Form 10-Q NORFOLK SOUTHERN CORP For: Mar 31

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April 25, 2018 11:08 AM EDT

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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 MARCH 31, 2018

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

Commission file number 1-8339

NORFOLK SOUTHERN CORPORATION

(Exact name of registrant as specified in its charter)



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

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

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 [ ]

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 March 31, 2018
Common Stock ($1.00 par value per share)		282,541,886 (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 First Quarter of 2018 and 2017	3
		Consolidated Statements of Comprehensive Income First Quarter of 2018 and 2017	4
		Consolidated Balance Sheets At March 31, 2018 and December 31, 2017	5
		Consolidated Statements of Cash Flows First Three Months of 2018 and 2017	6
		Notes to Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
	Item 4.	Controls and Procedures	25

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.	Exhibits	28

		Signatures	29

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)



	First Quarter
	2018		2017
	($ in millions, except per share amounts)

Railway operating revenues	$	2,717	$	2,575

Railway operating expenses:
Compensation and benefits	737		759
Purchased services and rents	401		377
Fuel	266		213
Depreciation	272		259
Materials and other	206		210

Total railway operating expenses	1,882		1,818

Income from railway operations	835		757

Other income – net	8		40
Interest expense on debt	136		142

Income before income taxes	707		655

Income taxes	155		222

Net income	$	552	$	433

Per share amounts:
Net income
Basic	$	1.94	$	1.49
Diluted	1.93		1.48

Dividends	0.72		0.61

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)



	First Quarter
	2018			2017
	($ in millions)

Net income	$	552		$	433
Other comprehensive income (loss), before tax:
Pension and other postretirement benefit (expense)	(7		)	7
Other comprehensive income (loss) of equity investees	1			(2		)
Other comprehensive income (loss), before tax	(6		)	5

Income tax benefit (expense) related to items of
other comprehensive income (loss)	2			(3		)

Other comprehensive income (loss), net of tax	(4		)	2

Total comprehensive income	$	548		$	435

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)



	March 31, 2018			December 31, 2017
	($ in millions)

Assets
Current assets:
Cash and cash equivalents	$	1,072		$	690
Accounts receivable – net	973			955
Materials and supplies	245			222
Other current assets	189			282
Total current assets	2,479			2,149

Investments	3,020			2,981
Properties less accumulated depreciation of $12,076 and
$11,909, respectively	30,396			30,330
Other assets	267			251

Total assets	$	36,162		$	35,711

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,217		$	1,401
Short-term debt	50			100
Income and other taxes	217			211
Other current liabilities	304			233
Current maturities of long-term debt	600			600
Total current liabilities	2,388			2,545

Long-term debt	9,637			9,136
Other liabilities	1,352			1,347
Deferred income taxes	6,367			6,324
Total liabilities	19,744			19,352

Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 282,541,886 and 284,157,187 shares,
respectively, net of treasury shares	284			285
Additional paid-in capital	2,255			2,254
Accumulated other comprehensive loss	(448		)	(356		)
Retained income	14,327			14,176

Total stockholders’ equity	16,418			16,359

Total liabilities and stockholders’ equity	$	36,162		$	35,711

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)



		First Three Months
		2018			2017
		($ in millions)

Cash flows from operating activities:
	Net income	$	552		$	433
	Reconciliation of net income to net cash provided by operating activities:
	Depreciation	272			260
	Deferred income taxes	45			56
	Gains and losses on properties	(8		)	(9		)
	Changes in assets and liabilities affecting operations:
	Accounts receivable	(26		)	(53		)
	Materials and supplies	(23		)	(24		)
	Other current assets	13			31
	Current liabilities other than debt	12			188
	Other – net	(21		)	(36		)

	Net cash provided by operating activities	816			846

Cash flows from investing activities:
	Property additions	(383		)	(438		)
	Property sales and other transactions	13			35
	Investment purchases	(2		)	(2		)
	Investment sales and other transactions	1			1

	Net cash used in investing activities	(371		)	(404		)

Cash flows from financing activities:
	Dividends	(205		)	(177		)
	Common stock transactions	(1		)	34
	Purchase and retirement of common stock	(300		)	(200		)
	Proceeds from borrowings – net of issuance costs	543			—
	Debt repayments	(100		)	(100		)

	Net cash used in financing activities	(63		)	(443		)

	Net increase (decrease) in cash and cash equivalents	382			(1		)

Cash and cash equivalents:
	At beginning of year	690			956

	At end of period	$	1,072		$	955

Supplemental disclosures of cash flow information:
	Cash paid during the period for:
	Interest (net of amounts capitalized)	$	69		$	70
	Income taxes (net of refunds)	7			12

See accompanying notes to consolidated financial statements.

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 March 31, 2018, and December 31, 2017, our results of operations and comprehensive income for the first quarters of 2018 and 2017, and our cash flows for the first three months of 2018 and 2017 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 Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers,” and related amendments which are jointly referred to as Accounting Standards Codification (ASC) Topic 606. This update replaced most existing revenue recognition guidance in GAAP and requires entities to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. FASB ASC Topic 606 defines a performance obligation as a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. We adopted the provisions of this standard on January 1, 2018, using the modified retrospective method. There was no cumulative effect of initially applying ASC Topic 606, nor is there any material difference in first quarter 2018 revenue as compared with the GAAP that was in effect prior to January 1, 2018.

