Norfolk Southern Corporation Business Information, Profile, and History

Company Perspectives:

Norfolk Southern's mission is to enhance the value of our stockholder s' investment over time by providing quality freight transportation s ervices and undertaking any other related businesses in which our res ources, particularly our people, give the company an advantage.

History of Norfolk Southern Corporation

Norfolk Southern Corporation (NS) is a holding company that owns and operates one of the nation's biggest railroad systems, the Norfolk So uthern Railway Company. Its lines run through 22 states, mostly in th e South and East, and extend into Ontario, Canada, covering approxima tely 21,300 miles of rail. About one-third of its rail was acquired i n a 1998 takeover of lines formerly owned by Conrail Inc. Norfolk Sou thern also operates a coal, natural gas, and timber company through i ts subsidiary Pocahontas Land Corporation. Approximately one-quarter of Norfolk Southern's revenues come from the transportation of coal, coke, and iron ore. Intermodal services (the movement of trailers and containers on railroad freight cars) generates about 20 percent, wit h the remainder well balanced among the following sectors: automotive ; chemicals; metals and construction; agriculture, consumer products, and government; and paper, clay, and forest products. The railway's predecessors, principally Norfolk and Western Railway Company and Sou thern Railway Company, in addition to Conrail, date back to the 1820s and 1830s.

19th-Century Roots of Norfolk and Western

Norfolk and Western Railway Company was the result of numerous merger s. It started as a ten-mile line, City Point Railroad, which served t wo small Virginia towns beginning in 1838. William Mahone orchestrate d the company's first mergers. He was elected president of a successo r, the Norfolk and Petersburg Railroad (N&P), in 1860. He joined the company on its founding in 1853 as chief engineer and was the inn ovator of a roadbed through swampland that continues to hold up under the huge tonnages of coal traffic. After the Civil War, N&P link ed up with South Side Railroad and Virginia & Tennessee Railroad, forming Atlantic, Mississippi & Ohio Railroad (AM&O). In 187 0 this line extended from Norfolk to Bristol, Virginia. The combined railroads were damaged during the war and reconstruction was slow and expensive. Half of the railroads in the South failed between 1873 an d 1880. Mahone borrowed heavily and three years after the crash and f inancial panic of 1873, the company was put into receivership by its creditors. A private Philadelphia banking firm, E.W. Clark and Compan y, purchased the AM&O in 1881, changing its name to Norfolk and W estern Railroad Company.

A partner in the firm, Frederick Kimball, took charge of Norfolk and Western, merging it with the Shenandoah Valley Railroad in 1882. Kimb all's interest in minerals led to lines being built with access to co al deposits, although at this time the railroad was mainly an agricul tural line, cotton being its primary freight. Four years later, the c oal handled by Norfolk passed the one-million-ton mark. Within a deca de, coal would account for the line's greatest traffic.

Henry Fink became president when the company emerged from bankruptcy in 1896 as Norfolk and Western Railway Company (NW). For the next thr ee decades, NW expanded aggressively. Building through West Virginia, north to Ohio and south to North Carolina, NW established its tradem ark route. Between 1895 and 1905 railroads across the nation consolid ated and improved operations. In 1901 NW acquired about 400,000 acres of coal reserves owned by the Philadelphia-based Flat-Top Coal Land Association; these properties were vested in a subsidiary called Poca hontas Coal & Coke Company (renamed Pocahontas Land Corporation i n 1939). In 1904 Lucius Johnson became president of NW.

War Years

During World War I, traffic was heavy and equipment condition and upk eep suffered from material shortages. Government control of the railr oads took place in 1917 and was relinquished in 1920. For the next te n years, NW consolidated its strength as a coal carrier. The early 19 20s saw increased Interstate Commerce Commission (ICC) involvement in the industry and increased union activity. The drive for greater eff iciency and reduced costs, as well as the company's coal revenues, he lped NW through the Great Depression, but unprofitable branch lines w ere abandoned and equipment purchases were delayed.

With the start of World War II, NW rebounded. Traffic volume reached a peak in 1944. Robert H. Smith assumed the presidency in 1946. Betwe en 1945 and 1950, $14 million was spent on improvements. During t his same time, diesel locomotives were becoming an indelible presence in the industry. Although NW had great investments in coal-burning p ower and steam engines, the greater economy and efficiency of diesel were decisive; the company ordered its first diesel engines in 1955.

Mergers Through the Early 1980s

The 1950s were marked by union battles, the abandonment of steam powe r, and a decline in coal traffic, but growth nonetheless. Stuart Saun ders became president in 1958. A lawyer, he stepped up the company's mergers through complicated transactions, beginning with Virginian Ra ilway in 1959. In 1964 NW acquired two railways: Wabash, Nickel Plate , Pittsburgh & West Virginia and Akron, Canton & Youngstown. With this, NW gained a Midwestern presence, providing service between the Atlantic, the Great Lakes, and the Mississippi River. Saunders e xpected expansion to reduce the company's reliance on coal as a reven ue source.

Following the flurry of merger activity in the 1960s, the ICC authori zed rights to NW in 1971 for portions of the tracks of the Atchison, Topeka & Santa Fe Railway. NW began merger talks with Southern Ra ilway in 1979. The year before the consummation of the NW-Southern me rger in 1982, NW acquired the Illinois Terminal Railroad.

History of Southern Railway

Like NW, Southern Railway was the result of many railroad lines combi ned and reorganized, nearly 150 lines. The earliest of these lines wa s the South Carolina Canal & Rail Road Company, a nine-mile line chartered in 1827. It was the first regularly scheduled passenger tra in in the United States in 1830. It was also the first to carry U.S. troops and mail. Within three years, it was 136 miles long, the longe st in the world.

Prior to the Civil War, rail expansion crossed the South. By 1857 Cha rleston, South Carolina, and Memphis, Tennessee, were linked by rail, but growth was stopped by the Civil War. With the devastation of the Southern economy and railroads by the war, rebuilding of the industr y was slow. Repairs and reorganization took place during the postwar period, and new railroads were built along the Ohio and Mississippi R ivers.

Southern Railway (SR) was formed in 1894, when the Richmond & Dan ville merged with the East Tennessee, Virginia & Georgia Railroad . The company's first president was Samuel Spencer. Its line spread o ver 4,400 miles, two-thirds of which SR owned. The Alabama Great Sout hern Railway, and the Georgia Southern and Florida were also under SR 's control. Over the span of Spencer's 12-year presidency, SR acquire d many more lines and equipment, and revenues went from $17 milli on to more than $153 million. The company shifted from dependency on tobacco and cotton to more involvement with the South's industria l development. By 1916 SR had an 8,000-mile line over 13 states, esta blishing its territory for the next half century.

Fairfax Harrison became president in 1913. World War I traffic was su bstantial but was offset by inflation, and the postwar boom period he lped pay for repairs and equipment replacement delayed by the war. In 1922 SR invested $77 million in improvements. The stock market c rash of 1929 came two months after SR moved into lavish new headquart ers. Many U.S. railroads were forced into bankruptcy in the early 193 0s. SR operated at a loss for the first time in 1931 and began amassi ng debts. The company did not show a profit again until 1936.

Under Ernest Norris, SR recovered, paying its debts to the Reconstruc tion Finance Corporation in 1941. That same year SR purchased its fir st diesel equipment, and World War II began. Wartime traffic led to i ncreased efficiency and safety. By 1951 SR owned a fleet of almost 85 0 diesel-electric units that drove nearly 92 percent of its freight s ervice and 86 percent of its passenger service. SR became the first U .S. railroad to convert entirely to diesel-powered locomotives in 195 3, closing the era of the steam locomotive.

SR prospered as a result of dieselization. The southern economy led t he nation in growth in the late 1950s. SR took advantage of this grow th by acquiring railroads and gaining access to developing industrial areas beginning with the 1952 purchase of the Louisiana-Southern Rai lway. In 1957 it acquired the Atlantic & North Carolina Railroad and in 1961 the Interstate Railroad, which brought SR to new coal fie lds in southwest Virginia. In 1963 the Central of Georgia merged with SR.

W. Graham Claytor became president in 1967, instituting the streamlin ed management and tough budgets that saw the company through the 1974 recession. An unrelated company called Norfolk Southern Railway was acquired in 1974, adding 622 miles of line in an area marked for econ omic growth. At this time, SR was thriving. There was a 70 percent in crease in revenue between 1974 and 1978. In 1979 Harold Hall became p resident and later ushered the company through its merger with Norfol k and Western. SR was considered one of the best managed railroads in the industry. In 1980 the company enjoyed its fifth consecutive year of record profits.

At the time of the merger, both NW and SR were among the most profita ble firms in the industry. Between 1971 and 1981, net income at NW ha d increased fivefold. At SR it had tripled. Prior to merging, both ra ilroads had added many miles and much time to their transportation ro utes to avoid using each other's tracks; the amount of overlap was sm all but affected operations significantly. In some cases three days o f transportation time was added just to circumvent ten miles of track operated by the other system. SR operated a 10,000-mile line between Washington, D.C.; New Orleans, Louisiana; Cincinnati, Ohio; and St. Louis, Missouri. NW had a 7,000-mile line between Norfolk and Kansas City.

1980s: Creation of Norfolk Southern Corp. and Subsequent Acquisiti ons

In 1980 Chessie System Inc. and Seaboard Coast Line Industries, Inc. merged, forming CSX Corporation. This provided some impetus for the N orfolk Southern merger. Equally compelling was the complementary terr itories and corporate objectives of NW and SR. Norfolk Southern Corpo ration, incorporated in 1980 and completing its acquisition of the ra ilroads in 1982, became the lowest cost, highest profit corporation i n the industry. Merging also made NS the nation's fourth largest syst em in terms of track line. Robert Claytor, who had been president of NW, became the first chairman of Norfolk Southern Corporation. Huge a ssets and conservative investments kept NS sound in 1982, when the st eel and coal businesses slowed, but NW's revenues dipped as a result. It was expected that SR's merchandise traffic would help offset NW's coal business if it slowed, and vice versa. Both slumped, however, i n the early 1980s.

With an eye toward becoming the country's first integrated transporta tion company, NS moved to purchase North American Van Lines, Inc. (NA VL) in 1984. The acquisition was completed in 1985. NAVL was known mo stly for its household moving, which, however, constituted only one-t hird of its revenues. Other services offered included commercial tran sport, moving general commodities from manufacturer to distributor, a nd transporting high-value products such as computers. NAVL was found ed in Ohio in 1933, moved to Indiana in 1947, and was purchased by Pe psiCo, Inc. in 1968. The purchase of NAVL by NS for $369 million put the recent industry deregulation policy of the ICC to the test. N S became the dominant railroad in trucking, developing a transportati on system that provided both motor carrier and rail service.

In the mid-1980s, NS aggressively pursued the purchase of Consolidate d Rail Corporation (Conrail) from the U.S. government. Conrail was fo unded in 1976 from six bankrupt northwestern railroads and subsequent ly became profitable. The purchase would have made NS the nation's la rgest railroad, but after several years of negotiations, it fell thro ugh. The unsuccessful bid to take over Conrail, however, resulted in 1986 in a profitable cooperation between the two companies, including an interchange agreement that allowed NS and Conrail to offer compet itive services over the same areas.

In the mid-1980s NS's principal revenue-producing commodities, aside from fuel, were paper, chemicals, and automobiles. In 1985 NS had rev enues of $3.8 billion and was the most profitable railroad in the nation. The following year NS formed Triple Crown Services Company a s a subsidiary specializing in intermodal services. In 1987 Arnold Mc Kinnon succeeded Robert Claytor as CEO and chairman and Harold Hall b ecame vice-chairman.

The company further profited from its investments in Santa Fe Souther n Pacific and Piedmont Aviation, both of which it sold later at huge profits. By 1988 coal and merchandise traffic began to increase after a long slump. McKinnon worked on cutting costs and smoothing the way for increased intermodal traffic, traffic that shifts easily between railroad and highway. Only 6 percent of NS's business in 1988, inter modal traffic posed great growth potential.

With the recession in 1989, automobile and steel industries suffered, as did housing and, therefore, lumber shipments and coal. The declin e in industrial freight shipments hit railroads hard. NS's revenues w ere down by about 3 percent because of traffic declines early in 1989 . At the same time fuel prices and insurance costs rose.

Growth in the 1990s, Particularly Through Conrail Carve-Up

Although heavy freight and merchandise revenues remained lower in 199 0, increased shipments of coal, coke, and iron ore helped the company offset losses. Profits dipped in 1990, the result of higher fuel cos ts and the expense of employee layoffs and early retirements. At the end of 1990, NS restructured its rail operations, changing Southern R ailway's name to Norfolk Southern Railway Company and transferring ow nership of Norfolk and Western to it. The company spent $20 milli on in the early 1990s to improve its routes for double-stacked contai ners and vied with the trucking industry for freight. NS entered a jo int venture with Conrail in 1993 to run a hybrid truck and rail servi ce. It used vehicles called Road-Railers, which could convert quickly from truck to rail car, and ran these on a network that joined Chica go, Atlanta, and Harrisburg, Pennsylvania. NS also acquired more vari ed business in its home southern territory as auto companies built ne w plants. Toyota expanded a plant in Georgetown, Kentucky, and BMW bu ilt a new factory in Greer, South Carolina, in the early 1990s, givin g NS a lucrative new product, automobiles, to ship. In August 1992, m eanwhile, McKinnon retired, and David R. Goode took over as chairman, president, and CEO.

NS was a remarkably stable and profitable company despite the downtur n in coal exports, and it was known for its low costs and efficient m anagement. Much of its profits came from running the easy downhill ro ute from the coal mines in the Appalachians to the port of Hampton Ro ads, Virginia, where waiting tankers took its freight abroad. One sna g on its profitability, however, was its trucking unit, North America n Van Lines, which continued to do poorly. The company sought to sell off two of its trucking unit's divisions in 1993, after trucking ope rations came in with a loss of close to $40 million in 1992. The rest of its trucking operations was sold off in 1998.

Meanwhile, NS began merger talks with its old friend Conrail. Conrail controlled 12,200 miles of rail, particularly in the industrial Nort heast and Midwest. Heavy traffic between Chicago and Philadelphia and from East St. Louis to Boston gave the firm much of its profits. Whe n Conrail and NS began to talk in 1994, Conrail was valued at around $4 billion. Negotiations between the two companies broke down in the summer of 1994, however, apparently because Conrail wanted a pric e substantially higher than that of market value. After talks between the companies broke off, Conrail's CEO James Hagen told Forbes magazine in a November 21, 1994, interview, "We don't need a merger ." Yet two years later, in November 1996, Conrail was on the verge of accepting a merger offer from rival railroad CSX. NS topped CSX's bi d, offering $9 billion for the company that had been too expensiv e at more than $4 billion in 1994. In March 1997 a new deal was c emented, involving all three companies: CSX bought Conrail for $1 0.3 billion and then sold half of Conrail's routes (58 percent of the company) to NS for $5.9 billion. This led to what one analyst, t ransportation curator of the Smithsonian Institution William Withuhn called "the most complicated merger in history," according to a Wa ll Street Journal article from June 10, 1998. Norfolk Southern an d CSX had to divide up the thousands of miles of Conrail track, despi te daunting physical and administrative problems. The two companies s pent more than a billion dollars each expanding tracks, terminals, an d equipment, and had other headaches such as working their computer s ystems into Conrail's. The breakup of Conrail was carefully plotted, yet myriad problems led to delays. By January 1999 NS was paying out approximately $1 million every day in interest costs on the rough ly $6 billion it had borrowed for its share of Conrail. Finally, the merger was physically complete on June 1, 1999, when Conrail's ra il lines went into use by its respective owners. The many expenses in curred by the merger dampened income for that year, but to NS it seem ed a wise long-term investment. The company was now about evenly matc hed with CSX, splitting the eastern United States between them, just as two other railroads dominated the West. NS was convinced it would be a stronger company with Conrail's addition, as the expanded mileag e opened many more markets to it.

Early 2000s: Post-Conrail Indigestion Followed by a Turnaround

Norfolk Southern's difficulties digesting the Conrail lines were more than evident in the dropoff in profits that followed the deal. The c ompany had netted $734 million in 1998, but this figure dropped t o $239 million in 1999 and then $172 million in 2000. After t he 1999 carve-up, the NS system suffered from widespread service brea kdowns, including blocked tracks, lost freight cars, and delivery del ays. Many customers switched their shipments to trucks, cutting into revenues. At the same time, a sharp decline in coal exports, stemming largely from stiff competition from Australia, hurt NS's core busine ss of hauling coal. Further reductions in profits were incurred from charges taken to slash the workforce in order to cut expenses. The pa yroll was trimmed by 3,500 in 2000 and then a further cut of 1,000 wa s announced in January 2001. The latter cutback included the closure of several rail years and repair facilities identified as "redundant. " That same month, Norfolk Southern suffered another black eye when i t agreed to settle a class-action lawsuit filed in 1993 by African Am erican employees who alleged they were denied promotion to management on the basis of race. NS agreed to pay $28 million to the plaint iffs and to establish new promotion policies.

To turn matters around, Norfolk Southern, among other initiatives, la unched the Thoroughbred Operating Plan in the summer of 2001. Named a fter the firm's longtime logo of a speedy black stallion, this effort aimed to fix NS's customer service problems by implementing new trai n schedules, operating trains over shortened, more direct routes, and bypassing as many freight yards as feasible to reduce delays. By Feb ruary 2002 Norfolk Southern's on-time delivery rate had improved from 57 percent to 86 percent. By another key rail industry yardstick, th e operating ratio, a measure of efficiency, and profitability, compar ing expenses with revenues (the lower the figure the better), NS seem ed to have completely turned the corner by 2004. That year, the firm' s operating ratio stood at 76.7 percent, the best showing since 1998 (and therefore since the Conrail split-up). Indeed, 2004 was a record year for Norfolk Southern: $7.31 billion in revenues and net inc ome of $923 million. In part, NS was riding a significant increas e in demand for rail transport, at the expense of the trucking indust ry, propelled by a combination of several factors: increasing highway congestion, rising fuel prices, demand for more environmentally frie ndly transportation options, and changes in trucking regulation. In t his shifting climate, the surging demand for NS's intermodal services , the firm's fastest-growing sector, came as no surprise. Intermodal revenues jumped 24 percent in 2004, reaching $1.54 billion, secon d only to the $1.73 billion generated by coal shipments.

