What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-03 compared with 2022-02-04 · 149 added, 147 removed, 264 unchanged (53% of the section changed)

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We are also a principal carrier of coal, automobiles, and automotive parts.

During 2021, revenue growth and the absence of two prior-year charges resulted in substantial increases in operating income, net income and earnings per share.

Our current year results compare favorably to the prior year, during which there was a pandemic-induced decline in demand which resulted in reduced earnings.

The COVID-19 pandemic continues to impact the U.S.

and global economies and has resulted in ongoing supply chain challenges.

We are monitoring and reacting to the evolving nature of the pandemic, governmental responses, and their impacts on our business, including employee availability.

We remain committed to protecting our employees, operating safely, and providing excellent transportation service products for our customers.

In 2022, revenue growth led to year-over-year improvements in income from operations, net income and diluted earnings per share.

Throughout the year, we focused on efforts to increase our network fluidity and improve service for our customers.

These efforts included the hiring of new conductors in a tight labor market and evolving our operating plan, which collectively drove improvements in our network performance as we concluded the year and is providing strong momentum going into 2023.

Additionally, new labor agreements were secured by December 2022 which provided retroactive pay and other benefits for our craft employees.

As we head into 2023, we are focused on providing reliable and resilient service and delivering smart sustainable revenue growth that will deliver long-term value to our customers and shareholders.

SUMMARIZED RESULTS OF OPERATIONS

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Railway operating ratio (percent) 62.3 60.1 69.3 4 % (13 %)

Income from railway operations increased in 2022 compared to 2021, driven by higher railway operating revenues.

Revenue growth was the result of higher fuel surcharge revenues and pricing gains, which more than offset the impact of volume declines.

The rise in revenues was partly offset by increased railway operating expenses, driven by higher fuel prices, other inflationary pressures, service-related costs, increased labor-related costs primarily resulting from labor union negotiations, and higher claims-related expenses.

Incremental expenses incurred in 2022 that resulted from finalized labor agreements for wages earned in 2021 and prior periods lowered diluted earnings per share by $0.18.

Additionally, net income includes a $136 million deferred tax benefit resulting from a corporate income tax rate change in the Commonwealth of Pennsylvania, which increased diluted earnings per share by $0.58.

Our share repurchase activity resulted in the percentage increase in diluted earnings per share that exceeded that of net income.

Railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses) increased to 62.3 percent.

Income from railway operations increased in 2021 compared to 2020, the result of a 14% increase in railway operating revenues and a 1% reduction in railway operating expenses.

Revenue growth was driven by increased average revenue per unit and higher volumes, the result of improved customer demand.

The decline in railway operating expenses was largely due to the absence of two charges, as 2020 results were adversely impacted by a $385 million loss on asset disposal related to locomotives and a $99 million impairment charge related to an equity method investment.

The decline in railway

operating expenses was largely due to the absence of two charges, as 2020 results were adversely impacted by a $385 million loss on asset disposal related to locomotives and a $99 million impairment charge related to an equity method investment.

For more information on these charges, see Notes 7 and 6, respectively.

Higher fuel costs, purchased services, and compensation and benefits expense mostly offset the reduction associated with these charges.

Additionally, gains on the sale of operating properties increased compared to the prior year.

Additionally, gains on the sale of operating properties increased compared to 2020.

The 48% increase in income from railway operations drove comparable increases in net income and diluted earnings per share.

Our railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses) decreased to 60.1 percent.

Income from railway operations declined in 2020 compared to 2019 as railway operating revenues fell 13% which exceeded a 7% reduction in operating expenses.

Railway operating revenues declined as lower customer demand resulted in reduced volume.

Additionally, negative mix and lower fuel surcharge revenue, partially offset by increased pricing, led to lower average revenue per unit.

Railway operating expenses decreased due to declines in

fuel price and consumption, reduced employment levels, lower volumes and operational efficiency improvements.

These decreases in expenses were partially offset by the impact of the aforementioned charges.

Our railway operating ratio decreased to 60.1 percent.

The following tables adjust our 2020 U.S.

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In the table below, references to 2020 results and related comparisons use the adjusted, non-GAAP results from the table above.

2021 Adjusted

Adjusted 2020

2020 2020 (non-GAAP)

2021 (non-GAAP) 2019 (non-GAAP) vs.

Adjusted 2022 vs.

2022 2021 (non-GAAP) 2021 (non-GAAP)

($ in millions, except per share amounts) (% change)

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Total 1,865 1,584 1,465 18 % 8 %

Revenues increased $1.4 billion in 2021 and decreased $1.5 billion in 2020 compared to the prior years.