The following table disaggregates our revenues by major commodity group (in millions):



	First Quarter
	2018
Merchandise:
Chemicals	$	443
Agr./consumer/gov’t		393
Metals/construction		338
Automotive		243
Paper/clay/forest		188
Merchandise		1,605
Intermodal		678
Coal		434
Total	$	2,717

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 major 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, 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 ($ millions):



	March 31, 2018		December 31, 2017
	($ in millions)
Customer	$	751	$	703
Non-customer	222		252
Accounts receivable - net	$	973	$	955

Non-customer receivables include non-revenue-related amounts due from other railroads, governmental entities, and others. “Other assets” includes non-current customer receivables of $47 million and $39 million at March 31, 2018 and December 31, 2017, respectively. We do not have any material contract assets or liabilities.

Certain of our contracts contain refunds (which are primarily volume-based incentives) that are recorded as a reduction to revenue. Refunds are recorded on the basis of management’s best estimate of projected liability, which is based on historical activity, current shipment counts and expectation of future activity.

Certain accessorial 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 4% of total “Railway operating revenues.”

2. Stock-Based Compensation



	First Quarter
	2018		2017
	($ in millions)
Stock-based compensation expense	$	16	$	27
Total tax benefit	14		30

During the first quarter of 2018, a committee of nonemployee members of our Board of Directors (and the Chief Executive Officer 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), as follows:



	Granted	Weighted-Average Grant-Date Fair Value

Stock options	40,960	$	41.70
Restricted stock units	215,880	148.32
Performance share units	91,914	91.55

Beginning in 2018, recipients of certain RSUs and PSUs pursuant to the LTIP who retire prior to October 1st will forfeit awards received in the current year.

Stock Options



	First Quarter
	2018		2017
	($ in millions)
Stock options exercised	254,982		885,722
Cash received upon exercise	$	17	$	49
Related tax benefit realized	$	4	$	16

Restricted Stock Units

RSUs primarily have a four-year ratable restriction period and will be settled through the issuance of shares of Norfolk Southern common stock (Common Stock). Compensation cost for the award is recognized on a straight-line basis over the requisite service period for the entire award. 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.



	First Quarter
	2018		2017
	($ in millions)
RSUs vested	160,200		137,200
Common Stock issued net of tax withholding	99,968		81,318
Related tax benefit realized	$	3	$	3

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.



	First Quarter
	2018		2017
	($ in millions)
PSUs earned	154,189		171,080
Common Stock issued net of tax withholding	94,399		99,805
Related tax benefit realized	$	3	$	1

3. Earnings Per Share

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



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

Net income	$	552		$	433		$	552		$	433
Dividend equivalent payments	(1		)	(1		)	(1		)	(1		)

Income available to common stockholders	$	551		$	432		$	551		$	432

Weighted-average shares outstanding	283.5			290.3			283.5			290.3
Dilutive effect of outstanding options
and share-settled awards							2.4			2.5

Adjusted weighted-average shares outstanding							285.9			292.8

Earnings per share	$	1.94		$	1.49		$	1.93		$	1.48

During the first quarters of 2018 and 2017, dividend equivalent payments were made to holders of stock options and RSUs. For purposes of computing basic earnings per share, dividend equivalent payments made to holders of stock options and RSUs were deducted from net income to determine income available to common stockholders. For purposes of computing diluted earnings per share, we evaluate on a grant-by-grant basis those stock options and RSUs receiving dividend equivalent payments under the two-class and treasury stock methods to determine which method is more dilutive for each grant. For those grants for which the two-class method was more dilutive, net income was reduced by dividend equivalent payments to determine income available to common stockholders. The dilution calculations exclude options having exercise prices exceeding the average market price of Common Stock of zero and 0.5 million for the quarters ended March 31, 2018 and 2017, respectively.

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, 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	)

Three Months Ended March 31, 2017
Pensions and other
postretirement liabilities	$	(414	)	$	—		$	—		$	4	$	(410	)
Other comprehensive loss
of equity investees	(73		)	(2		)	—			—		(75		)

Accumulated other comprehensive loss	$	(487	)	$	(2	)	$	—		$	4	$	(485	)

In February 2018, the FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This update is intended to reclassify the stranded tax effects resulting from the Tax Cuts and Jobs Act (“tax reform”) that was enacted on December 22, 2017 from accumulated other comprehensive income (AOCI) to retained earnings. The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in AOCI and the amount that would have been charged or credited directly to other comprehensive income using the newly enacted U.S. federal corporate income tax rate. In the first quarter of 2018, we adopted the provisions of ASU 2018-02 resulting in an increase to “Accumulated other comprehensive loss” of $88 million and a corresponding increase to “Retained income,” with no impact on “Total stockholders’ equity.”

5. Stock Repurchase Program

We repurchased and retired 2.1 million and 1.7 million shares of Common Stock under our stock repurchase program in the first quarters of 2018 and 2017, respectively, at a cost of $300 million and $200 million, respectively. Since the beginning of 2006, we have repurchased and retired 170.6 million shares at a total cost of $11.6 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 $1.3 billion at both March 31, 2018, and December 31, 2017.

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 $35 million for the first quarters of 2018 and 2017, respectively. Our equity in the earnings of Conrail, net of amortization, included in “Purchased services and rents” was $16 million and $10 million for the first quarters of 2018 and 2017, respectively.

