Restricted Stock Units
Beginning in 2018, 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). RSUs granted in previous years have a five-year restriction period and will also be settled through the issuance of shares of Common Stock. Certain RSU grants include cash dividend equivalent payments during the restriction period in an amount equal to the regular quarterly dividends paid on Common Stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
First Nine Months
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
($ in millions)
|
RSUs vested
|
|
142
|
|
|
—
|
|
|
166,197
|
|
|
160,200
|
|
Common Stock issued net of tax withholding
|
|
102
|
|
|
—
|
|
|
119,346
|
|
|
99,968
|
|
Related tax benefit realized
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
3
|
|
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 2019 or 2018.
|
|
|
|
|
|
|
|
|
|
|
|
First Nine Months
|
|
|
2019
|
|
2018
|
|
|
($ in millions)
|
PSUs earned
|
|
331,099
|
|
|
154,189
|
Common Stock issued net of tax withholding
|
|
221,241
|
|
|
94,399
|
Related tax benefit realized
|
|
$
|
9
|
|
|
$
|
3
|
|
3. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
Diluted
|
|
Third Quarter
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
($ in millions, except per share amounts,
shares in millions)
|
|
|
|
|
|
|
|
|
Net income
|
$
|
657
|
|
|
$
|
702
|
|
|
$
|
657
|
|
|
$
|
702
|
|
Dividend equivalent payments
|
(1
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
$
|
656
|
|
|
$
|
700
|
|
|
$
|
657
|
|
|
$
|
702
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
262.1
|
|
|
275.5
|
|
|
262.1
|
|
|
275.5
|
|
Dilutive effect of outstanding options
|
|
|
|
|
|
|
|
|
|
|
|
and share-settled awards
|
|
|
|
|
|
|
2.2
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares outstanding
|
|
|
|
|
|
|
264.3
|
|
|
278.2
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
$
|
2.50
|
|
|
$
|
2.54
|
|
|
$
|
2.49
|
|
|
$
|
2.52
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
Diluted
|
|
First Nine Months
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
($ in millions, except per share amounts,
shares in millions)
|
|
|
|
|
|
|
|
|
Net income
|
$
|
2,056
|
|
|
$
|
1,964
|
|
|
$
|
2,056
|
|
|
$
|
1,964
|
|
Dividend equivalent payments
|
(4
|
)
|
|
(4
|
)
|
|
—
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
$
|
2,052
|
|
|
$
|
1,960
|
|
|
$
|
2,056
|
|
|
$
|
1,963
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding
|
264.6
|
|
|
280.1
|
|
|
264.6
|
|
|
280.1
|
|
Dilutive effect of outstanding options
|
|
|
|
|
|
|
|
|
|
|
|
and share-settled awards
|
|
|
|
|
|
|
2.3
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
Adjusted weighted-average shares outstanding
|
|
|
|
|
|
266.9
|
|
|
282.6
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
$
|
7.76
|
|
|
$
|
7.00
|
|
|
$
|
7.70
|
|
|
$
|
6.95
|
|
During the third quarters and first nine months of 2019 and 2018, dividend equivalent payments were made to certain 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 awards outstanding that were antidilutive for both the third quarters and first nine months ended September 30, 2019 and 2018.
4. Accumulated Other Comprehensive Loss
The changes in the cumulative balances of “Accumulated other comprehensive loss” reported on the Consolidated Balance Sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning
of Year
|
|
Net Income
(Loss)
|
|
Reclassification of Stranded
Tax Effects
|
|
Reclassification
Adjustments
|
|
Balance at
End of Period
|
|
($ in millions)
|
Nine Months Ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
Pensions and other
|
|
|
|
|
|
|
|
|
|
postretirement liabilities
|
$
|
(497
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
(486
|
)
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of equity investees
|
(66
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
Accumulated other
|
|
|
|
|
|
|
|
|
|
comprehensive loss
|
$
|
(563
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
(553
|
)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions and other
|
|
|
|
|
|
|
|
|
|
postretirement liabilities
|
$
|
(300
|
)
|
|
$
|
(11
|
)
|
|
$
|
(86
|
)
|
|
$
|
18
|
|
|
$
|
(379
|
)
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
(loss) of equity investees
|
(56
|
)
|
|
2
|
|
|
(2
|
)
|
|
—
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
Accumulated other
|
|
|
|
|
|
|
|
|
|
comprehensive loss
|
$
|
(356
|
)
|
|
$
|
(9
|
)
|
|
$
|
(88
|
)
|
|
$
|
18
|
|
|
$
|
(435
|
)
|
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” We adopted the provisions of ASU 2018-02 in the first quarter of 2018 resulting in an increase to “Accumulated other comprehensive loss” of $88 million and a corresponding increase to “Retained income,” with no impact on “Total stockholders’ equity.”
