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Item 7. Management’s Discussion and Analysis

2024-02-05 compared with 2023-02-03 · 167 added, 157 removed, 256 unchanged (56% of the section changed)

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The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes.

Refer to Item 8 “Notes to Consolidated Financial Statements” for all “Note” references.

We are one of the nation’s premier transportation companies, moving goods and materials that help drive the U.S.

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

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.

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

The derailment of 38 railcars 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 17) and throughout the remainder of the year, we have worked to clean the derailment site safely and thoroughly and to monitor for any impact on public health and the environment.

As a result of the Incident, we incurred $1.1 billion of expenses primarily related to our environmental cleanup and remediation efforts at and around the site, related legal proceedings, and other Incident-related costs.

As a result, income from railway operations, net income, and diluted earnings per share declined compared to 2022, most significantly as a result of the direct costs from the Incident.

Our financial results were further impacted by lower revenues and higher non-Incident-related operating expenses.

SUMMARIZED RESULTS OF OPERATIONS

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Railway operating ratio (percent) 76.5 62.3 60.1 23 % 4 %

Income from railway operations, net income and diluted earnings per share declined in 2023 compared to 2022, driven by expenses incurred with our response efforts to the Incident (Note 17), lower railway operating revenues, and higher non-Incident-related railway operating expenses.

Railway operating revenues declined 5% due to lower average revenue per unit, the result of lower fuel surcharge revenue and decreased intermodal storage service revenues partially offset by favorable pricing and mix.

Additionally, lower volumes contributed to the decline in revenues.

Expenses associated with the Incident for the year were $1.1 billion.

In addition to costs resulting from the Incident, railway operating expenses increased due to inflationary pressures, investments in operational resiliency, and higher service-related costs, offset partially by lower fuel prices.

The decline in net income and diluted earnings per share also reflects the absence of a prior year $136 million deferred tax benefit, a result of an enactment of a change in the corporate income tax rate in the Commonwealth of Pennsylvania in 2022.

Railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses) deteriorated to 76.5 percent.

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

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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.

Additionally, net income included a $136 million deferred tax benefit resulting from a state corporate income tax rate change, 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.

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 2020.

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

Our railway operating ratio decreased to 60.1 percent.

The following tables adjust our 2020 U.S.

Generally Accepted Accounting Principles (GAAP) financial results to exclude the effects of the loss on asset disposal and investment impairment.

The income tax effects on these non-GAAP adjustments were calculated based on the applicable tax rates to which the non-GAAP adjustments relate.

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 2020 charges.

Railway operating ratio deteriorated to 62.3 percent.

The following table adjusts our 2023 U.S.

Generally Accepted Accounting Principles (GAAP) financial results to exclude the effects of the Incident.

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

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 from, or as a substitute for, the related financial information prepared in accordance with GAAP.

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Non-GAAP Reconciliation for 2023

Reported (GAAP) Loss on Asset Disposal Investment Impairment Adjusted

(GAAP) Eastern Ohio Incident Adjusted

($ in millions, except per share amounts)

Railway operating expenses $ 6,787 $ (385) $ (99) $ 6,303

Income from railway operations $ 2,851 $ 1,116 $ 3,967

Income before income taxes $ 2,530 $ 385 $ 99 $ 3,014

Income taxes $ 493 $ 270 $ 763

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Railway operating ratio (percent) 76.5 (9.1) 67.4

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

Adjusted 2022 vs.

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

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

Adjusted (non-GAAP) 2022

(non-GAAP) 2022 2021 2022 2021

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

Railway operating expenses $ 7,936 $ 6,695 $ 6,303 19 % 6 %

Income from railway operations $ 3,967 $ 4,809 $ 4,447 (18 %) 8 %

Income before income taxes $ 4,130 $ 3,878 $ 3,014 6 % 29 %

Income taxes $ 860 $ 873 $ 639 (1 %) 37 %

Net income $ 2,673 $ 3,270 $ 3,005 (18 %) 9 %

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Railway operating ratio (percent) 67.4 62.3 60.1 8 % 4 %

On a non-GAAP basis excluding the impact of direct costs resulting from the Incident, income from railway operations decreased in 2023 due to lower railway operating revenues and higher railway operating expenses.

Railway operating revenues declined due to decreased fuel surcharge revenue, decreased intermodal storage revenues, and lower volume, partially offset by increased pricing and favorable mix compared to the prior year.

Railway operating expenses increased due to inflationary pressures, investments in operational resiliency, and higher service-related costs, partially offset by lower fuel prices.

DETAILED RESULTS OF OPERATIONS

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Total 1,802 1,865 1,584 (3 %) 18 %

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

Revenues decreased $589 million in 2023 but increased $1.6 billion in 2022 compared to the prior years.

Revenues declined in 2023 as a result of lower average revenue per unit, driven by decreases in fuel surcharge revenue and intermodal storage revenues, and volume declines.

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.

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.

Fuel surcharge revenues totaled $1.2 billion, $1.6 billion, and $622 million in 2023, 2022, and 2021, respectively.

The change in fuel surcharge revenues in each period was primarily driven by fluctuations in fuel commodity prices.

For 2024, we expect that revenue will increase modestly driven by higher volumes.

MERCHANDISE revenues increased in both 2023 and 2022 compared with the prior years.

In 2023, revenues were slightly higher as pricing and volume gains were nearly offset by lower fuel surcharge revenue and unfavorable mix.

Increased volumes in automotive and agriculture, forest and consumer shipments were partially offset by decreased chemicals shipments.

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 economic recovery following the onset of the COVID-19 pandemic.

Agriculture, forest and consumer products revenues increased in both 2023 and 2022 compared with the prior years.

In 2023, the rise was the result of increased volume.

Average revenue per unit was flat, the result of lower fuel surcharge revenue offset by pricing gains.

Increases in ethanol and fertilizer shipments more than offset declines in shipments of wood chips and graphic paper.

Increased market demand led to volume gains in ethanol and fertilizer.

Volume declines in wood chips were due to customer mill closures, while lower market demand led to the decline in graphic paper.

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.

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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.

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

Chemicals revenues decreased in 2023 but increased in 2022 compared with the prior years.

In 2023, the decrease was as a result of volume declines.

Reduced shipments of crude oil, organic chemicals, and natural gas liquids, more than offset the increases in solid waste and other petroleum products.

Volume declines for crude oil were driven by soft demand in the energy markets.

Organic chemicals and natural gas liquids volume declined as a result

of lower demand.

Volume gains in solid waste were due to growth with existing customers, while the gains in petroleum products were due to growth with existing customers and new business opportunities.

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

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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.

The increase in volume was due to economic and production recovery since the beginning of the pandemic, despite ongoing challenges in the energy markets.

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

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

Metals and construction revenues were lower in 2023 but higher in 2022 compared with the prior years.

In 2023, the decline in revenue was driven by lower average revenue per unit, the result of decreased fuel surcharge revenue partially offset by increased price.

Volumes were nearly unchanged as reduced shipments of kaolin and construction materials were offset by volume gains in coil steel and scrap metal.

The volume declines in kaolin were largely driven by lower demand, while the declines in construction materials were due to lower demand, extended cycle times and service challenges.

Gains in coil steel volume were due to increased equipment available to handle demand, while scrap metal volume increased due to higher demand.

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

Automotive revenues rose in both 2023 and 2022 compared with the prior years.

The increase in revenues in 2023 was driven by increased volume and higher average revenue per unit, driven by favorable price.

Volume increases were due to higher finished vehicle inventory levels available for rail transportation and improved equipment cycle times.

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.

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.

INTERMODAL revenues decreased in 2023 but increased in 2022 compared with the prior years.

The decrease in 2023 was the result of lower average revenue per unit, driven by reduced storage service charges and lower fuel surcharge revenue, and decreased volume.

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

Intermodal units by market were as follows:

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Total 3,822.4 3,913.1 4,104.1 (2 %) (5 %)

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

Domestic volume decreased in both 2023 and 2022 compared with the prior years.

In 2023, volume declined due to a decrease in freight demand as a result of reduced consumer consumption combined with high inventories, and increased truck competition.

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.

International volume increased in 2023 but decreased in 2022.

The increase in 2023 was driven by ocean carriers favoring inland point intermodal traffic, partially offset by a decrease in imports.

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.

COAL revenues decreased in 2023 but increased in 2022 compared with the prior years.

The decrease in 2023 was a result of decreased volumes.

Average revenue per unit was flat as lower fuel surcharge revenue and pricing declines were offset by positive mix.

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.

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

As shown in the following table, total tonnage decreased in 2023 but increased 2022.

2023 2022 2021 vs.

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Total 75,892 76,664 73,454 (1 %) 4 %

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

Utility coal tonnage decreased in 2023 but increased in 2022 compared with the prior years.

The decrease in 2023 was due to low natural gas prices, high stockpiles, and unplanned customer outages.

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.

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.

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

The increases in both years were a result of increased demand and coal supply.

Domestic metallurgical coal tonnage decreased in both 2023 and 2022 compared with the prior years.

The decrease in 2023 was due to reduced coke shipments resulting from idled customer facilities.

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.

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

Industrial coal tonnage decreased in 2023 but increased in 2022 compared with the prior years.

The decrease in 2023 was due to reduced coal shipments related to customer sourcing changes.

The increase in 2022 was the result of increased demand.

Railway Operating Expenses

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Materials and other 832 713 547 17 % 30 %

Loss on asset disposal — — 385

Eastern Ohio incident 1,116 — —

Total $ 9,305 $ 7,936 $ 6,695 17 % 19 %

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 2023, expenses increased as we incurred $1.1 billion of costs related to environmental matters and legal proceedings resulting from the Incident (Note 17).

Additionally, railway operating expenses reflected higher costs due to inflationary pressures, investments in operational resiliency, and higher service-related costs.

Partially offsetting these increases were the impacts of lower fuel prices and the absence of retroactive wage increases recorded in 2022.

Compensation and benefits increased in 2023, reflecting changes in:

• increased pay rates (up $188 million),

• employee activity levels (up $138 million),

• pay rates (up $86 million),

• overtime (up $9 million),

• incentive and stock-based compensation (down $30 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.

• other (down $5 million).

In 2022, compensation and benefits increased, a result of changes in:

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

• overtime and recrews (up $47 million),

• increased pay rates (up $41 million),

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

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

• 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).

Pay rates in 2022 were impacted by the outcome of completed labor negotiations, which resulted in retroactive wage increases and other benefits pertaining to prior years.

These wage increases and benefits increased compensation and benefits by $54 million.

Our employment averaged 20,300 in 2023, compared with 18,900 in 2022, and 18,500 in 2021.

Purchased services and rents includes the costs of services purchased from external vendors and contractors, including the net costs of operating joint (or leased) facilities with other railroads and the net cost of equipment rentals.

Purchased services and rents includes the costs of services purchased from external vendors and contractors, including the net costs of operating joint facilities with other railroads and the net cost of equipment rentals.

2023 2022 2021 vs.

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Total $ 2,070 $ 1,922 $ 1,726 8 % 11 %

The increase in purchased services in 2023 was due to higher technology-related costs, increased operational and transportation expenses, and higher engineering activity.

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.

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.

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.

In 2023, the increase was due to increased intermodal equipment expenses, higher freight car lease costs, and decreased equity in TTX Company's (TTX) earnings.

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.

Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, decreased in 2023 but increased in 2022.

The decrease in 2023 was due to lower locomotive fuel prices (down 20%), which decreased fuel expense by $275 million.

The increase in 2022 was due to higher locomotive fuel prices (up 87%) which increased expenses by $634 million.

Locomotive fuel consumption was nearly flat in 2023 and decreased 2% in 2022.

We consumed 377 million gallons of diesel fuel in 2023, compared with 376 million gallons in 2022 and 384 million gallons in 2021.

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

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

Depreciation expense increased in both periods.

In both periods, the increase was a reflection of reinvestment in our infrastructure, rolling stock, and technology.

The increase in 2023 also reflects the impact of changes in group depreciable lives as a result of our periodic roadway study.

Materials and other expenses increased in both 2023 and 2022 as shown in the following table.

2023 2022 2021 vs.

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Total $ 832 $ 713 $ 547 17 % 30 %

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.

Materials expense increased in both 2023 and 2022.

The increases in both years were due to increased locomotive, freight car, and track materials costs.

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

The decrease in 2023 was primarily the result of lower personal injury case development, lower costs related to environmental remediation matters unrelated to the Incident, and a claims-related recovery.

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.

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.

Other expense increased in 2023 primarily due to lower gains from operating property sales and increased travel-related expenses.

In 2022, other expense increased 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.

Gains from operating property sales amounted to $43 million, $76 million, and $82 million in 2023, 2022, and 2021, respectively.

Loss on asset disposal

During 2020, we recorded a $385 million charge related to the disposal of 703 locomotives.

For more information on the impact of the charge, see Note 7.

Eastern Ohio incident

During 2023, we recorded $1.1 billion for costs primarily associated with environmental matters and legal proceedings.

We recorded $101 million of recoveries from claims made under our insurance policies, which are included in the total amount recorded in 2023.

For further details regarding the Incident, see Note 17 in Item 8 “Notes to Consolidated Financial Statements.”