“Other liabilities” includes $280 million at both March 31, 2018, and December 31, 2017, 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 to TTX for use of equipment are included in “Purchased services and rents” and amounted to $66 million and $57 million of expense for the first quarters of 2018 and 2017, respectively. Our equity in the earnings of TTX, also included in “Purchased services and rents,” totaled $16 million and $8 million for the first quarters of 2018 and 2017, respectively.

7. Debt

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

We have a $350 million accounts receivable securitization program expiring in June 2018. There was $50 million and $100 million outstanding under this program at March 31, 2018, and December 31, 2017, respectively, reflected as “Short-term debt” on the Consolidated Balance Sheets.

8. 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 first quarters are as follows:



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

Service cost	$	10		$	9		$	2		$	2
Interest cost	20			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	)

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 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, whereas under the previous standard all components were included in “Compensation and benefits.”

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

9. Fair Values of Financial Instruments

The fair values of “Cash and cash equivalents,” “Accounts receivable,” “Accounts payable,” and “Short-term debt” approximate carrying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life insurance is recorded at cash surrender value and, accordingly, approximates fair value. Other than these assets and liabilities that approximate fair value, there are no other assets or liabilities measured at fair value on a recurring basis at March 31, 2018, or December 31, 2017. The carrying amounts and estimated fair values for the remaining financial instruments, excluding investments accounted for under the equity method, consisted of the following:



	March 31, 2018						December 31, 2017
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
	($ in millions)

Long-term investments	$	26		$	43		$	26		$	43
Long-term debt, including current maturities	(10,237		)	(11,780		)	(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)

March 31, 2018
Long-term investments	$	4		$	39		$	43
Long-term debt, including current maturities	(11,685		)	(95		)	(11,780		)

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

10. 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 and other respiratory diseases, as well as conditions allegedly related to repetitive motion) are often not caused by a specific accident or event but rather allegedly result from a claimed exposure over time. Many such claims are being asserted by former or retired employees, some of whom have not been employed in the rail industry for decades. The independent actuarial firm provides an estimate of the occupational claims liability based upon our history of claim filings, severity, payments, and other pertinent facts. The liability is dependent upon judgments we make as to the specific case reserves as well as judgments of the actuarial firm in the quarterly studies. The actuarial firm’s estimate of ultimate loss includes a provision for those claims that have been incurred but not reported. This provision is derived by analyzing industry data and projecting our experience. 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 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 $56 million and $58 million at March 31, 2018, and December 31, 2017, respectively (of which $15 million is classified as a current liability at both dates). At March 31, 2018, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 128 known locations and projects compared with 127 locations and projects at December 31, 2017. At March 31, 2018, 15 sites accounted for $35 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 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. 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. The FASB approved amendments that permit the use of the effective date as the date of initial application or a modified retrospective transition approach, with application in all comparative periods presented. We are evaluating which transition approach to adopt. We are currently evaluating the effects ASU 2016-02 will have on our consolidated financial statements and related disclosures. We disclosed $660 million in undiscounted operating lease obligations in our lease commitments footnote in our most recent 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 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 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 receivables have historically been insignificant, we do not expect this standard to have a material effect on our financial statements.

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 miles of road in 22 states and the District of Columbia, with service to every major container port in the eastern United States, and provides efficient connections to other rail carriers. We operate the most extensive intermodal network in the East and are a major transporter of coal, automotive, and industrial products.

We continued to make progress towards the goals in our strategic plan, posting record results in the first quarter. The operating ratio (a measure of the amount of operating revenues consumed by operating expenses) of 69.3% was a first-quarter record, as was income from railway operations, net income and diluted earnings per share. We are progressing with initiatives to improve the fluidity and resilience of our network while simultaneously positioning it for additional growth and efficiency.

SUMMARIZED RESULTS OF OPERATIONS

($ in millions, except per share amounts)



	First Quarter
	2018		2017		% change
Income from railway operations	$	835	$	757	10%
Net income	$	552	$	433	27%
Diluted earnings per share	$	1.93	$	1.48	30%
Railway operating ratio (percent)	69.3		70.6		(2%)

The increase in income from railway operations was a result of increased railway operating revenues. Traffic volume was up 3% and average revenue per unit growth was driven by pricing gains and higher fuel surcharge revenues, partially offset by mix related impacts due to increased intermodal volume. The rise in revenues was offset in part by increased railway operating expenses, driven by higher fuel expense and costs associated with overall lower network velocity. Net income and diluted earnings per share also benefited from a lower effective tax rate, primarily due to the enactment of tax reform in 2017.

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 group.



	First Quarter
Revenues	2018		2017		% change
Merchandise:
Chemicals	$	443	$	427	4%
Agr./consumer/gov’t	393		384		2%
Metals/construction	338		340		(1%)
Automotive	243		246		(1%)
Paper/clay/forest	188		187		1%
Merchandise	1,605		1,584		1%
Intermodal	678		571		19%
Coal	434		420		3%
Total	$	2,717	$	2,575	6%



Units
Merchandise:
Chemicals	120.8	118.6	2%
Agr./consumer/gov’t	148.3	149.5	(1%)
Metals/construction	164.6	168.4	(2%)
Automotive	102.8	110.5	(7%)
Paper/clay/forest	69.6	70.6	(1%)
Merchandise	606.1	617.6	(2%)
Intermodal	1,049.2	969.4	8%
Coal	249.1	259.6	(4%)
Total	1,904.4	1,846.6	3%



Revenue per Unit
Merchandise:
Chemicals	$	3,663	$	3,599	2%
Agr./consumer/gov’t	2,650		2,568		3%
Metals/construction	2,053		2,020		2%
Automotive	2,362		2,221		6%
Paper/clay/forest	2,704		2,651		2%
Merchandise	2,647		2,564		3%
Intermodal	647		589		10%
Coal	1,743		1,617		8%
Total	1,427		1,394		2%

First-quarter railway operating revenues increased $142 million over the same period last year. The table below reflects the components of the revenue change by major market group ($ in millions).



