What changed in this filing

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Item 1. Financial Statements

2023-04-26 compared with 2022-10-26 · 156 added, 163 removed, 318 unchanged (50% of the section changed)

2 unchanged sentences

Consolidated Statements of Income

Third Quarter First Nine Months

2022 2021 2022 2021

First Quarter

($ in millions, except per share amounts)

3 unchanged sentences

Purchased services and rents 496 437

Fuel 383 208 1,092 573

Depreciation 321 302

Materials and other 212 171

Eastern Ohio incident 387 —

Total railway operating expenses 2,421 1,830

11 unchanged sentences

Consolidated Statements of Comprehensive Income

Third Quarter First Nine Months

2022 2021 2022 2021

First Quarter

($ in millions)

Net income $ 466 $ 703

Other comprehensive income, before tax:

Pension and other postretirement benefits 6 10 17 31

Other comprehensive income of equity investees 5 — 13 —

Other comprehensive income, before tax 11 10 30 31

Income tax expense related to items of other

comprehensive income — ( 3 ) ( 5 ) ( 8 )

Other comprehensive income, net of tax 11 7 25 23

Other comprehensive income (loss), before tax:

Pension and other postretirement benefit (expense) ( 5 ) 6

Other comprehensive income (loss) of equity investees ( 1 ) 6

Other comprehensive income (loss), before tax ( 6 ) 12

Income tax benefit (expense) related to items of other

comprehensive income (loss) 2 ( 4 )

Other comprehensive income (loss), net of tax ( 4 ) 8

Total comprehensive income $ 462 $ 711

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Consolidated Balance Sheets

September 30,

2023 December 31,

15 unchanged sentences

Accounts payable $ 1,315 $ 1,293

Short-term debt — 100

Income and other taxes 438 312

18 unchanged sentences

Consolidated Statements of Cash Flows

First Nine Months

First Three Months

($ in millions)

24 unchanged sentences

Debt repayments ( 800 ) ( 1 )

Net cash used in financing activities ( 1,989 ) ( 2,116 )

Net cash provided by (used in) financing activities ( 686 ) 73

Net increase in cash and cash equivalents 96 732

17 unchanged sentences

Net income 466 466

Other comprehensive income 8 8

Other comprehensive loss ( 4 ) ( 4 )

Total comprehensive income 462

5 unchanged sentences

Balance at March 31, 2023 $ 229 $ 2,155 $ ( 355 ) $ 10,698 $ 12,727

Comprehensive income:

Net income 819 819

Other comprehensive income 6 6

Total comprehensive income 825

Dividends on common stock,

$ 1.24 per share

( 294 ) ( 294 )

Share repurchases ( 4 ) ( 29 ) ( 821 ) ( 854 )

Stock-based compensation 16 16

Balance at June 30, 2022 236 2,190 ( 388 ) 11,116 13,154

Comprehensive income:

Net income 958 958

Other comprehensive income 11 11

Total comprehensive income 969

Dividends on common stock,

$ 1.24 per share

( 290 ) ( 290 )

Share repurchases ( 3 ) ( 31 ) ( 796 ) ( 830 )

Stock-based compensation 22 ( 1 ) 21

Balance at September 30, 2022 $ 233 $ 2,181 $ ( 377 ) $ 10,987 $ 13,024

See accompanying notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

Stock Additional

14 unchanged sentences

Balance at March 31, 2022 $ 240 $ 2,203 $ ( 394 ) $ 11,412 $ 13,461

Comprehensive income:

Net income 819 819

Other comprehensive income 8 8

Total comprehensive income 827

Dividends on common stock,

$ 0.99 per share

( 247 ) ( 247 )

Share repurchases ( 3 ) ( 28 ) ( 903 ) ( 934 )

Stock-based compensation 27 1 28

Balance at June 30, 2021 248 2,240 ( 578 ) 12,407 14,317

Comprehensive income:

Net income 753 753

Other comprehensive income 7 7

Total comprehensive income 760

Dividends on common stock,

$ 1.09 per share

( 268 ) ( 268 )

Share repurchases ( 4 ) ( 31 ) ( 900 ) ( 935 )

Stock-based compensation 15 ( 2 ) 13

Balance at September 30, 2021 $ 244 $ 2,224 $ ( 571 ) $ 11,990 $ 13,887

See accompanying notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Norfolk Southern Corporation (Norfolk Southern) and subsidiaries’ (collectively, NS, we, us, and our) financial position at September 30, 2022 and December 31, 2021, our results of operations, comprehensive income and changes in stockholders’ equity for the third quarters and first nine months of 2022 and 2021, and our cash flows for the first nine months of 2022 and 2021 in conformity with U.S.

