Norfolk Southern
Annual Report 2013

Plain-text annual report

ouR Vision Be the sAfest, most customeR-focused, And successful tRAnspoRtAtion compAny in the woRld Three Commercial Place | Norfolk, Virginia 23510 | www.nscorp.com © 2014 Norfolk Southern Corporation - All Rights Reserved 10.0114.6657.105k N o r f o l k S o u t h e r n C o r p o r a t i o n | A n n u A l R e p o R t 2 0 1 3 w w w . n s c o r p . c o m finAnciAl highlights noRfolk southeRn coRpoRAtion & suBsidiARies foR the yeAR (numbers in millions, except per-share amounts) Railway operating revenues Income from railway operations Net income Per share – basic Per share – diluted Dividends per share Dividend pay-out ratio Cash provided by operating activities Property additions Free cash flow2 At yeAR end Total assets Total debt Stockholders’ equity Shares outstanding Stockholders’ equity per share finAnciAl RAtios Operating ratio Debt-to-total-capitalization ratio Total Stockholder Returns1 (dollars) $ 350 $ 300 $ 250 $ 200 $ 150 $ 100 $ 50 $ 0 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2013 11,245 3,257 1,910 6.10 6.04 2.04 33% 3,078 1,971 1,107 32,483 9,448 11,289 308.9 36.55 71.0% 45.6% 2012 11,040 $ $ $ $ $ $ $ $ $ $ $ $ $ 3,124 1,749 5.42 5.37 1.94 36% 3,065 2,241 824 30,342 8,682 9,760 314.0 31.08 71.7% 47.1% 2011 11,172 3,213 1,916 5.52 5.45 1.66 30% 3,227 2,160 1,067 28,538 7,540 9,911 330.4 30.00 71.2% 43.2% Railway Operating Revenues (in millions) $11,172 $11,245 $11,040 Income from Railway Operations (in millions) $3,213$3,124 $3,257 Free Cash Flow2 (in millions) $1,067 $1,107 $824 12/08 12/09 12/10 12/11 12/12 12/13 Norfolk Southern Corp. Common Stock S&P Railroad Stock Price Index S&P Composite-500 Stock Price Index 11 12 13 11 12 13 11 12 13 1 This graph provides an indicator of cumulative total stockholder returns for Norfolk Southern Corporation as compared to the other identified indices. Assumes that the value of the investment in Norfolk Southern Corporation common stock and each index was $100 on Dec. 31, 2008, and that all dividends were reinvested. Data furnished by Bloomberg Financial Markets. 2 Free cash flow as used here is defined as cash provided by operating activities minus property additions and is a measure of cash available for other investing activities and financing activities, including dividends and repurchases of common stock. descRiption of Business Norfolk Southern Corporation (NYSE: NSC) is one of the nation’s premier transportation companies. Our Norfolk Southern Railway Company subsidiary operates approximately 20,000 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. We operate the most extensive intermodal network in the East and are a major transporter of coal, automotive, and industrial products. stockholdeR infoRmAtion common stock Ticker symbol: NSC Our common stock is listed and traded on the New York Stock Exchange. puBlicAtions The following reports and publications are available on our website at www.nscorp.com and, upon written request, will be furnished in printed form to stockholders free of charge: - Annual Reports on Form 10-K - Quarterly Reports on Form 10-Q - Corporate Governance Guidelines - Board Committee Charters - Thoroughbred Code of Ethics - Code of Ethical Conduct for Senior Financial Officers - Categorical Independence Standards for Directors Stockholders desiring a printed copy of one or more of these reports and publications should send their request to the corporate secretary: Denise W. Hutson Corporate Secretary Norfolk Southern Corporation Three Commercial Place Norfolk, Va. 23510 757.823.5567 A notice and proxy statement for the annual meeting of stockholders are furnished to stockholders in advance of the meeting. Amendments to or waivers of the Thoroughbred Code of Ethics and/or the Code of Ethical Conduct for Senior Financial Officers that are required to be disclosed pursuant to Item 5.05 of the current report on Form 8-K will be disclosed on our website. ethics & compliAnce hotline High ethical standards always have been key to our success. Anyone who may be aware of a violation of our corporation’s Thoroughbred Code of Ethics is encouraged to contact our Ethics & Compliance Hotline at 800.732.9279. diVidends At its January 2014 meeting, our board of directors declared a quarterly dividend of 54 cents per share on its common stock, payable on March 10, 2014, to stockholders of record on Feb. 7, 2014. We usually pay quarterly dividends on our common stock on or about March 10, June 10, Sept. 10, and Dec. 10, when and if declared by our board of directors to stockholders of record. We have paid 126 consecutive quarterly dividends since our inception in 1982. Account AssistAnce For assistance with lost stock certificates, transfer requirements, the INVESTORS CHOICE Plan, address changes, dividend checks, and direct deposit of dividends, contact: American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, N.Y. 11219 877.864.4750 inVestoRs choice We and our transfer agent, American Stock Transfer & Trust Company LLC (AST), offer the INVESTORS CHOICE Plan for investors wishing to purchase or sell Norfolk Southern Corporation Common Stock. This plan is available to both present stockholders of record and individual investors wishing to make an initial purchase of Norfolk Southern Corporation Common Stock. Once enrolled in the plan, you can invest cash dividends when paid and make optional cash investments simply and conveniently. To take advantage of the INVESTORS CHOICE Plan, contact AST at 877.864.4750 or visit www.amstock.com. Once you are on this page, you may go to Invest Online to access information about the NS INVESTORS CHOICE Plan. finAnciAl inquiRies Marta R. Stewart Executive Vice President Finance and Chief Financial Officer Norfolk Southern Corp. Three Commercial Place Norfolk, Va. 23510 757.629.2770 inVestoR inquiRies Michael Hostutler Director Investor Relations Norfolk Southern Corp. Three Commercial Place Norfolk, Va. 23510 757.629.2861 coRpoRAte offices Executive Offices Norfolk Southern Corp. Three Commercial Place Norfolk, Va. 23510 757.629.2600 RegionAl offices 1200 Peachtree St. N.E. Atlanta, Ga. 30309 110 Franklin Road S.E. Roanoke, Va. 24042 AnnuAl RepoRt Requests & Information 800.531.6757 AnnuAl meeting May 8, 2014 8:30 a.m. EDT Williamsburg Lodge Conference Center 310 South England St. Williamsburg, Va. 23185 MeSSage to StockholDerS Dear Fellow StockholDerS: 2013 was a big year for Norfolk Southern. We achieved record performance levels as our investments in network capacity, technology, and new talent delivered the safe, efficient, and dependable service our transportation customers deserve. We set new precedents for railway operating revenues and income from railway operations and achieved new landmarks for net income, earnings per share, and operating ratio. At our 2013 annual meeting, I shared my optimism that, “The best is still to come.” I couldn’t foresee that a sluggish economic first half of the year would turn around significantly in the second half, but that’s what happened. Our fourth quarter set records in railway operating income, net income, and earnings per share not only for a breakthrough year, but in Norfolk Southern history. Looking at the numbers for the year, we came in at a record $11.2 billion in revenues. That’s our third consecutive year at $11 billion-plus revenues. Net income in 2013 was up 9 percent, and earnings per share were up 12 percent, both setting records. We delivered on our commitment to holding expenses to a 1 percent increase, contributing to a record-best operating ratio of 71 percent – tribute to our measurable productivity and efficiency enhancements. We also continued our tradition of a solid dividend policy, raising the dividend on the company’s common stock by 5 percent, along with $627 million in share repurchases. Total traffic volume was up 3 percent in 2013, despite a decline of coal shipments of 5 percent. Intermodal traffic led overall volume growth, up 6 percent driven by increases in both domestic and international business fed by our multiyear investments in corridor infrastructure. Merchandise volume increased 4 percent for the year, as chemicals and automotive showed significant gains, and all merchandise categories trended upward at year-end. Norfolk Southern is reinventing our markets and adapting to changes in our coal traffic. We’re developing emerging energy markets and revitalizing our existing network to change not with the times, but lead with innovation and determination ahead of them, while remaining strongly committed to the coal business. In 2013, we celebrated 50 years of serving the world’s energy needs at our Pier 6 coal transload facility, one of the world’s largest and most efficient. The Norfolk facility set U.S. records for vessel loadings in 2013. our ManageMent teaM (left to right top to bottom) Don Seale Cindy Earhart Jim Hixon Marta Stewart Mark Manion Jim Squires Wick Moorman Deb Butler In an effort to prepare for operating in shifting markets and to provide the best possible customer service, we invested $2 billion in capital improvements in 2013. We opened new Crescent Corridor intermodal facilities at Greencastle, Pa., and Charlotte, N.C., an inland port facility at Greer, S.C., and new bulk transfer facilities at Knoxville, Tenn., and Columbia, S.C. All of these projects were designed with one underlying commitment in mind: to provide service excellence for our customers for the long term. In line with our standard of excellence, we helped with the location of 67 new industries and the expansion of 25 existing industries on our lines in 2013. Together, our work represents a customer investment of $2.3 billion, will lead to an expected creation of 3,100 new jobs, and will bring more than 136,000 carloads of new rail traffic annually. Holding firm to our belief that Norfolk Southern is at its best when the communities we serve are at their best, we continued corporate responsibility leadership in 2013. We purchased fuel-efficient locomotives and increased our use of idle-reduction and train-handling technologies. As a result, our efforts to reduce Norfolk Southern’s carbon footprint and environmental impacts are marching steadily forward. We’re giving back to the communities that give us so much through the Norfolk Southern Foundation. Internally, we’re refining our culture to step up productivity and improve our working environment – they go hand- in-hand. Lastly, and arguably most importantly, we’re hiring a new generation of railroaders for the Thoroughbred of Transportation, with an emphasis on bringing military veterans into the Norfolk Southern family. But make no mistake: The rail industry faces a plethora of legislative and regulatory challenges. The task of launching the congressionally mandated positive train control nationwide is expensive and complex and will certainly take longer than Congress originally decreed. We face high levels of scrutiny over transport of hazardous materials. Efforts to reregulate the rail industry persist, along with truck size and weight issues. These matters notwithstanding, we’ll continue to firmly advocate for policies and rules that support America’s rail transportation infrastructure as a strong, competitive asset in the international marketplace. 2013 marked a year of remarkable achievement by many measures. For that, we have to thank the people behind our brand. Their talents, ingenuity, and hard work brought us to new heights today and will take us even further in the years ahead. We named new leaders to our senior management team this year, including Jim Squires as president, along with Cindy Earhart and Marta Stewart as executive vice presidents. We have the best people in the business, the most capable leadership team anywhere, and because of them, I am confident in the future of Norfolk Southern and the rail industry and in our ability to help move the nation’s economy forward. Chairman and Chief Executive Officer BoarD oF DirectorS thoMaS D. Bell Jr., 64, of Atlanta, Ga., is chairman of Mesa Capital Partners LLC and formerly served as chairman and chief executive officer of Cousins Properties Inc. and Young and Rubicam Inc. His board service began in 2010. Committees: Finance (chair), Executive, Compensation erSkine B. BowleS, 68, of Charlotte, N.C., is a senior advisor to Carousel Capital and co-chairman of the National Commission on Fiscal Responsibility and Reform. He formerly served as president of the University of North Carolina’s 16-campus system and as chief of staff to President Bill Clinton. His board service began in 2011. Committees: Compensation, Finance roBert a. BraDway, 51, of Thousand Oaks, Calif., is chairman and chief executive officer of Amgen. His board service began in 2011. Committees: Audit, Governance and Nominating weSley g. BuSh, 52, of McLean, Va., is chairman, chief executive officer and president of Northrop Grumman Corporation. His board service began in 2012. Committees: Compensation, Finance Daniel a. carp, 65, of Naples, Fla., is nonexecutive chairman of Delta Air Lines, Inc., and formerly served as chairman and chief executive officer of Eastman Kodak Company. His board service began in 2006. Committees: Compensation (chair), Executive, Governance and Nominating karen n. horn, 70, of DeLand, Fla., is a partner with Brock Capital Group and director of the National Bureau of Economic Research. She previously served as president of private client services and managing director of Marsh Inc., a subsidiary of MMC; chair and chief executive officer of Bank One; and president of the Federal Reserve Bank of Cleveland. Her board service began in 2008. Committees: Audit, Governance and Nominating All directors stand for re-election annually. In accord with the director retirement policy of our corporate governance guidelines, one director, Burton M. Joyce, will retire from the board as of the 2014 annual meeting. Information below is as of Feb. 1, 2014. (left to right top to bottom) Wesley G. Bush, Martin H. Nesbitt, Michael D. Lockhart, John R. Thompson, Robert A. Bradway, Thomas D. Bell Jr., Erskine B. Bowles, Daniel A. Carp, Steven F. Leer, Karen N. Horn, Charles W. Moorman, Burton M. Joyce. (Not pictured are Amy E. Miles and James A. Squires, who joined the board Jan. 21, 2014.) Burton M. Joyce, 71, of Gulfport, Fla., is former chairman of IPSCO Inc., a leading steel producer. His board service began in 2003. Committees: Audit (chair), Executive, Finance Steven F. leer, 61, of St. Louis, Mo., is executive chairman of Arch Coal, Inc., one of the nation’s largest coal producers. His board service began in 1999. Committees: Compensation, Executive, Governance and Nominating (chair) Michael D. lockhart, 64, of Lancaster, Pa., is former chairman, president, and chief executive officer of Armstrong World Industries, Inc. His board service began in 2008. Committees: Audit, Finance aMy e. MileS, 47, of Knoxville, Tenn., is chief executive officer and a director of Regal Entertainment Group Inc., the largest movie theater company in the U.S. Her board service began in 2014. Committees: Audit, Finance charleS w. MoorMan, 61, of Virginia Beach, Va., is chairman and chief executive officer of Norfolk Southern Corporation. His board service began in 2005. Committee: Executive (chair) Martin h. neSBitt, 51, of Chicago, Ill., is co-founder of The Vistria Group, a private equity firm. He served as managing director of Green Courte Partners LLC, a real estate investment firm, and president and chief executive officer of PRG Parking Holding LLC until 2012. His board service began in 2013. Committees: Audit, Finance JaMeS a. SquireS, 52, of Norfolk, Va., is president of Norfolk Southern Corporation. His board service began in 2014. John r. thoMpSon, 62, of Baltimore, Md., is a government relations consultant for Best Buy Co. Inc. and formerly served as senior vice president and general manager of BestBuy.com. His board service began in 2013. Committees: Audit, Governance and Nominating equal eMployMent opportunity policy Norfolk Southern Corporation’s policy is to comply with all applicable laws, regulations, and executive orders concerning equal employment opportunity and nondiscrimination and to offer employment on the basis of qualification and performance, regardless of race, religion, color, national origin, gender, age, sexual orientation, veteran status, the presence of a disability, or any other legally protected status. thoMaS e. hurlBut Vice President and Controller DaviD F. Julian Vice President Safety and Environmental roBert M. keSler Jr. Vice President Taxation DaviD t. lawSon Vice President Coal Bruno MaeStri Vice President Government Relations roBert e. Martínez Vice President Business Development Michael r. Mcclellan Vice President Industrial Products alan h. Shaw Vice President Intermodal Operations Scott r. weaver Vice President Labor Relations thoMaS g. werner Vice President and Treasurer Michael J. wheeler Vice President Engineering F. Blair wiMBuSh Vice President Real Estate and Corporate Sustainability Officer DeniSe w. hutSon Corporate Secretary oFFicerS charleS w. MoorMan Chairman and Chief Executive Officer JaMeS a. SquireS President DeBorah h. Butler Executive Vice President Planning and Chief Information Officer cynthia c. earhart Executive Vice President Administration JaMeS a. hixon Executive Vice President Law and Corporate Relations Mark D. Manion Executive Vice President and Chief Operating Officer DonalD w. Seale Executive Vice President and Chief Marketing Officer Marta r. Stewart Executive Vice President Finance and Chief Financial Officer clyDe h. alliSon Jr. Vice President Audit and Compliance Juan k. cunninghaM Vice President Human Resources FreDric M. ehlerS Vice President Information Technology terry n. evanS Vice President Transportation John h. FrieDMann Vice President Strategic Planning williaM a. galanko Vice President Law DonalD D. graaB Vice President Mechanical Jerry w. hall Vice President Network and Service Management JeFFrey S. heller Vice President Intermodal and Automotive Marketing  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, 2013 ( ) 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) Three Commercial Place Norfolk, Virginia (Address of principal executive offices) Registrant’s telephone number, including area code: 52-1188014 (IRS Employer Identification No.) 23510-2191 Zip 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 Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 the 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, or a non-accelerated filer or smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer (X) Accelerated filer ( ) Non-accelerated filer ( ) Smaller reporting company ( ) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X) The aggregate market value of the voting common equity held by non-affiliates at June 30, 2013, was $22,587,575,039 (based on the closing price as quoted on the New York Stock Exchange on that date). The number of shares outstanding of each of the registrant’s classes of common stock, at January 31, 2014: 309,715,149 (excluding 20,320,777 shares held by the registrant's consolidated subsidiaries). Portions of the Registrant’s definitive proxy statements 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. DOCUMENTS INCORPORATED BY REFERENCE: TABLE OF CONTENTS NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Part I. Items 1 and 2. Business and Properties Item 1A. Item 1B. Item 3. Item 4. Risk Factors Unresolved Staff Comments Legal Proceedings Mine Safety Disclosures Executive Officers of the Registrant Part II. Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Part III. Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers, and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Part IV. Item 15. Exhibits and Financial Statements Schedules Power of Attorney Signatures K2 Page K3 K13 K16 K17 K17 K18 K19 K20 K21 K38 K39 K79 K79 K79 K80 K80 K81 K84 K84 K85 K97 K97 PART I NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Item 1. Business and Item 2. Properties GENERAL – Norfolk Southern Corporation is a Norfolk, Virginia based company that owns a major freight railroad, Norfolk Southern Railway Company. Norfolk Southern Corporation was 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 Norfolk Southern Railway Company, 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 provide comprehensive logistics services and offer the most extensive intermodal network in the eastern half of the United States. We make available free of charge through our website, www.nscorp.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: (cid:120) Corporate Governance Guidelines (cid:120) Charters of the Committees of the Board of Directors (cid:120) The Thoroughbred Code of Ethics (cid:120) Code of Ethical Conduct for Senior Financial Officers (cid:120) Categorical Independence Standards for Directors K3 RAILROAD OPERATIONS – At December 31, 2013, our railroads operated approximately 20,000 miles of road in 22 states and the District of Columbia. Our system reaches many individual industries, electric generating facilities, mines (in western Virginia, eastern Kentucky, southern and northern West Virginia, western Pennsylvania, and southern Illinois and Indiana), distribution centers, transload facilities, and other businesses located in our service area. Corridors with heaviest freight volume: (cid:120) New York City area to Chicago (via Allentown and Pittsburgh) (cid:120) Chicago to Macon (via Cincinnati, Chattanooga, and Atlanta) (cid:120) Appalachian coal fields of Virginia, West Virginia, and Kentucky to Norfolk, Virginia and Sandusky, Ohio (cid:120) Cleveland to Kansas City (cid:120) Birmingham to Meridian (cid:120) Memphis to Chattanooga K4 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, 2013 Second and Other Main Track Miles of Road Passing Track, Crossover Way and and Yard Turnouts Switching Total Owned Operated under lease, contract or trackage rights 15,181 4,780 2,750 1,910 1,989 397 8,281 831 28,201 7,918 Total 19,961 4,660 2,386 9,112 36,119 Triple Crown Operations – Triple Crown Services Company (Triple Crown), one of our subsidiaries, provides bimodal truckload transportation service primarily utilizing RoadRailer® trailers, a hybrid technology that facilitates both over-the-road and on-the-rail transportation utilizing enclosed trailers that are pulled over the highways in tractor-trailer configuration and over the rails by locomotives. In addition, Triple Crown utilizes conventional trailers that are also moved on rail flatcars. Triple Crown provides service in the eastern United States, as well as Ontario and Quebec, through a network of terminals strategically located in 13 cities. The following table sets forth certain statistics relating to our railroads’ operations for the past 5 years: Years ended December 31, 2013 2012 2011 2010 2009 159 Revenue ton miles (billions) 67.5 Freight train miles traveled (millions) $0.0581 $0.0595 $0.0582 $0.0523 $0.0503 Revenue per ton mile 3,376 3,153 3,207 3,218 2,900 Revenue ton miles per employee-hour worked Ratio of railway operating expenses to railway operating revenues 71.0% 71.7% 71.2% 71.9% 75.4% 192 75.7 194 74.8 186 76.3 182 72.6 RAILWAY OPERATING REVENUES – Total railway operating revenues were $11.2 billion in 2013. Following is an overview of our three major market groups. COAL – Coal is our largest commodity group as measured by revenues. Revenues from coal accounted for about 23% of our total railway operating revenues in 2013. We handled 150.1 million tons, or 1.3 million carloads, in 2013, 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 100 coal generation plants, as well as the export, metallurgical and industrial markets, primarily through direct rail and river, lake, and coastal facilities, including various terminals on the Ohio River, Lambert’s Point in Norfolk, Virginia, the Port of Baltimore, and Lake Erie. See the discussion of coal revenues and tonnage, by type of coal, in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” K5 GENERAL MERCHANDISE – Our general merchandise market group is composed of five major commodity groupings: (cid:120) Chemicals includes sulfur and related chemicals, petroleum products (including crude oil), chlorine and bleaching compounds, plastics, rubber, industrial chemicals, and chemical wastes. (cid:120) 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. (cid:120) Metals and construction includes steel, aluminum products, machinery, scrap metals, cement, aggregates, sand, and minerals. (cid:120) Automotive includes finished vehicles for BMW, Chrysler, Ford, General Motors, Honda, Hyundai, Mercedes-Benz, Mitsubishi, Subaru, Toyota, and Volkswagen, and auto parts for BMW, Chrysler, Ford, General Motors, Honda, Hyundai, Mazda, Mitsubishi, Nissan, Subaru, Toyota, and Volkswagen. (cid:120) Paper, clay and forest products includes lumber and wood products, pulp board and paper products, wood fibers, wood pulp, scrap paper, and clay. In 2013, 119 million tons of general merchandise freight, or approximately 62% of total general merchandise tonnage we handled, originated on our lines. The balance of general merchandise freight was received from connecting carriers at interterritorial gateways. Our principal interchange points for received freight included Chicago, New Orleans, East St. Louis, Memphis, Detroit, Kansas City, Buffalo, Toledo, and Meridian. General merchandise carloads handled in 2013 were 2.4 million, the revenues from which accounted for 56% of our total railway operating revenues. See the discussion of general merchandise revenues by commodity group in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” INTERMODAL – Our intermodal market group consists of shipments moving in trailers, domestic and international containers, and RoadRailer® equipment. These shipments are handled on behalf of intermodal marketing companies, international steamship lines, truckers, and other shippers. Intermodal units handled in 2013 were 3.6 million, the revenues from which accounted for 21% of our total railway operating revenues. See the discussion of intermodal revenues in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” FREIGHT RATES – Private contracts and exempt price quotes are our predominant pricing mechanisms. Thus, a major portion of our freight business is not economically regulated by the federal government. In general, market forces are the primary determinant of rail service prices. In 2013, our railroads were found by the U.S. Surface Transportation Board (STB), the regulatory board that has broad jurisdiction over railroad practices, to be “revenue adequate” on an annual basis based on results for the year 2012. The STB has not made its revenue adequacy determination for the year 2013. 