filings.toolsItem 8. Financial Statements and Supplementary Data
138K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
K32
Report of Management
February 4, 2022
To the Stockholders
Norfolk Southern Corporation:
Management is responsible for establishing and maintaining adequate internal control over financial reporting. In order to ensure that Norfolk Southern’s internal control over financial reporting is effective, management regularly assesses such controls and did so most recently as of December 31, 2021. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that we maintained effective internal control over financial reporting as of December 31, 2021.
KPMG LLP, independent registered public accounting firm, has audited our financial statements and issued an attestation report on our internal control over financial reporting as of December 31, 2021.
| /s/ James A. Squires | /s/ Mark R. George | /s/ Clyde H. Allison, Jr. | ||||||||||||
| James A. Squires | Mark R. George | Clyde H. Allison, Jr. | ||||||||||||
| Chairman and | Executive Vice President Finance | Vice President and | ||||||||||||
| Chief Executive Officer | and Chief Financial Officer | Controller |
K33
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Norfolk Southern Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Norfolk Southern Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders’ equity for each of the years in the three-year period ended December 31, 2021, and the related notes and financial statement schedule of valuation and qualifying accounts as listed in Item 15(A)2 (collectively, the consolidated financial statements), and our report dated February 4, 2022 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
K34
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
KPMG LLP
Atlanta, Georgia
February 4, 2022
K35
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Norfolk Southern Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Norfolk Southern Corporation and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders’ equity for each of the years in the three‑year period ended December 31, 2021, and the related notes and financial statement schedule of valuation and qualifying accounts as listed in Item 15(A)2 (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 4, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
K36
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Sufficiency of audit evidence related to the capitalization of property expenditures
As discussed in Note 1 to the consolidated financial statements, expenditures that extend an asset’s useful life or increase its utility are capitalized. The Company has recorded $31,653 million in net book value of properties at December 31, 2021 and has recorded $1,470 million in property additions for the year ended December 31, 2021. Expenditures capitalized include those that are directly related to a capital project and may include materials, labor and other direct costs, in addition to an allocable portion of indirect costs that relate to a capital project. A significant portion of the Company’s annual capital spending relates to self-constructed assets. Costs related to repair and maintenance activities, that in the Company’s judgment, do not extend an asset’s useful life or increase its utility are expensed when such repairs are performed.
We identified the evaluation of the sufficiency of audit evidence related to capitalization of property expenditures as a critical audit matter. Subjective auditor judgment was required in determining procedures and evaluating audit results related to the capitalization of purchased services and compensation due to their usage for both self-constructed assets and repairs and maintenance.
The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over capitalized property expenditures. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to capitalize property expenditures, including controls over the determination of whether purchased services and compensation expenditures extend an asset’s useful life or increase its utility. For a sample of property addition expenditures, we inquired and inspected support to evaluate that the expenditure extended an asset’s useful life or increased its utility. We evaluated the sufficiency of audit evidence obtained by assessing the results of the procedures performed, including the appropriateness of the nature of such evidence.
/s/ KPMG LLP
KPMG LLP
We have served as the Company’s auditor since 1982.
Atlanta, Georgia
February 4, 2022
K37
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
| Years ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| ($ in millions, except per share amounts) | |||||||||||||||||
| Railway operating revenues | $ | 11,142 | $ | 9,789 | $ | 11,296 | |||||||||||
| Railway operating expenses | |||||||||||||||||
| Compensation and benefits | 2,442 | 2,373 | 2,751 | ||||||||||||||
| Purchased services and rents | 1,726 | 1,687 | 1,725 | ||||||||||||||
| Fuel | 799 | 535 | 953 | ||||||||||||||
| Depreciation | 1,181 | 1,154 | 1,138 | ||||||||||||||
| Materials and other | 547 | 653 | 740 | ||||||||||||||
| Loss on asset disposal | — | 385 | — | ||||||||||||||
| Total railway operating expenses | 6,695 | 6,787 | 7,307 | ||||||||||||||
| Income from railway operations | 4,447 | 3,002 | 3,989 | ||||||||||||||
| Other income – net | 77 | 153 | 106 | ||||||||||||||
| Interest expense on debt | 646 | 625 | 604 | ||||||||||||||
| Income before income taxes | 3,878 | 2,530 | 3,491 | ||||||||||||||
| Income taxes | 873 | 517 | 769 | ||||||||||||||
| Net income | $ | 3,005 | $ | 2,013 | $ | 2,722 | |||||||||||
| Earnings per share | |||||||||||||||||
| Basic | $ | 12.16 | $ | 7.88 | $ | 10.32 | |||||||||||
| Diluted | 12.11 | 7.84 | 10.25 |
See accompanying notes to consolidated financial statements.
K38
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
| Years ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| ($ in millions) | |||||||||||||||||
| Net income | $ | 3,005 | $ | 2,013 | $ | 2,722 | |||||||||||
| Other comprehensive income (loss), before tax: | |||||||||||||||||
| Pension and other postretirement benefits | 226 | (140) | 101 | ||||||||||||||
| Other comprehensive income (loss) of equity investees | 24 | 2 | (4) | ||||||||||||||
| Other comprehensive income (loss), before tax | 250 | (138) | 97 | ||||||||||||||
| Income tax benefit (expense) related to items of | |||||||||||||||||
| other comprehensive income (loss) | (58) | 35 | (25) | ||||||||||||||
| Other comprehensive income (loss), net of tax | 192 | (103) | 72 | ||||||||||||||
| Total comprehensive income | $ | 3,197 | $ | 1,910 | $ | 2,794 |
See accompanying notes to consolidated financial statements.
K39
Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
| At December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| ($ in millions) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 839 | $ | 1,115 | |||||||
| Accounts receivable – net | 976 | 848 | |||||||||
| Materials and supplies | 218 | 221 | |||||||||
| Other current assets | 134 | 134 | |||||||||
| Total current assets | 2,167 | 2,318 | |||||||||
| Investments | 3,707 | 3,590 | |||||||||
| Properties less accumulated depreciation of $12,031 and | |||||||||||
| $11,985, respectively | 31,653 | 31,345 | |||||||||
| Other assets | 966 | 709 | |||||||||
| Total assets | $ | 38,493 | $ | 37,962 | |||||||
| Liabilities and stockholders’ equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 1,351 | $ | 1,016 | |||||||
| Income and other taxes | 305 | 263 | |||||||||
| Other current liabilities | 312 | 302 | |||||||||
| Current maturities of long-term debt | 553 | 579 | |||||||||
| Total current liabilities | 2,521 | 2,160 | |||||||||
| Long-term debt | 13,287 | 12,102 | |||||||||
| Other liabilities | 1,879 | 1,987 | |||||||||
| Deferred income taxes | 7,165 | 6,922 | |||||||||
| Total liabilities | 24,852 | 23,171 | |||||||||
| Stockholders’ equity: | |||||||||||
| Common Stock $1.00 per share par value, 1,350,000,000 shares | |||||||||||
| authorized; outstanding 240,162,790 and 252,095,082 shares, | |||||||||||
| respectively, net of treasury shares | 242 | 254 | |||||||||
| Additional paid-in capital | 2,215 | 2,248 | |||||||||
| Accumulated other comprehensive loss | (402) | (594) | |||||||||
| Retained income | 11,586 | 12,883 | |||||||||
| Total stockholders’ equity | 13,641 | 14,791 | |||||||||
| Total liabilities and stockholders’ equity | $ | 38,493 | $ | 37,962 |
See accompanying notes to consolidated financial statements.
K40
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
| Years ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| ($ in millions) | |||||||||||||||||
| Cash flows from operating activities | |||||||||||||||||
| Net income | $ | 3,005 | $ | 2,013 | $ | 2,722 | |||||||||||
| Reconciliation of net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation | 1,181 | 1,154 | 1,139 | ||||||||||||||
| Deferred income taxes | 184 | 142 | 330 | ||||||||||||||
| Gains and losses on properties | (86) | (39) | (42) | ||||||||||||||
| Loss on asset disposal | — | 385 | — | ||||||||||||||
| Impairment of investment | — | 99 | — | ||||||||||||||
| Changes in assets and liabilities affecting operations: | |||||||||||||||||
| Accounts receivable | (133) | 71 | 87 | ||||||||||||||
| Materials and supplies | 3 | 23 | (37) | ||||||||||||||
| Other current assets | (6) | 3 | (4) | ||||||||||||||
| Current liabilities other than debt | 283 | 34 | (185) | ||||||||||||||
| Other – net | (176) | (248) | (118) | ||||||||||||||
| Net cash provided by operating activities | 4,255 | 3,637 | 3,892 | ||||||||||||||
| Cash flows from investing activities | |||||||||||||||||
| Property additions | (1,470) | (1,494) | (2,019) | ||||||||||||||
| Property sales and other transactions | 159 | 333 | 377 | ||||||||||||||
| Investment purchases | (10) | (13) | (18) | ||||||||||||||
| Investment sales and other transactions | 99 | (1) | (104) | ||||||||||||||
| Net cash used in investing activities | (1,222) | (1,175) | (1,764) | ||||||||||||||
| Cash flows from financing activities | |||||||||||||||||
| Dividends | (1,028) | (960) | (949) | ||||||||||||||
| Common Stock transactions | 17 | 69 | 27 | ||||||||||||||
| Purchase and retirement of Common Stock | (3,390) | (1,439) | (2,099) | ||||||||||||||
| Proceeds from borrowings – net of issuance costs | 1,676 | 784 | 2,192 | ||||||||||||||
| Debt repayments | (584) | (381) | (1,188) | ||||||||||||||
| Other | — | — | 23 | ||||||||||||||
| Net cash used in financing activities | (3,309) | (1,927) | (1,994) | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | (276) | 535 | 134 | ||||||||||||||
| Cash and cash equivalents | |||||||||||||||||
| At beginning of year | 1,115 | 580 | 446 | ||||||||||||||
| At end of year | $ | 839 | $ | 1,115 | $ | 580 | |||||||||||
| Supplemental disclosures of cash flow information | |||||||||||||||||
| Cash paid during the year for: | |||||||||||||||||
| Interest (net of amounts capitalized) | $ | 579 | $ | 577 | $ | 555 | |||||||||||
| Income taxes (net of refunds) | 654 | 311 | 543 | ||||||||||||||
See accompanying notes to consolidated financial statements.
K41
Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
| Common Stock | Additional Paid-in Capital | Accum. Other Comprehensive Loss | Retained Income | Total | |||||||||||||||||||||||||
| ($ in millions, except per share amounts) | |||||||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | 269 | $ | 2,216 | $ | (563) | $ | 13,440 | $ | 15,362 | |||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||
| Net income | 2,722 | 2,722 | |||||||||||||||||||||||||||
| Other comprehensive income | 72 | 72 | |||||||||||||||||||||||||||
| Total comprehensive income | 2,794 | ||||||||||||||||||||||||||||
| Dividends on Common Stock, | |||||||||||||||||||||||||||||
| $3.60 per share | (949) | (949) | |||||||||||||||||||||||||||
| Share repurchases | (11) | (88) | (2,000) | (2,099) | |||||||||||||||||||||||||
| Stock-based compensation | 1 | 81 | (6) | 76 | |||||||||||||||||||||||||
| Balance at December 31, 2019 | 259 | 2,209 | (491) | 13,207 | 15,184 | ||||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||
| Net income | 2,013 | 2,013 | |||||||||||||||||||||||||||
| Other comprehensive loss | (103) | (103) | |||||||||||||||||||||||||||
| Total comprehensive income | 1,910 | ||||||||||||||||||||||||||||
| Dividends on Common Stock, | |||||||||||||||||||||||||||||
| $3.76 per share | (960) | (960) | |||||||||||||||||||||||||||
| Share repurchases | (7) | (59) | (1,373) | (1,439) | |||||||||||||||||||||||||
| Stock-based compensation | 2 | 98 | (4) | 96 | |||||||||||||||||||||||||
| Balance at December 31, 2020 | 254 | 2,248 | (594) | 12,883 | 14,791 | ||||||||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||||||
| Net income | 3,005 | 3,005 | |||||||||||||||||||||||||||
| Other comprehensive income | 192 | 192 | |||||||||||||||||||||||||||
| Total comprehensive income | 3,197 | ||||||||||||||||||||||||||||
| Dividends on Common Stock, | |||||||||||||||||||||||||||||
| $4.16 per share | (1,028) | (1,028) | |||||||||||||||||||||||||||
| Share repurchases | (13) | (106) | (3,271) | (3,390) | |||||||||||||||||||||||||
| Stock-based compensation | 1 | 73 | (3) | 71 | |||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | 242 | $ | 2,215 | $ | (402) | $ | 11,586 | $ | 13,641 |
See accompanying notes to consolidated financial statements.
K42
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 Georgia-based holding company engaged principally in the rail transportation business, operating 19,300 route miles primarily in the Southeast, East, and Midwest. These consolidated financial statements include Norfolk Southern and its majority-owned and controlled subsidiaries (collectively, NS, we, us, and our). Norfolk Southern’s major subsidiary is NSR. All significant intercompany balances and transactions have been eliminated in consolidation.
NSR and its railroad subsidiaries transport raw materials, intermediate products, and finished goods classified in the following commodity groups (percent of total railway operating revenues in 2021): intermodal (28%); agriculture, forest and consumer products (20%); chemicals (18%); metals and construction (14%); coal (12%); and automotive (8%). Although most of our customers are domestic, ultimate points of origination or destination for some of the products transported (particularly coal bound for export and some intermodal shipments) may be outside the U.S. Approximately 80% of our railroad employees are covered by collective bargaining agreements with various labor unions.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We periodically review our estimates, including those related to the recoverability and useful lives of assets, as well as liabilities for litigation, environmental remediation, casualty claims, income taxes and pension and other postretirement benefits. Changes in facts and circumstances may result in revised estimates.
Revenue Recognition
Transportation revenues are recognized proportionally as a shipment moves from origin to destination, and related expenses are recognized as incurred. Certain of our contract refunds (which are primarily volume-based incentives) are recorded as a reduction to revenues on the basis of our best estimate of projected liability, which is based on historical activity, current shipment counts and expectation of future activity. Certain ancillary services, such as switching, demurrage and other incidental activities, may be provided to customers under their transportation contracts. These are distinct performance obligations that are recognized at a point in time when the services are performed or as contractual obligations are met.
Cash Equivalents
“Cash equivalents” are highly liquid investments purchased three months or less from maturity.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts was $8 million and $6 million at December 31, 2021 and 2020, respectively. To determine our allowance for doubtful accounts, we evaluate historical loss experience (which has not been significant), the characteristics of current accounts, and general economic conditions and trends.
K43
Materials and Supplies
“Materials and supplies,” consisting mainly of items for maintenance of property and equipment, are stated at the lower of average cost or net realizable value. The cost of materials and supplies expected to be used in property additions or improvements is included in “Properties.”
Investments
Investments in entities over which we have the ability to exercise significant influence but do not control the entity are accounted for using the equity method, whereby the investment is carried at the cost of the acquisition plus our equity in undistributed earnings or losses since acquisition.
Properties
“Properties” are stated principally at cost and are depreciated using the group method whereby assets with similar characteristics, use, and expected lives are grouped together in asset classes and depreciated using a composite depreciation rate. This methodology treats each asset class as a pool of resources, not as singular items. We use approximately 75 depreciable asset classes.
Depreciation expense is based on our assumptions concerning expected service lives of our properties as well as the expected net salvage that will be received upon their retirement. In developing these assumptions, we utilize periodic depreciation studies that are performed by an independent outside firm of consulting engineers and approved by the STB. Our depreciation studies are conducted about every three years for equipment and every six years for track assets and other roadway property. The frequency of these studies is consistent with guidelines established by the STB. We adjust our rates based on the results of these studies and implement the changes prospectively. The studies may also indicate that the recorded amount of accumulated depreciation is deficient (or in excess) of the amount indicated by the study. Any such deficiency (or excess) is amortized as a component of depreciation expense over the remaining service lives of the affected class of property, as determined by the study.
Key factors that are considered in developing average service life and salvage estimates include:
-
statistical analysis of historical retirement data and surviving asset records,
-
review of historical salvage received and current market rates,
-
review of our operations including expected changes in technology, customer demand, maintenance practices and asset management strategies,
-
review of accounting policies and assumptions, and
-
industry review and analysis.
The composite depreciation rate for rail in high density corridors is derived based on consideration of annual gross tons as compared to the total or ultimate capacity of rail in these corridors. Our experience has shown that traffic density is a leading factor in the determination of the expected service life of rail in high density corridors. In developing the respective depreciation rate, consideration is also given to several rail characteristics including age, weight, condition (new or second-hand) and type (curved or straight).
We capitalize interest on major projects during the period of their construction. Expenditures, including those on leased assets, that extend an asset’s useful life or increase its utility are capitalized. Expenditures capitalized include those that are directly related to a capital project and may include materials, labor, and other direct costs, in addition to an allocable portion of indirect costs that relate to a capital project. A significant portion of our annual capital spending relates to self-constructed assets. Removal activities occur in conjunction with replacement and are estimated based on the average percentage of time employees replacing assets spend on removal functions. Costs related to repairs and maintenance activities that, in our judgment, do not extend an asset’s useful life or increase its utility are expensed when such repairs are performed.
K44
When depreciable operating road and equipment assets are sold or retired in the ordinary course of business, the cost of the assets, net of sales proceeds or salvage, is charged to accumulated depreciation, and no gain or loss is recognized in earnings. Actual historical cost values are retired when available, such as with most equipment assets. The use of estimates in recording the retirement of certain roadway assets is necessary based on the impracticality of tracking individual asset costs. When retiring rail, ties and ballast, we use statistical curves that indicate the relative distribution of the age of the assets retired. The historical cost of other roadway assets is estimated using a combination of inflation indices specific to the rail industry and those published by the U.S. Bureau of Labor Statistics. The indices are applied to the replacement value based on the age of the retired assets. These indices are used because they closely correlate with the costs of roadway assets. Gains and losses on disposal of operating land are included in “Materials and other” expenses. Gains and losses on disposal of nonoperating land and nonrail assets are included in “Other income – net” since such income is not a product of our railroad operations.
