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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 
☒     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended DECEMBER 31, 2019
 
☐      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 

nsc-20191231_g1.jpg

NORFOLK SOUTHERN CORPORATION
(Exact name of registrant as specified in its charter) 
Virginia52-1188014
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
Three Commercial Place23510-2191
Norfolk,Virginia
(Address of principal executive offices)(Zip Code)
(757)629-2680
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Norfolk Southern Corporation Common Stock (Par Value $1.00)NSCNew 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 ☒  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 ☒
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 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 ☒   No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes ☒   No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒    Accelerated filer ☐   Non-accelerated filer ☐   Smaller reporting company ☐ Emerging growth company ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐   No ☒
 
The aggregate market value of the voting common equity held by non-affiliates at June 30, 2019 was $52,456,511,032 (based on the closing price as quoted on the New York Stock Exchange on June 28, 2019).
 
The number of shares outstanding of each of the registrant’s classes of common stock, at January 31, 2020: 257,844,180 (excluding 20,320,777 shares held by the registrant’s consolidated subsidiaries).
 
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant’s definitive proxy statement 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
 
 
 
 
  
   
  
 
 
  
 
 
 
  
 
 
   
 
 
  
 
 
   
 
  
   
  

K2

PART I
 
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
 
Item 1. Business and Item 2. Properties
 
GENERAL – Our company, Norfolk Southern Corporation (Norfolk Southern), is a Norfolk, Virginia-based company that owns a major freight railroad, Norfolk Southern Railway Company (NSR).  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 NSR, 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 offer the most extensive intermodal network in the eastern half of the United States.
 
We make available free of charge through our website, www.norfolksouthern.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

K3

RAILROAD OPERATIONS – At December 31, 2019, our railroad operated approximately 19,500 route miles in 22 states and the District of Columbia.
 
Our system reaches many manufacturing plants, electric generating facilities, mines, distribution centers, transload facilities, and other businesses located in our service area.

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Corridors with heaviest freight volume:
•New York City area to Chicago (via Allentown and Pittsburgh)
•Chicago to Macon (via Cincinnati, Chattanooga, and Atlanta)
•Central Ohio to Norfolk (via Columbus and Roanoke)
•Birmingham to Meridian
•Cleveland to Kansas City
•Memphis to Chattanooga

K4

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, 2019
Route MilesSecond
and
Other
Main
Track		Passing
Track,
Crossovers
and
Turnouts
Way and
Yard
Switching 
Total 
Owned14,655  2,677  2,008  8,320  27,660  
Operated under lease, contract or trackage
rights4,796  1,889  407  840  7,932  
Total19,451  4,566  2,415  9,160  35,592  
 
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, and Michigan Department of Transportation.

The following table sets forth certain statistics relating to our railroads’ operations for the past five years:
 
 Years ended December 31,
 20192018201720162015
Revenue ton miles (billions)194  207  201  191  200  
Revenue per thousand revenue ton miles$58.21  $55.25  $52.38  $51.91  $52.63  
Revenue ton miles (thousands) per railroad employee7,939  7,822  7,474  6,838  6,645  
Ratio of railway operating expenses to railway
operating revenues (Railway operating ratio)64.7 %65.4 %66.6 %69.6 %72.8 %

RAILWAY OPERATING REVENUES – Total railway operating revenues were $11.3 billion in 2019.  Following is an overview of our three commodity groups. See the discussion of merchandise revenues by major commodity group, intermodal revenues, and coal revenues and tonnage in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 

K5

MERCHANDISE – Our merchandise commodity group is composed of five groupings: 
•Chemicals includes sulfur and related chemicals, petroleum products (including crude oil), chlorine and bleaching compounds, plastics, rubber, industrial chemicals, and chemical wastes.
•Agriculture products includes soybeans, wheat, corn, fertilizer, livestock and poultry feed, food products, food oils, flour, sweeteners, and ethanol.
•Metals and construction includes steel, aluminum products, machinery, scrap metals, cement, aggregates, sand, minerals, transportation equipment, and items for the U.S. military.
•Automotive includes finished motor vehicles and automotive parts.
•Forest and consumer includes lumber and wood products, pulp board and paper products, wood fibers, wood pulp, scrap paper, clay, beverages, canned goods, and consumer products

Merchandise carloads handled in 2019 were 2.4 million, the revenues from which accounted for 60% of our total railway operating revenues.

