Item 1. Financial Statements

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

			Third Quarter												First Nine Months
			2021						2020						2021						2020
			($ in millions, except per share amounts)
Railway operating revenues			$	2,852					$	2,506					$	8,290					$	7,216
Railway operating expenses
Compensation and benefits			609						578						1,844						1,786
Purchased services and rents			432						486						1,254						1,261
Fuel			208						126						573						399
Depreciation			297						293						883						867
Materials and other			170						183						418						500
Loss on asset disposal			—						—						—						385
Total railway operating expenses			1,716						1,666						4,972						5,198
Income from railway operations			1,136						840						3,318						2,018
Other income – net			14						39						56						110
Interest expense on debt			164						155						481						465
Income before income taxes			986						724						2,893						1,663
Income taxes			233						155						648						321
Net income			$	753					$	569					$	2,245					$	1,342
Earnings per share
Basic			$	3.07					$	2.23					$	9.03					$	5.24
Diluted			3.06						2.22						8.99						5.21

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

			Third Quarter												First Nine Months
			2021						2020						2021						2020
			($ in millions)
Net income			$	753					$	569					$	2,245					$	1,342
Other comprehensive income, before tax:
Pension and other postretirement benefits			10						7						31						20
Other comprehensive income of equity investees			—						—						—						6
Other comprehensive income, before tax			10						7						31						26
Income tax expense related to items of other
comprehensive income			(3)						(3)						(8)						(6)
Other comprehensive income, net of tax			7						4						23						20
Total comprehensive income			$	760					$	573					$	2,268					$	1,362

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

			September 30, 2021						December 31, 2020
			($ in millions)
Assets
Current assets:
Cash and cash equivalents			$	1,465					$	1,115
Accounts receivable – net			945						848
Materials and supplies			235						221
Other current assets			77						134
Total current assets			2,722						2,318
Investments			3,684						3,590
Properties less accumulated depreciation of $11,867
and $11,985, respectively			31,429						31,345
Other assets			769						709
Total assets			$	38,604					$	37,962
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable			$	1,196					$	1,016
Income and other taxes			272						263
Other current liabilities			384						302
Current maturities of long-term debt			558						579
Total current liabilities			2,410						2,160
Long-term debt			13,274						12,102
Other liabilities			1,944						1,987
Deferred income taxes			7,089						6,922
Total liabilities			24,717						23,171
Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 243,344,509 and 252,095,082 shares,
respectively, net of treasury shares			244						254
Additional paid-in capital			2,224						2,248
Accumulated other comprehensive loss			(571)						(594)
Retained income			11,990						12,883
Total stockholders’ equity			13,887						14,791
Total liabilities and stockholders’ equity			$	38,604					$	37,962

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

						First Nine Months
						2021						2020
						($ in millions)
Cash flows from operating activities
			Net income			$	2,245					$	1,342
			Reconciliation of net income to net cash provided by operating activities:
			Depreciation			883						867
			Deferred income taxes			158						78
			Gains and losses on properties			(80)						(14)
			Loss on asset disposal			—						385
			Impairment of investment			—						99
			Changes in assets and liabilities affecting operations:
			Accounts receivable			(102)						36
			Materials and supplies			(14)						(3)
			Other current assets			57						55
			Current liabilities other than debt			294						104
			Other – net			(128)						(182)
			Net cash provided by operating activities			3,313						2,767
Cash flows from investing activities
			Property additions			(1,025)						(1,053)
			Property sales and other transactions			135						291
			Investment purchases			(5)						(6)
			Investment sales and other transactions			48						(50)
			Net cash used in investing activities			(847)						(818)
Cash flows from financing activities
			Dividends			(764)						(722)
			Common stock transactions			8						53
			Purchase and retirement of common stock			(2,460)						(960)
			Proceeds from borrowings			1,676						784
			Debt repayments			(576)						(325)
			Net cash used in financing activities			(2,116)						(1,170)
			Net increase in cash and cash equivalents			350						779
Cash and cash equivalents
			At beginning of year			1,115						580
			At end of period			$	1,465					$	1,359
Supplemental disclosures of cash flow information
			Cash paid during the period for:
			Interest (net of amounts capitalized)			$	391					$	395
			Income taxes (net of refunds)			468						118

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

			Common Stock						Additional Paid-in Capital						Accum. Other Comprehensive Loss						Retained Income						Total
			($ in millions, except per share amounts)
Balance at December 31, 2020			$	254					$	2,248					$	(594)					$	12,883					$	14,791
Comprehensive income:
Net income																					673						673
Other comprehensive income															8												8
Total comprehensive income																											681
Dividends on common stock,
$0.99 per share																					(249)						(249)
Share repurchases			(3)						(19)												(569)						(591)
Stock-based compensation									12												(1)						11
Balance at March 31, 2021			251						2,241						(586)						12,737						14,643
Comprehensive income:
Net income																					819						819
Other comprehensive income															8												8
Total comprehensive income																											827
Dividends on common stock,
$0.99 per share																					(247)						(247)
Share repurchases			(3)						(28)												(903)						(934)
Stock-based compensation									27												1						28
Balance at June 30, 2021			248						2,240						(578)						12,407						14,317
Comprehensive income:
Net income																					753						753
Other comprehensive income															7												7
Total comprehensive income																											760
Dividends on common stock,
$1.09 per share																					(268)						(268)
Share repurchases			(4)						(31)												(900)						(935)
Stock-based compensation									15												(2)						13
Balance at September 30, 2021			$	244					$	2,224					$	(571)					$	11,990					$	13,887

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

			Common Stock						Additional Paid-in Capital						Accum. Other Comprehensive Loss						Retained Income						Total
			($ in millions, except per share amounts)
Balance at December 31, 2019			$	259					$	2,209					$	(491)					$	13,207					$	15,184
Comprehensive income:
Net income																					381						381
Other comprehensive income															10												10
Total comprehensive income																											391
Dividends on common stock,
$0.94 per share																					(242)						(242)
Share repurchases			(2)						(21)												(443)						(466)
Stock-based compensation			1						17												(1)						17
Balance at March 31, 2020			258						2,205						(481)						12,902						14,884
Comprehensive income:
Net income																					392						392
Other comprehensive income															6												6
Total comprehensive income																											398
Dividends on common stock,
$0.94 per share																					(240)						(240)
Share repurchases			(2)						(10)												(191)						(203)
Stock-based compensation									22																		22
Balance at June 30, 2020			256						2,217						(475)						12,863						14,861
Comprehensive income:
Net income																					569						569
Other comprehensive income															4												4
Total comprehensive income																											573
Dividends on common stock,
$0.94 per share																					(240)						(240)
Share repurchases			(1)						(11)												(279)						(291)
Stock-based compensation									40												(2)						38
Balance at September 30, 2020			$	255					$	2,246					$	(471)					$	12,911					$	14,941

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Norfolk Southern Corporation (Norfolk Southern) and subsidiaries’ (collectively, NS, we, us, and our) financial position at September 30, 2021, and December 31, 2020, our results of operations, comprehensive income and changes in stockholders’ equity for the third quarters and first nine months of 2021 and 2020, and our cash flows for the first nine months of 2021 and 2020 in conformity with U.S. generally accepted accounting principles (GAAP).

These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our latest Annual Report on Form 10-K.

