5. Stock Repurchase ~~Programs~~Program

We repurchased and retired ~~12.8~~5.7 million shares ~~(5.7 million shares under an accelerated stock repurchase program (ASR)~~ and ~~7.1 million shares under our ongoing program) and 6.0~~4.8 million shares of Common Stock under our stock repurchase ~~programs~~program in the first ~~nine~~six months of ~~2018~~2019 and ~~2017,~~2018, respectively, at a cost of ~~$2.1~~$1.1 billion and ~~$712~~$700 million, respectively. We entered into an ASR on August 2, 2018 with two third-party financial institutions to repurchase Common Stock, at which time we made a payment of $1.2 billion to the financial institutions and received an initial delivery of 5.7 million shares valued at $960 million. The remaining balance of $240 million, included in “Additional paid-in capital” on the Consolidated Balance Sheets, will be settled no later than the end of January 2019, with the final number of shares to be delivered by the financial institutions equal to the volume-weighted average price per share of Common Stock over the ASR term, less a negotiated discount.

Since the beginning of 2006, we have repurchased and retired ~~181.3~~191.3 million shares at a total cost of ~~$13.4~~$15.2 billion.

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 $1.4 billion at June 30, 2019, and $1.3 billion at ~~both September 30, 2018, and~~ December 31, ~~2017.~~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 $38 million and ~~$34~~$36 million for the ~~third~~second quarters of ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$112~~$75 million and ~~$106~~$74 million for the first ~~nine~~six months of ~~2018~~2019 and ~~2017,~~2018, respectively. Our equity in the earnings of Conrail, net of amortization, included in “Purchased services and rents” was ~~$12~~$15 million and ~~$10~~$18 million for the ~~third~~second quarters of ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$46~~$23 million and ~~$30~~$34 million for the first ~~nine~~six months of 2019 and 2018, ~~and 2017,~~ respectively.

“Other liabilities” includes $280 million at both ~~September~~June 30, ~~2018~~, 2019, and December 31, ~~2017,~~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 paid to TTX for use of equipment are included in “Purchased services and rents” and amounted to ~~$43~~$60 million and ~~$58~~$67 million of expense for the ~~third~~second quarters of ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$176~~$122 million and ~~$173~~$133 million for the first ~~nine~~six months of ~~2018~~2019 and ~~2017,~~2018, respectively. Our equity in the earnings of TTX, also included in “Purchased services and rents,” totaled ~~$16~~$12 million and ~~$14~~$17 million for the ~~third~~second quarters of ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$49~~$25 million and ~~$32~~$33 million for the first ~~nine~~six months of ~~2018~~2019 and ~~2017,~~2018, respectively.

7. Debt

During the ~~third~~second quarter of ~~2018,~~2019, we issued ~~$300 million of 3.65% senior notes due 2025, $400~~$200 million of 3.80% senior notes due 2028, ~~$200~~$400 million of ~~4.15%~~4.10% senior notes due ~~2048,~~2049, and ~~$600~~$200 million of 5.10% senior notes due 2118.

In ~~June of 2018,~~May 2019, we renewed and amended our accounts receivable securitization program, increasing borrowing capacity from ~~$350~~$400 million to ~~$400~~$450 million onwith a ~~364-day~~ term ~~to run through~~expiring in May ~~2019.~~2020. We had no amounts outstanding ~~under this program~~ at ~~September~~June 30, ~~2018~~2019, and ~~$100 million outstanding at~~ December 31, ~~2017, reflected as “Short-term debt” on the Consolidated Balance Sheets.~~ 2018.

~~During the first quarter of 2018, we issued $500 million of 4.15% senior notes due 2048.~~

The “Cash, cash equivalents, and restricted cash” line item in the Consolidated Statements of Cash Flows includes restricted cash of $86 million and $88 million at ~~September~~June 30, 2019 and December 31, 2018, ~~which reflects~~respectively, reflecting deposits held by a ~~third party~~third-party bond agent as collateral for certain debt obligations maturing in 2019. The restricted cash balance is included as part of “Other current assets” on the Consolidated Balance ~~Sheets.~~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 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 “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 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 land 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 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:



		June 30, 2019
Assets	Classification	($ in millions)
ROU assets	Other assets	$	586

Liabilities
Current lease liabilities	Other current liabilities	$	98
Non-current lease liabilities	Other liabilities	488

Total lease liabilities		$	586

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



	Second Quarter		First Six Months
	2019		2019
	($ in millions)
Operating lease expense	$	29	$	56
Variable lease expense	16		28
Short-term lease expense	1		3

Total lease expense	$	46	$	87

At June 30, 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 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:



	June 30, 2019

Weighted-average remaining lease term (years) on operating leases	8.43

Weighted-average discount rates on operating leases	3.51	%

As the rates implicit in most of our leases are not readily determinable, we use a collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. We use the portfolio approach and group leases into short, medium, and long-term categories, applying the corresponding incremental borrowing rates to these categories of leases.

