Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Norfolk Southern Corporation and Subsidiaries

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

OVERVIEW

We are one of the nation’s premier transportation companies, moving goods and materials that help drive the U.S. economy. We connect customers to markets and communities to economic opportunity with safe, reliable, and cost-effective shipping solutions. Our Norfolk Southern Railway Company subsidiary operates in 22 states and the District of Columbia. We are a major transporter of industrial products, including agriculture, forest and consumer products, chemicals, and metals and construction materials. In addition, in the East we serve every major container port and operate the most extensive intermodal network. 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.

SUMMARIZED RESULTS OF OPERATIONS

																					2022						2021
			2022						2021						2020						vs. 2021						vs. 2020
			($ in millions, except per share amounts)																		(% change)
Income from railway operations			$	4,809					$	4,447					$	3,002					8		%				48		%
Net income			$	3,270					$	3,005					$	2,013					9		%				49		%
Diluted earnings per share			$	13.88					$	12.11					$	7.84					15		%				54		%
Railway operating ratio (percent)			62.3						60.1						69.3						4		%				(13		%)

Income from railway operations increased in 2022 compared to 2021, driven by higher railway operating revenues. Revenue growth was the result of higher fuel surcharge revenues and pricing gains, which more than offset the impact of volume declines. The rise in revenues was partly offset by increased railway operating expenses, driven by higher fuel prices, other inflationary pressures, service-related costs, increased labor-related costs primarily resulting from labor union negotiations, and higher claims-related expenses. Incremental expenses incurred in 2022 that resulted from finalized labor agreements for wages earned in 2021 and prior periods lowered diluted earnings per share by $0.18. Additionally, net income includes a $136 million deferred tax benefit resulting from a corporate income tax rate change in the Commonwealth of Pennsylvania, which increased diluted earnings per share by $0.58. Our share repurchase activity resulted in the percentage increase in diluted earnings per share that exceeded that of net income. Railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses) increased to 62.3 percent.

Income from railway operations increased in 2021 compared to 2020, the result of a 14% increase in railway operating revenues and a 1% reduction in railway operating expenses. Revenue growth was driven by increased average revenue per unit and higher volumes, the result of improved customer demand. The decline in railway

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

			Non-GAAP Reconciliation for 2020
			Reported (GAAP)						Loss on Asset Disposal						Investment Impairment						Adjusted (non-GAAP)
			($ in millions, except per share amounts)
Railway operating expenses			$	6,787					$	(385)					$	(99)					$	6,303
Income from railway operations			$	3,002					$	385					$	99					$	3,486
Income before income taxes			$	2,530					$	385					$	99					$	3,014
Income taxes			$	517					$	97					$	25					$	639
Net income			$	2,013					$	288					$	74					$	2,375
Diluted earnings per share			$	7.84					$	1.12					$	0.29					$	9.25
Railway operating ratio (percent)			69.3						(3.9)						(1.0)						64.4

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

																											2021
															Adjusted						2022						vs. Adjusted
															2020						vs.						2020
			2022						2021						(non-GAAP)						2021						(non-GAAP)
			($ in millions, except per share amounts)																		(% change)
Railway operating expenses			$	7,936					$	6,695					$	6,303					19		%				6		%
Income from railway operations			$	4,809					$	4,447					$	3,486					8		%				28		%
Income before income taxes			$	4,130					$	3,878					$	3,014					6		%				29		%
Income taxes			$	860					$	873					$	639					(1		%)				37		%
Net income			$	3,270					$	3,005					$	2,375					9		%				27		%
Diluted earnings per share			$	13.88					$	12.11					$	9.25					15		%				31		%
Railway operating ratio (percent)			62.3						60.1						64.4						4		%				(7		%)

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DETAILED RESULTS OF OPERATIONS

Railway Operating Revenues

The following tables present a three-year comparison of revenues, volumes (units), and average revenue per unit by commodity group.

