficiency of the system. In addition to performance metrics, the number of trains that require new crews helps measure service improvement. Norfolk Southern reduced the percentage of trains recrewed from 6.4% in 1999 to 3.0% in 2000 – a 53.1% improvement. Another measure of service improvement is the number of calls received by NS’ National Customer Service Center. Calls in 2000 were 34.6% fewer than in 1999. In the first half of 2000, NS returned all 533 locomotives it had leased temporarily to help improve system velocity and fluidity during the integration of its expanded territory. Norfolk Southern recognizes the importance of maintaining safe, fluid operations and improving customer service. The company is focused on improved efficiency now that operations are stable.

Grade-Crossing Safety Innovation NS continued in 2000 its focus to improve highway-rail grade-crossing safety. In Charlotte, N.C., Norfolk Southern “sealed” one corridor by equipping public crossings with one or a combination of median barriers, longer gate arms, articulated gate arms, four-quadrant gates and a video monitoring system. The test methods and results have drawn favorable responses from federal and state authorities, the news media and other railroads.

2000 Norfolk Southern Corporation

Annual Report 8 Digital Recording Systems Outside Recognition Thoroughbred Mechanical Installed in Locomotives l Georgia Freight Bureau – Services Sets the Stage In 2000, NS installed a digital video Rail Carrier of the Year for New Business recording system on a number of its NS was named rail carrier of the year by NS opened the doors of its car and loco- locomotives to record events along the the Georgia Freight Bureau. This was NS’ motive shops to others, setting the stage railroad’s right of way. sixth recognition. for new business opportunities. Called “Railview,” the system is l TRANSCAER® — National Thoroughbred Mechanical Services mounted in a locomotive cab. It records Achievement in the Carrier Category (TMS) is a division of NS’ Mechanical track conditions, train speed, weather, NS received the National Transportation department. visibility, signal operation, horn Community Awareness and Emergency In 2000, TMS generated $36 million soundings, a train’s direction of travel, Response achievement award. in billings for locomotive and railcar brake applications and activities on or TRANSCAER® is a safety and educa- repair and remanufacture. Customers near the right of way. tional effort among manufacturers, included Class I, short line and regional Railview will help NS improve distributors and transporters of railroads, locomotive manufacturers and grade-crossing safety. NS plans to install hazardous materials. This was NS’ international rail systems. the system on 160 additional locomotives second recognition. TMS meets stringent standards for in 2001, bringing the total number of loco- safety and quality work set by the l State of Indiana Quality motives equipped with Railview to 270. Association of American Railroads. Improvement Award Triple Crown Services, an NS affiliate, NS is Recognized earned the State of Indiana Quality NS Improves Service For Safety and Performance Improvement Award for continuous to the Northeast Industrywide Awards service and operation improvement. Norfolk Southern and its service part- This was TCS’ second recognition. ners enhanced service to the Northeast. l E.H. Harriman Memorial Gold Medal Capital investments and a revised oper- Award for Employee Safety Agreement Signed with ating plan enabled NS to offer consistent, NS employees earned an unprecedented Locomotive Engineers more competitive rail transportation eleventh consecutive award for the best NS signed a five-year agreement with the connecting the Northeast to major western safety record among the nation’s largest Brotherhood of Locomotive Engineers U.S. markets through Chicago. railroads. that links engineer compensation to Westbound service is provided through Kansas City. l Toyota Logistics Services Inc. – corporate performance. Key improvements include: Logistics Excellence Award for The agreement covers approximately Quality Performance 5,000 locomotive engineers and maintains l NS’ route through Cleveland has been NS earned the award for providing a groundbreaking bonus system originally upgraded to connect existing NS transportation of finished vehicles with implemented in a 1996 agreement. routes with new double-track connec- fewer defects than any other Toyota rail Under this agreement, bonuses are tions to a former Conrail main line, carrier. This was NS’ third recognition. paid to engineers based on corporate improving efficiency and service to financial performance and are calculated New York and New England. l Dow Chemical Co. – Most Improved in the same way as those of NS’ l Completion of a $13 million expansion Rail Safety Award management employees. of Bison Yard in Buffalo, N.Y., gives NS Dow recognized NS for continuous The bonus potential is in lieu of wage increased capacity, service flexibility improvement in safety and performance increases over the term of the agree- and efficiency. in chemical transport. This was the first ment. The agreement also raised base year NS won this award. wages to national standard levels effective Jan. 1, 2000, as a one-time wage adjustment. 9 Cooperation Yields Improved Efficiency Cooperation Helps Speed Trains Both freight and passenger trains will be Norfolk Southern and CSX Transportation joined forces in 2000 able to improve transit times once a rail to decrease congestion in the Cincinnati terminal. interlocking is upgraded in Northern Virginia. Both NS and CSXT experienced terminal congestion in Cincinnati, a Completion is scheduled for 2001. major interchange point for each railroad. As a result, the two railroads NS and CSX tracks converge in began a unique experiment that required coordination by train dispatch- Alexandria,Va. Numerous freight trains ing offices in Dearborn, Mich., Fort Wayne, Ind., and Jacksonville, Fla., and operate over these tracks as do intercity and cooperation between two competing railroads. commuter passenger trains of Amtrak and Northbound NS and CSXT trains leaving Cincinnati now use CSXT’s Virginia Railway Express (VRE). Toledo, Ohio, route, while all trains entering Cincinnati from the north The project is funded by VRE and operate over NS’ Norwood, Ohio, route. the federal government, with leadership from More than 50 Norfolk Southern and CSXT trains move in both the commonwealth of Virginia. directions over the new route daily. It is an initial step in the planned introduc- The cooperative effort has paid off. Terminal congestion was virtually tion of high-speed passenger rail service eliminated for both railroads, according to NS Cincinnati Terminal between Washington, D.C., and Richmond,Va., Superintendent Bob Setzer. as well as additional commuter and intercity “We experienced an immediate reduction in train delay, and we passenger trains. continue to improve performance,” said Setzer, adding that this initiative resulted in significant cost savings for NS. “Not only have our Short Line Partnership customers and employees benefited from this project, but it also has Attracts New Business improved our financial performance.” “Thanks to the NS and CSXT train crews, train dispatchers and Eastman Kodak awarded NS and Rochester operating supervision, we improved service at this terminal,”Western and Southern Railroad, Inc., a multiyear Region General Manager Greg Comstock said. – contract to handle coal business originating in the Monongahela coal region of Pennsylvania and West Virginia. Eastman Kodak uses approximately 550,000 tons of this type of coal annually for Operating Performance Metrics energy to power its manufacturing facility in 230 Avg Cars On Line (thousands) Goal (215,000) Rochester, N.Y. 220 This contract is just one example of NS’ commitment to working with short line part- 210

ners to create new business opportunities thousands 200 over its expanded rail network. – 38 Avg Dwell Time (hours) Goal (25 hours) 34

NS’ ability to improve service, grow the business and operate 30 efficiently depends primarily on the ability to manage the number hours of cars on line, train speed and terminal dwell time. 26 (top) The average number of cars on line on NS’ system improved 22 significantly throughout 2000, as indicated by the green line. The 24 Avg Train Speed (mph) Goal (20.4 mph) red line indicates a system goal of 215,000 cars. (center) Average terminal dwell time on NS’ system remained sta- 22 ble during 2000, as indicated by the green line. The red line indi- mph cates a system goal of 25 hours. 20 (bottom) Average train speed on NS improved incrementally during 2000, as indicated by the blue line. The red line indicates a sys- 18 tem goal of 20.4 mph. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Normal variations in July and December are attributed to customer holiday shutdowns.

2000 Norfolk Southern Corporation

Annual Report 10 Norfolk Southern is enhancing ways in which it will meet customers’ needs electronically. NS plays an important role in electronic commerce by delivering goods purchased online. The railroad is pursuing system advancements to yield wide-ranging productivity improvements, linking NS, customers and suppliers more efficiently. These initiatives will improve the quality of information and the consistency of service NS provides to customers. NS focuses on technology and innovation to improve car utilization, management and repair of rail equipment by providing information that connects customers with the tools needed to do business with the railroad.

Internet Coal Information System Under Way NS implemented the second phase of its Coal Transportation Management System. CTMS is an Internet-based system that provides customers with access to real-time shipment tracking. Unique to Norfolk Southern, CTMS combines track- side scanners, automatic computer-assisted dispatch reporting and manual reporting with online technology. CTMS’ common information base allows customers to schedule loading, equipment and personnel more efficiently. Developed by NS’ Coal Transportation, Coal Marketing and Information Technology departments, CTMS yields improved coal car utilization and increased customer satisfaction. The second phase provides information to external customers through the Internet. It was rolled out to NS’ major coal customers in 2000. Phase three, which addresses tracking and schedul- ing of empty cars, equipment release and bill of lading shipping instructions, will be completed in 2001. CTMS is provided to Norfolk Southern customers as a value-added service.

2000 Norfolk Southern Corporation

Annual Report 11

Annual Report Locomotive System ry information to railcar or truck ship- l A News Ticker with links to details Enhances Efficiency ments and warehousing for total product and current railroad events visibility. Thoroughbred Locomotive System (TLS) l A Spotlight section that features In 2001, Norfolk Southern plans to is an Intranet-based system that enables current services and upcoming use this system for other customers for NS to better manage its locomotive fleet. enhancements TLS provides locomotive managers supply chain management. l A Customer Corner with contact with information used to assign locomo- information for intermodal customers tives to trains. Equipment Tracking Improved TLS features an electronic system NS now provides customers with a In 2001, the site also will feature map that displays all or selected trains more efficient equipment tracking an interactive system map, a frequently operating over the NS network. It also option through the Internet for asked questions section and direct shows locomotive supply and demand at intermodal shipments. e-mail to NS Intermodal department selected locations. The feature, called Quik-Trak, allows representatives. The system improves the quality of customers to track shipments online 24 supply and demand information and hours a day through NS’ Web site. Thoroughbred Direct assists with forecasting, leading to better Quik-Trak provides the most Introduces New Web Site up-to-date event record for intermodal asset utilization. Thoroughbred Direct Intermodal shipments. Services (TDIS), a Norfolk Southern NS Enhances Automotive subsidiary, introduced its Web site, Visibility, Shipment Tracking Intermodal www.ns-direct.com, in December. In 2000, NS enhanced its Internet-based Web Page Enhanced The site allows TDIS customers to tracking system for Ford Motor NS Intermodal launched in 2000 a access information by using either a Company’s North American automotive redesigned Web page at trailer reference or a TDIS load number. distribution network. www.nscorp.com/intermodal. Customers can determine pickup and This system provides Vehicle In addition to a new look, the site delivery times and the number of loads Identification Number (VIN) shipment features updated information and arriving or departing a terminal. tracking from manufacturer to dealer enhancements: Through a link to the TDIS database, delivery. This system can be customized customers can view all data l A direct link to Quik-Trak for to track all shipments across multiple associated with their shipments and equipment tracking modes of transportation. can request rate quotes. Information is transmitted real-time l Service matrices for individual TDIS provides door-to-door, time- to transportation and supply chain part- equipment types sensitive transportation services to ners, improving efficiency and visibility. select retail customers through rail and l More functional navigation throughout This tracking system links Stock highway carriers. Keeping Unit (SKU) and product invento- NS’ Web site, including easy-to-find terminal information and schedules

12 RailMarketplace.comSM Created B2B Speeds Transactions, TCS Unveils Online Booking for Global Rail Industry Reduces Costs Triple Crown Services Company (TCS), a Norfolk Southern, Burlington Northern NS is using business-to-business Norfolk Southern affiliate, has completed Santa Fe, Union Pacific, Canadian (B2B) technology to auction scrap the rollout of five new customer services National and Canadian Pacific Railway, and surplus materials. available through the company’s Internet along with iRail.com, Inc., and GE Global Qualified scrap buyers submit bids site at www.triplecrownsvc.com. eXchange Services, announced a partner- electronically and receive immediate bid The new services include rate quote ship in January 2001 to launch an status information. requests, load booking, tracing, open-load online marketplace for the worldwide The highest bidder is awarded viewing and bill-of-lading viewing. railroad industry. material and provided a price quote for Customers and consignees can The new initiative, RailMarketplace.comSM, transportation costs. conduct and manage the entire booking will create an electronic exchange to link and transit process online 24 hours a day. buyers and sellers across the North NS Joins Railroads The new services are easy to use, improve American rail industry through fast, in Internet-based Venture efficiency and help ensure accuracy. open access to goods and services. Norfolk Southern, along with Canadian Through RailMarketplace.com, rail- Pacific, CSX Corporation and Union Steelroads.com Improves roads, suppliers and other buyers will be Pacific, invested in a company Customer Service able to improve efficiency and reduce called Arzoon. A new Web site, www.steelroads.com, costs through improved spending con- Arzoon is developing an online system provides information for existing and trols and global sourcing. Suppliers will that allows customers to procure rail and potential rail customers. benefit from improved access to an transport services and track movements The site can be accessed through expanded customer base. across all modes and borders. www.railinc.com. It is a cooperative The exchange will link the rail indus- Each carrier’s performance will be initiative of Association of American try globally in a multicurrency, multi- monitored and analyzed. Real-time Railroads (AAR) members. lingual marketplace. reports showing the status of all The site connects participating shipments will be provided. railroads and enables customers to electronically set up and track freight shipments, determine transit and arrival times and make rate inquiries. The site is available in French and Spanish to better serve customers. –

2000 Norfolk Southern Corporation

Annual Report 13 New Intermodal Hub Speeds Operations In June, NS opened its Rutherford intermodal hub in Harrisburg, Pa. The new hub offers enhanced service capabilities for NS customers: l Redesigned and improved services for customers using the mid-Atlantic ports of Philadelphia, Baltimore, New York/New Jersey and Norfolk,Va. l Reduced congestion in Chicago as NS and its interline partners “hub” traffic at Rutherford l New north-south service options

The Rutherford hub differs from traditional intermodal facilities in that it transfers trailers not only between road and rail, but also between trains. This flexibility enables NS to reduce transit times, serve more lanes and offer additional services. In addition to providing increased terminal capacity, the new facility serves as a hub for traffic moving in and out of the Northeast, facilitating both east-west and north-south flexibility. This operational benefit reduces truck traffic through Chicago. The hub helps NS deliver on the intermodal service potential resulting from the railroad’s expansion into the Northeast. The $31 million facility consists of 10 classifica- tion tracks and two loading-unloading tracks. Two overhead cranes transfer shipments between trains and trucks. Four inbound and four outbound lanes accommodate trucks entering and leaving the terminal, which has parking capacity for more than 600 trailers or containers.

2000 Norfolk Southern Corporation

Annual Report 14 Austell Intermodal Hub The service links the California ment with a Mexican logistics provider to Benefit Customers, terminals of Richmond, Modesto, Fresno, using Mexican rail carriers. This service Los Angeles and San Bernardino, and creates opportunities for Norfolk Southern Improve Service Reliability Phoenix, Ariz., with Atlanta, Charlotte, to move freight from the Midwest, Construction is under way at Norfolk N.C., and Jacksonville, Fla. Northeast and the Dallas-Fort Worth, Southern’s Austell, Ga., intermodal hub. NS provides service between Dallas Texas, area to Mexico. The new Atlanta-area facility will be a and the Southeast through an agreement The new service enables shippers to key component in NS’ intermodal net- with the Kansas City Southern Railway transport freight between the United work and is expected to open in 2001. Company (KCS). BNSF provides service States and Mexico faster by eliminating The Austell hub will improve NS’ between the West Coast and Dallas. border delays and providing one-invoice efficiency in moving freight between The new service provides customers pricing, door-to-terminal cargo insurance the Southeast and Southwest and with fifth-morning availability for both and enhanced security en route. between the North and Southeast, as westbound and eastbound freight moving well as in handling strong local and between southern California and Atlanta. regional demand for intermodal Distribution Network This service is the first fully inte- freight distribution. Attracts New Business grated operating agreement between “Austell is vital for Norfolk Southern NS adopted the name “SteelNet” for its NS and BNSF. It gives customers a and its customers,” said Mike McClellan, network of qualifying steel distribution competitive, cost-efficient alternative vice president Intermodal Marketing. centers. to over-the-road shipping between the “Complementing our new Rutherford SteelNet refers to certain rail-served West Coast and the Southeast. hub in the Northeast, and located at the distribution centers on NS lines that crossing of major traffic lanes constitut- handle just-in-time truck deliveries of ing a giant ‘X,’ it will allow Norfolk Triple Crown Services steel and metal products to nonrail- Southern to provide a broader variety Expands to Mexico City served customers. of services more consistently.” Triple Crown Services Company (TCS), SteelNet facilities provide quality The hub is being developed on 450 an NS affiliate, now serves Mexico City. service for high-value steel and metal acres of an 830-acre industrial site. It In a cooperative effort with TMM commodities. will feature four one-mile-long loading- Logistics, a member of Grupo TMM, which SteelNet facilities offer integrated unloading tracks, four one-mile-long sup- is an owner of Transportación Ferroviaria pricing packages that include rail rates, port yard tracks, 4,000 parking spots for Mexicana (TFM) and Texas Mexican handling and storage. In some cases, the 12-by-53-foot trailers, and convenient Railway Company (Tex-Mex), Triple Crown package price includes delivery charges access to nearby Interstate 20. Services offers five-days-a-week service to on a single bill. Additional capacity created by the hub and from Mexico City. Of the 71 distribution facilities should reduce congestion at NS’ Inman Dedicated trains hauling TCS served by NS, 35 are classified as Yard in Atlanta. RoadRailer® trailers operate over Norfolk SteelNet operations. Southern lines to Kansas City, Mo., where Railroads Team Up they connect with the Burlington Northern Shuttle Train Improves to Improve Intermodal Service Santa Fe Railway Company (BNSF). Service to Feed Mills In 2000, Norfolk Southern and BNSF transports trains to the Tex-Mex In 2000, NS introduced a 75-car grain Burlington Northern Santa Fe Railway at Robstown, Texas, and Tex-Mex handles shuttle train program to better serve the Company (BNSF) launched run-through them to Laredo, Texas, where they are southeastern feed mill industry. transcontinental intermodal service interchanged with TFM for final delivery to This new program allows NS to deliver between the West Coast, the Southwest Mexico City. larger grain volumes with more consis- and the Southeast. This marks TCS’ first service agree- tency and improved transit times.