During the first six months of 2019, right-of-use assets obtained in exchange for new operating lease liabilities were $46 million. During the first six months of 2019, cash paid for amounts included in the measurement of lease liabilities was $56 million in operating cash flows from operating leases. During the first quarter, cash proceeds from a sale and leaseback transaction were $82 million and the gain on the transaction was $15 million.

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



	June 30, 2019
	($ in millions)
2019 - 6 months	$	58
2020	110
2021	104
2022	79
2023	70
2024 and subsequent years	266
Total lease payments	687
Less: Interest	101

Present value of lease liabilities	$	586

Undiscounted future minimum lease payments under non-cancellable operating leases accounted for under ASC 840 “Leases” were as follows:



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

Total	$	695

8.9. 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 quarters~~second quarter and first ~~nine~~six months are as follows:




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

Service cost	$	8		$	10		$	1		$	2
Interest cost	23			22			5			4
Expected return on plan assets	(44		)	(45		)	(3		)	(4		)
Amortization of net losses	11			14			—			—
Amortization of prior service benefit	—			—			(6		)	(6		)

Net expense (benefit)	$	(2	)	$	1		$	(3	)	$	(4	)

Other Postretirement
Pension Benefits Benefits
Third Quarter
2018 2017 2018 2017
($ in millions)

Service cost $ 9
$ 9
$ 2
$ 2
Interest cost 21
20
4
4
Expected return on plan assets (44 ) (43 ) (4 ) (4 )
Amortization of net losses 14
13
—
—
Amortization of prior service benefit —
—
(6 ) (6 )

Net benefit $ —
$ (1 ) $ (4 ) $ (4 )




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

Service cost	$	17		$	20		$	3		$	4
Interest cost	46			42			9			8
Expected return on plan assets	(89		)	(89		)	(7		)	(8		)
Amortization of net losses	22			28			—			—
Amortization of prior service benefit	—			—			(12		)	(12		)

Net expense (benefit)	$	(4	)	$	1		$	(7	)	$	(8	)

Other Postretirement
Pension Benefits Benefits
First Nine Months
2018 2017 2018 2017
($ in millions)

Service cost $ 29
$ 28
$ 6
$ 6
Interest cost 63
60
12
12
Expected return on plan assets (133 ) (129 ) (12 ) (12 )
Amortization of net losses 42
39
—
—
Amortization of prior service benefit —
—
(18 ) (18 )

Net expense (benefit) $ 1
$ (2 ) $ (12 ) $ (12 )

~~In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~.” This update requires segregation of net benefit costs between operating and non-operating expenses and also requires retrospective application. We adopted the standard on January 1, 2018. Under the new standard, only theThe 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, whereas under the previous standard all components were included in “Compensation and benefits.”~~Income.

The retrospective application resulted in an offsetting increase in “Compensation and benefits” expense and an increase in “Other income – net” on the Consolidated Statements of Income of $16 million and $48 million for the third quarter and first nine months of 2017, respectively, with no impact on “Net income.”

9.10. Fair Values of Financial Instruments

The fair values of “Cash and cash equivalents,” “Accounts receivable~~” “Accounts payable,~~ – net,” and ~~“Short-term debt”~~“Accounts payable” approximate carrying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life 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~~June 30, ~~2018,~~2019 or December 31, ~~2017.~~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:



	June 30, 2019						December 31, 2018
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
	($ in millions)

Long-term debt, including current maturities	$	(11,477	)	$	(13,638	)	$	(11,145	)	$	(12,203	)

September 30, 2018 December 31, 2017

Carrying
Amount

Fair
Value

Carrying
Amount

Fair
Value
($ in millions)

Long-term investments $ 21
$ 39
$ 26
$ 43
Long-term debt, including current maturities (11,135 ) (12,397 ) (9,736 ) (11,771 )

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, 2018
Long-term investments $ —
$ 39
$ 39
Long-term debt, including current maturities (12,304 ) (93 ) (12,397 )

December 31, 2017

Long-term investments $ 4
$ 39
$ 43
Long-term debt, including current maturities (11,676 ) (95 ) (11,771 )

~~10.~~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 Partnerships (Sunbelt), filed in 2011 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. Sunbelt’s appeal of the STB’s decision to the United States Court of Appeal for the 11th Circuit was denied on January 26, 2018. This matter did not have a material effect on our financial position, results of operations, or liquidity.

