Norfolk Southern (NSC)

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle.   During the first quarter of 2009, there were 1,209,700 PSUs granted with a grant-date fair value of $38.71.   The PSUs granted in 2009 will be paid in the form of shares; however, one-half of any previously granted PSUs earned will be paid in the form of shares of Common Stock, with the other half to be paid in cash.

During the first quarter of 2009, 983,965 PSUs were earned and paid out, one-half in shares of Common Stock, and one-half in cash.   These PSUs had a grant-date fair value of $49.43 per unit and a fair value at pay out of $38.71 per unit.   The total related tax expense recognized as additional paid-in capital was $2 million for the first quarter of 2009.

For the first three months of 2008, 1,013,999 PSUs were earned and paid out, one-half in shares of Common Stock and one-half in cash.   These PSUs had a grant-date fair value of $34.10 per unit and a fair value at pay out of $50.47 per unit.   The total related tax benefit recognized in additional paid-in capital was $2 million in the first quarter of 2008.

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals (total shareholder return, return on average invested capital and operating ratio) at the end of a three-year cycle.   PSU grants and average grant-date fair values were 1,162,600 and $50.465 in 2008; 1,203,300 and $49.555 in 2007; and 1,163,600 and $49.425 in 2006.   One-half of any PSUs earned will be paid in the form of shares of Common Stock with the other half to be paid in cash.   A summary of the status of PSUs as of December 31, 2008, and changes during the twelve months then ended is presented below:

As of December 31, 2008, there was $18 million of total unrecognized compensation related to PSUs granted under the LTIP, which is expected to be recognized over a weighted-average period of approximately 1.1 years.   The total fair values of PSUs earned and paid in cash during the twelve months ended December 31, 2008, 2007 and 2006 were $26 million, $18 million, and $34   million, respectively.   The total related excess tax benefits realized were $2 million in 2008, $2 million in 2007, and zero in 2006.

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle.   There were 1,162,600 PSUs granted with a grant-date fair value of $50.47 during the first quarter of 2008.   One-half of any PSUs earned will be paid in the form of shares of Common Stock, with the other half to be paid in cash.

For the first nine months of 2008, 1,013,999 PSUs were earned and paid out, one-half in shares of Common Stock, and one-half in cash.   These PSUs had a grant-date fair value of $34.10 per unit and a fair value at pay out of $50.47 per unit.   The total related tax benefit was $2 million for the first nine months of 2008.

2.  Income Taxes

In the third quarter of 2008, NS’ balance of unrecognized tax benefits decreased $28 million to $134 million primarily due to the resolution of the Internal Revenue Service (IRS) examination of NS’ 2004 and 2005 federal income tax returns.   Of the $134 million unrecognized tax benefits remaining, $54 million would affect the effective tax rate if recognized.   NS’ resolution of the 2004 and 2005 examination did not have a material effect on income tax expense.   NS’ consolidated federal income tax returns for 2006 and 2007 are being audited by the IRS.

Interest expense related to the overpayment and underpayment of income taxes, which is included in “Other income – net,” was reduced by $11 million during the third quarter of 2008 and $21 million for the first nine months of 2008.   The decrease for the quarter was primarily due to the resolution of the 2004 and 2005 IRS examination, while the first nine months also reflected the second quarter resolutions of certain refund claims submitted to the IRS and NS’ appeal of the 2002 and 2003 tax years.  

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle.  There were 1,162,600 PSUs granted with a grant-date fair value of $50.47 during the first quarter of 2008.  One-half of any PSUs earned will be paid in the form of shares of Common Stock, with the other half to be paid in cash.

For the first six months of 2008, 1,013,999 PSUs were earned and paid out, one-half in shares of Common Stock, and one-half in cash.  These PSUs had a grant-date fair value of $34.10 per unit and a fair value at pay out of $50.47 per unit.  The total related tax benefit was $2 million for the first six months of 2008.

2.  Income Taxes

There have been no material changes to the balance of unrecognized tax benefits reported at Dec. 31, 2007.  During the second quarter, the IRS completed fieldwork on its examination of NS’ 2004 and 2005 federal income tax returns; however, the audit remains subject to further administrative review.  NS anticipates that this review will be completed during the third quarter.  NS expects that the resolution of the 2004 and 2005 examination will not have a material effect on income tax expense.  Also, NS’ appeal of certain adjustments proposed by the IRS with respect to the 2002 and 2003 tax years was resolved in the second quarter without a material effect on income tax expense.

Interest expense related to the overpayment and underpayment of income taxes, which is included in “Other income – net,” was reduced by $13 million during the quarter primarily due to the resolution of certain refund claims submitted to the IRS and the resolution of NS’ appeal of the 2002 and 2003 tax years.  Depending upon the final outcome of the 2004 and 2005 examination, an adjustment to interest expense could be made during the third quarter.     

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle.   During the first quarter of 2008, there were 1,162,600 PSUs granted with a grant-date fair value of $50.47.   One-half of any PSUs earned will be paid in the form of shares of Common Stock, with the other half to be paid in cash.

During the first quarter of 2008, 1,013,999 PSUs were earned and paid out, one-half in shares of Common Stock, and one-half in cash.   These PSUs had a grant-date fair value of $34.10 per unit and a fair value at pay out of $50.47 per unit.   The total related tax benefit was $2 million in the first quarter of 2008.

