What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-26 compared with 2022-10-26 · 141 added, 130 removed, 110 unchanged (71% of the section changed)

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

During the third quarter, strong revenue growth drove improved profitability despite higher inflation-related operating expenses.

Higher fuel surcharge revenues, resulting from higher fuel commodity prices, and pricing gains led to revenue per unit growth that more than offset the impact of lower volume.

The increase in fuel commodity prices also led to higher fuel expense.

Additionally, tentative agreements, resulting as part of ongoing labor union negotiations, included retroactive pay increases and other benefits for our craft employees that resulted in increased compensation and benefits expenses.

Finally, although we incurred incremental service-related costs, we continued to make progress on efforts to increase network fluidity and improve service for our customers.

Our first quarter results were impacted by a February 2023 derailment in Eastern Ohio.

The derailment consisted of 38 railcars and resulted in the release of certain chemicals that were being transported for our customers.

Following the Incident (as defined and as further described in Note 10 in the Notes to Consolidated Financial Statements), we have worked to clean the derailment site safely and thoroughly and to monitor for any impact on public health and the environment.

Expenses recognized in the first quarter amounted to $387 million and relate to our initial response costs, ongoing cleanup efforts and estimates associated with environmental remediation and legal proceedings.

Our current estimates of future environmental cleanup and remediation liabilities related to the Incident may change over time due to various factors, and the final outcome of any legal proceedings cannot be predicted with certainty.

Thus, 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.

This amount does not include any estimate of loss for specific items for which we believe a loss is either not probable or not reasonably estimable for the reasons noted.

In addition, this amount does not include any amounts that may be recoverable from third parties, including expenses or liabilities that may be recovered under our insurance policies and for which such amounts will be reflected in future periods when reimbursement is considered probable.

Please see Note 10 in the Notes to Consolidated Financial Statements for a detailed discussion of these estimates and exclusions.

We continue to work with federal, state, and local officials to mitigate impacts from the Incident and to provide support to affected members of the community.

Revenue growth over the prior year was driven by higher average revenue per unit, as our volumes for the quarter were flat.

In addition to the costs recognized from the Incident, our operating expenses were higher, driven by inflationary pressures and service-related costs.

As we continue to make progress in response to the derailment and support the impacted community, we are committed to our strategy — a balanced approach of delivering safe, reliable and resilient service, smart and sustainable growth, and continuous productivity improvement.

SUMMARIZED RESULTS OF OPERATIONS

Third Quarter First Nine Months

2022 2021 % change 2022 2021 % change

First Quarter

2023 2022 % change

($ in millions, except per share amounts)

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Railway operating ratio (percent) 77.3 62.8 23%

Income from railway operations increased in both periods, 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 in both the third quarter and first nine months.

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

The first nine months also include higher claims-related expenses and lower gains on the sale of operating properties.

The increase in estimates for retroactive wage increases anticipated under our tentative labor agreements and that pertain to prior periods lowered diluted earnings per share by $0.28 and $0.18 in the third quarter and first nine months, respectively.

Additionally, net income in both periods 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 and $0.57 in the third quarter and first nine months, respectively.

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

First-quarter 2023 income from railway operations included $387 million of expenses arising from the Incident, which reduced net income by $293 million and diluted earnings per share by $1.28.

For more information see Note 10 in the Notes to Consolidated Financial Statements.

First quarter income from railway operations, net income, and diluted earnings per share were further impacted by the factors set forth further below.

The following table adjusts our 2023 GAAP financial results to exclude the effects of the Incident.

The income tax effect of this non-GAAP adjustment was calculated based on the applicable tax rates to which the non-GAAP adjustment related.

We use these non-GAAP financial measures internally and believe this information provides useful supplemental information to investors to facilitate making period-to-period comparisons by excluding the 2023 costs arising from the Incident.

While we believe that these non-GAAP financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation, or as a substitute for, the related financial information prepared in accordance with GAAP.

In addition, these non-GAAP financial measures may not be the same as similar measures presented by other companies.