In 2007, various antitrust class actions filed against us and other Class I railroads in various Federal district courts regarding fuel surcharges were consolidated in the District of Columbia by the Judicial Panel on Multidistrict Litigation. In 2012, the court certified the case as a class action. The defendant railroads appealed this certification, and the Court of Appeals for the District of Columbia vacated the District Court’s decision and remanded the case for further consideration. On October 10, 2017, the District Court denied class certification; the 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 personal injury and occupational claims are subject to the Federal Employer’s Liability Act (FELA), which is applicable only to railroads. FELA’s fault-based tort system produces results that are unpredictable and inconsistent as compared with a no-fault workers’ compensation system. The variability inherent in this system 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 ~~$59~~$63 million and ~~$58~~$55 million at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, of which $15 million is classified as a current liability at both dates. At ~~September~~June 30, ~~2018,~~2019, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at ~~120~~113 known locations and projects compared with ~~127~~114 locations and projects at December 31, ~~2017.~~2018. At ~~September~~June 30, ~~2018, 15~~2019, sixteen sites accounted for ~~$38~~$44 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 ~~twelve~~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.

~~11.~~12. New Accounting Pronouncements

~~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 leases greater than twelve months and disclose key information about leasing arrangements. When implemented, lessees will be required to measure and record leases at the present value of the remaining lease payments. In July 2018, the FASB issued ASU 2018-11, ~~“Leases (Topic 842): Targeted Improvements,”~~ which created a new, optional transition method for implementing ASU 2016-02. We expect to use this new transition method, which permits the use of the effective date as the date of initial application. We disclosed $660 million in undiscounted operating lease obligations in our lease commitments footnote in our most recent 10-K, and have evaluated those contracts. We continue to evaluate other existing arrangements to determine if they qualify for lease accounting under the new standard. We are in the process of implementing a lease management system to support the new reporting requirements. We do not anticipate a material impact on our results of operations, and we will not 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. We will not adopt the standard early.

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, ~~with service to~~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.

Our second quarter 2019 results reflect the commitment to the implementation of our new strategic plan that we unveiled in February. We achieved a record low ~~third-quarter~~second-quarter operating ratio (a measure of the amount of operating revenues consumed by operating expenses) of ~~65.4%~~63.6%, in addition to ~~third-quarter~~second-quarter records for income from railway operations, net income, and diluted earnings per share. ~~These record results were driven by strong revenue growth and demonstrate continued progress on our long-range objectives.~~

SUMMARIZED RESULTS OF OPERATIONS

($ in millions, except per share amounts)


	Third Quarter					First Nine Months					Second Quarter					First Six Months
	2018		2017		% change	2018		2017		% change	2019		2018		% change	2019		2018		% change
Income from railway operations	$	1,020	$	895	14%	$	2,881	$	2,524	14%	$	1,065	$	1,026	4%	$	2,031	$	1,861	9%
Net income	$	702	$	506	39%	$	1,964	$	1,436	37%	$	722	$	710	2%	$	1,399	$	1,262	11%
Diluted earnings per share	$	2.52	$	1.75	44%	$	6.95	$	4.93	41%	$	2.70	$	2.50	8%	$	5.21	$	4.43	18%
Railway operating ratio (percent)	65.4		66.5		(2%)	66.4		68.0		(2%)	63.6		64.6		(2%)	64.8		66.9		(3%)

Income from railway operations ~~rose~~increased in both periods, asprimarily a result of increased railway operating revenues, ~~that more than offset~~driven by higher ~~expenses. Average~~average revenue per unit, ~~grew due to higher fuel surcharge revenues and~~reflecting pricing ~~gains, partially offset by~~gains. Traffic volumes were down 4% for the ~~mix-related impacts of increased intermodal volume and decreased coal volume. Volumes rose 5% in both the third~~second quarter and 2% for the first ~~nine~~six months. Railway operating ~~expense increases included higher~~expenses decreased as declines in fuel prices ~~as well as volume-related increases~~ and ~~costs associated with overall~~ lower expenses due to increased network velocity were offset by an increase in ~~both periods. Net income and~~depreciation. Our share repurchase program resulted in diluted earnings per share ~~also benefited from a lower effective tax rate, primarily due to the enactment~~growth that exceeded that of ~~tax reform in late 2017.~~net income.

