UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended ~~JUNE 30, 2014~~

MARCH 31, 2015

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ___________ to___________

Commission file number 1-8339

NORFOLK SOUTHERN CORPORATION

(Exact name of registrant as specified in its charter)



Virginia (State or other jurisdiction of incorporation)	52-1188014 (IRS Employer Identification No.)
Three Commercial Place Norfolk, Virginia (Address of principal executive offices)	23510-2191 (Zip Code)
(757) 629-2680 (Registrant’s telephone number, including area code)
No Change (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [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 Regulation S-T 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

~~Class~~

Class		Outstanding at ~~June 30, 2014~~ March 31, 2015
Common Stock ($1.00 par value per share)		~~309,515,208~~304,849,454 (excluding 20,320,777 shares held by the registrant’s consolidated subsidiaries)

TABLE OF CONTENTS

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)

~~TABLE OF CONTENTS~~

~~NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)~~			Page
Part I.	Financial Information:
	Item 1.	Financial Statements:		~~Page~~
~~Part I.~~	~~Financial Information:~~
	~~Item 1.~~	~~Financial Statements:~~
		Consolidated Statements of Income ~~Second~~ First Quarters of 2015 and ~~First Six Months of~~ 2014 ~~and 2013~~		3
		Consolidated Statements of Comprehensive Income ~~Second~~ First Quarters of 2015 and ~~First Six Months of~~ 2014 ~~and 2013~~		4
		Consolidated Balance Sheets At ~~June 30, 2014~~March 31, 2015 and December 31, ~~2013~~ 2014		5
		Consolidated Statements of Cash Flows First ~~Six Months~~Quarters of ~~2014~~2015 and ~~2013~~ 2014		6
		Notes to Consolidated Financial Statements		7
		Report of Independent Registered Public Accounting Firm		19 16
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20 17
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		29 24
	Item 4.	Controls and Procedures		29 25
Part II.	Other Information:
	Item 1.	Legal Proceedings		30 26
	Item 1A.	Risk Factors		30 26
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		31 27
	Item 6.	Exhibits		31 27
Signatures				32 28

Exhibit Index				33
				29

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

Second Quarter

First Six Months

2014

2013

2014

2013

($ in millions, except per share amounts)

Railway operating revenues
$
3,042

$
2,802

$
5,731

$
5,540

Railway operating expenses

     Compensation and benefits

715

726

1,455

1,506
     Purchased services and rents

414

410

806

803
     Fuel

408

391

840

820
     Depreciation

238

226

475

453
     Materials and other

248

213

469

431

          Total railway operating expenses

2,023

1,966

4,045

4,013

          Income from railway operations

1,019

836

1,686

1,527

Other income – net

18

29

44

164
Interest expense on debt

139

128

278

257

     Income before income taxes

898

737

1,452

1,434

Provision for income taxes

336

272

522

519

          Net income
$
562

$
465

$
930

$
915

Per share amounts

      Net income:

          Basic
$
1.81

$
1.47

$
2.99

$
2.90
          Diluted

1.79

1.46

2.97

2.87

     Dividends

0.54

0.50

1.08

1.00



	First Quarter
	2015		2014
	($ in millions, except per share amounts)

Railway operating revenues	$	2,567	$	2,689

Railway operating expenses:
Compensation and benefits	783		740
Purchased services and rents	423		392
Fuel	264		432
Depreciation	245		237
Materials and other	246		221

Total railway operating expenses	1,961		2,022

Income from railway operations	606		667

Other income – net	21		26
Interest expense on debt	132		139

Income before income taxes	495		554

Provision for income taxes	185		186

Net income	$	310	$	368

Per share amounts:
Net income
Basic	$	1.01	$	1.18
Diluted	1.00		1.17

Dividends	0.59		0.54

See accompanying notes toconsolidatedfinancialstatements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

Second Quarter

First Six Months

2014

2013

2014

2013

($ in millions)

Net income
$
562

$
465

$
930

$
915
Other comprehensive income, before tax:

     Pension and other postretirement benefits

7

36

306

72
     Other comprehensive income of equity investees

7

1

10

2
Other comprehensive income, before tax

14

37

316

74
Income tax expense related to items of other

     comprehensive income

(4)

(14)

(118)

(28)
     Other comprehensive income, net of tax

10

23

198

46

          Total comprehensive income
$
572

$
488

$
1,128

$
961



	First Quarter
	2015			2014
	($ in millions)

Net income	$	310		$	368
Other comprehensive income, before tax:
Pension and other postretirement benefits	10			299
Other comprehensive income (loss) of equity investees	(4		)	3

Other comprehensive income, before tax	6			302
Income tax expense related to items of other
comprehensive income	(3		)	(114		)

Other comprehensive income, net of tax	3			188

Total comprehensive income	$	313		$	556

See accompanying notes toconsolidatedfinancialstatements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

June 30,

December 31,

2014

2013

($ in millions)

Assets

Current assets:

   Cash and cash equivalents
$
1,667

$
1,443
   Short-term investments

-

118
   Accounts receivable – net

1,122

1,024
   Materials and supplies

251

223
   Deferred income taxes

161

180
   Other current assets

65

87
          Total current assets

3,266

3,075

Investments

2,505

2,439
Properties less accumulated depreciation of $10,634 and

   $10,387, respectively

26,927

26,645
Other assets

342

324

          Total assets
$
33,040

$
32,483

Liabilities and stockholders’ equity

Current liabilities:

   Accounts payable
$
1,245

$
1,265
   Short-term debt

-

100
   Income and other taxes

359

225
   Other current liabilities

331

270
   Current maturities of long-term debt

433

445
          Total current liabilities

2,368

2,305

Long-term debt

8,814

8,903
Other liabilities

1,122

1,444
Deferred income taxes

8,659

8,542
            Total liabilities

20,963

21,194

Stockholders’ equity:

   Common stock $1.00 per share par value, 1,350,000,000 shares

    authorized; outstanding 309,515,208 and 308,878,402 shares,

    respectively, net of treasury shares
311

310
   Additional paid-in capital

2,113

2,021
   Accumulated other comprehensive loss

(183)

(381)
   Retained income

9,836

9,339

          Total stockholders’ equity

12,077

11,289

          Total liabilities and stockholders’ equity
$
33,040

$
32,483



	March 31, 2015			December 31, 2014
	($ in millions)

Assets
Current assets:
Cash and cash equivalents	$	524		$	973
Accounts receivable – net	1,032			1,055
Materials and supplies	268			236
Deferred income taxes	118			167
Other current assets	173			347
Total current assets	2,115			2,778

Investments	2,701			2,679
Properties less accumulated depreciation of $11,020 and
$10,814, respectively	27,829			27,694
Other assets	130			90

Total assets	$	32,775		$	33,241

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,094		$	1,233
Short-term debt	—			100
Income and other taxes	210			217
Other current liabilities	298			228
Current maturities of long-term debt	501			2
Total current liabilities	2,103			1,780

Long-term debt	8,429			8,924
Other liabilities	1,302			1,312
Deferred income taxes	8,783			8,817

Total liabilities	20,617			20,833

Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 304,849,454 and 308,240,130 shares,
respectively, net of treasury shares	306			310
Additional paid-in capital	2,160			2,148
Accumulated other comprehensive loss	(395		)	(398		)
Retained income	10,087			10,348

Total stockholders’ equity	12,158			12,408

Total liabilities and stockholders’ equity	$	32,775		$	33,241

See accompanying notes toconsolidatedfinancialstatements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

First Six Months

2014

2013

($ in millions)
Cash flows from operating activities

Net income
$
930

$
915
Reconciliation of net income to net cash provided by operating activities:

     Depreciation

478

456
     Deferred income taxes

17

143
     Gains and losses on properties and investments

(3)

(99)
     Changes in assets and liabilities affecting operations:

          Accounts receivable

(98)

37
          Materials and supplies

(28)

(12)
          Other current assets

30

28
          Current liabilities other than debt

144

6
     Other – net

(33)

32
            Net cash provided by operating activities

1,437

1,506

Cash flows from investing activities

Property additions

(809)

(884)
Property sales and other transactions

44

68
Investments, including short-term

(3)

(7)
Investment sales and other transactions

121

16
            Net cash used in investing activities

(647)

(807)

Cash flows from financing activities

Dividends

(335)

(315)
Common stock issued – net

82

80
Purchase and retirement of common stock

(100)

(314)
Debt repayments

(213)

(216)
            Net cash used in financing activities

(566)

(765)

            Net increase (decrease) in cash and cash equivalents

224

(66)

Cash and cash equivalents

At beginning of period

1,443

653

At end of period
$
1,667

$
587

Supplemental disclosures of cash flow information

Cash paid during the period for:

     Interest (net of amounts capitalized)
$
255

$
244
     Income taxes (net of refunds)

313

238



		First Quarter
		2015			2014
		($ in millions)

Cash flows from operating activities:
	Net income	$	310		$	368
	Reconciliation of net income to net cash provided by operating activities:
	Depreciation	246			238
	Deferred income taxes	12			(8		)
	Gains and losses on properties and investments	(5		)	(2		)
	Changes in assets and liabilities affecting operations:
	Accounts receivable	23			(85		)
	Materials and supplies	(32		)	(17		)
	Other current assets	176			17
	Current liabilities other than debt	(97		)	86
	Other – net	(28		)	(9		)

	Net cash provided by operating activities	605			588

Cash flows from investing activities:
	Property additions	(392		)	(381		)
	Property sales and other transactions	16			22
	Investments, including short-term	(3		)	(3		)
	Investment sales and other transactions	1			108

	Net cash used in investing activities	(378		)	(254		)

Cash flows from financing activities:
	Dividends	(181		)	(167		)
	Common stock issued	21			62
	Purchase and retirement of common stock	(415		)	(50		)
	Debt repayments	(101		)	(100		)

	Net cash used in financing activities	(676		)	(255		)

	Net increase (decrease) in cash and cash equivalents	(449		)	79

Cash and cash equivalents:
	At beginning of year	973			1,443

	At end of period	$	524		$	1,522

Supplemental disclosures of cash flow information:
	Cash paid during the period for:
	Interest (net of amounts capitalized)	$	71		$	75
	Income taxes (net of refunds)	12			60

See accompanying notes toconsolidatedfinancialstatements.