Non-GAAP Reconciliation for First Quarter 2023

Reported Eastern Ohio Incident Adjusted

($ in millions, except per share amounts)

Income from railway operations $ 711 $ 387 $ 1,098

Net income $ 466 $ 293 $ 759

Diluted earnings per share $ 2.04 $ 1.28 $ 3.32

Railway operating ratio (percent) 77.3 (12.4) 64.9

In the table below, references to 2023 results and related comparisons use the adjusted, non-GAAP results from the reconciliation in the table above.

First Quarter

(non-GAAP) 2022 Adjusted 2023 (non-GAAP)

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

Income from railway operations $ 1,098 $ 1,085 1%

Net income $ 759 $ 703 8%

Diluted earnings per share $ 3.32 $ 2.93 13%

Railway operating ratio (percent) 64.9 62.8 3%

On a non-GAAP basis excluding the impact of the Incident, income from railway operations increased due to higher railway operating revenues.

Revenue growth was driven by higher fuel surcharge revenues and pricing gains, as volumes remained flat compared to the same period last year.

The rise in revenues was partially offset by increased railway operating expenses, primarily driven by inflationary pressures and service-related costs.

DETAILED RESULTS OF OPERATIONS

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The following tables present a comparison of revenues ($ in millions), units (in thousands), and average revenue per unit ($ per unit) by commodity group.

Third Quarter First Nine Months

Revenues 2022 2021 % change 2022 2021 % change

First Quarter

Revenues 2023 2022 % change

Agriculture, forest and consumer products $ 653 $ 573 14%

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Total 1,891 1,758 8%

Railway operating revenues increased $491 million in the third quarter and $1.2 billion for the first nine months compared with the same periods last year.

Railway operating revenues increased $217 million compared with the same period last year.

The table below reflects the components of the revenue change by major commodity group ($ in millions).

Third Quarter First Nine Months

Merchandise Intermodal Coal Merchandise Intermodal Coal

First Quarter

Merchandise Intermodal Coal

Increase (Decrease)

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

Revenues associated with these surcharges totaled $501 million and $174 million in the third quarters of 2022 and 2021, respectively, and $1.2 billion and $419 million for the first nine months of 2022 and 2021, respectively.

Revenues associated with these surcharges totaled $375 million and $244 million in the first quarters of 2023 and 2022, respectively.

The increase in fuel surcharge revenues is driven by higher fuel commodity prices.

Should the current fuel price environment persist for the remainder of 2022, we expect fuel surcharge revenue to continue to be higher than 2021.

Merchandise revenues increased in both periods due to higher average revenue per unit, driven by higher fuel surcharge revenue and increased pricing, partially offset by lower volume.

Volumes fell in both periods as declines in metals and construction and agriculture, forest, and consumer products shipments more than offset higher automotive shipments in the third quarter and chemicals shipments in the first nine months.

Agriculture, forest and consumer products volume decreased in both periods.

During the third quarter, declines in ethanol, pulpboard, fertilizer, and pulp, more than offset gains in corn, food oils, feed, and soybeans.

During the first nine months, declines in fertilizer, corn, pulpboard, and pulp more than offset increases in feed, soybeans, and food oils.

Decreased ethanol shipments in the third quarter were due to a decline in gasoline consumption.

Pulpboard shipments declined in both periods due to decreased demand.

Lower fertilizer shipments in both periods were driven by high fertilizer prices causing customers to draw down on existing inventories or delay purchases.

Pulp shipments decreased in both periods due to equipment availability, service disruptions and over-the-road competition.

Increased corn shipments in the third quarter were due to improved cycle times on grain trains.

In both periods, feed and food oils shipments increased due to increased customer demand and soybean volumes were higher due to increased opportunity for exports.

Chemicals volume was flat in the third quarter but increased for the first nine months driven by growth in shipments of sand in both periods due to increased demand.

Both periods were impacted by reduced shipments of inorganic chemicals, plastics, and organic chemicals, due to decreased demand.

The first nine months also saw an increase in solid waste shipments due to growth with existing customers.

Metals and construction volume fell in both periods, largely the result of decreased shipments of coil steel, iron and steel, and scrap metal driven by service disruptions and slower equipment cycle times.