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. K6 PASSENGER OPERATIONS – Amtrak operates regularly scheduled passenger trains on our lines between the following locations: (cid:120) Alexandria and Lynchburg, Virginia (cid:120) Alexandria, Virginia and New Orleans, Louisiana (cid:120) Alexandria and Orange, Virginia (cid:120) Petersburg and Norfolk, Virginia (cid:120) Raleigh and Charlotte, North Carolina (cid:120) Selma and Charlotte, North Carolina (cid:120) Chicago, Illinois, and Porter, Indiana (cid:120) Chicago, Illinois, and Cleveland, Ohio (cid:120) Chicago, Illinois, and Pittsburgh, Pennsylvania (cid:120) Kalamazoo and Battle Creek, Michigan (cid:120) Kalamazoo and Detroit, Michigan (cid:120) Pittsburgh and Harrisburg, Pennsylvania Two transportation commissions of the Commonwealth of Virginia operate commuter trains on our line between Manassas and Alexandria. We lease the Chicago to Manhattan, Illinois, line to the Commuter Rail Division of the Regional Transportation Authority of Northeast Illinois (METRA). We operate freight service over lines with significant ongoing Amtrak and commuter passenger operations, and conduct freight operations over trackage owned or leased by: (cid:120) Amtrak (cid:120) New Jersey Transit (cid:120) Southeastern Pennsylvania Transportation Authority (cid:120) Metro-North Commuter Railroad Company (cid:120) Maryland Department of Transportation Amtrak and various commuter agencies conduct passenger operations over trackage owned by Conrail in the Shared Assets Areas (Note 5 to the Consolidated Financial Statements). NONCARRIER OPERATIONS – Our noncarrier subsidiaries engage principally in the acquisition, leasing, and management of coal, oil, gas and minerals; the development of commercial real estate; telecommunications; and the leasing or sale of rail property and equipment. In 2013, no such noncarrier subsidiary or industry segment grouping of noncarrier subsidiaries met the requirements for a reportable business segment under relevant authoritative accounting guidance. RAILWAY PROPERTY Our railroad system extends across 22 states and the District of Columbia. The railroad infrastructure makes us capital intensive with net property of approximately $27 billion on a historical cost basis. Property Additions – Property additions for the past five years were as follows (including capitalized leases): 2013 2012 2011 ($ in millions) 2010 2009 Road and all other property Equipment Total $ $ 1,421 $ 550 1,465 $ 776 1,222 $ 938 1,153 $ 317 1,128 171 1,971 $ 2,241 $ 2,160 $ 1,470 $ 1,299 K7 Our capital spending and replacement programs are and have been designed to assure the ability to provide safe, efficient, and reliable rail transportation services. For 2014, we have budgeted $2.2 billion of property additions. We have invested and will continue to invest in various projects and corridor initiatives to expand our rail network to increase capacity and improve transit times, while returning value to shareholders. Initiatives include the following: (cid:120) The Crescent Corridor consists of a program of projects for infrastructure and other facility improvements geared toward creating seamless, high-capacity intermodal routes spanning 11 states from New Jersey to Louisiana and offering truck-competitive service along several major interstate highway corridors, including I-81, I-85, I-20, I-40, I-59, I-78, and I-75. (cid:120) The Heartland Corridor is a seamless, high-capacity intermodal route across Virginia and West Virginia to Midwest markets. (cid:120) Meridian Speedway LLC, a joint venture with Kansas City Southern, owns and operates a 320-mile rail line between Meridian, Mississippi and Shreveport, Louisiana designed to increase capacity and improve service. (cid:120) Pan Am Southern LLC, a joint venture with Pan Am Railways, Inc., owns and operates a 155-mile main line track that runs between Mechanicville, New York and Ayer, Massachusetts, along with 281 miles of secondary and branch lines, including trackage rights in New York, Connecticut, Massachusetts, New Hampshire, and Vermont designed to increase intermodal and automotive capacity. (cid:120) The MidAmerica Corridor is an arrangement between us and Canadian National Railway (CN) to share track between Chicago, St. Louis, Kentucky, and Mississippi in order to establish more efficient routes for shipments moving between the Midwest and Southeast, including potential shipments from CN-served Illinois Basin coal producers to southeastern utility plants we serve. (cid:120) The CREATE project is a public-private partnership to reduce rail and highway congestion and add freight and passenger capacity in the metropolitan Chicago area. We and other railroads have agreed to participate in CREATE. K8 Equipment – At December 31, 2013, we owned or leased the following units of equipment: Owned(1) Leased(2) Total Capacity of Equipment (Horsepower) Locomotives: Multiple purpose Auxiliary units Switching Total locomotives Freight cars: Gondola Hopper Box Covered hopper Flat Other Total freight cars Other: Highway trailers and containers RoadRailer® Work equipment Vehicles Miscellaneous Total other 3,877 131 105 4,113 30,933 13,072 11,340 10,251 2,362 4,602 72,560 9,553 6,350 4,547 3,785 15,050 39,285 79 - - 79 3,956 131 105 4,192 14,479,300 - 157,750 14,637,050 (Tons) 3,748,088 1,514,656 1,062,685 1,149,345 323,910 221,441 8,020,125 3,533 523 1,378 158 1,129 14 6,735 8,623 27 243 - 7,778 16,671 34,466 13,595 12,718 10,409 3,491 4,616 79,295 18,176 6,377 4,790 3,785 22,828 55,956 (1) Includes equipment leased to outside parties and equipment subject to equipment trusts, conditional sale agreements, and capitalized leases. (2) Includes short-term and long-term operating leases. Freight cars include 523 units leased from Consolidated Rail Corporation. The following table indicates the number and year built for locomotives and freight cars owned at December 31, 2013: Locomotives: No. of units % of fleet Freight cars: No. of units % of fleet 2013 2012 2011 2010 2009 2004- 2008 1999- 2003 1998& Before Total 50 1% 60 1% 90 2% 42 1% - -% 568 14% 605 15% 2,698 66% 4,113 100% - -% 2,025 3% 3,836 5% 150 -% 513 1% 4,031 6% 1,537 60,468 72,560 100% 83% 2% K9 The following table shows the average age of our owned locomotive and freight car fleets at December 31, 2013, and information regarding 2013 retirements: Average age – in service Retirements Average age – retired Locomotives Freight Cars 22.5 years 17 units 38.7 years 30.2 years 6,522 cars 42.3 years Our ongoing locomotive and freight car maintenance programs are intended to ensure the highest standards of safety, reliability, customer satisfaction, and equipment availability. The locomotive bad order ratio includes all units (owned and leased) out of service for required periodic inspections, unscheduled maintenance and program work which includes such activity as overhauls. Locomotives Freight cars Annual Average Bad Order Ratio 2011 7.3% 5.7% 2010 6.7% 5.8% 2012 7.1% 5.3% 2013 7.1% 4.9% 2009 6.1% 4.5% Encumbrances – Certain railroad equipment is subject to the prior lien of equipment financing obligations totaling $15 million at December 31, 2013. Track Maintenance – Of the 36,119 total miles of track we operate, we are responsible for maintaining 28,957 miles, with the remainder being operated under trackage rights from other parties responsible for maintenance. Over 82% 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 44% of our lines, excluding rail operated pursuant to trackage rights, carried 20 million or more gross tons per track mile during 2013. The following table summarizes several measurements regarding our track roadway additions and replacements during the past five years: Track miles of rail installed Miles of track surfaced New crossties installed (millions) 2013 549 5,475 2.5 2012 509 5,642 2.6 2011 484 5,441 2.7 2010 422 5,326 2.6 2009 434 5,568 2.7 Microwave System – Our microwave system, consisting of approximately 6,968 radio route miles, 421 core stations, 30 secondary stations, and five passive repeater stations, provides communications between most operating locations. We use the microwave system primarily for voice communications, VHF radio control circuits, data and facsimile transmissions, traffic control operations, and AEI data transmissions. Traffic Control – Of the approximately 16,500 route miles we dispatch, about 11,025 miles are signalized, including 8,200 miles of centralized traffic control (CTC) and 2,825 miles of automatic block signals. Of the 8,200 miles of CTC, approximately 6,836 miles are controlled by data radio originating at 336 base station radio sites. Computers – A computer network consisting of a centralized production and backup data center near Atlanta, Georgia, and various distributed computers throughout the company connects the yards, terminals, transportation offices, rolling stock repair points, sales offices, and other key system locations. Operating and traffic data are processed and stored to provide customers with information on their shipments throughout the system. Computer systems provide current information on the location of every train and each car on line, as well as related waybill and other train and car movement data. In addition, our computer systems assist us in the performance of a K10 variety of functions and services, including payroll, car and revenue accounting, billing, sourcing, inventory management activities and controls, and special studies. ENVIRONMENTAL MATTERS – Compliance with federal, state, and local laws and regulations relating to the protection of the environment is one 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 “Legal Proceedings,” Part I, Item 3; “Personal Injury, Environmental, and Legal Liabilities” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 16 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: Average number of employees Average wage cost per employee $ Average benefit cost per employee $ 2013 30,103 72,000 40,000 $ $ 2012 30,943 69,000 38,000 $ $ 2011 30,329 71,000 39,000 $ $ 2010 28,559 69,000 37,000 $ $ 2009 28,593 63,000 32,000 More than 80% of our railroad employees are covered by collective bargaining agreements with various labor unions. See the discussion of “Labor Agreements” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” GOVERNMENT REGULATION – In addition to environmental, safety, securities, and other regulations generally applicable to all business, our railroads are subject to regulation by the STB. The STB has jurisdiction over some rates, routes, 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. The Federal Railroad Administration (FRA) regulates certain track and mechanical equipment standards. 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 regulation for the duration of the contract. About 88% 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 re-subject the rail industry to increased federal economic regulation, and such efforts are expected to continue in 2014. 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 concerning 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. K11 Our primary rail competitor is CSX Corporation; both railroads 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 among railroads and between railroads and motor carriers enable railroads to compete more effectively in specific markets. SECURITY OF OPERATIONS – We continue to take measures to provide enhanced security for 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. Although security concerns preclude public disclosure of its contents, our System Security Plan outlines the protocol within our company for all concerned to be notified of AAR Alert Level changes. 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 effectively addresses and complies with U.S. Department of Transportation (DOT) security regulations pertaining to training and security plans with respect to the transportation of hazardous materials. As part of the plan, security awareness training is given to all railroad employees who directly affect hazardous material transportation safety, and this training is integrated into recurring hazardous material training and re- certification programs. Toward that end, we, working closely with the National Transit Institute at Rutgers University, developed a four-module uniform national training program. We have also worked with the Transportation Security Administration (TSA) in developing other industry training programs. More in-depth security training has been given to select employees of ours who have been given specific security responsibilities, and additional, location-specific security plans are in place for certain metropolitan areas and each of the six port facilities we serve. With respect to the ports, each facility plan has been approved by the applicable Captain of the Port and remains subject to inspection by the U.S. Coast Guard. 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 TSA, the Federal Bureau of Investigation (FBI), the FRA, the U.S. Coast Guard, U.S. Customs and Border Protection, and various state Homeland Security offices. As one notable example, one of our Police Special Agents in Charge (SAC), under the auspices of the AAR, continues to serve at the National Joint Terrorism Task Force (NJTTF) operated by the FBI, and located at the National Counter Terrorism Center (NCTC) in Arlington, Virginia to represent and serve as liaison to the North American rail industry. This arrangement improves logistical flow of vital security and law enforcement information with respect to the rail industry as a whole, while having the post filled by one of our SACs also serves to foster a strong working relationship between us and the FBI. We also are a member of the Customs- Trade Partnership Against Terrorism (C-TPAT) program sponsored by U.S. Customs. C-TPAT allows us to work closely with U.S. Customs and our customers to develop measures that will help ensure the integrity of freight shipments moving on our railroads, particularly those moving to or from a foreign country. Based on participation in C-TPAT, we have ensured that our plan meets all current applicable security recommendations made by U.S. Customs. Similarly, we continue to be guided in our operations by various supplemental security action items issued by DHS and DOT, U.S. Coast Guard Maritime Security requirements, as well as voluntary security action items developed in collaboration with TSA, DOT, and the freight railroads. Many of the action items are based on lessons learned from DHS and DOT security assessments of 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 K12 cars carrying toxic-by-inhalation (TIH) materials; (2) the expedited movement of trains transporting rail cars carrying TIH materials; (3) the minimization of unattended loaded tank cars carrying TIH materials; and (4) cooperation with federal, state, local and tribal governments to identify, through risk assessments, those locations where security risks are the highest. These action items and our compliance initiatives are outlined in the various departmental sections of our System Security Plan. We have taken appropriate actions to be compliant with the TSA Final Security Rule addressing Rail Security Sensitive Materials (RSSM) to ensure these shipments are properly inspected and that positive chain-of-custody is maintained when required. We are in compliance with the Pipeline and Hazardous Materials Safety Administration (PHMSA) rail-routing regulations outlined in Docket HM-232E. We conduct ongoing route evaluations. In 2011, as part of the FRA’s bi-annual review, this methodology and selected routes were found to be compliant with the regulation. The next review by the FRA is expected mid-year 2014. In 2013, through participation in the Transportation Community Awareness and Emergency Response (TRANSCAER) Program, we provided rail accident response training to approximately 4,900 emergency responders, such as local police and fire personnel. Our other training efforts throughout 2013 included participation in 17 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. Improvements in equipment design also are expected to play a role in enhancing rail security. PHMSA, in coordination with the FRA, has amended the Hazardous Materials Regulations to prescribe enhanced safety for rail transportation of TIH materials, has provided interim design standards for railroad tank cars. The rule mandates commodity-specific improvements in safety features and design standards for newly manufactured DOT specification tank cars and an improved top fittings performance standard. The interim standards established in this rule will enhance the accident survivability of TIH tank cars. Item 1A. Risk Factors We are subject to significant governmental legislation and regulation over commercial, operating and environmental matters. Railroads are subject to the enactment of laws by Congress that could increase economic regulation of the industry. Railroads presently are subject to commercial regulation by the Surface Transportation Board (STB), which has jurisdiction over some rates, routes, fuel surcharges, conditions of service, and the extension or abandonment of rail lines. The STB also has jurisdiction over the consolidation, merger, or acquisition of control of and by rail common carriers. Additional economic regulation of the rail industry by Congress or the STB, whether under new or existing laws, could have a significant negative impact on our ability to determine prices for rail services and result in a material adverse effect in the future on our financial position, results of operations, or liquidity in a particular year or quarter. This potential material adverse effect could also result in reduced capital spending on our rail network or abandonment of lines. Railroads are subject to safety and security regulation by the U.S. Department of Transportation and the U.S. Department of Homeland Security, which regulate most aspects of our operations. Compliance with the Rail Safety Improvement Act of 2008 will result in additional operating costs associated with the statutorily mandated implementation of positive train control by 2015. In addition to increased capital expenditures, 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. K13 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, and the resulting liabilities could have a significant effect on our financial position, results of operations, or liquidity in a particular year or quarter. 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. A catastrophic rail accident involving hazardous materials could have a material adverse effect on our financial position, results of operations, or liquidity to the extent not covered by insurance. We have obtained insurance for potential losses for third-party liability and first-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. 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 and may adversely affect our financial position, results of operations, or liquidity in a particular year or quarter. 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 general economic conditions. Prolonged negative changes in domestic and global economic conditions affecting the producers and consumers of the commodities we carry may have an adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter. Economic conditions resulting in bankruptcies of one or more large customers could have a significant impact on our financial position, results of operations, or liquidity in a particular year or quarter. We may be affected by climate change legislation or regulation. Concern over climate change has led to significant federal, state, and international legislative and regulatory efforts to limit greenhouse gas (GHG) emissions. Moreover, even without such legislation or regulation, government incentives and adverse publicity relating to GHGs could affect certain of our customers and the markets for certain of the commodities we carry. 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, and thus could have an adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter. Such restrictions could affect 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. 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 or expenditures materially increasing the quality or reducing the cost of alternative modes of transportation in the regions in which we operate, or legislation granting materially greater latitude for motor carriers with respect to size or weight limitations, could have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter. K14 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 cooperative relationships with connecting carriers 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. 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. 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. Any of these factors could have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter. The vast majority of our employees belong to labor unions, and labor agreements, strikes, or work stoppages could adversely affect our operations. More than 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 healthcare, wages, and other benefits. Any of these factors could have a material adverse impact on our financial position, results of operations, or liquidity in a particular year or quarter. 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 very 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 our financial position, results of operations, or liquidity to the extent not covered by insurance. We have obtained insurance for potential losses for third-party liability and first-party property damages. Specified levels of risk are retained on a self-insurance basis (currently up to $50 million and above $1 billion per occurrence and/or policy year for bodily injury and property damage to third parties and up to $25 million and above $175 million per occurrence and/or policy year for property owned by us or in our care, custody, or control). 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, which could have an adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter. Unpredictability of demand for rail services resulting in the unavailability of qualified personnel could adversely affect our operational efficiency and ability to meet demand. Workforce demographics, training requirements, and the availability of qualified personnel, particularly engineers and trainmen, could each have a K15 negative impact on our ability to meet demand for rail service. Unpredictable increases in demand for rail services may exacerbate such risks, which could have a negative impact on our operational efficiency and otherwise have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter. 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 477 million gallons of diesel fuel in 2013. 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 have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter. Also, such an event could impact us as well as our customers and other transportation companies. Due to the capital intensive nature and 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 certain track materials, such as rail and ties. Changes in the competitive landscapes of these limited-supplier markets could result in increased prices or significant shortages of materials that could have a material adverse effect on our financial position, results of operations, or liquidity in a particular year or quarter. The state of capital markets could adversely affect our liquidity. From time-to-time we rely on the capital markets to provide some of our capital requirements, including the issuance of long-term debt instruments and commercial paper, 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 condition 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 condition, 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. K16 Item 3. Legal Proceedings On November 6, 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. On June 21, 2012, the court certified the case as a class action. The defendant railroads appealed this certification, and on August 9, 2013, the Court of Appeals for the District of Columbia vacated the District Court’s decision and remanded the case for further consideration. 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. A lawsuit containing similar allegations against us and four other major railroads that was filed on March 25, 2008, in the U.S. District Court for the District of Minnesota was voluntarily dismissed by the plaintiff subject to a tolling agreement entered into in August 2008, and most recently extended in August 2013. We received a Notice of Violation (NOV) issued by the Tennessee Department of Environmental Conservation concerning soil runoff in connection with construction of the Memphis Regional Intermodal Facility in Rossville, Tennessee. Although we will contest liability and the imposition of any penalties, we describe this matter here consistent with SEC rules and requirements concerning governmental proceedings with respect to environmental laws and regulations. We do not believe that the outcome of this proceeding will have a material effect on our financial position, results of operations, or liquidity. Item 4. Mine Safety Disclosures Not applicable. K17 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, 2014, relating to our officers. Name, Age, Present Position Business Experience During Past Five Years Charles W. Moorman, 61, Chairman and Chief Executive Officer James A. Squires, 52, President Deborah H. Butler, 59, Executive Vice President – Planning and Chief Information Officer Cindy C. Earhart, 52, Executive Vice President – Administration James A. Hixon, 60, Executive Vice President – Law and Corporate Relations Mark D. Manion, 61, Executive Vice President and Chief Operating Officer Donald W. Seale, 61, Executive Vice President and Chief Marketing Officer Marta R. Stewart, 56, Executive Vice President – Finance and Chief Financial Officer Thomas E. Hurlbut, 49, Vice President and Controller Present position since February 1, 2006. Present position since June 1, 2013. Served as Executive Vice – Administration from August 1, 2012 to June 1, 2013 . Served as Executive Vice President – Finance and Chief Financial Officer from July 1, 2007 to August 1, 2012. Present position since June 1, 2007. Present position since June 1, 2013. Served as Vice President Human Resources from March 1, 2007 to June 1, 2013. Present position since October 1, 2005. Present position since April 1, 2009. Served as Executive Vice President – Operations from October 1, 2004 to April 1, 2009. Present position since April 1, 2006. Present position since November 1, 2013. Served as Vice President and Treasurer from April 1, 2009 to November 1, 2013. Served as Vice President and Controller from December 1, 2003 to April 1, 2009. Present position since November 1, 2013. Served as Vice President Audit and Compliance from February 1, 2010 to November 1, 2013. Served as Assistant Vice President Internal Audit from February 1, 2008 to February 1, 2010. K18 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 PRICE AND DIVIDEND INFORMATION Common Stock is owned by 30,990 stockholders of record as of December 31, 2013 and is traded on the New York Stock Exchange under the symbol “NSC.” The following table shows the high and low sales prices as reported by Bloomberg L.P. on its internet-based service and dividends per share, by quarter, for 2013 and 2012. 2013 1st 2nd 3rd 4th Quarter Market Price High Low Dividends per share 2012 Market Price High Low Dividends per share $ $ 75.59 $ 61.63 0.50 79.32 $ 69.55 0.50 77.84 $ 70.73 0.52 92.87 75.82 0.52 1st 2nd 3rd 4th 78.24 $ 64.45 0.47 74.41 $ 63.67 0.47 75.10 $ 63.63 0.50 67.71 56.34 0.50 ISSUER PURCHASES OF EQUITY SECURITIES Total of Shares (or Units) Purchased (1) Average Price Paid per Share (or Unit) Period Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans (2) or Programs Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be Purchased under the Plans or Programs (2) October 1-31, 2013 November 1-30, 2013 December 1-31, 2013 Total $ 818,038 1,024 4,960 824,022 78.46 87.11 90.58 808,800 - - 808,800 38,278,367 38,278,367 38,278,367 (1) Of this amount, 15,222 represents shares tendered by employees in connection with the exercise of stock options under the stockholder-approved Long-Term Incentive Plan. (2) Our Board of Directors authorized a share repurchase program, pursuant to which up to 125 million shares of Common Stock could be purchased through December 31, 2014. On August 1, 2012, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2017. K19 Item 6. Selected Financial Data FIVE-YEAR FINANCIAL REVIEW 2013 2012 2011 ($ in millions, except per share amounts) 2010 2009 RESULTS OF OPERATIONS Railway operating revenues Railway operating expenses Income from railway operations Other income – net Interest expense on debt Income before income taxes $ 11,245 $ 7,988 3,257 233 525 2,965 11,040 $ 7,916 3,124 11,172 $ 7,959 3,213 9,516 $ 6,840 2,676 7,969 6,007 1,962 129 495 2,758 160 455 2,918 153 462 2,367 127 467 1,622 Provision for income taxes 1,055 1,009 1,002 871 588 Net income $ 1,910 $ 1,749 $ 1,916 $ 1,496 $ 1,034 PER SHARE DATA Net income – basic – diluted Dividends Stockholders’ equity at year end FINANCIAL POSITION Total assets Total debt Stockholders’ equity OTHER Property additions Average number of shares outstanding (thousands) Number of stockholders at year end Average number of employees: Rail Nonrail Total $ 6.10 $ 6.04 2.04 36.55 5.42 $ 5.37 1.94 31.08 5.52 $ 5.45 1.66 30.00 4.06 $ 4.00 1.40 29.85 2.79 2.76 1.36 28.06 $ 32,483 $ 9,448 11,289 30,342 $ 8,682 9,760 28,538 $ 7,540 9,911 28,199 $ 27,369 7,153 7,025 10,353 10,669 $ 1,971 $ 2,241 $ 2,160 $ 1,470 $ 1,299 311,916 320,864 345,484 366,522 367,077 37,486 33,381 30,990 35,416 32,347 29,698 405 30,543 400 29,933 396 28,160 399 28,173 420 30,103 30,943 30,329 28,559 28,593 See accompanying consolidated financial statements and notes thereto. K20 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Norfolk Southern Corporation and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes and the Selected Financial Data. OVERVIEW We are one of the nation’s premier transportation companies. Our Norfolk Southern Railway Company subsidiary operates approximately 20,000 miles of road 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. We operate the most extensive intermodal network in the East and are a major transporter of coal, automotive, and industrial products. Our net income increased 9% in 2013, compared with 2012, and earnings per share improved 12%, reflecting improved operating results, a large gain from a nonoperating transaction, and share repurchases. Higher revenues and increased network efficiencies improved our railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses) from 71.7% in 2012 to 71.0% in the current year. Cash provided by operating activities totaled $3.1 billion, which along with proceeds from borrowings and cash on hand, allowed for property additions, dividends, share repurchases, and debt repayments. During 2013, we repurchased 8.3 million shares of Common Stock at a total cost of $627 million. Since inception of our stock repurchase program in 2006, we have repurchased and retired 136.7 million shares of Common Stock at a total cost of $8.1 billion. At December 31, 2013, cash, cash equivalents, and short-term investments totaled $1.6 billion. In 2014, we expect revenues to increase, reflecting higher volumes. We will continue to focus on safety, cost control, productivity, service levels, operational efficiency, and an ongoing market-based approach to pricing. K21 SUMMARIZED RESULTS OF OPERATIONS 2013 Compared with 2012 Net income in 2013 was $1.9 billion, or $6.04 per diluted share, up $161 million, or 9%, compared with $1.7 billion, or $5.37 per diluted share, in 2012, a reflection of a 4% increase in income from railway operations, in addition to the favorable impact of the recognition of the gain from the sale of certain assets to the Michigan Department of Transportation (MDOT), which benefited net income by $60 million and earnings per share by $0.19. Railway operating revenues rose 2%, while operating expenses increased 1%, driven largely by higher volume-related expenses. 2012 Compared with 2011 Net income in 2012 was $1.7 billion, or $5.37 per diluted share, down $167 million, or 9%, compared with $1.9 billion, or $5.45 per diluted share, in 2011. The decrease in net income was due to lower income from railway operations, lower nonoperating income items, higher interest expense on debt, and a higher effective income tax rate (Note 3). Railway operating revenues decreased modestly, $132 million, reflecting lower average revenue per unit, including fuel surcharges. Railway operating expenses also decreased modestly, $43 million, largely driven by the absence of the $58 million unfavorable arbitration ruling in 2011 and declines related to network efficiency and productivity gains, offset by higher depreciation and intermodal volume-related expenses. DETAILED RESULTS OF OPERATIONS Railway Operating Revenues Railway operating revenues were $11.2 billion in 2013, $11.0 billion in 2012, and $11.2 billion in 2011. The following table presents a three-year comparison of revenues, volumes, and average revenue per unit by market group. 