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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2020

    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-20200930_g1.jpg
 
NORFOLK SOUTHERN CORPORATION
(Exact name of registrant as specified in its charter) 
Virginia52-1188014
(State or other jurisdiction of incorporation or organization)(I.R.S. 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)
No Change
(Former name, former address and former fiscal year, if changed since last report)

 Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Norfolk Southern Corporation Common Stock (Par Value $1.00)NSCNew York Stock Exchange

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 Exchange Act). Yes   No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class Outstanding at September 30, 2020
Common Stock ($1.00 par value per share)253,985,338(excluding 20,320,777 shares held by the registrant’s
consolidated subsidiaries)




TABLE OF CONTENTS

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

  Page
  
  
  
  
  
  
 
 
 
 
 
 
 
 


2


PART I. FINANCIAL INFORMATION
  
Item 1. Financial Statements.
 
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
 Third QuarterFirst Nine Months
 2020201920202019
 ($ in millions, except per share amounts)
Railway operating revenues$2,506 $2,841 $7,216 $8,606 
Railway operating expenses:    
Compensation and benefits578 682 1,786 2,121 
Purchased services and rents486 423 1,261 1,265 
Fuel126 226 399 730 
Depreciation293 286 867 853 
Materials and other183 228 500 610 
Loss on asset disposal  385  
Total railway operating expenses1,666 1,845 5,198 5,579 
Income from railway operations840 996 2,018 3,027 
Other income – net39 22 110 88 
Interest expense on debt155 150 465 452 
Income before income taxes724 868 1,663 2,663 
Income taxes155 211 321 607 
Net income$569 $657 $1,342 $2,056 
Earnings per share:    
Basic$2.23 $2.50 $5.24 $7.76 
Diluted2.22 2.49 5.21 7.70 
 
 See accompanying notes to consolidated financial statements.
3


Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 Third QuarterFirst Nine Months
2020201920202019
 ($ in millions)
Net income$569 $657 $1,342 $2,056 
Other comprehensive income, before tax:  
Pension and other postretirement benefits7 5 20 15 
Other comprehensive income (loss) of equity investees  6 (1)
Other comprehensive income, before tax7 5 26 14 
Income tax expense related to items of
other comprehensive income(3)(1)(6)(4)
Other comprehensive income, net of tax4 4 20 10 
Total comprehensive income$573 $661 $1,362 $2,066 
 
 See accompanying notes to consolidated financial statements.
4


Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
September 30,
2020
December 31,
2019
($ in millions)
Assets  
Current assets:  
Cash and cash equivalents$1,359 $580 
Accounts receivable – net883 920 
Materials and supplies247 244 
Other current assets90 337 
Total current assets2,579 2,081 
Investments3,566 3,428 
Properties less accumulated depreciation of $11,873
 
and $11,982, respectively
31,239 31,614 
Other assets795 800 
Total assets$38,179 $37,923 
Liabilities and stockholders’ equity  
Current liabilities:  
Accounts payable$1,273 $1,428 
Income and other taxes257 229 
Other current liabilities386 327 
Current maturities of long-term debt89 316 
Total current liabilities2,005 2,300 
Long-term debt12,634 11,880 
Other liabilities1,701 1,744 
Deferred income taxes6,898 6,815 
Total liabilities23,238 22,739 
Stockholders’ equity:  
Common stock $1.00 per share par value, 1,350,000,000 shares
  
  authorized; outstanding 253,985,338 and 257,904,956 shares,
  
  respectively, net of treasury shares255 259 
Additional paid-in capital2,246 2,209 
Accumulated other comprehensive loss(471)(491)
Retained income12,911 13,207 
Total stockholders’ equity14,941 15,184 
Total liabilities and stockholders’ equity$38,179 $37,923 
 