	First Quarter
	Increase (Decrease)

	Merchandise			Intermodal		Coal

Volume	$	(30	)	$	47	$	(17	)
Fuel surcharge revenue	18			31		2
Rate, mix and other	33			29		29

Total	$	21		$	107	$	14

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 almost 75% tied to OHD. In the first quarter of 2018, contracts tied to OHD accounted for about 95% of our fuel surcharge revenue, as price levels were below most of our surcharge trigger points in contracts tied to WTI. Revenues associated with these surcharges totaled $131 million and $80 million in the first quarters of 2018 and 2017, respectively.

Merchandise

Merchandise revenues increased in the first quarter as a result of higher average revenue per unit, driven by pricing gains and higher fuel surcharge revenues, offset by volume declines, as gains in chemicals shipments were more than offset by declines in the remaining groups.

Chemicals volume rose, driven by higher shipments of liquefied petroleum gas due to colder winter weather and increased shipments of plastics, partially offset by lower shipments of coal ash.

Agriculture, consumer products, and government volume was down slightly due to reduced network velocity as well as lower soybean shipments due to export market contraction and decreased corn shipments, partially offset by increased ethanol shipments.

Metals and construction volume declined, a result of lower aggregates, coil steel, and aluminum products traffic related to reduced network velocity. These decreases were partially offset by increased frac sand shipments for use in natural gas drilling in the Marcellus and Utica regions.

Automotive volume declined, driven by shortages in availability of multilevel equipment, reduced network velocity and decreases in U.S. light vehicle production.

Paper, clay, and forest products volume decreased in the first quarter. Woodchip volumes fell due to customer sourcing changes, in addition to a drop in lumber and graphic paper traffic. These declines were partially offset by increases in pulpboard and municipal waste shipments, a result of tightened truck capacity and growth with existing customers, respectively.

Merchandise revenues for the remainder of the year are expected to increase compared to last year, reflecting higher average revenue per unit, driven by pricing gains and higher fuel surcharge revenues, and higher volumes.

Intermodal

Intermodal revenues increased driven by higher average revenue per unit, a result of increased fuel surcharge revenues and pricing gains, and volume growth.

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



	First Quarter
	2018	2017	% change

Domestic	671.7	600.9	12%
International	377.5	368.5	2%

Total	1,049.2	969.4	8%

Domestic volume increases were the result of continued highway conversions due to tighter capacity in the truck market, higher truckload pricing, and growth in existing accounts. International volume rose due to increased demand from existing accounts.

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

Coal

Coal revenues increased, as higher average revenue per unit, the result of pricing gains and positive mix due to increased export traffic, was partially offset by volume decreases in the other markets.

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



	First Quarter
	2018	2017	% change

Utility	15,865	17,602	(10%)
Export	7,238	6,343	14%
Domestic metallurgical	3,147	3,367	(7%)
Industrial	1,260	1,471	(14%)

Total	27,510	28,783	(4%)

The decline in utility coal tonnage was driven primarily by network velocity issues and inclement weather. Export coal tonnage growth was a result of higher demand for U.S. coal. Domestic metallurgical coal tonnage decreased, driven by customer sourcing changes. Industrial coal tonnage fell, reflecting continued pressure from natural gas conversions and customer sourcing changes.

Coal revenues for the remainder of the year are expected to be flat as average revenue per unit will be lower due to market conditions that will influence pricing and changes in the mix of traffic.

Railway Operating Expenses

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



	First Quarter
	2018		2017		% change

Compensation and benefits	$	737	$	759	(3%)
Purchased services and rents	401		377		6%
Fuel	266		213		25%
Depreciation	272		259		5%
Materials and other	206		210		(2%)

Total	$	1,882	$	1,818	4%

Compensation and benefits expense decreased, reflecting changes in:


•	employment levels (down $24 million),


•	health and welfare benefit rates for agreement employees (down $8 million),


•	incentive and stock-based compensation (down $8 million), and


•	overtime and recrews (up $19 million).

Average rail headcount for the quarter was down by about 1,000 compared with the first-quarter 2017. Going forward, headcount is expected to remain relatively flat for the full year, as train and engine employee hiring will be largely offset by headcount reductions in other areas.

Purchased services and rents increased as follows ($ in millions):



	First Quarter
	2018		2017		% change

Purchased services	$	318	$	304	5%
Equipment rents	83		73		14%

Total	$	401	$	377	6%

The increase was primarily due to higher intermodal volume-related costs and decreased network velocity.

Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increased due primarily to higher locomotive fuel prices (up 21%) as well as increased consumption (up 2%).

Materials and other expenses declined as follows ($ in millions):



	First Quarter
	2018		2017		% change

Materials	$	90	$	92	(2%)
Casualties and other claims	47		40		18%
Other	69		78		(12%)

Total	$	206	$	210	(2%)

Materials costs decreased modestly, as lower roadway repairs were tempered by increased freight car and locomotive repairs. Casualties and other claims expenses include the estimates of costs related to personal injury, property damage, and environmental remediation matters. The increase was a result of higher damages related to derailments during the quarter. Other expense decreased, reflecting the inclusion of $18 million of net rental income from operating property within railway operating expenses previously included in “Other income – net.”