Automotive volume increased in the third quarter but decreased for the first nine months.

Higher shipments in the third quarter were primarily due to increased production due to fewer parts supply issues when compared to the prior year, partially offset by slower equipment cycle times.

Volume declines for the first nine months were driven by slower equipment cycle times partially offset by fewer parts supply issues when compared to the prior year.

Merchandise revenues for the remainder of the year are expected to be higher due to increased average revenue per unit, driven by higher fuel surcharge revenue and pricing gains.

Intermodal revenues increased in both periods, driven by higher average revenue per unit, a result of higher fuel surcharge revenues and pricing gains, partially offset by lower volume.

The first nine months also included higher storage services revenue.

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

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

Merchandise revenues increased due to higher average revenue per unit, driven by higher fuel surcharge revenue and increased pricing, as well as higher volumes in all commodity groups.

Agriculture, forest and consumer products volume increased as the shipment demand for corn, soybeans, ethanol, feed, and lumber, more than offset the declines in pulpboard.

Volume gains in corn, ethanol, feed and lumber were driven by increased market demand.

Higher soybean volume was due to an extended export season.

The decline in pulpboard was due to higher inventories slowing down the demand for shipments.

Chemicals volume rose as growth in shipments of sand, petroleum products, and solid waste more than the offset declines in plastics, organic chemicals and natural gas liquids.

Volume gains for sand were driven by current market demand, while the volume increases for petroleum and solid waste were both driven by growth with existing customers.

Plastics volumes declined due to lower demand as a result of decreased activity in the housing market, while organic chemicals volumes declined as a result of production delays due to weather events.

Natural gas liquid volumes were down due to decreased demand.

Metals and construction volume increased, largely driven by higher demand for aggregates and scrap metal.

Automotive volume was higher due to an increase in production of vehicles partially offset by elongated cycle times.

Intermodal revenues decreased, driven by lower volumes, and lower average revenue per unit, a result of decreased storage service charges partially offset by higher fuel surcharge revenue.

Intermodal units (in thousands) by market were as follows:

Third Quarter First Nine Months

2022 2021 % change 2022 2021 % change

First Quarter

2023 2022 % change

Domestic 587.7 653.4 (10%)

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Total 916.8 956.5 (4%)

Domestic volume declined in both periods due to service disruptions and terminal congestion.

International volume decreased in both periods as supply chain constraints, equipment shortages, as well as excess retail inventory which more than offset strong consumer demand.

Intermodal revenues for the remainder of the year are expected to be higher due to increased average revenue per unit, driven by higher fuel surcharge revenue and pricing gains.

Coal revenues increased in both periods due to higher average revenue per unit, driven by pricing gains and higher fuel surcharge revenue, and higher volume.

Domestic volume declined due to high inventories and increased truck availability resulting in strong over-the-road competition.

International volume increased driven by ocean carriers favoring inland point intermodal traffic.

Coal revenues increased due to higher average revenue per unit, driven by traffic mix and higher fuel surcharge revenue, and increased export coal volumes.

Coal tonnage (in thousands) by market was as follows:

Third Quarter First Nine Months

2022 2021 % change 2022 2021 % change

First Quarter

2023 2022 % change

Utility 8,210 8,961 (8%)

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Total 19,436 18,608 4%

Coal tonnage increased in both periods primarily due to increased utility and export tonnage.

Utility tonnage increased in both periods due to stronger demand.

Export tonnage increased due to increased coal supply.

Domestic metallurgical coal tonnage increased for the third quarter due to increased coal supply, partially offset by reduced coke shipments related to customer sourcing changes.

For the first nine months domestic metallurgical coal

tonnage decreased due to reduced coke shipments related to customer sourcing changes.

Industrial coal tonnage increased in both periods due to increased demand.

Coal revenues for the remainder of the year are expected to rise due to increased average revenue per unit, driven primarily by higher fuel surcharge revenue, and volume growth.

Coal tonnage increased due to increased export volume, partially offset by decreased volumes in all other market groups.