In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Norfolk Southern Corporation (Norfolk Southern) and subsidiaries’ (collectively, NS, we, us, and our) financial position at March 31, 2023 and December 31, 2022, our results of operations, comprehensive income and changes in stockholders’ equity for the first quarters of 2023 and 2022, and our cash flows for the first three months of 2023 and 2022 in conformity with U.S.

Generally Accepted Accounting Principles (GAAP).

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The following table disaggregates our revenues by major commodity group:

Third Quarter First Nine Months

2022 2021 2022 2021

First Quarter

($ in millions)

5 unchanged sentences

Intermodal 814 854

Coal 471 330 1,285 960

Total $ 3,132 $ 2,915

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Estimated revenues associated with in-process shipments at period-end are recorded based on the estimated percentage of service completed.

We had no material remaining performance obligations at September 30, 2022 and December 31, 2021.

We had no material remaining performance obligations at March 31, 2023 and December 31, 2022.

We may provide customers ancillary services, such as switching, demurrage and other incidental activities, under their transportation contracts.

These are distinct performance obligations that are recognized at a point in time when the services are performed or as contractual obligations are met.

These revenues are included within each of the commodity groups and represent a percentage of total “Railway operating revenues” on the Consolidated Statements of Income as follows:

7 % for the third quarters of 2022 and 2021, and the first nine months of 2022, and 6 % for the first nine months of 2021.

The revenues associated with these distinct performance obligations are recognized when the services are performed or as contractual obligations are met.

These revenues are included within each of the commodity groups and represent approximately 6 % and 7 % of total “Railway operating revenues” on the Consolidated Statements of Income for the first quarters of 2023 and 2022, respectively.

Revenues related to interline transportation services that involve another railroad are reported on a net basis.

2 unchanged sentences

“Accounts receivable – net” on the Consolidated Balance Sheets includes both customer and non-customer receivables as follows:

September 30,

2023 December 31, 2022

4 unchanged sentences

Non-customer receivables include non-revenue-related amounts due from other railroads, governmental entities, and others.

There were no non-current customer receivables at September 30, 2022, while “Other assets” on the Consolidated Balance Sheets included $ 23 million at December 31, 2021.

We do no t have any material contract assets or liabilities at September 30, 2022 and December 31, 2021.

We do no t have any material contract assets or liabilities at March 31, 2023 and December 31, 2022.

Stock-Based Compensation

Third Quarter First Nine Months

2022 2021 2022 2021

First Quarter

($ in millions)

1 unchanged sentence

Total tax benefit 6 13

During 2022, we granted stock options, restricted stock units (RSUs) and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP), as follows:

Third Quarter First Nine Months

Granted Weighted-Average Grant-Date Fair Value Granted Weighted-Average Grant-Date Fair Value

During the first quarter of 2023, we granted stock options, restricted stock units (RSUs) and performance share units (PSUs) pursuant to the Long-Term Incentive Plan (LTIP), as follows:

First Quarter

Granted Weighted-Average Grant-Date Fair Value

Stock options 69,580 $ 77.60

2 unchanged sentences

Stock Options

Third Quarter First Nine Months

2022 2021 2022 2021

First Quarter

($ in millions)

5 unchanged sentences

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

2022 2021 2022 2021

First Quarter

($ in millions)

6 unchanged sentences

The market condition fair value was measured on the date of grant using a Monte Carlo simulation model.

earned or paid out during the third quarters of 2022 or 2021.

First Nine Months

First Quarter

($ in millions)

2 unchanged sentences

Related tax benefits realized $ — $ 1

On July 8, 2022, House Bill 1342 was signed into law in the Commonwealth of Pennsylvania, which reduced its corporate income tax rate from 9.99% to 4.99%, through a series of phased reductions beginning each tax year from January 1, 2023 through January 1, 2031.

