UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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, 2022

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the transition period from ___________ to___________

Commission File Number: 1-8339

NORFOLK SOUTHERN CORPORATION

(Exact name of registrant as specified in its charter) 

Virginia	52-1188014
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

650 West Peachtree Street NW		30308-1925
Atlanta,	Georgia
(Address of principal executive offices)		(Zip Code)
(855)		667-3655
(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 class	Trading Symbol	Name of each exchange on which registered
Norfolk Southern Corporation Common Stock (Par Value $1.00)	NSC	New 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, 2022
Common Stock ($1.00 par value per share)	231,514,213	(excluding 20,320,777 shares held by the registrant’s
	consolidated subsidiaries)

TABLE OF CONTENTS

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

		Page
Part I.	Financial Information:
	Item 1.	Financial Statements:
		Consolidated Statements of Income Third Quarter and First Nine Months of 2022 and 2021	3
		Consolidated Statements of Comprehensive Income Third Quarter and First Nine Months of 2022 and 2021	4
		Consolidated Balance Sheets At September 30, 2022 and December 31, 2021	5
		Consolidated Statements of Cash Flows First Nine Months of 2022 and 2021	6
		Consolidated Statements of Changes in Stockholders’ Equity Third Quarter and First Nine Months of 2022 and 2021	7
		Notes to Consolidated Financial Statements	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
	Item 4.	Controls and Procedures	27
Part II.	Other Information:
	Item 1.	Legal Proceedings	29
	Item 1A.	Risk Factors	29
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
	Item 3.	Defaults Upon Senior Securities	29
	Item 4.	Mine Safety Disclosures	29
	Item 5.	Other Information	29
	Item 6.	Exhibits	30
		Signatures	31

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

 

	Third Quarter				First Nine Months
	2022		2021		2022		2021
	($ in millions, except per share amounts)
Railway operating revenues	$	3,343	$	2,852	$	9,508	$	8,290
Railway operating expenses
Compensation and benefits	735		609		1,968		1,844
Purchased services and rents	484		432		1,402		1,254
Fuel	383		208		1,092		573
Depreciation	306		297		912		883
Materials and other	163		170		506		418
Total railway operating expenses	2,071		1,716		5,880		4,972
Income from railway operations	1,272		1,136		3,628		3,318
Other income (expense) – net	(2)		14		(21)		56
Interest expense on debt	177		164		515		481
Income before income taxes	1,093		986		3,092		2,893
Income taxes	135		233		612		648
Net income	$	958	$	753	$	2,480	$	2,245
Earnings per share
Basic	$	4.11	$	3.07	$	10.49	$	9.03
Diluted	4.10		3.06		10.45		8.99

 See accompanying notes to consolidated financial statements.

3

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

 

	Third Quarter				First Nine Months
	2022		2021		2022		2021
	($ in millions)
Net income	$	958	$	753	$	2,480	$	2,245
Other comprehensive income, before tax:
Pension and other postretirement benefits	6		10		17		31
Other comprehensive income of equity investees	5		—		13		—
Other comprehensive income, before tax	11		10		30		31
Income tax expense related to items of other
comprehensive income	—		(3)		(5)		(8)
Other comprehensive income, net of tax	11		7		25		23
Total comprehensive income	$	969	$	760	$	2,505	$	2,268

 See accompanying notes to consolidated financial statements.

4

Norfolk Southern Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

	September 30, 2022		December 31, 2021
	($ in millions)
Assets
Current assets:
Cash and cash equivalents	$	1,214	$	839
Accounts receivable – net	1,151		976
Materials and supplies	276		218
Other current assets	74		134
Total current assets	2,715		2,167
Investments	3,686		3,707
Properties less accumulated depreciation of $12,445
and $12,031, respectively	31,838		31,653
Other assets	1,067		966
Total assets	$	39,306	$	38,493
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,486	$	1,351
Income and other taxes	299		305
Other current liabilities	408		312
Current maturities of long-term debt	605		553
Total current liabilities	2,798		2,521
Long-term debt	14,463		13,287
Other liabilities	1,828		1,879
Deferred income taxes	7,193		7,165
Total liabilities	26,282		24,852
Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 231,514,213 and 240,162,790 shares,
respectively, net of treasury shares	233		242
Additional paid-in capital	2,181		2,215
Accumulated other comprehensive loss	(377)		(402)
Retained income	10,987		11,586
Total stockholders’ equity	13,024		13,641
Total liabilities and stockholders’ equity	$	39,306	$	38,493

 See accompanying notes to consolidated financial statements.