Higher revenue for 2021 was the result of increased average revenue per unit, driven by pricing gains, higher fuel surcharge revenue, increased intermodal storage service charges and improved mix, as well as volume growth.

In 2020, lower revenue was the result of decreased volumes and lower fuel surcharge revenue, partially offset by pricing gains.

Revenues increased $1.6 billion in 2022 and $1.4 billion in 2021 compared to the prior years.

Higher revenue for 2022 was the result of increased average revenue per unit, driven by higher fuel surcharge revenue, pricing gains, improved mix, and increased intermodal storage service charges, partially offset by volume declines.

In 2021, higher revenue was the result of increased average revenue per unit, driven by pricing gains, higher fuel surcharge revenue, increased intermodal storage service charges and improved mix, as well as volume growth.

The table below reflects the components of the revenue change by major commodity group.

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Approximately 95% of our revenue base is covered by contracts that include negotiated fuel surcharges.

These revenues totaled $622 million, $349 million, and $578 million in 2021, 2020, and 2019, respectively.

MERCHANDISE revenues increased in 2021 but decreased in 2020 compared with the prior years.

Fuel surcharge revenues totaled $1.6 billion, $622 million, and $349 million in 2022, 2021, and 2020, respectively.

The increase in fuel surcharge revenues in 2022 and 2021 was driven by higher fuel commodity prices.

For 2023, we expect that revenue growth will be a challenge, as there is substantial economic uncertainty.

Additionally, we expect revenue headwinds resulting from lower fuel prices, softening coal pricing, and declining storage service charges.

In this difficult environment, we will continue to fight to increase revenue by recapturing truck-competitive freight and achieving pricing gains.

MERCHANDISE revenues increased in both 2022 and 2021 compared with the prior years.

In 2022, revenues rose due to higher average revenue per unit, driven by higher fuel surcharge revenue and increased pricing, partially offset by lower volume.

Decreased volumes in metal and construction and automotive shipments more than offset higher chemical shipments.

In 2021, revenues rose due to increased volume and higher average revenue per unit driven by increased fuel surcharge revenue and pricing.

Volumes increased in all merchandise commodity groups, reflecting continued economic recovery following the onset of the COVID-19 pandemic.

In 2020, revenues decreased due to volume declines in all commodity groups which were partially offset by higher average revenue per unit, driven by pricing gains.

For 2022, merchandise revenues are expected to increase, the result of higher revenue per unit, driven by pricing gains and increased fuel surcharge revenue, and higher volumes.

Agriculture, forest and consumer products revenues increased in 2021 but decreased in 2020 compared with the prior years.

In 2021, the rise was the result of higher volume across almost all markets as the economy has improved since the early months of the pandemic in 2020 and increased average revenue per unit, the result of pricing gains and higher fuel surcharge revenue.

Volumes increased in all merchandise commodity groups, reflecting economic recovery following the onset of the COVID-19 pandemic.

Agriculture, forest and consumer products revenues increased in both 2022 and 2021 compared with the prior years.

In 2022, the rise was the result of increased average revenue per unit, the result of higher fuel surcharge revenue and pricing gains, while volumes were nearly flat.

Declines in pulpboard, fertilizer, and pulp, were offset by increases in soybeans, feed, and corn.

Pulpboard and pulp shipments declined due to decreased demand, equipment availability, service disruptions, and production down time.

Lower fertilizer shipments were driven by high fertilizer prices causing customers to draw down on existing inventories or delay purchases as well as production disruptions.

Soybean volumes were higher due to increased opportunity for exports.

Feed shipments were higher due to increased customer demand.

Increased corn shipments were due to improved equipment cycle times.

In 2021, higher revenues were the result of higher volume across almost all markets, as the economy improved from the early months of the pandemic in 2020, and increased average revenue per unit, the result of pricing gains and higher fuel surcharge revenue.

Gains in ethanol, pulpboard, beverages, lumber and wood, and woodchips more than offset declines in soybeans and pulp.

In 2020, the decline was the result of reduced volume partially offset by higher average revenue per unit, driven by pricing gains partially offset by lower fuel surcharge revenue.

Volume declined due to the impact of COVID-19 on the demand for ethanol, corn, food service products, and building, industrial and commercial products.

In 2022, agriculture, forest and consumer products revenues are expected to rise, a result of increased volume and average revenue per unit increases resulting from pricing gains.

We expect volumes to increase in most markets led by corn, soybeans, pulpboard, and feed.

Chemicals revenues rose in 2021 and fell in 2020 compared with the prior years.

Chemicals revenues increased in both 2022 and 2021 compared with the prior years.

In 2022, the increase was the result of higher average revenue per unit, driven by fuel surcharge revenue and pricing gains, and volume growth.