Norfolk Southern Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Norfolk Southern Corporation (Norfolk Southern) and subsidiaries’ (collectively, NS, we, us, and our) financial condition at ~~June 30, 2014,~~March 31, 2015, and December 31, ~~2013,~~2014, our results of operations, ~~and~~ comprehensive income, ~~for the second quarters~~ and ~~first six months of 2014 and 2013, and our~~ cash flows for the first ~~six months~~quarters of ~~2014~~2015 and ~~2013~~2014 in conformity with U.S. generally accepted accounting principles (GAAP).

These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our latest Annual Report on Form 10-K.

1. Stock-Based Compensation

During the first quarter of ~~2014,~~2015, a committee of non-employee ~~directors~~members of our Board of Directors granted stock options, restricted stock units (RSUs) and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP) and granted stock options pursuant to the Thoroughbred Stock Option Plan (TSOP) as discussed below. Stock-based compensation expense was ~~$10~~$31 million and $6$32 million during the ~~second~~first quarters of ~~2014~~2015 and ~~2013, respectively. For the first six months of~~ 2014, ~~and 2013, stock-based compensation was $42 million and $43 million,~~ respectively. The total tax effects recognized in income in relation to stock-based compensation were net benefits of ~~$4 million and $2 million for the second quarters of 2014 and 2013, and net benefits of $14~~$10 million for the first ~~six months~~quarters both of ~~both 2014~~2015 and ~~2013.~~

2014.

Stock Options

In the first quarter of ~~2014, 515,240~~2015, 511,010 options were granted under LTIP and ~~181,070~~181,320 options were granted under TSOP. In each case, the grant price was ~~$94.17,~~$104.23, which was the greater of the average fair market value of Norfolk Southern common stock (Common Stock) or the closing price of Common Stock on the effective date of the grant, and the options have a term of ten years. The options granted under LTIP and TSOP ~~in 2014~~ may not be exercised prior to the fourth and third anniversaries of the date of grant, ~~respectively.~~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. Holders of the ~~2014~~2015 options granted under LTIP who remain actively employed receive cash dividend equivalent payments ~~for~~during the four ~~years~~year vesting period in an amount equal to the regular quarterly dividends paid on Common Stock. Dividend equivalent payments are not made on TSOP options.

The fair value of each option award ~~in 2014~~ was measured on the date of grant using a lattice-based option valuation model. Expected volatilities are based on implied volatilities 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. The average expected option life 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. The average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. ~~For options granted that include dividend equivalent payments, a~~A dividend yield of zero was ~~used.~~used for LTIP options during the vesting period. A dividend yield of ~~2.29%~~2.27% was used for all vested LTIP options ~~for periods where no dividend equivalent payments are made as well as for~~and all TSOP ~~options, which do not receive dividend equivalents.~~

options.

The assumptions for the ~~2014~~2015 LTIP and TSOP grants are shown in the following table:



Expected volatility range	~~23%~~ 19% - 27%
Average expected volatility	25%
Average risk-free interest rate	~~2.79%~~ 1.83%
Average expected option term LTIP	~~8.9~~9.3 years
Per-share grant-date fair value LTIP	$~~29.87~~ 30.35
Average expected option term TSOP	~~8.8~~9.1 years
Per-share grant-date fair value TSOP	$~~24.38~~ 24.71

For the ~~second~~first quarter of ~~2014,~~2015, options relating to ~~353,327~~241,404 shares were exercised, yielding ~~$16~~$12 million of cash proceeds and $4 million of tax benefit recognized as additional paid-in capital. For the second quarter of 2013, options relating to 546,886 shares were exercised, yielding $18 million of cash proceeds and $7 million of tax benefit recognized as additional paid-in capital.

~~For the first six months of 2014, options relating to 1,234,071 shares were exercised, yielding $56 million of cash proceeds and $15~~$3 million of tax benefit recognized as additional paid-in capital. For the first ~~six months~~quarter of ~~2013,~~2014, options relating to ~~1,571,500~~880,744 shares were exercised, yielding ~~$53~~$40 million of cash proceeds and ~~$20~~$11 million of tax benefit recognized as additional paid-in capital.

Restricted Stock Units

During the first quarter of ~~2014,~~2015, there were ~~113,505~~101,470 RSUs granted with a grant-date fair value of ~~$94.17~~$104.23 and a five-year restriction period that will be settled through the issuance of shares of Common Stock. The RSU grants include cash dividend equivalent payments during the restriction period commensurate with regular quarterly dividends paid on Common Stock.

~~No RSUs were earned or paid out in the second quarters of 2014 and 2013.~~

During the first ~~six months~~quarter of 2015, 166,750 of the RSUs granted in 2010 vested, with 99,337 shares of Common Stock issued net of withholding taxes. During the first quarter of 2014, 318,150 of the RSUs granted in 2009 vested, with 187,449 shares of Common Stock issued net of withholding taxes. ~~For the first six months of 2013, 298,400 of the RSUs granted in 2008 vested, with 178,250 shares of Common Stock issued net of withholding taxes.~~ The total related tax benefits recognized as additional paid-in capital were ~~less than $1~~$3 million ~~for the second quarters of both 2014~~ and ~~2013 and $6 million and $2~~$6 million for the first ~~six months~~quarters of 2015 and 2014, ~~and 2013,~~ respectively.

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle and are ~~paid in~~settled through the ~~form~~issuance of shares of Common Stock. During the first quarter of ~~2014,~~2015, there were ~~399,530~~413,770 PSUs granted. PSUs will earn out based on the achievement of a return on average invested capital target (a performance condition) and a total shareholder return target (a market condition). The grant-date fair values of the PSUs associated with the performance and market conditions were ~~$94.17~~$97.24 and ~~$50.31,~~$46.08, respectively, with the market condition fair value measured on the date of grant using a Monte Carlo simulation model.

~~No PSUs were earned or paid out in the second quarters of 2014 and 2013.~~

During the first ~~six months~~quarter of 2015,236,601 of the PSUs granted in 2012 were earned, with 141,386 shares of Common Stock issued net of withholding taxes. For the first quarter of 2014, 374,099 of the PSUs granted in 2011 were earned, with 223,253 shares of Common Stock issued net of withholding taxes. ~~For the first six months of 2013, 577,585 of the PSUs granted in 2010 were earned, with 348,189 shares of Common Stock issued net of withholding taxes.~~ The total related tax benefits recognized as additional paid-in capital were $3 million and $5 million for the first ~~six months~~quarters of ~~both~~2015 and 2014, ~~and 2013.~~

respectively.

2. Income Taxes

There have been no material changes to the balance of unrecognized tax benefits reported at December 31, ~~2013.~~2014. IRS examinations have been completed for all years prior to 2011. Our consolidated federal income tax returns for 2011 and 2012 are currently being audited by the IRS.

We anticipate that the IRS will complete its examination in 2015. We do not expect that the resolution of the examination will have a material effect on our financial position, results of operations, or liquidity.

3. Earnings Per Share

Basic

Diluted

Second Quarter

2014

2013

2014

2013

($ in millions, except per share amounts,

shares in millions)

Net income
$
562

$
465

$
562

$
465
Dividend equivalent payments

(2)

(1)

(1)

(1)

        Income available to common stockholders
$
560

$
464

$
561

$
464

Weighted-average shares outstanding

309.5

314.1

309.5

314.1
Dilutive effect of outstanding options

     and share-settled awards

3.3

3.7
Adjusted weighted-average shares outstanding

312.8

317.8

        Earnings per share
$
1.81

$
1.47

$
1.79

$
1.46

Basic

Diluted

First Six Months

2014

2013

2014

2013

($ in millions, except per share amounts,

shares in millions)

Net income
$
930

$
915

$
930

$
915
Dividend equivalent payments

(4)

(3)

(2)

(2)

        Income available to common stockholders
$
926

$
912

$
928

$
913

Weighted-average shares outstanding

309.5

314.3

309.5

314.3
Dilutive effect of outstanding options

     and share-settled awards

3.2

3.6
Adjusted weighted-average shares outstanding

312.7

317.9

        Earnings per share
$
2.99

$
2.90

$
2.97

$
2.87

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



	Basic						Diluted
	First Quarter
	2015			2014			2015			2014
	($ in millions, except per share amounts, shares in millions)

Net income	$	310		$	368		$	310		$	368
Dividend equivalent payments	(2		)	(2		)	(1		)	(1		)

Income available to common stockholders	$	308		$	366		$	309		$	367

Weighted-average shares outstanding	306.8			309.5			306.8			309.5
Dilutive effect of outstanding options
and share-settled awards							2.8			3.1

Adjusted weighted-average shares outstanding							309.6			312.6

Earnings per share	$	1.01		$	1.18		$	1.00		$	1.17

During the ~~second~~first quarters of 2015 and ~~first six months of~~ 2014, ~~and 2013,~~ 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 the more dilutive for each grant. For those grants for which the two-class method was more dilutive, net income was reduced by dividend equivalent payments to determine income available to common stockholders. The dilution calculations exclude options having exercise prices

exceeding the average market price of Common Stock as follows: none in 2015 and 0.7 million ~~and 0.8 million~~ in ~~the first quarters of 2014 and 2013, respectively, and zero for the second quarters of both 2014 and 2013.~~

2014.