INTERMODAL – Our intermodal commodity group consists of shipments moving in domestic and international containers and trailers.  These shipments are handled on behalf of intermodal marketing companies, international steamship lines, premium customers and asset owning companies. Intermodal units handled in 2019 were 4.2 million, the revenues from which accounted for 25% of our total railway operating revenues.
 
COAL – Revenues from coal accounted for 15% of our total railway operating revenues in 2019.  We handled 102 million tons, or 0.9 million carloads, in 2019, 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 60 coal generation plants, as well as the export, domestic metallurgical and industrial markets, primarily through direct rail and river, lake, and coastal facilities, including various terminals on the Ohio River, Lamberts Point in Norfolk, Virginia, the Port of Baltimore, and Lake Erie.

FREIGHT RATES – Our predominant pricing mechanisms, private contracts and exempt price quotes, are not subject to regulation. In general, market forces are the primary determinant of rail service prices.
 
RAILWAY PROPERTY
 
Our railroad infrastructure makes us capital intensive with net property of approximately $32 billion on a historical cost basis.

Property Additions – Property additions for the past five years were as follows:
 20192018201720162015
 ($ in millions)
Road and other property$1,371  $1,276  $1,210  $1,292  $1,514  
Equipment648  675  513  595  658  
Delaware & Hudson acquisition—  —  —  —  213  
Total$2,019  $1,951  $1,723  $1,887  $2,385  

Our capital spending and replacement programs are and have been designed to assure the ability to provide safe, efficient, and reliable rail transportation services.
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Equipment – At December 31, 2019, we owned or leased the following units of equipment:
 
OwnedLeasedTotalCapacity of
Equipment
Locomotives:   (Horsepower)
Multiple purpose3,711  —  3,711  14,234,300  
Auxiliary units178  —  178  —  
Switching17  —  17  23,800  
Total locomotives3,906  —  3,906  14,258,100  
Freight cars:   (Tons)
Gondola22,081  3,541  25,622  2,476,401  
Hopper9,877  —  9,877  1,109,777  
Covered hopper6,320  —  6,320  699,985  
Box4,432  747  5,179  388,615  
Flat1,572  387  1,959  190,213  
Other1,592  4  1,596  73,203  
Total freight cars45,874  4,679  50,553  4,938,194  
Other:
Chassis33,861  —  33,861  
Containers18,920  —  18,920  
Work equipment5,754  258  6,012  
Vehicles3,349  59  3,408  
Miscellaneous2,391  —  2,391  
Total other64,275  317  64,592  
 
The following table indicates the number and year built for locomotives and freight cars owned at December 31, 2019:
 
201920182017201620152010-
2014		2005-
2009		2004 &
Before		Total
Locomotives:        
No. of units3515556683253593,0433,906
% of fleet1 %— %2 %2 %— %8 %9 %78 %100 %
Freight cars:       
No. of units200—4707752,0906,8414,76030,73845,874
% of fleet— %— %1 %2 %5 %15 %10 %67 %100 %

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The following table shows the average age of our owned locomotive and freight car fleets at December 31, 2019, and information regarding 2019 retirements:
 
 Locomotives Freight Cars 
Average age – in service25.7 years27.0 years
Retirements250 units8,825 units
Average age – retired29.8 years42.6 years

Track Maintenance – Of the approximately 35,600 total miles of track on which we operate, we are responsible for maintaining approximately 28,400 miles, with the remainder being operated under trackage rights from other parties responsible for maintenance.
 
Over 84% 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 44% of our lines, excluding rail operated pursuant to trackage rights, carried 20 million or more gross tons per track mile during 2019.
 
The following table summarizes several measurements regarding our track roadway additions and replacements during the past five years:
 20192018201720162015
Track miles of rail installed449  416  466  518  523  
Miles of track surfaced5,012  4,594  5,368  4,984  5,074  
Crossties installed (millions)2.4  2.2  2.5  2.3  2.4  

Traffic Control – Of the approximately 16,400 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 of 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 Note 17 to the Consolidated Financial Statements.
 
EMPLOYEES – The following table shows the average number of employees and the average cost per employee for wages and benefits: 
 20192018201720162015
Average number of employees24,587  26,662  27,110  28,044  30,456  
Average wage cost per employee$85,000  $83,000  $79,000  $76,000  $77,000  
Average benefit cost per employee$40,000  $39,000  $42,000  $35,000  $32,000  

Approximately 80% of our railroad employees are covered by collective bargaining agreements with various labor unions. See the discussion of “Labor Agreements” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 
 
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GOVERNMENT REGULATION – In addition to environmental, safety, securities, and other regulations generally applicable to all business, our railroads are subject to regulation by the U.S. Surface Transportation Board (STB).  The STB has jurisdiction to varying extents over rates, routes, customer access provisions, fuel surcharges, conditions of service, and the extension or abandonment of rail lines.  The STB has jurisdiction to determine whether we are “revenue adequate” on an annual basis based on the results of the prior year. 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. The STB also has jurisdiction over the consolidation, merger, or acquisition of control of and by rail common carriers. 
 
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.  Approximately 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 2020.  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 are further discussed within Item 1A “Risk Factors” and 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 (CSX); both NS and CSX 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 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 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 to mitigate the risk of terrorist, violent extremist or seriously disruptive cyber-attack 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 security 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,
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and is integrated into hazardous material training programs. Additionally, location-specific security plans are in place for rail corridors in certain metropolitan areas referred to as High Threat Urban Areas (HTUA). Particular attention is aimed at reducing risk in a 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) 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.

We also operate six facilities that are under U.S. Coast Guard (USCG) Maritime Security Regulations. With respect to these facilities, each facility’s security plan has been approved by the applicable Captain of the Port and remains subject to inspection by the USCG.

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 Transportation Security Administration, the Federal Bureau of Investigation, the Federal Railroad Administration (FRA), the USCG, U.S. Customs and Border Protection, the Department of Defense, and various state Homeland Security offices.

In 2019, through the Norfolk Southern Operation Awareness and Response Program as well as participation in the Transportation Community Awareness and Emergency Response Program, we provided rail accident response training to approximately 5,700 emergency responders, such as local police and fire personnel. Our other training efforts throughout 2019 included participation in tabletop and full scale exercises 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.

We also continually evaluate ourselves for appropriate business continuity and disaster recovery planning, with test scenarios that include cybersecurity attacks. Our risk-based information security program helps ensure our defenses and resources are aligned to address the most likely and most damaging potential attacks, to provide support for our organizational mission and operational objectives, and to keep us in the best position to detect, mitigate, and recover from a wide variety of potential attacks in a timely fashion.

Item 1A. Risk Factors

The risks set forth in the following risk factors could have a materially adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter, and could cause those results to differ materially from those expressed or implied in our forward-looking statements. The information set forth in this Item 1A “Risk Factors” should be read in conjunction with the rest of the information included in this annual report, including Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 “Financial Statements and Supplementary Data.”
Significant governmental legislation and regulation over commercial, operating and environmental matters could affect us, our customers, and the markets we serve. Congress can enact laws that could increase economic regulation of the industry. Railroads presently are subject to commercial regulation by the STB, which has jurisdiction to varying extents over rates, routes, customer access provisions, 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 negotiate prices for rail services, on railway operating revenues, and on the efficiency of our operations. 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 DOT and the DHS, which regulate most aspects of our operations related to safety and security. The Rail Safety Improvement Act of 2008, the Surface Transportation Extension Act of 2015, and the implementing regulations promulgated by the FRA (collectively “the PTC laws and regulations”) require us (and each other Class I railroad) to implement, on certain mainline track where intercity and commuter passenger railroads operate and where TIH hazardous materials are
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transported, an interoperable positive train control system (PTC). PTC is a set of highly advanced technologies designed to prevent train-to-train collisions, speed-related derailments, and certain other accidents caused by human error, but PTC will not prevent all types of train accidents or incidents. We met the deadline under the PTC laws and regulations to install all hardware and to implement PTC on some of those rail lines, and we are required to fully implement PTC on the remainder of those rail lines by December 31, 2020. In addition, other railroads’ implementation schedules could impose additional interoperability requirements and accelerated timelines on us, which could impact our operations over other railroads if not met.

Full implementation of PTC 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.

Concern over climate change has led to significant federal, state, and international legislative and regulatory efforts to limit greenhouse gas (GHG) emissions. 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.

In addition, legislation and regulation related to GHGs could negatively affect the markets we serve and our customers. Even without legislation or regulation, government incentives and adverse publicity relating to GHGs could negatively affect the markets for certain of the commodities we carry and 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.

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. The cost of a catastrophic rail accident involving hazardous materials could exceed our insurance coverage. We have obtained insurance for potential losses for third-party liability and first-party property damages (see Note 17 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 general economic conditions. Prolonged negative changes in domestic and global economic conditions could affect the producers and consumers of the commodities we carry. Economic conditions could also result in bankruptcies of one or more large customers.

Significant increases in demand for rail services could result in the unavailability of qualified personnel and locomotives. In addition, workforce demographics and training requirements, particularly for engineers and conductors, could have a negative impact on our ability to meet short-term demand for rail service. Unpredicted increases in demand for rail services may exacerbate such risks.
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We may be affected by energy prices. Volatility in energy prices could have a significant 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 oil, natural gas, and coal; fuel prices; and fuel surcharges.

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, expenditures, legislation, or regulation materially increasing the quality or reducing the cost of alternative modes of transportation in the regions in which we operate (such as granting materially greater latitude for motor carriers with respect to size or weight limitations or adoption of autonomous commercial vehicles) could have a material adverse effect on our operations.

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 collaborative relationships with connecting carriers (including shortlines and regional railroads) 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. Additionally, any significant consolidations, mergers or operational changes among other railroads may significantly redefine our market access and reach.

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. We also face cybersecurity threats which may result in breaches of systems, or compromises of sensitive data, which may result in an inability to access or operate systems necessary for conducting operations and providing customer service, thereby impacting our efficiency and/or damaging our corporate reputation. 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.

The vast majority of our employees belong to labor unions, and labor agreements, strikes, or work stoppages could adversely affect our operations. Approximately 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 health care, wages, and other benefits.

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 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 us to the extent not covered by insurance. We have obtained insurance for potential losses for third-party liability and first-party property damages; 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.
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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.

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. 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 supply constraints resulting from disruptions in the fuel markets or the nature of some of our supplier markets. We consumed approximately 451 million gallons of diesel fuel in 2019. 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 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.

The state of capital markets could adversely affect our liquidity. We rely on the capital markets to provide some of our capital requirements, including the issuance of debt instruments, 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 position 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 position, 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
 
In 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. In 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. On October 10, 2017, the District Court denied class certification. The decision was upheld by the Court of Appeals on August 16, 2019. Since that decision, various individual cases have been filed in multiple jurisdictions. 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.

Item 4. Mine Safety Disclosures
 
Not applicable.

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Information About Our Executive Officers
 
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, 2020, relating to our officers.
 
Name, Age, Present PositionBusiness Experience During Past Five Years
  
James A. Squires, 58,
Chairman, President and
Chief Executive Officer
Present position since October 1, 2015.
Served as CEO since June 1, 2015. Served as President since June 1, 2013.
  
Ann A. Adams, 49,
Executive Vice President and
Chief Transformation Officer
Present position since April 1, 2019.
Served as Vice President Human Resources from April 1, 2016 to April 1, 2019. Served as Assistant Vice President Human Resources from July 1, 2012 to April 1, 2016.
Mark R. George, 52,
Executive Vice President –
Finance and Chief Financial Officer
Present position since November 1, 2019.
Prior to joining Norfolk Southern, served as Vice President, Finance and Chief Financial Officer at segments of United Technologies Corporation. The positions were Vice President Finance, Strategy, IT and Chief Financial Officer at Otis Elevator Company from October 2015 to May 2019, and Vice President Finance and Chief Financial Officer at Carrier Corporation from September 2008 until September 2015, and again June 2019 until joining Norfolk Southern.
 
John M. Scheib, 48,
Executive Vice President and
Chief Strategy Officer
Present position since April 1, 2019.
Served as Executive Vice President – Law and Administration and Chief Legal Officer from March 1, 2018 to April 1, 2019. Served as Senior Vice President Law and Corporate Relations from October 1, 2017, to March 1, 2018. Served as Vice President Law from December 1, 2016, to October 1, 2017. Served as General Counsel from August 16, 2010, to December 1, 2016.
 
Alan H. Shaw, 52,
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 16, 2015.
Michael J. Wheeler, 57,
Executive Vice President and
Chief Operating Officer
Present position since February 1, 2016.
Served as Senior Vice President Operations from October 1, 2015 to February 1, 2016. Served as Vice President Engineering from November 1, 2012 to October 1, 2015.
Jason A. Zampi, 45,
Vice President and Controller
Present position since December 16, 2018.
Served as Assistant Vice President Corporate Accounting from April 1, 2016 to December 16, 2018. Served as Director Accounting Research and Analysis from May 1, 2014 to April 1, 2016.

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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 INFORMATION
 
Common Stock is owned by 23,273 stockholders of record as of December 31, 2019, and is traded on the New York Stock Exchange under the symbol “NSC.”
 
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, 20191,024,028  $178.89  1,020,083  29,956,368  
November 1-30, 2019923,726  192.84  922,109  29,034,259  
December 1-31, 2019987,478  191.40  987,478  28,046,781  
Total2,935,232    2,929,670    
 
(1)Of this amount, 5,562 represents shares tendered by employees in connection with the exercise of stock options under the stockholder-approved Long-Term Incentive Plan.
(2)On September 26, 2017, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2022. As of December 31, 2019, 28.0 million shares remain authorized for repurchase.
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Item 6. Selected Financial Data 
FIVE-YEAR FINANCIAL REVIEW
 20192018201720162015
 ($ in millions, except per share amounts)
RESULTS OF OPERATIONS     
Railway operating revenues$11,296  $11,458  $10,551  $9,888  $10,511  
Railway operating expenses7,307  7,499  7,029  6,879  7,656  
Income from railway operations3,989  3,959  3,522  3,009  2,855  
Other income – net106  67  156  136  132  
Interest expense on debt604  557  550  563  545  
Income before income taxes3,491  3,469  3,128  2,582  2,442  
Income taxes769  803  (2,276) 914  886  
Net income$2,722  $2,666  $5,404  $1,668  $1,556  
PER SHARE DATA     
Basic earnings per share$10.32  $9.58  $18.76  $5.66  $5.13  
Diluted earnings per share10.25  9.51  18.61  5.62  5.10  
Dividends3.60  3.04  2.44  2.36  2.36  
Stockholders’ equity at year-end58.87  57.30  57.57  42.73  40.93  
FINANCIAL POSITION     
Total assets$37,923  $36,239  $35,711  $34,892  $34,139  
Total debt12,196  11,145  9,836  10,212  10,093  
Stockholders’ equity15,184  15,362  16,359  12,409  12,188  
OTHER     
Property additions$2,019  $1,951  $1,723  $1,887  $2,385  
Average number of shares outstanding (thousands)263,270  277,708  287,861  293,943  301,873  
Number of stockholders at year-end23,273  24,475  25,737  27,288  28,443  
Average number of employees: 
Rail24,442  26,512  26,955  27,856  30,057  
Nonrail145  150  155  188  399  
Total24,587  26,662  27,110  28,044  30,456  

Note 1:  In 2017, as a result of the enactment of tax reform, “Railway operating expenses” included a $151 million benefit and “Income taxes” included a $3,331 million benefit, which added $3,482 million to “Net income” and $12.00 to “Diluted earnings per share.”
Note 2: On January 1, 2019, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842),” which requires lessees to recognize right-of-use (ROU) assets and lease liabilities on the balance sheet for leases greater than twelve months. As a result of the adoption, the Consolidated Balance Sheets at December 31, 2019 includes the recognition of ROU assets of $539 million and corresponding lease liabilities of $538 million.

See accompanying consolidated financial statements and notes thereto.
K17

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.
 
OVERVIEW
 
We are one of the nation’s premier transportation companies.  Our Norfolk Southern Railway Company subsidiary operates approximately 19,500 route miles 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.  Norfolk Southern is a major transporter of industrial products, including chemicals, agriculture, and metals and construction materials. In addition, we operate the most extensive intermodal network in the East and are a principal carrier of coal, automobiles, and automotive parts.

The execution of the initiatives in our strategic plan allowed us to achieve records for income from railway operations and railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses) for the year. We continued our focus on improving the efficiency of our operations and utilization of our assets, allowing us to reduce our operating expenses by 3% in the face of a 1% revenue decline.

SUMMARIZED RESULTS OF OPERATIONS

20192018
201920182017vs. 2018vs. 2017
 ($ in millions, except per share amounts)(% change)
Income from railway operations$3,989  $3,959  $3,522  1 %12 %
Net income$2,722  $2,666  $5,404  2 %(51 %)
Diluted earnings per share$10.25  $9.51  $18.61  8 %(49 %)
Railway operating ratio (percent)64.7  65.4  66.6  (1 %)(2 %)

Income from railway operations rose in 2019 as a 3% reduction in railway operating expenses more than offset the impact of a 1% decline in railway operating revenues. In addition to higher income from railway operations, net income and diluted earnings per share growth in 2019 also benefited from a lower effective tax rate. Our continuing share repurchase program contributed to diluted earnings per share growth that exceeded that of net income.

On December 22, 2017, the Tax Cuts and Jobs Act (“tax reform”) was signed into law. The following table adjusts our 2017 U.S. Generally Accepted Accounting Principles (GAAP) financial results to exclude the effects of tax reform, specifically, the effects of remeasurement of net deferred tax liabilities related to the reduction of the federal tax rate from 35% to 21% (the “2017 tax adjustments”). We use these non-GAAP financial measures internally and believe this information provides useful supplemental information to investors to facilitate making period-to-period comparisons by excluding the 2017 tax adjustments. While we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similar measures presented by other companies.

K18

Reconciliation of Non-GAAP Financial Measures

Reported 2017 (GAAP)2017
tax adjustments		Adjusted 2017
(non-GAAP)
($ in millions, except per share amounts)
Income from railway operations$3,522  $(151) $3,371  
Net income$5,404  $(3,482) $1,922  
Diluted earnings per share$18.61  $(12.00) $6.61  
Railway operating ratio (percent)66.6  1.5  68.1  

In the table below and the paragraph following, references to 2017 results and related comparisons use the adjusted, non-GAAP results from the reconciliation in the table above.

2018 vs.
AdjustedAdjusted
201720192017
20192018(non-GAAP)vs. 2018(non-GAAP)
 ($ in millions, except per share amounts)(% change)
Income from railway operations$3,989  $3,959  $3,371  1 %17 %
Net income$2,722  $2,666  $1,922  2 %39 %
Diluted earnings per share$10.25  $9.51  $6.61  8 %44 %
Railway operating ratio (percent)64.7  65.4  68.1  (1 %)(4 %)

Income from railway operations increased in 2018 as compared to 2017, as a 9% increase in railway operating revenues more than offset a 4% increase in adjusted operating expenses. In addition to higher income from railway operations, net income and diluted earnings per share growth in 2018 also benefited from a lower effective tax rate, primarily due to the enactment of tax reform. Finally, our share repurchase program resulted in diluted earnings per share growth that exceeded that of net income.

K19

DETAILED RESULTS OF OPERATIONS

Railway Operating Revenues

The following tables present a three-year comparison of revenues, volumes (units), and average revenue per unit by major commodity group.  At the beginning of 2019, we made changes in the categorization of certain commodity groups within Merchandise. Prior period railway operating revenues, units, and revenue per unit have been reclassified to conform to the current presentation (see Note 2).
Revenues20192018
201920182017vs. 2018vs. 2017
($ in millions)(% change)
Merchandise:
Chemicals$1,874  $1,858  $1,710  1 %9 %
Agriculture products1,567  1,514  1,416  4 %7 %
Metals and construction1,522  1,539  1,481  (1 %)4 %
Automotive994  991  955  — %4 %
Forest and consumer846  842  795  — %6 %
Merchandise6,803  6,744  6,357  1 %6 %
Intermodal2,824  2,893  2,452  (2 %)18 %
Coal1,669  1,821  1,742  (8 %)5 %
Total$11,296  $11,458  $10,551  (1 %)9 %

Units20192018
201920182017vs. 2018vs. 2017
(in thousands)(% change)
Merchandise:
Chemicals514.9  523.3  488.6  (2 %)7 %
Agriculture products528.5  538.9  524.8  (2 %)3 %
Metals and construction721.3  759.7  761.2  (5 %)— %
Automotive394.7  403.9  423.1  (2 %)(5 %)
Forest and consumer273.0  293.3  293.7  (7 %)— %
Merchandise2,432.4  2,519.1  2,491.4  (3 %)1 %
Intermodal4,207.2  4,375.7  4,074.1  (4 %)7 %
Coal914.0  1,033.5  1,046.0  (12 %)(1 %)
Total7,553.6  7,928.3  7,611.5  (5 %)4 %

Revenue per Unit20192018
201920182017vs. 2018vs. 2017
($ per unit)(% change)
Merchandise:
Chemicals$3,640  $3,551  $3,501  3 %1 %
Agriculture products2,964  2,809  2,697  6 %4 %
Metals and construction2,110  2,026  1,946  4 %4 %
Automotive2,517  2,453  2,257  3 %9 %
Forest and consumer3,101  2,870  2,706  8 %6 %
Merchandise2,797  2,677  2,552  4 %5 %
Intermodal671  661  602  2 %10 %
Coal1,826  1,762  1,665  4 %6 %
Total1,495  1,445  1,386  3 %4 %
K20

Revenues decreased $162 million in 2019 but increased $907 million in 2018 compared to the prior years. As reflected in the table below, lower 2019 revenues were the result of decreased volumes, partially offset by higher average revenue per unit, driven by pricing gains. The rise in 2018 revenues was the result of higher average revenue per unit, driven by pricing gains and higher fuel surcharge revenue, partially offset by the mix-related impacts of increased intermodal volume and decreased coal volume. In addition, overall volume also increased.

The table below reflects the components of the revenue change by major commodity group.

 2019 vs. 2018 2018 vs. 2017
Increase (Decrease)Increase (Decrease)
($ in millions)
MerchandiseIntermodalCoalMerchandiseIntermodalCoal
Volume $(232) $(111) $(210) $71  $182  $(21) 
Fuel surcharge
revenue(14) (30) (35) 119