Increases in sand and solid waste shipments were partially offset by declines in plastics, inorganic chemicals, organic chemicals, and natural gas liquids.

The increase in sand was due to greater demand resulting from sustained high natural gas prices.

Solid waste shipments increased due to growth with existing customers.

Plastics shipments decreased due to softening of the housing market.

Declines in inorganic chemicals, organic chemicals, and natural gas liquids shipments were due to decreased demand and reduced production.

In 2021, the increase was the result of volume growth partially offset by lower average revenue per unit, driven by mix of traffic.

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The markets with the largest gains were solid waste, industrial chemicals, sand, natural gas liquids, and plastics.

In 2020, the decrease was the result of volume declines partially offset by higher average revenue per unit, due to pricing gains.

Volume declined due to the impact from COVID-19 and ongoing disruptions in the energy markets.

The onset of the pandemic created an overabundance of products in the market

as companies reduced stockpiles before requiring more products.

Oil and petroleum shipments were negatively impacted due to reductions in gasoline/jet fuel demand and travel.

For 2022, chemicals revenues are anticipated to increase, a result of higher average revenue per unit, driven by pricing gains, and increased volume.

We expect carload increases in plastics, solid waste, and petroleum products to be partially offset by reduced volumes of inorganic chemicals.

Metals and construction revenues were higher in 2021 but declined in 2020 compared with the prior years.

Metals and construction revenues were higher in both 2022 and 2021 compared with the prior years.

In 2022, revenue growth was driven by higher average revenue per unit, the result of higher fuel surcharge revenue and pricing gains, partially offset by lower volume.

Volumes fell largely as a result of decreased shipments of coil steel, iron and steel, and scrap metal driven by service disruptions and slower equipment cycle times.

In 2021, revenue growth was driven by increased volumes and higher average revenue per unit, the result of pricing gains and higher fuel surcharge revenue.

Volume increased across almost all markets due to economic improvement since the beginning of the pandemic.

The markets serving the metal production industry, including coil steel, scrap metal, and iron and steel, experienced the largest gains.

In 2020, volume declines were partially offset by higher average revenue per unit, the result of pricing gains.

Volume declines were largely the result of weakened demand due to reductions in metal and domestic vehicle production.

The onset of the pandemic caused industries to suspend production which heavily impacted customers’ needs for materials and shipping of finished and semi-finished goods.

These declines were partially offset by increased demand for cement.

For 2022, metals and construction revenues are expected to rise, a result of higher average revenue per unit, driven by pricing gains, and increased volume.

As the economic recovery continues, volume growth is expected in almost all markets led by aggregates, coil steel, scrap metal, and construction.

Automotive revenues rose in 2021 but were lower in 2020 compared with the prior years.

The increase in revenues in 2021 were driven by volume growth and higher average revenue per unit, driven by an increase in fuel surcharge revenue and pricing gains.

The commodities serving the metal production industry, including coil steel, scrap metal, and iron and steel, experienced the largest gains.

Automotive revenues rose in both 2022 and 2021 compared with the prior years.

The increase in revenues in 2022 was driven by higher average revenue per unit, due to higher fuel surcharge revenue and pricing gains, partially offset by volume declines.

Volume declines were the result of slower equipment cycle times partially offset by fewer parts supply issues due to easing supply chain congestion when compared to the prior year.

In 2021, the increase in revenues was driven by volume growth and higher average revenue per unit, a result of an increase in fuel surcharge revenue and pricing gains.

Automotive volumes were higher due primarily to increased retail demand and the impact of prior-year pandemic-induced production shutdowns.

This was partially offset by the impact of the microchip shortage on production.

In 2020, revenue declines were driven by lower volume and fuel surcharge revenue, partially offset by pricing gains.

The volume decline was mostly the result of unplanned automotive plant shutdowns in the first half of the year, primarily due to the COVID-19 pandemic, which was partially offset by increased demand in the second half of the year.

In 2022, automotive revenues are expected to increase as a result of higher volume, as inventories replenish, and increased average revenue per unit driven by pricing gains.

INTERMODAL revenues increased in 2021 but decreased in 2020 compared with the prior years.

INTERMODAL revenues increased in both 2022 and 2021 compared with the prior years.

The increase in 2022 was the result of higher average revenue per unit, driven by higher fuel surcharge revenue, pricing gains, and increased storage service charges, partially offset by decreased volume.

The rise in 2021 was primarily the result of higher average revenue per unit driven by increased storage service charges, higher fuel surcharge revenue and pricing gains.

The decline in 2020 was driven by lower volume and fuel surcharge revenue, which were partially offset by pricing gains and favorable mix.

For 2022, we expect intermodal revenues to rise, the result of increased volume, higher fuel surcharge revenue and pricing gains, partially offset by lower storage service charges.