1. Railway Operating Revenues

The following table disaggregates our revenues by major commodity group:

						Third Quarter												First Nine Months
						2021						2020						2021						2020
						($ in millions)
Merchandise:
Agriculture, forest and consumer products						$	564					$	521					$	1,681					$	1,570
Chemicals						504						428						1,457						1,371
Metals and construction						424						337						1,196						997
Automotive						218						270						664						597
Merchandise						1,710						1,556						4,998						4,535
Intermodal						812						700						2,332						1,924
Coal						330						250						960						757
Total						$	2,852					$	2,506					$	8,290					$	7,216

We recognize the amount of revenues to which we expect to be entitled for the transfer of promised goods or services to customers. A performance obligation is created when a customer under a transportation contract or public tariff submits a bill of lading to us for the transport of goods. These performance obligations are satisfied as the shipments move from origin to destination. As such, transportation revenues are recognized proportionally as a shipment moves, and related expenses are recognized as incurred. These performance obligations are generally short-term in nature with transit days averaging approximately one week or less for each commodity group. The customer has an unconditional obligation to pay for the service once the service has been completed. Estimated revenues associated with in-process shipments at period-end are recorded based on the estimated percentage of service completed. We had no material remaining performance obligations at September 30, 2021 and December 31, 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 a percentage of total “Railway operating revenues” on the Consolidated Statements of Income as follows: 7% for the third quarter of 2021, 6% for the first nine months of 2021, and 5% for both the third quarter and first nine months of 2020.

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

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

						September 30, 2021						December 31, 2020
						($ in millions)
Customer						$	740					$	629
Non-customer						205						219
Accounts receivable – net						$	945					$	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 September 30, 2021 and December 31, 2020. We do not have any material contract assets or liabilities at September 30, 2021 and December 31, 2020.

2. Stock-Based Compensation

						Third Quarter												First Nine Months
						2021						2020						2021						2020
						($ in millions)
Stock-based compensation expense						$	14					$	13					$	46					$	25
Total tax benefit						3						10						28						39

During 2021, we granted stock options, restricted stock units (RSUs) and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP), as follows:

						Third Quarter												First Nine Months
						Granted						Weighted-Average Grant-Date Fair Value						Granted						Weighted-Average Grant-Date Fair Value
Stock options						—						$	—					42,770						$	62.49
RSUs						2,490						258.14						179,345						239.01
PSUs						—						—						50,060						240.69

Stock Options

						Third Quarter												First Nine Months
						2021						2020						2021						2020
						($ in millions)
Options exercised						22,502						313,358						363,982						998,996
Cash received upon exercise						$	2					$	27					$	33					$	82
Related tax benefit realized						1						8						13						24

Restricted Stock Units

RSUs granted primarily have a four-year ratable restriction period and will be settled through the issuance of shares of Norfolk Southern common stock (Common Stock). Certain RSU grants include cash dividend equivalent payments during the restriction period in an amount equal to the regular quarterly dividends paid on Common Stock.

						Third Quarter												First Nine Months
						2021						2020						2021						2020
						($ in millions)
RSUs vested						1,100						1,635						260,227						203,934
Common Stock issued net of tax withholding						761						1,630						184,272						145,342
Related tax benefit realized						$	—					$	—					$	7					$	4

Performance Share Units

PSUs provide for awards based on the achievement of certain predetermined corporate performance goals at the end of a three-year cycle and are settled through the issuance of shares of Common Stock. All PSUs will earn out based on the achievement of performance conditions and some will also earn out based on a market condition. The market condition fair value was measured on the date of grant using a Monte Carlo simulation model. No PSUs were earned or paid out during the third quarters of 2021 or 2020.

						First Nine Months
						2021						2020
						($ in millions)
PSUs earned						78,727						235,935
Common Stock issued net of tax withholding						49,967						156,450
Related tax benefit realized						$	1					$	7

3. 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. 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.

4. Earnings Per Share

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

			Basic												Diluted
			Third Quarter
			2021						2020						2021						2020
			($ in millions, except per share amounts, shares in millions)
Net income			$	753					$	569					$	753					$	569
Dividend equivalent payments			(1)						(2)						—						(1)
Income available to common stockholders			$	752					$	567					$	753					$	568
Weighted-average shares outstanding			245.3						254.6						245.3						254.6
Dilutive effect of outstanding options and share-settled awards															1.1						1.5
Adjusted weighted-average shares outstanding															246.4						256.1
Earnings per share			$	3.07					$	2.23					$	3.06					$	2.22
			Basic												Diluted
			First Nine Months
			2021						2020						2021						2020
			($ in millions, except per share amounts, shares in millions)
Net income			$	2,245					$	1,342					$	2,245					$	1,342
Dividend equivalent payments			(2)						(3)						—						(2)
Income available to common stockholders			$	2,243					$	1,339					$	2,245					$	1,340
Weighted-average shares outstanding			248.5						255.7						248.5						255.7
Dilutive effect of outstanding options and share-settled awards															1.2						1.5
Adjusted weighted-average shares outstanding															249.7						257.2
Earnings per share			$	9.03					$	5.24					$	8.99					$	5.21

During the third quarters and first nine months of 2021 and 2020, 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 the third quarters and first nine months ended September 30, 2021 and 2020.

5. Accumulated Other Comprehensive Loss

The changes in the cumulative balances of “Accumulated other comprehensive loss” reported in the Consolidated Balance Sheets consisted of the following:

			Balance at Beginning of Year						Net Income						Reclassification Adjustments						Balance at End of Period
			($ in millions)
Nine months ended September 30, 2021
Pensions and other postretirement liabilities			$	(526)					$	—					$	23					$	(503)
Other comprehensive loss of equity investees			(68)						—						—						(68)
Accumulated other comprehensive loss			$	(594)					$	—					$	23					$	(571)
Nine months ended September 30, 2020
Pensions and other postretirement liabilities			$	(421)					$	—					$	14					$	(407)
Other comprehensive income (loss) of equity investees			(70)						6						—						(64)
Accumulated other comprehensive loss			$	(491)					$	6					$	14					$	(471)

6. Stock Repurchase Program

We repurchased and retired 9.4 million and 5.3 million shares of Common Stock under our stock repurchase program during the first nine months of 2021 and 2020, respectively, at a cost of $2.5 billion and $960 million, respectively.

7. Investments

Investment in Conrail

Through a limited liability company, we and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC). We have a 58% economic and 50% voting interest in the jointly-owned entity, and CSX has the remainder of the economic and voting interests. Our investment in Conrail was $1.5 billion and $1.4 billion at September 30, 2021 and December 31, 2020, respectively.

CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of Norfolk Southern Railway Company (NSR) and CSX Transportation, Inc. (CSXT). The costs of operating the Shared Assets Areas are borne by NSR and CSXT based on usage. In addition, NSR and CSXT pay CRC a fee for access to the Shared Assets Areas. “Purchased services and rents” and “Fuel” include expenses payable to CRC for operation of the Shared Assets Areas totaling $37 million and $32 million for the third quarters of 2021 and 2020, respectively, and $108 million and $97 million for the first nine months of 2021 and 2020, respectively. Our equity in Conrail’s earnings, net of amortization, was $14 million and $17 million for the third quarters of 2021 and 2020, respectively, and $42 million and $39 million for the first nine months of 2021 and 2020, respectively. These amounts offset the costs of operating the Shared Assets Areas and are included in “Purchased services and rents.”

“Other liabilities” includes $534 million at both September 30, 2021, and December 31, 2020 for long-term advances from Conrail, maturing in 2050 that bear interest at an average rate of 1.31%.

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 $59 million and $67 million for the third quarters of 2021 and 2020, respectively, and $183 million and $185 million for the first nine months of 2021 and 2020, respectively. Our equity in TTX’s earnings offsets these costs and totaled $12 million and $21 million for the third quarters of 2021 and 2020, respectively, and $43 million and $35 million for the first nine months of 2021 and 2020, respectively.

Impairment of Investment

During 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 Consolidated Statements of Income and had a $74 million impact on net income for the third quarter and first nine months of 2020.

8. Debt

In August 2021, we issued $600 million of 2.90% senior notes due 2051.

In May 2021, we issued $500 million of 2.30% senior notes due 2031 and $600 million of 4.10% senior notes due 2121.

In May 2021, we renewed, amended and restated our accounts receivable securitization program with a maximum borrowing capacity of $400 million and a term that expires in May 2022. We had no amounts outstanding under this program and our available borrowing capacity was $400 million at both September 30, 2021 and December 31, 2020.

9. Pensions and Other Postretirement Benefits

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

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

															Other Postretirement
			Pension Benefits												Benefits
			Third Quarter
			2021						2020						2021						2020
			($ in millions)
Service cost			$	10					$	10					$	1					$	2
Interest cost			14						19						1						3
Expected return on plan assets			(48)						(48)						(3)						(4)
Amortization of net losses			16						13						—						—
Amortization of prior service benefit			—						—						(6)						(6)
Net benefit			$	(8)					$	(6)					$	(7)					$	(5)

															Other Postretirement
			Pension Benefits												Benefits
			First Nine Months
			2021						2020						2021						2020
			($ in millions)
Service cost			$	32					$	30					$	4					$	5
Interest cost			41						56						5						9
Expected return on plan assets			(144)						(143)						(9)						(10)
Amortization of net losses			49						39						1						—
Amortization of prior service benefit			—						—						(19)						(19)
Net benefit			$	(22)					$	(18)					$	(18)					$	(15)

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

10. Fair Values of Financial Instruments

The fair values of “Cash and cash equivalents,” “Accounts receivable – net,” and “Accounts payable,” approximate carrying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life insurance is recorded at cash surrender value and, accordingly, approximates fair value. There are no other assets or liabilities measured at fair value on a recurring basis at September 30, 2021 or December 31, 2020. The carrying amounts and estimated fair values, based on Level 1 inputs, of long-term debt consist of the following:

			September 30, 2021												December 31, 2020
			Carrying Amount						Fair Value						Carrying Amount						Fair Value
			($ in millions)
Long-term debt, including current maturities			$	(13,832)					$	(17,034)					$	(12,681)					$	(16,664)

11. Commitments and Contingencies

Lawsuits

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

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 the Federal Employer’s Liability Act (FELA), which is applicable only to railroads. FELA’s fault-based tort system produces results that are unpredictable and inconsistent as compared with a no-fault workers’ compensation system. The variability inherent in this system could result in actual costs being different from the liability recorded. While the ultimate amount of claims incurred is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payments of claims and is supported by the most recent actuarial study. In all cases, we record a liability when the expected loss for the claim is both probable and 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. The actuarial firm’s estimate of ultimate loss includes a provision for those claims that have been incurred but not reported. This provision is derived by analyzing industry data and projecting our experience. 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 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 $52 million at September 30, 2021 and $54 million at December 31, 2020, of which $15 million is classified as a current liability at the end of both periods. At September 30, 2021, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 97 known locations and projects compared with 100 locations and projects at December 31, 2020. At September 30, 2021, nineteen sites accounted for $40 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 those environmental matters of which we are aware. Further, we believe that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, or liquidity.

Insurance

We purchase insurance covering legal liabilities for bodily injury and property damage to third parties. This insurance provides coverage above $75 million and below $800 million ($1.1 billion for specific perils) per occurrence and/or policy year. In addition, we purchase insurance covering damage to property owned by us or in our care, custody, or control. This insurance covers approximately 87% of potential losses above $75 million and below $275 million per occurrence and/or policy year.

12. New Accounting Pronouncements

On January 1, 2021, we adopted Financial Accounting Standards Board Accounting Standards Update 2019-12, “Simplifying the Accounting for Income Taxes,” which adds new guidance to simplify the accounting for income taxes, changes the accounting for certain income tax transactions, and makes other minor changes. There was no material impact to the financial statements upon adoption.