			Revenues																		2022						2021
			2022						2021						2020						vs. 2021						vs. 2020
			($ in millions)																		(% change)
Merchandise:
Agriculture, forest and consumer products			$	2,493					$	2,251					$	2,116					11		%				6		%
Chemicals			2,148						1,951						1,809						10		%				8		%
Metals and construction			1,652						1,562						1,333						6		%				17		%
Automotive			1,038						905						830						15		%				9		%
Merchandise			7,331						6,669						6,088						10		%				10		%
Intermodal			3,681						3,163						2,654						16		%				19		%
Coal			1,733						1,310						1,047						32		%				25		%
Total			$	12,745					$	11,142					$	9,789					14		%				14		%

			Units																		2022						2021
			2022						2021						2020						vs. 2021						vs. 2020
			(in thousands)																		(% change)
Merchandise:
Agriculture, forest and consumer products			723.0						725.5						704.4						—		%				3		%
Chemicals			540.1						529.7						482.0						2		%				10		%
Metals and construction			634.6						669.0						601.2						(5		%)				11		%
Automotive			339.1						345.4						329.7						(2		%)				5		%
Merchandise			2,236.8						2,269.6						2,117.3						(1		%)				7		%
Intermodal			3,913.1						4,104.1						3,992.1						(5		%)				3		%
Coal			684.6						658.0						574.1						4		%				15		%
Total			6,834.5						7,031.7						6,683.5						(3		%)				5		%

			Revenue per Unit																		2022						2021
			2022						2021						2020						vs. 2021						vs. 2020
			($ per unit)																		(% change)
Merchandise:
Agriculture, forest and consumer products			$	3,448					$	3,102					$	3,004					11		%				3		%
Chemicals			3,978						3,684						3,753						8		%				(2		%)
Metals and construction			2,604						2,334						2,216						12		%				5		%
Automotive			3,059						2,621						2,518						17		%				4		%
Merchandise			3,277						2,938						2,875						12		%				2		%
Intermodal			941						771						665						22		%				16		%
Coal			2,532						1,991						1,824						27		%				9		%
Total			1,865						1,584						1,465						18		%				8		%

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Revenues increased $1.6 billion in 2022 and $1.4 billion in 2021 compared to the prior years. Higher revenue for 2022 was the result of increased average revenue per unit, driven by higher fuel surcharge revenue, pricing gains, improved mix, and increased intermodal storage service charges, partially offset by volume declines. In 2021, higher revenue was the result of increased average revenue per unit, driven by pricing gains, higher fuel surcharge revenue, increased intermodal storage service charges and improved mix, as well as volume growth.

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

			2022 vs. 2021																		2021 vs. 2020
			Increase (Decrease)																		Increase (Decrease)
			($ in millions)
			Merchandise						Intermodal						Coal						Merchandise						Intermodal						Coal
Volume			$	(96)					$	(147)					$	53					$	438					$	75					$	153
Fuel surcharge
revenue			455						417						79						91						178						4
Rate, mix and
other			303						248						291						52						256						106
Total			$	662					$	518					$	423					$	581					$	509					$	263

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.

MERCHANDISE revenues increased in both 2022 and 2021 compared with the prior years. In 2022, revenues rose due to higher average revenue per unit, driven by higher fuel surcharge revenue and increased pricing, partially offset by lower volume. Decreased volumes in metal and construction and automotive shipments more than offset higher chemical shipments. In 2021, revenues rose due to increased volume and higher average revenue per unit driven by increased fuel surcharge revenue and pricing. Volumes increased in all merchandise commodity groups, reflecting economic recovery following the onset of the COVID-19 pandemic.

Agriculture, forest and consumer products revenues increased in both 2022 and 2021 compared with the prior years. In 2022, the rise was the result of increased average revenue per unit, the result of higher fuel surcharge revenue and pricing gains, while volumes were nearly flat. Declines in pulpboard, fertilizer, and pulp, were offset by increases in soybeans, feed, and corn. Pulpboard and pulp shipments declined due to decreased demand, equipment availability, service disruptions, and production down time. Lower fertilizer shipments were driven by high fertilizer prices causing customers to draw down on existing inventories or delay purchases as well as production disruptions. Soybean volumes were higher due to increased opportunity for exports. Feed shipments were higher due to increased customer demand. Increased corn shipments were due to improved equipment cycle times. In 2021, higher revenues were the result of higher volume across almost all markets, as the economy improved from the early months of the pandemic in 2020, and increased average revenue per unit, the result of pricing gains and higher fuel surcharge revenue. Gains in ethanol, pulpboard, beverages, lumber and wood, and woodchips more than offset declines in soybeans and pulp.

Chemicals revenues increased in both 2022 and 2021 compared with the prior years. In 2022, the increase was the result of higher average revenue per unit, driven by fuel surcharge revenue and pricing gains, and volume growth.