Export tonnage was higher due to increased demand, coal supply, and metal production.

Utility tonnage decreased as a result of low natural gas prices and mild winter weather.

Domestic metallurgical and industrial coal tonnage decreased due to reduced coal shipments related to idled customer facilities.

Railway Operating Expenses

Railway operating expenses summarized by major classifications follow ($ in millions):

Third Quarter First Nine Months

2022 2021 % change 2022 2021 % change

First Quarter

2023 2022 % change

Compensation and benefits $ 690 $ 619 11%

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Materials and other 212 171 24%

Eastern Ohio incident 387 —

Total $ 2,421 $ 1,830 32%

Compensation and benefits expense increased in both periods as follows:

• increased pay rates (up $130 million for the quarter and $151 million for the first nine months),

• employee activity levels (up $28 million for the quarter and $13 million for the first nine months),

• overtime (up $4 million for the quarter and $17 million for the first nine months),

• incentive and stock-based compensation (down $38 million for the quarter and $62 million for the first nine months), and

• other (up $2 million for the quarter and $5 million for the first nine months).

The increase in pay rates in 2022 includes higher estimates associated with previously recorded amounts for retroactive wage increases and other benefits anticipated under our labor agreements.

For the third quarter of 2022, compensation and benefits includes $85 million and purchased services 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 includes $2 million of additional expenses pertaining to estimated wage increases recorded in periods prior to January 1, 2022.

Average rail headcount for the quarter was up by over 800 compared with the third quarter of 2021 due to the hiring of additional conductor trainees.

Purchased services and rents increased in both periods as follows ($ in millions):

Third Quarter First Nine Months

2022 2021 % change 2022 2021 % change

Compensation and benefits expense increased as follows:

• increased pay rates (up $49 million),

• employee activity levels (up $36 million),

• stock-based compensation (down $12 million), and

• other (down $2 million).

Average rail headcount for the quarter was up by over 1,400 compared with the first quarter of 2022 primarily due to the hiring of additional train and engine craft employees.

Purchased services and rents increased as follows ($ in millions):

First Quarter

2023 2022 % change

Purchased services $ 399 $ 349 14%

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Total $ 496 $ 437 14%

Purchased services increased in both periods due to inflationary pressures which resulted in higher intermodal-related expenses, increased operational and transportation expenses, as well as higher technology-related costs.

Equipment rents increased in both periods as lower network fluidity led to greater time-and-mileage expenses, increased automotive equipment expenses, and higher short-term locomotive resource costs.

Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increased in both periods due to higher locomotive fuel prices (up 88% in the third quarter and 97% in the first nine months), partially offset by decreased consumption (down 2% in the third quarter and 3% in the first nine months).

Should the current fuel price environment persist for the remainder of 2022, we expect fuel expenses to continue to be higher compared to 2021.

Materials and other expenses decreased in the third quarter but increased in the first nine months as follows ($ in millions):

Third Quarter First Nine Months

2022 2021 % change 2022 2021 % change

Purchased services primarily increased due to inflationary pressures which resulted in higher intermodal-related expenses, increased operational and transportation expenses, as well as higher technology-related costs.

Equipment rents increased as lower network fluidity led to increased intermodal equipment expenses and greater time-and-mileage expenses.

We also incurred higher freight car lease costs.

Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, increased due to higher locomotive fuel prices (5%).

Locomotive fuel consumption was flat compared to the same period last year.

Depreciation expense increased due to our higher asset base and the impact of the results of our periodic roadway study.

Materials and other expenses increased as follows ($ in millions):

First Quarter

2023 2022 % change

Materials $ 91 $ 62 47%

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Total $ 212 $ 171 24%

Materials expense increased in both periods due to increased freight car and track materials costs.

Claims expense increased in both periods as a result of higher costs associated with environmental remediation matters and personal injuries partially offset by lower derailment costs.

Other expense decreased in the third quarter due to a favorable legal settlement and increased gains on operating property sales, partially offset by higher travel-related expenses.

Other expense increased the first nine months due to lower gains on operating property sales and higher travel-related expenses.

