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 ~~SEPTEMBER 30, 2017~~MARCH 31, 2019

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

Commission file number 1-8339

NORFOLK SOUTHERN CORPORATION

(Exact name of registrant as specified in its charter)



Virginia	52-1188014
(State or other jurisdiction of incorporation)	~~52-1188014~~ (IRS Employer Identification No.)
Three Commercial Place Norfolk, Virginia	23510-2191
(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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange ~~Act~~Act. [ ]

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	Outstanding at ~~September 30, 2017~~March 31, 2019
Common Stock ($1.00 par value per share)	~~286,148,766 (excluding~~265,967,039	(excluding 20,320,777 shares held by the registrant’s
	consolidated subsidiaries)

TABLE OF CONTENTS

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES



		Page
Part I.	Financial Information:
	Item 1.	Financial Statements:
		Consolidated Statements of Income ~~Third Quarters~~ First Quarter of 2019 and ~~First Nine Months of 2017 and 2016~~2018	3
		Consolidated Statements of Comprehensive Income ~~Third Quarters~~ First Quarter of 2019 and ~~First Nine Months of 2017 and 2016~~2018	4
		Consolidated Balance Sheets At ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018	5
		Consolidated Statements of Cash Flows First ~~Nine~~Three Months of ~~2017~~2019 and ~~2016~~2018	6
		~~Notes to~~ Consolidated ~~Financial~~ Statements of Changes in Stockholders’ Equity First Quarter of 2019 and 2018	7
		~~Item 2.~~Notes to Consolidated Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1720
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2427
	Item 4.	Controls and Procedures	2427

Part II.	Other Information:
	Item 1.	Legal Proceedings	2528
	Item 1A.	Risk Factors	2528
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2528
	Item 6.	Exhibits	2629

		Signatures	2730

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)


	Third Quarter				First Nine Months				First Quarter
	2017		2016		2017		2016		2019		2018
	($ in millions, except per share amounts)								($ in millions, except per share amounts)

Railway operating revenues	$	2,670	$	2,524	$	7,882	$	7,398	$	2,840	$	2,717

Railway operating expenses:
Compensation and benefits	755		691		2,201		2,081		727		737
Purchased services and rents	377		386		1,146		1,149		424		401
Fuel	198		181		601		504		250		266
Depreciation	265		258		788		767		283		272
Materials and other	164		188		574		584		190		206

Total railway operating expenses	1,759		1,704		5,310		5,085		1,874		1,882

Income from railway operations	911		820		2,572		2,313		966		835

Other income – net	23		29		79		49		44		8
Interest expense on debt	134		144		416		421		149		136

Income before income taxes	800		705		2,235		1,941		861		707

Provision for income taxes	294		245		799		689
Income taxes									184		155

Net income	$	506	$	460	$	1,436	$	1,252	$	677	$	552

Per share amounts:
Net income
Earnings per share:
Basic	$	1.76	$	1.56	$	4.96	$	4.23	$	2.53	$	1.94
Diluted	1.75		1.55		4.93		4.21		2.51		1.93

Dividends	0.61		0.59		1.83		1.77

See accompanying notes toconsolidatedfinancialstatements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

Third Quarter First Nine Months
2017 2016 2017 2016
($ in millions)

Net income $ 506
$ 460
$ 1,436
$ 1,252
Other comprehensive income, before tax:

Reclassification adjustments for costs
included in net income 7
7
21
20
Other comprehensive loss of
equity investees —
—
(1 ) —
Other comprehensive income, before tax 7
7
20
20

Income tax expense related to reclassification
adjustments for costs included in net income (2 ) (3 ) (8 ) (8 )

Other comprehensive income, net of tax 5
4
12
12

Total comprehensive income $ 511
$ 464
$ 1,448
$ 1,264



	First Quarter
	2019			2018
	($ in millions)

Net income	$	677		$	552
Other comprehensive income (loss), before tax:
Pension and other postretirement benefits (expense)	5			(7		)
Other comprehensive income (loss) of equity investees	(1		)	1
Other comprehensive income (loss), before tax	4			(6		)

Income tax benefit (expense) related to items of
other comprehensive income (loss)	(1		)	2

Other comprehensive income (loss), net of tax	3			(4		)

Total comprehensive income	$	680		$	548

See accompanying notes toconsolidatedfinancialstatements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)


	September 30, 2017			December 31, 2016			March 31, 2019			December 31, 2018
	($ in millions)						($ in millions)

Assets
Current assets:
Cash and cash equivalents	$	724		$	956		$	411		$	358
Accounts receivable – net	973			945			1,048			1,009
Materials and supplies	245			257			228			207
Other current assets	57			133			235			288
Total current assets	1,999			2,291			1,922			1,862

Investments	2,888			2,777			3,198			3,109
Properties less accumulated depreciation of $11,987 and
$11,737, respectively	30,163			29,751
Properties less accumulated depreciation of $12,374
at both periods							31,158			31,091
Other assets	103			73			784			177

Total assets	$	35,153		$	34,892		$	37,062		$	36,239

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,287		$	1,215		$	1,334		$	1,505
Short-term debt	—			100			250			—
Income and other taxes	206			245			338			255
Other current liabilities	320			229			378			246
Current maturities of long-term debt	600			550			585			585
Total current liabilities	2,413			2,339			2,885			2,591

Long-term debt	9,280			9,562			10,569			10,560
Other liabilities	1,366			1,442			1,759			1,266
Deferred income taxes	9,367			9,140			6,518			6,460

Total liabilities	22,426			22,483			21,731			20,877

Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 286,148,766 and 290,417,610 shares,
authorized; outstanding 265,967,039 and 268,098,472 shares,
respectively, net of treasury shares	288			292			267			269
Additional paid-in capital	2,249			2,179			2,213			2,216
Accumulated other comprehensive loss	(475		)	(487		)	(560		)	(563		)
Retained income	10,665			10,425			13,411			13,440

Total stockholders’ equity	12,727			12,409			15,331			15,362

Total liabilities and stockholders’ equity	$	35,153		$	34,892		$	37,062		$	36,239

See accompanying notes toconsolidatedfinancialstatements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)


		First Nine Months							First Three Months
		2017			2016				2019			2018
		($ in millions)							($ in millions)

Cash flows from operating activities:	Cash flows from operating activities:							Cash flows from operating activities:
	Net income	$	1,436		$	1,252		Net income	$	677		$	552
	Reconciliation of net income to net cash provided by operating activities:							Reconciliation of net income to net cash provided by operating activities:
	Depreciation	791			770			Depreciation	283			272
	Deferred income taxes	219			177			Deferred income taxes	57			45
	Gains and losses on properties	(62		)	(38		)	Gains and losses on properties	(18		)	(8		)
	Changes in assets and liabilities affecting operations:							Changes in assets and liabilities affecting operations:
	Accounts receivable	(59		)	8			Accounts receivable	(39		)	(26		)
	Materials and supplies	12			(30		)	Materials and supplies	(21		)	(23		)
	Other current assets	68			130			Other current assets	12			13
	Current liabilities other than debt	165			149			Current liabilities other than debt	(27		)	12
	Other – net	(105		)	(106		)	Other – net	(43		)	(21		)

	Net cash provided by operating activities	2,465			2,312			Net cash provided by operating activities	881			816

Cash flows from investing activities:	Cash flows from investing activities:							Cash flows from investing activities:
	Property additions	(1,315		)	(1,304		)	Property additions	(467		)	(383		)
	Property sales and other transactions	137			87			Property sales and other transactions	152			13
	Investment purchases	(4		)	(119		)	Investment purchases	(2		)	(2		)
	Investment sales and other transactions	8			6			Investment sales and other transactions	(33		)	1

	Net cash used in investing activities	(1,174		)	(1,330		)	Net cash used in investing activities	(350		)	(371		)

Cash flows from financing activities:	Cash flows from financing activities:							Cash flows from financing activities:
	Dividends	(529		)	(523		)	Dividends	(230		)	(205		)
	Common stock transactions	75			33			Common stock transactions	2			(1		)
	Purchase and retirement of common stock	(712		)	(603		)	Purchase and retirement of common stock	(500		)	(300		)
	Proceeds from borrowings – net	293			594			Proceeds from borrowings – net of issuance costs	250			543
	Debt repayments	(650		)	(600		)	Debt repayments	—			(100		)

	Net cash used in financing activities	(1,523		)	(1,099		)	Net cash used in financing activities	(478		)	(63		)

	Net decrease in cash and cash equivalents	(232		)	(117		)	Net increase in cash, cash equivalents,
								and restricted cash	53			382
Cash and cash equivalents:

Cash, cash equivalents, and restricted cash:								Cash, cash equivalents, and restricted cash:
	At beginning of year	956			1,101			At beginning of year	446			690

	At end of period	$	724		$	984		At end of period	$	499		$	1,072

Supplemental disclosures of cash flow information:	Supplemental disclosures of cash flow information:							Supplemental disclosures of cash flow information:
	Cash paid during the period for:							Cash paid during the period for:
	Interest (net of amounts capitalized)	$	345		$	337		Interest (net of amounts capitalized)	$	112		$	69
	Income taxes (net of refunds)	594			409			Income taxes (net of refunds)	9			7

See accompanying notes toconsolidatedfinancialstatements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)



