UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DCD.C. 20549
FORM 10-K
(X)☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended DECEMBER 31, 20172020
( )☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ___________ to___________
Commission file numberFile Number 1-8339
NORFOLK SOUTHERN CORPORATION
(Exact name of registrant as specified in its charter)
|
| | | | | | | |
Virginia | 52-1188014 |
(State or other jurisdiction of incorporation)incorporation or organization) | | 52-1188014
(IRSI.R.S Employer Identification No.) |
Three Commercial Place | 23510-2191 |
| Norfolk, | Virginia |
| (Address of principal executive offices) | | 23510-2191
(Zip Code) |
| (757) | 629-2680 |
(Registrant’s telephone number, including area code:code) |
Securities registered pursuant to Section 12(b) of the Act:
| | (757) 629-2680 | | | | | | |
|
Securities registered pursuant to Section 12(b) of the Act: |
| | |
Title of each Classclass | Trading Symbol(s) | Name of each exchange on which registered |
| Norfolk Southern Corporation | | |
| Common Stock (Par Value $1.00) | NSC | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (X)☒ No ( )☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ( )☐ No (X)☒
Indicate by check mark whether the registrant: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 (X)☒ No ( )☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationsRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (X) ☒ No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated filer,” “smallerfiler", "accelerated filer", "smaller reporting company,”company", and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer (X)☒ 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act [ ](15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ( )☐ No (X)☒
The aggregate market value of the voting common equity held by non-affiliates at June 30, 2017,2020 was $35,044,199,563$44,745,974,634 (based on the closing price as quoted on the New York Stock Exchange on that date)June 30, 2020).
The number of shares outstanding of each of the registrant’s classes of common stock, at January 31, 2018: 283,997,2422021: 251,911,634 (excluding 20,320,777 shares held by the registrant’s consolidated subsidiaries).
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant’s definitive proxy statement to be filed electronically pursuant to Regulation 14A not later than 120 days after the end of the fiscal year, are incorporated herein by reference in Part III.
TABLE OF CONTENTS
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
PART I
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Item 1. Business and Item 2. Properties
GENERAL– Our company, Norfolk Southern Corporation (Norfolk Southern) is a Norfolk, Virginia basedVirginia-based company that ownsa major freight railroad, Norfolk Southern Railway Company (NSR). We were incorporated on July 23, 1980, under the laws of the Commonwealth of Virginia. Ourcommon stock (Common Stock) is listed on the New York Stock Exchange (NYSE) under the symbol “NSC.”
Unless indicatedotherwise, Norfolk SouthernCorporationand its subsidiaries, including NSR,are referred to collectively as NS, we, us, and our.
We areprimarily engaged in the rail transportation of raw materials, intermediate products, and finished goods primarily in the Southeast, East, and Midwest and, via interchange with rail carriers, to and from the rest of theUnited States.States (U.S.). Wealso transport overseas freight through several Atlantic and Gulf Coast ports. We offer the most extensive intermodal network in the eastern half of the United States.U.S.
Wemake available free of charge throughourwebsite, www.norfolksouthern.com,ourannual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to theU.S.Securities and Exchange Commission (SEC). In addition, the following documents are available onourwebsite and in print to any shareholder who requests them:
•Corporate Governance Guidelines
•Charters of the Committees of the Board of Directors
•The Thoroughbred Code of Ethics
•Code of Ethical Conduct for Senior Financial Officers
•Categorical Independence Standards for Directors
•Norfolk Southern Corporation Bylaws
RAILROAD OPERATIONS–AtDecember 31, 2017, our railroad2020, we operated approximately 19,50019,300 route miles of roadin22states and the District of Columbia.
Oursystem reachesmany manufacturing plants, electric generating facilities, mines, distribution centers, transload facilities, and other businesses locatedinourservice area.
Corridors with heaviest freight volume:
•New York City area to Chicago (via Allentown and Pittsburgh)
•Chicago to Macon (via Cincinnati, Chattanooga, and Atlanta)
•Central Ohio to Norfolk (via Columbus and Roanoke)
•Birmingham to Meridian
Memphis to Chattanooga
•Cleveland to Kansas City
•Memphis to Chattanooga
The miles operated, which include major leased lines between Cincinnati Ohio, and Chattanooga, Tennessee, and an exclusive operating agreement fortrackage rights over property owned by North Carolina Railroad Company, were as follows:
| | | | Mileage Operated at December 31, 2017 | | Mileage Operated at December 31, 2020 |
| | Miles of Road | | Second and Other Main Track | | Passing Track, Crossovers and Turnouts | | Way and Yard Switching | | Total | | Route Miles | | Second
and
Other
Main
Track | | Passing
Track,
Crossovers
and
Turnouts | | Way and Yard Switching | | Total |
| | | | | | | | | | | | | | | | | | | | |
| Owned | 14,711 |
| | 2,753 |
| | 1,952 |
| | 8,320 |
| | 27,736 |
| Owned | 14,540 | | | 2,678 | | | 2,004 | | | 8,310 | | | 27,532 | |
| Operated under lease, contract or trackage | | | | | | | | |
|
| Operated under lease, contract or trackage | |
| rights | 4,756 |
| | 1,932 |
| | 398 |
| | 835 |
| | 7,921 |
| rights | 4,795 | | | 1,889 | | | 406 | | | 840 | | | 7,930 | |
| | | | | | | | | | | | | | | | | | | | |
| Total | 19,467 |
| | 4,685 |
| | 2,350 |
| | 9,155 |
| | 35,657 |
| Total | 19,335 | | | 4,567 | | | 2,410 | | | 9,150 | | | 35,462 | |
We operate freight service over lines with significant ongoing Amtrak and commuter passenger operations and conduct freight operations over trackage owned or leased by Amtrak, New Jersey Transit, Southeastern Pennsylvania Transportation Authority, Metro-North Commuter Railroad Company, Maryland Department of Transportation, and Michigan Department of Transportation.
The following table sets forth certain statistics relating toourrailroads’ operations for the past five years:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, | |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | |
| | | | | | | | | | |
| Revenue ton miles (billions) | 164 | | | 194 | | | 207 | | | 201 | | | 191 | | |
| Revenue per thousand revenue ton miles | $ | 59.67 | | | $ | 58.21 | | | $ | 55.25 | | | $ | 52.38 | | | $ | 51.91 | | |
| Revenue ton miles (thousands) per railroad employee | 8,191 | | | 7,939 | | | 7,822 | | | 7,474 | | | 6,838 | | |
| Ratio of railway operating expenses to railway | | | | | | | | | | |
| operating revenues (railway operating ratio) | 69.3% | | 64.7% | | 65.4% | | 66.6% | | 69.6% | |
|
| | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | | | | | | | | |
| Revenue ton miles (billions) | 201 |
| | 191 |
| | 200 |
| | 205 |
| | 194 |
|
| Revenue per thousand revenue ton miles | $ | 52.38 |
| | $ | 51.91 |
| | $ | 52.63 |
| | $ | 56.70 |
| | $ | 58.10 |
|
| Revenue ton miles (thousands) per railroad employee | 7,474 |
| | 6,838 |
| | 6,645 |
| | 7,054 |
| | 6,517 |
|
| Ratio of railway operating expenses to railway operating | | | | | | | | | |
| revenues | 67.4 | % | 1 | 68.9% |
| | 72.6% |
| | 69.2% |
| | 71.0% |
|
1Note:RAILWAY OPERATING REVENUES– Total railway operating revenues were $9.8 billion in 2020. Following is an overview of our three commodity groups. See reconciliation to U.S. Generally Accepted Accounting Principles (GAAP)the discussion of merchandise revenues by major commodity group, intermodal revenues, and coal revenues and tonnage in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
RAILWAY OPERATING REVENUES–Total railway operating revenues were $10.6 billion in 2017. Following is an overview of our three major market groups. See the discussion of merchandise revenues by commodity group, intermodal revenues, and coal revenues and tonnage in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
MERCHANDISE– Our merchandise marketcommodity group is composed of five major commodityfour groupings:
•Agriculture, forest and consumer products includes soybeans, wheat, corn, fertilizer, livestock and poultry feed, food products, food oils, flour, sweeteners, ethanol, lumber and wood products, pulp board and paper products, wood fibers, wood pulp, scrap paper, beverages, canned goods, and consumer products.
•Chemicals includes sulfur and related chemicals, petroleum products (including crude oil), chlorine and bleaching compounds, plastics, rubber, industrial chemicals, chemical wastes and chemical wastes. sand.
Agriculture, consumer products, and government includes soybeans, wheat, corn, fertilizer, livestock and poultry feed, food oils, flour, beverages, canned goods, sweeteners, consumer products, ethanol, transportation equipment, and items for the U.S. military.
•Metals and construction includes steel, aluminum products, machinery, scrap metals, cement, aggregates, sand,minerals, clay, transportation equipment, and minerals.items for the U.S. military.
•Automotive includes finished motor vehicles and automotive parts.
Paper, clay and forest products includes lumber and wood products, pulp board and paper products, wood fibers, wood pulp, scrap paper, and clay.
MerchandiseIn 2020, we handled 2.1 million merchandise carloads, handled in 2017 were 2.5 million, the revenues from which accounted for 60%62% of our total railway operating revenues.
INTERMODAL– Our intermodal marketcommodity group consists of shipments moving in domestic and international containers and trailers. These shipments are handled on behalf of intermodal marketing companies, international steamship lines, truckers,premium customers and other shippers. Intermodalasset owning companies. In 2020, we handled 4.0 million intermodal units, handled in 2017 were 4.1 million, the revenues from which accounted for 23%27% of our total railway operating revenues.
COAL– Revenues from coal Coal revenues accounted for 17%11% of our total railway operating revenues in 2017.2020. We handled 11664 million tons, or 1.00.6 million carloads, in 2017, most of which originated on our lines from major eastern coal basins, with the balance from major western coal basins received via the Memphis and Chicago gateways. Our coal franchise supports the electric generation market, serving approximately 76 coal generation50 coal-fired power plants, as well as the export, domestic metallurgical and industrial markets,primarily through direct rail and river, lake, and coastal facilities, including various terminals on the Ohio River,Lamberts Point in Norfolk, Virginia,the Port of Baltimore, and Lake Erie.
FREIGHT RATES– Our predominant pricing mechanisms, private contracts and exempt price quotes, are not subject to regulation. In general, market forcesare the primary determinant of rail service prices.
In 2017, our railroad was found by the U.S. Surface Transportation Board (STB), the regulatory board that has broad jurisdiction over railroad practices, to be “revenue adequate” on an annual basis based on results for the year 2016. The STB has not made its revenue adequacy determination for the year 2017. A railroad is “revenue adequate” on an annual basis under the applicable law when its return on net investment exceeds the rail industry’s composite cost of capital. This determination is made pursuant to a statutory requirement.
RAILWAY PROPERTY
Our railroad infrastructure makesuscapital intensive with net propertyproperties of approximately $30$31 billion on a historical cost basis.
Property Additions–Property additions for the past five years were as follows:
| | | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | ($ in millions) | | ($ in millions) |
| | | | | | | | | | | |
| Road and other property | $ | 1,210 |
| | $ | 1,292 |
| | $ | 1,514 |
| | $ | 1,406 |
| | $ | 1,421 |
| Road and other property | $ | 1,046 | | | $ | 1,371 | | | $ | 1,276 | | | $ | 1,210 | | | $ | 1,292 | |
| Equipment | 513 |
| | 595 |
| | 658 |
| | 712 |
| | 550 |
| Equipment | 448 | | | 648 | | | 675 | | | 513 | | | 595 | |
| Delaware & Hudson acquisition | — |
| | — |
| | 213 |
| | — |
| | — |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Total | $ | 1,723 |
| | $ | 1,887 |
| | $ | 2,385 |
| | $ | 2,118 |
| | $ | 1,971 |
| Total | $ | 1,494 | | | $ | 2,019 | | | $ | 1,951 | | | $ | 1,723 | | | $ | 1,887 | |
Our capital spending and replacement programs are and have been designed to assure the ability to provide safe, efficient, and reliable rail transportation services. For 2018, wehavebudgeted $1.8 billion of property additions.
Equipment–AtDecember 31, 2017,2020, weowned or leased the following units of equipment:
| | | | Owned | | Leased | | Total | | Capacity of Equipment | | Owned | | Leased | | Total | | Capacity of
Equipment |
| Locomotives: | |
| | |
| | |
| | (Horsepower) |
| Locomotives: | | | | | | | (Horsepower) |
| Multiple purpose | 3,911 |
| | 14 |
| | 3,925 |
| | 14,948,800 |
| Multiple purpose | 3,060 | | | — | | | 3,060 | | | 11,901,400 | |
| Auxiliary units | 175 |
| | — |
| | 175 |
| | — |
| Auxiliary units | 138 | | | — | | | 138 | | | — | |
| Switching | 55 |
| | — |
| | 55 |
| | 82,050 |
| Switching | 4 | | | — | | | 4 | | | 4,400 | |
| | | | | | | | | | | | | | | | |
| Total locomotives | 4,141 |
| | 14 |
| | 4,155 |
| | 15,030,850 |
| Total locomotives | 3,202 | | | — | | | 3,202 | | | 11,905,800 | |
| | | | | | | | | | | | | | | | |
| Freight cars: | |
| | |
| | |
| | (Tons) | Freight cars: | | | | | | | (Tons) |
| Gondola | 25,265 |
| | 2,549 |
| | 27,814 |
| | 3,086,465 |
| Gondola | 18,958 | | | 3,203 | | | 22,161 | | | 2,460,176 | |
| Hopper | 11,266 |
| | — |
| | 11,266 |
| | 1,272,224 |
| Hopper | 8,723 | | | — | | | 8,723 | | | 992,956 | |
| Covered hopper | 9,061 |
| | 85 |
| | 9,146 |
| | 1,013,837 |
| Covered hopper | 5,951 | | | — | | | 5,951 | | | 661,573 | |
| Box | 8,248 |
| | 1,362 |
| | 9,610 |
| | 829,014 |
| Box | 2,851 | | | 617 | | | 3,468 | | | 312,994 | |
| Flat | 1,776 |
| | 1,484 |
| | 3,260 |
| | 316,534 |
| Flat | 1,494 | | | 85 | | | 1,579 | | | 133,586 | |
| Other | 1,606 |
| | 4 |
| | 1,610 |
| | 74,100 |
| Other | 1,559 | | | 4 | | | 1,563 | | | 70,045 | |
| | | | | | | | | | | | | | | | |
| Total freight cars | 57,222 |
| | 5,484 |
| | 62,706 |
| | 6,592,174 |
| Total freight cars | 39,536 | | | 3,909 | | | 43,445 | | | 4,631,330 | |
| | | | | | | | | | | | | | | | |
| Other: | | | | | | | | Other: | |
| Chassis | 28,710 |
| | — |
| | 28,710 |
| | | Chassis | 33,865 | | | — | | | 33,865 | | |
| Containers | 16,190 |
| | 1,738 |
| | 17,928 |
| | | Containers | 18,350 | | | — | | | 18,350 | | |
| Work equipment | 7,213 |
| | 287 |
| | 7,500 |
| | | Work equipment | 5,546 | | | 183 | | | 5,729 | | |
| Vehicles | 4,072 |
| | 156 |
| | 4,228 |
| | | Vehicles | 2,928 | | | 32 | | | 2,960 | | |
| Miscellaneous | 2,387 |
| | 189 |
| | 2,576 |
| | | Miscellaneous | 2,306 | | | — | | | 2,306 | | |
| | | | | | | | | | | | | | | |
| Total other | 58,572 |
| | 2,370 |
| | 60,942 |
| | | Total other | 62,995 | | | 215 | | | 63,210 | | |
| | | | | | | | | |
The following table indicates the number and year built for locomotives and freight cars owned at December 31, 2017:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | 2011-
2015 | | 2006-
2010 | | 2005 &
Before | | Total |
| Locomotives: | | | | | | | | | | | | | | | | | |
| No. of units | — | | 35 | | 15 | | 55 | | 65 | | 291 | | 260 | | 2,481 | | 3,202 |
| % of fleet | — | | 1 | % | | 1 | % | | 2 | % | | 2 | % | | 9 | % | | 8 | % | | 77 | % | | 100 | % |
| | | | | | | | | | | | | | | | | |
| Freight cars: | | | | | | | | | | | | | | | | | |
| No. of units | — | | 200 | | — | | 470 | | 775 | | 8,782 | | 4,840 | | 24,469 | | 39,536 |
| % of fleet | — | | 1 | % | | — | | 1 | % | | 2 | % | | 22 | % | | 12 | % | | 62 | % | | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | 2008- 2012 | | 2003- 2007 | | 2002 & Before | | Total |
| Locomotives: | | | | | | | | | | | | | | | | | |
| No. of units | 53 | | 66 | | 8 | | 83 | | 50 | | 231 |
| | 624 |
| | 3,026 |
| | 4,141 |
|
| % of fleet | 1 | % | | 2 | % | | — | % | | 2 | % | | 1 | % | | 6 | % | | 15 | % | | 73 | % | | 100 | % |
| | | | | | | | | | | | | | | | | | |
| Freight cars: | | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| No. of units | 470 |
| | 775 |
| | 2,091 |
| | 897 |
| | — |
| | 8,889 |
| | 1,658 |
| | 42,442 |
| | 57,222 |
|
| % of fleet | 1 | % | | 1 | % | | 4 | % | | 1 | % | | — | % | | 16 | % | | 3 | % | | 74 | % | | 100 | % |
The following table shows the average age of our owned locomotive and freight car fleets at December 31, 2017,2020 andinformation regarding 20172020 retirements:
|
| | | | | | | | | | |
| Locomotives | | Freight Cars |
| Average age – in service | 24.425.7 years | | 28.525.6 years |
| Retirements | 180704 units | | 6,9476,338 units |
| Average age – retired | 33.231.3 years | | 44.742.7 years |
Track Maintenance– Of the approximately 35,70035,500 total miles of track on which we operate, we are responsible for maintaining approximately 28,50028,800 miles, with the remainder being operated under trackage rights from other parties responsible for maintenance.
Over 83%84% of the main line trackage (including first, second, third, and branch main tracks, all excluding rail operated pursuant to trackage rights) has rail ranging from 131 to 155 pounds per yard with the standard installation currently at 136 pounds per yard. Approximately 46%39% of our lines, excluding rail operated pursuant to trackage rights, carried 20 million or more gross tons per track mile during 2017.2020.
The following table summarizes several measurements regardingourtrack roadway additions and replacements during the past five years:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| Track miles of rail installed | 418 | | | 449 | | | 416 | | | 466 | | | 518 | |
| Miles of track surfaced | 4,785 | | | 5,012 | | | 4,594 | | | 5,368 | | | 4,984 | |
| Crossties installed (millions) | 1.8 | | | 2.4 | | | 2.2 | | | 2.5 | | | 2.3 | |
|
| | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Track miles of rail installed | 466 |
| | 518 |
| | 523 |
| | 507 |
| | 549 |
|
| Miles of track surfaced | 5,368 |
| | 4,984 |
| | 5,074 |
| | 5,248 |
| | 5,475 |
|
| Crossties installed (millions) | 2.5 |
| | 2.3 |
| | 2.4 |
| | 2.7 |
| | 2.5 |
|
Traffic Control– Of the approximately 16,400 route miles we dispatch, about 11,300 miles are signalized, including 8,500 miles of centralized traffic control (CTC) and 2,800 miles of automatic block signals. Of the 8,500 miles of CTC, approximately 7,600 miles are controlled by data radio originating at 355 base station radio sites.
ENVIRONMENTAL MATTERS–Compliance with federal, state, and local laws and regulations relating to the protection of the environment isone of ourprincipal goals. To date, such compliancehas not had a material effect on our financial position, results of operations, liquidity, or competitive position. See Note 1617 to the Consolidated Financial Statements.
EMPLOYEESHUMAN CAPITAL MANAGEMENT
Workforce–The following table shows We employed an average of 20,200 employees during 2020, and 19,100 employees at the average numberend of employees and the average cost per employee for wages and benefits:
|
| | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | | | | | | | | |
| Average number of employees | 27,110 |
| | 28,044 |
| | 30,456 |
| | 29,482 |
| | 30,103 |
|
| Average wage cost per employee | $ | 79,000 |
| | $ | 76,000 |
| | $ | 77,000 |
| | $ | 76,000 |
| | $ | 72,000 |
|
| Average benefit cost per employee | $ | 42,000 |
| | $ | 35,000 |
| | $ | 32,000 |
| | $ | 35,000 |
| | $ | 40,000 |
|
2020. Approximately 80%of ourrailroad employees– referred to as “craft” employees – are covered by collective bargaining agreements with various labor unions. See the discussion of “Labor Agreements” in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The remainder of our workforce is composed of management employees.
Craft Workforce Levels and Productivity– Maintaining appropriate headcount levels for our craft-employee workforce is critical to our on-time and consistent delivery of customers’ goods and operational efficiency goals. We manage this human capital metric through forecasting tools designed to ensure the optimal level of staffing to meet business demands while controlling costs. We measure and monitor employee productivity based on gross ton miles per train and engine employee.
Safety– We are dedicated to providing employees with a safe workplace and the knowledge and tools they need to work safely and return home safely every day. Our commitment to an injury-free workplace is illustrated by our “I am Coming Home” safety message, which is featured prominently in our yards, shops, and facilities and further reinforces the importance of working safely. We measure employee safety performance through internal metrics
such as lost-time injuries and serious injuries per 200,000 employee-hours and metrics established by the Federal Railroad Administration (FRA), such as FRA reportable injuries per 200,000 employee-hours. Given the importance of safety among our workforce and business, in 2020, our Board of Directors established a standing Safety Committee that, among other duties, reviews, monitors, and evaluates our compliance with our safety programs and practices.
Attracting and Retaining Management Employees– Our talent strategy for management employees is essential to attracting strong candidates in a competitive talent environment. We evaluate the effectiveness of that strategy by studying market trends, benchmarking the attractiveness of our employee value proposition, and analyzing retention data.
We also focus on driving employee engagement, which is key to increasing employee productivity, retention, and safety. We take a data-centric approach, including the use of quarterly surveys among management employees, to identify new initiatives that will help boost engagement and drive business results.
Employee Development and Training– We provide a range of developmental programs, opportunities, skills, and resources for our employees to work safely and be successful in their careers. We provide hands-on training and simulation training designed to improve training effectiveness and safety outcomes.
We also use modern learning and performance technologies to offer robust professional growth opportunities. Through on-demand digital course offerings, custom-built learning paths, and performance-management tools, our platforms deliver a contemporary, convenient, and inclusive approach to professional development.
Diversity, Equity and Inclusion– As a leading transportation service company, we understand that competing in the global marketplace requires recruiting the most qualified, talented, and diverse people. We strive to create a diverse, equitable, and inclusive workplace where a wide range of perspectives and experiences are represented, valued, and empowered to thrive.
While our current workforce reflects a broad range of backgrounds and experiences, we continue to focus on building an even more diverse workforce, using technology-driven outreach and multiple recruiting relationships to maintain a robust pipeline of diverse talent.
To underscore our commitment to cultivating a workplace experience where the unique experiences, perspectives, and contributions of all our people are valued, our senior management team recently signed a pledge reaffirming our commitment to diversity, equity, and inclusion. To advance that commitment, senior leaders from across the company serve on an Inclusion Leadership Council, which is accountable for setting our enterprise inclusion strategy and articulating measurable goals and actions needed to achieve them.
GOVERNMENT REGULATION–In addition to environmental, safety, securities, and other regulations generally applicable to all business, ourrailroads are subject to regulation by the STB.U.S. Surface Transportation Board (STB). The STB has jurisdiction to varying extents over rates, routes, customer access provisions, fuel surcharges, conditions of service, and the extension or abandonment of rail lines. The STB has jurisdiction to determine whether we are “revenue adequate” on an annual basis based on the results of the prior year. A railroad is “revenue adequate” on an annual basis under the applicable law when its return on net investment exceeds the rail industry’s composite cost of capital. This determination is made pursuant to a statutory requirement. The STB also has jurisdiction over the consolidation, merger, or acquisition of control of and by rail common carriers.
The relaxation of economic regulation of railroads, following the Staggers Rail Act of 1980, included exemption from STB regulation of the rates and most service terms for intermodal business (trailer-on-flat-car, container-on-flat-car), rail boxcar shipments, lumber, manufactured steel, automobiles, and certain bulk commodities such as sand, gravel, pulpwood, and wood chips for paper manufacturing. Further, all shipments that we have under contract are effectively removed from commercial regulation for the duration of the contract. Approximately 90% of our revenues comes from either exempt shipments or shipments moving under transportation contracts; the remainder comes from shipments moving under public tariff rates.
Effortshave been made over the past several yearsto increase federal economic regulation of the rail industry,and such efforts are expected to continue in 2018.2021. The Staggers Rail Act of 1980substantially balancedthe interests of shippers and rail carriers,andencouraged and enabled rail carriers to innovate, invest in their infrastructure, and compete for business, thereby contributing to the economic health of the nation and to the revitalization of the industry. Accordingly,wewill continue to oppose efforts to reimpose increased economic regulation.
Government regulations are further discussed within Item 1A.1A “Risk Factors” and the safety and security of our railroads are discussed within the “Security of Operations” section contained herein.
COMPETITION–There is continuing strong competition among rail, water, and highway carriers. Price is usually only one factor of importance as shippers and receivers choose a transport mode and specific hauling company. Inventory carrying costs, service reliability, ease of handling, and the desire to avoid loss and damage during transit are also important considerations, especially for higher-valued finished goods, machinery, and consumer products. Even for raw materials, semi-finished goods, and work-in-progress, users are increasingly sensitive to transport arrangements that minimize problems at successive production stages.
Ourprimary rail competitor is CSXCorporation (CSX); both NS we and CSX operate throughout much of the same territory. Other railroads also operate in parts of the territory. Wealso compete with motor carriers, water carriers, and with shippers who have the additional options of handling their own goods in private carriage, sourcing products from different geographic areas, and using substitute products.
Certain marketing strategies to expand reach and shipping options among railroads and between railroads and motor carriers enablerailroadsto compete more effectively in specific markets.
SECURITY OF OPERATIONS – We continue to enhance the security of our rail system. Our comprehensive security plan is modeled on and was developed in conjunction with the security plan prepared by the Association of American Railroads (AAR) post September 11, 2001. The AAR Security Plan defines four Alert Levels and details the actions and countermeasures that are being applied across the railroad industry as ato mitigate the risk of terrorist, threatviolent extremist or seriously disruptive cyber-attack increases or decreases. The Alert Level actions include countermeasures that will be applied in three general areas: (1) operations (including transportation, engineering, and mechanical); (2) information technology and communications; and, (3) railroad police. All of our Operations Division employees are advised by their supervisors or train dispatchers, as appropriate, of any change in Alert Level and any additional responsibilities they may incur due to such change.
Our security plan also complies with U.S. Department of Transportation (DOT) security regulations pertaining to training and security plans with respect to the transportation of hazardous materials. As part of the plan, security awareness training is given to all railroad employees who directly affect hazardous material transportation safety, and is integrated into hazardous material training programs. Additionally, location-specific security plans are in place for rail corridors in certain metropolitan areas referred to as High Threat Urban Areas (HTUA). Particular attention is aimed at reducing risk in a HTUA by: (1) the establishment of secure storage areas for rail cars carrying toxic-by-inhalation (TIH) materials; (2) the expedited movement of trains transporting rail cars carrying TIH materials; (3) reducing the number of unattended loaded tank cars carrying TIH materials; and each of(4) cooperation with federal, state, local, and tribal governments to identify those locations where security risks are the highest.
We also operate six facilities we operate that are under U.S. Coast Guard (USCG)
Maritime Security Regulations. With respect to these facilities, each facility’s security plan has been approved by the applicable Captain of the Port and remains subject to inspection by the USCG.
Additionally, we continue to engage in close and regular coordination with numerous federal and state agencies, including the U.S. Department of Homeland Security (DHS), the Transportation Security Administration, the Federal Bureau of Investigation, the Federal Railroad Administration (FRA),FRA, the USCG, U.S. Customs and Border Protection, the Department of Defense, and various state Homeland Security offices. Similarly, we follow guidance from DHS and DOT regarding rail corridors in High Threat Urban Areas (HTUA). Particular attention is aimed at reducing risk in HTUA by: (1) the establishment of secure storage areas for rail cars carrying toxic-by-inhalation (TIH) materials; (2) the expedited movement of trains transporting rail cars carrying TIH materials; (3) substantially reducing the number of unattended loaded tank cars carrying TIH materials; and (4) cooperation with federal, state, local, and tribal governments to identify those locations where security risks are the highest.
In 2017, through2020, the COVID-19 pandemic led to cancellation of all face-to-face training, including the Safety Train Tour as part of our Operation Awareness and Response Program, as well as participation in the Transportation Community
Awareness and Emergency Response (TRANSCAER) Program,Program. The need to provide training to first responders did not go away. Our Hazmat Group adapted and created online training courses as well as conducted training webinars for first responders. Even with the adverse conditions of 2020, we provided rail accident response training to approximately 8,1851,000 emergency responders, such as local police and fire personnel. Our other training efforts throughout 2017 included participation in drills for local, state, and federal agencies.
We also have ongoing programscontinually evaluate ourselves for appropriate business continuity and disaster recovery planning, with test scenarios that include cybersecurity attacks. Our risk-based information security program helps ensure our defenses and resources are aligned to sponsor local emergency responders ataddress the Securitymost likely and Emergency Response Training Course conducted atmost damaging potential attacks, to provide support for our organizational mission and operational objectives, and to keep us in the AAR Transportation Technology Centerbest position to detect, mitigate, and recover from a wide variety of potential attacks in Pueblo, Colorado. a timely fashion.
Item 1A. Risk Factors
The risks set forth in the following risk factors could have a materially adverse effect on our financial condition,position, results of operations, or liquidity in a particular year or quarter, and could cause those results to differ materially from those expressed or implied in our forward-looking statements. The information set forth in this Item 1A.1A “Risk Factors” should be read in conjunction with the rest of the information included in this annual report, including
Item 7 “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” and Item 8 “Financial“Financial Statements and Supplementary Data.”
REGULATORY RISKS
Significant governmental legislation and regulation over commercial, tax, operating and environmental matters could affect us, our customers, and the markets we serve.Congress can enact laws that could increase economic regulation of the industry.Railroads presently are subject to commercial regulation by the STB, which hasjurisdiction to varying extents over rates, routes, customer access provisions, fuel surcharges, conditions of service, and the extension or abandonment of raillines. The STB also has jurisdiction over the consolidation, merger, or acquisition of control of and by rail commoncarriers. Additional economic regulation of the rail industry by Congress or the STB, whether under new orexisting laws, could have a significant negative impact on our ability to determinenegotiate prices for rail services, on railway operating revenues, and on theefficiency of our operations. This potential material adverse effectSuch additional industry regulation, as well as enactment of any new tax laws, could also negatively impact cash flows from operating activities and, therefore, could result in reduced capital spending on our rail network or abandonment of lines.
Railroads are also subject to the enactment of laws by Congress and regulation by the DOT and the DHS, (whichwhich regulate most aspects of our operations)operations related to safety and security. The Rail Safety Improvement Act of 2008, (RSIA), the Surface Transportation Extension Act of 2015, and the implementing regulations promulgated by the FRA (collectively “the PTC laws and regulations”) requirerequired us (and each other Class I railroad) to implement on certain mainline track where intercity and commuter passenger railroads operate and where TIH hazardous materials are transported, an interoperable positive train control system (PTC). on main lines over which five million or more gross tons of annual traffic and certain hazardous materials are transported, and on any main lines over which intercity or commuter rail passenger transportation is regularly provided. We completed our PTC implementation prior to the December 31, 2020 deadline. PTC is a setinstalled on 8,000 of highly advanced technologiesour 19,300 routes miles. PTC is designed to prevent train-to-train collisions, speed-related derailments, and certain other accidents caused by human error, but PTCit will not prevent all types of train accidents or incidents. The PTC laws and regulations require ussystem will continue to install all hardware and to implement the PTC system on some of those rail lines by December 31, 2018, and to implement such system on the remainder of those rail lines by December 31, 2020.
Full implementation of PTC in compliance with RSIA, as amended, will result in additional operating costs and capital expenditures, and PTC implementation may result in reduced operational efficiency and service levels, as well as increased compensation and benefits expenses, and increased claims and litigation costs.
Our operations are subject to extensive federal and state environmental laws and regulations concerning, among other things, emissions to the air; discharges to waterways or groundwater supplies; handling, storage, transportation, and disposal of waste and other materials; and, the cleanup of hazardous material or petroleum releases. The risk of incurring environmental liability, for acts and omissions, past, present, and future, is inherent in the railroad business. This risk includes property owned by us, whether currently or in the past, that is or has been subject to a variety of uses, including our railroad operations and other industrial activity by past owners or our past and present tenants.
Environmental problems that are latent or undisclosed may exist on these properties, and we could incur environmental liabilities or costs, the amount and materiality of which cannot be estimated reliably at this time, with respect to one or more of these properties. Moreover, lawsuits and claims involving other unidentified environmental sites and matters are likely to arise from time to time.
Concern over climate changeOPERATIONAL RISKS
The COVID-19 pandemic could further impact us, our customers, our supply chain and our operations. The pandemic has lednegatively impacted the economy and continues to generate significant federal, state,economic uncertainty. The magnitude and international legislativeduration of the pandemic, and regulatory effortsits impact on our customers and general economic conditions will influence the demand for our services and affect our revenues. In addition, COVID-19 could affect our operations and business continuity if a significant number of our essential employees, overall or in a key location, are quarantined from contraction of or exposure to limit greenhouse gas (GHG) emissions. Restrictions, caps, taxes,the disease or other controls on GHG emissions, including diesel exhaust, could significantly increaseif governmental orders prevent our operating costs, decreaseemployees or critical suppliers from working. To the amountextent COVID-19 adversely affects our business and financial results, it may also have the effect of traffic handled, and decrease the value of coal reserves we own.
In addition, legislation and regulation related to GHGs could negatively affect the markets we serve and our customers. Even without legislation or regulation, government incentives and adverse publicity relating to GHGs could negatively affect the markets for certainheightening many of the commodities we carry and our customers that (1) use commodities that we carry to produce energy, including coal, (2) use significant amounts of energyother risks described in producing or delivering the commodities we carry, or (3) manufacture or produce goods that consume significant amounts of energy.risk factors included herein.
As a common carrier by rail, we must offer to transport hazardous materials, regardless of risk. Transportation of certain hazardous materials could create catastrophic losses in terms of personal injury andproperty (including environmental) damage and compromise critical parts of our rail network. The costcosts of a catastrophic railaccident involving hazardous materials could exceed our insurance coverage. We have obtained insurance for potential losses forthird-party liability and first-party property damages (see Note 1617 to the Consolidated Financial Statements);however, insurance is available from a limited number of insurers and may not continue to be available or, ifavailable, may not be obtainable on terms acceptable to us.
We may be affected by general economic conditions. Prolonged negative changes in domestic and global economic conditions could affect the producers and consumers of the commodities we carry. Economic conditions could also result in bankruptcies of one or more large customers.
Significant increases in demand for rail services could result in the unavailability of qualified personnel and locomotives.In addition, workforce demographics and trainingrequirements, particularly for engineers and conductors, could have anegative impact on our ability to meet short-term demand for rail service. Unpredicted increases in demand for rail servicesmay exacerbate such risks.
We may be affected by energy prices. Volatility in energy prices could have a significant effect on a variety of items including, but not limited to: the economy; demand for transportation services; business related to the energy sector, including crude oil, natural gas, and coal; fuel prices; and fuel surcharges.