 See accompanying notes to consolidated financial statements.
5


Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
 First Nine Months
 20202019
 ($ in millions)
Cash flows from operating activities:  
Net income$1,342 $2,056 
Reconciliation of net income to net cash provided by operating activities:  
Depreciation867 854 
Deferred income taxes78 225 
Gains and losses on properties(14)(4)
Loss on asset disposal385  
Impairment of investment99  
Changes in assets and liabilities affecting operations:  
Accounts receivable36 34 
Materials and supplies(3)(59)
Other current assets55 40 
Current liabilities other than debt104 (72)
Other – net(182)(77)
Net cash provided by operating activities2,767 2,997 
Cash flows from investing activities:  
Property additions(1,053)(1,494)
Property sales and other transactions291 282 
Investment purchases(6)(12)
Investment sales and other transactions(50)(99)
Net cash used in investing activities(818)(1,323)
Cash flows from financing activities:  
Dividends(722)(705)
Common stock transactions53 21 
Purchase and retirement of common stock(960)(1,550)
Proceeds from borrowings – net of issuance costs784 1,404 
Debt repayments(325)(750)
Net cash used in financing activities(1,170)(1,580)
Net increase in cash, cash equivalents,
and restricted cash
779 94 
Cash, cash equivalents, and restricted cash:   
At beginning of year580 446 
At end of period$1,359 $540 
Supplemental disclosures of cash flow information:  
Cash paid during the period for:  
Interest (net of amounts capitalized)$395 $392 
Income taxes (net of refunds)118 404 

 See accompanying notes to consolidated financial statements.
6


Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)

Common
Stock
Additional
Paid-in
Capital
Accum. Other
Comprehensive
Loss
Retained
Income
Total
 ($ in millions, except per share amounts)
Balance at December 31, 2019$259 $2,209 $(491)$13,207 $15,184 
Comprehensive income:
Net income381 381 
Other comprehensive income10 10 
Total comprehensive income391 
Dividends on common stock,
$0.94 per share
(242)(242)
Share repurchases(2)(21)(443)(466)
Stock-based compensation1 17 (1)17 
Balance at March 31, 2020258 2,205 (481)12,902 14,884 
Comprehensive income:
Net income392 392 
Other comprehensive income6 6 
Total comprehensive income398 
Dividends on common stock,
$0.94 per share
(240)(240)
Share repurchases(2)(10)(191)(203)
Stock-based compensation22 22 
Balance at June 30, 2020256 2,217 (475)12,863 14,861 
Comprehensive income:
Net income569 569 
Other comprehensive income4 4 
Total comprehensive income573 
Dividends on common stock,
$0.94 per share
(240)(240)
Share repurchases(1)(11)(279)(291)
Stock-based compensation40 (2)38 
Balance at September 30, 2020$255 $2,246 $(471)$12,911 $14,941 


 See accompanying notes to consolidated financial statements.
7



Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)

Common
Stock
Additional
Paid-in
Capital
Accum. Other
Comprehensive
Loss
Retained
Income
Total
($ in millions, except per share amounts)
Balance at December 31, 2018$269 $2,216 $(563)$13,440 $15,362 
Comprehensive income:
Net income677 677 
Other comprehensive income3 3 
Total comprehensive income680 
Dividends on common stock,
$0.86 per share
(230)(230)
Share repurchases(3)(22)(475)(500)
Stock-based compensation1 19 (1)19 
Balance at March 31, 2019267 2,213 (560)13,411 15,331 
Comprehensive income:
Net income722 722 
Other comprehensive income3 3 
Total comprehensive income725 
Dividends on common stock,
$0.86 per share
(228)(228)
Share repurchases(2)(22)(526)(550)
Stock-based compensation35 (2)33 
Balance at June 30, 2019265 2,226 (557)13,377 15,311 
Comprehensive income:
Net income657 657 
Other comprehensive income4 4 
Total comprehensive income661 
Dividends on common stock,
$0.94 per share
(247)(247)
Share repurchases(3)(21)(476)(500)
Stock-based compensation14 (1)13 
Balance at September 30, 2019$262 $2,219 $(553)$13,310 $15,238 




 See accompanying notes to consolidated financial statements.
8


Norfolk Southern Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
 
In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Norfolk Southern Corporation (Norfolk Southern) and subsidiaries’ (collectively, NS, we, us, and our) financial position at September 30, 2020, and December 31, 2019, our results of operations, comprehensive income and changes in stockholders’ equity for the third quarters and first nine months of 2020 and 2019, and our cash flows for the first nine months of 2020 and 2019 in conformity with U.S. generally accepted accounting principles (GAAP).
 
These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our latest Annual Report on Form 10-K.

1. Railway Operating Revenues

The following table disaggregates our revenues by major commodity group:
Third QuarterFirst Nine Months
2020201920202019
($ in millions)
Merchandise:
Agriculture, forest and consumer products$521 $572 $1,570 $1,707 
Chemicals428 535 1,371 1,586 
Metals and construction337 377 997 1,131 
Automotive270 247 597 749 
Merchandise1,556 1,731 4,535 5,173 
Intermodal700 707 1,924 2,127 
Coal250 403 757 1,306 
Total$2,506 $2,841 $7,216 $8,606 

At the beginning of 2020, we combined the agriculture products and forest and consumer commodity groups. In addition, we also made changes in the categorization of certain other commodity groups within Merchandise. Specifically, certain commodities were shifted between agriculture, forest, and consumer products; chemicals; and, metals and construction. These changes were made as a result of organizational initiatives to better align with how we manage these commodities. Prior period railway operating revenues have been reclassified to conform to the current presentation.