Gains from operating property sales totaled $17 million and $5 million for the third quarters of 2022 and 2021, respectively, and $51 million and $76 million in the first nine months of 2022 and 2021, respectively.

Materials expense increased due to increased locomotive and freight car materials costs.

Claims expense increased as a result of higher costs associated with derailments not related to the Incident.

Other expense increased due to higher travel-related expenses.

Gains from operating property sales, included in Other, totaled $3 million and $6 million in 2023 and 2022, respectively.

Eastern Ohio incident

During the first quarter, we recorded $387 million for costs primarily associated with environmental matters and legal proceedings.

The expense recorded in the first quarter does not include any estimates for amounts that may be recovered under our insurance policies.

For further details regarding the Incident, see Note 10 in the Notes to Consolidated Financial Statements.

Other income (expense) – net

Other income decreased $16 million in the third quarter and $77 million for the first nine months.

Both periods experienced lower net returns on corporate-owned life insurance (COLI) partially offset by a higher net pension benefit.

The effective tax rates for the third quarter and first nine months of 2022 were 12.4% and 19.8%, lower than the 23.6% and 22.4%, respectively, for the same periods last year primarily due to a change in a state corporate income tax rate.

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, we recognized a benefit of $136 million in the third quarter of 2022.

Other income increased $61 million due to higher returns on corporate-owned life insurance (COLI) and increased interest income.

The first-quarter effective tax rate was 21.3% compared with 22.9% for the same period last year.

The effective rate for 2023 includes the recognition of certain business tax credits and tax benefits on stock-based compensation.

FINANCIAL CONDITION AND LIQUIDITY

Cash provided by operating activities, our principal source of liquidity, was $3.4 billion for the first nine months of 2022, compared with $3.3 billion for the same period of 2021.

We had negative working capital of $83 million and $354 million at September 30, 2022 and December 31, 2021, respectively.

Cash and cash equivalents totaled $1.2 billion at September 30, 2022.

Cash used in investing activities was $1.1 billion for the first nine months of 2022, compared with $847 million for the same period last year.

Cash provided by operating activities, our principal source of liquidity, was $1.2 billion for the first three months of 2023, compared with $1.0 billion for the same period of 2022.

The increase reflected changes in working capital, offset in part by lower operating results.

We had negative working capital of $702 million and $642 million at March 31, 2023 and December 31, 2022, respectively.

Cash and cash equivalents totaled $552 million at March 31, 2023.

Cash used in investing activities was $391 million for the first three months of 2023, compared with $335 million for the same period last year.

The increase was primarily driven by higher property additions.

Cash used in financing activities was $2.0 billion for the first nine months of 2022, compared with $2.1 billion for the same period last year, reflecting lower repurchases of Common Stock, and increased proceeds from borrowing, partially offset by higher dividends.

We repurchased $2.3 billion of Common Stock in the first nine months of 2022 compared to $2.5 billion in the same period last year.

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.

Cash used in financing activities was $686 million for the first three months of 2023, while cash provided by financing activities was $73 million for the same period last year, reflecting higher debt repayments and decreased proceeds from borrowing.

Partially offsetting this activity was lower repurchases of Common Stock.

We repurchased $163 million of Common Stock in the first three months of 2023 compared to $600 million in the same period last year.

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) and Rule 10b-18 under the Securities and Exchange Act of 1934.

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)

and Rule 10b-18 under the Securities and Exchange Act of 1934.

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

Our debt-to-total capitalization ratio was 53.6% at September 30, 2022, and 50.4% at December 31, 2021.

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.

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

Our debt-to-total capitalization ratio was 54.1% at March 31, 2023 and 54.4% at December 31, 2022.

We 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 March 31, 2023 or December 31, 2022.

We also have in place an 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.

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 September 30, 2022 or December 31, 2021.

In addition, we have investments in general purpose COLI policies and had the ability to borrow against these policies up to $605 million and $715 million at September 30, 2022 and December 31, 2021, respectively.

We had no amounts outstanding under this program at March 31, 2023 and $100 million outstanding at December 31, 2022.