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Increases in sand and solid waste shipments were partially offset by declines in plastics, inorganic chemicals, organic chemicals, and natural gas liquids. The increase in sand was due to greater demand resulting from sustained high natural gas prices. Solid waste shipments increased due to growth with existing customers. Plastics shipments decreased due to softening of the housing market. Declines in inorganic chemicals, organic chemicals, and natural gas liquids shipments were due to decreased demand and reduced production. In 2021, the increase was the result of volume growth partially offset by lower average revenue per unit, driven by mix of traffic. 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. 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 2022 and 2021 compared with the prior years. The increase in revenues in 2022 was driven by higher average revenue per unit, due to higher fuel surcharge revenue and pricing gains, partially offset by volume declines. Volume declines were the result of slower equipment cycle times partially offset by fewer parts supply issues due to easing supply chain congestion when compared to the prior year. In 2021, the increase in revenues was driven by volume growth and higher average revenue per unit, a result of an increase in fuel surcharge revenue and pricing gains. Automotive volumes were higher due primarily to increased retail demand and the impact of prior-year pandemic-induced production shutdowns. This was partially offset by the impact of the microchip shortage on production.

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 units by market were as follows:

																					2022						2021
			2022						2021						2020						vs. 2021						vs. 2020
			(units in thousands)																		(% change)
Domestic			2,573.6						2,630.6						2,568.7						(2		%)				2		%
International			1,339.5						1,473.5						1,423.4						(9		%)				4		%
Total			3,913.1						4,104.1						3,992.1						(5		%)				3		%

Domestic volume decreased in 2022 but increased in 2021 compared with the prior years. In 2022, volume declined due to service disruptions, terminal congestion, strong over-the-road competition, and increased truck availability. In 2021, volume rose due to strong consumer demand which was partially offset by overall supply chain congestion, including equipment availability issues.

International volume fell in 2022 but rose in 2021. The decline in 2022 was the result of supply chain constraints, chassis shortages, and excess retail inventory. The increase in 2021 was the result of strong import demand despite being limited by various supply chain constraints, including chassis availability issues.

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COAL revenues increased in both 2022 and 2021 compared with the prior years. The increase in 2022 was due to higher average revenue per unit, driven by pricing gains and higher fuel surcharge revenue, and increased volumes. The increase in 2021 was due to increased volumes and higher average revenue per unit driven by pricing gains and positive mix.

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

																					2022						2021
			2022						2021						2020						vs. 2021						vs. 2020
			(tons in thousands)																		(% change)
Utility			35,705						33,169						32,479						8		%				2		%
Export			25,887						24,886						18,900						4		%				32		%
Domestic metallurgical			11,307						11,804						9,441						(4		%)				25		%
Industrial			3,765						3,595						3,566						5		%				1		%
Total			76,664						73,454						64,386						4		%				14		%

Utility coal tonnage increased in both 2022 and 2021 compared with the prior years. The increase in 2022 was due to increased demand and service improvements. The increase in 2021 was due to higher natural gas prices and increased demand from coal-sourced electrical generation.

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 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.

Railway Operating Expenses

Railway operating expenses summarized by major classifications were as follows:

																					2022						2021
			2022						2021						2020						vs. 2021						vs. 2020
			($ in millions)																		(% change)
Compensation and benefits			$	2,621					$	2,442					$	2,373					7		%				3		%
Purchased services and rents			1,922						1,726						1,687						11		%				2		%
Fuel			1,459						799						535						83		%				49		%
Depreciation			1,221						1,181						1,154						3		%				2		%
Materials and other			713						547						653						30		%				(16		%)
Loss on asset disposal			—						—						385
Total			$	7,936					$	6,695					$	6,787					19		%				(1		%)

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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.

Compensation and benefits increased in 2022, reflecting changes in:

• increased pay rates (up $188 million),

• employee activity levels (up $51 million),

• overtime (up $18 million),

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

• other (up $1 million).

The increase in pay rates in 2022 includes payments in excess of amounts previously estimated in 2021 and 2020 for retroactive wage increases and other benefits under our labor agreements. In 2022, compensation and benefits includes $54 million and purchased services includes $2 million of additional expenses pertaining to compensation earned in those periods.

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

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

• 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

• other (up $26 million).

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

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.