5. Stock Repurchase Program
We repurchased and retired 8.4 million shares of Common Stock under our stock repurchase program during the first nine months of 2019, at a cost of $1.6 billion. During the first nine months of 2018, we repurchased and retired 12.8 million shares (5.7 million under an accelerated share repurchase program and 7.1 million shares under our ongoing program) at a cost of $2.1 billion.
Since the beginning of 2006, we have repurchased and retired 194.0 million shares at a total cost of $15.7 billion.
6. 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 $1.4 billion at September 30, 2019, and $1.3 billion at December 31, 2018.
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 amounts payable to CRC for the operation of the Shared Assets Areas totaling $37 million and $38 million for the third quarters of 2019 and 2018, respectively, and $112 million for both the first nine months of 2019 and 2018. Our equity in the earnings of Conrail, net of amortization, included in “Purchased services and rents” was $13 million and $12 million for the third quarters of 2019 and 2018, respectively, and $36 million and $46 million for the first nine months of 2019 and 2018, respectively.
“Other liabilities” includes $280 million at both September 30, 2019, and December 31, 2018, 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” and amounted to $61 million and $64 million of expense for the third quarters of 2019 and 2018, respectively, and $183 million and $197 million for the first nine months of 2019 and 2018, respectively. Our equity in the earnings of TTX, also included in “Purchased services and rents,” totaled $19 million and $16 million for the third quarters of 2019 and 2018, respectively, and $44 million and $49 million for the first nine months of 2019 and 2018, respectively.
7. Debt
In May 2019, we issued $200 million of 3.80% senior notes due 2028, $400 million of 4.10% senior notes due 2049, and $200 million of 5.10% senior notes due 2118.
In May 2019, we renewed and amended our accounts receivable securitization program, increasing borrowing capacity from $400 million to $450 million with a term expiring in May 2020. We had $350 million outstanding at September 30, 2019 reflected as “Short-term debt” on the Consolidated Balance Sheets, and no amounts outstanding at December 31, 2018.
The “Cash, cash equivalents, and restricted cash” line item on the Consolidated Statements of Cash Flows includes restricted cash of $88 million at both September 30, 2019 and December 31, 2018, reflecting deposits held by a third-party bond agent as collateral for certain debt obligations maturing in October 2019. The restricted cash balance is included as part of “Other current assets” on the Consolidated Balance Sheets in both periods.
8. Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” and subsequent amendments, which replaced existing lease guidance in GAAP and requires lessees to recognize right-of-use (ROU) assets and lease liabilities on the balance sheet for leases greater than twelve months and disclose key information about leasing arrangements. We adopted the standard on January 1, 2019 using the modified retrospective method and used the effective date as our date of initial application. Financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. Upon adoption of the standard, we recognized ROU assets and corresponding lease liabilities of $586 million on the Consolidated Balance Sheets as of January 1, 2019. There were no adjustments to “Retained income” on adoption.
The new standard provides a number of optional practical expedients for transition. We elected the package of practical expedients under the transition guidance which permitted us not to reassess under the new standard our prior conclusions for lease identification and lease classification on expired or existing contracts and whether initial direct costs previously capitalized would qualify for capitalization under FASB Accounting Standards Codification (ASC) 842. We also elected the practical expedient related to land easements, which allowed us to not reassess our current accounting treatment for existing agreements on land easements, which are not accounted for as leases. We did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases.
The new standard also provides practical expedients and recognition exemptions for an entity’s ongoing accounting policy elections. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we do not recognize ROU assets or lease liabilities.
