NSC 10-Q Quarter ended March 31, 2013

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended MARCH 31, 2013

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ___________ to___________

Commission file number 1-8339

NORFOLK SOUTHERN CORPORATION

(Exact name of registrant as specified in its charter)

Virgini a (State or other jurisdiction of incorporation)	52-1188014 (IRS Employer Identification No.)
Three Commercial Place Norfolk, Virginia (Address of principal executive offices)	23510-2191 (Zip Code)
(757) 629-2680 (Registrant’s telephone number, including area code)
No Change (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act o f 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at March 3 1, 2013
Common Stock ($1.00 par value per share)		315,088,379 (excluding 20,320,777 shares held by the registrant’s consolidated subsidiaries)

		TABLE OF CONTENTS
		NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)
				Page
Part I.	Financial Information:
	Item 1.	Financial Statements:
		Consolidated Statements of Income First Quarters of 2013 and 2012		3
		Consolidated Statements of Comprehensive Income First Quarters of 2013 and 2012		4
		Consolidated Balance Sheets At March 31, 2013 and December 31, 2012		5
		Consolidated Statements of Cash Flows First Quarters of 2013 and 2012		6
		Notes to Consolidated Financial Statements		7
		Report of Independent Registered Public Accounting Firm		1 7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1 8
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		2 6
	Item 4.	Controls and Procedures		2 6
Part II.	Other Information:
	Item 1.	Legal Proceedings		27
	Item 1A.	Risk Factors		27
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28
	Item 6.	Exhibits		28
Signatures				29
Exhibit Index				30

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	First Quarter
	2013			2012
	($ in millions, except per share amounts)
Railway operating revenues	$	2,738		$	2,789
Railway operating expenses
Compensation and benefits		780			786
Purchased services and rents		393			391
Fuel		429			413
Depreciation		227			224
Materials and other		218			230
Total railway operating expenses		2,047			2,044
Income from railway operations		691			745
Other income – net		135			29
Interest expense on debt		129			120
Income before income taxes		697			654
Provision for income taxes		247			244
Net income	$	450		$	410
Per share amounts
Net income:
Basic	$	1.43		$	1.24
Diluted		1.41			1.23
Dividends		0.50			0.47

See accompanying n otes to c onsolidated f inancial s tatements .

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

	First Quarter
	2013			2012
	($ in millions)
Net income	$	450		$	410
Other comprehensive income, before tax:
Pension and other postretirement benefits		36			32
Other comprehensive income (loss) of equity investees		1			(4)
Other comprehensive income, before tax		37			28
Income tax expense related to items of other
comprehensive income		(14)			(12)
Other comprehensive income, net of tax		23			16
Total comprehensive income	$	473		$	426

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

	March 31,				December 31,
	2013				2012
	($ in millions)
Assets
Current assets:
Cash and cash equivalents	$		672		$		653
Short-term investments			15				15
Accounts receivable – net			1,158				1,109
Materials and supplies			246				216
Deferred income taxes			167				167
Other current assets			65				82
Total current assets			2,323				2,242
Investments			2,341				2,300
Properties less accumulated depreciation of $10,042 and
$9,922, respectively			25,870				25,736
Other assets			65				64
Total assets	$		30,599		$		30,342
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$		1,188		$		1,362
Short-term debt			-				200
Income and other taxes			319				206
Other current liabilities			350				263
Current maturities of long-term debt			47				50
Total current liabilities			1,904				2,081
Long-term debt			8,438				8,432
Other liabilities			2,226				2,237
Deferred income taxes			7,921				7,832
Total liabilities			20,489				20,582
Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 315,088,379 and 314,034,174 shares,
respectively, net of treasury shares			316				315
Additional paid-in capital			1,976				1,911
Accumulated other comprehensive loss			(1,086)				(1,109)
Retained income			8,904				8,643
Total stockholders’ equity			10,110				9,760
Total liabilities and stockholders’ equity	$		30,599		$		30,342

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	First Quarter
	2013			2012
	($ in millions)
Cash flows from operating activities
Net income	$	450		$	410
Reconciliation of net income to net cash provided by operating activities:
Depreciation		228			226
Deferred income taxes		74			88
Gains and losses on properties and investments		(99)			(1)
Changes in assets and liabilities affecting operations:
Accounts receivable		(49)			(34)
Materials and supplies		(30)			(19)
Other current assets		17			5
Current liabilities other than debt		96			316
Other – net		36			44
Net cash provided by operating activities		723			1,035
Cash flows from investing activities
Property additions		(379)			(461)
Property sales and other transactions		19			2
Investments, including short-term		(5)			(4)
Investment sales and other transactions		(1)			27
Net cash used in investing activities		(366)			(436)
Cash flows from financing activities
Dividends		(157)			(155)
Common stock issued – net		55			31
Purchase and retirement of common stock		(33)			(400)
Proceeds from borrowings – net		-			696
Debt repayments		(203)			(218)
Net cash used in financing activities		(338)			(46)
Net increase in cash and cash equivalents		19			553
Cash and cash equivalents
At beginning of period		653			276
At end of period	$	672		$	829
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest (net of amounts capitalized)	$	62		$	60
Income taxes (net of refunds)		23			2

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 accrual s) necessary to present fairly Norfolk Southern Corporation (Norfolk Southern) and subsidiaries’ (collectively, NS , we, us, and our ) financial condition at March 31, 2013 , and December 31, 20 12 , and our results of operations , comprehensive income, and cash flows for the first quarters of 2013 and 2012 in conformity with U.S. generally accepted accounting principles (GAAP) .

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

1.  Stock-Based Compensation

During the first quarter of 2013 , a committee of non-employee directors of our Board of Directors granted stock options, restricted stock units (RSUs) and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP) and granted stock option s pursuant to the Thoroughbred Stock Option Plan (TSOP) as discussed below. Stoc k-based compensation expense was $ 37 million and $ 34 million during the first quarters of 2013 and 2012, respectively. The total tax effects recognized in income in relation to stock-based compensation were net benefits of $ 12 million and $ 11 million for the first quarters of 2013 and 2012 , respec tively .

Stock Options

In the first quarter of 2013 , 748,200 options were granted under LTIP and 268,500 options were granted under TSOP. In each case, the grant price was $ 69.83 , which was the greater of the average fair market value of Norfolk Southern common stock (Common St ock) or the closing price of Common Stock on the effecti ve date of the grant, and the options have a term of ten years. The o ptions granted under LTIP and TSOP in 2013 may not be exercised prior to the fourth and third anniversaries of the date of grant, respectively. Holders of the 2013 options granted under LTIP who remain actively employed receive cash dividend equivalent payments for four years in an amount equal to the regular quarterly dividends paid on Common Stock. Dividend equivalent payments are not m ade on TSOP options.

The fair value of each option award in 2013 was measured on the date of grant using a lattice-based option valuation model. Expected volatilities are based on implied volatilities from traded options on and h istorical volatility of Common Stock. H istorical data is used to estimate option exercises and employee terminations within the valuation model. The average expected option life is derived from the output of the valuation model and represents the period of time that options granted are expected to be outstanding. The average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. For options granted that include dividend equivalent payments, a dividend yield of zero was used. A dividend yield of 2.86% was used for LTIP options for periods where no dividend equivalent payments are made as well as for TSOP options , which do not receive dividend equivalents.

The assumptions for the 2013 LTIP and TSOP grants are shown in the following table:

Expected volatility range	24% - 30%
Average expected volatility	26%
Average risk-free interest rate	1.88%
Average expected option term LTIP	9.0 years
Per-share grant-date fair value LTIP	$20.40
Average expected option term TSOP	8.9 years
Per-share grant-date fair value TSOP	$15.84

For the first quarter of 2013 , options relating to 1,024,614 shares were exercised, yielding $ 35 million of cash proceeds and $ 13 million of tax benefit recognized as additional paid-in capital. For the first quarter of 2012 , options relating to 376,357 shares were exercised , yielding $ 11 million of cash proceeds and $ 6 million of tax benefit recog nized as additional paid-in capital.

Restricted Stock Units

There were 162,000 RSUs granted in 2013 , with an average grant-date fair value of $ 69.83 and a five -year restriction period. The RSUs granted in 2013 will be settled through the issuance of shares of Common Stock.

During the first qua rter of 2013, 298,400 of the RSUs granted in 2008 vested, with 178,250 shares of Common Stock issued net of withholding taxes.  For the first quarter of 2012, 281,900 of the RSUs granted in 2007 vested, with 174,535 shares of Com mon Stock issued net of withholding taxes. The total related tax benefit s recognized as additional paid-in capital were $ 2 million and $ 3 million for the first quarters of 2013 and 2012, respectively .

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate perfo rmance goals (total shareholder return , return on average invested capital , and operating ratio) at the end of a three-year cycle and are paid in the form of shares of Common Stock . During the first quarter of 2013 , there were 550,800 PSUs gra nted with a grant-date fair value of $ 69.83 .

During the first quarter of 2013, 577,585 of the PSUs granted in 2010 were earned, with 348,189 shares of Common Stock issued net of withholding taxes.  For the first quarter 2012, 782,889 of the PSUs granted in 2009 were earned, with 488,957 shares of Common Stock issued net of withholding taxes. The total related tax ben efit s recognized as additional paid-in capital w ere $ 5 million and $ 11 million for the first quarter s of 2013 and 2012, respectively .

2.  Income Taxes

There have been no material changes to the balance of unrecognized tax benefits reported at December 31, 2012. IRS examinations have been completed for all years prior to 2011. We expect the IRS to begin auditing our 2011 and 2012 consolidated income tax returns in late 2013.

3.  Earnings Per Share

	Basic						Diluted
	First Quarter
	2013			2012			2013			2012
	($ in millions except per share amounts,
	shares in millions)
Net income	$	450		$	410		$	450		$	410
Dividend equivalent payments		(2)			(3)			(1)			(2)
Income available to common stockholders		448			407			449			408
Weighted-average shares outstanding		314.5			328.3			314.5			328.3
Dilutive effect of outstanding options
and share-settled awards								3.6			4.6
Adjusted weighted-average shares outstanding								318.1			332.9
Earnings per share	$	1.43		$	1.24		$	1.41		$	1.23

During the first quarter s of 2013 and 2012 , dividend equivalent payments were made to holders of options and RSUs. For purposes of computing basic earnings per share, dividend equivalent payments made to holders of options and RSUs were deducted from net i ncome to determine income available to common stockholders. For purposes of computing diluted earnings per share, we evalua te on a grant-by-grant basis those options and RSUs receiving dividend equivalent payments under the two-class and treasury stock methods to determine which method is the more dilutive for each grant. For those grants for which the two-class method was more dilutive, net income was reduced by dividend equivalent payments to determine income available to common stockholders. The dilut ed calculations exclude options having exercise prices exceeding the average market price of Common Stock as follows: 0.8 million in both 2013 and 2012 .

4.  Stockholders’ Equity

Common Stock

Common S tock is reported net of shares held by our consolidated subsidiaries (Treasury Shares) . Treasury Shares at March 31, 2013 and December 31, 2012 , amounted to 20,320,777 shares, with a cost of $ 19 million at both dates.

Accumulated Other Comprehensive Loss

“Accumulate d other comprehensive loss” reported in the Consolidated Balance Sheets consisted of the following:

				Accumulated
	Pensions			Other			Accumulated
	and Other			Comprehensive			Other
	Postretirement			Loss of Equity			Comprehensive
	Liabilities			Investees			Loss
	($ in millions)
December 31, 2012	$	(999)		$	(110)		$	(1,109)
Other comprehensive income (loss):
Amounts reclassified into net income		36	(1)		-			36
Net gain		-			1			1
Tax expense		(14)			-			(14)
Other comprehensive income		22			1			23
March 31, 2013	$	(977)		$	(109)		$	(1,086)

(1) These items are included in the computation of net periodic pension and postretirement benefit costs. See Note 8, “Pensions and Other Postretirement Benefits” for additional information.

5. Stock Repurchase Program

We repurchased and retired 0.5 million and 5.7 million shares of Common Stock in the first quarter s of 2013 and 2012 , respectively, at a cost of $ 33 million and $ 400 million . The timing and volume of purchases is guided by our assessment of market conditions and other pertinent factors. Any near-term share repurchases are expected to be made with internally generated cash, cash on hand , or proceeds from borrowings. Since the beginning of 2006, we have repurchased and retired 128.9 million shares at a total cost of $ 7.5 billion.

6.  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 $ 1.0 bil lion at March 31, 2013 , and $ 996 million at December 31, 2012 .

CRC owns and operates certain properties (the S hared 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 CR C a fee for access to the Shared Assets Areas. “Purchased services and rents” and “Fuel” include expenses for the use of the Shared Assets Areas totaling $ 34 million and $ 36 million for the first quarters of 2013 and 2012 , respectively . Our equity in the earnin gs of Conrail, net of amortization, included in “Other income – net” was $ 9 million and $ 6 million for the first quarter s of 2013 and 2012 , respectively.

“Accounts payable” includes $ 174 million at March 31, 2013 , and $ 178 million at December 31, 2012 , due to Conrail for the operation of the Shared Assets Areas. In addition, “Other lia bilities” includes $ 133 million at both March 31, 2013 and December 31, 2012 , for long-term advances from Conrail, maturing 2035 , t hat bear interest at an average rate of 4.40% .

7.  Debt

In the first quarter of 2013 , we repaid $ 200 million under our accounts receivable securitization facility.  At March 31, 2013 and December 31, 2012, the amounts outstanding under the facility were $ 100 million (at an average variable interest rate of 1.25 %) and $ 300 million (at an average variable interest rate of 1.28%), respectively.  In October 2012, we renewed our accounts receivable securitization facility with a 364-d ay term to run until October 2013.

During the first quarter of 2012 , we issued $ 600 million of 3.00% senior notes due 2022 .

We have authority from our Board of Directors to issue an additional $600 million of debt or equity securities through public or private sale.

8.  Pensions and Other Postretirement Benefits

We have both funded and unfunded defined benefit pension plans covering principally salaried employees. We also provide specified health care and death benefits to eligible retired employees and their dependents; these plans can be amended or terminated at our option.  Under our health care plan s, a defined percentage of health care expenses is covered, reduced by any deductibles, co-payments, Medicare payments and, in some cases, coverage provided under other group insurance policies.

							Other Postretirement
	Pension Benefits						Benefits
	First Quarter
	2013			2012			2013			2012
	($ in millions)
Service cost	$	10		$	8		$	4		$	4
Interest cost		20			22			13			14
Expected return on plan assets		(35)			(34)			(4)			(4)
Amortization of net losses		22			19			14			13
Net cost	$	17		$	15		$	27		$	27

9.  Fair Value

Fair Value Measurements

The Financial Accounting Standards Board (FASB) Accounting Standards Codifications ( 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; • Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
	If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3	Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The asset’s or liability’s fair value measurement level within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Other th an those assets and liabilities described below that approximate fair value, there were no assets or liabilities measured at fair value on a recurring basis at March 31, 2013 or December 31, 2012 .

Fair Values of Financial Instruments

We have evaluated the fair values of financial instruments and methods used to determine those fair values. The fair values of “Cash and cash equivalents,” “Short-term investments,” “Accounts receivable,” “Accounts payable,” and “Short-term debt” approximate carr ying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life insurance is recorded at cash surrender value and, accordingly, approximates fair value. The carrying amounts and estimated fair values for the remaining financial instruments, excluding investments accounted for under the equity method, consisted of the following:

	March 31, 2013						December 31, 2012
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
	($ in millions)
Long-term investments	$	146		$	181		$	139		$	174
Long-term debt, including current maturities		(8,485)			(10,606)			(8,482)			(10,734)

Underlying net assets were used to estimate the fair value of investments with the exception of notes receivable, which are based on future discounted cash flows. The fair values of long-term debt were estimated based on quoted market prices or discounted cash flows using current interest rates for debt with similar terms, company rating, and remaining maturity.

The following table sets forth the fair value of long-term investment and long-term debt balances disclosed above by valuation technique level, wi thin the fair value hierarchy (there were no level 3 valued assets or liabilities).

	Level 1			Level 2			Total
	($ in millions)
March 31, 2013
Long-term investments	$	44		$	137		$	181
Long-term debt, including current maturities		(10,323)			(283)			(10,606)
December 31, 2012
Long-term investments	$	41		$	133		$	174
Long-term debt, including current maturities		(10,450)			(284)			(10,734)

10.  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 estimat ed, it is accrued through a charge to earnings. While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payment of such liability and claims. However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a pa rticular year or quarter. Any adjustments to the recorded liability will be reflected in earnings in the periods in which such adjustments are known.

One of our customers , DuPont, has a rate reasonableness complaint pending before the STB alleging that o ur tariff rates for transportation of regulated movements are unreasonable. We dispute th is allegation .  S ince June 1, 2009, we ha ve been billing and collecting from DuPont amounts based on the challenged tariff rates. We presently expect resolution of the DuPont case to occur in 2 014 and believe the estimate of reasonably possible loss will not have a material effect on our financial position, results of operations, or liquidity. With regard to rate cases, we record adjustments to revenu es in the periods, if and when, such adjustments are probable and estimable.

On November 6, 2007, various antitrust class actions filed against us and other C lass I railroads in various f ederal district courts regarding fuel surcharges were consolidated i n the District of Columbia by the Judicial Panel on Multidistrict Litigation. We believe the allegations in the complaints are with out merit and intend to vigorously defend the cases. We do not believe that the outcome of these proceedings will have a ma terial effect on our financial position, results of operations, or liquidity. A lawsuit filed on March 25, 2008, in the U.S. District Court for the District of Minnesota containing similar allegations against us and four other major railroads was voluntar ily dismissed by the plaintiff subject to a tolling agreement entered into in August 2008 .

Casualty Claims

Casualty claims include employee personal injury and occupational claims as well as thir d-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-r elated accidental injury and occupational claims are subject to the Federal Employers’ Liability Act (FELA), which is applicable only to railroads. FELA’s fault-based system produces results that are unpredictable and inconsistent as compared with a no-fa ult 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 reco rded liability is adequate to cover the future payments of claims and is supported by the most recent actuarial study. In all cases, we record a liability when the expected loss for the claim is both probable and estimable.

Employee personal injury claims – The largest component of casualties and other claims expense is employee personal injury costs. The independent actuarial firm engaged by us provides quarterly studies to aid in valuing our employee personal injury liability and estimating person al injury expens e. The actuarial firm studies our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences. The actuar ial firm uses the results of these analyses to estimate the ultimate amou nt of liability, which includes amounts for incurred but unasserted claims. We adjust the liability quarterly based upon our assessment and the results of the study. Our estimate of loss liabilities is subject to inherent limitation given the difficulty o f predicting future events such as jury decisions, court interpretations, or legislative changes and as such the actual loss may vary from the estimated liability recorded.

Occupational claims – Occupational claims (including asbestosis and other respirat ory diseases, as well as conditions allegedly related to repetitive motion) are often not caused by a specific accident or event but rather allegedly result from a claimed exposure over time. Many such claims are being asserted by former or retired employ ees, 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. Th e 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 incur red but not reported. This provision is derived by analyzing industry data and projecting our experience into the future as far as can be reasonably determined. We adjust the liability quarterly based upon our assessment and the results of the study. Ho wever, 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 clai ms – We record a liability for third-party claims including those for highway crossing accidents, trespasser and other injuries, automobile liability, property damage, and lading damage. The actuarial firm assists us with the calculation of potential liab ility for third-party claims, ex cept lading damage, based upon our experience including the number and timing of incidents, amount of payments, settlement rates, number of open claims, and legal defenses. The actuarial estimate includes a provision for cla ims that have been incurred but not reported. We adjust the liability quarterly based upon our assessment and the results of the study. Given the inherent uncertainty in regard to the ultimate outcome of third-party claims, it is possible that the actual loss may differ from the estimated liability recorded .

Environmental Matters

We are subject to various jurisdictions’ environmental laws and regulations. We record a liability where such liability or loss is probable and its amount can be estimated reasonably. Claims, if any, against third parties, for recovery of cleanup costs we have incurred are reflected as receivables (when collection is probable) in th e Consolidated Balance Sheets and are not netted against the associated liability. Environmental engineers regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates. We have an Env ironmental Policy Council, composed of senior managers, to oversee and interpret our environmental policy .

Our Consolidated Balance Sheets include liabilities for environmental exposures of $ 48 million at March 31, 2013 , and $ 42 million at December 31, 2012 (of which $ 12 million is classified as a current liability at the end of each period). A t March 31, 2013 , the liability represents our estimate of the probable cleanup , investigation, and remediation costs based on availa ble information at 151 known locations and projects compared with 146 locations and projects at December 31, 2012 . At March 31, 2013 , ten sites accounted for $ 28 million of the liability, and no individual site was considered to be material. We anticipate that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period.

At 21 locations, one or more of our subsidiaries in conjunction with a number of other parties have been i dentified 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 liabilit y 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 environmenta l sites (whether identified by us or by the Environmental Protection Agency ( EP A ) or comparable state authorities), estimates of our ultimate potential financial exposure for a given site or in the aggregate for all such sites are necessarily imprecise because of the widely varying costs of currently available cleanup techniques, unp redictable contaminant recovery and reduction rates associated with available cleanup technologies, the likely development of new cleanup technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant’s share of any estimated loss (and that participant’s ability to bear it), and evolving statutory and regulatory standards governing liability.

The risk of incurring environmental liability – for acts and omissions, past, present, and future – is inherent in the railroad business. Some of the commodities in our traffic mix, particularly those classified as hazardous materials, pose special risks that we work diligently to minimize. In addition, several of our s ubsidiaries 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 liabi lities 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 believ e we have recorded the probable and reasonably estimable costs for dealing with those environmental matters of which we are aware. F urther, we believe that it is unlikely that any known matters, either individually or in the aggregate, will have a materia l adverse effect on our financial position, results of operations, or liquidity .

Insurance

We obtain on behalf of ourself and our subsidiaries insurance for potential losses for third-party liability and first-party property damages. We are currently self-insured up to $ 50 million and above $ 1.1 billion per occurrence for bodily injury and property damage to third parties and up to $ 25 million and above $ 175 million per occurrence for property owned by us or i n our care, custody, or control .

Purchase Commitments

At March 31, 2013 , we had outstanding purchase commitments totaling approximately $ 515 million for locomotives, track and yard expansion projects, track material, freight cars, and vehicle fleet additions, in connection with our capital programs through 2016 .

11 .  New Accounting Pronouncement

In the first quarter of 2013, we prospectively adopted Accounting Standards Update (ASU) No. 2013-02, “ Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income .” This update requires the disclosure of the effects of reclassifications out of Accumulated Other Comprehensive Loss on the respective line items in our Consolidated Statements of Income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, we are required to cross-reference other required GAAP disclosures to provide additional detail about those amounts.  These disclosure s can be made on the face of the financial statement that reports net income or in the notes, provided all the information is disclosed in a single location.  However, an entity is prohibited from providing this information on the face of the statement tha t reports net income if it has items that are not reclassified in their entirety into net income.  This update does not change the requirement to present the components of net income and other comprehensive income in either a single continuous statement or two separate consecutive statements, nor does it change the items currently reported in other comprehensive income .

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Norfolk Southern Corporation:

We have reviewed the accompanying consolidated balance sheet of Norfolk Southern Corporation and subsidiaries as of March 31, 2013 , and the related consolidated statements of income , comprehensive income and cash flows for the three -month periods ended March 31, 2013 and 2012 . These consolidated financial statements are the responsibility of the Company ’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquirie s of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expres sion of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements refer red to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Norfolk Southern Corporation and subsidiaries as of December 31, 2012 , and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated February 1 5 , 201 3 , we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2012 , is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/KPMG LLP

KPMG LLP

Norfolk, Virginia

April 24 , 201 3

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Norfolk Southern Corporation and Subsidiaries

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

OVERVIEW

We are one of the nation’s premier transportation companies.  Our Norfolk Southern Railway Company subsidiary operates approximately 20,000 miles of road in 22 states and the District of Columbia, serves every major container port in the eastern United States, and provides efficient connections to other rail carriers.  We operate the most extensive intermodal network in the East and are a major transporter of coal, automotive, and industrial products.  During the first quarter of 2013, we opened the Franklin County Regional Intermodal Facility in Greencastle, Pennsylvania.  This is the third Crescent Corridor-related facility we have opened since mid-2012, in order to position ourselves to handle increased intermodal volumes faster and more reliably.

Our first quarter net income improved to $ 450 million in 2013 from $ 410 million in 2012 and e arnings per share grew to $ 1.41 from $ 1.23 in the prior year .  Net income and earnings per share were favorably impacted by the recognition of the gain from the sale of certain assets to the Michigan Department of Transportation, resulting in an after-tax benefit of $60 million, or $0.19 per share.

Cash provided by operating activities for the first quarter o f 2013 was $ 723 m illion, which along with cash on hand allowed for property additions, debt repayments, dividends, and share repurchases . In the first quarter of 2013 , we repurchased approximately 0.5 million shares of Norfolk Southern common stock (C ommon S tock ) at a total cost of $33 m illion. Since inception of our stock repurchase program in 2006 , we ha ve repurchased and retired 128.9 million shares of Common Stock at a total cost of $ 7.5 billion. At March 31, 2013 , cash, cash equivalents, and short-term investments totaled $ 687 million.

SUMMARIZED RESULTS OF OPERATIONS

First quarter 2013 net income was $ 450 million, up $ 40 million, or 10% , compared with the same period l ast year. The increase resulted from higher non-operating income, primarily the gain on sale of land in Michigan as discussed above, which was partially o ffset by a $ 54 million decline in income from railway operations .  The d ecrease in income from railway operations reflected a $ 51 million, or 2 %, decline in railway operating revenues as the softness in our coal business overshad owed intermodal and general merchandise revenue growth. The railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses) rose to 74.8 % for the first quarter of 2013 , compared with 73.3% for the first quarter of 2012 .

Oil prices affect our results of operations in a variety of ways and can have an overall favorable or unfavorable impact in any particular period. In addition to the impact of oil prices o n general economic conditions, volume, and supplier costs, oil price s directly affect our revenues through market-based fuel surcharges and contract escalators (see “Railway Operating Revenues”) and also affect fuel costs (see “Railway Operating Expenses”). For the first qu arter of 2013 , excluding the impact of in creased consumption , fuel surcharge revenue decreased while fuel expense increased.  F uture changes in oil prices may cause volatility in operating results that could be material to a parti cular year or quarter.