We recognize the amount of revenue we expect to be entitled to for the transfer of promised goods or services to customers. A performance obligation is created when a customer under a transportation contract or public tariff submits a bill of lading to NS for the transport of goods. These performance obligations are satisfied as the shipments move from origin to destination. As such, transportation revenue is recognized proportionally as a shipment moves, and related expenses are recognized as incurred. These performance obligations are generally short-term in nature with transit days averaging approximately one week or less for each commodity group. The customer has an unconditional obligation to pay for the service once the service has been completed. Estimated revenue associated with in-process shipments at period-end is recorded based on the estimated percentage of service completed. We had no material remaining performance obligations as of September 30, 2020 or December 31, 2019.

Revenue related to interline transportation services that involve another railroad is reported on a net basis. Therefore, the portion of the amount that relates to another party is not reflected in revenue.

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Under the typical payment terms of our freight contracts, payment for services is due within fifteen days of billing the customer, thus there are no significant financing components. “Accounts receivable – net” on the Consolidated Balance Sheets includes both customer and non-customer receivables as follows:
September 30,
2020
December 31, 2019
($ in millions)
Customer                                       $664 $682 
Non-customer219 238 
  Accounts receivable – net$883 $920 

Non-customer receivables include non-revenue-related amounts due from other railroads, governmental entities, and others. “Other assets” on the Consolidated Balance Sheets includes non-current customer receivables of $23 million at both September 30, 2020 and December 31, 2019. We do not have any material contract assets or liabilities at September 30, 2020 or December 31, 2019.

We may provide customers ancillary services, such as switching, demurrage and other incidental services, under their transportation contracts. These are distinct performance obligations that are recognized at a point in time when the services are performed or as contractual obligations are met. This revenue is included within each of the commodity groups and represents 5% of total “Railway operating revenues” on the Consolidated Statements of Income for the third quarters and first nine months of 2020 and 2019.

2.  Stock-Based Compensation
Third QuarterFirst Nine Months
2020201920202019
($ in millions)
Stock-based compensation expense$13 $10 $25 $46 
Total tax benefit10 3 39 34 

During 2020, a committee of nonemployee members of our Board of Directors (and the Chief Executive Officer when delegated authority by such committee) granted stock options, restricted stock units (RSUs) and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP), as follows:

Third QuarterFirst Nine Months
GrantedWeighted-Average Grant-Date Fair ValueGrantedWeighted-Average Grant-Date Fair Value
Stock options $ 43,770 $52.05 
RSUs10,230 211.90 177,770 210.13 
PSUs  78,720 212.67 


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Stock Options
Third QuarterFirst Nine Months
2020201920202019
($ in millions)
Stock options exercised313,35855,155 998,996 677,072 
Cash received upon exercise$27 $3 $82 $47 
Related tax benefit realized8 1 24 16 

Restricted Stock Units

RSUs granted primarily have a four-year ratable restriction period and will be settled through the issuance of shares of Norfolk Southern common stock (Common Stock). Certain RSU grants include cash dividend equivalent payments during the restriction period in an amount equal to the regular quarterly dividends paid on Common Stock. 
Third QuarterFirst Nine Months
2020201920202019
($ in millions)
RSUs vested1,635 142 203,934 166,197 
Common Stock issued net of tax withholding1,630 102 145,342 119,346 
Related tax benefit realized$ $ $4 $2 

Performance Share Units

PSUs provide for awards based on the achievement of certain predetermined corporate performance goals at the end of a three-year cycle and are settled through the issuance of shares of Common Stock. All PSUs will earn out based on the achievement of performance conditions and some will also earn out based on a market condition. The market condition fair value was measured on the date of grant using a Monte Carlo simulation model. No PSUs were earned or paid out during the third quarters of 2020 or 2019.