	Common Stock			Additional Paid-in Capital			Accum. Other Comprehensive Loss			Retained Income			Total
	($ in millions, except per share amounts)

Balance at December 31, 2018	$	269		$	2,216		$	(563	)	$	13,440		$	15,362

Comprehensive income:
Net income										677			677
Other comprehensive income							3						3
Total comprehensive income													680
Dividends on common stock,
$0.86 per share										(230		)	(230		)
Share repurchases	(3		)	(22		)				(475		)	(500		)
Stock-based compensation	1			19						(1		)	19

Balance at March 31, 2019	$	267		$	2,213		$	(560	)	$	13,411		$	15,331



	Common Stock			Additional Paid-in Capital			Accum. Other Comprehensive Loss			Retained Income			Total
	($ in millions, except per share amounts)

Balance at December 31, 2017	$	285		$	2,254		$	(356	)	$	14,176		$	16,359

Comprehensive income:
Net income										552			552
Other comprehensive loss							(4		)				(4		)
Total comprehensive income													548
Dividends on common stock,
$0.72 per share										(205		)	(205		)
Share repurchases	(2		)	(16		)				(282		)	(300		)
Stock-based compensation	1			17						(2		)	16
Reclassification of stranded
tax effects							(88		)	88			—

Balance at March 31, 2018	$	284		$	2,255		$	(448	)	$	14,327		$	16,418

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 position at ~~September 30, 2017,~~March 31, 2019, and December 31, ~~2016,~~2018, our results of operations, ~~and~~ comprehensive income and changes in stockholders’ equity for the ~~third~~first quarters of 2019 and ~~first nine months of 2017 and 2016,~~2018, and our cash flows for the first ~~nine~~three months of ~~2017~~2019 and ~~2016~~2018 in conformity with U.S. generally accepted accounting principles (GAAP).

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

1. Railway Operating Revenues

The following table disaggregates our revenues by major commodity group:



	First Quarter
	2019		2018
Merchandise:	($ in millions)
Chemicals	$	452	$	454
Agriculture products	385		357
Metals and construction	385		356
Automotive	251		243
Forest and consumer	213		195
Merchandise	1,686		1,605
Intermodal	719		678
Coal	435		434

Total	$	2,840	$	2,717

At the beginning of 2019, we recategorized certain commodities within Merchandise major commodity groups to better align with how we internally manage these commodities. Prior period amounts have been reclassified to conform to the current presentation with no net impact to overall Merchandise revenue or total railway operating revenues. Specifically, certain commodities were shifted between Chemicals, Agriculture products, Metals and construction, and Forest and consumer.

We recognize the amount of revenue we expect to be entitled to for the transfer of promised goods or services to customers. A performance obligation is created when a customer under a transportation contract or public tariff submits a bill of lading to NS for the transport of goods. These performance obligations are satisfied as the shipments move from origin to destination. As such, transportation revenue is recognized proportionally as a shipment moves, and related expenses are recognized as incurred. These performance obligations are generally short-term in nature with transit days averaging approximately one week or less for each commodity group. The customer has an unconditional obligation to pay for the service once the service has been completed. Estimated revenue associated with in-process shipments at period-end is recorded based on the estimated percentage of service completed to total transit days. We had no material remaining performance obligations as of March 31, 2019 or December 31, 2018.

Under the typical payment terms of our freight contracts, payment for services is due within fifteen days of billing the customer, thus there are no significant financing components. “Accounts receivable – net” on the Consolidated Balance Sheets includes both customer and non-customer receivables as follows:



	March 31, 2019		December 31, 2018
	($ in millions)
Customer	$	793	$	740
Non-customer	255		269

Accounts receivable – net	$	1,048	$	1,009

Non-customer receivables include non-revenue-related amounts due from other railroads, governmental entities, and others. “Other assets” on the Consolidated Balance Sheets includes non-current customer receivables of $55 million at both March 31, 2019 and December 31, 2018. We do not have any material contract assets or liabilities.

Certain ancillary services may be provided to customers under their transportation contracts such as switching, demurrage and other incidental service revenues. These are distinct performance obligations that are recognized at a point in time when the services are performed or as contractual obligations are met. This revenue is included within each of the commodity groups and represents approximately 5% and 4% of total “Railway operating revenues” on the Consolidated Statements of Income for the quarters ended March 31, 2019 and 2018, respectively.

2. Stock-Based Compensation



	First Quarter
	2019		2018
	($ in millions)
Stock-based compensation expense	$	16	$	16
Total tax benefit	23		14

Third Quarter First Nine Months
2017 2016 2017 2016
($ in millions)
Stock-based compensation expense $ 7
$ 7
$ 39
$ 42
Total tax benefit 13
8
47
27

During ~~2017,~~the first quarter 2019, a committee of nonemployee members of our Board of Directors ~~(or~~(and the Chief Executive Officer ~~when~~under delegated authority by such committee) granted stock options, restricted stock units (RSUs) and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP) ~~and granted stock options pursuant to the Thoroughbred Stock Option Plan (TSOP)~~, as follows:



	First Quarter
	Granted	Weighted-Average Grant-Date Fair Value

Stock options	42,380	$	45.61
RSUs	208,320	163.33
PSUs	93,710	97.75

Third Quarter First Nine Months
Granted Weighted-Average Grant-Date Fair Value Granted Weighted-Average Grant-Date Fair Value
Stock options:
LTIP —
$ —
341,120
$ 37.73
TSOP —
—
144,440
31.33
Total —
485,560

Restricted stock units —
—
83,330
120.16
Performance share units 1,775
119.73
297,376
88.16

Stock Options



	First Quarter
	2019		2018
	($ in millions)
Stock options exercised	406,371		254,982
Cash received upon exercise	$	28	$	17
Related tax benefit realized	9		4

The options granted under the LTIP and the TSOP have a term that will not exceed ten years and may not be exercised prior to the fourth and third anniversaries of the date of grant, respectively, or if the optionee retires or dies before that anniversary date, may not be exercised before the later of one year after the grant date or the date of the optionee’s retirement or death. Holders of the options granted under the LTIP who remain actively employed receive cash dividend equivalent payments for four years in an amount equal to the regular quarterly dividends paid on Norfolk Southern common stock (Common Stock). Dividend equivalent payments are not made on the TSOP options.

The fair value of each option award was measured on the date of grant using a binomial lattice-based option valuation model. Expected volatility is based on implied volatility from traded options on, and historical volatility of, Common Stock. Historical data is used to estimate option exercises within the valuation model. The average

expected option term is derived from the output of the valuation model and represents the period of time that all options granted are expected to be outstanding, including the branches of the model that result in options expiring unexercised. The average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. A dividend yield of zero was used for the LTIP options during the vesting period. A dividend yield of 2.04% was used for all vested LTIP options and all TSOP options.

~~The assumptions for the 2017 LTIP and TSOP grants are shown in the following table:~~



~~Average expected volatility~~	26	%
~~Average risk-free interest rate~~	~~2.51~~	%
~~Average expected option term LTIP~~	~~8.6 years~~
~~Average expected option term TSOP~~	~~8.3 years~~
~~Per-share grant price LTIP and TSOP~~	~~$120.25~~

Third Quarter First Nine Months
2017 2016 2017 2016
($ in millions)
Stock options exercised 527,543
633,931
1,538,858
1,003,848
Cash received upon exercise $ 33
$ 32
$ 90
$ 50
Related tax benefit realized $ 10
$ 6
$ 29
$ 8

Restricted Stock Units

Beginning in 2018, RSUs granted primarily have a ~~five-year~~four-year ratable restriction period and will be settled through the issuance of shares of Norfolk Southern common stock (Common Stock). RSUs granted in previous years have a five-year restriction period and will also be settled through the issuance of shares of Common Stock. ~~The~~Certain RSU grants include cash dividend equivalent payments during the restriction period in an amount equal to the regular quarterly dividends paid on Common Stock. ~~The total related tax benefits were less than $1 million for the third quarter of 2017 and 2016. No RSUs vested or were paid out during the second or third quarters of 2017 or 2016.~~



	First Quarter
	2019		2018
	($ in millions)
RSUs vested	165,549		160,200
Common Stock issued net of tax withholding	118,881		99,968
Related tax benefit realized	$	2	$	3

First Nine Months
2017 2016
($ in millions)
RSUs vested 137,200
175,500
Common Stock issued net of tax withholding 81,318
103,936
Related tax benefit realized $ 3
$ 1

Performance Share Units

PSUs provide for awards based on the achievement of certain predetermined corporate performance goals at the end of a three-year cycle and are settled through the issuance of shares of Common Stock. All PSUs will earn out based on the achievement of performance conditions and some will also earn out based on a market condition. The market condition fair value was measured on the date of grant using a Monte Carlo simulation model. ~~No PSUs were earned or paid out during the second or third quarters of 2017 or 2016.~~



	First Quarter
	2019		2018
	($ in millions)
PSUs earned	331,099		154,189
Common Stock issued net of tax withholding	221,241		94,399
Related tax benefit realized	$	9	$	3

First Nine Months
2017 2016
($ in millions)
PSUs earned 171,080
406,038
Common Stock issued net of tax withholding 99,805
241,757
Related tax benefit realized $ 1
$ 3