Intermodal units by market were as follows:

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Total 3,913.1 4,104.1 3,992.1 (5 %) 3 %

Domestic volume increased in 2021 but decreased in 2020 compared with the prior years.

Volume rose due to strong consumer demand which was partially offset by overall supply chain congestion, including chassis availability issues.

In 2020, volume declined due to supply chain disruptions related to the onset of the pandemic and strong over-the-road competition in the first half of the year.

Inventory replenishment and a strong peak season in the second half of the year assisted in dampening the overall volume decline.

For 2022, we expect higher domestic volume driven by new business and growth from existing customers.

International volume rose in 2021 but fell in 2020.

The increase in 2021 was the result of continued strong import demand despite being limited by various supply chain constraints, including chassis availability issues.

The decline in 2020 resulted from supply chain disruptions due to the onset of the pandemic.

For 2022, we expect international volume growth due to increased demand and supply chain recovery.

COAL revenues increased in 2021 but decreased in 2020 compared with the prior years.

Domestic volume decreased in 2022 but increased in 2021 compared with the prior years.

In 2022, volume declined due to service disruptions, terminal congestion, strong over-the-road competition, and increased truck availability.

In 2021, volume rose due to strong consumer demand which was partially offset by overall supply chain congestion, including equipment availability issues.

International volume fell in 2022 but rose in 2021.

The decline in 2022 was the result of supply chain constraints, chassis shortages, and excess retail inventory.

The increase in 2021 was the result of strong import demand despite being limited by various supply chain constraints, including chassis availability issues.

COAL revenues increased in both 2022 and 2021 compared with the prior years.

The increase in 2022 was due to higher average revenue per unit, driven by pricing gains and higher fuel surcharge revenue, and increased volumes.

The increase in 2021 was due to increased volumes and higher average revenue per unit driven by pricing gains and positive mix.

The decrease in 2020 was a result of significant volume declines.

For 2022, we expect coal revenues to decline due to lower average revenue per unit and decreased volume driven by coal supply challenges.

As shown in the following table, total tonnage increased in 2021 but decreased in 2020.

As shown in the following table, total tonnage increased in both 2022 and 2021.

2022 2021 2020 vs.

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Total 76,664 73,454 64,386 4 % 14 %

Utility coal tonnage increased in 2021 but decreased in 2020 compared with the prior years.

Utility coal tonnage increased in both 2022 and 2021 compared with the prior years.

The increase in 2022 was due to increased demand and service improvements.

The increase in 2021 was due to higher natural gas prices and increased demand from coal-sourced electrical generation.

The decline in 2020 was due to low natural gas prices, diminished industrial and commercial electricity demand, and high stockpiles.

For 2022, utility coal tonnage is expected to decline due to higher coal prices, lower natural gas prices, uncertainty regarding coal production and impacts of weather on demand.

Export coal tonnage increased in 2021 but decreased in 2020 compared with the prior years.

Export coal tonnage increased in both periods compared with prior years.

The increase in 2022 was a result of strong global demand and increased coal supply.

The increase in 2021 was a result of strong seaborne pricing, improved global economic conditions, and greater global demand.

The decline in 2020 was a result of weak seaborne pricing, COVID-19-related global disruptions, and import restrictions.

For 2022, export coal tonnage is expected to decrease due to uncertainty regarding the global coal market and tight coal supply availability.

Domestic metallurgical coal tonnage increased in 2021 but decreased in 2020 compared with the prior years.

Domestic metallurgical coal tonnage decreased in 2022 but increased in 2021 compared with the prior years.

The decrease in 2022 was the result of reduced coke shipments related to customer sourcing changes and idled customer facilities.

The increase in 2021 was the result of strong recovery in the steel market.

The decrease in 2020 was a reflection of reduced domestic steel demand which led to idled customer facilities and lower production.

For 2022, domestic metallurgical coal tonnage is expected to decrease due to customer sourcing challenges and tight coal supply availability.

Industrial coal tonnage increased in 2021 but decreased in 2020 compared with the prior years.

The increase in 2021 was a result of improved demand.

The decrease in 2020 was driven by pressure from natural gas conversions and customer sourcing changes.

For 2022, industrial coal tonnage is expected to decrease due to continued natural gas conversions and coal supply sourcing challenges.

Industrial coal tonnage increased in both 2022 and 2021 compared with the prior year as a result of increased demand.

Railway Operating Expenses

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Total $ 7,936 $ 6,695 $ 6,787 19 % (1 %)

In 2022, expenses increased primarily as a result of higher fuel prices, other inflationary pressures, service-related costs, increased labor-related costs resulting from labor union negotiations, and higher claims expenses.