GAAP requires companies to recognize the effect of tax law changes in the period of enactment.

As a result, in the third quarter we recognized a $ 136 million benefit in “Income taxes” with a corresponding reduction in “Deferred income taxes.”

Earnings Per Share

1 unchanged sentence

Basic Diluted

Third Quarter

2022 2021 2022 2021

($ in millions, except per share amounts,

shares in millions)

Net income $ 958 $ 753 $ 958 $ 753

Dividend equivalent payments — ( 1 ) — —

Income available to common stockholders $ 958 $ 752 $ 958 $ 753

Weighted-average shares outstanding 233.2 245.3 233.2 245.3

Dilutive effect of outstanding options and share-settled awards 0.8 1.1

Adjusted weighted-average shares outstanding 234.0 246.4

Earnings per share $ 4.11 $ 3.07 $ 4.10 $ 3.06

Basic Diluted

First Nine Months

First Quarter

2023 2022 2023 2022

8 unchanged sentences

Earnings per share $ 2.04 $ 2.94 $ 2.04 $ 2.93

During the third quarters and first nine months of 2022 and 2021, dividend equivalent payments were made to certain holders of stock options and RSUs.

During the first quarters of 2023 and 2022, 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.

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The dilution calculations exclude options having exercise prices exceeding the average market price of Common Stock as follows:

0.1 million in the third quarter and first nine months ended September 30, 2022 and none in the third quarter and first nine months ended September 30, 2021.

0.1 million in both the first quarters ended March 31, 2023 and 2022.

Accumulated Other Comprehensive Loss

4 unchanged sentences

($ in millions)

Nine months ended September 30, 2022

Three months ended March 31, 2023

Pensions and other postretirement liabilities $ ( 319 ) $ — $ ( 4 ) $ ( 323 )

Other comprehensive income (loss) of equity investees ( 46 ) 11 — ( 35 )

Other comprehensive loss of equity investees ( 32 ) — — ( 32 )

Accumulated other comprehensive loss $ ( 351 ) $ — $ ( 4 ) $ ( 355 )

Nine months ended September 30, 2021

Three months ended March 31, 2022

Pensions and other postretirement liabilities $ ( 356 ) $ — $ 4 $ ( 352 )

Other comprehensive loss of equity investees ( 68 ) — — ( 68 )

Other comprehensive income (loss) of equity investees ( 46 ) 4 — ( 42 )

Accumulated other comprehensive loss $ ( 402 ) $ 4 $ 4 $ ( 394 )

Stock Repurchase Program

We repurchased and retire d 9.2 million and 9.4 million shares of Common Stock under our stock repurchase program at a cost of $ 2.3 billion and $ 2.5 billion during the first nine months of 2022 and 2021, respectively.

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

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

We repurchased and retire d 0.6 million and 2.2 million shares of Common Stock under our stock repurchase programs in the first three months of 2023 and 2022, respectively, at a cost of $ 163 million and $ 600 million.

Investment in Conrail

2 unchanged sentences

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 $ 1.6 billion and $ 1.5 billion at September 30, 2022 and December 31, 2021, respectfully.

Our investment in Conrail was $ 1.6 billion at March 31, 2023 and December 31, 2022.

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.

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In addition, NSR and CSXT pay CRC a fee for access to the Shared Assets Areas.

“Purchased services and rents” and “Fuel” include expenses payable to CRC for operation of the Shared Assets Areas totaling $ 42 million and $ 37 million for the third quarters of 2022 and 2021, respectively, and $ 116 million and $ 108 million for the first nine months of 2022 and 2021, respectively.

Our equity in Conrail’s earnings, net of amortization, was $ 15 million and $ 14 million for the third quarters of 2022 and 2021, respectively, and $ 40 million and $ 42 million for the first nine months of 2022 and 2021, respectively.

“Purchased services and rents” and “Fuel” include expenses payable to CRC for operation of the Shared Assets Areas totaling $ 45 million and $ 38 million for the first quarters of 2023 and 2022, respectively.

Our equity in Conrail’s earnings, net of amortization, was $ 16 million and $ 14 million for the first quarters of 2023 and 2022, respectively.