15 Shuttle trains operate seven days T-Cubed Expands disposal, T-Cubed offers network builders a week, 24 hours a day, with dedicated Fiber Optic Network access to major metropolitan areas as power and defined allowance for In cooperation with its partners in well as other eastern U.S. markets. loading and unloading, resulting in the telecommunications industry, Interest from the telecommunications improved equipment utilization and Thoroughbred Technology and industry continues to be strong. delivery dependability. Telecommunications, Inc., or T-Cubed, is T-Cubed announced in October a Cars originate at grain elevators pursuing a unique business plan and joint agreement with 360networks to in Indiana, Michigan and Ohio and building an eastern U.S. fiber optic install and market fiber optic network terminate at feed mills in the Southeast. conduit and dark fiber network along infrastructure on NS properties. The program is expected to grow in NS’ rail right of way. In addition, NS entered into a long- 2001 to include additional elevator track T-Cubed is Norfolk Southern’s telecom term transaction in 2000 with Dominion expansions and feed mills. infrastructure provider and leverages Telecom, a telecommunications sub- the physical assets of NS’ network to sidiary of Dominion Resources, to build create added value. and provide telecommunications With more than 21,000 miles of right of infrastructure along NS’ right of way. way and some 375 microwave towers at its Under the 25-year agreement, Dominion will sublease right of way and purchase fiber optic conduit along two corridors totaling 1,030 miles. –

Grand Rapids Delhi Buffalo Lyons Lansing Ithaca Binghamton Detroit Cleveland Corry Chicago Mehoopany South Hennepin Toledo East Bend Youngstown Stroudsburg Peoria Ft. Wayne Harrisburg New York Columbus Pittsburgh Wilmington Philadelphia Decatur Powhatan Perryville Moberly Waynesburg Morgantown Cincinnati Kansas City Louisville Alexandria St. Louis West Pokomoke Point Roanoke

Fulton Lynchburg Norfolk

Plymouth Knoxville Greensboro Durham Raleigh Chattanooga Asheville Memphis Spartanburg Charlotte Corinth Morehead City Columbia Birmingham Atlanta Madison Charleston Macon Demopolis Route Structure Savannah Dothan Under Construction Albany Brunswick Planned Construction Mobile Jacksonville Future Development Navair New Orleans

2000 Norfolk Southern Corporation

Annual Report 16 The diversity of Norfolk Southern’s traffic mix helps balance economic impact in a given sector. At year end, general merchandise traffic accounted for 59% of total NS revenues, while coal accounted for 23% and intermodal 18%. NS will continue to focus on increasing revenues and profitability in each market group to realize the potential of its expanded network.

General Merchandise Automotive Automotive revenue growth resulted from system expansion and record-breaking vehicle production in 2000. A new NS-served assembly plant and a vehicle parts distribution center also contributed to increased revenue. NS is implementing network redesign of critical routes for the automotive mixing centers to improve velocity of shipments over the system. The redesign will be completed in 2001. Additional auto assembly plants and distribution centers along NS’ network are expected to help offset anticipated declines in light-vehicle production in the United States.

Metals and Construction NS strengthened its metals franchise as a result of expanded access to steel mills in the Northeast and Midwest, plant expansions and new mini-mills Percentage of NS Revenues locating on the railroad’s lines. Traffic benefited from marketing initiatives involving NS’ network of 72 steel mills and 71 metals distribution centers. Construction revenues increased as a result 18% Intermodal Automotive 15% of highway expansion programs in the eastern United States, primarily benefiting aggregates 23% Coal, Chemicals 13% and cement traffic. New NS-served cement ter- Coke and minals continue to contribute to volume Iron Ore Metals and Construction 11% increases. Paper, Clay and Forest Products 10% Agriculture 10% neral Merchandise 2000 Norfolk Southern Corporation 17 59% General Merchandise Annual Report Chemicals goods shipments from the West. At Tennessee Valley Authority’s Chemicals traffic benefited from the A 75-car shuttle train program that Kingston Plant, construction of an return of diverted traffic following NS’ began in 2000 contributed to feed mill unloading facility and track improve- integration of its Northeast operations, growth and improved equipment ments allowed NS to capture additional plant expansions and new facilities utilization and service reliability. market share and handle traffic locating on NS’ system. Additional plant more efficiently. expansions are expected in 2001. Coal Increasing demand for electricity NS has access to 174 bulk transfer Coal revenue increased due primarily in the NS-served region and high natural facilities capable of handling a range of to system expansion. Utility coal gas prices that continue to make coal- chemical products. Growth of integrated tonnage increased 11% due to system fired generation the most economical rail-to-truck delivery services has expansion and increased electricity source of electricity leave NS well averaged 21% annually. demand. Export coal tonnage increased positioned to realize gains in the utility Softness in domestic chemical and 8% in 2000 as a result of increased East coal market. petroleum production could affect the Coast port access. outlook for 2001. Domestic metallurgical coal, coke and Intermodal iron ore volume increased 17% in 2000. Intermodal volume growth was 18%, Paper, Clay and Forest Products Strong first-half production at integrated and intermodal is NS’ fastest growing NS serves 95 paper distribution centers steel manufacturers and increases in NS business sector. and 124 lumber reload facilities that are market share further buoyed traffic In 2000, the introduction of several well positioned to supplement NS’ direct gains over 1999 levels. new or improved intermodal services carload service. Other coal traffic, primarily steam contributed to growth. Initiatives in 2001 will include a net- coal shipped to manufacturing plants, The new Rutherford intermodal hub work approach to NS’ enhanced distribu- increased 4% in 2000 as a result of terminal opened in Harrisburg, Pa., tion system, rate negotiations that reflect system expansion. expanding NS’ north-south services current market values for rail service Three utility coal market opportuni- and significantly improving Atlantic and improved car utilization through ties brought additional business to NS. port services. cycle time reduction programs. NS began hauling a significant portion NS teamed up with Burlington The paper, clay and forest products of the coal consumed by the utility plant Northern Santa Fe to launch run-through industries are expecting little expansion operated by Keystone-Conemaugh Projects transcontinental intermodal service and limited capacity growth in 2001. at Shelocta, Pa. Future construction of a between the West Coast, Southwest and Paper consumption in the United States is track connection designed to improve Southeast, improving service for freight expected to increase, but at a slower pace. routing to the plant and allow heavier ton- moving between the West Coast and nage should enable NS to compete for even the Southeast. Additionally, Triple Crown Services Agriculture, Consumer Products greater market share. At Blairsville, Pa., NS established a rail- began service to Mexico City in a cooper- and Government to-truck transfer facility to supply coal ative effort with TMM Logistics and System expansion bolstered agriculture from CONSOL Energy, Inc., to a utility Texas Mexican Railway Company, enabling revenue growth. plant owned and operated by Edison customers to ship freight between the Volume growth resulted from increased Mission Energy at Homer City, Pa. The United States and Mexico more efficiently. grain consumption by poultry producers facility began operations in October, and A new intermodal facility at Austell, in eastern Pennsylvania, Delaware, NS supplies a significant portion of the Ga., scheduled to be completed in 2001, Maryland and Virginia; sweetener traffic plant’s total coal consumption. should improve efficiency in moving from the Midwest to rail-truck transfer freight between the Southeast and facilities in the Northeast; and canned Southwest and between the North and

18 Southeast, as well as in handling strong location of a new vehicle loading facility in paper, cement, lumber and construction local and regional demand for intermodal Chesapeake,Va., to serve Ford Motor materials. freight distribution. Company’s truck assembly plant in NS works with state and local econom- Norfolk,Va. ic development authorities on projects Industrial Development Additionally, Martin Marietta and involving site location and development NS assisted with the location of 74 new Florida Rock completed major quarry of infrastructure to connect customers to industries and the expansion of another expansions in 2000. The paper and pack- its rail system. NS provides free and 43 in 2000. aging sector saw major new plants at confidential plant location services, This represents an investment of Valparaiso, Ind., and Albion, Mich., locating including site layout, engineering and $2.3 billion by NS customers and is on NS lines. logistics assistance. expected to create approximately 7,000 Five new feed mills opened on NS lines, New plants under construction for jobs in the 20 states where the plants and and seven feed mills and grain elevators completion in 2001 include Honda expansions are located. expanded. In addition, five food manufac- Motors’ $400 million minivan plant in NS expects these industrial develop- turers expanded facilities. Lincoln, Ala., and IPSCO Steel’s $426 ment efforts to generate more than Other projects include facilities million steel mill in LeMoyne, Ala. – 100,000 carloads annually. involved in the production or handling of The largest project of 2000 was the plastics, scrap metal, steel, chemicals,

Partnering for Success in Expanded Territory

In 2000, NS participated with state, regional and local econom- county, state, New York State Electric & Gas Corp., Norfolk ic development organizations in the Northeast to assist in the Southern and the town. Each entity was a critical participant.” location and expansion of 25 industries in the new service area. Other recent industry locations and expansions in the rail- The new plants and expansions represent an investment of road’s new service territory include facilities involved in the more than $978 million by NS customers and are expected to production or handling of plastics, beverages, lumber, steel, paper, create more than 1,200 jobs and to generate some 10,000 new chemicals, auto parts and construction materials in Delaware, carloads of rail traffic annually. Indiana, Maryland, Michigan, New Jersey, New York, Ohio, One of the largest initiatives involves the location of NUCOR Pennsylvania and West Virginia. Corp., the nation’s second largest producer of steel for the “The expanded market reach and service opportunities construction industry, at Chemung, N.Y., along NS’ Southern generated by our larger rail network are key benefits for new Tier rail line. and existing customers,” said Roger Bennett, director Industrial NUCOR’s 500,000-square-foot Vulcraft facility will produce steel Development for NS’ Northeast Region. “With our economic ceiling and floor joists. It is expected to employ 300 at development partners in the Northeast and all along the NS capacity when it opens in 2001. Vulcraft already has one plant system, we look forward to continued growth as 2001 progresses.” on NS lines near Fort Payne, Ala. New industrial development offices serving the Northeast George Miner, president of Southern Tier Economic Growth and are located in Philadelphia and Harrisburg, Pa., and in executive director of the Chemung County Industrial Development Binghamton, N.Y. – Agency, described the NUCOR project as “a team effort by the

2000 Norfolk Southern Corporation

Annual Report 19 Financial Overview

NS’ financial results in 2000 reduced net income by $101 million, or and new business. Coal revenues include the first full year of operations 26 cents per diluted share. Excluding increased $113 million, or 9%, as the over the Northern Region and reflect these charges, net income would have effects of the Northern Region traffic both the economic and business chal- been $273 million, or 71 cents per were somewhat offset by lower export lenges faced during the year and the diluted share, up 14% compared with coal volume at Lambert’s Point and the actions taken to address them. The 1999. Most of the improvement resulted effects of utility plant outages and larger combination of lower-than-expected from higher nonoperating income, which stockpiles early in the year. railroad carloadings and higher-than- reflected gains from the sales of timber Revenues for each of the general expected diesel fuel prices combined to rights and oil and gas royalty and merchandise commodity groups produce lower income from operations. working interests. increased, principally as a result of the NS responded with a number of “Most of the traffic that was diverted expanded operations. Automotive actions to control costs and enhance in 1999 has returned and operating revenues increased $175 million, or revenues. These actions included statistics have improved; however, the 23%. Metals and construction revenues softening in the increased $122 million, or 22%. economy and a Chemicals revenues increased $115 sharp rise in million, or 18%. Agriculture, consumer NS responded with a number of fuel prices hurt products and government revenues actions to control costs and our financial increased $70 million, or 13%. Paper, enhance revenues. These actions performance,” clay and forest products revenues included programs to reduce the said Henry C. increased $52 million, or 9%. Wolf, NS vice Excluding the work-force reduction size of the work force, changes chairman and charges, railway operating expenses were in operating procedures and chief financial $5.4 billion, up $837 million, or 19%, implementation of fuel surcharges. officer. “Our compared with 1999, principally due to challenge is to a full year of Northern Region opera- deliver a superi- tions. The railway operating ratio was programs to reduce the size of the work or product to our customers and improve 87.0%, compared with 86.3% in 1999, force, changes in operating procedures the efficiency of our expanded railroad.” principally due to lower than expected and implementation of fuel surcharges. Railway operating revenues were carloadings and a sharp increase in NS continues to review its operations for $6.2 billion, up $917 million, or 17%, diesel fuel prices. – opportunities to enhance revenues and compared with 1999, reflecting a full lower costs. year of Northern Region operations. Net income for 2000 was $172 General merchandise revenues increased million, or 45 cents per diluted share. $534 million, or 17%. Intermodal Results in 2000 included $165 million in revenues increased $270 million, or work-force reduction charges, which 32%, reflecting Northern Region traffic

20 Quarterly Financial Data

(UNAUDITED) Three Months Ended March 31 June 30 Sept. 30 Dec. 31 (In millions of dollars, except per share amounts) 2000 Railway operating revenues $ 1,508 $ 1,592 $1,535 $1,524 Income from railway operations 28 278 211 116 Net income (loss) (48) 116 99 5 Earnings (loss) per share – Basic $ (0.12) $ 0.30 $ 0.26 $ 0.01 – Diluted $ (0.12) $ 0.30 $ 0.26 $ 0.01

1999 Railway operating revenues $ 1,038 $ 1,202 $1,514 $1,488 Income from railway operations 237 198 146 137 Net income 112 77 19 31 Earnings per share – Basic $ 0.30 $ 0.20 $ 0.05 $ 0.08 – Diluted $ 0.30 $ 0.20 $ 0.05 $ 0.08

Stock Price and Dividend Information

(UNAUDITED) The Common Stock of Norfolk Southern Corporation, owned by 53,194 stockholders of record as of Dec. 31, 2000, is traded on the New York Stock Exchange with the symbol NSC. The following table shows the high and low sales prices and dividends per share, by quarter, for 2000 and 1999.

Quarter 2000 1st 2nd 3rd 4th Market Price 3/ 11/ 3/ 5/ High $ 22 4 $19 16 $194 $158 11/ 3/ 1/ 15/ Low 12 16 14 16 14 8 11 16 Dividends per share $0.20 $0.20 $0.20 $0.20

1999 1st 2nd 3rd 4th Market Price 3 7 5 3 High $ 32 /16 $36/16 $31/16 $25/8 1 1 1 5 Low 26 /4 25 /2 24 /8 19 /8 Dividends per share $0.20 $0.20 $0.20 $0.20

2000 Norfolk Southern Corporation

Annual Report 21 Eleven-Year Financial Review Norfolk Southern Corporation and Subsidiaries

($ in millions, except per-share amounts) 20001 19992 1998 1997 1996 Results of operations Railway operating revenues $ 6,159 $ 5,242 $ 4,254 $ 4,249 $ 4,118 Railway operating expenses 5,526 4,524 3,202 3,036 2,953 Income from railway operations 633 718 1,052 1,213 1,165 Other income – net 168 164 309 170 117 Interest expense on debt 551 531 516 385 116 Income from continuing operations before income taxes 250 351 845 998 1,166 Provision for income taxes 78 112 215 299 413 Income from continuing operations before accounting changes 172 239 630 699 753 Discontinued operations3 — — 104 22 17 Cumulative effect of accounting changes — ———— Net income $ 172 $ 239 $ 734 $ 721 $ 770 Per share data Net income – basic $ 0.45 $ 0.63 $ 1.94 $ 1.91 $ 2.03 Net income – diluted $ 0.45 $ 0.63 $ 1.93 $ 1.90 $ 2.01 2 Dividends $ 0.80 $ 0.80 $ 0.80 $ 0.80 $0.74 /3 Stockholders’ equity at year end $ 15.16 $ 15.50 $ 15.61 $ 14.44 $ 13.26 Financial position Total assets $ 18,976 $ 19,250 $ 18,180 $ 17,350 $ 11,234 Total long-term debt, including current maturities $ 7,636 $ 8,059 $ 7,624 $ 7,459 $ 1,856 Stockholders’ equity $ 5,824 $ 5,932 $ 5,921 $ 5,445 $ 4,977 Other Capital expenditures $ 731 $ 912 $ 1,060 $ 929 $ 789 Average number of shares outstanding (thousands) 383,358 380,606 378,749 376,593 379,372 Number of stockholders at year end 53,194 51,123 51,727 50,938 50,748 Average number of employees: Rail 33,344 30,897 24,185 23,323 23,361 Nonrail3 394 269 115 2,494 2,469 Total 33,738 31,166 24,300 25,817 25,830 All share and per-share amounts have been restated to reflect the Sept. 5, 1997, three-for-one stock split. Notes

11 2000 operating expenses include $165 million in work-force reduction costs for early retirement and separation programs. These costs reduced net income by $101 million, or 26 cents per diluted share.

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

32 In 1998, NS sold all the common stock of its motor carrier subsidiary, North American Van Lines, Inc. (NAVL), for $207 million and recorded a $90 million pretax ($105 million, or 28 cents per diluted share, after-tax) gain. Accordingly, NAVL’s results of operations, financial position and cash flows are presented as “Discontinued operations.”

43 1993 results include an increase in the provision for income taxes reflecting a 1% increase in the federal income tax rate, which reduced net income by $54 million, or 13 cents per diluted share. “Discontinued operations” includes a $50 million pretax charge for the disposition of two NAVL businesses. Net income also reflects two accounting changes, the cumulative effect of which increased 1993 net income by $223 million, or 53 cents per diluted share: a change in accounting for income taxes increased net income by $467 million, with a corresponding reduction in deferred taxes, and changes in accounting for postretirement and postemployment benefits decreased net income by $244 million.

54 1991 operating expenses include a $483 million charge primarily for labor force reductions. “Discontinued operations” includes a $197 million charge primarily for the write- down of the goodwill portion of NS’ investment in NAVL. These charges reduced net income by $498 million, or $1.12 per diluted share. 22 Net Income and Earnings Per Share 1995 1994 19934 1992 19915 1990 In 2000, excluding the work- force reduction costs, net $ 4,028 $ 3,921 $ 3,746 $ 3,777 $ 3,654 $ 3,786 income increased 14% and dilut- 2,966 2,878 2,831 2,851 3,345 2,969 ed earnings per share increased 13%, compared with results in 1,062 1,043 915 926 309 817 1999. The improvement reflect- 140 86 135 97 131 142 ed gains from the sale of nonop- 113 101 98 109 99 78 erating properties and higher income from railway operations. (millions) $273 $239 $734 $721 $770 $733 * * 1,089 1,028 952 914 341 881 *2000 excludes work-force 99 00 98 97 96 95 391 372 370 328 112 316 reduction costs that reduced net income by $101 million and Net Income diluted earnings per share by 698 656 582 586 229 565 26 cents. 1995 excludes an 15 12 (33) (28) (199) (9) early retirement charge that ——223———reduced net income by $20 mil- $ 713 $ 668 $ 772 $ 558 $ 30 $ 556 lion and diluted earnings per share by 6 cents.