Other Income – Net

Other income – net declined $32 million in the first quarter driven primarily by lower returns on corporate-owned life insurance and the absence of net rental income as discussed above.

Income Taxes

The first-quarter effective tax rate was 21.9% compared with 33.9% for the same period last year. The decline is a result of the effects of the enactment of tax reform in 2017 that lowered the federal corporate income tax rate, as well as income tax benefits for certain 2017 tax credits enacted retroactively by the Bipartisan Budget Act of 2018, which was signed into law on February 9, 2018. We expect our full year effective rate to be around 24%.

FINANCIAL CONDITION AND LIQUIDITY

Cash provided by operating activities, our principal source of liquidity, was $816 million for the first three months of 2018, compared with $846 million for the same period of 2017, the result of increased incentive compensation payments partially offset by improved operating results. We had working capital of $91 million at March 31, 2018, compared with a working capital deficit of $396 million at December 31, 2017. Cash and cash equivalents totaled $1.1 billion at March 31, 2018. We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations.

During the first quarter of 2018, we issued $500 million of 4.15% senior notes due 2048. Other than this item, 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, 2017.

Cash used in investing activities was $371 million for the first three months of 2018, compared with $404 million in the same period last year, the decrease driven primarily by lower property additions.

Cash used in financing activities was $63 million in the first three months of 2018, compared with $443 million in the same period last year, primarily the result of increased proceeds from borrowing, partially offset by higher repurchases of common stock. We repurchased 2.1 million shares of Common Stock, totaling $300 million, in the first three months of 2018, compared to 1.7 million shares, totaling $200 million, in the same period last year. The timing and volume of future share repurchases will be guided by our assessment of market conditions and other pertinent factors. Any near-term purchases under the program are expected to be made with internally-generated cash, cash on hand, or proceeds from borrowings.

Our total debt-to-total capitalization ratio was 38.5% at March 31, 2018, and 37.5% at December 31, 2017.

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 March 31, 2018, and December 31, 2017, and are in compliance with all of its covenants. We have a $350 million accounts receivable securitization program expiring in June 2018. There was $50 million and $100 million outstanding under this program at March 31, 2018, and December 31, 2017, respectively.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of 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. There have been no significant changes to the application of the critical accounting policies disclosure contained in our Form 10-K at December 31, 2017.

OTHER MATTERS

Labor Agreements

Approximately 80% of our railroad employees are covered by collective bargaining agreements with various labor unions. Pursuant to the Railway Labor Act, these agreements remain in effect until new agreements are reached, or until the bargaining procedures mandated by the Railway Labor Act are completed. We largely bargain nationally in concert with other major railroads, represented by the National Carriers Conference Committee (NCCC). 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 formed three separate bargaining coalitions and the NCCC has reached agreements with 2 of these coalitions representing 10 separate unions and approximately 80% of the unionized workforce. Two of these agreements (applicable to approximately 10% of the unionized workforce) are still pending ratification by the union membership while the remainder are already final. The NCCC and the third coalition have agreed to resolve their contract dispute through binding arbitration. That arbitration decision is expected in late May and the contract will be final at that time. In accordance with the Railway Labor Act, current agreements will remain in effect during the statutory bargaining process. Separately, NS has reached agreement covering wages and work rules through 2019 with the Brotherhood of Locomotive Engineers and Trainmen (BLET), which represents approximately 4,600 NS engineers.

New Accounting Pronouncements

For a detailed discussion of new accounting pronouncements, see Note 11.

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 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 and herein, 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 Investor Relations 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 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 March 31, 2018. Based on such evaluation, our officers have concluded that, at March 31, 2018, 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 first quarter of 2018, we have not identified any changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors.

The risk factors included in our 2017 Form 10-K remain unchanged and are incorporated herein by reference with the exception of the following:

Significant governmental legislation and regulation over commercial, operating and environmental matters could affect us, our customers, and the markets we serve. Congress can enact laws that could increase economic regulation of the industry. Railroads presently are subject to commercial regulation by the STB, which has jurisdiction to varying extents over rates, routes, customer access provisions, fuel surcharges, conditions of service, and the extension or abandonment of rail lines. The STB also has jurisdiction over the consolidation, merger, or acquisition of control of and by rail common carriers. Additional economic regulation of the rail industry by Congress or the STB, whether under new or existing laws, could have a significant negative impact on our ability to determine prices for rail services and on the efficiency of our operations. This potential material adverse effect could also result in reduced capital spending on our rail network or abandonment of lines.

Railroads are also subject to the enactment of laws by Congress and regulation by the Department of Transportation and the Department of Homeland Security (which regulate most aspects of our operations) related to safety and security. The Rail Safety Improvement Act of 2008 (RSIA), the Surface Transportation Extension Act of 2015, and the implementing regulations promulgated by the Federal Railroad Association (collectively “the PTC laws and regulations”) require us (and each other Class I railroad) to implement, on certain mainline track where intercity and commuter passenger railroads operate and where toxic inhalation hazardous materials are transported, an interoperable positive train control system (PTC). PTC is a set of highly advanced technologies designed to prevent train-to-train collisions, speed-related derailments, and certain other accidents caused by human error, but PTC will not prevent all types of train accidents or incidents. The PTC laws and regulations require us to install all hardware and to implement the PTC system on some of those rail lines by December 31, 2018, and to implement such system on the remainder of those rail lines by December 31, 2020. In addition, other railroads’ implementation schedules could impose additional interoperability requirements and accelerated timelines on us, which could impact our operations over other railroads if not met.

