UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington , D.C.   20549

FORM 10-K

 

The registrant meets the conditions set forth in General Instruction ( I )( 1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format.

Table of Contents

 

Norfolk Southern Railway Company and Subsidiaries (NS Rail)

 

 

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PART I

Norfolk Southern Railway Company and Subsidiaries (NS Rail)

Item 1.   Business. and Item 2.   Properties .

In accordance with General Instruction ( I )( 2)(d), the registrant is providing reduced disclosure for Items 1, Business, and 2, Properties.   For Item 1, the registrant furnishes below a brief description of the business done by the registrant and its subsidiaries during the most recent fiscal year, which, in the opinion of management, indicates the general nature and scope of the business of the registrant and its subsidiaries.   For Item 2, the registrant furnishes below a brief description of the material properties of the registrant and its subsidiaries to the extent, in the opinion of management, necessary for an understanding of the business done by the registrant and its subsidiaries.

General - Norfolk Southern Railway Company (Norfolk Southern Railway or NSR) was incorporated in 1894 under the name Southern Railway Company (Southern) in the Commonwealth of Virginia and, together with its consolidated subsidiaries (collectively, NS Rail), is primarily engaged in the transportation of freight by rail.

On June 1, l982, Southern and Norfolk and Western Railway Company (N&W) became subsidiaries of Norfolk Southern Corporation (NS), a transportation holding company.   Effective Dec. 31, 1990 , NS transferred all the common stock of N&W to Southern, and Southern's name was changed to Norfolk Southern Railway Company.   Effective Sept. 1, 1998 , N&W was merged with and into Norfolk Southern Railway.   All the equity securities of Norfolk Southern Railway are owned directly, or indirectly, by NS.   NS common stock is publicly held and listed on the New York Stock Exchange.

Norfolk Southern Railway makes available free of charge through the website www.nscorp.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC).

CONRAIL CORPORATE REORGANIZATION - On August 27, 2004 , NS, CSX Corporation (CSX) and Conrail Inc. (Conrail) completed a reorganization of Conrail (Conrail Corporate Reorganization), which established direct ownership and control by NSR and CSX Transportation, Inc. (CSXT) of two former CRC subsidiaries, Pennsylvania Lines LLC (PRR) and New York Central Lines LLC (NYC), respectively.   Prior to the Conrail Corporate Reorganization, NSR operated the routes and assets of PRR and CSXT operated the routes and assets of NYC, each in accordance with operating and lease agreements.   Pursuant to the Conrail Corporate Reorganization, the operating and lease agreements were terminated and PRR and NYC were merged into NSR and CSXT, respectively.   The reorganization did not involve the Shared Assets Areas and did not affect the competitive rail service provided in the Shared Assets Areas.   Conrail continues to own, manage and operate the Shared Assets Areas as previously approved by the Surface Transportation Board (STB).   In connection with the Conrail Corporate Reorganization, NS, CSX and Conrail obtained a ruling from the Internal Revenue Service (IRS) regarding certain tax matters, and the STB approved the transaction.   As a part of the Conrail Corporate Reorganization, Conrail restructured its existing unsecured and secured public indebtedness, with the consent of Conrail's debtholders .   See Note 2 to the Consolidated Financial Statements.

TRIPLE CROWN SERVICES COMPANY CAPITAL CONTRIBUTION - On Aug. 27, 2004 , NS contributed 500 shares of TCS Leasing, Inc. (TCS Leasing) common stock to the capital of NSR.   TCS Leasing indirectly owns a 50% partnership interest in Triple Crown Services Company (Triple Crown).   As a result of the Conrail Corporate Reorganization, NSR became the indirect owner of the remaining partnership interest in Triple Crown.   Accordingly, Triple Crown is now included in NS Rail's consolidated financial statements.   See Note 2 to the Consolidated Financial Statements.

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RAILROAD OPERATIONS - As of Dec. 31, 2004 , NS Rail operated approximately 21,300 miles of road.   The miles operated, which includes leased lines between Cincinnati , Ohio and Chattanooga , Tennessee , and trackage rights over property owned by North Carolina Railway Company, were as follows:

NS Rail's lines carry raw materials, intermediate products and finished goods primarily in the Southeast, East and Midwest , and via interchange with other rail carriers, to and from the rest of the United States and parts of Canada .   These lines also transport overseas freight through several Atlantic and Gulf Coast ports.   Atlantic ports served by NS Rail include:   the Ports of New York/New Jersey; Philadelphia, Pennsylvania/Camden, New Jersey; Baltimore, Maryland; Wilmington, Delaware; Norfolk, Virginia; Morehead City, North Carolina; Charleston, South Carolina; Savannah and Brunswick, Georgia; and Jacksonville, Florida.   Gulf Coast ports served include Mobile , Alabama and New Orleans , Louisiana .