These amounts partially offset the costs of operating the Shared Assets Areas and are included in “Purchased services and rents.”

“Other liabilities” includes $ 534 million at both September 30, 2022 and December 31, 2021 for long-term advances from Conrail, maturing in 2050 that bear interest at an average rate of 1.31 %.

“Other liabilities” includes $ 534 million at both March 31, 2023 and December 31, 2022 for long-term advances from Conrail, maturing in 2050 that bear interest at an average rate of 1.31 %.

Investment in TTX

We and eight other North American railroads collectively own TTX Company (TTX), a railcar pooling company that provides its owner-railroads with standardized fleets of intermodal, automotive, and general use railcars at stated rates.

We and seven other North American railroads collectively own TTX Company (TTX), a railcar pooling company that provides its owner-railroads with standardized fleets of intermodal, automotive, and general use railcars at stated rates.

We have a 19.78 % ownership interest in TTX.

Expenses incurred for use of TTX equipment are included in “Purchased services and rents.” These expenses amounted to $ 63 million and $ 59 million for the third quarters of 2022 and 2021, respectively, and $ 193 million and $ 183 million for the first nine months of 2022 and 2021, respectively.

Our equity in TTX’s earnings partially offsets these costs and totaled $ 18 million and $ 12 million for the third quarters of 2022 and 2021, respectively, and $ 39 million and $ 43 million for the first nine months of 2022 and 2021, respectively.

In June 2022, we issued $ 750 million of 4.55 % 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 September 30, 2022 and December 31, 2021.

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

Expenses incurred for use of TTX equipment are included in “Purchased services and rents.” These expenses amounted to $ 66 million and $ 64 million for the first quarters of 2023 and 2022, respectively.

Our equity in TTX’s earnings partially offsets these costs and totaled $ 9 million and $ 10 million for the first quarters of 2023 and 2022, respectively.

In February 2023, we issued $ 500 million of 4.45 % senior notes due 2033.

We have in place an accounts receivable securitization program with a maximum borrowing capacity of $ 400 million and a term that expires in May 2023.

Amounts received under this facility are accounted for as borrowings.

We had no amounts outstanding under this program at March 31, 2023 and our available borrowing capacity was $ 400 million.

At December 31, 2022, we had $ 100 million (at an average variable interest rate of 5.05 %) outstanding, which is included within “Short-term debt” and our available borrowing capacity was $ 300 million.

Our accounts receivable securitization program was supported by $ 916 million and $ 883 million in receivables at March 31, 2023 and December 31, 2022, respectively, which are included in “Accounts receivable – net”.

Pensions and Other Postretirement Benefits

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Eligible retired participants and their spouses who are Medicare-eligible are not covered under the self-insured retiree health care plan, but instead are provided with an employer-funded health reimbursement account which can be used for reimbursement of health insurance premiums or eligible out-of-pocket medical expenses.

Pension and postretirement benefit cost components for the third quarter and first nine months were as follows:

Pension Benefits Other Postretirement Benefits

Third Quarter

2022 2021 2022 2021

($ in millions)

Service cost $ 10 $ 10 $ 1 $ 1

Interest cost 17 14 3 1

Expected return on plan assets ( 53 ) ( 48 ) ( 3 ) ( 3 )

Amortization of net losses 12 16 — —

Amortization of prior service benefit — — ( 6 ) ( 6 )

Net benefit $ ( 14 ) $ ( 8 ) $ ( 5 ) $ ( 7 )

Pension and postretirement benefit cost components were as follows:

Pension Benefits Other Postretirement Benefits

First Nine Months

First Quarter

2023 2022 2023 2022

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Fair Values of Financial Instruments

The fair values of “Cash and cash equivalents,” “Accounts receivable – net,” and “Accounts payable,” approximate carrying values because of the short maturity of these 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, 2022 or December 31, 2021.

There are no other assets or liabilities measured at fair value on a recurring basis at March 31, 2023 or December 31, 2022.

The carrying amounts and estimated fair values, based on Level 1 inputs, of long-term debt consist of the following:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Value Carrying

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Commitments and Contingencies

Eastern Ohio Incident

On February 3, 2023, a train we operated derailed in East Palestine, Ohio.