Our available borrowing capacity was $400 million and $300 million at March 31, 2023 and December 31, 2022, respectively.

In addition, we have investments in general purpose COLI policies and had the ability to borrow against these policies up to $620 million and $610 million at March 31, 2023 and December 31, 2022, 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 or defer expenditures on property additions and decrease shareholder distributions, including share repurchases, provide additional flexibility to meet our ongoing obligations.

Nonetheless, we are monitoring the ongoing impacts of the COVID-19 pandemic, which could lead to a decline of cash inflows from operations.

There have been no material changes to the information on future contractual obligations, including those that may have material cash requirements, contained in our Form 10-K for the year ended December 31, 2021, with the exception of additional senior notes (see Note 8) and approximately $1.0 billion of additional unconditional purchase obligations, which extend through 2025.

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

There have been no material changes to the information on future contractual obligations, including those that may have material cash requirements, contained in our Form 10-K for the year ended December 31, 2022, with the exception of additional senior notes (see Note 7).

CRITICAL ACCOUNTING ESTIMATES

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Accordingly, we regularly review these estimates and assumptions based on historical experience, changes in the business environment, and other factors we believe to be reasonable under the circumstances.

There have been no significant changes to the critical accounting estimates contained in our Form 10-K at December 31, 2021.

In addition to the critical accounting estimates below, the remainder of our critical accounting estimates are contained in our December 31, 2022 Form 10-K.

Contingencies

We are currently involved in certain environmental response and remediation activities and subject to numerous legal proceedings and regulatory inquiries and investigations resulting from the Incident.

As required, we have accrued estimates of the probable and reasonably estimable costs for the resolution of these matters.

Our environmental estimates are based upon types of remediation efforts currently anticipated, the volume of contaminants in the impacted areas, and governmental oversight and other costs, amongst other factors.

Estimates associated with the legal proceedings to which we are subject are based on information that is currently available, including but not limited to an assessment of the proceedings and the potential and likely results of such proceedings.

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.

Additionally, the final outcome of any of the legal proceedings and regulatory inquiries and investigations cannot be predicted with certainty, and unfavorable or unexpected developments or outcomes could result in new or additional accruals that could be material.

Furthermore, certain of these costs may be recoverable under our insurance policies in effect at the date of the Incident.

Any amounts that are recoverable under our insurance policies will be reflected in periods in which we determine that such amounts are probable of recovery.

See Note 10 in the Notes to Consolidated Financial Statements for more detailed information as it pertains to these contingencies.

OTHER MATTERS

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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 late September, management had reached tentative agreements with all relevant unions.

Some of these agreements have since been finalized through ratification by union membership, but others are still 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 for the outstanding tentative agreements 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).

In this scenario, the parties could voluntarily agree to further delay self-help and continue to pursue voluntary ratification, or Congress could take legislative action to preempt self-help and avert a service disruption.

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 labor costs.

New Accounting Pronouncements

For a detailed discussion of new accounting pronouncements, see Note 12.

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.

In preparing financial statements, GAAP requires the use of historical cost that disregards the effects of inflation on the replacement cost of property.

As a capital-intensive company, we have most of our capital invested in long-

lived assets.

As a capital-intensive company, we have most of our capital invested in long-lived assets.

The replacement cost of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical cost.

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While we believe these expectations, assumptions, estimates, beliefs, and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which involve factors or circumstances that are beyond our control.

These and other important factors, including those discussed under “Risk Factors” in our latest Form 10-K, as well as our subsequent filings with the Securities and Exchange Commission, may cause actual results, performance, or achievements to differ materially from those expressed or implied by these forward-looking statements.

These and other important factors, including those discussed under “Risk Factors” in our latest Form 10-K, as supplemented in Part II, Item 1 A of this Form 10-Q, as well as our subsequent filings with the Securities and Exchange Commission, may cause actual results, performance, or achievements to differ materially from those expressed or implied by these forward-looking statements.

The forward-looking statements herein are made only as of the date they were first issued, and unless otherwise required by applicable securities laws, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

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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-Q

Item 2. Management’s Discussion and Analysis