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<div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "><b>10. Commitments and Contingencies</b></font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "><b>Lawsuits</b></font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; ">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 are known.</font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; ">One of our customers, DuPont, has a rate reasonableness complaint pending before the STB alleging that our tariff rates for transportation of regulated movements are unreasonable. We dispute this allegation. Since June 1, 2009, we have been billing and collecting from DuPont amounts based on the challenged tariff rates. We presently expect resolution of the DuPont case to occur in 2014 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 revenues in the periods, if and when, such adjustments are probable and estimable.</font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; ">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 have appealed such certification, and a decision by the court to either reject the appeal outright or proceed with ruling on its merits is pending. 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. A lawsuit containing similar allegations against us and four other major railroads that was filed on March 25, 2008, in the U.S. District Court for the District of Minnesota was voluntarily dismissed by the plaintiff subject to a tolling agreement entered into in August 2008.</font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "><b>Casualty Claims</b></font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; ">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 estimable.</font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "><b>Employee personal injury claims</b> - 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.</font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "><b> </b></font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "><b>Occupational claims</b> - 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.</font></div> <div style="text-align:center;text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "><b>Third-party claims</b> - 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.</font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "><b>Environmental Matters </b></font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; ">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 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.</font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; ">Our Consolidated Balance Sheets include liabilities for environmental exposures of $53 million at June 30, 2013, and $42 million at December 31, 2012 (of which $12 million is classified as a current liability at the end of each period). At June 30, 2013, the liability represents our estimate of the probable cleanup, investigation, and remediation costs based on available information at 149 known locations and projects compared with 146 locations and projects at December 31, 2012. At June 30, 2013, ten sites accounted for $29 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.</font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; ">At 21 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.</font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; ">With respect to known environmental sites (whether identified by us or by the Environmental Protection Agency (EPA) 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, 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.</font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; ">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 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.</font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; ">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.</font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "><b>Insurance</b></font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; ">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 in our care, custody, or control.</font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "><b>Purchase Commitments</b></font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; "> </font></div> <div style="text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000; ">At June 30, 2013, we had outstanding purchase commitments totaling approximately $487 million for locomotives, track and yard expansion projects, track material, freight cars, and vehicle fleet additions, in connection with our capital programs through 2016.</font></div> <div style="text-indent:0.0px;"></div><div style="text-align:center;text-indent:0.0px;"><font style="font-family:Times New Roman;font-size:14.7px;color:#000000;"></font></div> <div style="text-indent:0.0px;"></div>
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