2013 Revenues 2012 ($ in millions) 2011 2013 Units 2012 2011 (in thousands) 2013 Revenue per Unit 2012 ($ per unit) 2011 Coal General merchandise: Chemicals Agr./consumer/gov’t. Metals/construction Automotive Paper/clay/forest General merchandise Intermodal Total $ 2,543 $ 2,879 $ 3,458 1,346.7 1,414.1 1,619.6 $ 1,888 $ 2,036 $ 2,135 1,667 1,467 1,405 984 795 6,318 1,467 1,446 1,335 897 775 5,920 1,368 1,439 1,241 780 756 5,584 449.2 594.3 666.9 402.1 309.4 2,421.9 388.8 595.9 669.7 374.6 305.8 2,334.8 373.7 599.4 665.0 332.2 314.3 2,284.6 3,711 2,468 2,106 2,448 2,570 2,609 3,772 2,427 1,993 2,395 2,536 2,536 3,662 2,400 1,867 2,348 2,404 2,444 2,384 2,241 2,130 3,572.3 3,358.3 3,210.5 667 667 663 $ 11,245 $ 11,040 $ 11,172 7,340.9 7,107.2 7,114.7 $ 1,532 $ 1,553 $ 1,570 K22 Revenues increased $205 million in 2013, but decreased $132 million in 2012. As reflected in the table below, the increase in 2013 resulted from higher volumes, partially offset by lower average revenue per unit as lower market-based export coal rates, the effects of changes in the mix of business, and slightly lower fuel surcharges more than offset rate increases. The decrease in 2012 was due to lower average revenue per unit (as the negative effects of changes in the mix of business offset rate increases and slightly higher fuel surcharges) and slightly lower volume. Fuel surcharge revenue totaled $1,254 million in 2013, $1,278 million in 2012, and $1,255 million in 2011. If fuel prices remain at or near year-end 2013 levels, fuel surcharge revenue will be relatively flat in 2014. Revenue Variance Analysis Increase (Decrease) 2013 vs. 2012 2012 vs. 2011 ($ in millions) Volume (units) Revenue per unit Total $ $ 363 (158) $ 205 $ (12) (120) (132) Many of our negotiated fuel surcharges for coal and industrial products shipments are based on the monthly average price of West Texas Intermediate Crude Oil (WTI Average Price). These surcharges are reset the first day of each calendar month based on the WTI Average Price for the second preceding calendar month. This two- month lag in applying WTI Average Price decreased fuel surcharge revenue by approximately $29 million in 2013, increased fuel surcharge revenue by approximately $39 million in 2012, and decreased fuel surcharge revenue by approximately $44 million in 2011. Two of our customers, DuPont and Sunbelt Chlor Alkai Partnership (“Sunbelt”), have rate reasonableness complaints pending before the Surface Transportation Board (STB) alleging that our tariff rates for transportation of regulated movements are unreasonable. We dispute these allegations. Since June 1, 2009, in the case of DuPont, and April 1, 2011, in the case of Sunbelt, we have been billing and collecting amounts based on the challenged tariff rates. We presently expect resolution of these cases to occur in 2014 and believe the estimate of reasonably possible loss will not have a material effect on our financial position, results of operations, or liquidity. With regard to rate cases, we record adjustments to revenues in the periods, if and when, such adjustments are probable and estimable. COAL revenues decreased $336 million, or 12%, compared with 2012, reflecting a 5% decrease in carload volume (tonnage hauled declined 4%) primarily due to fewer shipments of utility and domestic metallurgical coal. Average revenue per unit was down 7%, the result of lower pricing (mainly market-based export coal) and decreased fuel surcharge revenue, partially offset by the positive effect of changes in mix. In 2012, coal revenues decreased $579 million, or 17%, compared with 2011, reflecting a 13% decrease in carload volume (tonnage was 12% lower) primarily due to fewer shipments of utility coal. Coal average revenue per unit was down 5% compared with 2011, the result of lower pricing (mainly market-based export metallurgical coal) and decreased fuel surcharge revenue, partially offset by the positive effect of changes in mix. For 2014, coal revenues are expected to decrease, although more modestly, due to fewer carloads and lower average revenue per unit. K23 Coal represented 23% of our revenues in 2013, and 79% of shipments handled originated on our lines. As shown in the following table, tonnage decreased in our utility and domestic metallurgical markets but increased slightly in our export and industrial markets. Coal Tonnage by Market 2013 2012 (tons in thousands) 2011 Utility Export Domestic metallurgical Industrial 97,146 28,631 16,905 7,388 101,636 28,304 18,793 7,376 122,004 28,461 19,702 7,713 Total 150,070 156,109 177,880 Utility coal tonnage was down 4% in 2013 as compared to 2012. Utility coal shipments in our southern region decreased due to lower demand as utility stockpiles remained high and natural gas prices remained low. This decrease was partially offset by increased shipments in our northern region as higher coal burn necessitated stockpile replenishments to maintain targeted levels. In 2012, utility coal tonnage dropped 17%, compared with 2011, reflecting competition from low natural gas prices and reduced electrical demand in NS-served regions. Additional tonnage declines resulted from plant closures and maintenance. For 2014, we expect utility coal tonnage to decrease driven by continued weak demand as well as the loss of a contract. Export coal tonnage increased 1% in 2013, compared with 2012. Despite strong global competition, we handled higher export thermal and metallurgical coal shipments as an increase in steel production in developing markets offset weakness in the European market. Volume through Norfolk was up 2.1 million tons, or 11%, whereas Baltimore volume decreased 1.4 million tons, or 17%. Other export volume decreased 0.4 million tons, or 36%. In 2012, export coal tonnage decreased 1% compared with 2011, a reflection of weaker global demand for metallurgical coal used in steel production in NS-served markets, in addition to the negative impact of the return of Australian supply, offset in part by increased thermal shipments. Volume through Norfolk was down 1.3 million tons, or 6%, whereas volume through Baltimore increased 0.3 million tons, or 4%. Other export coal volume increased 0.8 million tons. For 2014, export coal tonnage is expected to decrease as a result of strong competition in the Western European metallurgical coal market, in addition to soft demand and an oversupply of thermal coal. K24 Domestic metallurgical coal tonnage was down 10% in 2013, compared with 2012, due to weaker domestic steel production, sourcing shifts away from coal origins we serve, and the permanent closure of a steel plant in mid- 2012 that impacted the year-over-year comparison for the first half of 2013. In 2012, domestic metallurgical coal tonnage was down 5% compared with 2011, as declines in coke and iron ore shipments (primarily due to the plant closure) offset improved domestic steel production experienced in the first half of 2012. For 2014, domestic metallurgical coal tonnage is expected to be flat with 2013, as improved steel demand should offset losses due to sourcing shifts. Industrial coal tonnage increased slightly in 2013, compared with 2012, as increased shipments to existing customers was partially offset by weaker industrial demand in the print paper and cement sectors. In 2012, industrial coal tonnage decreased 4% compared to 2011, as weak industrial demand was partially offset by new business. For 2014, industrial coal tonnage is expected to increase slightly due to higher demand in the U.S. industrial sector. GENERAL MERCHANDISE revenues in 2013 increased $398 million, or 7%, compared with 2012, reflecting 4% growth in carload volume and a 3% improvement in average revenue per unit that reflected favorable changes in the mix of traffic (increases in higher-than-average revenue per unit traffic) as well as higher rates and fuel surcharges. In 2012, general merchandise revenues increased $336 million, or 6%, compared with 2011, reflecting a 4% rise in average revenue per unit as a result of higher rates and fuel surcharges. Carload volume increased 2%. Chemicals revenues in 2013 increased 14%, compared with 2012, reflecting 16% growth in volume partially offset by a 2% decline in average revenue per unit that resulted from the negative effect of the changes in mix due to increased crude oil shipments. The volume improvement was primarily the result of more carloads of crude oil from the Bakken and Canadian oil fields. Additionally, there were more carloads of liquefied petroleum gas in the Utica Shale region. In 2012, chemicals revenues grew 7%, compared with 2011, reflecting 4% growth in volume and a 3% increase in average revenue per unit that resulted from higher rates and fuel surcharges. The volume improvement was largely the result of more carloads of crude oil from the Bakken and Canadian oil fields. Additionally, there were more carloads of liquefied petroleum gas, as well as higher shipments of plastics driven by greater demand for plastic bottles. These increases were offset in part by fewer shipments of rock salt as a mild winter resulted in higher inventory levels throughout 2012. For 2014, chemicals revenues are anticipated to increase, largely a result of more shipments of crude oil and asphalt. Agriculture, consumer products, and government revenues increased 1% in 2013, compared with 2012, as a 2% improvement in average revenue per unit (reflecting pricing improvements that were slightly offset by a negative change in mix related to the increase of lower-rated shorter-haul movements of corn) was partially offset by a slight decline in volume. The volume decline was driven by reduced shipments of soybeans and related products caused by tightened supplies of domestic beans and a strong South American crop, in addition to fewer revenue movements of empty equipment. Carload volume declines were partially offset by higher shipments of food oils as we handled new business with existing customers and more biodiesel carloads in advance of the anticipated elimination of the biodiesel tax credit. We also hauled more shipments of fertilizer due to a strong farm economy and increased planting activity. K25 In 2012, agriculture, consumer products, and government revenues were relatively flat, compared with 2011, as higher average revenue per unit was offset by lower volume. The volume decline was driven by reduced corn shipments (due to plant closures), fewer carloads of fertilizer (led by certain network classification changes), and reduced shipments of wheat to the eastern U.S. (due to customer sourcing changes). These volume declines were offset in part by more shipments of soybean and soybean meal due to a poor South American bean crop, as well as higher shipments of corn-based feed to Texas. For 2014, agriculture, consumer products, and government revenues are expected to improve as a result of higher average revenue per unit offset in part by a slight decrease in volume. The projected decline in volume is based primarily on fewer shipments of corn, as we anticipate that strong local production will prompt customer sourcing changes, as well as reduced shipments of wheat feed, with a partial offset by anticipated market share growth in perishables, beverages, and consumer products. Metals and construction revenues increased 5% in 2013, compared with 2012. The revenue improvement resulted from 6% higher average revenue per unit, which reflected the positive change in mix of business as we transported higher-rated shipments of slag and fractionating sand for natural gas drilling, higher rates, and increased fuel surcharges. Although we moved more slag and fractionating carloads, volume declined modestly as we handled reduced shipments of iron and steel (driven by fewer import slabs and a steel plant closure during the third quarter of 2012) and scrap metal (a result of weakening demand). In 2012, metals and construction revenues increased 8%, compared with 2011. The improvement resulted from 7% higher average revenue per unit, which reflected higher rates and fuel surcharges. Volume improved 1%, the result of more coil steel shipments driven by increased automotive production. The mild winter weather experienced in early and late 2012 led to more shipments of cement for construction projects. There were also higher shipments of fractionating sand for natural gas drilling. These increases were partially offset by fewer aggregates carloads, primarily driven by weak market conditions in road/highway construction, and as lower coal utility burn led to fewer shipments of scrubber stone. For 2014, metals and construction revenues are expected to increase reflecting higher shipments of fractionating sand and other materials used for natural gas drilling, as well as additional shipments of steel used by the automotive and energy sectors. Average revenue per unit is also anticipated to improve. Automotive revenues rose 10% compared to 2012, reflecting 7% growth in volume due to increased vehicle production at plants we serve and new business from existing customers (including both auto parts and finished vehicles). Average revenue per unit improved 2%, reflecting improved pricing and higher fuel surcharges. In 2012, automotive revenues rose 15%, compared to 2011, reflecting a 13% rise in volume due to increased vehicle production at plants we serve and a 2% improvement in average revenue per unit, including fuel surcharges. For 2014, automotive revenues are expected to grow as a result of volume gains driven by a continued increase in domestic production at plants we serve, in addition to higher average revenue per unit. Paper, clay and forest products revenues increased 3% in 2013, compared with 2012, reflecting 1% gains in both volume and average revenue per unit. Volume increases for lumber, pulp, and pulpboard were offset by reduced demand for newsprint and paper. In 2012, paper, clay, and forest products revenues increased 3%, compared with 2011, reflecting a 5% improvement in average revenue per unit due to increased rates, which more than offset the effects of a 3% volume decline. The lower volume was due to reduced shipments of miscellaneous wood driven by the loss of business and fewer carloads of pulp as a result of declining export market demand. K26 For 2014, paper, clay, and forest products revenues are anticipated to decline as we expect reduced shipments of miscellaneous wood (due to market share loss), in addition to fewer shipments of pulp and graphic paper as demand declines, partially offset by improvements in the housing market and higher average revenue per unit. INTERMODAL revenues increased $143 million, or 6%, compared with 2012, reflecting a 6% growth in volume. Average revenue per unit was flat. Domestic volume (including truckload and intermodal marketing companies, Triple Crown Services, and Premium business) improved 7%, the result of continued highway-to-rail conversions and additional business associated with the opening of new intermodal terminals. International traffic volume grew 6%, due to growth with existing customers as the economy continued to improve. In 2012, intermodal revenues increased $111 million, or 5%, compared with 2011, reflecting 5% growth in volume largely due to increased domestic units resulting from continued highway-to-rail conversions. Average revenue per unit improved 1% as a result of higher fuel surcharges, partially offset by lower pricing. Domestic volume increased 8%, reflecting continued highway conversions. International volume declined 1%, as the loss of business from a shipping line was partially offset by growth across remaining international customers. For 2014, intermodal revenues are expected to increase due to higher volume and average revenue per unit as a result of continued highway conversions and growth associated with our new intermodal terminals. Railway Operating Expenses Railway operating expenses in 2013 were $8.0 billion, up $72 million, or 1% compared to 2012. Expenses in 2012 were $7.9 billion, down $43 million, or 1%, compared to 2011. In 2013, higher wage rates and volume- related expense increases were offset in part by lower costs resulting from network efficiencies. For 2012, the decrease reflected the absence of 2011’s $58 million unfavorable arbitration ruling and lower costs due to gains in network efficiency, offset in part by higher volume-related expenses. The following table shows the changes in railway operating expenses summarized by major classifications. Operating Expense Variances Increase (Decrease) 2013 vs. 2012 2012 vs. 2011 ($ in millions) Compensation and benefits Fuel Purchased services and rents Depreciation Materials and other Total $ $ 42 36 25 - (31) 72 $ $ (14) (12) (6) 54 (65) (43) K27 Compensation and benefits, which represents 38% of total operating expenses, increased $42 million, or 1%, in 2013, reflecting changes in: (cid:120) pay rates (up $59 million), (cid:120) (cid:120) (cid:120) payroll taxes (down $16 million). incentive and stock-based compensation (up $39 million), lower activity levels (down $48 million) that reflected improved employee productivity, and In 2012, compensation and benefits decreased $14 million compared with 2011, primarily due to changes in: employee activity levels (down $40 million), incentive and stock-based compensation (down $35 million), (cid:120) (cid:120) (cid:120) pay rates (up $43 million), and (cid:120) pension and postretirement benefit costs (up $16 million). Our employment averaged 30,103 in 2013, compared with 30,943 in 2012, and 30,329 in 2011. The decrease in 2013 reflected the benefit from operational efficiencies. Looking forward to 2014, we expect employment levels to be consistent with those of 2013. In addition, as a result of net actuarial gains related to pension and other postretirement benefits, we expect expenses associated with these benefits to be approximately $25 million lower per quarter in 2014. We also expect favorable labor hour trends to continue. These declines are expected to be offset in part by higher wage rates. Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increased $36 million, or 2%, in 2013, but decreased $12 million, or 1%, in 2012. The increase in 2013 was principally the result of higher locomotive fuel consumption (up 4%), offset in part by lower locomotive fuel prices (down 2%). The decrease in 2012 reflected lower locomotive fuel consumption (down 3%), offset in part by higher locomotive fuel prices (up 3%). 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. This category of expenses increased $25 million, or 2%, in 2013, but decreased $6 million in 2012. 2013 2012 ($ in millions) 2011 Purchased services Equipment rents Total $ $ 1,353 $ 276 1,321 $ 283 1,272 338 1,629 $ 1,604 $ 1,610 The increase in 2013 for purchased services costs reflected higher volume-related activities and software expenses, partially offset by lower professional and consulting fees and travel expenses. The increase in 2012 reflected higher professional and consulting fees, intermodal operations expenses, Conrail-related casualty costs ($15 million), and advertising expenses. These increases were partially offset by lower haulage expenses. 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, decreased in 2013 and 2012 as a result of increased velocity and improved equipment utilization. K28 Depreciation expense was flat in 2013, but increased $54 million, or 6%, in 2012. Both periods reflected our larger roadway and equipment capital base as we continue to invest in our infrastructure and rolling stock. In 2013, that increase was completely offset by the favorable impact of an equipment study that was completed during the first quarter of 2013. We expect depreciation expense in 2014 to be approximately $40 million higher than 2013. Materials and other expenses decreased $31 million, or 4%, in 2013, and $65 million, or 7%, in 2012, as shown in the following table. 2013 2012 ($ in millions) 2011 Materials Casualties and other claims Other Total $ $ 422 $ 90 316 408 $ 130 321 828 $ 859 $ 408 216 300 924 In 2013, lower expenses for casualties and other claims more than offset higher costs for materials. Casualties and other claims expenses include the estimates of costs related to personal injury (PI), property damage, and environmental matters. Over the last two years, we have experienced lower PI expenses that have been offset in part by higher environmental expenses, resulting in net benefits of $52 million in 2013 and $27 million in 2012. The lower PI expenses have been driven by improved historical trend rates, resulting in favorable reserve adjustments for prior years’ claim amounts. Going forward, if favorable trends continue for PI costs, we could see additional favorable adjustments, however, likely not at the levels experienced in 2013. The decrease in 2012 reflected the absence of 2011’s unfavorable arbitration ruling discussed below and the favorable reserve developments discussed above. These favorable items were partially offset by higher costs associated with property taxes. The Consolidated Balance Sheets reflect long-term receivables for estimated recoveries from our insurance carriers for claims associated with the January 6, 2005, derailment in Graniteville, S.C. In the first quarter of 2011, we received an unfavorable ruling for an arbitration claim with an insurance carrier and were denied recovery of the contested portion of the claim. As a result, we recorded a $43 million charge for the receivables associated with the contested portion of the claim and a $15 million charge for other receivables affected by the ruling for which recovery was no longer probable. PI cases involving occupational injuries comprised about 28% of total employee injury cases resolved and about 17% of total employee injury payments made. With our long-established commitment to safety, we continue to work actively to eliminate all employee injuries and reduce the associated costs. With respect to occupational injuries, which are not caused by a specific accident or event but allegedly result from a claimed exposure over time, the benefits of any existing safety initiatives may not be realized immediately. The majority of these types of claims are being asserted by former or retired employees, some of whom have not been actively employed in the rail industry for decades. The rail industry remains uniquely susceptible to litigation involving job-related accidental injury and occupational claims because of the Federal Employers’ Liability Act (FELA), which is applicable only to railroads. FELA’s fault-based system, which covers employee claims for job-related injuries, produces results that are unpredictable and inconsistent as compared with a no-fault workers’ compensation system. We maintain substantial amounts of insurance for potential third-party liability and property damage claims. We also retain reasonable levels of risk through self-insurance (Note 16). K29 Other Income – Net Other income – net was $233 million in 2013, $129 million in 2012, and $160 million in 2011 (Note 2). The increase in 2013 reflected a $97 million land sale gain in Michigan and higher net returns from corporate-owned life insurance (COLI), which was partially offset by lower coal royalties. The decline in 2012 reflected fewer gains on the sale of property, decreased coal royalties, and higher interest expense (net) on uncertain tax positions offset in part by higher net returns from COLI, increased equity in the earnings of Conrail, and higher rental income. Income Taxes Income tax expense in 2013 was $1.1 billion, an effective rate of 36%, compared with 37% in 2012 and 34% in 2011. The decrease in the rate for 2013 was primarily due to tax credits that became available in 2013 as a result of the American Taxpayer Relief Act of 2012 (2012 Act), enacted January 2, 2013, and favorable reductions in deferred tax expense for state law changes. The increase in the rate for 2012 primarily reflects the absence of 2011’s favorable resolution of the Internal Revenue Service (IRS) examination of our 2008 return and review of certain claims for refund ($40 million) and the absence of a favorable reduction in deferred tax expense for state law changes ($28 million). The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act, enacted in 2010, allowed 100 percent bonus depreciation for 2011 and fifty-percent bonus depreciation in 2012. Additionally, the 2012 Act as mentioned in the paragraph above, extended fifty-percent bonus depreciation for an additional year. While bonus depreciation does not affect our total provision for income taxes or the effective rate, the absence of bonus depreciation is expected to increase current income tax expense and the related cash outflows for the payment of income taxes in 2014 by approximately $200 million. The 2012 Act also reinstated certain business tax credits retroactively for 2012 and for 2013, but these provisions expired at the end of 2013. IRS examinations have been completed for all years prior to 2011. We expect the IRS will begin auditing our 2011 and 2012 consolidated income tax returns in early 2014. FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES Cash provided by operating activities, our principal source of liquidity, was $3.1 billion in both 2013 and 2012 and $3.2 billion in 2011. The decrease in 2012 reflected increased tax payments driven by reduced bonus depreciation, in addition to lower operating results. We had working capital of $770 million at December 31, 2013, compared with $161 million at December 31, 2012, primarily reflecting higher cash and short-term investment balances as a result of new debt issued and lower share repurchase activity in 2013, partially offset by an increase in our current maturities of long-term debt. Cash, cash equivalents, and short-term investment balances totaled $1.6 billion and $668 million at December 31, 2013 and 2012, respectively, and were invested in accordance with our corporate investment policy as approved by the Board of Directors. The portfolio contains securities that are subject to market risk. There are no limits or restrictions on our access to these assets. We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations. K30 Contractual obligations at December 31, 2013, were comprised of interest on fixed-rate long-term debt and capital leases, long-term debt and capital leases (Note 8), operating leases (Note 9), agreements with CRC (Note 5), unconditional purchase obligations (Note 16), long-term advances from Conrail (Note 5), and unrecognized tax benefits (Note 3): Total 2014 2015 - 2016 2017 - 2018 ($ in millions) 2019 and Subsequent Other Interest on fixed-rate long-term debt and capital lease principal Long-term debt and capital lease principal Operating leases Agreements with CRC Unconditional purchase obligations Long-term advances from Conrail Unrecognized tax benefits* $ 13,331 $ 9,843 738 360 353 133 65 533 $ 445 80 35 310 - - 1,016 $ 501 136 70 27 - - 892 $ 1,150 104 70 16 - - 10,890 $ 7,747 418 185 - 133 - Total $ 24,823 $ 1,403 $ 1,750 $ 2,232 $ 19,373 $ - - - - - - 65 65 * When the amount and timing of liabilities for unrecognized tax benefits can be reasonably estimated, the amount is shown in the table under the appropriate period. When the year of settlement cannot be reasonably estimated, the amount is shown in the Other column. 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 9. Cash used in investing activities was $1.9 billion in 2013, compared with $2.0 billion in 2012, and $1.8 billion in 2011. The decrease in 2013 primarily reflects fewer property additions and property sales that were partially offset by increased investment purchases, net of sales. The 2012 increase resulted from a decrease in investment sales, net of purchases, and increased property additions that were offset in part by proceeds from property sales. Property additions account for most of the recurring spending in this category. The following tables show capital spending (including capital leases) and track and equipment statistics for the past five years. Property Additions 2013 2012 2011 ($ in millions) 2010 2009 Road and other property Equipment Total $ $ 1,421 $ 550 1,465 $ 776 1,222 $ 938 1,153 $ 317 1,128 171 1,971 $ 2,241 $ 2,160 $ 1,470 $ 1,299 Track Structure Statistics (Capital and Maintenance) 2013 2012 2011 2010 2009 Track miles of rail installed Miles of track surfaced New crossties installed (millions) 549 5,475 2.5 509 5,642 2.6 484 5,441 2.7 422 5,326 2.6 434 5,568 2.7 K31 Average Age of Owned Railway Equipment 2013 2012 2011 (years) 2010 2009 Freight cars Locomotives Retired locomotives 30.2 22.5 38.7 30.2 21.6 41.2 30.3 21.0 31.7 31.0 20.5 28.4 30.3 19.9 31.2 For 2014, we have budgeted $2.2 billion for property additions. The anticipated spending includes $910 million for the normalized replacement of rail, ties and ballast and the improvement or replacement of bridges. Planned equipment spending of $550 million includes new and rebuilt locomotives, coal cars, intermodal containers and chassis, covered and open coil cars, and multilevel automobile racks. Investments in facilities and terminals are anticipated to be $210 million, and include intermodal terminals and equipment to add capacity to the intermodal network (including Crescent Corridor), continued progress on our multi-year project to expand the Bellevue Yard in northern Ohio, and mechanical service shops. We have budgeted $220 million for the continued implementation of positive train control (PTC) and expect remaining additional PTC-related property additions to total at least $670 million. We also expect to spend $50 million on infrastructure improvements to increase mainline capacity, accommodate business growth and provide our share of funding for various public/private partnership investments such as Crescent Corridor and the Chicago CREATE project. Technology investments of $70 million are planned for new or upgraded systems and computers. The Crescent Corridor consists of a program of projects for infrastructure and other facility improvements geared toward creating a seamless, high-capacity intermodal route spanning 11 states from New Jersey to Louisiana and offering truck-competitive service along several major interstate highway corridors, including I-81, I-85, I-20, I-40, I-59, I-78, and I-75. Based on the public benefits that stand to be derived in the form of highway congestion relief, we plan to implement certain elements of the Crescent Corridor through a series of public-private partnerships. Currently, the Crescent Corridor has received or expects to receive a total of $309 million in public capital funding commitments from the Commonwealths of Pennsylvania and Virginia, the State of Tennessee, the federal TIGER Stimulus Program and other federal funding sources related to projects in Alabama, Pennsylvania, Tennessee, and North Carolina. With respect to the private funding component, we currently anticipate spending up to $315 million ($260 million of which has been spent to date) for the substantial completion of work on these projects, which is expected in 2015. This includes planned investments for the Crescent Corridor that approximate $42 million in 2014 and $13 million in 2015. If and when demand warrants, additional improvements and expansions beyond these amounts may be made to the Crescent Corridor. Cash used in financing activities was $394 million in 2013, compared with $694 million in 2012, and $2.0 billion in 2011. The change in 2013 includes lower share repurchases and reduced proceeds from borrowings, net of debt repayments. The change in 2012 reflected lower share repurchases, increased proceeds from borrowings, reduced debt repayments and maturities, offset in part by higher dividends. Share repurchases totaled $627 million in 2013, $1.3 billion in 2012, and $2.1 billion in 2011 for the purchase and retirement of 8.3 million, 18.8 million, and 30.2 million shares, respectively. On August 1, 2012, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2017, and 38.3 million shares remain under this authority as of December 31, 2013. 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. K32 During the fourth quarter of 2013, we issued $400 million of 3.85% senior notes due 2024. During the third quarter of 2013, we issued $500 million of 4.80% senior notes due 2043. Our debt-to-total capitalization ratio was 45.6% at December 31, 2013, compared with 47.1% at December 31, 2012. As of December 31, 2013, we had authority from our Board of Directors to issue an additional $800 million of debt or equity securities through public or private sale. We have on file with the SEC a Form S-3 automatic shelf registration statement for well-known seasoned issuers under which securities may be issued pursuant to this authority. We also have in place and available a $750 million, five-year credit agreement expiring in 2016, which provides for borrowings at prevailing rates and includes covenants. We had no amounts outstanding under this facility at December 31, 2013, and are in compliance with all of its covenants. In October 2013, we renewed our $350 million accounts receivable securitization program with a 364-day term to run until October 2014. There was $200 million outstanding under this program at December 31, 2013, and $300 million outstanding at December 31, 2012 (Note 8). Upcoming annual debt maturities are relatively modest (Note 8). 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 ESTIMATES The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. These estimates and assumptions may require significant judgment about matters that are inherently uncertain, and future events are likely to occur that may require us to make changes to these estimates and assumptions. Accordingly, we regularly review these estimates and assumptions based on historical experience, changes in the business environment, and other factors we believe to be reasonable under the circumstances. We regularly discuss the development, selection, and disclosures concerning critical accounting estimates with the Audit Committee of the Board of Directors. Pensions and Other Postretirement Benefits Accounting for pensions and other postretirement benefit plans requires us to make several estimates and assumptions (Note 11). These include the expected rate of return from investment of the plans’ assets, projected increases in medical costs, 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 assumptions and valuing related liabilities. Net pension expense, which is included in “Compensation and benefits” in the Consolidated Statements of Income, was $69 million for 2013. In recording this amount, 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 $18 million change in pension expense. Changes that are reasonably likely to occur in assumptions concerning retirement age, projected earnings, and mortality would not be 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 a discount rate that is 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 K33 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. Net cost for other postretirement benefits, which is also included in “Compensation and benefits,” was $108 million for 2013. In recording this expense and valuing the net liability for other postretirement benefits, we estimated future increases in healthcare costs. These assumptions, along with the effect of a one-percentage point change in them, are described in Note 11. Properties and Depreciation Most of our total assets are long-lived railway properties (Note 6). As disclosed in Note 1, properties are depreciated using group depreciation. The primary depreciation method for our asset base is group life. Units of production is the principal method of depreciation for rail in high density corridors and for depletion of natural resources. Remaining properties are depreciated generally using the straight-line method over the lesser of estimated service or lease lives. Depreciation expense is based on assumptions concerning expected service lives of properties as well as the expected net salvage that will be received upon their retirement. In developing these assumptions, we utilize periodic depreciation studies that are performed by an independent outside firm of consulting engineers and approved by the STB. Depreciation studies are conducted about every three years for equipment and every six years for track assets and other roadway property. The frequency of these studies correlates with guidelines established by the STB. Key factors which are considered in developing average service life and salvage estimates include: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) statistical analyses of historical retirement data and surviving asset records; review of historical salvage received and current market rates; review of our operations including expected changes in technology, customer demand, maintenance practices and asset management strategies; review of accounting policies and assumptions; and industry review and analysis. The units of production depreciation rate for rail in high density corridors is derived based on consideration of annual gross ton miles as compared to the total or ultimate capacity of rail in these corridors. Our experience has shown that traffic density is a leading factor in determination of the expected service life of rail in high density corridors. In developing the respective depreciation rate, consideration is also given to several rail characteristics including age, weight, condition (new or second hand) and type (curve or straight). As a result, a composite depreciation rate is developed which is applied to the depreciable base. We adjust our rates based on the results of these studies and implement the changes prospectively. These studies may also indicate that the recorded amount of accumulated depreciation is deficient (or in excess) of the amount indicated by the study. Any such deficiency (or excess) is amortized as a component of depreciation expense over the remaining service lives of the affected class of property, as determined by the study. Depreciation expense for 2013 totaled $916 million. Our composite depreciation rates for 2013 are disclosed in Note 6; a one-tenth percentage point increase (or decrease) in these rates would have resulted in a $35 million increase (or decrease) to depreciation expense. For 2013, roadway depreciation rates ranged from 0.83% to 33.3% and equipment depreciation rates ranged from 1.40% to 33.33%. When properties other than land and nonrail assets are sold or retired in the ordinary course of business, the cost of the assets, net of sale proceeds or salvage, is charged to accumulated depreciation, and no gain or loss is recognized in earnings. Actual historical cost values are retired when available, such as with equipment assets. The use of estimates in recording the retirement of certain roadway assets is necessary based on the impracticality of tracking individual asset costs. When retiring rail, ties, and ballast, we use statistical curves that indicate the relative distribution of the age of the assets retired. The historical cost of other roadway assets is K34 estimated using a combination of inflation indices specific to the rail industry and those published by the U.S. Bureau of Labor Statistics. The indices are applied to the replacement value based on the age of the retired assets. These indices are used because they closely correlate with the costs of roadway assets. Gains and losses on disposal of land and nonrail assets are included in “Other income – net” (Note 2) since such income is not a product of our railroad operations. A retirement is considered abnormal if it does not occur in the normal course of business, if it relates to disposition of a large segment of an asset class and if the retirement varies significantly from the retirement profile identified through our depreciation studies, which inherently consider the impact of normal retirements on expected service lives and depreciation rates. Gains or losses from abnormal retirements would be recognized in earnings; however, there were no such gains or losses in 2013, 2012, or 2011. We review the carrying amount of properties whenever events or changes in circumstances indicate that such carrying amount may not be recoverable based on future undiscounted cash flow. Assets that are deemed impaired as a result of such review would be recorded at the lesser of carrying amount or fair value; however, there were no such impairments in 2013, 2012, or 2011. Personal Injury, Environmental, and Legal Liabilities Casualties and other claims expense, included in “Materials and other,” totaled $90 million in 2013, $130 million in 2012, and $216 million in 2011. Historically, most of this expense relates to our accrual for personal injury liabilities; however, over the last few years our personal injury expense has decreased due to improved historical trend rates for prior years’ claims. Environmental expenses, which are also included in this category, have increased over the last few years as a result of unfavorable developments and more aggressive remediation strategies. Job-related personal injury and occupational claims are subject to 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 very different from the liability recorded. In all cases, we record a liability when the expected loss for the claim is both probable and estimable. To aid in valuing personal injury liability and determining the amount to accrue during each period, we utilize studies prepared by an independent consulting actuarial firm. For employee personal injury cases, the actuarial firm studies our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences. We estimate the ultimate amount of the liability, which includes amounts for incurred but unasserted claims, based on the results of this analysis. For occupational injury claims, the actuarial firm studies our history of claim filings, severity, payments and other relevant facts. Additionally, our estimate of the ultimate loss for occupational injuries includes a provision for those claims that have been incurred but not reported by projecting our experience into the future as far as can be reasonably determined. We have recorded this actuarially determined liability. The liability is dependent upon many individual judgments made as to the specific case reserves, as well as our and the actuarial firm’s judgments in the periodic studies. Accordingly, there could be significant changes in the liability, which we would recognize when such a change became known. While the liability recorded is supported by the most recent study, it is possible that the ultimate liability could be higher or lower. We are subject to various jurisdictions’ environmental laws and regulations. We record a liability where such liability or loss is probable and its amount can be estimated reasonably (Note 16). Claims, if any, against third parties for recovery of cleanup costs we’ve incurred, are reflected as receivables (when collection is probable) in the Consolidated Balance Sheets and are not netted against the associated liability. Environmental engineers regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates. We have an Environmental Policy Council, composed of senior managers, to oversee and interpret our environmental policy. K35 Operating expenses for environmental matters totaled $57 million in 2013, $40 million in 2012, and $32 million in 2011, and property additions for environmental matters totaled $8 million in 2013, $6 million in 2012, and $7 million in 2011. Property additions for environmental matters in 2014 are expected to be about $11 million. Our Consolidated Balance Sheets include liabilities for environmental exposures of $58 million at December 31, 2013, and $42 million at December 31, 2012 (of which $15 million is classified as a current liability at December 31, 2013 and $12 million at December 31, 2012). At December 31, 2013, the liability represents our estimate of the probable cleanup and remediation costs based on available information at 142 known locations and projects. As of that date, ten sites accounted for $30 million of the liability, and no individual site was considered to be material. We anticipate that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period. At 12 locations, one or more of our subsidiaries in conjunction with a number of other parties have been identified as potentially responsible parties under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or comparable state statutes that impose joint and several liability for cleanup costs. We calculate our estimated liability for these sites based on facts and legal defenses applicable to each site and not solely on the basis of the potential for joint liability. With respect to known environmental sites (whether identified by us or by the EPA or comparable state authorities), estimates of our ultimate potential financial exposure for a given site or in the aggregate for all such sites are necessarily imprecise because of the widely varying costs of currently available cleanup techniques, unpredictable contaminant recovery and reduction rates associated with available cleanup technologies, the likely development of new cleanup technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant’s share of any estimated loss (and that participant’s ability to bear it), and evolving statutory and regulatory standards governing liability. We estimate our environmental remediation liability on a site-by-site basis, using assumptions and judgments we deem appropriate for each site. As a result, it is not practical to quantitatively describe the effects of changes in these many assumptions and judgments. We have consistently applied our methodology of estimating our environmental liabilities. Based on the assessment of facts and circumstances now known, we believe we have recorded the probable and reasonably estimable costs for dealing with those environmental matters of which we are aware. Further, we believe that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, or liquidity. We and/or certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations. When we conclude that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to earnings. While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payment of such liability and claims. However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter. Any adjustments to the recorded liability will be reflected in earnings in the periods in which such adjustments are known. K36 Income Taxes Our net long-term deferred tax liability totaled $8.5 billion at December 31, 2013 (Note 3). 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 had a $32 million valuation allowance on $630 million of deferred tax assets as of December 31, 2013, reflecting the expectation that almost all of these assets will be realized. In addition, we have a recorded liability for our estimate of uncertain tax positions taken or expected to be taken in a tax return. Judgment is required in evaluating the application of federal and state tax laws and assessing whether it is more likely than not that a tax position will be sustained on examination and, if so, judgment is also required as to the measurement of the amount of tax benefit that will be realized upon settlement with the taxing authority. We believe this liability for uncertain tax positions to be adequate. Income tax expense is adjusted in the period in which new information about a tax position becomes available or the final outcome differs from the amounts recorded. For every one half percent change in the 2013 effective tax rate, net income would have changed by $15 million. OTHER MATTERS Labor Agreements More than 80% of our railroad employees are covered by collective bargaining agreements with various labor unions. These agreements remain in effect until changed pursuant to the Railway Labor Act. We largely bargain nationally in concert with other major railroads, represented by the National Carriers Conference Committee (NCCC). Moratorium provisions in the labor agreements govern when the railroads and unions may propose changes to the agreements. We and the NCCC have concluded the round of bargaining that began in November 2009 and reached agreements that extend through December 31, 2014 with all applicable labor unions. With regard to the Wheelersburg (Ohio) Terminal workers who are represented by the Brotherhood of Maintenance of Way Employes Division (BMWED), negotiations are ongoing and mediation under the auspices of the National Mediation Board is expected to begin in the first quarter of 2014. Market Risks We manage overall exposure to fluctuations in interest rates by issuing both fixed- and floating-rate debt instruments. At December 31, 2013, debt subject to interest rate fluctuations totaled $200 million. A one- percentage point increase in interest rates would increase total annual interest expense related to all variable debt by approximately $2 million. 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. 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 such property. 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. K37 FORWARD-LOOKING STATEMENTS This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward- looking statements that may be identified by the use of words like “believe,” “expect,” “anticipate,” “estimate,” “plan,” “consider,” “project,” and similar references to the future. Forward-looking statements reflect our good- faith evaluation of information currently available. However, such statements are dependent on and, therefore, can be influenced by, a number of external variables over which we have little or no control, including: transportation of hazardous materials as a common carrier by rail; acts of terrorism or war; general economic conditions including, but not limited to, fluctuation and competition within the industries of our customers; competition and consolidation within the transportation industry; the operations of carriers with which we interchange; disruptions to our technology infrastructure, including computer systems; labor difficulties, including strikes and work stoppages; commercial, operating, environmental, and climate change legislative and regulatory developments; results of litigation; natural events such as severe weather, hurricanes, and floods; unpredictable demand for rail services; fluctuation in supplies and prices of key materials, in particular diesel fuel; and changes in securities and capital markets. For additional discussion of significant risk factors applicable to our business, see Part II, Item 1A “Risk Factors.” Forward- looking statements are not, and should not be relied upon as, a guarantee of future performance or results, nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved. As a result, actual outcomes and results may differ materially from those expressed in forward- looking statements. We undertake no obligation to update or revise forward-looking statements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The information required by this item is included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Market Risks and Hedging Activities.” K38 Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS Report of Management Reports of Independent Registered Public Accounting Firm Consolidated Statements of Income Years ended December 31, 2013, 2012, and 2011 Consolidated Statements of Comprehensive Income Years ended December 31, 2013, 2012, and 2011 Consolidated Balance Sheets At December 31, 2013 and 2012 Consolidated Statements of Cash Flows Years ended December 31, 2013, 2012, and 2011 Consolidated Statements of Changes in Stockholders’ Equity Years ended December 31, 2013, 2012, and 2011 Notes to Consolidated Financial Statements The Index to Consolidated Financial Statement Schedule in Item 15 Page K40 K41 K43 K44 K45 K46 K47 K48 K85 K39 Report of Management February 14, 2014 To the Stockholders Norfolk Southern Corporation Management is responsible for establishing and maintaining adequate internal control over financial reporting. In order to ensure that the Corporation’s internal control over financial reporting is effective, management regularly assesses such controls and did so most recently for its financial reporting as of December 31, 2013. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework (1992) 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, 2013. 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, 2013. /s/Charles W. Moorman Charles W. Moorman Chairman and Chief Executive Officer /s/Marta R. Stewart Marta R. Stewart Executive Vice President Finance and Chief Financial Officer /s/Thomas E. Hurlbut Thomas E. Hurlbut Vice President and Controller K40 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Norfolk Southern Corporation: We have audited Norfolk Southern Corporation’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Norfolk Southern Corporation’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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 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. 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. 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. In our opinion, Norfolk Southern Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) 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), the consolidated balance sheets of Norfolk Southern Corporation and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and our report dated February 14, 2014 expressed an unqualified opinion on those consolidated financial statements. /s/KPMG LLP KPMG LLP Norfolk, Virginia February 14, 2014 K41 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Norfolk Southern Corporation: We have audited the accompanying consolidated balance sheets of Norfolk Southern Corporation and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 15(A)2. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Norfolk Southern Corporation and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Norfolk Southern Corporation’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 14, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. /s/KPMG LLP KPMG LLP Norfolk, Virginia February 14, 2014 K42 Norfolk Southern Corporation and Subsidiaries Consolidated Statements of Income Years ended December 31, 2011 2012 2013 ($ in millions, except per share amounts) Railway operating revenues $ 11,245 $ 11,040 $ 11,172 Railway operating expenses: Compensation and benefits Purchased services and rents Fuel Depreciation Materials and other Total railway operating expenses 3,002 1,629 1,613 916 828 7,988 2,960 1,604 1,577 916 859 7,916 Income from railway operations 3,257 3,124 2,974 1,610 1,589 862 924 7,959 3,213 160 455 2,918 1,002 1,916 233 525 129 495 2,965 2,758 1,055 1,009 $ 1,910 $ 1,749 $ $ 6.10 6.04 $ 5.42 5.37 $ 5.52 5.45 Other income – net Interest expense on debt Income before income taxes Provision for income taxes Net income Per share amounts: Net income Basic Diluted See accompanying notes to consolidated financial statements. K43 Norfolk Southern Corporation and Subsidiaries Consolidated Statements of Comprehensive Income Net income Other comprehensive income (loss), before tax: Pension and other postretirement benefits Other comprehensive income (loss) of equity investees Other comprehensive income (loss), before tax Income tax benefit (expense) related to items of other comprehensive income (loss) Other comprehensive income (loss), net of tax 2013 Years ended December 31, 2012 ($ in millions) 2011 $ 1,910 $ 1,749 $ 1,916 1,122 42 1,164 (436) 728 (114) (13) (127) 44 (83) (325) (21) (346) 125 (221) Total comprehensive income $ 2,638 $ 1,666 $ 1,695 See accompanying notes to consolidated financial statements. K44 Norfolk Southern Corporation and Subsidiaries Consolidated Balance Sheets Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable - net Materials and supplies Deferred income taxes Other current assets Total current assets Investments Properties less accumulated depreciation of $10,387 and $9,922, respectively Other assets Total assets Liabilities and stockholdersʼ equity Current liabilities: Accounts payable Short-term debt Income and other taxes Other current liabilities Current maturities of long-term debt Total current liabilities Long-term debt Other liabilities Deferred income taxes Total liabilities Stockholdersʼ equity: Common Stock $1.00 per share par value, 1,350,000,000 shares authorized; outstanding 308,878,402 and 314,034,174 shares, respectively, net of treasury shares Additional paid-in capital Accumulated other comprehensive loss Retained income Total stockholdersʼ equity Total liabilities and stockholdersʼ equity See accompanying notes to consolidated financial statements. K45 At December 31, 2013 2012 ($ in millions) $ 1,443 $ 118 1,024 223 180 87 3,075 653 15 1,109 216 167 82 2,242 2,439 2,300 26,645 324 25,736 64 $ 32,483 $ 30,342 $ 1,265 $ 100 225 270 445 2,305 8,903 1,444 8,542 21,194 1,362 200 206 263 50 2,081 8,432 2,237 7,832 20,582 310 2,021 (381) 9,339 315 1,911 (1,109) 8,643 11,289 9,760 $ 32,483 $ 30,342 Norfolk Southern Corporation and Subsidiaries Consolidated Statements of Cash Flows 2013 Years ended December 31, 2012 ($ in millions) 2011 Cash flows from operating activities: Net income Reconciliation of net income to net cash provided by operating activities: Depreciation Deferred income taxes Gains and losses on properties and investments Changes in assets and liabilities affecting operations: Accounts receivable Materials and supplies Other current assets Current liabilities other than debt Other – net Net cash provided by operating activities Cash flows from investing activities: Property additions Property sales and other transactions Investments, including short-term Investment sales and other transactions Net cash used in investing activities Cash flows from financing activities: Dividends Common Stock issued – net Purchase and retirement of Common Stock Proceeds from borrowings – net Debt repayments Net cash used in financing activities $ 1,910 $ 1,749 $ 1,916 922 262 (104) 85 (7) (5) 5 10 3,078 (1,971) 144 (130) 63 (1,894) (637) 131 (627) 989 (250) (394) 922 366 (6) (64) (7) (6) 82 29 3,065 (2,241) 192 (23) 78 (1,994) (624) 89 (1,288) 1,491 (362) (694) 869 527 (32) (215) (40) 14 68 120 3,227 (2,160) 84 (135) 439 (1,772) (576) 120 (2,051) 1,101 (600) (2,006) Net increase (decrease) in cash and cash equivalents 790 377 (551) Cash and cash equivalents: At beginning of year At end of year Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amounts capitalized) Income taxes (net of refunds) 653 276 $ 1,443 $ 653 $ 827 276 $ 492 $ 735 473 $ 618 435 289 See accompanying notes to consolidated financial statements. K46 Norfolk Southern Corporation and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity Additional Accum. Other Common Stock Paid-in Comprehensive Retained Capital Income Loss ($ in millions, except per share amounts) Total Balance at December 31, 2010 $ 358 $ 1,892 $ (805) $ 9,224 $ 10,669 Comprehensive income: Net income Other comprehensive loss Total comprehensive income Dividends on Common Stock, $1.66 per share Share repurchases Stock-based compensation, including tax benefit of $45 Balance at December 31, 2011 Comprehensive income: Net income Other comprehensive loss Total comprehensive income Dividends on Common Stock, $1.94 per share Share repurchases Stock-based compensation, including tax benefit of $42 Balance at December 31, 2012 Comprehensive income: Net income Other comprehensive income Total comprehensive income Dividends on Common Stock, $2.04 per share Share repurchases Stock-based compensation, including tax benefit of $38 1,916 (221) 1,916 (221) 1,695 (30) (159) (576) (1,862) (576) (2,051) 4 332 179 (9) 1,912 (1,026) 8,693 1,749 (83) 174 9,911 1,749 (83) 1,666 (19) (104) (624) (1,165) (624) (1,288) 2 315 103 (10) 95 1,911 (1,109) 8,643 9,760 1,910 728 (637) (570) 1,910 728 2,638 (637) (627) (7) 155 (8) 3 (49) 159 Balance at December 31, 2013 $ 310 $ 2,021 $ (381) $ 9,339 $ 11,289 See accompanying notes to consolidated financial statements. K47 Norfolk Southern Corporation and Subsidiaries Notes to Consolidated Financial Statements The following Notes are an integral part of the Consolidated Financial Statements. 1. Summary of Significant Accounting Policies Description of Business Norfolk Southern Corporation is a Virginia-based holding company engaged principally in the rail transportation business, operating approximately 20,000 miles of road primarily in the East and Midwest. These consolidated financial statements include Norfolk Southern Corporation (Norfolk Southern) and its majority-owned and controlled subsidiaries (collectively, NS, we, us, and our). Norfolk Southern’s major subsidiary is Norfolk Southern Railway Company (NSR). All significant intercompany balances and transactions have been eliminated in consolidation. NSR and its railroad subsidiaries transport raw materials, intermediate products and finished goods classified in the following commodity groups (percent of total railway operating revenues in 2013): coal (23%); intermodal (21%); chemicals (15%); agriculture/consumer products/government (13%); metals/construction (12%); automotive (9%); and, paper/clay/forest products (7%). Although most of our customers are domestic, ultimate points of origination or destination for some of the products transported (particularly coal bound for export and some intermodal containers) may be outside the U.S. More than 80% of our railroad employees are covered by collective bargaining agreements with various labor unions. Use of Estimates The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We periodically review our estimates, including those related to the recoverability and useful lives of assets, as well as liabilities for litigation, environmental remediation, casualty claims, income taxes and pension and other postretirement benefits. Changes in facts and circumstances may result in revised estimates. Revenue Recognition Transportation revenue is recognized proportionally as a shipment moves from origin to destination, and related expenses are recognized as incurred. Refunds (which are primarily volume-based incentives) are recorded as a reduction to revenues on the basis of management’s best estimate of projected liability, which is based on historical activity, current shipment counts and the expectation of future activity. We regularly monitor our contract refund liability and, historically, the estimates have not differed significantly from the amounts ultimately refunded. Switching, demurrage and other incidental service revenues are recognized when the services are performed. Cash Equivalents “Cash equivalents” are highly liquid investments purchased three months or less from maturity. K48 Allowance for Doubtful Accounts Our allowance for doubtful accounts was $3 million at both December 31, 2013 and 2012. To determine our allowance for doubtful accounts, we evaluate historical loss experience (which has not been significant), the characteristics of current accounts, and general economic conditions and trends. Materials and Supplies “Materials and supplies,” consisting mainly of fuel oil and items for maintenance of property and equipment, are stated at the lower of average cost or market. The cost of materials and supplies expected to be used in property additions or improvements is included in “Properties.” Investments Debt securities classified as “held-to-maturity” are reported at amortized cost. Investments where we have the ability to exercise significant influence over but do not control the entity are accounted for using the equity method, whereby the investment is carried at the cost of the acquisition plus our equity in undistributed earnings or losses since acquisition. Properties “Properties” are stated principally at cost and are depreciated using the group method whereby assets with similar characteristics, use, and expected lives are grouped together in asset classes and depreciated using a composite depreciation rate. This methodology treats each asset class as a pool of resources, not as singular items. We use more than 60 depreciable asset classes. The primary depreciation method for our asset base is group life. Units of production is the principal method of depreciation for rail in high density corridors and for depletion of natural resources (Note 2). Remaining properties are depreciated generally using the straight-line method over the lesser of estimated service or lease lives. Depreciation in the Consolidated Statements of Cash Flows includes both depreciation and depletion. Depreciation expense is based on our assumptions concerning expected service lives of our properties as well as the expected net salvage that will be received upon their retirement. In developing these assumptions, we utilize periodic depreciation studies that are performed by an independent outside firm of consulting engineers and approved by the Surface Transportation Board (STB). Our depreciation studies are conducted about every three years for equipment and every six years for track assets and other roadway property. The frequency of these studies is consistent with guidelines established by the STB. Key factors which are considered in developing average service life and salvage estimates include: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) statistical analysis of historical retirement data and surviving asset records; review of historical salvage received and current market rates; review of our operations including expected changes in technology, customer demand, maintenance practices and asset management strategies; review of accounting policies and assumptions; and industry review and analysis. The units of production depreciation rate for rail in high density corridors is derived based on consideration of annual gross ton miles as compared to the total or ultimate capacity of rail in these corridors. Our experience has shown that traffic density is a leading factor in determination of the expected service life of rail in high density corridors. In developing the respective depreciation rate, consideration is also given to several rail characteristics including age, weight, condition (new or second hand) and type (curve or straight). As a result, a composite depreciation rate is developed which is applied to the depreciable base. K49 We adjust our rates based on the results of these studies and implement the changes prospectively. The studies may also indicate that the recorded amount of accumulated depreciation is deficient (or in excess) of the amount indicated by the study. Any such deficiency (or excess) is amortized as a component of depreciation expense over the remaining service lives of the affected class of property, as determined by the study. For 2013, roadway depreciation rates ranged from 0.83% to 33.3% and equipment depreciation rates ranged from 1.40% to 33.33%. We capitalize interest on major projects during the period of their construction. Expenditures, including those on leased assets, that extend an asset’s useful life or increase its utility, are capitalized. Expenditures capitalized include those that are directly related to a capital project and may include materials, labor and equipment, in addition to an allocable portion of indirect costs that clearly relate to a particular project. Due to the capital intensive nature of the railroad industry, a significant portion of annual capital spending relates to the replacement of self-constructed assets. Because removal activities occur in conjunction with replacement, removal costs are estimated based on an average percentage of time employees replacing assets spend on removal functions. Costs related to repairs and maintenance activities that do not extend an asset’s useful life or increase its utility are expensed when such repairs are performed. When properties other than land and nonrail assets are sold or retired in the ordinary course of business, the cost of the assets, net of sale proceeds or salvage, is charged to accumulated depreciation, and no gain or loss is recognized in earnings. Actual historical cost values are retired when available, such as with equipment assets. The use of estimates in recording the retirement of certain roadway assets is necessary based on the impracticality of tracking individual asset costs. When retiring rail, ties and ballast, we use statistical curves that indicate the relative distribution of the age of the assets retired. The historical cost of other roadway assets is estimated using a combination of inflation indices specific to the rail industry and those published by the U.S. Bureau of Labor Statistics. The indices are applied to the replacement value based on the age of the retired assets. These indices are used because they closely correlate with the costs of roadway assets. Gains and losses on disposal of land and nonrail assets are included in “Other income – net” (Note 2) since such income is not a product of our railroad operations. A retirement is considered abnormal if it does not occur in the normal course of business, if it relates to disposition of a large segment of an asset class and if the retirement varies significantly from the retirement profile identified through our depreciation studies, which inherently consider the impact of normal retirements on expected service lives and depreciation rates. Gains or losses from abnormal retirements are recognized in earnings. We review the carrying amount of properties whenever events or changes in circumstances indicate that such carrying amount may not be recoverable based on future undiscounted cash flows. Assets that are deemed impaired as a result of such review are recorded at the lower of carrying amount or fair value. Required Accounting Changes In the first quarter of 2013, we prospectively adopted Accounting Standards Update (ASU) No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This update requires the disclosure of the effects of reclassifications out of Accumulated Other Comprehensive Loss on the respective line items in our Consolidated Statements of Income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. We don’t have any such items. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, we are required to cross-reference other required GAAP disclosures to provide additional detail about those amounts. We include these disclosures in our “Stockholders’ Equity” (Note 13) footnote. This update does not change the requirement to present the components of net income and other comprehensive income in either a single continuous statement or two separate consecutive statements, nor does it change the items currently reported in other comprehensive income. K50 2. Other Income – Net Income from natural resources: Royalties from coal Nonoperating depletion and depreciation Subtotal Gains and losses from sale of properties Rental income Equity in earnings of Conrail Inc. (Note 5) Corporate-owned life insurance – net Interest income Taxes on nonoperating property Charitable contributions Other interest expense – net Other 2013 2012 ($ in millions) 2011 $ 50 $ (6) 44 72 $ (6) 66 101 61 42 25 8 (10) (11) (12) (15) 5 54 34 13 8 (10) (9) (9) (23) 86 (7) 79 32 51 31 8 9 (9) (9) (3) (29) Total $ 233 $ 129 $ 160 “Other income – net” includes income and costs not part of rail operations and the income generated by the activities of our noncarrier subsidiaries as well as the costs incurred by those subsidiaries in their operations. 3. Income Taxes Provisions for Income Taxes Current: Federal State Total current taxes Deferred: Federal State Total deferred taxes 2013 2012 ($ in millions) 2011 $ 695 $ 98 793 569 $ 74 643 270 (8) 262 339 27 366 432 43 475 506 21 527 Provision for income taxes $ 1,055 $ 1,009 $ 1,002 K51 Reconciliation of Statutory Rate to Effective Rate The “Provision for income taxes” in the Consolidated Statements of Income differs from the amounts computed by applying the statutory federal corporate tax rate as follows: 2013 Amount % 2012 2011 Amount % ($ in millions) Amount % Federal income tax at statutory rate State income taxes, net of federal tax effect Internal Revenue Service (IRS) audit, settlement State tax law changes, net of federal tax effect Other, net $ 1,038 69 - (11) (41) 35 $ 2 - - (1) 965 69 (6) (3) (16) 35 $ 3 - - (1) 1,021 69 (40) (28) (20) 35 2 (1) (1) (1) Provision for income taxes $ 1,055 36 $ 1,009 37 $ 1,002 34 Deferred Tax Assets and Liabilities Certain items are reported in different periods for financial reporting and income tax purposes. Deferred tax assets and liabilities are recorded in recognition of these differences. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows: Deferred tax assets: Compensation and benefits, including postretirement Accruals, including casualty and other claims Other Total gross deferred tax assets Less valuation allowance Net deferred tax asset Deferred tax liabilities: Property Other Total gross deferred tax liabilities Net deferred tax liability Net current deferred tax asset Net long-term deferred tax liability December 31, 2013 2012 ($ in millions) $ 462 $ 114 54 630 (32) 598 (8,494) (466) (8,960) (8,362) 180 834 139 41 1,014 (19) 995 (8,188) (472) (8,660) (7,665) 167 $ (8,542) $ (7,832) Except for amounts for which a valuation allowance has been provided, we believe that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. The valuation allowance at the end of each year primarily relates to subsidiary state income tax net operating losses that may not be utilized prior to their expiration. The valuation allowance for 2013 also includes state investment tax credits that may not be utilized prior to their expiration. The total valuation allowance increased by $13 million in 2013 and remained unchanged in 2012. K52 Uncertain Tax Positions A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: December 31, 2013 2012 ($ in millions) Balance at beginning of year $ 63 $ 105 Additions based on tax positions related to the current year Additions for tax positions of prior years Reductions for tax positions of prior years Settlements with taxing authorities Lapse of statutes of limitations 3 4 (1) (2) (2) Balance at end of year $ 65 $ 6 - (20) (23) (5) 63 Included in the balance of unrecognized tax benefits at December 31, 2013, are potential benefits of $25 million that would affect the effective tax rate if recognized. Unrecognized tax benefits are adjusted in the period in which new information about a tax position becomes available or the final outcome differs from the amount recorded. IRS examinations have been completed for all years prior to 2011. We expect the IRS to begin auditing our 2011 and 2012 consolidated income tax returns in early 2014. State income tax returns generally are subject to examination for a period of three to four years after filing of the return. In addition, we are generally obligated to report changes in taxable income arising from federal income tax examinations to the states within a period of up to two years from the date the federal examination is final. We have various state income tax returns either under examination, administrative appeals, or litigation. We expect that the total amount of unrecognized tax benefits at December 31, 2013, will decrease by approximately $8 million in 2014 due to tax positions for which there was an uncertainty about the timing of deductibility in earlier years, but deductibility may become certain by the close of 2014. We do not expect that the aforementioned potential change in unrecognized tax benefits will have a material effect on our financial position, results of operations, or liquidity. Interest related to unrecognized tax benefits, which is included in “Other income – net,” totaled $1 million of expense in 2013, $1 million of income in 2012, and $10 million of income in 2011. There were no penalties related to tax matters in 2013, 2012, and 2011. We have recorded a liability of $4 million at December 31, 2013, and $3 million at December 31, 2012, for the payment of interest on unrecognized tax benefits. We have no liability recorded at December 31, 2013 and 2012, for the payment of penalties on unrecognized tax benefits. K53 4. Fair Value Fair Value Measurements ASC 820-10, “Fair Value Measurements,” established a framework for measuring fair value and a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows: Level 1 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access. Level 2 Inputs to the valuation methodology include: (cid:120) quoted prices for similar assets or liabilities in active markets; (cid:120) quoted prices for identical or similar assets or liabilities in inactive markets; (cid:120) inputs other than quoted prices that are observable for the asset or liability; (cid:120) inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. The asset’s or liability’s fair value measurement level within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Other than those assets and liabilities described below that approximate fair value, there were no assets or liabilities measured at fair value on a recurring basis at December 31, 2013 or 2012. Fair Values of Financial Instruments We have evaluated the fair values of financial instruments and methods used to determine those fair values. The fair values of “Cash and cash equivalents,” “Short-term investments,” “Accounts receivable,” “Accounts payable,” and “Short-term debt” approximate carrying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life insurance is recorded at cash surrender value and, accordingly, approximates fair value. The carrying amounts and estimated fair values for the remaining financial instruments, excluding investments accounted for under the equity method, consisted of the following at December 31: 2013 Carrying Amount Fair Value Carrying Amount ($ in millions) 2012 Fair Value Long-term investments Long-term debt, including current maturities $ 148 $ 177 $ 139 $ (9,348) (10,673) (8,482) 174 (10,734) Underlying net assets were used to estimate the fair value of investments with the exception of notes receivable, which are based on future discounted cash flows. The fair values of long-term debt were estimated based on quoted market prices or discounted cash flows using current interest rates for debt with similar terms, company rating, and remaining maturity. K54 The following tables set forth the fair value of long-term investment and long-term debt balances disclosed above by valuation technique level, within the fair value hierarchy (there were no level 3 valued assets or liabilities). Long-term investments Long-term debt, including current maturities $ 47 $ (10,449) 130 $ (224) 177 (10,673) Level 1 December 31, 2013 Level 2 ($ in millions) Total Level 1 December 31, 2012 Level 2 ($ in millions) Total Long-term investments Long-term debt, including current maturities $ 41 $ (10,450) 133 $ (284) 174 (10,734) Sales of available-for-sale securities were zero for years ended December 31, 2013 and 2012, and $81 million for the year ended December 31, 2011. 5. Investments December 31, 2013 2012 ($ in millions) $ 98 $ 20 $ 118 $ - 15 15 $ 1,075 $ 404 278 155 90 2,002 289 148 996 383 281 155 82 1,897 264 139 $ 2,439 $ 2,300 Short-term investments: Commercial paper, 2 months Federal government bonds, held-to-maturity, with average maturities of 3 and 5 months, respectively Total short-term investments Long-term investments: Equity method investments: Conrail Inc. TTX Company Meridian Speedway LLC Pan Am Southern LLC Other Total equity method investments Company-owned life insurance at net cash surrender value Other investments Total long-term investments K55 Investment in Conrail Through a limited liability company, we and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC). We have a 58% economic and 50% voting interest in the jointly owned entity, and CSX has the remainder of the economic and voting interests. We are amortizing the excess of the purchase price over Conrail’s net equity using the principles of purchase accounting, based primarily on the estimated useful lives of Conrail’s depreciable property and equipment, including the related deferred tax effect of the differences in book and tax accounting bases for such assets, as all of the purchase price at acquisition was allocable to Conrail’s tangible assets and liabilities. At December 31, 2013, based on the funded status of Conrail’s pension plans, we increased our proportional investment in Conrail by $37 million. This resulted in income of $34 million recorded to “Other comprehensive loss” and a combined federal and state deferred tax liability of $3 million. At December 31, 2012, based on the funded status of Conrail’s pension plans, we decreased our proportional investment in Conrail by $7 million. This resulted in a loss of $6 million recorded to “Other comprehensive loss” and a combined federal and state deferred tax asset of $1 million. At December 31, 2013, the difference between our investment in Conrail and our share of Conrail’s underlying net equity was $535 million. Our equity in the earnings of Conrail, net of amortization, included in “Other income – net” was $42 million, $34 million, and $31 million in 2013, 2012, and 2011, respectively. CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of NSR and CSX Transportation, Inc. (CSXT). The costs of operating the Shared Assets Areas are borne by NSR and CSXT based on usage. In addition, NSR and CSXT pay CRC a fee for access to the Shared Assets Areas. “Purchased services and rents” and “Fuel” include expenses for amounts due to CRC for operation of the Shared Assets Areas totaling $146 million in 2013, $147 million in 2012, and $131 million in 2011. Future minimum lease payments due to CRC under the Shared Assets Areas agreements are as follows: $35 million in each of 2014 through 2018 and $185 million thereafter. We provide certain general and administrative support functions to Conrail, the fees for which are billed in accordance with several service-provider arrangements and approximate $8 million annually. “Accounts payable” includes $187 million at December 31, 2013, and $178 million at December 31, 2012, due to Conrail for the operation of the Shared Assets Areas. In addition, “Other liabilities” includes $133 million at both December 31, 2013 and 2012, for long-term advances from Conrail, maturing 2035, that bear interest at an average rate of 4.4%. K56 6. Properties At December 31, 2013 Land Roadway: Rail and other track material Ties Ballast Construction in process Other roadway Total roadway Equipment: Locomotives Freight cars Computers and software Construction in process Other equipment Total equipment Cost Accumulated Depreciation Net Book Value Depreciation Rate (1) ($ in millions) $ 2,253 $ - $ 2,253 - 5,934 4,464 2,244 405 11,704 24,751 4,814 3,225 513 139 862 9,553 (1,782) (1,100) (468) - (2,814) (6,164) (1,918) (1,429) (292) - (316) (3,955) 4,152 3,364 1,776 405 8,890 18,587 2,896 1,796 221 139 546 5,598 2.46% 3.24% 2.65% - 2.55% 3.42% 2.78% 11.07% - 6.15% Other property 475 (268) 207 1.15% Total properties $ 37,032 $ (10,387) $ 26,645 K57 At December 31, 2012 Land Roadway: Rail and other track material Ties Ballast Construction in process Other roadway Total roadway Equipment: Locomotives Freight cars Computers and software Construction in process Other equipment Total equipment Cost Accumulated Depreciation Net Book Value Depreciation Rate (1) ($ in millions) $ 2,240 $ - $ 2,240 - 5,699 4,255 2,128 378 11,223 23,683 4,576 3,214 480 177 817 9,264 (1,707) (1,027) (437) - (2,636) (5,807) (1,798) (1,502) (270) - (282) (3,852) 3,992 3,228 1,691 378 8,587 17,876 2,778 1,712 210 177 535 5,412 2.48% 3.28% 2.61% - 2.57% 3.54% 2.95% 13.29% - 5.99% Other property 471 (263) 208 1.31% Total properties $ 35,658 $ (9,922) $ 25,736 (1) Composite annual depreciation rate for the underlying assets, excluding the effects of the amortization of any deficiency (or excess) that resulted from our depreciation studies. Roadway and equipment property includes $8 million at December 31, 2013, and $9 million at December 31, 2012, of assets recorded pursuant to capital leases with accumulated amortization of $3 million at both December 31, 2013 and 2012. Other property includes the costs of obtaining rights to natural resources of $336 million at both December 31, 2013 and 2012, with accumulated depletion of $195 million and $192 million, respectively. Capitalized Interest Total interest cost incurred on debt was $543 million in 2013, $515 million in 2012, and $474 million in 2011, of which $18 million, $20 million, and $19 million, respectively, was capitalized. K58 7. Current Liabilities Accounts payable: Accounts and wages payable Due to Conrail (Note 5) Casualty and other claims (Note 16) Vacation liability Other Total Other current liabilities: Interest payable Postretirement and pension benefit obligations (Note 11) Other Total 8. Debt December 31, 2013 2012 ($ in millions) $ 685 $ 187 166 130 97 777 178 183 129 95 $ 1,265 $ 1,362 $ $ 121 $ 64 85 270 $ 112 70 81 263 Debt with weighted average interest rates and maturities is presented below: Notes and debentures: 6.16% maturing to 2018 6.16% maturing 2019 to 2021 3.22% maturing 2022 to 2024 6.93% maturing 2025 to 2037 4.81% maturing 2041 to 2043 6.39% maturing 2097 to 2111 Securitization borrowings, 1.23% Other debt, 7.94% maturing 2024 Discounts and premiums, net Total debt Less current maturities and short-term debt $ December 31, 2013 2012 ($ in millions) 2,082 $ 1,397 1,600 1,402 1,833 1,328 200 101 (495) 9,448 (545) 2,082 1,397 1,200 1,403 1,333 1,328 300 151 (512) 8,682 (250) Long-term debt excluding current maturities and short-term debt $ 8,903 $ 8,432 Long-term debt maturities subsequent to 2014 are as follows: 2015 2016 2017 2018 2019 and subsequent years Total $ 1 500 550 600 7,252 $ 8,903 During the third quarter of 2012, we issued $600 million of senior notes at 2.90% due 2023 and paid $115 million of premium in exchange for $521 million of our previously issued notes ($156 million at 7.25% due 2031, K59 $140 million at 5.64% due 2029, $115 million at 5.59% due 2025, $72 million at 7.80% due 2027, and $38 million at 7.05% due 2037). The premium is reflected as a reduction of debt in the Consolidated Balance Sheets, is included within “Debt repayments” in the 2012 Statement of Cash Flows, and is being amortized as additional interest expense over the term of the new debt. No gain or loss was recognized as a result of the debt exchange. We have in place a $350 million receivables securitization facility under which NSR sells substantially all of its eligible third-party receivables to a subsidiary, which in turn may transfer beneficial interests in the receivables to various commercial paper vehicles. Amounts received under the facility are accounted for as borrowings. Under this facility, we received $100 million and repaid $200 million in 2013. At December 31, 2013 and 2012, respectively, the amounts outstanding under the receivables securitization facility were $200 million at an average variable interest rate of 1.23% and $300 million at an average variable interest rate of 1.28%. Our intent is to refinance $100 million of these borrowings on a long-term basis, which is supported by our $750 million credit agreement (see below). Accordingly, these amounts outstanding are included in the line item “Long-term debt” and the remaining $100 million outstanding at December 31, 2013 and $200 million outstanding at December 31, 2012, are included in the line item “Short-term debt” in the Consolidated Balance Sheets. The facility has a 364-day term which was renewed and amended in October 2013 to run until October 2014. At December 31, 2013 and 2012, the receivables included in “Accounts receivable – net” serving as collateral for these borrowings totaled $747 million and $751 million, respectively. Issuance of Debt or Equity Securities We have authority from our Board of Directors to issue an additional $800 million of debt or equity securities through public or private sale. Credit Agreement, Debt Covenants, and Commercial Paper We have in place and available a $750 million, five-year credit agreement expiring in 2016, which provides for borrowings at prevailing rates and includes covenants. We had no amounts outstanding under this facility at December 31, 2013 and 2012, and we are in compliance with all of its covenants. We have the ability to issue commercial paper supported by the $750 million credit agreement. At December 31, 2013 and 2012, we had no outstanding commercial paper. K60 9. Lease Commitments We are committed under long-term lease agreements, which expire on various dates through 2067, for equipment, lines of road and other property. The following amounts do not include payments to CRC under the Shared Assets Areas agreements (Note 5). Future minimum lease payments and operating lease expense are as follows: Future Minimum Lease Payments Operating Leases Capital Leases ($ in millions) 2014 2015 2016 2017 2018 2019 and subsequent years Total $ 80 $ 74 62 54 50 418 $ 738 Less imputed interest on capital leases at an average rate of 5.50% Present value of minimum lease payments included in debt $ 2 1 - - - 2 5 (1) 4 Operating Lease Expense Minimum rents Contingent rents Total 2013 2012 ($ in millions) 2011 $ $ 121 $ 82 129 $ 73 203 $ 202 $ 150 77 227 Contingent rents are primarily comprised of usage-based rent paid to other railroads for joint facility operations. 10. Other Liabilities December 31, 2013 2012 ($ in millions) $ 566 $ 218 214 133 120 193 1,049 482 258 133 118 197 $ 1,444 $ 2,237 Net postretirement benefit obligations (Note 11) Net pension benefit obligations (Note 11) Casualty and other claims (Note 16) Long-term advances from Conrail (Note 5) Deferred compensation Other Total K61 11. Pensions and Other Postretirement Benefits We have both funded and unfunded defined benefit pension plans covering principally salaried employees. We also provide specified health care and death benefits to eligible retired employees and their dependents; these plans can be amended or terminated at our option. Under our health care plans, a defined percentage of health care expenses is covered, reduced by any deductibles, co-payments, Medicare payments and, in some cases, coverage provided under other group insurance policies. Pension and Other Postretirement Benefit Obligations and Plan Assets Change in benefit obligations: Benefit obligation at beginning of year Service cost Interest cost Actuarial (gains) losses Benefits paid Benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contribution Benefits paid Fair value of plan assets at end of year Other Postretirement Pension Benefits 2012 2013 Benefits 2013 2012 ($ in millions) $ 2,285 $ 41 81 (196) (120) 2,091 2,027 $ 34 89 253 (118) 2,285 1,311 $ 16 50 (471) (51) 855 1,206 15 54 82 (46) 1,311 1,791 432 12 (120) 2,115 1,670 227 12 (118) 1,791 205 34 51 (51) 239 186 19 46 (46) 205 Funded status at end of year $ 24 $ (494) $ (616) $ (1,106) Amounts recognized in the Consolidated Balance Sheets: Noncurrent assets Current liabilities Noncurrent liabilities Net amount recognized Amounts recognized in other comprehensive income (before tax): Net (gain) loss Prior service cost 256 $ (14) (218) 1 $ - $ (13) (482) (50) (566) - (57) (1,049) 24 $ (494) $ (616) $ (1,106) 585 $ 4 1,160 $ 4 (88) $ - 459 - $ $ $ K62 Our accumulated benefit obligation for our defined benefit pension plans is $1.9 billion and $2.1 billion at December 31, 2013 and 2012, respectively. Our unfunded pension plans, included above, which in all cases have no assets and therefore have an accumulated benefit obligation in excess of plan assets, had projected benefit obligations of $231 million at December 31, 2013, and $239 million at December 31, 2012, and had accumulated benefit obligations of $206 million at December 31, 2013, and $215 million at December 31, 2012. Pension and Other Postretirement Benefit Cost Components Pension benefits: Service cost Interest cost Expected return on plan assets Amortization of net losses Amortization of prior service cost Net cost Other postretirement benefits: Service cost Interest cost Expected return on plan assets Amortization of net losses Net cost 2013 2012 ($ in millions) 2011 $ $ $ 41 $ 81 (142) 89 - 34 $ 89 (138) 75 - 69 $ 60 $ 16 $ 50 (16) 58 15 $ 54 (15) 53 28 92 (140) 67 3 50 14 58 (15) 44 $ 108 $ 107 $ 101 Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income Net gain arising during the year Amortization of net losses Total recognized in other comprehensive income Total recognized in net periodic cost and other comprehensive income 2013 Other Postretirement Benefits Pension Benefits ($ in millions) $ $ $ $ 486 89 575 $ 506 $ 489 58 547 439 Net actuarial gains arising during the year to our pension benefits were due primarily to a higher than expected return on plan assets and an increase in our discount rate. Net actuarial gains arising during the year related to our other postretirement benefits were due to changes in our estimate of the allocation of medical claims costs between our Medicare eligible and non-Medicare eligible populations, lower estimates of prescription drug costs and an increase in our discount rate. The estimated net losses for the pension benefit plans that will be amortized from accumulated other comprehensive loss into net periodic cost over the next year are $54 million. There is no expected amortization for the other postretirement benefit plans over the next year. K63 Pension and Other Postretirement Benefits Assumptions Costs for pension and other postretirement benefits are determined based on actuarial valuations that reflect appropriate assumptions as of the measurement date, ordinarily the beginning of each year. The funded status of the plans is determined using appropriate assumptions as of each year end. A summary of the major assumptions follows: Pension funded status: Discount rate Future salary increases Other postretirement benefits funded status: Discount rate Pension cost: Discount rate Return on assets in plans Future salary increases Other postretirement benefits cost: Discount rate Return on assets in plans Health care trend rate 2013 2012 2011 4.60% 4.50% 3.65% 4.50% 4.50% 4.50% 4.65% 3.80% 4.55% 3.65% 8.25% 4.50% 3.80% 8.00% 7.33% 4.50% 8.25% 4.50% 4.55% 8.00% 7.70% 5.25% 8.75% 4.50% 5.40% 8.50% 8.10% To determine the discount rates, we utilize analyses in which the projected annual cash flows from the pension and other postretirement benefit plans were matched with yield curves based on an appropriate universe of high- quality corporate bonds. We use the results of the yield curve analyses to select the discount rates that match the payment streams of the benefits in these plans. Health Care Cost Trend Assumptions For measurement purposes at December 31, 2013, increases in the per capita cost of covered health care benefits were assumed to be 6.94% for 2014. It is assumed the rate will decrease gradually to an ultimate rate of 5.0% for 2019 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported in the consolidated financial statements. To illustrate, a one-percentage point change in the assumed health care cost trend would have the following effects: One-percentage point Decrease Increase ($ in millions) Increase (decrease) in: Total service and interest cost components $ Postretirement benefit obligation 11 $ 100 (9) (84) K64 Asset Management Nine investment firms manage our defined benefit pension plans’ assets under investment guidelines approved by our Benefits Investment Committee that is comprised of members of our management. Investments are restricted to domestic and international equity securities, domestic and international fixed income securities, and unleveraged exchange-traded options and financial futures. Limitations restrict investment concentration and use of certain derivative investments. The target asset allocation for equity is 75% of the pension plans’ assets. The fixed income portfolio is invested in the Barclays Government/Credit Bond Index Fund, except that the Canadian earmarked portion of the portfolio is maintained in U.S. Treasury Bonds. Equity investments must be in liquid securities listed on national exchanges. No investment is permitted in our securities (except through commingled pension trust funds). Investment managers’ returns are expected to meet or exceed selected market indices by prescribed margins. Our pension plans’ weighted-average asset allocations, by asset category, were as follows: Domestic equity securities International equity securities Debt securities Cash and cash equivalents Total Percentage of plan assets at December 31, 2013 2012 54% 22% 20% 4% 52% 22% 24% 2% 100% 100% The other postretirement benefit plan assets consist primarily of trust-owned variable life insurance policies with an asset allocation at December 31, 2013, of 65% in equity securities and 35% in debt securities compared with 58% in equity securities and 42% in debt securities at December 31, 2012. The target asset allocation for equity is between 50% and 75% of the plan’s assets. The plans’ assumed future returns are based principally on the asset allocations and historic returns for the plans’ asset classes determined from both actual plan returns and, over longer time periods, market returns for those asset classes. The expected long-term rate of return on plan assets is applied to a calculated value of plan assets that recognizes changes in fair value over a three-year period. We assumed a rate of return on pension plan assets of 8.25% for both 2013 and 2012 and 8.75% for 2011. A one-percentage point change to the rate of return assumption would result in an $18 million change to the net pension cost and, as a result, an equal change in “Compensation and benefits” expense. For 2014, we assume an 8.25% return on pension plan assets. K65 Fair Value of Plan Assets Following is a description of the valuation methodologies used for pension plan assets measured at fair value. Common stock: Shares held by the plan at year end are valued at the official closing price as defined by the exchange or at the most recent trade price of a security at the close of the active market. Common collective trusts: Valued at the net asset value (NAV) of shares held by the plan at year end, based on the quoted market prices of the underlying assets of the trusts. The investments are valued using NAV as a practical expedient for fair value. The common collective trusts hold equity securities, fixed income securities and cash and cash equivalents. Corporate bonds and other fixed income instruments: When available, valued at an estimated price at which a dealer would pay for a similar security at year end using observable market inputs. Otherwise, valued at an estimated price at which a dealer would pay for a similar security at year end using unobservable market inputs. Municipal bonds: Valued at an estimated price at which a dealer would pay for a security at year end using observable market-based inputs. Commingled funds: Valued at the NAV of shares held by the plan at year end, based on the quoted market prices of the underlying assets of the funds. The investments are valued using NAV as a practical expedient for fair value. The commingled funds hold equity securities. Interest bearing cash: Short-term bills or notes are valued at an estimated price at which a dealer would pay for the security at year end using observable market-based inputs; money market funds are valued at the closing price reported on the active market on which the funds are traded. United States Government and agencies securities: Valued at an estimated price at which a dealer would pay for a security at year end using observable as well as unobservable market-based inputs. Inflation adjusted instruments utilize the appropriate index factor. Preferred stock: Shares held by the plan at year end are valued at the most recent trade price of a security at the close of the active market or at an estimated price at which a dealer would pay for a similar security at year end using primarily observable as well as unobservable market-based inputs. The following table sets forth the pension plans’ assets by valuation technique level, within the fair value hierarchy (there were no level 3 valued assets). Common stock Common collective trusts: Debt securities International equity securities Commingled funds Interest bearing cash U.S. government and agencies securities Level 1 December 31, 2013 Level 2 ($ in millions) Total $ 1,245 $ - $ 1,245 - - - 83 - 423 265 95 - 4 423 265 95 83 4 Total investments $ 1,328 $ 787 $ 2,115 K66 Common stock Common collective trusts: Debt securities International equity securities Commingled funds Interest bearing cash U.S. government and agencies securities Preferred stock Level 1 December 31, 2012 Level 2 ($ in millions) Total $ 1,028 $ - $ 1,028 - - - 31 - - 433 211 84 - 3 1 433 211 84 31 3 1 Total investments $ 1,059 $ 732 $ 1,791 Following is a description of the valuation methodologies used for other postretirement benefit plan assets measured at fair value. Trust-owned life insurance: Valued at our share of the net assets of trust-owned life insurance issued by a major insurance company. The underlying investments of that trust consist of a U.S. stock account and a U.S. bond account, valued based upon the aggregate market values of the underlying investments. The loan asset account is valued at cash surrender value at the time of the loan, plus accrued interest. The other postretirement benefit plan assets consisted of trust-owned life insurance with fair values of $239 million and $205 million at December 31, 2013 and 2012, respectively, and are valued under level 2 of the fair value hierarchy. There were no level 1 or level 3 related assets. The methods used to value pension and other postretirement benefit plan assets may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Contributions and Estimated Future Benefit Payments In 2014, we expect to contribute approximately $14 million to our unfunded pension plans for payments to pensioners and approximately $50 million to our other postretirement benefit plans for retiree health and death benefits. We do not expect to contribute to our funded pension plan in 2014. Benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows: 2014 2015 2016 2017 2018 Years 2019 – 2023 Pension Benefits Other Postretirement Benefits ($ in millions) $ 127 $ 130 133 135 137 693 50 51 52 53 54 272 K67 The other postretirement benefits payments include an estimated average annual reduction due to the Medicare Part D subsidy of approximately $6 million. Other Postretirement Coverage Under collective bargaining agreements, Norfolk Southern and certain subsidiaries participate in a multi-employer benefit plan, which provides certain postretirement health care and life insurance benefits to eligible union employees. Premiums under this plan are expensed as incurred and totaled $41 million in 2013, $47 million in 2012, and $48 million in 2011. Section 401(k) Plans Norfolk Southern and certain subsidiaries provide Section 401(k) savings plans for employees. Under the plans, we match a portion of employee contributions, subject to applicable limitations. Our matching contributions, recorded as an expense, under these plans were $19 million in 2013, $18 million in 2012, and $17 million in 2011. 12. Stock-Based Compensation Under the stockholder-approved Long-Term Incentive Plan (LTIP), the Compensation Committee (Committee), made up of nonemployee members of the Board of Directors or the Chief Executive Officer (if delegated such authority by the Committee), may grant stock options, stock appreciation rights (SARs), restricted stock units (RSUs), restricted shares, performance share units (PSUs), and performance shares, up to a maximum of 96,125,000 shares of our common stock (Common Stock). Of these shares, 5,000,000 were approved by the Board for issuance to non-officer participants; as a broad-based issuance, stockholder approval was not required. The number of shares remaining for issuance under LTIP is reduced (i) by 1 for each award granted as a stock option or stock-settled SAR, or (ii) by 1.61 for an award made in the form other than a stock option or stock- settled SAR. Under the Board-approved Thoroughbred Stock Option Plan (TSOP), the Committee may grant stock options up to a maximum of 6,000,000 shares of Common Stock; as a broad-based stock option plan, stockholder approval of TSOP was not required. We use newly issued shares to satisfy any exercises and awards under LTIP and TSOP. Shares available for future grants are shown in the table below. LTIP also permits the payment – on a current or a deferred basis and in cash or in stock – of dividend equivalents on shares of Common Stock covered by stock options, RSUs, or PSUs in an amount commensurate with regular quarterly dividends paid on Common Stock. With respect to stock options, if employment of the participant is terminated for any reason, including retirement, disability, or death, we have no further obligation to make any dividend equivalent payments. Regarding RSUs, if employment of the participant is terminated for any reason other than retirement, disability, or death, we have no further obligation to make any dividend equivalent payments. Should an employee terminate employment, they are not required to forfeit dividend equivalent payments already received. Outstanding PSUs do not currently receive dividend equivalent payments. During the first quarter of 2013, the Committee granted stock options, RSUs and PSUs pursuant to LTIP and granted stock options pursuant to TSOP. Receipt of an award under LTIP was made contingent upon the awardee’s execution of a non-compete agreement, and all awards under LTIP were made subject to forfeiture in the event the awardee “engages in competing employment” for a period of time following retirement. K68 Accounting Method We account for our grants of stock options, RSUs, PSUs, and dividend equivalent payments in accordance with ASC 718 “Compensation-Stock Compensation.” Accordingly, all awards result in charges to net income while dividend equivalent payments, which are all related to equity classified awards, are charged to retained income. Related compensation costs were $54 million in 2013, $45 million in 2012, and $61 million in 2011. The total tax effects recognized in income in relation to stock-based compensation were benefits of $18 million in 2013, $14 million in 2012, and $20 million in 2011. “Common stock issued – net” in the Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011 includes tax benefits generated from tax deductions in excess of compensation costs recognized (excess tax benefits) for share-based awards of $38 million, $42 million, and $45 million, respectively. Stock Options Option exercise prices may not be less than the average of the high and low prices at which Common Stock is traded on the grant date and, effective for LTIP options granted after May 13, 2010, will be at least the higher of (i) the average of the high and low prices at which Common Stock is traded on the grant date, or (ii) the closing price of Common Stock on the grant date. All options are subject to a vesting period of at least one year, and the term of the option will not exceed ten years. In the first quarter of 2013, 748,200 options were granted under LTIP and 268,500 options were granted under TSOP. In each case, the grant price was $69.83. In the first quarter of 2012, 567,300 options were granted under LTIP and 210,300 options were granted under TSOP, each with a grant price of $75.14. In the first quarter of 2011, 627,700 options were granted under LTIP and 257,000 options were granted under TSOP, each with a grant price of $62.75. For all years, options granted under LTIP and TSOP may not be exercised prior to the fourth and third anniversaries of the date of grant, respectively, or if the optionee retires or dies before that anniversary date, may not be exercised before the later of one year after the grant date or the date of the optionee’s retirement or death. Holders of the options granted under LTIP who remain actively employed receive cash dividend equivalent payments for four years in an amount equal to the regular quarterly dividends paid on Common Stock. Dividend equivalent payments are not made on TSOP options. K69 The fair value of each option awarded in 2013, 2012, and 2011 was measured on the date of grant using a lattice- based option valuation model. Expected volatilities are based on implied volatilities from traded options on, and historical volatility of, Common Stock. Historical data is used to estimate option exercises and employee terminations within the valuation model. The average expected option life is derived from the output of the valuation model and represents the period of time that all options granted are expected to be outstanding, including branches of the model that result in options expiring unexercised. The average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. For options granted that include dividend equivalent payments, a dividend yield of zero was used. For 2013, 2012, and 2011, a dividend yield of 2.86%, 2.30%, and 2.55%, respectively, was used for LTIP options for periods where no dividend equivalent payments are made, as well as for TSOP options, which do not receive dividend equivalents. The assumptions for the LTIP and TSOP grants for the last three years are shown in the following table: 2013 2012 2011 Expected volatility range Average expected volatility Average risk-free interest rate Average expected option term LTIP Per-share grant-date fair value LTIP Average expected option term TSOP Per-share grant-date fair value TSOP Options granted (LTIP and TSOP) 24% – 30% 27% – 29% 28% – 32% 28% 3.42% 8.5 years $22.26 8.5 years $18.10 884,700 26% 1.88% 9.0 years $20.40 8.9 years $15.84 1,016,700 27% 1.96% 8.9 years $23.84 8.8 years $19.55 777,600 A summary of the status of changes in stock options is presented below: Stock Options Weighted Avg. Exercise Price Outstanding at December 31, 2012 Granted Exercised Forfeited 8,718,566 $ 1,016,700 (2,570,088) (13,000) Outstanding at December 31, 2013 7,152,178 47.61 69.83 37.08 67.42 54.52 The aggregate intrinsic value of options outstanding at December 31, 2013, was $274 million with a weighted average remaining contractual term of 5.5 years. Of these options outstanding, 4,105,878 were exercisable and had an aggregate intrinsic value of $188 million with a weighted average exercise price of $46.97 and a weighted average remaining contractual term of 3.7 years. The following table provides information related to options exercised for the last three years: 2013 2012 ($ in millions) 2011 Options exercised Total intrinsic value Cash received upon exercise Related excess tax benefits realized $ 2,570,088 1,809,770 106 $ 93 31 80 $ 47 28 2,845,677 127 75 42 At December 31, 2013, total unrecognized compensation related to options granted under LTIP and TSOP was $10 million, and is expected to be recognized over a weighted-average period of approximately 2.3 years. K70 Restricted Stock Units RSU grants and grant-date fair values were 162,000 and $69.83 in 2013; 140,000 and $75.14 in 2012; and 177,400 and $62.75 in 2011. RSUs granted in all three years have a five-year restriction period and will be settled through issuance of shares of Common Stock. The RSU grants include cash dividend equivalent payments during the restriction period commensurate with regular quarterly dividends paid on Common Stock. During 2013, 298,400 of the RSUs granted in 2008 vested, with 178,991 shares of Common Stock issued net of withholding taxes. A summary of the status of and changes in RSUs is presented below: Nonvested at December 31, 2012 Granted Vested Forfeited Nonvested at December 31, 2013 Weighted- Average Grant-Date Fair Value RSUs 1,102,450 $ 162,000 (298,400) (2,050) 964,000 51.75 69.83 50.47 61.33 55.17 At December 31, 2013, total unrecognized compensation related to RSUs granted under LTIP was $8 million, and is expected to be recognized over a weighted-average period of approximately 3.2 years. The total related excess tax amounts realized in 2013, 2012, and 2011 were benefits of $2 million, $3 million, and $1 million, respectively. Performance Share Units PSUs provide for awards based on achievement of certain predetermined corporate performance goals (total shareholder return, return on average invested capital and operating ratio) at the end of a three-year cycle. PSU grants and grant-date fair values were 550,800 and $69.83 in 2013; 468,850 and $75.14 in 2012; and 580,900 and $62.75 in 2011. PSUs granted in 2013, 2012, and 2011 will be paid in the form of shares of Common Stock. During 2013, 577,585 of the PSUs granted in 2010 were earned, with 348,189 shares of Common Stock issued net of withholding taxes. A summary of the status of and changes in PSUs is presented below: Balance at December 31, 2012 Granted Earned Unearned Forfeited Balance at December 31, 2013 Weighted- Average Grant-Date Fair Value PSUs 1,870,200 $ 550,800 (577,585) (244,015) (3,600) 1,595,800 59.27 69.83 47.76 47.76 69.09 68.81 At December 31, 2013, total unrecognized compensation related to PSUs granted under LTIP was $7 million, and is expected to be recognized over a weighted-average period of approximately 1.7 years. The total fair value of PSUs earned and paid in cash during 2011 totaled $27 million. The total related excess tax amounts realized in 2013, 2012, and 2011 were benefits of $5 million, $11 million, and $2 million, respectively. K71 Shares Available and Issued Shares of Common Stock available for future grants and issued in connection with all features of LTIP and TSOP at December 31, were as follows: Available for future grants: LTIP TSOP Issued: LTIP TSOP 13. Stockholders’ Equity Common Stock 2013 2012 2011 5,945,033 1,172,256 7,638,688 1,434,356 8,803,298 1,640,456 2,765,986 331,282 2,337,179 153,423 3,077,739 193,060 Common Stock is reported net of shares held by our consolidated subsidiaries (Treasury Shares). Treasury Shares at December 31, 2013 and 2012, amounted to 20,320,777, with a cost of $19 million for both 2013 and 2012. Accumulated Other Comprehensive Loss “Accumulated other comprehensive loss” reported in the Consolidated Statements of Changes in Stockholders’ Equity consisted of the following: Balance at Beginning of Year Net Gain (Loss) Reclassification Adjustments ($ in millions) Balance at End of Year $ (999) $ 600 $ 89 (1) $ (310) Year ended December 31, 2013 Pensions and other postretirement liabilities Other comprehensive gain (loss) of equity investees Accumulated other comprehensive loss $ (1,109) $ 639 $ 89 $ (110) 39 - (71) (381) Year ended December 31, 2012 Pensions and other postretirement liabilities $ Other comprehensive loss of equity investees (928) $ (98) Accumulated other comprehensive loss $ (1,026) $ (149) $ (12) (161) $ 78 (1) $ - 78 $ (999) (110) (1,109) (1)These items are included in the computation of net periodic pension and postretirement benefit costs. See Note 11, “Pensions and Other Postretirement Benefits,” for additional information. K72 Other Comprehensive Income (Loss) “Other comprehensive income (loss)” reported in the Consolidated Statements of Changes in Stockholders’ Equity consisted of the following: Other comprehensive income $ 1,164 $ (436) $ Year ended December 31, 2013 Net gain (loss) arising during the year: Pensions and other postretirement benefits Reclassification adjustments for costs included in net income Subtotal Other comprehensive income of equity investees Year ended December 31, 2012 Net gain (loss) arising during the year: Pensions and other postretirement benefits Reclassification adjustments for costs included in net income Subtotal Other comprehensive loss of equity investees Year ended December 31, 2011 Net gain (loss) arising during the year: Pensions and other postretirement benefits Reclassification adjustments for costs included in net income Subtotal Other comprehensive loss of equity investees Pretax Amount Tax (Expense) Benefit ($ in millions) Net-of-Tax Amount $ 975 $ (375) $ 600 147 1,122 42 (58) (433) (3) $ (242) $ 93 $ (149) 128 (114) (13) (50) 43 1 $ (439) $ 169 $ (270) 114 (325) (21) (46) 123 2 89 689 39 728 78 (71) (12) (83) 68 (202) (19) (221) Other comprehensive loss $ (127) $ 44 $ Other comprehensive loss $ (346) $ 125 $ 14. Stock Repurchase Program We repurchased and retired 8.3 million, 18.8 million, and 30.2 million shares under our share repurchase program in 2013, 2012, and 2011, respectively, at a cost of $627 million, $1.3 billion, and $2.1 billion. On August 1, 2012, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2017. The timing and volume of purchases is guided by our assessment of market conditions and other pertinent factors. Any near-term share repurchases are expected to be made with internally generated cash, cash on hand, or proceeds from borrowings. Since the beginning of 2006, we have repurchased and retired 136.7 million shares of Common Stock at a total cost of $8.1 billion. K73 15. Earnings Per Share The following table sets forth the calculation of basic and diluted earnings per share: 2013 Basic 2012 2011 2013 Diluted 2012 2011 ($ in millions except per share amounts, shares in millions) Net income Dividend equivalent payments $ 1,910 $ 1,749 $ 1,916 $ 1,910 $ 1,749 $ 1,916 (2) (9) (4) (7) (9) (4) Income available to common stockholders 1,903 1,740 1,907 1,906 1,745 1,914 Weighted-average shares outstanding Dilutive effect of outstanding options and share-settled awards Adjusted weighted-average shares outstanding 311.9 320.9 345.5 311.9 320.9 345.5 3.6 315.5 4.3 325.2 5.8 351.3 Earnings per share $ 6.10 $ 5.42 $ 5.52 $ 6.04 $ 5.37 $ 5.45 In each year, dividend equivalent payments were made to holders of stock options and RSUs. For purposes of computing basic earnings per share, dividend equivalent payments made to holders of stock options and RSUs were deducted from net income to determine income available to common stockholders. For purposes of computing diluted earnings per share, we evaluate on a grant-by-grant basis those stock options and RSUs receiving dividend equivalent payments under the two-class and treasury stock methods to determine which method is the more dilutive for each grant. For those grants for which the two-class method was more dilutive, net income was reduced by dividend equivalent payments to determine income available to common stockholders. The diluted calculations exclude options having exercise prices exceeding the average market price of Common Stock as follows: none in 2013, 2 million in 2012, and none in 2011. 16. Commitments and Contingencies Lawsuits We and/or certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations. When we conclude that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to earnings. While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payment of such liability and claims. However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter. Any adjustments to the recorded liability will be reflected in earnings in the periods in which such adjustments become known. Two of our customers, DuPont and Sunbelt Chlor Alkai Partnership (“Sunbelt”), have rate reasonableness complaints pending before the STB alleging that our tariff rates for transportation of regulated movements are unreasonable. We dispute these allegations. Since June 1, 2009, in the case of DuPont, and since April 1, 2011, in the case of Sunbelt, we have been billing and collecting amounts based on the challenged tariff rates. We presently expect resolution of these cases to occur in 2014 and believe the estimate of reasonably possible loss will not have a material effect on our financial position, results of operations, or liquidity. With regard to rate cases, we record adjustments to revenues in the periods, if and when, such adjustments are probable and estimable. K74 On November 6, 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. The defendant railroads appealed this certification, and on August 9, 2013, the Court of Appeals for the District of Columbia vacated the District Court’s decision and remanded the case for further consideration. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases. We do not believe that the outcome of these proceedings will have a material effect on our financial position, results of operations, or liquidity. A lawsuit filed on March 25, 2008, in the U.S. District Court for the District of Minnesota containing similar allegations against us and four other major railroads was voluntarily dismissed by the plaintiff subject to a tolling agreement entered into in August 2008. Casualty Claims Casualty claims include employee personal injury and occupational claims as well as third-party claims, all exclusive of legal costs. To aid in valuing our personal injury liability and determining the amount to accrue with respect to such claims during the year, we utilize studies prepared by an independent consulting actuarial firm. Job-related accidental injury and occupational claims are subject to the Federal Employers’ Liability Act (FELA), which is applicable only to railroads. FELA’s fault-based system produces results that are unpredictable and inconsistent as compared with a no-fault workers’ compensation system. The variability inherent in this system could result in actual costs being different from the liability recorded. While the ultimate amount of claims incurred is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payments of claims and is supported by the most recent actuarial study. In all cases, we record a liability when the expected loss for the claim is both probable and estimable. The Consolidated Balance Sheets reflect long-term receivables for estimated recoveries from our insurance carriers for claims associated with the January 6, 2005, derailment in Graniteville, S.C. In the first quarter of 2011, we received an unfavorable ruling for an arbitration claim with an insurance carrier, and were denied recovery of the contested portion of the claim. As a result, we recorded a $43 million charge for the receivables associated with the contested portion of the claim and a $15 million charge for other receivables affected by the ruling for which recovery is no longer probable. Employee personal injury claims – The largest component of casualties and other claims expense is employee personal injury costs. The independent actuarial firm engaged by us provides quarterly studies to aid in valuing our employee personal injury liability and estimating personal injury expense. The actuarial firm studies our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences. The actuarial firm uses the results of these analyses to estimate the ultimate amount of liability, which includes amounts for incurred but unasserted claims. We adjust the liability quarterly based upon our assessment and the results of the study. Our estimate of loss liabilities is subject to inherent limitation given the difficulty of predicting future events such as jury decisions, court interpretations, or legislative changes and as such the actual loss may vary from the estimated liability recorded. Occupational claims – Occupational claims (including asbestosis and other respiratory diseases, as well as conditions allegedly related to repetitive motion) are often not caused by a specific accident or event but rather allegedly result from a claimed exposure over time. Many such claims are being asserted by former or retired employees, some of whom have not been employed in the rail industry for decades. The independent actuarial firm provides an estimate of the occupational claims liability based upon our history of claim filings, severity, payments, and other pertinent facts. The liability is dependent upon judgments we make as to the specific case reserves as well as judgments of the actuarial firm in the quarterly studies. The actuarial firm’s estimate of ultimate loss includes a provision for those claims that have been incurred but not reported. This provision is derived by analyzing industry data and projecting our experience into the future as far as can be reasonably determined. We adjust the liability quarterly based upon our assessment and the results of the study. However, it is possible that the recorded liability may not be adequate to cover the future payment of claims. Adjustments to the recorded liability are reflected in operating expenses in the periods in which such adjustments become known. K75 Third-party claims – We record a liability for third-party claims including those for highway crossing accidents, trespasser and other injuries, automobile liability, property damage, and lading damage. The actuarial firm assists us with the calculation of potential liability for third-party claims, except lading damage, based upon our experience including the number and timing of incidents, amount of payments, settlement rates, number of open claims, and legal defenses. The actuarial estimate includes a provision for claims that have been incurred but not reported. We adjust the liability quarterly based upon our assessment and the results of the study. Given the inherent uncertainty in regard to the ultimate outcome of third-party claims, it is possible that the actual loss may differ from the estimated liability recorded. Environmental Matters We are subject to various jurisdictions’ environmental laws and regulations. We record a liability where such liability or loss is probable and its amount can be estimated reasonably. Claims, if any, against third parties, for recovery of cleanup costs we have incurred are reflected as receivables (when collection is probable) in the Consolidated Balance Sheets and are not netted against the associated liability. Environmental engineers regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates. We have an Environmental Policy Council, composed of senior managers, to oversee and interpret our environmental policy. Our Consolidated Balance Sheets include liabilities for environmental exposures of $58 million at December 31, 2013, and $42 million at December 31, 2012 (of which $15 million is classified as a current liability at December 31, 2013 and $12 million at December 31, 2012). At December 31, 2013, the liability represents our estimate of the probable cleanup and remediation costs based on available information at 142 known locations and projects compared with 146 locations and projects at December 31, 2012. At December 31, 2013, ten sites accounted for $30 million of the liability, and no individual site was considered to be material. We anticipate that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period. At 12 locations, one or more of our subsidiaries in conjunction with a number of other parties have been identified as potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or comparable state statutes that impose joint and several liability for cleanup costs. We calculate our estimated liability for these sites based on facts and legal defenses applicable to each site and not solely on the basis of the potential for joint liability. With respect to known environmental sites (whether identified by us or by the EPA or comparable state authorities), estimates of our ultimate potential financial exposure for a given site or in the aggregate for all such sites are necessarily imprecise because of the widely varying costs of currently available cleanup techniques, unpredictable contaminant recovery and reduction rates associated with available cleanup technologies, the likely development of new cleanup technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant’s share of any estimated loss (and that participant’s ability to bear it), and evolving statutory and regulatory standards governing liability. The risk of incurring environmental liability – for acts and omissions, past, present, and future – is inherent in the railroad business. Some of the commodities in our traffic mix, particularly those classified as hazardous materials, pose special risks that we work diligently to minimize. In addition, several of our subsidiaries own, or have owned, land used as operating property, or which is leased and operated by others, or held for sale. Because environmental problems that are latent or undisclosed may exist on these properties, there can be no assurance that we will not incur environmental liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably at this time. Moreover, lawsuits and claims involving these and potentially other unidentified environmental sites and matters are likely to arise from time to time. The resulting liabilities could have a significant effect on financial position, results of operations, or liquidity in a particular year or quarter. K76 Based on our assessment of the facts and circumstances now known, we believe we have recorded the probable and reasonably estimable costs for dealing with those environmental matters of which we are aware. Further, we believe that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, or liquidity. Insurance We obtain on behalf of ourself and our subsidiaries insurance for potential losses for third-party liability and first- party property damages. We are currently self-insured up to $50 million and above $1.0 billion per occurrence and/or policy year for bodily injury and property damage to third parties and up to $25 million and above $175 million per occurrence and/or policy year for property owned by us or in our care, custody, or control. Purchase Commitments At December 31, 2013, we had outstanding purchase commitments totaling approximately $353 million for long- term service contracts through 2019 as well as locomotives, track material, and freight cars, in connection with our capital programs through 2018. Change-In-Control Arrangements We have compensation agreements with certain officers and key employees that become operative only upon a change in control of Norfolk Southern, as defined in those agreements. The agreements provide generally for payments based on compensation at the time of a covered individual’s involuntary or other specified termination and for certain other benefits. Guarantees In a number of instances, we have agreed to indemnify lenders for additional costs they may bear as a result of certain changes in laws or regulations applicable to their loans. Such changes may include impositions or modifications with respect to taxes, duties, reserves, liquidity, capital adequacy, special deposits, and similar requirements relating to extensions of credit by, deposits with, or the assets or liabilities of such lenders. The nature and timing of changes in laws or regulations applicable to our financings are inherently unpredictable, and therefore our exposure in connection with the foregoing indemnifications cannot be quantified. No liability has been recorded related to these indemnifications. We have agreed to indemnify parties in a number of transactions for U.S. income tax withholding imposed as a result of changes in U.S. tax law. In all cases, we have the right to unwind the related transaction if the withholding cannot be avoided in the future. Because these indemnities would be triggered and are dependent upon a change in the tax law, the maximum exposure is not quantifiable. We do not believe it is likely that we will be required to make any payments under these indemnities. At December 31, 2013, certain Norfolk Southern subsidiaries are contingently liable as guarantors with respect to $7 million of indebtedness, due in 2019, of an entity in which they have an ownership interest, the Terminal Railroad Association of St. Louis. Four other railroads are also jointly and severally liable as guarantors for this indebtedness. No liability has been recorded related to this guaranty. K77 NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES QUARTERLY FINANCIAL DATA (Unaudited) 2013 Railway operating revenues Income from railway operations Net income Earnings per share: Basic Diluted 2012 Railway operating revenues Income from railway operations Net income Earnings per share: Basic Diluted Three Months Ended March 31 June 30 September 30 December 31 ($ in millions, except per share amounts) $ $ 2,738 $ 691 450 1.43 1.41 2,789 $ 745 410 1.24 1.23 2,802 $ 836 465 1.47 1.46 2,874 $ 934 524 1.62 1.60 2,824 $ 849 482 1.55 1.53 2,693 $ 731 402 1.26 1.24 2,881 881 513 1.66 1.64 2,684 714 413 1.31 1.30 K78 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our Chief Executive Officer and Chief Financial Officer, with the assistance of management, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) at December 31, 2013. Based on such evaluation, our officers have concluded that, at December 31, 2013, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported, within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal Control Over Financial Reporting We are responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting includes those policies and procedures that pertain to our ability to record, process, summarize, and report reliable financial data. We recognize that there are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. In order to ensure that our internal control over financial reporting is effective, we regularly assess such controls and did so most recently for our financial reporting at December 31, 2013. This assessment was based on criteria for effective internal control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (1992). Based on our assessment, we have concluded that we maintained effective internal control over financial reporting at December 31, 2013. Our Board of Directors, acting through its Audit Committee, is responsible for the oversight of our accounting policies, financial reporting, and internal control. The Audit Committee of our Board of Directors is comprised entirely of outside directors who are independent of management. The independent registered public accounting firm and our internal auditors have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over financial reporting, and any other matters which they believe should be brought to the attention of the Audit Committee. We have issued a report of our assessment of internal control over financial reporting, and our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting at December 31, 2013. These reports appear in Part II, Item 8 of this report on Form 10-K. During the fourth quarter of 2013, we have not identified any changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially effect, our internal control over financial reporting. Item 9B. Other Information None. K79 PART III NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Item 10. Directors, Executive Officers, and Corporate Governance In accordance with General Instruction G(3), information called for by Part III, Item 10, is incorporated herein by reference from the information appearing under the caption “Election of Directors,” under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” under the caption “Corporate Governance,” and under the caption “Committees” in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 8, 2014, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I hereof beginning under “Executive Officers of the Registrant.” Item 11. Executive Compensation In accordance with General Instruction G(3), information called for by Part III, Item 11, is incorporated herein by reference from the information: (cid:120) (cid:120) (cid:120) appearing under the subcaption “Compensation” under the caption “Board of Directors” for directors, including the “2013 Non-Employee Director Compensation Table” and the “Narrative to Non-Employee Director Compensation Table;” appearing under the caption “Executive Compensation” for executives, including the “Compensation Discussion and Analysis,” the information appearing in the “Summary Compensation Table” and the “2013 Grants of Plan-Based Awards” table, including the narrative to such tables, the “Outstanding Equity Awards at Fiscal Year-End 2013” and “Option Exercises and Stock Vested in 2013” tables, and the tabular and narrative information appearing under the subcaptions “Retirement Benefits,” “Deferred Compensation,” and “Potential Payments Upon a Change in Control or Other Termination of Employment;” and appearing under the captions “Compensation Committee Interlocks and Insider Participation,” “Compensation Policy Risk Assessment,” and “Compensation Committee Report,” in each case included in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 8, 2014, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A. K80 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters In accordance with General Instruction G(3), information on security ownership of certain beneficial owners and management called for by Item 403 of Regulation S-K, Part III, Item 12, is incorporated herein by reference from the information appearing under the caption “Beneficial Ownership of Stock” in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 8, 2014, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A. Equity Compensation Plan Information (at December 31, 2013) Plan Category Equity compensation plans approved by securities holders(2) Equity compensation plans not approved by securities holders(3) Total Number of securities to be issued upon exercise of Weighted- average exercise price of outstanding outstanding options, options, warrants warrants and rights (a) and rights (b) Number of securities remaining available for future issuance under equity compensation plans (1) (c) 8,899,753 (4) $ 53.32 (5) 5,945,033 1,163,586 10,063,339 60.69 1,184,256 (6) 7,129,289 (1) Excludes securities reflected in column (a) (2) LTIP, excluding five million shares for broad-based issuance to non-officers. (3) LTIP’s five million shares for broad-based issuance to non-officers, TSOP and the Director’s Restricted Stock Plan. (4) Includes options, RSUs and PSUs granted under LTIP that may be settled in shares of stock. (5) Calculated without regard to 2,911,661, outstanding RSUs and PSUs at December 31, 2013. (6) Of the shares remaining available for grant under plans not approved by stockholders, 12,000 are available for grant as restricted stock under the Directors’ Restricted Stock Plan. K81 Norfolk Southern Corporation Long-Term Incentive Plan (LTIP) Established on June 28, 1983, and approved by our stockholders at their Annual Meeting held on May 10, 1984, LTIP was adopted to promote the success of our company by providing an opportunity for non-employee Directors, officers, and other key employees to acquire a proprietary interest in the Corporation. On January 23, 2001, our Board of Directors further amended LTIP and approved the issuance of an additional 5,000,000 shares of authorized but unissued Common Stock to participants who are not officers of our company. The issuance of these shares was broadly-based, and stockholder approval of these shares was not required. Accordingly, this portion of LTIP is included in the number of securities available for future issuance for plans not approved by stockholders. Also on January 23, 2001, our Board of Directors amended LTIP, which amendment was approved by shareholders on May 10, 2001, that included the reservation for issuance of an additional 30,000,000 shares of authorized but unissued Common Stock. In May 2010, our shareholders approved an amended LTIP that adopted a fungible share reserve ratio so that, for awards granted after May 13, 2010, the number of shares remaining for issuance under the amended LTIP will be reduced (i) by 1 for each award granted as an option or stock-settled stock appreciation right, or (ii) by 1.61 for an award made in the form other than an option or stock-settled stock appreciation right. Any shares of Common Stock subject to options, PSUs, restricted shares, or RSUs which are not issued as Common Stock will again be available for award under LTIP after the expiration or forfeiture of an award. Non-employee Directors, officers, and other key employees residing in the United States or Canada are eligible for selection to receive LTIP awards. Under LTIP, the Compensation Committee (Committee), or the Corporation’s chief executive officer to the Committee delegates award-making authority pursuant to LTIP, may grant incentive stock options, nonqualified stock options, stock appreciation rights, RSUs, restricted shares, PSUs, and performance shares. In addition, dividend equivalent payments may be awarded for options, RSUs, and PSUs. Awards under LTIP may be made subject to forfeiture under certain circumstances and may establish such other terms and conditions for the awards as provided in LTIP. For options granted after May 13, 2010, the option price will be at least the higher of (i) the average of the high and low prices at which Common Stock is traded on the date of grant, or (ii) the closing price of Common Stock on the date of the grant. All options are subject to a vesting period of at least one year, and the term of the option will not exceed ten years. LTIP specifically prohibits option repricing without stockholder approval, except that adjustments may be made in the event of changes in our capital structure or Common Stock. PSUs entitle a recipient to receive performance-based compensation at the end of a three-year cycle based on our performance during that period. For the 2013 PSU awards, corporate performance will be measured using three equally weighted standards established by the Committee: (1) three-year average return on average capital invested, (2) three-year average operating ratio, and (3) total return to stockholders measured at the end of the three-year period. For the 2013 PSU awards, PSUs will be settled in shares of Common Stock. RSUs are payable in cash or in shares of Common Stock at the end of a restriction period of not less than 36 months and not more than 60 months. During the restriction period, the holder of the RSUs has no beneficial ownership interest in the Common Stock represented by the RSUs and has no right to vote the shares represented by the units or to receive dividends (except for dividend equivalent payment rights that may be awarded with respect to the RSUs). The Committee at its discretion may waive the restriction period, but settlement of any RSUs will occur on the same settlement date as would have applied absent a waiver of restrictions, if no performance goals were imposed. K82 Norfolk Southern Corporation Thoroughbred Stock Option Plan (TSOP) Our Board of Directors adopted TSOP on January 26, 1999, to promote the success of our company by providing an opportunity for nonagreement employees to acquire a proprietary interest in our company and thereby to provide an additional incentive to nonagreement employees to devote their maximum efforts and skills to the advancement, betterment, and prosperity of our company and our stockholders. Under TSOP there were 6,000,000 shares of authorized but unissued Common Stock reserved for issuance. TSOP has not been and is not required to have been approved by our stockholders. Active full-time nonagreement employees residing in the United States or Canada are eligible for selection to receive TSOP awards. Under TSOP, the Committee, or the Corporation’s chief executive officer to the extent the Committee delegates award-making authority pursuant to TSOP, may grant nonqualified stock options subject to such terms and conditions as provided in TSOP. The option price may not be less than the average of the high and low prices at which Common Stock is traded on the date of the grant. All options are subject to a vesting period of at least one year, and the term of the option will not exceed ten years. TSOP specifically prohibits repricing without stockholder approval, except for capital adjustments. Norfolk Southern Corporation Directors’ Restricted Stock Plan (Plan) The Plan was adopted on January 1, 1994, and is designed to increase ownership of Common Stock by our non- employee Directors so as to further align their ownership interest in our company with that of our stockholders. The Plan has not been and is not required to have been approved by our stockholders. Currently, a maximum of 66,000 shares of Common Stock may be granted under the Plan. To make grants eligible to Directors, we purchase, through one or more subsidiary companies, the number of shares required in open-market transactions at prevailing market prices, or make such grants from Common Stock already owned by one or more of our subsidiary companies. Only non-employee Directors who are not and never have been employees of our company are eligible to participate in the Plan. Upon becoming a Director, each eligible Director receives a one-time grant of 3,000 restricted shares of Common Stock. No individual member of the Board exercises discretion concerning the eligibility of any Director or the number of shares granted. The restriction period applicable to restricted shares granted under the Plan begins on the date of the grant and ends on the earlier of the recipient’s death or the day after the recipient ceases to be a Director by reason of disability or retirement. During the restriction period, shares may not be sold, pledged, or otherwise encumbered. Directors will forfeit the restricted shares if they cease to serve as a Director of our company for reasons other than their disability, retirement, or death. K83 Item 13. Certain Relationships and Related Transactions, and Director Independence In accordance with General Instruction G(3), information called for by Part III, Item 13, is incorporated herein by reference from the information appearing under the caption “Transactions with Related Persons” and under the caption “Director Independence” in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 8, 2014, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A. Item 14. Principal Accountant Fees and Services In accordance with General Instruction G(3), information called for by Part III, Item 14, is incorporated herein by reference from the information appearing under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm” in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 8, 2014, which definitive Proxy Statement will be filed electronically with the SEC pursuant to Regulation 14A. K84  Page K40 K41 K43 PART IV NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES Item 15. Exhibits and Financial Statement Schedules (A) The following documents are filed as part of this report: 1. Index to Consolidated Financial Statements Report of Management Reports of Independent Registered Public Accounting Firm Consolidated Statements of Income, Years ended December 31, 2013, 2012, and 2011 Consolidated Statements of Comprehensive Income, Years ended December 31, 2013, 2012, and 2011 K44 K45 Consolidated Balance Sheets at December 31, 2013 and 2012 Consolidated Statements of Cash Flows, Years ended December 31, 2013, 2012, and 2011 K46 Consolidated Statements of Changes in Stockholders’ Equity, Years ended December 31, 2013, 2012, and 2011 Notes to Consolidated Financial Statements K47 K48 2. Financial Statement Schedule: The following consolidated financial statement schedule should be read in connection with the consolidated financial statements: Index to Consolidated Financial Statement Schedule Schedule II – Valuation and Qualifying Accounts K99 Schedules other than the one listed above are omitted either because they are not required or are inapplicable, or because the information is included in the consolidated financial statements or related notes. Exhibit Number 3 3(i) 3. Exhibits Description Articles of Incorporation and Bylaws – The Restated Articles of Incorporation of Norfolk Southern Corporation are incorporated by reference to Exhibit 3(i) to Norfolk Southern Corporation’s 10-K filed on March 5, 2001. K85 3(ii) 3(iii) An amendment to the Articles of Incorporation of Norfolk Southern Corporation is incorporated by reference to Exhibit 3(i) to Norfolk Southern Corporation’s Form 8-K filed on May 18, 2010. The Bylaws of Norfolk Southern Corporation, as amended January 21, 2014, are incorporated by reference to Exhibit 3(ii) to Norfolk Southern Corporation’s Form 8-K filed on January 21, 2014. 4 Instruments Defining the Rights of Security Holders, Including Indentures: (a) (b) (c) (d) (e) (f) (g) (h) Indenture, dated as of January 15, 1991, from Norfolk Southern Corporation to First Trust of New York, National Association, as Trustee, is incorporated by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Registration Statement on Form S-3 (No. 33-38595). First Supplemental Indenture, dated May 19, 1997, between Norfolk Southern Corporation and First Trust of New York, National Association, as Trustee, related to the issuance of notes in the principal amount of $4.3 billion, is incorporated herein by reference to Exhibit 1.1(d) to Norfolk Southern Corporation’s Form 8-K filed on May 21, 1997. Second Supplemental Indenture, dated April 26, 1999, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, is incorporated herein by reference to Exhibit 1.1(c) to Norfolk Southern Corporation’s Form 8-K filed on April 30, 1999. Fourth Supplemental Indenture, dated as of February 6, 2001, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $1 billion, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on February 7, 2001. Eighth Supplemental Indenture, dated as of September 17, 2004, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of 5.257% Notes due 2014 (Securities) in the aggregate principal amount of $441.5 million in connection with Norfolk Southern Corporation’s offer to exchange the Securities and cash for up to $400 million of its outstanding 7.350% Notes due 2007, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on September 23, 2004. Indenture, dated August 27, 2004, among PRR Newco, Inc., as Issuer, and Norfolk Southern Railway Company, as Guarantor, and The Bank of New York, as Trustee, is incorporated herein by reference to Exhibit 4(1) to Norfolk Southern Corporation’s Form 10-Q filed on October 28, 2004. First Supplemental Indenture, dated August 27, 2004, among PRR Newco, Inc., as Issuer, and Norfolk Southern Railway Company, as Guarantor, and The Bank of New York, as Trustee, related to the issuance of notes in the principal amount of approximately $451.8 million, is incorporated herein by reference to Exhibit 4(m) to Norfolk Southern Corporation’s Form 10-Q filed on October 28, 2004. Ninth Supplemental Indenture, dated as of March 11, 2005, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $300 million, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on March 15, 2005. K86 (i) (j) (k) (l) (m) (n) (o) (p) (q) (r) Tenth Supplemental Indenture, dated as of May 17, 2005, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $366.6 million, is incorporated herein by reference to Exhibit 99.1 to Norfolk Southern Corporation’s Form 8-K filed on May 18, 2005. Eleventh Supplemental Indenture, dated as of May 17, 2005, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $350 million, is incorporated herein by reference to Exhibit 99.2 to Norfolk Southern Corporation’s Form 8-K filed on May 18, 2005. Twelfth Supplemental Indenture, dated as of August 26, 2010, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $250 million, is incorporated herein by reference to Exhibit 4.2 to Norfolk Southern Corporation’s Form 8-K filed on August 26, 2010. Indenture, dated as of April 4, 2008, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $600 million, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on April 9, 2008. Indenture, dated as of January 15, 2009, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $500 million, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on January 20, 2009. Indenture, dated as of June 1, 2009, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on June 1, 2009. First Supplemental Indenture, dated as of June 1, 2009, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $500 million, is incorporated herein by reference to Exhibit 4.2 to Norfolk Southern Corporation’s Form 8-K filed on June 1, 2009. Second Supplemental Indenture, dated as of May 23, 2011, between the Registrant and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $400 million, is incorporated by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on May 23, 2011. Indenture, dated as of September 14, 2011, between the Registrant and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $595,504,000, is incorporated by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on September 15, 2011. Third Supplemental Indenture, dated as of September 14, 2011, between the Registrant and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $4,492,000, is incorporated by reference to Exhibit 4.2 to Norfolk Southern Corporation’s Form 8-K filed on September 15, 2011. K87 (s) (t) (u) (v) (w) (x) (y) Fourth Supplemental Indenture, dated as of November 17, 2011, between the Registrant and U.S. Bank Trust National Association, as Trustee, related to the issuance of two series of notes, one in the principal amount of $500 million and one in the principal amount of $100 million, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on November 17, 2011. Indenture, dated as of March 15, 2012, between the Registrant and U.S. Bank Trust National Association, as Trustee, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on March 15, 2012. First Supplemental Indenture, dated as of March 15, 2012, between the Registrant and U.S. Bank Trust National Association, as Trustee, is incorporated herein by reference to Exhibit 4.2 to Norfolk Southern Corporation’s Form 8-K filed on March 15, 2012. Indenture, dated as of August 20, 2012, between the Registrant and U.S. Bank Trust National Association, as Trustee, is incorporated herein by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed on August 21, 2012. Second Supplemental Indenture, dated as of September 7, 2012, between the Registrant and U.S. Bank Trust National Association, as Trustee, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on September 7, 2012. Third Supplemental Indenture, dated as of August 13, 2013, between the Registrant and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $500,000,000, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on August 13, 2013. Fourth Supplemental Indenture, dated as of November 21, 2013, between the Registrant and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $400,000,000, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation’s Form 8-K filed on November 21, 2013. In accordance with Item 601(b)(4)(iii) of Regulation S-K, copies of other instruments of Norfolk Southern Corporation and its subsidiaries with respect to the rights of holders of long-term debt are not filed herewith, or incorporated by reference, but will be furnished to the Commission upon request. 10 Material Contracts - (a) The Transaction Agreement, dated as of June 10, 1997, by and among CSX and CSX Transportation, Inc., Registrant, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation, and CRR Holdings LLC, with certain schedules thereto, previously filed, is incorporated herein by reference to Exhibit 10(a) to Norfolk Southern Corporation’s Form 10-K filed on February 24, 2003. K88 (b) (c) (d) (e) (f) (g) (h) (i) (j) Amendment No. 1 dated as of August 22, 1998, to the Transaction Agreement, dated as of June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail, Inc., Consolidated Rail Corporation, and CRR Holdings LLC, is incorporated herein by reference from Exhibit 10.1 to Norfolk Southern Corporation’s Form 10-Q filed on August 11, 1999. Amendment No. 2 dated as of June 1, 1999, to the Transaction Agreement, dated June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail, Inc., Consolidated Rail Corporation, and CRR Holdings LLC, is incorporated herein by reference from Exhibit 10.2 to Norfolk Southern Corporation’s Form 10-Q filed on August 11, 1999. Amendment No. 3 dated as of June 1, 1999, and executed in April 2004, to the Transaction Agreement, dated June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail, Inc., Consolidated Rail Corporation, and CRR Holdings LLC, is incorporated herein by reference from Exhibit 10(dd) to Norfolk Southern Corporation’s Form 10-Q filed on July 30, 2004. Amendment No. 5 to the Transaction Agreement, dated as of August 27, 2004, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail, Inc., Consolidated Rail Corporation, and CRR Holdings LLC, is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 8-K filed on September 2, 2004. Amendment No. 6 dated as of April 1, 2007, to the Transaction Agreement, dated June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Railway Company, Conrail, Inc., Consolidated Rail Corporation, and CRR Holdings LLC, is incorporated herein by reference to Exhibit 10.5 to Norfolk Southern Corporation’s Form 10-Q filed on July 27, 2007. Shared Assets Area Operating Agreement for North Jersey, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit 10.4 to Norfolk Southern Corporation’s Form 10-Q filed on August 11, 1999. Shared Assets Area Operating Agreement for Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit 10.6 to Norfolk Southern Corporation’s Form 10-Q filed on August 11, 1999. Shared Assets Area Operating Agreement for South Jersey/Philadelphia, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit 10.5 to Norfolk Southern Corporation’s Form 10-Q filed on August 11, 1999. Amendment No. 1, dated as of June 1, 2000, to the Shared Assets Area Operating Agreements for North Jersey, South Jersey/Philadelphia, and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibits thereto, is incorporated herein by reference to Exhibit 10(h) to Norfolk Southern Corporation’s Form 10-K filed on March 5, 2001. K89 (k) (l) (m) (n) (o) (p) (q) (r) Amendment No. 2, dated as of January 1, 2001, to the Shared Assets Area Operating Agreements for North Jersey, South Jersey/Philadelphia, and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibits thereto, is incorporated herein by reference to Exhibit 10(j) to Norfolk Southern Corporation’s Form 10-K filed on February 21, 2002. Amendment No. 3, dated as of June 1, 2001, and executed in May of 2002, to the Shared Assets Area Operating Agreements for North Jersey, South Jersey/Philadelphia, and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibits thereto, is incorporated herein by reference to Exhibit 10(k) to Norfolk Southern Corporation’s Form 10-K filed on February 24, 2003. Amendment No. 4, dated as of June 1, 2005, and executed in late June 2005, to the Shared Assets Area Operating Agreements for North Jersey, South Jersey/Philadelphia, and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibits thereto, is incorporated herein by reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K filed on July 1, 2005. Monongahela Usage Agreement, dated as of June 1, 1999, by and among CSX Transportation, Inc., Norfolk Southern Railway Company, Pennsylvania Lines LLC, and New York Central Lines LLC, with exhibit thereto, is incorporated herein by reference from -Exhibit 10.7 to Norfolk Southern Corporation’s Form 10-Q filed on August 11, 1999. The Agreement, entered into as of July 27, 1999, between North Carolina Railroad Company and Norfolk Southern Railway Company, is incorporated herein by reference from Exhibit 10(i) to Norfolk Southern Corporation’s Form 10-K filed on March 6, 2000. First Amendment, dated March 19, 2007, to the Master Agreement dated July 27, 1999, by and between North Carolina Railroad Company and Norfolk Southern Railway Company, is incorporated herein by reference to Exhibit 10.3 to Norfolk Southern Corporation’s Form 10-Q filed on July 27, 2007. Second Amendment, dated December 28, 2009, to the Master Agreement dated July 27, 1999, by and between North Carolina Railroad Company and Norfolk Southern Railway Company, is incorporated herein by reference to Exhibit 10(q) to Norfolk Southern Corporation’s Form 10-K filed on February 17, 2010 (Exhibits, annexes and schedules omitted. The Registrant will furnish supplementary copies of such materials to the SEC upon request). The Supplementary Agreement, entered into as of January 1, 1987, between the Trustees of the Cincinnati Southern Railway and The Cincinnati, New Orleans and Texas Pacific Railway Company (the latter a wholly owned subsidiary of Norfolk Southern Railway Company) – extending and amending a Lease, dated as of October 11, 1881 – is incorporated by reference to Exhibit 10(k) to Norfolk Southern Corporation’s Form 10-K filed on March 5, 2001. (s)*,** Norfolk Southern Corporation Executive Management Incentive Plan, as approved by shareholders May 13, 2010 and as amended September 27, 2011, April 26, 2012, and November 26, 2013. K90 (t)* (u)* (v)* (w)* (x)* (y) (z)* (aa) (bb) (cc)* The Norfolk Southern Corporation Officers’ Deferred Compensation Plan, as amended effective September 26, 2000, is incorporated herein by reference to Exhibit 10(n) to Norfolk Southern Corporation’s Form 10-K filed on March 5, 2001. The Norfolk Southern Corporation Directors’ Restricted Stock Plan, adopted January 1, 1994, and amended and restated effective as of August 1, 2012, is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 10-Q filed on October 25, 2012. Supplemental Benefit Plan of Norfolk Southern Corporation and Participating Subsidiary Companies, as amended effective January 1, 2009, is incorporated herein by reference to Exhibit 10.06 to Norfolk Southern Corporation’s Form 8-K filed on July 24, 2008. Amendment to the Supplemental Benefit Plan of Norfolk Southern Corporation and Participating Subsidiary Companies, effective as of January 1, 2009, is incorporated herein by reference to Exhibit 10(x) to Norfolk Southern Corporation’s Form 10-K filed on February 18, 2009. The Norfolk Southern Corporation Directors’ Charitable Award Program, as amended effective July 2007, is incorporated herein by reference to Exhibit 10.6 to Norfolk Southern Corporation’s Form 10-Q filed on July 27, 2007. The Norfolk Southern Corporation Thoroughbred Stock Option Plan, as amended effective July 22, 2013, is incorporated herein by reference to Exhibit 10.2 to Norfolk Southern Corporation’s Form 10-Q filed on July 24, 2013. The Norfolk Southern Corporation Executive Life Insurance Plan, as amended and restated effective November 1, 2009, is incorporated herein by reference to Exhibit 10(cc) to Norfolk Southern Corporation’s Form 10-K filed on February 17, 2010. Distribution Agreement, dated as of July 26, 2004, by and among CSX Corporation, CSX Transportation, Inc., CSX Rail Holding Corporation, CSX Northeast Holdings Corporation, Norfolk Southern Corporation, Norfolk Southern Railway Company, CRR Holdings LLC, Green Acquisition Corp., Conrail Inc., Consolidated Rail Corporation, New York Central Lines LLC, Pennsylvania Lines LLC, NYC Newco, Inc., and PRR Newco, Inc., is incorporated herein by reference to Exhibit 2.1 to Norfolk Southern Corporation’s Form 8-K filed on September 2, 2004. Tax Agreement, dated as of August 27, 2004, by and among Green Acquisition Corp., Conrail Inc., Consolidated Rail Corporation, New York Central Lines LLC, and Pennsylvania Lines LLC, is incorporated herein by reference to Exhibit 10.2 to Norfolk Southern Corporation’s Form 8-K filed on September 2, 2004. The description of Norfolk Southern Corporation’s executive physical reimbursement for non- employee directors and certain executives is incorporated herein by reference to Norfolk Southern Corporation’s Form 8-K filed on July 28, 2005. (dd)*,** The Norfolk Southern Corporation Long-Term Incentive Plan, as amended effective May 13, 2010, and as amended July 23, 2013, and November 26, 2013. K91 (ee) (ff) (gg) (hh) (ii)* (jj) (kk) (ll) (mm) (nn) (oo) The Transaction Agreement, dated as of December 1, 2005, by and among Norfolk Southern Corporation, The Alabama Great Southern Railroad Company, Kansas City Southern, and The Kansas City Southern Railway Company, is incorporated herein by reference to Exhibit 10(II) to Norfolk Southern Corporation’s Form 10-K filed on February 23, 2006 (Exhibits, annexes, and schedules omitted. The Registrant will furnish supplementary copies of such materials to the SEC upon request). Amendment No. 1, dated as of January 17, 2006, by and among Norfolk Southern Corporation, The Alabama Great Southern Railroad Company, Kansas City Southern, and The Kansas City Southern Railroad , is incorporated herein by reference to Exhibit 10(mm) to Norfolk Southern Corporation’s Form 10-K filed on February 23, 2006. Amendment No. 2, dated as of May 1, 2006, to the Transaction Agreement, dated as of December 1, 2005, by and among Norfolk Southern Corporation, The Alabama Great Southern Railroad Company, Kansas City Southern, and The Kansas City Southern Railway Company is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 8-K filed on May 4, 2006. Limited Liability Agreement of Meridian Speedway, LLC, dated as of May 1, 2006, by and among the Alabama Great Southern Railroad Company and Kansas City Southern, is incorporated herein by reference to Exhibit 10.2 to Norfolk Southern Corporation’s Form 8-K filed on May 4, 2006. Retirement Plan of Norfolk Southern Corporation and Participating Subsidiary Companies effective June 1, 1982, amended effective January 1, 2010, is incorporated herein by reference to Exhibit 10(rr) to Norfolk Southern Corporation’s Form 10-K filed on February 17, 2010. Transfer and Administration Agreement dated as of November 8, 2007, is incorporated herein by reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K filed on November 14, 2007. Amendment No. 2, dated as of May 19, 2009, to Transfer and Administration Agreement dated as of November 8, 2007, is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 10-Q filed on July 31, 2009. Amendment No. 3, dated as of August 21, 2009, to Transfer and Administration Agreement dated as of November 8, 2007, is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 10-Q filed on October 30, 2009. Amendment No. 4, dated as of October 22, 2009, to Transfer and Administration Agreement dated as of November 8, 2007, is incorporated herein by reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K filed on October 22, 2009. Amendment No. 5, dated as of December 23, 2009, to Transfer and Administration Agreement dated as of November 8, 2007, is incorporated herein by reference to Exhibit 10(xx) to Norfolk Southern Corporation’s Form 10-K filed on February 17, 2010. Amendment No. 6, dated as of August 30, 2010, to Transfer and Administration Agreement dated as of November 8, 2007, is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 10-Q filed on October 29, 2010. K92 (pp) (qq) (rr) (ss) (tt) (uu) (vv) (ww) (xx) (yy)* (zz)* Amendment No. 7, dated as of October 21, 2010, to Transfer and Administration Agreement dated as of November 8, 2007, is incorporated herein by reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K filed on October 22, 2010. Amendment No. 8, dated as of October 20, 2011, to Transfer and Administration Agreement dated as of November 8, 2007, is incorporated herein by reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K filed on October 20, 2011. Amendment No. 9, dated as of October 18, 2012, to Transfer and Administration Agreement dated as of November 8, 2007, is incorporated herein by reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K filed on October 22, 2012. Amendment No. 10, dated as of October 17, 2013, to Transfer and Administration Agreement dated as of November 8, 2007, is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 8-K filed on October 18, 2013. Dealer Agreement dated as of January 23, 2008, between the Registrant and J. P. Morgan Securities Inc. is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 8-K filed on January 25, 2008. Dealer Agreement dated as of January 23, 2008, between the Registrant and Goldman, Sachs & Co. is incorporated herein by reference to Exhibit 10.2 to Norfolk Southern Corporation’s Form 8-K filed on January 25, 2008. Omnibus Amendment, dated as of March 18, 2008, to the Transfer and Administration Agreement dated as of November 8, 2007, is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 10-Q filed on April 23, 2008. Transaction Agreement (Pan Am Transaction Agreement), dated May 15, 2008, by and among Norfolk Southern Railway Company, Pan Am Railways, Inc., Boston and Maine Corporation, and Springfield Terminal Railway Company, is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 10-Q filed on July 24, 2008 (Exhibits, annexes and schedules omitted. The Registrant will furnish supplementary copies of such materials to the SEC upon request). Letter Agreement, dated October 21, 2008, by and among Norfolk Southern Railway Company, Pan Am Railways, Inc., Boston and Maine Corporation, and Springfield Terminal Railway Company amending certain terms of the Pan Am Transaction Agreement, is incorporated herein by reference to Exhibit 10(rrr) to Norfolk Southern Corporation’s Form 10-K filed on February 18, 2009. Directors’ Deferred Fee Plan of Norfolk Southern Corporation, as amended effective January 1, 2009, is incorporated herein by reference to Exhibit 10.01 to Norfolk Southern Corporation’s Form 8-K filed on July 24, 2008. Norfolk Southern Corporation Executives’ Deferred Compensation Plan, as amended effective June 26, 2013, is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 10-Q filed on July 24, 2013. K93 (aaa)* (bbb)* (ccc) (ddd)* (eee)* (fff) Amendment to Norfolk Southern Corporation Officers’ Deferred Compensation Plan, effective January 1, 2008, is incorporated herein by reference to Exhibit 10.03 to Norfolk Southern Corporation’s Form 8-K filed on July 24, 2008. Norfolk Southern Corporation Restricted Stock Unit Plan, as amended effective January 1, 2009, is incorporated herein by reference to Exhibit 10.05 to Norfolk Southern Corporation’s Form 8-K filed on July 24, 2008. Amendment No. 1 to Transfer and Administration Agreement dated as of October 22, 2008, and effective as of October 23, 2008, is incorporated herein by reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K filed on October 23, 2006. Stock Unit Plan of Norfolk Southern Corporation dated as of July 24, 2001, as amended on August 21, 2008, with an effective date of January 1, 2009, is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 10-Q filed on October 24, 2008. Form of Amended and Restated Change in Control Agreement between Norfolk Southern Corporation and certain executive officers (including those defined as “named executive officers” and identified in the Corporation’s Proxy Statement for the 2008 annual Meetings of Stockholders), is incorporated herein by reference to Exhibit 10(aaaa) to Norfolk Southern Corporation’s Form 10- K filed on February 18, 2009. Limited Liability Company Agreement of Pan Am Southern LLC, dated as of April 9, 2009, is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 8-K filed on April 9, 2009 (exhibits, annexes, and schedules omitted – the Registrant will furnish supplementary copies of such materials to the SEC upon request). (ggg) Credit Agreement dated as of December 14, 2011, is incorporated herein by reference to Exhibit 99 to Norfolk Southern Corporation’s Form 8-K filed on December 15, 2011. (hhh)* Consulting Services Agreement between Norfolk Southern Corporation and John P. Rathbone, entered into on September 20, 2013, is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 8-K/A filed on September 24, 2013. (iii)*,** (jjj)*,** Form of Norfolk Southern Corporation Long-Term Incentive Plan, Award Agreement for Outside Directors approved by the Compensation Committee on November 25, 2013. Form of Norfolk Southern Corporation Long-Term Incentive Plan, Award Agreement for incentive stock options approved by the Compensation Committee on November 25, 2013. (kkk)*,** Form of Norfolk Southern Corporation Long-Term Incentive Plan, Award Agreement for performance share units approved by the Compensation Committee on November 25, 2013. (lll)*,** Form of Norfolk Southern Corporation Long-Term Incentive Plan, Award Agreement for non-qualified stock options approved by the Compensation Committee on November 25, 2013. (mmm)*,** Form of Norfolk Southern Corporation Long-Term Incentive Plan, Award Agreement for restricted stock units approved by the Compensation Committee on November 25, 2013. K94 (nnn)*,** Form of Norfolk Southern Corporation Long-Term Incentive Plan, Non-Compete Agreement Associated with Award Agreement, approved by the Compensation Committee on November 25, 2013. (ooo) (ppp) (qqq)* Performance Criteria for bonuses payable in 2015 for the 2014 incentive year. On January 20, 2014, the Compensation Committee of the Norfolk Southern Corporation Board of Directors adopted the following performance criteria for determining bonuses payable in 2015 for the 2014 incentive year under the Norfolk Southern Corporation Executive Management Incentive Plan: 50% based on operating income; 35% based on operating ratio; and 15% based on a composite of three transportation service measures, consisting of adherence to operating plan, connection performance, and train performance. Omnibus Amendment, dated as of January 17, 2011, to Pan Am Transaction Agreement dated as of May 15, 2008, and Limited Liability Company Agreement of Pan Am Southern LLC dated as of April 9, 2009, is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 10-Q filed on April 27, 2012. Form of Amendment to Amended and Restated Change in Control Agreements between Norfolk Southern Corporation and the Corporation’s Chairman, President and Chief Executive Officer, and each of the Corporation’s Executive Vice Presidents, to eliminate the excise tax gross-up provision in the Agreements, is incorporated herein by reference to Exhibit 10.1 to Norfolk Southern Corporation’s Form 8-K filed on January 23, 2013. 12** 21** 23** Statement re: Computation of Ratio of Earnings to Fixed Charges. Subsidiaries of the Registrant. Consent of Independent Registered Public Accounting Firm. 31-A** Rule 13a-14(a)/15d-014(a) CEO Certifications. 31-B** Rule 13a-14(a)/15d-014(a) CFO Certifications. 32** 99** Section 1350 Certifications. Annual CEO Certification pursuant to NYSE Rule 303A.12(a). K95 101** The following financial information from Norfolk Southern Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013, formatted in Extensible Business Reporting Language (XBRL) includes: (i) the Consolidated Statements of Income of each of the years ended December 31, 2013, 2012, and 2011; (ii) the Consolidated Statements of Comprehensive Income for each of the years ended December 31, 2012, 2011, and 2010; (iii) the Consolidated Balance Sheets at December 31, 2013 and 2012; (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012, and 2011; (v) the Consolidated Statements of Changes in Stockholders’ Equity for each of the three years ended December 31, 2013, 2012, and 2011; and (vi) the Notes to Consolidated Financial Statements. * Management contract or compensatory arrangement. ** Filed herewith. (B) Exhibits. The Exhibits required by Item 601 of Regulation S-K as listed in Item 15(A)3 are filed herewith or incorporated herein by reference. (C) Financial Statement Schedules. Financial statement schedules and separate financial statements specified by this Item are included in Item 15(A)2 or are otherwise not required or are not applicable. Exhibits 23, 31, 32, and 99 are included in copies assembled for public dissemination. All exhibits are included in the 2013 Form 10-K posted on our website at www.nscorp.com under “Investors” and “SEC Filings” or you may request copies by writing to: Office of Corporate Secretary Norfolk Southern Corporation Three Commercial Place Norfolk, Virginia 23510-9219 K96 POWER OF ATTORNEY Each person whose signature appears on the next page under SIGNATURES hereby authorizes James A. Hixon and Marta R. Stewart, or any one of them, to execute in the name of each such person, and to file, any amendments to this report, and hereby appoints James A. Hixon and Marta R. Stewart, or any one of them, as attorneys-in-fact to sign on his or her behalf, individually and in each capacity stated below, and to file, any and all amendments to this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Norfolk Southern Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 14th day of February, 2014. /s/Charles W. Moorman By: Charles W. Moorman (Chairman and Chief Executive Officer) K97 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 14th day of February, 2014, by the following persons on behalf of Norfolk Southern Corporation and in the capacities indicated. Signature Title /s/Charles W. Moorman (Charles W. Moorman) Chairman and Chief Executive Officer and Director (Principal Executive Officer) /s/Marta R. Stewart (Marta R. Stewart) /s/Thomas E. Hurlbut (Thomas E. Hurlbut) /s/Thomas D. Bell, Jr. (Thomas D. Bell, Jr.) /s/Erskine B. Bowles (Erskine B. Bowles) /s/Robert A. Bradway (Robert A. Bradway) /s/Wesley G. Bush (Wesley G. Bush) /s/Daniel A. Carp (Daniel A. Carp) /s/Karen N. Horn (Karen N. Horn) /s/Burton M. Joyce (Burton M. Joyce) /s/Steven F. Leer (Steven F. Leer) /s/Michael D. Lockhart (Michael D. Lockhart) /s/Amy E. Miles (Amy E. Miles) /s/Martin H. Nesbitt (Martin H. Nesbitt) /s/James A. Squires (James A. Squires) /s/John R. Thompson (John R. Thompson) Executive Vice President Finance and Chief Financial Officer (Principal Financial Officer) Vice President and Controller (Principal Accounting Officer) Director Director Director Director Director Director Director Director Director Director Director Director Director K98 Norfolk Southern Corporation and Subsidiaries Valuation and Qualifying Accounts Years ended December 31, 2011, 2012, and 2013 ($ in millions) Schedule II Additions charged to: Beginning Balance Expenses Other Accounts Deductions Ending Balance $ 21 $ - $ - $ 2 $ 19 261 102 (1) 1 89 (3) 275 254 16 133 (2) 202 (4) 201 $ 19 $ - $ - $ - $ 19 275 76 (1) - 93 (3) 258 201 18 157 (2) 193 (4) 183 $ 19 $ 13 $ - $ - $ 32 258 33 (1) - 77 (3) 214 183 15 101 (2) 133 (4) 166 Year ended December 31, 2011 Valuation allowance (included net in deferred tax liability) for deferred tax assets Casualty and other claims included in other liabilities Current portion of casualty and other claims included in accounts payable Year ended December 31, 2012 Valuation allowance (included net in deferred tax liability) for deferred tax assets Casualty and other claims included in other liabilities Current portion of casualty and other claims included in accounts payable Year ended December 31, 2013 Valuation allowance (included net in deferred tax liability) for deferred tax assets Casualty and other claims included in other liabilities Current portion of casualty and other claims included in accounts payable (1)Includes adjustments for changes in estimates for prior years’ claims. (2)Includes revenue refunds and overcharges provided through deductions from operating revenues and transfers from other accounts. (3)Payments and reclassifications to/from accounts payable. (4)Payments and reclassifications to/from other liabilities. K99 Intentionally Left Blank K100 finAnciAl highlights noRfolk southeRn coRpoRAtion & suBsidiARies foR the yeAR (numbers in millions, except per-share amounts) Railway operating revenues Income from railway operations Net income Per share – basic Per share – diluted Dividends per share Dividend pay-out ratio Cash provided by operating activities Property additions Free cash flow2 At yeAR end Total assets Total debt Stockholders’ equity Shares outstanding Stockholders’ equity per share finAnciAl RAtios Operating ratio Debt-to-total-capitalization ratio Total Stockholder Returns1 (dollars) $ 350 $ 300 $ 250 $ 200 $ 150 $ 100 $ 50 $ 0 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2013 11,245 3,257 1,910 6.10 6.04 2.04 33% 3,078 1,971 1,107 32,483 9,448 11,289 308.9 36.55 71.0% 45.6% 2012 11,040 $ $ $ $ $ $ $ $ $ $ $ $ $ 3,124 1,749 5.42 5.37 1.94 36% 3,065 2,241 824 30,342 8,682 9,760 314.0 31.08 71.7% 47.1% 2011 11,172 3,213 1,916 5.52 5.45 1.66 30% 3,227 2,160 1,067 28,538 7,540 9,911 330.4 30.00 71.2% 43.2% Railway Operating Revenues (in millions) $11,172 $11,245 $11,040 Income from Railway Operations (in millions) $3,213$3,124 $3,257 Free Cash Flow2 (in millions) $1,067 $1,107 $824 12/08 12/09 12/10 12/11 12/12 12/13 Norfolk Southern Corp. Common Stock S&P Railroad Stock Price Index S&P Composite-500 Stock Price Index 11 12 13 11 12 13 11 12 13 1 This graph provides an indicator of cumulative total stockholder returns for Norfolk Southern Corporation as compared to the other identified indices. Assumes that the value of the investment in Norfolk Southern Corporation common stock and each index was $100 on Dec. 31, 2008, and that all dividends were reinvested. Data furnished by Bloomberg Financial Markets. 2 Free cash flow as used here is defined as cash provided by operating activities minus property additions and is a measure of cash available for other investing activities and financing activities, including dividends and repurchases of common stock. descRiption of Business Norfolk Southern Corporation (NYSE: NSC) is one of the nation’s premier transportation companies. Our Norfolk Southern Railway Company subsidiary operates approximately 20,000 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. We operate the most extensive intermodal network in the East and are a major transporter of coal, automotive, and industrial products. stockholdeR infoRmAtion common stock Ticker symbol: NSC Our common stock is listed and traded on the New York Stock Exchange. puBlicAtions The following reports and publications are available on our website at www.nscorp.com and, upon written request, will be furnished in printed form to stockholders free of charge: - Annual Reports on Form 10-K - Quarterly Reports on Form 10-Q - Corporate Governance Guidelines - Board Committee Charters - Thoroughbred Code of Ethics - Code of Ethical Conduct for Senior Financial Officers - Categorical Independence Standards for Directors Stockholders desiring a printed copy of one or more of these reports and publications should send their request to the corporate secretary: Denise W. Hutson Corporate Secretary Norfolk Southern Corporation Three Commercial Place Norfolk, Va. 23510 757.823.5567 A notice and proxy statement for the annual meeting of stockholders are furnished to stockholders in advance of the meeting. Amendments to or waivers of the Thoroughbred Code of Ethics and/or the Code of Ethical Conduct for Senior Financial Officers that are required to be disclosed pursuant to Item 5.05 of the current report on Form 8-K will be disclosed on our website. ethics & compliAnce hotline High ethical standards always have been key to our success. Anyone who may be aware of a violation of our corporation’s Thoroughbred Code of Ethics is encouraged to contact our Ethics & Compliance Hotline at 800.732.9279. diVidends At its January 2014 meeting, our board of directors declared a quarterly dividend of 54 cents per share on its common stock, payable on March 10, 2014, to stockholders of record on Feb. 7, 2014. We usually pay quarterly dividends on our common stock on or about March 10, June 10, Sept. 10, and Dec. 10, when and if declared by our board of directors to stockholders of record. We have paid 126 consecutive quarterly dividends since our inception in 1982. Account AssistAnce For assistance with lost stock certificates, transfer requirements, the INVESTORS CHOICE Plan, address changes, dividend checks, and direct deposit of dividends, contact: American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, N.Y. 11219 877.864.4750 inVestoRs choice We and our transfer agent, American Stock Transfer & Trust Company LLC (AST), offer the INVESTORS CHOICE Plan for investors wishing to purchase or sell Norfolk Southern Corporation Common Stock. This plan is available to both present stockholders of record and individual investors wishing to make an initial purchase of Norfolk Southern Corporation Common Stock. Once enrolled in the plan, you can invest cash dividends when paid and make optional cash investments simply and conveniently. To take advantage of the INVESTORS CHOICE Plan, contact AST at 877.864.4750 or visit www.amstock.com. Once you are on this page, you may go to Invest Online to access information about the NS INVESTORS CHOICE Plan. finAnciAl inquiRies Marta R. Stewart Executive Vice President Finance and Chief Financial Officer Norfolk Southern Corp. Three Commercial Place Norfolk, Va. 23510 757.629.2770 inVestoR inquiRies Michael Hostutler Director Investor Relations Norfolk Southern Corp. Three Commercial Place Norfolk, Va. 23510 757.629.2861 coRpoRAte offices Executive Offices Norfolk Southern Corp. Three Commercial Place Norfolk, Va. 23510 757.629.2600 RegionAl offices 1200 Peachtree St. N.E. Atlanta, Ga. 30309 110 Franklin Road S.E. Roanoke, Va. 24042 AnnuAl RepoRt Requests & Information 800.531.6757 AnnuAl meeting May 8, 2014 8:30 a.m. EDT Williamsburg Lodge Conference Center 310 South England St. Williamsburg, Va. 23185 ouR Vision Be the sAfest, most customeR-focused, And successful tRAnspoRtAtion compAny in the woRld Three Commercial Place | Norfolk, Virginia 23510 | www.nscorp.com © 2014 Norfolk Southern Corporation - All Rights Reserved 10.0114.6657.105k N o r f o l k S o u t h e r n C o r p o r a t i o n | A n n u A l R e p o R t 2 0 1 3 w w w . n s c o r p . c o m 

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