$ 1.81 $ 1.63 $ 1.85 $ 1.31 $ 0.07 $ 1.14 $ 1.80 $ 1.62 $ 1.83 $ 1.30 $ 0.07 $ 1.14 1 1 2 $0.69 /3 $ 0.64 $ 0.62 $ 0.60 $0.53 /3 $0.50 /3 $ 12.47 $ 11.73 $ 11.12 $ 10.05 $ 9.55 $ 10.52 (dollars) $10,718 $10,403 $10,301 $10,188 $ 9,959 $10,326 $0.71 $0.63 $1.93 $1.90 $2.01 $1.86 * * $ 1,638 $ 1,619 $ 1,594 $ 1,648 $ 1,387 $ 1,122 99 00 98 97 96 95 $ 4,829 $ 4,685 $ 4,621 $ 4,233 $ 4,093 $ 4,912 Earnings Per Share —Diluted $ 757 $ 707 $ 639 $ 628 $ 688 $ 605 392,987 408,904 418,243 424,378 443,276 486,284 53,401 52,442 51,884 51,200 53,725 56,187

24,488 24,710 25,531 25,650 27,366 28,697 Capital Expenditures 2,456 2,458 3,773 4,485 4,586 4,584 NS has made more than $5 bil- 26,944 27,168 29,304 30,135 31,952 33,281 lion of capital expenditures since 1995 — demonstrating a commitment to make the investments necessary to support safe, efficient and reliable operations and revenue growth. (millions) $731 $912 $1,060 $929 $789 $757 99 00 98 97 96 95

Capital Expenditures

2000 Norfolk Southern Corporation

Annual Report 23 Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes beginning on Page 42 and the Eleven-Year Financial Review on Pages 26 and 27.

Operations Over rentals. Moreover, revenues were lower (see Note 3 on Page 49) and higher Conrail’s Lines than expected as some customers diverted income from railway operations, com- traffic to other modes of transportation. pared with a weak 1999. Results for 2000 reflect the first full Diluted earnings per share were year of operations over Conrail’s lines. Summarized 45 cents, down 29%. Excluding the On June 1, 1999 (the “Closing Date”), NS’ Results of Operations effects of the work-force reduction costs, railroad subsidiary (Norfolk Southern diluted earnings per share were up 13%. Railway Company [NSR]) began operating 2000 Compared with 1999 a substantial portion of Conrail’s proper- Net income in 2000 was $172 million, 1999 Compared with 1998 ties (NSR’s “Northern Region”) under down 28%. Results in 2000 included Net income in 1999 was $239 million, a various agreements with Pennsylvania $165 million of costs related to actions decrease of 67%. Net income in 1998 Lines LLC (PRR), a wholly owned sub- taken to reduce the size of the work included the $105 million gain from the sidiary of Consolidated Rail Corporation force, which reduced net income by sale of NS’ former motor carrier sub- (CRC) (see Note 2 on Page 47). As a $101 million, or 26 cents per diluted sidiary (see Note 16 on Page 56). Income result, both the railroad route miles oper- share. Excluding these costs, net income from continuing operations, which ated by NSR and the number of its rail- would have been $273 million, up 14%. excludes both the motor carrier’s results road employees increased by approxi- The increase resulted from gains from of operations prior to its sale and the mately 50% on that date. Results for the sale of nonoperating properties gain from its sale, declined 62%. The 1999 reflect five months (January decrease resulted from lower income through May) of operating the former from railway operations and from lower Norfolk Southern railroad system and Income from Railway Conrail earnings before the Closing Date. seven months (June through December) Operations The decline in income from railway oper- of operating the present system, which ations reflected the difficulties in inte- includes the Northern Region. grating the Northern Region and a sharp Results in 1999 were adversely affect- decline in export coal traffic. ed by difficulties encountered in the Diluted earnings per share of assimilation of the Northern Region into 63 cents were down 67%. Diluted earn- NSR’s existing system that resulted in ings per share from continuing opera- system congestion, an increase in cars tions were down 62%. on line, increased terminal dwell time (millions) and reduced system velocity. These serv- $798 $718 $1,052 $1,213 $1,165 $1,096 * ice issues and actions taken to address * 99 00 them increased operating expenses, pri- 98 97 96 95 Income from railway operations increased 11% in marily labor costs and equipment costs, 2000, despite a sharp rise in diesel fuel prices, reflect- including car hire and locomotive ing a full year of Northern Region operations.

* 2000 excludes $165 million of work-force reduction costs. 1995 excludes a $34 million charge for an early retirement program.

24 Detailed Results Railway Operating Revenue proportion of the Northern Region traf- Of Operations Variance Analysis fic is shorter-haul (lower revenue-per- Increases (Decreases) unit) traffic. ($ in millions) 2000 vs. 1999 1999 vs. 1998 Railway Operating Revenues Volume $ 779 $ 1,015 Total Coal, Coke and Iron Ore Tonnage Railway operating revenues were Revenue per unit/mix 138 (27) (In millions of tons) 2000 1999 1998 Total $ 917 $ 988 $6.2 billion in 2000, $5.2 billion in 1999, Utility 119 108 83 and $4.3 billion in 1998. Revenues in Export 20 18 25 2000 and 1999 include results of opera- Revenue per unit improved in most Domestic metallurgical 25 22 18 market groups, principally due to the Other 11 10 8 tions in the Northern Region for 12 Total 175 158 134 months and seven months, respectively. effects of Northern Region traffic and increased rates. About one-half of the rev- The following table presents a three-year Utility coal traffic increased 11% in enue per unit increase for the intermodal comparison of revenues by market group. 2000, reflecting a full year of Northern market group was attributable to the Region operations. The effects of Railway Operating Revenues by effects of the consolidation of Triple expanded operations were somewhat Market Group Crown Services Company (TCS) revenues. offset by coal production problems at ($ in millions) 2000 1999 1998 In 1999, revenues increased for all Coal $1,435 $1,322 $1,252 several NS-served mines, unanticipated market groups as a result of Northern General merchandise: outages at some NS-served utility Automotive 921 746 577 Region traffic. Prior to the Closing Date, plants, large stockpiles at the beginning Chemicals 756 641 492 revenues for all market groups, except Metals/construction 689 567 375 of the year and mild summer weather in automotive, were below or even with Paper/clay/forest 630 578 535 portions of NS’ service territory. In Agriculture/consumer products/ those of the prior year. Revenue per unit 1999, utility coal traffic increased 30%, government 609 539 468 improved principally due to the effects of due to the expansion of operations into General merchandise 3,605 3,071 2,447 consolidating TCS’ revenues and Intermodal 1,119 849 555 the Northern Region after the Closing Northern Region traffic; however, the Total $6,159 $5,242 $4,254 Date. effects of changes in the mix of traffic, The near-term outlook for utility coal most notably reduced export coal traffic, In 2000, revenues increased for all remains positive. U.S. demand for elec- more than offset the revenue-per-unit market groups, reflecting a full year of tricity continues to grow rapidly, and improvements. handling Northern Region traffic. coal-fired generation remains the cheap- Revenues for the last seven months, a est marginal source of electricity. Coal tonnage increased 11% in comparison that fully includes the Several underutilized coal-fired power 2000, and revenues increased 9%, Northern Region in both years, plants are making the transition from reflecting a full year of Northern Region improved, reflecting recovery of most of peak-only generation to full-time genera- traffic. Revenue per unit declined, a the diverted traffic and new business. tion. In addition, natural gas prices result of a higher proportion of traffic However, weakness in the economy reached record levels in 2000 and are with a shorter length of haul, principally resulted in lower revenues very late in anticipated to remain higher than his- attributable to a full year of Northern the year. As shown in the following torical levels for the near future, fur- Region operations. Coal revenues repre- table, the full-year volume gains attrib- ther improving the competitive position sented 23% of total railway operating utable to expanded operations produced of coal-fired generation. revenues in 2000, and 89% of NS’ coal most of the revenue increase. Phase II of Title IV of the Clean Air shipments originated on lines it operat- Act Amendments of 1990, which imposed. In 1999, coal tonnage increased es more stringent limits on sulfur diox- 18%, but revenues increased only 5%. ide emissions, took effect on Jan. 1, The positive revenue effects of handling 2000. Many of the mines served by NS Northern Region tonnage were largely produce coals that satisfy Phase II offset by the significant drop in export requirements. In addition, substantial coal tonnage. In addition, a larger

2000 Norfolk Southern Corporation

Annual Report 25 banks of sulfur dioxide allowances held royalties (see Note 3 on Page 49, Domestic metallurgical coal, coke by many NS-served utilities should con- “Royalties from coal”). A decision by the and iron ore traffic increased 17% in tinue to provide a market for other NS- appellate court is expected in 2001. The 2000, due to a full year of Northern served mines for nearly a decade. district court’s ruling already has made Region operations. In addition, increased However, several federal environmental coal mine permitting a more arduous and production in the first half of the year regulatory initiatives continued to be lengthy process. and gains in NS’ market share con- pursued during 2000. Many of the rules tributed to the higher traffic. However, the that have been promulgated to date are Export coal tonnage increased 8% in softening economy and increased steel in litigation. If the rules survive litiga- 2000, a result of a full year of access to imports diminished blast furnace production and are implemented, they could Baltimore through the Northern Region, tion rates, sharply reducing demand for increase the cost of coal-fired generation mitigated by lower tonnage through raw materials. and potentially adversely affect the value Lambert’s Point. Several additional fac- In 1999, domestic metallurgical coal, of the sulfur dioxide allowance bank. tors also adversely affected export coal coke and iron ore traffic increased 22%, Also, the Kyoto Protocol, if ratified and traffic volume. Delayed settlements as the addition of Northern Region traffic implemented, could put additional cost between buyers and sellers in the spring more than offset the effects of reduced pressures on coal-fired generation. postponed shipments of some export ton- U.S. steel production. Lower-priced steel A 1999 decision by a federal district nage. Foreign buyers ultimately intended imports led to reduced production levels court judge in West Virginia held that to purchase additional U.S. metallurgical at integrated steel manufacturers, espe- some common mountaintop mining prac- coal, but production capacity available for cially through the first three quarters of tices in the coal industry are illegal. export had been diminished by two years 1999, thereby lowering demand for raw There are a small number of mountain- of dramatically lower prices. Toward the materials. top mining operations on NS’ lines; how- end of 2000, production difficulties at Domestic metallurgical coal, coke and ever, if sustained, the decision could have several large NS-served mines signifi- iron ore traffic is expected to continue to an adverse effect on these operations cantly reduced tonnage available for suffer from the effects of the slowing and on NS’ coal traffic, revenues and export. Limited supplies overall prevent- economy. Curtailed steel production levels ed other coal producers from providing are expected to continue in the near substitute coal. term, which could further weaken the In 1999, export coal tonnage steel industry. In 2000, an Alabama steel decreased 28%, despite the expansion of producer closed permanently, and several Coal operations into the Northern Region. The others filed for Chapter 11 bankruptcy lower traffic resulted from reduced protection. Long-term demand is expected demand for U.S. coking coal (in part, the to continue to decline, due to advanced export result of a strong U.S. dollar), productivi- technologies that allow production of steel ty gains made by foreign producers, using less coke. lower ocean transportation rates and lower foreign royalties. Steam coal Other coal traffic, principally steam exports continued to be noncompetitive coal shipped to manufacturing plants, on price, making domestic markets more increased 4% in 2000, reflecting a full attractive for U.S. producers. year of handling Northern Region traffic; Export tonnage is expected to contin- however, this was mitigated by the loss of (millions) $1,435 $1,322 $1,252 $1,301 $1,305 $1,268 ue to be limited by supply and competi- some traffic to competitors. Other coal 99 00 98 97 96 95 tion from Australian coals. In addition, traffic increased 25% in 1999, due to the

Revenues increased $113 million, or 9%, in 2000, due environmental issues concerning carbon- commencement of operations in the to the effects of a full year of Northern Region traffic. based fuels could increase pressure to Northern Region. This group includes utility coal, export coal, domestic reduce their use. metallurgical coal and industrial coal, coke and iron ore.

26 GENERAL MERCHANDISE traffic Automotive Chemicals volume (carloads) increased 15% in 2000, and revenues increased 17%, principally due to a full year of operating the Northern Region. In 1999, traffic volume increased 24%, and revenues increased 26%, reflecting the commencement of operations in the Northern Region; however, service issues resulted in traffic diversions in all market groups. (millions) $756 $641 $492 $504 $482 $541 (millions) $921 $746 $577 $492 $489 $449 Automotive traffic volume increased 99 00 98 97 96 95 99 00 13%, and revenues increased 23% in 98 97 96 95 2000, reflecting a full year of Northern Revenues increased $175 million, or 23%, in 2000, due Revenues increased $115 million, or 18%, in 2000, Region operations, record vehicle pro- to a full year of operations in the Northeast and record reflecting a full year of Northern Region traffic and duction and the recapture of business vehicle production. This group includes finished vehicles the return of traffic diverted last year.This group for BMW, DaimlerChrysler, Ford Motor Company, diverted because of service issues after includes sulfur and related chemicals, petroleum General Motors, Honda, Isuzu, Jaguar, Land Rover, products, chlorine and bleaching compounds, plastics, the Closing Date. The carload increase Mazda, Mercedes-Benz, Mitsubishi, Nissan, Saab, rubber, industrial chemicals, chemical wastes and was less than the revenue increase prin- Subaru, Suzuki, Toyota and Volkswagen, and auto parts municipal wastes. for Ford Motor Company, General Motors, Mercedes- cipally due to the effects of a redesign of Benz and Toyota. the mixing center network. This redesign improves vehicle velocity Automotive revenues in 2001 are In 1999, chemicals traffic volume through the network and includes expected to be down, reflecting an antic- increased 25%, and revenues increased changes in traffic flows that resulted in ipated decline in light vehicle production 30%, due to the addition of Northern a decline in carloads, with no correspon- from the record level of 2000. Region traffic. Chemical production ding decrease in revenues. increased slightly during the year, and In 1999, automotive traffic volume Chemicals traffic volume increased shipments of chlorine, caustic soda and increased 26%, and revenues increased 15%, and revenues increased 18% in PVC plastics rebounded from 1998 lev- 29%, largely due to the expansion of 2000, due to a full year of Northern els, benefiting from an improved Asian operations into the Northern Region Region operations and the return of economy. The location of new and and record vehicle production. The NS- traffic that had been diverted because of expanded processing plants on lines NS served Toyota plant in Princeton, Ind., service issues after the Closing Date. serves increased shipments of plastic and the vehicle parts distribution center Shipments of miscellaneous chemicals, pellets. Chemicals shipments also in Dayton, Ohio, which were new in chlorine, caustic soda and plastics con- increased through NS’ TBT facilities. 1999, also contributed to the increase. tinued to rebound, but sulfur carloads Shipments of sulfur declined, due to pro- However, design and service issues and were down due to weak fertilizer mar- duction cutbacks at plants served by NS. equipment shortages caused by extend- kets. Chemicals shipments continued to Chemicals revenues in 2001 are ed cycle times adversely affected NS’ increase through NS’ Thoroughbred Bulk expected to remain relatively flat, due to mixing center network. In addition, Transfer (TBT) facilities that handle fewer plant expansions and softness in service issues after the Closing Date chemicals and bulk commodities for cus- U.S. chemical and petroleum production. resulted in significant traffic diversions. tomers not located on NS-served lines.

2000 Norfolk Southern Corporation

Annual Report 27 Metals and construction traffic vol- Metals and construction revenues in paper industry, had a negative impact ume increased 29%, and revenues 2001 are expected to suffer from the on traffic volume. increased 22% in 2000, reflecting a full effects of a continued softness in the Paper, clay and forest products rev- year of operations over the expanded steel market. enues are expected to continue to be system. Revenue per unit declined, large- adversely affected by weak demand in ly due to a change in the mix of traffic. Paper, clay and forest products traf- 2001, due to continued consolidations Metals traffic benefited from increased fic volume increased 5%, and revenues and little anticipated capacity expansion shipments of sheet steel, imported slab increased 9% in 2000, principally due through 2003. steel and ferrous scrap; however, this was to the effects of a full year of Northern tempered by a significant slowdown in Region operations. Additional consolida- Agriculture, consumer products and the steel industry in the last half of the tion in the paper industry and a weak- government traffic volume increased 7%, year. Construction traffic benefited from ening paper market in the second half of and revenues increased 13% in 2000, continued strength in housing starts and the year contributed to lower carloads due to the effects of a full year of highway construction. during the summer months and into the Northern Region traffic and modest In 1999, metals and construction fall. Demand for paper production growth in the Southeast markets. Rate traffic volume increased 57%, and rev- inputs, such as scrap paper and wood increases and more longer-haul (higher enues increased 51%, due to the addi- pulp, was weak, but this was tempered revenue-per-unit) traffic also contributed tion of Northern Region traffic. by stronger demand for newsprint and to the revenue increase. Grain traffic Continued growth, resulting from the printing paper. benefited from new shuttle-train service location of new mini-mills and steel In 1999, paper, clay and forest prod- that improved service to new and processors in NS’ service territory, off- ucts traffic volume increased 4%, and expanded Southeast feed mills. In addi- set the effects of a weaker scrap mar- revenues increased 8%, reflecting the tion, traffic increased for Midwest grain ket. Construction traffic benefited from commencement of Northern Region and sweeteners and consumer goods strong housing starts and highway con- operations. The closure of four major from the West. struction in the Southeast. In addition, paper mills and some chip mills late in In 1999, agriculture, consumer prod- new cement terminals on NS’ lines gen- 1998, coupled with the effects of consol- ucts and government traffic volume erated additional traffic. idations and weak demand within the increased 11%, and revenues increased 15%, reflecting access to the large Metals and Construction Paper, Clay and Forest Products Northeast consumer markets. Service issues that arose early in the year due to harsh weather conditions and continued during integration of the Northern Region had an adverse effect on volume. In addition, soybean traffic was negatively affected by low-priced imports from South America. Shipments of fertilizer declined, reflecting significantly lower production. Agriculture, consumer products and government revenues are expected to be $689 $567 $375 $369 $355 $350 (millions) (millions) $630 $578 $535 $539 $514 $538 tempered by the soft economic condi- 99 00 98 97 96 95 99 00 98 97 96 95 tions. While only a normal crop year is

Revenues increased $122 million, or 22%, in 2000, Revenues increased $52 million, or 9%, in 2000, expected, strong export demand could principally due to the effects of a full year of expanded reflecting a full year of operations in the Northern help offset the resulting drop in domes- operations. This group includes steel, aluminum prod- Region. This group includes lumber and wood tic shipments. ucts, machinery, scrap metals, cement, aggregates, products, pulpboard and paper products, wood- bricks and minerals. fibers, woodpulp, scrap paper and clay. NS serves 85 paper mills, 95 paper distribution centers and more than 100 lumber reload centers. 28 Agriculture, Consumer Intermodal continue to grow, supported by contin- Products and Government ued improvements in service and added capacity, notably through a new terminal in Austell, Ga., scheduled to open in the third quarter of 2001. However, a softening economy could temper this positive outlook.