1819

DETAILED RESULTS OF OPERATIONS

Railway Operating Revenues

The following tables present a comparison of revenues ($ in millions), volumes (units in thousands), and average revenue per unit ($ per unit) by commodity group. 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					Second Quarter					First Six Months
Revenues	2018		2017		% change	2018		2017		% change	2019		2018		% change	2019		2018		% change
Merchandise:
Chemicals	$	468	$	418	12%	$	1,363	$	1,251	9%	$	473	$	465	2%	$	925	$	919	1%
Agr./consumer/gov’t	428		388		10%	1,244		1,156		8%
Metals/construction	383		378		1%	1,110		1,089		2%
Agriculture products											406		379		7%	791		736		7%
Metals and construction											416		413		1%	801		769		4%
Automotive	245		218		12%	741		713		4%	251		253		(1%)	502		496		1%
Paper/clay/forest	213		198		8%	602		572		5%
Forest and consumer											210		208		1%	423		403		5%
Merchandise	1,737		1,600		9%	5,060		4,781		6%	1,756		1,718		2%	3,442		3,323		4%
Intermodal	746		621		20%	2,138		1,785		20%	701		714		(2%)	1,420		1,392		2%
Coal	464		449		3%	1,364		1,316		4%	468		466		—%	903		900		—%

Total	$	2,947	$	2,670	10%	$	8,562	$	7,882	9%	$	2,925	$	2,898	1%	$	5,765	$	5,615	3%



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



Title of each class	Trading Symbol	Name of each exchange on which registered
Norfolk Southern Corporation Common Stock (Par Value $1.00)	NSC	New York Stock Exchange



Class	Outstanding at ~~September~~June 30, ~~2018~~2019
Common Stock ($1.00 par value per share)	~~272,346,940 (excluding~~263,406,773	(excluding 20,320,777 shares held by the registrant’s
	consolidated subsidiaries)



		Page
Part I.	Financial Information:
	Item 1.	Financial Statements:
		Consolidated Statements of Income ~~Third~~ Second Quarter and First ~~Nine~~Six Months of ~~2018~~2019 and ~~2017~~2018	3
		Consolidated Statements of Comprehensive Income ~~Third~~ Second Quarter and First ~~Nine~~Six Months of ~~2018~~2019 and ~~2017~~2018	4
		Consolidated Balance Sheets At ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018	5
		Consolidated Statements of Cash Flows First ~~Nine~~Six Months of ~~2018~~2019 and ~~2017~~2018	6
		~~Notes to~~ Consolidated ~~Financial~~ Statements of Changes in Stockholders’ Equity Second Quarter and First Six Months of 2019 and 2018	7
		~~Item 2.~~Notes to Consolidated Financial Statements	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1819
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2526
	Item 4.	Controls and Procedures	2526

Part II.	Other Information:
	Item 1.	Legal Proceedings	26
	~~Item 1A.~~	~~Risk Factors~~	26
	~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	27
	Item 6.1A.	Risk Factors	27
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
	Item 6.	Exhibits	28

		Signatures	29


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

Railway operating revenues	$	2,947	$	2,670	$	8,562	$	7,882	$	2,925	$	2,898	$	5,765	$	5,615

Railway operating expenses:
Compensation and benefits	725		771		2,168		2,249		712		706		1,439		1,443
Purchased services and rents	450		377		1,281		1,146		418		430		842		831
Fuel	274		198		812		601		254		272		504		538
Depreciation	276		265		821		788		284		273		567		545
Materials and other	202		164		599		574		192		191		382		397

Total railway operating expenses	1,927		1,775		5,681		5,358		1,860		1,872		3,734		3,754

Income from railway operations	1,020		895		2,881		2,524		1,065		1,026		2,031		1,861

Other income – net	30		39		67		127		22		29		66		37
Interest expense on debt	142		134		409		416		153		131		302		267

Income before income taxes	908		800		2,539		2,235		934		924		1,795		1,631

Income taxes	206		294		575		799		212		214		396		369

Net income	$	702	$	506	$	1,964	$	1,436	$	722	$	710	$	1,399	$	1,262

Per share amounts:
Net income
Earnings per share:
Basic	$	2.54	$	1.76	$	7.00	$	4.96	$	2.72	$	2.52	$	5.25	$	4.46
Diluted	2.52		1.75		6.95		4.93		2.70		2.50		5.21		4.43