4. Stockholders’ Equity

Common Stock

Common Stock is reported net of shares held by our consolidated subsidiaries (Treasury Shares). Treasury Shares at ~~June 30, 2014,~~March 31, 2015, and December 31, ~~2013,~~2014, amounted to 20,320,777 shares, with a cost of $19 million at both dates.

Accumulated Other Comprehensive Loss

~~“Accumulated~~

The components of "Other comprehensive income" 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:

Accumulated

Pensions

Other

Accumulated

and Other

Comprehensive

Other

Postretirement

Loss of Equity

Comprehensive

Benefits

Investees

Loss

($ in millions)
Second Quarter

March 31, 2014
$
(125)

$
(68)

$
(193)
Other comprehensive income:

  Amounts reclassified into net income

7
(1)

-

7
  Net gain

-

7

7
  Tax expense

(3)

(1)

(4)
        Other comprehensive income

4

6

10

June 30, 2014
$
(121)

$
(62)

$
(183)

Pensions

Other

Accumulated

and Other

Comprehensive

Other

Postretirement

Loss of Equity

Comprehensive

Benefits

Investees

Loss

($ in millions)
Second Quarter

March 31, 2013
$
(977)

$
(109)

$
(1,086)
Other comprehensive income:

  Amounts reclassified into net income

36
(1)

-

36
  Net gain

-

1

1
  Tax expense

(14)

-

(14)
        Other comprehensive income

22

1

23

June 30, 2013
$
(955)

$
(108)

$
(1,063)



	Pensions and Other Postretirement Benefits				Other Comprehensive Loss of Equity Investees			Accumulated Other Comprehensive Loss
	($ in millions)

December 31, 2014	$	(320	)		$	(78	)	$	(398	)
Other comprehensive income (loss):
Amounts reclassified into net income	10			(1)	—			10
Net loss	—				(4		)	(4		)
Tax expense	(3		)		—			(3		)

Other comprehensive income (loss)	7				(4		)	3

March 31, 2015	$	(313	)		$	(82	)	$	(395	)



	Pensions and Other Postretirement Benefits				Other Comprehensive Gain (Loss) of Equity Investees			Accumulated Other Comprehensive Loss
	($ in millions)

December 31, 2013	$	(310	)		$	(71	)	$	(381	)
Other comprehensive income:
Prior service benefit	367				—			367
Amounts reclassified into net income	12			(1)	—			12
Net gain (loss)	(80		)		3			(77		)
Tax expense	(114		)		—			(114		)

Other comprehensive income	185				3			188

March 31, 2014	$	(125	)		$	(68	)	$	(193	)


⁽¹⁾	These items are included in the computation of net periodic pension and postretirement benefit costs. See Note 7, “Pensions and Other Postretirement Benefits” for additional information.

Accumulated

Pensions

Other

Accumulated

and Other

Comprehensive

Other

Postretirement

Loss of Equity

Comprehensive

Benefits

Investees

Loss

($ in millions)
First Six Months

December 31, 2013
$
(310)

$
(71)

$
(381)
Other comprehensive income:

Prior service benefit

367

-

367
  Amounts reclassified into net income

19
(1)

-

19
  Net gain (loss)

(80)

10

(70)
  Tax expense

(117)

(1)

(118)
        Other comprehensive income

189

9

198

June 30, 2014
$
(121)

$
(62)

$
(183)

Accumulated

Pensions

Other

Accumulated

and Other

Comprehensive

Other

Postretirement

Loss of Equity

Comprehensive

Benefits

Investees

Loss

($ in millions)
First Six Months

December 31, 2012
$
(999)

$
(110)

$
(1,109)
Other comprehensive income:

  Amounts reclassified into net income

72
(1)

-

72
  Net gain

-

2

2
  Tax expense

(28)

-

(28)
        Other comprehensive income

44

2

46

June 30, 2013
$
(955)

$
(108)

$
(1,063)

~~(1)~~ ~~These items are included in the computation of net periodic pension and postretirement benefit costs. See~~

~~Note 7, “Pensions and Other Postretirement Benefits” for additional information.~~

5. Stock Repurchase Program

We repurchased and retired ~~1.0~~3.9 million and ~~4.2~~0.5 million shares of Common Stock under our stock repurchase program in ~~each of~~ the first ~~six months~~quarters of ~~2014~~2015 and ~~2013,~~2014, respectively, at a cost of ~~$100~~$415 million and ~~$314~~$50 million, respectively. The timing and volume of purchases is guided by our assessment of market conditions and other pertinent factors. Any near-term share repurchases are expected to be made with internally generated cash, cash on hand, or proceeds from borrowings. Since the beginning of 2006, we have repurchased and retired ~~137.8~~143.7 million shares at a total cost of ~~$8.2~~$8.8 billion.

6. Investment in Conrail

Through a limited liability company, we and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC). We have a 58% economic and 50% voting interest in the jointly owned entity, and CSX has the remainder of the economic and voting interests. Our investment in Conrail was $1.1 billion at both ~~June 30, 2014~~March 31, 2015 and December 31, ~~2013.~~

2014.

CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of Norfolk Southern Railway Company (NSR) and CSX Transportation, Inc. (CSXT). The costs of operating the Shared Assets Areas are borne by NSR and CSXT based on usage. In addition, NSR and CSXT pay CRC a fee for access to the Shared Assets Areas. “Purchased services and rents” and “Fuel” include expenses for amounts due to CRC for the ~~use~~operation of the Shared Assets Areas totaling ~~$34~~$37 million and ~~$39 million for the second quarters~~ ~~of 2014 and 2013, respectively, and $68 million and $73~~$34 million for the first ~~six months~~quarters of ~~2014~~2015 and ~~2013,~~2014, respectively. Our equity in the earnings of Conrail, net of amortization, included in “Purchased services and rents” was $10 million and ~~$16~~$6 million for the ~~second quarter~~first quarters of 2015 and ~~the first six months of~~ 2014, respectively. ~~For the second quarter and first six months of 2013, this amounted to $9 million and $18 million, respectively, and was included in “Other income – net.”~~

“Accounts payable” includes ~~$192~~$60 million at ~~June 30, 2014,~~March 31, 2015, and ~~$187~~$56 million at December 31, ~~2013,~~2014, due to Conrail for the operation of the Shared Assets Areas. In addition, “Other liabilities” includes ~~$133~~$280 million at both ~~June 30, 2014,~~March 31, 2015 and December 31, ~~2013,~~2014, for long-term advances from Conrail, maturing ~~2035,~~2044, that bear interest at an average rate of ~~4.4%~~2.9%.

7. Pensions and Other Postretirement Benefits

We have both funded and unfunded defined benefit pension plans covering principally salaried employees. We also provide ~~specific~~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 of health care expenses is covered for retired employees and their dependents, reduced by any deductibles, coinsurance, and, in some cases, coverage provided under other group insurance policies.

Other Postretirement

Pension Benefits

Benefits

Second Quarter

2014

2013

2014

2013

($ in millions)

Service cost
$
8

$
10

$
2

$
4
Interest cost

24

21

5

12
Expected return on plan assets

(38)

(36)

(5)

(4)
Amortization of net losses

13

22

-

14
Amortization of prior service benefit

-

-

(6)

-

Net cost (benefit)
$
7

$
17

$
(4)

$
26

Other Postretirement

Pension Benefits

Benefits

First Six Months

2014

2013

2014

2013

($ in millions)

Service cost
$
17

$
20

$
4

$
8
Interest cost

47

41

13

25
Expected return on plan assets

(76)

(71)

(9)

(8)
Amortization of net losses

27

44

-

28
Amortization of prior service benefit

-

-

(8)

-

Net cost
$
15

$
34

$
-

$
53

~~In the first quarter of 2014, we amended our retiree medical plan for participants who are Medicare eligible resulting in a remeasurement of our plan assets and obligations. Effective July 1, 2014,~~Those participants who are Medicare-eligible are not covered under the self-insured retiree health care plan, but instead are provided with an employer-funded health reimbursement account which can be used for reimbursement of health insurance premiums or eligible out-of-pocket medical expenses. As required, the discount rate assumption was revised as a result of the remeasurement to 3.90% from 4.65% at December 31, 2013, and there were no significant changes to the expected return on plan assets, asset mix, mortality rates, or health care trend rates. The prior service benefit associated with the plan amendment was $367 million and the actuarial losses associated with the change in discount rate were $80 million, resulting in a decrease in the benefit obligation of $287 million. The estimated prior service benefit for the other postretirement benefit plans that will be amortized from accumulated other comprehensive loss into net periodic cost during the remainder of the year is $12 million.