We face competition from other transportation providers.We are subject to competition from motor carriers, railroads and, to a lesser extent, ships, barges, and pipelines, on the basis of transit time, pricing, and quality and reliability of service. While we have used primarily internal resources to build or acquire and maintain our rail system, trucks and barges have been able to use public rights-of-way maintained by public entities. Any future improvements, expenditures, legislation, or regulation materially increasing the quality or reducing the cost of alternative modes of transportation in the regions in which we operate (such as granting materially greater latitude
for motor carriers with respect to size or weight limitations or adoption of autonomous commercial vehicles) could have a material adverse effect on our operations.ability to compete with other modes of transportation.
Capacity constraints could negatively impact our service and operating efficiency. We could experience capacity constraints on our rail network related to increased demand for rail services, locomotive or employee shortages, severe weather, congestion on other railroads, including passenger activities, or impacts from changes to our network structure or composition. Such constraints could result in operational inefficiencies or adversely affect our operations.
Significant increases in demand for rail services could result in the unavailability of qualified personnel and resources like locomotives. Changes in workforce demographics, training requirements, and availability of qualified personnel, particularly for engineers and conductors, could have a negative impact on our ability to meet short-term demand for rail service. Unpredicted increases in demand for rail services may exacerbate such risks and could negatively impact our operational efficiency.
The operations of carriers with which we interchange may adversely affect our operations.Our ability to provide rail service to customers in the U.S. and Canada depends in large part upon our ability to maintain collaborative relationships with connecting carriers (including shortlines and regional railroads) with respect to, among other matters, freight rates, revenue division, car supply and locomotive availability, data exchange and communications, reciprocal switching, interchange, and trackage rights. Deterioration in the operations of or service provided by connecting carriers, or in our relationship with those connecting carriers, could result in our inability to meet our customers’ demands or require us to use alternate train routes, which could result in significant additional costs and network inefficiencies. Additionally, any significant consolidations, mergers or operational changes among other railroads may significantly redefine our market access and reach.
We rely on technology and technology improvements in our business operations. If we experience significant disruption or failure of one or more of our information technology systems, including computer hardware, software, and communications equipment, we could experience a service interruption, a security breach, or other operational difficulties. We also face cybersecurity threats which may result in breaches of systems, or compromises of sensitive data, which may result in an inability to access or operate systems necessary for conducting operations and providing customer service, thereby impacting our efficiency and/or damaging our corporate reputation. Additionally, if we do not have sufficient capital to acquire new technology or we are unable to implement new technology, we may suffer a competitive disadvantage within the rail industry and with companies providing other modes of transportation service.
The vast majority of our employees belong to labor unions, and labor agreements, strikes, or work stoppages could adversely affect our operations.Approximately 80% of our railroad employees are covered by collectivebargaining agreements with various labor unions. If unionized workers were to engage in a strike, work stoppage,or other slowdown, we could experience a significant disruption of our operations. Additionally, future nationallabor agreements, or renegotiation of labor agreements or provisions of labor agreements, could significantlyincrease our costs for health care, wages, and other benefits.
We may be affected by terrorism or war. Any terrorist attack, or other similar event, any government response thereto, and war or risk of war could cause significant business interruption. Because we play a critical role in the nation’s transportation system, we could become the target of such an attack or have a significant role in the government’s preemptive approach or response to an attack or war.
Although we currently maintain insurance coverage for third-party liability arising out of war and acts of terrorism, we maintain only limited insurance coverage for first-party property damage and damage to property in our care, custody, or control caused by certain acts of terrorism. In addition, premiums for some or all of our current insurance programs covering these losses could increase dramatically, or insurance coverage for certain losses could be unavailable to us in the future.
We may be affected by supply constraints resulting from disruptions in the fuel markets or the nature of some of our supplier markets. We consumed approximately 368 million gallons of diesel fuel in 2020. Fuel availability could be affected by any limitation in the fuel supply or by any imposition of mandatory allocation or rationing regulations. A severe fuel supply shortage arising from production curtailments, increased demand in existing or emerging foreign markets, disruption of oil imports, disruption of domestic refinery production, damage to refinery or pipeline infrastructure, political unrest, war or other factors could impact us as well as our customers and other transportation companies.
Due to the capital intensive nature, as well as the industry-specific requirements of the rail industry, high barriers of entry exist for potential new suppliers of core railroad items, such as locomotives and rolling stock equipment. Additionally, we compete with other industries for available capacity and raw materials used in the production of locomotives and certain track and rolling stock materials. Changes in the competitive landscapes of these limited supplier markets could result in increased prices or significant shortages of materials.
LITIGATION RISKS
We may be subject to various claims and lawsuits that could result in significant expenditures.The nature of our business exposes us to the potential for various claims and litigation related to labor and employment, personal injury, commercial disputes, freight loss and other property damage, and other matters. Job-related personal injury and occupational claims are subject to the Federal Employer’s Liability Act (FELA), which is applicable only to railroads. FELA’s fault-based tort system produces results that are unpredictable and inconsistent as compared with a no-fault worker’s compensation system. The variability inherent in this system could result in actual costs being different from the liability recorded.
Any material changes to current litigation trends or aA catastrophic rail accident, whether on our lines or another carrier’s, involving any or all of release of hazardous materials, freight loss, property damage, personal injury, and environmental liability could compromise critical parts of our rail network. Losses associated with such an accident involving us could exceed our insurance coverage, resulting in a material adverse effect on our liquidity. Any material changes to current litigation trends could also have a material adverse effect on usour liquidity to the extent not covered by insurance.
We have obtained insurance for potential losses for third-party liability and first-party property damages;damages (see Note 17 to the Consolidated Financial Statements); however, insurance is available from a limited number of insurers and may not continue to be available or, if available, may not be obtainable on terms acceptable to us.
CLIMATE CHANGE RISKS
Severe weather could result in significant business interruptions and expenditures.Severe weather conditions and other natural phenomena, including hurricanes, floods, fires, and earthquakes, may cause significant business interruptions and result in increased costs, increased liabilities, and decreased revenues.
Concern over climate change has led to significant federal, state, and international legislative and regulatory efforts to limit greenhouse gas (GHG) emissions. Restrictions, caps, taxes, or other controls on GHG emissions, including diesel exhaust, could significantly increase our operating costs and decrease the amount of traffic we handle.
In addition, legislation and regulation related to GHGs could negatively affect the markets we serve and our customers. Even without legislation or regulation, government incentives and adverse publicity relating to GHGs could negatively affect the markets for certain of the commodities we carry and our customers that (1) use commodities we carry to produce energy, including coal, (2) use significant amounts of energy in producing or delivering the commodities we carry, or (3) manufacture or produce goods that consume significant amounts of energy.
GENERAL RISKS
We may be affected by terrorismgeneral economic conditions. Prolonged negative changes in domestic and global economic conditions, including reduced import and export volumes, could affect the producers and consumers of the commodities we carry. Economic conditions could also result in bankruptcies of one or war. Any terrorist attack, or other similar event, any government response thereto, and war or risk of war could cause significant business interruption. Because we play a critical role in the nation’s transportation system, we could become the target of such an attack or have a significant role in the government’s preemptive approach or response to an attack or war.more large customers.
Although we currently maintain insurance coverage for third-party liability arising out of war and acts of terrorism, we maintain only limited insurance coverage for first-party property damage and damage to property in our care, custody, or control caused by certain acts of terrorism. In addition, premiums for some or all of our current insurance programs covering these losses could increase dramatically, or insurance coverage for certain losses could be unavailable to us in the future.
We may be affected by supply constraints resulting from disruptionsenergy prices. Volatility in energy prices could have a significant effect on a variety of items including, but not limited to: the economy; demand for transportation services; business related to the energy sector, including crude oil, natural gas, and coal; fuel marketsprices; and, fuel surcharges.
We rely on technology and technology improvements in our business operations. If we experience significant disruption or the naturefailure of someone or more of our supplier markets. We consumed approximately 458 million gallons of diesel fuel in 2017. Fuelavailabilityinformation technology systems, including computer hardware, software, and communications equipment, we could be affected by any limitation in the fuel supply or by any imposition of mandatory allocation orrationing regulations. A severe fuel supply shortage arising from production curtailments, increased demand inexisting or emerging foreign markets, disruption of oil imports, disruption of domestic refinery production, damage
to refinery or pipeline infrastructure, political unrest, warexperience a service interruption, a security breach, or other factorsoperational difficulties. We also face cybersecurity threats which may result in breaches of systems, or compromises of sensitive data, which may also result in service interruptions, safety failures, or operational difficulties. Such a breach, or compromise, could decrease revenues, increase operating costs, including those to protect our infrastructure, impact us as well as our customers and other transportation companies.
Dueefficiency, or damage our corporate reputation. Additionally, if we do not have sufficient capital to the capital intensive nature, as well as the industry-specific requirements ofacquire new technology or we are unable to implement new technology, we may suffer a competitive disadvantage within the rail industry high barriersand with companies providing alternative modes of entry exist for potential new suppliers of core railroad items, such as locomotives and rolling stock equipment. Additionally, we compete with other industries for available capacity and raw materials used in the production of locomotives and certain track and rolling stock materials. Changes in the competitive landscapes of these limited supplier markets could result in increased prices or significant shortages of materials.transportation service.
The state of capital markets could adversely affect our liquidity.We rely on the capital markets to provide some of our capital requirements, including the issuance of debt instruments as well asand the sale of certain receivables. Significant instability or disruptions of the capital markets, including the credit markets, or deterioration of our financial conditionposition due to internal or external factors could restrict or eliminate our access to, and/or significantly increase the cost of, various financing sources, including bank credit facilities and issuance of corporate bonds. Instability or disruptions of the capital markets and deterioration of our financial condition,position, alone or in combination, could also result in a reduction inof our credit rating to below investment grade, which could prohibit or restrict us from accessing external sources of short- and long-term debt financing and/or significantly increase the associated costs.
Item 1B. Unresolved Staff Comments
None.
Item 3. Legal Proceedings
In 2007, various antitrust class actions filed against us and other Class I railroads in various Federal district courts regarding fuel surcharges were consolidated in the District of Columbia by the Judicial Panel on Multidistrict Litigation. In 2012, the court certified the case as a class action. The defendant railroads appealed this certification, and the Court of Appeals for the District of Columbia vacated the District Court’s decision and remanded the case for further consideration. On October 10, 2017, the District Court denied class certification;certification. The decision was upheld by the findings are subject to appeal.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.
Item 4. Mine Safety Disclosures
Not applicable.
Information About Our Executive Officers of the Registrant
Our executive officers generally are elected and designated annually by the Board of Directors (Board) at its first meeting held after the annual meeting of stockholders, and they hold office until their successors are elected. Executive officers also may be elected and designated throughout the year as the Board of Directors considers appropriate. There are no family relationships among our officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. The following table sets forth certain information, at February 1, 2018,2021, relating to our officers.
|
| | | | |
| Name, Age, Present Position | Business Experience During Past Five Years |
| |
James A. Squires, 56,59, Chairman, President and Chief Executive Officer | Present position since October 1, 2015. Served as CEO since June 1, 2015. Served as President since June 1, 2013. Served as
|
| |
Ann A. Adams, 50,
Executive Vice President – Administration from August 1, 2012 to June 1, 2013. Served as Executive Vice President – Finance and
Chief FinancialTransformation Officer from July 1, 2007 to August 1, 2012. |
| |
Cynthia C. Earhart, 56,
Executive Vice President –
Finance and Chief Financial Officer | Present position since August 15, 2017.
Served as Executive Vice President - Administration and Chief Information Officer from OctoberApril 1, 2015 to August 15, 2017. Served as Executive Vice President - Administration from June 1, 2013 to October 1, 2015. 2019. Served as Vice President Human Resources from MarchApril 1, 20072016 to JuneApril 1, 2013.2019. Served as Assistant Vice President Human Resources from July 1, 2012 to April 1, 2016. |
| |
William A. Galanko, 61,
Vanessa Allen Sutherland, 49, Executive Vice President –
Law and Administration Chief Legal Officer | Present position since OctoberApril 1, 2017.
2020. Served as Senior Vice President -Government Relations and Chief Legal Officer from August 16, 2019 to April 1, 2020. Served as Senior Vice President Law and Corporate CommunicationsChief Legal Officer from DecemberApril 1, 20162019 to October 1, 2017.August 16, 2019. Served as Vice President Law from June 25, 2018 to April 1, 20062019. Prior to December 1, 2016.joining Norfolk Southern, served as Chairman of the U.S. Chemical Safety and Hazard Investigation Board from August 2015 to June 2018. |
| |
Alan H. Shaw, 50,
Mark R. George, 53,
Executive Vice President Finance and
Chief MarketingFinancial Officer | Present position since May 16, 2015.
ServedNovember 1, 2019. Prior to joining Norfolk Southern, served as Vice President, Intermodal OperationsFinance and Chief Financial Officer at segments of United Technologies Corporation. The positions were Vice President Finance, Strategy, IT and Chief Financial Officer at Otis Elevator Company from
November 1, 2013 October 2015 to May 16, 2015. Served as Group2019, and Vice President Industrial ProductsFinance and Chief Financial Officer at Carrier Corporation from November 16, 2009 to November 1, 2013.June 2019 until joining Norfolk Southern. |
| |
Michael J. Wheeler, 55,Cynthia M. Sanborn, 56,
Executive Vice President and Chief Operating Officer | Present position since FebruarySeptember 1, 2016.2020. ServedPrior to joining Norfolk Southern, served as Senior Vice President Operations from October 1, 2015 to February 1, 2016. Servedserved as Vice President EngineeringNetwork Planning & Operations at Union Pacific from November 1, 2012May 2019 to October 1, 2015. ServedSeptember 2020 and as Regional Vice President Transportation– Western Region from February 1, 20092018 to May 2019. Previously served as Executive Vice President and Chief Operating Officer at CSX from September 2015 to November 1, 2012.2017.
|
| |
Thomas E. Hurlbut,Alan H. Shaw, 53,
Executive Vice President and Chief Marketing Officer | Present position since May 16, 2015.
|
| |
Clyde H. Allison, Jr., 57, Vice President and Controller | Present position since NovemberJune 1, 2013.2020. Served as Vice President Audit and ComplianceTreasurer from February 1, 20102017 to June 1, 2020. Served as Vice President Internal Audit from November 1, 2013. 2013 to February 1, 2017. |
PART II
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
STOCK PRICE AND DIVIDEND INFORMATION
Common Stock is owned by 25,73721,825 stockholders of record as of December 31, 2017,2020, and is traded on the New York Stock Exchange under the symbol “NSC.” The following table shows the high and low sales prices as reported by Bloomberg L.P. on its internet-based service and dividends per share, by quarter, for 2017 and 2016.
|
| | | | | | | | | | | | | | | |
| | Quarter |
| 2017 | 1st | | 2nd | | 3rd | | 4th |
| Market Price | | | | | | | |
| High | $ | 123.77 |
| | $ | 124.51 |
| | $ | 133.04 |
| | $ | 145.82 |
|
| Low | 107.39 |
| | 112.07 |
| | 112.28 |
| | 126.45 |
|
| Dividends per share | 0.61 |
| | 0.61 |
| | 0.61 |
| | 0.61 |
|
| | | | | | | | |
| 2016 | 1st | | 2nd | | 3rd | | 4th |
| Market Price | | | | | | | |
| High | $ | 85.37 |
| | $ | 93.15 |
| | $ | 96.83 |
| | $ | 110.52 |
|
| Low | 66.41 |
| | 78.93 |
| | 83.89 |
| | 90.77 |
|
| Dividends per share | 0.59 |
| | 0.59 |
| | 0.59 |
| | 0.59 |
|
ISSUER PURCHASES OF EQUITY SECURITIES
|
| | | | | | | | | | | | | |
| Period | | Total Number of Shares (or Units) Purchased(1) | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(2) | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be Purchased under the Plans or Programs(2) |
| | | | | | | | | |
| October 1-31, 2017 | | 776,328 |
| | $ | 131.53 |
| | 772,572 |
| | 57,935,286 |
|
| November 1-30, 2017 | | 786,387 |
| | 129.44 |
| | 785,106 |
| | 57,150,180 |
|
| December 1-31, 2017 | | 679,945 |
| | 142.33 |
| | 679,945 |
| | 56,470,235 |
|
| | | | | | | | | |
| Total | | 2,242,660 |
| | |
| | 2,237,623 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares (or Units) Purchased(1) | | Average
Price Paid
per Share
(or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(2) | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be Purchased under the Plans or Programs(2) |
| | | | | | | | |
| October 1-31, 2020 | | 327,383 | | | $ | 213.70 | | | 327,383 | | | 22,425,507 | |
| November 1-30, 2020 | | 793,494 | | | 235.37 | | | 793,022 | | | 21,632,485 | |
| December 1-31, 2020 | | 943,868 | | | 235.65 | | | 943,713 | | | 20,688,772 | |
| | | | | | | | |
| Total | | 2,064,745 | | | | | 2,064,118 | | | |
| |
(1)(1)Of this amount, 627 represents shares tendered by employees in connection with the exercise of stock options under the stockholder-approved Long-Term Incentive Plan (LTIP). (2)On September 26, 2017, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2022. As of December 31, 2020, 20.7 million shares remain authorized for repurchase.
| Of this amount, 5,037 represents shares tendered by employees in connection with the exercise of stock options under the stockholder-approved Long-Term Incentive Plan. |
| |
(2)
| On September 26, 2017, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2022. As of December 31, 2017, 56.5 million shares remain authorized for repurchase. |
Item 6. Selected Financial Data
FIVE-YEAR FINANCIAL REVIEW
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | ($ in millions, except per share amounts) |
| | | | | | | | | |
| RESULTS OF OPERATIONS | | | | | | | | | |
| Railway operating revenues | $ | 9,789 | | | $ | 11,296 | | | $ | 11,458 | | | $ | 10,551 | | | $ | 9,888 | |
| Railway operating expenses | 6,787 | | | 7,307 | | | 7,499 | | | 7,029 | | | 6,879 | |
| Income from railway operations | 3,002 | | | 3,989 | | | 3,959 | | | 3,522 | | | 3,009 | |
| | | | | | | | | |
| Other income – net | 153 | | | 106 | | | 67 | | | 156 | | | 136 | |
| Interest expense on debt | 625 | | | 604 | | | 557 | | | 550 | | | 563 | |
| Income before income taxes | 2,530 | | | 3,491 | | | 3,469 | | | 3,128 | | | 2,582 | |
| | | | | | | | | |
| Income taxes | 517 | | | 769 | | | 803 | | | (2,276) | | | 914 | |
| Net income | $ | 2,013 | | | $ | 2,722 | | | $ | 2,666 | | | $ | 5,404 | | | $ | 1,668 | |
| | | | | | | | | |
| PER SHARE DATA | | | | | | | | | |
| Basic earnings per share | $ | 7.88 | | | $ | 10.32 | | | $ | 9.58 | | | $ | 18.76 | | | $ | 5.66 | |
| Diluted earnings per share | 7.84 | | | 10.25 | | | 9.51 | | | 18.61 | | | 5.62 | |
| Dividends | 3.76 | | | 3.60 | | | 3.04 | | | 2.44 | | | 2.36 | |
| Stockholders’ equity at year-end | 58.67 | | | 58.87 | | | 57.30 | | | 57.57 | | | 42.73 | |
| | | | | | | | | |
| FINANCIAL POSITION | | | | | | | | | |
| Total assets | $ | 37,962 | | | $ | 37,923 | | | $ | 36,239 | | | $ | 35,711 | | | $ | 34,892 | |
| Total debt | 12,681 | | | 12,196 | | | 11,145 | | | 9,836 | | | 10,212 | |
| Stockholders’ equity | 14,791 | | | 15,184 | | | 15,362 | | | 16,359 | | | 12,409 | |
| | | | | | | | | |
| OTHER | | | | | | | | | |
| Property additions | $ | 1,494 | | | $ | 2,019 | | | $ | 1,951 | | | $ | 1,723 | | | $ | 1,887 | |
| | | | | | | | | |
| | | | | | | | | |
| Average number of shares outstanding (thousands) | 255,117 | | | 263,270 | | | 277,708 | | | 287,861 | | | 293,943 | |
| Number of stockholders at year-end | 21,825 | | | 23,273 | | | 24,475 | | | 25,737 | | | 27,288 | |
| Average number of employees: | | | | | | | | | |
| Rail | 20,029 | | | 24,442 | | | 26,512 | | | 26,955 | | | 27,856 | |
| Nonrail | 127 | | | 145 | | | 150 | | | 155 | | | 188 | |
| | | | | | | | | |
| Total | 20,156 | | | 24,587 | | | 26,662 | | | 27,110 | | | 28,044 | |
|
| | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | ($ in millions, except per share amounts) |
| | | | | | | | | | |
| RESULTS OF OPERATIONS | | | | | | | | | |
| Railway operating revenues | $ | 10,551 |
| | $ | 9,888 |
| | $ | 10,511 |
| | $ | 11,624 |
| | $ | 11,245 |
|
| Railway operating expenses | 6,965 |
| | 6,814 |
| | 7,627 |
| | 8,049 |
| | 7,988 |
|
| Income from railway operations | 3,586 |
| | 3,074 |
| | 2,884 |
| | 3,575 |
| | 3,257 |
|
| | | | | | | | | | |
| Other income – net | 92 |
| | 71 |
| | 103 |
| | 104 |
| | 233 |
|
| Interest expense on debt | 550 |
| | 563 |
| | 545 |
| | 545 |
| | 525 |
|
| Income before income taxes | 3,128 |
| | 2,582 |
| | 2,442 |
| | 3,134 |
| | 2,965 |
|
| | | | | | | | | | |
| Income taxes | (2,276 | ) | | 914 |
| | 886 |
| | 1,134 |
| | 1,055 |
|
| | | | | | | | | | |
| Net income | $ | 5,404 |
| | $ | 1,668 |
| | $ | 1,556 |
| | $ | 2,000 |
| | $ | 1,910 |
|
| | | | | | | | | | |
| PER SHARE DATA | |
| | |
| | |
| | |
| | |
|
| Net income – basic | $ | 18.76 |
| | $ | 5.66 |
| | $ | 5.13 |
| | $ | 6.44 |
| | $ | 6.10 |
|
| – diluted | 18.61 |
| | 5.62 |
| | 5.10 |
| | 6.39 |
| | 6.04 |
|
| Dividends | 2.44 |
| | 2.36 |
| | 2.36 |
| | 2.22 |
| | 2.04 |
|
| Stockholders’ equity at year end | 57.57 |
| | 42.73 |
| | 40.93 |
| | 40.26 |
| | 36.55 |
|
| | | | | | | | | | |
| FINANCIAL POSITION | |
| | |
| | |
| | |
| | |
|
| Total assets | $ | 35,711 |
| | $ | 34,892 |
| | $ | 34,139 |
| | $ | 33,033 |
| | $ | 32,259 |
|
| Total debt | 9,836 |
| | 10,212 |
| | 10,093 |
| | 8,985 |
| | 9,404 |
|
| Stockholders’ equity | 16,359 |
| | 12,409 |
| | 12,188 |
| | 12,408 |
| | 11,289 |
|
| | | | | | | | | | |
| OTHER | |
| | |
| | |
| | |
| | |
|
| Property additions | $ | 1,723 |
| | $ | 1,887 |
| | $ | 2,385 |
| | $ | 2,118 |
| | $ | 1,971 |
|
| | | | | | | | | | |
| | | | | | | | | | |
| Average number of shares outstanding (thousands) | 287,861 |
| | 293,943 |
| | 301,873 |
| | 309,367 |
| | 311,916 |
|
| Number of stockholders at year end | 25,737 |
| | 27,288 |
| | 28,443 |
| | 29,575 |
| | 30,990 |
|
| Average number of employees: | | | | | | | |
| | |
|
| Rail | 26,955 |
| | 27,856 |
| | 30,057 |
| | 29,063 |
| | 29,698 |
|
| Nonrail | 155 |
| | 188 |
| | 399 |
| | 419 |
| | 405 |
|
| Total | 27,110 |
| | 28,044 |
| | 30,456 |
| | 29,482 |
| | 30,103 |
|
Note: 1: In 2017, as a result of the enactment of tax reform, “Railway operating expenses” includesincluded a $151 million benefit and “Income taxes” includesincluded a $3,331 million benefit, which added $3,482 million to “Net income” and $12.00 to “Diluted earnings per share.”
Note 2: On January 1, 2019, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842),” which requires lessees to recognize right-of-use (ROU) assets and lease liabilities on the balance sheet for leases greater than twelve months. As a result of the adoption, the Consolidated Balance Sheets include the recognition of ROU assets of $433 million and $539 million at December 31, 2020 and 2019, respectively, and corresponding lease liabilities of $433 million and $538 million, respectively.
See accompanying consolidated financial statements and notes thereto.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Norfolk Southern Corporation and Subsidiaries
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes.
OVERVIEW
We are one of the nation’s premier transportation companies. Our Norfolk Southern Railway Company subsidiary operates approximately 19,50019,300 route miles of road in 22 states and the District of Columbia, serves every major container port in the eastern United States,U.S., and provides efficient connections to other rail carriers. We are a major transporter of industrial products, including agriculture, forest and consumer products, chemicals, and metals and construction materials. In addition, we operate the most extensive intermodal network in the East and are a major transporterprincipal carrier of coal, automobiles, and automotive and industrial products. parts.
Throughout 2017In 2020, we further pursuedcontinued the implementation of our strategic plan, focused on a balanced approach of growth, increasing efficiency, and delivering a strongincluding tactical changes to our operating plan, to generate operational efficiencies, improve customer service, product. We achievedand deliver strong financial results. The COVID-19 pandemic caused significant economic disruption and, along with softening energy markets, reduced the demand for our services. Nevertheless, we executed on operational initiatives to generate efficiencies and lower our cost structure. In the face of economic headwinds that resulted in a record-setting railway operating ratio foryear-over-year volume decline of 12%, we improved productivity by driving year-over-year average headcount down by 18%, and we increased asset utilization through rationalization of our locomotive fleet. These sustainable cost structure improvements will provide greater benefits as the year (a measureeconomy recovers. However, there is still substantial uncertainty as to the pace of economic recovery and the continued effects of the amountpandemic on our results of operating revenues consumed by operating expenses) and delivered approximately $150 million of productivity savings, the direct result of our commitment to achieving the targets set forth in our plan. Operational leverage allowed us to grow our business by providing a competitive service product to our customers while simultaneously driving productivity.
In 2018, we willoperations. We continue to implementmonitor the impact of the pandemic on our balanced, dynamic strategic plan. Weemployees’ availability and remain committed to consistentlyprotecting our employees and providing high levels of railexcellent transportation service and increasing the efficiency ofproducts for our resources, thereby generating higher returns on capital and increasing shareholder value.customers.
SUMMARIZED RESULTS OF OPERATIONS
| | | | | | | | | | 2017 | | 2016 | | | 2020 | | 2019 | |
| | 2017 | | 2016 | | 2015 | | vs. 2016 | | vs. 2015 | | | 2020 | | 2019 | | 2018 | | vs. 2019 | | vs. 2018 | |
| | $ in millions, except per share amounts | | % change | | | ($ in millions, except per share amounts) | | (% change) | |
| | | | | | | | | | | | |
| Income from railway operations | $ | 3,586 |
| | $ | 3,074 |
| | $ | 2,884 |
| | 17 | % | | 7 | % | | Income from railway operations | $ | 3,002 | | | $ | 3,989 | | | $ | 3,959 | | | (25 | %) | | 1 | % | |
| Net income | $ | 5,404 |
| | $ | 1,668 |
| | $ | 1,556 |
| | 224 | % | | 7 | % | | Net income | $ | 2,013 | | | $ | 2,722 | | | $ | 2,666 | | | (26 | %) | | 2 | % | |
| Diluted earnings per share | $ | 18.61 |
| | $ | 5.62 |
| | $ | 5.10 |
| | 231 | % | | 10 | % | | Diluted earnings per share | $ | 7.84 | | | $ | 10.25 | | | $ | 9.51 | | | (24 | %) | | 8 | % | |
| Railway operating ratio | 66.0 |
| | 68.9 |
| | 72.6 |
| | (4 | %) | | (5 | %) | | |
| Railway operating ratio (percent) | | Railway operating ratio (percent) | 69.3 | | | 64.7 | | | 65.4 | | | 7 | % | | (1 | %) | |
On December 22, 2017, the Tax CutsIncome from railway operations declined in 2020 compared to 2019 as railway operating revenues fell 13% which exceeded a 7% reduction in operating expenses. Railway operating revenues declined as lower customer demand resulted in volume reductions. Additionally, negative mix and Jobs Act (“tax reform”) was signed into law.lower fuel surcharge revenue, partially offset by increased pricing, led to lower revenue per unit. Railway operating expenses decreased due to declines in fuel price and consumption, reduced employment levels, lower volumes and operational efficiency improvements. Additionally, 2020 results were adversely impacted by a loss on asset disposal of $385 million related to locomotives sold, and by a $99 million impairment charge related to an equity method investment. For more information on the impact of tax reform,these charges, see Note 3. AsNotes 7 and 6, respectively.
Income from railway operations rose in 2019 compared to 2018 as a result3% reduction in railway operating expenses more than offset the impact of the enactment of this law, “Purchased servicesa 1% decline in railway operating revenues. In addition to higher income from railway operations, net income and rents” includes a $151 million benefit and “Income taxes” includes a $3,331 million benefit, which added $3,482 million to “Net income” and $12.00 to “Diluteddiluted earnings per share.” The operating ratio was favorably impacted by 1.4 percentage points.share growth in 2019 also benefited from a lower effective
tax rate. Our continuing share repurchase program contributed to diluted earnings per share growth that exceeded that of net income.
The following table adjuststables adjust our GAAP2020 U.S. Generally Accepted Accounting Principles (“GAAP”) financial results to exclude the effects of the aforementioned charges. The income tax reform (specifically,effects on the effects of remeasurement of net deferrednon-GAAP adjustments were calculated based on the applicable tax liabilities relatedrates to which the reduction of the federal tax rate from 35% to 21%).non-GAAP adjustments relate. We use these non-GAAP financial measures internally and believe this information provides useful supplemental information to investors to facilitate making period-to-period comparisons by excluding the effects of tax reform.2020 charges. While we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation from, or as a substitute for, the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similar measures presented by other companies.
| | | | | | | | | | | | | | | | | | | | | | | |
| Non-GAAP Reconciliation for 2020 |
| Reported 2020 (GAAP) | | Loss on Asset Disposal | | Investment Impairment | | Adjusted 2020
(non-GAAP) |
| ($ in millions, except per share amounts) |
| | | | | | | |
| Railway operating expenses | $ | 6,787 | | | $ | (385) | | | $ | (99) | | | $ | 6,303 | |
| Income from railway operations | $ | 3,002 | | | $ | 385 | | | $ | 99 | | | $ | 3,486 | |
| Income before income taxes | $ | 2,530 | | | $ | 385 | | | $ | 99 | | | $ | 3,014 | |
| Income taxes | $ | 517 | | | $ | 97 | | | $ | 25 | | | $ | 639 | |
| Net income | $ | 2,013 | | | $ | 288 | | | $ | 74 | | | $ | 2,375 | |
| Diluted earnings per share | $ | 7.84 | | | $ | 1.12 | | | $ | 0.29 | | | $ | 9.25 | |
| Railway operating ratio (percent) | 69.3 | | | (3.9) | | | (1.0) | | | 64.4 | |
| | | | | | | |
Reconciliation of Non-GAAP Financial Measures
|
| | | | | | | | | | | | |
| | Reported results (GAAP) | | Tax reform | | Adjusted results (non-GAAP) | |
| | $ in millions, except per share amounts | |
| | | | | | | |
| Income from railway operations | $ | 3,586 |
| | $ | (151 | ) | | $ | 3,435 |
| |
| Net income | $ | 5,404 |
| | $ | (3,482 | ) | | $ | 1,922 |
| |
| Diluted earnings per share | $ | 18.61 |
| | $ | (12.00 | ) | | $ | 6.61 |
| |
| Railway operating ratio | 66.0 |
| | 1.4 |
| | 67.4 |
| |
In the table below, and the paragraph following, references to 20172020 results and related comparisons use the adjusted, non-GAAP results from the reconciliation in the table above.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Adjusted | | |
| Adjusted | | | | | | 2020 | | |
| 2020 | | | | | | (non-GAAP) | | 2019 |
| (non-GAAP) | | 2019 | | 2018 | | vs. 2019 | | vs. 2018 |
| | ($ in millions, except per share amounts) | | (% change) |
| | | | | | | | | |
| Railway operating expenses | $ | 6,303 | | | $ | 7,307 | | | $ | 7,499 | | | (14 | %) | | (3 | %) |
| Income from railway operations | $ | 3,486 | | | $ | 3,989 | | | $ | 3,959 | | | (13 | %) | | 1 | % |
| Income before income taxes | $ | 3,014 | | | $ | 3,491 | | | $ | 3,469 | | | (14 | %) | | 1 | % |
| Income taxes | $ | 639 | | | $ | 769 | | | $ | 803 | | | (17 | %) | | (4 | %) |
| Net income | $ | 2,375 | | | $ | 2,722 | | | $ | 2,666 | | | (13 | %) | | 2 | % |
| Diluted earnings per share | $ | 9.25 | | | $ | 10.25 | | | $ | 9.51 | | | (10 | %) | | 8 | % |
| Railway operating ratio (percent) | 64.4 | | | 64.7 | | | 65.4 | | | — | % | | (1 | %) |
|
| | | | | | | | | | | | | | | | | | |
| | Adjusted | | | | | | Adjusted | | | |
| | 2017 | | | | | | 2017 vs. 2016 | | 2016 | |
| | (non-GAAP) | | 2016 | | 2015 | | (non-GAAP) | | vs. 2015 | |
| | $ in millions, except per share amounts | | % change | |
| | | | | | | | | | | |
| Income from railway operations | $ | 3,435 |
| | $ | 3,074 |
| | $ | 2,884 |
| | 12 | % | | 7 | % | |
| Net income | $ | 1,922 |
| | $ | 1,668 |
| | $ | 1,556 |
| | 15 | % | | 7 | % | |
| Diluted earnings per share | $ | 6.61 |
| | $ | 5.62 |
| | $ | 5.10 |
| | 18 | % | | 10 | % | |
| Railway operating ratio | 67.4 |
| | 68.9 |
| | 72.6 |
| | (2 | %) | | (5 | %) | |
The increases in net income for both comparisons resulted from higher income from railway operations. For 2017, a 7% increase in revenues was partially offset by a 4% rise in adjusted operating expenses. For 2016, an 11% decline in operating expenses more than offset a 6% decrease in revenues. The higher percentage increases in diluted earnings per share compared with the percentage increases in net income for both years was largely the result of our share repurchase program.