In 2021, expenses declined primarily as a result of the absence of the 2020 loss on asset disposal and the equity method investment impairment charge, which is included in purchased services and rents.

This was partially offset by higher fuel costs, increased other purchased services, and higher compensation and benefits expense.

In 2020, expenses fell as our strategic initiatives to improve productivity and asset utilization resulted in lower compensation and benefits expense, declines in fuel consumption, reduced purchased services, and lower materials expense.

Fuel expense also declined due to lower prices.

These expense reductions were partially offset by the loss on asset disposal and impairment charge previously discussed.

Compensation and benefits increased in 2022, reflecting changes in:

• increased pay rates (up $188 million),

• employee activity levels (up $51 million),

• overtime (up $18 million),

• incentive and stock-based compensation (down $79 million), and

• other (up $1 million).

The increase in pay rates in 2022 includes payments in excess of amounts previously estimated in 2021 and 2020 for retroactive wage increases and other benefits under our labor agreements.

In 2022, compensation and benefits includes $54 million and purchased services includes $2 million of additional expenses pertaining to compensation earned in those periods.

In 2021, compensation and benefits increased, a result of changes in:

• incentive and stock-based compensation (up $128 million),

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• health and welfare benefits for craft employees (down $19 million),

• employment levels (down $154 million), and

• employee activity levels (down $154 million), and

• other (up $26 million).

In 2020, compensation and benefits decreased, a result of changes in:

• employment levels (down $309 million),

• health and welfare benefits for craft employees (down $77 million),

• overtime and recrews (down $54 million),

• incentive and stock-based compensation (down $38 million),

• increased pay rates (up $50 million),

• lower capitalized labor (additional expense of $51 million), and

• other (down $1 million).

Our employment averaged 18,900 in 2022, compared with 18,500 in 2021, and 20,200 in 2020.

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Total $ 1,922 $ 1,726 $ 1,687 11 % 2 %

The increase in purchased services in 2021 was due to increased technology costs, higher intermodal-related expenses, and increased Conrail costs.

The increase in purchased services in 2022 was due to inflationary pressures which resulted in higher intermodal-related expenses, and increased operational and transportation expenses, as well as higher technology-related costs.

The increase in purchased services in 2021 was due to increased technology costs, higher intermodal-related expenses, and increased Conrail, Inc.

(Conrail) costs.

This was partially offset by the absence of a prior year $99 million impairment related to an equity method investment.

The decrease in purchased services in 2020 resulted from volume-related declines and strategic initiatives to improve productivity and asset utilization, partially offset by the impairment of an equity method investment.

Equipment rents, which includes our cost of using equipment (mostly freight cars) owned by other railroads or private owners less the rent paid to us for the use of our equipment, increased in both periods.

In 2022, the increase was the result of lower network fluidity which led to greater time-and-mileage expenses, increased automotive and

intermodal equipment expenses, and higher short-term locomotive resource costs.

In 2021, equipment rents were higher for general-use equipment due to decreased network velocity and increased volume.

These increases were partially offset by lower intermodal costs and higher equity in TTX earnings.

In 2020, the increase was primarily the result of lower equity in TTX earnings and increased automotive equipment expenses partially offset by decreased intermodal equipment expenses.

Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increased in 2021 but decreased in 2020 compared with the prior years.

The increase in 2021 was primarily due to locomotive fuel prices (up 43%), which increased expenses $224 million.

Additionally, locomotive fuel consumption increased 4%.

The decline in 2020 was primarily due to locomotive fuel prices (down 32%), which decreased expenses $235 million.

Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increased in both periods.

The change in both years was due to higher locomotive fuel prices (up 87% in 2022 and 43% in 2021) which increased expenses by $634 million in 2022 and $224 million in 2021.

Locomotive fuel consumption decreased 2% in 2022, but increased 4% in 2021.

We consumed 376 million gallons of diesel fuel in 2022, compared with 384 million gallons in 2021 and 368 million gallons in 2020.

Depreciation expense increased in both periods, a reflection of reinvestment in our infrastructure, rolling stock, and technology.

Materials and other expenses decreased in both periods as shown in the following table.

Materials and other expenses increased in 2022 but decreased in 2021 as shown in the following table.

2022 2021 2020 vs.

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Total $ 713 $ 547 $ 653 30 % (16 %)

Materials expense decreased in both periods due primarily to lower maintenance requirements as a result of fewer locomotives and freight cars in service.

Materials expense increased in 2022 but decreased in 2021.

The increase in 2022 is due to increased locomotive, freight car, and track materials costs.

In 2021, the decrease was due primarily to lower maintenance requirements as a result of fewer locomotives and freight cars in service.

Claims expense includes costs related to personal injury, property damage, and environmental matters.