First Nine Months
20202019
($ in millions)
PSUs earned235,935 331,099
Common Stock issued net of tax withholding156,450 221,241
Related tax benefit realized$7 $9 

3. Loss on Asset Disposal

In the first quarter of 2020, in connection with our initiatives to increase operational fluidity and asset utilization and improve labor and fuel efficiency, we committed to a plan to dispose of certain locomotives deemed excess and no longer needed for railroad operations. When depreciable operating road and equipment assets are sold or retired in the ordinary course of business, the cost of the assets, net of sale proceeds or salvage, is charged to accumulated depreciation, and no gain or loss is recognized in earnings. A retirement is considered abnormal if it does not occur in the ordinary course of business, if it relates to disposition of a large segment of an asset class and if the retirement varies significantly from the retirement profile identified through our depreciation studies, which inherently consider the impact of normal retirements on expected service lives and depreciation rates. We evaluated the

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planned locomotive retirements and concluded they were abnormal. Accordingly, a $385 million loss was recorded to adjust their carrying amount to their estimated fair value, which resulted in a $97 million tax benefit. During the first nine months, we sold 574 of 703 locomotives under the plan. The carrying amount of the remaining assets held for sale of $20 million is classified as “Other current assets” in the Consolidated Balance Sheet at September 30, 2020.

4.  Earnings Per Share

The following table sets forth the calculation of basic and diluted earnings per share:

 BasicDiluted
 Third Quarter
 2020201920202019
($ in millions, except per share amounts,
shares in millions)
Net income$569 $657 $569 $657 
Dividend equivalent payments(2)(1)(1) 
Income available to common stockholders$567 $656 $568 $657 
Weighted-average shares outstanding254.6 262.1 254.6 262.1 
    
Dilutive effect of outstanding options and share-settled awards  1.5 2.2 
Adjusted weighted-average shares outstanding  256.1 264.3 
Earnings per share$2.23 $2.50 $2.22 $2.49 
 BasicDiluted
 First Nine Months
 2020201920202019
($ in millions, except per share amounts,
shares in millions)
Net income$1,342 $2,056 $1,342 $2,056 
Dividend equivalent payments(3)(4)(2) 
Income available to common stockholders$1,339 $2,052 $1,340 $2,056 
Weighted-average shares outstanding255.7 264.6 255.7 264.6 
    
Dilutive effect of outstanding options and share-settled awards  1.5 2.3 
Adjusted weighted-average shares outstanding 257.2 266.9 
Earnings per share$5.24 $7.76 $5.21 $7.70 


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During the third quarters and first nine months of 2020 and 2019, we made dividend equivalent payments to certain holders of stock options and RSUs.  For purposes of computing basic earnings per share, dividend equivalent payments made to holders of stock options and RSUs were deducted from net income to determine income available to common stockholders. For purposes of computing diluted earnings per share, we evaluate on a grant-by-grant basis those stock options and RSUs receiving dividend equivalent payments under the two-class and treasury stock methods to determine which method is more dilutive for each grant. For those grants for which the two-class method was more dilutive, net income was reduced by dividend equivalent payments to determine income available to common stockholders. There are no awards outstanding that were antidilutive for the third quarters and first nine months ended September 30, 2020 and 2019.

5. Accumulated Other Comprehensive Loss
The changes in the cumulative balances of “Accumulated other comprehensive loss” reported in the Consolidated Balance Sheets consisted of the following:
Balance at
Beginning
of Year
Net Income
(Loss)
Reclassification
Adjustments
Balance at
End of Period
 ($ in millions)    
Nine Months Ended September 30, 2020     
Pensions and other postretirement liabilities$(421)$ $14 $(407)
Other comprehensive income (loss) of equity
investees(70)6   (64)
Accumulated other comprehensive loss$(491)$6 $14  $(471)
Nine Months Ended September 30, 2019     
Pensions and other postretirement liabilities$(497)$ $11 $(486)
Other comprehensive loss of equity investees(66)(1)  (67)
Accumulated other comprehensive loss$(563)$(1)$11  $(553)

6.  Stock Repurchase Program
 
We repurchased and retired 5.3 million and 8.4 million shares of Common Stock under our stock repurchase program during the first nine months of 2020 and 2019, respectively, at a cost of $960 million and $1.6 billion, respectively.

7.  Investments

Investment in Conrail
 
Through a limited liability company, we and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC). We have a 58% economic and 50% voting interest in Conrail, and CSX has the remainder of the economic and voting interests. Our investment in Conrail was $1.4 billion at both September 30, 2020 and December 31, 2019.

CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of Norfolk Southern Railway Company (NSR) and CSX Transportation, Inc. (CSXT). The costs of operating the Shared Assets Areas are borne by NSR and CSXT based on usage. In addition, NSR and CSXT pay CRC a fee for access to the Shared Assets Areas. “Purchased services and rents” and “Fuel” include amounts payable to CRC for the operation of the Shared Assets Areas totaling $32 million and $37 million for the third quarters of 2020 and 2019,

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respectively, and $97 million and $112 million for the first nine months of 2020 and 2019, respectively. Our equity in the earnings of Conrail, net of amortization, included in “Purchased services and rents,” which offsets the costs of operating the Shared Assets Areas, was $17 million and $13 million for the third quarters of 2020 and 2019, respectively, and $39 million and $36 million for the first nine months of 2020 and 2019, respectively.

“Other liabilities” includes $280 million at both September 30, 2020 and December 31, 2019, for long-term advances from Conrail, maturing 2044, that bear interest at an average rate of 2.9%.

Investment in TTX

NS and eight other North American railroads jointly own TTX Company (TTX).  NS has a 19.65% ownership interest in TTX, a railcar pooling company that provides its owner-railroads with standardized fleets of intermodal, automotive, and general use railcars at stated rates.

Amounts paid to TTX for use of equipment are included in “Purchased services and rents” and amounted to $67 million and $61 million of expense for the third quarters of 2020 and 2019, respectively, and $185 million and $183 million for the first nine months of 2020 and 2019, respectively. Our equity in the earnings of TTX, which offsets the costs and are also included in “Purchased services and rents,” totaled $21 million and $19 million for the third quarters of 2020 and 2019, respectively, and $35 million and $44 million for the first nine months of 2020 and 2019, respectively.

Impairment of Investment

During the third quarter of 2020, we recorded an other-than-temporary impairment of $99 million related to the carrying value of an equity method investment. This non-cash impairment charge is recorded in “Purchased services and rents” on the 2020 Consolidated Statements of Income and had a $74 million impact on net income for the third quarter and first nine months of 2020.

8.  Debt

In May 2020, we issued $800 million of 3.05% senior notes due 2050, resulting in $790 million in net proceeds.

In May 2020, we also issued $800 million of 3.155% senior notes due 2055 in exchange for $554 million of previously issued notes ($450 million at 5.1% due 2118, $42 million at 6% due 2111, $29 million at 7.9% due 2097, $26 million at 6% due 2105, and $7 million at 7.05% due 2037). As part of the debt exchange, a $4 million loss on extinguishment was recognized in “Other income – net.”

In May 2020, we renewed and amended our accounts receivable securitization program with maximum borrowing capacity of $400 million and a term expiring in May 2021. We had no amounts outstanding at both September 30, 2020, and December 31, 2019, and our available borrowing capacity was $400 million and $429 million, respectively.

In March 2020, we renewed and amended our five-year credit agreement. We increased the program’s borrowing authority from $750 million to $800 million. The amended agreement expires in 2025 and provides for borrowing at prevailing rates and includes covenants. We had no amounts outstanding under this facility at both September 30, 2020, and December 31, 2019.

The “Cash, cash equivalents, and restricted cash” line item on the Consolidated Statements of Cash Flows includes restricted cash of $88 million in 2019, reflecting deposits held by a third-party bond agent as collateral for certain debt obligations, which matured on October 1, 2019.


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9.  Pensions and Other Postretirement Benefits
 
We have both funded and unfunded defined benefit pension plans covering principally salaried employees. We also provide specified health care and life insurance benefits to eligible retired employees; these plans can be amended or terminated at our option.  Under our self-insured retiree health care plan, for those participants who are not Medicare-eligible, certain health care expenses are covered for retired employees and their dependents, reduced by any deductibles, coinsurance, and, in some cases, coverage provided under other group insurance policies.  Those participants who are Medicare-eligible are not covered under the self-insured retiree health care plan, but instead are provided with an employer-funded health reimbursement account which can be used for reimbursement of health insurance premiums or eligible out-of-pocket medical expenses.

