Edgar Filing: NORFOLK SOUTHERN CORP

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

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

for the fiscal year ended DECEMBER 31, 2018

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

for the transition period from ___________ to___________

Commission file number 1-8339

NORFOLK SOUTHERN CORPORATION

(Exact name of registrant as specified in its charter)



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

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

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )

Indicate by check mark whether the registrant has submitted electronically 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 (X) No ( )

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)

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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer (X) Accelerated filer ( ) Non-accelerated filer ( ) Smaller reporting company ( ) Emerging growth company ( )

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

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

The aggregate market value of the voting common equity held by non-affiliates at June 30, 2018 was $42,224,842,213 (based on the closing price as quoted on the New York Stock Exchange on June 29, 2018).

The number of shares outstanding of each of the registrant’s classes of common stock, at January 31, 2019: 267,455,326 (excluding 20,320,777 shares held by the registrant’s consolidated subsidiaries).

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

TABLE OF CONTENTS

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES



			Page
Part I.	Items 1 and 2.	Business and Properties	K 3
	Item 1A.	Risk Factors	K 10
	Item 1B.	Unresolved Staff Comments	K 13
	Item 3.	Legal Proceedings	K 13
	Item 4.	Mine Safety Disclosures	K 14
		Executive Officers of the Registrant	K 15

Part II.	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and
		Issuer Purchases of Equity Securities	K 16
	Item 6.	Selected Financial Data	K 17
	Item 7.	Management’s Discussion and Analysis of Financial Condition and
		Results of Operations	K 18
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	K 30
	Item 8.	Financial Statements and Supplementary Data	K 31
	Item 9.	Changes in and Disagreements with Accountants on Accounting and
		Financial Disclosure	K 73
	Item 9A.	Controls and Procedures	K 73
	Item 9B.	Other Information	K 73

Part III.	Item 10.	Directors, Executive Officers and Corporate Governance	K 74
	Item 11.	Executive Compensation	K 74
	Item 12.	Security Ownership of Certain Beneficial Owners and Management
		and Related Stockholder Matters	K 75
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	K 77
	Item 14.	Principal Accounting Fees and Services	K 77

Part IV.	Item 15.	Exhibits, Financial Statement Schedules	K 78
	Item 16.	Form 10-K Summary	K 88

		Power of Attorney	K 89

		Signatures	K 89

K 2

PART I

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

Item 1. Business and Item 2. Properties

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

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

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

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


•	Corporate Governance Guidelines


•	Charters of the Committees of the Board of Directors


•	The Thoroughbred Code of Ethics


•	Code of Ethical Conduct for Senior Financial Officers


•	Categorical Independence Standards for Directors


•	Norfolk Southern Corporation Bylaws

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RAILROAD OPERATIONS – At December 31, 2018, our railroad operated approximately 19,500 route miles in 22 states and the District of Columbia.

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

Corridors with heaviest freight volume:


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


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


•	Central Ohio to Norfolk (via Columbus and Roanoke)


•	Birmingham to Meridian


•	Cleveland to Kansas City


•	Memphis to Chattanooga

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



	Mileage Operated at December 31, 2018
	Route Miles	Second and Other Main Track	Passing Track, Crossovers and Turnouts	Way and Yard Switching	Total

Owned	14,664	2,755	1,949	8,319	27,687
Operated under lease, contract or trackage
rights	4,756	1,943	398	834	7,931

Total	19,420	4,698	2,347	9,153	35,618

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

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



	Years ended December 31,
	2018		2017			2016			2015			2014

Revenue ton miles (billions)	207		201			191			200			205
Revenue per thousand revenue ton miles	$	55.25	$	52.38		$	51.91		$	52.63		$	56.70
Revenue ton miles (thousands) per railroad employee	7,822		7,474			6,838			6,645			7,054
Ratio of railway operating expenses to railway
operating revenues (Railway operating ratio)	65.4%		66.6%		²	69.6%		²	72.8%		²	69.4%		²
Railway operating ratio, excluding the effects of the
2017 tax adjustments (non-GAAP)	65.4%		68.1%		^1,2	69.6%		²	72.8%		²	69.4%		²


¹	See reconciliation to U.S. Generally Accepted Accounting Principles (GAAP) in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2017-07 on January 1, 2018. The retrospective application resulted in an increase in “Railway operating expenses” and therefore an increase to the “Railway operating ratio” for all years presented prior to 2018. See additional details in Item 8 “Financial Statements and Supplementary Data” in Note 1.

RAILWAY OPERATING REVENUES – Total railway operating revenues were $11.5 billion in 2018. Following is an overview of our three major commodity groups. See the discussion of merchandise revenues by commodity group, intermodal revenues, and coal revenues and tonnage in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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


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


•	Agriculture, consumer products, and government includes soybeans, wheat, corn, fertilizer, livestock and poultry feed, food oils, flour, beverages, canned goods, sweeteners, consumer products, ethanol, transportation equipment, and items for the U.S. military.


•	Metals and construction includes steel, aluminum products, machinery, scrap metals, cement, aggregates, sand, and minerals.


•	Automotive includes finished motor vehicles and automotive parts.


•	Paper, clay and forest products includes lumber and wood products, pulp board and paper products, wood fibers, wood pulp, scrap paper, and clay.

Merchandise carloads handled in 2018 were 2.5 million, the revenues from which accounted for 59% of our total railway operating revenues.

INTERMODAL – Our intermodal commodity group consists of shipments moving in domestic and international containers and trailers. These shipments are handled on behalf of intermodal marketing companies, international steamship lines, truckers, and other shippers. Intermodal units handled in 2018 were 4.4 million, the revenues from which accounted for 25% of our total railway operating revenues.

COAL – Revenues from coal accounted for 16% of our total railway operating revenues in 2018. We handled 115 million tons, or 1.0 million carloads, in 2018, most of which originated on our lines from major eastern coal basins, with the balance from major western coal basins received via the Memphis and Chicago gateways. Our coal franchise supports the electric generation market, serving approximately 70 coal generation plants, as well as the export, domestic metallurgical and industrial markets, primarily through direct rail and river, lake, and coastal facilities, including various terminals on the Ohio River, Lamberts Point in Norfolk, Virginia, the Port of Baltimore, and Lake Erie.