The increase in 2022 was primarily the result of higher costs associated with unfavorable personal injury case development, increased environmental remediation expenses, and higher lading and property damage costs.

The decrease in 2021 was primarily the result of lower costs associated with derailments and personal injuries.

In 2020, claims expense declined, the result of lower costs related to environmental remediation matters that were partially offset by increased derailment costs.

Other expense decreased in 2021, primarily due to higher gains from sales of operating property.

Other expense increased in 2022, primarily due to higher travel-related expenses, increased non-income based taxes, and lower gains from sales of operating property, partially offset by lower relocation expenses.

In 2021, other expense decreased primarily due to higher gains from sales of operating property.

Gains from operating property sales amounted to $76 million, $82 million, and $26 million in 2022, 2021, and 2020, respectively.

In 2020, other expense decreased largely due to the absence of the 2019 write-off of a $32 million receivable as a result of a legal dispute.

Additionally, 2020 benefited from reduced travel expenses resulting from the COVID-19 pandemic.

These reductions were partially offset by lower gains from sales of operating property.

Loss on asset disposal

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Other income – net

Other income – net decreased in 2021 but increased in 2020.

Other income fell in 2021 due to lower net returns on corporate-owned life insurance (COLI) and lower gains on sales of non-operating property.

The increase in 2020 was driven by the absence of a prior year $49 million impairment loss related to natural resource assets, lower pension and postretirement benefit expenses, and higher returns on COLI investments, which more than offset the absence of coal royalties and lower gains on sales of non-operating property.

Other income – net decreased in both 2022 and 2021.

Other income fell in 2022 due to lower net returns on corporate-owned life insurance (COLI) partially offset by a higher net pension benefit and increased interest income.

The decrease in 2021 was driven by lower net returns on COLI and lower gains on sales of non-operating property.

The effective income tax rate was 20.8% in 2022, compared with 22.5% in 2021 and 20.4% in 2020.

All three years benefited from favorable tax benefits associated with stock-based compensation and COLI returns.

The current year benefited from a reduction in deferred taxes associated with state tax law change s , while 2020 benefited from a reduction of taxes upon the resolution of our 2012 amended return (see Note 4).

The current year benefited by $136 million due to an enacted reduction to the Pennsylvania corporate income tax rate while 2021 benefited by $34 million due to various state law changes (see Note 4).

All years experienced favorable benefits associated with stock-based compensation, while 2021 and 2020 benefited from COLI returns.

For 2023, we expect an effective income tax rate between 23% and 24%.

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Cash provided by operating activities, our principal source of liquidity, was $4.2 billion in 2022, $4.3 billion in 2021, and $3.6 billion in 2020.

The decrease in 2022 reflected changes in working capital, offset in part by improved operating results.

The increase in 2021 was primarily the result of improved operating results.

The decline in 2020 reflected a decrease in income from railway operations offset in part by lower income tax payments.

We had negative working capital of $354 million at December 31, 2021 and working capital of $158 million at December 31, 2020.

Cash and cash equivalents totaled $839 million and $1.1 billion at December 31, 2021, and 2020, respectively.

We expect cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations.

In addition, we believe our currently-available borrowing capacity, access to additional financing, and ability to reduce property additions and shareholder distributions, including share repurchases, provide additional flexibility to meet our ongoing obligations.

Nonetheless, we continue to monitor the ongoing impacts of the COVID-19 pandemic, which could lead to a reduction in cash flows from operations.

Contractual obligations at December 31, 2021, including those that may have material cash requirements, include interest on fixed-rate long-term debt, long-term debt (Note 9), unconditional purchase obligations (Note 17), long-term advances from Conrail Inc.

(Conrail) (Note 6), operating leases (Note 10), agreements with Consolidated Rail Corporation (CRC) (Note 6), and unrecognized tax benefits (Note 4).

We had negative working capital of $642 million at December 31, 2022 and $354 million at December 31, 2021.

Cash and cash equivalents totaled $456 million and $839 million at December 31, 2022, and 2021, respectively.

We expect that cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations.

In addition, we believe our currently-available borrowing capacity, access to additional financing, and ability to reduce property additions and shareholder distributions, including share repurchases, provides us additional flexibility to meet our ongoing obligations.

Contractual obligations at December 31, 2022, including those that may have material cash requirements, include interest on fixed-rate long-term debt, long-term debt (Note 9), unconditional purchase obligations (Note 17), long-term advances from Conrail (Note 6), operating leases (Note 10), agreements with Consolidated Rail Corporation (CRC) (Note 6), and unrecognized tax benefits (Note 4).