NS Rail's lines reach most of the larger industrial and trading centers of the Southeast, Northeast, Mid-Atlantic region and Midwest .   Chicago, Norfolk, Detroit, Atlanta, Metropolitan New York City, Jacksonville, Kansas City (Missouri), Baltimore, Buffalo, Charleston, Cleveland, Columbus, Philadelphia, Pittsburgh, Toledo, Greensboro, Charlotte and Savannah are among the leading centers originating and terminating freight traffic on the system.   In addition, haulage arrangements with connecting carriers allow NS Rail to provide single-line service to and from additional markets, including haulage provided by Florida East Coast Railway Company to serve southern and eastern Florida, including the port cities of Miami, West Palm Beach and Fort Lauderdale; and haulage provided by The Kansas City Southern Railway Company to provide transcontinental intermodal service via a connection in Dallas, Texas with the Burlington Northern and Santa Fe Railway Company.   Service is provided to New England , including the Port of Boston , via haulage, trackage rights and interline arrangements with Canadian Pacific Railway Company and Guilford Transportation Industries.   The system's lines also reach many individual industries, electric generating facilities, mines (in western Virginia , eastern Kentucky , southern and northern West Virginia and western Pennsylvania ), distribution centers, transload facilities and other businesses located in smaller communities in its service area.   The traffic corridors carrying the heaviest volumes of freight include those from the New York City area to Chicago (via Allentown and Pittsburgh ); Chicago to Jacksonville (via Cincinnati , Chattanooga and Atlanta ); Appalachian coal fields of Virginia , West Virginia and Kentucky , to Norfolk , Virginia and Sandusky , Ohio ; Cleveland to Kansas City ; and Knoxville to Chattanooga .   Chicago , Memphis , Sidney/Salem, Illinois , New Orleans , Kansas City, Buffalo , St. Louis and Meridian , Mississippi are major gateways for interterritorial system traffic.

Triple Crown Operations - Triple Crown, NS Rail's intermodal subsidiary, offers door-to-door intermodal service using RoadRailer ® equipment and domestic containers.   RoadRailer ® units are enclosed vans that can be pulled over highways in tractor-trailer configuration and over the rails by locomotives.   Triple Crown provides intermodal service in major traffic corridors, including those between the Midwest and the Northeast, the Midwest and the Southeast, and the Midwest and Texas .

RAILWAY OPERATING REVENUES - NS Rail's total railway operating revenues were $7.2 billion in 2004.

COAL TRAFFIC  -  Coal, coke and iron ore -- most of which is bituminous coal -- is NS Rail's largest commodity group as measured by revenues.   NS Rail handled a total of 181 million tons in 2004, most of which originated on NS Rail's lines in West Virginia , Virginia , Pennsylvania and Kentucky .   Revenues from coal, coke and iron ore accounted for about 24% of NS Rail's total railway operating revenues in 2004.

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GENERAL Merchandise Traffic  -  General merchandise traffic is composed of five major commodity groupings:  automotive; chemicals; metals and construction; agriculture, consumer products and government; and paper, clay and forest products.   The automotive group includes finished vehicles for BMW, DaimlerChrysler, Ford Motor Company, General Motors, Honda, Isuzu, Jaguar, Land Rover, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru, Suzuki, Toyota and Volkswagen, and auto parts for Ford Motor Company, General Motors, Mercedes-Benz and Toyota .   The chemicals group includes sulfur and related chemicals, petroleum products, chlorine and bleaching compounds, plastics, rubber, industrial chemicals, chemical wastes and municipal wastes.   The metals and construction group includes steel, aluminum products, machinery, scrap metals, cement, aggregates, bricks and minerals.   The agriculture, consumer products and government group includes soybeans, wheat, corn, fertilizer, animal and poultry feed, food oils, flour, beverages, canned goods, sweeteners, consumer products, ethanol and items for the military.   The paper, clay and forest products group includes lumber and wood products, pulp board and paper products, wood fibers, wood pulp, scrap paper and clay.   General merchandise carloads handled in 2004 were 2.88 million, compared with 2.78 million handled in 2003, an increase of 4%.   General merchandise revenues accounted for about 56% of NS Rail's total railway operation revenues.