5

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

		First Nine Months
		2022		2021
		($ in millions)
Cash flows from operating activities
	Net income	$	2,480	$	2,245
	Reconciliation of net income to net cash provided by operating activities:
	Depreciation	912		883
	Deferred income taxes	23		158
	Gains and losses on properties	(54)		(80)
	Changes in assets and liabilities affecting operations:
	Accounts receivable	(174)		(102)
	Materials and supplies	(58)		(14)
	Other current assets	57		57
	Current liabilities other than debt	273		294
	Other – net	(35)		(128)
	Net cash provided by operating activities	3,424		3,313
Cash flows from investing activities
	Property additions	(1,282)		(1,025)
	Property sales and other transactions	193		135
	Investment purchases	(8)		(5)
	Investment sales and other transactions	37		48
	Net cash used in investing activities	(1,060)		(847)
Cash flows from financing activities
	Dividends	(881)		(764)
	Common stock transactions	(5)		8
	Purchase and retirement of common stock	(2,284)		(2,460)
	Proceeds from borrowings	1,732		1,676
	Debt repayments	(551)		(576)
	Net cash used in financing activities	(1,989)		(2,116)
	Net increase in cash and cash equivalents	375		350
Cash and cash equivalents
	At beginning of year	839		1,115
	At end of period	$	1,214	$	1,465
Supplemental disclosures of cash flow information
	Cash paid during the period for:
	Interest (net of amounts capitalized)	$	425	$	391
	Income taxes (net of refunds)	578		468

 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, 2021	$	242	$	2,215	$	(402)	$	11,586	$	13,641
Comprehensive income:
Net income							703		703
Other comprehensive income					8				8
Total comprehensive income									711
Dividends on common stock,
$1.24 per share							(297)		(297)
Share repurchases	(2)		(19)				(579)		(600)
Stock-based compensation			7				(1)		6
Balance at March 31, 2022	240		2,203		(394)		11,412		13,461
Comprehensive income:
Net income							819		819
Other comprehensive income					6				6
Total comprehensive income									825
Dividends on common stock,
$1.24 per share							(294)		(294)
Share repurchases	(4)		(29)				(821)		(854)
Stock-based compensation			16						16
Balance at June 30, 2022	236		2,190		(388)		11,116		13,154
Comprehensive income:
Net income							958		958
Other comprehensive income					11				11
Total comprehensive income									969
Dividends on common stock,
$1.24 per share							(290)		(290)
Share repurchases	(3)		(31)				(796)		(830)
Stock-based compensation			22				(1)		21
Balance at September 30, 2022	$	233	$	2,181	$	(377)	$	10,987	$	13,024

 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, 2020	$	254	$	2,248	$	(594)	$	12,883	$	14,791
Comprehensive income:
Net income							673		673
Other comprehensive income					8				8
Total comprehensive income									681
Dividends on common stock,
$0.99 per share							(249)		(249)
Share repurchases	(3)		(19)				(569)		(591)
Stock-based compensation			12				(1)		11
Balance at March 31, 2021	251		2,241		(586)		12,737		14,643
Comprehensive income:
Net income							819		819
Other comprehensive income					8				8
Total comprehensive income									827
Dividends on common stock,
$0.99 per share							(247)		(247)
Share repurchases	(3)		(28)				(903)		(934)
Stock-based compensation			27				1		28
Balance at June 30, 2021	248		2,240		(578)		12,407		14,317
Comprehensive income:
Net income							753		753
Other comprehensive income					7				7
Total comprehensive income									760
Dividends on common stock,
$1.09 per share							(268)		(268)
Share repurchases	(4)		(31)				(900)		(935)
Stock-based compensation			15				(2)		13
Balance at September 30, 2021	$	244	$	2,224	$	(571)	$	11,990	$	13,887