Dividends	0.80		0.61		2.24		1.83


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

Assets
Current assets:
Cash and cash equivalents	$	729		$	690		$	274		$	358
Accounts receivable – net	1,043			955			1,039			1,009
Materials and supplies	267			222			256			207
Other current assets	70			282			345			288
Total current assets	2,109			2,149			1,914			1,862

Investments	3,109			2,981			3,301			3,109
Properties less accumulated depreciation of $12,276 and
$11,909, respectively	30,712			30,330
Properties less accumulated depreciation of $12,372
and $12,374, respectively							31,201			31,091
Other assets	392			251			756			177

Total assets	$	36,322		$	35,711		$	37,172		$	36,239

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,394		$	1,401		$	1,407		$	1,505
Short-term debt	—			100
Income and other taxes	230			211			270			255
Other current liabilities	317			233			373			246
Current maturities of long-term debt	500			600			401			585
Total current liabilities	2,441			2,545			2,451			2,591

Long-term debt	10,635			9,136			11,076			10,560
Other liabilities	1,302			1,347			1,738			1,266
Deferred income taxes	6,464			6,324			6,596			6,460

Total liabilities	20,842			19,352			21,861			20,877

Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 272,346,940 and 284,157,187 shares,
authorized; outstanding 263,406,773 and 268,098,472 shares,
respectively, net of treasury shares	274			285			265			269
Additional paid-in capital	1,996			2,254			2,226			2,216
Accumulated other comprehensive loss	(435		)	(356		)	(557		)	(563		)
Retained income	13,645			14,176			13,377			13,440

Total stockholders’ equity	15,480			16,359			15,311			15,362

Total liabilities and stockholders’ equity	$	36,322		$	35,711		$	37,172		$	36,239



	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

Comprehensive income:
Net income										722			722
Other comprehensive income							3						3
Total comprehensive income													725
Dividends on common stock,
$0.86 per share										(228		)	(228		)
Share repurchases	(2		)	(22		)				(526		)	(550		)
Stock-based compensation				35						(2		)	33

Balance at June 30, 2019	$	265		$	2,226		$	(557	)	$	13,377		$	15,311



	September 30, 2018		December 31, 2017
	($ in millions)
Customer	$	781	$	703
Non-customer	262		252
Accounts receivable – net	$	1,043	$	955



	Second Quarter			First Six Months
	Granted	Weighted-Average Grant-Date Fair Value		Granted	Weighted-Average Grant-Date Fair Value

Stock options	1,540	$	54.83	43,920	$	45.93
RSUs	2,870	203.25		211,190	163.87
PSUs	3,060	189.57		96,770	160.24



	Balance at Beginning of Year			Net Income (Loss)			Reclassification of Stranded Tax Effects			Reclassification Adjustments		Balance at End of Period
	($ in millions)
Six Months Ended June 30, 2019
Pensions and other
postretirement liabilities	$	(497	)	$	—		$	—		$	7	$	(490	)
Other comprehensive loss
of equity investees	(66		)	(1		)	—			—		(67		)

Accumulated other
comprehensive loss	$	(563	)	$	(1	)	$	—		$	7	$	(557	)

Six Months Ended June 30, 2018
Pensions and other
postretirement liabilities	$	(300	)	$	(11	)	$	(86	)	$	12	$	(385	)
Other comprehensive income
(loss) of equity investees	(56		)	2			(2		)	—		(56		)

Accumulated other
comprehensive loss	$	(356	)	$	(9	)	$	(88	)	$	12	$	(441	)



	Level 1			Level 2			Total
	($ in millions)

September 30, 2018
Long-term investments	$	—		$	39		$	39
Long-term debt, including current maturities	(12,304		)	(93		)	(12,397		)

December 31, 2017
Long-term investments	$	4		$	39		$	43
Long-term debt, including current maturities	(11,676		)	(95		)	(11,771		)


Units
Merchandise:
Chemicals	127.9	115.2	11%	375.8	348.6	8%	129.8	133.0	(2%)	255.7	259.6	(2%)
Agr./consumer/gov’t	155.3	147.8	5%	461.9	443.0	4%
Metals/construction	189.7	194.2	(2%)	548.0	556.0	(1%)
Agriculture products							141.3	137.4	3%	272.2	267.3	2%
Metals and construction							196.7	206.8	(5%)	370.6	382.7	(3%)
Automotive	98.4	96.6	2%	305.9	318.5	(4%)	101.8	104.7	(3%)	199.9	207.5	(4%)
Paper/clay/forest	74.5	73.4	1%	215.8	214.3	1%
Forest and consumer							68.6	73.6	(7%)	138.0	144.5	(4%)
Merchandise	645.8	627.2	3%	1,907.4	1,880.4	1%	638.2	655.5	(3%)	1,236.4	1,261.6	(2%)
Intermodal	1,116.2	1,035.2	8%	3,257.2	3,013.7	8%	1,048.5	1,091.8	(4%)	2,119.5	2,141.0	(1%)
Coal	255.8	266.6	(4%)	778.5	792.3	(2%)	258.3	273.6	(6%)	494.6	522.7	(5%)

Total	2,017.8	1,929.0	5%	5,943.1	5,686.4	5%	1,945.0	2,020.9	(4%)	3,850.5	3,925.3	(2%)


Revenue per Unit
Merchandise:
Chemicals	$	3,661	$	3,624	1%	$	3,626	$	3,586	1%	$	3,646	$	3,495	4%	$	3,617	$	3,539	2%
Agr./consumer/gov’t	2,756		2,626		5%	2,694		2,610		3%
Metals/construction	2,018		1,945		4%	2,025		1,959		3%
Agriculture products											2,870		2,759		4%	2,906		2,752		6%
Metals and construction											2,112		1,997		6%	2,161		2,009		8%
Automotive	2,486		2,256		10%	2,422		2,239		8%	2,471		2,421		2%	2,513		2,392		5%
Paper/clay/forest	2,867		2,699		6%	2,791		2,668		5%
Forest and consumer											3,057		2,825		8%	3,064		2,790		10%
Merchandise	2,690		2,550		5%	2,653		2,542		4%	2,751		2,621		5%	2,784		2,634		6%
Intermodal	669		600		12%	656		592		11%	668		654		2%	670		650		3%
Coal	1,812		1,687		7%	1,752		1,662		5%	1,815		1,704		7%	1,826		1,723		6%
Total	1,461		1,384		6%	1,441		1,386		4%	1,504		1,434		5%	1,497		1,430		5%



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

	Merchandise		Intermodal		Coal			Merchandise		Intermodal		Coal

Volume	$	47	$	49	$	(18	)	$	68	$	144	$	(23	)
Fuel surcharge
revenue	41		49		8			84		125		12
Rate, mix and
other	49		27		25			127		84		59

Total	$	137	$	125	$	15		$	279	$	353	$	48



	(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) (3)}	Programs ⁽³⁾

July 1-31, 2018	659,655	157.04	657,377	51,004,923
August 1-31, 2018	6,548,145	169.93	6,544,993	44,459,930
September 1-30, 2018	802,299	180.29	801,933	43,657,997

Total	8,010,099		8,004,303


⁽¹⁾	Of this amount, ~~5,796~~10,299 represent shares tendered by employees in connection with the exercise of options under the stockholder-approved Long-Term Incentive Plan.


⁽²⁾	~~Total number of shares purchased as part of publicly announced plans or programs includes 5.7 million shares purchased under the ASR (see Note 5).~~


⁽³⁾	On September 26, 2017, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2022. As of ~~September~~June 30, ~~2018, 43.7~~2019, 33.7 million shares remain authorized for repurchase.




4.1	~~Second~~Third Supplemental Indenture, dated as of ~~August 2, 2018,~~May 8, 2019, between ~~the Registrant~~Norfolk Southern Corporation and U.S. Bank National Association, ~~as Trustee. The Indenture~~ is incorporated by reference herein to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed ~~August 2, 2018. SEC File~~on May 8, 2019.

10.1	Amendment No. ~~001-08339.~~14, dated as of May 31, 2019, to Transfer and Administration Agreement, dated as of November 8, 2007, is incorporated by reference herein to Exhibit 10.1 to Norfolk Southern Corporation’s Form 8-K filed on June 3, 2019.

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

* Filed herewith.



		NORFOLK SOUTHERN CORPORATION Registrant



Date:	~~October~~July 24, ~~2018~~2019	/s/ ~~Thomas E. Hurlbut~~Jason A. Zampi
		~~Thomas E. Hurlbut~~Jason A. Zampi Vice President and Controller (Principal Accounting Officer) (Signature)


Date:	~~October~~July 24, ~~2018~~2019	/s/ Denise W. Hutson
		Denise W. Hutson Corporate Secretary (Signature)