NORFOLK SOUTHERN CORP (Form: 10-K, Received: 02/04/2021 12:10:48)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended DECEMBER 31, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from ___________ to___________

Commission File Number 1-8339

NORFOLK SOUTHERN CORPORATION

(Exact name of registrant as specified in its charter)


Virginia		52-1188014
(State or other jurisdiction of incorporation or organization)		(I.R.S Employer Identification No.)
Three Commercial Place		23510-2191
Norfolk,	Virginia
(Address of principal executive offices)		(Zip Code)
(757)		629-2680
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


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

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ 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 ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The aggregate market value of the voting common equity held by non-affiliates at June 30, 2020 was $44,745,974,634 (based on the closing price as quoted on the New York Stock Exchange on June 30, 2020).

The number of shares outstanding of each of the registrant’s classes of common stock, at January 31, 2021: 251,911,634 (excluding 20,320,777 shares held by the registrant’s consolidated subsidiaries).

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant’s definitive proxy statement to be filed electronically pursuant to Regulation 14A not later than 120 days after the end of the fiscal year, are incorporated herein by reference in Part III.

TABLE OF CONTENTS

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES


			Page
Part I.	Items 1 and 2.	Business and Properties	K 3
	Item 1A.	Risk Factors	K 11
	Item 1B.	Unresolved Staff Comments	K 14
	Item 3.	Legal Proceedings	K 15
	Item 4.	Mine Safety Disclosures	K 15
		Information About Our Executive Officers	K 16

Part II.	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and
		Issuer Purchases of Equity Securities	K 17
	Item 6.	Selected Financial Data	K 18
	Item 7.	Management’s Discussion and Analysis of Financial Condition and
		Results of Operations	K 19
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	K 32
	Item 8.	Financial Statements and Supplementary Data	K 33
	Item 9.	Changes in and Disagreements with Accountants on Accounting and
		Financial Disclosure	K 77
	Item 9A.	Controls and Procedures	K 77
	Item 9B.	Other Information	K 77

Part III.	Item 10.	Directors, Executive Officers and Corporate Governance	K 78
	Item 11.	Executive Compensation	K 78
	Item 12.	Security Ownership of Certain Beneficial Owners and Management
		and Related Stockholder Matters	K 79
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	K 81
	Item 14.	Principal Accounting Fees and Services	K 81

Part IV.	Item 15.	Exhibit s and Financial Statement Schedule	K 82
	Item 16.	Form 10-K Summary	K92

		Power of Attorney	K 93

		Signatures	K 93

PART I

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

Item 1. Business and Item 2. Properties

GENERAL – Norfolk Southern Corporation (Norfolk Southern) is a Norfolk, Virginia-based company that owns a major freight railroad, Norfolk Southern Railway Company (NSR). We were incorporated on July 23, 1980, under the laws of the Commonwealth of Virginia. Our common stock (Common Stock) is listed on the New York Stock Exchange (NYSE) under the symbol “NSC.”

Unless indicated otherwise, Norfolk Southern Corporation and its subsidiaries, including NSR, are referred to collectively as NS, we, us, and our.

We are primarily engaged in the rail transportation of raw materials, intermediate products, and finished goods primarily in the Southeast, East, and Midwest and, via interchange with rail carriers, to and from the rest of the United States (U.S.). We also transport overseas freight through several Atlantic and Gulf Coast ports. We offer the most extensive intermodal network in the eastern half of the U.S.

We make available free of charge through our website, www.norfolksouthern.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the U.S. Securities and Exchange Commission (SEC). In addition, the following documents are available on our website and in print to any shareholder who requests them:

•Corporate Governance Guidelines

•Charters of the Committees of the Board of Directors

•The Thoroughbred Code of Ethics

•Code of Ethical Conduct for Senior Financial Officers

•Categorical Independence Standards for Directors

•Norfolk Southern Corporation Bylaws

RAILROAD OPERATIONS – At December 31, 2020, we operated approximately 19,300 route miles in 22 states and the District of Columbia.

Our system reaches many manufacturing plants, electric generating facilities, mines, distribution centers, transload facilities, and other businesses located in our service area.

Corridors with heaviest freight volume:

•New York City area to Chicago (via Allentown and Pittsburgh)

•Chicago to Macon (via Cincinnati, Chattanooga, and Atlanta)

•Central Ohio to Norfolk (via Columbus and Roanoke)

•Birmingham to Meridian

•Cleveland to Kansas City

•Memphis to Chattanooga

The miles operated, which include major leased lines between Cincinnati and Chattanooga, and an exclusive operating agreement for trackage rights over property owned by North Carolina Railroad Company, were as follows:


	Mileage Operated at December 31, 2020
	Route Miles	Second and Other Main Track	Passing Track, Crossovers and Turnouts	Way and Yard Switching	Total

Owned	14,540	2,678	2,004	8,310	27,532
Operated under lease, contract or trackage
rights	4,795	1,889	406	840	7,930

Total	19,335	4,567	2,410	9,150	35,462

We operate freight service over lines with significant ongoing Amtrak and commuter passenger operations and conduct freight operations over trackage owned or leased by Amtrak, New Jersey Transit, Southeastern Pennsylvania Transportation Authority, Metro-North Commuter Railroad Company, Maryland Department of Transportation, and Michigan Department of Transportation.

The following table sets forth certain statistics relating to our operations for the past five years:


	Years ended December 31,
	2020		2019		2018		2017		2016

Revenue ton miles (billions)	164		194		207		201		191
Revenue per thousand revenue ton miles	$	59.67	$	58.21	$	55.25	$	52.38	$	51.91
Revenue ton miles (thousands) per railroad employee	8,191		7,939		7,822		7,474		6,838
Ratio of railway operating expenses to railway
operating revenues (railway operating ratio)	69.3%		64.7%		65.4%		66.6%		69.6%

RAILWAY OPERATING REVENUES – Total railway operating revenues were $9.8 billion in 2020. Following is an overview of our three commodity groups. See the discussion of merchandise revenues by major commodity group, intermodal revenues, and coal revenues and tonnage in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

MERCHANDISE – Our merchandise commodity group is composed of four groupings:

•Agriculture, forest and consumer products includes soybeans, wheat, corn, fertilizer, livestock and poultry feed, food products, food oils, flour, sweeteners, ethanol, lumber and wood products, pulp board and paper products, wood fibers, wood pulp, scrap paper, beverages, canned goods, and consumer products.

•Chemicals includes sulfur and related chemicals, petroleum products (including crude oil), chlorine and bleaching compounds, plastics, rubber, industrial chemicals, chemical wastes and sand.

•Metals and construction includes steel, aluminum products, machinery, scrap metals, cement, aggregates, minerals, clay, transportation equipment, and items for the U.S. military.

•Automotive includes finished motor vehicles and automotive parts.

In 2020, we handled 2.1 million merchandise carloads, which accounted for 62% of our total railway operating revenues.

INTERMODAL – Our intermodal commodity group consists of shipments moving in domestic and international containers and trailers. These shipments are handled on behalf of intermodal marketing companies, international steamship lines, premium customers and asset owning companies. In 2020, we handled 4.0 million intermodal units, which accounted for 27% of our total railway operating revenues.

COAL – Coal revenues accounted for 11% of our total railway operating revenues in 2020. We handled 64 million tons, or 0.6 million carloads, most of which originated on our lines from major eastern coal basins, with the balance from major western coal basins received via the Memphis and Chicago gateways. Our coal franchise supports the electric generation market, serving approximately 50 coal-fired power plants, as well as the export, domestic metallurgical and industrial markets, primarily through direct rail and river, lake, and coastal facilities, including various terminals on the Ohio River, Lamberts Point in Norfolk, Virginia, the Port of Baltimore, and Lake Erie.

FREIGHT RATES – Our predominant pricing mechanisms, private contracts and exempt price quotes, are not subject to regulation. In general, market forces are the primary determinant of rail service prices.

RAILWAY PROPERTY

Our railroad infrastructure makes us capital intensive with net properties of approximately $31 billion on a historical cost basis.

Property Additions – Property additions for the past five years were as follows:


	2020		2019		2018		2017		2016
	($ in millions)

Road and other property	$	1,046	$	1,371	$	1,276	$	1,210	$	1,292
Equipment	448		648		675		513		595


Total	$	1,494	$	2,019	$	1,951	$	1,723	$	1,887

Our capital spending and replacement programs are and have been designed to assure the ability to provide safe, efficient, and reliable rail transportation services.

Equipment – At December 31, 2020, we owned or leased the following units of equipment:


	Owned	Leased	Total	Capacity of Equipment
Locomotives:				(Horsepower)
Multiple purpose	3,060	—	3,060	11,901,400
Auxiliary units	138	—	138	—
Switching	4	—	4	4,400

Total locomotives	3,202	—	3,202	11,905,800

Freight cars:				(Tons)
Gondola	18,958	3,203	22,161	2,460,176
Hopper	8,723	—	8,723	992,956
Covered hopper	5,951	—	5,951	661,573
Box	2,851	617	3,468	312,994
Flat	1,494	85	1,579	133,586
Other	1,559	4	1,563	70,045

Total freight cars	39,536	3,909	43,445	4,631,330

Other:
Chassis	33,865	—	33,865
Containers	18,350	—	18,350
Work equipment	5,546	183	5,729
Vehicles	2,928	32	2,960
Miscellaneous	2,306	—	2,306

Total other	62,995	215	63,210

The following table indicates the number and year built for locomotives and freight cars owned at December 31, 2020:


	2020	2019		2018		2017		2016		2011- 2015		2006- 2010		2005 & Before		Total
Locomotives:
No. of units	—	35		15		55		65		291		260		2,481		3,202
% of fleet	—	1	%	1	%	2	%	2	%	9	%	8	%	77	%	100	%

Freight cars:
No. of units	—	200		—		470		775		8,782		4,840		24,469		39,536
% of fleet	—	1	%	—		1	%	2	%	22	%	12	%	62	%	100	%

The following table shows the average age of our owned locomotive and freight car fleets at December 31, 2020 and information regarding 2020 retirements:


	Locomotives	Freight Cars
Average age – in service	25.7 years	25.6 years
Retirements	704 units	6,338 units
Average age – retired	31.3 years	42.7 years

Track Maintenance – Of the 35,500 total miles of track on which we operate, we are responsible for maintaining 28,800 miles, with the remainder being operated under trackage rights from other parties responsible for maintenance.

Over 84% of the main line trackage (including first, second, third, and branch main tracks, all excluding rail operated pursuant to trackage rights) has rail ranging from 131 to 155 pounds per yard with the standard installation currently at 136 pounds per yard. Approximately 39% of our lines, excluding rail operated pursuant to trackage rights, carried 20 million or more gross tons per track mile during 2020.

The following table summarizes several measurements regarding our track roadway additions and replacements during the past five years:


	2020	2019	2018	2017	2016
Track miles of rail installed	418	449	416	466	518
Miles of track surfaced	4,785	5,012	4,594	5,368	4,984
Crossties installed (millions)	1.8	2.4	2.2	2.5	2.3

Traffic Control – Of the 16,400 route miles we dispatch, 11,300 miles are signalized, including 8,500 miles of centralized traffic control (CTC) and 2,800 miles of automatic block signals. Of the 8,500 miles of CTC, 7,600 miles are controlled by data radio originating at 355 base station radio sites.