In 2004, 141 million tons of general merchandise freight, or approximately 67% of total general merchandise tonnage handled by NS Rail, originated online.   The balance of general merchandise traffic was received from connecting carriers at interterritorial gateways.   The principal interchange points for NS Rail-received traffic included Chicago , Memphis , New Orleans , Cincinnati , Kansas City, Detroit , Hagerstown , St. Louis/East St. Louis and Louisville .

INTERMODAL TRAFFIC - The intermodal market consists of shipments moving in trailers, domestic and international containers, and Roadrailer ® equipment.   These shipments are handled on behalf of intermodal marketing companies, international steamship lines, truckers and other shippers.   Intermodal units handled in 2004 were 2.89 million, compared with 2.47 million handled in 2003, an increase of 17%.   Intermodal revenues accounted for about 20% of NS Rail's total railway operating revenues.

FREIGHT RATES - In 2004, NS Rail continued its reliance on private contracts and exempt price quotes as the predominant pricing mechanism.   Thus, a major portion of NS Rail's freight business is not currently economically regulated by the government.   In general, market forces have been substituted for government regulation and now are the primary determinant of rail service prices.   However, in 2004 there were significant coal movements moving under common carrier (tariff) rates that had previously moved under rates contained in transportation contracts.   Beginning Jan. 1, 2002, coal moving to Duke Energy's (Duke) Belew's Creek, Allen, Buck and Dan River generating stations moved under common carrier rates and beginning April 1, 2002, coal moving to Carolina Power and Light's (CP&L) Hyco and Mayo plants moved under common carrier rates.   In 2002, Duke and CP&L filed rate reasonableness complaints at the STB alleging that NS Rail's tariff rates for the transportation of coal were unreasonable.   On Oct. 20, 2004 , in a consolidated decision the STB found NS Rail's rates to be reasonable in both cases.   At the STB's invitation, Duke and CP&L have each initiated proceedings to determine whether phasing constraints should apply.   Although management has made an estimate of the ultimate resolution of these cases, the uncertainty of future developments in the Duke case and (or) the CP&L case may result in adjustments that could have a favorable or unfavorable material impact on results of operations in a particular quarter or year.   See the discussion of the rate cases in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

In 2004, NS Rail was found by the STB not to be "revenue adequate" based on results for the year 2003.   A railroad is "revenue adequate" under the applicable law when its return on net investment exceeds the rail industry's composite cost of capital.   This determination is made pursuant to statutory requirement and does not adversely impact NS Rail's liquidity or capital resources.

 

PASSENGER OPERATIONS - Regularly scheduled passenger trains are operated by Amtrak on NS Rail's lines between Alexandria and New Orleans , Louisiana ; between Greensboro and Selma , North Carolina ; between Chicago , Illinois , and Detroit , Michigan ; and between Chicago and Harrisburg , Pennsylvania .   Commuter trains are operated on the NS Rail line between Manassas and Alexandria in accordance with contracts with two transportation commissions of the Commonwealth of Virginia .   NS Rail also leases the Chicago to Manhattan , Illinois , line to the Commuter Rail Division of the Regional Transportation Authority of Northeast Illinois.   NS Rail

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operates lines on which Amtrak conducts regularly scheduled passenger operations.   In addition, NS Rail provides freight service over lines with significant ongoing Amtrak and commuter passenger operations, and is conducting freight operations over some trackage owned by Amtrak or by New Jersey Transit, the Southeastern Pennsylvania Transportation Authority, Metro-North Commuter Railroad Company and Maryland DOT.   Finally, passenger operations are conducted either by Amtrak or by the commuter agencies over trackage owned by Conrail in the Shared Assets Areas.

 

RAILWAY PROPERTY

The NS Rail system extends across 22 states, the District of Columbia and portions of Canada .   The railroad infrastructure makes the company capital intensive with total property of approximately $20 billion.   Of the approximately 38,200 total miles of track operated, NS Rail had responsibility for maintaining about 31,000 miles of track with the remainder being operated under trackage rights.   Over 75% of the main line trackage (including first, second, third and branch main tracks, all excluding trackage rights) has rail ranging from 131 to 155 pounds per yard with the standard installation currently at 141 pounds per yard.   Approximately 40% of NS Rail's lines carried 20 million or more gross tons per track mile.

The following table summarizes certain information about track roadway additions and replacements during the past five years:

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Equipment - As of Dec. 31, 2004 , NS Rail owned or leased the following units of equipment: