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, 2016
, and
December 31, 2015
, our results of operations and comprehensive income for the
third quarter
s and
first nine months
of
2016
and
2015
, and our cash flows for the
first nine months
of
2016
and
2015
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. Stock-Based Compensation
During the first, second, and third quarters of
2016
, a committee of non-employee members of our Board of Directors (and the Chief Executive Officer when delegated authority by such committee) granted stock options, restricted stock units (RSUs) and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP) and granted stock options pursuant to the Thoroughbred Stock Option Plan (TSOP), as discussed below. Stock-based compensation expense was
$7 million
and
$3 million
during the
third
quarters of
2016
and
2015
, respectively. Stock-based compensation expense was
$42 million
and
$38 million
for the
first nine months
of
2016
and
2015
, respectively. The total tax effects recognized in income in relation to stock-based compensation expense were net benefits of
$2 million
and
$1 million
for the
third
quarters of
2016
and
2015
, respectively, and net benefits of
$15 million
and
$12 million
for the
first nine months
of
2016
and
2015
, respectively.
Stock Options
In the first quarter of
2016
,
691,310
options were granted under the LTIP and
302,320
options were granted under the TSOP, each with a grant price of
$70.32
on the effective date of the grant. In the third quarter of 2016,
2,980
options were granted under the LTIP with a grant price of
$89.48
on the effective date of the grant. In each case, the options have a term that will not exceed
ten
years. The 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 the anniversary date, may not be exercised before the later of one year after the grant date or the date of the optionee's retirement or death. Holders of options granted under the LTIP who remain actively employed receive cash dividend equivalent payments during the
four
year vesting period in an amount equal to the regular quarterly dividends paid on Norfolk Southern common stock (Common Stock). Dividend equivalent payments are not made on the TSOP options.
The fair value of each option award was measured on the date of grant using a lattice-based option 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. The average expected option life is derived from the output of the valuation model and represents the period of time that all options granted are expected to be outstanding, including the branches of the model that result in options expiring unexercised. The average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. A dividend yield of
zero
was used for the LTIP options during the vesting period. A dividend yield of
3.37%
was used for all vested LTIP options and all TSOP options.
The assumptions for the
2016
LTIP and TSOP grants are shown in the following table:
|
|
|
|
|
Average expected volatility
|
27%
|
|
Average risk-free interest rate
|
2.00%
|
|
Average expected option term LTIP
|
8.9 years
|
|
Per-share grant-date fair value LTIP
|
$
|
19.92
|
|
Average expected option term TSOP
|
8.6 years
|
|
Per-share grant-date fair value TSOP
|
$
|
14.75
|
|
For the
third quarter
of
2016
, options relating to
633,931
shares were exercised, yielding
$32 million
of cash proceeds and
$6 million
of excess tax benefit recognized in the “Provision for income taxes.” For the
third
quarter of
2015
, options relating to
41,134
shares were exercised, yielding
$2 million
of cash proceeds and less than
$1 million
of excess tax benefit, which was recognized as additional paid-in capital.
For the
first nine months
of
2016
, options relating to
1,003,848
shares were exercised, yielding
$50 million
of cash proceeds and
$8 million
of tax benefit recognized in the “Provision for income taxes.” For the
first nine months
of
2015
, options relating to
372,807
shares were exercised, yielding
$19 million
of cash proceeds and
$4 million
of tax benefit, which was recognized as additional paid-in capital.
Restricted Stock Units
During the first and third quarters of
2016
, there were
135,390
and
860
RSUs granted, respectively, with grant-date fair values of
$70.32
and
$89.48
, respectively. In each case, the RSUs have a
five
-year restriction period that will be settled through the issuance of shares of Common Stock. The RSU grants include cash dividend equivalent payments during the restriction period in an amount equal to the regular quarterly dividends paid on Common Stock.
No RSUs were earned or paid out during the
third quarter
s of
2016
or
2015
. During the
first nine months
of
2016
,
175,500
of the RSUs granted in 2011 vested, with
103,936
shares of Common Stock issued net of minimum withholding taxes. For the
first nine months
of
2015
,
166,750
of the RSUs granted in 2010 vested, with
99,337
shares of Common Stock issued net of minimum withholding taxes. The total related excess tax benefits were less than
$1 million
and
$1 million
for the
third quarter
and
first nine months
of
2016
, respectively, and were recognized in the “Provision for income taxes,” and less than
$1 million
and
$4 million
for the
third quarter
and
first nine months
of
2015
, respectively, recognized as additional paid-in capital.
