Commodities Review: Revenues Up
Despite Down Economy

Changes in traffic mix, pricing strategies and improvements in operating efficiency during 2001 enabled Norfolk Southern to improve its per-car revenue yield by 3% overall, resulting in an $11 million increase in railway operating revenues. This was achieved despite a decline in carloadings, which were 3% below 2000 as all business sectors were affected by a soft economy and further dampening of consumer spending following the Sept. 11 terrorist attacks.

A Norfolk Southern coal train near Bluefield, Va.

Coal

Coal, coke and iron ore finished the year 6% ahead in total revenues and 2% ahead on tons that totaled 178 million.

Growing demand and high natural gas prices early in the year spurred increased electricity production by coal-powered generation plants served by NS. Utilities replenished very low coal stockpiles. NS coal volumes to the important domestic utility market grew by 11%.

Per-car revenue yields increased by 6% in 2001 following a strategy of measured price increases, reduced refunds on export coal and improved per-car lading weights.

Mining problems and increased domestic coal demand caused coal prices to rise in 2001. Nevertheless, coal production in states served by NS rose by about 2.3% in 2001.

The Coal Transportation and Coal Marketing departments were combined in February 2001 to create the Coal Business Group. The new group is better able to meet customer service expectations while improving equipment utilization and yields.

Projects started during 2000 continued to grow utility volumes in 2001, and NS and its coal supply partners also took advantage of new opportunities to improve market share.

Projects planned for 2002 include a new rail spur to serve the Sammis Power plant of First Energy at Stratton, Ohio, creating an opportunity for 20,000 new carloads annually over the next five years. Also, a new shuttle train to serve increased Ohio coal production for the river utility market will lead to new traffic for NS in 2002.

Intermodal

Despite a constricted freight market in 2001, Intermodal was able to hold ground by the steady launch of new services, including:

• Improved international services from new Cleveland and Savannah terminals

• A premium transcontinental train between Southern California and the Northeast with Burlington Northern Santa Fe

• Blue Streak, a new premium service with Union Pacific that offers several levels of premium transcontinental service, including on-time-or-free guaranteed service, between Los Angeles and the Southeast

• A significantly expanded portfolio of services between the Southeast and the Northeast

• International services between the Port of New York and Montreal with Canadian Pacific.

The new services and the completion of major enhancements to the intermodal network, including the new Whitaker terminal in Austell, Ga., near Atlanta, will allow NS to handle increased traffic when the economy begins growing again. NS will launch more new intermodal services in 2002, including more premium products designed to speed the pace of converting truck traffic to rail intermodal.

General Merchandise

Highlights of 2001:

• In agriculture, a 50% improvement in cycle time for new 75-car grain trains enabled NS to handle the same amount of traffic with 200 fewer cars. The 2001 harvest saw a gain of 4,000 carloads over the previous year. Agriculture business came back strong in the fourth quarter as weather conditions improved and markets started to move, boosting fourth quarter revenues for the commodity group by 6%.

• While automotive carloadings decreased by 10% as North American vehicle production fell from a record level in 2000, automotive revenues declined only 4%, due in part to the continued redesign of the automotive mixing center network and continued market penetration in the Northern Region of NS' system. NS benefits from access to more automotive plants than any other railroad.

Revenue gains resulted from:

• New vehicle traffic moving between Detroit and St. Louis for DaimlerChrysler

• New vehicle traffic moving from Fort Wayne to Canadian destinations for General Motors

• Return of previously diverted traffic as a result of rectifying Conrail implementation service issues.

Automotive Group prospects for 2002 include:

• A new General Motors inbound vehicle distribution facility in Moraine, Ohio, that opened in fourth quarter 2001

• Expansion of the Mitsubishi assembly plant at Bloomington, Ill.

• Toyota's second plant at Princeton, Ind.

• Southeast Toyota's new vehicle distribution facility in Jacksonville, Fla., scheduled for opening in September 2002.

• In chemicals, revenues were stable despite a weak market as a result of improved pricing to meet market conditions. As a result of aggressive industrial development, NS expects new business from a new Stolt-Nielsen's bulk terminal at Braithwaite, La., a new Michelin plant at Anderson, S.C., and a new salt transload facility for American Rock Salt at Radford, Va. Another growth area is ethanol, a gasoline additive.

• In the metals market, NS' dominant market and equipment position and new business opportunities helped to partially offset market softness, enabling it to maintain a leadership role in transporting metals commodities.

Business opportunities for metals in 2001 included:

• Continued production ramp-up of new steel mills located on NS and recent success in acquiring new business

• Export sheet steel to Mexico

• Import slab steel business via East Coast ports

• Domestic slab steel and billet shipments

• Continued strength in pig iron shipments

• Steel pipe shipments to oil and gas pipeline projects.

• In the construction market, highway spending remained strong, based on increased highway construction funding from the Transportation Equity Act for the 21st Century (TEA-21). This resulted in revenue growth from sand and shipments to regional highway projects.

• In paper, clay and forest products, improved pricing and a positive change in traffic mix led to a gain of 6 percent in revenue per unit despite a soft market. Wood pulp traffic remained robust, with expansions at several tissue and towel production facilities and increased NS market share. Low pulpboard inventory levels prompted a rebound in shipments in the fourth quarter. Lumber shipments almost matched record levels of 2000 as a result of strong housing starts and low mortgage rates. NS scrap paper volume will benefit from a shift to 100% recycled paper at a large newsprint mill in Alabama.

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