							Other Postretirement
	Pension Benefits						Benefits
	First Quarter
	2015			2014			2015			2014
	($ in millions)

Service cost	$	10		$	9		$	2		$	2
Interest cost	24			23			5			8
Expected return on plan assets	(41		)	(38		)	(5		)	(4		)
Amortization of net losses	16			14			—			—
Amortization of prior service benefit	—			—			(6		)	(2		)

Net cost (benefit)	$	9		$	8		$	(4	)	$	4

For the remainder of 2014, we expect to contribute approximately $26 million to our other postretirement benefit plans for retiree health and life insurance benefits. Benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:

Other

Postretirement

Benefits

($ in millions)

Remainder of 2014
$
26
2015

47
2016

46
2017

45
2018

44
Years 2019 - 2023

201

8. Fair Value

Fair Value Measurements

The Financial Accounting Standards Board (FASB) Accounting Standards ~~Codifications~~Codification (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; • quoted prices for identical or similar assets or liabilities in inactive markets; • inputs other than quoted prices that are observable for the asset or liability; • 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’s 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 ~~June 30, 2014~~March 31, 2015 or December 31, ~~2013.~~

2014.

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,” “Short-term investments,” “Accounts receivable,” “Accounts payable,” and “Short-term debt” approximate carrying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life insurance is recorded at cash surrender value and, accordingly, approximates fair value. The carrying amounts and estimated fair values for the remaining financial instruments, excluding investments accounted for under the equity method, consisted of the following:

June 30, 2014

December 31, 2013

Carrying

Fair

Carrying

Fair

Amount

Value

Amount

Value

($ in millions)

Long-term investments
$
149

$
182

$
148

$
177
Long-term debt, including current maturities

(9,247)

(11,102)

(9,348)

(10,673)



	March 31, 2015						December 31, 2014
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
	($ in millions)

Long-term investments	$	163		$	193		$	162		$	193
Long-term debt, including current maturities	(8,930		)	(11,081		)	(8,926		)	(10,962		)

Underlying net assets were used to estimate the fair value of investments with the exception of notes receivable, which are based on future discounted cash flows. 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, company rating, and remaining maturity.

The following table sets 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)
June 30, 2014

   Long-term investments
$
49

$
133

$
182
   Long-term debt, including current maturities

(10,991)

(111)

(11,102)

December 31, 2013

    Long-term investments
$
47

$
130

$
177
    Long-term debt, including current maturities

(10,449)

(224)

(10,673)



	Level 1			Level 2			Total
	($ in millions)

March 31, 2015
Long-term investments	$	51		$	142		$	193
Long-term debt, including current maturities	(10,870		)	(211		)	(11,081		)

December 31, 2014
Long-term investments	$	50		$	143		$	193
Long-term debt, including current maturities	(10,754		)	(208		)	(10,962		)

9. Commitments and Contingencies

Lawsuits

We and/or certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations. When we conclude that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to earnings. While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payment of such liability and claims. However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter. Any adjustments to the recorded liability will be reflected in earnings in the periods in which such adjustments ~~are known and estimable.~~

become known.

of Sunbelt, we have been billing and collecting amounts based on the challenged tariff rates. ~~On March 14,~~In 2014, the STB resolved ~~DuPont’s~~both rate reasonableness ~~complaint in our favor, and on June 20, 2014, the STB resolved Sunbelt’s rate case~~complaints in our favor. The STB’s findings in both cases remain subject to technical corrections, requests for reconsideration, and appeal. We believe the estimate of any reasonably possible loss will not have a material effect on our financial position, results of operations, or liquidity. With regard to rate cases, we record adjustments to revenues in the periods if and when such adjustments are probable and estimable.

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

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 accidental injury and occupational claims are subject to the Federal Employers’ Liability Act (FELA), which

is applicable only to railroads. FELA’s fault-based 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 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 us 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, which includes amounts for incurred but unasserted claims. We adjust the liability quarterly based upon our assessment and the results of the study. Our estimate of loss liabilities is subject to inherent limitation given the difficulty of predicting future events such as jury decisions, court interpretations, or legislative changes and as such the actual loss may vary from the estimated liability recorded.

Occupational claims – Occupational claims (including asbestosis and other respiratory diseases, as well as conditions allegedly related to repetitive motion) are often not caused by a specific accident or event but rather allegedly result from a claimed exposure over time. 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 into the future as far as can be reasonably determined. 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. The actuarial estimate includes a provision for claims that have been incurred but not reported. 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 its amount can be estimated reasonably. Claims, if any, against third parties, for recovery of cleanup costs we have incurred are reflected as receivables (when collection is probable) in the Consolidated Balance Sheets and are not netted against the associated liability. Environmental engineers regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates. We have an Environmental Policy Council, composed of senior managers, to oversee and interpret our environmental policy.

Our Consolidated Balance Sheets include liabilities for environmental exposures of ~~$65~~$69 million at ~~June 30, 2014,~~March 31, 2015, and ~~$58~~$66 million at December 31, ~~2013~~2014 (of which $15 million is classified as a current liability at the end of each period). At ~~June 30, 2014,~~March 31, 2015, the liability represents our ~~estimate~~estimates of the probable cleanup, investigation, and

remediation costs based on available information at ~~147~~145 known locations and projects compared with ~~142~~146 locations and projects at December 31, ~~2013.~~2014. At ~~June 30, 2014, 11~~March 31, 2015, 15 sites accounted for ~~$36~~$43 million of the liability, and no individual site was considered to be material. We anticipate that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period.

At 1211 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 (EPA) 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 ~~minimize.~~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 our 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 ourself and our subsidiaries insurance for potential losses for third-party liability and first-party property damages. We are currently self-insured up to $50 million and above ~~$1.0~~$1.2 billion per occurrence and/or policy year for bodily injury and property 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 inin our care, custody, or control.

Purchase Commitments

At ~~June 30, 2014,~~March 31, 2015, we had outstanding purchase commitments totaling approximately ~~$889 million~~$1.2 billion for freight cars and containers, locomotives, track material, and track and yard expansion projects in connection with our capital programs ~~through 2018~~ as well as long-term service contracts through 2018.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Norfolk Southern Corporation:

We have reviewed the accompanying consolidated balance sheet of Norfolk Southern Corporation and subsidiaries as of ~~June 30, 2014,~~March 31, 2015, and the related consolidated statements of income, comprehensive income and cash flows for the three-month ~~and six-month~~ periods ended ~~June 30, 2014~~March 31, 2015 and ~~2013 and the related consolidated statements of cash flows for the six-month periods ended June 30, 2014 and 2013.~~2014. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

KPMG LLP

Norfolk, Virginia

April 29, 2015
~~July 23, 2014~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Norfolk Southern Corporation and Subsidiaries

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes.

OVERVIEW

We are one of the nation’s premier transportation companies. Our Norfolk Southern Railway Company subsidiary operates approximately 20,000 miles of road in 22 states and the District of Columbia, serves every major container port in the eastern United States, and provides efficient connections to other rail carriers. We operate the most extensive intermodal network in the East and are a major transporter of coal, automotive, and industrial products.

~~For the second quarter, increased revenues, driven primarily by higher volumes, outpaced growth in our operating expenses, resulting in record-setting financial results. Net~~

Our net income for the ~~second~~first quarter of 2015 was ~~$562~~$310 million, or ~~$1.79~~$1.00 per diluted share ~~(up $97~~(down $58 million, or ~~$0.33~~$0.17 per diluted ~~share, respectively)~~share), and our railway operating revenues reached $3.0 billion (up $240 million), all of which are all-time records. Despite higher operating expenses (up $57 million, or 3%), we still achieved an all-time record low operating ratio rose 1.2 percentage points to 76.4%. The reduction in earnings was primarily due to a 9% decline in income from railway operations. First-quarter operating results were negatively impacted by continued weakness in coal markets, lower average revenue per unit related to the mix of ~~66.5% for~~traffic, and additional costs attributable to harsh weather and service recovery efforts. These factors more than offset the ~~quarter.~~

effects of volume increases and lower fuel prices.

Our network fluidity is improving, and we expect our metrics (train speed and terminal dwell) to approach 2012-2013 performance during the second half of the year.

Cash provided by operating activities for the first ~~six months~~quarter of ~~2014~~2015 totaled ~~$1.4 billion,~~$605 million, which along with cash on hand allowed for share repurchases, property additions, dividends, and debt ~~repayments, and share repurchases.~~repayments. In the first ~~six months~~quarter of ~~2014,~~2015, we repurchased ~~1.0~~3.9 million shares of ~~Norfolk Southern common stock (Common Stock)~~Common Stock at a total cost of ~~$100~~$415 million. Since inception of our stock repurchase program in 2006, we have repurchased and retired ~~137.8~~143.7 million shares of Common Stock at a total cost of ~~$8.2~~$8.8 billion. At ~~June 30, 2014,~~March 31, 2015, cash and cash equivalents totaled ~~$1.7 billion.~~

$524 million.

