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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2022

☐    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

nsc-20220930_g1.jpg
 
NORFOLK SOUTHERN CORPORATION
(Exact name of registrant as specified in its charter) 
Virginia52-1188014
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
650 West Peachtree Street NW30308-1925
Atlanta,Georgia
(Address of principal executive offices)(Zip Code)
(855)667-3655
(Registrant’s telephone number, including area code)
No change
(Former name, former address and former fiscal year, if changed since last report)

 Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Norfolk Southern Corporation Common Stock (Par Value $1.00)NSCNew York Stock Exchange

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class Outstanding at September 30, 2022
Common Stock ($1.00 par value per share)231,514,213 (excluding 20,320,777 shares held by the registrant’s
consolidated subsidiaries)



TABLE OF CONTENTS

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES
  Page
  
  
  
  
  
  
 
 
 
 
 
 
 
 


2

PART I. FINANCIAL INFORMATION
  
Item 1. Financial Statements
 
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
 
 Third QuarterFirst Nine Months
 2022202120222021
 ($ in millions, except per share amounts)
Railway operating revenues$3,343 $2,852 $9,508 $8,290 
Railway operating expenses    
Compensation and benefits735 609 1,968 1,844 
Purchased services and rents484 432 1,402 1,254 
Fuel383 208 1,092 573 
Depreciation306 297 912 883 
Materials and other163 170 506 418 
Total railway operating expenses2,071 1,716 5,880 4,972 
Income from railway operations1,272 1,136 3,628 3,318 
Other income (expense) – net(2)14 (21)56 
Interest expense on debt177 164 515 481 
Income before income taxes1,093 986 3,092 2,893 
Income taxes135 233 612 648 
Net income$958 $753 $2,480 $2,245 
Earnings per share    
Basic$4.11 $3.07 $10.49 $9.03 
Diluted4.10 3.06 10.45 8.99 
 
 See accompanying notes to consolidated financial statements.
3

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 Third QuarterFirst Nine Months
2022202120222021
 ($ in millions)
Net income$958 $753 $2,480 $2,245 
Other comprehensive income, before tax:  
Pension and other postretirement benefits6 10 17 31 
Other comprehensive income of equity investees5 — 13 — 
Other comprehensive income, before tax11 10 30 31 
Income tax expense related to items of other
comprehensive income— (3)(5)(8)
Other comprehensive income, net of tax11 7 25 23 
Total comprehensive income$969 $760 $2,505 $2,268 
 
 See accompanying notes to consolidated financial statements.
4

Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
September 30,
2022		December 31,
2021
($ in millions)
Assets  
Current assets:  
Cash and cash equivalents$1,214 $839 
Accounts receivable – net1,151 976 
Materials and supplies276 218 
Other current assets74 134 
Total current assets2,715 2,167 
Investments3,686 3,707 
Properties less accumulated depreciation of $12,445
 
and $12,031, respectively
31,838 31,653 
Other assets1,067 966 
Total assets$39,306 $38,493 
Liabilities and stockholders’ equity  
Current liabilities:  
Accounts payable$1,486 $1,351 
Income and other taxes299 305 
Other current liabilities408 312 
Current maturities of long-term debt605 553 
Total current liabilities2,798 2,521 
Long-term debt14,463 13,287 
Other liabilities1,828 1,879 
Deferred income taxes7,193 7,165 
Total liabilities26,282 24,852 
Stockholders’ equity:  
Common stock $1.00 per share par value, 1,350,000,000 shares
  
  authorized; outstanding 231,514,213 and 240,162,790 shares,
  
  respectively, net of treasury shares233 242 
Additional paid-in capital2,181 2,215 
Accumulated other comprehensive loss(377)(402)
Retained income10,987 11,586 
Total stockholders’ equity13,024 13,641 
Total liabilities and stockholders’ equity$39,306 $38,493 
 
 See accompanying notes to consolidated financial statements.
5

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
 First Nine Months
 20222021
 ($ in millions)
Cash flows from operating activities  
Net income$2,480 $2,245 
Reconciliation of net income to net cash provided by operating activities:  
Depreciation912 883 
Deferred income taxes23 158 
Gains and losses on properties(54)(80)
Changes in assets and liabilities affecting operations:  
Accounts receivable(174)(102)
Materials and supplies(58)(14)
Other current assets57 57 
Current liabilities other than debt273 294 
Other – net(35)(128)
Net cash provided by operating activities3,424 3,313 
Cash flows from investing activities  
Property additions(1,282)(1,025)
Property sales and other transactions193 135 
Investment purchases(8)(5)
Investment sales and other transactions37 48 
Net cash used in investing activities(1,060)(847)
Cash flows from financing activities  
Dividends(881)(764)
Common stock transactions(5)8 
Purchase and retirement of common stock(2,284)(2,460)
Proceeds from borrowings1,732 1,676 
Debt repayments(551)(576)
Net cash used in financing activities(1,989)(2,116)
Net increase in cash and cash equivalents375 350 
Cash and cash equivalents  
At beginning of year839 1,115 
At end of period$1,214 $1,465 
Supplemental disclosures of cash flow information  
Cash paid during the period for:  
Interest (net of amounts capitalized)$425 $391 
Income taxes (net of refunds)578 468 

 See accompanying notes to consolidated financial statements.
6

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)

Common
Stock		Additional
Paid-in
Capital		Accum. Other
Comprehensive
Loss		Retained
Income		Total
 ($ in millions, except per share amounts)
Balance at December 31, 2021$242 $2,215 $(402)$11,586 $13,641 
Comprehensive income:
Net income703 703 
Other comprehensive income8 8 
Total comprehensive income711 
Dividends on common stock,
$1.24 per share
(297)(297)
Share repurchases(2)(19)(579)(600)
Stock-based compensation7 (1)6 
Balance at March 31, 2022240 2,203 (394)11,412 13,461 
Comprehensive income:
Net income819 819 
Other comprehensive income6 6 
Total comprehensive income825 
Dividends on common stock,
$1.24 per share
(294)(294)
Share repurchases(4)(29)(821)(854)
Stock-based compensation16 16 
Balance at June 30, 2022236 2,190 (388)11,116 13,154 
Comprehensive income:
Net income958 958 
Other comprehensive income11 11 
Total comprehensive income969 
Dividends on common stock,
$1.24 per share
(290)(290)
Share repurchases(3)(31)(796)(830)
Stock-based compensation22 (1)21 
Balance at September 30, 2022$233 $2,181 $(377)$10,987 $13,024 


 See accompanying notes to consolidated financial statements.
7

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)

Common
Stock		Additional
Paid-in
Capital		Accum. Other
Comprehensive
Loss		Retained
Income		Total
($ in millions, except per share amounts)
Balance at December 31, 2020$254 $2,248 $(594)$12,883 $14,791 
Comprehensive income:
Net income673 673 
Other comprehensive income8 8 
Total comprehensive income681 
Dividends on common stock,
$0.99 per share
(249)(249)
Share repurchases(3)(19)(569)(591)
Stock-based compensation12 (1)11 
Balance at March 31, 2021251 2,241 (586)12,737 14,643 
Comprehensive income:
Net income819 819 
Other comprehensive income8 8 
Total comprehensive income827 
Dividends on common stock,
$0.99 per share
(247)(247)
Share repurchases(3)(28)(903)(934)
Stock-based compensation27 1 28 
Balance at June 30, 2021248 2,240 (578)12,407 14,317 
Comprehensive income:
Net income753 753 
Other comprehensive income7 7 
Total comprehensive income760 
Dividends on common stock,
$1.09 per share
(268)(268)
Share repurchases(4)(31)(900)(935)
Stock-based compensation15 (2)13 
Balance at September 30, 2021$244 $2,224 $(571)$11,990 $13,887 

 See accompanying notes to consolidated financial statements.
8

Norfolk Southern Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
 
In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Norfolk Southern Corporation (Norfolk Southern) and subsidiaries’ (collectively, NS, we, us, and our) financial position at September 30, 2022 and December 31, 2021, our results of operations, comprehensive income and changes in stockholders’ equity for the third quarters and first nine months of 2022 and 2021, and our cash flows for the first nine months of 2022 and 2021 in conformity with U.S. Generally Accepted Accounting Principles (GAAP).
 
These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our latest Annual Report on Form 10-K.

1. Railway Operating Revenues

The following table disaggregates our revenues by major commodity group:
Third QuarterFirst Nine Months
2022202120222021
($ in millions)
Merchandise:
Agriculture, forest and consumer products$642 $564 $1,839 $1,681 
Chemicals570 504 1,620 1,457 
Metals and construction442 424 1,237 1,196 
Automotive276 218 759 664 
Merchandise1,930 1,710 5,455 4,998 
Intermodal942 812 2,768 2,332 
Coal471 330 1,285 960 
Total$3,343 $2,852 $9,508 $8,290 

We recognize the amount of revenues to which we expect to be entitled 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 September 30, 2022 and December 31, 2021.

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 a percentage of total “Railway operating revenues” on the Consolidated Statements of Income as follows: 7% for the third quarters of 2022 and 2021, and the first nine months of 2022, and 6% for the first nine months of 2021.


9

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.

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:

September 30,
2022		December 31, 2021
($ in millions)
Customer$901 $741 
Non-customer250 235 
  Accounts receivable – net$1,151 $976 

Non-customer receivables include non-revenue related amounts due from other railroads, governmental entities, and others. There were no non-current customer receivables at September 30, 2022, while “Other assets” on the Consolidated Balance Sheets included $23 million at December 31, 2021. We do not have any material contract assets or liabilities at September 30, 2022 and December 31, 2021.

2.  Stock-Based Compensation

Third QuarterFirst Nine Months
2022202120222021
($ in millions)
Stock-based compensation expense$13 $14 $49 $46 
Total tax benefit7 3 24 28 

During 2022, we granted stock options, restricted stock units (RSUs) and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP), as follows:

Third QuarterFirst Nine Months
GrantedWeighted-Average Grant-Date Fair ValueGrantedWeighted-Average Grant-Date Fair Value
Stock options6,000 $74.95 139,810 $61.30 
RSUs9,993 240.63 173,984 266.72 
PSUs6,960 256.12 58,415 272.48 


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Stock Options
Third QuarterFirst Nine Months
2022202120222021
($ in millions)
Options exercised116,88122,502 275,770 363,982 
Cash received upon exercise$9 $2 $23 $33 
Related tax benefits realized5 1 11 13 

Restricted Stock Units

RSUs granted primarily have a four-year ratable restriction period and will be settled through the issuance of shares of Norfolk Southern common stock (Common Stock). Certain RSU grants include cash dividend equivalent payments during the restriction period in an amount equal to the regular quarterly dividends paid on Common Stock. 
Third QuarterFirst Nine Months
2022202120222021
($ in millions)
RSUs vested557 1,100 247,510 260,227 
Common Stock issued net of tax withholding397 761 175,373 184,272 
Related tax benefits realized$— $— $5 $7 

Performance Share Units

PSUs provide for awards based on the achievement of certain predetermined corporate performance goals at the end of a three-year cycle and are settled through the issuance of shares of Common Stock. All PSUs will earn out based on the achievement of performance conditions and some will also earn out based on a market condition. The market condition fair value was measured on the date of grant using a Monte Carlo simulation model. No PSUs were
earned or paid out during the third quarters of 2022 or 2021.

First Nine Months
20222021
($ in millions)
PSUs earned86,420 78,727 
Common Stock issued net of tax withholding54,651 49,967 
Related tax benefits realized$1 $1 

3. Income Taxes

On July 8, 2022, House Bill 1342 was signed into law in the Commonwealth of Pennsylvania, which reduced its corporate income tax rate from 9.99% to 4.99%, through a series of phased reductions beginning each tax year from January 1, 2023 through January 1, 2031. GAAP requires companies to recognize the effect of tax law changes in the period of enactment. As a result, in the third quarter we recognized a $136 million benefit in “Income taxes” with a corresponding reduction in “Deferred income taxes.”