Total 2023 2024 -

2027 2028 and

Subsequent Other

($ in millions)

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Total $ 36,037 $ 2,148 $ 3,198 $ 2,627 $ 28,064

* This amount is shown in the Other column because the year of settlement cannot be reasonably estimated.

* This amount is shown in the 2028 and Subsequent column because the year of settlement cannot be reasonably estimated.

Off balance sheet arrangements consist primarily of unrecognized obligations, including unconditional purchase obligations and future interest payments on fixed-rate long-term debt, which are included in the table above.

Cash used in investing activities was $1.2 billion in both 2021 and 2020, and $1.8 billion in 2019.

Cash used in investing activities was $1.6 billion in 2022, and $1.2 billion in both 2021 and 2020.

The increase in 2022 is due to higher property additions partially offset by increased proceeds from property sales.

In 2021, lower proceeds from property sales were mostly offset by reduced COLI policy loan repayments and lower property additions.

In 2020, the decrease was primarily driven by lower property additions.

Capital spending and track and equipment statistics can be found within the “Railway Property” section of Part I of this report on Form 10-K.

For 2022, we expect property additions will be between $1.8 billion and $1.9 billion.

For 2023, we expect property additions will be approximately $2.1 billion.

In November 2022, we entered into an asset purchase and sale agreement with the Board of Trustees of the Cincinnati Southern Railway to purchase approximately 337 miles of railway line that extends from Cincinnati, Ohio to Chattanooga, Tennessee which we currently operate under a lease agreement.

The total purchase price for the line and other associated real and personal property included in the transaction is approximately $1.6 billion.

The agreement is conditioned upon (i) certain changes to Ohio state law applicable to the use of the related sale proceeds, (ii) approval by the voters of the City of Cincinnati, and (iii) the receipt of regulatory approval from the STB.

The agreement includes various termination provisions including termination at any time prior to closing by the mutual written consent of the parties, termination at any time after December 31, 2024 by the mutual written consent of the parties, termination by us if the STB takes action that we deem unsatisfactory, and termination by either party if Cincinnati voter approval is not obtained on or before the later of June 30, 2025 and the calendar date on which the polls are open for the 2025 Cincinnati primary election.

Cash used in financing activities was $3.0 billion in 2022, compared with $3.3 billion in 2021, and $1.9 billion in 2020.

The increase in 2021 reflects higher repurchases of Common Stock and debt repayments, partially offset by increased proceeds from borrowings.

In 2020, the change reflects lower repurchases of Common Stock and debt repayments, partially offset by reduced proceeds from borrowings.

The decrease in 2022 reflects lower repurchases of Common Stock, and increased proceeds from borrowings, partially offset by higher dividends.

In 2021, the increase reflects higher repurchases of Common Stock and debt repayments, partially offset by increased proceeds from borrowings.

Share repurchases of $3.1 billion in 2022, $3.4 billion in 2021, and $1.4 billion in 2020 resulted in the retirement of 12.6 million, 12.7 million, and 7.4 million shares, respectively.

As of December 31, 2021, 8.0 million shares remain authorized by our Board of Directors for repurchase.

The timing and volume of future share repurchases

will be guided by our assessment of market conditions and other pertinent factors.

Repurchases may be executed in the open market, through derivatives, accelerated repurchase and other negotiated transactions and through plans designed to comply with Rule 10b5-1(c) under the Securities and Exchange Act of 1934.

On March 29, 2022, our Board of Directors authorized a new program for the repurchase of up to an additional $10.0 billion of Common Stock beginning April 1, 2022.

Our previous share repurchase program terminated on March 31, 2022.

As of December 31, 2022, $7.5 billion remains authorized by our Board of Directors for repurchase.

The timing and volume of future share repurchases will be guided by our assessment of market conditions and other pertinent factors.

Any near-term purchases under the program are expected to be made with internally-generated cash, cash on hand, or proceeds from borrowings.

In August 2021, we issued $600 million of 2.90% senior notes due 2051.

In May 2021, we issued $500 million of 2.30% senior notes due 2031 and $600 million of 4.10% senior notes due 2121.

The net proceeds of the 2.30% senior notes due 2031 will be used to finance or refinance, in whole or in part, new or existing eligible projects with environmental benefits, as outlined in our Green Financing Framework.

In May 2021, we renewed, amended and restated our accounts receivable securitization program with a maximum borrowing capacity of $400 million.

In June 2022, we issued $750 million of 4.55% senior notes due 2053.

In February 2022, we issued $600 million of 3.00% senior notes due 2032 and $400 million of 3.70% senior notes due 2053.

In May 2022, we renewed our accounts receivable securitization program with a maximum borrowing capacity of $400 million.

The term expires in May 2023.

We had no amounts outstanding under this program and our available borrowing capacity was $400 million at both December 31, 2021 and December 31, 2020.