2.3. Earnings Per Share

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


	Basic						Diluted					Basic						Diluted
	Third Quarter											First Quarter
	2017			2016			2017		2016			2019			2018			2019		2018
	($ in millions, except per share amounts, shares in millions)											($ in millions, except per share amounts, shares in millions)

Net income	$	506		$	460		$	506	$	460		$	677		$	552		$	677	$	552
Dividend equivalent payments	(1		)	(3		)	—		(2		)	(1		)	(1		)	—		(1		)

Income available to common stockholders	$	505		$	457		$	506	$	458		$	676		$	551		$	677	$	551

Weighted-average shares outstanding	287.1			292.7			287.1		292.7			267.1			283.5			267.1		283.5
Dilutive effect of outstanding options
and share-settled awards							2.4		2.0									2.3		2.4

Adjusted weighted-average shares outstanding							289.5		294.7									269.4		285.9

Earnings per share	$	1.76		$	1.56		$	1.75	$	1.55		$	2.53		$	1.94		$	2.51	$	1.93

Basic Diluted
First Nine Months
2017 2016 2017 2016
($ in millions, except per share amounts,
shares in millions)
Net income $ 1,436
$ 1,252
$ 1,436
$ 1,252
Dividend equivalent payments (3 ) (5 ) (1 ) (4 )

Income available to common stockholders $ 1,433
$ 1,247
$ 1,435
$ 1,248

Weighted-average shares outstanding 288.8
294.9
288.8
294.9
Dilutive effect of outstanding options

and share-settled awards

2.4
1.8

Adjusted weighted-average shares outstanding

291.2
296.7

Earnings per share $ 4.96
$ 4.23
$ 4.93
$ 4.21

During the ~~third quarters~~first quarter of 2019 and ~~first nine months of 2017 and 2016,~~2018, dividend equivalent payments were made to certain holders of ~~LTIP~~ stock options and RSUs. For purposes of computing basic earnings per share, dividend equivalent payments made to holders of ~~these~~ 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:~~of zero for the quarters ended March 31, 2019 and 2018.

Period 2017 2016
(in millions)
1st Quarter 0.5
1.5

2nd Quarter 0.5
1.5

3rd Quarter —
1.5

4. Accumulated Other Comprehensive Loss

The changes in the cumulative balances of “Accumulated other comprehensive loss” reported in the Consolidated Balance Sheets consisted of the following:



	Balance at Beginning of Year			Net Income (Loss)			Reclassification of Stranded Tax Effects			Reclassification Adjustments		Balance at End of Period
	($ in millions)
Three Months Ended March 31, 2019
Pensions and other
postretirement liabilities	$	(497	)	$	—		$	—		$	4	$	(493	)
Other comprehensive loss
of equity investees	(66		)	(1		)	—			—		(67		)

Accumulated other
comprehensive loss	$	(563	)	$	(1	)	$	—		$	4	$	(560	)

Three Months Ended March 31, 2018
Pensions and other
postretirement liabilities	$	(300	)	$	(11	)	$	(86	)	$	6	$	(391	)
Other comprehensive income
(loss) of equity investees	(56		)	1			(2		)	—		(57		)

Accumulated other
comprehensive loss	$	(356	)	$	(10	)	$	(88	)	$	6	$	(448	)

Balance
at Beginning
of Year

Net
Loss

Reclassification
Adjustments

Balance
at End
of Period
($ in millions)
Nine Months Ended September 30, 2017
Pensions and other postretirement
liabilities $ (414 ) $ —
$ 13
⁽¹⁾
$ (401 )
Other comprehensive loss

of equity investees (73 ) (1 ) —
(74 )

Accumulated other comprehensive loss $ (487 ) $ (1 ) $ 13
$ (475 )

Nine Months Ended September 30, 2016

Pensions and other postretirement
liabilities $ (367 ) $ —
$ 12
⁽¹⁾
$ (355 )
Other comprehensive loss
of equity investees (78 ) —
—
(78 )

Accumulated other comprehensive loss $ (445 ) $ —
$ 12
$ (433 )


⁽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.~~

In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” We adopted the provisions of ASU 2018-02 in the first quarter of 2018 resulting in an increase to “Accumulated other comprehensive loss” of $88 million and a corresponding increase to “Retained income,” with no impact on “Total stockholders’ equity.”

4.5. Stock Repurchase Program

We repurchased and retired ~~6.0~~2.9 million shares and ~~7.2~~2.1 million shares of Common Stock under our stock repurchase program in the first ~~nine~~three months of ~~2017~~2019 and ~~2016,~~2018, respectively, at a cost of ~~$712~~$500 million and ~~$603~~$300 million, respectively.

Since the beginning of 2006, we have repurchased and retired ~~166.3~~188.5 million shares at a total cost of ~~$11.0~~$14.6 billion.

5.6. Investments

Investment in Conrail

Through a limited liability company, we and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC). We have a 58% economic and 50% voting interest in

the jointly owned entity, and CSX has the remainder of the economic and voting interests. Our investment in Conrail was ~~$1.2~~$1.3 billion at both ~~September 30, 2017,~~March 31, 2019, and December 31, ~~2016.~~2018.

CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of Norfolk Southern Railway Company (NSR) and CSX Transportation, Inc. (CSXT). The costs of operating the Shared Assets Areas are borne by NSR and CSXT based on usage. In addition, NSR and CSXT pay CRC a fee for access to the Shared Assets Areas. “Purchased services and rents” and “Fuel” include amounts payable to CRC for the operation of the Shared Assets Areas totaling ~~$34~~$37 million and $38 million for the ~~third~~first quarters of ~~2017~~2019 and ~~2016, respectively, and $106 million and $113 million for the first nine months of 2017 and 2016,~~2018, respectively. Our equity in the earnings of Conrail, net of amortization, included in “Purchased services and rents” was ~~$10~~$8 million and ~~$15 million for the third quarters of 2017 and 2016, respectively, and $30 million and $37~~$16 million for the first ~~nine months~~quarters of ~~2017~~2019 and ~~2016,~~2018, respectively.

“Other liabilities” includes $280 million at both ~~September 30, 2017~~, March 31, 2019, and December 31, ~~2016,~~2018, for long-term advances from Conrail, maturing 2044, that bear interest at an average rate of 2.9%.

Investment in TTX

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

Amounts ~~payable~~paid to TTX for use of equipment are included in “Purchased services and rents” and amounted to ~~$58~~$62 million and ~~$56~~$66 million of expense for the ~~third~~first quarters of ~~2017~~2019 and ~~2016, respectively, and $173 million and $170 million for the first nine months of 2017 and 2016,~~2018, respectively. Our equity in the earnings of TTX, also included in “Purchased services and rents,” totaled ~~$14~~$13 million and ~~$8 million for the third quarters of 2017 and 2016, respectively, and $32 million and $18~~$16 million for the first ~~nine months~~quarters of ~~2017~~2019 and ~~2016,~~2018, respectively.

6.7. Debt

We have a $400 million accounts receivable securitization program expiring in ~~place a $350~~May 2019. We had $250 million ~~receivables securitization facility which expires in June 2018. At September 30, 2017, the amount~~ outstanding under this program at March 31, 2019, reflected as “Short-term debt” on the ~~facility was $100~~Consolidated Balance Sheets, and no amounts outstanding at December 31, 2018.

The “Cash, cash equivalents, and restricted cash” line item in the Consolidated Statements of Cash Flows includes restricted cash of $88 million at March 31, 2019 and ~~was~~December 31, 2018 reflecting deposits held by a third-party bond agent as collateral for certain debt obligations maturing in 2019. The restricted cash balance is included ~~within “Long-term debt” due~~as part of “Other current assets” on the Consolidated Balance Sheets in both periods.

8. Leases

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” and subsequent amendments, which replaced existing lease guidance in GAAP and requires lessees to recognize right-of-use (ROU) assets and lease liabilities on the balance sheet for leases greater than twelve months and disclose key information about leasing arrangements. We adopted the standard on January 1, 2019 using the modified retrospective method and used the effective date as our ~~intent~~date of initial application. Financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. There were no adjustments to ~~refinance $100 million~~“Retained income” on adoption.

The new standard provides a number of optional practical expedients for transition. We elected the package of practical expedients under the transition guidance which permitted us not to reassess under the new standard our prior conclusions for lease identification and lease classification on expired or existing contracts and whether initial direct costs previously capitalized would qualify for capitalization under FASB Accounting Standards Codification (ASC) 842. We also elected the practical expedient related to land easements, which allowed us to not reassess our current accounting treatment for existing agreements on land easements, which are not accounted for as leases. We did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases.

The new standard also provides practical expedients and recognition exemptions for an entity’s ongoing accounting policy elections. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we do not recognize ROU assets or lease liabilities.

We are committed under long-term lease agreements for equipment, lines of road, and other property. Some of these ~~borrowings~~agreements contain variable payment provisions that depend on an index or rate, initially measured using the index or rate at the lease commencement date, and are therefore not included in our future minimum lease payments. These variable lease agreements include usage-based payments for equipment under service contracts, lines of road, and other property. Our long-term lease agreements do not contain any material restrictive covenants.