Pension and postretirement benefit cost components for the third quarter and first nine months were as follows:
   Other Postretirement
 Pension BenefitsBenefits
 Third Quarter
 2020201920202019
 ($ in millions)
Service cost$10 $9 $2 $2 
Interest cost19 24 3 4 
Expected return on plan assets(48)(45)(4)(4)
Amortization of net losses13 11   
Amortization of prior service benefit  (6)(6)
Net benefit$(6)$(1)$(5)$(4)

   Other Postretirement
 Pension BenefitsBenefits
 First Nine Months
 2020201920202019
 ($ in millions)
Service cost$30 $26 $5 $5 
Interest cost56 70 9 13 
Expected return on plan assets(143)(134)(10)(11)
Amortization of net losses39 33   
Amortization of prior service benefit  (19)(18)
Net benefit$(18)$(5)$(15)$(11)

The service cost components of defined benefit pension cost and postretirement benefit cost are reported within “Compensation and benefits” and all other components of net benefit cost are presented in “Other income – net” on the Consolidated Statements of Income.


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10.  Fair Values of Financial Instruments
 
The fair values of “Cash and cash equivalents,” “Accounts receivable – net,” and “Accounts payable,” approximate carrying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life insurance is recorded at cash surrender value and, accordingly, approximates fair value. There are no other assets or liabilities measured at fair value on a recurring basis at September 30, 2020 or December 31, 2019. The carrying amounts and estimated fair values, based on Level 1 inputs, of long-term debt consisted of the following:

 September 30, 2020December 31, 2019
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
 ($ in millions)
Long-term debt, including current maturities$(12,723)$(16,582)$(12,196)$(14,806)

11.  Commitments and Contingencies
 
Lawsuits
 
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.  While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payment of such liability and claims.  However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter.  Any adjustments to the recorded liability will be reflected in earnings in the periods in which such adjustments become known.

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 and also consolidated in the District of Columbia. 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.

In 2018, a lawsuit was filed against one of our subsidiaries by the minority owner in a jointly-owned terminal railroad company in which our subsidiary has the majority ownership. The lawsuit alleged violations of various state laws and federal antitrust laws. It is reasonably possible that we could incur a loss in the case; however, we intend to vigorously defend the case and believe that we will prevail. The potential range of loss cannot be estimated at this time.

Casualty Claims

Casualty claims include employee personal injury and occupational claims as well as third-party claims, all exclusive of legal costs.  To aid in valuing our personal injury liability and determining the amount to accrue with respect to such claims during the year, we utilize studies prepared by an independent consulting actuarial firm.  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 workers’ compensation system.  The variability inherent in this system

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could result in actual costs being different from the liability recorded.  While the ultimate amount of claims incurred is dependent on future developments, in our opinion the recorded liability is adequate to cover future claim payments and is supported by the most recent actuarial study.  In all cases, we record a liability when the expected loss for the claim is both probable and reasonably estimable.
Employee personal injury claims – The largest component of claims expense is employee personal injury costs.  The independent actuarial firm we engage provides quarterly studies to aid in valuing our employee personal injury liability and estimating personal injury expense.  The actuarial firm studies our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences.  The actuarial firm uses the results of these analyses to estimate the ultimate amount of liability. We adjust the liability quarterly based upon our assessment and the results of the study. Our estimate of the liability is subject to inherent limitation given the difficulty of predicting future events such as jury decisions, court interpretations, or legislative changes. As a result, actual claim settlements may vary from the estimated liability recorded.

Occupational claims – Occupational claims include injuries and illnesses alleged to be caused by exposures which occur over time as opposed to injuries or illnesses caused by a specific accident or event. Types of occupational claims commonly seen allege exposure to asbestos and other claimed toxic substances resulting in respiratory diseases or cancer. Many such claims are being asserted by former or retired employees, some of whom have not been employed in the rail industry for decades.  The independent actuarial firm provides an estimate of the occupational claims liability based upon our history of claim filings, severity, payments, and other pertinent facts.  The liability is dependent upon judgments we make as to the specific case reserves as well as judgments of the actuarial firm in the quarterly studies.  The actuarial firm’s estimate of ultimate loss includes a provision for those claims that have been incurred but not reported.  This provision is derived by analyzing industry data and projecting our experience. We adjust the liability quarterly based upon our assessment and the results of the study.  However, it is possible that the recorded liability may not be adequate to cover future claim payments.  Adjustments to the recorded liability are reflected in operating expenses in the periods in which such adjustments become known.

Third-party claims – We record a liability for third-party claims including those for highway crossing accidents, trespasser and other injuries, property damage, and lading damage.  The actuarial firm assists us with the calculation of potential liability for third-party claims, except lading damage, based upon our experience including the number and timing of incidents, amount of payments, settlement rates, number of open claims, and legal defenses. We adjust the liability quarterly based upon our assessment and the results of the study.  Given the inherent uncertainty in regard to the ultimate outcome of third-party claims, it is possible that the actual loss may differ from the estimated liability recorded.