We had $100 million in borrowings outstanding under this program and our available borrowing capacity was $300 million at December 31, 2022 and $400 million at December 31, 2021.

We also have in place and available an $800 million credit agreement expiring in March 2025, which provides for borrowings at prevailing rates and includes covenants.

We had no amounts outstanding under this facility at December 31, 2021 or December 31, 2020.

We had no amounts outstanding under this facility at either December 31, 2022 or December 31, 2021, and we are in compliance with all of its covenants.

In addition, we have investments in general purpose COLI policies and had the ability to borrow against these policies up to $610 million and $715 million at December 31, 2022 and December 31, 2021, respectively.

We discuss our credit agreement and our accounts receivable securitization program in Note 9, and we have authority from our Board of Directors to issue an additional $3.0 billion of debt or equity securities through public or private sale, all of which provide for access to additional liquidity should the need arise.

Our debt-to-total capitalization ratio was 54.4% at December 31, 2022, compared with 50.4% at December 31, 2021.

We discuss our credit agreement and our accounts receivable securitization program in Note 9.

Subsequent to December 31, 2022, we issued $500 million in fixed rate debt securities.

These senior notes, issued February 2, 2023, carry an interest rate of 4.45% and mature in 2033.

After this issuance, we have authority from our Board of

Directors to issue an additional $800 million of debt or equity securities through public or private sale, all of which provide for access to additional liquidity should the need arise.

Upcoming annual debt maturities are disclosed in Note 9.

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A significant portion of our annual capital spending relates to self-constructed assets.

Costs related to repairs and maintenance activities that, in our judgment, do not extend an asset’s useful life or increase its utility are expensed when such repairs are performed.

Costs related to repairs and

maintenance activities that, in our judgment, do not extend an asset’s useful life or increase its utility are expensed when such repairs are performed.

Depreciation expense for 2022 totaled $1.2 billion.

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A valuation allowance is recorded if we expect that it is more likely than not that deferred tax assets will not be realized.

We have a $60 million valuation allowance on $461 million of

deferred tax assets as of December 31, 2021, reflecting the expectation that substantially all of these assets will be realized.

We have a $41 million valuation allowance on $373 million of deferred tax assets as of December 31, 2022, reflecting the expectation that substantially all of these assets will be realized.

OTHER MATTERS

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Approximately 80% of our railroad employees are covered by collective bargaining agreements with various labor unions.

Pursuant to the Railway Labor Act, these agreements remain in effect until new agreements are reached, or until the bargaining procedures mandated by the Railway Labor Act are completed.

We largely bargain nationally in concert with other major railroads, represented by the National Carriers Conference Committee.

Pursuant to the Railway Labor Act (RLA), these agreements remain in effect until new agreements are reached, or until the bargaining procedures mandated by the RLA are completed.

Moratorium provisions in the labor agreements govern when the railroads and unions may propose changes to the agreements.

The current round of bargaining commenced on November 1, 2019 with both management and the unions serving their formal proposals for changes to the collective bargaining agreements and negotiations are ongoing.

At December 31, 2021, we had no outstanding debt subject to interest rate fluctuations.

We largely bargain nationally in concert with other major railroads, represented by the National Carriers’ Conference Committee.

After management and the unions served their formal proposals in November 2019 for changes to the collective bargaining agreements, negotiations began in 2020 following the expiration of the last moratorium.

On June 17, 2022, the National Mediation Board notified the parties that all practical methods of ending the dispute had been exhausted without effecting a settlement and that its mediation services had been terminated.

Shortly thereafter, President Biden created Presidential Emergency Board (PEB) No.

250, effective July 18, 2022, to investigate the facts of the dispute and make recommendations.

The PEB issued its recommendations on August 16, 2022, and the parties engaged in further negotiations.

By December 2022, agreements based on the PEB’s recommendations had either been ratified or enacted through legislative action for all twelve unions.

While the parties are engaged in additional discussions to conclude the implementation of the recently finalized agreements, neither party can compel mandatory bargaining around any new proposals until November 1, 2024.

That said, we understand the imperative to continue improving quality of life for our craft employees and are actively engaged in voluntary discussions (which carry no risk of a work stoppage) with all of our unions on this important issue.

We manage overall exposure to fluctuations in interest rates by issuing both fixed- and floating- rate debt instruments.

At December 31, 2022, debt subject to interest rate fluctuations totaled $100 million.

A one-percentage point increase in interest rates would increase total annual interest expense related to all variable debt by approximately $1 million.

Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a one-percentage point decrease in interest rates as of December 31, 2022 and amounts to an increase of approximately $1.3 billion to the fair value of our debt at December 31, 2022.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis