10-K 1 nsc1231201510-k.htm 10-K 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
 
(X)       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended DECEMBER 31, 2015
 
(   )      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ___________ to___________ 
Commission file number 1-8339 


NORFOLK SOUTHERN CORPORATION
(Exact name of registrant as specified in its charter) 
Virginia
(State or other jurisdiction of incorporation)
 
52-1188014
(IRS Employer Identification No.)
Three Commercial Place
Norfolk, Virginia
(Address of principal executive offices)
 
23510-2191
Zip Code
Registrant’s telephone number, including area code:
 
(757) 629-2680
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each Class
 
Name of each exchange on which registered
Norfolk Southern Corporation
 
 
Common Stock (Par Value $1.00)
 
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (X)  No (  )
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes (  )  No (X)
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes (X)   No (  )
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months.  Yes (X)   No (  )
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K.  (X)
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or smaller reporting company. See definitions of  “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (X)        Accelerated filer (  )        Non-accelerated filer (  )        Smaller reporting company (  )
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes (  )   No (X)
 
The aggregate market value of the voting common equity held by non-affiliates at June 30, 2015, was $26,243,199,266 (based on the closing price as quoted on the New York Stock Exchange on that date).
 
The number of shares outstanding of each of the registrant’s classes of common stock, at January 31, 2016: 298,198,651 (excluding 20,320,777 shares held by the registrant's consolidated subsidiaries).
 
DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant’s definitive proxy statements to be filed electronically pursuant to Regulation 14A not later than 120 days after the end of the fiscal year, are incorporated herein by reference in Part III.



TABLE OF CONTENTS

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I
 
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
 
Item 1.  Business and Item 2.  Properties
 
GENERAL – Our company, Norfolk Southern Corporation, is a Norfolk, Virginia based company that owns a major freight railroad, Norfolk Southern Railway Company.  We were incorporated on July 23, 1980, under the laws of the Commonwealth of Virginia.  Our common stock (Common Stock) is listed on the New York Stock Exchange (NYSE) under the symbol “NSC.”
 
Unless indicated otherwise, Norfolk Southern Corporation and its subsidiaries, including Norfolk Southern Railway Company, are referred to collectively as NS, we, us, and our. 
 
We are primarily engaged in the rail transportation of raw materials, intermediate products, and finished goods primarily in the Southeast, East, and Midwest and, via interchange with rail carriers, to and from the rest of the United States.  We also transport overseas freight through several Atlantic and Gulf Coast ports.  We provide comprehensive logistics services and offer the most extensive intermodal network in the eastern half of the United States.
 
We make available free of charge through our website, www.nscorp.com, our 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 U.S. Securities and Exchange Commission (SEC).  In addition, the following documents are available on our website and in print to any shareholder who requests them:
Corporate Governance Guidelines
Charters of the Committees of the Board of Directors
The Thoroughbred Code of Ethics
Code of Ethical Conduct for Senior Financial Officers
Categorical Independence Standards for Directors
Norfolk Southern Corporation Bylaws


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RAILROAD OPERATIONS At December 31, 2015, our railroads operated approximately 20,000 miles of road in 22 states and the District of Columbia.
 
Our system reaches many manufacturing plants, electric generating facilities, mines (in western Virginia, eastern Kentucky, southern and northern West Virginia, western Pennsylvania, and southern Illinois and Indiana), distribution centers, transload facilities, and other businesses located in our service area.

Corridors with heaviest freight volume:
New York City area to Chicago (via Allentown and Pittsburgh)
Chicago to Macon (via Cincinnati, Chattanooga, and Atlanta)
Appalachian coal fields of Virginia, West Virginia, and Kentucky to Norfolk, Virginia and Sandusky, Ohio
Cleveland to Kansas City
Birmingham to Meridian
Memphis to Chattanooga


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The miles operated, which include major leased lines between Cincinnati, Ohio, and Chattanooga, Tennessee, and an exclusive operating agreement for trackage rights over property owned by North Carolina Railroad Company, were as follows:
 
 
Mileage Operated at December 31, 2015
 
Miles
of
Road
 
Second
and
Other
Main
Track
 
Passing
Track,
Crossovers
and
Turnouts
 
Way and
Yard
Switching 
 
Total 
 
 
 
 
 
 
 
 
 
 
Owned
15,194

 
2,754

 
1,976

 
8,381

 
28,305

Operated under lease, contract or trackage
 
 
 
 
 
 
 
 


rights
4,768

 
1,916

 
398

 
834

 
7,916

 
 
 
 
 
 
 
 
 
 
Total
19,962

 
4,670

 
2,374

 
9,215

 
36,221

 
The following table sets forth certain statistics relating to our railroads’ operations for the past 5 years:
 
 
Years ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
Revenue ton miles (billions)
200

 
205

 
194

 
186

 
192

Revenue per ton mile
$
0.0526

 
$
0.0567

 
$
0.0581

 
$
0.0595

 
$
0.0582

Revenue ton miles per employee-hour worked
3,467

 
3,576

 
3,376

 
3,153

 
3,207

Ratio of railway operating expenses to railway operating
 
 
 
 
 
 
 
 
 
 revenues
72.6%

 
69.2%

 
71.0%

 
71.7%

 
71.2%


RAILWAY OPERATING REVENUES Total railway operating revenues were $10.5 billion in 2015.  Following is an overview of our three major market groups.
 
COAL  Revenues from coal accounted for about 17% of our total railway operating revenues in 2015.  We handled 120 million tons, or 1.1 million carloads, in 2015, most of which originated on our lines from major eastern coal basins, with the balance from major western coal basins received via the Memphis and Chicago gateways.  Our coal franchise supports the electric generation market, serving approximately 79 coal generation plants, as well as the export, metallurgical and industrial markets, primarily through direct rail and river, lake, and coastal facilities, including various terminals on the Ohio River, Lambert’s Point in Norfolk, Virginia, the Port of Baltimore, and Lake Erie.
 
See the discussion of coal revenues and tonnage, by type of coal, in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

GENERAL MERCHANDISE Our general merchandise market group is composed of five major commodity groupings: 
Chemicals includes sulfur and related chemicals, petroleum products (including crude oil), chlorine and bleaching compounds, plastics, rubber, industrial chemicals, and chemical wastes.  
Agriculture, consumer products, and government includes soybeans, wheat, corn, fertilizer, livestock and poultry feed, food oils, flour, beverages, canned goods, sweeteners, consumer products, ethanol, transportation equipment, and items for the U.S. military.  

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Metals and construction includes steel, aluminum products, machinery, scrap metals, cement, aggregates, sand, and minerals.
Automotive includes finished vehicles for BMW, Chrysler, Ford, General Motors, Honda, Hyundai, Mercedes-Benz, Mitsubishi, Subaru, Tesla, Toyota, and Volkswagen, and auto parts for BMW, Chrysler, Ford, General Motors, Honda, Hyundai, Mazda, Nissan, Subaru, Toyota, and Volkswagen.
Paper, clay and forest products includes lumber and wood products, pulp board and paper products, wood fibers, wood pulp, scrap paper, and clay.

In 2015, 124 million tons of general merchandise freight, or approximately 62% of total general merchandise tonnage we handled, originated on our lines.  The balance of general merchandise freight was received from connecting carriers at interterritorial gateways.  Our principal interchange points for received freight included Chicago, East St. Louis, New Orleans, Memphis, Detroit, Kansas City, Bellevue, Meridian, Buffalo and Toledo.  General merchandise carloads handled in 2015 were 2.5 million, the revenues from which accounted for 60% of our total railway operating revenues.
 
See the discussion of general merchandise revenues by commodity group in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
INTERMODAL Our intermodal market group 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 2015 were 3.9 million, the revenues from which accounted for 23% of our total railway operating revenues.
 
See the discussion of intermodal revenues in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
FREIGHT RATES Private contracts and exempt price quotes are our predominant pricing mechanisms.  Thus, a major portion of our freight business is not economically regulated by the federal government.  In general, market forces are the primary determinant of rail service prices.
 
In 2015, our railroads were found by the U.S. Surface Transportation Board (STB), the regulatory board that has broad jurisdiction over railroad practices, to be “revenue adequate” on an annual basis based on results for the year 2014.  The STB has not made its revenue adequacy determination for the year 2015 A railroad is “revenue adequate” on an annual basis 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 a statutory requirement. 
 
PASSENGER OPERATIONS Amtrak operates regularly scheduled passenger trains on our lines between the following locations:
Alexandria and Lynchburg, Virginia
Alexandria, Virginia and New Orleans, Louisiana
Alexandria and Orange, Virginia
Petersburg and Norfolk, Virginia
Raleigh and Charlotte, North Carolina
Selma and Charlotte, North Carolina
Chicago, Illinois, and Porter, Indiana
Chicago, Illinois, and Cleveland, Ohio
Chicago, Illinois, and Pittsburgh, Pennsylvania
Pittsburgh and Harrisburg, Pennsylvania
 
A consortium of two transportation commissions of the Commonwealth of Virginia operate commuter trains on our line between Manassas and Alexandria.
 

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We lease the Chicago to Manhattan, Illinois, line to the Commuter Rail Division of the Regional Transportation Authority of Northeast Illinois (METRA).
 
We operate freight service over lines with significant ongoing Amtrak and commuter passenger operations, and conduct freight operations over trackage owned or leased by:
Amtrak
New Jersey Transit
Southeastern Pennsylvania Transportation Authority
Metro-North Commuter Railroad Company
Maryland Department of Transportation
Michigan Department of Transportation

Amtrak and various commuter agencies conduct passenger operations over trackage owned by Conrail in the Shared Assets Areas (Note 5 to the Consolidated Financial Statements).
   
NONCARRIER OPERATIONS Our noncarrier subsidiaries engage principally in the acquisition, leasing, and management of coal, oil, gas and minerals; the development of commercial real estate; telecommunications; and the leasing or sale of rail property and equipment.  In 2015, no such noncarrier subsidiary or industry segment grouping of noncarrier subsidiaries met the requirements for a reportable business segment under relevant authoritative accounting guidance. 
 
RAILWAY PROPERTY
 
Our railroad system extends across 22 states and the District of Columbia.  The railroad infrastructure makes us capital intensive with net property of approximately $29 billion on a historical cost basis.

Property Additions Property additions for the past five years were as follows (including capitalized leases):
 
2015
 
2014
 
2013
 
2012
 
2011
 
($ in millions)
 
 
 
 
 
 
 
 
 
 
Road and other property
$
1,514

 
$
1,406

 
$
1,421

 
$
1,465

 
$
1,222

Equipment
658

 
712

 
550

 
776

 
938

Delaware & Hudson acquisition
213

 

 

 

 

 
 
 
 
 
 
 
 
 
 
Total
$
2,385

 
$
2,118

 
$
1,971

 
$
2,241

 
$
2,160


Our capital spending and replacement programs are and have been designed to assure the ability to provide safe, efficient, and reliable rail transportation services.  For 2016, we have budgeted $2.1 billion of property additions. See further discussion of our planned capital spending and replacement programs in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the subheading "Financial Condition, Liquidity, and Capital Resources."
 
We have invested and will continue to invest in various projects and corridor initiatives to expand our rail network to increase capacity and improve transit times, while returning value to shareholders.  Initiatives include the following:
The Crescent Corridor consists of a program of projects for infrastructure and other facility improvements geared toward creating seamless, high-capacity intermodal routes spanning 11 states from New Jersey to Louisiana and offering truck-competitive service along several major interstate highway corridors, including I-81, I-85, I-20, I-40, I-59, I-78, and I-75.
The Heartland Corridor is a seamless, high-capacity intermodal route across Virginia and West Virginia to Midwest markets.

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Meridian Speedway LLC, a joint venture with Kansas City Southern, owns and operates a 320-mile rail line between Meridian, Mississippi and Shreveport, Louisiana designed to increase capacity and improve service.
Pan Am Southern LLC, a joint venture with Pan Am Railways, Inc., designed to increase intermodal and automotive capacity, owns and operates a 155-mile main line track that runs between Mechanicville, New York and Ayer, Massachusetts, along with 281 miles of secondary and branch lines, including trackage rights in New York, Connecticut, Massachusetts, New Hampshire, and Vermont.
The CREATE project is a public-private partnership to reduce rail and highway congestion and add freight and passenger capacity in the metropolitan Chicago area.  We and other railroads have agreed to participate in CREATE.

Equipment At December 31, 2015, we owned or leased the following units of equipment:
 
 
Owned(1)
 
Leased(2)
 
Total
 
Capacity of
Equipment
 
 
 
 
 
 
 
(Horsepower)

Locomotives:
 

 
 

 
 

 
 
Multiple purpose
4,068

 
31

 
4,099

 
15,292,800

Auxiliary units
155

 

 
155

 

Switching
99

 

 
99

 
148,750

 
 
 
 
 
 
 
 
Total locomotives
4,322

 
31

 
4,353

 
15,441,550

 
 
 
 
 
 
 
 
 
 

 
 

 
 

 
(Tons)
Freight cars:
 

 
 

 
 

 
 

Gondola
30,392

 
3,017

 
33,409

 
3,643,031

Hopper
12,516

 

 
12,516

 
1,402,161

Box
10,811

 
1,363

 
12,174

 
1,022,107

Covered hopper
10,267

 
85

 
10,352

 
1,144,496

Flat
2,091

 
1,489

 
3,580

 
342,252

Other
4,596

 
14

 
4,610

 
221,362

 
 
 
 
 
 
 
 
Total freight cars
70,673

 
5,968

 
76,641

 
7,775,409

 
 
 
 
 
 
 
 
Other:
 

 
 

 
 

 
 

Chassis
24,493

 
4,245

 
28,738

 
 
Containers
21,019

 
1,939

 
22,958

 
 

Work equipment
4,666

 
318

 
4,984

 
 

Vehicles
3,828

 

 
3,828

 
 

Miscellaneous
7,295

 
27

 
7,322

 
 

 
 
 
 
 
 
 
 
Total other
61,301

 
6,529

 
67,830

 
 

 
(1) 
Includes equipment leased to outside parties and equipment subject to equipment trusts, conditional sale agreements, and capitalized leases.
(2) 
Includes short-term and long-term operating leases.

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The following table indicates the number and year built for locomotives and freight cars owned at December 31, 2015:
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
2006-
2010
 
2001-
2005
 
2000 &
Before
 
Total
Locomotives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
No. of units
8

 
83

 
50

 
60

 
90

 
315

 
553

 
3,163

 
4,322

% of fleet
1
%
 
2
%
 
1
%
 
1
%
 
2
%
 
7
%
 
13
%
 
73
%
 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freight cars:
 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

No. of units
2,033

 
900

 

 
2,017

 
3,820

 
4,695

 
165

 
57,043

 
70,673

% of fleet
3
%
 
1
%
 
%
 
3
%
 
5
%
 
6
%
 
1
%
 
81
%
 
100
%

The following table shows the average age of our owned locomotive and freight car fleets at December 31, 2015, and information regarding 2015 retirements:
 
 
Locomotives
 
Freight Cars 
Average age – in service
23.9 years 
 
29.6 years 
Retirements
13 units 
 
2,661 units 
Average age – retired
43.4 years 
 
45.8 years 

Track Maintenance Of the 36,200 total miles of track we operate, we are responsible for maintaining 29,000 miles, with the remainder being operated under trackage rights from other parties responsible for maintenance.
 
Over 82% of the main line trackage (including first, second, third, and branch main tracks, all excluding rail operated pursuant to trackage rights) has rail ranging from 131 to 155 pounds per yard with the standard installation currently at 136 pounds per yard.  Approximately 43% of our lines, excluding rail operated pursuant to trackage rights, carried 20 million or more gross tons per track mile during 2015.
 
The following table summarizes several measurements regarding our track roadway additions and replacements during the past five years:
 
2015
 
2014
 
2013
 
2012
 
2011
Track miles of rail installed
523

 
507

 
549

 
509

 
484

Miles of track surfaced
5,074

 
5,248

 
5,475

 
5,642

 
5,441

New crossties installed (millions)
2.4

 
2.7

 
2.5

 
2.6

 
2.7


Traffic Control Of the approximately 16,800 route miles we dispatch, about 11,300 miles are signalized, including 8,500 miles of centralized traffic control (CTC) and 2,800 miles of automatic block signals.  Of the 8,500 miles of CTC, approximately 7,600 miles are controlled by data radio originating at 355 base station radio sites.
 
ENVIRONMENTAL MATTERS Compliance with federal, state, and local laws and regulations relating to the protection of the environment is one our principal goals.  To date, such compliance has not had a material effect on our financial position, results of operations, liquidity, or competitive position.  See “Legal Proceedings,” Part I, Item 3; “Personal Injury, Environmental, and Legal Liabilities” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 16 to the Consolidated Financial Statements.
 

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EMPLOYEES The following table shows the average number of employees and the average cost per employee for wages and benefits: 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
Average number of employees
30,456

 
29,482

 
30,103

 
30,943

 
30,329

Average wage cost per employee
$
77,000

 
$
76,000

 
$
72,000

 
$
69,000

 
$
71,000

Average benefit cost per employee
$
32,000

 
$
35,000

 
$
40,000

 
$
38,000

 
$
39,000


More than 80% of our railroad employees are covered by collective bargaining agreements with various labor unions. See the discussion of “Labor Agreements” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 
 
GOVERNMENT REGULATION In addition to environmental, safety, securities, and other regulations generally applicable to all business, our railroads are subject to regulation by the STB.  The STB has jurisdiction over some rates, routes, fuel surcharges, conditions of service, and the extension or abandonment of rail lines.  The STB also has jurisdiction over the consolidation, merger, or acquisition of control of and by rail common carriers.  The Federal Railroad Administration (FRA) regulates certain track and mechanical equipment standards.
 
The relaxation of economic regulation of railroads, following the Staggers Rail Act of 1980, included exemption from STB regulation of the rates and most service terms for intermodal business (trailer-on-flat-car, container-on-flat-car), rail boxcar shipments, lumber, manufactured steel, automobiles, and certain bulk commodities such as sand, gravel, pulpwood, and wood chips for paper manufacturing.  Further, all shipments that we have under contract are effectively removed from commercial regulation for the duration of the contract.  About 90% of our revenues comes from either exempt shipments or shipments moving under transportation contracts; the remainder comes from shipments moving under public tariff rates.
 
Efforts have been made over the past several years to increase federal economic regulation of the rail industry, and such efforts are expected to continue in 2016.  The Staggers Rail Act of 1980 substantially balanced the interests of shippers and rail carriers, and encouraged and enabled rail carriers to innovate, invest in their infrastructure, and compete for business, thereby contributing to the economic health of the nation and to the revitalization of the industry.  Accordingly, we will continue to oppose efforts to reimpose increased economic regulation. 
 
Government regulations concerning the safety and security of our railroads are discussed within the “Security of Operations” section contained herein. 
 
COMPETITION There is continuing strong competition among rail, water, and highway carriers.  Price is usually only one factor of importance as shippers and receivers choose a transport mode and specific hauling company. Inventory carrying costs, service reliability, ease of handling, and the desire to avoid loss and damage during transit are also important considerations, especially for higher-valued finished goods, machinery, and consumer products.  Even for raw materials, semi-finished goods, and work-in-progress, users are increasingly sensitive to transport arrangements that minimize problems at successive production stages.

Our primary rail competitor is CSX Corporation; both railroads operate throughout much of the same territory. Other railroads also operate in parts of the territory.  We also compete with motor carriers, water carriers, and with shippers who have the additional options of handling their own goods in private carriage, sourcing products from different geographic areas, and using substitute products.
 
Certain marketing strategies to expand reach and shipping options among railroads and between railroads and motor carriers enable railroads to compete more effectively in specific markets. 

SECURITY OF OPERATIONS - We continue to take measures to enhance the security of our rail system. Our comprehensive security plan is modeled on and was developed in conjunction with the security plan prepared by the

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Association of American Railroads (AAR) post September 11, 2001.  The AAR Security Plan defines four Alert Levels and details the actions and countermeasures that are being applied across the railroad industry as a terrorist threat increases or decreases.  The Alert Level actions include countermeasures that will be applied in three general areas:  (1) operations (including transportation, engineering, and mechanical); (2) information technology and communications; and, (3) railroad police.  All of our Operations Division employees are advised by their supervisors or train dispatchers, as appropriate, of any change in Alert Level and any additional responsibilities they may incur due to such change.

Our plan also complies with U.S. Department of Transportation (DOT) security regulations pertaining to training and security plans with respect to the transportation of hazardous materials.  As part of the plan, security awareness training is given to all railroad employees who directly affect hazardous material transportation safety, and is integrated into hazardous material training programs.  Additionally, location-specific security plans are in place for certain metropolitan areas and each of the six port facilities we serve.  With respect to the ports, each facility's security plan has been approved by the applicable Captain of the Port and remains subject to inspection by the U.S. Coast Guard.
 
Additionally, we continue to engage in close and regular coordination with numerous federal and state agencies, including the U.S. Department of Homeland Security (DHS), the TSA, the Federal Bureau of Investigation (FBI), the FRA, the U.S. Coast Guard, U.S. Customs and Border Protection, and various state Homeland Security offices. 
Similarly, we follow guidance from DHS and DOT regarding rail corridors in High Threat Urban Areas (HTUA). Particular attention is aimed at reducing risk in HTUA by:  (1) the establishment of secure storage areas for rail cars carrying toxic-by-inhalation (TIH) materials; (2) the expedited movement of trains transporting rail cars carrying TIH materials; (3) substantially reducing the number of unattended loaded tank cars carrying TIH materials; and (4) cooperation with federal, state, local, and tribal governments to identify those locations where security risks are the highest.  

In 2015, through participation in the Transportation Community Awareness and Emergency Response (TRANSCAER) Program, we provided rail accident response training to approximately 4,792 emergency responders, such as local police and fire personnel. Our other training efforts throughout 2015 included participation in drills for local, state, and federal agencies.  We also have ongoing programs to sponsor local emergency responders at the Security and Emergency Response Training Course conducted at the AAR Transportation Technology Center in Pueblo, Colorado. 

Item 1A. Risk Factors

We are subject to significant governmental legislation and regulation over commercial, operating and environmental matters.  Congress can enact laws that could increase economic regulation of the industry. Railroads presently are subject to commercial regulation by the Surface Transportation Board (STB), which has jurisdiction over some rates, routes, fuel surcharges, conditions of service, and the extension or abandonment of rail lines.  The STB also has jurisdiction over the consolidation, merger, or acquisition of control of and by rail common carriers.  Additional economic regulation of the rail industry by Congress or the STB, whether under new or existing laws, could have a significant negative impact on our ability to determine prices for rail services and on the efficiency of our operations, either of which could result in a material adverse effect in the future on our financial position, results of operations, or liquidity in a particular year or quarter.  This potential material adverse effect could also result in reduced capital spending on our rail network or abandonment of lines.
 
Railroads are also subject to the enactment of laws by Congress and regulation by the U.S. Department of Transportation and the U.S. Department of Homeland Security (which regulate most aspects of our operations) related to safety and security. The Rail Safety Improvement Act of 2008 (RSIA), the Surface Transportation Extension Act of 2015, and the implementing regulations promulgated by the Federal Railroad Administration (FRA) require us and each other Class I railroad to implement an interoperable positive train control system (PTC) on certain of our respective lines by December 31, 2018.


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Full implementation of PTC in compliance with RSIA will result in additional operating costs and capital expenditures, and PTC implementation may result in reduced operational efficiency and service levels, as well as increased compensation and benefits expenses, and increased claims and litigation costs.

Our operations are subject to extensive federal and state environmental laws and regulations concerning, among other things, emissions to the air; discharges to waterways or groundwater supplies; handling, storage, transportation, and disposal of waste and other materials; and the cleanup of hazardous material or petroleum releases.  The risk of incurring environmental liability - for acts and omissions, past, present, and future - is inherent in the railroad business.  This risk includes property owned by us, whether currently or in the past, that is or has been subject to a variety of uses, including our railroad operations and other industrial activity by past owners or our past and present tenants.

Environmental problems that are latent or undisclosed may exist on these properties, and we could incur environmental liabilities or costs, the amount and materiality of which cannot be estimated reliably at this time, with respect to one or more of these properties.  Moreover, lawsuits and claims involving other unidentified environmental sites and matters are likely to arise from time to time, and the resulting liabilities could have a significant effect on our financial position, results of operations, or liquidity in a particular year or quarter.

As a common carrier by rail, we must offer to transport hazardous materials, regardless of risk. Transportation of certain hazardous materials could create catastrophic losses in terms of personal injury and property (including environmental) damage, and compromise critical parts of our rail network.  A catastrophic rail accident involving hazardous materials could have a material adverse effect on our financial position, results of operations, or liquidity to the extent not covered by insurance. We have obtained insurance for potential losses for third-party liability and first-party property damages (see Note 16 to the Consolidated Financial Statements); however, insurance is available from a limited number of insurers and may not continue to be available or, if available, may not be obtainable on terms acceptable to us.
 
We may be affected by terrorism or war.  Any terrorist attack, or other similar event, any government response thereto, and war or risk of war could cause significant business interruption and may adversely affect our financial position, results of operations, or liquidity in a particular year or quarter.  Because we play a critical role in the nation’s transportation system, we could become the target of such an attack or have a significant role in the government’s preemptive approach or response to an attack or war.
 
Although we currently maintain insurance coverage for third-party liability arising out of war and acts of terrorism, we maintain only limited insurance coverage for first-party property damage and damage to property in our care, custody, or control caused by certain acts of terrorism.  In addition, premiums for some or all of our current insurance programs covering these losses could increase dramatically, or insurance coverage for certain losses could be unavailable to us in the future.
 
We may be affected by general economic conditions. Prolonged negative changes in domestic and global economic conditions affecting the producers and consumers of the commodities we carry may have an adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter. Economic conditions resulting in bankruptcies of one or more large customers could have a significant impact on our financial position, results of operations, or liquidity in a particular year or quarter.

We may be affected by energy prices. Volatility in energy prices could have an effect on a variety of items including, but not limited to: the economy; demand for transportation services; business related to the energy sector, including crude, natural gas, and coal; fuel prices; and fuel surcharges. Any of these items could have a significant impact on our financial position, results of operations, or liquidity in a particular year or quarter.

We may be affected by climate change legislation or regulation.  Concern over climate change has led to significant federal, state, and international legislative and regulatory efforts to limit greenhouse gas (GHG) emissions.  Moreover, even without such legislation or regulation, government incentives and adverse publicity

K 12


relating to GHGs could affect certain of our customers and the markets for certain of the commodities we carry.  Restrictions, caps, taxes, or other controls on GHG emissions, including diesel exhaust, could significantly increase our operating costs, decrease the amount of traffic handled, and decrease the value of coal reserves we own, and thus could have an adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter.  Such restrictions could affect our customers that (1) use commodities that we carry to produce energy, including coal, (2) use significant amounts of energy in producing or delivering the commodities we carry, or (3) manufacture or produce goods that consume significant amounts of energy.
 
We face competition from other transportation providers.  We are subject to competition from motor carriers, railroads and, to a lesser extent, ships, barges, and pipelines, on the basis of transit time, pricing, and quality and reliability of service.  While we have used primarily internal resources to build or acquire and maintain our rail system, trucks and barges have been able to use public rights-of-way maintained by public entities.  Any future improvements or expenditures materially increasing the quality or reducing the cost of alternative modes of transportation in the regions in which we operate, or legislation granting materially greater latitude for motor carriers with respect to size or weight limitations, could have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter.

The operations of carriers with which we interchange may adversely affect our operations.  Our ability to provide rail service to customers in the U.S. and Canada depends in large part upon our ability to maintain cooperative relationships with connecting carriers with respect to, among other matters, freight rates, revenue division, car supply and locomotive availability, data exchange and communications, reciprocal switching, interchange, and trackage rights. Deterioration in the operations of or service provided by connecting carriers, or in our relationship with those connecting carriers, could result in our inability to meet our customers’ demands or require us to use alternate train routes, which could result in significant additional costs and network inefficiencies.
 
We rely on technology and technology improvements in our business operations.  If we experience significant disruption or failure of one or more of our information technology systems, including computer hardware, software, and communications equipment, we could experience a service interruption, a security breach, or other operational difficulties.  Additionally, if we do not have sufficient capital to acquire new technology or we are unable to implement new technology, we may suffer a competitive disadvantage within the rail industry and with companies providing other modes of transportation service.  Any of these factors could have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter.
 
The vast majority of our employees belong to labor unions, and labor agreements, strikes, or work stoppages could adversely affect our operations.  More than 80% of our railroad employees are covered by collective bargaining agreements with various labor unions.  If unionized workers were to engage in a strike, work stoppage, or other slowdown, we could experience a significant disruption of our operations.  Additionally, future national labor agreements, or renegotiation of labor agreements or provisions of labor agreements, could significantly increase our costs for healthcare, wages, and other benefits.  Any of these factors could have a material adverse impact on our financial position, results of operations, or liquidity in a particular year or quarter.
 
We may be subject to various claims and lawsuits that could result in significant expenditures.  The nature of our business exposes us to the potential for various claims and litigation related to labor and employment, personal injury, commercial disputes, freight loss and other property damage, and other matters.  Job-related personal injury and occupational claims are subject to the Federal Employer’s Liability Act (FELA), which is applicable only to railroads. FELA’s fault-based tort system produces results that are unpredictable and inconsistent as compared with a no-fault worker’s compensation system.  The variability inherent in this system could result in actual costs being very different from the liability recorded.
 
Any material changes to current litigation trends or a catastrophic rail accident involving any or all of freight loss  property damage, personal injury, and environmental liability could have a material adverse effect on our financial position, results of operations, or liquidity to the extent not covered by insurance.  We have obtained insurance for potential losses for third-party liability and first-party property damages (see Note 16 to the Consolidated Financial

K 13


Statements); however, insurance is available from a limited number of insurers and may not continue to be available or, if available, may not be obtainable on terms acceptable to us.
 
Severe weather could result in significant business interruptions and expenditures.  Severe weather conditions and other natural phenomena, including hurricanes, floods, fires, and earthquakes, may cause significant business interruptions and result in increased costs, increased liabilities, and decreased revenues, which could have an adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter.
 
Unpredictability of demand for rail services resulting in the unavailability of qualified personnel could adversely affect our operational efficiency and ability to meet demand.  Workforce demographics, training requirements, and the availability of qualified personnel, particularly engineers and trainmen, could each have a negative impact on our ability to meet demand for rail service.  Unpredictable increases in demand for rail services may exacerbate such risks, which could have a negative impact on our operational efficiency and otherwise have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter.
 
We may be affected by supply constraints resulting from disruptions in the fuel markets or the nature of some of our supplier markets. We consumed approximately 487 million gallons of diesel fuel in 2015. Fuel availability could be affected by any limitation in the fuel supply or by any imposition of mandatory allocation or rationing regulations. A severe fuel supply shortage arising from production curtailments, increased demand in existing or emerging foreign markets, disruption of oil imports, disruption of domestic refinery production, damage to refinery or pipeline infrastructure, political unrest, war or other factors, could have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter. Also, such an event could impact us as well as our customers and other transportation companies.

Due to the capital intensive nature, as well as the industry-specific requirements of the rail industry, high barriers of entry exist for potential new suppliers of core railroad items, such as locomotives and rolling stock equipment. Additionally, we compete with other industries for available capacity and raw materials used in the production of locomotives and certain track and rolling stock materials. Changes in the competitive landscapes of these limited-supplier markets could result in increased prices or significant shortages of materials that could have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter.
 
The state of capital markets could adversely affect our liquidity.  From time-to-time we rely on the capital markets to provide some of our capital requirements, including the issuance of long-term debt instruments and commercial paper, as well as the sale of certain receivables.  Significant instability or disruptions of the capital markets, including the credit markets, or deterioration of our financial condition due to internal or external factors could restrict or eliminate our access to, and/or significantly increase the cost of, various financing sources, including bank credit facilities and issuance of corporate bonds.  Instability or disruptions of the capital markets and deterioration of our financial condition, alone or in combination, could also result in a reduction in our credit rating to below investment grade, which could prohibit or restrict us from accessing external sources of short- and long-term debt financing and/or significantly increase the associated costs.

Item 1B. Unresolved Staff Comments
 
None.

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Item 3. Legal Proceedings
 
On November 6, 2007, various antitrust class actions filed against us and other Class I railroads in various Federal district courts regarding fuel surcharges were consolidated in the District of Columbia by the Judicial Panel on Multidistrict Litigation. On June 21, 2012, the court certified the case as a class action. The defendant railroads appealed this certification, and the Court of Appeals for the District of Columbia vacated the District Court’s decision and remanded the case for further consideration. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases. We do not believe the outcome of these proceedings will have a material effect on our financial position, results of operations, or liquidity. A lawsuit containing similar allegations against us and four other major railroads that was filed on March 25, 2008, in the U.S. District Court for the District of Minnesota, was voluntarily dismissed by the plaintiff subject to a tolling agreement entered into in August 2008, and most recently extended in August 2013.

In 2012, we received a Notice of Violation (NOV) issued by the Tennessee Department of Environmental Conservation concerning soil runoff in connection with construction of the Memphis Regional Intermodal Facility in Rossville, Tennessee. Although we will contest liability and the imposition of any penalties - which could exceed $100,000 - this matter is described here consistent with SEC rules and requirements concerning governmental proceedings with respect to environmental laws and regulations. We do not believe that the outcome of this proceeding will have a material effect on our financial position, results of operations, or liquidity.

Item 4. Mine Safety Disclosures
 
Not applicable.


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Executive Officers of the Registrant
 
Our executive officers generally are elected and designated annually by the Board of Directors at its first meeting held after the annual meeting of stockholders, and they hold office until their successors are elected.  Executive officers also may be elected and designated throughout the year as the Board of Directors considers appropriate.  There are no family relationships among our officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected.  The following table sets forth certain information, at February 1, 2016, relating to our officers.
 
Name, Age, Present Position
Business Experience During Past Five Years
 
 
James A. Squires, 54,
Chairman, President, and Chief Executive Officer
 
 
 
Present position since June 1, 2015.
Served as President since June 1, 2013. Served as Executive Vice President – Administration from
August 1, 2012 to June 1, 2013. Served as Executive Vice President – Finance and Chief Financial Officer from July 1, 2007 to August 1, 2012.  
 
 
Cindy C. Earhart, 54,
Executive Vice President –
Administration and Chief Information Officer
Present position since June 1, 2013.
Served as Vice President Human Resources from
March 1, 2007 to June 1, 2013.
 
 
James A. Hixon, 62,
Executive Vice President –
Law and Corporate Relations
Present position since October 1, 2005.
 
 
 
 
Alan H. Shaw, 48
Executive Vice President and
Chief Marketing Officer
Present position since May 16, 2015.
Served as Vice President Intermodal Operations from
November 1, 2013 to May 15, 2015. Served as Group Vice President Industrial Products from November 16, 2009 to October 31, 2013.
 
 
Marta R. Stewart, 58,
Executive Vice President –
Finance and Chief Financial Officer
Present position since November 1, 2013.
Served as Vice President and Treasurer from April 1, 2009
to November 1, 2013. 
 
 
Michael J. Wheeler, 53,
Executive Vice President and
Chief Operating Officer
Present position since February 1, 2016.
Served as Senior Vice President Operations October 1, 2015 to January 31, 2016. Served as Vice President Engineering November 1, 2012 to September 30, 2015. Served as Vice President Transportation February 1, 2009 to October 31, 2012.

 
 
Thomas E. Hurlbut, 51,
Vice President and Controller
Present position since November 1, 2013.
Served as Vice President Audit and Compliance from   
February 1, 2010 to November 1, 2013. 


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PART II
 
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

STOCK PRICE AND DIVIDEND INFORMATION
 
Common Stock is owned by 28,443 stockholders of record as of December 31, 2015 and is traded on the New York Stock Exchange under the symbol “NSC.”   The following table shows the high and low sales prices as reported by Bloomberg L.P. on its internet-based service and dividends per share, by quarter, for 2015 and 2014.
 
 
Quarter
2015
1st
 
2nd
 
3rd
 
4th
Market Price
 
 
 
 
 
 
 
High
$
111.63

 
$
106.47

 
$
88.03

 
$
97.07

Low
100.14

 
87.24

 
73.57

 
77.19

Dividends per share
0.59

 
0.59

 
0.59

 
0.59

 
 
 
 
 
 
 
 
2014
1st
 
2nd
 
3rd
 
4th
Market Price
 
 
 
 
 
 
 
High
$
97.58

 
$
104.09

 
$
112.34

 
$
117.24

Low
87.20

 
92.78

 
100.11

 
101.98

Dividends per share
0.54

 
0.54

 
0.57

 
0.57

 
ISSUER PURCHASES OF EQUITY SECURITIES 
Period
 
Total Number
of Shares
(or Units)
Purchased(1)
 
Average
Price Paid
per Share
(or Unit)
 
Total
Number of
Shares (or Units)
Purchased as
Part of Publicly
Announced Plans
or Programs(2)
 
Maximum Number
(or Approximate
Dollar Value)
of Shares (or Units)
that may yet be
Purchased under
the Plans or Programs(2)
 
 
 
 
 
 
 
 
 
October 1-31, 2015
 
749,906

 
$
79.74

 
746,144

 
24,159,632

November 1-30, 2015
 
241,117

 
80.10

 
241,117

 
23,918,515

December 1-31, 2015
 

 

 

 
23,918,515

 
 
 
 
 
 
 
 
 
Total
 
991,023

 
 

 
987,261

 
 

 
(1) 
Of this amount, 3,762 represents shares tendered by employees in connection with the exercise of stock options under the stockholder-approved Long-Term Incentive Plan.
(2) 
Our Board of Directors authorized a share repurchase program, pursuant to which up to 50 million shares of Common Stock through December 31, 2017.

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Item 6. Selected Financial Data
 
FIVE-YEAR FINANCIAL REVIEW
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
($ in millions, except per share amounts)
 
 
 
 
 
 
 
 
 
 
RESULTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
Railway operating revenues
$
10,511

 
$
11,624

 
$
11,245

 
$
11,040

 
$
11,172

Railway operating expenses
7,627

 
8,049

 
7,988

 
7,916

 
7,959

Income from railway operations
2,884

 
3,575

 
3,257

 
3,124

 
3,213

 
 
 
 
 
 
 
 
 
 
Other income – net
103

 
104

 
233

 
129

 
160

Interest expense on debt
545

 
545

 
525

 
495

 
455

Income before income taxes
2,442

 
3,134

 
2,965

 
2,758

 
2,918

 
 
 
 
 
 
 
 
 
 
Provision for income taxes
886

 
1,134

 
1,055

 
1,009

 
1,002

 
 
 
 
 
 
 
 
 
 
Net income
$
1,556

 
$
2,000

 
$
1,910

 
$
1,749

 
$
1,916

 
 
 
 
 
 
 
 
 
 
PER SHARE DATA
 

 
 

 
 

 
 

 
 

Net income     – basic
$
5.13

 
$
6.44

 
$
6.10

 
$
5.42

 
$
5.52

– diluted
5.10

 
6.39

 
6.04

 
5.37

 
5.45

Dividends
2.36

 
2.22

 
2.04

 
1.94

 
1.66

Stockholders’ equity at year end
40.93

 
40.25

 
36.55

 
31.08

 
30.00

 
 
 
 
 
 
 
 
 
 
FINANCIAL POSITION
 

 
 

 
 

 
 

 
 

Total assets
$
34,260

 
$
33,200

 
$
32,439

 
$
30,302

 
$
28,505

Total debt
10,093

 
8,985

 
9,404

 
8,642

 
7,507

Stockholders’ equity
12,188

 
12,408

 
11,289

 
9,760

 
9,911

 
 
 
 
 
 
 
 
 
 
OTHER
 

 
 

 
 

 
 

 
 

Property additions
$
2,385

 
$
2,118

 
$
1,971

 
$
2,241

 
$
2,160

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average number of shares outstanding (thousands)
301,873

 
309,367

 
311,916

 
320,864

 
345,484

Number of stockholders at year end
28,443

 
29,575

 
30,990

 
32,347

 
33,381

Average number of employees:
 
 
 

 
 

 
 

 
 

Rail
30,057

 
29,063

 
29,698

 
30,543

 
29,933

Nonrail
399

 
419

 
405

 
400

 
396

 
 
 
 
 
 
 
 
 
 
Total
30,456

 
29,482

 
30,103

 
30,943

 
30,329

 
See accompanying consolidated financial statements and notes thereto.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Norfolk Southern Corporation and Subsidiaries
 
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes and the Selected Financial Data.
 
OVERVIEW
 
We are one of the nation’s premier transportation companies.  Our Norfolk Southern Railway Company subsidiary operates approximately 20,000 miles of road in 22 states and the District of Columbia, serves every major container port in the eastern United States, and provides efficient connections to other rail carriers.  We operate the most extensive intermodal network in the East and are a major transporter of coal, automotive and industrial products. 

We faced significant headwinds during 2015 as operating revenues were negatively impacted by the steep decline in energy prices, which drove both reduced fuel surcharge revenue and volume decreases in coal and energy-related products. Despite these challenges we continued our focus on deploying resources to improve network velocity and service, while streamlining our corporate assets with the restructuring of our Triple Crown Services Company (TCS) subsidiary and the closure of our Roanoke, Virginia, corporate office. As a result of operational improvements, network fluidity improved throughout the year, as evidenced by a 21% decrease in terminal dwell from the beginning of the year and a 17% improvement in train speed over the same time period.

In 2016, we expect to see continued improvement in our service levels and the implementation of multiple cost-control initiatives, as we balance resources with the demand for our high-quality rail service. Through these initiatives, we expect to produce expense savings of $130 million in 2016 while increasing productivity and efficiency. We also expect to see modest growth in our intermodal and automotive markets, which should help temper weakness in our commodity-related markets. However, further declines in commodity prices or consumer activity could erode demand. Average revenue per unit is anticipated to benefit from pricing gains. Improving our rail service, generating higher returns on capital, and increasing the efficiency of our resources remain our focus and we believe we are well-positioned to meet continued headwinds in 2016.

SUMMARIZED RESULTS OF OPERATIONS
 
2015 Compared with 2014
 
Net income in 2015 was $1.6 billion, or $5.10 per diluted share, down $444 million, or 22%, compared with $2.0 billion, or $6.39 per diluted share, in 2014. The decrease in net income for the year reflected lower income from railway operations, down $691 million, or 19%, primarily due to a $1.1 billion, or 10%, decline in railway operating revenues as a result of lower average revenue per unit (driven primarily by reduced fuel surcharge revenues offset in part by price increases) and depressed coal volumes. This decline in revenues was partially offset by lower operating expenses (down $422 million, or 5%) resulting from the drop in oil prices, which significantly reduced fuel expense for the year, and by lower incentive compensation expense. These expense reductions were partially offset by $93 million of costs associated with the restructuring of our TCS subsidiary and the closure of our Roanoke, Virginia corporate office, which reduced net income by $58 million, or $0.19 per diluted share, and by higher wage rates.

2014 Compared with 2013
 
Net income in 2014 was $2.0 billion, or $6.39 per diluted share, up $90 million, or 5%, compared with
$1.9 billion, or $6.04 per diluted share, in 2013, as a 10% increase in income from railway operations was only partially offset by the absence of a gain from a land sale in Michigan, which benefited net income by $60 million and earnings per share by $0.19 in 2013. Railway operating revenues rose 3%, while operating expenses increased

K 19


only 1%, driven largely by higher volume-related expenses that were offset in part by lower compensation and benefits costs and fuel prices.

DETAILED RESULTS OF OPERATIONS
 
Railway Operating Revenues
 
Railway operating revenues were $10.5 billion in 2015, $11.6 billion in 2014, and $11.2 billion in 2013.  The following table presents a three-year comparison of revenues, volumes, and average revenue per unit by market group.
 
 
Revenues
 
Units
 
Revenue per Unit
 
2015
 
2014
 
2013
 
2015
 
2014
 
2013
 
2015
 
2014
 
2013
 
   ($ in millions)
 
    (in thousands)
 
($ per unit)     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Coal
$
1,823

 
$
2,382

 
$
2,543

 
1,079.7

 
1,284.4

 
1,346.7

 
$
1,688

 
$
1,855

 
$
1,888

General merchandise:
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Chemicals
1,760

 
1,863

 
1,667

 
527.6

 
502.6

 
449.2

 
3,335

 
3,707

 
3,711

Agr./consumer/gov’t.
1,516

 
1,498

 
1,467

 
609.0

 
603.8

 
594.3

 
2,489

 
2,481

 
2,468

Metals/construction
1,263

 
1,521

 
1,405

 
672.4

 
725.6

 
666.9

 
1,879

 
2,096

 
2,106

Automotive
969

 
1,004

 
984

 
429.3

 
410.1

 
402.1

 
2,258

 
2,447

 
2,448

Paper/clay/forest
771

 
794

 
795

 
299.9

 
303.2

 
309.4

 
2,573

 
2,619

 
2,570

General merchandise
6,279

 
6,680

 
6,318

 
2,538.2

 
2,545.3

 
2,421.9

 
2,474

 
2,624

 
2,609

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intermodal
2,409

 
2,562

 
2,384

 
3,861.0

 
3,845.2

 
3,572.3

 
624

 
666

 
667

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
10,511

 
$
11,624

 
$
11,245

 
7,478.9

 
7,674.9

 
7,340.9

 
1,405

 
1,515

 
1,532

 
Revenues decreased $1.1 billion in 2015, and increased $379 million in 2014.  As reflected in the table below, the decline in 2015 resulted from lower average revenue per unit (a result of reduced fuel surcharge revenues, which were down $852 million, or 64%) and decreased volumes (primarily driven by continued weakness in the coal markets). The increase in 2014 resulted from higher volumes, partially offset by lower average revenue per unit as the effects of lower rates and changes in the mix of business more than offset higher fuel surcharges.
 
Revenue Variance Analysis
Increase (Decrease)
 
 2015 vs. 2014
 
 2014 vs. 2013 
 
($ in millions)
 
 
 
 
Revenue per unit
$
(816
)
 
$
(133
)
Volume (units)
(297
)
 
512

 
 
 
 
Total
$
(1,113
)
 
$
379

 
Over 85% of our revenue base is covered by negotiated fuel surcharges, and revenues associated with these surcharges totaled $477 million, $1,329 million, and $1,254 million in 2015, 2014 and 2013, respectively. Fuel surcharge revenues are typically tied to either West Texas Intermediate Crude Oil (WTI) or On-Highway Diesel (OHD). Although less than half of our revenue base subject to fuel surcharges is tied to OHD, because WTI price levels were below most of our surcharge trigger points during 2015, OHD accounted for about 85% of our fuel surcharge revenues. All of our WTI-related fuel surcharge revenue and about 20% of our OHD-related fuel

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surcharge revenue is on a two-month lag. This two-month lag increased fuel surcharge revenues by $34 million and $84 million in 2015 and 2014, respectively, but decreased fuel surcharge revenue by approximately $29 million in 2013. Should the current fuel price environment persist in 2016, we expect fuel surcharge revenue to be lower than 2015.

Two of our customers, DuPont and Sunbelt Chlor Alkali Partnership (Sunbelt), filed rate reasonableness complaints before the Surface Transportation Board (STB) alleging that our tariff rates for transportation of regulated movements are unreasonable. Since June 1, 2009, in the case of DuPont, and April 1, 2011, in the case of Sunbelt, we have been billing and collecting amounts based on the challenged tariff rates. In 2014, the STB resolved both rate reasonableness complaints in our favor. The STB’s findings in the Sunbelt case remain subject to technical corrections and requests for reconsideration.  Both cases remain open to possible appeal. We believe the estimate of any reasonably possible loss will not have a material effect on our financial position, results of operations, or liquidity. With regard to rate cases, we record adjustments to revenues in the periods if and when such adjustments are probable and estimable.

COAL revenues decreased $559 million, or 23%, compared with 2014, reflecting a 16% decline in carload volume.  Average revenue per unit was down 9%, primarily due to reduced fuel surcharge revenues, which lowered average revenue per unit by $134.
 
In 2014, coal revenues decreased $161 million, or 6%, compared with 2013, reflecting a 5% decrease in carload volume.  Average revenue per unit was down 2%, the result of lower pricing (mainly export coal) and the negative effect of changes in mix.
 
For 2016, coal revenues are expected to decrease primarily due to lower volumes associated with continued weak demand.

Coal represented 17% of our revenues in 2015, and 77% of shipments handled originated on our lines.  As shown in the following table, tonnage decreased in all markets.
 
 
Coal Tonnage by Market
 
2015
 
2014
 
2013
 
(tons in thousands)
 
 
 
 
 
 
Utility
81,137

 
93,884

 
97,146

Export
16,193

 
23,218

 
28,631

Domestic metallurgical
14,450

 
16,130

 
16,905

Industrial
8,201

 
8,599

 
7,388

 
 
 
 
 
 
Total
119,981

 
141,831

 
150,070

 
Utility coal tonnage was down 14% in 2015, compared with 2014.  The decrease primarily resulted from reduced coal burn due to significantly lower natural gas prices which caused utilities to shift from coal to natural gas generation as well as coal plant retirements (due to the Mercury and Air Toxics Standards implementation) and mild weather during the last half of 2015.

Utility coal tonnage was down 3% in 2014 as compared with 2013. Lower utility coal shipments to our northern region due to market share loss and competition from lower priced natural gas were offset in part by gains in our southern region, resulting from strong demand for electric generation and stockpile rebuilding after a harsh winter.

For 2016, we expect utility coal tonnage to decrease, as we expect lower demand resulting from high stockpiles due to mild weather and depressed natural gas prices.

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Export coal tonnage decreased 30% in 2015, compared with 2014.  Competition faced by U.S. coal suppliers continued to increase as excess coal supply, a strong U.S. dollar, and depressed coal prices significantly reduced demand for U.S. export coal.  Volume through Norfolk was down 5.5 million tons, or 33%, and volume through Baltimore was down 1.5 million tons, or 23%
 
In 2014, export coal tonnage decreased 19%, compared with 2013. Strong competition in the global metallurgical and thermal coal markets resulting from excess coal supply, weakening economies in the global market, and a strong Australian currency advantage significantly reduced demand for U.S. export coal.  Volume through Norfolk was down 4.3 million tons, or 20%, and volume through Baltimore was down 0.5 million tons, or 8%. Other export volume decreased 0.6 million tons, or 85%.
 
For 2016, export coal tonnage is expected to decrease, as we expect continued pressure in the overseas coal markets due to oversupply, weak seaborne coal prices, and a strong U.S. dollar.
 
Domestic metallurgical coal tonnage was down 10% in 2015, compared with 2014, and down 5% in 2014 as compared to 2013. Both years reflect volume losses related to plant curtailments and sourcing shifts resulting from steel producers looking for opportunities to reduce costs that were offset in part by market share gains.

For 2016, domestic metallurgical coal tonnage is expected to remain relatively flat as customer-specific gains will be partially offset by volume decreases due to plant curtailments and sourcing shifts as we expect steel producers to continue to look for opportunities to reduce costs.
 
Industrial coal tonnage dropped 5% in 2015, compared with 2014, as a result of natural gas conversions and decreased coal burn.

In 2014, industrial coal tonnage increased 16% compared with 2013, as new business opportunities with existing customers was partially offset by declines in anthracite and petcoke shipments.
 
For 2016, industrial coal tonnage is expected to remain flat due to reduced demand resulting from conversions to natural gas offset by additional business with existing customers.
 
GENERAL MERCHANDISE revenues in 2015 decreased $401 million, or 6%, compared with 2014, reflecting a 6% decline in average revenue per unit, the result of lower fuel surcharge revenues, which reduced average revenue per unit by $185 and offset the effects of higher rates. Volume was relatively flat year over year.

In 2014, general merchandise revenues increased $362 million, or 6%, compared with 2013, reflecting 5% growth in carload volume and a 1% improvement in average revenue per unit that reflected favorable changes in fuel surcharge revenue and in mix.  

For 2016, general merchandise revenues are expected to increase primarily due to pricing gains.

Chemicals revenues in 2015 decreased 6%, compared with 2014, reflecting a 10% decrease in revenue per unit, driven by reduced fuel surcharge revenues and negative mix resulting from increased shipments of lower rated liquefied petroleum gas, which more than offset the effect of higher rates. Volume grew 5%, largely driven by more shipments of liquefied petroleum gas and strong demand for shipments of polypropylene due to lower feedstock prices. These volume increases were partially offset by fewer shipments of crude oil from the Bakken oil fields.
 
In 2014, chemicals revenues increased 12%, compared with 2013, reflecting volume growth (up 12%) largely driven by more shipments of crude oil from the Bakken and Canadian oil fields and growth in shipments of liquefied petroleum gas in the Utica Shale region.

For 2016, chemicals revenues are anticipated to increase, as average revenue per unit is expected to be higher, largely the effect of increased volumes of higher rated plastics and pricing gains.

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Agriculture, consumer products, and government revenues increased 1% in 2015, compared with 2014, the result of increased ethanol shipments due to higher gasoline consumption, offset in part by lower fuel surcharge revenues and fewer revenue shipments of empty rail cars as part of the conclusion of a hopper re-body program.

In 2014, agriculture, consumer products, and government revenues increased 2% compared with 2013, as a result of a 2% improvement in volume and a 1% improvement in average revenue per unit, due primarily to higher rates that were slightly offset by a negative change in mix.  The volume increase was driven by higher corn shipments due to increased demand for ethanol production, partially offset by fewer shipments of fertilizer due to production curtailments.

For 2016, agriculture, consumer products, and government revenues are expected to increase, as we expect average revenue per unit to be higher due to pricing gains. We also expect modest volume growth, supported by increased shipments of ethanol, fertilizer, food products, and feed products.

Metals and construction revenues fell 17% in 2015, compared with 2014.  The decline resulted from a 10% drop in average revenue per unit, largely the result of lower fuel surcharge revenues partially offset by pricing gains, and a 7% decrease in carloads. The decline in carloads was the result of lower demand for materials used in the construction of pipe for drilling activity due to a drop in energy prices, fewer shipments of fractionating sand and ceramic proppant used in natural gas drilling, and declines in scrap metal and coil shipments, resulting from a decline in steel production due to global over-supply. These decreases were offset in part by increased shipments of aggregates as a result of higher demand in the Southeast for project work and strong highway and construction related markets.
 
In 2014, metals and construction revenues grew 8% compared with 2013.  The revenue improvement resulted from a 9% increase in carloads, as we moved more shipments of fractionating sand for natural gas drilling, in addition to higher coil shipments to support growing demand in the automotive and energy sectors, and increased shipments of iron and steel as a result of higher import activity. 
 
For 2016, metals and construction revenues are expected to benefit from increased average revenue per unit due to pricing gains. We expect volumes to be relatively flat as construction-related gains are expected to be offset by declines in the steel market.

Automotive revenues fell 3% compared to 2014, reflecting an 8% drop in average revenue per unit, due primarily to lower fuel surcharge revenues, offset in part by rate increases. Volume grew 5% due to increased production of North American light vehicles and the return of shipments diverted in 2014 due to improved service in the second half of 2015.  

In 2014, automotive revenues rose 2% compared to 2013, reflecting 2% growth in volume due to increased vehicle production at plants we serve that was offset in part by the diversion of shipments to other modes of transportation as a result of equipment shortages and network delays. 
 
For 2016, automotive revenues are expected to increase as a result of volume gains due to continued increases in domestic production as well as higher average revenue per unit as a result of improved pricing.

Paper, clay and forest products revenues were down 3%, as average revenue per unit decreased 2%, and volumes fell 1%. The decline in average revenue per unit was driven primarily by lower fuel surcharge revenues and negative mix (fewer higher rated kaolin shipments) offset by pricing gains. Volume changes reflected lower waste, kaolin, woodchip, and graphic paper volumes as a result of customer sourcing changes, softened demand, and mill closures, offset by higher carloads of pulpboard, lumber, and pulp due to continued recovery of the housing market.

In 2014, paper, clay and forest products revenues were flat compared with 2013 as a 2% improvement in average revenue per unit (reflecting pricing gains and positive mix) was offset by a 2% decrease in volumes.  Volume declines were driven by reduced shipments of municipal solid waste resulting from loss of business, lower

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shipments of newsprint and paper due to mill and plant closures, and fewer pulp shipments due to production issues and reduced export demand. These declines were offset in part by higher lumber shipments resulting from the continued housing recovery and new business.

For 2016, paper, clay, and forest products revenues are anticipated to increase due to modest improvement in volumes and revenue per unit. Volume growth is expected to be driven by higher woodchip and lumber shipments, as we anticipate growth in demand for wood pellets and the continued recovery of the housing market, offset in part by lower municipal solid waste due to the loss of a customer, and lower kaolin and graphic paper shipments due to demand declines.

INTERMODAL revenues decreased $153 million, or 6%, compared with 2014, reflecting decreased revenue per unit of 6% (the result of lower fuel surcharge revenues, which decreased average revenue per unit by $51).
 
Domestic volume (including truckload and intermodal marketing companies, TCS, and Premium business) declined 3%, a result of the restructuring of the TCS subsidiary, ongoing service challenges during the first three quarters, an increase in available trucking capacity, and weaker overall demand, all partially offset by growth from continued highway-to-rail conversions. International volume grew 6% due to stronger demand from existing customers and new business.
 
In 2014, intermodal revenues increased $178 million, or 7%, compared with 2013, reflecting a 8% growth in volume.  Domestic volume improved 6%, a result of growth in strategic corridors, continued highway-to-rail conversions, and higher demand for rail service from existing customers.  International volume grew 10% due to increased demand from existing customers and expanded service opportunities.
 
For 2016, we anticipate higher intermodal revenues due to increased volumes as a result of continued highway conversions and growth associated with new and existing customers to be partially offset by declines due to the restructuring of the TCS subsidiary and an increase in available trucking capacity. Average revenue per unit is expected to be lower as pricing gains are offset by unfavorable changes in business mix, primarily a result of the TCS restructuring, and reduced fuel surcharge revenue.

In connection with the TCS restructuring discussed above, we are working with our customers and business partners to convert business handled by TCS into our current intermodal network. As this transition occurs, we expect some shipments previously handled by TCS to be absorbed by our domestic container line of business. While it is likely that not all of this TCS business will make this transition, we do not expect this restructuring to have a material effect on our railway operating revenues or income from railway operations.

Railway Operating Expenses
 
Railway operating expenses in 2015 were $7.6 billion, down $422 million, or 5%, compared to 2014.  Expenses in 2014 were $8.0 billion, up $61 million, or 1%, compared to 2013.  In 2015, decreases in fuel costs and incentive compensation were offset in part by costs associated with the TCS restructuring and closure of our Roanoke, Virginia corporate office, in addition to higher wage rates. In 2014, increases in volume-related costs were offset in part by lower postretirement and pension benefit costs as well as lower fuel prices. 


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The following table shows the changes in railway operating expenses summarized by major classifications.
 
 
Operating Expense Variances
Increase (Decrease)
 
2015 vs. 2014
 
2014 vs. 2013
 
($ in millions)   
 
 
 
 
Fuel
$
(640
)
 
$
(39
)
Compensation and benefits
14

 
(105
)
Materials and other
36

 
112

Purchased services and rents
65

 
58

Depreciation
103

 
35

 
 
 
 
Total
$
(422
)
 
$
61


Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, decreased $640 million, or 41%, in 2015 and decreased $39 million, or 2%, in 2014.  Both declines were principally the result of lower locomotive fuel prices (down 40% in 2015 and 6% in 2014). Locomotive fuel consumption decreased 1% in 2015, but increased 4% in 2014. We consumed approximately 487 million gallons of diesel fuel in 2015, compared with 494 million gallons in 2014 and 476 million gallons in 2013.

Looking forward to 2016, we expect lower fuel expenses as current prices for locomotive fuel are significantly below the average cost per gallon of $1.74 experienced in 2015. In addition, we anticipate the TCS restructuring and improved fuel productivity will benefit fuel expense in 2016.

Compensation and benefits, which represents 38% of total operating expenses, increased $14 million in 2015 reflecting changes in:
pay rates (up $83 million),
payroll taxes (up $37 million),
labor agreement payments ($24 million),
employee levels, including overtime and increased trainees (up $21 million), and
incentive compensation (down $151 million).

In 2014, compensation and benefits decreased $105 million, or 3%, reflecting changes in:
postretirement and pension benefit costs (down $152 million),
health and welfare benefit costs (down $25 million),
pay rates (up $57 million), and
payroll taxes (up $21 million).

Our employment averaged 30,456 in 2015, compared with 29,482 in 2014, and 30,103 in 2013. Looking forward to 2016, we expect normalized levels of incentive compensation in addition to increased medical cost inflation and higher wages to be offset in part by lower employment levels driven from operational efficiencies and the TCS restructuring.

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Materials and other expenses increased $36 million, or 4%, in 2015, and increased $112 million, or 14%, in 2014, as shown in the following table.
 
 
2015
 
2014
 
2013
 
($ in millions)
 
 
 
 
 
 
Materials
$
469

 
$
470

 
$
422

Casualties and other claims
137

 
135

 
90

Other
370

 
335

 
316

 
 
 
 
 
 
Total
$
976

 
$
940

 
$
828

 
The increase in other costs in 2015 reflected higher relocation costs driven by the Roanoke, Virginia corporate office closure, increased travel costs for train service employees and higher property taxes. Casualties and other claims expenses include the estimates of costs related to personal injury (PI), property damage, and environmental matters. The increase in 2015 was driven by less favorable PI reserve adjustments for prior years' claim amounts offset in part by reduced environmental remediation costs as a result of less unfavorable development for our environmental liability.

Volume growth in 2014 drove increases in locomotive and equipment maintenance and repair costs. Additionally, harsh winter weather experienced in the first quarter of 2014 resulted in increased maintenance activity, which negatively impacted the comparison to 2013. The increase in casualties and other claims expenses in 2014 reflected lower favorable PI reserve adjustments for prior years' claim amounts.

Purchased services and rents includes the costs of services purchased from outside contractors, including the net costs of operating joint (or leased) facilities with other railroads and the net cost of equipment rentals.  This category of expenses increased $65 million, or 4%, in 2015, and increased $58 million, or 4%, in 2014.
 
 
2015
 
2014
 
2013
 
($ in millions)
 
 
 
 
 
 
Purchased services
$
1,433

 
$
1,394

 
$
1,353

Equipment rents
319

 
293

 
276

 
 
 
 
 
 
Total
$
1,752

 
$
1,687

 
$
1,629

 
The increase in 2015 for purchased services expense reflects higher costs associated with intermodal operations, information technology, maintenance and repair, and the Roanoke, Virginia corporate office closure. These increases were partially offset by TCS restructuring-related savings. The increase in 2014 for purchased services expense resulted from higher volumes and the effect reduced network velocity had on intermodal operations and joint facilities costs. Additionally, higher maintenance and repair costs were offset in part by reduced expenses associated with the Shared Asset Areas (including equity in the earnings of Conrail, see Note 5). 

Equipment rents, which includes our cost of using equipment (mostly freight cars) owned by other railroads or private owners less the rent paid to us for the use of our equipment, increased in 2015 principally due to higher automotive and intermodal rates and volumes. The 2014 increase is a result of higher volumes and network congestion.


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Looking forward to 2016, we expect decreases in our purchased services and equipment rents expenses principally due to lower TCS operational costs and improved network velocity. These decreases will be partially offset by higher intermodal operations costs associated with higher conventional volumes.

Depreciation expense increased by $103 million, or 11%, in 2015, and increased by $35 million, or 4%, in 2014. The increase in 2015 is due in part to the recognition of $63 million of accelerated depreciation on TCS assets as a result of our TCS restructuring. Both periods also reflect growth in our roadway and equipment capital base as we continue to invest in our infrastructure and rolling stock.

Other Income – Net
 
Other income – net was $103 million in 2015, $104 million in 2014, and $233 million in 2013 (Note 2). The decrease in 2015 reflects decreased returns from corporate-owned life insurance, declines in coal royalties and higher professional and consultant fees, offset in part from higher gains from sales of property (including income earned from joint ventures). The decrease in 2014 reflects the absence of the 2013 Michigan land sale ($97 million). 
 
Income Taxes
 
Income tax expense in 2015 was $886 million, an effective rate of 36.3%, compared with 36.2% in 2014 and 35.6% in 2013. All three years benefited from favorable reductions in deferred tax expense for state law changes and certain business tax credits.

IRS examinations have been completed for all years prior to 2013. We are not currently under audit by the Internal Revenue Service.

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
 
Cash provided by operating activities, our principal source of liquidity, was $2.9 billion in 2015 and 2014, and $3.1 billion in 2013. Lower cash from operations in 2015 compared with 2014 was offset by reduced tax payments. The decrease in 2014 reflected increased tax payments, offset in part by improved operating results. We had working capital of $402 million at December 31, 2015, compared with $998 million at December 31, 2014, primarily reflecting higher current maturities of long-term debt.  Cash and cash equivalents totaled $1.1 billion and $973 million at December 31, 2015 and 2014, respectively, and were invested in accordance with our corporate investment policy as approved by the Board of Directors.  The portfolio contains securities that are subject to market risk.  There are no limits or restrictions on our access to these assets.  We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations.

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Contractual obligations at December 31, 2015, were comprised of interest on fixed-rate long-term debt and capital leases, long-term debt and capital leases (Note 8), operating leases (Note 9), agreements with Consolidated Rail Corporation (CRC) (Note 5), unconditional purchase obligations (Note 16), long-term advances from Conrail (Note 5), and unrecognized tax benefits (Note 3):
 
 
Total
 
2016
 
2017 -
2018
 
2019 -
2020
 
2021 and
Subsequent
 
Other
 
($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
Interest on fixed-rate long-term debt
 
 
 
 
 
 
 
 
 
 
 
and capital lease principal
$
13,780

 
$
543

 
$
992

 
$
851

 
$
11,394

 
$

Long-term debt and capital lease principal
10,398

 
500

 
1,150

 
899

 
7,849

 

Operating leases
664

 
77

 
138

 
101

 
348

 

Agreements with CRC
304

 
36

 
72

 
72

 
124

 

Unconditional purchase obligations
909

 
552

 
347

 
10

 

 

Long-term advances from Conrail
280

 

 

 

 
280

 

Unrecognized tax benefits*
25

 

 

 

 

 
25

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
26,360

 
$
1,708

 
$
2,699

 
$
1,933

 
$
19,995

 
$
25

 
* When the amount and timing of liabilities for unrecognized tax benefits can be reasonably estimated, the amount is shown in the table under the appropriate period.  When the year of settlement cannot be reasonably estimated, the amount is shown in the Other column.
 
Off balance sheet arrangements consist of obligations related to operating leases, which are included in the table of contractual obligations above and disclosed in Note 9.
 
Cash used in investing activities was $2.1 billion in 2015, compared with $2.0 billion in 2014, and $1.9 billion in 2013.  The increase in 2015 primarily reflected higher cash outflows for property additions, which were partially offset by higher proceeds from COLI activity. The increase in 2014 primarily reflected increased use of cash for property additions and COLI investments, which were partially offset by higher short-term investment maturities.

On September 18, 2015, we completed the acquisition of 282 miles of the Delaware and Hudson Railway Co. (D&H) line between Sunbury, Pennsylvania and Schenectady, New York, for $215 million. The transaction is included in Property additions on the Statement of Cash Flows. The acquisition comprises land ($49 million), roadway, including bridges, tunnels, grading, rail, cross ties and other track material ($162 million), and other property including supplies ($4 million). The acquired lines connect with our network at Sunbury, Pennsylvania, and Binghamton, New York, and provide us single-line routes from Chicago and the southeastern United States to Albany, New York, and our intermodal terminals in Scranton, Pennsylvania and Mechanicville, New York. We also gain an enhanced connection to our Pan Am Southern LLC joint venture, which serves New England markets. We previously provided service over the D&H lines via trackage rights and haulage agreements. In addition, we hired, trained and qualified 152 former D&H employees.









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Property additions account for most of the recurring spending in this category.  The following tables show capital spending (including capital leases) and track and equipment statistics for the past five years.

Property Additions
 
 
 
 
 
 
 
 
 
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
($ in millions)
 
 
 
 
 
 
 
 
 
 
Road and other property
$
1,514

 
$
1,406

 
$
1,421

 
$
1,465

 
$
1,222

Equipment
658

 
712

 
550

 
776

 
938

Delaware & Hudson acquisition
213

 

 

 

 

 
 
 
 
 
 
 
 
 
 
Total
$
2,385

 
$
2,118

 
$
1,971

 
$
2,241

 
$
2,160

 
Track Structure Statistics (Capital and Maintenance)
 
 
 
 
 
 
 
 
 
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
Track miles of rail installed
523

 
507

 
549

 
509

 
484

Miles of track surfaced
5,074

 
5,248

 
5,475

 
5,642

 
5,441

New crossties installed (millions)
2.4

 
2.7

 
2.5

 
2.6

 
2.7

 
Average Age of Owned Railway Equipment
 
 
 
 
 
 
 
 
 
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
(years)
 
 
 
 
 
 
 
 
 
 
Freight cars
29.6

 
30.1

 
30.2

 
30.2

 
30.3

Locomotives
23.9

 
23.1

 
22.5

 
21.6

 
21.0

Retired locomotives
43.4

 
35.3

 
38.7

 
41.2

 
31.7

 
For 2016, we have budgeted $2.1 billion for property additions.  The anticipated spending includes $820 million for the normalized replacement of rail, ties, and ballast, and the improvement or replacement of bridges.  Planned equipment spending of $490 million includes new and rebuilt locomotives, intermodal containers and chassis, mill gondolas, multilevel automobile racks, and covered hoppers.  Investments in facilities and terminals are anticipated to be $220 million and include terminals and equipment to add capacity to our intermodal network, new or expanded bulk transfer facilities, improvements to vehicle distribution facilities, and upgrades and expansions of our mechanical service shops.  For 2016, we have budgeted $250 million for the continued implementation of positive train control (PTC) and expect PTC-related property additions in 2017 and 2018 to total approximately $530 million.  We also expect to spend $90 million on infrastructure improvements to increase mainline capacity, create operating savings, and to accommodate business growth. Technology investments of $80 million are planned for new or upgraded systems and computers.

Cash used in financing activities was $662 million in 2015, compared with $1.3 billion in 2014, and $394 million in 2013.  The decrease in 2015 was driven primarily by higher proceeds from borrowing and lower debt repayments, partially offset by higher share repurchase activity (see Note 14).  The increase in 2014 was driven primarily by higher debt repayments and lower debt proceeds, partially offset by reduced share repurchase activity.

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Share repurchases totaled $1.1 billion in 2015, $318 million in 2014, and $627 million in 2013 for the purchase and retirement of 11.3 million, 3.1 million, and 8.3 million shares, respectively.  On August 1, 2012, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2017, and 23.9 million shares remain under this authority as of December 31, 2015.  The timing and volume of future share repurchases will be guided by our assessment of market conditions and other pertinent factors.  Any near-term purchases under the program are expected to be made with internally generated cash, cash on hand, or proceeds from borrowings.
 
We further discuss our current securities issuance authority from our Board of Directors, our credit agreement, and our accounts receivable securitization program in Note 8 of our Notes to Consolidated Financial Statements, all of which provide for access to additional liquidity should the need arise. Our debt-to-total capitalization ratio was 45.3% at December 31, 2015, compared with 42.0% at December 31, 2014.
 
Upcoming annual debt maturities are relatively modest (Note 8).  Overall, our goal is to maintain a capital structure with appropriate leverage to support our business strategy and provide flexibility through business cycles.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
 
The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.  These estimates and assumptions may require significant judgment about matters that are inherently uncertain, and future events are likely to occur that may require us to make changes to these estimates and assumptions.  Accordingly, we regularly review these estimates and assumptions based on historical experience, changes in the business environment, and other factors we believe to be reasonable under the circumstances.  We regularly discuss the development, selection, and disclosures concerning critical accounting estimates with the Audit Committee of the Board of Directors.
 
Pensions and Other Postretirement Benefits
 
Accounting for pensions and other postretirement benefit plans requires us to make several estimates and assumptions (Note 11).  These include the expected rate of return from investment of the plans’ assets, projected increases in medical costs, and the expected retirement age of employees as well as their projected earnings and mortality.  In addition, the amounts recorded are affected by changes in the interest rate environment because the associated liabilities are discounted to their present value.  We make these estimates based on our historical experience and other information that we deem pertinent under the circumstances (for example, expectations of future stock market performance).  We utilize an independent actuarial consulting firm’s studies to assist us in selecting appropriate actuarial assumptions and valuing related liabilities.
 
Net pension expense, which is included in “Compensation and benefits” in the Consolidated Statements of Income, was $34 million for 2015.  In recording this amount, we assumed a long-term investment rate of return of 8.25%, which was supported by the long-term total rate of return on plan assets since inception, as well as our expectation of future returns.  A one-percentage point change to this rate of return assumption would result in a $20 million change in pension expense.  We review assumptions related to our defined benefit plans annually, and while changes are likely to occur in assumptions concerning retirement age, projected earnings, and mortality, they are not expected to have a material effect on our net pension expense or net pension liability in the future. The net pension liability is recorded at net present value using discount rates that are based on the current interest rate environment in light of the timing of expected benefit payments.  We utilize analyses in which the projected annual cash flows from the pension and postretirement benefit plans are matched with yield curves based on an appropriate universe of high-quality corporate bonds.  We use the results of the yield curve analyses to select the discount rates that match the payment streams of the benefits in these plans.
 

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Net benefit for other postretirement benefits, which is also included in “Compensation and benefits,” was $15 million for 2015. Historically, medical inflation has been a significant component of the estimate for postretirement benefits, however, its effect has been reduced substantially due to the plan amendment made in 2014 (Note 11).  Since there is a fixed benefit for Medicare-eligible retirees, there is no medical inflation assumed for this population.  The medical inflation factor is still applicable for pre-Medicare-eligible retirees.
 