																					2022						2021
			2022						2021						2020						vs. 2021						vs. 2020
			($ in millions)																		(% change)
Purchased services			$	1,565					$	1,409					$	1,387					11		%				2		%
Equipment rents			357						317						300						13		%				6		%
Total			$	1,922					$	1,726					$	1,687					11		%				2		%

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

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

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

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

																					2022						2021
			2022						2021						2020						vs. 2021						vs. 2020
			($ in millions)																		(% change)
Materials			$	283					$	250					$	274					13		%				(9		%)
Claims			270						165						179						64		%				(8		%)
Other			160						132						200						21		%				(34		%)
Total			$	713					$	547					$	653					30		%				(16		%)

Materials expense increased in 2022 but decreased in 2021. The increase in 2022 is due to increased locomotive, freight car, and track materials costs. In 2021, the decrease was due primarily to lower maintenance requirements as a result of fewer locomotives and freight cars in service.

Claims expense includes costs related to personal injury, property damage, and environmental matters. The increase in 2022 was primarily the result of higher costs associated with unfavorable personal injury case development, increased environmental remediation expenses, and higher lading and property damage costs. The decrease in 2021 was primarily the result of lower costs associated with derailments and personal injuries.

Other expense increased in 2022, primarily due to higher travel-related expenses, increased non-income based taxes, and lower gains from sales of operating property, partially offset by lower relocation expenses. In 2021, other expense decreased primarily due to higher gains from sales of operating property. Gains from operating property sales amounted to $76 million, $82 million, and $26 million in 2022, 2021, and 2020, respectively.

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.

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.

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Income taxes

The effective income tax rate was 20.8% in 2022, compared with 22.5% in 2021 and 20.4% in 2020. The current year benefited by $136 million due to an enacted reduction to the Pennsylvania corporate income tax rate while 2021 benefited by $34 million due to various state law changes (see Note 4). All years experienced favorable benefits associated with stock-based compensation, while 2021 and 2020 benefited from COLI returns.

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

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

Cash provided by operating activities, our principal source of liquidity, was $4.2 billion in 2022, $4.3 billion in 2021, and $3.6 billion in 2020. The decrease in 2022 reflected changes in working capital, offset in part by improved operating results. The increase in 2021 was primarily the result of improved operating results. We had negative working capital of $642 million at December 31, 2022 and $354 million at December 31, 2021. Cash and cash equivalents totaled $456 million and $839 million at December 31, 2022, and 2021, respectively. We expect that cash on hand combined with cash provided by operating activities will be sufficient to meet our ongoing obligations. In addition, we believe our currently-available borrowing capacity, access to additional financing, and ability to reduce property additions and shareholder distributions, including share repurchases, provides us additional flexibility to meet our ongoing obligations.

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

			Total						2023						2024 - 2025						2026 - 2027						2028 and Subsequent
			($ in millions)
Interest on fixed-rate long-term debt			$	17,085					$	643					$	1,239					$	1,144					$	14,059
Long-term debt principal			16,012						603						957						1,223						13,229
Unconditional purchase obligations			1,650						757						736						80						77
Long-term advances from Conrail			534						—						—						—						534
Operating leases			462						103						182						96						81
Agreements with CRC			272						42						84						84						62
Unrecognized tax benefits*			22						—						—						—						22
Total			$	36,037					$	2,148					$	3,198					$	2,627					$	28,064

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

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

Cash used in investing activities was $1.6 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.

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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. As of December 31, 2022, $7.5 billion remains authorized by our Board of Directors for repurchase. The timing and volume of future share repurchases will be guided by our assessment of market conditions and other pertinent factors. 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.

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

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

In May 2022, we renewed our accounts receivable securitization program with a maximum borrowing capacity of $400 million. The term expires in May 2023. We had $100 million in borrowings outstanding under this program and our available borrowing capacity was $300 million at December 31, 2022 and $400 million at December 31, 2021.

We also have in place and available an $800 million credit agreement expiring in March 2025, which provides for borrowings at prevailing rates and includes covenants. We had no amounts outstanding under this facility at either December 31, 2022 or December 31, 2021, and we are in compliance with all of its covenants.

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

Our debt-to-total capitalization ratio was 54.4% at December 31, 2022, compared with 50.4% at December 31, 2021. We discuss our credit agreement and our accounts receivable securitization program in Note 9. Subsequent to December 31, 2022, we issued $500 million in fixed rate debt securities. These senior notes, issued February 2, 2023, carry an interest rate of 4.45% and mature in 2033. After this issuance, we have authority from our Board of

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

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions may require judgment about matters that are inherently uncertain, and future events are likely to occur that may require us to make changes to these estimates and assumptions. 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.