The derailed equipment included 38 railcars, 11 of which were non-Company-owned tank cars containing hazardous materials.

Fires associated with the derailment threatened certain of the tank cars.

There was concern about the risk that the content of five of the tank cars carrying vinyl chloride might polymerize, which would have posed the risk of a catastrophic explosion.

As a consequence, on February 6, 2023, the local incident commander—in consultation with the incident command that included, among others, federal, state and local officials and Norfolk Southern—opted to conduct a controlled vent and burn of five derailed tank cars, all of which contained vinyl chloride.

This procedure involved creating holes in the five tank cars to drain the vinyl chloride into adjacent trenches that had been dug into the ground where such vinyl chloride was then burned, with any material remaining after burning of the vinyl chloride being remediated.

The February 3rd derailment, the associated fire, and the resulting vent and burn of the tank cars containing vinyl chloride on February 6th is hereinafter referred to as the “Incident.”

In response to the Incident, we have worked to clean the site safely and thoroughly, including those activities described in the Environmental Matters section below with respect to potentially impacted air, soil and water and to monitor for any impact on public health and the environment.

We are working with federal, state, and local officials to mitigate impacts from the Incident, including, among other efforts, conducting environmental monitoring and clean-up activities (as more fully described below), and establishing a family assistance center to provide financial support to affected members of the East Palestine and surrounding communities .

Financial Impact

Although we cannot predict the final outcome or estimate the reasonably possible range of loss with certainty, we have recognized $ 387 million of expense for costs directly attributable to the Incident, which is presented in “Eastern Ohio incident” on the Consolidated Statements of Income.

During the first quarter, our cash expenditures attributable to the Incident were $ 55 million, which are presented in “Net cash provided by operating activities” on the Consolidated Statement of Cash Flows.

The remainder, $ 332 million, is primarily comprised of our estimates of

probable and reasonably estimable liabilities principally associated with environmental matters and legal proceedings, which are discussed in further detail below.

While certain costs recorded in the first quarter may be recoverable under our insurance policies in effect at the date of the Incident, no estimate of potential recoveries has yet been recorded.

Any amounts recoverable under our insurance policies will be reflected in future periods in which recovery is considered probable.

For additional information about our insurance coverage, see “Insurance” below.

Environmental Matters – In response to the Incident, we have been working with federal, state, and local officials such as the U.S.

Environmental Protection Agency (EPA), the Ohio EPA, and the Pennsylvania Department of Environmental Protection, to conduct environmental response and remediation activities, including but not limited to, air monitoring, indoor air quality screenings, municipal water and private water well testing, residential, commercial, and agricultural soil sampling, surface water and groundwater sampling, re-routing a local waterway around the affected site, capturing and shipping stormwater that enters the impacted derailment site to proper disposal facilities, and excavating and disposing of potentially affected soil at hazardous waste landfills or incinerators.

EPA issued a Unilateral Administrative Order (UAO) on February 21, 2023, containing various requirements, including the submission of numerous work plans to assess and remediate various environmental media and performance of certain removal actions at the affected site.

On February 24, 2023, we submitted to the U.S.

EPA our Notice of Intent to Comply with the UAO and are currently cooperating with U.S.

EPA as well as the Ohio EPA and Pennsylvania Department of Environmental Protection, pursuant to the UAO and the directives issued thereunder.

We are also subject to the following legal proceedings that principally relate to the environmental impact of the Incident:

Department of Justice (DOJ) and the U.S.

EPA filed a civil complaint (the DOJ Complaint) in the Northern District of Ohio (Eastern Division) seeking injunctive relief, cost recovery and civil penalties for violations of the Clean Water Act and seeking cost recovery under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA);

• The Ohio Attorney General filed a CERCLA lawsuit (the Ohio Complaint) in the Northern District of Ohio (Eastern Division) requesting statutory damages for a variety of tort and environmental claims under CERCLA.

In connection with the foregoing items, we recognized $ 317 million of expense during the first quarter, of which $ 31 million was paid, related to probable obligations that are reasonably estimable, in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 410-30, “Environmental Obligations.” Our current estimate includes ongoing and future environmental cleanup activities and remediation efforts, governmental oversight costs (including those incurred by the U.S.

EPA and the Ohio EPA), and other related costs, including those in connection with the DOJ Complaint (including potential civil penalties related to violations of the Clean Water Act).

Our current estimates of future environmental cleanup and remediation liabilities related to the Incident may change over time due to various factors, including but not limited to, the success of current cleanup techniques, the nature and extent of required future cleanup activities, and the extent of governmental oversight, amongst other factors.

As clean-up efforts progress and more information is available, including any federal and state requirements, we will review these estimates and revise as appropriate.

Legal Proceedings (Non-Environmental) – To date, numerous non-environmental legal actions have been filed with respect to the Incident, including those more specifically set forth below.

• There are currently numerous putative class action and individual lawsuits that have been filed, primarily consolidated in the Northern District of Ohio (Eastern Division).

The putative class

action complaints currently allege numerous claims, including negligence, nuisance, trespass, and medical monitoring, and seek as relief, among other things, compensatory and punitive damages.

The putative classes are currently defined by reference to class areas ranging from the evacuation zone up to 100 miles away.

Additional multi-plaintiff lawsuits are also pending in the same court and others, such as additional lawsuits pending in the Western District of Pennsylvania brought by local school districts including claims such as negligence, nuisance, trespass, and future health monitoring.

No responsive pleadings have yet been filed with respect to these matters (collectively referred to herein as the Incident Lawsuits).

In accordance with ASC 450, “Contingencies,” we have recognized a $ 12 million probable loss in the first quarter with respect to the Incident Lawsuits, which is in addition to $ 16 million in amounts paid during the first quarter with respect to these matters.

• Securities litigation, including a securities class action lawsuit filed in the Southern District of Ohio alleging multiple securities law violations for which no responsive pleading has yet been filed, as well as multiple shareholder demand letters that we have received (collectively, the Shareholder Lawsuits).

If and when we conclude that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it will be accrued through a charge to earnings and, if material, disclosed.

Any adjustments to the recorded liability will be reflected in earnings in the periods in which such adjustments become known.

Because the final outcome of any of these legal proceedings cannot be predicted with certainty, unfavorable or unexpected developments or outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter.

For legal proceedings where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established but the matter, if potentially material, is disclosed.

The reserves established by us during the first quarter do not include any estimate of loss for the following items, for which we believe a loss is either not probable or not reasonably estimable for the reasons noted:

(i) the overall cost to us for programs being developed in conjunction with the Ohio Attorney General for affected residents and businesses, which amounts will impact our loss contingency analysis with respect to the Incident Lawsuits described above, namely a healthcare fund, tailored protection for property owners, and programs to protect drinking water over the long term (given the preliminary nature of such discussions), or (ii) any fines or penalties (in excess of the reserves established for Clean Water Act-related civil penalties) that may be imposed as a result of the Incident Inquiries and Investigations, as more specifically set forth and defined below (the outcome of which are uncertain at this time).

Additionally, as noted above, amounts recognized during the first quarter do not include potential recoveries from third parties, including the impact of our insurance coverage, which may apply to various Incident-related expenses or liabilities, as more specifically set forth further below (given the preliminary nature of any related discussions with our insurers).

Inquiries and Investigations

As set forth above, we are subject to inquiries and investigations by numerous federal, state, and local government authorities and regulatory agencies regarding the Incident, including but not limited to, the DOJ and the U.S.

EPA, the Ohio EPA, the National Transportation Safety Board (NTSB), the Federal Railroad Administration (FRA), the Occupational Safety and Health Administration, the Ohio Attorney General, and the Pennsylvania Attorney General.

Further details regarding the NTSB and FRA investigations are set forth below.

We are cooperating with all inquiries and investigations, including responding to civil and criminal subpoenas and other requests for information (the aforementioned inquiries and investigations, as well as the civil and criminal subpoenas are collectively referred to herein as the Incident Inquiries and Investigations).

The outcome of any current or future Incident Inquiries and Investigations is uncertain at this time, including any related fines, penalties or settlements.

Therefore, our first quarter expenses do not include estimates of the total amount that we may incur for any such fines, penalties or settlements.