Our equipment leases have remaining terms of less than 1 year to 9 years and our lines of road and property leases have remaining terms of less than 1 year to 138 years. Some of these leases may include options to extend the leases for up to 99 years, and some may include options to terminate the leases within 30 days. Because we are not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term, and associated payments are excluded from future minimum lease payments.

Leases with an initial term of twelve months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a ~~long-term~~straight-line basis over the lease term. We do not separate lease and non-lease components.

Operating lease amounts included in the Consolidated Balance Sheet are as follows:



		March 31, 2019
Assets	Classification	($ in millions)
ROU assets	Other assets	$	593

Liabilities
Current lease liabilities	Other current liabilities	$	93
Non-current lease liabilities	Other liabilities	500

Total lease liabilities		$	593

The components of operating lease expense, primarily included in“Purchased services and rents,” were as follows:



	First Quarter
	2019
	($ in millions)
Operating lease expense	$	27
Variable lease expense	12
Short-term lease expense	2

Total lease expense	$	41

At March 31, 2019, we do not have any material finance lease assets or liabilities, nor do we have any material subleases.

During March 2019, we entered into a non-cancellable lease for an office building with an estimated construction cost of $550 million. The lease will commence upon completion of the construction (for which we are a construction agent) of the office building which is ~~supported by our $750 million credit agreement.~~expected to be in 2021. The initial term of the lease is five years, with options to renew, purchase, or sell the office building at the end of the lease term. Upon lease commencement, the ROU asset and lease liability will be determined and recorded. The lease also contains a residual value guarantee of up to ninety percent of the total construction cost.

Other information related to operating leases was as follows:



	First Quarter
	2019
	($ in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	27

Right-of-use assets obtained in exchange for new operating lease liabilities	29

Weighted-average remaining lease term (years) on operating leases	8.68

Weighted-average discount rates on operating leases	3.52		%

During the ~~third~~first quarter, ~~of 2017, we issued $750~~cash proceeds from a sale and leaseback transaction were $82 million ~~of senior notes at 4.050% due 2052 in exchange~~and the gain on the transaction was $15 million.

Future minimum lease payments under non-cancellable operating leases were as follows:



	March 31, 2019
	($ in millions)
2019 - 9 months	$	84
2020	105
2021	99
2022	76
2023	68
2024 and subsequent years	266
Total lease payments	$	698
Less: Interest	105

Present value of lease liabilities	$	593

Undiscounted future minimum lease payments under non-cancellable operating leases accounted for ~~$551 million of its previously issued notes ($48 million at 7.9% due 2097, $378 million at 6% due 2111, and $125 million at 6% due 2105). No gain or loss was recognized~~under ASC 840 “Leases” were as ~~a result of the debt exchange.~~ follows:



	December 31, 2018
	($ in millions)
2019	$	101
2020	95
2021	88
2022	75
2023	69
2024 and subsequent years	267

Total	$	695

~~During the second quarter of 2017, we issued $300 million of 3.15% senior notes due 2027.~~

7.9. Pensions and Other Postretirement Benefits

We have both funded and unfunded defined benefit pension plans covering principally salaried employees. We also provide specified health care and life insurance benefits to eligible retired employees; these plans can be amended or terminated at our option. Under our self-insured retiree health care plan, for those participants who are not Medicare-eligible, 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. Those participants who are Medicare-eligible are not covered under the self-insured retiree health care plan, but instead are provided with an employer-funded health reimbursement account which can be used for reimbursement of health insurance premiums or eligible out-of-pocket medical expenses.

Pension and postretirement benefit cost components for the ~~third~~first quarter ~~and first nine months~~ are as follows:




							Other Postretirement
	Pension Benefits						Benefits
	First Quarter
	2019			2018			2019			2018
	($ in millions)

Service cost	$	9		$	10		$	2		$	2
Interest cost	23			20			4			4
Expected return on plan assets	(45		)	(44		)	(4		)	(4		)
Amortization of net losses	11			14			—			—
Amortization of prior service benefit	—			—			(6		)	(6		)

Net benefit	$	(2	)	$	—		$	(4	)	$	(4	)

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

Other Postretirement
Pension Benefits Benefits
Third Quarter
2017 2016 2017 2016
($ in millions)

Service cost $ 9
$ 9
$ 2
$ 2
Interest cost 20
20
4
4
Expected return on plan assets (43 ) (43 ) (4 ) (4 )
Amortization of net losses 13
13
—
—
Amortization of prior service benefit —
—
(6 ) (6 )

Net benefit $ (1 ) $ (1 ) $ (4 ) $ (4 )

Other Postretirement
Pension Benefits Benefits
First Nine Months
2017 2016 2017 2016
($ in millions)
Service cost $ 28
$ 27
$ 6
$ 5
Interest cost 60
61
12
12
Expected return on plan assets (129 ) (129 ) (12 ) (13 )
Amortization of net losses 39
38
—
—
Amortization of prior service benefit —
—
(18 ) (18 )

Net benefit $ (2 ) $ (3 ) $ (12 ) $ (14 )

10. Fair Values of Financial Instruments

The fair values of “Cash and cash equivalents,” “Accounts receivable – net,” “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. ~~Other than these assets and liabilities that approximate fair value, there~~There are no other assets or liabilities measured at fair value on a recurring basis at ~~September 30, 2017,~~March 31, 2019 or December 31, ~~2016.~~2018. The carrying amounts and estimated fair

values, ~~for the remaining financial instruments, excluding investments accounted for under the equity method,~~based on Level 1 inputs, of long-term debt consisted of the following:



	March 31, 2019						December 31, 2018
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
	($ in millions)

Long-term debt, including current maturities	$	(11,154	)	$	(12,698	)	$	(11,145	)	$	(12,203	)

September 30, 2017 December 31, 2016

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value
($ in millions)

Long-term investments $ 114
$ 136
$ 116
$ 141
Long-term debt, including current maturities (9,880 ) (11,774 ) (10,112 ) (11,626 )

Underlying net assets and future discounted cash flows were used to estimate the fair value of investments. The fair values of long-term debt were estimated based on quoted market prices or discounted cash flows using current interest rates for debt with similar terms, credit rating, and remaining maturity.

The following 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)

September 30, 2017
Long-term investments $ 4
$ 132
$ 136
Long-term debt, including current maturities (11,576 ) (198 ) (11,774 )

December 31, 2016

Long-term investments $ 4
$ 137
$ 141
Long-term debt, including current maturities (11,427 ) (199 ) (11,626 )

9.11. Commitments and Contingencies

Lawsuits

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

One of our chemical customers, Sunbelt Chlor Alkali Partnership (Sunbelt), filed a rate reasonableness complaint before the Surface Transportation Board (STB) alleging that our tariff rates for transportation of regulated movements are unreasonable. Since April 1, 2011, we have been billing and collecting amounts based on the challenged tariff rates. In 2014, the STB resolved this rate reasonableness complaint in our favor, and in June 2016, the STB resolved petitions for reconsideration. The matter remains decided in our favor; however, the findings are still subject to appeal. We believe the estimate of any reasonably possible loss will not have a material effect on our financial position, results of operations, or liquidity. With regard to rate cases, we record adjustments to revenues in the periods if and when such adjustments are probable and reasonably 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,~~In 2012, the court certified the case as a class action. The defendant railroads appealed this certification, and the Court of Appeals for the District of Columbia vacated the District Court’s decision and remanded the case for further consideration. On October 10, 2017, the District Court denied class ~~certification.~~certification; the findings are subject to appeal. 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.

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~~personal injury and occupational claims are subject to the Federal ~~Employers’~~Employer’s Liability Act (FELA), which is applicable only to railroads. FELA’s fault-based tort system produces results that are unpredictable and inconsistent as compared with a no-fault workers’ compensation system. The variability inherent in this system could result in actual costs being different from the liability recorded. While the ultimate amount of claims incurred is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payments of claims and is supported by the most recent actuarial study. In all cases, we record a liability when the expected loss for the claim is both probable and reasonably estimable.

Employee personal injury claims – The largest component of casualties and other claims expense is employee personal injury costs. The independent actuarial firm engaged by 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. We adjust the liability quarterly based upon our assessment and the results of the study. Our estimate of the liability is subject to inherent limitation given the difficulty of predicting future events such as jury decisions, court interpretations, or legislative changes. As a result, actual claim settlements may vary from the estimated liability recorded.

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

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

Environmental Matters

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

Our Consolidated Balance Sheets include liabilities for environmental exposures of ~~$62~~$58 million and ~~$67~~$55 million at ~~September 30, 2017,~~March 31, 2019 and December 31, ~~2016,~~2018, respectively, ~~(of~~of which $15 million ~~are~~is classified as a current ~~liabilities~~liability at both ~~dates).~~dates. At ~~September 30, 2017,~~March 31, 2019, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at ~~131~~112 known locations and projects compared with ~~134~~114 locations and projects at December 31, ~~2016.~~2018. At ~~September 30, 2017, 17~~March 31, 2019, fifteen sites accounted for ~~$41~~$39 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 ~~thirteen~~eleven locations, one or more of our subsidiaries in conjunction with a number of other parties have been identified as potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or comparable state statutes that impose joint and several liability for cleanup costs. We calculate our estimated liability for these sites based on facts and legal defenses applicable to each site and not solely on the basis of the potential for joint liability.

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

The risk of incurring environmental liability for acts and omissions, past, present, and future, is inherent in the railroad business. Some of the commodities we transport, particularly those classified as hazardous materials, pose special risks that we work diligently to reduce. In addition, several of our subsidiaries own, or have owned, land used as operating property, or which is leased and operated by others, or held for sale. Because environmental problems that are latent or undisclosed may exist on these properties, there can be no assurance that we will not incur environmental liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably at this time. Moreover, lawsuits and claims involving these and potentially other unidentified environmental sites and matters are likely to arise from time to time. The resulting liabilities could have a significant effect on ~~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 $1.1 billion ($1.5 billion for specific perils) 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 in our care, custody, or control.

~~10.~~12. New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers.” This update will replace most existing revenue recognition guidance in GAAP and require 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. The new standard will be effective for our annual and interim reporting periods beginning January 1, 2018. ASU 2014-09 permits the use of either the retrospective or modified retrospective transition method. Freight revenue will continue to be recognized proportionally as a shipment moves from origin to destination and other revenues will be recognized as performance obligations are satisfied. We have substantially completed our analysis and do not expect that adoption of the standard will have a material effect on our financial position and results of operations. Certain additional financial statement disclosure requirements are mandated by the new standard including disclosure of contract assets and contract liabilities as well as a disaggregated view of revenue, which we expect to be similar to our current disclosures within the “Railway Operating Revenues” section of Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We do not plan to adopt the standard early and will use the modified retrospective transition method.

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~“Leases.”~~ This update, effective for our annual and interim reporting periods beginning January 1, 2019, will replace existing lease guidance in GAAP and will require lessees to recognize lease assets and lease liabilities on the balance sheet for all leases greater than twelve months and disclose key information about leasing arrangements. When implemented, lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. We are currently evaluating the effects ASU 2016-02 will have on our consolidated financial statements and related disclosures. We disclosed $614 million in operating lease obligations in our lease commitments footnote in our most recent Form 10-K and we will evaluate those contracts as well as other existing arrangements to determine if they qualify for lease accounting under the new standard. We do not plan to adopt the standard early.

In June 2016, the FASB issued ASU 2016-13, “Credit Losses - Measurement of Credit Losses on Financial Instruments,” which replaces the current incurred loss impairment method with a method that reflects expected credit losses. The new standard is effective as of January 1, 2020, and early adoption is permitted as of January 1, 2019. Because credit losses associated from our ~~trade~~accounts receivables have historically been insignificant, we do not expect this standard to have a material effect on our financial statements.

~~In March 2017, the FASB issued ASU No. 2017-07,~~ ~~“Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.”~~ ~~This update, effective for annual and interim reporting periods beginning January 1, 2018,~~ We will require segregation of these net benefit costs between operating and non-operating expenses. Currently, we report the net benefit costs associated with our defined benefit and postretirement plans in the “Compensation and benefits” line item of the Consolidated Statements of Income, as disclosed in Note 7, “Pensions and Other Postretirement Benefits.” When the ASU is implemented, only the service cost component of defined benefit pension cost and postretirement benefit cost will be reported within compensation costs, while all other components of net benefit cost will be presented within the “Other income – net” line item on the Consolidated Statements of Income. The standard requires retrospective application, and as such the adoption of this standard will result in offsetting increases in “Compensation and benefits” expense and “Other income – ~~net” on the Consolidated Statements of Income for all periods of 2017 and 2016, with no impact on net income. We did~~ not adopt the standard early.

1619

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

Norfolk Southern Corporation and Subsidiaries

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

OVERVIEW

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

~~Record-setting~~Our first quarter 2019 results reflect the initial steps in the ~~third quarter were the result of the sustained execution~~implementation of our new strategic ~~plan.~~plan that we unveiled in February. We achieved ~~an all-time~~a record ~~quarterly~~low first-quarter operating ratio (a measure of the amount of operating revenues consumed by operating expenses) of ~~65.9%~~66.0%, in ~~the third quarter, and first nine-month~~addition to first-quarter records for ~~both~~railway operating ~~ratio~~revenues, income from railway operations, net income, and diluted earnings per share. We ~~are in~~have started the year with positive momentum as we build a ~~position to support additional volume growth~~stronger company for our shareholders, customers, and ~~manage higher volume-related expenses and inflationary headwinds while continuing to improve productivity.~~employees.

SUMMARIZED RESULTS OF OPERATIONS

($ in millions, except per share amounts)


	Third Quarter					First Nine Months					First Quarter
	2017		2016		% change	2017		2016		% change	2019		2018		% change
Income from railway operations	$	911	$	820	11%	$	2,572	$	2,313	11%	$	966	$	835	16%
Net income	$	506	$	460	10%	$	1,436	$	1,252	15%	$	677	$	552	23%
Diluted earnings per share	$	1.75	$	1.55	13%	$	4.93	$	4.21	17%	$	2.51	$	1.93	30%
Railway operating ratio (percent)	65.9		67.5		(2%)	67.4		68.7		(2%)	66.0		69.3		(5%)

~~The rise in net income for both periods was driven by increased income~~Income from railway operations rose as a result of ~~higher~~increased railway operating revenues, ~~offset in part~~driven by ~~increases in railway operating expenses. Traffic volume was up 4% for the third quarter and 5% for the first nine months compared to the same periods last year, and~~higher average revenue per unit, ~~growth was driven by~~reflecting pricing gains, ~~and~~ higher fuel surcharge ~~revenues~~revenue, and increased accessorial charges. Overall volumes were flat, as gains in ~~both periods.~~intermodal were tempered by declines in coal and merchandise. Railway operating expenses were relatively flat as fuel price declines, decreased compensation expense, and lower expenses due to increased network velocity were offset by increases in purchased services. Our share repurchase program resulted in diluted earnings per share growth that exceeded that of net income.

DETAILED RESULTS OF OPERATIONS

Railway Operating Revenues

The following tables present a comparison of revenues ($ in millions), volumes (units in thousands), and average revenue per unit ($ per unit) by ~~market~~commodity group. At the beginning of 2019, we made changes in the categorization of certain commodity groups within Merchandise. Prior period railway operating revenues, units, and revenue per unit have been reclassified to conform to the current presentation (see Note 1).


	Third Quarter					First Nine Months					First Quarter
Revenues	2017		2016		% change	2017		2016		% change	2019		2018		% change
Merchandise:
Chemicals	$	418	$	408	2%	$	1,251	$	1,253	—	$	452	$	454	—
Agr./consumer/gov’t	388		380		2%	1,156		1,149		1%
Metals/construction	378		337		12%	1,089		971		12%
Agriculture products											385		357		8%
Metals and construction											385		356		8%
Automotive	218		236		(8%)	713		738		(3%)	251		243		3%
Paper/clay/forest	198		191		4%	572		567		1%
Forest and consumer											213		195		9%
Merchandise	1,600		1,552		3%	4,781		4,678		2%	1,686		1,605		5%
Intermodal	621		575		8%	1,785		1,635		9%	719		678		6%
Coal	449		397		13%	1,316		1,085		21%	435		434		—

Total	$	2,670	$	2,524	6%	$	7,882	$	7,398	7%	$	2,840	$	2,717	5%


Units
Merchandise:
Chemicals	115.2	117.5	(2%)	348.6	360.9	(3%)	125.9	126.6	(1%)
Agr./consumer/gov’t	147.8	147.6	—	443.0	447.0	(1%)
Metals/construction	194.2	186.9	4%	556.0	525.4	6%
Agriculture products							130.9	129.9	1%
Metals and construction							173.9	175.9	(1%)
Automotive	96.6	106.8	(10%)	318.5	332.8	(4%)	98.1	102.8	(5%)
Paper/clay/forest	73.4	71.7	2%	214.3	216.3	(1%)
Forest and consumer							69.4	70.9	(2%)
Merchandise	627.2	630.5	(1%)	1,880.4	1,882.4	—	598.2	606.1	(1%)
Intermodal	1,035.2	993.5	4%	3,013.7	2,874.4	5%	1,071.0	1,049.2	2%
Coal	266.6	238.2	12%	792.3	663.0	20%	236.3	249.1	(5%)

Total	1,929.0	1,862.2	4%	5,686.4	5,419.8	5%	1,905.5	1,904.4	—


Revenue per Unit
Merchandise:
Chemicals	$	3,624	$	3,473	4%	$	3,586	$	3,472	3%	$	3,587	$	3,585	—
Agr./consumer/gov’t	2,626		2,577		2%	2,610		2,571		2%
Metals/construction	1,945		1,802		8%	1,959		1,848		6%
Agriculture products											2,945		2,744		7%
Metals and construction											2,217		2,023		10%
Automotive	2,256		2,217		2%	2,239		2,219		1%	2,557		2,362		8%
Paper/clay/forest	2,699		2,655		2%	2,668		2,620		2%
Forest and consumer											3,070		2,755		11%
Merchandise	2,550		2,462		4%	2,542		2,485		2%	2,819		2,647		6%
Intermodal	600		579		4%	592		569		4%	671		647		4%
Coal	1,687		1,666		1%	1,662		1,636		2%	1,839		1,743		6%
Total	1,384		1,355		2%	1,386		1,365		2%	1,490		1,427		4%

~~Third-quarter railway~~

Railway operating revenues increased ~~$146~~$123 million in the first quarter over the same period last year. ~~For the first nine months, railway operating revenues increased $484 million.~~ The table below reflects the components of the revenue change by major ~~market~~commodity group ~~over the same period last year~~ ($ in millions).

Third Quarter First Nine Months
Increase (Decrease) Increase (Decrease)

Merchandise Intermodal Coal Merchandise Intermodal Coal

Volume $ (8 ) $ 24
$ 47
$ (5 ) $ 79
$ 212
Fuel surcharge
revenue 7
10
—
22
51
10
Rate, mix and
other 49
12
5
86
20
9

Total $ 48
$ 46
$ 52
$ 103
$ 150
$ 231



	First Quarter
	Increase (Decrease)

	Merchandise			Intermodal		Coal

Volume	$	(21	)	$	14	$	(22	)
Fuel surcharge revenue	14			9		(1		)
Rate, mix and other	88			18		24

Total	$	81		$	41	$	1

Most of our contracts include negotiated fuel surcharges, typically tied to either On-Highway Diesel (OHD) or West Texas Intermediate Crude Oil (WTI). Approximately 90% of our revenue base is covered by these negotiated fuel surcharges, with ~~more than half~~over 75% tied to OHD. In the ~~third~~first quarter ~~and first nine months~~ of ~~2017,~~2019, contracts tied to OHD accounted for about ~~90%~~95% of our fuel surcharge ~~revenue, as price levels were below most of our surcharge trigger points in contracts tied to WTI.~~revenue. Revenues associated with these surcharges totaled ~~$84~~$153 million and ~~$67~~$131 million in the ~~third~~first quarters of ~~2017~~2019 and ~~2016, respectively, and $249 million and $166 million for the first nine months of 2017 and 2016,~~2018, respectively.

Merchandise

Merchandise revenue ~~increased for both periods reflecting~~grew in the first quarter, as higher average revenue per unit was driven by pricing ~~gains. Total merchandise~~gains and increased fuel surcharge revenue. Overall volumes ~~were down less than 1% in both periods~~fell, as gains in ~~the metals and construction group and paper, clay, and forest~~agriculture products ~~in the third quarter~~ were ~~more than~~ offset by declines in ~~automotive and chemicals traffic.~~the remaining groups.

Chemicals volume ~~declined in both periods,~~decreased driven by reduced shipments of liquefied petroleum gas, crude oil, ~~from the Bakken oil fields~~ and ~~lower shipments of coal ash,~~plastics partially offset by gains in municipal waste and petroleum shipments.

Agriculture products volume rose, as increases in corn and feed shipments more ~~shipments of higher-rated plastics. The first nine months were also impacted by decreased shipments of liquefied petroleum gas, partially~~than offset ~~by increased rock salt shipments~~declines in ethanol, primarily due to ~~weather and replenishing of stockpiles.~~

One of our chemical customers, Sunbelt, filed a rate reasonableness complaint before the STB alleging that our tariff rates for transportation of regulated movements are unreasonable. Since April 1, 2011, we have been billing and collecting amounts based on the challenged tariff rates. In 2014, the STB resolved this rate reasonableness complaint in our favor and in June 2016, the STB resolved petitions for reconsideration. The matter remains decided in our favor; however, the findings are still subject to appeal. We believe the estimate of any reasonably possible loss will not have a material effect on our financial position, results of operations, or liquidity. With regard to rate cases, we record adjustments to revenuessevere flooding in the ~~periods if~~Midwest, and ~~when such adjustments are probable and reasonably estimable.~~wheat traffic.

Agriculture, consumer products, and government volume was flat in the third quarter and down in the first nine months, reflecting lower ethanol shipments, partially offset by increased fertilizer and corn shipments.

Metals and construction volume ~~grew in both periods, a~~fell, largely the result of ~~increased frac sand shipments for use~~decreases in ~~natural gas drilling in the Marcellus, Utica, and Permian regions and higher~~ iron and steel ~~shipments driven by continued improvement in construction activity. These increases were~~traffic, partially offset by ~~declines in coil and cement traffic,~~higher aggregate shipments due to ~~customer sourcing changes.~~an extended shipping season.

Automotive volume declined ~~in both periods, driven mainly by~~as a result of decreases in U.S. light vehicle ~~production.~~

~~Paper, clay,~~production and forest products volume increased in the third quarter and decreased in the first nine months. Both periods reflected higher pulp and municipal waste shipments as a result of increased consumer demand and growth with existing customers, partially offset by lower woodchip volumerailcar availability, due to ~~customer sourcing changes. The first nine months were also impacted by lower pulpboard~~disruptions across the U.S. multilevel network.

Forest and consumer volume ~~due to increased truck competition.~~declined, reflecting decreases in kaolin, lumber, and graphic paper traffic.

Merchandise revenues for the remainder of the year are expected to ~~increase compared~~continue to ~~last year,~~be higher year-over-year, reflecting higher average revenue per unit, driven by pricing ~~gains, and higher volumes.~~gains.

Intermodal

Intermodal ~~revenues~~revenue increased, ~~for both periods due to~~driven by higher ~~traffic volumes and~~ average revenue per unit, ~~primarily driven by~~a result of pricing gains and ~~higher~~increased fuel ~~surcharges.~~surcharge revenues, as well as volume growth.

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


	Third Quarter			First Nine Months			First Quarter
	2017	2016	% change	2017	2016	% change	2019	2018	% change

Domestic	662.6	616.2	8%	1,890.6	1,775.8	6%	656.3	671.7	(2%)
International	372.6	377.3	(1%)	1,123.1	1,098.6	2%	414.7	377.5	10%

Total	1,035.2	993.5	4%	3,013.7	2,874.4	5%	1,071.0	1,049.2	2%

Domestic ~~volume increases in both periods were the~~volumes fell as a result of ~~continued highway conversions, growth in existing accounts, and market share gains. International volume declined slightly~~inclement winter weather in the ~~third quarter. Demand~~Midwest and trailer lane rationalizations. International volumes rose due to increased demand from existing ~~customers and new business awards drove the increase in the first nine months.~~accounts.

Intermodal revenues for the remainder of the year are expected to ~~increase compared~~continue to ~~last year,~~increase, driven by volume growth ~~and~~in addition to higher average revenue per unit due to ~~higher fuel surcharge revenues and~~ pricing gains.

Coal

Coal revenues ~~increased in both periods, a result of higher volumes, primarily in the export market, and~~were relatively flat, as higher average revenue per unit, the result of pricing ~~gains. The first nine months were also impacted~~gains, was tempered by ~~higher fuel surcharge revenue.~~volume decreases.

Coal tonnage (in thousands) by market was as follows:


	Third Quarter			First Nine Months			First Quarter
	2017	2016	% change	2017	2016	% change	2019	2018	% change

Utility	17,410	18,357	(5%)	52,599	48,097	9%	15,755	15,865	(1%)
Export	6,280	2,567	145%	19,189	9,949	93%	6,388	7,238	(12%)
Domestic metallurgical	4,298	3,816	13%	11,647	10,355	12%	2,931	3,147	(7%)
Industrial	1,457	1,589	(8%)	4,259	4,785	(11%)	1,222	1,260	(3%)

Total	29,445	26,329	12%	87,694	73,186	20%	26,296	27,510	(4%)

Utility coal tonnage ~~decreased in the third quarter, but~~was relatively flat as volume declines due to plant outages and inclement weather were offset by higher volumes from increased ~~in the first nine months. The third quarter drop was driven primarily by weakened~~network velocity and demand ~~for coal driven by sustained~~to replenish low ~~natural gas prices and plant outages. Market share gains contributed to the increase in the first nine months.~~stockpiles. Export coal tonnage ~~grew significantly over~~

~~prior periods,~~dropped as a ~~continued tightening~~result of ~~international~~a decline in coal ~~supply drove incremental production increases~~availability and ~~higher demand for U.S. coal.~~weak thermal seaborne pricing. Domestic metallurgical coal tonnage ~~rose as customer-specific gains more than offset supply issues driven by increased demand in the export markets in both periods.~~fell due to customer sourcing changes and plant outages. Industrial coal tonnage ~~fell in both periods, reflecting continued~~decreased as a result of customer sourcing changes and pressure from natural gas ~~conversions and customer sourcing changes.~~conversions.

Coal revenues for the remainder of the year are expected to decline. Utility demand continues to be ~~slightly above last year primarily due to export volume increases, partially offset~~impacted by lower natural gas prices. Export will be impacted by a lower average revenue per unit, mainly the result of softening seaborne metallurgical prices, and reduced volume due to ~~negative mix.~~weak thermal seaborne pricing and supply issues.

Railway Operating Expenses

Railway operating expenses ~~($ in millions)~~ summarized by major classifications were as ~~follows:~~follows ($ in millions):


	Third Quarter					First Nine Months					First Quarter
	2017		2016		% change	2017		2016		% change	2019		2018		% change

Compensation and benefits	$	755	$	691	9%	$	2,201	$	2,081	6%	$	727	$	737	(1%)
Purchased services and rents	377		386		(2%)	1,146		1,149		—	424		401		6%
Fuel	198		181		9%	601		504		19%	250		266		(6)%
Depreciation	265		258		3%	788		767		3%	283		272		4%
Materials and other	164		188		(13%)	574		584		(2%)	190		206		(8%)

Total	$	1,759	$	1,704	3%	$	5,310	$	5,085	4%	$	1,874	$	1,882	—

Compensation and benefits expense ~~increased in both periods, reflecting changes in:~~decreased as follows:

~~incentive and stock-based compensation (up $47 million for the quarter and $70 million for the first nine months),~~

~~health and welfare benefit rates for agreement employees (up $16 million for the quarter and $46 million for the first nine months),~~

~~pay rates (up $13 million for the quarter and $49 million for the first nine months), and~~

employment levels (down ~~$26 million for the quarter~~$11 million),

higher capitalized labor ($8 million),

overtime and ~~$57 million for the first nine months)~~recrews (down $6 million),

payroll taxes on stock-based compensation (down $4 million),

other (down $1 million), and

increased pay rates (up $20 million).

Average rail headcount for the quarter was down by about ~~1,100~~175 compared with ~~third-quarter 2016~~the first quarter 2018 and ~~approximately 300~~down by about 375 sequentially. We expect that headcount for the remainder of the year will continue to ~~enter 2018 with employment levels flat~~decline and that our year-end headcount will be down at least 500 as compared to ~~slightly higher than third-quarter 2017.~~prior year.

Purchased services and rents ~~decreased for both periods~~increased as follows ($ in millions):


	Third Quarter					First Nine Months					First Quarter
	2017		2016		% change	2017		2016		% change	2019		2018		% change

Purchased services	$	309	$	312	(1%)	$	931	$	921	1%	$	346	$	318	9%
Equipment rents	68		74		(8%)	215		228		(6%)	78		83		(6%)

Total	$	377	$	386	(2%)	$	1,146	$	1,149	—	$	424	$	401	6%

The ~~decline~~rise in ~~equipment rents in both periods is~~purchased services was largely the result of higher intermodal-related costs, increased technology-related expenses, and lower ~~automotive volumes and improved~~earnings in equity affiliates. Equipment rents fell, the result of increased network ~~fluidity. Purchased services decreased slightly in the third quarter. The increase for the first nine months was due to higher intermodal volume-related costs.~~velocity.

Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, ~~increased for both periods,~~decreased primarily due to ~~higher~~lower locomotive fuel prices ~~(up 12% in the third quarter and 22% in the first nine months)~~(down 4%), ~~offset in part by improved locomotive fuel efficiency (consumption was 2% lower during the third quarter and first nine months despite the 4% and 5% increases in traffic volume, respectively)~~as well as decreased consumption (down 1%).

Materials and other expenses ~~declined in the third quarter and for the first nine months~~decreased as follows ($ in millions):


	Third Quarter					First Nine Months					First Quarter
	2017		2016		% change	2017		2016		% change	2019		2018		% change

Materials	$	85	$	102	(17%)	$	264	$	273	(3%)	$	87	$	90	(3%)
Casualties and other claims	39		36		8%	114		101		13%	49		47		4%
Other	40		50		(20%)	196		210		(7%)	54		69		(22%)

Total	$	164	$	188	(13%)	$	574	$	584	(2%)	$	190	$	206	(8%)

~~Material usage~~Materials costs decreased ~~in both periods, a result of~~due primarily to lower locomotive ~~and freight car repairs.~~repair costs. Casualties and other claims expenses ~~include the estimates~~increased, largely a result of higher costs related to ~~personal injury, property damage, and~~ environmental remediation ~~matters. Cost associated with personal injury increased in the third quarter and first nine months as a result of unfavorable developments in personal injury cases.~~matters, partially offset by lower derailment-related costs. Other expense ~~decreases in both periods reflect~~decreased, reflecting higher gains from the sale of operating ~~properties.~~property.

Other Income – Net

Other income – net ~~decreased $6~~increased $36 million in the ~~third~~first quarter ~~but rose $30 million~~primarily driven by higher investment returns on corporate-owned life insurance.

Income Taxes

The first-quarter effective tax rate was 21.4% compared with 21.9% for the ~~first nine months compared with the~~ same ~~periods~~period last year. Both periods reflect favorable tax benefits on stock-based compensation. The ~~decline in the third quarter was driven by lower~~current year also benefited from higher returns on corporate-owned life insurance, ~~and debt exchange fees, partially offset~~while the prior year included benefits of certain 2017 tax credits enacted retroactively by ~~higher gains from~~ the ~~sale~~Bipartisan Budget Act of non-operating properties. The first nine months increase was a result of the absence of advisory fees incurred last year, increased income associated with our coal mining properties, and higher returns from corporate-owned life insurance.

~~Provision for Income Taxes~~

The third-quarter and year-to-date effective income tax rates were 36.8% and 35.7%, compared with 34.8% and 35.5% for the same periods last year. The higher effective tax rate for the quarter was due to Illinois-enacted legislation which increased deferred tax expense by $12 million.

2018.

FINANCIAL CONDITION AND LIQUIDITY

Cash provided by operating activities, our principal source of liquidity, was ~~$2.5 billion~~$881 million for the first ~~nine~~three months of ~~2017,~~2019, compared with ~~$2.3 billion~~$816 million for the same period of ~~2016, largely~~2018, primarily the result of improved operating ~~results.~~results partially offset by increased interest payments. We had a working capital ~~deficit~~deficits of ~~$414~~$963 million at ~~September 30, 2017,~~March 31, 2019, compared ~~to $48~~with $729 million at December 31, ~~2016.~~2018. Cash, ~~and~~ cash equivalents, and restricted cash totaled ~~$724~~$499 million at ~~September 30, 2017.~~March 31, 2019. We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations.

In May of 2017, we issued $300 million of 3.15% senior notes due 2027. In August of 2017, we issued$750 million of 4.050% senior notes due 2052 as part of a debt exchange for $551 million of previously issued notes (See Note 6). Other than these items, there There have been no material changes to the information on future contractual obligations contained in our Form 10-K for the year ended December 31, ~~2016.~~2018 with the exception of additional lease obligations (see Note 8).

Cash used in investing activities was ~~$1.2 billion~~$350 million for the first ~~nine~~three months of ~~2017,~~2019, compared with ~~$1.3 billion~~$371 million in the same period last year, ~~the decrease driven primarily due to lower corporate-owned life insurance investments.~~reflecting increased property sale proceeds partially offset by higher property additions.

Cash used in financing activities was ~~$1.5 billion~~$478 million in the first ~~nine~~three months of ~~2017,~~2019, compared with ~~$1.1 billion~~$63 million in the same period last year, ~~primarily~~largely the result of lower ~~debt~~ proceeds from borrowing and higher repurchases of ~~common stock.~~Common Stock. We repurchased ~~6.0~~2.9 million shares of Common Stock, totaling ~~$712~~$500 million, in the first ~~nine~~three months of ~~2017,~~2019, compared to ~~7.2~~2.1 million shares, totaling ~~$603~~$300 million, in the same period last year. ~~On September 26, 2017, our Board of~~

~~Directors authorized the repurchase of up to an additional 50 million shares of Common stock through December 31, 2022.~~ 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~~internally-generated cash, cash on hand, or proceeds from borrowings.

Our ~~total debt-to-total~~total-debt-to-total capitalization ratio was ~~43.7%~~42.7% at ~~September 30, 2017,~~March 31, 2019, and ~~45.1%~~42.0% at December 31, ~~2016.~~2018.

We have in place and available a $750 million credit agreement expiring in May 2021, which provides for borrowings at prevailing rates and includes covenants. We had no amounts outstanding under this facility at both ~~September 30, 2017,~~March 31, 2019, and December 31, ~~2016,~~2018, and are in compliance with all of its covenants. We have a ~~$350~~$400 million ~~accounts~~

account receivable securitization program expiring ~~June 2018. There was $100 million and $200~~in May 2019. We had $250 million outstanding under this program at ~~September 30, 2017,~~March 31, 2019, and no amounts outstanding at December 31, ~~2016, respectively.~~2018.

APPLICATION OF CRITICAL ACCOUNTING ~~ESTIMATES~~POLICIES

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of 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 the critical accounting ~~estimates~~policies disclosure contained in our Form 10-K at December 31, ~~2016.~~2018.

OTHER MATTERS

Labor Agreements

Approximately 80% of our railroad employees are covered by collective bargaining agreements with various labor unions. Pursuant to the Railway Labor Act, ~~(the Act),~~ these agreements remain in effect until new agreements are reached, or until the bargaining procedures mandated by the Railway Labor Act are completed. We largely bargain nationally in concert with other major railroads, represented by the National Carriers Conference ~~Committee (NCCC).~~Committee. Moratorium provisions in the labor agreements govern when the railroads and unions may propose changes to the agreements.

Beginning in late 2014, the NCCC and the various unions exchanged new proposals to begin the current round of national negotiations. The unions have formed three separate bargaining coalitions. The NCCC has reached a tentative agreement with one coalition that represents approximately 60% of the unionized workforce. That agreement is subject to ratification by the union membership. Negotiations with the other two coalitions are ongoing with the assistance of mediators from the National Mediation Board. Separately, in January 2015, we reached an agreement covering wages and work rules through 2019 with the Brotherhood of Locomotive Engineers and Trainmen (BLET), which represents approximately 20% of our union workforce. Changes to the BLET benefit plan are covered by the national tentative agreement currently pending membership ratification.

New Accounting Pronouncements

For a detailed discussion of new accounting pronouncements, see Note ~~10.~~12.

Inflation

In preparing financial statements, GAAP requires the use of historical cost that disregards the effects of inflation on the replacement cost of property. ~~We are~~As a capital-intensive company with most of our capital invested in long-lived assets. The replacement cost of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical cost.

FORWARD-LOOKING STATEMENTS

Certain statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or our achievements or those of our industry to be materially different from those expressed or implied by any forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “project,” “consider,” “predict,” “potential,” “feel,” or other comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates, beliefs, and projections. While we believe these expectations, assumptions, estimates, beliefs, and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which involve factors or circumstances that are beyond our control. These and other important factors, including those discussed under “Risk Factors” in our latest Form 10-K, as well as our subsequent filings with the Securities and Exchange Commission, may cause actual results, performance, or achievements to differ materially from those expressed or implied by these forward-looking statements. The forward-looking statements herein are made only as of the date they were first issued, and unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Copies of our press releases and additional information about us is available at www.norfolksouthern.com, or you can contact ~~Norfolk Southern Corporation~~our Investor Relations department by calling 757-629-2861.

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 ~~September 30, 2017.~~March 31, 2019. Based on such evaluation, our officers have concluded that, at ~~September 30, 2017,~~March 31, 2019, our disclosure controls and procedures were 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 ~~third~~first quarter of ~~2017,~~2019, we implemented controls to support the adoption of the new lease accounting standard ASU No. 2016-02, “Leases (Topic 842).” We have not identified any other 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.

~~On November 6,~~In 2007, various antitrust class actions filed against us and other Class I railroads in various Federal district courts regarding fuel surcharges were consolidated in the District of Columbia by the Judicial Panel on Multidistrict Litigation. ~~On June 21,~~In 2012, the court certified the case as a class action. The defendant railroads appealed this certification, and the Court of Appeals for the District of Columbia vacated the District Court’s decision and remanded the case for further consideration. On October 10, 2017, the District Court denied class ~~certification.~~certification; the findings are subject to appeal. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases. We do not believe the outcome of these proceedings will have a material effect on our financial position, results of operations, or liquidity.

Item 1A. Risk Factors.

The risk factors included in our ~~2016~~2018 Form 10-K remain unchanged and are incorporated herein by reference.

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

(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⁾

July 1-31, 2017 602,443
119.18
602,443
10,664,429

August 1-31, 2017 1,110,444
117.34
1,109,602
9,554,827

September 1-30, 2017 847,742
127.51
846,969
58,707,858

Total 2,560,629

2,559,014



	(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, 2019	1,089,814	160.66	1,089,201	38,278,718
February 1-28, 2019	928,331	177.68	921,840	37,356,878
March 1-31, 2019	894,511	180.45	893,393	36,463,485

Total	2,912,656		2,904,434


⁽¹⁾	Of this amount, ~~1,615~~8,222 represent shares tendered by employees in connection with the exercise of options under the stockholder-approved Long-Term Incentive Plan.


⁽²⁾	On September 26, 2017, our Board of Directors authorized ~~a share~~the repurchase ~~program, pursuant~~of up to ~~which up to~~an additional 50 million shares of Common Stock ~~could be purchased~~ through December 31, 2022. As of March 31, 2019, 36.5 million shares remain authorized for repurchase.

Item 6. Exhibits.



~~4.1~~
3(ii)	~~Indenture dated~~The Bylaws of Norfolk Southern Corporation, as ~~of August 15, 2017, between the Registrant and U.S. Bank National Association, as Trustee, is~~amended March 26, 2019, are incorporated by reference ~~herein~~ to Exhibit ~~4.1~~3(ii) to Norfolk Southern Corporation’s Form 8-K filed ~~August 15, 2017. SEC File No. 001-08339~~on March 26, 2019.

~~4.2~~10.1	~~Registration Rights~~A Construction Agency Agreement, dated ~~as of August 15, 2017. The~~March 1, 2019, between Norfolk Southern Railway Company (“NSRC”) and BA Leasing BSC, LLS. This Agreement is incorporated by reference herein to Exhibit ~~4.2~~10.1 to Norfolk Southern Corporation’s Form 8-K filed ~~August 15, 2017. SEC File No. 001-08339~~

10.1,*	~~The Norfolk Southern Corporation Directors’ Restricted Stock Plan, adopted January 1, 1994, and amended and restated effective as of January 23, 2015.~~March 5, 2019.

10.2*10.2	A Lease Agreement, dated March 1, 2019, between NSRC and BA Leasing BSC, LLS. This Agreement is incorporated by reference herein to Exhibit 10.2 to Norfolk Southern Corporation’s Form 8-K filed March 5, 2019.

10.3	A Participation Agreement, dated March 1, 2019, between NSRC and BA Leasing BSC, LLS, Bank of America, N.A. as Administrative Agent, and each of the Rent Assignees listed on Schedule II thereto. This Agreement is incorporated by reference herein to Exhibit 10.3 to Norfolk Southern Corporation’s Form 8-K filed March 5, 2019.

10.4	Guaranty of NSRC’s obligations under the Participation Agreement, Construction Agency Agreement, Lease Agreement and related documents by Norfolk Southern Corporation. This Agreement is incorporated by reference herein to Exhibit 10.4 to Norfolk Southern Corporation’s Form 8-K filed March 5, 2019.

10.5,*	~~Supplemental Benefit Plan~~Form of Norfolk Southern Corporation ~~and Participating Subsidiary Companies, adopted June 1, 1982,~~Long-Term Incentive Plan, Off-Cycle Award Agreement for Non-Qualified Stock Options as approved by the Compensation Committee on April 23, 2019.

10.6,*	Form of Norfolk Southern Corporation Long-Term Incentive Plan, Off-Cycle Award Agreement for Performance Share Units as approved by the Compensation Committee on April 23, 2019.

10.7,*	Form of Norfolk Southern Corporation Long-Term Incentive Plan, Off-Cycle Award Agreement for Restricted Stock Units as approved by the Compensation Committee on April 23, 2019.

10.8*	Norfolk Southern Corporation Executives’ Deferred Compensation Plan, as amended and restated effective ~~as of June 26, 2015.~~January 1, 2019 is incorporated by reference to Exhibit 10(ww) to Norfolk Southern’s Form 10-K filed on February 8, 2019. (See SEC File No. 001-08339)

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 ~~third~~first quarter of ~~2017,~~2019, formatted in Inline Extensible Business Reporting Language ~~(XBRL)~~(iXBRL) includes (i) the Consolidated Statements of Income for the ~~third~~first quarter of 2019 and ~~first nine months of 2017 and 2016;~~2018; (ii) the Consolidated Statements of Comprehensive Income for the ~~third~~first quarter of 2019 and ~~first nine months of 2017 and 2016;~~2018; (iii) the Consolidated Balance Sheets at ~~September 30, 2017,~~March 31, 2019 and December 31, ~~2016;~~2018; (iv) the Consolidated Statements of Cash Flows for the first ~~nine~~three months of ~~2017~~2019 and ~~2016;~~2018; (v) the Consolidated Statements of Changes in Stockholders’ Equity for the first quarter of 2019 and ~~(v)~~2018; and (vi) the Notes to Consolidated Financial Statements.

* Management contract or compensatory arrangement.
** Filed herewith.

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:	~~October 25, 2017~~April 24, 2019	/s/ ~~Thomas E. Hurlbut~~Jason A. Zampi
		~~Thomas E. Hurlbut~~Jason A. Zampi Vice President and Controller (Principal Accounting Officer) (Signature)


Date:	~~October 25, 2017~~April 24, 2019	/s/ Denise W. Hutson
		Denise W. Hutson Corporate Secretary (Signature)

2730



	Balance at Beginning of Year			Net Loss			Reclassification Adjustments			Balance at End of Period
	($ in millions)
Nine Months Ended September 30, 2017
Pensions and other postretirement
liabilities	$	(414	)	$	—		$	13	⁽¹⁾	$	(401	)
Other comprehensive loss
of equity investees	(73		)	(1		)	—			(74		)

Accumulated other comprehensive loss	$	(487	)	$	(1	)	$	13		$	(475	)

Nine Months Ended September 30, 2016
Pensions and other postretirement
liabilities	$	(367	)	$	—		$	12	⁽¹⁾	$	(355	)
Other comprehensive loss
of equity investees	(78		)	—			—			(78		)

Accumulated other comprehensive loss	$	(445	)	$	—		$	12		$	(433	)



	September 30, 2017						December 31, 2016
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
	($ in millions)

Long-term investments	$	114		$	136		$	116		$	141
Long-term debt, including current maturities	(9,880		)	(11,774		)	(10,112		)	(11,626		)



	Level 1			Level 2			Total
	($ in millions)

September 30, 2017
Long-term investments	$	4		$	132		$	136
Long-term debt, including current maturities	(11,576		)	(198		)	(11,774		)

December 31, 2016
Long-term investments	$	4		$	137		$	141
Long-term debt, including current maturities	(11,427		)	(199		)	(11,626		)