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. During the first and second quarters of
2016
, there were
1,036,120
and
6,508
PSUs granted, respectively, with weighted average grant-date fair values of
$52.55
and
$84.00
, respectively. 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 in the
third quarter
s of
2016
and
2015
. During the
first nine months
of
2016
,
406,038
of the PSUs granted in 2013 were earned, with
241,757
shares of Common Stock issued net of minimum withholding taxes. For the
first nine months
of
2015
,
236,601
of the PSUs granted in 2012 were earned, with
141,386
shares of Common Stock issued net of minimum withholding taxes. The total related excess tax benefits were
$3 million
for the
first nine months
of
2016
, which was recognized in the “Provision for income taxes,” and
$3 million
for the
first nine months
of
2015
, which was recognized as additional paid-in capital.
2. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
Diluted
|
|
Third Quarter
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
($ in millions, except per share amounts,
shares in millions)
|
|
|
|
|
|
|
|
|
Net income
|
$
|
460
|
|
|
$
|
452
|
|
|
$
|
460
|
|
|
$
|
452
|
|
Dividend equivalent payments
|
(3
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
$
|
457
|
|
|
$
|
450
|
|
|
$
|
458
|
|
|
$
|
451
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
292.7
|
|
|
300.1
|
|
|
292.7
|
|
|
300.1
|
|
Dilutive effect of outstanding options
|
|
|
|
|
|
|
|
|
|
|
|
and share-settled awards
|
|
|
|
|
|
|
2.0
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares outstanding
|
|
|
|
|
|
|
294.7
|
|
|
302.5
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
$
|
1.56
|
|
|
$
|
1.50
|
|
|
$
|
1.55
|
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
Diluted
|
|
First Nine Months
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
($ in millions, except per share amounts,
shares in millions)
|
|
|
|
|
|
|
|
|
Net income
|
$
|
1,252
|
|
|
$
|
1,195
|
|
|
$
|
1,252
|
|
|
$
|
1,195
|
|
Dividend equivalent payments
|
(5
|
)
|
|
(5
|
)
|
|
(4
|
)
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
$
|
1,247
|
|
|
$
|
1,190
|
|
|
$
|
1,248
|
|
|
$
|
1,192
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
294.9
|
|
|
303.2
|
|
|
294.9
|
|
|
303.2
|
|
Dilutive effect of outstanding options
|
|
|
|
|
|
|
|
|
|
|
|
and share-settled awards
|
|
|
|
|
|
|
1.8
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares outstanding
|
|
|
|
|
|
|
296.7
|
|
|
305.8
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
$
|
4.23
|
|
|
$
|
3.93
|
|
|
$
|
4.21
|
|
|
$
|
3.90
|
|
During the
third quarter
s and
first nine months
of
2016
and
2015
, dividend equivalent payments were made to holders of LTIP stock options and RSUs. For purposes of computing basic earnings per share, dividend equivalent payments made to holders of these stock options and RSUs were deducted from net income to determine income available to common stockholders. For purposes of computing diluted earnings per share, we evaluate on a grant-by-grant basis those stock options and RSUs receiving dividend equivalent payments under the two-class and treasury stock methods to determine which method is the more dilutive for each grant. For those grants for which the two-class method was more dilutive, net income was reduced by dividend equivalent payments to determine
income available to common stockholders. The dilution calculations exclude options having exercise prices exceeding the average market price of Common Stock as follows:
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|
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Period
|
|
2016
|
|
2015
|
|
(in millions)
|
1st Quarter
|
|
1.5
|
|
|
—
|
|
2nd Quarter
|
|
1.5
|
|
|
0.7
|
|
3rd Quarter
|
|
1.5
|
|
|
1.5
|
|
3. Accumulated Other Comprehensive Loss
The components of “Other comprehensive income” 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:
|
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|
|
|
|
|
|
|
|
|
|
|
Pensions
and Other
Postretirement
Benefits
|
|
Other