Pensions and Other Postretirement Benefits

Accounting for pensions and other postretirement benefit plans requires us to make several estimates and assumptions (Note 12). These include the expected rate of return from investment of the plans’ assets and the expected retirement age of employees as well as their projected earnings and mortality. In addition, the amounts recorded are affected by changes in the interest rate environment because the associated liabilities are discounted to their present value. We make these estimates based on our historical experience and other information we deem pertinent under the circumstances (for example, expectations of future stock market performance). We utilize an independent actuarial consulting firm’s studies to assist us in selecting appropriate actuarial assumptions and valuing related liabilities.

For 2022, 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. 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. The net pension liability is recorded at net present value using discount rates that are based on the current interest rate environment in light of the timing of expected benefit payments. We utilize analyses in which the projected annual cash flows from the pension and postretirement benefit plans are matched with yield curves based on an appropriate universe of high-quality corporate bonds. 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.

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

Expenditures, including those on leased assets, that extend an asset’s useful life or increase its utility are capitalized. Expenditures capitalized include those that are directly related to a capital project and may include materials, labor, and other direct costs, in addition to an allocable portion of indirect costs that relate to a capital project. A significant portion of our annual capital spending relates to self-constructed assets. Costs related to repairs and

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

Depreciation expense for 2022 totaled $1.2 billion. Our composite depreciation rates for 2022 are disclosed in Note 7; a one-year increase (or decrease) in the estimated average useful lives of depreciable assets would have resulted in an approximate $44 million decrease (or increase) to annual depreciation expense.

Personal Injury

Claims expense, included in “Materials and other” in the Consolidated Statements of Income, includes our estimate of costs for personal injuries.

To aid in valuing our personal injury liability and determining the amount to accrue with respect to such claims during the year, we utilize studies prepared by an independent actuarial consulting firm. The actuarial firm studies our historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences. We adjust the liability quarterly based upon our assessment and the results of the study. The accuracy of our estimate of the liability is subject to inherent limitation given the difficulty of predicting future events and, as such, the ultimate loss sustained may vary from the estimated liability recorded.

See Note 17 for a more detailed discussion of the assumptions and estimates we use for personal injury.

Income Taxes

Our net deferred tax liability totaled $7.3 billion at December 31, 2022 (Note 4). This liability is estimated based on the expected future tax consequences of items recognized in the financial statements. After application of the federal statutory tax rate to book income, judgment is required with respect to the timing and deductibility of expenses in our income tax returns. For state income and other taxes, judgment is also required with respect to the apportionment among the various jurisdictions. A valuation allowance is recorded if we expect that it is more likely than not that deferred tax assets will not be realized. We have a $41 million valuation allowance on $373 million of deferred tax assets as of December 31, 2022, reflecting the expectation that substantially all of these assets will be realized.

OTHER MATTERS

Labor Agreements

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. 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.

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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.

Market Risks

We manage overall exposure to fluctuations in interest rates by issuing both fixed- and floating- rate debt instruments. At December 31, 2022, debt subject to interest rate fluctuations totaled $100 million. A one-percentage point increase in interest rates would increase total annual interest expense related to all variable debt by approximately $1 million. Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a one-percentage point decrease in interest rates as of December 31, 2022 and amounts to an increase of approximately $1.3 billion to the fair value of our debt at December 31, 2022. We consider it unlikely that interest rate fluctuations applicable to these instruments will result in a material adverse effect on our financial position, results of operations, or liquidity.

New Accounting Pronouncements

For a detailed discussion of new accounting pronouncements, see Note 1.

Inflation

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. 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.

FORWARD-LOOKING STATEMENTS

Certain statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or our achievements or those of our industry to be materially different from those expressed or implied by any forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “project,” “consider,” “predict,” “potential,” “feel,” or other comparable terminology. We have based these forward-looking statements on our current expectations, assumptions, estimates, beliefs, and projections. 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 in Item 1A “Risk Factors,” 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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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). We may also use our website and social media channels for the purpose of complying with our disclosure obligations under Regulation FD. As a result, we encourage investors, the media, and others interested in Norfolk Southern to review the information posted on our website and social media channels. The information posted on our website and social media channels is not incorporated by reference in this Annual Report on Form 10-K.