A retirement is considered abnormal if it does not occur in the ordinary course of business, if it relates to disposition of a large segment of an asset class and if the retirement varies significantly from the retirement profile identified through our depreciation studies, which inherently consider the impact of normal retirements on expected service lives and depreciation rates. Gains or losses from abnormal retirements are recognized in income from railway operations.
We review the carrying amount of properties whenever events or changes in circumstances indicate that such carrying amount may not be recoverable based on future undiscounted cash flows. Assets that are deemed impaired as a result of such review are recorded at the lower of carrying amount or fair value.
New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Credit Losses - Measurement of Credit Losses on Financial Instruments,” which replaced the current incurred loss impairment method with a method that reflects expected credit losses. Short-term and long-term financial assets, as defined by the standard, are impacted by immediate recognition of estimated credit losses in the financial statements, reflecting the net amount expected to be collected. Historically, losses associated from the inability to collect on accounts receivable have been insignificant, with little divergence in collection trends through varying economic cycles. We adopted the standard on January 1, 2020 and there was no material impact to the financial statements upon adoption.
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which added new guidance to simplify the accounting for income taxes, changed the accounting for certain income tax transactions, and made other minor changes. We adopted the standard on January 1, 2021 and there was no material impact to the financial statements upon adoption.
K45
2. Railway Operating Revenues
The following table disaggregates our revenues by major commodity group:
| 2021 | 2020 | 2019 | ||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||
| Merchandise: | ||||||||||||||||||||
| Agriculture, forest and consumer products | $ | 2,251 | $ | 2,116 | $ | 2,256 | ||||||||||||||
| Chemicals | 1,951 | 1,809 | 2,092 | |||||||||||||||||
| Metals and construction | 1,562 | 1,333 | 1,461 | |||||||||||||||||
| Automotive | 905 | 830 | 994 | |||||||||||||||||
| Merchandise | 6,669 | 6,088 | 6,803 | |||||||||||||||||
| Intermodal | 3,163 | 2,654 | 2,824 | |||||||||||||||||
| Coal | 1,310 | 1,047 | 1,669 | |||||||||||||||||
| Total | $ | 11,142 | $ | 9,789 | $ | 11,296 |
We recognize the amount of revenues to which we expect to be entitled for the transfer of promised goods or services to customers. A performance obligation is created when a customer under a transportation contract or public tariff submits a bill of lading to us for the transport of goods. These performance obligations are satisfied as the shipments move from origin to destination. As such, transportation revenues are recognized proportionally as a shipment moves, and related expenses are recognized as incurred. These performance obligations are generally short-term in nature with transit days averaging approximately one week or less for each commodity group. The customer has an unconditional obligation to pay for the service once the service has been completed. Estimated revenues associated with in-process shipments at period-end are recorded based on the estimated percentage of service completed. We had no material remaining performance obligations at December 31, 2021 and 2020.
We may provide customers ancillary services, such as switching, demurrage and other incidental activities, under their transportation contracts. These are distinct performance obligations that are recognized at a point in time when the services are performed or as contractual obligations are met. These revenues are included within each of the commodity groups and represent approximately 7%, 5% and 5%, respectively, of total “Railway operating revenues” on the Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019.
Revenues related to interline transportation services that involve another railroad are reported on a net basis. Therefore, the portion of the amount that relates to another party is not reflected in revenues.
K46
Under the typical terms of our freight contracts, payment for services is due within fifteen days of billing the customer, thus there are no significant financing components. “Accounts receivable – net” on the Consolidated Balance Sheets includes both customer and non-customer receivables as follows:
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| ($ in millions) | ||||||||||||||
| Customer | $ | 741 | $ | 629 | ||||||||||
| Non-customer | 235 | 219 | ||||||||||||
| Accounts receivable – net | $ | 976 | $ | 848 |
Non-customer receivables include non-revenue-related amounts due from other railroads, governmental entities, and others. “Other assets” on the Consolidated Balance Sheets includes non-current customer receivables of $23 million at both December 31, 2021 and 2020. We do not have any material contract assets or liabilities at December 31, 2021 and 2020.
3. Other Income – Net
| 2021 | 2020 | 2019 | |||||||||||||||
| ($ in millions) | |||||||||||||||||
| Pension and other postretirement benefits (Note 12) | $ | 102 | $ | 91 | $ | 63 | |||||||||||
| COLI – net | 17 | 85 | 69 | ||||||||||||||
| Other | (42) | (23) | (26) | ||||||||||||||
| Total | $ | 77 | $ | 153 | $ | 106 |
4. Income Taxes
| 2021 | 2020 | 2019 | |||||||||||||||
| ($ in millions) | |||||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 553 | $ | 307 | $ | 356 | |||||||||||
| State | 136 | 68 | 83 | ||||||||||||||
| Total current taxes | 689 | 375 | 439 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | 186 | 111 | 280 | ||||||||||||||
| State | (2) | 31 | 50 | ||||||||||||||
| Total deferred taxes | 184 | 142 | 330 | ||||||||||||||
| Income taxes | $ | 873 | $ | 517 | $ | 769 |
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Reconciliation of Statutory Rate to Effective Rate
“Income taxes” on the Consolidated Statements of Income differs from the amounts computed by applying the statutory federal corporate tax rate as follows:
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||||||||||||||
| Federal income tax at statutory rate | $ | 814 | 21.0 | $ | 531 | 21.0 | $ | 733 | 21.0 | ||||||||||||||||||||||||||
| State income taxes, net of federal tax effect | 109 | 2.8 | 85 | 3.3 | 110 | 3.1 | |||||||||||||||||||||||||||||
| Excess tax benefits on stock-based compensation | (25) | (0.6) | (39) | (1.5) | (29) | (0.8) | |||||||||||||||||||||||||||||
| Other, net | (25) | (0.7) | (60) | (2.4) | (45) | (1.3) | |||||||||||||||||||||||||||||
| Income taxes | $ | 873 | 22.5 | $ | 517 | 20.4 | $ | 769 | 22.0 |
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:
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| ($ in millions) | |||||||||||
| Deferred tax assets: | |||||||||||
| Compensation and benefits, including postretirement benefits | $ | 181 | $ | 218 | |||||||
| Accruals, including casualty and other claims | 92 | 93 | |||||||||
| Other | 188 | 198 | |||||||||
| Total gross deferred tax assets | 461 | 509 | |||||||||
| Less valuation allowance | (60) | (57) | |||||||||
| Net deferred tax assets | 401 | 452 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Property | (7,016) | (6,820) | |||||||||
| Other | (550) | (554) | |||||||||
| Total deferred tax liabilities | (7,566) | (7,374) | |||||||||
| Deferred income taxes | $ | (7,165) | $ | (6,922) |
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 and state investment tax credits that may not be utilized prior to their expiration. The total valuation allowance increased by $3 million in both 2021 and 2020, and $4 million in 2019.
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Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| ($ in millions) | |||||||||||
| Balance at beginning of year | $ | 22 | $ | 24 | |||||||
| Additions based on tax positions related to the current year | 3 | 4 | |||||||||
| Additions for tax positions of prior years | 3 | — | |||||||||
| Settlements with taxing authorities | (5) | (4) | |||||||||
| Lapse of statutes of limitations | (2) | (2) | |||||||||
| Balance at end of year | $ | 21 | $ | 22 |
Included in the balance of unrecognized tax benefits at December 31, 2021 are potential benefits of $17 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.
The statute of limitations on Internal Revenue Service (IRS) examinations has expired for all years prior to 2018. The IRS accepted our 2012 amended income tax return. As a result, we received a refund of $46 million and recognized a tax benefit of $19 million in 2020. State income tax returns generally are subject to examination for a period of three to four years after filing 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 appeal, or litigation.
5. Fair Value Measurements
FASB Accounting Standards Codification (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: | ||||
| • quoted prices for similar assets or liabilities in active markets, • quoted prices for identical or similar assets or liabilities in inactive markets, • inputs other than quoted prices that are observable for the asset or liability, and • 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 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.
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Fair Values of Financial Instruments
The fair values of “Cash and cash equivalents,” “Accounts receivable – net,” and “Accounts payable” approximate carrying values because of the short maturity of these financial instruments. The carrying value of COLI is recorded at cash surrender value and, accordingly, approximates fair value. There are no other assets or liabilities measured at fair value on a recurring basis at December 31, 2021 or 2020. The carrying amounts and estimated fair values, based on Level 1 inputs, of long-term debt consist of the following at December 31:
| 2021 | 2020 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||
| Long-term debt, including current maturities | $ | (13,840) | $ | (17,033) | $ | (12,681) | $ | (16,664) |
6. Investments
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| ($ in millions) | |||||||||||
| Long-term investments: | |||||||||||
| Equity method investments: | |||||||||||
| Conrail | $ | 1,526 | $ | 1,446 | |||||||
| TTX Company | 851 | 798 | |||||||||
| Other | 420 | 418 | |||||||||
| Total equity method investments | 2,797 | 2,662 | |||||||||
| COLI at net cash surrender value | 885 | 902 | |||||||||
| Other investments | 25 | 26 | |||||||||
| Total long-term investments | $ | 3,707 | $ | 3,590 |
Investment in Conrail
Through a limited liability company, we and CSX jointly own Conrail, whose primary subsidiary is 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, 2021, our investment in Conrail exceeds our share of Conrail’s underlying net equity by $487 million.