DETAILED RESULTS OF OPERATIONS
Railway Operating Revenues
The following tables present a three-year comparison of revenues, volumes (units), and average revenue per unit by marketmajor commodity group.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | 2020 | | 2019 | |
| 2020 | | 2019 | | 2018 | | vs. 2019 | | vs. 2018 | |
| ($ in millions) | | (% change) | |
| Merchandise: | | | | | | | | | | |
Agriculture, forest and consumer
products | $ | 2,116 | | | $ | 2,256 | | | $ | 2,188 | | | (6 | %) | | 3 | % | |
| Chemicals | 1,809 | | | 2,092 | | | 2,083 | | | (14 | %) | | — | % | |
| Metals and construction | 1,333 | | | 1,461 | | | 1,482 | | | (9 | %) | | (1 | %) | |
| Automotive | 830 | | | 994 | | | 991 | | | (16 | %) | | — | % | |
| Merchandise | 6,088 | | | 6,803 | | | 6,744 | | | (11 | %) | | 1 | % | |
| Intermodal | 2,654 | | | 2,824 | | | 2,893 | | | (6 | %) | | (2 | %) | |
| Coal | 1,047 | | | 1,669 | | | 1,821 | | | (37 | %) | | (8 | %) | |
| Total | $ | 9,789 | | | $ | 11,296 | | | $ | 11,458 | | | (13 | %) | | (1 | %) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Units | | 2020 | | 2019 | |
| 2020 | | 2019 | | 2018 | | vs. 2019 | | vs. 2018 | |
| (in thousands) | | (% change) | |
| Merchandise: | | | | | | | | | | |
Agriculture, forest and consumer
products | 704.4 | | | 763.7 | | | 790.7 | | | (8 | %) | | (3 | %) | |
| Chemicals | 482.0 | | | 588.9 | | | 604.7 | | | (18 | %) | | (3 | %) | |
| Metals and construction | 601.2 | | | 685.1 | | | 719.8 | | | (12 | %) | | (5 | %) | |
| Automotive | 329.7 | | | 394.7 | | | 403.9 | | | (16 | %) | | (2 | %) | |
| Merchandise | 2,117.3 | | | 2,432.4 | | | 2,519.1 | | | (13 | %) | | (3 | %) | |
| Intermodal | 3,992.1 | | | 4,207.2 | | | 4,375.7 | | | (5 | %) | | (4 | %) | |
| Coal | 574.1 | | | 914.0 | | | 1,033.5 | | | (37 | %) | | (12 | %) | |
| Total | 6,683.5 | | | 7,553.6 | | | 7,928.3 | | | (12 | %) | | (5 | %) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue per Unit | | 2020 | | 2019 | |
| 2020 | | 2019 | | 2018 | | vs. 2019 | | vs. 2018 | |
| ($ per unit) | | (% change) | |
| Merchandise: | | | | | | | | | | |
Agriculture, forest and consumer
products | $ | 3,004 | | | $ | 2,953 | | | $ | 2,767 | | | 2 | % | | 7 | % | |
| Chemicals | 3,753 | | | 3,553 | | | 3,444 | | | 6 | % | | 3 | % | |
| Metals and construction | 2,216 | | | 2,133 | | | 2,059 | | | 4 | % | | 4 | % | |
| Automotive | 2,518 | | | 2,517 | | | 2,453 | | | — | % | | 3 | % | |
| Merchandise | 2,875 | | | 2,797 | | | 2,677 | | | 3 | % | | 4 | % | |
| Intermodal | 665 | | | 671 | | | 661 | | | (1 | %) | | 2 | % | |
| Coal | 1,824 | | | 1,826 | | | 1,762 | | | — | % | | 4 | % | |
| Total | 1,465 | | | 1,495 | | | 1,445 | | | (2 | %) | | 3 | % | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Revenues | | 2017 | | 2016 | |
| | 2017 | | 2016 | | 2015 | | vs. 2016 | | vs. 2015 | |
| | $ in millions | | % change | |
| Merchandise: | | | | | | | | | | |
| Chemicals | $ | 1,668 |
| | $ | 1,648 |
| | $ | 1,760 |
| | 1 | % | | (6 | %) | |
| Agr./consumer/gov’t. | 1,547 |
| | 1,548 |
| | 1,516 |
| | — | | 2 | % | |
| Metals/construction | 1,426 |
| | 1,267 |
| | 1,263 |
| | 13 | % | | — | |
| Automotive | 955 |
| | 975 |
| | 969 |
| | (2 | %) | | 1 | % | |
| Paper/clay/forest | 761 |
| | 744 |
| | 771 |
| | 2 | % | | (4 | %) | |
| Merchandise | 6,357 |
| | 6,182 |
| | 6,279 |
| | 3 | % | | (2 | %) | |
| Intermodal | 2,452 |
| | 2,218 |
| | 2,409 |
| | 11 | % | | (8 | %) | |
| Coal | 1,742 |
| | 1,488 |
| | 1,823 |
| | 17 | % | | (18 | %) | |
| Total | $ | 10,551 |
| | $ | 9,888 |
| | $ | 10,511 |
| | 7 | % | | (6 | %) | |
|
| | | | | | | | | | | | | | | | | |
| | Units | | 2017 | | 2016 | |
| | 2017 | | 2016 | | 2015 | | vs. 2016 | | vs. 2015 | |
| | in thousands | | % change | |
| Merchandise: | | | | | | | | | | |
| Chemicals | 467.2 |
| | 475.7 |
| | 527.6 |
| | (2 | %) | | (10 | %) | |
| Agr./consumer/gov’t. | 589.0 |
| | 601.2 |
| | 609.0 |
| | (2 | %) | | (1 | %) | |
| Metals/construction | 727.5 |
| | 685.8 |
| | 672.4 |
| | 6 | % | | 2 | % | |
| Automotive | 423.1 |
| | 440.5 |
| | 429.3 |
| | (4 | %) | | 3 | % | |
| Paper/clay/forest | 284.6 |
| | 284.0 |
| | 299.9 |
| | — | | (5 | %) | |
| Merchandise | 2,491.4 |
| | 2,487.2 |
| | 2,538.2 |
| | — | | (2 | %) | |
| Intermodal | 4,074.1 |
| | 3,870.4 |
| | 3,861.0 |
| | 5 | % | | — | |
| Coal | 1,046.0 |
| | 902.1 |
| | 1,079.7 |
| | 16 | % | | (16 | %) | |
| Total | 7,611.5 |
| | 7,259.7 |
| | 7,478.9 |
| | 5 | % | | (3 | %) | |
|
| | | | | | | | | | | | | | | | | | | |
| | Revenue per Unit | | 2017 | | 2016 | |
| | 2017 | | 2016 | | 2015 | | vs. 2016 | | vs. 2015 | |
| | $ per unit | | % change | |
| Merchandise: | | | | | | | | | | |
| Chemicals | $ | 3,571 |
| | $ | 3,465 |
| | $ | 3,335 |
| | 3 | % | | 4 | % | |
| Agr./consumer/gov’t. | 2,627 |
| | 2,575 |
| | 2,489 |
| | 2 | % | | 3 | % | |
| Metals/construction | 1,960 |
| | 1,847 |
| | 1,879 |
| | 6 | % | | (2 | %) | |
| Automotive | 2,257 |
| | 2,213 |
| | 2,258 |
| | 2 | % | | (2 | %) | |
| Paper/clay/forest | 2,673 |
| | 2,620 |
| | 2,573 |
| | 2 | % | | 2 | % | |
| Merchandise | 2,552 |
| | 2,486 |
| | 2,474 |
| | 3 | % | | — | |
| Intermodal | 602 |
| | 573 |
| | 624 |
| | 5 | % | | (8 | %) | |
| Coal | 1,665 |
| | 1,650 |
| | 1,688 |
| | 1 | % | | (2 | %) | |
| Total | 1,386 |
| | 1,362 |
| | 1,405 |
| | 2 | % | | (3 | %) | |
Revenues increased $663decreased $1.5 billion in 2020 and $162 million in 2017, following a $623 million decline in 2016.2019 compared to the prior years. As reflected in the table below, the rise in 2017 was largelylower revenues for both years were the result of increased volume, particularly in our coaldecreased volumes and intermodal markets, coupled withlower fuel surcharge revenue, partially offset by pricing gains.
The decline in 2016 reflected lowertable below reflects the components of the revenue per unit, the effects of reduced fuel surcharges and changes in traffic mix, which more than offset price increases, as well as lower volume, primarily drivenchange by reductions in energy-related markets and the restructuring of our Triple Crown Services (TCS) subsidiary.major commodity group.
|
| | | | | | | |
| | Revenue Variance Analysis Increase (Decrease) |
| | 2017 vs. 2016 | | 2016 vs. 2015 |
| | $ in millions |
| | | | |
| Revenue per unit | $ | 184 |
| | $ | (315 | ) |
| Volume (units) | 479 |
| | (308 | ) |
| | | | |
| Total | $ | 663 |
| | $ | (623 | ) |
| | | | |
| Fuel surcharge revenues | $ | 123 |
| | $ | (241 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 vs. 2019 | | 2019 vs. 2018 |
| Increase (Decrease) | | Increase (Decrease) |
| ($ in millions) |
| Merchandise | | Intermodal | | Coal | | Merchandise | | Intermodal | | Coal |
| | | | | | | | | | | |
| Volume | $ | (881) | | | $ | (144) | | | $ | (621) | | | $ | (232) | | | $ | (111) | | | $ | (210) | |
| Fuel surcharge | | | | | | | | | | | |
| revenue | (92) | | | (124) | | | (13) | | | (14) | | | (30) | | | (35) | |
| Rate, mix and | | | | | | | | | | | |
| other | 258 | | | 98 | | | 12 | | | 305 | | | 72 | | | 93 | |
| | | | | | | | | | | |
| Total | $ | (715) | | | $ | (170) | | | $ | (622) | | | $ | 59 | | | $ | (69) | | | $ | (152) | |
Most of our contracts include negotiated fuel surcharges, typically tied to either West Texas Intermediate Crude Oil (WTI) or On-Highway Diesel (OHD). Approximately 90% of our revenue base is covered by thesecontracts that include negotiated fuel surcharges, with about two-thirds tied to OHD. For both 2017 and 2016, contracts tied to OHD accounted for about 90% of our fuel surcharge revenue, as oil price levels were below most of our surcharge trigger points in contracts tied to WTI. Revenues associated with fuel surchargessurcharges. These revenues totaled $359$349 million, $236$578 million, and $477$657 million in 2017, 2016,2020, 2019, and 2015,2018, respectively.
MERCHANDISE revenues decreased in 2020 but increased in 2017, but decreased in 2016,2019 compared with the years before.prior years. In 2017, the growth was a result of2020, revenues decreased due to volume declines in all commodity groups which were partially offset by higher average revenue per unit, driven by pricing gains. Volume was relatively flat comparedIn 2019, revenues grew due to the prior year, as gains in the metals and construction group were offset by declines in automotive, agriculture, and chemicals traffic. In 2016, the effects of lower volume were offset in part by a slight increase inhigher average revenue per unit. Price increasesunit, driven by pricing gains, which were temperedpartially offset by reduced fuel surcharge revenues and unfavorable changesvolume declines in traffic mix.all commodity groups.
For 2018,2021, merchandise revenues are expected to increase, primarily the result of higher volume as the market continues to recover from the impact of the COVID-19 pandemic and increased revenue per unit driven by pricing gains.
Agriculture, forest and consumer products revenues decreased in 2020 but increased in 2019 compared with the prior years. In 2020, the decline was the result of reduced volume partially offset by higher average revenue per unit, driven by pricing gains and higherpartially offset by lower fuel surcharge revenues.
Chemicals revenues were modestly higherrevenue. Volume declined due to the impact of COVID-19 on the demand for ethanol, corn, food service products, and building, industrial and commercial products. Revenue growth in 2017, following a decline in 2016. The increase in 20172019 was due to higher average revenue per unit, a result of favorable mix and price improvements,pricing gains, which outweighed declines in volume. Both periods reflected fewermore than offset volume declines. Volume was down due to decreased shipments of crude oil from the Bakken oil fields,ethanol, pulpboard, lumber, soybeans, pulp, woodchips, canned goods, and 2017 reflected lower shipments of coal ash; in both periods, these reductions werefertilizer, partially offset by more shipmentsincreased corn shipments.
In 2021, agriculture, forest and consumer products revenues are expected to rise, a result of plastics. The 2016increased volume decline also reflected lower chlor-alkalias the economic recovery continues, and rock salt traffic,revenue per unit increases resulting from pricing gains. We expect volumes to increase in most markets led by ethanol, corn, pulpboard, and food services.
Chemicals revenues fell in 2020 but rose slightly in 2019 compared with the prior years. In 2020, the decrease was the result of market consolidations and softened demand. The 2016 volume decrease wasdeclines partially offset in part by higher average revenue per unit, due to favorable mixpricing gains. Volume declined due to the impact from COVID-19 and ongoing disruptions in the energy market. The pandemic created an overabundance of products in the market as increased volumescompanies reduced stockpiles before requiring more products. Oil and petroleum shipments were negatively impacted due to reductions in gasoline/jet fuel demand and travel. In
2019, the rise was the result of higher-ratedhigher average revenue per unit, due to pricing gains, which were partially offset by volume declines. Volume declines in natural gas, sand, petroleum products, organic and inorganic chemicals, and plastics more thanwere partially offset reduced fuel surcharge revenues.by gains in crude oil and municipal waste.
For 2018,2021, chemicals revenues are anticipated to increase, as average revenue per unit is expected to be higher, the effecta result of favorable mix influenced by increased volumes of higher-rated plasticsvolume and organic chemicals, as well as, overall pricing gains. We expect carload declines of liquefied petroleum gas to be offset by gains in plastics, industrial chemicals, and crude oil.
One of our chemical customers, Sunbelt Chlor Alkali Partnerships (Sunbelt), filed in 2011 a rate reasonableness complaint before the STB alleging that our tariff rates for transportation of regulated movements are unreasonable. Since April 1, 2011, we have been billing and collecting amounts based on the challenged tariff rates. In 2014, the
STB resolved this rate reasonableness complaint in our favor and in June 2016, the STB resolved petitions for reconsideration. The matter remains decided in our favor; however, the findings are still subject to appeal. We believe the estimate of any reasonably possible loss will not have a material effect on our financial position, results of operations, or liquidity.
Agriculture, consumer products, and government revenues were flat in 2017 after rising in 2016. In 2017, lower traffic volume was offset by higher revenue per unit driven by pricing gains. VolumeWe expect carloads to increase due to growth in plastics, organic chemicals, petroleum products, and solid waste which is projected to be partially offset by reduced volumes of sand, crude oil and natural gas liquids.
Metals and construction revenues declined in both periods. In 2020, volume declines in ethanol and soybeans, reflecting reduced market demand, more thanwere partially offset increases in fertilizer. The improvement in 2016 was driven by higher average revenue per unit, primarily the result of pricing gains,gains. Volume declines were largely the result of weakened demand due to reductions in metal and domestic vehicle production. The pandemic caused industries to suspend production which heavily impacted customers’ needs for materials and shipping of finished and semi-finished goods. These declines were partially offset in part by lower fuel surcharge revenues. Volumes decreased in 2016, driven by weakerincreased demand for feed shipments and the effects of customer sourcing changes on corn volumes,cement. In 2019, volume declines were largely offset in part by an increase in soybean export shipments and higher food oil volumes driven by service improvements.
For 2018, agriculture, consumer products, and government revenues are expected to increase, driven by more shipments of ethanol, corn and feed products, and by increased average revenue per unit, primarily athe result of pricing gains.
Metals and construction revenues rose Volume declines in both periods, reflecting higher traffic volume and, for 2017, higher average revenue per unit. In 2017, volume growth was a result of more frac sand shipments for use in natural gas drilling in the Marcellus and Utica regions and more iron and steel, shipments driven by continued improvement in construction activity. These increasescoil, scrap metal, and kaolin were partially offset by a declineincreases in coil steel trafficaggregates shipments due to customer sourcing changes. Revenue per unit growth in 2017 was driven by favorable changes in traffic mix. The volume increase in 2016 was driven by higher demand for aggregatesimproved service and iron and steel shipments, and more coil steel traffic due to customer sourcing changes. These increases were offset in part by lower demand for materials used in natural gas and oil drilling as a result of depressed commodity prices. Average revenue per unit declined in 2016, driven by lower fuel surcharge revenues and changes in traffic mix.market strength.
For 2018,2021, metals and construction revenues are expected to rise, primarily driven bya result of increased volume and revenue per unit adriven by pricing gains. As the economic recovery continues, volume growth is expected in almost all markets led by scrap metal, coil, iron and steel, and construction.
Automotive revenues declined in 2020 but were flat in 2019 compared with the prior years. In 2020, revenue declines were driven by lower volume and fuel surcharge revenue, partially offset by pricing gains. The volume decline was mostly the result of pricing gains and positive mix. Trafficunplanned automotive plant shutdowns in the first half of the year, primarily due to the COVID-19 pandemic, which was partially offset by increased demand in the second half of the year. In 2019, higher average revenue per unit, driven by price increases, offset volume growth shoulddeclines that were primarily the result from the continued rise in frac sand shipments in addition to more shipments of steel related products.
Automotive revenues fell in 2017, but rose in 2016. The decline in 2017 was driven mainly by decreases in U.S. light vehicle production as well as temporary shutdowns for retooling of several NS-served facilities. Average revenue per unit increased forand the year, driven by pricing gains and higher fuel surcharge revenue. In 2016, volumes increased as a result of higher automotive parts shipments and growthUnited Automobile Workers strike in the production of U.S. light vehicles. Lower fuel surcharge revenues offset in part by pricing gains drove the decrease in average revenue per unit in 2016.fourth quarter.
For 2018,In 2021, automotive revenues are expected to increase as a result of higher revenue per unitvolume as inventories continue to rebuild.
INTERMODAL revenues decreased in both periods. The decline in 2020 was driven by price increaseslower volume and higher fuel surcharge revenue, which were partially offset by volume declines due to reduced customer demand.
Paper, claypricing gains and forest products revenues rose in 2017 following afavorable mix. The decline in 2016. The increase in 20172019 was due todriven by lower volume, which was partially offset by higher average revenue per unit, a result of pricing gains and changes ingains.
For 2021, we expect intermodal revenues to rise, the traffic mix. Traffic was flat for the year as increases in waste and pulp shipments were offset by continued losses in woodchip volume due to customer sourcing changes. The decline in 2016 reflected volume decreases in our pulpboard and woodchip markets due to customer sourcing changes, in addition to lower paper shipments as a result of decreasedincreased demand, expected highway conversions, and further contraction of the paper market. Average revenue per unit increased in 2016 driven by pricing gains, offset in part by lower fuel surcharge revenues.
For 2018, paper, clay, and forest products revenues are anticipated to increase, reflecting pricing gains and increased volume, driven by growth in pulpboard as a result of tightening truck capacity, lumber due to more construction activity, and our miscellaneous waste markets. These increases may be partially offset by weaker export demand for kaolin shipments, and further contraction of the paper market.
INTERMODAL revenues increased in 2017, but declined in 2016, compared to the prior years. The 2017 increase resulted from higher traffic volume and higher average revenue per unit, driven by fuel surcharge revenue and pricing gains. The decline in 2016 was due to lower average revenue per unit that more than offset a small volume increase. Reduced fuel surcharge revenues and the effects of the TCS subsidiary restructuring (which together lowered average revenue per unit $57) offset the effects of price increases.
For 2018, we expect higher intermodal revenues due to increased average revenue per unit, driven by higher fuel surcharge revenues and rate increases, as well as, higher volumes.revenue.
Intermodal units by market were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2020 | | 2019 | |
| 2020 | | 2019 | | 2018 | | vs. 2019 | | vs. 2018 | |
| | (units in thousands) | | (% change) | |
| | | | | | | | | | |
| Domestic | 2,568.7 | | | 2,593.5 | | | 2,801.1 | | | (1 | %) | | (7 | %) | |
| International | 1,423.4 | | | 1,613.7 | | | 1,574.6 | | | (12 | %) | | 2 | % | |
| | | | | | | | | | |
| Total | 3,992.1 | | | 4,207.2 | | | 4,375.7 | | | (5 | %) | | (4 | %) | |
Domestic volume fell in both periods. While volume rebounded in the second half of 2020 due to inventory replenishment and a strong peak season, volume for the year was challenged by supply chain disruptions related to
|
| | | | | | | | | | | | | | | | |
| | | | | | | | 2017 | | 2016 | |
| | 2017 | | 2016 | | 2015 | | vs. 2016 | | vs. 2015 | |
| | units in thousands | | % change | |
| | | | | | | | | | | |
| Domestic | 2,585.0 |
| | 2,416.2 |
| | 2,500.4 |
| | 7 | % | | (3 | %) | |
| International | 1,489.1 |
| | 1,454.2 |
| | 1,360.6 |
| | 2 | % | | 7 | % | |
| | | | | | | | | | | |
| Total | 4,074.1 |
| | 3,870.4 |
| | 3,861.0 |
| | 5 | % | | — | |
Total domestic volume increasedCOVID-19 and strong over-the-road competition in 2017, but decreased 2016, a resultthe first half of the restructuring of our TCS subsidiary which decreased overallyear. Volume was challenged in 2019 by stronger over-the-road competition.
For 2021, we expect higher domestic volume. Domestic volumes in both years benefitted from continued highway conversions andvolume driven by growth from new and existing accounts.
For 2018, we expect higher domestic volumes driven by strong demand due to favorable economic conditions combined withcustomers and continued highway conversions.
International volume increasedfell in both years reflecting2020, but rose in 2019. The decline in 2020 resulted from supply chain disruptions due to COVID-19. The rise in 2019 was due to increased demand from existing customers and market share gains.
For 2018, we expect continued growth in our international volume largely driven by more traffic from both new and existing customers.customers partially offset by lower shipments due to tariff concerns.
For 2021, we expect international volume growth as demand and trade continue to recover.
COAL revenues increased in 2017, but decreased in 2016, compared with the prior years.both periods. The increasedecrease in 20172020 was a result of significant volume declines. The decrease in 2019 was a result of lower volume, which was partially offset by higher volume, primarily in the export market, and higheraverage revenue per unit, driven by fuel surcharge revenue and pricing gains. The 2016 decline was a result of lower carload volumes across all markets and decreased average revenue per unit, primarily due to reduced fuel surcharge revenues that lowered average revenue per unit by $34 in 2016.
For 2018,2021, we expect coal revenues to decline. We anticipate overall coal volume to be down as continued declines in utility are expectedprojected to decline, driven by lowermore than offset domestic metallurgical and export and utility volumes, in addition to decreased revenue per unit, primarily the result of lower pricing in our export market.gains.
As shown in the following table, total tonnage increased in 2017, but decreased in 2016.both periods.
| | | | | | | | | | 2017 | | 2016 | | | | 2020 | | 2019 | |
| | 2017 | | 2016 | | 2015 | | vs. 2016 | | vs. 2015 | | | 2020 | | 2019 | | 2018 | | vs. 2019 | | vs. 2018 | |
| | tons in thousands | | % change | | | (tons in thousands) | | (% change) | |
| | | | | | | | | | | | |
| Utility | 67,899 |
| | 65,033 |
| | 81,137 |
| | 4 | % | | (20 | %) | | Utility | 32,479 | | | 60,278 | | | 65,688 | | | (46 | %) | | (8 | %) | |
| Export | 26,460 |
| | 14,608 |
| | 16,193 |
| | 81 | % | | (10 | %) | | Export | 18,900 | | | 23,324 | | | 28,046 | | | (19 | %) | | (17 | %) | |
| Domestic metallurgical | 15,675 |
| | 13,884 |
| | 14,450 |
| | 13 | % | | (4 | %) | | Domestic metallurgical | 9,441 | | | 13,562 | | | 15,500 | | | (30 | %) | | (13 | %) | |
| Industrial | 5,545 |
| | 6,152 |
| | 8,201 |
| | (10 | %) | | (25 | %) | | Industrial | 3,566 | | | 4,655 | | | 5,410 | | | (23 | %) | | (14 | %) | |
| | | | | | | | | | | | | | | | | | |
| Total | 115,579 |
| | 99,677 |
| | 119,981 |
| | 16 | % | | (17 | %) | | Total | 64,386 | | | 101,819 | | | 114,644 | | | (37 | %) | | (11 | %) | |
Utility coal tonnage increaseddecreased in 2017, driven by market share gains. Both years were affected by limited coal burn due to milder weather and sustained lower natural gas prices.both periods. The decline in 20162020 was additionally impacteddue to low natural gas prices, diminished industrial and commercial electricity demand, and high stockpiles. The decline in 2019 was due to continued headwinds from low natural gas prices and additional natural gas and renewable energy generating capacity, which were slightly offset by residual customer stockpile overhang.inventory rebuilding.
For 2018, we expect2021, utility coal tonnage is expected to decrease theas a result of high stockpiles and continued pressure from natural gas prices and new renewable and natural gas capacity.energy.
Export coal tonnage grew significantlydecreased in 2017 as continued tightening of international coal supply drove incremental production increases and higher demand for U.S. coal. In 2016, the decreaseboth periods. The decline in 2020 was a result of strong competition faced by U.S. coal suppliers as excess coal supply, weak seaborne coal prices,pricing, COVID-19-related global disruptions, and a strong U.S. dollar reduced demand. Volume through Norfolk was up 5.5 million tons, or 57%,import restrictions. The decline in 2017, following a drop of 1.7 million tons, or 15%, in 2016. Volume through Baltimore was up 6.4 million tons, or 129%, in 2017 and was up slightly in 2016.
For 2018, we expect export coal tonnage to decrease due to expected contraction of the elevated 2017 market.
Domestic metallurgical coal tonnage was up in 2017, but down in 2016. In 2017, the increase2019 was a result of market share gains while the 2016 decline was largely driven by softness in the metallurgical market.weak thermal seaborne pricing and coal supply disruptions at certain mines.
For 2018,2021, export coal tonnage is expected to increase due to the global recovery from COVID-19.
Domestic metallurgical coal tonnage was down in both years. The decline in 2020 was a reflection of continued reduced domestic steel demand which led to idled customer facilities and lower production. The decline in 2019 was a reflection of challenging overall market conditions including softening domestic steel demand, customer sourcing changes, and plant outages.
For 2021, domestic metallurgical coal tonnage is expected to remain relatively flat year-over-year.increase due to the recovery from COVID-19.
Industrial coal tonnage decreased in both years a result of plant outages,driven by pressure from natural gas conversions and decreased coal burn.customer sourcing changes.
For 2018,2021, industrial coal tonnage is expected to increase driven by increased customer demand, but will continue to facedecrease as a result of continued pressure due tofrom natural gas conversions and customer sourcing changes.
Railway Operating Expenses
Railway operating expenses summarized by major classifications were as follows:
| | | | | | | | | | 2017 | | 2016 | | | 2020 | | 2019 | |
| | 2017 | | 2016 | | 2015 | | vs. 2016 | | vs. 2015 | | | 2020 | | 2019 | | 2018 | | vs. 2019 | | vs. 2018 | |
| | $ in millions | | % change | | | ($ in millions) | | (% change) | |
| | | | | | | | | | | | |
| Compensation and benefits | $ | 2,915 |
| | $ | 2,743 |
| | $ | 2,911 |
| | 6 | % | | (6 | %) | | Compensation and benefits | $ | 2,373 | | | $ | 2,751 | | | $ | 2,925 | | | (14 | %) | | (6 | %) | |
| Purchased services and rents | 1,414 |
| | 1,548 |
| | 1,752 |
| | (9 | %) | | (12 | %) | | Purchased services and rents | 1,687 | | | 1,725 | | | 1,730 | | | (2 | %) | | — | % | |
| Fuel | 840 |
| | 698 |
| | 934 |
| | 20 | % | | (25 | %) | | Fuel | 535 | | | 953 | | | 1,087 | | | (44 | %) | | (12 | %) | |
| Depreciation | 1,055 |
| | 1,026 |
| | 1,054 |
| | 3 | % | | (3 | %) | | Depreciation | 1,154 | | | 1,138 | | | 1,102 | | | 1 | % | | 3 | % | |
| Materials and other | 741 |
| | 799 |
| | 976 |
| | (7 | %) | | (18 | %) | | Materials and other | 653 | | | 740 | | | 655 | | | (12 | %) | | 13 | % | |
| Loss on asset disposal | | Loss on asset disposal | 385 | | | — | | | — | | |
| | | | | | | | | | | | | | | | | | |
| Total | $ | 6,965 |
| | $ | 6,814 |
| | $ | 7,627 |
| | 2 | % | | (11 | %) | | Total | $ | 6,787 | | | $ | 7,307 | | | $ | 7,499 | | | (7 | %) | | (3 | %) | |
In 2017, we experienced an overall increase2020, expenses fell as our strategic initiatives to improve productivity and asset utilization resulted in lower compensation and benefits expense, compareddeclines in fuel consumption, reduced purchased services, and lower materials expense. Fuel expense also declined due to the prior year, reflecting higher fuellower prices. These expense incentive compensation, inflationary increases, and volume-related costs,reductions were partially offset by improveda loss on asset disposal of $385 million related to locomotives sold, and a $99 million impairment charge included in purchased services and rents related to an equity method investment. In 2019, expenses fell as our strategic initiatives to improve productivity resulted in lower compensation, equipment rents, and materials expense. These decreases along with lower fuel prices and consumption were partially offset by lower gains on operating property sales, increased equity in earningsdepreciation, and a write-off of certain investeesa $32 million receivable as a result of the enactment of tax reform. In 2016, expenses were lower across all categories driven largely from cost-control initiatives, lower fuel expense, the absence of restructuring costs incurred in 2015, and service improvements.a legal dispute.
Compensation and benefits increaseddecreased in 2017,2020, reflecting changes in:
•employment levels (down $309 million),
•health and welfare benefits for craft employees (down $77 million),
•overtime and recrews (down $54 million),
•incentive and stock-based compensation (up $125(down $38 million),
higher health and welfare benefit rates for agreement employees (up $62 million),
•increased pay rates (up $43$50 million),
increased overtime (up $24•lower capitalized labor (additional expense of $51 million), and
employment levels•other (down $81$1 million).
In 2016,2019, compensation and benefits decreased, a result of changes in:
•employment levels including (down $117 million),
•incentive and stock-based compensation (down $83 million),
•overtime and traineesrecrews (down $184$45 million),
pension costs (down $38•higher capitalized labor (reduced expense of $9 million),
payroll taxes•2018 employment tax refund ($31 million unfavorable in 2019),
•pay rates (up $76 million), and
•other (down $27 million),.
labor agreement payments in 2015 ($24 million),
pay rates (up $34 million),
health and welfare benefit costs for agreement employees (up $35 million), which reflected higher rates, offset in part by favorability from reduced headcount, and
bonus accruals (up $59 million).
Our employment averaged 27,11020,200 in 2017,2020, compared with 28,04424,600 in 2016,2019, and 30,45626,700 in 2015.2018.
Purchased services and rents includes the costs of services purchased from outsideexternal vendors and contractors, including the net costs of operating joint (or leased) facilities with other railroads and the net cost of equipment rentals. As previously discussed, this line item includes a $151 million benefit from the enactment of tax reform ($36 million
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2020 | | 2019 | |
| | 2020 | | 2019 | | 2018 | | vs. 2019 | | vs. 2018 | |
| | ($ in millions) | | (% change) | |
| | | | | | | | | | |
| Purchased services | $ | 1,387 | | | $ | 1,434 | | | $ | 1,367 | | | (3 | %) | | 5 | % | |
| Equipment rents | 300 | | | 291 | | | 363 | | | 3 | % | | (20 | %) | |
| | | | | | | | | | |
| Total | $ | 1,687 | | | $ | 1,725 | | | $ | 1,730 | | | (2 | %) | | — | % | |
The decrease in purchased services in 2020 resulted from volume-related declines and $115strategic initiatives to improve productivity and asset utilization, partially offset by the $99 million in equipment rents) in the form of higher income of certainimpairment related to an equity investees.
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | 2017 | | 2016 | |
| | 2017 | | 2016 | | 2015 | | vs. 2016 | | vs. 2015 | |
| | $ in millions | | % change | |
| | | | | | | | | | | |
| Purchased services | $ | 1,233 |
| | $ | 1,242 |
| | $ | 1,433 |
| | (1 | %) | | (13 | %) | |
| Equipment rents | 181 |
| | 306 |
| | 319 |
| | (41 | %) | | (4 | %) | |
| | | | | | | | | | | |
| Total | $ | 1,414 |
| | $ | 1,548 |
| | $ | 1,752 |
| | (9 | %) | | (12 | %) | |
method investment. The remaining increase in purchased services expensein 2019 was athe result of higher intermodal volume-related costs. The 2016 decrease reflected lower TCS operationalincreased technology-related costs, reduced repairexpenses associated with our headquarters relocation, and maintenance expenses, andincreased intermodal-related costs partially offset by decreased transportation activity costs, offset in part by higher intermodal volume-related costs.activities.
Equipment rents, which includes our cost of using equipment (mostly freight cars) owned by other railroads or private owners less the rent paid to us for the use of our equipment, increased in 2020, but decreased in both 2017 and 2016.2019. In 2017, in addition to2020, the effects of tax reform,increase was primarily the decline was a result of lower equity in TTX earnings and increased automotive volume.equipment expenses partially offset by decreased intermodal equipment expenses. In 2016,2019, the decrease was largely fromdue to improved network velocity partly offset by higher rates and conventional intermodal volumes.the absence of short-term locomotive resource costs incurred in the prior year.
Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increased in 2017, but decreased in 2016.both periods. The change in both years was principally due to lower locomotive fuel prices (up 22%(down 32% in 20172020 and down 18%8% in 2016). Locomotive2019) which decreased expenses by $235 million in 2020 and $82 million in 2019. Additionally, locomotive fuel consumption decreased 1%18% in 2017 despite an increase2020 and 4% in volume of 5% and declined 5% in 2016 with a volume decrease of 3%, both the direct result of our strategic initiative to increase fuel efficiency.2019. We consumed approximately 458368 million gallons of diesel fuel in 2017,2020, compared with 462451 million gallons in 20162019 and 487472 million gallons in 2015.2018.
Depreciation expense increased in 2017, but decreased in 2016. Bothboth periods, reflect growth in our roadway and equipment capital base as we continue to investa reflection of reinvestment in our infrastructure, rolling stock, and rolling stock. In 2016, the decrease was a result of the effects of $63 million in accelerated depreciation related to the TCS restructuring in 2015.technology.
Materials and other expenses decreased in both periods2020 but increased in 2019 as shown in the following table.
| | | | | | | | | | 2017 | | 2016 | | | 2020 | | 2019 | |
| | 2017 | | 2016 | | 2015 | | vs. 2016 | | vs. 2015 | | | 2020 | | 2019 | | 2018 | | vs. 2019 | | vs. 2018 | |
| | $ in millions | | % change | | | ($ in millions) | | (% change) | |
| | | | | | | | | | | | |
| Materials | $ | 348 |
| | $ | 364 |
| | $ | 469 |
| | (4 | %) | | (22 | %) | | Materials | $ | 274 | | | $ | 327 | | | $ | 362 | | | (16 | %) | | (10 | %) | |
| Casualties and other claims | 145 |
| | 150 |
| | 137 |
| | (3 | %) | | 9 | % | | |
| Claims | | Claims | 179 | | | 193 | | | 176 | | | (7 | %) | | 10 | % | |
| Other | 248 |
| | 285 |
| | 370 |
| | (13 | %) | | (23 | %) | | Other | 200 | | | 220 | | | 117 | | | (9 | %) | | 88 | % | |
| | | | | | | | | | | | | | | | | | |
| Total | $ | 741 |
| | $ | 799 |
| | $ | 976 |
| | (7 | %) | | (18 | %) | | Total | $ | 653 | | | $ | 740 | | | $ | 655 | | | (12 | %) | | 13 | % | |
Material usage declinedMaterials expense decreased in both periods,2020 and 2019 due primarily to lower maintenance requirements as a result of lowerfewer locomotives and freight car repairs associated with cost-control initiatives and improved asset utilization.cars in service.
Casualties and other claims expenses include the estimates ofClaims expense includes costs related to personal injury, property damage, and environmental matters. The decrease in 2017 was2020 expense declined, primarily the result of lower losscosts related to environmental remediation matters partially offset by increased derailment costs. The 2019 expense increased, primarily due to higher costs related to environmental remediation matters and damage, offset in part by unfavorable developments in personal injury cases.claims.
Other expense decreased in 2020, largely due to the absence of the 2019 write-off of a $32 million receivable as a result of a legal dispute. Additionally, 2020 benefited from reduced travel expenses resulting from the COVID-19 pandemic. These reductions were partially offset by lower gains from sales of operating property. Other expense increased in 2019, primarily due to lower gains from sales of operating property and the $32 million write-off. Gains from operating property sales amounted to $26 million, $64 million, and $158 million in 2020, 2019, and 2018, respectively.
Loss on asset disposal
During 2020, we recorded a $385 million charge related to the disposal of 703 locomotives, the sales of which were completed during the fourth quarter. For more information on the impact of the charge, see Note 7.
Other income – net
Other income – net increased in 2020 and 2019. The increase in 20162020 was primarily driven by higher derailment expenses.
Both declines in other expenses reflected more gains from the sale of operating properties (up $42 million in 2017 and $37 million in 2016). The 2016 decline was also driven by the absence of the prior year $49 million impairment loss related to natural resource assets that were sold in 2020, lower pension and postretirement benefit expenses, that occurredand higher returns on corporate-owned life insurance (“COLI”) investments, which more than offset the absence of coal royalties and lower gains on sales of non-operating property. The increase in 2015 for relocating employees2019 was driven by higher COLI returns and increased gains on sales of non-operating property, which more than offset the aforementioned $49 million impairment loss.
Income taxes
The effective income tax rate was 20.4% in connection2020, compared with 22.0% in 2019 and 23.1% in 2018. The current year benefited from a reduction of taxes upon the closureresolution of our Roanoke, Virginia office.
Income Taxes
Income taxes in 2017 includes a benefit of $3,331 million related to the effects of the enactment of tax reform from the reduction in our net deferred tax liabilities driven by the change in the federal rate. Our tax benefit on 2017 income resulted in an effective rate of negative 72.8%, which includes negative 106.5% related to tax reform, compared with 35.4% in 2016 and 36.3% in 2015. Both 2017 and 20162012 amended return (see Note 4). All three years benefited from favorable tax benefits associated with stock-based compensation and higher returns from corporate-owned life insurance. The 2016 and 2015 years also benefited from favorable reductions in deferred taxes for state tax law changes and certain business tax credits.COLI returns.
WeFor 2021, we expect ouran effective income tax rate to approximatebetween 23% and 24% on a go-forward basis. In addition, we expect cash paid for income taxes to be approximately 25% lower than 2017 levels, which is less than the percentage decline in the effective rate, as 2017 benefited from accelerated tax deductions related to our two debt exchanges (see Note 8).
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Cash provided by operating activities, our principal source of liquidity, was $3.3$3.6 billion in 2017, $3.02020, $3.9 billion in 2016,2019, and $2.9$3.7 billion in2015. 2018. The increasesdecline in both 2017 and 2016 were2020 reflects a decrease in income from railway operations offset in part by lower income tax payments. The increase in 2019 was primarily the result of improved operating results. We had working capital deficits of $396$158 million and $48negative working capital of $219 million at December 31, 20172020, and 2016,2019, respectively. Cash and cash equivalents totaled $690 million$1.1 billion and $956$580 million at December 31, 20172020, and 2016,2019, respectively. We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations. In addition, we believe our currently-available borrowing capacity, access to additional financing, and ability to reduce property additions and shareholder distributions, including share repurchases, provide additional flexibility to meet our ongoing obligations. Nonetheless, we continue to monitor the ongoing impacts of the COVID-19 pandemic, which could lead to a reduction in cash flows from operations.
Contractual obligations at December 31, 2017, were comprised of2020, include long-term debt (Note 9), interest on fixed-rate long-term debt, (Note 8), unconditional purchase obligations (Note 16)17), long-term advances from Conrail (Note 6), operating leases (Note 9)10), agreements with Consolidated Rail Corporation (CRC) and long-term advances from Conrail (Note 5)6), and unrecognized tax benefits (Note 3):4).
| | | | Total | | 2018 | | 2019 - 2020 | | 2021 - 2022 | | 2023 and Subsequent | | Other | | Total | | 2021 | | 2022 -
2023 | | 2024 -
2025 | | 2026 and
Subsequent | | Other |
| | $ in millions | | ($ in millions) |
| | | | | | | | | | | | | |
| Long-term debt principal | $ | 10,584 |
| | $ | 600 |
| | $ | 899 |
| | $ | 1,184 |
| | $ | 7,901 |
| | $ | — |
| Long-term debt principal | $ | 13,693 | | | $ | 579 | | | $ | 1,156 | | | $ | 958 | | | $ | 11,000 | | | — | |
| Interest on fixed-rate long-term debt | 10,105 |
| | 493 |
| | 884 |
| | 782 |
| | 7,946 |
| | — |
| Interest on fixed-rate long-term debt | 13,515 | | | 568 | | | 1,062 | | | 997 | | | 10,888 | | | — | |
| Unconditional purchase obligations | 1,050 |
| | 438 |
| | 315 |
| | 297 |
| | — |
| | — |
| Unconditional purchase obligations | 1,120 | | | 600 | | | 329 | | | 76 | | | 115 | | | — | |
| Long-term advances from Conrail | | Long-term advances from Conrail | 534 | | | — | | | — | | | — | | | 534 | | | — | |
| Operating leases | 660 |
| | 69 |
| | 126 |
| | 106 |
| | 359 |
| | — |
| Operating leases | 504 | | | 101 | | | 143 | | | 115 | | | 145 | | | — | |
| Agreements with CRC | 281 |
| | 38 |
| | 76 |
| | 76 |
| | 91 |
| | — |
| Agreements with CRC | 140 | | | 41 | | | 82 | | | 17 | | | — | | | — | |
| Long-term advances from Conrail | 280 |
| | — |
| | — |
| | — |
| | 280 |
| | — |
| |
| Unrecognized tax benefits* | 17 |
| | — |
| | — |
| | — |
| | — |
| | 17 |
| Unrecognized tax benefits* | 22 | | | — | | | — | | | — | | | — | | | 22 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total | $ | 22,977 |
| | $ | 1,638 |
| | $ | 2,300 |
| | $ | 2,445 |
| | $ | 16,577 |
| | $ | 17 |
| Total | $ | 29,528 | | | $ | 1,889 | | | $ | 2,772 | | | $ | 2,163 | | | $ | 22,682 | | | $ | 22 | |
* This amount is shown in the Other column because the year of settlement cannot be reasonably estimated.
Off balance sheet arrangements consist primarily of unrecognized obligations, related to operating leases,including unconditional purchase obligations and future interest payments on fixed-rate long-term debt, which are included in the table of contractual obligations above and disclosedabove. In addition, we entered into a synthetic lease during 2019 which is discussed further in Note 9.10.
Cash used in investing activities was $1.5$1.2 billion in 2017,2020, compared with $1.8 billion in 2016,2019, and $2.1$1.7 billion in 2015. Both year-over-year comparisons reflected lower cash outflows for property additions. A decline in corporate-owned life insurance investments additionally impacted 2017.2018. The decrease in 2016 is also a reflection of2020 was primarily driven by lower property additions. In 2019, increased COLI activity and higher property additions were partially offset by increased proceeds from corporate-owned life insurance investments.property sales. We had the ability to borrow up to $750 million against our COLI policies at December 31, 2020.
Capital spending and track and equipment statistics can be found within the “Railway Property” section of Part I of this report on Form 10-K. For 2018,2021, we expect capital spending to total $1.8will approximate $1.6 billion.
Cash used in financing activities was $1.9 billion in 2020, compared with $2.0 billion in 2017, compared with $1.32019, and $2.3 billion in 2016, and $693 million2018. The change in 2015. Both year-over-year comparisons reflected2020 reflects lower debt proceeds. In 2017, the rise was further affected by increased repurchases of common stock. Contributing to the increase in 2016 were higherCommon Stock and debt repayments, partially offset by lower
reduced proceeds from borrowings. In 2019, the decrease was impacted by fewer repurchases of common stock. Common Stock, higher debt repayments, and increased dividends.
Share repurchases totaled $1.0of $1.4 billion in 2017, $803 million in 2016, and $1.12020, $2.1 billion in 2015 for2019, and $2.8 billion in 2018 resulted in the purchase and retirement of 8.27.4 million, 9.211.3 million, and 11.317.1 million shares, respectively. On September 26, 2017,As of December 31, 2020, 20.7 million shares
remain authorized by our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2022. As of December 31, 2017, 56.5 million shares remain authorized for repurchase. The timing and volume of future share repurchases will be guided by our assessment of market conditions and other pertinent factors. Any near-term purchases under the program are expected to be made with internally generated cash, cash on hand, or proceeds from borrowings.
In May of 2017,2020, we issued $300$800 million of 3.15%3.05% senior notes due 2027. 2050, resulting in $790 million in net proceeds.
In August of 2017,May 2020, we also issued $750$800 million of 4.05%3.155% senior notes due 2052 as part of a debt exchange for $551 million of previously issued notes. In November of 2017, we issued $750 million of senior notes at 3.94% due 2047 and paid $52 million of premium2055 in exchange for $613$554 million of previously issued notes (see Note 8)($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 also renewed and amended our accounts receivable securitization program, reducing our maximum borrowing capacity from $450 million to $400 million. The term expires in May 2021. We had no amounts outstanding at December 31, 2020 or 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 capacity from $750 million to $800 million. The amended agreement expires in 2025 and provides for borrowings at prevailing rates and includes covenants. We had no amounts outstanding under this facility at December 31, 2020 or December 31, 2019.
We discuss our credit agreement and our accounts receivable securitization program in Note 8,9, and we have authority from our Board of Directors to issue an additional $1.2$1.6 billion of debt or equity securities through public or private sale, all of which provide for access to additional liquidity should the need arise. Our debt-to-total capitalization ratio was 37.5%46.2% at December 31, 2017,2020, compared with 45.1%44.5% at December 31, 2016.2019.
Upcoming annual debt maturities are disclosed in Note 8.9. Overall, our goal is to maintain a capital structure with appropriate leverage to support our business strategy and provide flexibility through business cycles.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenuerevenues and expenses during the reporting period. These estimates and assumptions may require significant judgment about matters that are inherently uncertain, and future events are likely to occur that may require us to make changes to these estimates and assumptions. Accordingly, we regularly review these estimates and assumptions based on historical experience, changes in the business environment, and other factors we believe to be reasonable under the circumstances. The following critical accounting policies are a subset of our significant accounting policies described in Note 1.
Pensions and Other Postretirement Benefits
Accounting for pensions and other postretirement benefit plans requires us to make several estimates and assumptions (Note 11)12). These include the expected rate of return from investment of the plans’ assets and the expected retirement age of employees as well as their projected earnings and mortality. In addition, the amounts recorded are affected by changes in the interest rate environment because the associated liabilities are discounted to their present value. We make these estimates based on our historical experience and other information that we deem pertinent under the circumstances (for example, expectations of future stock market performance). We utilize an independent actuarial consulting firm’s studies to assist us in selecting appropriate actuarial assumptions and valuing related liabilities.
In recording our net pension benefit,For 2020, we assumed a long-term investment rate of return of 8.25%, which was supported by theour long-term total rate of return on plan assets since inception, as well as our expectation of future returns. A one-percentage point change to this rate of return assumption would result in a $22$24 million change in annual pension expense. We review
assumptions related to our defined benefit plans annually, and while changes are likely to occur in assumptions concerning retirement age, projected earnings, and mortality, they are not expected to have a material effect on our net pension expense or net pension liability in the future. The net pension liability is recorded at net present value using discount rates that are based on the current interest rate environment in light of the timing of expected benefit payments. We utilize analyses in which the projected annual cash flows from the pension and postretirement benefit plans are matched with yield curves based on an appropriate universe of high-quality corporate bonds. We use the results of the yield curve analyses to select the discount rates that match the payment streams of the benefits in these plans. A one-percentage point change to this discount rate assumption would result in a $17 million change in annual pension expense.
Properties and Depreciation
Most of our assets are long-lived railway properties (Note 6)7). As disclosed“Properties” are stated principally at cost and are depreciated using the group method whereby assets with similar characteristics, use, and expected lives are grouped together in Note 1, the primaryasset classes and depreciated using a composite depreciation method for our asset base is group life.rate. See Note 1 for a more detailed discussion of the assumptions and estimatesestimates.
Expenditures, including those on leased assets, that extend an asset’s useful life or increase its utility are capitalized. Expenditures capitalized include those that are directly related to a capital project and may include materials, labor, and other direct costs, in this area.addition to an allocable portion of indirect costs that relate to a capital project. A significant portion of our annual capital spending relates to self-constructed assets. Costs related to repairs and maintenance activities that, in our judgment, do not extend an asset’s useful life or increase its utility are expensed when such repairs are performed.
Depreciation expense for 20172020 totaled $1.1$1.2 billion. Our composite depreciation rates for 20172020 are disclosed in
Note 6;7; a one-tenth percentage pointone-year increase (or decrease) in these ratesthe estimated average useful lives of depreciable assets would have resulted in aan approximate $40 million increasedecrease (or decrease)increase) to annual depreciation expense. For 2017, roadway depreciation rates ranged from 0.83% to 29.12% and equipment depreciation rates ranged from 1.38% to 33%.
Personal Injury
Casualties and other claimsClaims expense, included in “Materials and other” in the Consolidated Statements of Income, includes our accrualestimate of costs for personal injury liabilities.injuries.
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. The actuarial firm studies our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences. We adjust the liability quarterly based upon our assessment and the results of the study. OurThe accuracy of our estimate of the liability is subject to inherent limitation given the difficulty of predicting future events and, as such, the ultimate loss sustained may vary from the estimated liability recorded.
ForSee Note 17 for a more detailed discussion of the assumptions and estimates in accountingwe use for personal injury see Note 16.injury.
Income Taxes
Our net deferred tax liability totaled $6.3$6.9 billion at December 31, 20172020 (Note 3)4). This liability is estimated based on the expected future tax consequences of items recognized in the financial statements. After application of the
federal statutory tax rate to book income, judgment is required with respect to the timing and deductibility of expenses in our income tax returns. For state income and other taxes, judgment is also required with respect to the apportionment among the various jurisdictions. A valuation allowance is recorded if we expect that it is more likely than not that deferred tax assets will not be realized. We have a $44$57 million valuation allowance on $366$509 million of deferred tax assets as of December 31, 2017,2020, reflecting the expectation that almost all of these assets will be realized. See discussion of tax reform in Note 3.
OTHER MATTERS
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. We largely bargain nationally in concert with other major railroads, represented by the National Carriers Conference Committee (NCCC).Committee. Moratorium provisions in the labor agreements govern when the railroads and unions may propose changes to the agreements.
Beginning in late 2014, the NCCC and the various unions exchanged new proposals to begin the The current round of national negotiations. The unions formed three separate bargaining coalitionscommenced on November 1, 2019 with both management and the NCCC has reachedunions serving their formal proposals for changes to the collective bargaining agreements with 2 of these coalitions representing 10 separate unions and approximately 80% of the unionized workforce. Some of these agreements (applicable to approximately 10% of the unionized workforce)direct negotiations are still pending ratification by the union membership while the rest have already been ratified and are now final. Negotiations with the other coalition is ongoing with the assistance of mediators from the National Mediation Board. In accordance with the Railway Labor Act, current agreements will remain in effect during the statutory bargaining process. Separately, NS has reached agreement covering wages and work rules through 2019 with the Brotherhood of Locomotive Engineers and Trainmen (BLET), which represents approximately 4,600 NS engineers.ongoing.
Market Risks
We manage overall exposure to fluctuations in interest rates by issuing both fixed- and floating-rate debt instruments. At December 31, 2017,2020, we had no outstanding debt subject to interest rate fluctuations totaled $100 million. Afluctuations. Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a one-percentage point increasedecrease in interest rates wouldas of December 31, 2020 and amounts to an increase total annual interest expense relatedof approximately $2.0 billion to all variablethe fair value of our debt by approximately $1 million.at December 31, 2020. We consider it unlikely that interest rate fluctuations applicable to these instruments will result in a material adverse effect on our financial position, results of operations, or liquidity.
New Accounting Pronouncements
For a detailed discussion of new accounting pronouncements, see Note 1.
Inflation
In preparing financial statements, GAAP requires the use of historical cost that disregards the effects of inflation on the replacement cost of property. As a capital-intensive company, we have most of our capital invested in long-lived assets. The replacement cost of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical cost.
FORWARD-LOOKING STATEMENTS
Certain statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or our achievements or those of our industry to be materially different from those expressed or implied by any forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “project,” “consider,” “predict,” “potential,” “feel,” or other comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates, beliefs, and projections. While we believe these expectations, assumptions, estimates, beliefs, and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which involve factors or circumstances that are beyond our control. These and other important factors, including those discussed in Part I, Item 1A.1A “Risk Factors,” may cause actual results, performance, or achievements to differ materially from those expressed or implied by these forward-looking statements. The forward-looking statements herein are made only as of the date they were first issued, and unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Copies of our press releases and additional information about us is available at www.norfolksouthern.com, or you can contact Norfolk Southern Corporation Investor Relations Department by calling 757-629-2861.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Market Risks.”
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Report of Management
February 5, 20184, 2021
To the Stockholders
Norfolk Southern CorporationCorporation:
Management is responsible for establishing and maintaining adequate internal control over financial reporting. In order to ensure that Norfolk Southern Corporation’sSouthern’s internal control over financial reporting is effective, management regularly assesses such controls and did so most recently as of December 31, 2017.2020. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control -– Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that the Corporationwe maintained effective internal control over financial reporting as of December 31, 2017.2020.
KPMG LLP, independent registered public accounting firm, has audited the Corporation’sour financial statements and issued an attestation report on the Corporation’sour internal control over financial reporting as of December 31, 2017.2020.
|
| | | | | | | | | | | | | |
| /s/ James A. Squires | | /s/ Cynthia C. EarhartMark R. George | | /s/ Thomas E. HurlbutClyde H. Allison, Jr. |
| James A. Squires | | Cynthia C. EarhartMark R. George | | Thomas E. HurlbutClyde H. Allison, Jr. |
| Chairman, President and | | Executive Vice President Finance | | Vice President and |
| Chief Executive Officer | | and Chief Financial Officer | | Controller |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors and Stockholders
Norfolk Southern Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Norfolk Southern Corporation and subsidiaries’ (the “Company”)Company) internal control over financial reporting as of December 31, 2017,2020, based on criteria established inInternal Control -– Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the consolidated balance sheets of the Company as of December 31, 20172020 and 2016,2019, the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders’ equity for each of the years in the three-year period ended December 31, 2017,2020, and the related notes and financial statement schedule of valuation and qualifying accounts as listed in Item 15(A)2 (collectively, the “consolidatedconsolidated financial statements”)statements), and our report dated February 5, 20184, 2021, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
KPMG LLP
Norfolk, VirginiaAtlanta, Georgia
February 5, 20184, 2021
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors and Stockholders
Norfolk Southern Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Norfolk Southern Corporation and subsidiaries (the “Company”)Company) as of December 31, 20172020 and 2016,2019, the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders’ equity for each of the years in the three-yearthree‑year period ended December 31, 2017,2020, and the related notes and financial statement schedule of valuation and qualifying accounts as listed in Item 15(A)2 (collectively, the “consolidatedconsolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the years in the three-yearthree‑year period ended December 31, 2017,2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 5, 20184, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019, due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842) and related amendments.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Sufficiency of audit evidence related to the capitalization of property expenditures
As discussed in Note 1 to the consolidated financial statements, expenditures that extend an asset’s useful life or increase its utility are capitalized. The Company has recorded $31,345 million in net book value of properties at December 31, 2020 and has recorded $1,494 million in property additions for the year ended December 31, 2020. Expenditures capitalized include those that are directly related to a capital project and may include materials, labor and other direct costs, in addition to an allocable portion of indirect costs that relate to a capital project. A significant portion of the Company’s annual capital spending relates to self-constructed assets. Costs related to repair and maintenance activities, that in the Company’s judgment, do not extend an asset’s useful life or increase its utility are expensed when such repairs are performed.
We identified the evaluation of the sufficiency of audit evidence related to capitalization of property expenditures as a critical audit matter. Subjective auditor judgment was required in determining procedures and evaluating audit results related to the capitalization of purchased services and compensation due to their usage for both self-constructed assets and repairs and maintenance.
The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over capitalized property expenditures. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to capitalize property expenditures, including controls over the determination of whether purchased services and compensation expenditures extend an asset’s useful life or increase its utility. For a sample of property addition expenditures, we inquired and inspected support to evaluate that the expenditure extended an asset’s useful life or increased its utility. We evaluated the sufficiency of audit evidence obtained by assessing the results of the procedures performed, including the appropriateness of the nature of such evidence.
/s/ KPMG LLP
KPMG LLP
We have served as the Company’s auditor since 1982.
Norfolk, VirginiaAtlanta, Georgia
February 5, 20184, 2021
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | ($ in millions, except per share amounts) |
| | | | | |
| Railway operating revenues | $ | 9,789 | | | $ | 11,296 | | | $ | 11,458 | |
| | | | | |
| Railway operating expenses: | | | | | |
| Compensation and benefits | 2,373 | | | 2,751 | | | 2,925 | |
| Purchased services and rents | 1,687 | | | 1,725 | | | 1,730 | |
| Fuel | 535 | | | 953 | | | 1,087 | |
| Depreciation | 1,154 | | | 1,138 | | | 1,102 | |
| Materials and other | 653 | | | 740 | | | 655 | |
| Loss on asset disposal | 385 | | | 0 | | | 0 | |
| | | | | |
| Total railway operating expenses | 6,787 | | | 7,307 | | | 7,499 | |
| | | | | |
| Income from railway operations | 3,002 | | | 3,989 | | | 3,959 | |
| | | | | |
| Other income – net | 153 | | | 106 | | | 67 | |
| Interest expense on debt | 625 | | | 604 | | | 557 | |
| | | | | |
| Income before income taxes | 2,530 | | | 3,491 | | | 3,469 | |
| | | | | |
| Income taxes | 517 | | | 769 | | | 803 | |
| | | | | |
| Net income | $ | 2,013 | | | $ | 2,722 | | | $ | 2,666 | |
| | | | | |
| Earnings per share: | | | | | |
| Basic | $ | 7.88 | | | $ | 10.32 | | | $ | 9.58 | |
| Diluted | 7.84 | | | 10.25 | | | 9.51 | |
See accompanying notes to consolidated financial statements.
K39
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | ($ in millions, except per share amounts) |
| | | | | | |
| Railway operating revenues | $ | 10,551 |
| | $ | 9,888 |
| | $ | 10,511 |
|
| | | | | | |
| Railway operating expenses: | |
| | |
| | |
|
| Compensation and benefits | 2,915 |
| | 2,743 |
| | 2,911 |
|
| Purchased services and rents | 1,414 |
| | 1,548 |
| | 1,752 |
|
| Fuel | 840 |
| | 698 |
| | 934 |
|
| Depreciation | 1,055 |
| | 1,026 |
| | 1,054 |
|
| Materials and other | 741 |
| | 799 |
| | 976 |
|
| | | | | | |
| Total railway operating expenses | 6,965 |
| | 6,814 |
| | 7,627 |
|
| | | | | | |
| Income from railway operations | 3,586 |
| | 3,074 |
| | 2,884 |
|
| | | | | | |
| Other income – net | 92 |
| | 71 |
| | 103 |
|
| Interest expense on debt | 550 |
| | 563 |
| | 545 |
|
| | | | | | |
| Income before income taxes | 3,128 |
| | 2,582 |
| | 2,442 |
|
| | | | | | |
| Income taxes | (2,276 | ) | | 914 |
| | 886 |
|
| | | | | | |
| Net income | $ | 5,404 |
| | $ | 1,668 |
| | $ | 1,556 |
|
| | | | | | |
| Per share amounts: | | | | | |
| Net income | | | | | |
| Basic | $ | 18.76 |
| | $ | 5.66 |
| | $ | 5.13 |
|
| Diluted | 18.61 |
| | 5.62 |
| | 5.10 |
|
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | ($ in millions) |
| | | | | |
| Net income | $ | 2,013 | | | $ | 2,722 | | | $ | 2,666 | |
| Other comprehensive income (loss), before tax: | | | | | |
| Pension and other postretirement benefits | (140) | | | 101 | | | (148) | |
| Other comprehensive income (loss) of equity investees | 2 | | | (4) | | | (9) | |
| | | | | |
| Other comprehensive income (loss), before tax | (138) | | | 97 | | | (157) | |
| Income tax benefit (expense) related to items of | | | | | |
| other comprehensive income (loss) | 35 | | | (25) | | | 38 | |
| | | | | |
| Other comprehensive income (loss), net of tax | (103) | | | 72 | | | (119) | |
| | | | | |
| Total comprehensive income | $ | 1,910 | | | $ | 2,794 | | | $ | 2,547 | |
See accompanying notes to consolidated financial statements.
K40
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | ($ in millions) |
| | | | | | |
| Net income | $ | 5,404 |
| | $ | 1,668 |
| | $ | 1,556 |
|
| Other comprehensive income (loss), before tax: | |
| | |
| | |
|
| Pension and other postretirement benefits | 155 |
| | (74 | ) | | (76 | ) |
| Other comprehensive income of equity investees | 19 |
| | 5 |
| | — |
|
| | | | | | |
| Other comprehensive income (loss), before tax | 174 |
| | (69 | ) | | (76 | ) |
| Income tax benefit (expense) related to items of | |
| | |
| | |
|
| other comprehensive income (loss) | (43 | ) | | 27 |
| | 29 |
|
| | | | | | |
| Other comprehensive income (loss), net of tax | 131 |
| | (42 | ) | | (47 | ) |
| | | | | | |
| Total comprehensive income | $ | 5,535 |
| | $ | 1,626 |
| | $ | 1,509 |
|
Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | | | | |
| | At December 31, |
| | 2020 | | 2019 |
| | ($ in millions) |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 1,115 | | | $ | 580 | |
| | | |
| Accounts receivable – net | 848 | | | 920 | |
| Materials and supplies | 221 | | | 244 | |
| Other current assets | 134 | | | 337 | |
| Total current assets | 2,318 | | | 2,081 | |
| | | |
| Investments | 3,590 | | | 3,428 | |
| Properties less accumulated depreciation of $11,985 and | | | |
| $11,982, respectively | 31,345 | | | 31,614 | |
| Other assets | 709 | | | 800 | |
| | | |
| Total assets | $ | 37,962 | | | $ | 37,923 | |
| | | |
| Liabilities and stockholders’ equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 1,016 | | | $ | 1,428 | |
| | | |
| Income and other taxes | 263 | | | 229 | |
| Other current liabilities | 302 | | | 327 | |
| Current maturities of long-term debt | 579 | | | 316 | |
| Total current liabilities | 2,160 | | | 2,300 | |
| | | |
| Long-term debt | 12,102 | | | 11,880 | |
| Other liabilities | 1,987 | | | 1,744 | |
| Deferred income taxes | 6,922 | | | 6,815 | |
| | | |
| Total liabilities | 23,171 | | | 22,739 | |
| | | |
| Stockholders’ equity: | | | |
| Common Stock $1.00 per share par value, 1,350,000,000 shares | | | |
| authorized; outstanding 252,095,082 and 257,904,956 shares, | | | |
| respectively, net of treasury shares | 254 | | | 259 | |
| Additional paid-in capital | 2,248 | | | 2,209 | |
| Accumulated other comprehensive loss | (594) | | | (491) | |
| Retained income | 12,883 | | | 13,207 | |
| | | |
| Total stockholders’ equity | 14,791 | | | 15,184 | |
| | | |
| Total liabilities and stockholders’ equity | $ | 37,962 | | | $ | 37,923 | |
See accompanying notes to consolidated financial statements.
K41
|
| | | | | | | |
| | At December 31, |
| | 2017 | | 2016 |
| | ($ in millions) |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 690 |
| | $ | 956 |
|
| Accounts receivable – net | 955 |
| | 945 |
|
| Materials and supplies | 222 |
| | 257 |
|
| Other current assets | 282 |
| | 133 |
|
| Total current assets | 2,149 |
| | 2,291 |
|
| | | | |
| Investments | 2,981 |
| | 2,777 |
|
| Properties less accumulated depreciation of $11,909 and | |
| | |
|
| $11,737, respectively | 30,330 |
| | 29,751 |
|
| Other assets | 251 |
| | 73 |
|
| | | | |
| Total assets | $ | 35,711 |
| | $ | 34,892 |
|
| | | | |
| Liabilities and stockholders’ equity | |
| | |
|
| Current liabilities: | |
| | |
|
| Accounts payable | $ | 1,401 |
| | $ | 1,215 |
|
| Short-term debt | 100 |
| | 100 |
|
| Income and other taxes | 211 |
| | 245 |
|
| Other current liabilities | 233 |
| | 229 |
|
| Current maturities of long-term debt | 600 |
| | 550 |
|
| Total current liabilities | 2,545 |
| | 2,339 |
|
| | | | |
| Long-term debt | 9,136 |
| | 9,562 |
|
| Other liabilities | 1,347 |
| | 1,442 |
|
| Deferred income taxes | 6,324 |
| | 9,140 |
|
| Total liabilities | 19,352 |
| | 22,483 |
|
| | | | |
| Stockholders’ equity: | |
| | |
|
| Common Stock $1.00 per share par value, 1,350,000,000 shares | |
| | |
|
| authorized; outstanding 284,157,187 and 290,417,610 shares, | |
| | |
|
| respectively, net of treasury shares | 285 |
| | 292 |
|
| Additional paid-in capital | 2,254 |
| | 2,179 |
|
| Accumulated other comprehensive loss | (356 | ) | | (487 | ) |
| Retained income | 14,176 |
| | 10,425 |
|
| | | | |
| Total stockholders’ equity | 16,359 |
| | 12,409 |
|
| | | | |
| Total liabilities and stockholders’ equity | $ | 35,711 |
| | $ | 34,892 |
|
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| | 2020 | | 2019 | | 2018 |
| | ($ in millions) |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 2,013 | | | $ | 2,722 | | | $ | 2,666 | |
| Reconciliation of net income to net cash provided by operating activities: | | | | | |
| Depreciation | 1,154 | | | 1,139 | | | 1,104 | |
| Deferred income taxes | 142 | | | 330 | | | 173 | |
| Gains and losses on properties | (39) | | | (42) | | | (171) | |
| Loss on asset disposal | 385 | | | 0 | | | 0 | |
| Impairment of investment | 99 | | | 0 | | | 0 | |
| Changes in assets and liabilities affecting operations: | | | | | |
| Accounts receivable | 71 | | | 87 | | | (70) | |
| Materials and supplies | 23 | | | (37) | | | 15 | |
| Other current assets | 3 | | | (4) | | | (46) | |
| Current liabilities other than debt | 34 | | | (185) | | | 223 | |
| Other – net | (248) | | | (118) | | | (168) | |
| | | | | |
| Net cash provided by operating activities | 3,637 | | | 3,892 | | | 3,726 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Property additions | (1,494) | | | (2,019) | | | (1,951) | |
| Property sales and other transactions | 333 | | | 377 | | | 204 | |
| Investment purchases | (13) | | | (18) | | | (10) | |
| Investment sales and other transactions | (1) | | | (104) | | | 99 | |
| | | | | |
| Net cash used in investing activities | (1,175) | | | (1,764) | | | (1,658) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Dividends | (960) | | | (949) | | | (844) | |
| Common Stock transactions | 69 | | | 27 | | | 40 | |
| Purchase and retirement of Common Stock | (1,439) | | | (2,099) | | | (2,781) | |
| Proceeds from borrowings – net of issuance costs | 784 | | | 2,192 | | | 2,023 | |
| Debt repayments | (381) | | | (1,188) | | | (750) | |
| Other | 0 | | | 23 | | | 0 | |
| | | | | |
| Net cash used in financing activities | (1,927) | | | (1,994) | | | (2,312) | |
| | | | | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | 535 | | | 134 | | | (244) | |
| | | | | |
| Cash, cash equivalents, and restricted cash: | | | | | |
| At beginning of year | 580 | | | 446 | | | 690 | |
| | | | | |
| At end of year | $ | 1,115 | | | $ | 580 | | | $ | 446 | |
| | | | | |
| Supplemental disclosures of cash flow information: | | | | | |
| Cash paid during the year for: | | | | | |
| Interest (net of amounts capitalized) | $ | 577 | | | $ | 555 | | | $ | 496 | |
| Income taxes (net of refunds) | 311 | | | 543 | | | 519 | |
| | | | | |
See accompanying notes to consolidated financial statements.
K42
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | ($ in millions) |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 5,404 |
| | $ | 1,668 |
| | $ | 1,556 |
|
| Reconciliation of net income to net cash | |
| | |
| | |
|
| provided by operating activities: | |
| | |
| | |
|
| Depreciation | 1,059 |
| | 1,030 |
| | 1,059 |
|
| Deferred income taxes | (2,859 | ) | | 227 |
| | 320 |
|
| Gains and losses on properties | (92 | ) | | (46 | ) | | (30 | ) |
| Changes in assets and liabilities affecting operations: | |
| | |
| | |
|
| Accounts receivable | (41 | ) | | 23 |
| | 109 |
|
| Materials and supplies | 35 |
| | 42 |
| | (35 | ) |
| Other current assets | (71 | ) | | 82 |
| | 192 |
|
| Current liabilities other than debt | 135 |
| | 158 |
| | (152 | ) |
| Other – net | (317 | ) | | (150 | ) | | (111 | ) |
| | | | | | |
| Net cash provided by operating activities | 3,253 |
| | 3,034 |
| | 2,908 |
|
| | | | | | |
| Cash flows from investing activities: | |
| | |
| | |
|
| Property additions | (1,723 | ) | | (1,887 | ) | | (2,385 | ) |
| Property sales and other transactions | 202 |
| | 130 |
| | 63 |
|
| Investment purchases | (7 | ) | | (123 | ) | | (5 | ) |
| Investment sales and other transactions | 47 |
| | 48 |
| | 240 |
|
| | | | | | |
| Net cash used in investing activities | (1,481 | ) | | (1,832 | ) | | (2,087 | ) |
| | | | | | |
| Cash flows from financing activities: | |
| | |
| | |
|
| Dividends | (703 | ) | | (695 | ) | | (713 | ) |
| Common Stock transactions | 89 |
| | 57 |
| | 12 |
|
| Purchase and retirement of Common Stock | (1,012 | ) | | (803 | ) | | (1,075 | ) |
| Proceeds from borrowings – net of issuance costs | 290 |
| | 694 |
| | 1,185 |
|
| Debt repayments | (702 | ) | | (600 | ) | | (102 | ) |
| | | | | | |
| Net cash used in financing activities | (2,038 | ) | | (1,347 | ) | | (693 | ) |
| | | | | | |
| Net increase (decrease) in cash and cash equivalents | (266 | ) | | (145 | ) | | 128 |
|
| | | | | | |
| Cash and cash equivalents: | |
| | |
| | |
|
| At beginning of year | 956 |
| | 1,101 |
| | 973 |
|
| | | | | | |
| At end of year | $ | 690 |
| | $ | 956 |
| | $ | 1,101 |
|
| | | | | | |
| Supplemental disclosures of cash flow information: | |
| | |
| | |
|
| Cash paid during the year for: | |
| | |
| | |
|
| Interest (net of amounts capitalized) | $ | 528 |
| | $ | 543 |
| | $ | 518 |
|
| Income taxes (net of refunds) | 705 |
| | 593 |
| | 386 |
|
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common
Stock | | Additional
Paid-in
Capital | | Accum. Other
Comprehensive
Loss | | Retained
Income | | Total |
| | ($ in millions, except per share amounts) |
| | | | | | | | | |
| Balance at December 31, 2017 | $ | 285 | | | $ | 2,254 | | | $ | (356) | | | $ | 14,176 | | | $ | 16,359 | |
| | | | | | | | | |
| Comprehensive income: | | | | | | | | | |
| Net income | | | | | | | 2,666 | | | 2,666 | |
| Other comprehensive loss | | | | | (119) | | | | | (119) | |
| Total comprehensive income | | | | | | | | | 2,547 | |
| Dividends on Common Stock, | | | | | | | | | |
| $3.04 per share | | | | | | | (844) | | | (844) | |
| Share repurchases | (17) | | | (125) | | | | | (2,639) | | | (2,781) | |
| Stock-based compensation | 1 | | | 87 | | | | | (7) | | | 81 | |
| Reclassification of stranded | | | | | | | | | |
| tax effects | | | | | (88) | | | 88 | | | 0 | |
| | | | | | | | | |
| Balance at December 31, 2018 | 269 | | | 2,216 | | | (563) | | | 13,440 | | | 15,362 | |
| | | | | | | | | |
| Comprehensive income: | | | | | | | | | |
| Net income | | | | | | | 2,722 | | | 2,722 | |
| Other comprehensive income | | | | | 72 | | | | | 72 | |
| Total comprehensive income | | | | | | | | | 2,794 | |
| Dividends on Common Stock, | | | | | | | | | |
| $3.60 per share | | | | | | | (949) | | | (949) | |
| Share repurchases | (11) | | | (88) | | | | | (2,000) | | | (2,099) | |
| Stock-based compensation | 1 | | | 81 | | | | | (6) | | | 76 | |
| | | | | | | | | |
| Balance at December 31, 2019 | 259 | | | 2,209 | | | (491) | | | 13,207 | | | 15,184 | |
| | | | | | | | | |
| Comprehensive income: | | | | | | | | | |
| Net income | | | | | | | 2,013 | | | 2,013 | |
| Other comprehensive loss | | | | | (103) | | | | | (103) | |
| Total comprehensive income | | | | | | | | | 1,910 | |
| Dividends on Common Stock, | | | | | | | | | |
| $3.76 per share | | | | | | | (960) | | | (960) | |
| Share repurchases | (7) | | | (59) | | | | | (1,373) | | | (1,439) | |
| Stock-based compensation | 2 | | | 98 | | | | | (4) | | | 96 | |
| | | | | | | | | |
| Balance at December 31, 2020 | $ | 254 | | | $ | 2,248 | | | $ | (594) | | | $ | 12,883 | | | $ | 14,791 | |
See accompanying notes to consolidated financial statements.