SUMMARIZED RESULTS OF OPERATIONS

~~Second~~

First quarter ~~2014~~2015 net income was ~~$562~~$310 million, ~~up 21%~~down 16% compared with the same period last year. The ~~increase~~decrease in net income for the quarter reflected ~~higher~~lower income from railway operations, ~~up $183~~down $61 million, or ~~22%~~9%, primarily due to a ~~$240~~$122 million, or 9%5%, ~~improvement~~decline in railway operating revenues as a result of ~~an 8% rise~~lower average revenue per unit (driven primarily by the decline in fuel surcharge revenue) and lower coal volumes. This decline was offset in part by lower operating expenses (down $61 million, or 3%) resulting from the drop in oil prices which significantly reduced fuel expense for the quarter. Higher costs associated with increased intermodal and merchandise volumes and additional resources aimed at improving our service partially offset the reduction in fuel costs. The railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses) ~~improved~~rose to ~~66.5%~~76.4% for the ~~second~~first quarter of ~~2014,~~2015, compared with ~~70.2%~~75.2% for the ~~second~~first quarter of ~~2013.~~

For the first six months of 2014 net income was $930 million, up $15 million, or 2%, compared with the same period last year. Prior year results included a gain from the sale of certain assets to the Michigan Department of Transportation, which benefited net income by $60 million and earnings per share by $0.19. Current year results were favorably impacted by higher income from railway operations (up $159 million, or 10%).

Oil prices affect our results of operations in a variety of ways and can have an overall favorable or unfavorable impact in any particular period. In addition to the impact of oil prices on general economic conditions, volume, and supplier costs, oil prices directly affect our revenues through market-based fuel surcharges and contract escalators (see “Railway Operating Revenues”) and also affect fuel costs (see “Railway Operating Expenses”). For the second quarter of 2014, excluding the impact of increased consumption, fuel surcharge revenue increased more than fuel expense. For the first six months of 2014, excluding the impact of increased consumption, fuel surcharge revenue increased, whereas fuel expense decreased. Future changes in oil prices may cause volatility in operating results that could be material to a particular year or quarter.

2014.

DETAILED RESULTS OF OPERATIONS

Railway Operating Revenues

~~Second~~

First quarter railway operating revenues were ~~$3.0~~$2.6 billion in ~~2014, up $240~~2015, down $122 million, or 9%5%, compared with the ~~second~~first quarter of ~~2013. For the first six months of 2014, railway operating revenues were $5.7 billion, up $191 million, or 3%, compared with the same period last year.~~2014. As shown in the following table, the ~~increases~~decline in revenue resulted from ~~higher volume and~~lower average revenue per unit ~~(which includes~~(primarily a result of lower fuel surcharges as well as changes in the ~~effects~~mix of ~~fuel surcharges). Fuel surcharge~~traffic) offset in part by higher volumes.



	First Quarter 2015 vs. 2014
	Increase (Decrease)
	($ in millions)

Volume (units)	$	60
Revenue per unit	(182		)

Total	$	(122	)

Over 85% of our revenue ~~for the second quarters of 2014 and 2013 totaled $358 million and $306 million, respectively, and $653 million and $580 million for the first six months of 2014 and 2013, respectively.~~

Second Quarter

First Six Months

2014 vs. 2013

2014 vs. 2013

Increase

($ in millions)

Volume (units)

$
221

$
190

Revenue per unit

19

1

Total

$
240

$
191

~~Many of our~~base is covered by negotiated fuel surcharges, ~~for coal~~ and ~~industrial products shipments~~revenues associated with these surcharges totaled $163 million and $295 million in the first quarters of 2015 and 2014, respectively. Fuel surcharge revenues are ~~based on the monthly average price of~~typically tied to either West Texas Intermediate Crude Oil ~~(WTI Average Price)~~(WTI) or On-Highway Diesel (OHD). ~~These surcharges~~Although the revenue base covered by each program is split about evenly, because WTI price levels are below most surcharge trigger points, in the first quarter of 2015, about three-quarters were generated by OHD-based surcharges. Surcharges tied to WTI are reset the first day of each calendar month based on the WTI Average Price for the second preceding calendar month. This two-month lag in applying WTI Average Price ~~decreased~~increased fuel surcharge revenue by approximately ~~$11 million for the quarter and $28~~$24 million for the first ~~six months~~quarter of ~~2014. This two-month lag~~2015, but decreased ~~fuel surcharge revenue~~it by approximately $4$17 million for the ~~second~~first quarter of ~~2013 and $27 million~~2014. Should the ~~first six months~~current fuel price environment persist for the remainder of ~~2013.~~

the year, total fuel surcharges for 2015 could be less than half of the amount in 2014.

Two of our customers, DuPont and Sunbelt Chlor Alkai Partnership (Sunbelt), filed rate reasonableness complaints before the Surface Transportation Board (STB) alleging that our tariff rates for transportation of regulated movements are unreasonable. Since June 1, 2009, in the case of DuPont, and April 1, 2011, in the case of Sunbelt, we have been billing and collecting amounts based on the challenged tariff rates. ~~On March 14,~~In 2014, the STB resolved ~~DuPont’s~~both rate reasonableness ~~complaint in our favor, and on June 20, 2014, the STB resolved Sunbelt’s rate case~~complaints in our favor. The STB’s findings in both cases remain subject to technical corrections, requests for reconsideration, and appeal. We believe the estimate of any reasonably possible loss will not have a material effect on our financial position, results of operations, or liquidity. With regard to rate cases, we record adjustments to revenues in the periods if and when such adjustments are probable and estimable.

Revenues, units, and average revenue per unit for our market groups were as follows:

Second Quarter

Revenues

Units

Revenue per Unit

2014

2013

2014

2013

2014

2013

($ in millions)

(in thousands)

($ per unit)

Coal
$
672

$
626

350.5

341.4

$
1,916

$
1,833
General merchandise:

    Chemicals

455

415

121.8

114.0

3,730

3,642
    Agriculture/consumer/gov’t

386

366

155.6

147.9

2,479

2,475
    Metals and construction

410

350

193.6

171.1

2,118

2,045
    Automotive

270

261

109.5

106.4

2,469

2,456
    Paper/clay/forest

199

196

76.0

76.4

2,628

2,570
General merchandise

1,720

1,588

656.5

615.8

2,620

2,580

Intermodal

650

588

976.1

881.0

666

667

        Total
$
3,042

$
2,802

1,983.1

1,838.2

1,534

1,524

First Six Months

Revenues

Units

Revenue per Unit

2014

2013

2014

2013

2014

2013

($ in millions)

(in thousands)

($ per unit)

Coal
$
1,213

$
1,261

650.2

684.6

$
1,865

$
1,841
General merchandise:

    Chemicals

898

809

237.9

220.0

3,774

3,679
    Agriculture/consumer/gov’t

747

727

302.7

295.8

2,468

2,458
    Metals and construction

741

686

343.5

325.9

2,157

2,106
    Automotive

497

505

201.8

205.1

2,462

2,461
    Paper/clay/forest

389

391

148.4

153.0

2,624

2,554
General merchandise

3,272

3,118

1,234.3

1,199.8

2,651

2,599

Intermodal

1,246

1,161

1,861.2

1,737.4

670

668

        Total
$
5,731

$
5,540

3,745.7

3,621.8

1,530

1,530



	First Quarter
	Revenues				Units		Revenue per Unit
	2015		2014		2015	2014	2015		2014
	($ in millions)				(in thousands)		($ per unit)

Coal	$	455	$	541	277.4	299.7	$	1,642	$	1,805

General merchandise:
Chemicals	432		443		127.3	116.1	3,390		3,820
Metals and construction	310		331		152.5	149.9	2,031		2,207
Agriculture/consumer/gov’t	374		361		150.0	147.1	2,495		2,457
Automotive	219		227		95.7	92.3	2,291		2,455
Paper/clay/forest	185		190		72.5	72.4	2,552		2,620

General merchandise	1,520		1,552		598.0	577.8	2,541		2,686

Intermodal	592		596		926.7	885.1	639		673

Total	$	2,567	$	2,689	1,802.1	1,762.6	1,425		1,525

Coal

Coal revenues ~~increased $46~~decreased $86 million, or 7%16%, in the ~~second~~first quarter, ~~but decreased $48 million, or 4%, for the first six months~~ compared with the same ~~periods~~period last ~~year. The increase for the quarter resulted from~~year, reflecting a ~~5% improvement~~9% decrease in average revenue per unit (including fuel surcharges) and a ~~3% rise~~7% decline in carload volume. ~~The decrease for the first six months was due to a 5% decline in carload volume, partially offset by 1% increase in average revenue per unit.~~ Coal tonnage by market was as follows:

Second Quarter

First Six Months

2014

2013

2014

2013

(tons in thousands)

Utility

25,968

24,319

47,164

48,277
Export

6,443

7,380

12,946

15,799
Domestic metallurgical

4,121

4,608

7,307

8,650
Industrial

2,260

1,810

4,231

3,610

Total

38,792

38,117

71,648

76,336



	First Quarter
	2015	2014
	(tons in thousands)

Utility	20,114	21,196
Export	5,311	6,503
Domestic metallurgical	3,145	3,186
Industrial	1,983	1,971

Total	30,553	32,856

Utility coal tonnage ~~increased 7%~~decreased 5% in the ~~second~~first quarter ~~but was down 2% for the first six months. Both periods were positively impacted by higher demand for utility coal~~ as ~~utilities rebuilt their stockpiles in response to higher~~significantly lower natural gas prices and ~~increased electric demand as a result~~the impact of the harsh winter. This increase was partially offset by the loss of business from a northern utility and the first six months were also negatively impacted by severe weather disruptions during the first quarter.new environmental regulations reduced coal burn for electrical generation. Export coal tonnage declined ~~13%~~18% in the ~~second~~first quarter ~~and 18% for the first six months,~~of 2015, driven by strong competition that U.S. coal suppliers faced ~~in a well-supplied global market. Domestic metallurgical coal tonnage was down 11% in the second quarter and 16% for the first six months~~ due to ~~facility shutdowns~~excess coal supply, depressed coal prices, and curtailments related to weakened customer demand and the impact of severe winter weather on our network in the first quarter. Industrial coal tonnage increased 25% in the second quarter and 17% for the first six months as a result of new business opportunities with existing customers.

an Australian currency advantage.