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

RAILWAY PROPERTY

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

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



	2018		2017		2016		2015		2014
	($ in millions)

Road and other property	$	1,276	$	1,210	$	1,292	$	1,514	$	1,406
Equipment	675		513		595		658		712
Delaware & Hudson acquisition	—		—		—		213		—

Total	$	1,951	$	1,723	$	1,887	$	2,385	$	2,118

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

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Equipment – At December 31, 2018, we owned or leased the following units of equipment:



	Owned	Leased	Total	Capacity of Equipment
Locomotives:				(Horsepower)
Multiple purpose	3,900	76	3,976	15,229,400
Auxiliary units	178	—	178	—
Switching	43	—	43	64,050

Total locomotives	4,121	76	4,197	15,293,450

Freight cars:				(Tons)
Gondola	24,768	4,048	28,816	3,205,609
Hopper	11,001	—	11,001	1,244,016
Covered hopper	8,323	85	8,408	932,767
Box	7,125	1,251	8,376	726,694
Flat	1,685	1,608	3,293	312,537
Other	1,597	4	1,601	73,203

Total freight cars	54,499	6,996	61,495	6,494,826

Other:
Chassis	33,865	—	33,865
Containers	17,664	—	17,664
Work equipment	7,117	258	7,375
Vehicles	3,591	133	3,724
Miscellaneous	2,381	—	2,381

Total other	64,618	391	65,009

The following table indicates the number and year built for locomotives and freight cars owned at December 31, 2018:



	2018		2017		2016		2015		2014		2009- 2013		2004- 2008		2003 & Before		Total
Locomotives:
No. of units	15		55		66		8		83		242		564		3,088		4,121
% of fleet	—	%	1	%	2	%	—	%	2	%	6	%	14	%	75	%	100	%

Freight cars:
No. of units	—		470		775		2,091		897		6,464		4,080		39,722		54,499
% of fleet	—	%	1	%	1	%	4	%	2	%	12	%	7	%	73	%	100	%

K 7

The following table shows the average age of our owned locomotive and freight car fleets at December 31, 2018, and information regarding 2018 retirements:



	Locomotives	Freight Cars
Average age – in service	25.2 years	28.7 years
Retirements	37 units	2,748 units
Average age – retired	42.9 years	44.7 years

Track Maintenance – Of the approximately 35,600 total miles of track on which we operate, we are responsible for maintaining approximately 28,400 miles, with the remainder being operated under trackage rights from other parties responsible for maintenance.

Over 83% of the main line trackage (including first, second, third, and branch main tracks, all excluding rail operated pursuant to trackage rights) has rail ranging from 131 to 155 pounds per yard with the standard installation currently at 136 pounds per yard. Approximately 47% of our lines, excluding rail operated pursuant to trackage rights, carried 20 million or more gross tons per track mile during 2018.

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



	2018	2017	2016	2015	2014
Track miles of rail installed	416	466	518	523	507
Miles of track surfaced	4,594	5,368	4,984	5,074	5,248
Crossties installed (millions)	2.2	2.5	2.3	2.4	2.7

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

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

EMPLOYEES – The following table shows the average number of employees and the average cost per employee for wages and benefits:



	2018		2017		2016		2015		2014

Average number of employees	26,662		27,110		28,044		30,456		29,482
Average wage cost per employee	$	83,000	$	79,000	$	76,000	$	77,000	$	76,000
Average benefit cost per employee	$	39,000	$	42,000	$	35,000	$	32,000	$	35,000

Approximately 80% of our railroad employees are covered by collective bargaining agreements with various labor unions. See the discussion of “Labor Agreements” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

K 8

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

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

Efforts have been made over the past several years to increase federal economic regulation of the rail industry, and such efforts are expected to continue in 2019. The Staggers Rail Act of 1980 substantially balanced the interests of shippers and rail carriers, and encouraged and enabled rail carriers to innovate, invest in their infrastructure, and compete for business, thereby contributing to the economic health of the nation and to the revitalization of the industry. Accordingly, we will continue to oppose efforts to reimpose increased economic regulation.

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

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

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

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

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

Our plan also complies with U.S. Department of Transportation (DOT) security regulations pertaining to training and security plans with respect to the transportation of hazardous materials. As part of the plan, security awareness

K 9

training is given to all railroad employees who directly affect hazardous material transportation safety, and is integrated into hazardous material training programs. Additionally, location-specific security plans are in place for certain metropolitan areas and each of the six facilities we operate that are under U.S. Coast Guard (USCG) Maritime Security Regulations. With respect to these facilities, each facility’s security plan has been approved by the applicable Captain of the Port and remains subject to inspection by the USCG.

Additionally, we continue to engage in close and regular coordination with numerous federal and state agencies, including the U.S. Department of Homeland Security (DHS), the Transportation Security Administration, the Federal Bureau of Investigation, the Federal Railroad Administration (FRA), the USCG, U.S. Customs and Border Protection, the Department of Defense, and various state Homeland Security offices. Similarly, we follow guidance from DHS and DOT regarding rail corridors in High Threat Urban Areas (HTUA). Particular attention is aimed at reducing risk in HTUA by: (1) the establishment of secure storage areas for rail cars carrying toxic-by-inhalation (TIH) materials; (2) the expedited movement of trains transporting rail cars carrying TIH materials; (3) substantially reducing the number of unattended loaded tank cars carrying TIH materials; and (4) cooperation with federal, state, local, and tribal governments to identify those locations where security risks are the highest.

In 2018, through participation in the Transportation Community Awareness and Emergency Response Program, we provided rail accident response training to approximately 6,300 emergency responders, such as local police and fire personnel. Our other training efforts throughout 2018 included participation in drills for local, state, and federal agencies. We also have ongoing programs to sponsor local emergency responders at the Security and Emergency Response Training Course conducted at the AAR Transportation Technology Center in Pueblo, Colorado.

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

Item 1A. Risk Factors

The risks set forth in the following risk factors could have a materially adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter, and could cause those results to differ materially from those expressed or implied in our forward-looking statements. The information set forth in this Item 1A “Risk Factors” should be read in conjunction with the rest of the information included in this annual report, including Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 “Financial Statements and Supplementary Data.”

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

Railroads are also subject to the enactment of laws by Congress and regulation by the DOT and the DHS (which regulate most aspects of our operations) related to safety and security. The Rail Safety Improvement Act of 2008, the Surface Transportation Extension Act of 2015, and the implementing regulations promulgated by the FRA (collectively “the PTC laws and regulations”) require us (and each other Class I railroad) to implement, on certain mainline track where intercity and commuter passenger railroads operate and where TIH hazardous materials are

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transported, an interoperable positive train control system (PTC). PTC is a set of highly advanced technologies designed to prevent train-to-train collisions, speed-related derailments, and certain other accidents caused by human error, but PTC will not prevent all types of train accidents or incidents. We have met the December 31, 2018 deadline under the PTC laws and regulations to install all hardware and to implement PTC on some of those rail lines. The PTC laws and regulations also require us to fully implement PTC on the remainder of those rail lines by December 31, 2020. In addition, other railroads’ implementation schedules could impose additional interoperability requirements and accelerated timelines on us, which could impact our operations over other railroads if not met.

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

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

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

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

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

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

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

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

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

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

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

We rely on technology and technology improvements in our business operations. If we experience significant disruption or failure of one or more of our information technology systems, including computer hardware, software, and communications equipment, we could experience a service interruption, a security breach, or other operational difficulties. We also face cybersecurity threats which may result in breaches of systems, or compromises of sensitive data, which may result in an inability to access or operate systems necessary for conducting operations and providing customer service, thereby impacting our efficiency and/or damaging our corporate reputation. Additionally, if we do not have sufficient capital to acquire new technology or we are unable to implement new technology, we may suffer a competitive disadvantage within the rail industry and with companies providing other modes of transportation service.

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

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

Any material changes to current litigation trends or a catastrophic rail accident involving any or all of freight loss, property damage, personal injury, and environmental liability could have a material adverse effect on us to the extent not covered by insurance. We have obtained insurance for potential losses for third-party liability and first-

K 12

party property damages; however, insurance is available from a limited number of insurers and may not continue to be available or, if available, may not be obtainable on terms acceptable to us.

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

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

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

We may be affected by supply constraints resulting from disruptions in the fuel markets or the nature of some of our supplier markets. We consumed approximately 472 million gallons of diesel fuel in 2018. Fuel availability could be affected by any limitation in the fuel supply or by any imposition of mandatory allocation or rationing regulations. A severe fuel supply shortage arising from production curtailments, increased demand in existing or emerging foreign markets, disruption of oil imports, disruption of domestic refinery production, damage

to refinery or pipeline infrastructure, political unrest, war or other factors could impact us as well as our customers and other transportation companies.

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

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

Item 1B. Unresolved Staff Comments

None.

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Item 3. Legal Proceedings

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

Item 4. Mine Safety Disclosures

Not applicable.

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Executive Officers of the Registrant

Our executive officers generally are elected and designated annually by the Board of Directors at its first meeting held after the annual meeting of stockholders, and they hold office until their successors are elected. Executive officers also may be elected and designated throughout the year as the Board of Directors considers appropriate. There are no family relationships among our officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. The following table sets forth certain information, at February 1, 2019, relating to our officers.



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

James A. Squires, 57, Chairman, President and Chief Executive Officer	Present position since October 1, 2015. Served as CEO since June 1, 2015. Served as President since June 1, 2013.

Cynthia C. Earhart, 57, Executive Vice President – Finance and Chief Financial Officer	Present position since August 15, 2017. Served as Executive Vice President – Administration and Chief Information Officer from October 1, 2015 to August 15, 2017. Served as Executive Vice President – Administration from June 1, 2013 to October 1, 2015.

John M. Scheib, 47, Executive Vice President – Law and Administration and Chief Legal Officer	Present position since March 1, 2018. Served as Senior Vice President Law and Corporate Relations from October 1, 2017, to March 1, 2018. Served as Vice President Law from December 1, 2016, to October 1, 2017. Served as General Counsel from August 16, 2010, to December 1, 2016.

Alan H. Shaw, 51, Executive Vice President and Chief Marketing Officer	Present position since May 16, 2015. Served as Vice President Intermodal Operations from November 1, 2013 to May 16, 2015.

Michael J. Wheeler, 56, Executive Vice President and Chief Operating Officer	Present position since February 1, 2016. Served as Senior Vice President Operations from October 1, 2015 to February 1, 2016. Served as Vice President Engineering from November 1, 2012 to October 1, 2015.

Jason A. Zampi, 44, Vice President and Controller	Present position since December 16, 2018. Served as Assistant Vice President Corporate Accounting from April 1, 2016 to December 16, 2018. Served as Director Accounting Research and Analysis from May 1, 2014 to April 1, 2016. Served as Director Forecast and Performance Measures from March 16, 2011 to May 1, 2014.

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PART II

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

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

STOCK INFORMATION

Common Stock is owned by 24,475 stockholders of record as of December 31, 2018, and is traded on the New York Stock Exchange under the symbol “NSC.”

ISSUER PURCHASES OF EQUITY SECURITIES



Period	Total Number of Shares (or Units) Purchased⁽¹⁾	Average Price Paid per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs^{(2) (3)}	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be Purchased under the Plans or Programs⁽³⁾

October 1-31, 2018	874,580	$	171.45	874,580	42,783,417
November 1-30, 2018	1,145,256	168.48		1,145,256	41,638,161
December 1-31, 2018	2,271,418	166.72		2,270,242	39,367,919

Total	4,291,254			4,290,078


⁽¹⁾	Of this amount, 1,176 represents shares tendered by employees in connection with the exercise of stock options under the stockholder-approved Long-Term Incentive Plan.


⁽²⁾	Total number of shares purchased as part of publicly announced plans or programs includes 1.3 million shares purchased under the accelerated stock repurchase program (ASR) (see Note 15).


⁽³⁾	On September 26, 2017, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2022. As of December 31, 2018, 39.4 million shares remain authorized for repurchase.

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Item 6. Selected Financial Data

FIVE-YEAR FINANCIAL REVIEW



	2018		2017			2016		2015		2014
	($ in millions, except per share amounts)

RESULTS OF OPERATIONS
Railway operating revenues	$	11,458	$	10,551		$	9,888	$	10,511	$	11,624
Railway operating expenses	7,499		7,029			6,879		7,656		8,066
Income from railway operations	3,959		3,522			3,009		2,855		3,558

Other income – net	67		156			136		132		121
Interest expense on debt	557		550			563		545		545
Income before income taxes	3,469		3,128			2,582		2,442		3,134

Income taxes	803		(2,276		)	914		886		1,134
Net income	$	2,666	$	5,404		$	1,668	$	1,556	$	2,000

PER SHARE DATA
Basic earnings per share	$	9.58	$	18.76		$	5.66	$	5.13	$	6.44
Diluted earnings per share	9.51		18.61			5.62		5.10		6.39
Dividends	3.04		2.44			2.36		2.36		2.22
Stockholders’ equity at year end	57.30		57.57			42.73		40.93		40.26

FINANCIAL POSITION
Total assets	$	36,239	$	35,711		$	34,892	$	34,139	$	33,033
Total debt	11,145		9,836			10,212		10,093		8,985
Stockholders’ equity	15,362		16,359			12,409		12,188		12,408

OTHER
Property additions	$	1,951	$	1,723		$	1,887	$	2,385	$	2,118


Average number of shares outstanding (thousands)	277,708		287,861			293,943		301,873		309,367
Number of stockholders at year end	24,475		25,737			27,288		28,443		29,575
Average number of employees:
Rail	26,512		26,955			27,856		30,057		29,063
Nonrail	150		155			188		399		419
Total	26,662		27,110			28,044		30,456		29,482

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

Note 2: The retrospective application of FASB ASU 2017-07 resulted in an increase to “Compensation and benefits” expense within “Railway operating expenses” and an offsetting increase to “Other income – net” of $64 million, $65 million, $29 million, and $17 million for the years ended 2017, 2016, 2015, and 2014, respectively, with no impact on “Net income.” See additional details in Item 8 “Financial Statements and Supplementary Data” in Note 1.

See accompanying consolidated financial statements and notes thereto.

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

Norfolk Southern Corporation and Subsidiaries

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

OVERVIEW

We are one of the nation’s premier transportation companies. Our Norfolk Southern Railway Company subsidiary operates approximately 19,500 route miles in 22 states and the District of Columbia, serves every major container port in the eastern United States, and provides efficient connections to other rail carriers. Norfolk Southern is a major transporter of industrial products, including chemicals, agriculture, and metals and construction materials. In addition, the railroad operates the most extensive intermodal network in the East and is a principal carrier of coal, automobiles, and automotive parts.

We achieved records for income from railway operations and railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses) for the year, the result of significant revenue growth, partially offset by increased operating expenses. Progress on our strategic initiatives established in 2015 has created a sustainable platform positioning us for the continued execution of transformational changes that will provide greater long-term value for our shareholders.

SUMMARIZED RESULTS OF OPERATIONS



							2018		2017
	2018		2017		2016		vs. 2017		vs. 2016
	($ in millions, except per share amounts)						(% change)

Income from railway operations	$	3,959	$	3,522	$	3,009	12	%	17	%
Net income	$	2,666	$	5,404	$	1,668	(51	%)	224	%
Diluted earnings per share	$	9.51	$	18.61	$	5.62	(49	%)	231	%
Railway operating ratio	65.4		66.6		69.6		(2	%)	(4	%)

On December 22, 2017, the Tax Cuts and Jobs Act (“tax reform”) was signed into law. As a result of the enactment of this law, in 2017, “Purchased services and rents” included a $151 million benefit and “Income taxes” included a $3,331 million benefit, which added $3,482 million to “Net income” and $12.00 to “Diluted earnings per share.” The 2017 operating ratio was favorably impacted by 1.5 percentage points. For more information on the impact of tax reform, see Note 4.

The following table adjusts our 2017 GAAP financial results to exclude the effects of tax reform, specifically, the effects of remeasurement of net deferred tax liabilities related to the reduction of the federal tax rate from 35% to 21% (the “2017 tax adjustments”). We use these non-GAAP financial measures internally and believe this information provides useful supplemental information to investors to facilitate making period-to-period comparisons by excluding the 2017 tax adjustments. While we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similar measures presented by other companies.

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Reconciliation of Non-GAAP Financial Measures



	Reported 2017 (GAAP)		2017 tax adjustments			Adjusted 2017 (non-GAAP)
	($ in millions, except per share amounts)

Income from railway operations	$	3,522	$	(151	)	$	3,371
Net income	$	5,404	$	(3,482	)	$	1,922
Diluted earnings per share	$	18.61	$	(12.00	)	$	6.61
Railway operating ratio	66.6		1.5			68.1

In the table below and the paragraph following, references to 2017 results and related comparisons use the adjusted, non-GAAP results from the reconciliation in the table above.



							2018 vs.		Adjusted
			Adjusted				Adjusted		2017
			2017				2017		(non-GAAP)
	2018		(non-GAAP)		2016		(non-GAAP)		vs. 2016
	($ in millions, except per share amounts)						(% change)

Income from railway operations	$	3,959	$	3,371	$	3,009	17	%	12	%
Net income	$	2,666	$	1,922	$	1,668	39	%	15	%
Diluted earnings per share	$	9.51	$	6.61	$	5.62	44	%	18	%
Railway operating ratio	65.4		68.1		69.6		(4	%)	(2	%)

Income from railway operations rose in both comparisons resulting from higher railway operating revenues that more than offset higher expenses. Revenue growth of 9% and 7% in 2018 and 2017, respectively, was tempered by increased adjusted operating expenses of 4% in both periods. In addition to higher income from railway operations, net income and diluted earnings per share growth in 2018 also benefited from a lower effective tax rate, primarily due to the enactment of tax reform. Finally, our share repurchase programs in both years resulted in diluted earnings per share growth that exceeded that of net income.

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DETAILED RESULTS OF OPERATIONS

Railway Operating Revenues

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



	Revenues						2018		2017
	2018		2017		2016		vs. 2017		vs. 2016
	($ in millions)						(% change)
Merchandise:
Chemicals	$	1,808	$	1,668	$	1,648	8	%	1	%
Agr./consumer/gov’t.	1,674		1,547		1,548		8	%	—
Metals/construction	1,462		1,426		1,267		3	%	13	%
Automotive	991		955		975		4	%	(2	%)
Paper/clay/forest	809		761		744		6	%	2	%
Merchandise	6,744		6,357		6,182		6	%	3	%
Intermodal	2,893		2,452		2,218		18	%	11	%
Coal	1,821		1,742		1,488		5	%	17	%
Total	$	11,458	$	10,551	$	9,888	9	%	7	%



	Units			2018		2017
	2018	2017	2016	vs. 2017		vs. 2016
	(in thousands)			(% change)
Merchandise:
Chemicals	498.0	467.2	475.7	7	%	(2	%)
Agr./consumer/gov’t.	614.4	589.0	601.2	4	%	(2	%)
Metals/construction	715.7	727.5	685.8	(2	%)	6	%
Automotive	403.9	423.1	440.5	(5	%)	(4	%)
Paper/clay/forest	287.1	284.6	284.0	1	%	—
Merchandise	2,519.1	2,491.4	2,487.2	1	%	—
Intermodal	4,375.7	4,074.1	3,870.4	7	%	5	%
Coal	1,033.5	1,046.0	902.1	(1	%)	16	%
Total	7,928.3	7,611.5	7,259.7	4	%	5	%



	Revenue per Unit						2018		2017
	2018		2017		2016		vs. 2017		vs. 2016
	($ per unit)						(% change)
Merchandise:
Chemicals	$	3,631	$	3,571	$	3,465	2	%	3	%
Agr./consumer/gov’t.	2,724		2,627		2,575		4	%	2	%
Metals/construction	2,042		1,960		1,847		4	%	6	%
Automotive	2,453		2,257		2,213		9	%	2	%
Paper/clay/forest	2,819		2,673		2,620		5	%	2	%
Merchandise	2,677		2,552		2,486		5	%	3	%
Intermodal	661		602		573		10	%	5	%
Coal	1,762		1,665		1,650		6	%	1	%
Total	1,445		1,386		1,362		4	%	2	%

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Revenues increased $907 million and $663 million in 2018 and 2017, respectively, compared to the prior years. As reflected in the table below, higher 2018 revenues were the result of higher average revenue per unit, driven by pricing gains and higher fuel surcharge revenue, partially offset by the mix-related impacts of increased intermodal volume and decreased coal volume. In addition, overall volume also increased. The rise in 2017 was largely the result of increased volume, particularly in our coal and intermodal markets, coupled with pricing gains. The table below reflects the components of the revenue change by major commodity group.



	2018 vs. 2017							2017 vs. 2016
	Increase (Decrease)							Increase
	($ in millions)
	Merchandise		Intermodal		Coal			Merchandise		Intermodal		Coal

Volume	$	71	$	182	$	(21	)	$	10	$	117	$	237
Fuel surcharge
revenue	119		159		20			35		78		10
Rate, mix and
other	197		100		80			130		39		7

Total	$	387	$	441	$	79		$	175	$	234	$	254

Most of our contracts include negotiated fuel surcharges, typically tied to either On-Highway Diesel (OHD) or West Texas Intermediate Crude Oil. Approximately 90% of our revenue base is covered by these negotiated fuel surcharges, with almost 75% tied to OHD. For both 2018 and 2017, contracts tied to OHD accounted for about 90% of our fuel surcharge revenue. Revenues associated with fuel surcharges totaled $657 million, $359 million, and $236 million in 2018, 2017, and 2016, respectively.

MERCHANDISE revenues increased in both 2018 and 2017 compared with the prior years. In 2018, revenues grew due to higher average revenue per unit, driven by pricing gains and higher fuel surcharge revenue, as well as higher volumes. Volume gains in chemicals, agriculture, and paper, clay, and forest products were partially offset by declines in automotive and metals and construction traffic. Revenue growth in 2017 was a result of higher average revenue per unit, the result of price improvements. Volume was relatively flat compared to the prior year, as gains in the metals and construction group were offset by declines in automotive, agriculture, and chemicals traffic.

For 2019, merchandise revenues are expected to increase, primarily the result of pricing gains.

Chemicals revenues rose in 2018 compared to a modest increase in 2017. In 2018 the rise was the result of higher volume and higher average revenue per unit, due to pricing gains and higher fuel surcharge revenue. Volumes grew due to increased shipments of crude oil, liquefied petroleum gas, and plastics, partially offset by a decrease in coal ash shipments. The increase in 2017 was due to higher average revenue per unit, a result of favorable mix and price improvements, which outweighed declines in volume. Volume declines were the result of fewer shipments of crude oil from the Bakken oil fields, lower shipments of coal ash, partially offset by an increase in shipments of plastics.

For 2019, chemicals revenues are anticipated to increase, as average revenue per unit is expected to be higher, the effect of overall pricing gains. We expect carloads to be relatively flat year-over-year, as declines in liquefied petroleum gas are expected to be offset by gains in crude oil.

Agriculture, consumer products, and government revenues increased in 2018 and were flat in 2017 compared to the prior years. Growth in 2018 was due to higher volume and higher average revenue per unit, a result of pricing gains and higher fuel surcharge revenues. Higher ethanol and fertilizer shipments more than offset declines in soybean and corn shipments. In 2017, lower traffic volume was offset by higher revenue per unit, driven by pricing gains. Volume declines in ethanol and soybeans, reflecting reduced market demand, more than offset increases in fertilizer.

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For 2019, agriculture, consumer products, and government revenues are expected to increase, driven by increased average revenue per unit, primarily a result of pricing gains. We expect volumes to decrease due to lower fertilizer shipments.

Metals and construction revenues grew in both periods, more significantly so in 2017. In 2018, higher average revenue per unit, the result of pricing gains and higher fuel surcharge revenue, more than offset volume declines. Volume declines in aggregates, cement, aluminum, and iron and steel were partially offset by increases in frac sand shipments for use in natural gas drilling in the Marcellus and Utica regions. In 2017, higher volume and average revenue per unit contributed to the rise in revenues. Volume growth was a result of more frac sand shipments for use in natural gas drilling in the Marcellus and Utica regions and more iron and steel shipments driven by continued improvement in construction activity. These increases were partially offset by a decline in coil steel traffic due to customer sourcing changes. Revenue per unit growth in 2017 was driven by favorable changes in traffic mix.

For 2019, metals and construction revenues are expected to rise, a result of increased revenue per unit driven by pricing gains, and volume growth is expected in aggregates and coil steel traffic.

Automotive revenues rose in 2018, but declined in 2017 compared to the prior years. In 2018, higher average revenue per unit, driven by price increases and higher fuel surcharge revenues, more than offset volume declines. Traffic declines were the result of shortages of availability of multilevel equipment and scheduled automotive plant downtime. The drop in volume in 2017 was driven mainly by decreases in U.S. light vehicle production, as well as temporary shutdowns for retooling of several NS-served facilities. Average revenue per unit increased for the year, primarily the result of higher fuel surcharge revenue.

For 2019, automotive revenues are expected to increase as a result of higher volumes, reflecting increased demand at NS-served plants, and higher average revenue per unit driven by price increases.

Paper, clay and forest products revenues rose in both 2018 and 2017 compared to the prior years. In 2018, higher average revenue per unit, the result of pricing gains and higher fuel surcharge revenue, and volume gains drove the increase. Gains in pulpboard and municipal waste shipments, a result of tightened truck capacity and growth with existing customers, respectively, were partially offset by decreases in pulp, woodchip, and graphic paper traffic. The increase in 2017 was due to higher average revenue per unit, a result of pricing gains and changes in the traffic mix. Traffic was flat for the year as increases in waste and pulp shipments were offset by losses in woodchip volume due to customer sourcing changes.

For 2019, paper, clay, and forest products revenues are anticipated to increase, reflecting pricing gains. We expect volume to decline slightly, as gains in lumber traffic are expected to be offset by declines in wood chips and graphic paper.

INTERMODAL revenues increased considerably in both 2018 and 2017 compared to the prior years. The rise in 2018 was driven by higher average revenue per unit, a result of increased fuel surcharge revenue and pricing gains, and higher volume. Growth in 2017 was the result of higher volume and higher average revenue per unit, due to higher fuel surcharge revenue and pricing gains.

For 2019, we expect intermodal revenues to rise, the result of increased domestic volumes and higher average revenue per unit, driven by rate increases.

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Intermodal units by market were as follows:



				2018		2017
	2018	2017	2016	vs. 2017		vs. 2016
	(units in thousands)			(% change)

Domestic	2,801.1	2,585.0	2,416.2	8	%	7	%
International	1,574.6	1,489.1	1,454.2	6	%	2	%

Total	4,375.7	4,074.1	3,870.4	7	%	5	%

Domestic volume increased in both periods. The rise in 2018 benefited from continued highway conversions due to tighter capacity in the truck market, higher truckload pricing, and growth from existing accounts. In 2017, continued highway conversions and growth from existing accounts drove the increase.

For 2019, we expect higher domestic volumes driven by continued highway conversions and growth from existing accounts.

International volume increased in both years reflecting increased demand from existing customers.

For 2019, we expect continued growth in our international volume largely driven by more traffic from existing customers.

COAL revenues increased in 2018 and significantly so in 2017 compared with the prior years. Revenue growth in 2018 was the result of higher average revenue per unit, largely the result of pricing gains, which more than offset volume declines. The increase in 2017 was a result of higher volume, primarily in the export market, and higher revenue per unit, driven by higher fuel surcharge revenue and pricing gains.

For 2019, coal revenues are expected to remain relatively flat year-over-year. Higher export and domestic metallurgical volumes are expected to be offset by lower revenue per unit, primarily the result of lower pricing in our export market.

As shown in the following table, total tonnage decreased slightly in 2018, but increased in 2017.



				2018		2017
	2018	2017	2016	vs. 2017		vs. 2016
	(tons in thousands)			(% change)

Utility	65,688	67,899	65,033	(3	%)	4	%
Export	28,046	26,460	14,608	6	%	81	%
Domestic metallurgical	15,500	15,675	13,884	(1	%)	13	%
Industrial	5,410	5,545	6,152	(2	%)	(10	%)

Total	114,644	115,579	99,677	(1	%)	16	%

Utility coal tonnage declined in 2018, driven by lower network velocity, decreased coal supply, inclement weather in the first quarter, and plant outages. Tonnage rose in 2017, driven by market share gains, partially offset by limited coal burn due to milder weather. Both periods were negatively impacted by sustained lower natural gas prices.

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For 2019, we expect utility tonnage to be relatively flat year-over-year, the result of continued pressure from natural gas prices and continued expected growth in renewable and natural gas capacity.

Export coal tonnage increased in both periods due to strong seaborne pricing that resulted in higher demand for U.S. coal. Volume through Norfolk was up 2.3 million tons, or 15%, in 2018 and 5.5 million tons, or 57%, in 2017. Volume through Baltimore declined 0.8 million tons, or 7%, in 2018, but rose 6.4 million tons, or 129%, in 2017.

For 2019, we expect export coal tonnage to rise due to continued demand for U.S. coal.

Domestic metallurgical coal tonnage was down slightly in 2018, but up in 2017. The decline in 2018 was a reflection of customer sourcing changes. In 2017, the increase was a result of market share gains.

For 2019, domestic metallurgical coal tonnage is expected to grow due to increased demand in domestic steel production.

Industrial coal tonnage decreased in both years. In 2018, the decrease reflected customer sourcing changes and pressure from natural gas conversions. The drop in 2017 was a result of plant outages, natural gas conversions, and decreased coal burn.

For 2019, industrial coal tonnage is expected to decrease as a result of continued pressure from natural gas conversions and customer sourcing changes.

Railway Operating Expenses

Railway operating expenses summarized by major classifications were as follows:



							2018		2017
	2018		2017		2016		vs. 2017		vs. 2016
	($ in millions)						(% change)

Compensation and benefits	$	2,925	$	2,979	$	2,808	(2	%)	6	%
Purchased services and rents	1,730		1,414		1,548		22	%	(9	%)
Fuel	1,087		840		698		29	%	20	%
Depreciation	1,102		1,055		1,026		4	%	3	%
Materials and other	655		741		799		(12	%)	(7	%)

Total	$	7,499	$	7,029	$	6,879	7	%	2	%

In 2018, expenses rose due to higher fuel prices as well as volume-related increases and costs associated with overall lower network velocity, partially offset by higher property sales. In 2017, we experienced an overall increase in expense compared to the prior year, reflecting higher fuel expense, incentive compensation, inflationary increases, and volume-related costs, partially offset by improved productivity and increased equity in earnings of certain investees as a result of the enactment of tax reform.

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Compensation and benefits decreased in 2018, reflecting changes in:


•	employment levels (down $61 million),


•	health and welfare benefit rates for agreement employees (down $34 million),


•	employment tax refund ($31 million benefit),


•	incentive and stock-based compensation (down $7 million),


•	pay rates (up $34 million), and


•	overtime and recrews (up $58 million).

In 2017, compensation and benefits increased, a result of changes in:


•	incentive and stock-based compensation (up $125 million),


•	higher health and welfare benefit rates for agreement employees (up $62 million),


•	pay rates (up $43 million),


•	increased overtime (up $24 million), and


•	employment levels (down $81 million).

Our employment averaged 26,662 in 2018, compared with 27,110 in 2017, and 28,044 in 2016.

Purchased services and rents includes the costs of services purchased from outside contractors, including the net costs of operating joint (or leased) facilities with other railroads and the net cost of equipment rentals. As previously discussed, in 2017, this line item includes a $151 million benefit from the 2017 tax adjustments ($36 million in purchased services and $115 million in equipment rents) in the form of higher income of certain equity investees.



							2018		2017
	2018		2017		2016		vs. 2017		vs. 2016
	($ in millions)						(% change)

Purchased services	$	1,367	$	1,233	$	1,242	11	%	(1	%)
Equipment rents	363		181		306		101	%	(41	%)

Total	$	1,730	$	1,414	$	1,548	22	%	(9	%)

The increase in purchased services in 2018 was largely the result of the absence of the benefit from the 2017 tax adjustments, higher intermodal volume-related costs, additional transportation and engineering activities as well as higher technology costs. In addition to the tax reform impacts discussed above, the remaining increase in purchased services expense in 2017 was a result of higher intermodal volume-related costs.

Equipment rents, which includes our cost of using equipment (mostly freight cars) owned by other railroads or private owners less the rent paid to us for the use of our equipment, increased in 2018, but decreased in 2017. In 2018, the rise was due to the absence of the benefits from the 2017 tax adjustments, the impact of slower network velocity, the cost of additional short-term locomotive resources as well as growth in volume. In 2017, in addition to the benefit from the 2017 tax adjustments, the decline was a result of lower automotive volume.

Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increased in both periods. The change in both years was principally due to locomotive fuel prices (up 25% in 2018 and up 22% in 2017) which increased expenses $208 million and $143 million, respectively. Locomotive fuel consumption increased 3% in 2018, but declined 1% in 2017. We consumed approximately 472 million gallons of diesel fuel in 2018, compared with 458 million gallons in 2017 and 462 million gallons in 2016.

Depreciation expense increased in both periods, a reflection of growth in our roadway and equipment capital base as we continue to invest in our infrastructure and rolling stock.

K 25

Materials and other expenses decreased in both periods as shown in the following table.



							2018		2017
	2018		2017		2016		vs. 2017		vs. 2016
	($ in millions)						(% change)

Materials	$	362	$	348	$	364	4	%	(4	%)
Casualties and other claims	176		145		150		21	%	(3	%)
Other	117		248		285		(53	%)	(13	%)

Total	$	655	$	741	$	799	(12	%)	(7	%)

Materials expense increased in 2018, due primarily to higher locomotive repair costs. In 2017, the decline was a result of lower freight car repairs.

Casualties and other claims expenses include the estimates of costs related to personal injury, property damage, and environmental matters. The 2018 expense increased, primarily the result of higher derailment-related costs. The decrease in 2017 was the result of lower loss and damage, offset in part by unfavorable developments in personal injury cases.

Other expense decreased in both periods, largely a result of higher gains from sales of operating properties, up $79 million and $42 million in 2018 and 2017, respectively, compared to the prior periods. In 2018, the decline was additionally impacted by the inclusion of net rental income from operating property previously included in “Other income – net” of $78 million, partially offset by increased costs as a result of the relocation of our train dispatchers to Atlanta, Georgia.

Other income – net

Other income – net decreased in 2018, following an increase in 2017. The decline was driven by the absence of net rental income as discussed above and unfavorable returns from corporate-owned life insurance (COLI) investments. In 2017, the rise was mainly the result of favorable returns on COLI investments.

Income Taxes

The effective income tax rate was 23.1% in 2018, compared with negative 72.8% in 2017 and 35.4% in 2016. Income taxes in 2018 benefited from the effects of the enactment of tax reform in late 2017 that lowered the federal corporate income tax rate. Income taxes in 2017 included a benefit of $3,331 million related to the effects of the enactment of tax reform from the reduction in our net deferred tax liabilities driven by the change in the federal rate. All three years benefited from favorable tax benefits associated with stock-based compensation. Both 2018 and 2016 benefited from favorable reductions in deferred taxes for state tax law changes and certain business tax credits, while 2017 and 2016 benefited from higher returns from corporate-owned life insurance.

The statute of limitations on Internal Revenue Service (IRS) examinations has expired for all years prior to 2015. Our consolidated federal income tax return for 2015 is currently being audited by the IRS. We do not expect that the resolution of the examination will have a material effect on our financial position, results of operations, or liquidity.

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

Cash provided by operating activities, our principal source of liquidity, was $3.7 billion in 2018, $3.3 billion in 2017, and $3.0 billion in 2016. The increases in both 2018 and 2017 were primarily the result of improved

K 26

operating results. We had working capital deficits of $729 million and $396 million at December 31, 2018, and 2017, respectively. Cash, cash equivalents, and restricted cash totaled $446 million and $690 million at December 31, 2018, and 2017, respectively. We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations.

Contractual obligations at December 31, 2018, were comprised of interest on fixed-rate long-term debt, long-term debt (Note 9), unconditional purchase obligations (Note 17), operating leases (Note 10), long-term advances from Conrail, agreements with Consolidated Rail Corporation (CRC) (Note 6), and unrecognized tax benefits (Note 4):



	Total		2019		2020 - 2021		2022 - 2023		2024 and Subsequent		Other
	($ in millions)

Interest on fixed-rate long-term debt	$	13,742	$	545	$	1,001	$	907	$	11,289	$	—
Long-term debt principal	11,984		585		898		1,200		9,301		—
Unconditional purchase obligations	1,206		611		408		187		—		—
Operating leases	695		101		183		144		267		—
Long-term advances from Conrail	280		—		—		—		280		—
Agreements with CRC	206		38		76		76		16		—
Unrecognized tax benefits*	21		—		—		—		—		21

Total	$	28,134	$	1,880	$	2,566	$	2,514	$	21,153	$	21

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

Off balance sheet arrangements consist of obligations related to operating leases, which are included in the table of contractual obligations above and disclosed in Note 10.

Cash used in investing activities was $1.7 billion in 2018, compared with $1.5 billion in 2017, and $1.8 billion in 2016. In 2018, higher property additions drove the increase. The decline in 2017 was a reflection of lower cash outflows for property additions and a drop in corporate-owned life insurance investments.

Capital spending and track and equipment statistics can be found within the “Railway Property” section of Part I of this report on Form 10-K. For 2019, we expect capital spending to approximate 16% to 18% of revenues.

Cash used in financing activities was $2.3 billion in 2018, compared with $2.0 billion in 2017, and $1.3 billion in 2016. Both year-over-year comparisons reflect increased repurchases of common stock and higher debt repayments. In 2018, the increase was also impacted by higher dividend payments, but tempered by increased proceeds from borrowings. In 2017, lower proceeds from borrowings also contributed to the rise.

Share repurchases totaled $2.8 billion in 2018, $1.0 billion in 2017, and $803 million in 2016 for the purchase and retirement of 17.1 million (including 7.0 million shares repurchased for $1.2 billion under the ASR program, see Note 15), 8.2 million, and 9.2 million shares, respectively. As of December 31, 2018, 39.4 million shares remain authorized by our Board of Directors for repurchase. The timing and volume of future share repurchases will be guided by our assessment of market conditions and other pertinent factors. Any near-term purchases under the program are expected to be made with internally generated cash, cash on hand, or proceeds from borrowings.

In February of 2018, we issued $500 million of 4.15% senior notes due 2048. In August of 2018, we issued $300 million of 3.65% senior notes due 2025, $400 million of 3.80% senior notes due 2028, $200 million of 4.15% senior notes due 2048, and $600 million of 5.10% senior notes due 2118 (see Note 9).

K 27

We discuss our credit agreement and our accounts receivable securitization program in Note 9, and we have authority from our Board of Directors to issue an additional $1.2 billion of debt or equity securities through public or private sale, all of which provide for access to additional liquidity should the need arise. Our debt-to-total capitalization ratio was 42.0% at December 31, 2018, compared with 37.5% at December 31, 2017.

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

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of 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. The following critical accounting policies are a subset of our significant accounting policies described in Note 1.

Pensions and Other Postretirement Benefits

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

In recording our net pension benefit, we assumed a long-term investment rate of return of 8.25%, which was supported by the long-term total rate of return on plan assets since inception, as well as our expectation of future returns. A one-percentage point change to this rate of return assumption would result in a $22 million change in pension expense. We review assumptions related to our defined benefit plans annually, and while changes are likely to occur in assumptions concerning retirement age, projected earnings, and mortality, they are not expected to have a material effect on our net pension expense or net pension liability in the future. The net pension liability is recorded at net present value using discount rates that are based on the current interest rate environment in light of the timing of expected benefit payments. We utilize analyses in which the projected annual cash flows from the pension and postretirement benefit plans are matched with yield curves based on an appropriate universe of high-quality corporate bonds. We use the results of the yield curve analyses to select the discount rates that match the payment streams of the benefits in these plans.

Properties and Depreciation

Most of our assets are long-lived railway properties (Note 7). As disclosed in Note 1, the primary depreciation method for our asset base is group life. See Note 1 for a more detailed discussion of the assumptions and estimates in this area.

Depreciation expense for 2018 totaled $1.1 billion. Our composite depreciation rates for 2018 are disclosed in

Note 7; a one year increase (or decrease) in the estimated average useful lives of depreciable assets would have resulted in an approximate $40 million decrease (or increase) to depreciation expense.

K 28

Personal Injury

Casualties and other claims expense, included in “Materials and other” in the Consolidated Statements of Income, includes our accrual for personal injury liabilities.

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

For a more detailed discussion of the assumptions and estimates in accounting for personal injury see Note 17.

Income Taxes

Our net deferred tax liability totaled $6.5 billion at December 31, 2018 (Note 4). This liability is estimated based on the expected future tax consequences of items recognized in the financial statements. After application of the federal statutory tax rate to book income, judgment is required with respect to the timing and deductibility of expenses in our income tax returns. For state income and other taxes, judgment is also required with respect to the apportionment among the various jurisdictions. A valuation allowance is recorded if we expect that it is more likely than not that deferred tax assets will not be realized. We have a $50 million valuation allowance on $425 million of deferred tax assets as of December 31, 2018, reflecting the expectation that almost all of these assets will be realized.

OTHER MATTERS

Labor Agreements

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

The 2015 bargaining round is now complete with finalized agreements in place with all employees. All of the newly negotiated agreements have moratorium provisions that will reopen the agreements for negotiation beginning January 1, 2020.

Market Risks

At December 31, 2018, we had no outstanding debt subject to interest rate fluctuations. Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a one percentage point decrease in interest rates as of December 31, 2018, and amounts to an increase of approximately $1.4 billion to the fair value of our debt at December 31, 2018. We consider it unlikely that interest rate fluctuations applicable to these instruments will result in a material adverse effect on our financial position, results of operations, or liquidity.

New Accounting Pronouncements

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

K 29

Inflation

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

FORWARD-LOOKING STATEMENTS

Certain statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or our achievements or those of our industry to be materially different from those expressed or implied by any forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “project,” “consider,” “predict,” “potential,” “feel,” or other comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates, beliefs, and projections. While we believe these expectations, assumptions, estimates, beliefs, and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which involve factors or circumstances that are beyond our control. These and other important factors, including those discussed in Item 1A “Risk Factors,” may cause actual results, performance, or achievements to differ materially from those expressed or implied by these forward-looking statements. The forward-looking statements herein are made only as of the date they were first issued, and unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Copies of our press releases and additional information about us is available at www.norfolksouthern.com, or you can contact our Investor Relations Department by calling 757-629-2861.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

K 30

Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS



	Page

Report of Management	K 32

Reports of Independent Registered Public Accounting Firm	K 33

Consolidated Statements of Income Years ended December 31, 2018, 2017, and 2016	K 36

Consolidated Statements of Comprehensive Income Years ended December 31, 2018, 2017, and 2016	K 37

Consolidated Balance Sheets At December 31, 2018 and 2017	K 38

Consolidated Statements of Cash Flows Years ended December 31, 2018, 2017, and 2016	K 39

Consolidated Statements of Changes in Stockholders’ Equity Years ended December 31, 2018, 2017, and 2016	K 40

Notes to Consolidated Financial Statements	K 41

Index to Consolidated Financial Statement Schedule in Item 15	K 78

K 31

Report of Management

February 8, 2019

To the Stockholders

Norfolk Southern Corporation

Management is responsible for establishing and maintaining adequate internal control over financial reporting. In order to ensure that Norfolk Southern Corporation’s internal control over financial reporting is effective, management regularly assesses such controls and did so most recently as of December 31, 2018. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2018.

KPMG LLP, independent registered public accounting firm, has audited the Corporation’s financial statements and issued an attestation report on the Corporation’s internal control over financial reporting as of December 31, 2018.



/s/ James A. Squires	/s/ Cynthia C. Earhart	/s/ Jason A. Zampi
James A. Squires	Cynthia C. Earhart	Jason A. Zampi
Chairman, President and	Executive Vice President Finance	Vice President and
Chief Executive Officer	and Chief Financial Officer	Controller

K 32

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Norfolk Southern Corporation:

Opinion on Internal Control Over Financial Reporting

We have audited Norfolk Southern Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders’ equity for each of the years in the three-year period ended December 31, 2018, and the related notes and financial statement schedule of valuation and qualifying accounts as listed in Item 15(A)2 (collectively, the consolidated financial statements), and our report dated February 8, 2019 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting

and for its assessment of the effectiveness of internal control over financial reporting, included in the

accompanying Report of Management. Our responsibility is to express an opinion on the Company’s internal

control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB

and are required to be independent with respect to the Company in accordance with the U.S. federal securities

laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan

and perform the audit to obtain reasonable assurance about whether effective internal control over financial

reporting was maintained in all material respects. Our audit of internal control over financial reporting included

obtaining an understanding of internal control over financial reporting, assessing the risk that a material

weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on

the assessed risk. Our audit also included performing such other procedures as we considered necessary in

the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance

regarding the reliability of financial reporting and the preparation of financial statements for external purposes in

accordance with generally accepted accounting principles. A company’s internal control over financial reporting

includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,

accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide

reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements

in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,

or disposition of the company’s assets that could have a material effect on the financial statements.

K 33

Because of its inherent limitations, internal control over financial reporting may not prevent or detect

misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that

controls may become inadequate because of changes in conditions, or that the degree of compliance with the

policies or procedures may deteriorate.

/s/ KPMG LLP

KPMG LLP

Norfolk, Virginia

February 8, 2019

K 34

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Norfolk Southern Corporation:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Norfolk Southern Corporation and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders’ equity for each of the years in the three-year period ended December 31, 2018, and the related notes and financial statement schedule of valuation and qualifying accounts as listed in Item 15(A)2 (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 8, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our

responsibility is to express an opinion on these consolidated financial statements based on our audits. We are

a public accounting firm registered with the PCAOB and are required to be independent with respect to the

Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the

Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we

plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements

are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to

assess the risks of material misstatement of the consolidated financial statements, whether due to error or

fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test

basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits

also included evaluating the accounting principles used and significant estimates made by management, as

well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits

provide a reasonable basis for our opinion.

/s/ KPMG LLP

KPMG LLP

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

Norfolk, Virginia

February 8, 2019

K 35

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Income



	Years ended December 31,
	2018		2017		2016
	($ in millions, except per share amounts)

Railway operating revenues	$	11,458	$	10,551	$	9,888

Railway operating expenses:
Compensation and benefits	2,925		2,979		2,808
Purchased services and rents	1,730		1,414		1,548
Fuel	1,087		840		698
Depreciation	1,102		1,055		1,026
Materials and other