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 payable to CRC for operation of the Shared Assets Areas totaling $147 million in 2021, $129 million in 2020, and $149 million in 2019. Future payments for access fees due to CRC under the Shared Assets Areas agreements are as follows: $42 million in 2022, $43 million in 2023, and $18 million
K50
in 2024. 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 $6 million annually.
In 2020, we converted $254 million of accounts payable into long-term advances from Conrail included in “Other liabilities.” “Accounts payable” includes $112 million at December 31, 2021, and $56 million at December 31, 2020, due to Conrail for the operation of the Shared Assets Areas. “Other liabilities” includes $534 million at December 31, 2021 and 2020, respectively, for long-term advances from Conrail, maturing in 2050 that bear interest at an average rate of 1.31%.
Our equity in Conrail’s earnings, net of amortization, was $56 million for 2021, $58 million for 2020, and $53 million for 2019. These amounts partially offset the costs of operating the Shared Assets Areas and are included in “Purchased services and rents.” Equity in Conrail’s earnings is included in the “Other – net” line item within operating activities in the Consolidated Statements of Cash Flows.
Investment in TTX
We and eight other North American railroads collectively own TTX Company (TTX), a railcar pooling company that provides its owner-railroads with standardized fleets of intermodal, automotive, and general use railcars at stated rates. We have a 19.65% ownership interest in TTX.
Expenses incurred for use of TTX equipment are included in “Purchased services and rents.” This amounted to $246 million, $250 million, and $244 million, respectively, for the years ended December 31, 2021, 2020 and 2019. Our equity in TTX’s earnings partially offsets these costs and totaled $53 million for 2021, $48 million for 2020, and $58 million for 2019. Equity in TTX’s earnings is included in the “Other – net” line item within operating activities in the Consolidated Statements of Cash Flows.
Impairment of Investment
In 2020, we recorded an other-than-temporary impairment of $99 million related to the carrying value of an equity method investment. This non-cash impairment charge is recorded in “Purchased services and rents” on the 2020 Consolidated Statements of Income and had a $74 million impact on net income.
K51
7. Properties
| Accumulated | Net Book | Depreciation | |||||||||||||||||||||
| December 31, 2021 | Cost | Depreciation | Value | Rate (1) | |||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||
| Land | $ | 2,453 | $ | — | $ | 2,453 | — | ||||||||||||||||
| Roadway: | |||||||||||||||||||||||
| Rail and other track material | 7,330 | (1,907) | 5,423 | 2.40 | % | ||||||||||||||||||
| Ties | 5,779 | (1,642) | 4,137 | 3.44 | % | ||||||||||||||||||
| Ballast | 3,041 | (818) | 2,223 | 2.79 | % | ||||||||||||||||||
| Construction in process | 339 | — | 339 | — | |||||||||||||||||||
| Other roadway | 14,111 | (3,733) | 10,378 | 2.69 | % | ||||||||||||||||||
| Total roadway | 30,600 | (8,100) | 22,500 | ||||||||||||||||||||
| Equipment: | |||||||||||||||||||||||
| Locomotives | 5,695 | (1,994) | 3,701 | 3.87 | % | ||||||||||||||||||
| Freight cars | 2,701 | (1,009) | 1,692 | 2.59 | % | ||||||||||||||||||
| Computers and software | 893 | (438) | 455 | 10.34 | % | ||||||||||||||||||
| Construction in process | 164 | — | 164 | — | |||||||||||||||||||
| Other equipment | 1,088 | (420) | 668 | 4.63 | % | ||||||||||||||||||
| Total equipment | 10,541 | (3,861) | 6,680 | ||||||||||||||||||||
| Other property | 90 | (70) | 20 | 2.25 | % | ||||||||||||||||||
| Total properties | $ | 43,684 | $ | (12,031) | $ | 31,653 |
K52
| Accumulated | Net Book | Depreciation | |||||||||||||||||||||
| December 31, 2020 | Cost | Depreciation | Value | Rate (1) | |||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||
| Land | $ | 2,394 | $ | — | $ | 2,394 | — | ||||||||||||||||
| Roadway: | |||||||||||||||||||||||
| Rail and other track material | 7,153 | (1,892) | 5,261 | 2.35 | % | ||||||||||||||||||
| Ties | 5,685 | (1,601) | 4,084 | 3.41 | % | ||||||||||||||||||
| Ballast | 2,973 | (774) | 2,199 | 2.76 | % | ||||||||||||||||||
| Construction in process | 297 | — | 297 | — | |||||||||||||||||||
| Other roadway | 14,320 | (3,926) | 10,394 | 2.71 | % | ||||||||||||||||||
| Total roadway | 30,428 | (8,193) | 22,235 | ||||||||||||||||||||
| Equipment: | |||||||||||||||||||||||
| Locomotives | 5,478 | (1,911) | 3,567 | 3.56 | % | ||||||||||||||||||
| Freight cars | 2,780 | (1,023) | 1,757 | 2.59 | % | ||||||||||||||||||
| Computers and software | 732 | (391) | 341 | 9.86 | % | ||||||||||||||||||
| Construction in process | 333 | — | 333 | — | |||||||||||||||||||
| Other equipment | 1,094 | (399) | 695 | 4.70 | % | ||||||||||||||||||
| Total equipment | 10,417 | (3,724) | 6,693 | ||||||||||||||||||||
| Other property | 91 | (68) | 23 | 2.24 | % | ||||||||||||||||||
| Total properties | $ | 43,330 | $ | (11,985) | $ | 31,345 |
(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.
Loss on Asset Disposal
In 2020, we sold 703 locomotives deemed excess and no longer needed for railroad operations. We evaluated these locomotive retirements and concluded they were abnormal (see Note 1). Accordingly, we recorded a $385 million loss to adjust their carrying amount to their estimated fair value, which resulted in a $97 million tax benefit.
Capitalized Interest
Total interest cost incurred on debt was $657 million, $639 million, and $620 million during 2021, 2020 and 2019, respectively, of which $11 million, $14 million, and $16 million was capitalized during 2021, 2020 and 2019, respectively.
K53
8. Current Liabilities
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| ($ in millions) | |||||||||||
| Accounts payable: | |||||||||||
| Accounts and wages payable | $ | 850 | $ | 552 | |||||||
| Casualty and other claims (Note 17) | 166 | 182 | |||||||||
| Vacation liability | 119 | 121 | |||||||||
| Due to Conrail (Note 6) | 112 | 56 | |||||||||
| Other | 104 | 105 | |||||||||
| Total | $ | 1,351 | $ | 1,016 | |||||||
| Other current liabilities: | |||||||||||
| Interest payable | $ | 150 | $ | 141 | |||||||
| Current operating lease liability (Note 10) | 82 | 89 | |||||||||
| Pension benefit obligations (Note 12) | 20 | 19 | |||||||||
| Other | 60 | 53 | |||||||||
| Total | $ | 312 | $ | 302 |
9. Debt
Debt maturities are presented below:
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| ($ in millions) | |||||||||||
| Notes and debentures, with weighted-average interest rates as of December 31, 2021: | |||||||||||
| 3.40% maturing to 2026 | $ | 2,699 | $ | 3,273 | |||||||
| 4.26% maturing 2027 to 2031 | 2,614 | 2,114 | |||||||||
| 4.02% maturing 2037 to 2055 | 8,097 | 7,497 | |||||||||
| 5.22% maturing 2097 to 2121 | 1,384 | 784 | |||||||||
| Finance leases | 22 | 25 | |||||||||
| Discounts, premiums, and debt issuance costs | (976) | (1,012) | |||||||||
| Total debt | 13,840 | 12,681 | |||||||||
| Less current maturities | (553) | (579) | |||||||||
| Long-term debt excluding current maturities | $ | 13,287 | $ | 12,102 |
K54
| Long-term debt maturities subsequent to 2022 are as follows: | |||||||||||
| 2023 | $ | 603 | |||||||||
| 2024 | 403 | ||||||||||
| 2025 | 554 | ||||||||||
| 2026 | 602 | ||||||||||
| 2027 and subsequent years | 11,125 | ||||||||||
| Total | $ | 13,287 |
In August 2021, we issued $600 million of 2.90% senior notes due 2051, resulting in $589 million in net proceeds.
In May 2021, we issued $500 million of 2.30% senior notes due 2031, resulting in $495 million in net proceeds and $600 million of 4.10% senior notes due 2121, resulting in $592 million in net proceeds. The net proceeds of the 2.30% senior notes due 2031 will be used to finance or refinance, in whole or in part, new or existing eligible projects with environmental benefits as outlined in our Green Financing Framework.
In May 2021, we renewed, amended and restated our accounts receivable securitization program with a maximum borrowing capacity of $400 million. The term expires in May 2022. We had no amounts outstanding under this program and our available borrowing capacity was $400 million at both December 31, 2021 and December 31, 2020.
Credit Agreement and Debt Covenants
We also have in place and available an $800 million credit agreement expiring in March 2025, which provides for borrowings at prevailing rates and includes covenants. We had no amounts outstanding under this facility at either December 31, 2021 or December 31, 2020, and we are in compliance with all of its covenants.
10. Leases
We are committed under long-term lease agreements for equipment, lines of road, and other property. We combine lease and non-lease components for new and reassessed leases. Some of these agreements are variable lease agreements that include usage-based payments. These agreements contain payment provisions that depend on an index or rate, initially measured using the index or rate at the lease commencement date, and are therefore not included in our future minimum lease payments. Our long-term lease agreements do not contain any material restrictive covenants.
Our equipment leases have remaining terms of less than 1 year to 5 years and our lines of road and land leases have remaining terms of less than 1 year to 136 years. Some of these leases include options to extend the leases for up to 99 years and some include options to terminate the leases within 30 days. Because we are not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term, and associated payments are excluded from future minimum lease payments.
Leases with an initial term of twelve months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.
K55
Operating lease amounts included on the Consolidated Balance Sheets are as follows:
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| ($ in millions) | ||||||||||||||
| Classification | ||||||||||||||
| Assets | ||||||||||||||
| ROU assets | Other assets | $ | 411 | $ | 433 | |||||||||
| Liabilities | ||||||||||||||
| Current lease liabilities | Other current liabilities | $ | 82 | $ | 89 | |||||||||
| Non-current lease liabilities | Other liabilities | 331 | 344 | |||||||||||
| Total lease liabilities | $ | 413 | $ | 433 |
The components of total lease expense, primarily included in “Purchased services and rents,” are as follows:
| 2021 | 2020 | ||||||||||
| ($ in millions) | |||||||||||
| Operating lease expense | $ | 106 | $ | 109 | |||||||
| Variable lease expense | 44 | 42 | |||||||||
| Short-term lease expense | 9 | 9 | |||||||||
| Total lease expense | $ | 159 | $ | 160 |
In March 2019, we entered into a non-cancellable lease for an office building. In 2021, the construction of the office building was completed and the lease commenced. The initial lease term is five years with options to renew, purchase, or sell the office building at the end of the lease term. The lease contains a residual value guarantee of up to eighty-three percent of the total construction cost of $499 million.
Other information related to operating leases is as follows:
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Weighted-average remaining lease term (years) on operating leases | 7.49 | 8.18 | |||||||||
| Weighted-average discount rates on operating leases | 3.04 | % | 3.50 | % |
As the rates implicit in most of our leases are not readily determinable, we use a collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. We use the portfolio approach and group leases into short-, medium-, and long-term categories, applying the corresponding incremental borrowing rates to these categories.
K56
During 2021 and 2020, respectively, ROU assets obtained in exchange for new operating lease liabilities were $57 million and $22 million. Cash paid for amounts included in the measurement of lease liabilities was $103 million and $109 million in 2021 and 2020, respectively, and is included in operating cash flows.
Future minimum lease payments under non-cancellable operating leases are as follows:
| December 31, 2021 | |||||
| ($ in millions) | |||||
| 2022 | $ | 92 | |||
| 2023 | 83 | ||||
| 2024 | 73 | ||||
| 2025 | 69 | ||||
| 2026 | 55 | ||||
| 2027 and subsequent years | 98 | ||||
| Total lease payments | 470 | ||||
| Less: Interest | 57 | ||||
| Present value of lease liabilities | $ | 413 |
| December 31, 2020 | |||||
| ($ in millions) | |||||
| 2021 | $ | 101 | |||
| 2022 | 76 | ||||
| 2023 | 67 | ||||
| 2024 | 58 | ||||
| 2025 | 57 | ||||
| 2026 and subsequent years | 145 | ||||
| Total lease payments | 504 | ||||
| Less: Interest | 71 | ||||
| Present value of lease liabilities | $ | 433 |
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11. Other Liabilities
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| ($ in millions) | |||||||||||
| Long-term advances from Conrail (Note 6) | $ | 534 | $ | 534 | |||||||
| Net pension benefit obligations (Note 12) | 338 | 340 | |||||||||
| Non-current operating lease liability (Note 10) | 331 | 344 | |||||||||
| Net other postretirement benefit obligations (Note 12) | 244 | 306 | |||||||||
| Casualty and other claims (Note 17) | 170 | 169 | |||||||||
| Deferred compensation | 109 | 107 | |||||||||
| Other | 153 | 187 | |||||||||
| Total | $ | 1,879 | $ | 1,987 |
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12. Pensions and Other Postretirement Benefits
We have both funded and unfunded defined benefit pension plans covering eligible employees. We also provide specified health care benefits to eligible retired employees; these plans can be amended or terminated at our option. Under our self-insured retiree health care plan, for those participants who are not Medicare-eligible, certain health care expenses are covered for retired employees and their dependents, reduced by any deductibles, coinsurance, and, in some cases, coverage provided under other group insurance policies. Eligible retired participants and their spouses who are Medicare-eligible are not covered under the self-insured retiree health care plan, but instead are provided with an employer-funded health reimbursement account which can be used for reimbursement of health insurance premiums or eligible out-of-pocket medical expenses.
Pension and Other Postretirement Benefit Obligations and Plan Assets
| Pension Benefits | Other Postretirement Benefits | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||
| Change in benefit obligations: | |||||||||||||||||||||||
| Benefit obligation at beginning of year | $ | 2,845 | $ | 2,588 | $ | 471 | $ | 457 | |||||||||||||||
| Service cost | 43 | 40 | 6 | 6 | |||||||||||||||||||
| Interest cost | 55 | 74 | 7 | 12 | |||||||||||||||||||
| Actuarial (gains) losses | (13) | 294 | (29) | 35 | |||||||||||||||||||
| Plan amendment | (2) | — | — | — | |||||||||||||||||||
| Benefits paid | (151) | (151) | (38) | (39) | |||||||||||||||||||
| Benefit obligation at end of year | 2,777 | 2,845 | 417 | 471 | |||||||||||||||||||
| Change in plan assets: | |||||||||||||||||||||||
| Fair value of plan assets at beginning of year | 2,675 | 2,462 | 165 | 170 | |||||||||||||||||||
| Actual return on plan assets | 317 | 345 | 29 | 21 | |||||||||||||||||||
| Employer contributions | 20 | 19 | 17 | 13 | |||||||||||||||||||
| Benefits paid | (151) | (151) | (38) | (39) | |||||||||||||||||||
| Fair value of plan assets at end of year | 2,861 | 2,675 | 173 | 165 | |||||||||||||||||||
| Funded status at end of year | $ | 84 | $ | (170) | $ | (244) | $ | (306) | |||||||||||||||
| Amounts recognized in the Consolidated Balance Sheets: | |||||||||||||||||||||||
| Other assets | $ | 442 | $ | 189 | $ | — | $ | — | |||||||||||||||
| Other current liabilities | (20) | (19) | — | — | |||||||||||||||||||
| Other liabilities | (338) | (340) | (244) | (306) | |||||||||||||||||||
| Net amount recognized | $ | 84 | $ | (170) | $ | (244) | $ | (306) | |||||||||||||||
| Amounts included in accumulated other comprehensive | |||||||||||||||||||||||
| loss (before tax): | |||||||||||||||||||||||
| Net loss | $ | 666 | $ | 869 | $ | 10 | $ | 57 | |||||||||||||||
| Prior service benefit | (2) | — | (202) | (228) |
K59
Our accumulated benefit obligation for our defined benefit pension plans is $2.6 billion at both December 31, 2021 and 2020, respectively. Our unfunded pension plans, included above, which in all cases have no assets, had projected benefit obligations of $358 million and $359 million at December 31, 2021 and 2020, respectively, and had accumulated benefit obligations of $332 million and $330 million at December 31, 2021 and 2020, respectively.
Pension and Other Postretirement Benefit Cost Components
| 2021 | 2020 | 2019 | |||||||||||||||
| ($ in millions) | |||||||||||||||||
| Pension benefits: | |||||||||||||||||
| Service cost | $ | 43 | $ | 40 | $ | 35 | |||||||||||
| Interest cost | 55 | 74 | 93 | ||||||||||||||
| Expected return on plan assets | (193) | (190) | (179) | ||||||||||||||
| Amortization of net losses | 66 | 51 | 43 | ||||||||||||||
| Amortization of prior service cost | — | 1 | 1 | ||||||||||||||
| Net benefit | $ | (29) | $ | (24) | $ | (7) | |||||||||||
| Other postretirement benefits: | |||||||||||||||||
| Service cost | $ | 6 | $ | 6 | $ | 6 | |||||||||||
| Interest cost | 7 | 12 | 17 | ||||||||||||||
| Expected return on plan assets | (12) | (14) | (14) | ||||||||||||||
| Amortization of net losses | 1 | — | — | ||||||||||||||
| Amortization of prior service benefit | (26) | (25) | (24) | ||||||||||||||
| Net benefit | $ | (24) | $ | (21) | $ | (15) |
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
| 2021 | |||||||||||
| Pension Benefits | Other Postretirement Benefits | ||||||||||
| ($ in millions) | |||||||||||
| Net gains arising during the year | $ | (137) | $ | (46) | |||||||
| Prior service effect of plan amendment | (2) | — | |||||||||
| Amortization of net losses | (66) | (1) | |||||||||
| Amortization of prior service benefit | — | 26 | |||||||||
| Total recognized in other comprehensive income | $ | (205) | $ | (21) | |||||||
| Total recognized in net periodic cost and other comprehensive income | $ | (234) | $ | (45) |
Net gains arising during the year for both pension benefits and other postretirement benefits were due primarily to higher actual returns on plan assets and increases in discount rates.
K60
The estimated net losses for the pension plans that will be amortized from accumulated other comprehensive loss into net periodic cost over the next year are $48 million. The estimated net losses and prior service benefit for the other postretirement benefit plans that will be amortized from accumulated other comprehensive loss into net periodic benefit over the next year is $25 million.
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:
| 2021 | 2020 | 2019 | |||||||||||||||
| Pension funded status: | |||||||||||||||||
| Discount rate | 2.97 | % | 2.67 | % | 3.38 | % | |||||||||||
| Future salary increases | 4.44 | % | 4.21 | % | 4.21 | % | |||||||||||
| Other postretirement benefits funded status: | |||||||||||||||||
| Discount rate | 2.72 | % | 2.27 | % | 3.13 | % | |||||||||||
| Pension cost: | |||||||||||||||||
| Discount rate - service cost | 3.14 | % | 3.71 | % | 4.55 | % | |||||||||||
| Discount rate - interest cost | 1.95 | % | 2.92 | % | 3.99 | % | |||||||||||
| Return on assets in plans | 8.00 | % | 8.25 | % | 8.25 | % | |||||||||||
| Future salary increases | 4.44 | % | 4.21 | % | 4.21 | % | |||||||||||
| Other postretirement benefits cost: | |||||||||||||||||
| Discount rate - service cost | 2.71 | % | 3.41 | % | 4.39 | % | |||||||||||
| Discount rate - interest cost | 1.57 | % | 2.69 | % | 3.83 | % | |||||||||||
| Return on assets in plans | 7.75 | % | 8.00 | % | 8.00 | % | |||||||||||
| Health care trend rate | 6.00 | % | 6.25 | % | 6.50 | % |
To determine the discount rates used to measure our benefit obligations, 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.
We use a spot rate approach to estimate the service cost and interest cost components of net periodic benefit cost for our pension and other postretirement benefit plans.
Health Care Cost Trend Assumptions
For measurement purposes at December 31, 2021, increases in the per capita cost of pre-Medicare covered health care benefits were assumed to be 6.50% for 2022. We assume the rate will ratably decrease to an ultimate rate of 5.0% for 2028 and remain at that level thereafter.
K61
Assumed health care cost trend rates affect the amounts reported in the financial statements. To illustrate, a one-percentage point change in the assumed health care cost trend would have the following effects:
| One-percentage Point | |||||||||||
| Increase | Decrease | ||||||||||
| ($ in millions) | |||||||||||
| Increase (decrease) in: | |||||||||||
| Total service and interest cost components | $ | 1 | $ | (1) | |||||||
| Postretirement benefit obligation | 7 | (7) |
Asset Management
Eleven investment firms manage our defined benefit pension plan’s assets under investment guidelines approved by our Benefits Investment Committee that is composed 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 plan’s assets. Fixed income investments must consist predominantly of securities rated investment grade or higher. Equity investments must be in liquid securities listed on national exchanges. No investment is permitted in our securities (except through commingled pension trust funds).
Our pension plan’s weighted-average asset allocations, by asset category, were as follows:
| Percentage of Plan Assets at December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Domestic equity securities | 52 | % | 52 | % | |||||||
| Debt securities | 24 | % | 22 | % | |||||||
| International equity securities | 23 | % | 24 | % | |||||||
| Cash and cash equivalents | 1 | % | 2 | % | |||||||
| Total | 100 | % | 100 | % |
The other postretirement benefit plan assets consist primarily of trust-owned variable life insurance policies with an asset allocation at December 31, 2021 of 65% in equity securities and 35% in debt securities compared with 68% in equity securities and 32% in debt securities at December 31, 2020. 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 historical returns for the plans’ asset classes determined from both actual plan returns and, over longer time periods, expected market returns for those asset classes. For 2022, we assume an 8.00% return on pension plan assets.
K62
Fair Value of Plan Assets
The 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 the security at the close of the active market.
Common collective trusts: The readily determinable fair value is based on the published fair value per unit of the trusts. The common collective trusts hold equity securities, fixed income securities and cash and cash equivalents.
Fixed income securities: Valued based on quotes received from independent pricing services or at an estimated price at which a dealer would pay for the security at year end using observable market-based inputs.
Commingled funds: The readily determinable fair value is based on the published fair value per unit of the funds. The commingled funds hold equity securities.
Cash and cash equivalents: Short-term Treasury 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.
The following table sets forth the pension plan’s assets by valuation technique level, within the fair value hierarchy. There were no level 3 valued assets at December 31, 2021 or 2020.
| December 31, 2021 | |||||||||||||||||
| Level 1 | Level 2 | Total | |||||||||||||||
| ($ in millions) | |||||||||||||||||
| Common stock | $ | 1,383 | $ | — | $ | 1,383 | |||||||||||
| Common collective trusts: | |||||||||||||||||
| International equity securities | — | 397 | 397 | ||||||||||||||
| Debt securities | — | 367 | 367 | ||||||||||||||
| Domestic equity securities | — | 189 | 189 | ||||||||||||||
| Fixed income securities: | |||||||||||||||||
| Government and agencies securities | — | 170 | 170 | ||||||||||||||
| Corporate bonds | — | 120 | 120 | ||||||||||||||
| Mortgage and other asset-backed securities | — | 33 | 33 | ||||||||||||||
| Commingled funds | — | 160 | 160 | ||||||||||||||
| Cash and cash equivalents | 42 | — | 42 | ||||||||||||||
| Total investments | $ | 1,425 | $ | 1,436 | $ | 2,861 |
K63
| December 31, 2020 | |||||||||||||||||
| Level 1 | Level 2 | Total | |||||||||||||||
| ($ in millions) | |||||||||||||||||
| Common stock | $ | 1,483 | $ | — | $ | 1,483 | |||||||||||
| Common collective trusts: | |||||||||||||||||
| International equity securities | — | 399 | 399 | ||||||||||||||
| Debt securities | — | 297 | 297 | ||||||||||||||
| Fixed income securities: | |||||||||||||||||
| Government and agencies securities | — | 146 | 146 | ||||||||||||||
| Corporate bonds | — | 117 | 117 | ||||||||||||||
| Mortgage and other asset-backed securities | — | 24 | 24 | ||||||||||||||
| Commingled funds | — | 149 | 149 | ||||||||||||||
| Cash and cash equivalents | 60 | — | 60 | ||||||||||||||
| Total investments | $ | 1,543 | $ | 1,132 | $ | 2,675 |
The 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 but may retain cash at times as well. The U.S. stock account and U.S. bond account are valued based on readily determinable fair values.
The other postretirement benefit plan assets consisted of trust-owned life insurance with fair values of $173 million and $165 million at December 31, 2021 and 2020, respectively, and are valued under level 2 of the fair value hierarchy. There were no level 1 or level 3 valued assets.
Contributions and Estimated Future Benefit Payments
In 2022, we expect to contribute approximately $20 million to our unfunded pension plans for payments to pensioners and approximately $34 million to our other postretirement benefit plans for retiree health and death benefits. We do not expect to contribute to our funded pension plan in 2022.
Benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
| Pension Benefits | Other Postretirement Benefits | ||||||||||
| ($ in millions) | |||||||||||
| 2022 | $ | 148 | $ | 34 | |||||||
| 2023 | 148 | 32 | |||||||||
| 2024 | 148 | 31 | |||||||||
| 2025 | 147 | 30 | |||||||||
| 2026 | 147 | 29 | |||||||||
| Years 2027 – 2031 | 738 | 134 |
K64
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 craft employees. Premiums under this plan are expensed as incurred and totaled $21 million in 2021, $22 million in 2020, and $31 million in 2019.
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, totaled $23 million in 2021, $21 million in 2020, and $22 million in 2019.
13. Stock-Based Compensation
Under the stockholder-approved LTIP, the Compensation Committee (Committee), which is made up of nonemployee members of the Board, or the Chief Executive Officer (when delegated authority by such 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 104,125,000 shares of our Common Stock, of which 8,609,075 remain available for future grants as of December 31, 2021.
The number of shares remaining for issuance under the 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. We use newly issued shares to satisfy any exercises and awards under the LTIP and the TSOP.
The 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, we have no further obligation to make any dividend equivalent payments unless employment of the participant is terminated as a result of qualifying retirement or disability. Should an employee terminate employment, they are not required to forfeit dividend equivalent payments already received. Outstanding PSUs do not receive dividend equivalent payments.
The Committee granted stock options, RSUs and PSUs pursuant to the LTIP for the last three years as follows:
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||
| Granted | Weighted- Average Grant-Date Fair Value | Granted | Weighted- Average Grant-Date Fair Value | Granted | Weighted- Average Grant-Date Fair Value | ||||||||||||||||||||||||||||||
| Stock options | 42,770 | $ | 62.49 | 43,770 | $ | 52.05 | 47,360 | $ | 45.74 | ||||||||||||||||||||||||||
| RSUs | 183,093 | 240.09 | 178,190 | 210.11 | 219,710 | 164.47 | |||||||||||||||||||||||||||||
| PSUs | 50,100 | 240.72 | 78,830 | 212.66 | 102,250 | 160.97 |
Recipients of certain RSUs and PSUs pursuant to the LTIP who retire prior to October 1st will forfeit awards received in the current year. Receipt of certain LTIP awards is contingent on the recipient having executed a non-compete agreement with the company.
K65
We account for our grants of stock options, RSUs, PSUs, and dividend equivalent payments in accordance with FASB 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. Compensation cost for the awards is recognized on a straight-line basis over the requisite service period for the entire award. Related compensation costs and tax benefits during the years were:
| 2021 | 2020 | 2019 | |||||||||||||||
| ($ in millions) | |||||||||||||||||
| Stock-based compensation expense | $ | 54 | $ | 28 | $ | 53 | |||||||||||
| Total tax benefit | 34 | 44 | 37 |
Stock Options
Option exercise prices 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. Holders of the options granted under the 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.
For all years, options granted under the LTIP and the 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.
The fair value of each option awarded was measured on the date of grant using the Black-Scholes valuation model. Expected volatility is based on implied volatility 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. Historical exercise data is used to estimate the average expected option term. The average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. A dividend yield of zero was used for the LTIP options during the vesting period. For 2021, 2020, and 2019, a dividend yield of 1.64%, 1.76%, and 2.06%, respectively, was used for all vested LTIP options.
The assumptions for the LTIP grants for the last three years are shown in the following table:
| 2021 | 2020 | 2019 | |||||||||||||||
| Average expected volatility | 26 | % | 22 | % | 23 | % | |||||||||||
| Average risk-free interest rate | 0.75 | % | 1.47 | % | 2.56 | % | |||||||||||
| Average expected option term | 7.5 years | 7.5 years | 7.2 years | ||||||||||||||
K66
A summary of changes in stock options is presented below:
| Stock Options | Weighted- Average Exercise Price | ||||||||||
| Outstanding at December 31, 2020 | 1,526,125 | $ | 98.17 | ||||||||
| Granted | 42,770 | 241.79 | |||||||||
| Exercised | (470,632) | 91.66 | |||||||||
| Forfeited | (2,368) | 94.31 | |||||||||
| Outstanding at December 31, 2021 | 1,095,895 | 106.58 |
The aggregate intrinsic value of options outstanding at December 31, 2021 was $209 million with a weighted-average remaining contractual term of 4.1 years. Of these options outstanding, 953,680 were exercisable and had an aggregate intrinsic value of $196 million with a weighted-average exercise price of $92.43 and a weighted-average remaining contractual term of 2.5 years.
The following table provides information related to options exercised for the last three years:
| 2021 | 2020 | 2019 | |||||||||||||||
| ($ in millions) | |||||||||||||||||
| Options exercised | 470,632 | 1,171,786 | 770,597 | ||||||||||||||
| Total intrinsic value | $ | 83 | $ | 144 | $ | 86 | |||||||||||
| Cash received upon exercise | 42 | 98 | 53 | ||||||||||||||
| Related tax benefits realized | 17 | 29 | 18 |
At December 31, 2021, total unrecognized compensation related to options granted under the LTIP was $1 million, and is expected to be recognized over a weighted-average period of approximately 2.6 years.
Restricted Stock Units
RSUs granted primarily have a four-year ratable restriction period and will be settled through the issuance of shares of Common Stock. Certain RSU grants include cash dividend equivalent payments during the restriction period in an amount equal to regular quarterly dividends paid on Common Stock.
| 2021 | 2020 | 2019 | |||||||||||||||
| ($ in millions) | |||||||||||||||||
| RSUs vested | 260,307 | 204,665 | 166,197 | ||||||||||||||
| Common Stock issued net of tax withholding | 184,319 | 146,047 | 119,346 | ||||||||||||||
| Related tax benefits realized | $ | 7 | $ | 4 | $ | 2 |
K67
A summary of changes in RSUs is presented below:
| RSUs | Weighted- Average Grant-Date Fair Value | ||||||||||
| Nonvested at December 31, 2020 | 600,240 | $ | 148.29 | ||||||||
| Granted | 183,093 | 240.09 | |||||||||
| Vested | (260,307) | 121.84 | |||||||||
| Forfeited | (21,923) | 201.84 | |||||||||
| Nonvested at December 31, 2021 | 501,103 | 193.23 |
At December 31, 2021, total unrecognized compensation related to RSUs was $34 million, and is expected to be recognized over a weighted-average period of approximately 2.6 years.
Performance Share Units
PSUs provide for awards based on the achievement of certain predetermined corporate performance goals at the end of a three-year cycle and are settled through the issuance of shares of Common Stock. All PSUs will earn out based on the achievement of performance conditions and some will also earn out based on a market condition. The market condition fair value was measured on the date of grant using a Monte Carlo simulation model.
| 2021 | 2020 | 2019 | |||||||||||||||
| ($ in millions) | |||||||||||||||||
| PSUs earned | 78,727 | 235,935 | 331,099 | ||||||||||||||
| Common Stock issued net of tax withholding | 49,967 | 156,477 | 221,241 | ||||||||||||||
| Related tax benefits realized | $ | 1 | $ | 7 | $ | 9 |
A summary of changes in PSUs is presented below:
| PSUs | Weighted- Average Grant-Date Fair Value | ||||||||||
| Balance at December 31, 2020 | 240,100 | $ | 171.34 | ||||||||
| Granted | 50,100 | 240.72 | |||||||||
| Earned | (78,727) | 147.75 | |||||||||
| Unearned | (4,143) | 147.75 | |||||||||
| Forfeited | (4,400) | 207.40 | |||||||||
| Balance at December 31, 2021 | 202,930 | 197.33 |
At December 31, 2021, total unrecognized compensation related to PSUs granted under the LTIP was $4 million, and is expected to be recognized over a weighted-average period of approximately 1.7 years.
K68
Shares Available and Issued
Shares of Common Stock available for future grants and issued in connection with all features of the LTIP and the TSOP at December 31, were as follows:
| 2021 | 2020 | 2019 | |||||||||||||||
| Available for future grants: | |||||||||||||||||
| LTIP | 8,609,075 | 8,995,582 | 9,294,726 | ||||||||||||||
| TSOP | 435,867 | 435,699 | 434,401 | ||||||||||||||
| Issued: | |||||||||||||||||
| LTIP | 632,279 | 1,270,208 | 852,869 | ||||||||||||||
| TSOP | 72,639 | 204,102 | 258,315 |
14. Stockholders’ Equity
Common Stock
Common Stock is reported net of shares held by our consolidated subsidiaries (Treasury Shares). Treasury Shares at December 31, 2021 and 2020 amounted to 20,320,777, with a cost of $19 million at both dates.
Accumulated Other Comprehensive Loss
The components of “Other comprehensive income (loss)” reported in the Consolidated Statements of Comprehensive Income and changes in the cumulative balances of “Accumulated other comprehensive loss” reported in the Consolidated Balance Sheets consisted of the following:
| Balance at Beginning of Year | Net Income (Loss) | Reclassification Adjustments | Balance at End of Year | ||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||
| Year ended December 31, 2021 | |||||||||||||||||||||||
| Pensions and other postretirement liabilities | $ | (526) | $ | 139 | $ | 31 | $ | (356) | |||||||||||||||
| Other comprehensive income of equity investees | (68) | 22 | — | (46) | |||||||||||||||||||
| Accumulated other comprehensive loss | $ | (594) | $ | 161 | $ | 31 | $ | (402) | |||||||||||||||
| Year ended December 31, 2020 | |||||||||||||||||||||||
| Pensions and other postretirement liabilities | $ | (421) | $ | (125) | $ | 20 | $ | (526) | |||||||||||||||
| Other comprehensive income of equity investees | (70) | 2 | — | (68) | |||||||||||||||||||
| Accumulated other comprehensive loss | $ | (491) | $ | (123) | $ | 20 | $ | (594) |
K69
Other Comprehensive Income (Loss)
“Other comprehensive income (loss)” reported in the Consolidated Statements of Comprehensive Income consisted of the following:
| Pretax Amount | Tax (Expense) Benefit | Net-of-Tax Amount | |||||||||||||||
| ($ in millions) | |||||||||||||||||
| Year ended December 31, 2021 | |||||||||||||||||
| Net gain arising during the year: | |||||||||||||||||
| Pensions and other postretirement benefits | $ | 185 | $ | (46) | $ | 139 | |||||||||||
| Reclassification adjustments for costs included in net income | 41 | (10) | 31 | ||||||||||||||
| Subtotal | 226 | (56) | 170 | ||||||||||||||
| Other comprehensive income of equity investees | 24 | (2) | 22 | ||||||||||||||
| Other comprehensive income | $ | 250 | $ | (58) | $ | 192 | |||||||||||
| Year ended December 31, 2020 | |||||||||||||||||
| Net loss arising during the year: | |||||||||||||||||
| Pensions and other postretirement benefits | $ | (167) | $ | 42 | $ | (125) | |||||||||||
| Reclassification adjustments for costs included in net income | 27 | (7) | 20 | ||||||||||||||
| Subtotal | (140) | 35 | (105) | ||||||||||||||
| Other comprehensive income of equity investees | 2 | — | 2 | ||||||||||||||
| Other comprehensive loss | $ | (138) | $ | 35 | $ | (103) | |||||||||||
| Year ended December 31, 2019 | |||||||||||||||||
| Net gain arising during the year: | |||||||||||||||||
| Pensions and other postretirement benefits | $ | 81 | $ | (20) | $ | 61 | |||||||||||
| Reclassification adjustments for costs included in net income | 20 | (5) | 15 | ||||||||||||||
| Subtotal | 101 | (25) | 76 | ||||||||||||||
| Other comprehensive loss of equity investees | (4) | — | (4) | ||||||||||||||
| Other comprehensive income | $ | 97 | $ | (25) | $ | 72 |
15. Stock Repurchase Programs
We repurchased and retired 12.7 million, 7.4 million, and 11.3 million shares of Common Stock under our stock repurchase programs in 2021, 2020, and 2019, respectively, at a cost of $3.4 billion, $1.4 billion, and $2.1 billion, respectively.
K70
On September 26, 2017, our Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2022. As of December 31, 2021, 8.0 million shares remain authorized for repurchase.
16. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share:
| Basic | Diluted | ||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||
| ($ in millions except per share amounts, shares in millions) | |||||||||||||||||||||||||||||||||||
| Net income | $ | 3,005 | $ | 2,013 | $ | 2,722 | $ | 3,005 | $ | 2,013 | $ | 2,722 | |||||||||||||||||||||||
| Dividend equivalent payments | (2) | (3) | (5) | — | (2) | — | |||||||||||||||||||||||||||||
| Income available to common stockholders | $ | 3,003 | $ | 2,010 | $ | 2,717 | $ | 3,005 | $ | 2,011 | $ | 2,722 | |||||||||||||||||||||||
| Weighted-average shares outstanding | 246.9 | 255.1 | 263.3 | 246.9 | 255.1 | 263.3 | |||||||||||||||||||||||||||||
| Dilutive effect of outstanding options | |||||||||||||||||||||||||||||||||||
| and share-settled awards | 1.2 | 1.5 | 2.3 | ||||||||||||||||||||||||||||||||
| Adjusted weighted-average shares outstanding | 248.1 | 256.6 | 265.6 | ||||||||||||||||||||||||||||||||
| Earnings per share | $ | 12.16 | $ | 7.88 | $ | 10.32 | $ | 12.11 | $ | 7.84 | $ | 10.25 |
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 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. There are no options excluded from the dilution calculations due to exercise prices exceeding the average market price of Common Stock for each of the years ended December 31, 2021, 2020, and 2019.
17. Commitments and Contingencies
Lawsuits
We and/or certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations. When we conclude that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to earnings and, if material, disclosed below. While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payment of such liability and claims. However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter. Any adjustments to the recorded liability will be reflected in earnings in the periods in which such adjustments become known. For lawsuits and other claims where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established but the matter, if potentially material, is disclosed below. We routinely review relevant information with respect to our lawsuits and other claims and update our accruals, disclosures and estimates of reasonably possible loss based on such reviews.
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In 2007, various antitrust class actions filed against us and other Class I railroads in various Federal district courts regarding fuel surcharges were consolidated in the District of Columbia by the Judicial Panel on Multidistrict Litigation. In 2012, the court certified the case as a class action. The defendant railroads appealed this certification, and the Court of Appeals for the District of Columbia vacated the District Court’s decision and remanded the case for further consideration. On October 10, 2017, the District Court denied class certification. The decision was upheld by the Court of Appeals on August 16, 2019. Since that decision, various individual cases have been filed in multiple jurisdictions and also consolidated in the District of Columbia. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases. We do not believe the outcome of these proceedings will have a material effect on our financial position, results of operations, or liquidity.
In 2018, a lawsuit was filed against one of our subsidiaries by the minority owner in a jointly-owned terminal railroad company in which our subsidiary has the majority ownership. The lawsuit alleged violations of various state laws and federal antitrust laws. It is reasonably possible that we could incur a loss in the case; however, we intend to vigorously defend the case and believe that we will prevail. The potential range of loss cannot be estimated at this time.
Casualty Claims
Casualty claims include employee personal injury and occupational claims as well as third-party claims, all exclusive of legal costs. To aid in valuing our personal injury liability and determining the amount to accrue with respect to such claims during the year, we utilize studies prepared by an independent consulting actuarial firm. Job-related personal injury and occupational claims are subject to FELA, which is applicable only to railroads. The variability inherent in FELA’s fault-based tort system could result in actual costs being different from the liability recorded. While the ultimate amount of claims incurred is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payments of claims and is supported by the most recent actuarial study. In all cases, we record a liability when the expected loss for the claim is both probable and reasonably estimable.
Employee personal injury claims – The largest component of claims expense is employee personal injury costs. The independent actuarial firm we engage provides quarterly studies to aid in valuing our employee personal injury liability and estimating personal injury expense. The actuarial firm studies our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences. The actuarial firm uses the results of these analyses to estimate the ultimate amount of liability. We adjust the liability quarterly based upon our assessment and the results of the study. The accuracy of our estimate of the liability is subject to inherent limitation given the difficulty of predicting future events such as jury decisions, court interpretations, or legislative changes. As a result, actual claim settlements may vary from the estimated liability recorded.
Occupational claims – Occupational claims include injuries and illnesses alleged to be caused by exposures which occur over time as opposed to injuries or illnesses caused by a specific accident or event. Types of occupational claims commonly seen allege exposure to asbestos and other claimed toxic substances resulting in respiratory diseases or cancer. Many such claims are being asserted by former or retired employees, some of whom have not been employed in the rail industry for decades. The independent actuarial firm provides an estimate of the occupational claims liability based upon our history of claim filings, severity, payments, and other pertinent facts. The liability is dependent upon judgments we make as to the specific case reserves as well as judgments of the actuarial firm in the quarterly studies. Our estimate of ultimate loss includes a provision for those claims that have been incurred but not reported. This provision is derived by analyzing industry data and projecting our experience. We adjust the liability quarterly based upon our assessment and the results of the study. However, it is possible that the recorded liability may not be adequate to cover the future payment of claims. Adjustments to the recorded liability are reflected in operating expenses in the periods in which such adjustments become known.
Third-party claims – We record a liability for third-party claims including those for highway crossing accidents, trespasser and other injuries, property damage, and lading damage. The actuarial firm assists us with the calculation of potential liability for third-party claims, except lading damage, based upon our experience including the number
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and timing of incidents, amount of payments, settlement rates, number of open claims, and legal defenses. We adjust the liability quarterly based upon our assessment and the results of the study. Given the inherent uncertainty in regard to the ultimate outcome of third-party claims, it is possible that the actual loss may differ from the estimated liability recorded.
Environmental Matters
We are subject to various jurisdictions’ environmental laws and regulations. We record a liability where such liability or loss is probable and reasonably estimable. Environmental specialists regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates.
Our Consolidated Balance Sheets include liabilities for environmental exposures of $49 million at December 31, 2021, and $54 million at December 31, 2020, of which $15 million is classified as a current liability at the end of both 2021 and 2020. At December 31, 2021, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 88 known locations and projects compared with 100 locations and projects at December 31, 2020. At December 31, 2021, sixteen sites accounted for $36 million of the liability, and no individual site was considered to be material. We anticipate that most of this liability will be paid out over five years; however, some costs will be paid out over a longer period.
At eight locations, one or more of our subsidiaries in conjunction with a number of other parties have been identified as potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or comparable state statutes that impose joint and several liability for cleanup costs. We calculate our estimated liability for these sites based on facts and legal defenses applicable to each site and not solely on the basis of the potential for joint liability.
With respect to known environmental sites (whether identified by us or by the Environmental Protection Agency or comparable state authorities), estimates of our ultimate potential financial exposure for a given site or in the aggregate for all such sites can change over time because of the widely varying costs of currently available cleanup techniques, unpredictable contaminant recovery and reduction rates associated with available cleanup technologies, the likely development of new cleanup technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant’s share of any estimated loss (and that participant’s ability to bear it), and evolving statutory and regulatory standards governing liability.
The risk of incurring environmental liability for acts and omissions, past, present, and future, is inherent in the railroad business. Some of the commodities we transport, particularly those classified as hazardous materials, pose special risks that we work diligently to reduce. In addition, several of our subsidiaries own, or have owned, land used as operating property, or which is leased and operated by others, or held for sale. Because environmental problems that are latent or undisclosed may exist on these properties, there can be no assurance that we will not incur environmental liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably at this time. Moreover, lawsuits and claims involving these and potentially other unidentified environmental sites and matters are likely to arise from time to time. The resulting liabilities could have a significant effect on financial position, results of operations, or liquidity in a particular year or quarter.
Based on our assessment of the facts and circumstances now known, we believe we have recorded the probable and reasonably estimable costs for dealing with those environmental matters of which we are aware. Further, we believe that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, or liquidity.
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Insurance
We purchase insurance covering legal liabilities for bodily injury and property damage to third parties. This insurance provides coverage above $75 million and below $800 million ($1.1 billion for specific perils) per occurrence and/or policy year. In addition, we purchase insurance covering damage to property owned by us or in our care, custody, or control. This insurance covers 87% of potential losses above $75 million and below $275 million per occurrence and/or policy year.
Purchase Commitments
At December 31, 2021, we had outstanding purchase commitments totaling $916 million through 2030 for locomotives, track material, long-term service contracts, track and yard expansion projects in connection with our capital programs, freight cars and containers.
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.
Indemnifications
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.
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