We are committed under long-term lease agreements for equipment, lines of road, and other property. Some of these agreements contain variable payment provisions that depend on an index or rate, initially measured using the index or rate at the lease commencement date, and are therefore not included in our future minimum lease payments. These variable lease agreements include usage-based payments for equipment under service contracts, lines of road, and other property. Our long-term lease agreements do not contain any material restrictive covenants.
Our equipment leases have remaining terms of less than 1 year to 9 years and our lines of road and land leases have remaining terms of less than 1 year to 138 years. Some of these leases include options to extend the leases for up to 99 years, and some include options to terminate the leases within 30 days. Because we are not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term, and associated payments are excluded from future minimum lease payments.
Leases with an initial term of twelve months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term. We do not separate lease and non-lease components.
Operating lease amounts included on the Consolidated Balance Sheet were as follows:
|
|
|
|
|
|
|
|
September 30, 2019
|
Assets
|
Classification
|
($ in millions)
|
ROU assets
|
Other assets
|
$
|
561
|
|
|
|
|
Liabilities
|
|
|
Current lease liabilities
|
Other current liabilities
|
$
|
97
|
|
Non-current lease liabilities
|
Other liabilities
|
464
|
|
|
|
|
Total lease liabilities
|
|
$
|
561
|
|
|
|
|
The components of total lease expense, primarily included in “Purchased services and rents,” were as follows:
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
First Nine Months
|
|
2019
|
|
2019
|
|
($ in millions)
|
Operating lease expense
|
$
|
29
|
|
|
$
|
85
|
|
Variable lease expense
|
15
|
|
|
43
|
|
Short-term lease expense
|
1
|
|
|
4
|
|
|
|
|
|
Total lease expense
|
$
|
45
|
|
|
$
|
132
|
|
At September 30, 2019, we do not have any material finance lease assets or liabilities, nor do we have any material subleases.
During March 2019, we entered into a non-cancellable lease for an office building with an estimated construction cost of $550 million. The lease will commence upon completion of the construction (for which we are a construction agent) of the office building which is expected to be in 2021. The initial term of the lease is five years, with options to renew, purchase, or sell the office building at the end of the lease term. Upon lease commencement, the ROU asset and lease liability will be determined and recorded. The lease also contains a residual value guarantee of up to ninety percent of the total construction cost.
Other information related to operating leases was as follows:
|
|
|
|
|
September 30, 2019
|
|
|
Weighted-average remaining lease term (years) on operating leases
|
8.32
|
|
|
|
Weighted-average discount rates on operating leases
|
3.52
|
%
|
As the rates implicit in most of our leases are not readily determinable, we use a collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. We use the portfolio approach and group leases into short, medium, and long-term categories, applying the corresponding incremental borrowing rates to these categories of leases.
During the first nine months of 2019, right-of-use assets obtained in exchange for new operating lease liabilities were $47 million. During the first nine months of 2019, cash paid for amounts included in the measurement of lease liabilities was $85 million in operating cash flows from operating leases. During the first quarter, cash proceeds from a sale and leaseback transaction were $82 million and the gain on the transaction was $15 million.
Future minimum lease payments under non-cancellable operating leases were as follows:
|
|
|
|
|
|
September 30, 2019
|
|
($ in millions)
|
2019 - 3 months
|
$
|
30
|
|
2020
|
110
|
|
2021
|
103
|
|
2022
|
79
|
|
2023
|
69
|
|
2024 and subsequent years
|
266
|
|
Total lease payments
|
657
|
|
Less: Interest
|
96
|
|
|
|
Present value of lease liabilities
|
$
|
561
|
|
Undiscounted future minimum lease payments under non-cancellable operating leases accounted for under ASC 840 “Leases” were as follows:
|
|
|
|
|
|
December 31, 2018
|
|
($ in millions)
|
2019
|
$
|
101
|
|
2020
|
95
|
|
2021
|
88
|
|
2022
|
75
|
|
2023
|
69
|
|
2024 and subsequent years
|
267
|
|
|
|
Total
|
$
|
695
|
|
9. 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 quarters and first nine months were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
Pension Benefits
|
|
Benefits
|
|
Third Quarter
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Interest cost
|
24
|
|
|
21
|
|
|
4
|
|
|
4
|
|
Expected return on plan assets
|
(45
|
)
|
|
(44
|
)
|
|
(4
|
)
|
|
(4
|
)
|
Amortization of net losses
|
11
|
|
|
14
|
|
|
—
|
|
|
—
|
|
Amortization of prior service benefit
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
Net benefit
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
Pension Benefits
|
|
Benefits
|
|
First Nine Months
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
26
|
|
|
$
|
29
|
|
|
$
|
5
|
|
|
$
|
6
|
|
Interest cost
|
70
|
|
|
63
|
|
|
13
|
|
|
12
|
|
Expected return on plan assets
|
(134
|
)
|
|
(133
|
)
|
|
(11
|
)
|
|
(12
|
)
|
Amortization of net losses
|
33
|
|
|
42
|
|
|
—
|
|
|
—
|
|
Amortization of prior service benefit
|
—
|
|
|
—
|
|
|
(18
|
)
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
Net expense (benefit)
|
$
|
(5
|
)
|
|
$
|
1
|
|
|
$
|
(11
|
)
|
|
$
|
(12
|
)
|
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,” “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. There are no other assets or liabilities measured at fair value on a recurring basis at September 30, 2019 or December 31, 2018. The carrying amounts and estimated fair values, based on Level 1 inputs, of long-term debt consisted of the following:
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|
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September 30, 2019
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December 31, 2018
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Carrying
Amount
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Fair
Value
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Carrying
Amount
|
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Fair
Value
|
|
($ in millions)
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|
|
|
|
|
|
|
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Long-term debt, including current maturities
|
$
|
(11,486
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)
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|
$
|
(14,131
|
)
|
|
$
|
(11,145
|
)
|
|
$
|
(12,203
|
)
|
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. 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.
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. 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 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 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. We adjust the liability quarterly based upon our assessment and the results of the study. 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, exposure to repetitive motion resulting in various musculoskeletal disorders, and exposure to excessive noise resulting in hearing loss. 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 $60 million and $55 million at September 30, 2019 and December 31, 2018, respectively, of which $15 million is classified as a current liability at both dates. At September 30, 2019, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 113 known locations and projects compared with 114 locations and projects at December 31, 2018. At September 30, 2019, sixteen sites accounted for $42 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 eleven locations, one or more of our subsidiaries in conjunction with a number of other parties have been identified as potentially responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or comparable state statutes that impose joint and several liability for cleanup costs. We calculate our estimated liability for these sites based on facts and legal defenses applicable to each site and not solely on the basis of the potential for joint liability.
With respect to known environmental sites (whether identified by us or by the Environmental Protection Agency or comparable state authorities), estimates of our ultimate potential financial exposure for a given site or in the aggregate for all such sites can change over time because of the widely varying costs of currently available cleanup techniques, unpredictable contaminant recovery and reduction rates associated with available cleanup technologies, the likely development of new cleanup technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant’s share of any estimated loss (and that participant’s ability to bear it), and evolving statutory and regulatory standards governing liability.
The risk of incurring environmental liability for acts and omissions, past, present, and future, is inherent in the railroad business. Some of the commodities we transport, particularly those classified as hazardous materials, pose special risks that we work diligently to reduce. In addition, several of our subsidiaries own, or have owned, land used as operating property, or which is leased and operated by others, or held for sale. Because environmental problems that are latent or undisclosed may exist on these properties, there can be no assurance that we will not incur environmental liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably at this time. Moreover, lawsuits and claims involving these and potentially other unidentified environmental sites and matters are likely to arise from time to time. The resulting liabilities could have a significant effect on financial position, results of operations, or liquidity in a particular year or quarter.
Based on our assessment of the facts and circumstances now known, we believe we have recorded the probable and reasonably estimable costs for dealing with those environmental matters of which we are aware. Further, we believe that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, or liquidity.
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.
12. New Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Credit Losses - Measurement of Credit Losses on Financial Instruments,” which will replace the current incurred loss impairment method with a method that reflects expected credit losses. The new standard is effective as of January 1, 2020, and early adoption is permitted as of January 1, 2019. Because credit losses associated from our accounts receivables have historically been insignificant, we do not expect this standard to have a material effect on our financial statements. We will not adopt the standard early.