 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, 2022 and December 31, 2021, our results of operations, comprehensive income and changes in stockholders’ equity for the third quarters and first nine months of 2022 and 2021, and our cash flows for the first nine months of 2022 and 2021 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 Quarter				First Nine Months
	2022		2021		2022		2021
	($ in millions)
Merchandise:
Agriculture, forest and consumer products	$	642	$	564	$	1,839	$	1,681
Chemicals	570		504		1,620		1,457
Metals and construction	442		424		1,237		1,196
Automotive	276		218		759		664
Merchandise	1,930		1,710		5,455		4,998
Intermodal	942		812		2,768		2,332
Coal	471		330		1,285		960
Total	$	3,343	$	2,852	$	9,508	$	8,290

We recognize the amount of revenues to which we expect to be entitled 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 us for the transport of goods. These performance obligations are satisfied as the shipments move from origin to destination. As such, transportation revenues are 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 revenues associated with in-process shipments at period-end are recorded based on the estimated percentage of service completed. We had no material remaining performance obligations at September 30, 2022 and December 31, 2021.

We may provide customers ancillary services, such as switching, demurrage and other incidental activities, 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. These revenues are included within each of the commodity groups and represent a percentage of total “Railway operating revenues” on the Consolidated Statements of Income as follows: 7% for the third quarters of 2022 and 2021, and the first nine months of 2022, and 6% for the first nine months of 2021.

9

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

Under the typical 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, 2022		December 31, 2021
	($ in millions)
Customer	$	901	$	741
Non-customer	250		235
Accounts receivable – net	$	1,151	$	976

Non-customer receivables include non-revenue related amounts due from other railroads, governmental entities, and others. There were no non-current customer receivables at September 30, 2022, while “Other assets” on the Consolidated Balance Sheets included $23 million at December 31, 2021. We do not have any material contract assets or liabilities at September 30, 2022 and December 31, 2021.

2.  Stock-Based Compensation

	Third Quarter				First Nine Months
	2022		2021		2022		2021
	($ in millions)
Stock-based compensation expense	$	13	$	14	$	49	$	46
Total tax benefit	7		3		24		28

During 2022, we granted stock options, restricted stock units (RSUs) and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP), as follows:

	Third Quarter			First Nine Months
	Granted	Weighted-Average Grant-Date Fair Value		Granted	Weighted-Average Grant-Date Fair Value
Stock options	6,000	$	74.95	139,810	$	61.30
RSUs	9,993	240.63		173,984	266.72
PSUs	6,960	256.12		58,415	272.48

10

Stock Options

	Third Quarter				First Nine Months
	2022		2021		2022		2021
	($ in millions)
Options exercised	116,881		22,502		275,770		363,982
Cash received upon exercise	$	9	$	2	$	23	$	33
Related tax benefits realized	5		1		11		13

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 Quarter				First Nine Months
	2022		2021		2022		2021
	($ in millions)
RSUs vested	557		1,100		247,510		260,227
Common Stock issued net of tax withholding	397		761		175,373		184,272
Related tax benefits realized	$	—	$	—	$	5	$	7

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 2022 or 2021.

	First Nine Months
	2022		2021
	($ in millions)
PSUs earned	86,420		78,727
Common Stock issued net of tax withholding	54,651		49,967
Related tax benefits realized	$	1	$	1

3. Income Taxes

On July 8, 2022, House Bill 1342 was signed into law in the Commonwealth of Pennsylvania, which reduced its corporate income tax rate from 9.99% to 4.99%, through a series of phased reductions beginning each tax year from January 1, 2023 through January 1, 2031. GAAP requires companies to recognize the effect of tax law changes in the period of enactment. As a result, in the third quarter we recognized a $136 million benefit in “Income taxes” with a corresponding reduction in “Deferred income taxes.”

11

4.  Earnings Per Share

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

	Basic				Diluted
	Third Quarter
	2022		2021		2022		2021
	($ in millions, except per share amounts, shares in millions)
Net income	$	958	$	753	$	958	$	753
Dividend equivalent payments	—		(1)		—		—
Income available to common stockholders	$	958	$	752	$	958	$	753
Weighted-average shares outstanding	233.2		245.3		233.2		245.3
Dilutive effect of outstanding options and share-settled awards					0.8		1.1
Adjusted weighted-average shares outstanding					234.0		246.4
Earnings per share	$	4.11	$	3.07	$	4.10	$	3.06
	Basic				Diluted
	First Nine Months
	2022		2021		2022		2021
	($ in millions, except per share amounts, shares in millions)
Net income	$	2,480	$	2,245	$	2,480	$	2,245
Dividend equivalent payments	(1)		(2)		(1)		—
Income available to common stockholders	$	2,479	$	2,243	$	2,479	$	2,245
Weighted-average shares outstanding	236.4		248.5		236.4		248.5
Dilutive effect of outstanding options and share-settled awards					0.8		1.2
Adjusted weighted-average shares outstanding					237.2		249.7
Earnings per share	$	10.49	$	9.03	$	10.45	$	8.99

During the third quarters and first nine months of 2022 and 2021, dividend equivalent payments were made 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. The dilution calculations exclude options having exercise prices exceeding the average market price of Common Stock as follows: 0.1 million in the third quarter and first nine months ended September 30, 2022 and none in the third quarter and first nine months ended September 30, 2021.

12

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		Reclassification Adjustments		Balance at End of Period
	($ in millions)
Nine months ended September 30, 2022
Pensions and other postretirement liabilities	$	(356)	$	—	$	14	$	(342)
Other comprehensive income (loss) of equity investees	(46)		11		—		(35)
Accumulated other comprehensive loss	$	(402)	$	11	$	14	$	(377)
Nine months ended September 30, 2021
Pensions and other postretirement liabilities	$	(526)	$	—	$	23	$	(503)
Other comprehensive loss of equity investees	(68)		—		—		(68)
Accumulated other comprehensive loss	$	(594)	$	—	$	23	$	(571)

6.  Stock Repurchase Program

We repurchased and retired 9.2 million and 9.4 million shares of Common Stock under our stock repurchase program at a cost of $2.3 billion and $2.5 billion during the first nine months of 2022 and 2021, respectively. On March 29, 2022, our Board of Directors authorized a new program for the repurchase of up to $10.0 billion of Common Stock beginning April 1, 2022. Our previous share repurchase program terminated on March 31, 2022.

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 the jointly-owned entity, and CSX has the remainder of the economic and voting interests. Our investment in Conrail was $1.6 billion and $1.5 billion at September 30, 2022 and December 31, 2021, respectfully.

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 expenses payable to CRC for operation of the Shared Assets Areas totaling $42 million and $37 million for the third quarters of 2022 and 2021, respectively, and $116 million and $108 million for the first nine months of 2022 and 2021, respectively. Our equity in Conrail’s earnings, net of amortization, was $15 million and $14 million for the third quarters of 2022 and 2021, respectively, and $40 million and $42 million for the first nine months of 2022 and 2021, respectively. These amounts partially offset the costs of operating the Shared Assets Areas and are included in “Purchased services and rents.”

“Other liabilities” includes $534 million at both September 30, 2022 and December 31, 2021 for long-term advances from Conrail, maturing in 2050 that bear interest at an average rate of 1.31%.

13

Investment in TTX

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

Expenses incurred for use of TTX equipment are included in “Purchased services and rents.” These expenses amounted to $63 million and $59 million for the third quarters of 2022 and 2021, respectively, and $193 million and $183 million for the first nine months of 2022 and 2021, respectively. Our equity in TTX’s earnings partially offsets these costs and totaled $18 million and $12 million for the third quarters of 2022 and 2021, respectively, and $39 million and $43 million for the first nine months of 2022 and 2021, respectively.

8.  Debt

In June 2022, we issued $750 million of 4.55% senior notes due 2053.

In May 2022, we renewed our accounts receivable securitization program with a maximum borrowing capacity of $400 million. The term expires in May 2023. We had no amounts outstanding under this program and our available borrowing capacity was $400 million at both September 30, 2022 and December 31, 2021.

In February 2022, we issued $600 million of 3.00% senior notes due 2032 and $400 million of 3.70% senior notes due 2053.

9.  Pensions and Other Postretirement Benefits

We have both funded and unfunded defined benefit pension plans covering eligible employees. We also provide specified health care 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. Eligible retired participants and their spouses 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:

	Pension Benefits				Other Postretirement Benefits
	Third Quarter
	2022		2021		2022		2021
	($ in millions)
Service cost	$	10	$	10	$	1	$	1
Interest cost	17		14		3		1
Expected return on plan assets	(53)		(48)		(3)		(3)
Amortization of net losses	12		16		—		—
Amortization of prior service benefit	—		—		(6)		(6)
Net benefit	$	(14)	$	(8)	$	(5)	$	(7)

14

	Pension Benefits				Other Postretirement Benefits
	First Nine Months
	2022		2021		2022		2021
	($ in millions)
Service cost	$	30	$	32	$	4	$	4
Interest cost	51		41		7		5
Expected return on plan assets	(160)		(144)		(9)		(9)
Amortization of net losses	36		49		—		1
Amortization of prior service benefit	—		—		(19)		(19)
Net benefit	$	(43)	$	(22)	$	(17)	$	(18)

The service cost component 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 (expense) – net” on the Consolidated Statements of Income.

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, 2022 or December 31, 2021. The carrying amounts and estimated fair values, based on Level 1 inputs, of long-term debt consist of the following:

	September 30, 2022				December 31, 2021
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	($ in millions)
Long-term debt, including current maturities	$	(15,068)	$	(13,481)	$	(13,840)	$	(17,033)

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 and, if material, disclosed below. 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. For lawsuits and other claims where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established but the matter, if potentially material, is disclosed below. We routinely review relevant information with respect to our lawsuits and other claims and update our accruals, disclosures and estimates of reasonably possible loss based on such reviews.

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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. Summary judgment has been briefed but not decided, and trial is likely to occur in the first quarter of 2023. We continue to vigorously defend the lawsuit and, although it is reasonably possible we could incur a loss in the case, we believe that we will prevail. However, given that litigation is inherently unpredictable and subject to uncertainties, there can be no assurances that the final outcome of the litigation or a litigation settlement will not have a material adverse affect on our financial position or results of operations. We cannot reasonably estimate the potential loss or range of loss associated with the litigation 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 actuarial consulting firm.  Job-related personal injury and occupational claims are subject to the Federal Employer’s Liability Act (FELA), which is applicable only to railroads. The variability inherent in FELA’s fault-based tort system 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 the future payments of claims 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. The accuracy of 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.  Our 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 the future payment of claims.  Adjustments to the recorded liability are reflected in operating expenses in the periods in which such adjustments become known.

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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 in determining any necessary adjustments to liability estimates.  

Our Consolidated Balance Sheets include liabilities for environmental exposures of $57 million at September 30, 2022 and $49 million at December 31, 2021, of which $15 million is classified as a current liability at the end of both periods. At September 30, 2022, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 86 known locations and projects compared with 88 locations and projects at December 31, 2021. At September 30, 2022, twenty sites accounted for $46 million of the liability, and no individual site was considered to be material. We anticipate that most of this liability will be paid out over five years; however, some costs will be paid out over a longer period.

At eight 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 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 that 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.

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Labor Agreements

Approximately 80% of our railroad employees are covered by collective bargaining agreements with various labor unions. Pursuant to the Railway Labor Act, these agreements remain in effect until new agreements are reached, or until the bargaining procedures mandated by the Railway Labor Act are completed.

In September 2022, management reached tentative agreements with all relevant unions. These tentative agreements, which pertain to years 2020-2024, included retroactive pay increases and other benefits for our craft employees that are higher than our estimates previously recorded for such items. For the third quarter of 2022, “Compensation and benefits” includes $85 million and “Purchased services and rents” includes $3 million of additional expenses pertaining to estimated wage increases recorded in periods prior to July 1, 2022. For the first nine months of 2022, “Compensation and benefits” includes $54 million and “Purchased services and rents” includes $2 million of additional expenses pertaining to estimated wage increases recorded in periods prior to January 1, 2022.

Although some of these agreements have been finalized through ratification by union membership, others remain subject to ratification. In addition, two labor unions did not initially ratify their tentative agreements (with one union putting out a second tentative agreement for a vote and the other agreeing to maintain the status quo as negotiations continue). The outcome of the ratification process cannot be predicted with certainty at this time; however, if one or more of the tentative agreements fails ratification and is not subsequently ratified during a final “status quo” period where self-help (strike or lockout) is not permitted, self-help could occur in mid-November or early December (dates vary by tentative agreement). A service disruption, depending on the duration, could have a material adverse effect on our financial position, results of operations, or liquidity. In addition, the resulting changes in our finalized labor agreements (and our tentative agreements, if ratified) are expected to increase our labor costs.

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 $800 million ($1.1 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 82% of potential losses above $75 million and below $275 million per occurrence and/or policy year.

12. New Accounting Pronouncements

In November 2021, the Financial Accounting Standards Board issued Accounting Standards Update 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance,” which requires annual disclosures when an entity has received government assistance. Entities are required to disclose the types of government assistance received, the accounting treatment for that government assistance, and the effect of the government assistance on the financial statements. The new standard is effective for annual periods beginning after December 15, 2021, and early adoption is permitted. We do not expect this standard to have a material effect on our disclosures. We did 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, moving goods and materials that help drive the U.S. economy. We connect customers to markets and communities to economic opportunity with safe, reliable, and cost-effective shipping solutions. Our Norfolk Southern Railway Company subsidiary operates in 22 states and the District of Columbia. We are a major transporter of industrial products, including agriculture, forest and consumer products, chemicals, and metals and construction materials. In addition, in the East we serve every major container port and operate the most extensive intermodal network. We are also a principal carrier of coal, automobiles, and automotive parts.

During the third quarter, strong revenue growth drove improved profitability despite higher inflation-related operating expenses. Higher fuel surcharge revenues, resulting from higher fuel commodity prices, and pricing gains led to revenue per unit growth that more than offset the impact of lower volume. The increase in fuel commodity prices also led to higher fuel expense. Additionally, tentative agreements, resulting as part of ongoing labor union negotiations, included retroactive pay increases and other benefits for our craft employees that resulted in increased compensation and benefits expenses. Finally, although we incurred incremental service-related costs, we continued to make progress on efforts to increase network fluidity and improve service for our customers.

SUMMARIZED RESULTS OF OPERATIONS

	Third Quarter					First Nine Months
	2022		2021		% change	2022		2021		% change
	($ in millions, except per share amounts)
Income from railway operations	$	1,272	$	1,136	12%	$	3,628	$	3,318	9%
Net income	$	958	$	753	27%	$	2,480	$	2,245	10%
Diluted earnings per share	$	4.10	$	3.06	34%	$	10.45	$	8.99	16%
Railway operating ratio (percent)	62.0		60.2		3%	61.8		60.0		3%

Income from railway operations increased in both periods, driven by higher railway operating revenues. Revenue growth was the result of higher fuel surcharge revenues and pricing gains, which more than offset the impact of volume declines in both the third quarter and first nine months. The rise in revenues was partly offset by increased railway operating expenses, driven by higher fuel prices, increased labor-related costs resulting from ongoing labor union negotiations, other inflationary pressures, and service-related costs. The first nine months also include higher claims-related expenses and lower gains on the sale of operating properties. The increase in estimates for retroactive wage increases anticipated under our tentative labor agreements and that pertain to prior periods lowered diluted earnings per share by $0.28 and $0.18 in the third quarter and first nine months, respectively. Additionally, net income in both periods includes a $136 million deferred tax benefit resulting from a corporate income tax rate change in the Commonwealth of Pennsylvania, which increased diluted earnings per share by $0.58 and $0.57 in the third quarter and first nine months, respectively. Our share repurchase activity resulted in the percentage increase in diluted earnings per share that exceeded that of net income.

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DETAILED RESULTS OF OPERATIONS

Railway Operating Revenues

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

	Third Quarter					First Nine Months
Revenues	2022		2021		% change	2022		2021		% change
Merchandise:
Agriculture, forest and consumer products	$	642	$	564	14%	$	1,839	$	1,681	9%
Chemicals	570		504		13%	1,620		1,457		11%
Metals and construction	442		424		4%	1,237		1,196		3%
Automotive	276		218		27%	759		664		14%
Merchandise	1,930		1,710		13%	5,455		4,998		9%
Intermodal	942		812		16%	2,768		2,332		19%
Coal	471		330		43%	1,285		960		34%
Total	$	3,343	$	2,852	17%	$	9,508	$	8,290	15%

Units
Merchandise:
Agriculture, forest and consumer products	178.0	181.3	(2%)	539.2	547.3	(1%)
Chemicals	137.9	138.3	—%	407.3	399.0	2%
Metals and construction	168.3	179.2	(6%)	480.2	510.5	(6%)
Automotive	85.4	81.5	5%	252.3	257.5	(2%)
Merchandise	569.6	580.3	(2%)	1,679.0	1,714.3	(2%)
Intermodal	972.7	1,021.0	(5%)	2,945.7	3,100.0	(5%)
Coal	183.0	160.5	14%	514.7	500.2	3%
Total	1,725.3	1,761.8	(2%)	5,139.4	5,314.5	(3%)