Comprehensive Loss of Equity
Investees
|
|
Accumulated
Other
Comprehensive
Loss
|
|
($ in millions)
|
|
|
|
|
|
|
December 31, 2015
|
$
|
(367
|
)
|
|
$
|
(78
|
)
|
|
$
|
(445
|
)
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Amounts reclassified into net income
|
7
|
|
(1)
|
—
|
|
|
7
|
|
Net loss
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Tax expense
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
4
|
|
|
(1
|
)
|
|
3
|
|
|
|
|
|
|
|
March 31, 2016
|
$
|
(363
|
)
|
|
$
|
(79
|
)
|
|
$
|
(442
|
)
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Amounts reclassified into net income
|
6
|
|
(1)
|
—
|
|
|
6
|
|
Net gain
|
—
|
|
|
1
|
|
|
1
|
|
Tax expense
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
|
|
|
|
|
Other comprehensive income
|
4
|
|
|
1
|
|
|
5
|
|
|
|
|
|
|
|
June 30, 2016
|
$
|
(359
|
)
|
|
$
|
(78
|
)
|
|
$
|
(437
|
)
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Amounts reclassified into net income
|
7
|
|
(1)
|
—
|
|
|
7
|
|
Tax expense
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
|
|
|
|
|
Other comprehensive income
|
4
|
|
|
—
|
|
|
4
|
|
|
|
|
|
|
|
September 30, 2016
|
$
|
(355
|
)
|
|
$
|
(78
|
)
|
|
$
|
(433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions
and Other
Postretirement
Benefits
|
|
Other
Comprehensive
Loss of Equity
Investees
|
|
Accumulated
Other
Comprehensive
Loss
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
$
|
(320
|
)
|
|
$
|
(78
|
)
|
|
$
|
(398
|
)
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Amounts reclassified into net income
|
10
|
|
(1)
|
—
|
|
|
10
|
|
Net loss
|
—
|
|
|
(4
|
)
|
|
(4
|
)
|
Tax expense
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
7
|
|
|
(4
|
)
|
|
3
|
|
|
|
|
|
|
|
March 31, 2015
|
$
|
(313
|
)
|
|
$
|
(82
|
)
|
|
$
|
(395
|
)
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Amounts reclassified into net income
|
11
|
|
(1)
|
—
|
|
|
11
|
|
Tax expense
|
(5
|
)
|
|
—
|
|
|
(5
|
)
|
|
|
|
|
|
|
Other comprehensive income
|
6
|
|
|
—
|
|
|
6
|
|
|
|
|
|
|
|
June 30, 2015
|
$
|
(307
|
)
|
|
$
|
(82
|
)
|
|
$
|
(389
|
)
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
Amounts reclassified into net income
|
$
|
10
|
|
(1)
|
$
|
—
|
|
|
$
|
10
|
|
Tax expense
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
|
|
|
|
|
Other comprehensive income
|
7
|
|
|
—
|
|
|
7
|
|
|
|
|
|
|
|
September 30, 2015
|
$
|
(300
|
)
|
|
$
|
(82
|
)
|
|
$
|
(382
|
)
|
|
|
(1)
|
These items are included in the computation of net periodic pension and postretirement benefit costs. See Note 7, “Pensions and Other Postretirement Benefits,” for additional information.
|
4. Stock Repurchase Program
We repurchased and retired
7.2 million
and
10.3 million
shares of Common Stock under our stock repurchase program in the
first nine months
of
2016
and
2015
, respectively, at a cost of
$603 million
and
$997 million
, respectively. 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
158.3 million
shares at a total cost of
$10.1 billion
.
5. 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
$1.2 billion
at
September 30, 2016
, and
$1.1 billion
at
December 31, 2015
.
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 for amounts due to CRC for the operation of the Shared Assets Areas totaling
$38 million
and
$39 million
for the
third quarter
s of
2016
and
2015
, respectively, and
$113 million
and
$116 million
for the
first nine months
of
2016
and
2015
, respectively. Our equity in the earnings of Conrail, net of amortization, included in “Purchased services and rents” was
$15 million
and
$9 million
for the
third quarter
s of
2016
and
2015
, respectively, and
$37 million
and
$32 million
for the
first nine months
of
2016
and
2015
, respectively.
“Accounts payable” includes
$118 million
at
September 30, 2016
, and
$71 million
at
December 31, 2015
, due to Conrail for the operation of the Shared Assets Areas. In addition, “Other liabilities” includes
$280 million
at both
September 30, 2016
,
and
December 31, 2015
, for long-term advances from Conrail, maturing
2044
, that bear interest at an average rate of
2.9%
.
Investment in TTX
NS and eight other North American railroads jointly own TTX Company (TTX). NS has a
19.65%
ownership interest in TTX, a railcar pooling company that provides its owner-railroads with standardized fleets of intermodal, automotive, and general use railcars at stated rates.
Amounts paid to TTX for use of equipment are included in “Purchased services and rents.” This amounted to
$56 million
of expense for the
third quarter
s of both 2016 and 2015, and
$170 million
and
$162 million
for the
first nine months
of
2016
and
2015
, respectively. Our equity in the earnings of TTX, also included in “Purchased services and rents,” totaled
$8 million
and
$6 million
for the
third quarter
s of
2016
and
2015
, respectively, and
$18 million
and
$15 million
for the
first nine months
of
2016
and
2015
, respectively.
6. Debt
During the second quarter of 2016, NS issued
$600 million
of
2.9%
senior notes due
2026
. In May 2016, we renewed our five-year credit agreement, extending the facility until May 2021. In June 2016, we renewed and amended our accounts receivable securitization facility, extending it until June 2018.
7. Pensions and Other Postretirement Benefits
We have both funded and unfunded defined benefit pension plans covering principally salaried employees. We also provide specified health care and life insurance benefits to eligible retired employees; these plans can be amended or terminated at our option. Under our self-insured retiree health care plan, for those participants who are not Medicare-eligible, a defined percentage of health care expenses is covered for retired employees and their dependents, reduced by any deductibles, coinsurance, and, in some cases, coverage provided under other group insurance policies. Those participants who are Medicare-eligible are not covered under the self-insured retiree health care plan, but instead are provided with an employer-funded health reimbursement account which can be used for reimbursement of health insurance premiums or eligible out-of-pocket medical expenses. Pension and postretirement benefit cost components for the
third quarter
and
first nine months
are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
Pension Benefits
|
|
Benefits
|
|
Third Quarter
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
9
|
|
|
$
|
10
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
20
|
|
|
23
|
|
|
4
|
|
|
5
|
|
Expected return on plan assets
|
(43
|
)
|
|
(41
|
)
|
|
(4
|
)
|
|
(4
|
)
|
Amortization of net losses
|
13
|
|
|
16
|
|
|
—
|
|
|
—
|
|
Amortization of prior service benefit
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
Net cost (benefit)
|
$
|
(1
|
)
|
|
$
|
8
|
|
|
$
|
(4
|
)
|
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
Pension Benefits
|
|
Benefits
|
|
First Nine Months
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
($ in millions)
|
Service cost
|
$
|
27
|
|
|
$
|
30
|
|
|
$
|
5
|
|
|
$
|
6
|
|
Interest cost
|
61
|
|
|
70
|
|
|
12
|
|
|
15
|
|
Expected return on plan assets
|
(129
|
)
|
|
(124
|
)
|
|
(13
|
)
|
|
(14
|
)
|
Amortization of net losses
|
38
|
|
|
49
|
|
|
—
|
|
|
—
|
|
Amortization of prior service benefit
|
—
|
|
|
—
|
|
|
(18
|
)
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
Net cost (benefit)
|
$
|
(3
|
)
|
|
$
|
25
|
|
|
$
|
(14
|
)
|
|
$
|
(11
|
)
|
Effective January 1, 2016, we began using a spot rate approach to estimate the service cost and interest cost components of net periodic benefit cost for our pension and other postretirement benefits plans rather than a single weighted-average discount rate. This change in estimate resulted in reductions in service and interest cost of
$6 million
and
$19 million
in the
third quarter
and
first nine months
of 2016, respectively.
8. Fair Value
Fair Value Measurements
Financial Accounting Standards Board (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;
•
inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
|
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
|
|
|
Level 3
|
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The asset’s or liability’s fair value measurement level within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Other than those assets and liabilities described below that approximate fair value, there were
no
assets or liabilities measured at fair value on a recurring basis at
September 30, 2016
, or
December 31, 2015
.
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,” “Accounts receivable,” “Accounts payable,” and “Short-term debt” approximate carrying values because of the short maturity of these financial instruments. The carrying value of corporate-owned life insurance is recorded at cash surrender value and, accordingly, approximates fair value. The carrying amounts and estimated fair values for the remaining financial instruments, excluding investments accounted for under the equity method, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
Long-term investments
|
$
|
186
|
|
|
$
|
211
|
|
|
$
|
162
|
|
|
$
|
190
|
|
Long-term debt, including current maturities
|
(10,105
|
)
|
|
(12,307
|
)
|
|
(9,893
|
)
|
|
(11,124
|
)
|
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, within the fair value hierarchy (there were no level 3 valued assets or liabilities).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
($ in millions)
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
Long-term investments
|
$
|
73
|
|
|
$
|
138
|
|
|
$
|
211
|
|
Long-term debt, including current maturities
|
(12,104
|
)
|
|
(203
|
)
|
|
(12,307
|
)
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
Long-term investments
|
$
|
49
|
|
|
$
|
141
|
|
|
$
|
190
|
|
Long-term debt, including current maturities
|
(11,022
|
)
|
|
(102
|
)
|
|
(11,124
|
)
|
9. Commitments and Contingencies
Lawsuits
We and/or certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations. When we conclude that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to earnings. While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payment of such liability and claims. However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter. Any adjustments to the recorded liability will be reflected in earnings in the periods in which such adjustments become known.
One of our chemical customers, Sunbelt Chlor Alkali Partnership (Sunbelt), filed a rate reasonableness complaint before the Surface Transportation Board (STB) alleging that our tariff rates for transportation of regulated movements are unreasonable. Since April 1, 2011, we have been billing and collecting amounts based on the challenged tariff rates. In 2014, the STB resolved this rate reasonableness complaint in our favor. In June 2016, the STB resolved petitions for reconsideration. The matter remains decided in our favor; however, the findings are still subject to appeal. We believe the estimate of any reasonably possible loss will not have a material effect on our financial position, results of operations, or liquidity. With regard to rate cases, we record adjustments to revenues in the periods if and when such adjustments are probable and reasonably estimable.
On November 6, 2007, various antitrust class actions filed against us and other Class I railroads in various Federal district courts regarding fuel surcharges were consolidated in the District of Columbia by the Judicial Panel on Multidistrict Litigation. On June 21, 2012, the court certified the case as a class action. The defendant railroads appealed this certification, and the Court of Appeals for the District of Columbia vacated the District Court’s decision and remanded the case for further consideration. We believe the allegations in the complaints are without merit and intend to vigorously defend the cases. We do not believe the outcome of these proceedings will have a material effect on our financial position, results of operations, or liquidity.
Casualty Claims
Casualty claims include employee personal injury and occupational claims as well as third-party claims, all exclusive of legal costs. To aid in valuing our personal injury liability and determining the amount to accrue with respect to such claims during the year, we utilize studies prepared by an independent consulting actuarial firm. Job-related accidental injury and occupational claims are subject to the Federal Employers’ Liability Act (FELA), which is applicable only to railroads. FELA’s fault-based system produces results that are unpredictable and inconsistent
as compared with a no-fault workers’ compensation system. The variability inherent in this system could result in actual costs being different from the liability recorded. While the ultimate amount of claims incurred is dependent on future developments, in our opinion, the recorded liability is adequate to cover the future payments of claims and is supported by the most recent actuarial study. In all cases, we record a liability when the expected loss for the claim is both probable and reasonably 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 personal injury expense. The actuarial firm studies our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences. The actuarial firm uses the results of these analyses to estimate the ultimate amount of liability, which includes amounts for incurred but unasserted claims. We adjust the liability quarterly based upon our assessment and the results of the study. Our estimate of loss liabilities is subject to inherent limitation given the difficulty of predicting future events such as jury decisions, court interpretations, or legislative changes, and as such the actual loss may vary from the estimated liability recorded.
Occupational claims
– Occupational claims (including asbestosis and other respiratory diseases, as well as conditions allegedly related to repetitive motion) are often not caused by a specific accident or event but rather allegedly result from a claimed exposure over time. Many such claims are being asserted by former or retired employees, some of whom have not been employed in the rail industry for decades. The independent actuarial firm provides an estimate of the occupational claims liability based upon our history of claim filings, severity, payments, and other pertinent facts. The liability is dependent upon judgments we make as to the specific case reserves as well as judgments of the actuarial firm in the quarterly studies. The actuarial firm’s estimate of ultimate loss includes a provision for those claims that have been incurred but not reported. This provision is derived by analyzing industry data and projecting our experience into the future as far as can be reasonably determined. We adjust the liability quarterly based upon our assessment and the results of the study. However, it is possible that the recorded liability may not be adequate to cover the future payment of claims. Adjustments to the recorded liability are reflected in operating expenses in the periods in which such adjustments become known.