ENVIRONMENTAL MATTERS – Compliance with federal, state, and local laws and regulations relating to the protection of the environment is one of our principal goals. To date, such compliance has not had a material effect on our financial position, results of operations, liquidity, or competitive position. See Note 17 to the Consolidated Financial Statements.

HUMAN CAPITAL MANAGEMENT

Workforce – We employed an average of 20,200 employees during 2020, and 19,100 employees at the end of 2020. Approximately 80% of our railroad employees – referred to as “craft” employees – are covered by collective bargaining agreements with various labor unions. See the discussion of “Labor Agreements” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The remainder of our workforce is composed of management employees.

Craft Workforce Levels and Productivity – Maintaining appropriate headcount levels for our craft-employee workforce is critical to our on-time and consistent delivery of customers’ goods and operational efficiency goals. We manage this human capital metric through forecasting tools designed to ensure the optimal level of staffing to meet business demands while controlling costs. We measure and monitor employee productivity based on gross ton miles per train and engine employee.

Safety – We are dedicated to providing employees with a safe workplace and the knowledge and tools they need to work safely and return home safely every day. Our commitment to an injury-free workplace is illustrated by our “I am Coming Home” safety message, which is featured prominently in our yards, shops, and facilities and further reinforces the importance of working safely. We measure employee safety performance through internal metrics

such as lost-time injuries and serious injuries per 200,000 employee-hours and metrics established by the Federal Railroad Administration (FRA), such as FRA reportable injuries per 200,000 employee-hours. Given the importance of safety among our workforce and business, in 2020, our Board of Directors established a standing Safety Committee that, among other duties, reviews, monitors, and evaluates our compliance with our safety programs and practices.

Attracting and Retaining Management Employees – Our talent strategy for management employees is essential to attracting strong candidates in a competitive talent environment. We evaluate the effectiveness of that strategy by studying market trends, benchmarking the attractiveness of our employee value proposition, and analyzing retention data.

We also focus on driving employee engagement, which is key to increasing employee productivity, retention, and safety. We take a data-centric approach, including the use of quarterly surveys among management employees, to identify new initiatives that will help boost engagement and drive business results.

Employee Development and Training – We provide a range of developmental programs, opportunities, skills, and resources for our employees to work safely and be successful in their careers. We provide hands-on training and simulation training designed to improve training effectiveness and safety outcomes.

We also use modern learning and performance technologies to offer robust professional growth opportunities. Through on-demand digital course offerings, custom-built learning paths, and performance-management tools, our platforms deliver a contemporary, convenient, and inclusive approach to professional development.

Diversity, Equity and Inclusion – As a leading transportation service company, we understand that competing in the global marketplace requires recruiting the most qualified, talented, and diverse people. We strive to create a diverse, equitable, and inclusive workplace where a wide range of perspectives and experiences are represented, valued, and empowered to thrive.

While our current workforce reflects a broad range of backgrounds and experiences, we continue to focus on building an even more diverse workforce, using technology-driven outreach and multiple recruiting relationships to maintain a robust pipeline of diverse talent.

To underscore our commitment to cultivating a workplace experience where the unique experiences, perspectives, and contributions of all our people are valued, our senior management team recently signed a pledge reaffirming our commitment to diversity, equity, and inclusion. To advance that commitment, senior leaders from across the company serve on an Inclusion Leadership Council, which is accountable for setting our enterprise inclusion strategy and articulating measurable goals and actions needed to achieve them.

GOVERNMENT REGULATION – In addition to environmental, safety, securities, and other regulations generally applicable to all business, our railroads are subject to regulation by the U.S. Surface Transportation Board (STB). The STB has jurisdiction to varying extents over rates, routes, customer access provisions, fuel surcharges, conditions of service, and the extension or abandonment of rail lines. The STB has jurisdiction to determine whether we are “revenue adequate” on an annual basis based on the results of the prior year. A railroad is “revenue adequate” on an annual basis under the applicable law when its return on net investment exceeds the rail industry’s composite cost of capital. This determination is made pursuant to a statutory requirement. The STB also has jurisdiction over the consolidation, merger, or acquisition of control of and by rail common carriers.

The relaxation of economic regulation of railroads, following the Staggers Rail Act of 1980, included exemption from STB regulation of the rates and most service terms for intermodal business (trailer-on-flat-car, container-on-flat-car), rail boxcar shipments, lumber, manufactured steel, automobiles, and certain bulk commodities such as sand, gravel, pulpwood, and wood chips for paper manufacturing. Further, all shipments that we have under contract are effectively removed from commercial regulation for the duration of the contract. Approximately 90% of our revenues comes from either exempt shipments or shipments moving under transportation contracts; the remainder comes from shipments moving under public tariff rates.

Efforts have been made over the past several years to increase federal economic regulation of the rail industry, and such efforts are expected to continue in 2021. The Staggers Rail Act of 1980 substantially balanced the interests of shippers and rail carriers, and encouraged and enabled rail carriers to innovate, invest in their infrastructure, and compete for business, thereby contributing to the economic health of the nation and to the revitalization of the industry. Accordingly, we will continue to oppose efforts to reimpose increased economic regulation.

Government regulations are further discussed within Item 1A “Risk Factors” and the safety and security of our railroads are discussed within the “Security of Operations” section contained herein.

COMPETITION – There is continuing strong competition among rail, water, and highway carriers. Price is usually only one factor of importance as shippers and receivers choose a transport mode and specific hauling company. Inventory carrying costs, service reliability, ease of handling, and the desire to avoid loss and damage during transit are also important considerations, especially for higher-valued finished goods, machinery, and consumer products. Even for raw materials, semi-finished goods, and work-in-progress, users are increasingly sensitive to transport arrangements that minimize problems at successive production stages.

Our primary rail competitor is CSX Corporation (CSX); both we and CSX operate throughout much of the same territory. Other railroads also operate in parts of the territory. We also compete with motor carriers, water carriers, and with shippers who have the additional options of handling their own goods in private carriage, sourcing products from different geographic areas, and using substitute products.

Certain marketing strategies to expand reach and shipping options among railroads and between railroads and motor carriers enable railroads to compete more effectively in specific markets.

SECURITY OF OPERATIONS – We continue to enhance the security of our rail system. Our comprehensive security plan is modeled on and was developed in conjunction with the security plan prepared by the Association of American Railroads (AAR) post September 11, 2001. The AAR Security Plan defines four Alert Levels and details the actions and countermeasures that are being applied across the railroad industry to mitigate the risk of terrorist, violent extremist or seriously disruptive cyber-attack increases or decreases. The Alert Level actions include countermeasures that will be applied in three general areas: (1) operations (including transportation, engineering, and mechanical); (2) information technology and communications; and, (3) railroad police. All of our Operations Division employees are advised by their supervisors or train dispatchers, as appropriate, of any change in Alert Level and any additional responsibilities they may incur due to such change.

Our security plan also complies with U.S. Department of Transportation (DOT) security regulations pertaining to training and security plans with respect to the transportation of hazardous materials. As part of the plan, security awareness training is given to all railroad employees who directly affect hazardous material transportation safety, and is integrated into hazardous material training programs. Additionally, location-specific security plans are in place for rail corridors in certain metropolitan areas referred to as High Threat Urban Areas (HTUA). Particular attention is aimed at reducing risk in a HTUA by: (1) the establishment of secure storage areas for rail cars carrying toxic-by-inhalation (TIH) materials; (2) the expedited movement of trains transporting rail cars carrying TIH materials; (3) reducing the number of unattended loaded tank cars carrying TIH materials; and (4) cooperation with federal, state, local, and tribal governments to identify those locations where security risks are the highest.

We also operate six facilities that are under U.S. Coast Guard (USCG) Maritime Security Regulations. With respect to these facilities, each facility’s security plan has been approved by the applicable Captain of the Port and remains subject to inspection by the USCG.

Additionally, we continue to engage in close and regular coordination with numerous federal and state agencies, including the U.S. Department of Homeland Security (DHS), the Transportation Security Administration, the Federal Bureau of Investigation, the FRA, the USCG, U.S. Customs and Border Protection, the Department of Defense, and various state Homeland Security offices.

In 2020, the COVID-19 pandemic led to cancellation of all face-to-face training, including the Safety Train Tour as part of our Operation Awareness and Response Program, as well as participation in the Transportation Community

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Awareness and Emergency Response Program. The need to provide training to first responders did not go away. Our Hazmat Group adapted and created online training courses as well as conducted training webinars for first responders. Even with the adverse conditions of 2020, we provided rail accident response training to approximately 1,000 emergency responders, such as local police and fire personnel.

We also continually evaluate ourselves for appropriate business continuity and disaster recovery planning, with test scenarios that include cybersecurity attacks. Our risk-based information security program helps ensure our defenses and resources are aligned to address the most likely and most damaging potential attacks, to provide support for our organizational mission and operational objectives, and to keep us in the best position to detect, mitigate, and recover from a wide variety of potential attacks in a timely fashion.

Item 1A. Risk Factors

The risks set forth in the following risk factors could have a materially adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter, and could cause those results to differ materially from those expressed or implied in our forward-looking statements. The information set forth in this Item 1A “Risk Factors” should be read in conjunction with the rest of the information included in this annual report, including

Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 “Financial Statements and Supplementary Data.”

REGULATORY RISKS

Significant governmental legislation and regulation over commercial, tax, operating and environmental matters could affect us, our customers, and the markets we serve. Congress can enact laws that could increase economic regulation of the industry. Railroads presently are subject to commercial regulation by the STB, which 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 negotiate prices for rail services, on railway operating revenues, and on the efficiency of our operations. Such additional industry regulation, as well as enactment of any new tax laws, could also negatively impact cash flows from operating activities and, therefore, could result in reduced capital spending on our rail network or abandonment of lines.

Railroads are also subject to the enactment of laws by Congress and regulation by the DOT and the DHS, which regulate most aspects of our operations related to safety and security. The Rail Safety Improvement Act of 2008, the Surface Transportation Extension Act of 2015, and the implementing regulations promulgated by the FRA (collectively “the PTC laws and regulations”) required us (and each other Class I railroad) to implement an interoperable positive train control system (PTC) on main lines over which five million or more gross tons of annual traffic and certain hazardous materials are transported, and on any main lines over which intercity or commuter rail passenger transportation is regularly provided. We completed our PTC implementation prior to the December 31, 2020 deadline. PTC is installed on 8,000 of our 19,300 routes miles. PTC is designed to prevent train-to-train collisions, speed-related derailments, and certain other accidents caused by human error, but it will not prevent all types of train accidents or incidents. The PTC system will continue to result in additional operating costs and capital expenditures, and may result in 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.

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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.

OPERATIONAL RISKS

The COVID-19 pandemic could further impact us, our customers, our supply chain and our operations. The pandemic has negatively impacted the economy and continues to generate significant economic uncertainty. The magnitude and duration of the pandemic, and its impact on our customers and general economic conditions will influence the demand for our services and affect our revenues. In addition, COVID-19 could affect our operations and business continuity if a significant number of our essential employees, overall or in a key location, are quarantined from contraction of or exposure to the disease or if governmental orders prevent our operating employees or critical suppliers from working. To the extent COVID-19 adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in the risk factors included herein.

As a common carrier by rail, we must offer to transport hazardous materials, regardless of risk. Transportation of certain hazardous materials could create catastrophic losses in terms of personal injury and property (including environmental) damage and compromise critical parts of our rail network. The costs of a catastrophic rail accident involving hazardous materials could exceed our insurance coverage. We have obtained insurance for potential losses for third-party liability and first-party property damages (see Note 17 to the Consolidated Financial Statements); however, insurance is available from a limited number of insurers and may not continue to be available or, if available, may not be obtainable on terms acceptable to us.

We face competition from other transportation providers. We are subject to competition from motor carriers, railroads and, to a lesser extent, ships, barges, and pipelines, on the basis of transit time, pricing, and quality and reliability of service. While we have used primarily internal resources to build or acquire and maintain our rail system, trucks and barges have been able to use public rights-of-way maintained by public entities. Any future improvements, expenditures, legislation, or regulation materially increasing the quality or reducing the cost of alternative modes of transportation in the regions in which we operate (such as granting materially greater latitude for motor carriers with respect to size or weight limitations or adoption of autonomous commercial vehicles) could have a material adverse effect on our ability to compete with other modes of transportation.

Capacity constraints could negatively impact our service and operating efficiency. We could experience capacity constraints on our rail network related to increased demand for rail services, locomotive or employee shortages, severe weather, congestion on other railroads, including passenger activities, or impacts from changes to our network structure or composition. Such constraints could result in operational inefficiencies or adversely affect our operations.

Significant increases in demand for rail services could result in the unavailability of qualified personnel and resources like locomotives. Changes in workforce demographics, training requirements, and availability of qualified personnel, particularly for engineers and conductors, could have a negative impact on our ability to meet short-term demand for rail service. Unpredicted increases in demand for rail services may exacerbate such risks and could negatively impact our operational efficiency.

The operations of carriers with which we interchange may adversely affect our operations. Our ability to provide rail service to customers in the U.S. and Canada depends in large part upon our ability to maintain collaborative relationships with connecting carriers (including shortlines and regional railroads) with respect to, among other matters, freight rates, revenue division, car supply and locomotive availability, data exchange and communications, reciprocal switching, interchange, and trackage rights. Deterioration in the operations of or service provided by connecting carriers, or in our relationship with those connecting carriers, could result in our inability to meet our customers’ demands or require us to use alternate train routes, which could result in significant additional costs and network inefficiencies. Additionally, any significant consolidations, mergers or operational changes among other railroads may significantly redefine our market access and reach.

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The vast majority of our employees belong to labor unions, and labor agreements, strikes, or work stoppages could adversely affect our operations. Approximately 80% of our railroad employees are covered by collective bargaining agreements with various labor unions. If unionized workers were to engage in a strike, work stoppage, or other slowdown, we could experience a significant disruption of our operations. Additionally, future national labor agreements, or renegotiation of labor agreements or provisions of labor agreements, could significantly increase our costs for health care, wages, and other benefits.

We may be affected by terrorism or war. Any terrorist attack, or other similar event, any government response thereto, and war or risk of war could cause significant business interruption. Because we play a critical role in the nation’s transportation system, we could become the target of such an attack or have a significant role in the government’s preemptive approach or response to an attack or war.

Although we currently maintain insurance coverage for third-party liability arising out of war and acts of terrorism, we maintain only limited insurance coverage for first-party property damage and damage to property in our care, custody, or control caused by certain acts of terrorism. In addition, premiums for some or all of our current insurance programs covering these losses could increase dramatically, or insurance coverage for certain losses could be unavailable to us in the future.

We may be affected by supply constraints resulting from disruptions in the fuel markets or the nature of some of our supplier markets. We consumed approximately 368 million gallons of diesel fuel in 2020. Fuel availability could be affected by any limitation in the fuel supply or by any imposition of mandatory allocation or rationing regulations. A severe fuel supply shortage arising from production curtailments, increased demand in existing or emerging foreign markets, disruption of oil imports, disruption of domestic refinery production, damage to refinery or pipeline infrastructure, political unrest, war or other factors could impact us as well as our customers and other transportation companies.

Due to the capital intensive nature, as well as the industry-specific requirements of the rail industry, high barriers of entry exist for potential new suppliers of core railroad items, such as locomotives and rolling stock equipment. Additionally, we compete with other industries for available capacity and raw materials used in the production of locomotives and certain track and rolling stock materials. Changes in the competitive landscapes of these limited supplier markets could result in increased prices or significant shortages of materials.

LITIGATION RISKS

We may be subject to various claims and lawsuits that could result in significant expenditures. The nature of our business exposes us to the potential for various claims and litigation related to labor and employment, personal injury, commercial disputes, freight loss and other property damage, and other matters. Job-related personal injury and occupational claims are subject to the Federal Employer’s Liability Act (FELA), which is applicable only to railroads. FELA’s fault-based tort system produces results that are unpredictable and inconsistent as compared with a no-fault worker’s compensation system. The variability inherent in this system could result in actual costs being different from the liability recorded.

A catastrophic rail accident, whether on our lines or another carrier’s, involving any or all of release of hazardous materials, freight loss, property damage, personal injury, and environmental liability could compromise critical parts of our rail network. Losses associated with such an accident involving us could exceed our insurance coverage, resulting in a material adverse effect on our liquidity. Any material changes to current litigation trends could also have a material adverse effect on our liquidity to the extent not covered by insurance.

We have obtained insurance for potential losses for third-party liability and first-party property damages (see Note 17 to the Consolidated Financial Statements); however, insurance is available from a limited number of insurers and may not continue to be available or, if available, may not be obtainable on terms acceptable to us.

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CLIMATE CHANGE RISKS

Severe weather could result in significant business interruptions and expenditures. Severe weather conditions and other natural phenomena, including hurricanes, floods, fires, and earthquakes, may cause significant business interruptions and result in increased costs, increased liabilities, and decreased revenues.

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

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

GENERAL RISKS

We may be affected by general economic conditions. Prolonged negative changes in domestic and global economic conditions, including reduced import and export volumes, could affect the producers and consumers of the commodities we carry. Economic conditions could also result in bankruptcies of one or more large customers.

We may be affected by energy prices. Volatility in energy prices could have a significant effect on a variety of items including, but not limited to: the economy; demand for transportation services; business related to the energy sector, including crude oil, natural gas, and coal; fuel prices; and, fuel surcharges.

We rely on technology and technology improvements in our business operations. If we experience significant disruption or failure of one or more of our information technology systems, including computer hardware, software, and communications equipment, we could experience a service interruption, a security breach, or other operational difficulties. We also face cybersecurity threats which may result in breaches of systems, or compromises of sensitive data, which may also result in service interruptions, safety failures, or operational difficulties. Such a breach, or compromise, could decrease revenues, increase operating costs, including those to protect our infrastructure, impact our efficiency, or damage our corporate reputation. Additionally, if we do not have sufficient capital to acquire new technology or we are unable to implement new technology, we may suffer a competitive disadvantage within the rail industry and with companies providing alternative modes of transportation service.

The state of capital markets could adversely affect our liquidity. We rely on the capital markets to provide some of our capital requirements, including the issuance of debt instruments and the sale of certain receivables. Significant instability or disruptions of the capital markets, including the credit markets, or deterioration of our financial position due to internal or external factors could restrict or eliminate our access to, and/or significantly increase the cost of, various financing sources, including bank credit facilities and issuance of corporate bonds. Instability or disruptions of the capital markets and deterioration of our financial position, alone or in combination, could also result in a reduction of our credit rating to below investment grade, which could prohibit or restrict us from accessing external sources of short- and long-term debt financing and/or significantly increase the associated costs.

Item 1B. Unresolved Staff Comments

None.

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Item 3. Legal Proceedings

In 2007, various antitrust class actions filed against us and other Class I railroads in various Federal district courts regarding fuel surcharges were consolidated in the District of Columbia by the Judicial Panel on Multidistrict Litigation. In 2012, the court certified the case as a class action. The defendant railroads appealed this certification, and the Court of Appeals for the District of Columbia vacated the District Court’s decision and remanded the case for further consideration. On October 10, 2017, the District Court denied class certification. The decision was upheld by the Court of Appeals on August 16, 2019. Since that decision, various individual cases have been filed in multiple jurisdictions and also consolidated in the District of Columbia. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases. We do not believe the outcome of these proceedings will have a material effect on our financial position, results of operations, or liquidity.

In 2018, a lawsuit was filed against one of our subsidiaries by the minority owner in a jointly-owned terminal

railroad company in which our subsidiary has the majority ownership. The lawsuit alleged violations of various

state laws and federal antitrust laws. It is reasonably possible that we could incur a loss in the case; however, we

intend to vigorously defend the case and believe that we will prevail. The potential range of loss cannot be

estimated at this time.

Item 4. Mine Safety Disclosures

Not applicable.

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Information About Our Executive Officers

Our executive officers generally are elected and designated annually by the Board of Directors (Board) at its first meeting held after the annual meeting of stockholders, and they hold office until their successors are elected. Executive officers also may be elected and designated throughout the year as the Board considers appropriate. There are no family relationships among our officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. The following table sets forth certain information, at February 1, 2021, relating to our officers.


Name, Age, Present Position			Business Experience During Past Five Years

James A. Squires, 59, Chairman, President and Chief Executive Officer			Present position since October 1, 2015.

Ann A. Adams, 50, Executive Vice President and Chief Transformation Officer			Present position since April 1, 2019. Served as Vice President Human Resources from April 1, 2016 to April 1, 2019. Served as Assistant Vice President Human Resources from July 1, 2012 to April 1, 2016.

Vanessa Allen Sutherland, 49, Executive Vice President and Chief Legal Officer			Present position since April 1, 2020. Served as Senior Vice President Government Relations and Chief Legal Officer from August 16, 2019 to April 1, 2020. Served as Senior Vice President Law and Chief Legal Officer from April 1, 2019 to August 16, 2019. Served as Vice President Law from June 25, 2018 to April 1, 2019. Prior to joining Norfolk Southern, served as Chairman of the U.S. Chemical Safety and Hazard Investigation Board from August 2015 to June 2018.

Mark R. George, 53, Executive Vice President Finance and Chief Financial Officer			Present position since November 1, 2019. Prior to joining Norfolk Southern, served as Vice President, Finance and Chief Financial Officer at segments of United Technologies Corporation. The positions were Vice President Finance, Strategy, IT and Chief Financial Officer at Otis Elevator Company from October 2015 to May 2019, and Vice President Finance and Chief Financial Officer at Carrier Corporation from June 2019 until joining Norfolk Southern.

Cynthia M. Sanborn, 56, Executive Vice President and Chief Operating Officer			Present position since September 1, 2020. Prior to joining Norfolk Southern, served as served as Vice President Network Planning & Operations at Union Pacific from May 2019 to September 2020 and as Regional Vice President – Western Region from February 2018 to May 2019. Previously served as Executive Vice President and Chief Operating Officer at CSX from September 2015 to November 2017.

Alan H. Shaw, 53, Executive Vice President and Chief Marketing Officer			Present position since May 16, 2015.

Clyde H. Allison, Jr., 57, Vice President and Controller			Present position since June 1, 2020. Served as Vice President and Treasurer from February 1, 2017 to June 1, 2020. Served as Vice President Internal Audit from November 1, 2013 to February 1, 2017.

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PART II

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

STOCK INFORMATION

Common Stock is owned by 21,825 stockholders of record as of December 31, 2020, and is traded on the New York Stock Exchange under the symbol “NSC.”

ISSUER PURCHASES OF EQUITY SECURITIES


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

October 1-31, 2020	327,383	$	213.70	327,383	22,425,507
November 1-30, 2020	793,494	235.37		793,022	21,632,485
December 1-31, 2020	943,868	235.65		943,713	20,688,772

Total	2,064,745			2,064,118

(1)Of this amount, 627 represents shares tendered by employees in connection with the exercise of stock options under the stockholder-approved Long-Term Incentive Plan (LTIP).

(2)On September 26, 2017, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2022. As of December 31, 2020, 20.7 million shares remain authorized for repurchase.

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Item 6. Selected Financial Data

FIVE-YEAR FINANCIAL REVIEW


	2020		2019		2018		2017		2016
	($ in millions, except per share amounts)

RESULTS OF OPERATIONS
Railway operating revenues	$	9,789	$	11,296	$	11,458	$	10,551	$	9,888
Railway operating expenses	6,787		7,307		7,499		7,029		6,879
Income from railway operations	3,002		3,989		3,959		3,522		3,009

Other income – net	153		106		67		156		136
Interest expense on debt	625		604		557		550		563
Income before income taxes	2,530		3,491		3,469		3,128		2,582

Income taxes	517		769		803		(2,276)		914
Net income	$	2,013	$	2,722	$	2,666	$	5,404	$	1,668

PER SHARE DATA
Basic earnings per share	$	7.88	$	10.32	$	9.58	$	18.76	$	5.66
Diluted earnings per share	7.84		10.25		9.51		18.61		5.62
Dividends	3.76		3.60		3.04		2.44		2.36
Stockholders’ equity at year-end	58.67		58.87		57.30		57.57		42.73

FINANCIAL POSITION
Total assets	$	37,962	$	37,923	$	36,239	$	35,711	$	34,892
Total debt	12,681		12,196		11,145		9,836		10,212
Stockholders’ equity	14,791		15,184		15,362		16,359		12,409

OTHER
Property additions	$	1,494	$	2,019	$	1,951	$	1,723	$	1,887


Average number of shares outstanding (thousands)	255,117		263,270		277,708		287,861		293,943
Number of stockholders at year-end	21,825		23,273		24,475		25,737		27,288
Average number of employees:
Rail	20,029		24,442		26,512		26,955		27,856
Nonrail	127		145		150		155		188

Total	20,156		24,587		26,662		27,110		28,044

Note 1: In 2017, as a result of the enactment of tax reform, “Railway operating expenses” included a $151 million benefit and “Income taxes” included a $3,331 million benefit, which added $3,482 million to “Net income” and $12.00 to “Diluted earnings per share.”

Note 2: On January 1, 2019, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842),” which requires lessees to recognize right-of-use (ROU) assets and lease liabilities on the balance sheet for leases greater than twelve months. As a result of the adoption, the Consolidated Balance Sheets include the recognition of ROU assets of $433 million and $539 million at December 31, 2020 and 2019, respectively, and corresponding lease liabilities of $433 million and $538 million, respectively.

See accompanying consolidated financial statements and notes thereto.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Norfolk Southern Corporation and Subsidiaries

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

OVERVIEW

We are one of the nation’s premier transportation companies. Our Norfolk Southern Railway Company subsidiary operates approximately 19,300 route miles in 22 states and the District of Columbia, serves every major container port in the eastern U.S., and provides efficient connections to other rail carriers. We are a major transporter of industrial products, including agriculture, forest and consumer products, chemicals, and metals and construction materials. In addition, we operate the most extensive intermodal network in the East and are a principal carrier of coal, automobiles, and automotive parts.

In 2020, we continued the implementation of our strategic plan, including tactical changes to our operating plan, to generate operational efficiencies, improve customer service, and deliver strong financial results. The COVID-19 pandemic caused significant economic disruption and, along with softening energy markets, reduced the demand for our services. Nevertheless, we executed on operational initiatives to generate efficiencies and lower our cost structure. In the face of economic headwinds that resulted in a year-over-year volume decline of 12%, we improved productivity by driving year-over-year average headcount down by 18%, and we increased asset utilization through rationalization of our locomotive fleet. These sustainable cost structure improvements will provide greater benefits as the economy recovers. However, there is still substantial uncertainty as to the pace of economic recovery and the continued effects of the pandemic on our results of operations. We continue to monitor the impact of the pandemic on our employees’ availability and remain committed to protecting our employees and providing excellent transportation service products for our customers.

SUMMARIZED RESULTS OF OPERATIONS


							2020		2019
	2020		2019		2018		vs. 2019		vs. 2018
	($ in millions, except per share amounts)						(% change)

Income from railway operations	$	3,002	$	3,989	$	3,959	(25	%)	1	%
Net income	$	2,013	$	2,722	$	2,666	(26	%)	2	%
Diluted earnings per share	$	7.84	$	10.25	$	9.51	(24	%)	8	%
Railway operating ratio (percent)	69.3		64.7		65.4		7	%	(1	%)

Income from railway operations declined in 2020 compared to 2019 as railway operating revenues fell 13% which exceeded a 7% reduction in operating expenses. Railway operating revenues declined as lower customer demand resulted in volume reductions. Additionally, negative mix and lower fuel surcharge revenue, partially offset by increased pricing, led to lower revenue per unit. Railway operating expenses decreased due to declines in fuel price and consumption, reduced employment levels, lower volumes and operational efficiency improvements. Additionally, 2020 results were adversely impacted by a loss on asset disposal of $385 million related to locomotives sold, and by a $99 million impairment charge related to an equity method investment. For more information on the impact of these charges, see Notes 7 and 6, respectively.

Income from railway operations rose in 2019 compared to 2018 as a 3% reduction in railway operating expenses more than offset the impact of a 1% decline in railway operating revenues. In addition to higher income from railway operations, net income and diluted earnings per share growth in 2019 also benefited from a lower effective

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tax rate. Our continuing share repurchase program contributed to diluted earnings per share growth that exceeded that of net income.

The following tables adjust our 2020 U.S. Generally Accepted Accounting Principles (“GAAP”) financial results to exclude the effects of the aforementioned charges. The income tax effects on the non-GAAP adjustments were calculated based on the applicable tax rates to which the non-GAAP adjustments relate. We use these non-GAAP financial measures internally and believe this information provides useful supplemental information to investors to facilitate making period-to-period comparisons by excluding the 2020 charges. While we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation from, or as a substitute for, the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similar measures presented by other companies.


	Non-GAAP Reconciliation for 2020
	Reported 2020 (GAAP)		Loss on Asset Disposal		Investment Impairment		Adjusted 2020 (non-GAAP)
	($ in millions, except per share amounts)

Railway operating expenses	$	6,787	$	(385)	$	(99)	$	6,303
Income from railway operations	$	3,002	$	385	$	99	$	3,486
Income before income taxes	$	2,530	$	385	$	99	$	3,014
Income taxes	$	517	$	97	$	25	$	639
Net income	$	2,013	$	288	$	74	$	2,375
Diluted earnings per share	$	7.84	$	1.12	$	0.29	$	9.25
Railway operating ratio (percent)	69.3		(3.9)		(1.0)		64.4

In the table below, references to 2020 results and related comparisons use the adjusted, non-GAAP results from the table above.


							Adjusted
	Adjusted						2020
	2020						(non-GAAP)		2019
	(non-GAAP)		2019		2018		vs. 2019		vs. 2018
	($ in millions, except per share amounts)						(% change)

Railway operating expenses	$	6,303	$	7,307	$	7,499	(14	%)	(3	%)
Income from railway operations	$	3,486	$	3,989	$	3,959	(13	%)	1	%
Income before income taxes	$	3,014	$	3,491	$	3,469	(14	%)	1	%
Income taxes	$	639	$	769	$	803	(17	%)	(4	%)
Net income	$	2,375	$	2,722	$	2,666	(13	%)	2	%
Diluted earnings per share	$	9.25	$	10.25	$	9.51	(10	%)	8	%
Railway operating ratio (percent)	64.4		64.7		65.4		—	%	(1	%)

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DETAILED RESULTS OF OPERATIONS

Railway Operating Revenues

The following tables present a three-year comparison of revenues, volumes (units), and average revenue per unit by major commodity group.


	Revenues						2020		2019
	2020		2019		2018		vs. 2019		vs. 2018
	($ in millions)						(% change)
Merchandise:
Agriculture, forest and consumer products	$	2,116	$	2,256	$	2,188	(6	%)	3	%
Chemicals	1,809		2,092		2,083		(14	%)	—	%
Metals and construction	1,333		1,461		1,482		(9	%)	(1	%)
Automotive	830		994		991		(16	%)	—	%
Merchandise	6,088		6,803		6,744		(11	%)	1	%
Intermodal	2,654		2,824		2,893		(6	%)	(2	%)
Coal	1,047		1,669		1,821		(37	%)	(8	%)
Total	$	9,789	$	11,296	$	11,458	(13	%)	(1	%)


	Units			2020		2019
	2020	2019	2018	vs. 2019		vs. 2018
	(in thousands)			(% change)
Merchandise:
Agriculture, forest and consumer products	704.4	763.7	790.7	(8	%)	(3	%)
Chemicals	482.0	588.9	604.7	(18	%)	(3	%)
Metals and construction	601.2	685.1	719.8	(12	%)	(5	%)
Automotive	329.7	394.7	403.9	(16	%)	(2	%)
Merchandise	2,117.3	2,432.4	2,519.1	(13	%)	(3	%)
Intermodal	3,992.1	4,207.2	4,375.7	(5	%)	(4	%)
Coal	574.1	914.0	1,033.5	(37	%)	(12	%)
Total	6,683.5	7,553.6	7,928.3	(12	%)	(5	%)


	Revenue per Unit						2020		2019
	2020		2019		2018		vs. 2019		vs. 2018
	($ per unit)						(% change)
Merchandise:
Agriculture, forest and consumer products	$	3,004	$	2,953	$	2,767	2	%	7	%
Chemicals	3,753		3,553		3,444		6	%	3	%
Metals and construction	2,216		2,133		2,059		4	%	4	%
Automotive	2,518		2,517		2,453		—	%	3	%
Merchandise	2,875		2,797		2,677		3	%	4	%
Intermodal	665		671		661		(1	%)	2	%
Coal	1,824		1,826		1,762		—	%	4	%
Total	1,465		1,495		1,445		(2	%)	3	%

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At the beginning of 2020, we combined the agriculture products and forest and consumer commodity groups. In addition, we also made changes in the categorization of certain other 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 2).

Revenues decreased $1.5 billion in 2020 and $162 million in 2019 compared to the prior years. As reflected in the table below, lower revenues for both years were the result of decreased volumes and lower fuel surcharge revenue, partially offset by pricing gains.

The table below reflects the components of the revenue change by major commodity group.


	2020 vs. 2019						2019 vs. 2018
	Increase (Decrease)						Increase (Decrease)
	($ in millions)
	Merchandise		Intermodal		Coal		Merchandise		Intermodal		Coal

Volume	$	(881)	$	(144)	$	(621)	$	(232)	$	(111)	$	(210)
Fuel surcharge
revenue	(92)		(124)		(13)		(14)		(30)		(35)
Rate, mix and
other	258		98		12		305		72		93

Total	$	(715)	$	(170)	$	(622)	$	59	$	(69)	$	(152)

Approximately 90% of our revenue base is covered by contracts that include negotiated fuel surcharges. These revenues totaled $349 million, $578 million, and $657 million in 2020, 2019, and 2018, respectively.

MERCHANDISE revenues decreased in 2020 but increased in 2019 compared with the prior years. In 2020, revenues decreased due to volume declines in all commodity groups which were partially offset by higher average revenue per unit, driven by pricing gains. In 2019, revenues grew due to higher average revenue per unit, driven by pricing gains, which were partially offset by volume declines in all commodity groups.

For 2021, merchandise revenues are expected to increase, the result of higher volume as the market continues to recover from the impact of the COVID-19 pandemic and increased revenue per unit driven by pricing gains.

Agriculture, forest and consumer products revenues decreased in 2020 but increased in 2019 compared with the prior years. In 2020, the decline was the result of reduced volume partially offset by higher average revenue per unit, driven by pricing gains partially offset by lower fuel surcharge revenue. Volume declined due to the impact of COVID-19 on the demand for ethanol, corn, food service products, and building, industrial and commercial products. Revenue growth in 2019 was due to higher average revenue per unit, a result of pricing gains, which more than offset volume declines. Volume was down due to decreased shipments of ethanol, pulpboard, lumber, soybeans, pulp, woodchips, canned goods, and fertilizer, partially offset by increased corn shipments.

In 2021, agriculture, forest and consumer products revenues are expected to rise, a result of increased volume as the economic recovery continues, and revenue per unit increases resulting from pricing gains. We expect volumes to increase in most markets led by ethanol, corn, pulpboard, and food services.

Chemicals revenues fell in 2020 but rose slightly in 2019 compared with the prior years. In 2020, the decrease was the result of volume declines partially offset by higher average revenue per unit, due to pricing gains. Volume declined due to the impact from COVID-19 and ongoing disruptions in the energy market. The pandemic created an overabundance of products in the market as companies reduced stockpiles before requiring more products. Oil and petroleum shipments were negatively impacted due to reductions in gasoline/jet fuel demand and travel. In

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2019, the rise was the result of higher average revenue per unit, due to pricing gains, which were partially offset by volume declines. Volume declines in natural gas, sand, petroleum products, organic and inorganic chemicals, and plastics were partially offset by gains in crude oil and municipal waste.

For 2021, chemicals revenues are anticipated to increase, as a result of increased volume and revenue per unit driven by pricing gains. We expect carloads to increase due to growth in plastics, organic chemicals, petroleum products, and solid waste which is projected to be partially offset by reduced volumes of sand, crude oil and natural gas liquids.

Metals and construction revenues declined in both periods. In 2020, volume declines were partially offset by higher average revenue per unit, the result of pricing gains. Volume declines were largely the result of weakened demand due to reductions in metal and domestic vehicle production. The pandemic caused industries to suspend production which heavily impacted customers’ needs for materials and shipping of finished and semi-finished goods. These declines were partially offset by increased demand for cement. In 2019, volume declines were largely offset by higher average revenue per unit, the result of pricing gains. Volume declines in iron and steel, coil, scrap metal, and kaolin were partially offset by increases in aggregates shipments due to improved service and market strength.

For 2021, metals and construction revenues are expected to rise, a result of increased volume and revenue per unit driven by pricing gains. As the economic recovery continues, volume growth is expected in almost all markets led by scrap metal, coil, iron and steel, and construction.

Automotive revenues declined in 2020 but were flat in 2019 compared with the prior years. In 2020, revenue declines were driven by lower volume and fuel surcharge revenue, partially offset by pricing gains. The volume decline was mostly the result of unplanned automotive plant shutdowns in the first half of the year, primarily due to the COVID-19 pandemic, which was partially offset by increased demand in the second half of the year. In 2019, higher average revenue per unit, driven by price increases, offset volume declines that were primarily the result of decreases in U.S. light vehicle production and the United Automobile Workers strike in the fourth quarter.

In 2021, automotive revenues are expected to increase as a result of higher volume as inventories continue to rebuild.

INTERMODAL revenues decreased in both periods. The decline in 2020 was driven by lower volume and fuel surcharge revenue, which were partially offset by pricing gains and favorable mix. The decline in 2019 was driven by lower volume, which was partially offset by higher average revenue per unit, a result of pricing gains.

For 2021, we expect intermodal revenues to rise, the result of increased demand, expected highway conversions, and higher fuel surcharge revenue.

Intermodal units by market were as follows:


				2020		2019
	2020	2019	2018	vs. 2019		vs. 2018
	(units in thousands)			(% change)

Domestic	2,568.7	2,593.5	2,801.1	(1	%)	(7	%)
International	1,423.4	1,613.7	1,574.6	(12	%)	2	%

Total	3,992.1	4,207.2	4,375.7	(5	%)	(4	%)

Domestic volume fell in both periods. While volume rebounded in the second half of 2020 due to inventory replenishment and a strong peak season, volume for the year was challenged by supply chain disruptions related to

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COVID-19 and strong over-the-road competition in the first half of the year. Volume was challenged in 2019 by stronger over-the-road competition.

For 2021, we expect higher domestic volume driven by growth from new and existing customers and continued highway conversions.

International volume fell in 2020, but rose in 2019. The decline in 2020 resulted from supply chain disruptions due to COVID-19. The rise in 2019 was due to increased demand from new and existing customers partially offset by lower shipments due to tariff concerns.

For 2021, we expect international volume growth as demand and trade continue to recover.

COAL revenues decreased in both periods. The decrease in 2020 was a result of significant volume declines. The decrease in 2019 was a result of lower volume, which was partially offset by higher average revenue per unit, driven by pricing gains.

For 2021, we expect coal revenues to decline. We anticipate overall coal volume to be down as continued declines in utility are projected to more than offset domestic metallurgical and export gains.

As shown in the following table, total tonnage decreased in both periods.


				2020		2019
	2020	2019	2018	vs. 2019		vs. 2018
	(tons in thousands)			(% change)

Utility	32,479	60,278	65,688	(46	%)	(8	%)
Export	18,900	23,324	28,046	(19	%)	(17	%)
Domestic metallurgical	9,441	13,562	15,500	(30	%)	(13	%)
Industrial	3,566	4,655	5,410	(23	%)	(14	%)

Total	64,386	101,819	114,644	(37	%)	(11	%)

Utility coal tonnage decreased in both periods. The decline in 2020 was due to low natural gas prices, diminished industrial and commercial electricity demand, and high stockpiles. The decline in 2019 was due to continued headwinds from low natural gas prices and additional natural gas and renewable energy generating capacity, which were slightly offset by customer inventory rebuilding.

For 2021, utility coal tonnage is expected to decrease as a result of high stockpiles and continued pressure from natural gas and renewable energy.

Export coal tonnage decreased in both periods. The decline in 2020 was a result of weak seaborne pricing, COVID-19-related global disruptions, and import restrictions. The decline in 2019 was a result of weak thermal seaborne pricing and coal supply disruptions at certain mines.

For 2021, export coal tonnage is expected to increase due to the global recovery from COVID-19.

Domestic metallurgical coal tonnage was down in both years. The decline in 2020 was a reflection of continued reduced domestic steel demand which led to idled customer facilities and lower production. The decline in 2019 was a reflection of challenging overall market conditions including softening domestic steel demand, customer sourcing changes, and plant outages.

For 2021, domestic metallurgical coal tonnage is expected to increase due to the recovery from COVID-19.

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Industrial coal tonnage decreased in both years driven by pressure from natural gas conversions and customer sourcing changes.

For 2021, industrial coal tonnage is expected to decrease as a result of continued pressure from natural gas conversions and customer sourcing changes.

Railway Operating Expenses

Railway operating expenses summarized by major classifications were as follows:


							2020		2019
	2020		2019		2018		vs. 2019		vs. 2018
	($ in millions)						(% change)

Compensation and benefits	$	2,373	$	2,751	$	2,925	(14	%)	(6	%)
Purchased services and rents	1,687		1,725		1,730		(2	%)	—	%
Fuel	535		953		1,087		(44	%)	(12	%)
Depreciation	1,154		1,138		1,102		1	%	3	%
Materials and other	653		740		655		(12	%)	13	%
Loss on asset disposal	385		—		—

Total	$	6,787	$	7,307	$	7,499	(7	%)	(3	%)

In 2020, expenses fell as our strategic initiatives to improve productivity and asset utilization resulted in lower compensation and benefits expense, declines in fuel consumption, reduced purchased services, and lower materials expense. Fuel expense also declined due to lower prices. These expense reductions were partially offset by a loss on asset disposal of $385 million related to locomotives sold, and a $99 million impairment charge included in purchased services and rents related to an equity method investment. In 2019, expenses fell as our strategic initiatives to improve productivity resulted in lower compensation, equipment rents, and materials expense. These decreases along with lower fuel prices and consumption were partially offset by lower gains on operating property sales, increased depreciation, and a write-off of a $32 million receivable as a result of a legal dispute.

Compensation and benefits decreased in 2020, reflecting changes in:

•employment levels (down $309 million),

•health and welfare benefits for craft employees (down $77 million),

•overtime and recrews (down $54 million),

•incentive and stock-based compensation (down $38 million),

•increased pay rates (up $50 million),

•lower capitalized labor (additional expense of $51 million), and

•other (down $1 million).

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In 2019, compensation and benefits decreased, a result of changes in:

•employment levels (down $117 million),

•incentive and stock-based compensation (down $83 million),

•overtime and recrews (down $45 million),

•higher capitalized labor (reduced expense of $9 million),

•2018 employment tax refund ($31 million unfavorable in 2019),

•pay rates (up $76 million), and

•other (down $27 million).

Our employment averaged 20,200 in 2020, compared with 24,600 in 2019, and 26,700 in 2018.

Purchased services and rents includes the costs of services purchased from external vendors and contractors, including the net costs of operating joint (or leased) facilities with other railroads and the net cost of equipment rentals.


							2020		2019
	2020		2019		2018		vs. 2019		vs. 2018
	($ in millions)						(% change)

Purchased services	$	1,387	$	1,434	$	1,367	(3	%)	5	%
Equipment rents	300		291		363		3	%	(20	%)

Total	$	1,687	$	1,725	$	1,730	(2	%)	—	%

The decrease in purchased services in 2020 resulted from volume-related declines and strategic initiatives to improve productivity and asset utilization, partially offset by the $99 million impairment related to an equity method investment. The increase in purchased services in 2019 was the result of increased technology-related costs, expenses associated with our headquarters relocation, and increased intermodal-related costs partially offset by decreased transportation activities.

Equipment rents, which includes our cost of using equipment (mostly freight cars) owned by other railroads or private owners less the rent paid to us for the use of our equipment, increased in 2020, but decreased in 2019. In 2020, the increase was primarily the result of lower equity in TTX earnings and increased automotive equipment expenses partially offset by decreased intermodal equipment expenses. In 2019, the decrease was largely due to improved network velocity and the absence of short-term locomotive resource costs incurred in the prior year.

Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, decreased in both periods. The change in both years was due to lower locomotive fuel prices (down 32% in 2020 and 8% in 2019) which decreased expenses by $235 million in 2020 and $82 million in 2019. Additionally, locomotive fuel consumption decreased 18% in 2020 and 4% in 2019. We consumed approximately 368 million gallons of diesel fuel in 2020, compared with 451 million gallons in 2019 and 472 million gallons in 2018.

Depreciation expense increased in both periods, a reflection of reinvestment in our infrastructure, rolling stock, and technology.

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Materials and other expenses decreased in 2020 but increased in 2019 as shown in the following table.


							2020		2019
	2020		2019		2018		vs. 2019		vs. 2018
	($ in millions)						(% change)

Materials	$	274	$	327	$	362	(16	%)	(10	%)
Claims	179		193		176		(7	%)	10	%
Other	200		220		117		(9	%)	88	%

Total	$	653	$	740	$	655	(12	%)	13	%

Materials expense decreased in 2020 and 2019 due primarily to lower maintenance requirements as a result of fewer locomotives and freight cars in service.

Claims expense includes costs related to personal injury, property damage, and environmental matters. The 2020 expense declined, primarily the result of lower costs related to environmental remediation matters partially offset by increased derailment costs. The 2019 expense increased, primarily due to higher costs related to environmental remediation matters and personal injury claims.

Other expense decreased in 2020, largely due to the absence of the 2019 write-off of a $32 million receivable as a result of a legal dispute. Additionally, 2020 benefited from reduced travel expenses resulting from the COVID-19 pandemic. These reductions were partially offset by lower gains from sales of operating property. Other expense increased in 2019, primarily due to lower gains from sales of operating property and the $32 million write-off. Gains from operating property sales amounted to $26 million, $64 million, and $158 million in 2020, 2019, and 2018, respectively.

Loss on asset disposal

During 2020, we recorded a $385 million charge related to the disposal of 703 locomotives, the sales of which were completed during the fourth quarter. For more information on the impact of the charge, see Note 7.

Other income – net

Other income – net increased in 2020 and 2019. The increase in 2020 was driven by the absence of the prior year $49 million impairment loss related to natural resource assets that were sold in 2020, lower pension and postretirement benefit expenses, and higher returns on corporate-owned life insurance (“COLI”) investments, which more than offset the absence of coal royalties and lower gains on sales of non-operating property. The increase in 2019 was driven by higher COLI returns and increased gains on sales of non-operating property, which more than offset the aforementioned $49 million impairment loss.

Income taxes

The effective income tax rate was 20.4% in 2020, compared with 22.0% in 2019 and 23.1% in 2018. The current year benefited from a reduction of taxes upon the resolution of our 2012 amended return (see Note 4). All three years benefited from favorable tax benefits associated with stock-based compensation and COLI returns.

For 2021, we expect an effective income tax rate between 23% and 24%.

K27

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

Cash provided by operating activities, our principal source of liquidity, was $3.6 billion in 2020, $3.9 billion in 2019, and $3.7 billion in 2018. The decline in 2020 reflects a decrease in income from railway operations offset in part by lower income tax payments. The increase in 2019 was primarily the result of improved operating results. We had working capital of $158 million and negative working capital of $219 million at December 31, 2020, and 2019, respectively. Cash and cash equivalents totaled $1.1 billion and $580 million at December 31, 2020, and 2019, respectively. We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations. In addition, we believe our currently-available borrowing capacity, access to additional financing, and ability to reduce property additions and shareholder distributions, including share repurchases, provide additional flexibility to meet our ongoing obligations. Nonetheless, we continue to monitor the ongoing impacts of the COVID-19 pandemic, which could lead to a reduction in cash flows from operations.

Contractual obligations at December 31, 2020, include long-term debt (Note 9), interest on fixed-rate long-term debt, unconditional purchase obligations (Note 17), long-term advances from Conrail (Note 6), operating leases (Note 10), agreements with Consolidated Rail Corporation (CRC) (Note 6), and unrecognized tax benefits (Note 4).


	Total		2021		2022 - 2023		2024 - 2025		2026 and Subsequent		Other
	($ in millions)

Long-term debt principal	$	13,693	$	579	$	1,156	$	958	$	11,000	—
Interest on fixed-rate long-term debt	13,515		568		1,062		997		10,888		—
Unconditional purchase obligations	1,120		600		329		76		115		—
Long-term advances from Conrail	534		—		—		—		534		—
Operating leases	504		101		143		115		145		—
Agreements with CRC	140		41		82		17		—		—
Unrecognized tax benefits*	22		—		—		—		—		22

Total	$	29,528	$	1,889	$	2,772	$	2,163	$	22,682	$	22

* This amount is shown in the Other column because the year of settlement cannot be reasonably estimated.

Off balance sheet arrangements consist primarily of unrecognized obligations, including unconditional purchase obligations and future interest payments on fixed-rate long-term debt, which are included in the table above. In addition, we entered into a synthetic lease during 2019 which is discussed further in Note 10.

Cash used in investing activities was $1.2 billion in 2020, compared with $1.8 billion in 2019, and $1.7 billion in 2018. The decrease in 2020 was primarily driven by lower property additions. In 2019, increased COLI activity and higher property additions were partially offset by increased proceeds from property sales. We had the ability to borrow up to $750 million against our COLI policies at December 31, 2020.

Capital spending and track and equipment statistics can be found within the “Railway Property” section of Part I of this report on Form 10-K. For 2021, we expect capital spending will approximate $1.6 billion.

Cash used in financing activities was $1.9 billion in 2020, compared with $2.0 billion in 2019, and $2.3 billion in 2018. The change in 2020 reflects lower repurchases of Common Stock and debt repayments, partially offset by

reduced proceeds from borrowings. In 2019, the decrease was impacted by fewer repurchases of Common Stock, higher debt repayments, and increased dividends.

Share repurchases of $1.4 billion in 2020, $2.1 billion in 2019, and $2.8 billion in 2018 resulted in the retirement of 7.4 million, 11.3 million, and 17.1 million shares, respectively. As of December 31, 2020, 20.7 million shares

K28

remain authorized by our Board of Directors for repurchase. The timing and volume of future share repurchases will be guided by our assessment of market conditions and other pertinent factors. Any near-term purchases under the program are expected to be made with internally generated cash, cash on hand, or proceeds from borrowings.

In May 2020, we issued $800 million of 3.05% senior notes due 2050, resulting in $790 million in net proceeds.

In May 2020, we also issued $800 million of 3.155% senior notes due 2055 in exchange for $554 million of previously issued notes ($450 million at 5.1% due 2118, $42 million at 6% due 2111, $29 million at 7.9% due 2097, $26 million at 6% due 2105, and $7 million at 7.05% due 2037). As part of the debt exchange, a $4 million loss on extinguishment was recognized in “Other income – net.”

In May 2020, we also renewed and amended our accounts receivable securitization program, reducing our maximum borrowing capacity from $450 million to $400 million. The term expires in May 2021. We had no amounts outstanding at December 31, 2020 or December 31, 2019, and our available borrowing capacity was $400 million and $429 million, respectively.

In March 2020, we renewed and amended our five-year credit agreement. We increased the program’s borrowing capacity from $750 million to $800 million. The amended agreement expires in 2025 and provides for borrowings at prevailing rates and includes covenants. We had no amounts outstanding under this facility at December 31, 2020 or December 31, 2019.

We discuss our credit agreement and our accounts receivable securitization program in Note 9, and we have authority from our Board of Directors to issue an additional $1.6 billion of debt or equity securities through public or private sale, all of which provide for access to additional liquidity should the need arise. Our debt-to-total capitalization ratio was 46.2% at December 31, 2020, compared with 44.5% at December 31, 2019.

Upcoming annual debt maturities are disclosed in Note 9. Overall, our goal is to maintain a capital structure with appropriate leverage to support our business strategy and provide flexibility through business cycles.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions may require judgment about matters that are inherently uncertain, and future events are likely to occur that may require us to make changes to these estimates and assumptions. Accordingly, we regularly review these estimates and assumptions based on historical experience, changes in the business environment, and other factors we believe to be reasonable under the circumstances. The following critical accounting policies are a subset of our significant accounting policies described in Note 1.

Pensions and Other Postretirement Benefits

Accounting for pensions and other postretirement benefit plans requires us to make several estimates and assumptions (Note 12). These include the expected rate of return from investment of the plans’ assets and the expected retirement age of employees as well as their projected earnings and mortality. In addition, the amounts recorded are affected by changes in the interest rate environment because the associated liabilities are discounted to their present value. We make these estimates based on our historical experience and other information we deem pertinent under the circumstances (for example, expectations of future stock market performance). We utilize an independent actuarial consulting firm’s studies to assist us in selecting appropriate actuarial assumptions and valuing related liabilities.

For 2020, we assumed a long-term investment rate of return of 8.25%, which was supported by our long-term total rate of return on plan assets since inception, as well as our expectation of future returns. A one-percentage point change to this rate of return assumption would result in a $24 million change in annual pension expense. We review

K29

assumptions related to our defined benefit plans annually, and while changes are likely to occur in assumptions concerning retirement age, projected earnings, and mortality, they are not expected to have a material effect on our net pension expense or net pension liability in the future. The net pension liability is recorded at net present value using discount rates that are based on the current interest rate environment in light of the timing of expected benefit payments. We utilize analyses in which the projected annual cash flows from the pension and postretirement benefit plans are matched with yield curves based on an appropriate universe of high-quality corporate bonds. We use the results of the yield curve analyses to select the discount rates that match the payment streams of the benefits in these plans. A one-percentage point change to this discount rate assumption would result in a $17 million change in annual pension expense.

Properties and Depreciation

Most of our assets are long-lived railway properties (Note 7). “Properties” are stated principally at cost and are depreciated using the group method whereby assets with similar characteristics, use, and expected lives are grouped together in asset classes and depreciated using a composite depreciation rate. See Note 1 for a more detailed discussion of assumptions and estimates.

Expenditures, including those on leased assets, that extend an asset’s useful life or increase its utility are capitalized. Expenditures capitalized include those that are directly related to a capital project and may include materials, labor, and other direct costs, in addition to an allocable portion of indirect costs that relate to a capital project. A significant portion of our annual capital spending relates to self-constructed assets. Costs related to repairs and maintenance activities that, in our judgment, do not extend an asset’s useful life or increase its utility are expensed when such repairs are performed.

Depreciation expense for 2020 totaled $1.2 billion. Our composite depreciation rates for 2020 are disclosed in Note 7; a one-year increase (or decrease) in the estimated average useful lives of depreciable assets would have resulted in an approximate $40 million decrease (or increase) to annual depreciation expense.

Personal Injury

Claims expense, included in “Materials and other” in the Consolidated Statements of Income, includes our estimate of costs for personal injuries.

To aid in valuing our personal injury liability and determining the amount to accrue with respect to such claims during the year, we utilize studies prepared by an independent consulting actuarial firm. The actuarial firm studies our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences. We adjust the liability quarterly based upon our assessment and the results of the study. The accuracy of our estimate of the liability is subject to inherent limitation given the difficulty of predicting future events and, as such, the ultimate loss sustained may vary from the estimated liability recorded.

See Note 17 for a more detailed discussion of the assumptions and estimates we use for personal injury.

Income Taxes

Our net deferred tax liability totaled $6.9 billion at December 31, 2020 (Note 4). This liability is estimated based on the expected future tax consequences of items recognized in the financial statements. After application of the federal statutory tax rate to book income, judgment is required with respect to the timing and deductibility of expenses in our income tax returns. For state income and other taxes, judgment is also required with respect to the apportionment among the various jurisdictions. A valuation allowance is recorded if we expect that it is more likely than not that deferred tax assets will not be realized. We have a $57 million valuation allowance on $509 million of deferred tax assets as of December 31, 2020, reflecting the expectation that almost all of these assets will be realized.

K30

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. Moratorium provisions in the labor agreements govern when the railroads and unions may propose changes to the agreements. The current round of bargaining commenced on November 1, 2019 with both management and the unions serving their formal proposals for changes to the collective bargaining agreements and direct negotiations are ongoing.

Market Risks

At December 31, 2020, we had no outstanding debt subject to interest rate fluctuations. Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a one-percentage point decrease in interest rates as of December 31, 2020 and amounts to an increase of approximately $2.0 billion to the fair value of our debt at December 31, 2020. We consider it unlikely that interest rate fluctuations applicable to these instruments will result in a material adverse effect on our financial position, results of operations, or liquidity.

New Accounting Pronouncements

For a detailed discussion of new accounting pronouncements, see Note 1.

Inflation

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

FORWARD-LOOKING STATEMENTS

Certain statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or our achievements or those of our industry to be materially different from those expressed or implied by any forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “project,” “consider,” “predict,” “potential,” “feel,” or other comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates, beliefs, and projections. While we believe these expectations, assumptions, estimates, beliefs, and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which involve factors or circumstances that are beyond our control. These and other important factors, including those discussed in Item 1A “Risk Factors,” may cause actual results, performance, or achievements to differ materially from those expressed or implied by these forward-looking statements. The forward-looking statements herein are made only as of the date they were first issued, and unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

K31

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Market Risks.”

K32

Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS


			Page

Report of Management			K 34

Reports of Independent Registered Public Accounting Firm			K 35

Consolidated Statements of Income Years ended December 31, 2020, 2019, and 2018			K 39

Consolidated Statements of Comprehensive Income Years ended December 31, 2020, 2019, and 2018			K 40

Consolidated Balance Sheets At December 31, 2020 and 2019			K 41

Consolidated Statements of Cash Flows Years ended December 31, 2020, 2019, and 2018			K 42

Consolidated Statements of Changes in Stockholders’ Equity Years ended December 31, 2020, 2019, and 2018			K 43

Notes to Consolidated Financial Statements			K 44

Index to Financial Statement Schedule in Item 15			K 82

K33

Report of Management

February 4, 2021

To the Stockholders

Norfolk Southern Corporation:

Management is responsible for establishing and maintaining adequate internal control over financial reporting. In order to ensure that Norfolk Southern’s internal control over financial reporting is effective, management regularly assesses such controls and did so most recently as of December 31, 2020. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that we maintained effective internal control over financial reporting as of December 31, 2020.

KPMG LLP, independent registered public accounting firm, has audited our financial statements and issued an attestation report on our internal control over financial reporting as of December 31, 2020.

/s/ James A. Squires

/s/ Mark R. George

/s/ Clyde H. Allison, Jr.

James A. Squires

Mark R. George

Clyde H. Allison, Jr.

Chairman, President and

Executive Vice President Finance

Vice President and

Chief Executive Officer

and Chief Financial Officer

Controller

K34

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Norfolk Southern Corporation:

Opinion on Internal Control Over Financial Reporting

We have audited Norfolk Southern Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders’ equity for each of the years in the three-year period ended December 31, 2020, and the related notes and financial statement schedule of valuation and qualifying accounts as listed in Item 15(A)2 (collectively, the consolidated financial statements), and our report dated February 4, 2021, expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

K35

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

KPMG LLP

Atlanta, Georgia

February 4, 2021

K36

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Norfolk Southern Corporation:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Norfolk Southern Corporation and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders’ equity for each of the years in the three‑year period ended December 31, 2020, and the related notes and financial statement schedule of valuation and qualifying accounts as listed in Item 15(A)2 (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 4, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019, due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842) and related amendments.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

K37

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Sufficiency of audit evidence related to the capitalization of property expenditures

As discussed in Note 1 to the consolidated financial statements, expenditures that extend an asset’s useful life or increase its utility are capitalized. The Company has recorded $31,345 million in net book value of properties at December 31, 2020 and has recorded $1,494 million in property additions for the year ended December 31, 2020. Expenditures capitalized include those that are directly related to a capital project and may include materials, labor and other direct costs, in addition to an allocable portion of indirect costs that relate to a capital project. A significant portion of the Company’s annual capital spending relates to self-constructed assets. Costs related to repair and maintenance activities, that in the Company’s judgment, do not extend an asset’s useful life or increase its utility are expensed when such repairs are performed.

We identified the evaluation of the sufficiency of audit evidence related to capitalization of property expenditures as a critical audit matter. Subjective auditor judgment was required in determining procedures and evaluating audit results related to the capitalization of purchased services and compensation due to their usage for both self-constructed assets and repairs and maintenance.

The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over capitalized property expenditures. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to capitalize property expenditures, including controls over the determination of whether purchased services and compensation expenditures extend an asset’s useful life or increase its utility. For a sample of property addition expenditures, we inquired and inspected support to evaluate that the expenditure extended an asset’s useful life or increased its utility. We evaluated the sufficiency of audit evidence obtained by assessing the results of the procedures performed, including the appropriateness of the nature of such evidence.

/s/ KPMG LLP

KPMG LLP

We have served as the Company’s auditor since 1982.

Atlanta, Georgia

February 4, 2021

K38

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Income


	Years ended December 31,
	2020		2019		2018
	($ in millions, except per share amounts)

Railway operating revenues	$	9,789	$	11,296	$	11,458

Railway operating expenses:
Compensation and benefits	2,373		2,751		2,925
Purchased services and rents	1,687		1,725		1,730
Fuel	535		953		1,087
Depreciation	1,154		1,138		1,102
Materials and other	653		740		655
Loss on asset disposal	385		—		—

Total railway operating expenses	6,787		7,307		7,499

Income from railway operations	3,002		3,989		3,959

Other income – net	153		106		67
Interest expense on debt	625		604		557

Income before income taxes	2,530		3,491		3,469

Income taxes	517		769		803

Net income	$	2,013	$	2,722	$	2,666

Earnings per share:
Basic	$	7.88	$	10.32	$	9.58
Diluted	7.84		10.25		9.51

See accompanying notes to consolidated financial statements.

K39

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income


	Years ended December 31,
	2020		2019		2018
	($ in millions)

Net income	$	2,013	$	2,722	$	2,666
Other comprehensive income (loss), before tax:
Pension and other postretirement benefits	(140)		101		(148)
Other comprehensive income (loss) of equity investees	2		(4)		(9)

Other comprehensive income (loss), before tax	(138)		97		(157)
Income tax benefit (expense) related to items of
other comprehensive income (loss)	35		(25)		38

Other comprehensive income (loss), net of tax	(103)		72		(119)

Total comprehensive income	$	1,910	$	2,794	$	2,547

See accompanying notes to consolidated financial statements.

K40

Norfolk Southern Corporation and Subsidiaries

Consolidated Balance Sheets


	At December 31,
	2020		2019
	($ in millions)
Assets
Current assets:
Cash and cash equivalents	$	1,115	$	580

Accounts receivable – net	848		920
Materials and supplies	221		244
Other current assets	134		337
Total current assets	2,318		2,081

Investments	3,590		3,428
Properties less accumulated depreciation of $11,985 and
$11,982, respectively	31,345		31,614
Other assets	709		800

Total assets	$	37,962	$	37,923

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,016	$	1,428

Income and other taxes	263		229
Other current liabilities	302		327
Current maturities of long-term debt	579		316
Total current liabilities	2,160		2,300

Long-term debt	12,102		11,880
Other liabilities	1,987		1,744
Deferred income taxes	6,922		6,815

Total liabilities	23,171		22,739

Stockholders’ equity:
Common Stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 252,095,082 and 257,904,956 shares,
respectively, net of treasury shares	254		259
Additional paid-in capital	2,248		2,209
Accumulated other comprehensive loss	(594)		(491)
Retained income	12,883		13,207

Total stockholders’ equity	14,791		15,184

Total liabilities and stockholders’ equity	$	37,962	$	37,923

See accompanying notes to consolidated financial statements.

K41

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Cash Flows


	Years ended December 31,
	2020		2019		2018
	($ in millions)
Cash flows from operating activities:
Net income	$	2,013	$	2,722	$	2,666
Reconciliation of net income to net cash provided by operating activities:
Depreciation	1,154		1,139		1,104
Deferred income taxes	142		330		173
Gains and losses on properties	(39)		(42)		(171)
Loss on asset disposal	385		—		—
Impairment of investment	99		—		—
Changes in assets and liabilities affecting operations:
Accounts receivable	71		87		(70)
Materials and supplies	23		(37)		15
Other current assets	3		(4)		(46)
Current liabilities other than debt	34		(185)		223
Other – net	(248)		(118)		(168)

Net cash provided by operating activities	3,637		3,892		3,726

Cash flows from investing activities:
Property additions	(1,494)		(2,019)		(1,951)
Property sales and other transactions	333		377		204
Investment purchases	(13)		(18)		(10)
Investment sales and other transactions	(1)		(104)		99

Net cash used in investing activities	(1,175)		(1,764)		(1,658)

Cash flows from financing activities:
Dividends	(960)		(949)		(844)
Common Stock transactions	69		27		40
Purchase and retirement of Common Stock	(1,439)		(2,099)		(2,781)
Proceeds from borrowings – net of issuance costs	784		2,192		2,023
Debt repayments	(381)		(1,188)		(750)
Other	—		23		—

Net cash used in financing activities	(1,927)		(1,994)		(2,312)

Net increase (decrease) in cash, cash equivalents, and restricted cash	535		134		(244)

Cash, cash equivalents, and restricted cash:
At beginning of year	580		446		690

At end of year	$	1,115	$	580	$	446

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amounts capitalized)	$	577	$	555	$	496
Income taxes (net of refunds)	311		543		519

See accompanying notes to consolidated financial statements.

K42

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity


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

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

Comprehensive income:
Net income							2,666		2,666
Other comprehensive loss					(119)				(119)
Total comprehensive income									2,547
Dividends on Common Stock,
$3.04 per share							(844)		(844)
Share repurchases	(17)		(125)				(2,639)		(2,781)
Stock-based compensation	1		87				(7)		81
Reclassification of stranded
tax effects					(88)		88		—

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

Comprehensive income:
Net income							2,722		2,722
Other comprehensive income					72				72
Total comprehensive income									2,794
Dividends on Common Stock,
$3.60 per share							(949)		(949)
Share repurchases	(11)		(88)				(2,000)		(2,099)
Stock-based compensation	1		81				(6)		76

Balance at December 31, 2019	259		2,209		(491)		13,207		15,184

Comprehensive income:
Net income							2,013		2,013
Other comprehensive loss					(103)				(103)
Total comprehensive income									1,910
Dividends on Common Stock,
$3.76 per share							(960)		(960)
Share repurchases	(7)		(59)				(1,373)		(1,439)
Stock-based compensation	2		98				(4)		96

Balance at December 31, 2020	$	254	$	2,248	$	(594)	$	12,883	$	14,791

See accompanying notes to consolidated financial statements.

K43

Norfolk Southern Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The following Notes are an integral part of the Consolidated Financial Statements.

1. Summary of Significant Accounting Policies

Description of Business

Norfolk Southern Corporation is a Virginia-based holding company engaged principally in the rail transportation business, operating 19,300 route miles primarily in the Southeast, East, and Midwest. These consolidated financial statements include Norfolk Southern and its majority-owned and controlled subsidiaries (collectively, NS, we, us, and our). Norfolk Southern’s major subsidiary is NSR. All significant intercompany balances and transactions have been eliminated in consolidation.

NSR and its railroad subsidiaries transport raw materials, intermediate products, and finished goods classified in the following commodity groups (percent of total railway operating revenues in 2020): intermodal (27%); agriculture, forest and consumer products (22%); chemicals (18%); metals and construction (14%); coal (11%); and, automotive (8%). Although most of our customers are domestic, ultimate points of origination or destination for some of the products transported (particularly coal bound for export and some intermodal shipments) may be outside the U.S. Approximately 80% of our railroad employees are covered by collective bargaining agreements with various labor unions.

Use of Estimates

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We periodically review our estimates, including those related to the recoverability and useful lives of assets, as well as liabilities for litigation, environmental remediation, casualty claims, income taxes and pension and other postretirement benefits. Changes in facts and circumstances may result in revised estimates.

Revenue Recognition

Transportation revenues are recognized proportionally as a shipment moves from origin to destination, and related expenses are recognized as incurred. Certain of our contract refunds (which are primarily volume-based incentives) are recorded as a reduction to revenues on the basis of our best estimate of projected liability, which is based on historical activity, current shipment counts and expectation of future activity. Certain ancillary services, such as switching, demurrage and other incidental activities, may be provided to customers under their transportation contracts. These are distinct performance obligations that are recognized at a point in time when the services are performed or as contractual obligations are met.

Cash Equivalents

“Cash equivalents” are highly liquid investments purchased three months or less from maturity.

Allowance for Doubtful Accounts

Our allowance for doubtful accounts was $6 million and $9 million at December 31, 2020 and 2019, respectively. To determine our allowance for doubtful accounts, we evaluate historical loss experience (which has not been significant), the characteristics of current accounts, and general economic conditions and trends.

K44

Materials and Supplies

“Materials and supplies,” consisting mainly of items for maintenance of property and equipment, are stated at the lower of average cost or net realizable value. The cost of materials and supplies expected to be used in property additions or improvements is included in “Properties.”

Investments

Investments in entities over which we have the ability to exercise significant influence but do not control the entity are accounted for using the equity method, whereby the investment is carried at the cost of the acquisition plus our equity in undistributed earnings or losses since acquisition.

Properties

“Properties” are stated principally at cost and are depreciated using the group method whereby assets with similar characteristics, use, and expected lives are grouped together in asset classes and depreciated using a composite depreciation rate. This methodology treats each asset class as a pool of resources, not as singular items. We use approximately 75 depreciable asset classes.

Depreciation expense is based on our assumptions concerning expected service lives of our properties as well as the expected net salvage that will be received upon their retirement. In developing these assumptions, we utilize periodic depreciation studies that are performed by an independent outside firm of consulting engineers and approved by the STB. Our depreciation studies are conducted about every three years for equipment and every six years for track assets and other roadway property. The frequency of these studies is consistent with guidelines established by the STB. We adjust our rates based on the results of these studies and implement the changes prospectively. The studies may also indicate that the recorded amount of accumulated depreciation is deficient (or in excess) of the amount indicated by the study. Any such deficiency (or excess) is amortized as a component of depreciation expense over the remaining service lives of the affected class of property, as determined by the study.

Key factors that are considered in developing average service life and salvage estimates include:

•statistical analysis of historical retirement data and surviving asset records,

•review of historical salvage received and current market rates,

•review of our operations including expected changes in technology, customer demand, maintenance practices and asset management strategies,

•review of accounting policies and assumptions, and

•industry review and analysis.

The composite depreciation rate for rail in high density corridors is derived based on consideration of annual gross tons as compared to the total or ultimate capacity of rail in these corridors. Our experience has shown that traffic density is a leading factor in the determination of the expected service life of rail in high density corridors. In developing the respective depreciation rate, consideration is also given to several rail characteristics including age, weight, condition (new or second-hand) and type (curved or straight).

We capitalize interest on major projects during the period of their construction. Expenditures, including those on leased assets, that extend an asset’s useful life or increase its utility are capitalized. Expenditures capitalized include those that are directly related to a capital project and may include materials, labor, and other direct costs, in addition to an allocable portion of indirect costs that relate to a capital project. A significant portion of our annual capital spending relates to self-constructed assets. Removal activities occur in conjunction with replacement and are estimated based on the average percentage of time employees replacing assets spend on removal functions. Costs related to repairs and maintenance activities that, in our judgment, do not extend an asset’s useful life or increase its utility are expensed when such repairs are performed.

K45

When depreciable operating road and equipment assets are sold or retired in the ordinary course of business, the cost of the assets, net of sales proceeds or salvage, is charged to accumulated depreciation, and no gain or loss is recognized in earnings. Actual historical cost values are retired when available, such as with most equipment assets. The use of estimates in recording the retirement of certain roadway assets is necessary based on the impracticality of tracking individual asset costs. When retiring rail, ties and ballast, we use statistical curves that indicate the relative distribution of the age of the assets retired. The historical cost of other roadway assets is estimated using a combination of inflation indices specific to the rail industry and those published by the U.S. Bureau of Labor Statistics. The indices are applied to the replacement value based on the age of the retired assets. These indices are used because they closely correlate with the costs of roadway assets. Gains and losses on disposal of operating land are included in “Materials and other” expenses. Gains and losses on disposal of nonoperating land and nonrail assets are included in “Other income – net” since such income is not a product of our railroad operations.

A retirement is considered abnormal if it does not occur in the ordinary course of business, if it relates to disposition of a large segment of an asset class and if the retirement varies significantly from the retirement profile identified through our depreciation studies, which inherently consider the impact of normal retirements on expected service lives and depreciation rates. Gains or losses from abnormal retirements are recognized in income from railway operations.

We review the carrying amount of properties whenever events or changes in circumstances indicate that such carrying amount may not be recoverable based on future undiscounted cash flows. Assets that are deemed impaired as a result of such review are recorded at the lower of carrying amount or fair value.

New Accounting Pronouncements

In 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 tax reform from accumulated other comprehensive income (AOCI) to retained earnings. The amount of the reclassification is the difference between the amount initially charged or credited directly to other comprehensive income at the previously enacted U.S. federal corporate income tax rate that remains in AOCI and the amount that would have been charged or credited directly to other comprehensive income using the U.S. federal corporate income tax rate enacted in December 2017. In the first quarter of 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.”

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” and subsequent amendments, which replaced existing lease guidance in GAAP. We adopted the standard on January 1, 2019 using the modified retrospective method and used the effective date as our date of initial application. See Note 10 for additional information.

In June 2016, the FASB issued ASU 2016-13, “Credit Losses - Measurement of Credit Losses on Financial Instruments,” which replaced the current incurred loss impairment method with a method that reflects expected credit losses. Short-term and long-term financial assets, as defined by the standard, are impacted by immediate recognition of estimated credit losses in the financial statements, reflecting the net amount expected to be collected. Historically, losses associated from the inability to collect on accounts receivable have been insignificant, with little divergence in collection trends through varying economic cycles. We adopted the standard on January 1, 2020 and there was no material impact to the financial statements upon adoption.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which adds new guidance to simplify the accounting for income taxes, changes the accounting for certain income tax transactions, and makes other minor changes. We adopted the standard on January 1, 2021 and do not expect it to have a material effect on our financial statements.

K46

2. Railway Operating Revenues

The following table disaggregates our revenues by major commodity group:


	2020		2019		2018
	($ in millions)
Merchandise:
Agriculture, forest and consumer products	$	2,116	$	2,256	$	2,188
Chemicals	1,809		2,092		2,083
Metals and construction	1,333		1,461		1,482
Automotive	830		994		991
Merchandise	6,088		6,803		6,744
Intermodal	2,654		2,824		2,893
Coal	1,047		1,669		1,821

Total	$	9,789	$	11,296	$	11,458

At the beginning of 2020, we combined the agriculture products and forest and consumer commodity groups. In addition, we also made changes in the categorization of certain other commodity groups within Merchandise. Specifically, certain commodities were shifted between agriculture, forest and consumer products; chemicals; and, metals and construction. We made these changes to better align our commodity groups as a result of an organizational realignment. Prior period railway operating revenues have been reclassified to conform to the current presentation.

We recognize the amount of revenues we expect to be entitled to for the transfer of promised goods or services to customers. A performance obligation is created when a customer under a transportation contract or public tariff submits a bill of lading to us for the transport of goods. These performance obligations are satisfied as the shipments move from origin to destination. As such, transportation revenues are recognized proportionally as a shipment moves, and related expenses are recognized as incurred. These performance obligations are generally short-term in nature with transit days averaging approximately one week or less for each commodity group. The customer has an unconditional obligation to pay for the service once the service has been completed. Estimated revenues associated with in-process shipments at period-end are recorded based on the estimated percentage of service completed. We had no material remaining performance obligations at December 31, 2020 and 2019.

We may provide customers ancillary services, such as switching, demurrage and other incidental activities, under their transportation contracts. These are distinct performance obligations that are recognized at a point in time when the services are performed or as contractual obligations are met. These revenues are included within each of the commodity groups and represent approximately 5% of total “Railway operating revenues” on the Consolidated Statements of Income for the years ended December 31, 2020 and 2019, and approximately 4% for the year ended December 31, 2018.

Revenues related to interline transportation services that involve another railroad are reported on a net basis. Therefore, the portion of the amount that relates to another party is not reflected in revenues.

K47

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


	December 31,
	2020		2019
	($ in millions)

Customer	$	629	$	682
Non-customer	219		238

Accounts receivable – net	$	848	$	920

Non-customer receivables include non-revenue-related amounts due from other railroads, governmental entities, and others. “Other assets” on the Consolidated Balance Sheets includes non-current customer receivables of $23 million at both December 31, 2020 and 2019. In 2019, we wrote off a $32 million non-current customer receivable resulting from a legal dispute and this expense is included in “Materials and other” on the Consolidated Statements of Income. We do not have any material contract assets or liabilities at December 31, 2020 and 2019.

3. Other Income – Net


	2020	2019	2018
	($ in millions)

Pension and other postretirement benefits (Note 12)