The year 2004 also saw Norfolk Southern and CSX reorganize the struct ure of their Conrail holdings. Since 1999 the two firms had jointly o wned Conrail, and NS had operated the routes and assets of a Conrail subsidiary called Pennsylvania Line LLC (the former Pennsylvania Rail road, incorporated in 1846), while CSX did the same for New York Cent ral Lines LLC. In August 2004, with the approval of the Surface Trans portation Board (the regulatory successor to the now abolished ICC), NS and CSX took direct ownership and control of these subsidiaries, a nd Pennsylvania Line was merged into Norfolk Southern Railway Company . The Conrail joint venture nevertheless continued to exist, owning, managing, and operating certain shared assets, such as switching faci lities and terminals, used by both railways.

Late in 2004 a succession plan appeared to be in place for the eventu al retirement of Goode. In October, Charles W. Moorman IV was named p resident of Norfolk Southern, marking him as the likely heir apparent . A civil engineer by training who had spent his entire career at NS, Moorman had most recently headed up Thoroughbred Technology and Tele communications, Inc., a unit that had developed fiber optic lines alo ng the railroad's routes and that had been forced to take an $84 million writedown of assets in 2003 following the implosion of the te lecom sector stemming from its overbuilding of capacity. In January 2 005, just months after Moorman's promotion, a Norfolk Southern freigh t train carrying deadly chlorine gas crashed and derailed in the smal l textile town of Graniteville, South Carolina, killing nine people, sending more than 200 to the hospital, and forcing the evacuation of all 5,400 people within a mile of the crash. A little more than a wee k later, Norfolk Southern offered an official apology to the town, an d the company later set aside $35 million to cover expenses relat ed to the accident. In August 2005 a federal judge approved an agreem ent whereby NS would compensate persons evacuated from the accident v icinity and those suffering minor injuries. The company still had to contend with lawsuits filed by people who incurred more serious injur ies and the families of those who died.

Principal Subsidiaries: Conrail Inc. (58%); Lambert's Poin t Docks, Incorporated; Norfolk Southern Properties, Inc.; Norfolk Sou thern Railway Company; Pocahontas Land Corporation; Thoroughbred Tech nology and Telecommunications, Inc.; Transworks Inc.; Triple Crown Se rvices Company.

Principal Competitors: CSX Corporation.

Chronology

• Key Dates:
• 1827: South Carolina Canal & Rail Road Company, earliest f orerunner of Southern Railway Company, is chartered.
• 1838: City Point Railroad, the earliest predecessor of Norfolk and Western Railway Company, is chartered.
• 1853: Norfolk and Petersburg Railroad (N&P), a successor t o City Point, is organized.
• 1870: N&P is merged with Southside Railroad and Virginia & amp; Tennessee Railroad to form Atlantic, Mississippi & Ohio Rail road (AM&O).
• 1881: The AM&O is bought out of receivership and renamed N orfolk and Western Railroad Company.
• 1894: Southern Railway Company (SR) is formed from the amalgam ation of the Richmond & Danville and the East Tennessee, Virginia & Georgia Railroad.
• 1896: Norfolk and Western emerges from bankruptcy as Norfolk a nd Western Railway Company (NW).
• 1959: NW acquires Virginian Railway.
• 1963: SR acquires the Central of Georgia.
• 1964: Two railways--the Wabash, Nickel Plate, Pittsburgh & West Virginia and the Akron, Canton & Youngstown--are consolidat ed into NW.
• 1974: SR acquires Norfolk Southern Railway.
• 1980: Norfolk Southern Corporation (NS) is incorporated.
• 1982: NW and SR are consolidated within the NS holding company .
• 1985: NS acquires North American Van Lines, Inc.
• 1986: After several years of negotiation, NS's bid to acquire Consolidated Rail Corporation (Conrail) falls through.
• 1990: NS restructures its rail operations, changing SR's name to Norfolk Southern Railway Company and transferring ownership of NW to the newly named subsidiary.
• 1998: North American Van Lines is divested.
• 1999: Norfolk Southern and archrival CSX Corporation complete their carve-up of Conrail.