Full implementation of PTC will result in additional operating costs and capital expenditures, and PTC implementation may result in reduced operational efficiency and service levels, as well as increased compensation and benefits expenses, and increased claims and litigation costs.

Our operations are subject to extensive federal and state environmental laws and regulations concerning, among other things, emissions to the air; discharges to waterways or groundwater supplies; handling, storage, transportation, and disposal of waste and other materials; and the cleanup of hazardous material or petroleum releases. The risk of incurring environmental liability, for acts and omissions, past, present, and future, is inherent in the railroad business. This risk includes property owned by us, whether currently or in the past, that is or has been subject to a variety of uses, including our railroad operations and other industrial activity by past owners or our past and present tenants.

Environmental problems that are latent or undisclosed may exist on these properties, and we could incur environmental liabilities or costs, the amount and materiality of which cannot be estimated reliably at this time, with respect to one or more of these properties. Moreover, lawsuits and claims involving other unidentified environmental sites and matters are likely to arise from time to time.

Concern over climate change has led to significant federal, state, and international legislative and regulatory efforts to limit greenhouse gas (GHG) emissions. Restrictions, caps, taxes, or other controls on GHG emissions, including diesel exhaust, could significantly increase our operating costs, decrease the amount of traffic handled, and decrease the value of coal reserves we own.

In addition, legislation and regulation related to GHGs could negatively affect the markets we serve and our customers. Even without legislation or regulation, government incentives and adverse publicity relating to GHGs could negatively affect the markets for certain of the commodities we carry and our customers that (1) use commodities that we carry to produce energy, including coal, (2) use significant amounts of energy in producing or delivering the commodities we carry, or (3) manufacture or produce goods that consume significant amounts of energy.

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⁾

January 1-31, 2018	661,196	151.24	661,196	55,809,039
February 1-28, 2018	670,296	142.08	668,527	55,140,512
March 1-31, 2018	757,034	138.77	756,616	54,383,896

Total	2,088,526		2,086,339


⁽¹⁾	Of this amount, 2,187 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 the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2022. As of March 31, 2018, 54.4 million shares remain authorized for repurchase.

Item 6. Exhibits.



3(ii)	The Bylaws of Norfolk Southern Corporation, as amended January 22, 2018, are incorporated by reference to Exhibit 99.1 to Norfolk Southern Corporation’s Form 8-K filed on January 22, 2018. SEC File No. 001-08339.

4.1	Indenture dated as of February 28, 2018, between the Registrant 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 February 28, 2018. SEC File No. 001-08339.

4.2	First Supplemental Indenture dated as of February 28, 2018, between the Registrant and U.S. Bank National Association, as Trustee. The Indenture is incorporated by reference herein to Exhibit 4.2 to Norfolk Southern Corporation’s Form 8-K filed February 28, 2018. SEC File No. 001-08339.

10.1,*	Norfolk Southern Corporation Executive Management Incentive Plan, as approved by shareholders May 14, 2015, and as amended March 27, 2018.

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 first quarter of 2018, formatted in Extensible Business Reporting Language (XBRL) includes (i) the Consolidated Statements of Income for the first quarter of 2018 and 2017; (ii) the Consolidated Statements of Comprehensive Income for the first quarter of 2018 and 2017; (iii) the Consolidated Balance Sheets at March 31, 2018 and December 31, 2017; (iv) the Consolidated Statements of Cash Flows for the first three months of 2018 and 2017; and (v) 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:	April 25, 2018	/s/ Thomas E. Hurlbut
		Thomas E. Hurlbut Vice President and Controller (Principal Accounting Officer) (Signature)


Date:	April 25, 2018	/s/ John M. Scheib
		John M. Scheib Executive Vice President Law and Administration and Chief Legal Officer (Signature)

EXHIBIT 10.1

NORFOLK SOUTHERN CORPORATION

EXECUTIVE MANAGEMENT INCENTIVE PLAN

AS APPROVED BY SHAREHOLDERS MAY 14, 2015,

AND AS AMENDED EFFECTIVE MARCH 27, 2018

The terms of this amended plan, as set forth below, were approved by the separate vote of the holders of a majority of the shares of Common Stock present or represented and entitled to vote at a meeting of the stockholders of the Corporation at which a quorum was present for the proposal on May 14, 2015. The Board of Directors of the Corporation subsequently amended Section V of the Plan on March 27, 2018, to allow the Committee to include or exclude gains or losses from property sales when determining whether the Corporate Performance Factor has been achieved under the Plan.

Section I. PURPOSE OF THE PLAN

It is the purpose of the Norfolk Southern Corporation Executive Management Incentive Plan (“Plan”) to enhance increased profitability for Norfolk Southern Corporation (“Corporation”) by rewarding certain officers elected by the Board of Directors of Norfolk Southern Corporation and its affiliates with a bonus for collectively striving to attain and surpass financial objectives. The Corporation intends that the Plan comply with the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended (“Code”) and intends that compensation paid under the Plan qualify as performance-based compensation under Code Section 162(m). Notwithstanding the preceding sentence, the Corporation reserves the right to pay compensation under the Plan that does not qualify as performance-based compensation under Code Section 162(m), as circumstances may warrant.

Section II. ADMINISTRATION OF THE PLAN

The Compensation Committee or any other committee of the Board of Directors of Norfolk Southern Corporation which is authorized to determine bonus awards under the Plan (“Committee”) shall administer and interpret this Plan and, from time to time, adopt such rules and regulations and make such recommendations to the Board of Directors concerning Plan changes as are deemed necessary to insure effective implementation of this Plan. It is intended that each member of the Committee qualify as an Outside Directors (as defined in Treasury Regulation § 1.162-27(e)(3)) and as an “independent director” under the rules of the New York Stock Exchange. No executive may simultaneously participate in more than one Norfolk Southern Corporation Incentive Group. An executive must reside in the United States or Canada in order to participate in the Plan.

Section III. ESTABLISHMENT OF PERFORMANCE STANDARDS

Not later than the first 90 days of an incentive year, the Committee shall establish:


A.	The Incentive Groups for the incentive year, which Groups shall consist of Board-elected officers at the level of Vice President and above,


B.	The bonus level for each Incentive Group for the incentive year, and

The performance standard or standards for the Corporation for the incentive year, the outcome of which must be substantially uncertain at the time the standard or standards are established. The performance standards shall be based on one or more, or any combination, of the following business criteria, selected by the Committee, which may be applied on a corporate, department or division level, which may be measured on an absolute or relative basis, or established as a measure of growth: earnings measures (including net income, earnings per share, income from continuing operations, income before income taxes, income from railway operations); return measures (including net income divided by total assets, return on shareholder equity, return on average invested capital); service measures (including connection performance, train performance, plan adherence); cash flow measures (including operating cash flow, free cash flow); productivity measures (including total operating expense per thousand gross ton miles or revenue ton miles, total operating revenue per employee, total operating expense per employee, gross ton miles or revenue ton miles per employee, carloads per employee, revenue ton miles per mile of road operated, total operating expense per carload, revenue ton miles per carload, gross ton miles or revenue ton miles per train hour, percent of loaded-to-total car miles, network performance); fair market value of shares of the Corporation's Common Stock; revenue measures; expense measures; operating ratio measures; customer satisfaction measures; working capital measures; cost control measures; economic value added measures; and safety measures. If the Committee establishes performance standards using more than one of the aforesaid business criteria, the Committee shall assign a weighting percentage to each business criterion or combination thereof; the sum of the weighting percentages shall equal 100%.

The Committee may establish performance standards solely with respect to the Corporation’s performance without regard to the performance of other Corporations or indices, or by comparison of the Corporation’s performance to the performance of a published or special index deemed applicable by the Committee including but not limited to, the Standard &

Poor's 500 Stock Index or an index based on a group of comparative companies.

Section IV. TYPE OF INCENTIVE BONUS

On or before a date which shall not be later than the date that is six months prior to the last day of the incentive year to which the performance standards established pursuant to Section III apply for any incentive bonus that is performance-based compensation, as defined in Code Section 409A, and which shall not be later than the last day of the year prior to the incentive year to which the performance standards established pursuant to Section III apply for any incentive bonus that is not performance-based compensation, as defined in Code Section 409A, each participant must elect to receive any incentive bonus which may be awarded to him or her for the incentive year either 100% cash or deferred in whole or in part. If the participant elects to receive 100% cash, the entire amount of the bonus for the incentive year shall be distributed to the participant, or to his or her estate in the event of the participant’s death, on or before March 1 of the year following the incentive year. If deferred in whole or in part, the amount deferred shall be allocated to the Norfolk Southern Corporation Executives’ Deferred Compensation Plan (and such deferrals will be governed by the provisions of that plan) on or before March 1 of the year following the incentive year and the remainder, if any, shall be distributed in cash to the participant, or to his or her estate in the event of the participant’s death, on or before March 2 of the year following the incentive year.

Failure on the part of the participant to elect a deferral by the date specified, either in whole or in part for the incentive year, shall be deemed to constitute an election by such participant to receive the entire incentive bonus for the incentive year as a cash bonus.

Section V. BONUS AWARDS

At the end of the incentive year, the Committee shall certify in writing to what extent the performance standards established pursuant to Section III have been achieved during the incentive year and shall determine the Corporate Performance Factor based on such achievement. In determining the Corporate Performance Factor, special charges and restructuring charges, and unusual or infrequent accounting adjustments which are significant, and restatements or reclassifications, all as determined in accordance with Generally Accepted Accounting Principles, which would have the effect of reducing the Corporate Performance Factor shall be excluded, and which would have the effect of increasing the Corporate Performance Factor shall be included, unless the Committee shall determine otherwise. The Committee shall further have the discretion, in determining whether the Corporate Performance Factor has been achieved, to include or exclude any of the following events: (a) litigation, claims, judgments, settlements or loss contingencies, (b) the effect of changes in tax law, accounting principles or other such laws or provisions affecting reported results, (c)

accruals of any amounts for payment under this Plan or any other compensation arrangement maintained by the Corporation, or (d) gains or losses from property sales.

Each participant shall be eligible to receive a bonus award equal to the product of the Corporate Performance Factor times the participant’s bonus level times the participant’s total salary paid during the incentive year. The Committee may review the performance of any of the Corporation’s Covered Employees, as defined in Code Section 162(m), and may, at its discretion, reduce the bonus award that is paid to any such Covered Employee. The Corporation’s chief executive officer may review the performance of any participant who is not a Covered Employee and may, at his discretion, reduce or increase the bonus award that is paid to any such participant, provided that any increase shall not exceed 25 percent of the amount calculated under the first sentence of this paragraph. The bonus award payable to a participant for an incentive year shall not exceed the lesser of: (1) three tenths of one percent (0.3%) of the Corporation’s income from railway operations for the incentive year; or (2) $10,000,000.

If the employment of a participant who is employed by Norfolk Southern Corporation or its affiliates during the incentive year terminates prior to the end of such year by reason of (1) death, or (2) normal retirement, early retirement or total disability under applicable Norfolk Southern Corporation plans and policies, then the phrase "total salary paid during the incentive year" means base salary paid to the participant during that portion of such year of employment prior to his or her termination and through the end of the calendar month or payroll period in which employment terminates but excludes any cash paid with respect to such participant's unused vacation. No incentive bonus for any incentive year shall be awarded or paid to any participant whose employment with Norfolk Southern Corporation and all its affiliates terminates before the end of such incentive year for a reason other than one of those specifically stated in the preceding sentence.

If a participant becomes eligible for the Plan during the year or becomes eligible for a different Incentive Group, then the amount of the award shall be adjusted proportionally to reflect such changes.

Section VI. REIMBURSEMENT OF EXCESS BONUS TO CORPORATION

The Board of Directors may require reimbursement of all or any portion of an excess bonus paid under the Plan if (a) financial results are restated due to the material noncompliance of the Corporation with any financial reporting requirement under the securities laws, and (b) an excess bonus was distributed within the three-year period prior to the date the applicable restatement was disclosed. For this purpose, “excess bonus” means the positive difference, if any, between (i) the bonus paid to the participant and (ii) the bonus that would have been paid to the participant had the bonus been calculated on the correct Corporate Performance Factor using the restated financial results. The Corporation will not be required to award an additional bonus to a

participant if a restated Corporate Performance Factor would result in a higher bonus payment.

Any bonus to a participant under this Plan is subject to reduction, forfeiture, or recoupment to the extent provided under Section 304 of the Sarbanes-Oxley Act of 2002, Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or as may be provided under any other applicable law.

Section VII. NO GUARANTEE OF CONTINUANCE OF EMPLOYMENT

Nothing contained in this Plan or in any designation of a participant hereunder shall constitute or be deemed to constitute any evidence of an agreement or obligation on the part of Norfolk Southern Corporation or its affiliates to continue to employ any such participant for any period whatsoever.

Section VIII. AMENDMENT TO AND TERMINATION OF PLAN

This Plan may be amended by written action of the chief executive officer of the Corporation to effect changes which are, in his or her sole judgment and discretion, ministerial, substantively administrative, or necessary to comply with statutory or other legally mandated requirements, and the implementation of which does not result in a material cost to the Corporation. All other amendments to this Plan shall be made by resolution duly adopted by the Board of Directors. This Plan may be amended in any manner or terminated at any time, except that no such amendment or termination shall deprive a participant of any rights hereunder theretofore legally accrued, and no such termination shall be effective for the year in which the Board of Directors adopts a resolution terminating this Plan.

Section IX. FUNDING SOURCE

All amounts that are payable under this Plan shall be paid for from the general assets of the Corporation. There is no trust or other fund from which amounts under this Plan shall be paid.

Section X. GOVERNING LAW

This Plan shall be construed, administered and enforced according to the laws of the Commonwealth of Virginia, to the extent not superseded by the Code or other federal law.

Section XI. NON-ASSIGNABILITY OF BENEFITS

A participant’s right to receive a payment hereunder is not subject in any manner to anticipation, allocation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to accomplish any of these acts shall be void.

Exhibit 31-A

CERTIFICATIONS

I, James A. Squires, certify that:


1.	I have reviewed this Quarterly Report on Form 10-Q of Norfolk Southern Corporation;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: April 25, 2018



	/s/ James A. Squires
	James A. Squires
	Chairman, President and Chief Executive Officer

Exhibit 31-B

CERTIFICATIONS

I, Cynthia C. Earhart, certify that:


1.	I have reviewed this Quarterly Report on Form 10-Q of Norfolk Southern Corporation;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: April 25, 2018



	/s/ Cynthia C. Earhart
	Cynthia C. Earhart
	Executive Vice President Finance and Chief Financial Officer

Exhibit 32

CERTIFICATIONS OF CEO AND CFO REQUIRED BY RULE 13a-14(b) OR RULE

15d-14(b) AND SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE U.S. CODE

I certify, to the best of my knowledge, that the Quarterly Report on Form 10-Q for the period ended

March 31, 2018, of Norfolk Southern Corporation fully complies with the requirements of Section 13(a) or

15(d) of the Securities Exchange Act of 1934 and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Norfolk Southern Corporation.



Signed:	/s/ James A. Squires
	James A. Squires
	Chairman, President and Chief Executive Officer
	Norfolk Southern Corporation

Dated: April 25, 2018

I certify, to the best of my knowledge, that the Quarterly Report on Form 10-Q for the period ended

March 31, 2018, of Norfolk Southern Corporation fully complies with the requirements of Section 13(a) or



Signed:	/s/ Cynthia C. Earhart
	Cynthia C. Earhart
	Executive Vice President Finance and Chief Financial Officer
	Norfolk Southern Corporation

Dated: April 25, 2018

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Form 10-Q NORFOLK SOUTHERN CORP For: Mar 31

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