Railway Operating Expenses Railway operating expenses increased 22% in 2000 and included $165 million of costs related to actions taken to $1,119 $849 $555 $568 $499 $485 (millions) $609 $539 $468 $476 $474 $397 (millions) reduce the size of the work force. 99 00 98 97 96 95 99 00 98 97 96 95 Excluding these costs, railway operating Revenues increased $70 million, or 13%, in 2000, Revenues increased $270 million, or 32%, in 2000, expenses increased 19%, while carload- reflecting a full year of Northern Region opera- due to a full year of Northern Region traffic and the ings increased 15%, reflecting a full year tions and modest growth in the Southeast mar- consolidation of TCS revenues. This group handles kets. This group includes soybeans, wheat, corn, trailers, domestic and international containers, TCS of Northern Region operations and fertilizers, animal and poultry feed, food oils, flour, equipment and equipment for intermodal marketing sharply higher diesel fuel prices. beverages, canned goods, sweeteners, consumer companies, international steamship lines, truckers In 1999, railway operating expenses products and items for the military. and other shippers. increased 41%, while carloadings increased 24%. The expense increase INTERMODAL traffic volume quarter. Domestic and premium business was attributable to the commencement of increased 18%, and revenues increased volumes benefited from service improve- operations in the Northern Region, and 32% in 2000, primarily due to a full year ments and expansion initiatives. included significant costs arising from of Northern Region traffic and the con- International traffic, which accounts for the service issues experienced after the solidation of TCS revenues (see Note 2 on about half of intermodal volume, grew Closing Date. Page 47). About one-half of the improve- 5%, notwithstanding the loss of business As a result, the railway operating ment in revenue per unit resulted from from the major customer. TCS traffic ratio, which measures the percentage of the effects of consolidating TCS. Prior to increased 3%, as it recovered from serv- railway operating revenues consumed by June 1, 1999, NS’ revenues included only ice shortcomings after the Closing Date. railway operating expenses, was 87.0% the amounts for rail services it per- In 1999, intermodal traffic volume in 2000 (excluding the work-force reduc- formed under contract to TCS, but NS’ increased 31%, and revenues increased tion costs, which increased the ratio volume included most TCS units. Also 53%, due to the addition of the Northern 2.7 percentage points), compared with contributing to the revenue-per-unit Region and the consolidation of TCS 86.3% in 1999 and 75.3% in 1998. improvement were rate increases after the Closing Date. More than half of The increase in the 2000 ratio reflect- throughout the year on domestic business the increase in revenue per unit resulted ed the effects of a full year of Northern and the implementation of fuel sur- from the effects of consolidating TCS. Region operations and the sharp increase charges later in the year. In addition, Intermodal traffic volume declined in the in diesel fuel prices, which more than off- increased demand, new business and first five months of 1999, reflecting the set the absence of the significant costs improved service contributed to the gains, network redesign implemented in August incurred in 1999 related to the service as major customers, including UPS, JB 1998, which pared a significant number issues after the Closing Date. In addition, Hunt, Hub Group and Maersk, increased of lanes and associated volumes. Service the ratio was adversely affected by a con- volumes. Despite weak demand in the issues following the integration of the tinuation of the trends seen in 1999 first quarter and the loss in December Northern Region also negatively affected involving changes in the mix of traffic. 1999 of a major customer, NS had volume and revenues. In 1999, the railway operating ratio regained its market share by the second Intermodal revenues are expected to reflected the effects of integration-related

2000 Norfolk Southern Corporation

Annual Report 29 service issues, including traffic diver- Compensation and benefits (excluding In 1999, the increase resulted largely sions, which in total were estimated to work-force reduction costs) represented from the almost 50% increase in the rail- have resulted in more than half of the 39% of total railway operating expenses road work force following commence- ratio’s 1999 increase. The remaining in 2000 and increased 12% in 2000 and ment of operations in the Northern increase was principally attributable to 24% in 1999. Region. The service issues encountered the change in traffic mix (more The work-force reduction costs, which after the Closing Date also contributed to resource-intensive traffic, such as auto- totaled $165 million, principally resulted the increase, including the $49 million motive and intermodal) and the new from voluntary early retirement and sep- cost of the SWIP.These increases were traffic in the Northern Region, coupled aration programs accepted by 1,446 somewhat offset by reduced stock-based with the decrease in export coal traffic. nonunion employees (see Note 11 on incentive compensation, the absence of The railway operating ratio is not Page 52 for details concerning the early bonus accruals and reduced pension and expected to return to pre-Closing Date retirement programs). In addition, an other postretirement benefits expenses. levels in the near term, due to the accrual was made for certain postemploy- changes in NS’ traffic mix and the high- ment benefits due to some union employ- Materials, services and rents includes er cost structure attributable to the ees who were furloughed. At year end, items used for the maintenance of the Conrail properties now operated by NSR. employment levels were down about 9%, railroads’ lines, structures and equip- In response to the economic slow- largely the result of these programs and ment; the costs of services purchased down and changes in its transportation other actions taken throughout the year from outside contractors, including the markets, NS announced in January to reduce the size of the work force. net costs of operating joint (or leased) 2001 several strategies designed to The 12% increase (excluding the facilities with other railroads; and the reduce costs. These include additional work-force reduction costs) in compensa- net cost of equipment rentals. This cate- work-force reductions, disposition of tion and benefits in 2000 was largely gory of expenses increased 13% in 2000 surplus freight cars, line rationalization attributable to the effects of a full year of and 52% in 1999. programs, consolidation or disposition expanded operations and higher wages The 2000 increase was mostly attrib- of underutilized or redundant facilities and benefit costs for union employees. utable to the effects of a full year of and a redesign of its service network. These increases were mitigated by higher Northern Region operations and the con- The following table shows the pension income and the absence of the solidation of TCS and was mitigated by changes in railway operating expenses $49 million incurred in 1999 for the the absence of significant costs incurred summarized by major classifications. Special Work Incentive Program (SWIP) in 1999 related to the service issues for union employees in the third quarter encountered after the Closing Date. of 1999. Pension income was higher in The increase in 1999 reflected the Railway Operating Expenses 2000 largely due to the transfer of expanded operations in the Northern Increases (Decreases) assets from the Conrail pension plan Region; additional costs attributable to ($ in millions) 2000 vs. 1999 1999 vs. 1998 Compensation and benefits $ 379 * $ 363 after the Closing Date. NS has substantial the service issues, including costs for Materials, services and rents 171 435 unrecognized gains related to its over- alternate transportation to meet the Conrail rents and services 167 311 funded pension plan; amortization of needs of customers; and the effects of Depreciation 28 38 Diesel fuel 223 81 these gains will continue to be included consolidating TCS. Casualties and other claims 4 43 in “Compensation and benefits” expenses Equipment rents, which include the Other 30 51 (see Note 11 on Page 52). cost to NS of using equipment (mostly Total $1,002 $1,322 freight cars) owned by other railroads or * Includes $165 million of work-force reduction costs private owners, less the rent paid to NS in 2000. for the use of its equipment, increased 22% in 2000 and 93% in 1999. The

30 2000 increase was principally due to the Depreciation expense was up 6% in for decades. NS continues to work active- effects of a full year of expanded opera- 2000 and 9% in 1999. Increases in both ly to eliminate all employee injuries and tions, but was mitigated by a favorable years were due to property additions, to reduce the associated costs. comparison for the last seven months, as reflecting substantial levels of capital The rail industry remains uniquely expenses in 1999 were high due to the spending (see Note 1, “Properties,” on susceptible to litigation involving job- service issues encountered after the Page 46 for NS’ depreciation policy). related accidental injury and occupation- Closing Date. The 1999 increase princi- al claims because of an outmoded law, the pally was due to: (1) the commencement Diesel fuel expenses increased 87% Federal Employers’ Liability Act (FELA), of Northern Region operations, (2) higher in 2000 and 47% in 1999. In both years, originally passed in 1908 and applicable rental costs driven by cycle times that most of the increase resulted from high- only to railroads. This law, which covers were increased because of the service er prices. In 2000, 86% of the increase employee claims for job-related injuries, issues and (3) short-term locomotive resulted from a 61% rise in the average promotes an adversarial claims environ- leases to improve system fluidity. In addi- price per gallon, which ranged from 77 ment and produces results that are tion, Conrail historically rented a higher cents in January to $1.07 in December. unpredictable and inconsistent, at a far percentage of its freight cars than NS, In 1999, 53% of the increase was attrib- greater cost to the rail industry than the resulting in higher equipment rents in utable to a 19% increase in the average no-fault workers’ compensation system the Northern Region. price per gallon, due to a sharp rise in to which nonrail competitors and other Locomotive and car repair costs the last half of the year. Higher consump- employers are universally subject. The increased in 2000, reflecting a full year of tion accounted for the remainder of the railroads have been unsuccessful so far Northern Region operations; however, the increases, primarily the result of the in efforts to persuade Congress to increase was tempered by reduced main- addition of the Northern Region. replace FELA with a no-fault workers’ tenance activities, a result of cost control compensation system. efforts. In 1999, maintenance costs Casualties and other claims expenses NS maintains substantial amounts of increased due to the expansion of opera- (including the estimates of costs related commercial insurance for potential third- tions and higher repair costs associated to personal injury, property damage and party liability and property damage with temporarily leased locomotives. environmental matters) increased 3% in claims. It also retains reasonable levels 2000 and 45% in 1999. The 1999 of risk through self-insurance. Conrail rents and services, a new cate- increase resulted principally from higher gory of expense arising from the expan- personal injury accruals related to the Other expenses increased 14% in sion of operations on the Closing Date, increased size of the work force as well 2000 and 31% in 1999. The increase in amounted to $478 million in 2000 and as higher environmental expenses. 2000 reflected a full year of Northern $311 million in 1999. This item includes The largest component of casualties Region operations and higher bad debt amounts due to PRR and CRC for use of and other claims expense is personal expense. The 1999 increase resulted their operating properties and equipment injury costs. In 2000, cases involving from the expansion of operations, includ- and CRC’s operation of the Shared Assets so-called “occupational” injuries com- ing property and other taxes related to Areas. Also included is NS’ equity in prised about 40% of the total employee the Northern Region, and to costs arising Conrail’s net earnings since the Closing injury cases settled and 20% of the from service issues. Date, plus the additional amortization total settlement payments made. related to the difference between NS’ Injuries of this type are not generally investment in Conrail and its underlying caused by a specific accident or event, equity (see Note 2 on Page 47). but, rather, result from a claimed exposure over time to some condition of employment. Many such claims are being asserted by former or retired employees, some of whom have not been actively employed in the rail industry

2000 Norfolk Southern Corporation

Annual Report 31 Income Taxes In January 1995, the United States flow statement primarily resulted from Income tax expense in 2000 was Tax Court issued a preliminary decision the commencement of operations in the $78 million, for an effective rate of 31%, that disallowed some of the tax benefits a Northern Region. In addition, collection compared with effective rates of 32% in subsidiary of NS purchased from a third of accounts receivable had slowed. 1999 and 25% in 1998. Excluding the party pursuant to a safe harbor lease NS’ working capital deficit was equity in Conrail’s after-tax earnings, the agreement in 1981. In January 2001, NS $1.0 billion at Dec. 31, 2000, compared effective rate was 34% in both 2000 and received payment from the third party in with $553 million at Dec. 31, 1999. The 1999 and was 33% in 1998. accordance with indemnification provi- large increase reflected the use of The effective rates in all three years sions of the lease agreement. accounts receivable sale proceeds to were below the statutory federal and reduce long-term debt. NS currently has state rates because of investments in Discontinued Operations the capability to issue commercial paper to meet its more immediate working capi- coal-seam gas properties, favorable Income from discontinued operations in tal needs (see the discussion of financing adjustments upon filing the prior year 1998 included the $105 million after-tax activities, below). tax returns and favorable adjustments gain from the sale of NS’ motor carrier to state tax liabilities. In addition, the subsidiary (see Note 16 on Page 56). rate in 1998 benefited from invest- Motor carrier operations in 1998 Cash used for investing activities ments in corporate-owned life insurance (through March 28) produced a $1 mil- decreased slightly in 2000, following an and favorable adjustments resulting lion loss. 11% decline in 1999. In 2000, property from settlement of federal income tax additions were significantly lower than years 1993 and 1994. Financial Condition, in the prior years --- locomotive fleet addi- The effective rate in 2001 is expect- tions in 2000 were accomplished by oper- ed to increase somewhat, primarily due Liquidity and Capital ating lease, whereas locomotives were to a substantial reduction in the level of Resources purchased in prior years. Investing activ- benefits from investments in coal-seam ities in 1999 included more borrowings Cash provided by operating activities, gas properties. against the net cash surrender value of NS’ principal source of liquidity, was corporate-owned life insurance: approxi- $1.3 billion in 2000, and reflects a new mately $140 million more than in 2000 program under which accounts receivable and $160 million more than in 1998. In Cash Provided by Operations are sold on a revolving basis (see Note 5 addition, 1999 included $60 million in on Page 50). Excluding the infusion of proceeds from the sublease of certain licensing rights and the sale of NS’ sign- cash from this program, operating cash board business. Investing activities in flow was $954 million in 2000, compared 1998 included the $207 million of pro- with $533 million in 1999 and $890 mil- ceeds from the sale of NS’ motor carrier lion in 1998. subsidiary. Property additions account The improvement in 2000 resulted for most of the recurring spending in primarily from favorable changes in this category. working capital, including an improve- The following tables show capital (millions) $1,342 $533 $890 $1,150 $1,198 $1,234 ment in collection of accounts receivable, spending and track and equipment statis- a lengthening of accounts payable and tics for the past five years. Capital expen- 99 00 98 97 96 95 the lack of bonus payments. The decline ditures include amounts relating to capi- in 1999 reflected lower income from tal leases, which are excluded from the Cash provided by operations increased significantly, reflecting an infusion of cash from the commence- operations, offset somewhat by lower Consolidated Statements of Cash Flows ment of a revolving accounts receivable sale pro- income tax payments. The large changes (see Note 8, “Capital Lease Obligations,” gram and favorable changes in working capital. in “Accounts receivable” and “Current lia- on Page 51). bilities other than debt” in the 1999 cash

32 Capital Expenditures Through its coal car rebody program, NS currently has in place a $2.0 bil- ($ in millions) 2000 1999 1998 1997 1996 which was suspended in 2000, NS con- lion credit facility to support the $1.1 bil- Road $ 557 $ 559 $ 612 $ 599 $ 438 verted about 29,000 hopper cars into lion of commercial paper outstanding at Equipment 146 349 442 306 326 high-capacity steel gondolas or hoppers. Dec. 31, 2000. In February 2001, NS Other property 28 4 6 24 25 Total $ 731 $ 912 $1,060 $ 929 $ 789 As a result, the remaining service life of issued $1.0 billion of debt under its the freight-car fleet is greater than may $1.0 billion shelf registration and used Capital expenditures decreased 20% be inferred from the increasing average the proceeds to reduce the amount of in 2000 and 14% in 1999. The decline in age shown in the table, above. commercial paper outstanding. 2000 reflected lower capital expendi- For 2001, NS has budgeted $806 mil- NS is subject to various financial tures for locomotives as a result of the lion for capital expenditures. The antici- covenants with respect to its credit operating lease. The 1999 decrease was pated spending includes $449 million agreement, including a maximum lever- largely attributable to significant outlays for roadway projects, of which $264 mil- age ratio restriction (see Note 8, “Debt in 1998 for roadway projects and equip- lion is for track and bridge program Covenants,” on Page 52). As a result of a ment in anticipation of the Closing Date work. Also included are projects for new negotiated amendment to the credit and automotive-related projects. or improved intermodal facilities, mar- agreement, the maximum leverage ratio keting and industrial development ini- will not tighten through the remainder of Track Structure Statistics tiatives, signal upgrades and environ- the agreement’s term. (Capital and Maintenance) mental and other public improvements. 2000 1999 1998 1997 1996 Equipment spending includes the pur- Track miles of Conrail’s Results of rail installed 392 403 429 451 401 chase of locomotives and the upgrade of Operations, Financial Miles of track surfaced 3,687 5,087 4,715 4,703 4,686 existing locomotives. In addition, NS’ New crossties installed telecommunications subsidiary plans to Condition and Liquidity (millions) 1.5 2.3 2.0 2.2 1.9 spend $62 million on the installation of Through May 31, 1999, Conrail’s Average Age of Owned fiber optic conduits. results of operations include freight Railway Equipment line-haul revenues and related expenses. (Years) 2000 1999 1998 1997 1996 Freight cars 24.6 23.8 23.6 23.0 22.3 Cash used for financing activities was After the Closing Date, June 1, 1999, its Locomotives 16.1 15.4 15.4 15.3 15.4 $798 million in 2000 and reflected a sub- results reflect its new structure and Retired locomotives 24.5 22.7 20.6 23.3 24.4 stantial net reduction of debt, accom- operations (see Note 2 on Page 47). plished using the proceeds from the sale Currently, Conrail’s major sources of In addition to NS-owned equipment, of accounts receivable, compared with operating revenues are operating fees 16% of the freight car fleet and 27% of the net increase in 1999. Dividend pay- and rents from NSR and CSXT. The com- the locomotive fleet is leased from PRR ments were comparable in all three position of Conrail’s operating expenses (see Note 2 on Page 47). years; however, in January 2001 the also has changed. The increase in 2000 in the average Corporation’s Board of Directors Conrail’s net income was $170 mil- age of owned locomotives reflects the declared a quarterly dividend of 6 cents lion in 2000, compared with $26 million fact that locomotives leased in 2000 are per share, compared with the 20 cents in 1999 and $267 million in 1998 (see not included in the statistic. The 1998 per share that had been paid in recent Note 2 on Page 47). decrease in the average age of retired quarters. NS’ debt-to-total capitalization locomotives resulted from a dispropor- ratio at year end was 57% in 2000 and tionate share of early retirements due 58% in 1999. to casualties and service failures and retention of older units in anticipation of the Closing Date.