Environmental Matters
 
We are subject to various jurisdictions’ environmental laws and regulations.  We record a liability where such liability or loss is probable and reasonably estimable. Environmental specialists regularly participate in ongoing evaluations of all known sites and determining any necessary adjustments to liability estimates.  

Our Consolidated Balance Sheets include liabilities for environmental exposures of $55 million and $56 million at September 30, 2020 and December 31, 2019, respectively, of which $15 million is classified as a current liability at both dates. At September 30, 2020, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 105 known locations and projects compared with 110 locations and projects at December 31, 2019. At September 30, 2020, seventeen sites accounted for $41 million of the liability, and no individual site was considered to be material. We anticipate that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period.

At eleven locations, one or more of our subsidiaries in conjunction with a number of other parties have been identified as potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or comparable state statutes that impose joint and several liability for cleanup costs.  We

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calculate our estimated liability for these sites based on facts and legal defenses applicable to each site and not solely on the basis of the potential for joint liability.

With respect to known environmental sites (whether identified by us or by the Environmental Protection Agency or comparable state authorities), estimates of our ultimate potential financial exposure for a given site or in the aggregate for all such sites can change over time because of the widely varying costs of currently available cleanup techniques, unpredictable contaminant recovery and reduction rates associated with available cleanup technologies, the likely development of new cleanup technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant’s share of any estimated loss (and that participant’s ability to bear it), and evolving statutory and regulatory standards governing liability.

The risk of incurring environmental liability for acts and omissions, past, present, and future, is inherent in the railroad business.  Some of the commodities we transport, particularly those classified as hazardous materials, pose special risks that we work diligently to reduce.  In addition, several of our subsidiaries own, or have owned, land used as operating property, or which is leased and operated by others, or held for sale.  Because environmental problems that are latent or undisclosed may exist on these properties, there can be no assurance that we will not incur environmental liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably at this time.  Moreover, lawsuits and claims involving these and potentially other unidentified environmental sites and matters are likely to arise from time to time.  The resulting liabilities could have a significant effect on financial position, results of operations, or liquidity in a particular year or quarter.
 
Based on our assessment of the facts and circumstances now known, we believe we have recorded the probable and reasonably estimable costs for dealing with those environmental matters of which we are aware.  Further, we believe it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, or liquidity.
 
Insurance
 
We purchase insurance covering legal liabilities for bodily injury and property damage to third parties. This insurance provides coverage above $75 million and below $1.1 billion ($1.5 billion for specific perils) per occurrence and/or policy year. In addition, we purchase insurance covering damage to property owned by us or in our care, custody, or control. This insurance covers approximately 85% of damage above $75 million and below $275 million per occurrence and/or policy year.
 
12. New Accounting Pronouncements

On January 1, 2020, we adopted the Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-13, “Credit Losses - Measurement of Credit Losses on Financial Instruments,” which replaced the current incurred loss impairment method with a method that reflects expected credit losses. Historically, losses associated from the inability to collect on accounts receivable have been insignificant, with little divergence in collection trends through varying economic cycles. Short-term and long-term financial assets, as defined by the standard, are impacted by immediate recognition of estimated credit losses in the financial statements, reflecting the net amount expected to be collected. There was no material impact to the financial statements upon adoption.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which adds new guidance to simplify the accounting for income taxes, changes the accounting for certain income tax transactions, and makes other minor changes. The new standard is effective as of January 1, 2021, and early adoption is permitted for any interim period for which financial statements have not been issued. We do not expect this standard to have a material effect on our financial statements. We will not adopt the standard early.


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Item 2.  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.  We are 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 ongoing COVID-19 pandemic has caused significant economic disruption and continues to influence the demand for our services, as evidenced by the volume declines compared to prior year experienced across most of our major commodity groups in the third quarter. However, we have seen improvement in underlying demand. Overall volumes in the third quarter were down 7% compared to last year, marking a significant improvement relative to the 26% year-over-year decline experienced in the second quarter. While substantial uncertainty remains with respect to customer demand as a result of the pandemic, we continue to execute on operational initiatives to improve efficiencies and lower our cost structure.

COVID-19 is generating significant uncertainty in the economy and our outlook as we conclude 2020. We continue to monitor the impact of the pandemic on our employees’ availability, which has not been adversely affected in a significant manner this year. We remain committed to protecting our employees and providing excellent transportation service products for our customers.