Other Income – Net

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.

Other income – net increased in 2023 but decreased in 2022.

The increase in 2023 was the result of higher net returns on corporate-owned life insurance (COLI) and increased interest income, partially offset by lower gains from non-operating property sales.

The decrease in 2022 was driven by lower net returns on COLI partially offset by a higher net pension benefit and increased interest income.

The effective income tax rate was 21.3% in 2023, compared with 20.8% in 2022 and 22.5% in 2021.

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.

The current year benefited from tax credits and higher COLI returns offset by reduced benefits from stock-based compensation.

The effective income tax rate in 2022 and 2021 reflects favorable benefits associated with stock-based compensation and various state law changes (Note 4), while 2021 also benefited from higher COLI returns.

For 2024, 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 $3.2 billion in 2023, $4.2 billion in 2022, and $4.3 billion in 2021.

The decrease in 2023 reflects lower operating results, offset in part by changes in working capital.

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.

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 had working capital of $639 million at December 31, 2023 and negative working capital of $642 million at December 31, 2022.

Cash and cash equivalents totaled $1.6 billion and $456 million at December 31, 2023, and 2022, 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).

In addition, we believe our currently-available borrowing capacity, access to additional financing, ability to reduce shareholder distributions, including share repurchases, and ability to moderate or defer property additions provide additional flexibility to meet our ongoing obligations in the short- and long-term.

Contractual obligations at December 31, 2023, including those that may have material cash requirements, include interest on fixed-rate long-term debt, long-term debt (Note 9), asset purchase of CSR (Note 17), 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).

Total 2024 2025 -

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Long-term debt principal 18,112 4 1,158 1,223 15,727

Asset purchase of CSR 1,662 1,662 — — —

Unconditional purchase obligations 1,405 687 455 79 184

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* This amount is shown in the 2029 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 $1.6 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.

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

Cash used in investing activities was $2.2 billion in 2023, $1.6 billion in 2022, and $1.2 billion in 2021.

The increase in 2023 was primarily driven by higher property additions and lower proceeds from property sales.

In 2022, the increase is due to higher property additions partially offset by increased proceeds from property sales.

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 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 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.

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.

For 2024, we expect property additions, excluding the purchase of the CSR, to approximate $2.3 billion.

In November 2022, we entered into an asset purchase and sale agreement with the Board of Trustees of the CSR, which was amended and restated in June 2023, to purchase approximately 337 miles of railway line that extends from Cincinnati, Ohio to Chattanooga, Tennessee.

We currently operate this railway line under a lease agreement.

Following the June 2023 amendment, the total purchase price for the line and other associated real and personal property included in the transaction is expected to be approximately $1.7 billion.

The agreement was conditioned upon the following, among other items:

(i) Cincinnati Voter Approval, which was obtained in November 2023, and (ii) the receipt of regulatory approval from the STB, which occurred in September 2023.

The transaction is scheduled to close on March 15, 2024.

Cash provided by financing activities was $115 million in 2023, while cash used in financing activities was $3.0 billion in 2022 and $3.3 billion in 2021.

The increase in cash provided by financing activities in 2023 reflects lower repurchases of Common Stock and increased proceeds from borrowings, partially offset by higher debt repayments.

In 2022, the decrease in cash used in financing activities reflects lower repurchases of Common Stock and increased proceeds from borrowings, partially offset by higher dividends.

Share repurchases of $622 million in 2023, $3.1 billion in 2022, and $3.4 billion in 2021 resulted in the retirement of 2.8 million, 12.6 million, and 12.7 million shares, respectively.

As of December 31, 2023, $6.9 billion remains authorized by our Board of Directors for repurchase.

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

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 November 2023, we issued $400 million of 5.55% senior notes due 2034 and $600 million of 5.95% senior notes due 2064.

In August 2023, we issued $600 million of 5.05% senior notes due 2030 and $1.0 billion of 5.35% senior notes due 2054.

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

In May 2023, we renewed our accounts receivable securitization program with a maximum borrowing capacity of $400 million.

The term expires in May 2023.

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.

Amounts under our accounts receivable securitization program are borrowed and repaid from time to time in the ordinary course for general corporate and cash management purposes.

The term of our accounts receivable securitization program expires in May 2024.

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

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

In January 2024, we renewed and amended our $800 million credit agreement.

The amended agreement expires in January 2029, and provides for borrowings at prevailing rates and includes covenants.

We had no amounts outstanding under this facility at either December 31, 2023 or December 31, 2022, and we are in compliance with all of its covenants.

In January 2024, we also entered into a term loan credit agreement that established a 364-day, $1.0 billion, unsecured delayed draw term loan facility under which we can borrow for general corporate purposes.

The term loan credit agreement provides for borrowing at prevailing rates and includes covenants that align with the $800 million credit agreement.

In addition, we have investments in general purpose COLI policies and had the ability to borrow against these policies up to $640 million and $610 million at December 31, 2023 and December 31, 2022, respectively.

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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.

Upcoming annual debt maturities are also disclosed in Note 9.

Overall, our goal is to maintain a capital structure with appropriate leverage to support our business strategy and provide flexibility through business cycles.

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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.

The following critical accounting estimates are a subset of our significant accounting policies described in Note 1.

Incident Contingencies

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

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 nature and extent of required future cleanup and removal activities (including those resulting from soil, water, sediment, and air assessment and investigative activities that are and will continue to be conducted at the site), and the extent and duration 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 developments related to the progress of such legal proceedings, inquiries, or investigations or other unfavorable or unexpected outcomes could result in additional costs or new or additionally accrued amounts that could be material to our results of operations in any particular year.

Furthermore, certain costs may be recoverable under our insurance policies in effect at the date of the Incident or from third parties.

Any amounts that are recoverable under our insurance policies or from third parties will be reflected in the period in which recovery is considered probable.

See Note 17 for more detailed information as it pertains to these contingencies.

Pensions and Other Postretirement Benefits

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For 2023, we assumed a long-term investment rate of return of 8.0%, which was supported by our long-term total rate of return on pension plan assets since inception, as well as our expectation of future returns.

A one-percentage point change to this rate of return assumption would result in a $26 million change in annual pension expense.

A one-percentage point decrease to this rate of return assumption would result in a $25 million increase in annual pension expense.

We review assumptions related to our defined benefit plans annually, and while changes are likely to occur in assumptions concerning retirement age, projected earnings, and mortality, they are not expected to have a material effect on our net pension expense or net pension liability in the future.

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We use the results of the yield curve analyses to select the discount rates that match the payment streams of the benefits in these plans.

A one-percentage point change to this discount rate assumption would result in a $3 million change in annual pension expense.

A one-percentage point decrease to this discount rate assumption would result in a $15 million increase in annual pension expense.

Properties and Depreciation

Most of our assets are long-lived railway properties (Note 7).

“Properties” are stated principally at cost and are depreciated using the group method whereby assets with similar characteristics, use, and expected lives are grouped together in asset classes and depreciated using a composite depreciation rate.

“Properties” are stated principally at cost and are depreciated using the group method whereby assets with similar characteristics, use, and expected lives are grouped

together in asset classes and depreciated using a composite depreciation rate.

See Note 1 for a more detailed discussion of assumptions and estimates.

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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 2023 totaled $1.3 billion.

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

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.

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.

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.

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.

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 remain actively engaged with our unions in voluntary local discussions (none of which carry the risk of a work stoppage) 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.

At December 31, 2023, we have no outstanding debt subject to interest rate fluctuations.

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, 2023 and amounts to an increase of approximately $1.7 billion to the fair value of our debt at December 31, 2023.

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Additional Information

Investors and others should note that we routinely use the Investor Relations, Performance Metrics and Sustainability sections of our website (www.norfolksouthern.com/content/nscorp/en/investor-relations.html, http://www.nscorp.com/content/nscorp/en/investor-relations/performance-metrics.html, & www.nscorp.com/content/nscorp/en/about-ns/sustainability.html) to post presentations to investors and other important information, including information that may be deemed material to investors.

Information about us, including information that may be deemed material, may also be announced by posts on our social media channels, including Twitter (www.twitter.com/nscorp) and LinkedIn (www.linkedin.com/company/norfolk-southern).

Investors and others should note that we routinely use the Investor Relations, Performance Metrics and Sustainability sections of our website (norfolksouthern.investorroom.com/key-investor-information, norfolksouthern.investorroom.com/weekly-performance-reports & www.norfolksouthern.com/sustainability) to post presentations to investors and other important information, including information that may be deemed material to investors.

Information about us, including information that may be deemed material, may also be announced by posts on our social media channels, including X (formerly known as Twitter) (www.twitter.com/nscorp) and LinkedIn (www.linkedin.com/company/norfolk-southern).

We may also use our website and social media channels for the purpose of complying with our disclosure obligations under Regulation FD.

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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