2000 Norfolk Southern Corporation

Annual Report 33

Annual Report Results in 1999 included $180 mil- in operations. In 1999, this was some- Prior to the STB’s release of its pro- lion of expenses ($121 million after what offset by higher casualty and other posed guidelines, Canadian National taxes), principally to increase certain claims expenses. Railway Company and Burlington components of its casualty reserves Conrail’s cash provided by opera- Northern Sante Fe Corporation announced based on an actuarial valuation, to adjust tions decreased $34 million, or 9%, in the cancellation of their earlier proposal certain litigation and environmental 2000, and $331 million, or 46%, in to combine their companies under com- reserves related to settlements and com- 1999. The 2000 reduction reflected the mon control. pletion of site reviews and a credit change in operations and payment of adjustment related to the assumption of one-time items owed to NSR and CSXT. Market Risks and a lease obligation by CSX. Results in The 1999 decrease was principally due Hedging Activities 1998 included a $170 million charge to the change in operations. Cash gener- NS does not engage in the trading of ($105 million after taxes) for severance ated from operations is Conrail’s princi- derivatives. NS manages its overall benefits covering nonunion employees pal source of liquidity and is primarily exposure to fluctuations in interest and $132 million ($82 million after used for debt repayments and capital rates by issuing both fixed- and floating- taxes) of other charges and reserves. expenditures. Debt repayments totaled rate debt instruments and by entering Excluding the effects of these items, $318 million in 2000 and $112 million into interest-rate hedging transactions net income increased $23 million in in 1999. Capital expenditures totaled to achieve a targeted mix within its debt 2000, but decreased $307 million in $220 million in 2000 and $176 million portfolio. 1999. The 2000 increase reflected a in 1999, but are expected to decrease Of NS’ total debt outstanding (see $37 million after-tax gain from a prop- significantly in 2001. Note 8 on Page 51), all is fixed-rate debt, erty sale. The 1999 decrease was princi- Conrail had working capital of except for commercial paper and most pally the result of Conrail’s change in $85 million at Dec. 31, 2000, compared capital leases. As a result, NS’ debt sub- operations. with a working capital deficit of ject to interest rate exposure totaled Conrail’s operating revenues were $194 million at Dec. 31, 1999. The deficit $1.4 billion on Dec. 31, 2000. A 1% $985 million in 2000, $2.2 billion in at Dec. 31, 1999, reflected $250 million increase in interest rates would increase 1999 and $3.9 billion in 1998. Both of long-term debt paid in June 2000. NS’ total annual interest expense related year-to-year declines were attributable Conrail is not an SEC registrant and, to all its variable debt by approximately to the change in operations. In addition, therefore, presently cannot issue any $14 million. Management considers it 1999’s comparison reflected a 2% de- publicly traded securities. Conrail is unlikely that interest rate fluctuations crease in freight revenues prior to the expected to have sufficient cash flow to applicable to these instruments will Closing Date. meet its ongoing obligations. result in a material adverse effect on Conrail’s operating expenses were NS’ equity in earnings of Conrail, net NS’ financial position, results of opera- $749 million in 2000, $2.0 billion in of amortization, was $21 million in tions or liquidity. 1999 and $3.3 billion in 1998. 2000, $17 million in 1999 and $194 mil- The average interest rate on commer- In addition to the $180 million of lion in 1998. cial paper was 7.0% on Dec. 31, 2000, 1999 expenses and the $302 million of and 6.4% on Dec. 31, 1999. During 1998 expenses discussed above, Conrail’s Other Matters 2000, the weighted-average interest rate operating expenses reflect transition- on NS’ outstanding commercial paper Proposed Merger Guidelines related expenses of $60 million in 1999 ranged from 6.1% to 7.0%. The Surface Transportation Board (STB) and $149 million in 1998 (principally The capital leases, which carry an has issued proposed merger guidelines technology integration costs and employ- average fixed rate of 7.1%, were effec- which, if adopted as proposed, would ee stay bonuses). Excluding the effects of tively converted to variable rate obliga- increase the substantive and evidentiary the acquisition-related compensation and tions using interest rate swap agree- standards that Class 1 railroad applicants transition costs, operating expenses ments. On Dec. 31, 2000, the average will have to satisfy. Final rules are due in decreased 62% in 2000 and 34% in pay rate under these agreements was June 2001. 1999. Both declines reflected the change 7.2%, and the average receive rate was

34 7.1%. During 2000, the effect of the Lawsuits While it is possible that the district swaps was to reduce interest expense by Norfolk Southern and certain sub- court will decline to give final approval to $1 million. A portion of the lease obliga- sidiaries are defendants in numerous law- the settlement, or that the settlement will tions is payable in Japanese yen. NS suits relating principally to railroad oper- be overturned on appeal, Management hedged the associated exchange rate risk ations. While the final outcome of these believes that the consent decree is a fair at the inception of each lease with a yen lawsuits cannot be predicted with certain- resolution of this controversy and that deposit sufficient to fund the yen-denom- ty, it is the opinion of Management, based disapproval by the courts is unlikely. inated obligation. Most of these deposits on known facts and circumstances, that On Sept. 8, 1997, a state court jury are held by Japanese banks. As a result, the amount of NS’ ultimate liability is in New Orleans returned a verdict NS is exposed to financial market risk unlikely to have a material adverse effect awarding $175 million in punitive dam- relative to Japan. Counterparties to the on NS’ financial position, results of opera- ages against The Alabama Great interest rate swaps and Japanese banks tions or liquidity. Southern Railroad Company (AGS), a holding yen deposits are major financial The Corporation has reached agree- subsidiary of NSR. The verdict was institutions believed by Management to ment on terms of a consent decree that returned in a class action suit which be creditworthy. should bring to a conclusion a class ultimately involved some 10,000 indi- action suit filed in federal district court viduals who claimed injury or damage Accounting Changes and in Birmingham, Ala. The action had been as the result of an explosion and fire New Pronouncements brought on behalf of African-Americans that occurred in New Orleans on Sept. 9, As discussed in Note 1 under “Required currently employed or working since 1987, when a chemical called butadiene Accounting Changes” on Page 47, NS Dec. 16, 1989, who alleged that the leaked from a tankcar. adopted in 2000 the consensus reached Corporation had discriminated against The jury verdict awarded a total of by the Emerging Issues Task Force of them in promotion to nonunion posi- nearly $3.2 billion in punitive damages the Financial Accounting Standards tions because of their race. The consent against four other defendants in the Board (FASB) concerning Issue No. 99- decree, which received preliminary same case: two rail carriers, the owner 19, “Reporting Revenue Gross as a approval from the court on Dec. 22, of the car and the shipper. Previously, Principal versus Net as an Agent.” In 2000, provides for a total payment of the jury had awarded nearly $2 million addition, NS has adopted the disclosure $28 million to the class of approximate- in compensatory damages to 20 of the provisions of the FASB’s Statement of ly 7,700 African-Americans and their individual plaintiffs. Prior to the trial Financial Accounting Standards (SFAS) attorneys and commits the Corporation court’s ruling on the post trial motions, No. 140. to establish good faith goals for the pro- AGS and four other defendants agreed NS has adopted SFAS No. 133, motion of class members to management- to settle their liability in this case for a “Accounting for Derivative Instruments level positions during the four-year term total payment of approximately and Hedging Activities,” effective Jan. 1, of the decree. In addition, the decree com- $150 million, of which AGS’ share was 2001. This adoption did not have a mits the Corporation to make extensive $15 million. The settlement has been material effect on NS’ consolidated improvements to its procedures for iden- given final approval by the trial court, financial statements. tifying, training and selecting candidates the time for appeals has expired, and for promotion to higher-rated positions the case has been concluded insofar as for all its employees. AGS is concerned. The settlement funds have been paid into a trust account in the South Trust Bank in Birmingham. Final approval of the consent decree and distribution of the settlement proceeds to qualified members of the class are subject to a fairness hear- ing scheduled for March 2, 2001.

2000 Norfolk Southern Corporation

Annual Report 35

Annual Report Environmental Matters this liability will be paid out over five Because environmental problems NS is subject to various jurisdictions’ years; however, some costs will be paid that are latent or undisclosed may exist environmental laws and regulations. It out over a longer period. on these properties, there can be no is NS’ policy to record a liability where At some of the 125 locations, certain assurance that NS will not incur envi- such liability or loss is probable and its NS subsidiaries, usually in conjunction ronmentally related liabilities or costs amount can be estimated reasonably. with a number of other parties, have with respect to one or more of them, Claims, if any, against third parties for been identified as potentially responsible the amount and materiality of which recovery of cleanup costs incurred by parties by the Environmental Protection cannot be estimated reliably at this NS are reflected as receivables (when Agency (EPA) or similar state authorities time. Moreover, lawsuits and claims collection is probable) in the balance under the Comprehensive Environmental involving these and other now-unidenti- sheet and are not netted against the Response, Compensation and Liability fied environmental sites and matters associated NS liability. Environmental Act of 1980, or comparable state are likely to arise from time to time. The engineers regularly participate in ongo- statutes, which often impose joint and resulting liabilities could have a signifi- ing evaluations of all identified sites and several liability for cleanup costs. cant effect on financial condition, in determining any necessary adjust- With respect to known environmen- results of operations or liquidity in a ments to initial liability estimates. NS tal sites (whether identified by NS or by particular year or quarter. also has established an Environmental the EPA or comparable state authori- However, based on its assessments of Policy Council, composed of senior man- ties), estimates of NS’ ultimate potential the facts and circumstances now agers, to oversee and interpret its envi- financial exposure for a given site or in known, Management believes that it has ronmental policy. the aggregate for all such sites are nec- recorded the probable costs for dealing Operating expenses for environmen- essarily imprecise because of the widely with those environmental matters of tal matters totaled approximately varying costs of currently available which the Corporation is aware. $11 million in 2000, $12 million in cleanup techniques, the likely develop- Further, Management believes that it is 1999 and $4 million in 1998, and capi- ment of new cleanup technologies, the unlikely that any identified matters, tal expenditures totaled approximately difficulty of determining in advance the either individually or in the aggregate, $10 million in 2000, $8 million in 1999 nature and full extent of contamination will have a material adverse effect on and $7 million in 1998. The lower oper- and each potential participant’s share of NS’ financial position, results of opera- ating expenses in 1998 principally were any estimated loss (and that partici- tions or liquidity. due to higher recoveries from third par- pant’s ability to bear it), and evolving ties of amounts paid by NS in prior statutory and regulatory standards gov- years for environmental cleanup and erning liability. remediation. Capital expenditures in The risk of incurring environmental 2001 are expected to be comparable to liability — for acts and omissions, past, those of 2000. present and future — is inherent in the As of Dec. 31, 2000, NS’ balance railroad business. Some of the commodi- sheet included a reserve for environ- ties in NS’ traffic mix, particularly those mental exposures in the amount of classified as hazardous materials, can $36 million (of which $8 million is pose special risks that NS and its sub- accounted for as a current liability), sidiaries work diligently to minimize. In which is NS’ estimate of the probable addition, several NS subsidiaries own, or cleanup and remediation costs based on have owned, land used as operating available information at 125 identified property, or which is leased or may have locations. On that date, 10 sites account- been leased and operated by others, or ed for $18 million of the reserve, and no held for sale. individual site was considered to be material. NS anticipates that much of

36 Labor Agreements Trends fired facilities even more difficult. The Approximately 85% of NS’ railroad Federal Economic Regulation — revenues and net income of NSR and employees are covered by collective bar- Efforts may be made in 2001 to re-sub- other railroads that move large quanti- gaining agreements with 15 different ject the rail industry to unwarranted ties of coal could be affected adversely. labor unions. These agreements remain federal economic regulation. The in effect until changed pursuant to the Staggers Rail Act of 1980, which sub- Forward-Looking Statements Railway Labor Act. Moratorium provi- stantially reduced such regulation, This Management’s Discussion and sions in these agreements permitted NS encouraged and enabled rail carriers to Analysis of Financial Condition and and the unions to propose such changes innovate and to compete for business, Results of Operations and other sec- in late 1999; negotiations at the national thereby contributing to the economic tions of this Annual Report contain for- level commenced shortly thereafter. The health of the nation and to the revital- ward-looking statements that are based outcome of these negotiations is uncer- ization of the industry.Accordingly, NS on current expectations, estimates and tain at this time. However, an agreement and other rail carriers vigorously will projections. Such forward-looking state- was reached with the Brotherhood of oppose these counterproductive efforts ments reflect Management’s good-faith Locomotive Engineers, which represents to reimpose or to authorize reimposing evaluation of information currently about 5,000 locomotive engineers on NS, such economic regulation. available. However, because such state- and a tentative national agreement (sub- ments are based upon and, therefore, ject to ratification) has been reached Utility Deregulation — Deregulation can be influenced by, a number of exter- with the United Transportation Union, of the electrical utility industry is nal variables over which Management which represents about 7,500 train expected to increase competition among has no, or incomplete, control, they are service employees on NS. electric power generators; deregulation not, and should not be read as being, over time would permit wholesalers and guarantees of future performance or of Inflation possibly retailers of electric power to actual future results; nor will they nec- Generally accepted accounting princi- sell or purchase increasing quantities of essarily prove to be accurate indications ples require the use of historical cost in power to or from far-distant parties. The of the times at or by which any such preparing financial statements. This effects of deregulation on NS and on its performance or result will be achieved. approach disregards the effects of infla- customers cannot be predicted with cer- Accordingly, actual outcomes and tion on the replacement cost of proper- tainty; however, NS serves a number of results may differ materially from those ty. NS, a capital-intensive company, has efficient power producers and is work- expressed in such forward-looking state- most of its capital invested in such ing diligently to assure that its cus- ments. This caveat has particular impor- assets. The replacement cost of these tomers remain competitive in this evolv- tance in the context of all such state- assets, as well as the related deprecia- ing environment. ments that relate to the addition of new tion expense, would be substantially business and the ability to reduce greater than the amounts reported on Carbon-Based Fuel — There is expenses. the basis of historical cost. growing concern that emissions resulting from burning carbon-based fuel, including coal, are contributing to global warming and causing other environmental changes. To the extent that these concerns evolve into a firm consensus, the impact could be either a reduction in the demand for coal or imposition of even more stringent regulations on emissions, which might result in making coal a less economical source of power generation or make permitting of coal-

2000 Norfolk Southern Corporation

Annual Report 37

Annual Report Consolidated Statements of Income Norfolk Southern Corporation and Subsidiaries

Years ended December 31, 2000 1999 1998 ($ in millions, except earnings per share)

Railway operating revenues $ 6,159 $ 5,242 $ 4,254

Railway operating expenses Compensation and benefits (Note 11) 2,234 1,855 1,492 Materials, services and rents 1,445 1,274 839 Conrail rents and services (Note 2) 478 311 — Depreciation 503 475 437 Diesel fuel 478 255 174 Casualties and other claims 142 138 95 Other 246 216 165 Total railway operating expenses 5,526 4,524 3,202

Income from railway operations 633 718 1,052

Equity in earnings of Conrail (Note 2) — 49 194 Other income – net (Note 3) 168 115 115 Interest expense on debt (Note 6) (551) (531) (516) Income from continuing operations before income taxes 250 351 845

Provision for income taxes (Note 4) 78 112 215 Income from continuing operations 172 239 630

Discontinued operations (Note 16): Loss from motor carrier operations, net of taxes — — (1) Gain on sale of motor carrier, net of taxes — — 105 Income from discontinued operations — — 104

Net income $ 172 $ 239 $ 734

Earnings per share (Note 14) Income from continuing operations – Basic $ 0.45 $ 0.63 $ 1.66 – Diluted $ 0.45 $ 0.63 $ 1.65

Net income – Basic $ 0.45 $ 0.63 $ 1.94 – Diluted $ 0.45 $ 0.63 $ 1.93

See accompanying Notes to Consolidated Financial Statements.

38 Consolidated Balance Sheets Norfolk Southern Corporation and Subsidiaries

As of December 31, 2000 1999 ($ in millions) Assets Current assets: Cash and cash equivalents $— $37 Short-term investments 2 14 Accounts receivable, net (Note 5) 411 857 Due from Conrail (Note 2) 31 77 Materials and supplies 91 100 Deferred income taxes (Note 4) 182 134 Other current assets 132 152 Total current assets 849 1,371

Investment in Conrail (Note 2) 6,154 6,132 Properties less accumulated depreciation (Note 6) 11,105 10,956 Other assets 868 791

Total assets $ 18,976 $ 19,250

Liabilities and stockholders’ equity Current liabilities: Accounts payable (Note 7) $ 925 $ 818 Income and other taxes 251 163 Notes and accounts payable to Conrail (Note 2) 155 184 Other current liabilities (Note 7) 259 256 Current maturities of long-term debt (Note 8) 297 503 Total current liabilities 1,887 1,924

Long-term debt (Note 8) 7,339 7,556 Other liabilities (Note 10) 1,131 1,101 Minority interests 50 50 Deferred income taxes (Note 4) 2,745 2,687 Total liabilities 13,152 13,318

Stockholders’ equity: Common stock $1.00 per share par value, 1,350,000,000 shares authorized; issued 405,421,447 and 404,309,672 shares, respectively 405 404 Additional paid-in capital 392 372 Accumulated other comprehensive income (Note 13) (6) (11) Retained income 5,053 5,187 Less treasury stock at cost, 21,363,974 and 21,627,902 shares, respectively (20) (20) Total stockholders’ equity 5,824 5,932

Total liabilities and stockholders’ equity $ 18,976 $ 19,250

See accompanying Notes to Consolidated Financial Statements. 2000 Norfolk Southern Corporation

Annual Report 39 Consolidated Statements of Cash Flows Norfolk Southern Corporation and Subsidiaries

Years ended December 31, 2000 1999 1998 ($ in millions) Cash flows from operating activities Net income $ 172 $ 239 $ 734 Reconciliation of net income to net cash provided by continuing operations: Depreciation 517 489 450 Deferred income taxes 2 85 114 Equity in earnings of Conrail (21) (17) (194) Gains and losses on properties and investments (160) (62) (51) Income from discontinued operations — — (104) Changes in assets and liabilities affecting continuing operations: Accounts receivable (Note 5) 446 (322) 33 Materials and supplies 9 (40) (1) Other current assets and due from Conrail 60 (50) (16) Current liabilities other than debt 220 259 (23) Other – net (Note 11) 97 (48) (50) Net cash provided by continuing operations 1,342 533 892 Net cash used for discontinued operations — — (2) Net cash provided by operating activities 1,342 533 890 Cash flows from investing activities Property additions (731) (912) (956) Property sales and other transactions 137 104 83 Investments, including short-term (77) (126) (156) Investment sales and other transactions 90 343 155 Proceeds from sale of motor carrier — — 207 Net cash used for investing activities (581) (591) (667) Cash flows from financing activities Dividends (306) (304) (303) Common stock issued – net 2 14 34 Proceeds from borrowings 1,055 1,110 196 Debt repayments (1,549) (730) (179) Net cash provided by (used for) financing activities (798) 90 (252) Net increase (decrease) in cash and cash equivalents (37) 32 (29) Cash and cash equivalents At beginning of year 37 534

At end of year $— $37$ 5

Supplemental disclosures of cash flow information Cash paid during the year for: Interest (net of amounts capitalized) $ 543 $ 520 $ 519 Income taxes $5 $16$76

See accompanying Notes to Consolidated Financial Statements. 40 Consolidated Statements of Changes in Stockholders’ Equity Norfolk Southern Corporation and Subsidiaries

Addi- Accumulated tional Other Common Paid-In Comprehensive Retained Treasury Stock Capital Income Income Stock Total ($ in millions, except per share amounts)

Balance December 31, 1997 $ 399 $ 241 $ 5 $ 4,821 $ (21) $ 5,445 Comprehensive income – 1998 Net income 734 734 Other comprehensive income (Note 13) (13) (13) Total comprehensive income 721 Dividends on Common Stock, $0.80 per share (303) (303) Other 2 55 1 58

Balance December 31, 1998 401 296 (8) 5,252 (20) 5,921 Comprehensive income – 1999 Net income 239 239 Other comprehensive income (Note 13) (3) (3) Total comprehensive income 236 Dividends on Common Stock, $0.80 per share (304) (304) Other 3 76 79

Balance December 31, 1999 404 372 (11) 5,187 (20) 5,932 Comprehensive income – 2000 Net income 172 172 Other comprehensive income (Note 13) 5 5 Total comprehensive income 177 Dividends on Common Stock, $0.80 per share (306) (306) Other 1 20 21

Balance December 31, 2000 $ 405 $ 392 $ (6) $ 5,053 $ (20) $ 5,824

See accompanying Notes to Consolidated Financial Statements. 2000 Norfolk Southern Corporation

Annual Report 41 Notes to Consolidated Financial Statements

The following Notes are an States. Approximately 85% of NS’ rail- “available-for-sale.”Accordingly, unreal- integral part of the Consolidated road employees are covered by collective ized gains and losses, net of taxes, are bargaining agreements with 15 different recognized in “Accumulated other com- Financial Statements. labor unions. prehensive income.” Through a jointly owned entity, Investments where NS has the abili- 1 Summary of Norfolk Southern and CSX Corporation ty to exercise significant influence over, Significant own the stock of Conrail Inc., which owns but does not control, the entity are Accounting Policies the major Northeast freight railroad. accounted for using the equity method Norfolk Southern has a 58% economic in accordance with APB Opinion No. 18, Description of Business and 50% voting interest in the jointly “The Equity Method of Accounting for Norfolk Southern Corporation is a owned entity (see Note 2). Investments in Common Stock.” Virginia-based holding company engaged principally in the transportation of Use of Estimates Materials and Supplies freight by rail, operating approximately The preparation of financial statements “Materials and supplies,” consisting 21,800 route miles primarily in the East in conformity with generally accepted mainly of fuel oil and items for mainte- and Midwest. These financial statements accounting principles requires nance of property and equipment, are include Norfolk Southern Corporation Management to make estimates and stated at the lower of average cost or (Norfolk Southern) and its majority- assumptions that affect the reported market. The cost of materials and sup- owned and controlled subsidiaries (col- amounts of assets and liabilities, the dis- plies expected to be used in capital addi- lectively NS) on a consolidated basis. closure of contingent assets and liabili- tions or improvements is included in Norfolk Southern’s major subsidiary is ties at the date of the financial state- “Properties.” Norfolk Southern Railway Company ments and the reported amounts of rev- (NSR). Financial results of a former enues and expenses during the reporting Properties motor carrier subsidiary, North period. Actual results could differ from “Properties” are stated principally at American Van Lines, Inc. (NAVL), are those estimates. cost and are depreciated using group reflected as “Discontinued Operations” depreciation. Rail is depreciated primarily (see Note 16). All significant intercompa- on the basis of use measured by gross ny balances and transactions have been Cash Equivalents ton-miles. Other properties are depreciat- eliminated in consolidation. “Cash equivalents” are highly liquid ed generally using the straight-line The railroad transports raw materi- investments purchased three months or method over the lesser of estimated als, intermediate products and finished less from maturity. service or lease lives. NS capitalizes goods classified in the following market interest on major capital projects during groups (percent of total railway operat- Investments the period of their construction. ing revenues): coal (23%); automotive Marketable equity and debt securities Additions to properties, including those (15%); chemicals (13%); metals/con- are reported at amortized cost or fair under lease, are capitalized. struction (11%); paper/clay/forest prod- value, depending upon their classifica- Maintenance expense is recognized ucts (10%); agriculture/consumer prod- tion as securities “held-to-maturity,” when repairs are performed. When prop- ucts/government (10%); and intermodal “trading” or “available-for-sale.” On erties other than land and nonrail (18%). Ultimate points of origination or Dec. 31, 2000 and 1999, all “Short-term assets are sold or retired in the ordi- destination for some of the freight (par- investments,” consisting primarily of nary course of business, the cost of the ticularly coal bound for export and inter- United States government and federal assets, net of sale proceeds or salvage, modal containers) are outside the United agency securities, were designated as is charged to accumulated depreciation

42 rather than recognized through income. Required Accounting Changes 2 Investment in Conrail Gains and losses on disposal of land and Effective Oct. 1, 2000, NS adopted the and Operations nonrail assets are included in “Other consensus reached by the Emerging Over Its Lines income - net” (see Note 3). Issues Task Force of the Financial NS reviews the carrying amount of Accounting Standards Board (FASB) Overview properties whenever events or changes concerning Issue No. 99-19, “Reporting NS and CSX Corporation (CSX) jointly in circumstances indicate that such car- Revenue Gross as a Principal versus Net own Conrail Inc. (Conrail), whose pri- rying amount may not be recoverable as an Agent.” The consensus presents mary subsidiary is Consolidated Rail based on future undiscounted cash flows indicators to consider in establishing Corporation (CRC), the major freight or estimated net realizable value. Assets the accounting for revenue. As a result railroad in the Northeast. From May 23, that are deemed impaired as a result of of the application of the consensus, NS 1997, the date NS and CSX completed such review are recorded at the lower of has reclassified to railway operating their acquisition of Conrail stock, until carrying amount or fair value. expenses certain charges that previous- June 1, 1999, Conrail’s operations con- ly have been reported net with railway tinued substantially unchanged while Revenue Recognition operating revenues. This change in NS and CSX awaited regulatory Revenue is recognized proportionally as a reporting has no effect on income from approvals and prepared for the integra- shipment moves from origin to destina- railway operations. Prior period tion of the respective Conrail routes and tion. Refunds due in accordance with amounts have been reclassified to con- assets to be leased to their railroad sub- transportation contracts are recorded as form to the current presentation. sidiaries, NSR and CSX Transportation, a reduction to revenues during the life of Effective with this Annual Report, NS Inc. (CSXT). From time to time, NS and the contract, based on Management’s best has adopted the disclosure provisions of CSX, as the indirect owners of Conrail, estimate of projected liability. the FASB’s Statement of Financial may need to make capital contributions, Accounting Standards (SFAS) No. 140, loans or advances to Conrail. Derivatives “Accounting for Transfers and Servicing NS does not engage in the trading of of Financial Assets and Extinguishment Commencement of Operations of Liabilities,” which replaced SFAS No. derivatives. NS has entered into a limit- On June 1, 1999 (the “Closing Date”), 125 of the same name. SFAS No. 140 ed number of derivative agreements to NSR and CSXT began operating as parts revises the standards for accounting for hedge interest rate exposures on cer- of their respective rail systems the sep- securitizations and other transfers of tain components of its debt portfolio. arate Conrail routes and assets leased financial assets and requires certain All of these derivative instruments are to them pursuant to operating and lease disclosures, but carries over most of the designated as hedges, have high correla- agreements. provisions of SFAS No. 125. tion with the underlying exposure and The Operating Agreement between are highly effective in offsetting under- NSR and Pennsylvania Lines LLC (PRR), lying price movements. Accordingly, Reclassifications a wholly owned subsidiary of CRC, gov- payments made or received under inter- Certain amounts in the financial state- erns substantially all nonequipment est rate swap agreements are recorded ments and notes thereto have been assets to be operated by NSR and has in the income statement with the corre- reclassified to conform to the 2000 pres- an initial 25-year term, renewable at the sponding interest expense. Payments entation. option of NSR for two five-year terms. made to hedge interest rate exposure Payments under the Operating related to the anticipated issuance of Agreement are subject to adjustment debt were deferred as a reduction of the every six years to reflect changes in val- debt proceeds and are being amortized ues. NSR also has leased or subleased to interest expense over the life of the for varying terms from PRR a number underlying debt. of equipment assets. Costs necessary to operate and maintain the PRR assets,

2000 Norfolk Southern Corporation

Annual Report 43 including leasehold improvements, services incident to customer freight Related-Party Transactions are borne by NSR. CSXT has entered contracts and employ the majority of Until the Closing Date, NSR and CRC had into comparable arrangements, for the Conrail’s former work force. As a transactions with each other in the cus- operation and use of certain other CRC result, NSR began to receive all freight tomary course of handling interline routes and assets, with another wholly revenues and incur all expenses on the traffic. As of Dec. 31, 2000, substantial- owned CRC subsidiary. PRR lines. ly all of the amounts receivable or NSR and CSXT also have entered into payable related to these transactions agreements with CRC governing other Investment in Conrail had been satisfied. Conrail properties that continue to be NS is applying the equity method of NS provides certain general and owned and operated by Conrail (the accounting to its investment in Conrail administrative support functions to “Shared Assets Areas”). NSR and CSXT in accordance with APB Opinion No. 18, Conrail, the fees for which are billed in pay CRC a fee for joint and exclusive “The Equity Method of Accounting for accordance with several service- access to the Shared Assets Areas. In Investments in Common Stock.” provider arrangements. addition, NSR and CSXT pay, based on NS is amortizing the excess of the “Conrail rents and services,” a new usage, the costs incurred by CRC to purchase price over Conrail’s net equity line on the income statements beginning operate the Shared Assets Areas. using the principles of purchase June 1, 1999, includes: (1) expenses for Future minimum lease payments due accounting, based primarily on the esti- amounts due to PRR and CRC for use by to PRR under the Operating Agreement mated remaining useful lives of NSR of operating properties and equip- and lease agreements and to CRC under Conrail’s property and equipment, ment, operation of the Shared Assets the Shared Assets Areas (SAA) agree- including the related deferred tax effect Areas and continued operation of cer- ments are as follows: of the differences in tax and accounting tain facilities during a transition period; bases for certain assets. At Dec. 31, and (2) NS’ equity in the earnings (or PRR Oper. PRR Lease SAA 2000, the difference between NS’ invest- loss) of Conrail, net of amortization. ($ in millions) Agmt. Agmts. Agmts. ment in Conrail and its share of “Notes and accounts payable to 2001 $ 178 $ 126 $ 24 2002 196 119 27 Conrail’s underlying net equity was Conrail” includes $51 million at Dec. 31, 2003 217 105 30 $3.8 billion. 2000, and $123 million at Dec. 31, 1999, 2004 238 89 32 NS’ consolidated balance sheet at of interest-bearing loans made to NS by 2005 246 71 34 2006 and subsequent years 4,776 229 652 Dec. 31, 2000, includes $116 million of a PRR subsidiary that are payable on Total $5,851 $ 739 $ 799 liabilities related to the Conrail transac- demand. The interest rate for these loans tion, principally for contractual obliga- is variable and was 5.9% at Dec. 31, 2000. Operating lease expense related to the tions to Conrail employees imposed by Also included is $104 million at Dec. 31, agreements, which is included in the STB when it approved the transac- 2000, and $61 million at Dec. 31, 1999, “Conrail rents and services,” amounted tion. Through Dec. 31, 2000, NS had due to PRR and CRC related to expenses to $502 million in 2000 and $273 mil- paid $71 million of these costs. included in “Conrail rents and services,” lion in 1999. Effective June 1, 1999, NS’ consoli- as discussed above. On the Closing Date, both NS’ rail- dated financial statements include the road route miles and its railroad consolidated financial position and employees increased approximately 50 results of Triple Crown Services percent. NSR and CSXT now provide Company (TCS), a partnership in which substantially all rail freight services subsidiaries of NS and PRR are partners. on Conrail’s route system, perform or are responsible for performing most

44 Summary Financial Summarized Consolidated 4 Income Taxes Information — Conrail Balance Sheets — Conrail The following summary financial infor- Provision for Income Taxes mation should be read in conjunction December 31, ($ in millions) 2000 1999 1998 ($ in millions) 2000 1999 with Conrail’s audited financial state- Current: Assets: Federal $65 $18$89 ments, included as an exhibit to NS’ Current assets $ 520 $ 669 State 11 912 Annual Report on Form 10-K filed with Noncurrent assets 7,540 7,714 Total current taxes 76 27 101 the Securities and Exchange Total assets $ 8,060 $ 8,383 Commission. Deferred: Liabilities and Federal 1 78 100 Through May 31, 1999, Conrail’s stockholders’ equity: State 1 714 results of operations include freight line- Current liabilities $ 435 $ 863 Total deferred taxes 2 85 114 Noncurrent liabilities 3,643 3,701 haul revenues and related expenses. After Provision for income Stockholders’ equity 3,982 3,819 the Closing Date, June 1, 1999, its results taxes $78 $ 112 $ 215 Total liabilities and reflect its new structure and operations. stockholders’ equity $ 8,060 $ 8,383 Currently, Conrail’s major sources of Reconciliation of Statutory operating revenues are from NSR and 3 Other Income — Net Rate to Effective Rate CSXT. The composition of Conrail’s oper- Total income taxes as reflected in the ating expenses also has changed. ($ in millions) 2000 1999 1998 Consolidated Statements of Income differ Income from natural resources: from the amounts computed by applying Summarized Consolidated Gains from sale of timber, oil and gas rights and interests $101 $— $— the statutory federal corporate tax rate Statements of Income — Conrail Royalties from coal 55 59 57 as follows: Nonoperating depletion ($ in millions) 2000 1999 1998 and depreciation (13) (14) (13) 2000 1999 1998 Operating revenues $ 985 $2,174 $3,863 Subtotal 143 45 44 ($ in millions) Amount % Amount % Amount % Operating expenses 749 2,046 3,348 Gains from sale of properties Federal income tax Operating income 236 128 515 and investments 59 62 51 at statutory rate $8735 $ 123 35 $ 296 35 Other – net 31 (83) (81) Rental income 40 34 26 State income taxes, Income before Interest income 11 812 net of federal tax income taxes 267 45 434 Other interest expense (39) (30) (21) benefit 83 10 3 17 2 Provision for income taxes 97 19 167 Sale of accounts receivable Equity in earnings Net income $ 170 $ 26 $ 267 (Note 5) (23) —— of Conrail (7) (3) (6) (2) (68) (8) Taxes on nonoperating property (9) (7) (4) Corporate-owned Note: Conrail’s results for 2000 included gains Corporate-owned life insurance (2) (1) 1 — (11) (1) from the sale of property that had been written up life insurance – net — (3) 11 Other – net (8) (3) (16) (4) (19) (3) to fair market value in the allocation of NS’ invest- Other – net (14) 6(4) Provision for ment in Conrail. Accordingly, the gains related to Total $ 168 $ 115 $ 115 income taxes $7831 $ 112 32 $ 215 25 that fair-value write-up, totaling $17 million after taxes, were excluded in determining NS’ equity in Conrail’s net income. Conrail’s results in 1999 “Other current assets” in the included after-tax expenses of $121 million, princi- Deferred Tax Assets and Consolidated Balance Sheets includes pally: (1) to increase certain components of its Liabilities casualty reserves based on an actuarial valuation, prepaid interest on corporate-owned life Certain items are reported in different (2) to adjust certain litigation and environmental insurance borrowings of $43 million reserves related to settlements and completion of periods for financial reporting and at Dec. 31, 2000, and $37 million at site reviews and (3) to adjust a credit related to the income tax purposes. Deferred tax assets assumption of a lease obligation by CSX. Conrail’s Dec. 31, 1999. results in 1998 included a $187 million after-tax and liabilities are recorded in recognition charge, primarily for estimated severance obliga- of these differences. tions to nonunion employees. These 1999 and 1998 items were considered in the allocation of NS’ investment in Conrail to the fair values of Conrail’s assets and liabilities and, accordingly, were excluded in determining NS’ equity in Conrail’s net income.

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Annual Report The tax effects of temporary differ- 5 Accounts Receivable NS’ allowance for doubtful accounts ences that give rise to significant por- was $7 million at Dec. 31, 2000, and tions of the deferred tax assets and $5 million at Dec. 31, 1999. Beginning in May 2000, a bankruptcy- deferred tax liabilities are as follows: remote special purpose subsidiary of NS sold without recourse undivided owner- 6 Properties December 31, ($ in millions) 2000 1999 ship interests in a pool of accounts Deferred tax assets: receivable totaling approximately December 31, Depreciation ($ in millions) 2000 1999 Rate for 2000 Reserves, including casualty $700 million. Upon commencement of and other claims $ 158 $ 168 Railway property: $ 10,078 Employee benefits 104 111 this program, NS received cash proceeds Road $ 9,681 2.9% 5,588 Retiree health and death of $460 million. The buyers have a pri- Equipment 5,577 4.1% Other property 653 627 3.3% benefit obligation 139 127 ority collection interest in the entire 16,319 15,885 Taxes, including state and property 200 174 pool of receivables, and as a result, NS Other 28 42 Less: Accumulated 5,214 Total gross deferred tax assets 629 622 has retained credit risk to the extent depreciation 4,929 $ 11,105 Less valuation allowance (12) (9) the pool exceeds the amount sold. NS Net properties $ 10,956 Net deferred tax assets 617 613 services and collects the receivables on Deferred tax liabilities: behalf of the buyers; however, no servic- Equipment includes $592 million at Property (3,117) (3,093) Other (63) (73) ing asset or liability has been recog- Dec. 31, 2000, and $593 million at Total gross deferred nized because the benefits of servicing Dec. 31, 1999, of assets recorded pur- tax liabilities (3,180) (3,166) are estimated to be just adequate to suant to capital leases. Other property Net deferred tax liability (2,563) (2,553) includes the costs of obtaining rights to Net current deferred tax assets 182 134 compensate NS for its responsibilities. Net long-term deferred Payments collected from sold receiv- natural resources of $341 million at tax liability $ (2,745) $ (2,687) ables are reinvested in new accounts Dec. 31, 2000, and $349 million at receivable on behalf of the buyers. Dec. 31, 1999. Except for amounts for which a At Dec. 31, 2000, $388 million had valuation allowance has been provided, been sold under this arrangement and, Capitalized Interest Management believes the other deferred therefore, is not included in “Accounts Total interest cost incurred on debt in tax assets will be realized. The total val- receivable, net,” on the consolidated bal- 2000, 1999 and 1998 was $569 million, uation allowance increased $3 million in ance sheet. The fees associated with the $546 million and $537 million, respec- 2000, $6 million in 1999 and $1 million sale, which are based on the buyers’ tively, of which $18 million, $15 million in 1998. financing costs, are included in “Other and $21 million was capitalized. income - net” (see Note 3). NS’ retained Internal Revenue Service (IRS) interest, which is included in “Accounts Reviews receivable, net,” is recorded at fair value Consolidated federal income tax returns using estimates of dilution based on NS’ have been examined and Revenue Agent historical experience. These estimates Reports have been received for all years are adjusted regularly based on NS’ up to and including 1996. The consoli- actual experience with the pool, includ- dated federal income tax returns for ing defaults and credit deterioration. NS 1997, 1998 and 1999 are being audited has historically experienced very low by the IRS. Management believes that levels of default, and as a result, little adequate provision has been made for dilution. If historical dilution percent- any additional taxes and interest there- ages were to increase one percentage on that might arise as a result of IRS point, the value of NS’ retained interest examinations. would be reduced by approximately $7 million.

46 7 Current Liabilities Long-Term Debt Commercial Paper Commercial paper debt is due within one December 31, December 31, ($ in millions) 2000 1999 year, but has been classified as long-term ($ in millions) 2000 1999 Commercial paper at an average because NS has the ability through a Accounts payable: rate of 7.0% $ 1,132 $ 1,722 $2.0 billion credit agreement to convert Accounts and wages payable $ 427 $ 354 Notes at average rates and this obligation into longer-term debt. The Casualty and other claims 223 181 maturities as follows: Equipment rents payable – net 134 135 6.93%, maturing 2001 to 2002 700 1,100 credit agreement expires in 2002 and Vacation liability 117 124 7.52%, maturing 2004 to 2010 2,200 1,600 provides for interest on borrowings at Other 24 24 8.10%, maturing 2017 to 2021 800 800 prevailing rates. NS intends to refinance Total $ 925 $ 818 7.80%, maturing 2027 800 800 the commercial paper either by issuing 7.05%, maturing 2037 750 750 Other current liabilities: 7.90%, maturing 2097 350 350 additional commercial paper or by replac- Interest payable $ 131 $ 123 Equipment obligations at an ing commercial paper notes with long- Accrued Conrail-related costs average rate of 6.7%, term debt. (Note 2) 47 56 maturing to 2014 473 548 Liabilities for forwarded traffic 40 37 Capitalized leases at an Retiree health and death average rate of 7.2%, Capital Lease Obligations benefit obligation (Note 11) 24 24 maturing to 2015 343 382 During 1998, NSR entered into capital Other 17 16 Other debt at an average rate Total $ 259 $ 256 of 7.4%, maturing to 2019 119 35 leases covering new locomotives. The Discounts and premiums, net (31) (28) related capital lease obligations, totaling 8Debt Total long-term debt 7,636 8,059 $127 million, were reflected in the Current maturities (297) (503) Consolidated Balance Sheets as debt Long-term debt less and, because they were noncash trans- Shelf Registration current maturities $ 7,339 $ 7,556 actions, were excluded from the NS has filed with the Securities and Long-term debt matures as follows: Consolidated Statements of Cash Flows. Exchange Commission a shelf registra- 2002 $ 593 These and certain other lease obligation statement on Form S-3 covering the 2003 92 2004 335 tions require the maintenance of a yen- issuance of up to $1 billion of securities. 2005 388 denominated deposit, which is pledged As of Dec. 31, 2000, NS had not issued 2006 and subsequent years 5,931 to the lessor to satisfy yen-denominated any securities under this shelf registra- Total $ 7,339 lease payments. They carry an average tion; however, NS expected to issue debt Each holder of a 2037 note may stated interest rate of 7.1%, but were in February 2001 and use the proceeds require NS to redeem all or part of the effectively converted to variable rate to reduce the amount of commercial note at face value, plus accrued and obligations using interest rate swap paper outstanding. unpaid interest, on May 1, 2004. agreements. The interest rates on the The railroad equipment obligations swap obligations are based on the six- and the capitalized leases are secured by month London Interbank Offered Rate liens on the underlying equipment. and are reset every six months with changes in interest rates accounted for as an adjustment of interest expense over the terms of the leases. As of Dec. 31, 2000, the notional amount of the swap agreements was $253 million, and the average interest rate was 7.2%. As a result, NS is exposed to the market risk associated with fluctuations in interest rates. To date, the effects of the rate fluctuations have been favorable and not material. Counterparties to the

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Annual Report 47

Annual Report interest rate swap agreements are Operating Lease Expense 11 Pensions and Other major financial institutions believed by Postretirement Management to be creditworthy. ($ in millions) 2000 1999 1998 Minimum rents $ 167 $ 118 $ 75 Benefits Contingent rents 61 61 40 Debt Covenants Total $ 228 $ 179 $ 115 Norfolk Southern and certain sub- NS is subject to various financial sidiaries have both funded and unfunded covenants with respect to its debt and During 2000, NS entered into an oper- defined benefit pension plans covering under its credit agreement, including a ating lease for 140 locomotives, which is principally salaried employees. Norfolk minimum net worth requirement, a max- renewable annually, has a maximum term Southern and certain subsidiaries also imum leverage ratio restriction and cer- of eight years and includes purchase provide specified health care and death tain restrictions on issuance of further options. If NS does not purchase the loco- benefits to eligible retired employees and debt. At Dec. 31, 2000, NS was in compli- motives at the end of the maximum lease their dependents. Under the present ance with all debt covenants. term, it is liable for any shortfall in the plans, which may be amended or termi- then fair-value of the locomotives and a nated at NS’ option, a defined percentage specified residual value. NS does not 9 Lease Commitments of health care expenses is covered, expect to be required to make any pay- reduced by any deductibles, copayments, ments under this provision. NS is committed under long-term lease Medicare payments and, in some cases, agreements, which expire on various coverage provided under other group dates through 2067, for equipment, lines 10 Other Liabilities insurance policies. of road and other property. The following amounts do not include payments to PRR December 31, Early Retirement Programs under the Operating Agreement and lease ($ in millions) 2000 1999 During 2000, NS offered two voluntary agreements or to CRC under the SAA Retiree health and death benefit obligation (Note 11) $ 291 $ 261 early retirement programs to its salaried agreements (see Note 2). Future mini- Casualty and other claims 262 275 employees. The principal incentives mum lease payments and operating lease Deferred compensation 148 142 offered in these programs were enhanced expense, other than to PRR and CRC, are Net pension obligations (Note 11) 83 74 Accrued Conrail-related costs pension benefits, the cost for most of as follows: (Note 2) 72 102 which will be paid from NS’ overfunded Other 275 247 pension plan. A February program was Operating Capital Total $ 1,131 $ 1,101 ($ in millions) Leases Leases accepted by 919 of 1,180 eligible employees, and a December program was accept- 2001 $ 107 $ 47 ed by 370 of 846 eligible employees. The 2002 94 46 2003 84 46 total cost of these programs, which is 2004 69 46 included in “Compensation and benefits,” 2005 62 44 was $133 million. The resulting noncash 2006 and subsequent years 512 190 reduction to NS’ pension plan asset is Total $ 928 419 included in “Other - net” in the Less imputed interest Consolidated Statement of Cash Flows. on capital leases at an average rate of 7.1% 76

Present value of minimum lease payments included in debt $ 343

48 Pension Benefits Other Benefits $76 million at Dec. 31, 1999. Because of A summary of the major assumptions ($ in millions) 2000 1999 2000 1999 the nature of such plans, there are no follows: Change in benefit plan assets. obligations NS received Section 401(h) account 2000 1999 1998 Benefit obligation at Funded status: transfers, from pension assets, of beginning of year $1,058 $1,063 $ 340 $ 362 Discount rate 7.5% 7.75% 6.75% Cost of early retirement $8 million in 2000 and $7 million in Future salary increases 5% 5% 5% benefits 119 — 14 — 1999 as reimbursement for medical Pension cost: Increase related to payments for retirees. Discount rate 7.75% 6.75% 7.25% former Conrail employees — 68 — — Return on assets in plans 10% 10% 9% Service cost 18 17 15 11 As a result of the commencement of Future salary increases 5% 5% 5.25% Interest cost 79 73 27 23 operations over Conrail’s lines (see Amendment 21 — — — Note 2), NS hired a substantial portion of Actuarial (gains) losses 120 (92) 79 (33) Pension and Other Benefits paid (103) (71) (30) (23) Conrail’s former work force. In August Benefit obligation 1999, NS assumed certain pension obli- Postretirement Benefit Costs at end of year 1,312 1,058 445 340 gations related to those employees. These Components Change in plan assets obligations, along with pension plan Fair value of plan assets ($ in millions) 2000 1999 1998 at beginning of year 2,072 1,544 152 139 assets in excess of the obligations, were Pension benefits Transfer of assets from transferred to the NS plans in 1999. This Service cost $18$17$13 Conrail plan — 352 — — transfer resulted in an increase to NS’ Interest cost 79 73 67 Actual return on plan assets 30 250 (5) 21 Cost of early retirement Employer contribution 8 4 9 15 pension plan asset and a corresponding programs 119 —— 401(h) account transfer (8) (7) — — decrease in NS’ investment in Conrail. Expected return on Benefits paid (103) (71) (30) (23) NS amended its qualified pension plan assets (192) (152) (106) Fair value of plan plan, effective Oct. 1, 2000, to allow for Amortization of prior assets at end of year 1,999 2,072 126 152 service cost 4 41 Funded status 687 1,014 (319) (188) the payment of qualifying disability benefits. The amendment increased the pen- Amortization of initial net asset (7) (7) (7) Unrecognized initial net asset (3) (10) — — sion benefit obligation by $21 million at Recognized net actuarial Unrecognized (gain) loss (478) (799) 4 (97) Dec. 31, 2000. (gain) loss (38) (22) (12) Unrecognized prior Net cost (benefit) $ (17) $ (87) $ (44) service cost (benefit) 47 40 — — Pension and other postretirement Other postretirement Net amount recognized $ 253 $ 245 $ (315)$ (285) benefit costs are determined based on benefits actuarial valuations that reflect appropri- Service cost $15$11$10 Amounts recognized in the Interest cost 27 23 24 Consolidated Balance ate assumptions as of the measurement Cost of early retirement Sheets consist of: date, ordinarily the beginning of each programs 14 —— Prepaid benefit cost $ 315 $ 298 $—$— year. The funded status of the plans is Expected return on plan Accrued benefit liability (83) (74) (315) (285) determined using appropriate assump- assets (14) (12) (9) Accumulated other Amortization of prior comprehensive income 21 21 — — tions as of each year end. During 1999, service cost — (12) (12) Net amount recognized $ 253 $ 245 $ (315)$ (285) NS received assets from the Conrail pen- Recognized net actuarial sion plan and assumed certain related (gain) loss (4) (2) (2) Of the pension plans included above, liabilities. As a result, the measurement Net cost $38$8$11 the unfunded pension plans were the dates for determining pension costs were only plans with an accumulated benefit Jan. 1, 1999, and Aug. 31, 1999; the For measurement purposes, increases obligation in excess of plan assets. These costs reflect discount rates of 6.75% and in the per capita cost of covered health plans’ accumulated benefit obligations 7.75%, respectively, and other assump- care benefits were assumed to be 7.0% were $83 million at Dec. 31, 2000, and tions appropriate at those dates. for 2001 and 7.5% for 2000. It is $74 million at Dec. 31, 1999. These assumed the rate will decrease gradually plans’ projected benefit obligations were to an ultimate rate of 5.0% for 2003 and $89 million at Dec. 31, 2000, and remain at that level thereafter.

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Annual Report Assumed health care cost trend rates 12 Stock-Based 1999 and $25 million in 1998. NS rec- have a significant effect on the amounts Compensation ognized additional paid-in capital of reported in the financial statements. To $4 million in 1999 and $10 million in illustrate, a one-percentage-point change 1998 related to the tax benefit generat- Under the stockholder-approved Long- in the assumed health care cost trend ed by stock option exercises. Term Incentive Plan (LTIP), a committee would have the following effects: Had such compensation costs been of nonemployee directors of the Board determined in accordance with may grant stock options, stock apprecia- One percentage point SFAS 123, net income would have been tion rights (SARs), restricted stock and ($ in millions) Increase Decrease $149 million in 2000, $210 million in Increase (decrease) in: performance share units (PSUs), up to a 1999 and $718 million in 1998; basic Total service and interest maximum 53,025,000 shares of Norfolk cost components $ 5 $ (4) earnings per share would have been Southern Common Stock (“Common Postretirement benefit $0.39 in 2000, $0.55 in 1999 and Stock”). Under the Board-approved obligation $ 35 $(30) $1.90 in 1998; and diluted earnings per Thoroughbred Stock Option Plan (TSOP), share would have been $0.39 in 2000, Under collective bargaining agree- the committee may grant stock options $0.55 in 1999 and $1.89 in 1998. ments, NS and certain subsidiaries par- up to a maximum of 6,000,000 shares of These pro forma amounts include com- ticipate in a multi-employer benefit plan, Common Stock. Options may be granted pensation costs as calculated using the which provides certain postretirement for a term not to exceed 10 years, but Black-Scholes option-pricing model, with health care and life insurance benefits to may not be exercised prior to the first average expected option lives of five eligible union employees. Premiums anniversary of the date of grant. Options years for 2000 grants, four years for under this plan are expensed as incurred are exercisable at the fair market value 1999 grants and five years for 1998 and amounted to $7 million in 2000 and of Common Stock on the date of grant. grants; average risk-free interest rates $5 million in both 1999 and 1998 The LTIP also permits the payment . of 6.8% in 2000, 5.2% in 1999 and — on a current or a deferred basis and 5.5% in 1998; average stock-price in cash or in stock — of dividend equiv- 401(k) Plans volatilities of 33% in 2000, 21% in alents on shares of Common Stock cov- Norfolk Southern and certain sub- 1999 and 15% in 1998; and dividend ered by options or PSUs in an amount sidiaries provide 401(k) savings plans yields ranging from 0% to 3%. These commensurate with dividends paid on for employees. Under the plans, NS assumptions produce per-share grant- Common Stock. Tax absorption pay- matches a portion of employee contribu- date fair values of $5.22 in 2000, $5.12 ments also are authorized in amounts tions, subject to applicable limitations. in 1999 and $8.82 in 1998. Since 1999, NS has issued shares of estimated to equal the federal and state income taxes applicable to shares of Common Stock to fund its contributions. Stock Option Activity NS’ expenses under these plans were Common Stock issued subject to a share retention agreement. $12 million in both 2000 and 1999 and Weighted Average $10 million in 1998. Option Shares Exercise Price In November 1999, NS issued and Accounting Method Balance 12/31/97 11,373,418 $ 22.32 contributed to eligible participants’ NS applies APB Opinion 25 and related Granted 3,625,000 32.16 Exercised (1,908,370) 19.22 accounts approximately 2 million shares interpretations in accounting for Canceled (31,000) 29.46 of Norfolk Southern Common Stock in awards made under the plans. Balance 12/31/98 13,059,048 25.48 connection with a temporary special Accordingly, grants of PSUs, restricted Granted 9,150,400 30.09 Exercised (859,085) 17.10 work incentive program available to its stock, dividend equivalents, tax absorp- Canceled (234,000) 29.84 unionized employees during much of the tion payments and SARs result in Balance 12/31/99 21,116,363 27.77 third quarter of 1999. The cost of the charges to net income, while grants of Granted 7,705,800 16.94 program, which was charged to compen- stock options have no effect on net Exercised (273,813) 13.95 Canceled (427,400) 26.84 income. Related compensation costs sation and benefits expenses, was Balance 12/31/00 28,120,950 $24.96 $49 million. were $5 million in 2000, $2 million in

50 Of the total options outstanding at 13 Stockholders’ Equity 14 Earnings Per Share Dec. 31, 2000, 20 million were vested and have a weighted-average exercise Accumulated Other The following table sets forth the price of $27.97. Comprehensive Income calculation of basic and diluted earnings “Accumulated other comprehensive per share: Stock Options Outstanding income” reported in “Stockholders’ equity” included the following net-of-tax ($ in millions except per share, Exercise Price Number Weighted Average shares in millions) 2000 1999 1998 Weighted Outstanding Remaining amounts: unrealized gains on securities Basic earnings per share: Range Average at 12/31/00 Contractual Life of $7 million at Dec. 31, 2000, and Income available to common $14.25 to$16.94 $16.82 8,037,350 8.7 years $2 million at Dec. 31, 1999; and mini- stockholders for basic and diluted computations $ 172 $ 239 $ 734 18.81 to 21.08 20.43 3,059,750 2.7 years mum pension liability of $13 million at 24.31 to 27.69 26.81 7,988,100 6.7 years Weighted-average shares 29.46 to 33.25 32.09 9,035,750 7.3 years each of Dec. 31, 2000, and Dec. 31, 1999. outstanding 383 381 379 $14.25 to$33.25 $24.96 28,120,950 7.0 years “Other comprehensive income” reported Basic earnings per share $0.45 $0.63 $1.94 in the Consolidated Statements of Diluted earnings per share: Changes in Stockholders’ Equity consist- Performance Share Units Weighted-average shares PSUs provide for awards based on ed of the following: outstanding per above 383 381 379 Dilutive effect of outstanding achievement of certain predetermined options, PSUs and SARs (as corporate performance goals at the end ($ in millions) 2000 1999 1998 Unrealized gains on securities $7 $(6)$ 1 determined by the application of a three-year cycle. PSU grants and Minimum pension liability -- 2 (23) of the treasury stock method) — 12 average grant-date fair market values Income taxes (2) 19 Adjusted weighted-average 383 Other comprehensive shares outstanding 382 381 were 937,500 and $16.94 in 2000; $0.45 income $5 $ (3) $ (13) Diluted earnings per share $0.63 $1.93 850,000 and $27.72 in 1999; and 565,500 and $32.16 in 1998, respective- These calculations exclude options ly. PSUs may be paid in the form of “Unrealized gains on securities” the exercise price of which exceeded the shares of Common Stock, cash or any included reclassification adjustments average market price of Common Stock combination thereof. Shares earned and for gains realized in income from the as follows: in 2000, 28 million in the issued may be subject to share retention sale of the securities of less than fourth, third and first quarters, and agreements and held by NS for up to five $1 million in each year. 20 million in the second quarter; in years. Undistributed Earnings of 1999, 17 million in the fourth quarter, 9 million in the third quarter, 7 million Equity Investees Shares Available and Issued in the second quarter and 5 million in “Retained income” includes undistributed Shares of stock available for future the first quarter; and in 1998, 4 million earnings of equity investees, principally grants and issued in connection with all in the fourth and third quarters. attributable to NS’ equity in the earnings features of the LTIP and TSOP are as fol- There are no adjustments to “Net of Conrail, of $351 million at Dec. 31, lows: income” or “Income from continuing 2000; $330 million at Dec. 31, 1999; and operations” for the diluted earnings per $314 million at Dec. 31, 1998. 2000 1999 1998 share computations. Available for future grants 12/31: LTIP 2,554,584 10,512,997 16,233,600 TSOP 2,488,700 2,349,600 —

Shares of Common Stock issued: LTIP 395,626 1,086,288 2,212,323 TSOP — ——

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Annual Report 15 Fair Values of 16 Discontinued 17 Commitments and Financial Instruments Operations — Contingencies Motor Carrier The fair values of “Cash and cash equiva- Lawsuits lents,” “Short-term investments,” On March 28, 1998, NS sold all the com- Norfolk Southern and certain sub- “Accounts receivable,” “Short-term debt” mon stock of North American Van Lines, sidiaries are defendants in numerous law- and “Accounts payable” approximate car- Inc. (NAVL), its motor carrier subsidiary. suits relating principally to railroad oper- rying values because of the short maturi- Total proceeds from the sale were ations. While the final outcome of these ty of these financial instruments. The $207 million, resulting in a $90 million lawsuits cannot be predicted with certain- fair value of corporate-owned life insur- pretax gain ($105 million, or 28 cents ty, it is the opinion of Management, based ance approximates carrying value. The per basic and diluted share, after taxes). on known facts and circumstances, that carrying amounts and estimated fair val- The higher after-tax gain was the result the amount of NS’ ultimate liability is ues for the remaining financial instru- of differences between book and tax unlikely to have a material adverse ments, excluding investments accounted bases and the realization of deferred tax effect on NS’ financial position, results for under the equity method in accor- benefits. of operations or liquidity. dance with APB Opinion No. 18, consisted NAVL’s results of operations, financial of the following at Dec. 31: position and cash flows are presented as Environmental Matters “Discontinued operations” in the accom- NS is subject to various jurisdictions’ 2000 1999 panying financial statements. A summary Carrying Fair Carrying Fair environmental laws and regulations. It is ($ in millions) Amount Value Amount Value of NAVL’s results of operations follows: NS’ policy to record a liability where Investments $ 142 $ 149 $49$54 such liability or loss is probable and its Long-term debt (7,636) (7,809) (8,058) (7,980) ($ in millions) 1998 amount can be estimated reasonably. Interest rate swaps —5—4Motor carrier revenues $ 207 Motor carrier expenses 208 Claims, if any, against third parties for Loss from operations (1) recovery of cleanup costs incurred by NS Quoted market prices were used to Gain on sale, net of taxes 105 are reflected as receivables in the bal- determine the fair value of marketable Income from discontinued operations $ 104 ance sheet and are not netted against the securities; underlying net assets were Earnings per share (basic and diluted) from discontinued operations $ 0.28 associated NS liability. Environmental used to estimate the fair value of other engineers regularly participate in ongo- investments. The fair values of debt were ing evaluations of all identified sites and estimated based on quoted market prices in determining any necessary adjust- or discounted cash flows using current ments to initial liability estimates. NS interest rates for debt with similar also has established an Environmental terms, company rating and remaining Policy Council, composed of senior man- maturity. The fair value of interest rate agers, to oversee and interpret its envi- swaps was estimated based on discounted ronmental policy. cash flows, reflecting the difference between estimated future variable-rate payments and future fixed-rate receipts. Carrying amounts of marketable securities reflect unrealized holding gains of $11 million on Dec. 31, 2000, and $3 million on Dec. 31, 1999. Sales of “available- for-sale” securities were immaterial for years ended Dec. 31, 2000 and 1999.

52 As of Dec. 31, 2000, NS’ balance present and future — is inherent in the Purchase Commitment sheet included a reserve for environ- railroad business. Some of the commodi- NSR committed in 2000 to purchase mental exposures in the amount of ties in NS’ traffic mix, particularly those 160 locomotives in 2001. Some of the $36 million (of which $8 million is classified as hazardous materials, can locomotives were received and paid for accounted for as a current liability), pose special risks that NS and its sub- in 2000, and the remainder will be deliv- which is NS’ estimate of the probable sidiaries work diligently to minimize. In ered in the first half of 2001. NSR cleanup and remediation costs based on addition, several NS subsidiaries own, or expects to finance the purchase of these available information at 125 identified have owned, land used as operating locomotives with proceeds from the sale locations. On that date, 10 sites account- property, or which is leased or may have of equipment trust certificates. ed for $18 million of the reserve, and no been leased and operated by others, or individual site was considered to be held for sale. Because environmental Change-In-Control material. NS anticipates that much of problems may exist on these properties this liability will be paid out over five that are latent or undisclosed, there can Arrangements Norfolk Southern has compensation years; however, some costs will be paid be no assurance that NS will not incur agreements with officers and certain out over a longer period. environmentally related liabilities or key employees that become operative At some of the 125 locations, certain costs with respect to one or more of only upon a change in control of the NS subsidiaries, usually in conjunction them, the amount and materiality of Corporation, as defined in those agree- with a number of other parties, have which cannot be estimated reliably at ments. The agreements provide general- been identified as potentially responsi- this time. Moreover, lawsuits and claims ly for payments based on compensation ble parties by the Environmental involving these and other now-unidenti- at the time of a covered individual’s Protection Agency (EPA) or similar fied environmental sites and matters involuntary or other specified termina- state authorities under the Comprehen- are likely to arise from time to time. The tion and for certain other benefits. sive Environmental Response, resulting liabilities could have a signifi- Compensation and Liability Act of 1980, cant effect on financial condition, or comparable state statutes, which results of operations or liquidity in a Debt Guarantees often impose joint and several liability particular year or quarter. As of Dec. 31, 2000, certain Norfolk for cleanup costs. However, based on its assessments of Southern subsidiaries are contingently With respect to known environmen- the facts and circumstances now liable as guarantors with respect to tal sites (whether identified by NS or by known, Management believes that it has $8 million of indebtedness of related the EPA or comparable state authori- recorded the probable costs for dealing entities. ties), estimates of NS’ ultimate potential with those environmental matters of financial exposure for a given site or in which the Corporation is aware. the aggregate for all such sites are nec- Further, Management believes that it is essarily imprecise because of the widely unlikely that any identified matters, varying costs of currently available either individually or in the aggregate, cleanup techniques, the likely develop- will have a material adverse effect on ment of new cleanup technologies, the NS’ financial position, results of opera- difficulty of determining in advance the tions or liquidity. 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,

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Annual Report 53

Annual Report Report of Management Norfolk Southern Corporation and Subsidiaries

January 23, 2001

To the Stockholders Norfolk Southern Corporation:

Management is responsible for the preparation and content Norfolk Southern Corporation and its subsidiaries have of the financial statements included in this annual report. established their intent to maintain the highest standards of The financial statements have been prepared in conformity ethical conduct in all their business activities. Internal with accounting principles generally accepted in the United accounting and operating control policies, as well as a corpo- States of America and reflect Management’s judgments and rate code of conduct, are documented and communicated to all estimates concerning effects of events and transactions that levels of Management. Adherence to these policies and are accounted for or disclosed. The financial information con- procedures and this code is continuously being evaluated by a tained in other sections of this annual report is consistent thorough, coordinated effort of internal audit staff and with that contained in the financial statements. independent auditors. Norfolk Southern Corporation and its subsidiaries main- The Audit Committee of the Board of Directors is com- tain accounting systems that are supported by internal posed solely of independent nonemployee directors. The accounting controls. These systems and controls provide Committee meets periodically with the Vice President- reasonable assurance that assets are safeguarded and that Internal Audit and the independent auditors to review and transactions are executed in accordance with Management’s discuss audit findings and other accounting and financial authorization and recorded properly to permit the prepara- matters. Matters reviewed include the annual audit plan and tion of financial statements in accordance with accounting the accounting policies of Norfolk Southern Corporation and principles generally accepted in the United States of its subsidiaries, conflict of interest policy, internal control America. The concept of reasonable assurance is based on systems, and financial operations and reporting. the recognition that the cost of a system of internal account- KPMG LLP,a firm of independent public accountants, ing control should not exceed its benefits. A staff of experi- has been engaged to audit and render an opinion on the enced and highly trained internal auditors conducts audit consolidated financial statements. As independent auditors, procedures designed to test compliance with internal con- they also provide an objective, outside review of trols. Results of audit efforts and actions are communicated Management’s report of operating results and financial con- to appropriate Management, including the Chairman, dition. Working with the internal auditors, they review inter- President and Chief Executive Officer, and to the Audit nal accounting controls and make tests as appropriate of the Committee of the Board of Directors. data included in the financial statements.

David R. Goode Henry C. Wolf John P. Rathbone Chairman, President and Vice Chairman and Senior Vice President and Chief Executive Officer Chief Financial Officer Controller

54 Independent Auditors’ Report

The Stockholders and Board of Directors Norfolk Southern Corporation:

We have audited the accompanying consolidated balance sheets of Norfolk Southern Corporation and subsidiaries as of December 31, 2000 and 1999, 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, 2000. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Norfolk Southern Corporation and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.

Norfolk,Virginia January 23, 2001

2000 Norfolk Southern Corporation

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Annual Report Board of Directors and Officers

Norfolk Southern Board of Directors and vice chairmen are: seated, left to right, Carroll A. Campbell Jr., Gerald L. Baliles and Jane Margaret O’Brien. Standing, left to right: Harold W. Pote, Henry C. Wolf, L.I. Prillaman, Stephen C. Tobias, Landon Hilliard, Gene R. Carter, Alston D. Correll, Steven F. Leer and David R. Goode.

Board of Directors Steven F. Leer, 48, of St. Louis, is president and John P. Rathbone, senior vice president NS Board of Directors as of Feb. 1, 2001 chief executive officer of Arch Coal, Inc., the nation’s and controller second largest coal producer. His Board service began Stephen P. Renken, senior vice president Gerald L. Baliles, 60, of Richmond, Va., is a partner in 1999; his current term expires in 2002. and chief information officer in the law firm of Hunton & Williams, a business law John M. Samuels, senior vice president firm with offices in several major U.S. cities and Jane Margaret O’Brien, 47, of St. Mary’s City, Md., Operations Planning and Support international offices in Bangkok, Brussels, London, is president of St. Mary’s College of Maryland. Her Donald W. Seale, senior vice president Vienna, Warsaw and Hong Kong. His Board service Board service began in 1994; her current term expires began in 1990; his current term expires in 2002. Merchandise Marketing in 2001. James E. Carter Jr., vice president Internal Audit Carroll A. Campbell Jr., 60, of Georgetown, S.C., Harold W. Pote, 54, of New York City, is regional Cindy C. Earhart, vice president is president and chief executive officer of the banking group executive of J. P.Morgan Chase Bank. Information Technology American Council of Life Insurers. His Board service His Board service began in 1988; his current term Robert C. Fort, vice president Public Relations began in 1996; his current term expires in 2003. expires in 2003. William A. Galanko, vice president Taxation Gene R. Carter, 61, of Alexandria,Va., is executive Robert E. Huffman, vice president Officers Intermodal Operations director and chief executive officer of the Association NS officers as of Feb. 1, 2001 for Supervision and Curriculum Development, among Tony L. Ingram, vice president the world’s largest international education associations. David R. Goode, chairman, president and Transportation Operations His Board service began in 1992; his current term chief executive officer H. Craig Lewis, vice president Corporate Affairs expires in 2002. L. I. Prillaman, vice chairman and Henry D. Light, vice president Law chief marketing officer Mark R. MacMahon, vice president Alston D. Correll, 59, of Atlanta, Ga., is Stephen C. Tobias, vice chairman and Labor Relations chairman, chief executive officer and chief operating officer Bruno Maestri, vice president Public Affairs president of Georgia-Pacific Corporation. Henry C. Wolf, vice chairman and Mark D. Manion, vice president Transportation His Board service began in 2000; his current chief financial officer Services and Mechanical term expires in 2001. John F. Corcoran, senior vice president Robert E. Martínez, vice president Ports Public Affairs and Development David R. Goode, 60, of Norfolk,Va., is chairman, John W. Fox Jr., senior vice president Michael R. McClellan, vice president president and chief executive officer of Norfolk Coal Marketing Intermodal Marketing Southern. He joined Norfolk and Western Railway in James A. Hixon, senior vice president Thomas H. Mullenix Jr., vice president 1965 and was named CEO of Norfolk Southern in Administration 1992. His Board service began in 1992; his current Human Resources J. Gary Lane, senior vice president Law term expires in 2003. Richard W. Parker, vice president Real Estate James W. McClellan, senior vice president William J. Romig, vice president and treasurer Landon Hilliard, 61, of New York City, is a partner in Planning Danny D. Smith, president NS Development Brown Brothers Harriman & Co., a private bank in Kathryn B. McQuade, senior vice president Charles J. Wehrmeister, vice president New York City. His Board service began in 1992; his Financial Planning Safety and Environmental current term expires in 2001. Charles W. Moorman, president Thoroughbred Gary W. Woods, vice president Engineering Technology and Telecommunications, Inc. Dezora M. Martin, corporate secretary 56 Stockholder Information Common Stock Corporate Offices Ticker symbol: NSC Executive offices Newspaper listing: NorflkSo Norfolk Southern Corporation Common stock of Norfolk Southern Corporation is Three Commercial Place listed and traded on the New York Stock Exchange. Norfolk,Va. 23510-9227 (757) 629-2600 Annual Meeting May 10, 2001, at 10 a.m. EDT Regional offices The Norfolk Waterside Marriott 110 Franklin Road, SE and Waterside Convention Center Roanoke,Va. 24042 235 East Main Street Norfolk,Va. 99 Spring St., SW Atlanta, Ga. 30303 Publications Upon written request, the Corporation’s annual report to Account Assistance the Securities and Exchange Commission on Form 10-K for the For assistance with lost stock certificates, transfer fiscal year ended Dec. 31, 2000, and its quarterly reports on requirements and the Dividend Reinvestment Plan, contact: Form 10-Q will be furnished free to stockholders. Write to: Registrar and Transfer Agent Public Relations Department, Norfolk Southern Corporation, The Bank of New York Three Commercial Place, Norfolk, Va. 23510-9227. 101 Barclay St.-12W A Notice and Proxy Statement/Annual Meeting of New York, N.Y. 10286-1002 Stockholders are furnished to stockholders in advance of the (800) 432-0140 annual meeting. A toll-free telephone number — (800) 531-6757 — For assistance with address changes, dividend checks and is available for information. direct deposit of dividends, contact: Assistant Corporate Secretary- Dividends Stockholder Records At its January 2001 meeting, the Corporation’s Board of Norfolk Southern Corporation Directors declared a quarterly dividend of 6 cents per share on Three Commercial Place its common stock, payable on March 10, 2001, to stockholders Norfolk,Va. 23510-9219 of record on Feb. 2, 2001. (800) 531-6757 Norfolk Southern Corporation pays quarterly dividends on its common stock, usually on or about March 10, June 10, Sept. 10, Dividend Reinvestment Plan and Dec. 10. The Corporation has paid 74 consecutive quarterly Stockholders whose names appear on their stock certificates dividends since its inception in 1982. (not a street or broker name) are eligible to participate in the Dividend Reinvestment Plan. Financial Inquiries The Plan provides a convenient, economical and systematic Henry C. Wolf method of acquiring additional shares of the Corporation’s com- Vice Chairman and Chief Financial Officer mon stock by permitting eligible stockholders of record to rein- Norfolk Southern Corporation vest dividends. Three Commercial Place The Plan’s administrator is The Bank of New York. For addi- Norfolk,Va. 23510-9215 tional information, dial (800) 432-0140. (757) 629-2650 Annual Report Requests Stockholder Inquiries (800) 531-6757 Director Investor Relations Norfolk Southern Corporation World Wide Web Address Three Commercial Place www.nscorp.com Norfolk,Va. 23510-9215 (757) 629-2861

Printing: Progress Press, Inc., of Roanoke,Va.