K43
|
| | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accum. Other Comprehensive Loss | | Retained Income | | Total |
| | ($ in millions, except per share amounts) |
| | | | | | | | | | |
| Balance at December 31, 2014 | $ | 310 |
| | $ | 2,148 |
| | $ | (398 | ) | | $ | 10,348 |
| | $ | 12,408 |
|
| | | | | | | | | | |
| Comprehensive income: | |
| | |
| | |
| | |
| | |
|
| Net income | |
| | |
| | |
| | 1,556 |
| | 1,556 |
|
| Other comprehensive loss | |
| | |
| | (47 | ) | | |
| | (47 | ) |
| Total comprehensive income | |
| | |
| | |
| | |
| | 1,509 |
|
| Dividends on Common Stock, | |
| | |
| | |
| | |
| | |
|
| $2.36 per share | |
| | |
| | |
| | (713 | ) | | (713 | ) |
| Share repurchases | (11 | ) | | (75 | ) | | |
| | (989 | ) | | (1,075 | ) |
| Stock-based compensation, | |
| | |
| | |
| | |
| | |
|
| including tax benefit of $14 |
|
| | 70 |
| | |
| | (8 | ) | | 62 |
|
| Other | | | | | | | (3 | ) | | (3 | ) |
| | | | | | | | | | |
| Balance at December 31, 2015 | 299 |
| | 2,143 |
| | (445 | ) | | 10,191 |
| | 12,188 |
|
| | | | | | | | | | |
| Comprehensive income: | |
| | |
| | |
| | |
| | |
|
| Net income | |
| | |
| | |
| | 1,668 |
| | 1,668 |
|
| Other comprehensive loss | |
| | |
| | (42 | ) | | |
| | (42 | ) |
| Total comprehensive income | |
| | |
| | |
| | |
| | 1,626 |
|
| Dividends on Common Stock, | |
| | |
| | |
| | |
| | |
|
| $2.36 per share | |
| | |
| | |
| | (695 | ) | | (695 | ) |
| Share repurchases | (9 | ) | | (63 | ) | | |
| | (731 | ) | | (803 | ) |
| Stock-based compensation | 2 |
| | 99 |
| | |
| | (6 | ) | | 95 |
|
| Other | | | | | | | (2 | ) | | (2 | ) |
| | | | | | | | | | |
| Balance at December 31, 2016 | 292 |
| | 2,179 |
| | (487 | ) | | 10,425 |
| | 12,409 |
|
| | | | | | | | | | |
| Comprehensive income: | |
| | |
| | |
| | |
| | |
|
| Net income | |
| | |
| | |
| | 5,404 |
| | 5,404 |
|
| Other comprehensive income | |
| | |
| | 131 |
| | |
| | 131 |
|
| Total comprehensive income | |
| | |
| | |
| | |
| | 5,535 |
|
| Dividends on Common Stock, | |
| | |
| | |
| | |
| | |
|
| $2.44 per share | |
| | |
| | |
| | (703 | ) | | (703 | ) |
| Share repurchases | (8 | ) | | (59 | ) | | |
| | (945 | ) | | (1,012 | ) |
| Stock-based compensation | 1 |
| | 134 |
| | |
| | (5 | ) | | 130 |
|
| | | | | | | | | | |
| Balance at December 31, 2017 | $ | 285 |
| | $ | 2,254 |
| | $ | (356 | ) | | $ | 14,176 |
| | $ | 16,359 |
|
Norfolk Southern Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following Notes are an integral part of the Consolidated Financial Statements.
1. Summary of Significant Accounting Policies
Description of Business
Norfolk Southern Corporation (Norfolk Southern) is a Virginia-based holding company engaged principally in the rail transportation business, operating approximately 19,50019,300 route miles of road primarily in the Southeast, East, and Midwest. These consolidated financial statements include Norfolk Southern and its majority-owned and controlled subsidiaries (collectively, NS, we, us, and our). Norfolk Southern’s major subsidiary is NSR. All significant intercompany balances and transactions have been eliminated in consolidation.
NSR and its railroad subsidiaries transport raw materials, intermediate products, and finished goods classified in the following commodity groups (percent of total railway operating revenues in 2017)2020): intermodal (23%(27%); agriculture, forest and consumer products (22%); chemicals (18%); metals and construction (14%); coal (17%); chemicals (16%); agriculture/consumer products/government (15%); metals/construction (13%); automotive (9%(11%); and, paper/clay/forest products (7%automotive (8%). Although most of our customers are domestic, ultimate points of origination or destination for some of the products transported (particularly coal bound for export and some intermodal containers)shipments) may be outside the U.S. Approximately 80% of our railroad employees are covered by collective bargaining agreements with various labor unions.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We periodically review our estimates, including those related to the recoverability and useful lives of assets, as well as liabilities for litigation, environmental remediation, casualty claims, income taxes and pension and other postretirement benefits. Changes in facts and circumstances may result in revised estimates.
Revenue Recognition
Transportation revenue isrevenues are recognized proportionally as a shipment moves from origin to destination, and related expenses are recognized as incurred. RefundsCertain of our contract refunds (which are primarily volume-based incentives) are recorded as a reduction to revenues on the basis of management’sour best estimate of projected liability, which is based on historical activity, current shipment counts and the expectation of future activity. Switching,Certain ancillary services, such as switching, demurrage and other incidental service revenuesactivities, may be provided to customers under their transportation contracts. These are distinct performance obligations that are recognized at a point in time when the services are performed.performed or as contractual obligations are met.
Cash Equivalents
“Cash equivalents” are highly liquid investments purchased three months or less from maturity.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts was $7$6 million and $9 million at December 31, 20172020 and $4 million at December 31, 2016.2019, respectively. To determine our allowance for doubtful accounts, we evaluate historical loss experience (which has not been significant), the characteristics of current accounts, and general economic conditions and trends.
Materials and Supplies
“Materials and supplies,” consisting mainly of items for maintenance of property and equipment, are stated at the lower of average cost or market.net realizable value. The cost of materials and supplies expected to be used in property additions or improvements is included in “Properties.”
Investments
Investments wherein entities over which we have the ability to exercise significant influence over but do not control the entity are accounted for using the equity method, whereby the investment is carried at the cost of the acquisition plus our equity in undistributed earnings or losses since acquisition.
Properties
“Properties” are stated principally at cost and are depreciated using the group method whereby assets with similar characteristics, use, and expected lives are grouped together in asset classes and depreciated using a composite depreciation rate. This methodology treats each asset class as a pool of resources, not as singular items. We use approximately 75 depreciable asset classes. “Depreciation” in the Consolidated Statements of Cash Flows includes both depreciation and depletion.
Depreciation expense is based on our assumptions concerning expected service lives of our properties as well as the expected net salvage that will be received upon their retirement. In developing these assumptions, we utilize periodic depreciation studies that are performed by an independent outside firm of consulting engineers and approved by the STB. Our depreciation studies are conducted about every three years for equipment and every six years for track assets and other roadway property. The frequency of these studies is consistent with guidelines established by the STB. We adjust our rates based on the results of these studies and implement the changes prospectively. The studies may also indicate that the recorded amount of accumulated depreciation is deficient (or in excess) of the amount indicated by the study. Any such deficiency (or excess) is amortized as a component of depreciation expense over the remaining service lives of the affected class of property, as determined by the study.
Key factors that are considered in developing average service life and salvage estimates include:
•statistical analysis of historical retirement data and surviving asset records;records,
•review of historical salvage received and current market rates;rates,
•review of our operations including expected changes in technology, customer demand, maintenance practices and asset management strategies;strategies,
•review of accounting policies and assumptions;assumptions, and
•industry review and analysis.
The composite depreciation rate for rail in high density corridors is derived based on consideration of annual gross tons as compared to the total or ultimate capacity of rail in these corridors. Our experience has shown that traffic density is a leading factor in the determination of the expected service life of rail in high density corridors. In developing the respective depreciation rate, consideration is also given to several rail characteristics including age, weight, condition (new or second hand)second-hand) and type (curve(curved or straight).
We capitalize interest on major projects during the period of their construction. Expenditures, including those on leased assets, that extend an asset’s useful life or increase its utility are capitalized. Expenditures capitalized include those that are directly related to a capital project and may include materials, labor, and equipment,other direct costs, in addition to an allocable portion of indirect costs that relate to a capital project. A significant portion of our annual capital spending relates to the replacement of self-constructed assets. Removal activities occur in conjunction with replacement and are estimated based on the average percentage of time employees replacing assets spend on removal functions. Costs related to repairs and maintenance activities that, in our judgment, do not extend an asset’s useful life or increase its utility are expensed when such repairs are performed.
When depreciable operating road and equipment assets are sold or retired in the ordinary course of business, the cost of the assets, net of salesales proceeds or salvage, is charged to accumulated depreciation, and no gain or loss is recognized in earnings. Actual historical cost values are retired when available, such as with most equipment assets. The use of estimates in recording the retirement of certain roadway assets is necessary based on the impracticality of tracking individual asset costs. When retiring rail, ties and ballast, we use statistical curves that indicate the relative distribution of the age of the assets retired. The historical cost of other roadway assets is estimated using a combination of inflation indices specific to the rail industry and those published by the U.S. Bureau of Labor Statistics. The indices are applied to the replacement value based on the age of the retired assets. These indices are used because they closely correlate with the costs of roadway assets. Gains and losses on disposal of operating land are included in “Materials and other” expenses. Gains and losses on disposal of nonoperating land and nonrail assets are included in “Other income – net” (Note 2) since such income is not a product of our railroad operations.
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. Gains or losses from abnormal retirements would beare recognized in income from railway operations.
We review the carrying amount of properties whenever events or changes in circumstances indicate that such carrying amount may not be recoverable based on future undiscounted cash flows. Assets that are deemed impaired as a result of such review are recorded at the lower of carrying amount or fair value.
New Accounting Pronouncements
In May 2014,February 2018, the Financial Accounting Standards Board (FASB)FASB issued Accounting Standards Update (ASU) No.
2014-09,ASU 2018-02, “RevenueReclassification of Certain Tax Effects from Contracts with CustomersAccumulated Other Comprehensive Income.” This update will replace most existing revenue recognition guidance in GAAP and require an entityis intended to recognizereclassify the stranded tax effects resulting from tax reform from accumulated other comprehensive income (AOCI) to retained earnings. The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in AOCI and the amount that would have been charged or credited directly to other comprehensive income using the U.S. federal corporate income tax rate enacted in December 2017. In the first quarter of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Freight revenue will continue to be recognized proportionally as a shipment moves from origin to destination and other revenues will be recognized as performance obligations are satisfied. We2018, we adopted the standardprovisions of ASU 2018-02 resulting in an increase to “Accumulated other comprehensive loss” of $88 million and a corresponding increase to “Retained income,” with no impact on January 1, 2018 using the modified retrospective“Total stockholders’ equity.”
transition method and the adoption did not have a material effect on our financial position and results of operations. Certain additional financial statement disclosures are required beginning with 2018 reporting, including disclosure of contract assets and contract liabilities as well as a disaggregated view of revenue, which we expect to be similar to our current disclosures within the “Railway Operating Revenues” section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
In February 2016, the FASB issued ASU 2016-02, “Leases.Leases (Topic 842),” This update, effective for our annual and interim reporting periods beginning January 1, 2019, will replacesubsequent amendments, which replaced existing lease guidance in GAAP and will require lessees to recognize lease assets and lease liabilitiesGAAP. We adopted the standard on the balance sheet for leases greater than twelve months and disclose key information about leasing arrangements. When implemented, lessees and lessors will be required to measure and record leases at the present value of the remaining lease payments as of the beginning of the earliest period presentedJanuary 1, 2019 using athe modified retrospective approach. We are currently evaluatingmethod and used the effects ASU 2016-02 will have oneffective date as our consolidated financial statements and related disclosures. We currently disclose approximately $660 million in undiscounted operating lease obligations in our lease commitments footnote (Note 9) and we will evaluate those contracts as well as other existing arrangements to determine if they qualifydate of initial application. See Note 10 for lease accounting under the new standard. We do not anticipate a material impact on our results of operations and we do not plan to adopt the standard early.additional information.
In June 2016, the FASB issued ASU 2016-13, “Credit Losses - Measurement of Credit Losses on Financial Instruments,” which replacesreplaced the current incurred loss impairment method with a method that reflects expected credit losses. The newShort-term and long-term financial assets, as defined by the standard, is effective asare impacted by immediate recognition of estimated credit losses in the financial statements, reflecting the net amount expected to be collected. Historically, losses associated from the inability to collect on accounts receivable have been insignificant, with little divergence in collection trends through varying economic cycles. We adopted the standard on January 1, 2020 and early adoption is permitted as ofthere was no material impact to the financial statements upon adoption.
In December 2019, the FASB issued ASU 2019-12,“Simplifying the Accounting for Income Taxes,” which adds new guidance to simplify the accounting for income taxes, changes the accounting for certain income tax transactions, and makes other minor changes. We adopted the standard on January 1,
2019. Because credit losses associated from our trade receivables have historically been insignificant, we 2021 and do not expect this standardit to have a material effect on our financial statements.
2. Railway Operating Revenues
The following table disaggregates our revenues by major commodity group:
| | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| | ($ in millions) |
| Merchandise: | | | | |
| Agriculture, forest and consumer products | | $ | 2,116 | | | $ | 2,256 | | | $ | 2,188 | |
| Chemicals | | 1,809 | | | 2,092 | | | 2,083 | |
| Metals and construction | | 1,333 | | | 1,461 | | | 1,482 | |
| Automotive | | 830 | | | 994 | | | 991 | |
| Merchandise | | 6,088 | | | 6,803 | | | 6,744 | |
| Intermodal | | 2,654 | | | 2,824 | | | 2,893 | |
| Coal | | 1,047 | | | 1,669 | | | 1,821 | |
| | | | | | |
| Total | | $ | 9,789 | | | $ | 11,296 | | | $ | 11,458 | |
At the beginning of 2020, we combined the agriculture products and forest and consumer commodity groups. In March 2017,addition, we also made changes in the FASB issued ASU No. 2017-07, “Improvingcategorization of certain other commodity groups within Merchandise. Specifically, certain commodities were shifted between agriculture, forest and consumer products; chemicals; and, metals and construction. We made these changes to better align our commodity groups as a result of an organizational realignment. Prior period railway operating revenues have been reclassified to conform to the Presentationcurrent presentation.
We recognize the amount of Net Periodic Pension Costrevenues 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 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
Net Periodic Postretirement Benefit Cost.” This update, effective 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 annual and interim reporting periods beginning January 1, 2018, will require segregation of these net benefit costs between operating and non-operating expenses. Currently, we reporteach commodity group. The customer has an unconditional obligation to pay for the net benefit costsservice once the service has been completed. Estimated revenues associated with our defined benefitin-process shipments at period-end are recorded based on the estimated percentage of service completed. We had no material remaining performance obligations at December 31, 2020 and postretirement plans2019.
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 “Compensation and benefits” line itemservices are performed or as contractual obligations are met. These revenues are included within each of the Consolidated Statementscommodity groups and represent approximately 5% of Income, as disclosed in Note 11, “Pensions and Other Postretirement Benefits.” When the ASU is implemented, only the service cost component of defined benefit pension cost and postretirement benefit cost will be reported within compensation costs, while all other components of net benefit cost will be presented within the “Other income – net” line item on the Consolidated Statements of Income. The standard requires retrospective application, and as such the adoption of this standard will result in offsetting increases in “Compensation and benefits” expense and “Other income – net”total “Railway operating revenues” on the Consolidated Statements of Income for all periodsthe years ended December 31, 2020 and 2019, and approximately 4% for the year ended December 31, 2018.
Revenues related to interline transportation services that involve another railroad are reported on a net basis. Therefore, the portion of 2017the 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 2016, with no impactnon-customer receivables as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| | ($ in millions) |
| | | | |
| Customer | | $ | 629 | | | $ | 682 | |
| Non-customer | | 219 | | | 238 | |
| | | | |
| Accounts receivable – net | | $ | 848 | | | $ | 920 | |
Non-customer receivables include non-revenue-related amounts due from other railroads, governmental entities, and others. “Other assets” on net income.the Consolidated Balance Sheets includes non-current customer receivables of $23 million at both December 31, 2020 and 2019. In 2019, we wrote off a $32 million non-current customer receivable resulting from a legal dispute and this expense is included in “Materials and other” on the Consolidated Statements of Income. We diddo not adopt the standard early.have any material contract assets or liabilities at December 31, 2020 and 2019.
2.3. Other Income – Net
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | ($ in millions) |
| | | | | | |
| Rental income | $ | 87 |
| | $ | 93 |
| | $ | 80 |
|
| Corporate-owned life insurance – net | 33 |
| | 20 |
| | (1 | ) |
| Royalties from coal | 19 |
| | 10 |
| | 19 |
|
| Interest income | 13 |
| | 10 |
| | 8 |
|
| Gains from sale of properties (including joint venture sales) | 13 |
| | 9 |
| | 55 |
|
| External advisor costs | — |
| | (20 | ) | | (8 | ) |
| Nonoperating depletion and depreciation | (4 | ) | | (4 | ) | | (5 | ) |
| Taxes on nonoperating property | (11 | ) | | (11 | ) | | (10 | ) |
| Charitable contributions | (15 | ) | | (9 | ) | | (9 | ) |
| Other interest expense – net (including debt exchange fees) | (17 | ) | | (6 | ) | | (4 | ) |
| Other | (26 | ) | | (21 | ) | | (22 | ) |
| | | | | | |
| Total | $ | 92 |
| | $ | 71 |
| | $ | 103 |
|
| | | | | | |
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| | ($ in millions) |
| | | | | |
| Pension and other postretirement benefits (Note 12) | $ | 91 | | | $ | 63 | | | $ | 61 | |
| Corporate-owned life insurance – net | 85 | | | 69 | | | (10) | |
| Other | (23) | | | (26) | | | 16 | |
| | | | | |
| Total | $ | 153 | | | $ | 106 | | | $ | 67 | |
3.4. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (“tax reform”) was signed into law. Tax reform lowered the Federal corporate tax rate from 35% to 21% and made numerous other tax law changes. GAAP requires companies to recognize the effect of tax law changes in the period of enactment. As a result, “Purchased services and rents” includes a $151 million benefit for earnings generated from reductions to net deferred tax liabilities at certain equity investees and “Income taxes” includes a $3,331 million benefit primarily due to the remeasurement of our net deferred tax liabilities to reflect the lower rate. Reasonable estimates were made based on our analysis of tax reform. These provisional amounts may be adjusted in future periods during 2018 when additional information is obtained. Additional information that may affect our provisional amounts would include further clarification and guidance on how the IRS will implement tax reform, including guidance with respect to 100% bonus depreciation on self-constructed assets, further clarification and guidance on how state taxing authorities will implement tax reform and the related effect on our state income tax returns, completion of our 2017 tax return filings, any changes | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| | ($ in millions) |
| Current: | | | | | |
| Federal | $ | 307 | | | $ | 356 | | | $ | 499 | |
| State | 68 | | | 83 | | | 131 | |
| Total current taxes | 375 | | | 439 | | | 630 | |
| | | | | |
| Deferred: | | | | | |
| Federal | 111 | | | 280 | | | 156 | |
| State | 31 | | | 50 | | | 17 | |
| Total deferred taxes | 142 | | | 330 | | | 173 | |
| | | | | |
| Income taxes | $ | 517 | | | $ | 769 | | | $ | 803 | |
made by our equity method investees, and the potential for additional guidance from the SEC or the FASB related to tax reform.
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | ($ in millions) |
| Current: | |
| | |
| | |
|
| Federal | $ | 500 |
| | $ | 612 |
| | $ | 505 |
|
| State | 83 |
| | 75 |
| | 61 |
|
| Total current taxes | 583 |
| | 687 |
| | 566 |
|
| | | | | | |
| Deferred: | |
| | |
| | |
|
| Federal | (2,924 | ) | | 206 |
| | 292 |
|
| State | 65 |
| | 21 |
| | 28 |
|
| Total deferred taxes | (2,859 | ) | | 227 |
| | 320 |
|
| | | | | | |
| Income taxes | $ | (2,276 | ) | | $ | 914 |
| | $ | 886 |
|
Reconciliation of Statutory Rate to Effective Rate
“Income taxes” inon the Consolidated Statements of Income differs from the amounts computed by applying the statutory federal corporate tax rate as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| | Amount | | % | | Amount | | % | | Amount | | % |
| | ($ in millions) |
| | | | | | | | | | | |
| Federal income tax at statutory rate | $ | 531 | | | 21.0 | | | $ | 733 | | | 21.0 | | | $ | 728 | | | 21.0 | |
| State income taxes, net of federal tax effect | 85 | | | 3.3 | | | 110 | | | 3.1 | | | 120 | | | 3.5 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Excess tax benefits on stock-based compensation | (39) | | | (1.5) | | | (29) | | | (0.8) | | | (22) | | | (0.7) | |
| Other, net | (60) | | | (2.4) | | | (45) | | | (1.3) | | | (23) | | | (0.7) | |
| | | | | | | | | | | |
| Income taxes | $ | 517 | | | 20.4 | | | $ | 769 | | | 22.0 | | | $ | 803 | | | 23.1 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Amount | | % | | Amount | | % | | Amount | | % |
| | ($ in millions) |
| | | | | | | | | | | | |
| Federal income tax at statutory rate | $ | 1,095 |
| | 35.0 |
| | $ | 904 |
| | 35.0 |
| | $ | 855 |
| | 35.0 |
|
| State income taxes, net of federal tax effect | 88 |
| | 2.8 |
| | 70 |
| | 2.8 |
| | 72 |
| | 3.0 |
|
Excess tax benefits on stock-based compensation
| (39 | ) | | (1.2 | ) | | (17 | ) | | (0.7 | ) | | — |
| | — |
|
| Equity in earnings related to tax reform | (38 | ) | | (1.2 | ) | | — |
| | — |
| | — |
| | — |
|
| Other, net | (51 | ) | | (1.7 | ) | | (43 | ) | | (1.7 | ) | | (41 | ) | | (1.7 | ) |
| Tax reform | (3,331 | ) | | (106.5 | ) | | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | |
| Income taxes | $ | (2,276 | ) | | (72.8 | ) | | $ | 914 |
| | 35.4 |
| | $ | 886 |
| | 36.3 |
|
Deferred Tax Assets and Liabilities
Certain items are reported in different periods for financial reporting and income tax purposes. Deferred tax assets and liabilities are recorded in recognition of these differences. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
| | | | December 31, | | December 31, |
| | 2017 | | 2016 | | 2020 | | 2019 |
| | ($ in millions) | | ($ in millions) |
| Deferred tax assets: | | | |
| Deferred tax assets: | | | |
| Compensation and benefits, including postretirement benefits | $ | 235 |
| | $ | 464 |
| Compensation and benefits, including postretirement benefits | $ | 218 | | | $ | 222 | |
| Accruals, including casualty and other claims | 64 |
| | 102 |
| Accruals, including casualty and other claims | 93 | | | 89 | |
| Other | 67 |
| | 62 |
| Other | 198 | | | 202 | |
| Total gross deferred tax assets | 366 |
| | 628 |
| Total gross deferred tax assets | 509 | | | 513 | |
| Less valuation allowance | (44 | ) | | (39 | ) | Less valuation allowance | (57) | | | (54) | |
| | | | | |
| Net deferred tax assets | 322 |
| | 589 |
| Net deferred tax assets | 452 | | | 459 | |
| | | | | | | | |
| Deferred tax liabilities: | |
| | |
| Deferred tax liabilities: | | | |
| Property | (6,212 | ) | | (9,301 | ) | Property | (6,820) | | | (6,714) | |
| Other | (434 | ) | | (428 | ) | Other | (554) | | | (560) | |
| Total deferred tax liabilities | (6,646 | ) | | (9,729 | ) | Total deferred tax liabilities | (7,374) | | | (7,274) | |
| | | | | | | | |
| Deferred income taxes | $ | (6,324 | ) | | $ | (9,140 | ) | Deferred income taxes | $ | (6,922) | | | $ | (6,815) | |
Except for amounts for which a valuation allowance has been provided, we believe that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. The valuation allowance at the end of each year primarily relates to subsidiary state income tax net operating losses and state investment tax credits that may not be utilized prior to their expiration. The total valuation allowance increased by $5$3 million in 2017 and2020, $4 million in 2016.2019, and $6 million in 2018.
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | December 31, | | December 31, |
| | 2017 | | 2016 | | 2020 | | 2019 |
| | ($ in millions) | | ($ in millions) |
| | | | | |
| Balance at beginning of year | $ | 27 |
| | $ | 25 |
| Balance at beginning of year | $ | 24 | | | $ | 21 | |
| | | | | |
| Additions based on tax positions related to the current year | 4 |
| | 3 |
| Additions based on tax positions related to the current year | 4 | | | 4 | |
| Additions for tax positions of prior years | 2 |
| | — |
| |
| Reductions for tax positions of prior years | (2 | ) | | — |
| |
| Settlements with taxing authorities | (11 | ) | | — |
| Settlements with taxing authorities | (4) | | | 0 | |
| Lapse of statutes of limitations | (3 | ) | | (1 | ) | Lapse of statutes of limitations | (2) | | | (1) | |
| | | | | | | | |
| Balance at end of year | $ | 17 |
| | $ | 27 |
| Balance at end of year | $ | 22 | | | $ | 24 | |
Included in the balance of unrecognized tax benefits at December 31, 2017,2020 are potential benefits of $11$17 million that would affect the effective tax rate if recognized. Unrecognized tax benefits are adjusted in the period in which new information about a tax position becomes available or the final outcome differs from the amount recorded.
IRSThe statute of limitations on Internal Revenue Service (IRS) examinations have been completedhas expired for all years prior to 2013. We have amended2017. The IRS accepted our 2012 amended income tax return to requestreturn. As a result, we received a refund of $46 million which is not includedand recognized a tax benefit of $19 million in the above balance of unrecognized tax benefits.2020. State income tax returns generally are subject to examination for a period of three to four years after filing of the return. In addition, we are generally obligated to report changes in taxable income arising from federal income tax examinations to the states within a period of up to two years from the date the federal examination is final. We have various state income tax returns either under examination, administrative appeal, or litigation.
4.5. Fair Value Measurements
FASB Accounting Standards Codification (ASC)ASC 820-10, “Fair Value Measurements,” established a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
|
| | | | |
| Level 1 | Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access. |
| |
| Level 2 | Inputs to the valuation methodology include: |
| • quoted prices for similar assets or liabilities in active markets;markets, • quoted prices for identical or similar assets or liabilities in inactive markets;markets, • inputs other than quoted prices that are observable for the asset or liability;liability, and • inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| |
| If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. |
| |
| Level 3 | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The asset’sasset or liability’s fair value measurement level within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Other than those assets and liabilities described below that approximate fair value, there were no assets or liabilities measured at fair value on a recurring basis at December 31, 2017 or 2016.
Fair Values of Financial Instruments
We have evaluated the fair values of financial instruments and methods used to determine those fair values. The fair values of “Cash and cash equivalents,” “Accounts receivable” “Accounts payable,– net,” and “Short-term debt”“Accounts payable” approximate carrying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life insuranceCOLI 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 December 31, 2020 or 2019. The carrying amounts and estimated fair values, for the remaining financial instruments, excluding investments accounted for under the equity method, consistedbased on Level 1 inputs, of long-term debt consist of the following at December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 |
| Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
| | ($ in millions) |
| | | | | | | |
| Long-term debt, including current maturities | $ | (12,681) | | | $ | (16,664) | | | $ | (12,196) | | | $ | (14,806) | |
|
| | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | ($ in millions) |
| | | | | | | | |
| Long-term investments | $ | 26 |
| | $ | 49 |
| | $ | 116 |
| | $ | 141 |
|
| Long-term debt, including current maturities | (9,736 | ) | | (11,771 | ) | | (10,112 | ) | | (11,626 | ) |
Underlying net assets and future discounted cash flows were used to estimate the fair value of investments. The fair values of long-term debt were estimated based on quoted market prices or discounted cash flows using current interest rates for debt with similar terms, credit rating, and remaining maturity.
The following tables set forth the fair value of long-term investment and long-term debt balances disclosed above by valuation technique level, within the fair value hierarchy (there were no level 3 valued assets or liabilities).
|
| | | | | | | | | | | |
| | |
| | Level 1 | | Level 2 | | Total |
| | ($ in millions) |
| December 31, 2017 | | | | | |
| Long-term investments | $ | 4 |
| | $ | 45 |
| | $ | 49 |
|
| Long-term debt, including current maturities | (11,676 | ) | | (95 | ) | | (11,771 | ) |
| | | | | | |
| December 31, 2016 | | | | | |
| Long-term investments | $ | 4 |
| | $ | 137 |
| | $ | 141 |
|
| Long-term debt, including current maturities | (11,427 | ) | | (199 | ) | | (11,626 | ) |
5.6. Investments
| | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| | ($ in millions) |
| Long-term investments: | | | |
| Equity method investments: | | | |
| Conrail Inc. | $ | 1,446 | | | $ | 1,387 | |
| TTX Company | 798 | | | 749 | |
| Other | 418 | | | 510 | |
| Total equity method investments | 2,662 | | | 2,646 | |
| | | |
| Corporate-owned life insurance at net cash surrender value | 902 | | | 767 | |
| Other investments | 26 | | | 15 | |
| | | |
| Total long-term investments | $ | 3,590 | | | $ | 3,428 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | ($ in millions) |
| Long-term investments: | |
| | |
|
| Equity method investments: | |
| | |
|
| Conrail Inc. | $ | 1,293 |
| | $ | 1,199 |
|
| TTX Company | 629 |
| | 471 |
|
| Meridian Speedway LLC | 272 |
| | 274 |
|
| Pan Am Southern LLC | 154 |
| | 155 |
|
| Other | 77 |
| | 77 |
|
| Total equity method investments | 2,425 |
| | 2,176 |
|
| | | | |
| Corporate-owned life insurance at net cash surrender value | 530 |
| | 485 |
|
| Other investments | 26 |
| | 116 |
|
| | | | |
| Total long-term investments | $ | 2,981 |
| | $ | 2,777 |
|
Investment in Conrail
Through a limited liability company, we and CSX jointly own Conrail Inc. (Conrail), whose primary subsidiary is CRC. We have a 58% economic and 50% voting interest in the jointly ownedjointly-owned entity, and CSX has the remainder of the economic and voting interests. We are amortizing the excess of the purchase price over Conrail’s net equity using the principles of purchase accounting, based primarily on the estimated useful lives of Conrail’s depreciable property and equipment, including the related deferred tax effect of the differences in book and tax accounting bases for such assets, as all of the purchase price at acquisition was allocable to Conrail’s tangible assets and liabilities.
At December 31, 2017, based on the funded status of Conrail’s pension plans, we increased our proportional investment in Conrail by $19 million. This resulted in income of $17 million recorded to “Other comprehensive income” and a combined federal and state deferred tax liability of $2 million.
At December 31, 2016, based on the funded status of Conrail’s pension plans, we increased our proportional investment in Conrail by $5 million. This resulted in income of $5 million recorded to “Other comprehensive loss” and a combined federal and state deferred tax liability of less than $1 million.
At December 31, 2017, the difference between our investment in Conrail and our share of Conrail’s underlying net equity was $519 million. Our equity in the earnings of Conrail, net of amortization, included in “Purchased services and rents” was $75 million (including $33 million related to the enactment of tax reform - see Note 3) for 2017, $47 million for 2016, and $42 million for 2015. Equity in earnings are included in the “Other - net” line item within operating activities in the Consolidated Statements of Cash Flows.
CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of 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 $141$129 million in 2017, $1512020, $149 million in 2016,2019, and $154$150 million in 2015.2018. Future minimum lease payments for access fees due to CRC under the Shared Assets Areas agreements are as follows: $38$41 million in each of 20182021 through 20222023, and $91$17 million thereafter.in 2024. We provide certain general and administrative support functions to Conrail, the fees for which are billed in accordance with several service-provider arrangements and approximate $8$6 million annually.
In 2020, we converted $254 million of accounts payable into long-term advances from Conrail included in “Other liabilities.” “Accounts payable” includes $146$56 million at December 31, 2017,2020, and $129$264 million at December 31, 2016,2019, due to Conrail for the operation of the Shared Assets Areas. “Other liabilities” includes $534 million and $280 million at both December 31, 20172020 and 20162019, respectively, for long-term advances from Conrail, maturing in 2044,2050 that bear interest at an average rate of 2.9%1.31%.
At December 31, 2020, the difference between our investment in Conrail and our share of Conrail’s underlying net equity was $494 million. Our equity in Conrail’s earnings, net of amortization, was $58 million for 2020, $53 million for 2019, and $55 million for 2018. These amounts offset the costs of operating the Shared Assets Areas and are included in “Purchased services and rents.” Equity in Conrail’s earnings is included in the “Other – net” line item within operating activities in the Consolidated Statements of Cash Flows.
Investment in TTX
NSWe and eight8 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. We have a 19.65% ownership interest in TTX.
Amounts paid to TTXExpenses incurred for use of TTX equipment are included in “Purchased services and rents.” This amounted to $237$250 million, $229$244 million, and $219$262 million, of expense, respectively, for the years ended December 31, 2017, 20162020, 2019 and 2015.2018. Our equity in TTX’s earnings offsets these costs and totaled $48 million for 2020, $58 million for 2019, and $61 million for 2018. Equity in TTX’s earnings is included in the earnings“Other – net” line item within operating activities in the Consolidated Statements of TTX, also includedCash Flows.
Impairment ofInvestment
In 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,” totaled $158rents” on the 2020 Consolidated Statement of Income and had a $74 million (including $115 million related to the enactment of tax reform - see Note 3) for 2017, $26 million for 2016, and $21 million for 2015.
impact on net income.
6.
7. Properties
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Accumulated | | Net Book | | Depreciation |
| December 31, 2020 | Cost | | Depreciation | | Value | | Rate (1) |
| | ($ in millions) | | |
| | | | | | | |
| Land | $ | 2,394 | | | $ | 0 | | | $ | 2,394 | | | 0 |
| | | | | | | |
| Roadway: | | | | | | | |
| Rail and other track material | 7,153 | | | (1,892) | | | 5,261 | | | 2.35 | % |
| Ties | 5,685 | | | (1,601) | | | 4,084 | | | 3.41 | % |
| Ballast | 2,973 | | | (774) | | | 2,199 | | | 2.76 | % |
| Construction in process | 297 | | | 0 | | | 297 | | | 0 |
| Other roadway | 14,320 | | | (3,926) | | | 10,394 | | | 2.71 | % |
| Total roadway | 30,428 | | | (8,193) | | | 22,235 | | | |
| | | | | | | |
| Equipment: | | | | | | | |
| Locomotives | 5,478 | | | (1,911) | | | 3,567 | | | 3.56 | % |
| Freight cars | 2,780 | | | (1,023) | | | 1,757 | | | 2.59 | % |
| Computers and software | 732 | | | (391) | | | 341 | | | 9.86 | % |
| Construction in process | 333 | | | 0 | | | 333 | | | 0 |
| Other equipment | 1,094 | | | (399) | | | 695 | | | 4.70 | % |
| Total equipment | 10,417 | | | (3,724) | | | 6,693 | | | |
| | | | | | | |
| Other property | 91 | | | (68) | | | 23 | | | 2.24 | % |
| | | | | | | |
| Total properties | $ | 43,330 | | | $ | (11,985) | | | $ | 31,345 | | | |
| | | | | | | | | | | | | | Accumulated | | Net Book | | Depreciation |
| | | | Accumulated | | Net Book | | Depreciation | |
| December 31, 2017 | Cost | | Depreciation | | Value | | Rate (1) | |
| December 31, 2019 | | December 31, 2019 | Cost | | Depreciation | | Value | | Rate (1) |
| | ($ in millions) | | | | ($ in millions) | | |
| | | | | | | | | |
| Land | $ | 2,342 |
| | $ | — |
| | $ | 2,342 |
| | — |
| Land | $ | 2,385 | | | $ | 0 | | | $ | 2,385 | | | 0 |
| | | | | | | | | |
| Roadway: | |
| | |
| | |
| | |
| Roadway: | | | | | | | |
| Rail and other track material | 6,730 |
| | (1,961 | ) | | 4,769 |
| | 2.28 | % | Rail and other track material | 7,024 | | | (1,905) | | | 5,119 | | | 2.30 | % |
| Ties | 5,181 |
| | (1,374 | ) | | 3,807 |
| | 3.37 | % | Ties | 5,536 | | | (1,496) | | | 4,040 | | | 3.37 | % |
| Ballast | 2,654 |
| | (624 | ) | | 2,030 |
| | 2.71 | % | Ballast | 2,868 | | | (723) | | | 2,145 | | | 2.72 | % |
| Construction in process | 447 |
| | — |
| | 447 |
| | — |
| Construction in process | 360 | | | 0 | | | 360 | | | 0 |
| Other roadway | 13,636 |
| | (3,523 | ) | | 10,113 |
| | 2.59 | % | Other roadway | 14,261 | | | (3,786) | | | 10,475 | | | 2.71 | % |
| Total roadway | 28,648 |
| | (7,482 | ) | | 21,166 |
| | |
| Total roadway | 30,049 | | | (7,910) | | | 22,139 | | | |
| | | | | | | | | |
| Equipment: | |
| | |
| | |
| | |
| Equipment: | | | | | | | |
| Locomotives | 5,658 |
| | (2,158 | ) | | 3,500 |
| | 3.77 | % | Locomotives | 5,973 | | | (2,112) | | | 3,861 | | | 3.66 | % |
| Freight cars | 3,256 |
| | (1,286 | ) | | 1,970 |
| | 2.48 | % | Freight cars | 2,988 | | | (1,148) | | | 1,840 | | | 2.45 | % |
| Computers and software | 610 |
| | (334 | ) | | 276 |
| | 10.61 | % | Computers and software | 732 | | | (355) | | | 377 | | | 9.68 | % |
| Construction in process | 247 |
| | — |
| | 247 |
| | — |
| Construction in process | 291 | | | 0 | | | 291 | | | 0 |
| Other equipment | 1,004 |
| | (366 | ) | | 638 |
| | 5.06 | % | Other equipment | 1,082 | | | (388) | | | 694 | | | 4.89 | % |
| Total equipment | 10,775 |
| | (4,144 | ) | | 6,631 |
| | |
| Total equipment | 11,066 | | | (4,003) | | | 7,063 | | | |
| | | | | | | | | |
| Other property | 474 |
| | (283 | ) | | 191 |
| | 0.77 | % | Other property | 96 | | | (69) | | | 27 | | | 1.05 | % |
| | | | | | | | | | | | | | | |
| Total properties | $ | 42,239 |
| | $ | (11,909 | ) | | $ | 30,330 |
| | |
| Total properties | $ | 43,596 | | | $ | (11,982) | | | $ | 31,614 | | | |
(1)Composite annual depreciation rate for the underlying assets, excluding the effects of the amortization of any deficiency (or excess) that resulted from our depreciation studies.
|
| | | | | | | | | | | | | | |
| | | | Accumulated | | Net Book | | Depreciation |
| December 31, 2016 | Cost | | Depreciation | | Value | | Rate (1) |
| | ($ in millions) | | |
| | | | | | | | |
| Land | $ | 2,330 |
| | $ | — |
| | $ | 2,330 |
| | — |
|
| | | | | | | | |
| Roadway: | |
| | |
| | |
| | |
|
| Rail and other track material | 6,632 |
| | (1,997 | ) | | 4,635 |
| | 2.46 | % |
| Ties | 5,011 |
| | (1,314 | ) | | 3,697 |
| | 3.25 | % |
| Ballast | 2,559 |
| | (584 | ) | | 1,975 |
| | 2.64 | % |
| Construction in process | 664 |
| | — |
| | 664 |
| | — |
|
| Other roadway | 13,096 |
| | (3,361 | ) | | 9,735 |
| | 2.51 | % |
| Total roadway | 27,962 |
| | (7,256 | ) | | 20,706 |
| | |
|
| | | | | | | | |
| Equipment: | |
| | |
| | |
| | |
|
| Locomotives | 5,525 |
| | (2,199 | ) | | 3,326 |
| | 3.65 | % |
| Freight cars | 3,377 |
| | (1,345 | ) | | 2,032 |
| | 2.51 | % |
| Computers and software | 552 |
| | (329 | ) | | 223 |
| | 10.40 | % |
| Construction in process | 295 |
| | — |
| | 295 |
| | — |
|
| Other equipment | 972 |
| | (329 | ) | | 643 |
| | 4.71 | % |
| Total equipment | 10,721 |
| | (4,202 | ) | | 6,519 |
| | |
|
| | | | | | | | |
| Other property | 475 |
| | (279 | ) | | 196 |
| | 0.83 | % |
| | | | | | | | |
| Total properties | $ | 41,488 |
| | $ | (11,737 | ) | | $ | 29,751 |
| | |
|
| |
(1)
| Composite annual depreciation rate for the underlying assets, excluding the effects of the amortization of any deficiency (or excess) that resulted from our depreciation studies. |
Loss on Asset Disposal
Other property includes the costs of obtaining rights
In 2020, we sold 703 locomotives deemed excess and no longer needed for railroad operations. We evaluated these locomotive retirements and concluded they were abnormal (see Note 1). Accordingly, we recorded a $385 million loss to natural resources of $336adjust their carrying amount to their estimated fair value, which resulted in a $97 million at both December 31, 2017 and December 31, 2016, with accumulated depletion of $200 million and $199 million, respectively.tax benefit.
Capitalized Interest
Total interest cost incurred on debt was $570$639 million, in 2017, $583$620 million, in 2016, and $566$574 million in 2015,during 2020, 2019 and 2018, respectively, of which $20$14 million, in both 2017$16 million, and 2016$17 million was capitalized during 2020, 2019 and $21 million in 2015 was capitalized.
2018, respectively.
7.
8. Current Liabilities
| | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| | ($ in millions) |
| Accounts payable: | | | |
| Accounts and wages payable | $ | 552 | | | $ | 710 | |
| Casualty and other claims (Note 17) | 182 | | | 212 | |
| Vacation liability | 121 | | | 136 | |
| Due to Conrail (Note 6) | 56 | | | 264 | |
| Other | 105 | | | 106 | |
| | | |
| Total | $ | 1,016 | | | $ | 1,428 | |
| | | |
| Other current liabilities: | | | |
| Interest payable | $ | 141 | | | $ | 149 | |
| Current operating lease liability (Note 10) | 89 | | | 97 | |
| Pension benefit obligations (Note 12) | 19 | | | 18 | |
| Other | 53 | | | 63 | |
| | | |
| Total | $ | 302 | | | $ | 327 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | ($ in millions) |
| Accounts payable: | | | |
| Accounts and wages payable | $ | 822 |
| | $ | 650 |
|
| Casualty and other claims (Note 16) | 187 |
| | 192 |
|
| Due to Conrail (Note 5) | 146 |
| | 129 |
|
| Vacation liability | 133 |
| | 134 |
|
| Other | 113 |
| | 110 |
|
| | | | |
| Total | $ | 1,401 |
| | $ | 1,215 |
|
| | | | |
| Other current liabilities: | |
| | |
|
| Interest payable | $ | 115 |
| | $ | 119 |
|
| Pension benefit obligations (Note 11) | 17 |
| | 16 |
|
| Other | 101 |
| | 94 |
|
| | | | |
| Total | $ | 233 |
| | $ | 229 |
|
8.9. Debt
Debt with weighted average interest rates and maturities isare presented below:
| | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| | ($ in millions) |
| Notes and debentures, with weighted-average interest rates as of December 31, 2020: | | | |
| 3.65% maturing to 2025 | $ | 2,673 | | | $ | 3,048 | |
| 4.32% maturing 2026 to 2031 | 2,714 | | | 2,714 | |
| 4.11% maturing 2037 to 2055 | 7,497 | | | 5,904 | |
| 6.07% maturing 2097 to 2118 | 784 | | | 1,331 | |
| Finance leases | 25 | | | 8 | |
| Discounts, premiums, and debt issuance costs | (1,012) | | | (809) | |
| Total debt | 12,681 | | | 12,196 | |
| | | |
| Less current maturities | (579) | | | (316) | |
| | | |
| Long-term debt excluding current maturities | $ | 12,102 | | | $ | 11,880 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | ($ in millions) |
| Notes and debentures: | | | |
| 5.32% maturing to 2022 | $ | 2,682 |
| | $ | 3,232 |
|
| 4.42% maturing 2023 to 2031 | 2,965 |
| | 2,746 |
|
| 4.54% maturing 2037 to 2052 | 4,404 |
| | 3,190 |
|
| 6.81% maturing 2097 to 2111 | 531 |
| | 1,328 |
|
| Securitization borrowings and capital leases | 102 |
| | 202 |
|
| Discounts, premiums, and debt issuance costs | (848 | ) | | (486 | ) |
| Total debt | 9,836 |
| | 10,212 |
|
| | | | |
| Less current maturities and short-term debt | (700 | ) | | (650 | ) |
| | | | |
| Long-term debt excluding current maturities and short-term debt | $ | 9,136 |
| | $ | 9,562 |
|
| | | | | | | | | | | |
| Long-term debt maturities subsequent to 2021 are as follows: | | | |
| 2022 | | | $ | 553 | |
| 2023 | | | 603 | |
| 2024 | | | 403 | |
| 2025 | | | 555 | |
| 2026 and subsequent years | | | 9,988 | |
| | | | |
| Total | | | $ | 12,102 | |
|
| | | | | |
| Long-term debt maturities subsequent to 2018 are as follows: | | | |
| 2019 | | | $ | 585 |
|
| 2020 | | | 314 |
|
| 2021 | | | 584 |
|
| 2022 | | | 600 |
|
| 2023 and subsequent years | | | 7,053 |
|
| | | | |
|
| Total | | | $ | 9,136 |
|
During the fourth quarter of 2017,In May 2020, we issued $750$800 million of 3.05% senior notes at 3.94% due 2047 and paid $522050, resulting in $790 million in net proceeds.
In May 2020, we also issued $800 million of premium3.155% senior notes due 2055 in exchange for $613$554 million of previously issued notes ($241450 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, $208 million at 4.8% due 2043, $78and $7 million at 7.05% due 2037, $492037). As part of the debt exchange, a $4 million loss on extinguishment was recognized in “Other income – net.”
In May 2020, we also renewed and amended our accounts receivable securitization program, reducing our maximum borrowing capacity from $450 million to $400 million. The term expires in May 2021. We had 0 amounts outstanding at 7.8% due 2027, $32either December 31, 2020 or 2019, and our available borrowing capacity was $400 million at 7.25% due 2031 and $5$429 million, at 6% due 2111). respectively.
The premium is reflected as a reduction of debtJanuary 1, 2019 and December 31, 2018 “Cash, cash equivalents, and restricted cash” line item in the Consolidated Balance Sheet and within “Debt repayments” in the Consolidated StatementStatements of Cash Flows and will be amortized as additional interest expense over the termincludes restricted cash of the new debt. No gain or loss was recognized as$88 million, which reflects deposits held by a result of the debt exchange.
During the third quarter of 2017, we issued $750 million of senior notes at 4.05% due 2052 in exchange for $551 million of previously issued notes ($48 million at 7.9% due 2097, $378 million at 6% due 2111, and $125 million at 6% due 2105). No gain or loss was recognized as a result of the debt exchange.
During the second quarter of 2017, we issued $300 million of 3.15% senior notes due 2027.
We have in place a $350 million receivables securitization facility under which NSR sells substantially all of its eligible third-party receivables to a subsidiary, which in turn may transfer beneficial interests in the receivables to various commercial paper vehicles. Amounts received under the facility are accounted for as borrowings. Under this facility, we received $100 million in 2016, and paid $100 million in both 2017 and 2016. The facility expires in June 2018. At December 31, 2017, the amount outstanding under the facility was $100 million (at an average variable interest rate of 3.21%). Our intent is to pay the remaining balance by the June 2018 expiration, therefore, this amount was included within “Short-term debt” at December 31, 2017. At December 31, 2016, the amount outstanding was $200 million (at an average variable interest rate of 2.47%), with $100 million included within “Long-term debt” and the remaining $100 million outstanding included in “Short-term debt” in the Consolidated Balance Sheet. At December 31, 2017 and 2016, the receivables included in “Accounts receivable-net” servingbond agent as collateral for these borrowings totaled $751 million and $704 million, respectively. These borrowings are supported by our $750 million credit agreement (see below).certain debt obligations which matured on October 1, 2019.
Credit Agreement and Debt Covenants
In March 2020, we renewed and amended our five-year credit agreement. We have in place and available aincreased the program’s borrowing capacity from $750 million five-year creditto $800 million. The amended agreement which expires in May 20212025 and provides for borrowings at prevailing rates and includes covenants. We had no0 amounts outstanding under this facility at either December 31, 20172020, or 2019.
10. Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” and 2016,subsequent amendments, which replaced existing lease guidance in GAAP and requires lessees to recognize ROU assets and lease liabilities on the balance sheet for leases greater than twelve months and disclose key information about leasing arrangements. We adopted the standard on January 1, 2019 using the modified retrospective method and used the effective date as our date of initial application. Financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. Upon adoption of the standard, we recognized ROU assets and corresponding lease liabilities of $586 million on the Consolidated Balance Sheet as of January 1, 2019. There were no adjustments to “Retained income” on adoption.
The standard provides a number of optional practical expedients for transition. We elected the package of practical expedients under the transition guidance which permitted us not to reassess under the new standard our prior conclusions for lease identification and lease classification on expired or existing contracts and whether initial direct costs previously capitalized would qualify for capitalization under FASB ASC 842. We also elected the practical expedient related to land easements, which allowed us to not reassess our current accounting treatment for existing agreements on land easements, which are in compliance withnot accounted for as leases. We did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases.
The standard also provides practical expedients and recognition exemptions for an entity’s ongoing accounting policy elections. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we do not recognize ROU assets or lease liabilities. We also elected the practical expedient not to separate lease and non-lease components for all of its covenants.our leases.
9. Lease Commitments
We are committed under long-term lease agreements which expire on various dates through 2067, for equipment, lines of road, and other property. The following amountsSome of these agreements are variable lease agreements that include usage-based payments. These agreements contain payment provisions that depend on an index or rate, initially measured using the index or rate at the lease commencement date, and are therefore not included in our future minimum lease payments. Our long-term lease agreements do not contain any material restrictive covenants.
Our equipment leases have remaining terms of less than 1 year to 5 years and our lines of road and land leases have remaining terms of less than 1 year to 137 years. Some of these leases include options to extend the leases for up to 99 years and some include options to terminate the leases within 30 days. Because we are not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term, and associated payments are excluded from future minimum lease payments.
Leases with an initial term of twelve months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.
Operating lease amounts included on the Consolidated Balance Sheets are as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| | ($ in millions) |
| Classification | | | |
| Assets | | | | |
| ROU assets | Other assets | $ | 433 | | | $ | 539 | |
| | | | |
| Liabilities | | | | |
| Current lease liabilities | Other current liabilities | $ | 89 | | | $ | 97 | |
| Non-current lease liabilities | Other liabilities | 344 | | | 441 | |
| | | | |
| Total lease liabilities | | $ | 433 | | | $ | 538 | |
The components of total lease expense, primarily included in“Purchased services and rents,” are as follows:
| | | | | | | | | | | |
| 2020 | | 2019 |
| ($ in millions) |
| | | |
| Operating lease expense | $ | 109 | | | $ | 114 | |
| Variable lease expense | 42 | | | 57 | |
| Short-term lease expense | 9 | | | 5 | |
| | | |
| Total lease expense | $ | 160 | | | $ | 176 | |
In March 2019, we entered into a non-cancellable lease for an office building with an estimated construction cost of $550 million. The lease will commence upon completion of the construction (for which we are a construction agent) of the office building which is expected to CRC underbe in the Shared Assets Areas agreements (Note 5). second half of 2021. The initial lease term is five years
with options to renew, purchase, or sell the office building at the end of the lease term. Upon lease commencement, the ROU asset and lease liability will be determined and recorded. The lease also contains a residual value guarantee of up to 90 percent of the total construction cost.
Other information related to operating leases is as follows:
| | | | | | | | | | | |
| December 31, |
| 2020 | | 2019 |
| | | |
| Weighted-average remaining lease term (years) on operating leases | 8.18 | | 8.25 |
| | | |
| Weighted-average discount rates on operating leases | 3.50 | % | | 3.52 | % |
As the rates implicit in most of our leases are not readily determinable, we use a collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. We use the portfolio approach and group leases into short-, medium-, and long-term categories, applying the corresponding incremental borrowing rates to these categories.
During 2020 and 2019, respectively, ROU assets obtained in exchange for new operating lease liabilities were $22 million and $49 million. Cash paid for amounts included in the measurement of lease liabilities was $109 million and $114 million in 2020 and 2019, respectively, and is included in operating cash flows. During 2019, cash proceeds from a sale and leaseback transaction were $82 million and the gain on the transaction was $15 million.
Future minimum lease payments andunder non-cancellable operating lease expenseleases are as follows:
| | | | | |
| December 31, 2020 |
| ($ in millions) |
| |
| 2021 | $ | 101 | |
| 2022 | 76 | |
| 2023 | 67 | |
| 2024 | 58 | |
| 2025 | 57 | |
| 2026 and subsequent years | 145 | |
| Total lease payments | 504 | |
| Less: Interest | 71 | |
| |
| Present value of lease liabilities | $ | 433 | |
Future Minimum Lease Payments
|
| | | |
| | Operating Leases |
| | ($ in millions) |
| | |
| 2018 | $ | 69 |
|
| 2019 | 66 |
|
| 2020 | 60 |
|
| 2021 | 55 |
|
| 2022 | 51 |
|
| 2023 and subsequent years | 359 |
|
| | |
| Total | $ | 660 |
|
| | | | | |
| December 31, 2019 |
| ($ in millions) |
| |
| 2020 | $ | 110 | |
| 2021 | 104 | |
| 2022 | 79 | |
| 2023 | 70 | |
| 2024 | 61 | |
| 2025 and subsequent years | 206 | |
| Total lease payments | 630 | |
| Less: Interest | 92 | |
| |
| Present value of lease liabilities | $ | 538 | |
Operating Lease Expense
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | ($ in millions) |
| | | | | | |
| Minimum rents | $ | 90 |
| | $ | 98 |
| | $ | 111 |
|
| Contingent rents | 79 |
| | 73 |
| | 84 |
|
| | | | | | |
| Total | $ | 169 |
| | $ | 171 |
| | $ | 195 |
|
lease expense accounted for under ASC 840 “Leases” in 2018 included $102 million for minimum rents and $102 million for contingent rents. Contingent rents are primarily comprised of usage-based rent paid to other railroadspayments for joint facility operations.equipment under service contracts.
10.11. Other Liabilities
| | | | | | | | | | | |
| | December 31, |
| | 2020 | | 2019 |
| | ($ in millions) |
| | | |
| Long-term advances from Conrail (Note 6) | $ | 534 | | | $ | 280 | |
| Non-current operating lease liability (Note 10) | 344 | | | 441 | |
| Net pension benefit obligations (Note 12) | 340 | | | 302 | |
| Net other postretirement benefit obligations (Note 12) | 306 | | | 287 | |
| Casualty and other claims (Note 17) | 169 | | | 171 | |
| Deferred compensation | 107 | | | 104 | |
| Other | 187 | | | 159 | |
| | | |
| Total | $ | 1,987 | | | $ | 1,744 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| | ($ in millions) |
| | | | |
| Net other postretirement benefit obligations (Note 11) | $ | 309 |
| | $ | 346 |
|
| Net pension benefit obligations (Note 11) | 296 |
| | 333 |
|
| Long-term advances from Conrail (Note 5) | 280 |
| | 280 |
|
| Casualty and other claims (Note 16) | 179 |
| | 178 |
|
| Deferred compensation | 113 |
| | 112 |
|
| Other | 170 |
| | 193 |
|
| | | | |
| Total | $ | 1,347 |
| | $ | 1,442 |
|
11.12. Pensions and Other Postretirement Benefits
We have both funded and unfunded defined benefit pension plans covering principally salariedeligible 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, a defined percentage ofcertain health care expenses isare covered for retired employees and their dependents, reduced by any deductibles, coinsurance, and, in some cases, coverage provided under other group insurance policies. ThoseEligible 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 Other Postretirement Benefit Obligations and Plan Assets
| | | | Pension Benefits | | Other Postretirement Benefits | | Pension Benefits | | Other Postretirement
Benefits |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
| | ($ in millions) | | ($ in millions) |
| Change in benefit obligations: | | | | | | | | Change in benefit obligations: | | | | | | | |
| Benefit obligation at beginning of year | $ | 2,420 |
| | $ | 2,372 |
| | $ | 528 |
| | $ | 536 |
| Benefit obligation at beginning of year | $ | 2,588 | | | $ | 2,371 | | | $ | 457 | | | $ | 466 | |
| Service cost | 38 |
| | 36 |
| | 7 |
| | 7 |
| Service cost | 40 | | | 35 | | | 6 | | | 6 | |
| Interest cost | 80 |
| | 82 |
| | 15 |
| | 16 |
| Interest cost | 74 | | | 93 | | | 12 | | | 17 | |
| Actuarial losses | 143 |
| | 66 |
| | 6 |
| | 14 |
| Actuarial losses | 294 | | | 235 | | | 35 | | | 28 | |
| Plan amendment | | Plan amendment | 0 | | | 0 | | | 0 | | | (18) | |
| Benefits paid | (140 | ) | | (136 | ) | | (46 | ) | | (45 | ) | Benefits paid | (151) | | | (146) | | | (39) | | | (42) | |
| Benefit obligation at end of year | 2,541 |
| | 2,420 |
| | 510 |
| | 528 |
| Benefit obligation at end of year | 2,845 | | | 2,588 | | | 471 | | | 457 | |
| | | | | | | | | | | | | | | | |
| Change in plan assets: | |
| | |
| | |
| | |
| Change in plan assets: | | | | | | | |
| Fair value of plan assets at beginning of year | 2,073 |
| | 2,040 |
| | 182 |
| | 189 |
| Fair value of plan assets at beginning of year | 2,462 | | | 2,105 | | | 170 | | | 158 | |
| Actual return on plan assets | 423 |
| | 152 |
| | 40 |
| | 17 |
| Actual return on plan assets | 345 | | | 485 | | | 21 | | | 34 | |
Employer contribution1 | 17 |
| | 17 |
| | 25 |
| | 21 |
| |
| Employer contribution | | Employer contribution | 19 | | | 18 | | | 13 | | | 20 | |
| Benefits paid | (140 | ) | | (136 | ) | | (46 | ) | | (45 | ) | Benefits paid | (151) | | | (146) | | | (39) | | | (42) | |
| Fair value of plan assets at end of year | 2,373 |
| | 2,073 |
| | 201 |
| | 182 |
| Fair value of plan assets at end of year | 2,675 | | | 2,462 | | | 165 | | | 170 | |
| | | | | | | | | | | | | | | | |
| Funded status at end of year | $ | (168 | ) | | $ | (347 | ) | | $ | (309 | ) | | $ | (346 | ) | Funded status at end of year | $ | (170) | | | $ | (126) | | | $ | (306) | | | $ | (287) | |
| | | | | | | | | | | | | | | | |
| Amounts recognized in the Consolidated | |
| | |
| | |
| | |
| Amounts recognized in the Consolidated | | | | | | | |
| Balance Sheets: | |
| | |
| | |
| | |
| Balance Sheets: | | | | | | | |
| Noncurrent assets | $ | 145 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| |
| Current liabilities | (17 | ) | | (16 | ) | | — |
| | — |
| |
| Noncurrent liabilities | (296 | ) | | (333 | ) | | (309 | ) | | (346 | ) | |
| Other assets | | Other assets | $ | 189 | | | $ | 194 | | | $ | 0 | | | $ | 0 | |
| Other current liabilities | | Other current liabilities | (19) | | | (18) | | | 0 | | | 0 | |
| Other liabilities | | Other liabilities | (340) | | | (302) | | | (306) | | | (287) | |
| | | | | | | | | | | | | | | | |
| Net amount recognized | $ | (168 | ) | | $ | (347 | ) | | $ | (309 | ) | | $ | (346 | ) | Net amount recognized | $ | (170) | | | $ | (126) | | | $ | (306) | | | $ | (287) | |
| | | | | | | | | | | | | | | | |
| Amounts included in accumulated other comprehensive | |
| | |
| | |
| | |
| Amounts included in accumulated other comprehensive | | | | | | | |
| loss (before tax): | |
| | |
| | |
| | |
| loss (before tax): | | | | | | | |
| Net loss | $ | 781 |
| | $ | 940 |
| | $ | 11 |
| | $ | 30 |
| Net loss | $ | 869 | | | $ | 781 | | | $ | 57 | | | $ | 29 | |
| Prior service cost (benefit) | 2 |
| | 3 |
| | (283 | ) | | (307 | ) | Prior service cost (benefit) | 0 | | | 1 | | | (228) | | | (253) | |
1Norfolk Southern is eligible to receive reimbursement from the Norfolk Southern Corporation Post-Retirement Benefits Trust (Trust), and the Trust had an outstanding liability to Norfolk Southern of $1 million at December 31, 2017 and $13 million at December 31, 2016.
Our accumulated benefit obligation for our defined benefit pension plans is $2.3$2.6 billion and $2.2$2.3 billion at December 31, 20172020 and December 31, 2016,2019, respectively. Our unfunded pension plans, included above, which in all cases have no assets, had projected benefit obligations of $313$359 million and $320 million at December 31, 20172020 and $286 million at December 31, 2016,2019, respectively, and had accumulated benefit obligations of $267$330 million and $252$292 million at December 31, 20172020 and December 31, 2016,2019, respectively.
Pension and Other Postretirement Benefit Cost Components
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| | ($ in millions) |
| | | | | |
| Pension benefits: | | | | | |
| Service cost | $ | 40 | | | $ | 35 | | | $ | 39 | |
| Interest cost | 74 | | | 93 | | | 83 | |
| Expected return on plan assets | (190) | | | (179) | | | (177) | |
| Amortization of net losses | 51 | | | 43 | | | 57 | |
| Amortization of prior service cost | 1 | | | 1 | | | 0 | |
| | | | | |
| Net cost (benefit) | $ | (24) | | | $ | (7) | | | $ | 2 | |
| | | | | |
| Other postretirement benefits: | | | | | |
| Service cost | $ | 6 | | | $ | 6 | | | $ | 7 | |
| Interest cost | 12 | | | 17 | | | 15 | |
| Expected return on plan assets | (14) | | | (14) | | | (15) | |
| | | | | |
| Amortization of prior service benefit | (25) | | | (24) | | | (24) | |
| | | | | |
| Net benefit | $ | (21) | | | $ | (15) | | | $ | (17) | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | ($ in millions) |
| | | | | | |
| Pension benefits: | | | | | |
| Service cost | $ | 38 |
| | $ | 36 |
| | $ | 41 |
|
| Interest cost | 80 |
| | 82 |
| | 93 |
|
| Expected return on plan assets | (172 | ) | | (173 | ) | | (165 | ) |
| Amortization of net losses | 51 |
| | 51 |
| | 65 |
|
| Amortization of prior service cost | 1 |
| | — |
| | — |
|
| | | | | | |
| Net cost (benefit) | $ | (2 | ) | | $ | (4 | ) | | $ | 34 |
|
| | | | | | |
| Other postretirement benefits: | |
| | |
| | |
|
| Service cost | $ | 7 |
| | $ | 7 |
| | $ | 7 |
|
| Interest cost | 15 |
| | 16 |
| | 21 |
|
| Expected return on plan assets | (15 | ) | | (17 | ) | | (19 | ) |
| Amortization of prior service benefit | (24 | ) | | (24 | ) | | (24 | ) |
| | | | | | |
| Net benefit | $ | (17 | ) | | $ | (18 | ) | | $ | (15 | ) |
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
|
| | | | | | | |
| | 2017 |
| | Pension
Benefits | | Other
Postretirement
Benefits |
| | ($ in millions) |
| | | | |
| Net gain arising during the year | $ | (108 | ) | | $ | (19 | ) |
| Amortization of net losses | (51 | ) | | — |
|
| Amortization of prior service benefit (cost) | (1 | ) | | 24 |
|
| | | | |
| Total recognized in other comprehensive income | $ | (160 | ) | | $ | 5 |
|
| Total recognized in net periodic cost | |
| | |
|
| and other comprehensive income | $ | (162 | ) | | $ | (12 | ) |
| | | | | | | | | | | |
| | 2020 |
| Pension
Benefits | | Other
Postretirement
Benefits |
| | ($ in millions) |
| | | |
| Net loss arising during the year | $ | 139 | | | $ | 28 | |
| | | |
| Amortization of net losses | (51) | | | 0 | |
| Amortization of prior service (cost) benefit | (1) | | | 25 | |
| | | |
| Total recognized in other comprehensive income | $ | 87 | | | $ | 53 | |
| | | |
| Total recognized in net periodic cost and other comprehensive income | $ | 63 | | | $ | 32 | |
Net actuarial gainslosses arising during the year for both pension benefits and other postretirement benefits were due primarily to decreases in discount rates, partially offset by higher actual returns on plan assets, partially offset by a decrease in discount rate.assets.
The estimated net losses for the pension benefit plans that will be amortized from accumulated other comprehensive loss into net periodic cost over the next year are $57$66 million. The estimated net losses and prior service benefit for the other postretirement benefit plans that will be amortized from accumulated other comprehensive loss into net periodic benefit over the next year is $24$23 million.
Pension and Other Postretirement BenefitsAssumptions
Costs for pension and other postretirement benefits are determined based on actuarial valuations that reflect appropriate assumptions as of the measurement date, ordinarily the beginning of each year. The funded status of the plans is determined using appropriate assumptions as of each year end. A summary of the major assumptions follows:
| | | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
| Pension funded status: | | | | | | Pension funded status: | | | | | |
| Discount rate | 3.74 | % | | 4.05 | % | | 4.30 | % | Discount rate | 2.67 | % | | 3.38 | % | | 4.33 | % |
| Future salary increases | 4.21 | % | | 4.21 | % | | 4.50 | % | Future salary increases | 4.21 | % | | 4.21 | % | | 4.21 | % |
| Other postretirement benefits funded status: | |
| | |
| | | Other postretirement benefits funded status: | | | | | |
| Discount rate | 3.57 | % | | 3.83 | % | | 4.02 | % | Discount rate | 2.27 | % | | 3.13 | % | | 4.18 | % |
| Pension cost: | |
| | |
| | | Pension cost: | | | | | |
| Discount rate - service cost | 4.31 | % | | 4.64 | % | | 3.95 | % | Discount rate - service cost | 3.71 | % | | 4.55 | % | | 4.01 | % |
| Discount rate - interest cost | 3.43 | % | | 3.51 | % | | 3.95 | % | Discount rate - interest cost | 2.92 | % | | 3.99 | % | | 3.33 | % |
| Return on assets in plans | 8.25 | % | | 8.25 | % | | 8.25 | % | Return on assets in plans | 8.25 | % | | 8.25 | % | | 8.25 | % |
| Future salary increases | 4.21 | % | | 4.50 | % | | 4.50 | % | Future salary increases | 4.21 | % | | 4.21 | % | | 4.21 | % |
| Other postretirement benefits cost: | |
| | |
| | | Other postretirement benefits cost: | | | | | |
Discount rate - service cost | 4.17 | % | | 4.36 | % | | 3.70 | % | Discount rate - service cost | 3.41 | % | | 4.39 | % | | 3.83 | % |
| Discount rate - interest cost | 3.14 | % | | 3.15 | % | | 3.70 | % | Discount rate - interest cost | 2.69 | % | | 3.83 | % | | 3.13 | % |
| Return on assets in plans | 8.00 | % | | 8.00 | % | | 8.00 | % | Return on assets in plans | 8.00 | % | | 8.00 | % | | 8.00 | % |
| Health care trend rate | 6.56 | % | | 6.30 | % | | 6.56 | % | Health care trend rate | 6.25 | % | | 6.50 | % | | 6.30 | % |
To determine the discount rates used to measure our benefit obligations, we utilize analyses in which the projected annual cash flows from the pension and other postretirement benefit plans were matched with yield curves based on an appropriate universe of high-quality corporate bonds. We use the results of the yield curve analyses to select the discount rates that match the payment streams of the benefits in these plans.
Effective January 1, 2016, we began usingWe use a spot rate approach to estimate the service cost and interest cost
components of net periodic benefit cost for our pension and other postretirement benefits plans rather than a single
weighted-average discount rate.benefit plans.
Health Care Cost Trend Assumptions
For measurement purposes at December 31, 2017,2020, increases in the per capita cost of pre-Medicare covered health care benefits were assumed to be 6.3%6.00% for 2018. It is assumed2021. We assume the rate will ratably decrease gradually to an ultimate rate of 5.0% for 20232025 and remain at that level thereafter.
Assumed health care cost trend rates affect the amounts reported in the consolidated financial statements. To illustrate, a one-percentage point change in the assumed health care cost trend would have the following effects:
| | | | | | | | | | | |
| | One-percentage Point |
| | Increase | | Decrease |
| | ($ in millions) |
| Increase (decrease) in: | | | |
| Total service and interest cost components | $ | 1 | | | $ | (1) | |
| Postretirement benefit obligation | 8 | | | (8) | |
|
| | | | | | | |
| | One-percentage point |
| | Increase | | Decrease |
| | ($ in millions) |
| Increase (decrease) in: | | | |
| Total service and interest cost components | $ | 1 |
| | $ | (1 | ) |
| Postretirement benefit obligation | 10 |
| | (9 | ) |
Asset Management
TenNaN investment firms manage our defined benefit pension plans’plan’s assets under investment guidelines approved by our Benefits Investment Committee that is comprisedcomposed of members of our management. Investments are restricted to domestic and international equity securities, domestic and international fixed income securities, and unleveraged exchange-traded options and financial futures. Limitations restrict investment concentration and use of certain derivative investments. The target asset allocation for equity is 75% of the pension plans’plan’s assets. The fixedFixed income portfolio is invested in the BlackRock Government/Credit Bond Index Fund.investments must consist predominantly of securities rated investment grade or higher. Equity investments must be in liquid securities listed on national exchanges. No investment is permitted in our securities (except through commingled pension trust funds).
Our pension plans’ weighted averageplan’s weighted-average asset allocations, by asset category, were as follows:
| | | | | | | | | | | |
| Percentage of Plan
Assets at December 31, |
| | 2020 | | 2019 |
| | | |
| Domestic equity securities | 52 | % | | 50 | % |
| International equity securities | 24 | % | | 24 | % |
| Debt securities | 22 | % | | 24 | % |
| Cash and cash equivalents | 2 | % | | 2 | % |
| | | |
| Total | 100 | % | | 100 | % |
|
| | | | | |
| | Percentage of plan assets at December 31, |
| | 2017 | | 2016 |
| | | | |
| Domestic equity securities | 49 | % | | 51 | % |
| International equity securities | 25 | % | | 24 | % |
| Debt securities | 24 | % | | 23 | % |
| Cash and cash equivalents | 2 | % | | 2 | % |
| | | | |
| Total | 100 | % | | 100 | % |
The other postretirement benefit plan assets consist primarily of trust-owned variable life insurance policies with an asset allocation at December 31, 20172020 of 61%68% in equity securities and 39%32% in debt securities compared with 67% in equity securities and 33% in debt securities at December 31, 2016.2019. The target asset allocation for equity is between 50% and 75% of the plan’s assets.
The plans’ assumed future returns are based principally on the asset allocations and historical returns for the plans’ asset classes determined from both actual plan returns and, over longer time periods, expected market returns for those asset classes. For 2018,2021, we assume an 8.25%8.00% return on pension plan assets.
Fair Value of Plan Assets
FollowingThe following is a description of the valuation methodologies used for pension plan assets measured at fair value.
Common stock:Stock: Shares held by the plan at year end are valued at the official closing price as defined by the exchange or at the most recent trade price of athe security at the close of the active market.
Common collective trusts: The readily determinable fair value is based on the published fair value per unit of the trusts. The common collective trusts hold equity securities, fixed income securities and cash and cash equivalents.
Fixed income securities: Valued based on quotes received from independent pricing services or at an estimated price at which a dealer would pay for the security at year end using observable market-based inputs.
Commingled funds: The readily determinable fair value is based on the published fair value per unit of the funds. The commingled funds hold equity securities.
Interest bearing cash:Cash and cash equivalents: Short-term Treasury bills or notes are valued at an estimated price at which a dealer would pay for the security at year end using observable market-based inputs; money market funds are valued at the closing price reported on the active market on which the funds are traded.
U.S. government and agencies securities: Valued at an estimated price at which a dealer would pay for a security at year end using observable market-based inputs. Inflation adjusted instruments utilize the appropriate index factor.
The following table sets forth the pension plans’plan’s assets by valuation technique level, within the fair value hierarchy (therehierarchy. There were no level 3 valued assets).assets at December 31, 2020 or 2019.
| | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Level 1 | | Level 2 | | Total |
| | ($ in millions) |
| | | | | |
| Common stock | $ | 1,483 | | | $ | 0 | | | $ | 1,483 | |
| Common collective trusts: | | | | | |
| International equity securities | 0 | | | 399 | | | 399 | |
| Debt securities | 0 | | | 297 | | | 297 | |
| Fixed income securities: | | | | | |
| Government and agencies securities | 0 | | | 146 | | | 146 | |
| Corporate bonds | 0 | | | 117 | | | 117 | |
| Mortgage and other asset-backed securities | 0 | | | 24 | | | 24 | |
| Commingled funds | 0 | | | 149 | | | 149 | |
| Cash and cash equivalents | 60 | | | 0 | | | 60 | |
| | | | | |
| | | | | |
| Total investments | $ | 1,543 | | | $ | 1,132 | | | $ | 2,675 | |
|
| | | | | | | | | | | |
| | December 31, 2017 |
| | Level 1 | | Level 2 | | Total |
| | ($ in millions) |
| | | | | | |
| Common stock | $ | 1,154 |
| | $ | — |
| | $ | 1,154 |
|
| Common collective trusts: | |
| | |
| | |
|
| Debt securities | — |
| | 562 |
| | 562 |
|
| International equity securities | — |
| | 397 |
| | 397 |
|
| Commingled funds | — |
| | 233 |
| | 233 |
|
| Interest bearing cash | 23 |
| | — |
| | 23 |
|
| U.S. government and agencies securities | — |
| | 4 |
| | 4 |
|
| | | | | | |
| Total investments | $ | 1,177 |
| | $ | 1,196 |
| | $ | 2,373 |
|
| | | | December 31, 2016 | | December 31, 2019 |
| | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| | ($ in millions) | | ($ in millions) |
| | | | | | | |
| Common stock | $ | 1,142 |
| | $ | — |
| | $ | 1,142 |
| Common stock | $ | 1,329 | | | $ | 0 | | | $ | 1,329 | |
| Common collective trusts: | |
| | |
| | |
| Common collective trusts: | | | | | |
| International equity securities | | International equity securities | 0 | | | 377 | | | 377 | |
| Debt securities | — |
| | 481 |
| | 481 |
| Debt securities | 0 | | | 303 | | | 303 | |
| International equity securities | — |
| | 324 |
| | 324 |
| |
| Fixed income securities: | | Fixed income securities: | |
| Government and agencies securities | | Government and agencies securities | 0 | | | 172 | | | 172 | |
| Corporate bonds | | Corporate bonds | 0 | | | 84 | | | 84 | |
| Mortgage and other asset-backed securities | | Mortgage and other asset-backed securities | 0 | | | 26 | | | 26 | |
| | Commingled funds | — |
| | 79 |
| | 79 |
| Commingled funds | 0 | | | 121 | | | 121 | |
| Interest bearing cash | 43 |
| | — |
| | 43 |
| |
| U.S. government and agencies securities | — |
| | 4 |
| | 4 |
| |
| Cash and cash equivalents | | Cash and cash equivalents | 50 | | | 0 | | | 50 | |
| | | | | | | | | | | | | |
| Total investments | $ | 1,185 |
| | $ | 888 |
| | $ | 2,073 |
| Total investments | $ | 1,379 | | | $ | 1,083 | | | $ | 2,462 | |
FollowingThe following is a description of the valuation methodologies used for other postretirement benefit plan assets measured at fair value.
Trust-owned life insurance: Valued at our share of the net assets of trust-owned life insurance issued by a major insurance company. The underlying investments of that trust consist of a U.S. stock account and a U.S. bond account but may retain cash at times as well. The U.S. stock account and U.S. bond account are valued based on readily determinable fair values.
The other postretirement benefit plan assets consisted of trust-owned life insurance with fair values of $201$165 million and $182$170 million at December 31, 20172020 and 20162019, respectively, and are valued under level 2 of the fair value hierarchy. There were no level 1 or level 3 valued assets.
Contributions and Estimated Future Benefit Payments
In 2018,2021, we expect to contribute approximately $17$19 million to our unfunded pension plans for payments to pensioners and approximately $43$36 million to our other postretirement benefit plans for retiree health and death benefits. We do not expect to contribute to our funded pension plan in 2018.2021.
Benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
|
| | | | | | | |
| | Pension Benefits | | Other Postretirement Benefits |
| | ($ in millions) |
| | | | |
| 2018 | $ | 143 |
| | $ | 42 |
|
| 2019 | 143 |
| | 41 |
|
| 2020 | 143 |
| | 40 |
|
| 2021 | 144 |
| | 38 |
|
| 2022 | 145 |
| | 37 |
|
| Years 2023 – 2027 | 731 |
| | 169 |
|
| | | | | | | | | | | |
| Pension
Benefits | | Other Postretirement Benefits |
| | ($ in millions) |
| | | |
| 2021 | $ | 147 | | | $ | 36 | |
| 2022 | 146 | | | 35 | |
| 2023 | 145 | | | 33 | |
| 2024 | 145 | | | 32 | |
| 2025 | 144 | | | 31 | |
| Years 2026 – 2030 | 719 | | | 142 | |
Other Postretirement Coverage
Under collective bargaining agreements, Norfolk Southern and certain subsidiaries participate in a multi-employer benefit plan, which provides certain postretirement health care and life insurance benefits to eligible unioncraft employees. Premiums under this plan are expensed as incurred and totaled $44$22 million in 2017, $372020, $31 million in 2016,2019, and $32$35 million in 2015.2018.
Section 401(k) Plans
Norfolk Southern and certain subsidiaries provide Section 401(k) savings plans for employees. Under the plans, we match a portion of employee contributions, subject to applicable limitations. Our matching contributions, recorded as an expense, under these plans weretotaled $21 million in 2020, $22 million in 2019, and $23 million in 2017 and $21 millionin both2016 and 2015.2018.
12.13. Stock-Based Compensation
Under the stockholder-approved Long-Term Incentive Plan (LTIP),LTIP, the Compensation Committee (Committee), which is made up of nonemployee members of the Board, of Directors, or the Chief Executive Officer (when delegated authority by such Committee), may grant stock options, stock appreciation rights (SARs), restricted stock units (RSUs), restricted shares, performance share units (PSUs), and performance shares, up to a maximum of
104,125,000 shares of our Common Stock, of which 8,774,7688,995,582 remain available for future grants as of December 31, 2017.2020.
The number of shares remaining for issuance under the LTIP is reduced (i) by 1 for each award granted as a stock option or stock-settled SAR, or (ii) by 1.61 for an award made in the form other than a stock option or stock-settled SAR. Under the Board-approved Thoroughbred Stock Option Plan (TSOP), the Committee may grant stock options up to a maximum of 6,000,000 shares of Common Stock. We use newly issued shares to satisfy any exercises and awards under the LTIP and the TSOP.
The LTIP also permits the payment, on a current or a deferred basis and in cash or in stock, of dividend equivalents on shares of Common Stock covered by stock options, RSUs, or PSUs in an amount commensurate with regular quarterly dividends paid on Common Stock. With respect to stock options, if employment of the participant is terminated for any reason, including retirement, disability, or death, we have no further obligation to make any dividend equivalent payments. Regarding RSUs, we have no further obligation to make any dividend equivalent payments unless employment of the participant is terminated as a result of qualifying retirement or disability. Should an employee terminate employment, they are not required to forfeit dividend equivalent payments already received. Outstanding PSUs do not receive dividend equivalent payments.
The Committee granted stock options, RSUs and PSUs pursuant to the LTIP and granted stock options pursuant to the TSOP for the last three years as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| Granted | | Weighted- Average Grant-Date Fair Value | | Granted | | Weighted- Average Grant-Date Fair Value | | Granted | | Weighted- Average Grant-Date Fair Value |
| Stock options | 43,770 | | $ | 52.05 | | | 47,360 | | $ | 45.74 | | | 40,960 | | $ | 41.70 | |
| RSUs | 178,190 | | 210.11 | | | 219,710 | | 164.47 | | | 217,290 | | 148.37 | |
| PSUs | 78,830 | | 212.66 | | | 102,250 | | 160.97 | | | 92,314 | | 147.47 | |
|
| | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Granted | | Weighted Average Grant-Date Fair Value | | Granted | | Weighted Average Grant-Date Fair Value | | Granted | | Weighted Average Grant-Date Fair Value |
| Stock options: | | | | | | | | | | | |
| LTIP | 341,120 | | $ | 37.73 |
| | 694,290 | | $ | 19.92 |
| | 643,890 | | $ | 30.35 |
|
| TSOP | 144,440 | | 31.33 |
| | 302,320 | | 14.75 |
| | 181,320 | | 24.71 |
|
| Total | 485,560 | | | | 996,610 | | | | 825,210 | | |
| | | | | | | | | | | | |
| Restricted stock units | 83,330 | | 120.16 |
| | 136,250 | | 70.44 |
| | 101,470 | | 104.23 |
|
| Performance share units | 300,334 | | 88.56 |
| | 1,042,628 | | 52.75 |
| | 413,770 | | 71.66 |
|
Beginning in 2018, recipients of certain RSUs and PSUs pursuant to the LTIP who retire prior to October 1st will forfeit awards received in the current year. Receipt of ancertain LTIP awardawards is contingent on the recipient having executed a non-compete agreement with the company.
We account for our grants of stock options, RSUs, PSUs, and dividend equivalent payments in accordance with FASB ASC 718, “Compensation - Stock Compensation.” Accordingly, all awards result in charges to net income while dividend equivalent payments, which are all related to equity classified awards, are charged to retained income. Compensation cost for the awards is recognized on a straight-line basis over the requisite service period for the entire award. Related compensation costs and tax benefits during the yearyears were:
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| | ($ in millions) |
| | | | | |
| Stock-based compensation expense | $ | 28 | | | $ | 53 | | | $ | 47 | |
| Total tax benefit | 44 | | | 37 | | | 33 | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | ($ in millions) |
| | | | | | |
| Stock-based compensation expense | $ | 45 |
| | $ | 42 |
| | $ | 42 |
|
| Total tax benefit | 54 |
| | 31 |
| | 13 |
|
Stock Options
Option exercise prices will be at least the higher of (i) the average of the high and low prices at which Common Stock is traded on the grant date, or (ii) the closing price of Common Stock on the grant date. All options are subject to a vesting period of at least one year, and the term of the option will not exceed ten years. Holders of the options granted under the LTIP who remain actively employed receive cash dividend equivalent payments for four years in an amount equal to the regular quarterly dividends paid on Common Stock. Dividend equivalent payments are not made on the TSOP options.
For all years, options granted under the LTIP and the TSOP may not be exercised prior to the fourth and third anniversaries of the date of grant, respectively, or if the optionee retires or dies before that anniversary date, may not be exercised before the later of one year after the grant date or the date of the optionee’s retirement or death.
The fair value of each option awarded in 2017, 2016, and 2015 was measured on the date of grant using a binomial lattice-based optionthe Black-Scholes valuation model. Expected volatility is based on implied volatility from traded options on, and historical volatility of, Common Stock. Historical data is used to estimate option exercises and employee terminations within the valuation model. TheHistorical exercise data is used to estimate the average expected option term is derived from the output of the valuation model and represents the period of time that all options granted are expected to be outstanding, including the branches of the model that result in options expiring unexercised.term. The average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. A dividend yield of zero0 was used for the LTIP options during the vesting period. For 2017, 2016,2020, 2019, and 2015,2018, a dividend yield of 2.04%1.76%, 3.37%2.06%, and 2.27%1.94%, respectively, was used for all vested LTIP options and all TSOP options.
The assumptions for the LTIP and TSOP grants for the last three years are shown in the following table:
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| | | | | |
| | | | | |
| Average expected volatility | 22 | % | | 23 | % | | 24 | % |
| Average risk-free interest rate | 1.47 | % | | 2.56 | % | | 2.55 | % |
| Average expected option term | 7.5 years | | 7.2 years | | 7.2 years |
| | | | | |
|
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| Average expected volatility | 26 | % | | 27 | % | | 25 | % |
| Average risk-free interest rate | 2.51 | % | | 2.00 | % | | 1.83 | % |
| Average expected option term LTIP | 8.6 years |
| | 8.9 years |
| | 9.3 years |
|
| Average expected option term TSOP | 8.3 years |
| | 8.6 years |
| | 9.1 years |
|
A summary of changes in stock options is presented below:
| | | | | | | Stock
Options | | Weighted- Average Exercise Price |
| | Stock Options | | Weighted Avg. Exercise Price | | | | |
| | | | | |
| Outstanding at December 31, 2016 | 5,554,054 |
| | $ | 72.57 |
| |
| Outstanding at December 31, 2019 | | Outstanding at December 31, 2019 | 2,677,449 | | | $ | 91.51 | |
| Granted | 485,560 |
| | 120.25 |
| Granted | 43,770 | | | 213.54 | |
| Exercised | (1,789,939 | ) | | 60.28 |
| Exercised | (1,171,786) | | | 86.12 | |
| Forfeited | (15,608 | ) | | 90.05 |
| Forfeited | (23,308) | | | 156.02 | |
| | | | | | | |
| Outstanding at December 31, 2017 | 4,234,067 |
| | 83.17 |
| |
| Outstanding at December 31, 2020 | | Outstanding at December 31, 2020 | 1,526,125 | | | 98.17 | |
The aggregate intrinsic value of options outstanding at December 31, 2017,2020 was $261$213 million with a weighted averageweighted-average remaining contractual term of 6.24.6 years. Of these options outstanding, 2,221,5771,220,685 were exercisable and had
an aggregate intrinsic value of $157$183 million with a weighted averageweighted-average exercise price of $74.06$87.75 and a weighted averageweighted-average remaining contractual term of 4.82.9 years.
The following table provides information related to options exercised for the last three years:
| | | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
| | ($ in millions) | | ($ in millions) |
| | | | | | | |
| Options exercised | 1,789,939 |
| | 1,466,721 |
| | 589,081 |
| Options exercised | 1,171,786 | | | 770,597 | | | 840,175 | |
| Total intrinsic value | $ | 114 |
| | $ | 60 |
| | $ | 27 |
| Total intrinsic value | $ | 144 | | | $ | 86 | | | $ | 72 | |
| Cash received upon exercise | 104 |
| | 74 |
| | 29 |
| Cash received upon exercise | 98 | | | 53 | | | 58 | |
| Related tax benefits realized | 35 |
| | 13 |
| | 7 |
| Related tax benefits realized | 29 | | | 18 | | | 16 | |
At December 31, 2017,2020, total unrecognized compensation related to options granted under the LTIP and the TSOP was $10$1 million, and is expected to be recognized over a weighted-average period of approximately 2.22.4 years. Tax benefits realized in both 2017 and 2016 are recognized in “Income taxes.” Tax benefits realized in 2015 were recognized as “Additional paid-in capital.”
Restricted Stock Units
Beginning in 2018, RSUs granted in all three yearsprimarily have a five-yearfour-year ratable restriction period and will be settled through the issuance of shares of Common Stock. TheRSUs granted prior to 2018 have a five-year restriction period and will also be settled through the issuance of shares of Common Stock. Certain RSU grants include cash dividend equivalent payments during the restriction period in an amount equal to regular quarterly dividends paid on Common Stock.
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| | ($ in millions) |
| | | | | |
| RSUs vested | 204,665 | | | 166,197 | | | 160,200 | |
| Common Stock issued net of tax withholding | 146,047 | | | 119,346 | | | 99,968 | |
| Related tax benefit realized | $ | 4 | | | $ | 2 | | | $ | 3 | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | ($ in millions) |
| | | | | | |
| RSUs vested | 137,200 |
| | 175,500 |
| | 166,750 |
|
| Common Stock issued net of tax witholding | 81,318 |
| | 103,936 |
| | 99,337 |
|
| Related tax benefit realized | $ | 3 |
| | $ | 1 |
| | $ | 4 |
|
Tax benefits realized in both 2017 and 2016 are recognized in “Income taxes.” Tax benefits realized in 2015 were recognized as “Additional paid-in capital.”
A summary of changes in RSUs is presented below:
| | | | | | | RSUs | | Weighted-
Average
Grant-Date
Fair Value |
| | RSUs | | Weighted- Average Grant-Date Fair Value | | | | |
| | | | | |
| Nonvested at December 31, 2016 | 645,645 |
| | $ | 80.68 |
| |
| Nonvested at December 31, 2019 | | Nonvested at December 31, 2019 | 666,172 | | | $ | 127.77 | |
| Granted | 83,330 |
| | 120.16 |
| Granted | 178,190 | | | 210.11 | |
| Vested | (137,200 | ) | | 75.14 |
| Vested | (204,665) | | | 130.87 | |
| Forfeited | (3,370 | ) | | 108.47 |
| Forfeited | (39,457) | | | 171.33 | |
| | | | | | | |
| Nonvested at December 31, 2017 | 588,405 |
| | 87.40 |
| |
| Nonvested at December 31, 2020 | | Nonvested at December 31, 2020 | 600,240 | | | 148.29 | |
At December 31, 2017,2020, total unrecognized compensation related to RSUs was $8$29 million, and is expected to be recognized over a weighted-average period of approximately 3.22.4 years.
Performance Share Units
PSUs provide for awards based on the achievement of certain predetermined corporate performance goals at the end of a three-year cycle and are settled through the issuance of shares of Common Stock. All PSUs will earn out based on the achievement of performance conditions and some will also earn out based on a market condition. The market condition fair value was measured on the date of grant using a Monte Carlo simulation model.
| | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| | ($ in millions) |
| | | | | |
| PSUs earned | 235,935 | | | 331,099 | | | 154,189 | |
| Common Stock issued net of tax withholding | 156,477 | | | 221,241 | | | 94,399 | |
| Related tax benefit realized | $ | 7 | | | $ | 9 | | | $ | 3 | |
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | ($ in millions) |
| | | | | | |
| PSUs earned | 171,080 |
| | 406,038 |
| | 236,601 |
|
| Common Stock issued net of tax witholding | 99,805 |
| | 241,757 |
| | 141,386 |
|
| Related tax benefit realized | $ | 1 |
| | $ | 3 |
| | $ | 3 |
|
Tax benefits realized in both 2017 and 2016 are recognized in “Income taxes.” Tax benefits realized in 2015 were recognized as “Additional paid-in capital.”
A summary of changes in PSUs is presented below:
| | | | | | | PSUs | | Weighted-
Average
Grant-Date
Fair Value |
| | PSUs | | Weighted- Average Grant-Date Fair Value | | | | |
| | | | | |
| Balance at December 31, 2016 | 1,849,008 |
| | $ | 61.17 |
| |
| Balance at December 31, 2019 | | Balance at December 31, 2019 | 456,510 | | | $ | 114.04 | |
| Granted | 300,334 |
| | 88.56 |
| Granted | 78,830 | | | 212.66 | |
| Earned | (171,080 | ) | | 68.67 |
| Earned | (235,935) | | | 89.70 | |
| Unearned | (226,780 | ) | | 74.93 |
| Unearned | (33,705) | | | 58.77 | |
| Forfeited | (2,730 | ) | | 58.09 |
| Forfeited | (25,600) | | | 177.41 | |
| | | | | | | |
| Balance at December 31, 2017 | 1,748,752 |
| | 63.36 |
| |
| Balance at December 31, 2020 | | Balance at December 31, 2020 | 240,100 | | | 171.34 | |
At December 31, 2017,2020, total unrecognized compensation related to PSUs granted under the LTIP was $6$5 million, and is expected to be recognized over a weighted-average period of approximately 1.81.7 years.
Shares Available and Issued
Shares of Common Stock available for future grants and issued in connection with all features of the LTIP and the TSOP at December 31, were as follows:
| | | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
| Available for future grants: | | | | | | Available for future grants: | | | | | |
| LTIP | 8,774,768 |
| | 9,385,674 |
| | 11,769,796 |
| LTIP | 8,995,582 | | | 9,294,726 | | | 8,644,108 | |
| TSOP | 410,895 |
| | 544,217 |
| | 832,676 |
| TSOP | 435,699 | | | 434,401 | | | 422,973 | |
| Issued: | |
| | |
| | |
| Issued: | | | | | |
| LTIP | 1,679,547 |
| | 1,511,645 |
| | 708,059 |
| LTIP | 1,270,208 | | | 852,869 | | | 820,746 | |
| TSOP | 291,515 |
| | 300,769 |
| | 121,745 |
| TSOP | 204,102 | | | 258,315 | | | 213,796 | |
13.14. Stockholders’ Equity
Common Stock
Common Stock is reported net of shares held by our consolidated subsidiaries (Treasury Shares). Treasury Shares at December 31, 20172020 and 20162019 amounted to 20,320,777, with a cost of $19 million at both dates.
Accumulated Other Comprehensive Loss
The components of “Other comprehensive income (loss)” reported in the Consolidated Statements of Comprehensive Income and changes in the cumulative balances of “Accumulated other comprehensive loss” reported in the Consolidated Balance Sheets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance
at Beginning
of Year | | Net Income
(Loss) | | | | Reclassification
Adjustments | | Balance
at End
of Year |
| | ($ in millions) |
| Year ended December 31, 2020 | | | | | | | | | |
| | | | | | | | | |
| Pensions and other postretirement liabilities | $ | (421) | | | $ | (125) | | | | | $ | 20 | | | $ | (526) | |
| Other comprehensive income of equity investees | (70) | | | 2 | | | | | 0 | | | (68) | |
| | | | | | | | | |
| Accumulated other comprehensive loss | $ | (491) | | | $ | (123) | | | | | $ | 20 | | | $ | (594) | |
| | | | | | | | | |
| Year ended December 31, 2019 | | | | | | | | | |
| | | | | | | | | |
| Pensions and other postretirement liabilities | $ | (497) | | | $ | 61 | | | | | $ | 15 | | | $ | (421) | |
| Other comprehensive loss of equity investees | (66) | | | (4) | | | | | 0 | | | (70) | |
| | | | | | | | | |
| Accumulated other comprehensive loss | $ | (563) | | | $ | 57 | | | | | $ | 15 | | | $ | (491) | |
|
| | | | | | | | | | | | | | | |
| | Balance at Beginning of Year | | Net Income (Loss) | | Reclassification Adjustments | | Balance at End of Year |
| | ($ in millions) |
| Year ended December 31, 2017 | | | | | | | |
| Pensions and other postretirement | | | | | | | |
| liabilities | $ | (414 | ) | | $ | 95 |
| | $ | 19 |
| | $ | (300 | ) |
| Other comprehensive income | |
| | |
| | |
| | |
|
| of equity investees | (73 | ) | | 17 |
| | — |
| | (56 | ) |
| | | | | | | | |
| Accumulated other comprehensive loss | $ | (487 | ) | | $ | 112 |
| | $ | 19 |
| | $ | (356 | ) |
| | | | | | | | |
| Year ended December 31, 2016 | |
| | |
| | |
| | |
|
| Pensions and other postretirement | | | | | | | |
| liabilities | $ | (367 | ) | | $ | (64 | ) | | $ | 17 |
| | $ | (414 | ) |
| Other comprehensive income | | | | | | | |
| of equity investees | (78 | ) | | 5 |
| | — |
| | (73 | ) |
| | | | | | | | |
| Accumulated other comprehensive loss | $ | (445 | ) | | $ | (59 | ) | | $ | 17 |
| | $ | (487 | ) |
Other Comprehensive Income (Loss)
“Other comprehensive income (loss)” reported in the Consolidated Statements of Comprehensive Income consisted of the following:
| | | | | | | | | | | | | | | | | |
| Pretax
Amount | | Tax
(Expense)
Benefit | | Net-of-Tax
Amount |
| | ($ in millions) |
| Year ended December 31, 2020 | | | | | |
| Net loss arising during the year: | | | | | |
| Pensions and other postretirement benefits | $ | (167) | | | $ | 42 | | | $ | (125) | |
| Reclassification adjustments for costs included in net income | 27 | | | (7) | | | 20 | |
| | | | | |
| Subtotal | (140) | | | 35 | | | (105) | |
| | | | | |
| Other comprehensive income of equity investees | 2 | | | 0 | | | 2 | |
| | | | | |
| Other comprehensive loss | $ | (138) | | | $ | 35 | | | $ | (103) | |
| | | | | |
| Year ended December 31, 2019 | | | | | |
| Net gain arising during the year: | | | | | |
| Pensions and other postretirement benefits | $ | 81 | | | $ | (20) | | | $ | 61 | |
| Reclassification adjustments for costs included in net income | 20 | | | (5) | | | 15 | |
| | | | | |
| �� Subtotal | 101 | | | (25) | | | 76 | |
| | | | | |
| Other comprehensive loss of equity investees | (4) | | | 0 | | | (4) | |
| | | | | |
| Other comprehensive income | $ | 97 | | | $ | (25) | | | $ | 72 | |
| | | | | |
| Year ended December 31, 2018 | | | | | |
| Net loss arising during the year: | | | | | |
| Pensions and other postretirement benefits | $ | (181) | | | $ | 45 | | | $ | (136) | |
| Reclassification adjustments for costs included in net income | 33 | | | (8) | | | 25 | |
| | | | | |
| Subtotal | (148) | | | 37 | | | (111) | |
| | | | | |
| Other comprehensive loss of equity investees | (9) | | | 1 | | | (8) | |
| | | | | |
| Other comprehensive loss | $ | (157) | | | $ | 38 | | | $ | (119) | |
|
| | | | | | | | | | | |
| | Pretax Amount | | Tax (Expense) Benefit | | Net-of-Tax Amount |
| | ($ in millions) |
| Year ended December 31, 2017 | | | | | |
| Net gain (loss) arising during the year: | | | | | |
| Pensions and other postretirement benefits | $ | 127 |
| | $ | (32 | ) | | $ | 95 |
|
| Reclassification adjustments for costs | |
| | |
| | |
|
| included in net income | 28 |
| | (9 | ) | | 19 |
|
| | | | | | |
| Subtotal | 155 |
| | (41 | ) | | 114 |
|
| | | | | | |
| Other comprehensive income of equity investees | 19 |
| | (2 | ) | | 17 |
|
| | | | | | |
| Other comprehensive income | $ | 174 |
| | $ | (43 | ) | | $ | 131 |
|
| | | | | | |
| Year ended December 31, 2016 | |
| | |
| | |
|
| Net gain (loss) arising during the year: | |
| | |
| | |
|
| Pensions and other postretirement benefits | $ | (101 | ) | | $ | 37 |
| | $ | (64 | ) |
| Reclassification adjustments for costs | |
| | |
| | |
|
| included in net income | 27 |
| | (10 | ) | | 17 |
|
| | | | | | |
| Subtotal | (74 | ) | | 27 |
| | (47 | ) |
| | | | | | |
| Other comprehensive income of equity investees | 5 |
| | — |
| | 5 |
|
| | | | | | |
| Other comprehensive loss | $ | (69 | ) | | $ | 27 |
| | $ | (42 | ) |
| | | | | | |
| Year ended December 31, 2015 | |
| | |
| | |
|
| Net gain (loss) arising during the year: | |
| | |
| | |
|
| Pensions and other postretirement benefits | $ | (117 | ) | | $ | 45 |
| | $ | (72 | ) |
| Reclassification adjustments for costs | |
| | |
| | |
|
| included in net income | 41 |
| | (16 | ) | | 25 |
|
| | | | | | |
| Other comprehensive loss | $ | (76 | ) | | $ | 29 |
| | $ | (47 | ) |
14.15. Stock Repurchase ProgramPrograms
We repurchased and retired 8.27.4 million, 9.211.3 million, and 11.317.1 million shares of Common Stock under our stock repurchase programprograms in 2017, 2016,2020, 2019, and 2015,2018, respectively, at a cost of $1.0$1.4 billion, $803 million,$2.1 billion, and $1.1$2.8 billion, respectively.
On September 26, 2017, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2022. As of December 31, 2017, 56.52020, 20.7 million shares remain authorized for repurchase. Since the beginning of 2006, we have repurchased and retired 168.5 million shares at a total cost of $11.3 billion.
15.
16. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Basic | | Diluted |
| | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| | ($ in millions except per share amounts, shares in millions) |
| | | | | | | | | | | |
| Net income | $ | 2,013 | | | $ | 2,722 | | | $ | 2,666 | | | $ | 2,013 | | | $ | 2,722 | | | $ | 2,666 | |
| Dividend equivalent payments | (3) | | | (5) | | | (6) | | | (2) | | | 0 | | | (1) | |
| | | | | | | | | | | |
| Income available to common stockholders | $ | 2,010 | | | $ | 2,717 | | | $ | 2,660 | | | $ | 2,011 | | | $ | 2,722 | | | $ | 2,665 | |
| | | | | | | | | | | |
| Weighted-average shares outstanding | 255.1 | | | 263.3 | | | 277.7 | | | 255.1 | | | 263.3 | | | 277.7 | |
| Dilutive effect of outstanding options | | | | | | | | | | | |
| and share-settled awards | | | | | | | 1.5 | | | 2.3 | | | 2.5 | |
| Adjusted weighted-average shares outstanding | | | | | | | 256.6 | | | 265.6 | | | 280.2 | |
| | | | | | | | | | | |
| Earnings per share | $ | 7.88 | | | $ | 10.32 | | | $ | 9.58 | | | $ | 7.84 | | | $ | 10.25 | | | $ | 9.51 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Basic | | Diluted |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| | ($ in millions except per share amounts, shares in millions) |
| | | | | | | | | | | | |
| Net income | $ | 5,404 |
| | $ | 1,668 |
| | $ | 1,556 |
| | $ | 5,404 |
| | $ | 1,668 |
| | $ | 1,556 |
|
| Dividend equivalent payments | (4 | ) | | (5 | ) | | (6 | ) | | (2 | ) | | (4 | ) | | (5 | ) |
| | | | | | | | | | | | |
| Income available to common stockholders | $ | 5,400 |
| | $ | 1,663 |
| | $ | 1,550 |
| | $ | 5,402 |
| | $ | 1,664 |
| | $ | 1,551 |
|
| | | | | | | | | | | | |
| Weighted-average shares outstanding | 287.9 |
| | 293.9 |
| | 301.9 |
| | 287.9 |
| | 293.9 |
| | 301.9 |
|
| Dilutive effect of outstanding options | |
| | |
| | |
| | |
| | |
| | |
|
| and share-settled awards | |
| | |
| | |
| | 2.4 |
| | 2.1 |
| | 2.5 |
|
| Adjusted weighted-average shares outstanding | |
| | |
| | |
| | 290.3 |
| | 296.0 |
| | 304.4 |
|
| | | | | | | | | | | | |
| Earnings per share | $ | 18.76 |
| | $ | 5.66 |
| | $ | 5.13 |
| | $ | 18.61 |
| | $ | 5.62 |
| | $ | 5.10 |
|
In each year, dividend equivalent payments were made to 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. TheThere are 0 options excluded from the dilution calculations exclude options havingdue to exercise prices exceeding the average market price of Common Stock for each of 0.2 million, 1.3 million, and 0.9 million for the years ended December 31, 2017, 20162020, 2019, and 2015, respectively.2018.
16.17. 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.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.
One 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 our chemical customers, Sunbelt, filed in 2011 a rate reasonableness complaint before the STB alleging that our tariff rates for transportation of regulated movements are unreasonable. Since April 1, 2011, we have been billing and collecting amounts based on the challenged tariff rates. In 2014, the STB resolved this rate reasonableness complaint in our favor, and in June 2016, the STB resolved petitions for reconsideration. The matter remains decided in our favor; however, the findings are still subject to appeal. We believe the estimate of any
reasonably possible loss will not have a material effectbased on our financial position, results of operations, or liquidity. With regard to rate cases, we record adjustments to revenues in the periods if and when such adjustments are probable and reasonably estimable.reviews.
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;certification. The decision was upheld by the findings are subject to appeal.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 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 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 casualties and other claims expense is employee personal injury costs. The independent actuarial firm engaged by uswe 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. OurThe 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 (including asbestosisinclude injuries and other respiratory diseases,illnesses alleged to be caused by exposures which occur over time as well as conditions allegedly relatedopposed to repetitive motion) are often notinjuries or illnesses caused by a specific accident or event but rather allegedly result from aevent. Types of occupational claims commonly seen allege exposure to asbestos and other claimed exposure over time.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 the future payment of claims. 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, automobile liability, 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 engineersspecialists 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 $58$54 million at December 31, 2017,2020, and $67$56 million at December 31, 2016, (of2019, of which $15 million is classified as a current liability at the end of both 20172020 and 2016).2019. At December 31, 2017,2020, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 127100 known locations and projects compared with 134110 locations and projects at December 31, 2016.2019. At December 31, 2017, 152020, 17 sites accounted for $37$40 million of the liability, and no individual site was considered to be material. We anticipate that muchmost of this liability will be paid out over five years; however, some costs will be paid out over a longer period.
At thirteen11 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.
Insurance
We obtain on behalf of ourselfpurchase insurance covering legal liabilities for bodily injury and our subsidiariesproperty damage to third parties. This insurance for potential losses for third-party liability and first-party property damages. We are currently self-insured up to $50provides coverage above $75 million and above $1.1 billionbelow $800 million ($1.51.1 billion for specific perils) per occurrence and/or policy year for bodily injury and propertyyear. In addition, we purchase insurance covering damage to third parties and up to $25 million and above $200 million per occurrence and/or policy year for property owned by us or in our care, custody, or control. This insurance covers approximately 85% of potential losses above $75 million and below $275 million per occurrence and/or policy year.
Purchase Commitments
At December 31, 2017,2020, we had outstanding purchase commitments totaling approximately $1.1 billion for locomotives, locomotive diesel fuel, track material, long-term service contracts, track and yard expansion projects in connection with our capital programs, as well as freight cars and containers through 2022.2030.
Change-In-Control Arrangements
We have compensation agreements with certain officers and key employees that become operative only upon a change in control of Norfolk Southern, as defined in those agreements. The agreements provide generally for payments based on compensation at the time of a covered individual’s involuntary or other specified termination and for certain other benefits.
Indemnifications
In a number of instances, we have agreed to indemnify lenders for additional costs they may bear as a result of certain changes in laws or regulations applicable to their loans. Such changes may include impositions or modifications with respect to taxes, duties, reserves, liquidity, capital adequacy, special deposits, and similar requirements relating to extensions of credit by, deposits with, or the assets or liabilities of such lenders. The nature and timing of changes in laws or regulations applicable to our financings are inherently unpredictable, and therefore our exposure in connection with the foregoing indemnifications cannot be quantified. No liability has been recorded related to these indemnifications.
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31 | | June 30 | | September 30 | | December 31 |
| | ($ in millions, except per share amounts) |
| 2020 | | | | | | | |
| Railway operating revenues | $ | 2,625 | | | $ | 2,085 | | | $ | 2,506 | | | $ | 2,573 | |
| Income from railway operations | 568 | | | 610 | | | 840 | | | 984 | |
| Net income | 381 | | | 392 | | | 569 | | | 671 | |
| Earnings per share: | | | | | | | |
| Basic | 1.48 | | | 1.53 | | | 2.23 | | | 2.65 | |
| Diluted | 1.47 | | | 1.53 | | | 2.22 | | | 2.64 | |
| | | | | | | |
| 2019 | | | | | | | |
| Railway operating revenues | $ | 2,840 | | | $ | 2,925 | | | $ | 2,841 | | | $ | 2,690 | |
| Income from railway operations | 966 | | | 1,065 | | | 996 | | | 962 | |
| Net income | 677 | | | 722 | | | 657 | | | 666 | |
| Earnings per share: | | | | | | | |
| Basic | 2.53 | | | 2.72 | | | 2.50 | | | 2.56 | |
| Diluted | 2.51 | | | 2.70 | | | 2.49 | | | 2.55 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31 | | June 30 | | September 30 | | December 31 |
| | ($ in millions, except per share amounts) |
| 2017 | | | | | | | |
| Railway operating revenues | $ | 2,575 |
| | $ | 2,637 |
| | $ | 2,670 |
| | $ | 2,669 |
|
| Income from railway operations | 773 |
| | 888 |
| | 911 |
| | 1,014 |
|
| Net income | 433 |
| | 497 |
| | 506 |
| | 3,968 |
|
| Earnings per share: | |
| | | | | | |
| Basic | 1.49 |
| | 1.72 |
| | 1.76 |
| | 13.91 |
|
| Diluted | 1.48 |
| | 1.71 |
| | 1.75 |
| | 13.79 |
|
| | | | | | | | |
| 2016 | |
| | | | | | |
| Railway operating revenues | $ | 2,420 |
| | $ | 2,454 |
| | $ | 2,524 |
| | $ | 2,490 |
|
| Income from railway operations | 723 |
| | 770 |
| | 820 |
| | 761 |
|
| Net income | 387 |
| | 405 |
| | 460 |
| | 416 |
|
| Earnings per share: | |
| | | | | | |
| Basic | 1.30 |
| | 1.37 |
| | 1.56 |
| | 1.43 |
|
| Diluted | 1.29 |
| | 1.36 |
| | 1.55 |
| | 1.42 |
|
Note: In the fourth quarter of 2017, as a result of the enactment of tax reform, “Income from railway operations” includes a $151 million benefit and income taxes includes a $3,331 million benefit, which added $3,482 million to “Net income,” $12.21 to “Earnings per share - basic,” and $12.10 to “Earnings per share - diluted.”
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, with the assistance of management, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) at December 31, 2017.2020. Based on such evaluation, our officers have concluded that, at December 31, 2017,2020, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported, within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting includes those policies and procedures that pertain to our ability to record, process, summarize, and report reliable financial data. We recognize that there are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
Our Board of Directors, acting through its Audit Committee, is responsible for the oversight of our accounting policies, financial reporting, and internal control. The Audit Committee of our Board of Directors is comprised of five outside directors who are independent of management. The independent registered public accounting firm and our internal auditors have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over financial reporting, and any other matters which they believe should be brought to the attention of the Audit Committee.
We have issued a report of our assessment of internal control over financial reporting, and our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting at December 31, 2017.2020. These reports appear in Part II, Item 8 of this report on Form 10-K.
Changes in Internal Control Over Financial Reporting
During the fourth quarter of 2017,2020, we have not identified any changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially effect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Item 10. Directors, Executive Officers and Corporate Governance
In accordance with General Instruction G(3), information called for by Part III, Item 10, is incorporated herein by reference from the information appearing under the caption “Election of Directors,” under the caption “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance,” under the caption “Corporate Governance and the Board,Reports,” under the caption “Committees of the Board,” under the caption “Shareholder Recommendations and Nominations,” and under the caption “The Thoroughbred Code of Ethics” in our definitive Proxy Statement for our 20182021 Annual Meeting of Stockholders, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I hereof beginning under “Executive Officers of the Registrant.“Information about our Executive Officers.”
Item 11. Executive Compensation
In accordance with General Instruction G(3), information called for by Part III, Item 11, is incorporated herein by reference from the information:
•under the caption “Corporate Governance and the Board”, including “Compensation of Directors” and “Non-Employee Director Compensation;Directors;”
appearing •under the caption “Executive Compensation” for executives, including the “Compensation Discussion and Analysis,” the information appearing in the “Summary Compensation Table” and the “2017“2020 Grants of Plan-Based Awards” table, including the narrative to such tables, the “Outstanding Equity Awards at Fiscal Year-End 2017”2020” and “Option Exercises and Stock Vested in 2017”2020” tables, and the tabular and narrative information appearing under the subcaptions “Retirement Benefits,” “Deferred Compensation,” and “Potential Payments Upon a Change in Control or Other Termination of Employment;” and,
appearing •under the captions “Compensation Committee Interlocks and Insider Participation,” “Compensation Policy Risk Assessment,” and “Compensation Committee Report,”
in each case included in our definitive Proxy Statement for our 20182021 Annual Meeting of Stockholders, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
In accordance with General Instruction G(3), information on security ownership of certain beneficial owners and management called for by Part III, Item 12, is incorporated herein by reference from the information appearing under the caption “Beneficial Ownership of Stock” in our definitive Proxy Statement for our 20182021 Annual Meeting of Stockholders, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
Equity Compensation Plan Information (at December 31, 2017)2020)
| | Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted- average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (1) | | Plan
Category | | Number of
securities
to be issued upon
exercise of
outstanding options,
warrants and rights | | Weighted-
average
exercise price
of outstanding
options, warrants
and rights | | Number of securities remaining available for future issuance under equity compensation plans (1) | |
| | | (a) | | (b) | | (c) | | | | (a) | | (b) | | (c) | |
| Equity compensation plans | | |
| | |
| | |
| | Equity compensation plans | | | | | | | |
approved by securities holders(2) | | 5,916,679 |
| (4) | $ | 83.00 |
| (5) | 8,774,768 |
| | approved by securities holders(2) | | 2,387,953 | | (3) | $ | 100.09 | | (5) | 8,995,582 | | |
| | | | | | | | | |
| Equity compensation plans | | |
| | |
| | |
| | Equity compensation plans | |
not approved by securities holders(3) | | 959,376 |
| | 83.77 |
| | 419,895 |
| (6) | |
| not approved by securities holders | | not approved by securities holders | | 258,359 | | (4) | 88.72 | | | 435,699 | | (6) |
| | | | | | | | | | | | | |
| Total | | 6,876,055 |
| | |
| | 9,194,663 |
| | Total | | 2,646,312 | | | | | 9,431,281 | | |
| |
(1)
| Excludes securities reflected in column (a). |
| |
(3)
| TSOP and the Director’s Restricted Stock Plan. |
| |
(4)
| Includes options, RSUs and PSUs granted under LTIP that will be settled in shares of stock. |
| |
(5)
| Calculated without regard to 2,641,988 outstanding RSUs and PSUs at December 31, 2017. |
| |
(6)
| Reflects shares remaining available for grant under TSOP. |
(1)Excludes securities reflected in column (a).
(2)LTIP.
(3)Includes options, RSUs and PSUs granted under LTIP that will be settled in shares of Common Stock.
(4)TSOP.
(5)Calculated without regard to 1,120,187 outstanding RSUs and PSUs at December 31, 2020.
(6)Reflects shares remaining available for grant under TSOP.
Norfolk Southern Corporation Long-Term Incentive Plan (LTIP)
Established on June 28, 1983, and approved by our stockholders at their Annual Meeting held on May 10, 1984, LTIP was adopted to promote the success of our company by providing an opportunity for non-employee Directors, officers, and other key employees to acquire a proprietary interest in the Corporation.Norfolk Southern Corporation (the Corporation). The Board of Directors amended LTIP on January 23, 2015, which amendment was approved by shareholders on May 14, 2015, to include the reservation for issuance of an additional 8,000,000 shares of authorized but unissued Common Stock.
The amended LTIP adopted a fungible share reserve ratio so that, for awards granted after May 13, 2010, the number of shares remaining for issuance under the amended LTIP will be reduced (i) by 1 for each award granted as an option or stock-settled stock appreciation right,SAR, or (ii) by 1.61 for an award made in the form other than an option or stock-settled stock appreciation right.SAR. Any shares of Common Stock subject to options, PSUs, restricted shares, or RSUs which are not issued as Common Stock will again be available for award under LTIP after the expiration or forfeiture of an award.
Non-employee Directors, officers, and other key employees residing in the United States of America or Canada are eligible for selection to receive LTIP awards. Under LTIP, the Committee, or the Corporation’s chief executive officer to the extent the Committee delegates award-making authority pursuant to LTIP, may grant incentive stock options, nonqualified stock options, stock appreciation rights,SARs, RSUs, restricted shares, PSUs, and performance shares. In addition, dividend equivalent payments may be awarded for options, RSUs, and PSUs. Awards under LTIP may be made subject to forfeiture under certain circumstances and the Committee may establish such other terms and conditions for the awards as provided in LTIP.
For options granted after May 13, 2010, theThe option price will beis at least the higher of (i) the average of the high and low prices at which Common Stock is traded on the date of grant, or (ii) the closing price of Common Stock on the date of the grant. All options are subject to a vesting period of at least one year, and the term of the option will not exceed ten years. LTIP specifically prohibits option repricing without stockholder approval, except that adjustments may be made in the event of changes in our capital structure or Common Stock.
PSUs entitle a recipient to receive performance-based compensation at the end of a three-year cycle based on our performance during that period. For the regular 20172020 PSU awards, corporate performance will be measured using two equally weighted standards established by the Committee: (1) three-year averagebased directly on return on average capital invested, and (2)with total return to stockholders measured at the end of the three-year period. For the 2017 PSU awards, PSUsserving as a modifier, and will be settled in shares of Common Stock. In 2016, the committee also granted an “accelerated turnaround incentive” award in the form of a PSU with a three-year performance that is based on equally weighted standards established by the Committee for operating ratio and earnings per share.
RSUs are payable in cash or in shares of Common Stock at the end of a restriction period. During the restriction period, the holder of the RSUs has no beneficial ownership interest in the Common Stock represented by the RSUs and has no right to vote the shares represented by the units or to receive dividends (except for dividend equivalent payment rights that may be awarded with respect to the RSUs). The Committee at its discretion may waive the restriction period, but settlement of any RSUs will occur on the same settlement date as would have applied absent a waiver of restrictions, if no performance goals were imposed. For the 2017 RSU awards, RSUs will be settled in shares of Common Stock.
Norfolk Southern Corporation Thoroughbred Stock Option Plan (TSOP)
Our Board of Directors adopted TSOP on January 26, 1999, to promote the success of our company by providing an opportunity for nonagreementmanagement employees to acquire a proprietary interest in our company and thereby to provide an additional incentive to nonagreementmanagement employees to devote their maximum efforts and skills to the advancement, betterment, and prosperity of our company and our stockholders. Under TSOP there were 6,000,000 shares of authorized but unissued Common Stock reserved for issuance. TSOP has not been and is not required to have been approved by our stockholders.
Active full-time nonagreementmanagement employees residing in the United StatesU.S. or Canada are eligible for selection to receive TSOP awards. Under TSOP, the Committee, or the Corporation’s chief executive officer to the extent the Committee delegates award-making authority pursuant to TSOP, may grant nonqualified stock options subject to such terms and conditions as provided in TSOP.
The option price may not be less than the average of the high and low prices at which Common Stock is traded on the date of the grant. All options are subject to a vesting period of at least one year, and the term of the option will not exceed ten years. TSOP specifically prohibits repricing without stockholder approval, except for capital adjustments.
Norfolk Southern Corporation Directors’ Restricted Stock Plan (Plan)
The Plan was adopted on January 1, 1994, and was designed to increase ownership of Common Stock by our non-employee Directors so as to further align their ownership interest in our company with that of our stockholders. The Plan has not been and is not required to have been approved by our stockholders.
Effective January 23, 2015, the Board amended the Plan to provide that no additional awards will be made under the Plan. Prior to that amendment, only non-employee Directors who are not and never have been employees of our company were eligible to participate in the Plan. Upon becoming a Director, each eligible Director received a one-time grant of 3,000 restricted shares of Common Stock. No additional shares may be granted under the Plan. No individual member of the Board exercised discretion concerning the eligibility of any Director or the number of shares granted.
The restriction period applicable to restricted shares granted under the Plan begins on the date of the grant and ends on the earlier of the recipient’s death or the day after the recipient ceases to be a Director by reason of disability or retirement. During the restriction period, shares may not be sold, pledged, or otherwise encumbered. Directors forfeit the restricted shares if they cease to serve as a Director of our company for reasons other than their disability, retirement, or death.
Item 13. Certain Relationships and Related Transactions, and Director Independence
In accordance with General Instruction G(3), information called for by Part III, Item 13, is incorporated herein by reference from the information appearing under the caption “Related Persons Transactions” and under the caption “Director Independence” in our definitive Proxy Statement for our 20182021 Annual Meeting of Stockholders, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
Item 14. Principal Accounting Fees and Services
In accordance with General Instruction G(3), information called for by Part III, Item 14, is incorporated herein by reference from the information appearing under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm” in our definitive Proxy Statement for our 20182021 Annual Meeting of Stockholders, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A.
PART IV
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
Item 15. Exhibits and Financial Statement Schedules
|
| | | | | | | | | | |
| | | Page |
| (A) | The following documents are filed as part of this report: | |
| | | |
| 1. | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| 2. | Financial Statement Schedule: | |
| | | |
| | The following consolidated financial statement schedule should be read in connection with the consolidated financial statements: | |
| | | |
| | Index to Consolidated Financial Statement Schedule | |
| | | |
| | | |
| | | |
| | Schedules other than the one listed above are omitted either because they are not required or are inapplicable, or because the information is included in the consolidated financial statements or related notes. | |
| | | |
| 3. | Exhibits | |
| | | |
| Exhibit Number | | Description | |
| 2.1 | | Distribution Agreement, dated as of July 26, 2004, by and among CSX Corporation, CSX Transportation, Inc., CSX Rail Holding Corporation, CSX Northeast Holdings Corporation, Norfolk Southern Corporation, Norfolk Southern Railway Company, CRR Holdings LLC, Green Acquisition Corp., Conrail Inc., Consolidated Rail Corporation, New York Central Lines LLC, Pennsylvania Lines LLC, NYC Newco, Inc., and PRR Newco, Inc., is incorporated by reference to Exhibit 2.1 to Norfolk Southern Corporation’s Form 8-K filed on September 2, 2004. (SEC File No. 001-08339) | |
| | | |
|
| | | |
| 3 | | Articles of Incorporation and Bylaws – | |
| | | |
| (i)(a) | | | |
| (i)(b) | | | |
| | | |
(ii)(i)(c) | | | |
| (ii) | | | |
|
| | | | | | | |
| 4 | | Instruments Defining the Rights of Security Holders, Including Indentures: |
| | |
| (a) | | Indenture, dated as of January 15, 1991, from Norfolk Southern Corporation to First Trust of New York, National Association, as Trustee, is incorporated by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Registration Statement on Form S-3 (SEC File No.(No. 33-38595). |
| | |
| (b) | | |
| | |
| (c) | | |
| | |
(d) | | |
| | |
(e)(d) | | Indenture, dated August 27, 2004, among PRR Newco, Inc., as Issuer, and Norfolk Southern Railway Company, as Guarantor, and The Bank of New York, as Trustee, is incorporated by reference to Exhibit 4(1) to Norfolk Southern Corporation’s Form 10-Q filed on October 28, 2004. (SEC File No. 001-08339) |
| | |
(f)(e) | | First Supplemental Indenture, dated August 27, 2004, among PRR Newco, Inc., as Issuer, and Norfolk Southern Railway Company, as Guarantor, and The Bank of New York, as Trustee, related to the issuance of notes in the principal amount of approximately $451.8 million, is incorporated by reference to Exhibit 4(m) to Norfolk Southern Corporation’s Form 10-Q filed on October 28, 2004. (SEC File No. 001-08339) |
| | |
(g)(f) | | |
| | |
(h)(g) | | |
| | |
|
| | |
(i)(h) | | |
| | |
(j)(i) | | |
| | |
(k)(j) | | |
| | |
(l) | | |
| | |
(m) | | |
| | |
(n)(k) | | |
| | |
(o)(l) | | |
| | |
(p)(m) | | |
| | |
|
| | |
(u)(r) | | |
| | |
(v)(s) | | |
| | |
(w)(t) | | |
| | |
(x)(u) | | |
| | |
(y)(v) | | |
| | |
(z)(w) | | |
| | |
(aa)(x) | | |
| | |
(bb)(y) | | |
| | |
(cc)(z) | | |
| | |
(dd)(aa) | | |
| | |
(ee)(bb) | | |
| | |
(ff) | | |
| | |
(gg)(cc) | | |
| | |
| | | | | | | | |
| (dd) | | |
| | |
| (ee) | | |
| | |
| (ff) | | |
| | |
| (gg) | | |
| | |
| (hh) | | |
| | |
| (ii) | | |
| | |
| (jj) | | |
| | |
| | In accordance with Item 601(b)(4)(iii) of Regulation S-K, copies of other instruments of Norfolk Southern Corporation and its subsidiaries with respect to the rights of holders of long-term debt are not filed herewith, or incorporated by reference, but will be furnished to the Commission upon request. |
| | |
|
| | |
| 10 | | Material Contracts - |
| | |
| (a) | | The Transaction Agreement, dated as of June 10, 1997, by and among CSX and CSX Transportation, Inc., Registrant, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation, and CRR Holdings LLC, with certain schedules thereto, previously filed, is incorporated by reference to Exhibit 10(a) to Norfolk Southern Corporation’s Form 10-K filed on February 24, 2003. (SEC File No. 001-08339) |
| | |
| (b) | | Amendment No. 1 dated as of August 22, 1998, to the Transaction Agreement, dated as of June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail, Inc., Consolidated Rail Corporation, and CRR Holdings LLC, is incorporated by reference from Exhibit 10.1 to Norfolk Southern Corporation’s Form 10-Q filed on August 11, 1999. (SEC File No. 001-08339) |
| | |
| (c) | | Amendment No. 2 dated as of June 1, 1999, to the Transaction Agreement, dated June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail, Inc., Consolidated Rail Corporation, and CRR Holdings LLC, is incorporated by reference from Exhibit 10.2 to Norfolk Southern Corporation’s Form 10-Q filed on August 11, 1999. (SEC File No. 001-08339) |
| | |
| (d) | | Amendment No. 3 dated as of June 1, 1999, and executed in April 2004, to the Transaction Agreement, dated June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail, Inc., Consolidated Rail Corporation, and CRR Holdings LLC, is incorporated by reference from Exhibit 10(dd) to Norfolk Southern Corporation’s Form 10-Q filed on July 30, 2004. (SEC File No. 001-08339) |
| | |
| (e) | | Amendment No. 5 to the Transaction Agreement, dated as of August 27, 2004, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail, Inc., Consolidated Rail Corporation, and CRR Holdings LLC, is incorporated by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 8-K filed on September 2, 2004. (SEC File No. 001-08339) |
| | |
| | | | | | | | |
| (f) | | Amendment No. 6 dated as of April 1, 2007, to the Transaction Agreement, dated June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Railway Company, Conrail, Inc., Consolidated Rail Corporation, and CRR Holdings LLC, is incorporated by reference to Exhibit 10.5 to Norfolk Southern Corporation’s Form 10-Q filed on July 27, 2007. (SEC File No. 001-08339) |
| | |
| (g) | | |
| | |
| (h) | | |
| | |
| (i) | | |
| | |
| (j) | | Amendment No. 1, dated as of June 1, 2000, to the Shared Assets Area Operating Agreements for North Jersey, South Jersey/Philadelphia, and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibits thereto, is incorporated by reference to Exhibit 10(h) to Norfolk Southern Corporation’s Form 10-K filed on March 5, 2001. (SEC File No. 001-08339) |
| | |
|
| | |
| (k) | | Amendment No. 2, dated as of January 1, 2001, to the Shared Assets Area Operating Agreements for North Jersey, South Jersey/Philadelphia, and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibits thereto, is incorporated by reference to Exhibit 10(j) to Norfolk Southern Corporation’s Form 10-K filed on February 21, 2002. (SEC File No. 001-08339) |
| | |
| (l) | | Amendment No. 3, dated as of June 1, 2001, and executed in May of 2002, to the Shared Assets Area Operating Agreements for North Jersey, South Jersey/Philadelphia, and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibits thereto, is incorporated by reference to Exhibit 10(k) to Norfolk Southern Corporation’s Form 10-K filed on February 24, 2003. (SEC File No. 001-08339) |
| | |
| (m) | | Amendment No. 4, dated as of June 1, 2005, and executed in late June 2005, to the Shared Assets Area Operating Agreements for North Jersey, South Jersey/Philadelphia, and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibits thereto, is incorporated by reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K filed on July 1, 2005. (SEC File No. 001-08339) |
| | |
| (n) | | Monongahela Usage Agreement, dated as of June 1, 1999, by and among CSX Transportation, Inc., Norfolk Southern Railway Company, Pennsylvania Lines LLC, and New York Central Lines LLC, with exhibit thereto, is incorporated by reference from -Exhibit 10.7 to Norfolk Southern Corporation’s Form 10-Q filed on August 11, 1999. (SEC File No. 001-08339) |
| | |
| (o) | | |
| | |
| (p) | | |
| | |
| (q) | | |
| | |
|
| | |
| (v)*,** | | |
| | |
| (w)* | | |
| | |
| (x) | | |
| | |
| (y)* | | |
| | |
| (z)* | | |
| | |
(aa)*,** | | The Norfolk Southern Corporation Long-Term Incentive Plan, as approved by shareholders May 14, 2015, and as amended July 29, 2016, November 29, 2016, November 28, 2017, November 27, 2018, and November 28, 2017.19, 2019, is incorporated by referenced to Exhibit 10(aa) to Norfolk Southern Corporation’s Form 10-K filed on February 6, 2020. (SEC File No. 001-08339) |
| | |
| (bb) | | The Transaction Agreement, dated as of December 1, 2005, by and among Norfolk Southern Corporation, The Alabama Great Southern Railroad Company, Kansas City Southern, and The Kansas City Southern Railway Company, is incorporated by reference to Exhibit 10(II) to Norfolk Southern Corporation’s Form 10-K filed on February 23, 2006 (Exhibits, annexes, and schedules omitted. The Registrant will furnish supplementary copies of such materials to the SEC upon request). (SEC File No. 001-08339) |
| | |
| (cc) | | |
| | |
| (dd) | | Amendment No. 2, dated as of May 1, 2006, to the Transaction Agreement, dated as of December 1, 2005, by and among Norfolk Southern Corporation, The Alabama Great Southern Railroad Company, Kansas City Southern, and The Kansas City Southern Railway Company is incorporated by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 8-K filed on May 4, 2006. (SEC File No. 001-08339) |
| | |
| (ee) | | |
| | |
|
| | |
| (ii) | | |
| | |
| (jj) | | |
| | |
| (kk) | | |
| | |
| (ll) | | |
| | |
| (mm) | | |
| | |
| (nn) | | |
| | |
| (oo) | | |
| | |
| (pp) | | |
| | |
| (qq) | |
|
| | |
| (rr) | |
|
| | |
| (ss) | | |
| | |
| (tt) | | |
| | |
| (uu) | | |
| | |
| | | | | | | | |
| (vv) | | Transaction Agreement (Pan Am Transaction Agreement), dated May 15, 2008, by and among Norfolk Southern Railway Company, Pan Am Railways, Inc., Boston and Maine Corporation, and Springfield Terminal Railway Company, is incorporated by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 10-Q filed on July 24, 2008 (Exhibits, annexes and schedules omitted. The Registrant will furnish supplementary copies of such materials to the SEC upon request). (SEC File No. 001-08339) |
| | |
|
| | |
(uu)(ww) | | |
| | |
(vv)(xx)* | | |
| | |
(ww)(yy)* | | |
| | |
(xx)(zz)* | | |
| | |
(yy)* | |
|
| | |
| (aaa)* | |
|
| | |
| (bbb) | | |
| | |
| (ccc)*,** | | |
| | |
| (ddd)*,** | | |
| | |
| (eee)*,** | | |
| | |
| (fff)*,** | | |
| | |
| (ggg)*,** | | |
| | |
|
| | |
| (hhh)* | | Performance Criteria for bonuses payable in 20192022 for the 20182021 incentive year.On November 27, 2017,16, 2020, the Compensation Committee of the Norfolk Southern Corporation Board of Directors adopted the following performance criteria for determining bonuses payable in 20192022 for the 20182021 incentive year under the Norfolk Southern Corporation Executive Management Incentive Plan: 50%60% based on operating income; 35%ratio, 20% based on operating ratio;income, and 15%20% based on a composite of three transportation service measures, consisting of adherence to operatingstrategic plan connection performance, and train performance.objectives. |
| | |
| (iii) | | |
| | |
| | | | | | | | |
| (jjj)* | | |
| | |
| (kkk)* | | |
| | |
(lll)* | | |
| | |
(mmm) | | |
| | |
12*(mmm)*,** | | |
| | |
21*(nnn)*,** | | |
| | |
| (ooo)*,** | | |
| | |
| (ppp)* | | |
| | |
| (qqq)* | | |
| | |
| (rrr)* | | |
| | |
| (sss)* | | |
| | |
| (ttt) | | |
| | |
| (uuu) | | |
| (vvv) | | |
| | |
| (www) | | |
| | |
| (xxx)* | | |
| | |
| 21** | | |
| | |
| 23** | | |
| | |
| | | | | | | | |
| 31-A** | | |
| | |
| 31-B** | | |
| | |
| 32** | | |
| | |
99*101** | | |
| | |
101** | | The following financial information from Norfolk Southern Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017,2020, formatted in Inline Extensible Business Reporting Language (XBRL)(iXBRL) includes: (i) the Consolidated Statements of Income offor each of the years ended December 31, 2017, 2016,2020, 2019, and 2015;2018; (ii) the Consolidated Statements of Comprehensive Income for each of the years ended December 31, 2017, 2016,2020, 2019, and 2015;2018; (iii) the Consolidated Balance Sheets at December 31, 20172020 and 2016;2019; (iv) the Consolidated Statements of Cash Flows for each of the years ended December 31, 2017, 2016,2020, 2019, and 2015;2018; (v) the Consolidated Statements of Changes in Stockholders’ Equity for each of the three years ended December 31, 2017, 2016,2020, 2019, and 2015;2018; and (vi) the Notes to Consolidated Financial Statements. |
| | |
| | * Management contract or compensatory arrangement. |
| | ** Filed herewith. |
| Exhibits. |
| | |
| | |
(B) | | Exhibits. |
| | |
| | The Exhibits required by Item 601 of Regulation S-K as listed in Item 15(A)3 are filed herewith or incorporated by reference. |
| | |
| (C) | | Financial Statement Schedules. |
| | |
| | Financial statement schedules and separate financial statements specified by this Item are included in Item 15(A)2 or are otherwise not required or are not applicable. |
| | |
| | Exhibits 23, 31, 32, and 9932 are included in copies assembled for public dissemination. All exhibits are included in the 20172020 Form 10-K posted on our website at www.norfolksouthern.com under “Investors”“Invest in NS” and “SEC Filings” or you may request copies by writing to: |
| | |
| | Office of Corporate Secretary
Norfolk Southern Corporation
Three Commercial Place
Norfolk, Virginia 23510-9219 |
Item 16. Form 10-K Summary
Not applicable.
POWER OF ATTORNEY
Each person whose signature appears on the next page under SIGNATURES hereby authorizes William A. GalankoVanessa Allen Sutherland and Cynthia C. Earhart,Mark R. George, or any one of them, to execute in the name of each such person, and to file, any amendments to this report, and hereby appoints William A. GalankoVanessa Allen Sutherland and Cynthia C. Earhart,Mark R. George, or any one of them, as attorneys-in-fact to sign on his or her behalf, individually and in each capacity stated below, and to file, any and all amendments to this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Norfolk Southern Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 5th4th day of February, 2018.2021.
| | | | | |
| |
| /s/ James A. Squires |
| By: | James A. Squires |
| (Chairman, President and Chief Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 5th4th day of February,2018, 2021, by the following persons on behalf of Norfolk Southern Corporation and in the capacities indicated.
|
| | | | |
| Signature | Title |
| |
/s/ James A. Squires (James A. Squires) | Chairman, President and Chief Executive Officer and Director
(Principal Executive Officer)
|
| |
/s/ Cynthia C. EarhartMark R. George (Cynthia C. Earhart)Mark R. George) | Executive Vice President Finance and Chief Financial Officer
(Principal Financial Officer)
|
| |
/s/ Thomas E. HurlbutClyde H. Allison, Jr. (Thomas E. Hurlbut)Clyde H. Allison, Jr.) | Vice President and Controller
(Principal Accounting Officer)
|
| |
/s/ Thomas D. Bell, Jr. (Thomas D. Bell, Jr.) | Director |
| |
/s/ Erskine B. Bowles
(Erskine B. Bowles)
| Director |
| |
/s/ Wesley G. Bush
(Wesley G. Bush)
| Director |
| |
/s/ Daniel A. Carp
(Daniel A. Carp)
| Director |
| |
/s/ Mitchell E. Daniels, Jr. (Mitchell E. Daniels, Jr.) | Director |
| |
/s/ Marcela E. Donadio (Marcela E. Donadio) | Director |
| |
/s/ John C. Hufford, Jr. (John C. Hufford, Jr.) | Director |
| |
/s/ Christopher T. Jones (Christopher T. Jones) | Director |
| |
/s/ Thomas C. Kelleher (Thomas C. Kelleher) | Director |
| |
/s/ Steven F. Leer (Steven F. Leer) | Director |
| |
/s/ Michael D. Lockhart (Michael D. Lockhart) | Director |
| |
/s/ Amy E. Miles (Amy E. Miles) | Director |
| |
/s/ Martin H. NesbittClaude Mongeau (Martin H. Nesbitt)Claude Mongeau) | Director |
| |
/s/ Jennifer F. Scanlon (Jennifer F. Scanlon) | Director |
| |
/s/ John R. Thompson
(John R. Thompson) | Director |
Schedule II
Norfolk Southern Corporation and Subsidiaries
Valuationand Qualifying Accounts
Years ended December 31, 2015, 2016,2020, 2019, and 20172018
($ in millions)
| | | | | | | | | | | | | | | | | | | | | | | | Additions charged to: | | | | |
| | | | Additions charged to: | | | | | | Beginning
Balance | | Expenses | | Other Accounts | | Deductions | | Ending
Balance |
| | Beginning Balance | | Expenses | | Other Accounts | | Deductions | | Ending Balance | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended December 31, 2015 | | | | | | | | | | |
| Valuation allowance (included net in | | | | | | | | | | |
| deferred tax liability) for deferred | | | | | | | | | | |
| tax assets | $ | 33 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 35 |
| |
| Casualty and other claims | | | | | | | | | | |
| included in other liabilities | 199 |
| | 66 |
| (1) | — |
| | 74 |
| (3) | 191 |
| |
| Year ended December 31, 2020 | | Year ended December 31, 2020 | |
| Current portion of casualty and | | | | | | | | | | Current portion of casualty and | | | |
| other claims included in | | | | | | | | | | other claims included in | |
| accounts payable | 187 |
| | 19 |
| | 119 |
| (2) | 151 |
| (4) | 174 |
| accounts payable | $ | 212 | | | $ | 27 | | | $ | 81 | | (2) | $ | 138 | | (3) | $ | 182 | |
| | | | | | | | | | | |
| Year ended December 31, 2016 | | | | | | | | | | |
| Valuation allowance (included net in | | | | | | | | | | |
| deferred tax liability) for deferred | | | | | | | | | | |
| tax assets | $ | 35 |
| | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | 39 |
| |
| Casualty and other claims | | | | | | | | | | Casualty and other claims | |
| included in other liabilities | 191 |
| | 68 |
| (1) | — |
| | 81 |
| (3) | 178 |
| included in other liabilities | 171 | | | 80 | | (1) | 0 | | | 82 | | (4) | 169 | |
| | Year ended December 31, 2019 | | Year ended December 31, 2019 | |
| Current portion of casualty and | | | | | | | | | | Current portion of casualty and | | | |
| other claims included in | | | | | | | | | | other claims included in | | | |
| accounts payable | 174 |
| | 25 |
| | 101 |
| (2) | 108 |
| (4) | 192 |
| accounts payable | $ | 213 | | | $ | 22 | | | $ | 131 | | (2) | $ | 154 | | (3) | $ | 212 | |
| | | | | | | | | | | |
| Year ended December 31, 2017 | | | | | | | | | | |
| Valuation allowance (included net in | | | | | | | | | | |
| deferred tax liability) for deferred | | | | | | | | | | |
| tax assets | $ | 39 |
| | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 44 |
| |
| Casualty and other claims | | | | | | | | | | Casualty and other claims | |
| included in other liabilities | 178 |
| | 83 |
| (1) | — |
| | 82 |
| (3) | 179 |
| included in other liabilities | 158 | | | 89 | | (1) | 0 | | | 76 | | (4) | 171 | |
| | Year ended December 31, 2018 | | Year ended December 31, 2018 | |
| Current portion of casualty and | | | | | | | | | | Current portion of casualty and | | | |
| other claims included in | | | | | | | | | | other claims included in | | | |
| accounts payable | 192 |
| | 17 |
| | 124 |
| (2) | 146 |
| (4) | 187 |
| accounts payable | $ | 187 | | | $ | 32 | | | $ | 145 | | (2) | $ | 151 | | (3) | $ | 213 | |
| Casualty and other claims | | Casualty and other claims | |
| included in other liabilities | | included in other liabilities | 179 | | | 85 | | (1) | 0 | | | 106 | | (4) | 158 | |
| |
(1)(1)Includes adjustments for changes in estimates for prior years’ claims. (2)Includes revenue refunds and overcharges provided through deductions from operating revenues and transfers | Includes adjustments for changes in estimates for prior years’ claims. |
| |
(2)
| Includes revenue refunds and overcharges provided through deductions from operating revenues and transfers |
from other accounts.
| |
(3)
| Payments and reclassifications to/from accounts payable. |
| |
(4)
| Payments and reclassifications to/from other liabilities. |
(3)Payments and reclassifications to/from accounts payable.
(4)Payments and reclassifications to/from other liabilities.