Subsequent to the Incident, investigators from the NTSB examined railroad equipment and track conditions;

reviewed data from the signal system, wayside defect detectors, local surveillance cameras, and the lead locomotive’s event recorder and forward-facing and inward-facing image recorders;

and completed certain interviews (the NTSB Investigation).

The NTSB issued a preliminary report indicating that one of the cars involved in the derailment appeared to have a wheel bearing in the final stage of overheat failure moments before the derailment.

Their preliminary report also indicates that the rail crew was operating the train within our rules;

the rail crew operated the train below the track speed limit, the wayside heat detectors were operating as designed;

and once the rail crew was alerted by the wayside detector, they immediately began to stop the train.

The NTSB’s investigation remains ongoing.

Concurrent with the NTSB Investigation, the FRA is also investigating the Incident.

Similar in scope to the NTSB Investigation, the FRA is examining railroad equipment, track conditions, hazardous materials train placement and routing, and emergency response (the FRA Incident Investigation).

The FRA Incident Investigation may result in the assessment of civil penalties.

In addition to the FRA Incident Investigation, the FRA announced on March 7, 2023 that it would conduct a 60-day supplemental safety assessment (the FRA Safety Assessment).

The FRA Safety Assessment will review findings from a previously completed 2022 system audit and assess operational elements including, but not limited to:

track, signal, and rolling stock maintenance, inspection and repair practices;

protection of employees;

communications between transportation departments and mechanical and engineering staff;

operation control center procedures and dispatcher training.

The overall scope of the FRA Safety Assessment is to examine our safety culture.

At the conclusion of the FRA Safety Assessment, the FRA will issue a public report which will include its findings and recommended corrective actions.

The FRA Incident Investigation and the FRA Safety Assessment remain ongoing.

Other Commitments and Contingencies

We and/or certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations.

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In 2018, a lawsuit was filed against one of our subsidiaries by the minority owner in a jointly-owned terminal railroad company in which our subsidiary has the majority ownership.

The lawsuit alleged violations of various state laws and federal antitrust laws.

Summary judgment has been briefed but not decided, and trial is likely to occur in the first quarter of 2023.

We continue to vigorously defend the lawsuit and, although it is reasonably possible we could incur a loss in the case, we believe that we will prevail.

However, given that litigation is inherently unpredictable and subject to uncertainties, there can be no assurances that the final outcome of the litigation or a litigation settlement will not have a material adverse affect on our financial position or results of operations.

We cannot reasonably estimate the potential loss or range of loss associated with the litigation at this time.

The lawsuit alleged violations of various

state laws and federal antitrust laws.

On January 3, 2023, the court granted summary judgment to us on all of the compensatory claims but denied summary judgment for all equitable relief claims.

On January 18, 2023, the court dismissed the federal equitable relief claims, leaving the state equitable relief claims as the sole remaining issue under consideration.

On April 19, 2023, the court disposed of all remaining state equitable relief claims.

These rulings may be appealed.

If appealed, we will continue to vigorously defend the lawsuit and, although it is reasonably possible we could incur a loss in the case, we believe that we will prevail.

However, given that litigation is inherently unpredictable and subject to uncertainties, there can be no assurances that the final outcome of the litigation (including any related appeal) will not be material.

Until such appeal is final, we cannot reasonably estimate the potential loss or range of loss associated with this matter.

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 actuarial consulting firm.

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.

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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 claims expense is employee personal injury costs.

Employee personal injury claims – Other than Incident-related matters noted above, the largest component of claims expense is employee personal injury costs.

The independent actuarial firm we engage provides quarterly studies to aid in valuing our employee personal injury liability and estimating personal injury expense.

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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 $ 57 million at September 30, 2022 and $ 49 million at December 31, 2021, of which $ 15 million is classified as a current liability at the end of both periods.

At September 30, 2022, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 86 known locations and projects compared with 88 locations and projects at December 31, 2021.

At September 30, 2022, twenty sites accounted for $ 46 million of the liability, and no individual site was considered to be material.

In addition to environmental claims associated with the Incident, our Consolidated Balance Sheets include liabilities for other environmental exposures of $ 61 million at March 31, 2023 and $ 66 million at December 31, 2022, of which $ 15 million is classified as a current liability at the end of both periods.