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4.  Earnings Per Share

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

 BasicDiluted
 Third Quarter
 2022202120222021
($ in millions, except per share amounts,
shares in millions)
Net income$958 $753 $958 $753 
Dividend equivalent payments— (1)— — 
Income available to common stockholders$958 $752 $958 $753 
Weighted-average shares outstanding233.2 245.3 233.2 245.3 
Dilutive effect of outstanding options and share-settled awards  0.8 1.1 
Adjusted weighted-average shares outstanding  234.0 246.4 
Earnings per share$4.11 $3.07 $4.10 $3.06 
 BasicDiluted
 First Nine Months
 2022202120222021
($ in millions, except per share amounts,
shares in millions)
Net income$2,480 $2,245 $2,480 $2,245 
Dividend equivalent payments(1)(2)(1)— 
Income available to common stockholders$2,479 $2,243 $2,479 $2,245 
Weighted-average shares outstanding236.4 248.5 236.4 248.5 
Dilutive effect of outstanding options and share-settled awards  0.8 1.2 
Adjusted weighted-average shares outstanding 237.2 249.7 
Earnings per share$10.49 $9.03 $10.45 $8.99 

During the third quarters and first nine months of 2022 and 2021, dividend equivalent payments were made to certain holders of stock options and RSUs.  For purposes of computing basic earnings per share, dividend equivalent payments made to holders of stock options and RSUs were deducted from net income to determine income available to common stockholders. For purposes of computing diluted earnings per share, we evaluate on a grant-by-grant basis those stock options and RSUs receiving dividend equivalent payments under the two-class and treasury stock methods to determine which method is more dilutive for each grant. For those grants for which the two-class method was more dilutive, net income was reduced by dividend equivalent payments to determine income available to common stockholders. The dilution calculations exclude options having exercise prices exceeding the average market price of Common Stock as follows: 0.1 million in the third quarter and first nine months ended September 30, 2022 and none in the third quarter and first nine months ended September 30, 2021.


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5. Accumulated Other Comprehensive Loss

The changes in the cumulative balances of “Accumulated other comprehensive loss” reported in the Consolidated Balance Sheets consisted of the following:
Balance at
Beginning
of Year		Net IncomeReclassification
Adjustments		Balance at
End of Period
 ($ in millions)   
Nine months ended September 30, 2022     
Pensions and other postretirement liabilities$(356)$— $14 $(342)
Other comprehensive income (loss) of equity investees(46)11 —  (35)
Accumulated other comprehensive loss$(402)$11 $14  $(377)
Nine months ended September 30, 2021     
Pensions and other postretirement liabilities$(526)$— $23 $(503)
Other comprehensive loss of equity investees(68)— —  (68)
Accumulated other comprehensive loss$(594)$— $23  $(571)

6.  Stock Repurchase Program
 
We repurchased and retired 9.2 million and 9.4 million shares of Common Stock under our stock repurchase program at a cost of $2.3 billion and $2.5 billion during the first nine months of 2022 and 2021, respectively. On March 29, 2022, our Board of Directors authorized a new program for the repurchase of up to $10.0 billion of Common Stock beginning April 1, 2022. Our previous share repurchase program terminated on March 31, 2022.

7.  Investments

Investment in Conrail
 
Through a limited liability company, we and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC). We have a 58% economic and 50% voting interest in the jointly-owned entity, and CSX has the remainder of the economic and voting interests. Our investment in Conrail was $1.6 billion and $1.5 billion at September 30, 2022 and December 31, 2021, respectfully.

CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of Norfolk Southern Railway Company (NSR) and CSX Transportation, Inc. (CSXT). The costs of operating the Shared Assets Areas are borne by NSR and CSXT based on usage. In addition, NSR and CSXT pay CRC a fee for access to the Shared Assets Areas. “Purchased services and rents” and “Fuel” include expenses payable to CRC for operation of the Shared Assets Areas totaling $42 million and $37 million for the third quarters of 2022 and 2021, respectively, and $116 million and $108 million for the first nine months of 2022 and 2021, respectively. Our equity in Conrail’s earnings, net of amortization, was $15 million and $14 million for the third quarters of 2022 and 2021, respectively, and $40 million and $42 million for the first nine months of 2022 and 2021, respectively. These amounts partially offset the costs of operating the Shared Assets Areas and are included in “Purchased services and rents.”

“Other liabilities” includes $534 million at both September 30, 2022 and December 31, 2021 for long-term advances from Conrail, maturing in 2050 that bear interest at an average rate of 1.31%.


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Investment in TTX

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

Expenses incurred for use of TTX equipment are included in “Purchased services and rents.” These expenses amounted to $63 million and $59 million for the third quarters of 2022 and 2021, respectively, and $193 million and $183 million for the first nine months of 2022 and 2021, respectively. Our equity in TTX’s earnings partially offsets these costs and totaled $18 million and $12 million for the third quarters of 2022 and 2021, respectively, and $39 million and $43 million for the first nine months of 2022 and 2021, respectively.

8.  Debt

In June 2022, we issued $750 million of 4.55% senior notes due 2053.

In May 2022, we renewed our accounts receivable securitization program with a maximum borrowing capacity of $400 million. The term expires in May 2023. We had no amounts outstanding under this program and our available borrowing capacity was $400 million at both September 30, 2022 and December 31, 2021.

In February 2022, we issued $600 million of 3.00% senior notes due 2032 and $400 million of 3.70% senior notes due 2053.

9.  Pensions and Other Postretirement Benefits
 
We have both funded and unfunded defined benefit pension plans covering eligible employees. We also provide specified health care benefits to eligible retired employees; these plans can be amended or terminated at our option.  Under our self-insured retiree health care plan, for those participants who are not Medicare-eligible, certain health care expenses are covered for retired employees and their dependents, reduced by any deductibles, coinsurance, and, in some cases, coverage provided under other group insurance policies. Eligible retired participants and their spouses who are Medicare-eligible are not covered under the self-insured retiree health care plan, but instead are provided with an employer-funded health reimbursement account which can be used for reimbursement of health insurance premiums or eligible out-of-pocket medical expenses.

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

 Pension BenefitsOther Postretirement Benefits
 Third Quarter
 2022202120222021
 ($ in millions)
Service cost$10 $10 $1 $1 
Interest cost17 14 3 1 
Expected return on plan assets(53)(48)(3)(3)
Amortization of net losses12 16 — — 
Amortization of prior service benefit— — (6)(6)
Net benefit$(14)$(8)$(5)$(7)

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 Pension BenefitsOther Postretirement Benefits
 First Nine Months
 2022202120222021
 ($ in millions)
Service cost$30 $32 $4 $4 
Interest cost51 41 7 5 
Expected return on plan assets(160)(144)(9)(9)
Amortization of net losses36 49 — 1 
Amortization of prior service benefit— — (19)(19)
Net benefit$(43)$(22)$(17)$(18)

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

10.  Fair Values of Financial Instruments
 
The fair values of “Cash and cash equivalents,” “Accounts receivable – net,” and “Accounts payable,” approximate carrying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life insurance is recorded at cash surrender value and, accordingly, approximates fair value. There are no other assets or liabilities measured at fair value on a recurring basis at September 30, 2022 or December 31, 2021. The carrying amounts and estimated fair values, based on Level 1 inputs, of long-term debt consist of the following:

 September 30, 2022December 31, 2021
Carrying
Amount		Fair
Value		Carrying
Amount		Fair
Value
 ($ in millions)
Long-term debt, including current maturities$(15,068)$(13,481)$(13,840)$(17,033)

11.  Commitments and Contingencies
 
Lawsuits
 
We and/or certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations.  When we conclude that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to earnings and, if material, disclosed below. While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payment of such liability and claims. However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter. Any adjustments to the recorded liability will be reflected in earnings in the periods in which such adjustments become known. For lawsuits and other claims where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established but the matter, if potentially material, is disclosed below. We routinely review relevant information with respect to our lawsuits and other claims and update our accruals, disclosures and estimates of reasonably possible loss based on such reviews.


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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. Summary judgment has been briefed but not decided, and trial is likely to occur in the first quarter of 2023. We continue to vigorously defend the lawsuit and, although it is reasonably possible we could incur a loss in the case, we believe that we will prevail. However, given that litigation is inherently unpredictable and subject to uncertainties, there can be no assurances that the final outcome of the litigation or a litigation settlement will not have a material adverse affect on our financial position or results of operations. We cannot reasonably estimate the potential loss or range of loss associated with the litigation at this time.

Casualty Claims

Casualty claims include employee personal injury and occupational claims as well as third-party claims, all exclusive of legal costs.  To aid in valuing our personal injury liability and determining the amount to accrue with respect to such claims during the year, we utilize studies prepared by an independent actuarial consulting firm.  Job-related personal injury and occupational claims are subject to the Federal Employer’s Liability Act (FELA), which is applicable only to railroads. The variability inherent in FELA’s fault-based tort system could result in actual costs being different from the liability recorded.  While the ultimate amount of claims incurred is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payments of claims and is supported by the most recent actuarial study.  In all cases, we record a liability when the expected loss for the claim is both probable and reasonably estimable.

Employee personal injury claims – The largest component of claims expense is employee personal injury costs.  The independent actuarial firm we engage provides quarterly studies to aid in valuing our employee personal injury liability and estimating personal injury expense.  The actuarial firm studies our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences.  The actuarial firm uses the results of these analyses to estimate the ultimate amount of liability. We adjust the liability quarterly based upon our assessment and the results of the study. The accuracy of our estimate of the liability is subject to inherent limitation given the difficulty of predicting future events such as jury decisions, court interpretations, or legislative changes. As a result, actual claim settlements may vary from the estimated liability recorded.

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

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

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

Our Consolidated Balance Sheets include liabilities for environmental exposures of $57 million at September 30, 2022 and $49 million at December 31, 2021, of which $15 million is classified as a current liability at the end of both periods. At September 30, 2022, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 86 known locations and projects compared with 88 locations and projects at December 31, 2021. At September 30, 2022, twenty sites accounted for $46 million of the liability, and no individual site was considered to be material. We anticipate that most of this liability will be paid out over five years; however, some costs will be paid out over a longer period.

At eight locations, one or more of our subsidiaries in conjunction with a number of other parties have been identified as potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or comparable state statutes that impose joint and several liability for cleanup costs.  We calculate our estimated liability for these sites based on facts and legal defenses applicable to each site and not solely on the basis of the potential for joint liability.

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

The risk of incurring environmental liability for acts and omissions, past, present, and future, is inherent in the railroad business.  Some of the commodities we transport, particularly those classified as hazardous materials, pose special risks that we work diligently to reduce.  In addition, several of our subsidiaries own, or have owned, land used as operating property, or which is leased and operated by others, or held for sale.  Because environmental problems that are latent or undisclosed may exist on these properties, there can be no assurance that we will not incur environmental liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably at this time.  Moreover, lawsuits and claims involving these and potentially other unidentified environmental sites and matters are likely to arise from time to time.  The resulting liabilities could have a significant effect on financial position, results of operations, or liquidity in a particular year or quarter.
 
Based on our assessment of the facts and circumstances now known, we believe we have recorded the probable and reasonably estimable costs for dealing with those environmental matters of which we are aware.  Further, we believe that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, or liquidity.
 

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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.

In September 2022, management reached tentative agreements with all relevant unions. These tentative agreements, which pertain to years 2020-2024, included retroactive pay increases and other benefits for our craft employees that are higher than our estimates previously recorded for such items. For the third quarter of 2022, “Compensation and benefits” includes $85 million and “Purchased services and rents” includes $3 million of additional expenses pertaining to estimated wage increases recorded in periods prior to July 1, 2022. For the first nine months of 2022, “Compensation and benefits” includes $54 million and “Purchased services and rents” includes $2 million of additional expenses pertaining to estimated wage increases recorded in periods prior to January 1, 2022.

Although some of these agreements have been finalized through ratification by union membership, others remain subject to ratification. In addition, two labor unions did not initially ratify their tentative agreements (with one union putting out a second tentative agreement for a vote and the other agreeing to maintain the status quo as negotiations continue). The outcome of the ratification process cannot be predicted with certainty at this time; however, if one or more of the tentative agreements fails ratification and is not subsequently ratified during a final “status quo” period where self-help (strike or lockout) is not permitted, self-help could occur in mid-November or early December (dates vary by tentative agreement). A service disruption, depending on the duration, could have a material adverse effect on our financial position, results of operations, or liquidity. In addition, the resulting changes in our finalized labor agreements (and our tentative agreements, if ratified) are expected to increase our labor costs.

Insurance
 
We purchase insurance covering legal liabilities for bodily injury and property damage to third parties. This insurance provides coverage above $75 million and below $800 million ($1.1 billion for specific perils) per occurrence and/or policy year. In addition, we purchase insurance covering damage to property owned by us or in our care, custody, or control. This insurance covers approximately 82% of potential losses above $75 million and below $275 million per occurrence and/or policy year.

12. New Accounting Pronouncements

In November 2021, the Financial Accounting Standards Board issued Accounting Standards Update 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance,” which requires annual disclosures when an entity has received government assistance. Entities are required to disclose the types of government assistance received, the accounting treatment for that government assistance, and the effect of the government assistance on the financial statements. The new standard is effective for annual periods beginning after December 15, 2021, and early adoption is permitted. We do not expect this standard to have a material effect on our disclosures. We did not adopt the standard early.


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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Norfolk Southern Corporation and Subsidiaries
 
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes.
 
OVERVIEW
 
We are one of the nation’s premier transportation companies, moving goods and materials that help drive the U.S. economy. We connect customers to markets and communities to economic opportunity with safe, reliable, and cost-effective shipping solutions. Our Norfolk Southern Railway Company subsidiary operates in 22 states and the District of Columbia. We are a major transporter of industrial products, including agriculture, forest and consumer products, chemicals, and metals and construction materials. In addition, in the East we serve every major container port and operate the most extensive intermodal network. We are also a principal carrier of coal, automobiles, and automotive parts.

During the third quarter, strong revenue growth drove improved profitability despite higher inflation-related operating expenses. Higher fuel surcharge revenues, resulting from higher fuel commodity prices, and pricing gains led to revenue per unit growth that more than offset the impact of lower volume. The increase in fuel commodity prices also led to higher fuel expense. Additionally, tentative agreements, resulting as part of ongoing labor union negotiations, included retroactive pay increases and other benefits for our craft employees that resulted in increased compensation and benefits expenses. Finally, although we incurred incremental service-related costs, we continued to make progress on efforts to increase network fluidity and improve service for our customers.

SUMMARIZED RESULTS OF OPERATIONS

Third QuarterFirst Nine Months
20222021% change20222021% change
($ in millions, except per share amounts)
Income from railway operations$1,272 $1,136 12%$3,628 $3,318 9%
Net income$958 $753 27%$2,480 $2,245 10%
Diluted earnings per share$4.10 $3.06 34%$10.45 $8.99 16%
Railway operating ratio (percent)62.0 60.2 3%61.8 60.0 3%

Income from railway operations increased in both periods, driven by higher railway operating revenues. Revenue growth was the result of higher fuel surcharge revenues and pricing gains, which more than offset the impact of volume declines in both the third quarter and first nine months. The rise in revenues was partly offset by increased railway operating expenses, driven by higher fuel prices, increased labor-related costs resulting from ongoing labor union negotiations, other inflationary pressures, and service-related costs. The first nine months also include higher claims-related expenses and lower gains on the sale of operating properties. The increase in estimates for retroactive wage increases anticipated under our tentative labor agreements and that pertain to prior periods lowered diluted earnings per share by $0.28 and $0.18 in the third quarter and first nine months, respectively. Additionally, net income in both periods includes a $136 million deferred tax benefit resulting from a corporate income tax rate change in the Commonwealth of Pennsylvania, which increased diluted earnings per share by $0.58 and $0.57 in the third quarter and first nine months, respectively. Our share repurchase activity resulted in the percentage increase in diluted earnings per share that exceeded that of net income.



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DETAILED RESULTS OF OPERATIONS
 
Railway Operating Revenues

The following tables present a comparison of revenues ($ in millions), units (in thousands), and average revenue per unit ($ per unit) by commodity group.
Third QuarterFirst Nine Months
Revenues 20222021% change20222021% change
Merchandise:
Agriculture, forest and consumer products$642 $564 14%$1,839 $1,681 9%
Chemicals570 504 13%1,620 1,457 11%
Metals and construction442 424 4%1,237 1,196 3%
Automotive276 218 27%759 664 14%
Merchandise1,930 1,710 13%5,455 4,998 9%
Intermodal942 812 16%2,768 2,332 19%
Coal471 330 43%1,285 960 34%
Total$3,343 $2,852 17%$9,508 $8,290 15%
Units
Merchandise:
Agriculture, forest and consumer products178.0 181.3 (2%)539.2 547.3 (1%)
Chemicals137.9 138.3 —%407.3 399.0 2%
Metals and construction168.3 179.2 (6%)480.2 510.5 (6%)
Automotive85.4 81.5 5%252.3 257.5 (2%)
Merchandise569.6 580.3 (2%)1,679.0 1,714.3 (2%)
Intermodal972.7 1,021.0 (5%)2,945.7 3,100.0 (5%)
Coal183.0 160.5 14%514.7 500.2 3%
Total1,725.3 1,761.8 (2%)5,139.4 5,314.5 (3%)
Revenue per Unit
Merchandise:
Agriculture, forest and consumer products$3,606 $3,113 16%$3,411 $3,072 11%
Chemicals4,135 3,647 13%3,978 3,651 9%
Metals and construction2,625 2,360 11%2,575 2,342 10%
Automotive3,231 2,679 21%3,008 2,579 17%
Merchandise3,388 2,946 15%3,249 2,915 11%
Intermodal968 796 22%940 752 25%
Coal2,575 2,057 25%2,498 1,919 30%
Total1,938 1,619 20%1,850 1,560 19%


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Railway operating revenues increased $491 million in the third quarter and $1.2 billion for the first nine months compared with the same periods last year. The table below reflects the components of the revenue change by major commodity group ($ in millions).

Third QuarterFirst Nine Months
MerchandiseIntermodalCoalMerchandiseIntermodalCoal
Increase (Decrease)
Volume$(32)$(38)$46 $(103)$(116)$28 
Fuel surcharge revenue168 124 35 356 333 58 
Rate, mix and other84 44 60 204 219 239 
Total$220 $130 $141 $457 $436 $325 
 
Approximately 95% of our revenue base is covered by contracts that include negotiated fuel surcharges. Revenues associated with these surcharges totaled $501 million and $174 million in the third quarters of 2022 and 2021, respectively, and $1.2 billion and $419 million for the first nine months of 2022 and 2021, respectively. The increase in fuel surcharge revenues is driven by higher fuel commodity prices. Should the current fuel price environment persist for the remainder of 2022, we expect fuel surcharge revenue to continue to be higher than 2021.

Merchandise

Merchandise revenues increased in both periods due to higher average revenue per unit, driven by higher fuel surcharge revenue and increased pricing, partially offset by lower volume. Volumes fell in both periods as declines in metals and construction and agriculture, forest, and consumer products shipments more than offset higher automotive shipments in the third quarter and chemicals shipments in the first nine months.

Agriculture, forest and consumer products volume decreased in both periods. During the third quarter, declines in ethanol, pulpboard, fertilizer, and pulp, more than offset gains in corn, food oils, feed, and soybeans. During the first nine months, declines in fertilizer, corn, pulpboard, and pulp more than offset increases in feed, soybeans, and food oils. Decreased ethanol shipments in the third quarter were due to a decline in gasoline consumption. Pulpboard shipments declined in both periods due to decreased demand. Lower fertilizer shipments in both periods were driven by high fertilizer prices causing customers to draw down on existing inventories or delay purchases. Pulp shipments decreased in both periods due to equipment availability, service disruptions and over-the-road competition. Increased corn shipments in the third quarter were due to improved cycle times on grain trains. In both periods, feed and food oils shipments increased due to increased customer demand and soybean volumes were higher due to increased opportunity for exports.

Chemicals volume was flat in the third quarter but increased for the first nine months driven by growth in shipments of sand in both periods due to increased demand. Both periods were impacted by reduced shipments of inorganic chemicals, plastics, and organic chemicals, due to decreased demand. The first nine months also saw an increase in solid waste shipments due to growth with existing customers.

Metals and construction volume fell in both periods, largely the result of decreased shipments of coil steel, iron and steel, and scrap metal driven by service disruptions and slower equipment cycle times.

Automotive volume increased in the third quarter but decreased for the first nine months. Higher shipments in the third quarter were primarily due to increased production due to fewer parts supply issues when compared to the prior year, partially offset by slower equipment cycle times. Volume declines for the first nine months were driven by slower equipment cycle times partially offset by fewer parts supply issues when compared to the prior year.

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Merchandise revenues for the remainder of the year are expected to be higher due to increased average revenue per unit, driven by higher fuel surcharge revenue and pricing gains.

Intermodal
 
Intermodal revenues increased in both periods, driven by higher average revenue per unit, a result of higher fuel surcharge revenues and pricing gains, partially offset by lower volume. The first nine months also included higher storage services revenue.

Intermodal units (in thousands) by market were as follows:
Third QuarterFirst Nine Months
20222021% change20222021% change
Domestic630.6 656.6 (4%)1,954.4 1,957.5 —%
International342.1 364.4 (6%)991.3 1,142.5 (13%)
Total972.7 1,021.0 (5%)2,945.7 3,100.0 (5%)

Domestic volume declined in both periods due to service disruptions and terminal congestion. International volume decreased in both periods as supply chain constraints, equipment shortages, as well as excess retail inventory which more than offset strong consumer demand.

Intermodal revenues for the remainder of the year are expected to be higher due to increased average revenue per unit, driven by higher fuel surcharge revenue and pricing gains.

Coal

Coal revenues increased in both periods due to higher average revenue per unit, driven by pricing gains and higher fuel surcharge revenue, and higher volume.

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

 Third QuarterFirst Nine Months
 20222021% change20222021% change
Utility9,908 8,234 20%27,136 25,343 7%
Export6,391 5,650 13%19,319 18,923 2%
Domestic metallurgical3,232 3,074 5%8,444 8,886 (5%)
Industrial963 940 2%2,849 2,710 5%
Total20,494 17,898 15%57,748 55,862 3%
 
Coal tonnage increased in both periods primarily due to increased utility and export tonnage. Utility tonnage increased in both periods due to stronger demand. Export tonnage increased due to increased coal supply. Domestic metallurgical coal tonnage increased for the third quarter due to increased coal supply, partially offset by reduced coke shipments related to customer sourcing changes. For the first nine months domestic metallurgical coal

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tonnage decreased due to reduced coke shipments related to customer sourcing changes. Industrial coal tonnage increased in both periods due to increased demand.

Coal revenues for the remainder of the year are expected to rise due to increased average revenue per unit, driven primarily by higher fuel surcharge revenue, and volume growth.

Railway Operating Expenses

Railway operating expenses summarized by major classifications follow ($ in millions):

Third QuarterFirst Nine Months
20222021% change20222021% change
Compensation and benefits$735 $609 21%$1,968 $1,844 7%
Purchased services and rents484 432 12%1,402 1,254 12%
Fuel383 208 84%1,092 573 91%
Depreciation306 297 3%912 883 3%
Materials and other163 170 (4%)506 418 21%
Total$2,071 $1,716 21%$5,880 $4,972 18%

Compensation and benefits expense increased in both periods as follows:

•increased pay rates (up $130 million for the quarter and $151 million for the first nine months),
•employee activity levels (up $28 million for the quarter and $13 million for the first nine months),
•overtime (up $4 million for the quarter and $17 million for the first nine months),
•incentive and stock-based compensation (down $38 million for the quarter and $62 million for the first nine months), and
•other (up $2 million for the quarter and $5 million for the first nine months).

The increase in pay rates in 2022 includes higher estimates associated with previously recorded amounts for retroactive wage increases and other benefits anticipated under our labor agreements. For the third quarter of 2022, compensation and benefits includes $85 million and purchased services includes $3 million of additional expenses pertaining to estimated wage increases recorded in periods prior to July 1, 2022. For the first nine months of 2022, compensation and benefits includes $54 million and purchased services includes $2 million of additional expenses pertaining to estimated wage increases recorded in periods prior to January 1, 2022.

Average rail headcount for the quarter was up by over 800 compared with the third quarter of 2021 due to the hiring of additional conductor trainees.

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

Third QuarterFirst Nine Months
 20222021% change20222021% change
Purchased services$397 $355 12%$1,133 $1,025 11%
Equipment rents87 77 13%269 229 17%
Total$484 $432 12%$1,402 $1,254 12%

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Purchased services increased in both periods due to inflationary pressures which resulted in higher intermodal-related expenses, increased operational and transportation expenses, as well as higher technology-related costs. Equipment rents increased in both periods as lower network fluidity led to greater time-and-mileage expenses, increased automotive equipment expenses, and higher short-term locomotive resource costs.

Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increased in both periods due to higher locomotive fuel prices (up 88% in the third quarter and 97% in the first nine months), partially offset by decreased consumption (down 2% in the third quarter and 3% in the first nine months). Should the current fuel price environment persist for the remainder of 2022, we expect fuel expenses to continue to be higher compared to 2021.

Materials and other expenses decreased in the third quarter but increased in the first nine months as follows ($ in millions):  

Third QuarterFirst Nine Months
 20222021% change20222021% change
Materials$83 $71 17%$215 $193 11%
Claims58 56 4%171 137 25%
Other22 43 (49%)120 88 36%
Total$163 $170 (4%)$506 $418 21%

Materials expense increased in both periods due to increased freight car and track materials costs. Claims expense increased in both periods as a result of higher costs associated with environmental remediation matters and personal injuries partially offset by lower derailment costs. Other expense decreased in the third quarter due to a favorable legal settlement and increased gains on operating property sales, partially offset by higher travel-related expenses. Other expense increased the first nine months due to lower gains on operating property sales and higher travel-related expenses. Gains from operating property sales totaled $17 million and $5 million for the third quarters of 2022 and 2021, respectively, and $51 million and $76 million in the first nine months of 2022 and 2021, respectively.

Other income (expense) – net

Other income decreased $16 million in the third quarter and $77 million for the first nine months. Both periods experienced lower net returns on corporate-owned life insurance (COLI) partially offset by a higher net pension benefit.

Income taxes
 
The effective tax rates for the third quarter and first nine months of 2022 were 12.4% and 19.8%, lower than the 23.6% and 22.4%, respectively, for the same periods last year primarily due to a change in a state corporate income tax rate. On July 8, 2022, House Bill 1342 was signed into law in the Commonwealth of Pennsylvania, which reduced its corporate income tax rate from 9.99% to 4.99%, through a series of phased reductions beginning each tax year from January 1, 2023 through January 1, 2031. GAAP requires companies to recognize the effect of tax law changes in the period of enactment. As a result, we recognized a benefit of $136 million in the third quarter of 2022.



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FINANCIAL CONDITION AND LIQUIDITY
 
Cash provided by operating activities, our principal source of liquidity, was $3.4 billion for the first nine months of 2022, compared with $3.3 billion for the same period of 2021. We had negative working capital of $83 million and $354 million at September 30, 2022 and December 31, 2021, respectively. Cash and cash equivalents totaled $1.2 billion at September 30, 2022.

Cash used in investing activities was $1.1 billion for the first nine months of 2022, compared with $847 million for the same period last year. The increase was primarily driven by higher property additions.

Cash used in financing activities was $2.0 billion for the first nine months of 2022, compared with $2.1 billion for the same period last year, reflecting lower repurchases of Common Stock, and increased proceeds from borrowing, partially offset by higher dividends. We repurchased $2.3 billion of Common Stock in the first nine months of 2022 compared to $2.5 billion in the same period last year.  On March 29, 2022, our Board of Directors authorized a new program for the repurchase of up to an additional $10.0 billion of Common Stock beginning April 1, 2022. Our previous share repurchase program terminated on March 31, 2022. The timing and volume of future share repurchases will be guided by our assessment of market conditions and other pertinent factors. Repurchases may be executed in the open market, through derivatives, accelerated repurchase and other negotiated transactions and through plans designed to comply with Rule 10b5-1(c) and Rule 10b-18 under the Securities and Exchange Act of 1934. Any near-term purchases under the program are expected to be made with internally-generated cash, cash on hand, or proceeds from borrowings.

Our debt-to-total capitalization ratio was 53.6% at September 30, 2022, and 50.4% at December 31, 2021.

In June 2022, we issued $750 million of 4.55% senior notes due 2053.

In May 2022, we renewed our accounts receivable securitization program with a maximum borrowing capacity of $400 million. The term expires in May 2023. We had no amounts outstanding under this program and our available borrowing capacity was $400 million at both September 30, 2022, and December 31, 2021.

In February 2022, we issued $600 million of 3.00% senior notes due 2032 and $400 million of 3.70% senior notes due 2053.

We also have in place and available an $800 million credit agreement expiring in March 2025, which provides for borrowings at prevailing rates and includes covenants. We had no amounts outstanding under this facility at September 30, 2022 or December 31, 2021.

In addition, we have investments in general purpose COLI policies and had the ability to borrow against these policies up to $605 million and $715 million at September 30, 2022 and December 31, 2021, 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 or defer expenditures on property additions and decrease shareholder distributions, including share repurchases, provide additional flexibility to meet our ongoing obligations. Nonetheless, we are monitoring the ongoing impacts of the COVID-19 pandemic, which could lead to a decline of cash inflows from operations. There have been no material changes to the information on future contractual obligations, including those that may have material cash requirements, contained in our Form 10-K for the year ended December 31, 2021, with the exception of additional senior notes (see Note 8) and approximately $1.0 billion of additional unconditional purchase obligations, which extend through 2025.



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CRITICAL ACCOUNTING 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 revenue 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.  There have been no significant changes to the critical accounting estimates contained in our Form 10-K at December 31, 2021.

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. Moratorium provisions in the labor agreements govern when the railroads and unions may propose changes to the agreements. We largely bargain nationally in concert with other major railroads, represented by the National Carriers’ Conference Committee.

After management and the unions served their formal proposals in November 2019 for changes to the collective bargaining agreements, negotiations began in 2020 following the expiration of the last moratorium. On June 17, 2022, the National Mediation Board notified the parties that all practical methods of ending the dispute had been exhausted without effecting a settlement and that its mediation services had been terminated. Shortly thereafter, President Biden created Presidential Emergency Board (PEB) No. 250, effective July 18, 2022, to investigate the facts of the dispute and make recommendations. The PEB issued its recommendations on August 16, 2022, and the parties engaged in further negotiations. By late September, management had reached tentative agreements with all relevant unions. Some of these agreements have since been finalized through ratification by union membership, but others are still subject to ratification. In addition, two labor unions did not initially ratify their tentative agreements (with one union putting out a second tentative agreement for a vote and the other agreeing to maintain the status quo as negotiations continue).

The outcome of the ratification process for the outstanding tentative agreements cannot be predicted with certainty at this time; however, if one or more of the tentative agreements fails ratification and is not subsequently ratified during a final “status quo” period where self-help (strike or lockout) is not permitted, self-help could occur in mid-November or early December (dates vary by tentative agreement). In this scenario, the parties could voluntarily agree to further delay self-help and continue to pursue voluntary ratification, or Congress could take legislative action to preempt self-help and avert a service disruption. A service disruption, depending on the duration, could have a material adverse effect on our financial position, results of operations, or liquidity. In addition, the resulting changes in our finalized labor agreements (and our tentative agreements, if ratified) are expected to increase labor costs.

New Accounting Pronouncements

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

Inflation

In preparing financial statements, GAAP requires the use of historical cost that disregards the effects of inflation on the replacement cost of property.  As a capital-intensive company, we have most of our capital invested in long-

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lived assets.  The replacement cost of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical cost.

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

Additional Information

Investors and others should note that we routinely use the Investor Relations, Performance Metrics, and Sustainability sections of our website (www.norfolksouthern.com/content/nscorp/en/investor-relations.html, http://www.nscorp.com/content/nscorp/en/investor-relations/performance-metrics.html & www.nscorp.com/content/nscorp/en/about-ns/sustainability.html) to post presentations to investors and other important information, including information that may be deemed material to investors. Information about us, including information that may be deemed material, may also be announced by posts on our social media channels, including Twitter (www.twitter.com/nscorp) and LinkedIn (www.linkedin.com/company/norfolk-southern). We may also use our website and social media channels for the purpose of complying with our disclosure obligations under Regulation FD. As a result, we encourage investors, the media, and others interested in Norfolk Southern to review the information posted on our website and social media channels. The information posted on our website and social media channels is not incorporated by reference in this Quarterly Report on Form 10-Q.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
The information required by this item is included in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Financial Condition and Liquidity.”
 
Item 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Our Chief Executive Officer and Chief Financial Officer, with the assistance of management, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) at September 30, 2022.  Based on such evaluation, our officers have concluded that, at September 30, 2022, our disclosure controls and procedures were effective in alerting them on a timely basis to material information required to be included in our periodic filings under the Exchange Act.

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Changes in Internal Control Over Financial Reporting
 
During the third quarter of 2022, we have not identified any changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION
 
Item 1.  Legal Proceedings
 
For information on our legal proceedings, see Note 11 “Commitments and Contingencies” in the Consolidated Financial Statements.

Item 1A. Risk Factors
 
The risks set forth in “Risk Factors” included in our 2021 Form 10-K could have a material 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. Those risks remain unchanged and are incorporated herein by reference.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 
Period
(a) Total Number of Shares (or Units) Purchased (1)
(b) Average Price Paid per Share (or Unit)
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (2)
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be purchased under the Plans or Programs (2)
July 1-31, 20221,129,867  $231.31 1,129,867  $8,884,909,445  
August 1-31, 20221,166,795  254.47 1,166,795  8,587,999,396  
September 1-30, 20221,179,619  230.72 1,179,619  8,315,840,542  
Total3,476,281   3,476,281    
 
(1)Of this amount, no shares were tendered by employees in connection with the exercise of options under the stockholder-approved LTIP.
(2)On March 29, 2022, our Board of Directors authorized a new program for the repurchase of up to $10.0 billion of Common Stock beginning April 1, 2022. As of September 30, 2022, $8.3 billion remains authorized for repurchase. Our previous share repurchase program terminated on March 31, 2022.

Item 3.  Defaults Upon Senior Securities

None. 

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.


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Item 6. Exhibits
 
10.1*
10.2*
31-A*
31-B*
32*
101*
The following financial information from Norfolk Southern Corporation’s Quarterly Report on Form 10-Q for the third quarter of 2022, formatted in Inline Extensible Business Reporting Language (iXBRL) includes (i) the Consolidated Statements of Income for the third quarter and first nine months of 2022 and 2021; (ii) the Consolidated Statements of Comprehensive Income for the third quarter and first nine months of 2022 and 2021; (iii) the Consolidated Balance Sheets at September 30, 2022 and December 31, 2021; (iv) the Consolidated Statements of Cash Flows for the first nine months of 2022 and 2021; (v) the Consolidated Statements of Changes in Stockholders’ Equity for the third quarter and first nine months of 2022 and 2021; and (vi) the Notes to Consolidated Financial Statements.
104*Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*  Filed herewith.


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
NORFOLK SOUTHERN CORPORATION
Registrant
Date:October 26, 2022/s/ Claiborne L. Moore
Claiborne L. Moore
Vice President and Controller
(Principal Accounting Officer) (Signature)
Date:October 26, 2022/s/ Denise W. Hutson
Denise W. Hutson
Corporate Secretary (Signature)


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Exhibit 10.1
EXECUTION VERSION


AMENDMENT NO. 1 TO
AMENDED AND RESTATED TRANSFER AND ADMINISTRATION AGREEMENT

THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED TRANSFER AND
ADMINISTRATION AGREEMENT (this “Amendment”), dated as of May 27, 2022, is by and among THOROUGHBRED FUNDING, INC., a Virginia corporation (the “SPV”), NORFOLK SOUTHERN RAILWAY COMPANY, a Virginia corporation, as originator (in such capacity, the “Originator”) and as servicer (in such capacity, the “Servicer”), NORFOLK SOUTHERN CORPORATION, a Virginia corporation (“NSC”), the “Committed Investors” party hereto, the “Managing Agents” party hereto, and SMBC NIKKO SECURITIES AMERICA, INC. (“SMBC”), as the Administrative Agent for the Investors. Capitalized terms used herein and not otherwise defined herein shall have the meaning given to such terms in the Transfer and Administration Agreement (defined below).

WHEREAS, the SPV, the Servicer, NSC, the Conduit Investors, the Committed Investors, the Managing Agents and the Administrative Agent are parties to that certain Amended and Restated Transfer and Administration Agreement dated as of May 28, 2021 (as amended, supplemented or otherwise modified as of the date hereof, the “Transfer and Administration Agreement”);

WHEREAS, Wells Fargo Bank, National Association (“Wells Fargo”) shall cease to be a party to the Transfer and Administration Agreement as a Committed Investor and a Managing Agent; and

WHEREAS, the SPV, the Originator, the Servicer, NSC, the Committed Investors (other than Wells Fargo) (the “Continuing Committed Investors”), the Managing Agents (other than Wells Fargo) (the “Continuing Managing Agents”) and the Administrative Agent have agreed to amend the Transfer and Administration Agreement on the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

Section 1. Termination. Effective as of the date first written above, (i) Wells Fargo shall relinquish its respective rights and be released from its respective obligations as Managing Agent and Committed Investor under the Transfer and Administration Agreement, and (ii) Wells Fargo shall cease to be party to the Transfer and Administration Agreement and the other Transaction Documents (including, without limitation, the Fee Letter) and shall have no further rights or obligations thereunder; provided that the provisions of Article IX and Sections 11.11 and 11.12 of the Transfer and Administration Agreement shall continue in effect for Wells Fargo’s benefit in respect of any actions taken or omitted to be taken by Wells Fargo as “Committed Investor” or “Managing Agent”, as applicable, under the Transfer and Administration Agreement and the other Transaction Documents prior to the date first written above, and Wells Fargo’s obligations under Sections 11.11 and 11.12 of the Transfer and Administration Agreement shall continue in effect for the benefit of the parties to the Transfer and Administration Agreement. Wells Fargo acknowledges and agrees that notwithstanding the terms of that certain Fee Letter, dated as of May 28, 2021 (the “Existing Fee Letter”), by and among the SPV, Wells Fargo and the other Managing Agents party thereto, the consent of Wells Fargo shall not be required in order to amend, restate, supplement or otherwise modify, or waive any provision of or provide any consent under, the Existing Fee Letter.

Section 2. Amendment to the Transfer and Administration Agreement. Effective as of the date first written above and subject to the satisfaction of the conditions precedent set forth in Section 3 below, the Transfer and Administration Agreement is hereby amended by incorporating the changes shown on the marked copy of the Transfer and Administration Agreement attached hereto as Exhibit A (it





being understood that language which appears “struck out” has been deleted and language which appears “double-underlined” has been added).

Section 3.    Conditions Precedent. This Amendment shall become effective as of the date hereof (the “Effective Date”) upon:

3.1.the receipt by each of Capital One, National Association and U.S. Bank National Association, each as a Managing Agent, for the account of the Investors in the related Investor Group, of
$33,333.33 (representing the product of (i) 0.025% and (ii) the sum of the Commitments of the Committed Investors in the related Investor Group as of the date hereof) by wire transfer of immediately available funds to the account specified by such Managing Agent to the SPV;

3.2.the receipt by SMBC, as a Managing Agent, for the account of the Investors in the related Investor Group, of $33,333.33 (representing the product of (i) 0.025% and (ii) the sum of the Commitments of the Committed Investors in the related Investor Group as of the date hereof) by wire transfer of immediately available funds to the account specified by SMBC to the SPV;

3.3.the receipt by Wells Fargo, for its own account, of an amount equal to
$25,277.72, constituting all accrued Yield, fees and other Aggregate Unpaids owing to Wells Fargo, as Managing Agent and Committed Investor, as of the date hereof, by wire transfer of immediately available funds to the account specified by Wells Fargo to the SPV; and

3.4.the receipt by the Administrative Agent of this Amendment, duly executed by the
parties hereto.

Section 4.    Representations and Warranties.

4.1.(a)    Each of the SPV and the Originator hereby represents and warrants that:

(i)This Amendment and the Transfer and Administration Agreement, as amended hereby constitute legal, valid and binding obligations of such parties and are enforceable against such parties in accordance with their respective terms, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and by general equitable principles.

(ii)Upon the effectiveness of this Amendment and after giving effect hereto, the covenants, representations and warranties of each such party, respectively, set forth in Articles IV and VI of the Transfer and Administration Agreement, as applicable, and as amended hereby, are true, complete and correct, in the case of such representations and warranties qualified by materiality, in all respects, and otherwise in all material respects on and as of the date hereof as though made on and as of the date hereof (except to the extent that such representations and warranties relate to an earlier date in which case such representations and warranties that expressly relate to an earlier date are true, correct and complete, in the case of such representations and warranties qualified by materiality, in all respects, and otherwise in all material respects, as of such earlier date).

(b) The SPV hereby represents and warrants that, upon the effectiveness of this Amendment, no event or circumstance has occurred and is continuing which constitutes a Termination Event or a Potential Termination Event.




Section 5.    Reference to and Effect on the Transfer and Administration Agreement.

5.1.Upon the effectiveness of this Amendment, on and after the date hereof, each reference in the Transfer and Administration Agreement to “this Agreement,” “hereunder,” “hereof,” “herein” or words of like import shall mean and be a reference to the Transfer and Administration Agreement and its amendments, as amended hereby.

5.2.The Transfer and Administration Agreement, as amended hereby, and all other amendments, documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed.

5.3.Except as expressly provided herein, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Conduit Investors, the Committed Investors, the Managing Agents or the Administrative Agent, nor constitute a waiver of any provision of the Transfer and Administration Agreement, any other Transaction Document or any other documents, instruments and agreements executed and/or delivered in connection therewith.

Section 6. CHOICE OF LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT REFERENCE TO THE CONFLICTS OF LAW PRINCIPLES THEREOF OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).

Section 7. Execution of Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery by facsimile or electronic mail (in .pdf or .tif format) of an executed signature page of this Amendment shall be effective as delivery of an executed counterpart hereof.

Section 8. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

[Signature pages follow.]


IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first written above.


THOROUGHBRED FUNDING, INC.,
as SPV
By: /s/ Christopher R. Neikirk    
Name: Christopher R. Neikirk
Title:    Chairman and President

NORFOLK SOUTHERN RAILWAY COMPANY,
as Originator and as Servicer

By: /s/ Christopher R. Neikirk     Name: Christopher R. Neikirk
Title:    Vice President and Treasurer

NORFOLK SOUTHERN CORPORATION
By: /s/ Christopher R. Neikirk     Name: Christopher R. Neikirk
Title:    Vice President and Treasurer
Signature Page to Amendment No. I to Amended and Restated Transfer and Administration Agreement

SMBC NIKKO SECURITIES AMERICA, INC.,
as Administrative Agent and a Managing Agent


By: /s/ Yukimi Konno     Name: Yukimi Konno
Title: Managing Director




SUMITOMO MITSUI BANKING CORPORATION,
as a Committed Investor


By: /s/ Minxiao Tian     Name: Minxiao Tian
Title: Director
Signature Page to Amendment No. I to Amended and Restated Transfer and Administration Agreement





CAPITAL ONE, NATIONAL ASSOCIATION,
as a Managing Agent and a Committed Investor


By: /s/ Joe A. Sacchetti                
Name: Joe A. Sacchetti
Title: Duly Authorized Signatory
Signature Page to Amendment No. I to Amended and Restated Transfer and Administration Agreement

U.S. BANK NATIONAL ASSOCIATION,
as a Managing Agent and a Committed Investor


By: /s/ Jeffrey K. Fricano            
Name: Jeffrey K. Fricano
Title: SVP
    




Solely with respect to Sections 1 and 3.3:

WELLS FARGO BANK, NATIONAL ASSOCIATION,
as a Managing Agent and a Committed Investor


By: /s/ Darrell Cole     Name: Darrell Cole
Title: Vice President















































Signature Page to Amendment No. 1 to
Amended and Restated Transfer and Administration Agreement

EXHIBIT A

AMENDED TRANSFER AND ADMINISTRATION AGREEMENT

(Attached)


EXECUTION VERSION CONFORMED COPY
Amendment No. 1, dated May 27, 2022




AMENDED AND RESTATED TRANSFER AND ADMINISTRATION AGREEMENT

by and among
THOROUGHBRED FUNDING, INC., NORFOLK SOUTHERN RAILWAY COMPANY,
as Originator and as Servicer,

NORFOLK SOUTHERN CORPORATION,

THE CONDUIT INVESTORS FROM TIME TO TIME PARTY HERETO, THE COMMITTED INVESTORS FROM TIME TO TIME PARTY HERETO, THE MANAGING AGENTS FROM TIME TO TIME PARTY HERETO,
and

SMBC NIKKO SECURITIES AMERICA, INC.
as Administrative Agent

























ACTIVE 281248726


TABLE OF CONTENTS

Page
1

ARTICLE I DEFINITIONS    1
SECTION 1.1    Certain Defined Terms    1
SECTION 1.2    Other Terms    20
SECTION 1.3    Computation of Time Periods    21
ARTICLE II TRANSFERS AND SETTLEMENTS    21
SECTION 2.1    Transfer of Affected Assets; Intended Characterization    21
SECTION 2.2    Acquisition Price    22
SECTION 2.3    Investment Procedures    23
SECTION 2.4    Determination of Yield and Rate Periods    24
SECTION 2.5    Yield, Fees and Other Costs and Expenses    26
SECTION 2.6    Deemed Collections    26
SECTION 2.7    Payments and Computations, Etc    26
SECTION 2.8    Reports    27
SECTION 2.9    Sharing of Payments, Etc    27
SECTION 2.10 Right of Setoff    27
SECTION 2.11 Other Carrier’s Divisions    27
SECTION 2.12 Settlement Procedures    28
SECTION 2.13 Optional Reduction of Net Investment    30
SECTION 2.14 Application of Collections Distributable to SPV    31
SECTION 2.15 Collections Held in Trust    31
ARTICLE III [RESERVED]    31
ARTICLE IV REPRESENTATIONS AND WARRANTIES    31
SECTION 4.1    Representations and Warranties of the SPV and the Servicer    31
SECTION 4.2    Additional Representations and Warranties of the Servicer    37
ARTICLE V CONDITIONS PRECEDENT    37
SECTION 5.1    Conditions Precedent to Restatement    37
SECTION 5.2    Conditions Precedent to All Investments and Reinvestments    37
ARTICLE VI COVENANTS    38
SECTION 6.1    Affirmative Covenants of the SPV and Servicer    38
SECTION 6.2    Negative Covenants of the SPV and Servicer    42
ARTICLE VII ADMINISTRATION AND COLLECTIONS    45
SECTION 7.1    Appointment of Servicer    45
SECTION 7.2    Duties of Servicer    46
SECTION 7.3    Blocked Account Arrangements    46
SECTION 7.4    Enforcement Rights After Designation of New Servicer    47
SECTION 7.5    Servicer Default    48
SECTION 7.6    Servicing Fee    49
SECTION 7.7    Protection of Ownership Interest of the Investors    49
ARTICLE VIII TERMINATION EVENTS    49
SECTION 8.1    Termination Events    49
SECTION 8.2    Termination    52
ARTICLE IX INDEMNIFICATION; EXPENSES; RELATED MATTERS    52
SECTION 9.1    Indemnities by the SPV    52
SECTION 9.2    Indemnity for Taxes, Reserves and Expenses    54
SECTION 9.3    Taxes    56
SECTION 9.4    Other Costs and Expenses    57
2

SECTION 9.5    Reconveyance Under Certain Circumstances    58
SECTION 9.6    Indemnities by the Servicer    58
SECTION 9.7    Contest Rights    58
SECTION 9.8    Accounting Based Consolidation Event    58
ARTICLE X THE AGENTS    59
SECTION 10.1 Appointment and Authorization of Agents    59
SECTION 10.2 Delegation of Duties    59
SECTION 10.3 Liability of Agents    60
SECTION 10.4 Reliance by Agents    60
SECTION 10.5 Notice of Termination Event, Potential Termination Event or
Servicer Default    60
SECTION 10.6 Credit Decision; Disclosure of Information by the Agents    61
SECTION 10.7 Indemnification of the Agents    61
SECTION 10.8 Agent in Individual Capacity    61
SECTION 10.9 Resignation of Administrative Agent    62
SECTION 10.10 Payments by the Agents    62
ARTICLE XI MISCELLANEOUS    62
SECTION 11.1 Term of Agreement    62
SECTION 11.2 Waivers; Amendments    62
SECTION 11.3 Notices; Payment Information    64
SECTION 11.4 Governing Law; Submission to Jurisdiction; Appointment of
Service Agent    64
SECTION 11.5 Integration    65
SECTION 11.6 Severability of Provisions    65
SECTION 11.7 Counterparts; Facsimile Delivery    65
SECTION 11.8 Successors and Assigns; Binding Effect    65
SECTION 11.9 Waiver of Confidentiality    68
SECTION 11.10 Confidentiality Agreement    68
SECTION 11.11 No Bankruptcy Petition Against Conduit Investors    69
SECTION 11.12 Limitation of Liability    69
SECTION 11.13 USA PATRIOT Act    70
SECTION 11.14 SMBC Roles    70
SECTION 11.15 Benchmark Replacement Setting    70
SECTION 11.16 Amendment and Restatement    74
3

Schedules
4

Schedule I Schedule II Schedule III Schedule IV Schedule 4.1(g) Schedule 4.1(i) Schedule 4.1(j) Schedule 4.1(s)


Accounts Investor Groups
List of Restatement Documents [RESERVED]
List of Actions and Suits
Location of Certain Offices and Records FEIN
List of Blocked Account Banks and Blocked Accounts
Schedule 11.3    Address and Payment Information EXHIBITS
Exhibit A Exhibit B

Form of Assignment and Assumption Agreement Form of Contract[s]
Exhibit C    Credit and Collection Policies and Practices
Exhibit D Exhibit E

Form of Investment Request
Form of Blocked Account Agreement
Exhibit F    Form of Servicer Report
Exhibit G    Form of Commitment Termination Date Extension Request
5

Amended and Restated Transfer And Administration Agreement


This AMENDED AND RESTATED TRANSFER AND ADMINISTRATION AGREEMENT (as amended,
supplemented or otherwise modified and in effect from time to time, this “Agreement”), dated as of May 28, 2021, by and among THOROUGHBRED FUNDING, INC., a Virginia corporation (the “SPV”), NORFOLK SOUTHERN RAILWAY COMPANY, a Virginia corporation, individually (the “Originator”) and as initial Servicer, NORFOLK SOUTHERN CORPORATION, a Virginia corporation (“NSC”), the “Conduit Investors” from time to time party hereto, the “Committed Investors” from time to time party hereto, the “Managing Agents” from time to time party hereto and SMBC NIKKO SECURITIES AMERICA, INC. (“SMBC”), as the Administrative Agent for the Investors and as a Managing Agent.

Preliminary Statements

WHEREAS, the SPV and the Originator are parties to the First Tier Agreement pursuant to which the SPV purchases and acquires Receivables, Related Security and certain other assets from the Originator;

WHEREAS, in order to fund the SPV’s purchases of Receivables, Related Security and other assets from the Originator pursuant to the First Tier Agreement, the SPV has sold and transferred the Asset Interest to the Administrative Agent on behalf of the Investors pursuant to that certain Transfer and Administration Agreement dated as of November 8, 2007 (as amended prior to the date hereof, the “Existing Transfer and Administration Agreement”) by and among the SPV, the Originator, the Servicer, NSC, the Committed Investors party thereto, the Managing Agents party thereto and the Administrative Agent; and

WHEREAS, the parties hereto desire to amend and restate the Existing Transfer and Administration Agreement in its entirety.

NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

ARTICLE I DEFINITIONS
SECTION 1.1 Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings:

“AAR” means the Association of American Railroads.

“Administrative Agent” means SMBC, in its capacity as administrative agent for the Investors, and any successor thereto appointed pursuant to Article X.

“Adverse Claim” means a lien, security interest, charge or encumbrance, or other right or claim in, of or on any Person’s assets or properties in favor of any other Person (including any UCC financing statement or any similar instrument filed against such Person’s assets or properties), but does not include, with reference to a Receivable, the right of another carrier to set off against the amount of such


Receivable the amount of claims in respect of freight carriage or other service performed by such other carrier which such other carrier may have against the Originator pursuant to the Procedures.

“Affected Assets” means, collectively, the following property, whether now existing or hereafter arising, now owned or hereafter acquired or wherever located: (a) all Receivables, (b) all Related Security, (c) all Collections, (d) each lock box and Blocked Account, (e) all other rights and payments with respect to the Receivables, (f) all of the SPV’s rights, title and interest in, to and under the First Tier Agreement, (g) all other personal property of the SPV, including, without limitation, all accounts, chattel paper, goods, investment property, letters of credit, letter-of-credit rights, instruments, general intangibles, payment intangibles, promissory notes and investment property, and (h) all proceeds of any of the foregoing.

“Affiliate” means, as to any Person, any other Person which, directly or indirectly, owns, is in control of, is controlled by, or is under common control with, such Person, in each case whether beneficially, or as a trustee, guardian or other fiduciary. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the other Person, whether through the ownership of voting securities or membership interests, by contract, or otherwise.

“Agent” means each of the Administrative Agent and the Managing Agents.

“Agent-Related Persons” means each Agent, together with its Affiliates, and the officers, directors, employees, agents and attorneys-in-fact of such Persons and their respective Affiliates.

“Aggregate Unpaids” means, at any time, an amount equal to the sum of (a) the aggregate unpaid Yield accrued and to accrue to maturity with respect to all Rate Periods at such time, (b) the Net Investment at such time and (c) all other amounts owed (whether or not then due and payable) hereunder and under the other Transaction Documents by the SPV, the Originator and the Servicer, to the Administrative Agent, the Managing Agents, the Investors or the Indemnified Parties at such time.

“Agreement” is defined in the Preamble.

“Alternate Rate” means (i) with respect to the Investor Group for which Wells Fargo Bank, National Association is the Managing Agent, for each day during any Rate Period for any Portion of Investment, an interest rate per annum equal to the Benchmark for such day plus 0.65%[reserved], (ii) with respect to the Investor Group for which SMBC is the Managing Agent, for each day during any Rate Period for any Portion of Investment, an interest rate per annum equal to the Benchmark for such day plus 0.65%, (iii) with respect to the Investor Group for which U.S. Bank National Association is the Managing Agent, for each day during any Rate Period for any Portion of Investment, an interest rate per annum equal to the Benchmark for such Rate Period plus 0.65%, (iv) with respect to the Investor Group for which Capital One, National Association is the Managing Agent, for each day during any Rate Period for any Portion of Investment, an interest rate per annum equal to the Benchmark for such Rate Period plus 0.65% and (v) with respect to any other Investor Group for any Rate Period for any Portion of Investment, an interest rate per annum equal to the Benchmark for such Rate Period plus 2.00%.

“Anti-Corruption Laws” means all Laws, rules, and regulations of any jurisdiction applicable to the SPV, the Originator, the Servicer or their respective Subsidiaries from time to time concerning or relating to bribery or corruption, including, without limitation, the Foreign Corrupt Practices Act of 1977, as amended, and any applicable Law or regulation implementing the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.




“Asset Interest” is defined in Section 2.1(b).

“Assignment and Assumption Agreement” means an Assignment and Assumption Agreement substantially in the form of Exhibit A.

“Bankruptcy Code” means the Bankruptcy Reform Act of 1978, 11 U.S.C. §§ 101 et seq.

“Base Rate” means, for any day, a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate for such day, plus 1.50%, (b) the rate of interest in effect for such day as publicly announced from time to time by a Managing Agent as its “prime rate” and (c) the LIBO RateBenchmark for such day, plus 1.00%. Any change in the prime rate shall be effective from and including the effective date of such change in the prime rate as specified in the public announcement of such change.

“Benchmark” means, initially, Daily Simple SOFR; provided that if a Benchmark Transition Event has occurred with respect to Daily Simple SOFR or the then-current Benchmark, then “Benchmark” means the applicable Benchmark Replacement to the extent that such Benchmark Replacement has replaced such prior benchmark rate pursuant to Section 11.15.

“Beneficial Ownership Rule” means 31 C.F.R. § 1010.230.

“Blocked Account” means an account maintained by the Servicer or the SPV at a Blocked Account Bank for the purpose of receiving Collections, set forth in Schedule 4.1(s) or any account added as a Blocked Account pursuant to and in accordance with 4.1(s) and which, if not maintained at and in the name of the Administrative Agent, is subject to a Blocked Account Agreement.

“Blocked Account Agreement” means an agreement among the BorrowerSPV, the Servicer (if applicable), the Administrative Agent and a Blocked Account Bank in substantially the form of Exhibit E.

“Blocked Account Bank” means each of the banks set forth in Schedule 4.1(s), as such Schedule 4.1(s) may be modified pursuant to Section 4.1(s).

“Business Day” means any day excluding Saturday, Sunday and any day on which banks in New York, New York or Norfolk, Virginia are authorized or required by Law to close, and, when used with respect to the determination of any LIBO Rate or LMIR or any notice with respect thereto, any such day which is also a day for trading by and between banks in United States dollar deposits in the London interbank market.

“Capitalized Lease” of a Person means any lease of property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with GAAP.

“Cause” means, with respect to the Independent Director, (i) acts or omissions by the Independent Director that constitute willful disregard of the Independent Director’s duties under the bylaws or the articles of incorporation of the SPV, (ii) that the Independent Director has engaged in or has been charged with, or has been convicted of, fraud or other acts constituting a crime under any Law applicable to the Independent Director, (iii) the Independent Director has breached his or her fiduciary duties of loyalty and care as and to the extent of such duties in accordance with the terms of the bylaws or the articles of incorporation of the SPV, (iv) there is a material increase in the fees charged by the Independent Director or a material change to the Independent Director’s terms of service, (v) the Independent Director is unable to perform his or her duties as Independent Director due to death, disability or incapacity, or (vi) the Independent Director no longer meets the definition of Independent




Director; provided that the Independent Director’s unwillingness to approve a voluntary petition under Section 301 of the Bankruptcy Code shall not constitute Cause for removal or expulsion of the Independent Director.

“Closing Date” means November 8, 2007.

“Code” means the Internal Revenue Code of 1986, as amended, and any regulations promulgated and rulings issued thereunder.

“Collections” means, with respect to any Receivable, all cash collections and other cash proceeds of such Receivable, including all finance charges, if any, and cash proceeds of Related Security, and all Deemed Collections in respect of such Receivable.

“Commercial Paper” means the promissory notes issued or to be issued by a Conduit Investor in the commercial paper market.

“Commitment” means, with respect to each Committed Investor, as the context requires, (a) the commitment of such Committed Investor to make Investments, and (b) the dollar amount as set forth on Schedule II attached hereto for each Committed Investor (or in the case of a Committed Investor which becomes a party hereto pursuant to an Assignment and Assumption Agreement, as set forth in such Assignment and Assumption Agreement), minus the dollar amount of any Commitment or portion thereof assigned by such Committed Investor pursuant to an Assignment and Assumption Agreement, plus the dollar amount of any increase to such Committed Investor’s Commitment consented to by such Committed Investor prior to the time of determination; provided, however, that in the event that the Facility Limit is reduced, the aggregate of the Commitments of all the Committed Investors shall be reduced in a like amount and the Commitment of each Committed Investor shall be reduced in proportion to such reduction.

“Commitment Termination Date” means May 2726, 20222023, as such date may be extended from time to time pursuant to Section 11.2(e).

“Commitment Termination Date Extension Request” is defined in Section 11.2(e).

“Committed Investor” means each of the financial institutions listed on the signature pages hereto as a “Committed Investor” and each other Person that becomes party to this Agreement as a “Committed Investor”.

“Committed Investor Percentage” means, at any time, with respect to a Committed Investor, a fraction (expressed as a percentage), the numerator of which is the Commitment of such Committed Investor at such time, and the denominator of which is the sum of the Commitments of all of the Committed Investors in the related Investor Group at such time.

“Concentration Limit” means, for any Obligor of any Receivable, at any time, (i) if such Obligor has a short-term debt rating from at least one of Moody’s or S&P at such time, the applicable percentage set forth below corresponding to such rating (or, if such Obligor has a short-term debt rating from both of Moody’s and S&P at such time, corresponding to the lower of such ratings); (ii) if such Obligor does not have a short-term debt rating from either Moody’s or S&P at such time but has a long-term debt rating from at least one of Moody’s or S&P at such time, the applicable percentage set forth below corresponding to such rating (or, if such Obligor has a long-term debt rating from both of Moody’s and S&P at such time, corresponding to the lower of such ratings); and (iii) otherwise, 4.00%;


Short-Term Rating
Long-Term Rating
S&P Rating
Moody’s Rating
S&P Rating
Moody’s Rating
Limit
A-1
P-1
A+
A1
16.00%
A-2
P-2
BBB+
Baa1
16.00%
A-3
P-3
BBB-
Baa3
8.00%
Below A-3
Below P-3
Below BBB-
Below Baa3
4.00%

provided, that the percentages set forth above with respect to an Obligor may be increased as consented to by all of the Managing Agents in writing from time to time.

“Conduit Assignee” means any commercial paper conduit administered by a Managing Agent or any of its Affiliates and designated by such Managing Agent from time to time to accept an assignment from such Investor Group’s Conduit Investor of all or a portion of its pro rata share of the Net Investment.

“Conduit Investor” means each Person identified as a “Conduit Investor” on the signature pages hereto and each other Person that becomes party to this Agreement as a “Conduit Investor”.

“Conforming Changes” means, with respect to either the use or administration of Daily Simple SOFR or the use, administration, adoption or implementation of any Benchmark Replacement, any technical, administrative or operational changes (including changes to the definition of “Base Rate,” the definition of “Business Day,” the definition of “Rate Period,” the definition of “U.S. Government Securities Business Day,” timing and frequency of determining rates and making payments of interest, timing of investment requests or prepayment, conversion or continuation notices, the applicability of Section 11.15, the applicability and length of lookback periods, and other technical, administrative or operational matters) that the Administrative Agent decides may be appropriate to reflect the adoption and implementation of such rate and to permit the use and administration thereof by the Administrative Agent in a manner substantially consistent with market practice (or, if the Administrative Agent decides that adoption of any portion of such market practice is not administratively feasible or if the Administrative Agent determines that no market practice for the administration of such rate exists, in such other manner of administration as the Administrative Agent decides is reasonably necessary in connection with the administration of this Agreement and the other Transaction Documents).

“Continuing Director” is defined in Section 8.1(l)(iii).

“Contract” means, with respect to any Receivable, any and all contracts, instruments, agreements, leases, invoices, notes, other writings or any other agreement or tariff (whether or not at the time evidenced by a written agreement or invoice) pursuant to which such Receivable arises or which evidence such Receivable or under which an Obligor becomes or is obligated to make payment in respect of such Receivable.

“CP Rate” means, for any Conduit Investor for any Rate Period for any Portion of Investment, the rate equivalent to the rate (or if more than one rate, the weighted average of the rates) of interest or discount accruing on all Commercial Paper issued by such Conduit Investor during such Rate Period plus if not included in the calculation of the foregoing rate or discount, any and all applicable issuing and


paying agent fees and commissions of placement agents and commercial paper dealers in respect of such Commercial Paper and other costs associated with funding small or odd-lot amounts; provided, however, that if the rate (or rates) as agreed between any such agent or dealer and such Conduit Investor is a discount rate (or rates), the “CP Rate” for such Conduit Investor for such Rate Period shall be the rate (or if more than one rate, the weighted average of the rates) resulting from the related Managing Agent’s converting such discount rate (or rates) to an interest-bearing equivalent rate per annum. On the fifth Business Day of each calendar month, the Managing Agent for each Conduit Investor shall calculate the CP Rate for the most recently ended Rate Period and shall notify the SPV and the Servicer of such CP Rate.

“CP Tranche Period” means, with respect to any Portion of Investment funded by the issuance of Commercial Paper, (i) initially the period commencing on (and including) the date of the funding of such Portion of Investment and ending on (and including) the last day of the current calendar month, and (ii) thereafter, each period commencing on (and including) the first day after the last day of the immediately preceding CP Tranche Period and ending on (and including) the last day of the current calendar month.

“Credit and Collection Policy” means the Originator’s credit and collection policy or policies and practices relating to Contracts and Receivables as in effect on the Restatement Date and set forth in Exhibit C, as modified, from time to time, in compliance with Sections 6.1(a)(vii) and 6.2(c).

“Daily Simple SOFR” means, for any day (a “SOFR Rate Day”), a rate per annum equal to the greater of (a) the sum of (i) SOFR for the day (such day “SOFR Determination Date”) that is five (5)
U.S. Government Securities Business Days prior to (A) if such SOFR Rate Day is a U.S. Government Securities Business Day, such SOFR Rate Day or (B) if such SOFR Rate Day is not a U.S. Government Securities Business Day, the U.S. Government Securities Business Day immediately preceding such SOFR Rate Day, in each case, as such SOFR is published by the SOFR Administrator on the SOFR Administrator’s Website plus (ii) the SOFR Adjustment, and (b) the Floor. If by 5:00 pm (New York City time) on the second (2nd) U.S. Government Securities Business Day immediately following any SOFR Determination Date, SOFR in respect of such SOFR Determination Date has not been published on the SOFR Administrator’s Website and a Benchmark Replacement Date with respect to the Daily Simple SOFR has not occurred, then the SOFR for such SOFR Determination Date will be SOFR as published in respect of the first preceding U.S. Government Securities Business Day for which such SOFR was published on the SOFR Administrator’s Website; provided that any SOFR determined pursuant to this sentence shall be utilized for purposes of calculation of Daily Simple SOFR for no more than three (3) consecutive SOFR Rate Days. Any change in Daily Simple SOFR due to a change in SOFR shall be effective from and including the effective date of such change in SOFR without notice to the SPV.

“Days Sales Outstanding” means, for any calendar month, the quotient of (a) the sum of all Unpaid Balances of the Receivables in the following accounts as of the last day of such calendar month: Account No. 706-111, Account No. 705-Total and Account No. 709-001, divided by, (b) the quotient of
(i) the aggregate amount of sales by the Originator giving rise to Receivables during the three (3) preceding calendar months and such calendar month divided by (ii) 120.

“Debt Rating” means, with respect to any Obligor at any time, the senior unsecured debt rating assigned by S&P or Moody’s for such Obligor, in each case without giving effect to any third party credit enhancement.

“Deemed Collections” means any Collections on any Receivable deemed to have been received pursuant to Section 2.6.




“Defaulted Receivable” means a Receivable (a) as to which any payment, or part thereof, remains unpaid for 90 days or more from its original Invoice Date; (b) as to which an Event of Bankruptcy has occurred and is continuing with respect to the Obligor thereof; (c) which has been written off or identified by the SPV, the Originator or the Servicer as uncollectible; or (d) which, consistent with the Credit and Collection Policy, would be written off as uncollectible.

“Default Ratio” means, for any calendar month, the ratio (expressed as a percentage), computed as of the last day of such calendar month by dividing (a) (i) the sum of (x) the aggregate initial Unpaid Balance of all Receivables as to which, as of such day, any payment, or any part thereof, remained unpaid 121 days or more, but not more than 150 days, from the original Invoice Date thereof, and (y) the aggregate initial Unpaid Balance of all Receivables as to which, as of such day, any payment, or any part thereof, remained unpaid for not more than 120 days from the original Invoice Date thereof and which have been written off, minus (ii) all Unpaid Balances of the Receivables in Account No. 706-509 and the Suspense Accounts as to which, as of such day, any payment, or any part thereof, remained unpaid 121 days or more, but not more than 150 days, from the original Invoice Date thereof, by (b) the aggregate amount of sales by the Originator giving rise to Receivables which arose during the calendar month ending four (4) calendar months prior to such calendar month.

“Delinquency Ratio” means, for any calendar month, the ratio (expressed as a percentage), computed as of the last day of such calendar month by dividing (a) the sum of (i) the aggregate initial Unpaid Balance of all Receivables (other than Drummond Receivables) as to which, as of such day, any payment, or any part thereof, remained unpaid 60 days or more from the original Invoice Date thereof, and (ii) all Unpaid Balances of the Receivables (other than Drummond Receivables) in Account No. 706-509 as of such day, and (iii) the aggregate initial Unpaid Balance of all Receivables (other than Drummond Receivables) that, as of such day, have been written off or identified by the SPV, the Originator or the Servicer as uncollectible, by (b) all Unpaid Balances of the Receivables (other than Drummond Receivables) in Account Nos. 706-509, 706-111 and 705-Total as of such day.

“Dilution” means, on any day, an amount equal to the sum, without duplication, of the aggregate reduction effected on such day in the Unpaid Balances of the Receivables attributable to any non-cash items including credits, rebates, billing errors, sales or similar taxes, cash discounts, volume discounts, allowances, disputes (it being understood that a Receivable is “subject to dispute” only if and to the extent that, in the reasonable good faith judgment of the Originator (which shall be exercised in the ordinary course of business), the Obligor’s obligation in respect of such Receivable is reduced on account of any performance failure on the part of the Originator), set-offs, counterclaims, chargebacks, returned or repossessed goods, sales and marketing discounts, warranties, any unapplied credit memos and other adjustments that are made in respect of Obligors; provided, that writeoffs related to an Obligor’s bad credit shall not constitute Dilution.

“Dilution Horizon Ratio” means, for any calendar month, the ratio (expressed as a percentage), computed as of the last day of such calendar month by dividing (a) the sum of (i) the aggregate amount of sales by the Originator giving rise to Receivables during such calendar month and the preceding calendar month and (ii) all Unpaid Balances of the Receivables in Account No. 709-001 as of such day, by (b) the Net Pool Balance as of such day.

“Dilution Ratio” means, for any calendar month, the ratio (expressed as a percentage), computed as of the last day of such calendar month by dividing (a) the aggregate Dilution incurred during such calendar month, by (b) the aggregate amount of sales by the Originator giving rise to Receivables in the calendar month ending one (1) calendar month prior to such calendar month.




“Dilution Reserve Floor” means, for any calendar month, the product (expressed as a percentage), computed as of the last day of such calendar month by multiplying (a) the average Dilution Ratio for the twelve (12) most recent calendar months, by (b) the Dilution Horizon Ratio for such calendar month.

“Dilution Reserve Ratio” means, for any calendar month, the ratio (expressed as a percentage), computed as of the last day of such calendar month by multiplying (a) the sum of (i) 2.00 multiplied by the average Dilution Ratio for the twelve (12) most recent calendar months, plus (ii) the Dilution Volatility Ratio for such calendar month, by (b) the Dilution Horizon Ratio for such calendar month.

“Dilution Spike” means, for any calendar month, the highest two (2) month average Dilution Ratio during the twelve (12) most recent calendar months.

“Dilution Volatility Ratio” means, for any calendar month, the product of (a) the difference between (i) the Dilution Spike and (ii) the arithmetic average of the Dilution Ratios for the twelve (12) most recent calendar months multiplied by (b) the quotient of (i) the Dilution Spike and (ii) the arithmetic average of the Dilution Ratios for twelve (12) most recent calendar months.

“Dollar” or “$” means the lawful currency of the United States. “Downgrade Collateral Account” is defined in Section 3.2(a). “Downgrade Draw” is defined in Section 3.2(a).
“Drummond Receivable” means any Receivable the Obligor of which is Drummond Company, Inc. or an Affiliate thereof.

“Eligible Investments” means highly rated short-term debt or the other highly rated liquid investments in which a Conduit Investor is permitted to invest cash pursuant to its commercial paper program documents.

“Eligible Receivable” means, at any time, any Receivable:

(a)which was originated by the Originator in the ordinary course of its business;

(b)which, according to the Contract related thereto, is required to be paid in full within 60 days of its original Invoice Date;

(c)which (i) satisfies all applicable requirements of the Credit and Collection Policy and (ii) at the time of the purchase by the Administrative Agent, on behalf of the Investors thereof hereunder, satisfies such other criteria and requirements as the Administrative Agent may from time to time specify to the SPV following five (5) days’ notice;

(d)which has been sold to the SPV pursuant to (and in accordance with) the First Tier Agreement, which does not arise from the sale of any inventory subject to any Adverse Claim and to which the SPV has good and marketable title, free and clear of all Adverse Claims;

(e)which is not a Drummond Receivable or a Receivable or of any class of Receivables as to which the Administrative Agent has not notified the SPV that either such Receivable or such class of Receivables is not acceptable for purchase hereunder;




(f)the Obligor of which is not an Affiliate or employee of any of the parties hereto;

(g)the Obligor of which has been directed to make all payments in respect of such Receivable to a Blocked Account;

(h)which under the related Contract and applicable Law is assignable without the consent of, or notice to, the Obligor thereunder unless such consent has been obtained and is in effect or such notice has been given;

(i)which, together with the related Contract, is in full force and effect and constitutes the legal, valid and binding obligation of the related Obligor enforceable against such Obligor in accordance with its terms and is not subject to any litigation, dispute, offset (other than on account of Interline Payables), counterclaim or other defense; provided, however, that if such litigation, dispute, offset (other than on account of Interline Payables), counterclaim or other defense affects only a portion of the Unpaid Balance of such Receivable, then such Receivable may be deemed to be an Eligible Receivable pursuant to this clause (i) to the extent of the portion of such Unpaid Balance which is not so affected;

(j)which is denominated and payable only in Dollars in the United States;

(k)which is not a Defaulted Receivable;

(l)which has not been compromised, adjusted or modified (including by the extension of time for payment or the granting of any discounts, allowances or credits) in any way not provided for in the Transaction Documents or the Credit and Collection Policy; provided, however, that only the portion of the Unpaid Balance of such Receivable that is not the subject of such compromise, adjustment or modification may be eligible pursuant to this clause (l);

(m)which is an “account” or a “general intangible” and is not evidenced by an instrument within the meaning of Article 9 of the UCC of all applicable jurisdictions;

(n)which is an “eligible asset” as defined in Rule 3a-7 under the Investment Company Act of 1940;

(o)which, together with the Contract related thereto, does not contravene in any material respect any Laws applicable thereto (including Laws relating to truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy) and with respect to which no part of the Contract related thereto is in violation of any such Law in any material respect;

(p)the assignment of which under the First Tier Agreement by the Originator to the SPV and hereunder by the SPV to the Administrative Agent does not violate, conflict or contravene any applicable Law or any contractual or other restriction, limitation or encumbrance;

(q)which (together with the Related Security related thereto) has been the subject of either a valid transfer and assignment from, or the grant of a first priority perfected security interest therein by, the SPV to the Administrative Agent, on behalf of the Investors, of all of the SPV’s right, title and interest therein, effective until the Final Payout Date (unless repurchased by the SPV at an earlier date pursuant to this Agreement);




(r)which is not owed by an Obligor whose Defaulted Receivables exceed 35% of the aggregate Unpaid Balances of all such Obligor’s Receivables;

(s)which is not an installment receivable;

(t)which shall not constitute Unapplied Cash;

(u)the Obligor of which, (x) if a natural Person, is a resident of the United States, or, if a corporation or other business organization, is organized under the Laws of the United States or any state or other political subdivision thereof or (y) the Obligor of which is a government of any state (or any governmental subdivision or agency thereof) of the United States or the government of the United States;

(v)which is not a Receivable identified in Account No. 759-031, provided that Receivables not exceeding a balance of $90,000,000 in Account No. 759-031 may be Eligible Receivables pursuant to this clause (v);

(w)which is not an unearned or disputed Receivable, to include but not be limited to those Receivables identified in the following Account Nos.: 759-011, 706-509, 709-008, 763-220, 763-001, 709-113, 709-004; and

(x)which is not a Receivable identified in a Suspense Account.

“ERISA” means the U.S. Employee Retirement Income Security Act of 1974 and any regulations promulgated and rulings issued thereunder.

“ERISA Affiliate” means, with respect to any Person, any corporation, partnership, trust, sole proprietorship or trade or business which, together with such Person, is treated as a single employer under Section 414(b) or (c) of the Code or, with respect to any liability for contributions under Section 302(c) of ERISA, Section 414(m) or Section 414(o) of the Code.

“Event of Bankruptcy” means, with respect to any Person, (a) that such Person or any Subsidiary of such Person (i) shall generally not pay its debts as such debts become due or (ii) shall admit in writing its inability to pay its debts generally or (iii) shall make a general assignment for the benefit of creditors;
(b) any proceeding shall be instituted by or against such Person or any Subsidiary of such Person seeking to adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any Law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or any substantial part of its property; or
(c) such Person or any Subsidiary of such Person shall take any corporate, partnership or other similar appropriate action to authorize any of the actions set forth in the preceding clauses (a) or (b).

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and any regulations promulgated and rulings issued thereunder.

“Excluded Receivable” means any amount payable for (i) “demurrage”, which is a charge for the time a railroad owned or leased freight car is held by shippers or receivers, (ii) “detention”, which is another form of demurrage that is applied against intermodal equipment or (iii) “storage”, which is a charge assessed on idle equipment (“equipment” for purposes of this clause (iii) meaning, private cars, railroad owned cars that contain hazardous materials and intermodal containers and trailers), when any free time allowed on such equipment expires while such equipment is on the Originator’s property or




sidings; provided, however, that upon at least 30 days’ prior written notice by the Servicer to the Agents and the written consent of the Agents, such receivables shall cease being Excluded Receivables.

“Excluded Taxes” is defined in Section 9.3.

“Existing Transfer and Administration Agreement” is defined in the Recitals.

“Facility Limit” means, at any time, the lesser of (i) $400,000,000 and (ii) the aggregate Commitments then in effect.

“FATCA” means Section 1471 through 1474 of the Code (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreements entered into pursuant to Section 1471(b)(1) of the Code.

“Federal Funds Rate” means, for any day, the greater of (a) the rate calculated by the Federal Reserve Bank of New York based on such day’s Federal funds transactions by depositary institutions (as determined in such manner as the Federal Reserve Bank of New York shall set forth on its public website from time to time) and published on the next succeeding Business Day by the Federal Reserve Bank of New York as the Federal funds effective rate and (b) 0%.

“Fee Letter” means the confidential letter agreement dated the date hereof among the SPV and the Managing Agents.

“Final Payout Date” means the date, after the Termination Date, on which the Net Investment has been reduced to zero, all accrued Servicing Fees have been paid in full and all other Aggregate Unpaids have been paid in full in cash.

“First Tier Agreement” means the Sale Agreement, dated as of November 8, 2007, between the Originator and the SPV.

“Fitch” means Fitch, Inc., or any successor that is a nationally recognized statistical rating organization.

“Floor” means a percentage equal to 0.0% per annum.

“Foreign Obligor” means an Obligor who, (i) if a natural person, is not a resident of the United States or (ii) if a corporation or other business organization, is neither organized under the Laws of the United States or any political subdivision thereof nor has its chief executive office in the United States.

“GAAP” means, at any time, generally accepted accounting principles in effect as of such time in the United States of America.

“Governmental Authority” means any nation or government, any state or other political subdivision thereof, and any court, agency, department, authority or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. The AAR shall be deemed to be a Governmental Authority for the purposes hereof.

“Gross-up Factor” means, for any Business Day, the quotient of (a) the sum of all Unpaid Balances of the Receivables as of the end of such day in Account Nos. 706-111 and 709-001, divided by
(b) all Unpaid Balances of the Receivables as of the end of such day in Account No. 706-111.




“Guaranteed Receivable” means any Receivable as to which the Originator or NSC has obtained a guarantee that cannot be enforced by anyone other than the Originator, NSC or any Affiliate of the Originator or NSC.

“Guaranty” means, with respect to any Person, any agreement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes liable upon, the obligation of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person or otherwise assures any other creditor of such other Person against loss, including any comfort letter, operating agreement or take-or-pay contract and shall include the contingent liability of such Person in connection with any application for a letter of credit.

“Indebtedness” means, without duplication, with respect to any Person, such Person’s (a) obligations for borrowed money, (b) obligations representing the deferred purchase price of property other than accounts payable arising in the ordinary course of such Person’s business on terms customary in the trade, (c) obligations, whether or not assumed, secured by liens or payable out of the proceeds or products of property now or hereafter owned or acquired by such Person, (d) obligations which are evidenced by notes, acceptances (including bankers acceptances), or other instruments, (e) Capitalized Lease obligations, (f) obligations for which such Person is obligated pursuant to a Guaranty, (g) reimbursement obligations with respect to any letters of credit and (h) any other liabilities which would be treated as indebtedness in accordance with GAAP.

“Indemnified Amounts” is defined in Section 9.1. “Indemnified Parties” is defined in Section 9.1.
“Independent Director” means a member of the board of directors of the SPV who (i) shall not have been at the time of such Person’s appointment or at any time during the preceding five (5) years, and shall not be as long as such Person is a director of the SPV, (A) a director, officer, employee, partner, shareholder, member, manager or Affiliate of any of the following Persons (collectively, the “Independent Parties”): NSC, the Originator, Servicer, or any of their respective Subsidiaries or Affiliates, (B) a supplier to any of the Independent Parties, (C) a Person controlling or under common control with any partner, shareholder, member, manager, Affiliate or supplier of any of the Independent Parties, or (D) a member of the immediate family of any director, officer, employee, partner, shareholder, member, manager, Affiliate or supplier of any of the Independent Parties; (ii) has prior experience as an independent director for a corporation or limited liability company whose charter documents required the unanimous consent of all independent directors thereof before such corporation or limited liability company could consent to the institution of bankruptcy or insolvency proceedings against it or could file a petition seeking relief under any applicable federal or state Law relating to bankruptcy and (iii) has at least three (3) years of employment experience with one or more entities that provide, in the ordinary course of their respective businesses, advisory, management or placement services to issuers of securitization or structured finance instruments, agreements or securities.

“Intercompany Debt Reserve” means at any time, an amount equal to the greater of (a) the highest Unpaid Balance of Receivables of any Obligor having long-term ratings from S&P, Moody’s or Fitch of less than BBB- or Baa3, as applicable, and (b) the product of (i) the Loss Reserve Ratio at such time (calculated for this purpose by using a stress factor of 1.50 rather than 2.00) and (ii) the Unpaid Balance of all Receivables.




“Intercompany Line of Credit” means the Intercompany Line of Credit, dated as of November 8, 2007, between NSC and SPV.

“Interline Payable” means any amount payable to another carrier by the Originator in respect of Other Carrier’s Divisions, as such amount payable would be set forth in the accounts of the SPV or the Originator specified on Schedule I under the heading “Interline Payable.”

“Interline Receivable” means a Receivable the Obligor of which shall be another carrier as trustee for the Originator (and the Originator’s successors and assigns) and which arises out of service provided to a shipper or consignee or agent thereof (it being acknowledged by the SPV that the SPV and the Originator treat all such carrier Obligors of Receivables as acting as trustee for the Originator (and the Originator’s successors and assigns) for the Unpaid Balance of such Receivable), as such Receivable would be set forth in the accounts of the SPV or the Originator specified on Schedule I under the heading “Interline Receivable.”

“Investment” is defined in Section 2.2(a). “Investment Date” is defined in Section 2.3(a).
“Investment Request” means each request substantially in the form of Exhibit D.

“Investor Group” means a group consisting of a Managing Agent and its related Conduit Investors and Committed Investors. The initial Investor Groups are set forth on Schedule II hereto.

“Investor Group Net Investment” means at any time with respect to an Investor Group, the portion of the Net Investment funded or maintained by the Investors in such Investor Group.

“Investor Group Percentage” means, for any Investor Group, the percentage equivalent (carried out to five decimal places) of a fraction the numerator of which is the aggregate amount of the Commitments of all Committed Investors in that Investor Group and the denominator of which is the sum of such numerators for each of the Investor Groups.

“Investor(s)” means the Conduit Investors and/or the Committed Investors, as the context may
require.

“Invoice Date” means (i) with respect to any Interline Receivable, the original waybill date for such Receivable and (ii) with respect to any other Receivable, the original customer billing date for such Receivable.

“Law” means any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree, judgment or award of any Official Body.
“LIBO Rate” means (a) the London interbank offered rate as administered by ICE Benchmark Administration (or any other Person that takes over the administration of such rate) for Dollars for a period equal in length to the relevant Rate Period as published by Thomson Reuters (or by any successor to or substitute or replacement for such service, providing rate quotations comparable to those currently provided by Thomson Reuters, as determined by the Administrative Agent from time to time, for purposes of providing quotations of interest rates applicable to Dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two (2) Business Days prior to the commencement of the relevant Rate Period, as the rate for dollar deposits with a maturity comparable to such Rate Period; provided, that, in the event that such rate is not available at such time for any reason, then the rate for the relevant Rate Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity



comparable to such Rate Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two (2) Business Days prior to the commencement of such Rate Period, divided by (b) one (1) minus the maximum aggregate reserve requirement (including all basic, supplemental, marginal or other reserves) which is imposed against the Administrative Agent in respect of Eurocurrency liabilities, as defined in Regulation D of the Board of Governors of the Federal Reserve System as in effect from time to time (expressed as a decimal) applicable to such Rate Period; provided, further that in the event that the rate as published shall be less than zero, such rate shall be deemed to be zero for the purposes of this Agreement.

“Liquidity Agreement” means an agreement among a Conduit Investor and one or more Liquidity Providers evidencing the obligation of such Liquidity Providers to provide liquidity or program support or asset purchase facilities in connection with the issuance by such Conduit Investor of Commercial Paper.

“Liquidity Provider” means each Person who provides liquidity or program support to a Conduit Investor in connection with the issuance by such Conduit Investor of Commercial Paper.

“LMIR” means, for any day during a Rate Period, the one-month Eurodollar rate for U.S. dollar deposits as reported on the Reuters Screen LIBOR01 Page or any other page that may replace such page from time to time for the purpose of displaying offered rates of leading banks for London interbank deposits in United States dollars, as of approximately 11:00 a.m. (London time) on such day, or if such day is not a Business Day, then approximately 11:00 a.m. (London time) on the immediately preceding Business Day (or if not so reported, then as determined by the related Managing Agent from another recognized source for interbank quotation), in each case, changing when and as such rate changes; provided, that, in the event that the rate appearing on such page or as so determined by such Managing Agent shall be less than zero, such rate shall be deemed to be zero for the purposes of this Agreement.

“Long Term Debt Rating” means, with respect to any Obligor at any time, the senior unsecured long term debt rating assigned by S&P or Moody’s for such Obligor, in each case without giving effect to any third party credit enhancement.

“Loss Horizon Ratio” means, for any calendar month, the ratio (expressed as a percentage), computed as of the last day of such calendar month by dividing (a) the sum of (i) the aggregate amount of sales by the Originator giving rise to Receivables which arose during the immediately preceding two (2) calendar months and such calendar month and (ii) all Unpaid Balances of the Receivables in Account No. 709-001 as of such day, by (b) the Net Pool Balance as of such day.

“Loss Reserve Floor” means 16.00%.

“Loss Reserve Ratio” means, for any calendar month, the ratio (expressed as a percentage), computed as of the last day of such calendar month by multiplying (a) 2.00, by (b) the Peak Default Ratio for such calendar month, by (c) the Loss Horizon Ratio for such calendar month.

“Majority Investors” means, at any time, the Administrative Agent, each of the Managing Agents and those Committed Investors which hold Commitments aggregating in excess of 50% of the Maximum Net Investment as of such date (or, if the Commitments shall have been terminated, the Administrative Agent, each of the Managing Agents and one or more Investors whose aggregate pro rata shares of the Net Investment exceed 66.67% of the Net Investment as of such date).




“Managing Agent” means each Person identified on the signature pages hereto as a “Managing Agent”, and each other Person that becomes a party to this Agreement as a “Managing Agent”.

“Material Adverse Effect” means any event or condition which would have a material adverse effect on (a) the collectibility of the Receivables, (b) the condition (financial or otherwise), businesses or properties of the SPV, the Servicer, NSC or the Originator, (c) the ability of the SPV, the Servicer, NSC or th