Coal revenues for the remainder of the year are expected to be lower compared to last year due to lower volumes and lower average revenue per unit ~~and~~(largely a result of lower ~~volumes.~~

fuel surcharge revenue).

General Merchandise

General merchandise revenues ~~increased $132~~decreased $32 million, or 8%2%, in the ~~second~~first quarter, compared with the same period last year, reflecting a ~~7% rise in carload volume and a 2% improvement~~5% decrease in average revenue per ~~unit. For~~unit (primarily driven by lower fuel surcharge revenue), offset in part by a 3% rise in volume.

Chemicals volume rose 10% in the first ~~six months, general merchandise revenues grew $154 million, or 5%, reflecting a 3% increase in carload volume and 2% rise in average revenue per unit.~~

~~Chemicals volume increased 7% in the second~~ quarter, ~~and 8% for the first six months,~~ largely driven by ~~higher~~increased shipments of crude oil originated from the Bakken and Canadian oil ~~fields. Additionally, we handled~~fields and higher volumes of liquefied petroleum gas.

Metals and construction volume rose 2% in the first quarter, reflecting higher shipments of aggregates as a result of improved demand in the Southeast and increased shipments of fractionating sand for natural gas drilling. These increases were offset in part by fewer shipments of iron and steel as lower crude oil prices reduced demand for materials used in the construction of pipelines.

Agriculture, consumer products, and government volume improved 5%2% in the ~~second~~first quarter, ~~and 2% for the first six months,~~ reflecting ~~more revenue shipments of empty railcars as part of a hopper re-body program,~~ higher volumes of corn and feed products driven by increased demand ~~for domestic ethanol production,~~from poultry and ~~improved shipments of soybeans related to tight local supplies.~~beef producers. These improvements were partially offset ~~for the first six months~~ by fewer shipments of ~~fertilizer~~soybeans due to ~~the late harvest and the deferral of purchases by farmers.~~

~~Metals and construction volume rose 13%~~strong competition in the ~~second quarter and 5% for the first six months reflecting higher shipments of fractionating sand for natural gas drilling, gains in our iron and steel business driven by higher~~

global market.

import activity, and more coil shipments used to support growing demand in the automotive sector. During the quarter, we also handled more scrap metal shipments as a result of higher demand for iron and steel products.

Automotive volume grew 3%4% in ~~the second quarter, but decreased 2% for the first six months. The improvement for the quarter was the result of increased North America light vehicle production. During~~ the first quarter, ~~severe winter weather led to lower network velocity that produced equipment shortages which negatively impacted our volumes for the first six months.~~

primarily driven by increased production of North American light vehicles.

Paper, clay, and forest products volume ~~declined 1% in the second quarter and 3%~~was flat for the first ~~six months,~~quarter, reflecting ~~reduced~~higher carloads of ~~pulp due to production issues and reduced export demand, fewer shipments of miscellaneous wood driven by loss of business, and the continued impact of the decline in~~lumber as demand for ~~newsprint~~housing materials grew, offset in part by lower wood chip volumes as a result of softened demand and ~~paper. These decreases were partially offset by higher woodchip shipments due to the temporary~~ customer sourcing ~~changes prompted by the recent wet weather in the Southeast.~~

changes.

General merchandise revenues for the remainder of the year are expected to ~~increase~~decrease compared to last year due to ~~higher volumes and improved~~lower average revenue per ~~unit.~~

unit, resulting from lower fuel surcharge revenue, which is expected to be offset in part by higher volumes.

Intermodal

Intermodal revenues ~~rose $62~~declined $4 million, or ~~11%~~1%, in the ~~second~~first quarter, compared with the same period last year ~~reflecting an 11% growth~~as a 5% decline in ~~volumes. For~~average revenue per unit, the ~~first six months, intermodal revenues increased $85 million, or 7%, reflecting~~result of lower fuel surcharges, was mostly offset by a 7%5% improvement in ~~carload~~ volume.

Domestic volume improved 8%3% in the ~~second~~first quarter, ~~and 7% for the first six months, as~~ a result of growth in strategic corridors, continued highway conversions, and higher demand for rail service from existing customers.

International volume increased ~~16% in the second quarter and~~ 8% ~~for the first six months,~~ due to ~~growth with~~new business and increased demand from existing ~~customers, as well as new service lanes. Both periods also benefited from accelerated shipping in anticipation of potential labor disruptions at West Coast ports.~~

customers.

Intermodal revenues for the remainder of the year are expected to be higher compared to last year due to volume increases, ~~and higher~~offset in part by lower average revenue per ~~unit.~~

unit (driven by lower fuel surcharge revenue).

Railway Operating Expenses

~~Second-quarter~~

First-quarter railway operating expenses were ~~$2.0~~$2 billion in ~~2014, up $57~~2015. We estimate severe winter weather and a slower network added approximately $42 million ~~or 3%, compared~~of operating expenses to our first quarter 2015 results. For the remainder of the year, in connection with the ~~same period last year. For~~recently announced closure of the ~~first six months, expenses were $4.0 billion, up $32 million, or 1%, compared~~Roanoke, VA office and subsequent relocation of employees, we expect to ~~the same period last year.~~

~~Materials and other expenses increased~~incur approximately $35 million ~~or 16%,~~in operating expenses beginning in the second quarter, ~~and $38 million, or 9%, for~~with most of the ~~first six months as follows:~~

Second Quarter

First Six Months

2014

2013

2014

2013

($ in millions)

Materials
$
124

$
116

$
232

$
217
Casualties and other claims

42

20

72

55
Other

82

77

165

159

Total
$
248

$
213

$
469

$
431

costs impacting the third quarter.

The following table shows the changes in railway operating expenses summarized by major classifications.



	Operating Expense Variances Increase (Decrease)
	2015 vs. 2014
	($ in millions)

Fuel	$	(168	)
Compensation and benefits	43
Purchased services and rents	31
Materials and other	25
Depreciation	8

Total	$	(61	)

Casualties and other claims expenses include the estimates of costs related to personal injury, property damage, and environmental matters. Both periods reflected higher casualty and other claims expense as the prior year benefitted from higher adjustments attributable to more favorable development in historical trend rates related to our personal injury liabilities. Both periods also reflected increased locomotive maintenance and repair costs as a result of higher volumes in the second quarter and the impact of severe winter weather in the first quarter.

Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, ~~rose $17~~decreased $168 million, or 4%39%, in the ~~second~~ quarter, ~~and $20 million, or 2%, for the first six months,~~ primarily the result of a ~~4% increase~~41% drop in locomotive fuel ~~consumption for both periods. Locomotive fuel prices were relatively flat for the quarter, but decreased 1% for the first six months.~~

~~Depreciation~~prices.

Compensation and benefits expense increased ~~$12~~$43 million, or 5%6%, in the ~~second~~first quarter, reflecting:

pay rates, up $26 million,

payroll taxes, up $14 million,

employee levels, including increased overtime, up $14 million,

a labor agreement signing bonus, $11 million, and

incentive and ~~$22 million, or 5%, for the first six months due to the effects of a larger capital base.~~

stock-based compensation, down $12 million.

Purchased services and rents includes the costs of services provided by outside contractors, the net costs of operating joint (or leased) facilities with other railroads and the net cost of equipment rentals. This category of expenses grew $4$31 million, or 1%8%, in the ~~second~~first quarter, ~~and $3 million for the first six months,~~ reflecting higher ~~volume-related expenses (intermodal~~intermodal operations and equipment rents costs resulting from increased volumes and joint facilities), partially offset by the reduced expense associated with the shared asset areas (including equity in the earnings of Conrail, see Note 6), as well as lower professional services. The first six months also included higher weather-related expenses incurred during the first quarter.

slower network velocity.

The following table shows the components of purchased services and rents expenses:

Second Quarter

First Six Months

2014

2013

2014

2013

($ in millions)

Purchased services
$
342

$
343

$
666

$
664
Equipment rents

72

67

140

139

Total
$
414

$
410

$
806

$
803

~~Compensation~~



	First Quarter
	2015		2014
	($ in millions)

Purchased services	$	341	$	324
Equipment rents	82		68

Total	$	423	$	392

Materials and ~~benefits expense decreased $11~~other expenses increased $25 million, or 2%11%, in the ~~second~~first quarter as follows:



	First Quarter
	2015		2014
	($ in millions)

Materials	$	122	$	108
Casualties and other claims	36		30
Other	88		83

Total	$	246	$	221

Volume growth resulted in increased locomotive maintenance and ~~$51~~repair costs. Casualties and other claims expenses include the estimates of costs related to personal injury, property damage, and environmental remediation matters. Costs associated with environmental and personal injury rose as a result of more unfavorable development with respect to our environmental liabilities, and lower favorable development for our personal injury reserves. Additionally, increased travel costs, primarily for train service employees, contributed to the increase in other expense.

Depreciation expense increased $8 million, or 3%, ~~for~~in the first ~~six months, reflecting changes in:~~

• ~~postretirement and pension benefit costs (down $40 million for the~~ quarter ~~and $72 million for the first six months) primarily~~ due to the ~~amortization of lower net actuarial losses and the~~ effects of ~~plan amendments to our retiree medical plan,~~

• ~~health and welfare benefit costs (down $7 million for the quarter and $14 million for the first six months),~~

• ~~employee levels despite increased overtime (down $4 million for the quarter and $16 million for the first six months),~~

• ~~incentive and stock-based compensation (up $29 million for the quarter and $23 million for the first six months), and~~

• ~~pay rates (up $12 million for the quarter and $26 million for the first six months).~~

During the first quarter of 2014, we amended our retiree medical plan to provide for fixed contributions to retiree health reimbursement accounts. We expect expenses for postretirement and pension benefits to be about $40 million lower per quarter for the remainder of 2014.

a larger capital base.

Other Income – Net

Other income – net decreased ~~$11~~$5 million in the ~~second~~first quarter ~~and $120 million for the first six months~~ of ~~2014.~~

~~Both periods reflect decreased~~2015, driven primarily by reduced coal ~~royalties, whereas the first six months also reflected the absence of the prior year $97 million land sale gain in Michigan.~~

royalties.

Provision for Income Taxes

The ~~second-quarter and year-to-date effective~~first quarter income tax ~~rates were~~rate was 37.4% ~~and 36.0%~~, compared with ~~36.9% and 36.2%, respectively,~~33.6% for the same ~~periods~~period last year. ~~Both periods reflect the absence of tax credits that became available in 2013 as a result of the American Taxpayer Relief Act of 2012 (Act), which was enacted January 2, 2013.~~ The ~~lower year-to-date~~higher effective tax rate ~~also~~this year reflects the absence of a $20 million favorable reduction in deferred tax expense for state tax law changes ~~offset in part~~(which reduced the effective tax rate by ~~the absence of $9 million in income tax benefits we recognized~~three and a half percentage points) in the first quarter of ~~2013 for certain tax credits retroactively reinstated by the Act.~~

2014.

Fifty-percent bonus depreciation was allowed for federal income taxes in ~~2013~~2014, but has not been extended to ~~2014.~~2015. While bonus depreciation does not affect our total provision for income taxes or effective rate, the absence of bonus depreciation will increase current income tax expense and the related cash outflows for the payment of income taxes in ~~2014 as compared to 2013.~~

~~IRS examinations have been completed for all years prior to 2011.~~ subsequent years.

Our consolidated federal income tax returns for 2011 and 2012 are currently being audited by the IRS.

We anticipate the IRS will complete its examination in 2015. We do not expect that the resolution of the examination will have a material effect on our financial position, results of operations, or liquidity.

FINANCIAL CONDITION AND LIQUIDITY

Cash provided by operating activities, our principal source of liquidity, was ~~$1.4 billion~~$605 million for the first ~~six months~~quarter of ~~2014,~~2015, compared with ~~$1.5 billion~~$588 million for the same period of ~~2013,~~2014, primarily reflecting ~~higher~~reduced receivable balances and lower tax ~~payments.~~

payments, offset in part by lower operating results and increased purchases of materials and supplies.

We had working capital of ~~$898~~$12 million at ~~June 30, 2014,~~March 31, 2015, compared with ~~$770~~$998 million at December 31, ~~2013, primarily due to~~2014, reflecting an increase in the current portion of long-term debt and lower cash ~~on hand.~~and cash equivalent balances resulting from higher share repurchase activity in the first quarter. Cash and cash equivalents totaled ~~$1.7 billion~~$524 million at ~~June 30, 2014,~~March 31, 2015, and were invested in accordance with our corporate investment policy as approved by the Finance Committee of our Board of Directors. The portfolio contains securities that are subject to market risk. There are no

limits or restrictions on our access to the assets. We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations. During the first ~~six months~~quarter of ~~2014,~~2015, we ~~increased our~~committed to purchase ~~commitment obligations by $536~~approximately $160 million ~~primarily for the future purchase~~ of ~~coal cars, other~~ freight cars and ~~intermodal equipment. Other than these items, there~~containers. There have been no other material changes to the information on our future obligations contained in our Form 10-K for the year ended December 31, ~~2013.~~

2014.

Cash used in investing activities was ~~$647~~$378 million for the first ~~six months~~quarter of ~~2014,~~2015, compared with ~~$807~~$254 million in the same period last year, primarily reflecting ~~an increase in~~the absence of short-term investment ~~maturities and lower property additions.~~

maturities.

Cash used in financing activities was ~~$566~~$676 million in the first ~~six months~~quarter of ~~2014,~~2015, compared with ~~$765~~$255 million in the same period last year driven primarily by ~~lower~~higher share repurchase activity. We repurchased ~~1.0~~3.9 million shares of Common Stock, totaling ~~$100~~$415 million, in the first ~~six months~~quarter of ~~2014,~~2015, compared to ~~4.2~~0.5 million shares, totaling ~~$314~~$50 million, in the same period last year. 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. ~~Debt repayments were comparable for the first six months. We expect to repay from cash on hand the $431 million debt maturing in the third quarter of 2014.~~

Our total debt-to-total capitalization ratio was ~~43.4%~~42.3% at ~~June 30, 2014,~~March 31, 2015, and ~~45.6%~~42.1% at December 31, ~~2013.~~

2014.

We have authority from our Board of Directors to issue an additional $800 million of debt or equity securities through public or private sale. We have on file with the Securities and Exchange Commission a Form S-3

automatic shelf registration statement for well-known seasoned issuers under which securities may be issued pursuant to this authority.

We also have in place and available a $750 million, five-year credit agreement expiring in 2016, which provides for borrowings at prevailing rates and includes covenants. We had no amounts outstanding under this facility at ~~June 30, 2014,~~March 31, 2015, and are in compliance with all of ~~our~~its covenants. In October ~~2013,~~2014, we renewed our $350 million accounts receivable securitization program with a ~~364-day~~two-year term to run until October ~~2014. During the first six months of 2014, we repaid the~~2016. There was $100 million and $200 million outstanding under this program at March 31, 2015 and December 31, ~~2013. As of June 30,~~ 2014, respectively. Other than this, we ~~had~~have no other floating-rate debt instruments outstanding subject to market risk.

~~On June 4, 2014, we terminated our commercial paper dealer agreement.~~

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates and assumptions may require significant judgment about matters that are inherently uncertain, and future events are likely to occur that may require us to make changes to these estimates and assumptions. Accordingly, we regularly review these estimates and assumptions based on historical experience, changes in the business environment, and other factors we believe to be reasonable under the circumstances. We regularly discuss the development, selection, and disclosures concerning critical accounting estimates with the Audit Committee of our Board of Directors. There have been no significant changes to the application of critical accounting estimates disclosure contained in our Form 10-K at December 31, ~~2013.~~

2014.

OTHER MATTERS

Labor Agreements

More than 80% of our railroad employees are covered by collective bargaining agreements with various labor unions. These agreements remain in effect until changed pursuant to the Railway Labor Act. We largely bargain nationally in concert with other major railroads, represented by the National Carriers Conference Committee (NCCC). Moratorium provisions in the labor agreements govern when the railroads and the unions may propose ~~change~~changes to the agreements. ~~We and the NCCC have concluded the round of bargaining that began in November 2009 and reached agreements that extend through December 31, 2014 with all applicable labor unions.~~

~~Environmental Matters~~

We are subject to various jurisdictions’ environmental laws and regulations. We record a liability where such liability or loss is probable and its amount can be estimated reasonably. Claims, if any, against third parties for recovery of cleanup costs we have incurred, are reflected as receivables (when collection is probable) in the Consolidated Balance Sheets and are not netted against the associated liability. Environmental engineers regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates. We have an Environmental Policy Council, composed of senior managers, to oversee and interpret our environmental policy.

Our Consolidated Balance Sheets include liabilities for environmental exposures of $65 million at June 30, 2014, and $58 million at December 31, 2013 (of which $15 million is classified as a current liability at the end of each period). At June 30, 2014, the liability represents our estimateThe moratorium provisions of the ~~probable cleanup, investigation,~~current agreements have now expired, formal

proposals to change the agreements have been made, and ~~remediation costs based on available information at 147 known locations~~negotiations with the various labor unions have begun. Separately, in January 2015 we reached an agreement covering wages and ~~projects. At that date, 11 sites accounted for $36 million~~work rules through 2019 with the Brotherhood of ~~the liability,~~Locomotive Engineers and ~~no individual site was considered~~Trainmen (BLET), which represents approximately 4,600 of our locomotive engineers. Any changes to ~~be material. We anticipate that much of this liability~~BLET benefits will be ~~paid out over five years; however, some costs will be paid out over a longer period.~~

bargained nationally through the NCCC.

At 12 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 joint liability.

With respect to known environmental sites (whether identified by us or the EPA, 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 clean-up 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. We estimate our environmental remediation liability on a site-by-site basis, using assumptions and judgments we deem appropriate for each site. As a result, it is not practical to quantitatively describe the effects of changes in these many assumptions and judgments. We have consistently applied our methodology of estimating our environmental liabilities.

Based on our assessment of 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.

