What is the most significant accounting change impacting the reported net income?

The adoption of Financial Accounting Standards Board (FASB) Statement No. 143, 'Accounting for Asset Retirement Obligations,' and FASB Interpretation No. 46, 'Consolidation of Variable Interest Entities,' effective January 1, 2003, resulted in a cumulative effect adjustment of $114 million recorded in the nine months ended September 30, 2003. SFAS 143 changed the accounting for crosstie removal costs, and FIN 46 led to the consolidation of a special-purpose entity leasing locomotives.

What is the status of the proposed spin-off of Conrail operations?

Norfolk Southern and CSX Corporation have jointly filed with the Surface Transportation Board (STB) to establish direct ownership and control of Pennsylvania Lines LLC (PRR) and New York Central (NYC) by NSR and CSXT, respectively. This proposed transaction would replace existing operating agreements and allow for direct operation of these assets. The plan also involves restructuring Conrail's public indebtedness, with new debt securities to be offered in exchange for Conrail's unsecured debentures.

Are there any significant litigation or contingent liabilities that investors should be aware of?

The company is involved in several lawsuits and claims. Notably, there are disputes concerning income protection benefits for furloughed employees related to the Conrail transaction, where management believes NS will prevail. Additionally, litigation with WilTel Communications, LLC regarding fiber optic infrastructure obligations is ongoing, with a court order for WilTel to pay approximately $36 million, which WilTel is appealing. Management believes that potential liabilities from known environmental matters, individually or in aggregate, are unlikely to have a material adverse effect on the company's financial position.

How has the company managed its exposure to fuel price volatility?

Norfolk Southern has implemented a program to hedge a portion of its diesel fuel consumption using derivative financial instruments, primarily swaps. For the third quarter of 2003, this hedging program reduced diesel fuel expense by $11 million and yielded an average cost per gallon of $0.77. The program limits hedges to a duration of 36 months and caps the hedged percentage at 80% of average monthly consumption.

NSC 10-Q Quarterly Report Q3 FY2003 — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-Q filed October 31, 2003. Cited figures are marked; the original filing is the authoritative source.

Norfolk Southern Corporation (NSC) reported steady railway operating revenues for the third quarter of 2003, holding flat at $1.6 billion^a compared to the prior year, driven by increased revenue per unit offsetting lower traffic volume.

For the first nine months, revenues grew 2% to $4.8 billion^b. Net income for the third quarter was $137 million, an increase of 9% over the prior year, benefiting from higher nonoperating income and a lower effective tax rate. Nine-month net income was $483 million, which included a significant $114 million cumulative effect from adopting new accounting standards (SFAS 143 and FIN 46) and a $10 million gain from discontinued operations.

Income from continuing operations before accounting changes was up 8%^c for the nine-month period. The company is undergoing a significant restructuring of its Conrail investment, proposing a spin-off of its share of Conrail's operations into direct ownership by Norfolk Southern and CSX. This move aims to simplify ownership and operations of key Northeast rail assets.

The company also announced a voluntary separation program for non-agreement employees, expected to incur costs of approximately $100 million^d in the fourth quarter. Despite some operational headwinds in general merchandise and the ongoing Conrail restructuring, the company's financial performance shows resilience, supported by effective fuel hedging and a lower tax rate.

02—Key points

Key Highlights

Railway operating revenues remained flat in Q3 2003 at $1.6 billion, with year-to-date revenues increasing 2% to $4.8 billion.
Third-quarter net income rose 9% to $137 million, while nine-month net income reached $483 million.
Nine-month net income included a significant $114 million cumulative effect from adopting SFAS 143 and FIN 46.
The company is proposing a spin-off of its stake in Conrail's operations into direct ownership by NSC and CSX.
A voluntary separation program for non-agreement employees was announced, with an estimated cost of $100 million to be recorded in Q4 2003.
Effective tax rate decreased significantly in both Q3 and year-to-date 2003 due to favorable tax audit resolutions.
Diesel fuel hedging program provided benefits of $11 million in Q3 and $45 million year-to-date 2003.

03—Questions

Frequently Asked Questions

What is the most significant accounting change impacting the reported net income?
The adoption of Financial Accounting Standards Board (FASB) Statement No. 143, 'Accounting for Asset Retirement Obligations,' and FASB Interpretation No. 46, 'Consolidation of Variable Interest Entities,' effective January 1, 2003, resulted in a cumulative effect adjustment of $114 million recorded in the nine months ended September 30, 2003. SFAS 143 changed the accounting for crosstie removal costs, and FIN 46 led to the consolidation of a special-purpose entity leasing locomotives.
What is the status of the proposed spin-off of Conrail operations?
Norfolk Southern and CSX Corporation have jointly filed with the Surface Transportation Board (STB) to establish direct ownership and control of Pennsylvania Lines LLC (PRR) and New York Central (NYC) by NSR and CSXT, respectively. This proposed transaction would replace existing operating agreements and allow for direct operation of these assets. The plan also involves restructuring Conrail's public indebtedness, with new debt securities to be offered in exchange for Conrail's unsecured debentures.
Are there any significant litigation or contingent liabilities that investors should be aware of?
The company is involved in several lawsuits and claims. Notably, there are disputes concerning income protection benefits for furloughed employees related to the Conrail transaction, where management believes NS will prevail. Additionally, litigation with WilTel Communications, LLC regarding fiber optic infrastructure obligations is ongoing, with a court order for WilTel to pay approximately $36 million, which WilTel is appealing. Management believes that potential liabilities from known environmental matters, individually or in aggregate, are unlikely to have a material adverse effect on the company's financial position.
How has the company managed its exposure to fuel price volatility?
Norfolk Southern has implemented a program to hedge a portion of its diesel fuel consumption using derivative financial instruments, primarily swaps. For the third quarter of 2003, this hedging program reduced diesel fuel expense by $11 million and yielded an average cost per gallon of $0.77. The program limits hedges to a duration of 36 months and caps the hedged percentage at 80% of average monthly consumption.

04—Continue

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