At March 31, 2023 and December 31, 2022, the liability represents our estimates of the probable cleanup, investigation, and remediation costs based on available information at 85 known locations and projects.

At March 31, 2023, twenty sites accounted for $ 49 million of the liability, and no individual site was considered to be material.

We anticipate that most of this liability will be paid out over five years ;

however, some costs will be paid out over a longer period.

At eight 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.

At eight locations, one or more of our subsidiaries in conjunction with a number of other parties have been identified as potentially responsible parties under CERCLA 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.

As set forth above, with respect to known environmental sites (whether identified by us or by the U.S.

EPA 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.

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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.

In September 2022, management reached tentative agreements with all relevant unions.

These tentative agreements, which pertain to years 2020-2024, included retroactive pay increases and other benefits for our craft employees that are higher than our estimates previously recorded for such items.

For the third quarter of 2022, “Compensation and benefits” includes $ 85 million and “Purchased services and rents” includes $ 3 million of additional expenses pertaining to estimated wage increases recorded in periods prior to July 1, 2022.

For the first nine months of 2022, “Compensation and benefits” includes $ 54 million and “Purchased services and rents” includes $ 2 million of additional expenses pertaining to estimated wage increases recorded in periods prior to January 1, 2022.

Although some of these agreements have been finalized through ratification by union membership, others remain subject to ratification.

In addition, two labor unions did not initially ratify their tentative agreements (with one union putting out a second tentative agreement for a vote and the other agreeing to maintain the status quo as negotiations continue).

The outcome of the ratification process cannot be predicted with certainty at this time ;

however, if one or more of the tentative agreements fails ratification and is not subsequently ratified during a final “status quo” period where self-help (strike or lockout) is not permitted, self-help could occur in mid-November or early December (dates vary by tentative agreement).

A service disruption, depending on the duration, could have a material adverse effect on our financial position, results of operations, or liquidity.

In addition, the resulting changes in our finalized labor agreements (and our tentative agreements, if ratified) are expected to increase our labor costs.

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

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

The latest round of national bargaining concluded in December 2022, when agreements were either ratified or enacted through legislative action for all twelve of our unions.

We are currently participating in additional

discussions (none of which carry the risk of a work stoppage) with several of our unions to conclude the implementation of these national agreements.

With the conclusion of national bargaining, neither party can compel mandatory bargaining around any new proposals until November 1, 2024.

In addition, we understand the imperative to continue improving quality of life for our craft employees and are actively engaged in voluntary local discussions with our unions on this important issue.

We purchase insurance covering legal liabilities for bodily injury and property damage to third parties.

This insurance provides coverage above $ 75 million and below $ 800 million ($ 1.1 billion for specific perils) per occurrence and/or policy year.

This insurance provides coverage above $ 75 million and below $ 800 million (or up to $ 1.1 billion for specified types of pollution releases) per occurrence and/or policy year.

In addition, we purchase insurance covering damage to property owned by us or in our care, custody, or control.

This insurance covers approximately 82 % of potential losses above $ 75 million and below $ 275 million per occurrence and/or policy year.

New Accounting Pronouncements

In November 2021, the Financial Accounting Standards Board issued Accounting Standards Update 2021-10, “ Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance ,” which requires annual disclosures when an entity has received government assistance.

Entities are required to disclose the types of government assistance received, the accounting treatment for that government assistance, and the effect of the government assistance on the financial statements.

The new standard is effective for annual periods beginning after December 15, 2021, and early adoption is permitted.

We do not expect this standard to have a material effect on our disclosures.

We did not adopt the standard early.

Our ability to recoup any of the foregoing amounts under our insurance coverage, including any amounts that may be recoverable with respect to the Incident, is subject to certain conditions, including but not limited to our insurers’ reservation of rights to further investigate and contest coverage, the express restrictions and sub-limits of coverage, and various policy exclusions, including those for some governmental fines or penalties, as well as potential coverage disputes over payments we make as part of our effort to mitigate the impact to the community and affected residents.

We are working with our insurers to confirm applicable coverage with respect to the Incident, but no estimate for potential insurance recovery has been accrued at this time.

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-Q

Item 1. Financial Statements