New Accounting Pronouncement

In May 2014, the ~~Financial Accounting Standards Board (FASB)~~FASB issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers.” This update ~~effective for us for annual and interim reporting periods beginning January 1, 2017,~~ will replace most existing revenue recognition guidance in ~~U.S.~~ GAAP and requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In April 2015, the FASB voted for a one-year deferral of the effective date of the new standard. If approved, the new standard will become effective for our annual and interim reporting periods beginning January 1, 2018. Early application ~~is not~~would be permitted, but ~~once~~not before the original effective date for public business entities (annual reporting periods beginning after December 15, 2016). The ASU permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures.

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, most of our capital is 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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that may be identified by the use of words like “believe,” “expect,” “anticipate,” “estimate,” “plan,” “consider,” “project,” and similar references to the future. Forward-looking statements reflect our good-faith evaluation of information currently available.

However, such statements are dependent on and, therefore, can be influenced by, a number of external variables over which we have little or no control, including: ~~significant governmental legislation and regulation over commercial, operating and environmental matters;~~ transportation of hazardous materials as a common carrier by rail; acts of terrorism or war; general economic conditions including, but not limited to, fluctuation and competition within the industries of our customers; ~~climate change legislative and regulatory developments;~~ competition and consolidation within the transportation industry; the operations of carriers with which we interchange; disruptions to our technology infrastructure, including computer systems; labor difficulties, including strikes and work stoppages; commercial, operating, environmental, and climate change legislative and regulatory developments; results of litigation; natural events such as severe weather, hurricanes, and floods; unpredictable demand for rail services; fluctuation in supplies and prices of key materials, in particular diesel fuel; volatility in energy prices; and changes in securities and capital markets. For aadditional discussion of significant risk factors applicable to our business, see Part II, Item 1A “Risk Factors.” Forward-looking statements are not, and should not be relied upon as, a guarantee of future performance or results, nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved. As a result, actual outcomes and results may differ materially from those expressed in forward-looking statements. We undertake no obligation to update or revise forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The information required by this item is included in Part I, Item 2., ~~“Management’s~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Financial Condition and Liquidity.”

Item 4. Controls and Procedures.

Evaluation of 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 ~~June 30, 2014.~~March 31, 2015. Based on such evaluation, our officers have concluded that, at ~~June 30, 2014,~~March 31, 2015, our disclosure controls and procedures are effective in alerting them on a timely basis to material information required to be included in our periodic filings under the Exchange Act.

Changes in Internal Control Over Financial Reporting

During the ~~second~~first quarter of ~~2014,~~2015, we have not identified any changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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

In or around 2012, a building located on non-operating property formerly leased to various tenants in Williamson, West Virginia, was demolished and the related debris and waste disposed of at a local landfill. Upon further investigation in March 2014, it became uncertain as to whether asbestos abatement was properly conducted on the building prior to demolition. Although the matter is under further investigation, we have self-reported it to the West Virginia Department of Environmental Protection, and it is described here consistent with SEC rules and requirements concerning governmental proceedings with respect to environmental laws and regulations. We do not believe that the outcome of this proceeding will have a material effect on our financial position, results of operations, or liquidity.

Item 1A. Risk Factors.

The risk factors included in our ~~2013~~2014 Form 10-K remain unchanged and are incorporated herein by reference.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(c) Total

Number of

(d) Maximum

Shares

Number (or

(or Units)

Approximate

Purchased

Dollar Value)

(a) Total

as Part of

of Shares (or Units)

Number

(b) Average

Publicly

that may yet be

of Shares

Price Paid

Announced

purchased under

(or Units)

per Share

Plans or

the Plans or

Period

Purchased
(1)

(or Unit)

Programs
(2)

Programs
(2)

April 1-30, 2014

169,883

95.45

165,744

37,580,041

May 1-31, 2014

175,389

97.09

174,713

37,405,328

June 1-30, 2014

170,242

101.68

169,241

37,236,087

515,514

509,698



	(a) Total Number of Shares (or Units)	(b) Average Price Paid per Share	(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be purchased under the Plans or
Period	Purchased⁽¹⁾	(or Unit)	Programs ⁽²⁾	Programs ⁽²⁾

January 1-31, 2015	1,160,291	103.06	1,160,291	34,043,546
February 1-28, 2015	1,151,558	108.94	1,149,496	32,894,050
March 1-31, 2015	1,586,688	107.89	1,581,933	31,312,117

Total	3,898,537		3,891,720

~~(1)~~
⁽¹⁾	Of this amount, ~~5,816~~6,817 represent shares tendered by employees in connection with the exercise of options under the stockholder-approved Long-Term Incentive Plan.


⁽²⁾	Our Board of Directors authorized a share repurchase program, pursuant to which up to ~~125~~50 million shares of Common Stock could be purchased through December 31, ~~2014. On August 1, 2012, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31,~~ 2017.

Item 6. Exhibits.

See Exhibit Index beginning on page 3329 for a description of the exhibits filed as part of this report.

SIGNATURES

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		NORFOLK SOUTHERN CORPORATION Registrant



Date:	April 29, 2015	~~July 23, 2014~~	/s/ Thomas E. Hurlbut Thomas E. Hurlbut Vice President and Controller (Principal Accounting Officer) (Signature)



Date:	April 29, 2015	~~July 23, 2014~~	/s/ Denise W. Hutson Denise W. Hutson Corporate Secretary (Signature)

EXHIBIT INDEX

15*

15*	Letter regarding unaudited interim financial information.

31-A*		Rule 13a-14(a)/15d-014(a) CEO Certifications.

31-B*		Rule 13a-14(a)/15d-014(a) CFO Certifications.

32*		Section 1350 Certifications.

101*		The following financial information from Norfolk Southern Corporation’s Quarterly Report on Form 10-Q for the ~~second~~first quarter of ~~2014,~~2015, formatted in Extensible Business Reporting Language (XBRL) includes (i) the Consolidated Statements of Income for the ~~second~~first quarters of 2015 and ~~first six months of 2014 and 2013;~~2014; (ii) the Consolidated Statements of Comprehensive Income for the ~~second~~first quarters of 2015 and ~~first six months of 2014 and 2013;~~2014; (iii) the Consolidated Balance Sheets at ~~June 30, 2014,~~March 31, 2015, and December 31, ~~2013~~;2014; (iv) the Consolidated Statements of Cash Flows for the first ~~six months~~quarters of ~~2014~~2015 and ~~2013;~~2014; and (v)(v) the Notes to Consolidated Financial Statements.

* Filed herewith.

	Second Quarter				First Six Months
	2014		2013		2014		2013
	($ in millions, except per share amounts)

Railway operating revenues	$	3,042	$	2,802	$	5,731	$	5,540

Railway operating expenses
Compensation and benefits		715		726		1,455		1,506
Purchased services and rents		414		410		806		803
Fuel		408		391		840		820
Depreciation		238		226		475		453
Materials and other		248		213		469		431

Total railway operating expenses		2,023		1,966		4,045		4,013

Income from railway operations		1,019		836		1,686		1,527

Other income – net		18		29		44		164
Interest expense on debt		139		128		278		257

Income before income taxes		898		737		1,452		1,434

Provision for income taxes		336		272		522		519

Net income	$	562	$	465	$	930	$	915

Per share amounts
Net income:
Basic	$	1.81	$	1.47	$	2.99	$	2.90
Diluted		1.79		1.46		2.97		2.87

Dividends		0.54		0.50		1.08		1.00

	June 30,		December 31,
	2014		2013
	($ in millions)

Assets
Current assets:
Cash and cash equivalents	$	1,667	$	1,443
Short-term investments		-		118
Accounts receivable – net		1,122		1,024
Materials and supplies		251		223
Deferred income taxes		161		180
Other current assets		65		87
Total current assets		3,266		3,075

Investments		2,505		2,439
Properties less accumulated depreciation of $10,634 and
$10,387, respectively		26,927		26,645
Other assets		342		324

Total assets	$	33,040	$	32,483

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,245	$	1,265
Short-term debt		-		100
Income and other taxes		359		225
Other current liabilities		331		270
Current maturities of long-term debt		433		445
Total current liabilities		2,368		2,305

Long-term debt		8,814		8,903
Other liabilities		1,122		1,444
Deferred income taxes		8,659		8,542
Total liabilities		20,963		21,194

Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 309,515,208 and 308,878,402 shares,
respectively, net of treasury shares		311		310
Additional paid-in capital		2,113		2,021
Accumulated other comprehensive loss		(183)		(381)
Retained income		9,836		9,339

Total stockholders’ equity		12,077		11,289

Total liabilities and stockholders’ equity	$	33,040	$	32,483

				Accumulated
	Pensions			Other		Accumulated
	and Other			Comprehensive		Other
	Postretirement			Loss of Equity		Comprehensive
	Benefits			Investees		Loss
	($ in millions)
Second Quarter
March 31, 2014	$	(125)		$	(68)	$	(193)
Other comprehensive income:
Amounts reclassified into net income		7	(1)		-		7
Net gain		-			7		7
Tax expense		(3)			(1)		(4)
Other comprehensive income		4			6		10

June 30, 2014	$	(121)		$	(62)	$	(183)

	June 30, 2014				December 31, 2013
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	($ in millions)

Long-term investments	$	149	$	182	$	148	$	177
Long-term debt, including current maturities		(9,247)		(11,102)		(9,348)		(10,673)

	Second Quarter			First Six Months
	2014 vs. 2013			2014 vs. 2013
	Increase
	($ in millions)

Volume (units)		$	221		$	190
Revenue per unit			19			1

Total		$	240		$	191