SUMMARIZED RESULTS OF OPERATIONS
($ in millions, except per share amounts)
Third QuarterFirst Nine Months
20202019% change20202019% change
Income from railway operations$840 $996 (16%)$2,018 $3,027 (33%)
Net income$569 $657 (13%)$1,342 $2,056 (35%)
Diluted earnings per share$2.22 $2.49 (11%)$5.21 $7.70 (32%)
Railway operating ratio (percent)66.5 64.9 2%72.0 64.8 11%

Decreases in railway operating revenues exceeded operating expense declines, resulting in reduced income from railway operations and increased operating ratios. Railway operating revenues declined in both periods as lower customer demand resulted in volume declines. Additionally, negative mix led to lower revenue per unit. Notwithstanding the charges noted below, railway operating expenses decreased due to declines in fuel price and consumption, reduced employment levels, lower volumes and operational efficiency improvements.

Third-quarter 2020 results were adversely impacted by a $99 million impairment charge related to an equity method investment. Additionally, our results for the first nine months of 2020 were adversely impacted by a loss on asset disposal of $385 million related to locomotives sold or designated as held-for-sale. For more information on the impact of these charges, see Notes 7 and 3.

The following tables adjust our 2020 GAAP financial results for the third quarter and first nine months to exclude the effects of these charges. We use these non-GAAP financial measures internally and believe this information

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provides useful supplemental information to investors to facilitate making period-to-period comparisons by excluding the 2020 charges. 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.

Non-GAAP Reconciliation for the Third Quarter
Reported 2020 (GAAP)2020 Investment ImpairmentAdjusted 2020
(non-GAAP)
($ in millions, except per share amounts)
Railway operating expenses$1,666 $(99)$1,567 
Income from railway operations$840 $99 $939 
Net income$569 $74 $643 
Diluted earnings per share$2.22 $0.29 $2.51 
Railway operating ratio (percent)66.5 (4.0)62.5 

In the table below, references to the third quarter of 2020 results and related comparisons use the adjusted, non-GAAP results from the reconciliation in the table above.

Third Quarter
Adjusted 2020
(non-GAAP)
2019Adjusted 2020 (non-GAAP)
vs. 2019
($ in millions, except per share amounts)% change
Railway operating expenses$1,567 $1,845 (15%)
Income from railway operations$939 $996 (6%)
Net income$643 $657 (2%)
Diluted earnings per share$2.51 $2.49 1%
Railway operating ratio (percent)62.5 64.9 (4%)




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Non-GAAP Reconciliation for First Nine Months
Reported 2020 (GAAP)First Quarter Loss on Asset DisposalThird Quarter Investment ImpairmentAdjusted 2020
(non-GAAP)
($ in millions, except per share amounts)
Railway operating expenses$5,198 $(385)$(99)$4,714 
Income from railway operations$2,018 $385 $99 $2,502 
Net income$1,342 $288 $74 $1,704 
Diluted earnings per share$5.21 $1.12 $0.29 $6.62 
Railway operating ratio (percent)72.0 (5.3)(1.4)65.3 

In the table below, references to the first nine months of 2020 results and related comparisons use the adjusted, non-GAAP results from the reconciliation in the table above.

First Nine Months
Adjusted 2020
(non-GAAP)
2019Adjusted 2020 (non-GAAP)
vs. 2019
($ in millions, except per share amounts)% change
Railway operating expenses$4,714 $5,579 (16%)
Income from railway operations$2,502 $3,027 (17%)
Net income$1,704 $2,056 (17%)
Diluted earnings per share$6.62 $7.70 (14%)
Railway operating ratio (percent)65.3 64.8 1%



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DETAILED RESULTS OF OPERATIONS
 
Railway Operating Revenues

The following tables present a comparison of revenues ($ in millions), volumes (units in thousands), and average revenue per unit ($ per unit) by commodity group.

Third QuarterFirst Nine Months
Revenues 20202019% change20202019% change
Merchandise:
Agriculture, forest and consumer products$521 $572 (9%)$1,570 $1,707 (8%)
Chemicals428 535 (20%)1,371 1,586 (14%)
Metals and construction337 377 (11%)997 1,131 (12%)
Automotive270 247 9%597 749 (20%)
Merchandise1,556 1,731 (10%)4,535 5,173 (12%)
Intermodal700 707 (1%)1,924 2,127 (10%)
Coal250 403 (38%)757 1,306 (42%)
Total$2,506 $2,841 (12%)$7,216 $8,606 (16%)