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals (total shareholder return, return on average invested capital and operating ratio) at the end of a three-year cycle.   PSU

grants and average grant-date fair values were 1,203,300 and $49.555 in 2007; 1,163,600 and $49.425 in 2006; and 1,344,400 and $34.10 in 2005.   One-half of any PSUs earned will be paid in the form of shares of Common Stock with the other half to be paid in cash.

A summary of the status of PSUs as of Dec. 31, 2007, and changes during the twelve months then ended is presented below:

As of Dec. 31, 2007, there was $19 million of total unrecognized compensation related to PSUs granted under the LTIP which is expected to be recognized over a weighted-average period of 1.0 year.   The total fair value of PSUs earned and paid in cash during the twelve months ended Dec. 31, 2007, 2006 and 2005 was $18 million, $34   million and $18   million, respectively.   The total related tax benefit realized was $2 million in 2007 and zero in 2006.

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle.   There were 1,203,300 PSUs granted with a grant-date fair value of $49.56 in 2007.   One-half of any PSUs earned will be paid in the form of shares of Common Stock with the other half to be paid in cash.

For the first nine months of 2007, 717,554 PSUs were earned and paid out, one-half in shares of Common Stock, and one-half in cash.   These PSUs had a grant-date fair value of $22.02 per unit and a fair value at pay out of $49.56 per unit.

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle.   There were 1,203,300 PSUs granted with a grant-date fair value of $49.56 in 2007.   One-half of any PSUs earned will be paid in the form of shares of Common Stock with the other half to be paid in cash.

For the first six months of 2007, 717,554 PSUs were earned and paid out, one-half in shares of Common Stock, and one-half in cash.   These PSUs had a grant-date fair value of $22.02 per unit and a fair value at pay out of $49.56 per unit.

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle.   There were 1,203,300 PSUs granted with a grant-date fair value of $49.56 in 2007.   One-half of any PSUs earned will be paid in the form of shares of Common Stock with the other half to be paid in cash.

During the first quarter of 2007, 717,554 PSUs were earned and paid out, one-half in shares of Common Stock, and one-half in cash.   These PSUs had a grant-date fair value of $22.02 per unit and a fair value at pay out of $49.56 per unit.

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals (total shareholder return, return on average invested capital and operating ratio) at the end of a three-year cycle.   PSU grants and average grant-date fair values were 1,163,600 and $49.425 in 2006; 1,344,400 and $34.10 in 2005; and 831,000 and $22.02 in 2004.   One-half of any PSUs earned will be paid in the form of shares of Common Stock with the other half to be paid in cash.

A summary of the status of PSUs as of Dec. 31, 2006, and changes during the twelve months then ended is presented below:

As of Dec. 31, 2006, there was $30   million of total unrecognized compensation related to PSUs granted under the LTIP which is expected to be recognized over a weighted-average period of 1.2   years.   The total fair value of PSUs earned and paid in cash during the twelve months ended Dec. 31, 2006, 2005 and 2004 was $34   million, $18   million and $10 million, respectively.

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle.   PSU grants and average grant-date fair values were 1,163,600 and $49.425 in 2006 and 1,344,400 and $34.10 in 2005.   One-half of any PSUs earned will be paid in the form of shares of Common Stock with the other half to be paid in cash.   Shares earned and issued may be subject to share retention agreements and held by NS for up to five years.

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle.   PSU grants and average grant-date fair values were 1,163,600 and $49.425 in 2006 and 1,344,400 and $34.10 in 2005.   One-half of any PSUs earned will be paid in the form of shares of Common Stock with the other half to be paid in cash.   Shares earned and issued may be subject to share retention agreements and held by NS for up to five years.

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle.   PSU grants and average grant-date fair values were 1,163,600 and $49.425 in 2006 and 1,344,400 and $34.10 in 2005.   One-half of any PSUs earned will be paid in the form of shares of Common Stock with the other half to be paid in cash.   Shares earned and issued may be subject to share retention agreements and held by NS for up to five years.

(Performance Share Units)

¹At the election of the Compensation Committee, PSUs that are earned may be satisfied in cash or in shares of Norfolk Southern Corporation Common Stock (or in some combination of the two).

²The Long-Term Incentive Plan does not provide a performance target for earning PSUs under this feature of the Plan; consequently, this column represents 73% of the maximum potential number of PSUs that can be earned which, in accordance with SEC rules, is the percentage actually earned under the plan at the end of the performance cycle that ended on December 31, 2005.

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Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle.   PSU grants and average grant-date fair values were 1,344,400 and $34.10 in 2005; 831,000 and $22.02 in 2004; and 946,000 and $19.63 in 2003.   PSUs may be paid in the form of shares of Common Stock, cash or any combination thereof.   Shares earned and issued may be subject to share retention agreements and held by NS for up to five years.

(Performance Share Units)

¹“Earn outs” may be satisfied in cash or in shares of Common Stock (or in some combination of the two).

²The Long-Term Incentive Plan does not provide a performance target for an “earn out” under this feature of the Plan; consequently, this column represents 55.2% of the maximum potential “earn out,” which, in accordance with applicable rules of the SEC, is the percentage actually “earned out” under the Plan at the end of the performance cycle which ended on December 31, 2003.

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Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle.   PSU grants and average grant-date fair market values were 831,000 and $22.02 in 2004; 946,000 and $19.63 in 2003; and 815,000 and $22.49 in 2002.   PSUs may be paid in the form of shares of Common Stock, cash or any combination thereof.   Shares earned and issued may be subject to share retention agreements and held by NS for up to five years.