Revenue per Unit
Merchandise:
Agriculture, forest and consumer products	$	3,606	$	3,113	16%	$	3,411	$	3,072	11%
Chemicals	4,135		3,647		13%	3,978		3,651		9%
Metals and construction	2,625		2,360		11%	2,575		2,342		10%
Automotive	3,231		2,679		21%	3,008		2,579		17%
Merchandise	3,388		2,946		15%	3,249		2,915		11%
Intermodal	968		796		22%	940		752		25%
Coal	2,575		2,057		25%	2,498		1,919		30%
Total	1,938		1,619		20%	1,850		1,560		19%

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Railway operating revenues increased $491 million in the third quarter and $1.2 billion for the first nine months compared with the same periods last year. The table below reflects the components of the revenue change by major commodity group ($ in millions).

	Third Quarter						First Nine Months
	Merchandise		Intermodal		Coal		Merchandise		Intermodal		Coal
	Increase (Decrease)
Volume	$	(32)	$	(38)	$	46	$	(103)	$	(116)	$	28
Fuel surcharge revenue	168		124		35		356		333		58
Rate, mix and other	84		44		60		204		219		239
Total	$	220	$	130	$	141	$	457	$	436	$	325

Approximately 95% of our revenue base is covered by contracts that include negotiated fuel surcharges. Revenues associated with these surcharges totaled $501 million and $174 million in the third quarters of 2022 and 2021, respectively, and $1.2 billion and $419 million for the first nine months of 2022 and 2021, respectively. The increase in fuel surcharge revenues is driven by higher fuel commodity prices. Should the current fuel price environment persist for the remainder of 2022, we expect fuel surcharge revenue to continue to be higher than 2021.

Merchandise

Merchandise revenues increased in both periods due to higher average revenue per unit, driven by higher fuel surcharge revenue and increased pricing, partially offset by lower volume. Volumes fell in both periods as declines in metals and construction and agriculture, forest, and consumer products shipments more than offset higher automotive shipments in the third quarter and chemicals shipments in the first nine months.

Agriculture, forest and consumer products volume decreased in both periods. During the third quarter, declines in ethanol, pulpboard, fertilizer, and pulp, more than offset gains in corn, food oils, feed, and soybeans. During the first nine months, declines in fertilizer, corn, pulpboard, and pulp more than offset increases in feed, soybeans, and food oils. Decreased ethanol shipments in the third quarter were due to a decline in gasoline consumption. Pulpboard shipments declined in both periods due to decreased demand. Lower fertilizer shipments in both periods were driven by high fertilizer prices causing customers to draw down on existing inventories or delay purchases. Pulp shipments decreased in both periods due to equipment availability, service disruptions and over-the-road competition. Increased corn shipments in the third quarter were due to improved cycle times on grain trains. In both periods, feed and food oils shipments increased due to increased customer demand and soybean volumes were higher due to increased opportunity for exports.

Chemicals volume was flat in the third quarter but increased for the first nine months driven by growth in shipments of sand in both periods due to increased demand. Both periods were impacted by reduced shipments of inorganic chemicals, plastics, and organic chemicals, due to decreased demand. The first nine months also saw an increase in solid waste shipments due to growth with existing customers.

Metals and construction volume fell in both periods, largely the result of decreased shipments of coil steel, iron and steel, and scrap metal driven by service disruptions and slower equipment cycle times.

Automotive volume increased in the third quarter but decreased for the first nine months. Higher shipments in the third quarter were primarily due to increased production due to fewer parts supply issues when compared to the prior year, partially offset by slower equipment cycle times. Volume declines for the first nine months were driven by slower equipment cycle times partially offset by fewer parts supply issues when compared to the prior year.

21

Merchandise revenues for the remainder of the year are expected to be higher due to increased average revenue per unit, driven by higher fuel surcharge revenue and pricing gains.

Intermodal

Intermodal revenues increased in both periods, driven by higher average revenue per unit, a result of higher fuel surcharge revenues and pricing gains, partially offset by lower volume. The first nine months also included higher storage services revenue.

Intermodal units (in thousands) by market were as follows:

	Third Quarter			First Nine Months
	2022	2021	% change	2022	2021	% change
Domestic	630.6	656.6	(4%)