Properties and Depreciation
 
Most of our total assets are long-lived railway properties (Note 6).  As disclosed in Note 1, properties are depreciated using group depreciation.  The primary depreciation method for our asset base is group life.  Units of production is the principal method of depreciation for rail in high density corridors and for depletion of natural resources.  Remaining properties are depreciated generally using the straight-line method over the lesser of estimated service or lease lives. See Note 1 for a more detailed discussion of the assumptions and estimates in this area.
 
Depreciation expense for 2015 totaled $1,054 million.  Our composite depreciation rates for 2015 are disclosed in Note 6; a one-tenth percentage point increase (or decrease) in these rates would have resulted in a $38 million increase (or decrease) to depreciation expense.  For 2015, roadway depreciation rates ranged from 0.83% to 33.33% and equipment depreciation rates ranged from 1.55% to 33.33%.
 
Personal Injury, Environmental, and Legal Liabilities
 
Casualties and other claims expense, included in “Materials and other” in the Consolidated Statements of Income, consists primarily of our accrual for personal injury liabilities and environmental remediation costs.  
 
To aid in valuing our personal injury liability and determining the amount to accrue during each period, we utilize studies prepared by an independent consulting actuarial firm.  The actuarial firm studies our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences. We adjust the liability quarterly based upon our assessment and the results of the study. Our estimate is subject to inherent limitation given the difficulty of predicting future events and as such the ultimate loss sustained may vary from the estimated liability recorded.
 
We are subject to various jurisdictions’ environmental laws and regulations.  We record a liability where such liability or loss is probable and its amount can be estimated reasonably.  Environmental engineers regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates. Additionally, our Environmental Policy Council (composed of senior managers) oversees and interprets our environmental policy. Operating expenses, included in "Materials and other" and "Purchased services and rents," for environmental matters totaled $40 million in 2015, $45 million in 2014, and $57 million in 2013, and property additions for environmental matters were not significant.

We and/or certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations. When we conclude that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to earnings.

For a more detailed discussion of the assumptions and estimates in accounting for personal injury and environmental matters see Note 16. 

Income Taxes
 
Our net long-term deferred tax liability totaled $9.1 billion at December 31, 2015 (Note 3).  This liability is estimated based on the expected future tax consequences of items recognized in the financial statements.  After application of the federal statutory tax rate to book income, judgment is required with respect to the timing and deductibility of expenses in our income tax returns.  For state income and other taxes, judgment is also required

K 31


with respect to the apportionment among the various jurisdictions. A valuation allowance is recorded if we expect that it is more likely than not that deferred tax assets will not be realized. We had a $35 million valuation allowance on $603 million of deferred tax assets as of December 31, 2015, reflecting the expectation that almost all of these assets will be realized.
 
In addition, we have a recorded liability for our estimate of uncertain tax positions taken or expected to be taken in a tax return.  Judgment is required in evaluating the application of federal and state tax laws and assessing whether it is more likely than not that a tax position will be sustained on examination and, if so, judgment is also required as to the measurement of the amount of tax benefit that will be realized upon settlement with the taxing authority.  We believe this liability for uncertain tax positions to be adequate.  Income tax expense is adjusted in the period in which new information about a tax position becomes available or the final outcome differs from the amounts recorded.  For every one half percent change in the 2015 effective tax rate, net income would have changed by $12 million.
 
OTHER MATTERS
 
Labor Agreements
 
More than 80% of our railroad employees are covered by collective bargaining agreements with various labor unions.  Pursuant to the Railway Labor Act, these agreements remain in effect until new agreements are reached, or until the bargaining procedures mandated by the Act are completed.  We largely bargain nationally in concert with other major railroads, represented by the National Carriers Conference Committee (NCCC).  Moratorium provisions in the labor agreements govern when the railroads and unions may propose changes to the agreements.

On or after November 1, 2014, the NCCC and the various unions exchanged new proposals to begin this round of national negotiations.  The unions have formed three separate bargaining coalitions and negotiations are ongoing with all three coalitions.  In the case of the Transportation Communications Union led coalition, the negotiations are being assisted by mediators from the National Mediation Board.  Separately, in January 2015 we reached an agreement covering wages and work rules through 2019 with the Brotherhood of Locomotive Engineers and Trainmen (BLET) which represents approximately 4,600 of our locomotive engineers.  Changes to the BLET benefit plan will be bargained nationally through the NCCC.
 
Market Risks
 
We manage overall exposure to fluctuations in interest rates by issuing both fixed- and floating-rate debt instruments. At December 31, 2015, debt subject to interest rate fluctuations totaled $200 million. A one-percentage point increase in interest rates would increase total annual interest expense related to all variable debt by approximately $2 million. We consider it unlikely that interest rate fluctuations applicable to these instruments will result in a material adverse effect on our financial position, results of operations, or liquidity.

New Accounting Pronouncements

For a detailed discussion of new accounting pronouncements, see Note 1.

Inflation
 
In preparing financial statements, GAAP requires the use of historical cost that disregards the effects of inflation on the replacement cost of property.  As a capital-intensive company, we have most of our capital invested in long-lived assets.  The replacement cost of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical cost.


K 32


FORWARD-LOOKING STATEMENTS
 
Certain statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended.  These statements relate to future events or the Company’s future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause the actual results, levels of activity, performance, or achievements of the Company or its industry to be materially different from those expressed or implied by any forward-looking statements.  In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “project,” “consider,” “predict,” “potential,” or other comparable terminology.  The Company has based these forward-looking statements on management’s current expectations, assumptions, estimates, beliefs, and projections.  While the Company believes these expectations, assumptions, estimates, and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which involve factors or circumstances that are beyond the Company’s control.  These and other important factors, including those discussed in Part II, Item 1A “Risk Factors,” may cause actual results, performance, or achievements to differ materially from those expressed or implied by these forward-looking statements.  The forward-looking statements herein are made only as of the date they were first issued, and unless otherwise required by applicable securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.  Copies of Norfolk Southern Corporation’s press releases and additional information about the Company are available at www.norfolksouthern.com, or you can contact the Norfolk Southern Corporation Investor Relations Department by calling 757-629-2861.
 
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
 
The information required by this item is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Market Risks.”
 

K 33


Item 8. Financial Statements and Supplementary Data
 
INDEX TO FINANCIAL STATEMENTS

K 34


Report of Management
 
February 8, 2016
 
To the Stockholders
Norfolk Southern Corporation
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting.  In order to ensure that the Corporation’s internal control over financial reporting is effective, management regularly assesses such controls and did so most recently for its financial reporting as of December 31, 2015.  This assessment was based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this assessment, management has concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2015.
 
KPMG LLP, independent registered public accounting firm, has audited the Corporation’s financial statements and issued an attestation report on the Corporation’s internal control over financial reporting as of December 31, 2015.
 
/s/James A. Squires
 
/s/Marta R. Stewart
 
/s/Thomas E. Hurlbut
James A. Squires
 
Marta R. Stewart
 
Thomas E. Hurlbut
Chairman, President and
 
Executive Vice President Finance
 
Vice President and
Chief Executive Officer
 
and Chief Financial Officer
 
Controller

K 35


Report of Independent Registered Public Accounting Firm

 
The Board of Directors and Stockholders
Norfolk Southern Corporation:
 
We have audited Norfolk Southern Corporation’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework  (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Norfolk Southern Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Norfolk Southern Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Norfolk Southern Corporation and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated February 8, 2016 expressed an unqualified opinion on those consolidated financial statements.


/s/KPMG LLP
KPMG LLP
Norfolk, Virginia
February 8, 2016

K 36


Report of Independent Registered Public Accounting Firm

 
The Board of Directors and Stockholders
Norfolk Southern Corporation:
 
We have audited the accompanying consolidated balance sheets of Norfolk Southern Corporation and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015.  In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 15(A)2. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  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, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.  Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Norfolk Southern Corporation’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 8, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.


/s/KPMG LLP
KPMG LLP
Norfolk, Virginia
February 8, 2016

K 37


Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
 
 
Years ended December 31,
 
2015
 
2014
 
2013
 
($ in millions, except per share amounts)
 
 
 
 
 
 
Railway operating revenues
$
10,511

 
$
11,624

 
$
11,245

 
 
 
 
 
 
Railway operating expenses:
 

 
 

 
 

Compensation and benefits
2,911

 
2,897

 
3,002

Purchased services and rents
1,752

 
1,687

 
1,629

Fuel
934

 
1,574

 
1,613

Depreciation
1,054

 
951

 
916

Materials and other
976

 
940

 
828

 
 
 
 
 
 
Total railway operating expenses
7,627

 
8,049

 
7,988

 
 
 
 
 
 
Income from railway operations
2,884

 
3,575

 
3,257

 
 
 
 
 
 
Other income – net
103

 
104

 
233

Interest expense on debt
545

 
545

 
525

 
 
 
 
 
 
Income before income taxes
2,442

 
3,134

 
2,965

 
 
 
 
 
 
Provision for income taxes
886

 
1,134

 
1,055

 
 
 
 
 
 
Net income
$
1,556

 
$
2,000

 
$
1,910

 
 
 
 
 
 
Per share amounts:
 
 
 
 
 
Net income
 
 
 
 
 
Basic
$
5.13

 
$
6.44

 
$
6.10

Diluted
5.10

 
6.39

 
6.04




See accompanying notes to consolidated financial statements.
K 38


Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
 
 
Years ended December 31,
 
2015
 
2014
 
2013
 
($ in millions)
 
 
 
 
 
 
Net income
$
1,556

 
$
2,000

 
$
1,910

Other comprehensive income (loss), before tax:
 

 
 

 
 

Pension and other postretirement benefits
(76
)
 
(15
)
 
1,122

Other comprehensive income (loss) of equity investees

 
(8
)
 
42

 
 
 
 
 
 
Other comprehensive income (loss), before tax
(76
)
 
(23
)
 
1,164

Income tax benefit (expense) related to items of
 

 
 

 
 

other comprehensive income (loss)
29

 
6

 
(436
)
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
(47
)
 
(17
)
 
728

 
 
 
 
 
 
Total comprehensive income
$
1,509

 
$
1,983

 
$
2,638




See accompanying notes to consolidated financial statements.
K 39


Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
 
At December 31,
 
2015
 
2014
 
($ in millions)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,101

 
$
973

Accounts receivable – net
946

 
1,055

Materials and supplies
271

 
236

Deferred income taxes
121

 
167

Other current assets
194

 
347

Total current assets
2,633

 
2,778

 
 
 
 
Investments
2,572

 
2,679

Properties less accumulated depreciation of $11,478 and
 

 
 

$10,814, respectively
28,992

 
27,694