Third-party claims
– We record a liability for third-party claims, including those for highway crossing accidents, trespasser and other injuries, automobile liability, property damage, and lading damage. The actuarial firm assists us with the calculation of potential liability for third-party claims, except lading damage, based upon our experience including the number and timing of incidents, amount of payments, settlement rates, number of open claims, and legal defenses. The actuarial estimate includes a provision for claims that have been incurred but not reported. We adjust the liability quarterly based upon our assessment and the results of the study. Given the inherent uncertainty in regard to the ultimate outcome of third-party claims, it is possible that the actual loss may differ from the estimated liability recorded.
Environmental Matters
We are subject to various jurisdictions’ environmental laws and regulations. We record a liability where such liability or loss is probable and its amount can be reasonably estimated. Claims, if any, against third parties, for recovery of cleanup costs we have incurred are reflected as receivables (when collection is probable) in the Consolidated Balance Sheets and are not netted against the associated liability. Environmental engineers regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates. We have an Environmental Policy Council, composed of senior managers, to oversee and interpret our environmental policy.
Our Consolidated Balance Sheets include liabilities for environmental exposures of
$64 million
at
September 30, 2016
, and
$69 million
at
December 31, 2015
(of which
$15 million
are classified as current liabilities at both
September 30, 2016
, and
December 31, 2015
). At
September 30, 2016
, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at
137
known locations and projects, compared with
145
known locations and projects at
December 31, 2015
. At
September 30, 2016
,
15
sites
accounted for
$41 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
ten
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 our 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.
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
(
$1.5 billion
for specific perils) per occurrence and/or policy year for bodily injury and property damage to third parties and up to
$25 million
and above
$200 million
per occurrence and/or policy year for property owned by us or in our care, custody, or control.
10. New Accounting Pronouncements
In March 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-09,
“Improvements to Employee Share-Based Payment Accounting.”
We adopted the provisions of this ASU during the first quarter of 2016. This update principally affects the recognition of excess tax benefits and deficiencies and the cash flow classification of share-based compensation-related transactions. The requirement to recognize excess tax benefits and deficiencies as income tax expense or benefit in the income statement was applied prospectively, with a benefit of
$12 million
recognized in the “Provision for income taxes” line item for the
nine
months ended
September 30, 2016
. The classification requirements on the Consolidated Statements of Cash Flows for the adoption of ASU 2016-09 resulted in a
$29 million
increase in “Current liabilities other than debt” within the operating activities section and a corresponding decrease in “Common stock transactions” within the financing activities section for the
first nine months
of 2016. We retrospectively presented the Consolidated Statements of Cash Flows for the
first nine months
of 2015 to reflect a
$29 million
increase in “Current liabilities other than debt” within the operating activities section and a corresponding decrease in “Common stock transactions” within the financing activities section.
In November 2015, the FASB issued ASU No. 2015-17,
“Balance Sheet Classification of Deferred Taxes.”
This update requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet rather than as separate current and noncurrent amounts. We adopted the provisions of this ASU during the first quarter of 2016 and applied it retrospectively. The adoption of ASU 2015-17 resulted in the presentation of
$121 million
of current deferred income tax assets as a reduction of “Deferred income taxes”
in the long-term liabilities section of the Consolidated Balance Sheet at
September 30, 2016
. We retrospectively presented the December 31, 2015, Consolidated Balance Sheet to reflect the reclassification of
$121 million
of deferred income tax assets from “Deferred income taxes” in the current assets section of the balance sheet to “Deferred income taxes” in the long-term liabilities section of the balance sheet.
In May 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers.”
This update will replace most existing revenue recognition guidance in GAAP and require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In July 2015, the FASB approved a one-year deferral of the effective date of the new standard, making it effective for our annual and interim reporting periods beginning January 1, 2018. Early application is permitted, but not before the original effective date for public business entities (annual reporting periods beginning after December 15, 2016). ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. We are still evaluating the effects of ASU 2014-09, but we do not currently expect adoption of the standard will have a material effect on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “
Leases
.” This update, effective for our annual and interim reporting periods beginning January 1, 2019, will replace existing lease guidance in GAAP and will require lessees to recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. When implemented, lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.