Item 8. Financial Statements and Supplementary Data

75K characters. Original on sec.gov · Markdown

Item 8. Financial Statements and Supplementary Data

NOTE 8. Employee Benefit Plans, continued

Under the supervision of the Investment Committee, individual investments or fund managers are selected in accordance with standards of prudence applicable to asset diversification and investment suitability. The Company also selects fund managers with differing investment styles and benchmarks their investment returns against appropriate indices. Fund investment performance is continuously monitored. Acceptable performance is determined in the context of the long-term return objectives of the fund and appropriate asset class benchmarks.

Within the Company's equity funds, the U.S. stock segment includes diversification among large and small capitalization stocks. The international stock segment is diversified in a similar manner as well as in developed versus emerging markets stocks. Guidelines established with individual managers limit investment by industry sectors, individual stock issuer concentration and the use of derivatives and CSX securities.

Fixed income securities guidelines established with individual managers specify the types of allowable investments, such as government, corporate and asset-backed bonds, target certain allocation ranges for domestic and foreign investments and limit the use of certain derivatives. Additionally, guidelines stipulate minimum credit quality constraints and any prohibited securities. For detailed information regarding the fair value of pension assets, see Note 13, Fair Value Measurements.

Benefit Obligation, Plan Assets and Funded Status

Changes in benefit obligation and the fair value of plan assets for the 2016 and 2015 calendar plan years are as follows:

Pension BenefitsPost-retirement Benefits
Plan YearPlan YearPlan YearPlan Year
(Dollars in Millions)2016201520162015
Actuarial Present Value of Benefit Obligation
Accumulated Benefit Obligation$2,717$2,672N/AN/A
Projected Benefit Obligation2,8712,860$274$314
Change in Projected Benefit Obligation:
Projected Benefit Obligation at Beginning of Plan Year$2,860$3,002$314$340
Service Cost484522
Interest Cost1191161212
Plan Participants' Contributions——67
Workforce Reduction Program/Curtailment—7——
Actuarial Loss (Gain)20(110)(22)(7)
Benefits Paid(176)(200)(38)(40)
Benefit Obligation at End of Plan Year$2,871$2,860$274$314
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Plan Year$2,309$2,504$—$—
Actual Return on Plan Assets139(9)——
Qualified Employer Contributions250———
Non-qualified Employer Contributions17143233
Plan Participants' Contributions——67
Benefits Paid(176)(200)(38)(40)
Fair Value of Plan Assets at End of Plan Year2,5392,309——
Funded Status at End of Plan Year$(332)$(551)$(274)$(314)

CSX 2016 Form 10-K p. 90

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 8. Employee Benefit Plans, continued

For qualified plan funding purposes, assets and discounted liabilities are measured in accordance with the Employee Retirement Income Security Act ("ERISA"), as well as other related provisions of the IRC and related regulations. Under these funding provisions and the alternative measurements available thereunder, the Company estimates its unfunded obligation for qualified plans on an annual basis.

In accordance with Compensation-Retirement Benefits Topic in the ASC, an employer must recognize the funded status of a pension or other post-retirement benefit plan by recording a liability (underfunded plan) or asset (overfunded plan) for the difference between the projected benefit obligation (or the accumulated post-retirement benefit obligation for a post-retirement benefit plan) and the fair value of plan assets at the plan measurement date. Amounts related to pension and post-retirement benefits recorded in other long-term assets, labor and fringe benefits payable and other long-term liabilities on the balance sheet are as follows:

Pension BenefitsPost-retirement Benefits
DecemberDecemberDecemberDecember
(Dollars in Millions)2016201520162015
Amounts Recorded in Consolidated
Balance Sheets:
Long-term Assets (a)$9$9$—$—
Current Liabilities(15)(15)(39)(36)
Long-term Liabilities(326)(545)(235)(278)
Net Amount Recognized in
Consolidated Balance Sheets$(332)$(551)$(274)$(314)
(a)Long-term assets as of December 2016 and 2015 relate to one of the qualified pension plans whose assets exceed projected benefit obligations.

The funded status, or amount by which the benefit obligation exceeds the fair value of plan assets, represents a liability. At December 2016, the status of CSX plans only with a net liability is disclosed below. The total fair value of all plans as of December 2016 was $2.5 billion, which includes the qualified pension plans with net assets.

Aggregate
(Dollars in Millions)Fair ValueAggregate
Benefit Obligations in Excess of Plan Assetsof Plan AssetsBenefit Obligation
Projected Benefit Obligation$2,506$(2,847)
Accumulated Benefit Obligation2,506(2,692)

CSX 2016 Form 10-K p. 91

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 8. Employee Benefit Plans, continued

Net Benefit Expense

The following table describes the components of expense/(income) related to net benefit expense recorded in labor and fringe on the income statement.

Pension Benefits Fiscal YearsPost-retirement Benefits Fiscal Years
(Dollars in Millions)201620152014201620152014
Service Cost$48$45$44$2$2$3
Interest Cost119116123121213
Expected Return on Plan Assets(157)(162)(166)———
Amortization of Net Loss487057345
Amortization of Prior Service Cost————(1)(1)
Net Periodic Benefit Expense586958171720
Special Termination Benefits - Workforce Reduction Program/Curtailment(a)—727——8
Settlement Gain(b)(1)(2)(1)———
Total Expense$57$74$84$17$17$28
(a)Special termination benefits are charges in 2015 and 2014 that resulted from a management workforce reduction program initiated in 2014. For further information regarding the program, see Note 1. Nature of Operations and Significant Accounting Policies.
(b)Settlement gains were recognized as one of the pension plan's lump-sum payments to retirees with insignificant balances exceeded the sum of the service cost and interest cost recognized. The gain is the recognition of a portion of its accumulated other comprehensive income related to that plan.

Pension and Other Post-Employment Benefits Adjustments

The following table shows the pre-tax change in other comprehensive loss (income) attributable to the components of net expense and the change in benefit obligation for CSX for pension and other post-employment benefits.

(Dollars in Millions)Pension BenefitsPost-retirement Benefits
Components of Other ComprehensiveDecemberDecemberDecemberDecember
Loss (Income)2016201520162015
Recognized in the balance sheet
Losses (Gains)$38$60$(22)$(7)
Expense (Income) recognized in the income statement
Amortization of net losses (a)$48$70$3$4
Settlement gain(1)(2)——
Amortization of prior service costs———(1)
(a)Amortization of net losses estimated to be expensed for 2017 is approximately $43 million for pension benefits.

CSX 2016 Form 10-K p. 92

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 8. Employee Benefit Plans, continued

As of December 2016, the balances of pre-tax amounts to be amortized that are included in accumulated other comprehensive loss (a component of shareholders’ equity) are as follows:

Pension BenefitsPost-retirement Benefits
Losses$891$24
Prior Service Costs (Credits)——
Total$891$24

Assumptions

The expected long-term average rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for benefits included in the projected benefit obligation. In estimating that rate, the Company gives appropriate consideration to the returns being earned by the plan assets in the funds and the rates of return expected to be available for reinvestment as well as the current and projected asset mix of the funds. Management balances market expectations obtained from various investment managers and economists with both market and actual plan historical returns to develop a reasonable estimate of the expected long-term rate of return on assets. This assumption is reviewed annually and adjusted as deemed appropriate.

In 2017, the Company will measure the service cost and interest cost components of the net pension and post-retirement benefits expense by using individual spot rates matched with separate cash flows for each future year instead of a single weighted-average discount rate approach, which has been used in prior years.

The Company made this change to improve the correlation between projected pension and post-retirement benefit obligation cash flows and the corresponding spot discount rates and to provide a more precise measurement of service and interest costs. Under the spot rate approach, individual spot discount rates along the same high-quality corporate bonds yield curve used to measure the pension and post-retirement benefit obligations are applied to the relevant projected cash flows at the relevant maturity. The use of the spot rate approach does not affect the measurement of the pension and post-retirement benefits obligations. The Company accounted for this change on a prospective basis as a change in accounting estimate. For 2017, the Company estimates the adoption of the spot rate approach will decrease net pension and post-retirement benefits expense by approximately $25 million compared to the approach applicable in prior years.

CSX 2016 Form 10-K p. 93

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 8. Employee Benefit Plans, continued

The weighted averages of assumptions used by the Company to value its pension and post-retirement obligations were as follows:

Pension BenefitsPost-retirement Benefits
2016201520162015
Expected Long-term Return on Plan Assets:
Benefit Cost for Current Plan Year7.00%7.25%N/AN/A
Benefit Cost for Subsequent Plan Year6.75%7.00%N/AN/A
Discount Rates:
Benefit Cost for Plan Year4.30%4.00%3.85%3.60%
Benefit Obligation at End of Plan Year4.08%(a)4.30%3.71%3.85%
Salary Scale Inflation4.60%4.60%N/AN/A
(a)This weighted average discount rate represents the single equivalent discount rate that would result in the same projected benefit obligation as calculated under the spot rate approach for all pension plans and is presented for purposes of comparison across years.

The impact of the health care cost trend rate is immaterial to the post-retirement benefit cost and obligation due to the plan's health reimbursement arrangement that covers Medicare-eligible retirees.

Other Plans

Under collective bargaining agreements, the Company participates in a multi-employer benefit plan, which provides certain post-retirement health care and life insurance benefits to eligible contract employees. Premiums under this plan are expensed as incurred and amounted to $35 million, $32 million and $37 million in 2016, 2015 and 2014, respectively.

The Company maintains savings plans for virtually all full-time salaried employees and certain employees covered by collective bargaining agreements. Expense associated with these plans was $35 million, $36 million and $41 million for 2016, 2015 and 2014, respectively.

CSX 2016 Form 10-K p. 94

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 9. Debt and Credit Agreements

Debt at December 2016 and December 2015 is shown in the table below. For information regarding the fair value of debt, see Note 13, Fair Value Measurements.

Maturity at DecemberAverage Interest Rates at DecemberDecemberDecember
(Dollars in Millions)2016201620162015
Notes(a)2017-20664.5%$11,055$10,277
Equipment Obligations(b)2016-20236.3%232250
Capital Leases2016-202615.6%67
Convertible Debentures(c)1.0%—1
Subtotal Long-term Debt (including current portion)$11,293$10,535
Less Debt Due within One Year(331)(20)
Long-term Debt (excluding current portion)$10,962$10,515

(a) Long-term debt as of December 2015 includes debt issue costs of $168 million that were reclassified from long-term assets to long-term debt on the consolidated balance sheet as a result of ASU, Interest - Imputation of Interest, which became effective for CSX during first quarter 2016.

(b) Equipment obligations are secured by an interest in certain railroad equipment.

(c) Convertible debentures were fully redeemed during August 2016.

Debt Issuance & Early Redemption of Long-term Debt

During 2016, the Company issued $2.2 billion of new debt and repurchased $1.4 billion of certain notes that were expected to mature in 2017, 2018 and 2019 resulting in a net increase in debt of $800 million related to these transactions. CSX issued $700 million of 2.60% notes due 2026, $800 million of 3.80% notes due 2046, and $700 million of 4.25% notes due 2066 (collectively, the “2016 issuances”). These notes are included in the consolidated balance sheets under long-term debt and may be redeemed by the Company at any time at the applicable redemption premium.

The net proceeds of the 2016 issuances were used to fully redeem $300 million of 5.60% notes that otherwise would have matured on May 1, 2017; $600 million of 6.25% notes that otherwise would have matured on March 15, 2018; and $500 million of 7.375% notes that otherwise would have matured on February 1, 2019. The remaining proceeds have been or will be used for general corporate purposes, which may include repurchases of CSX’s common stock, capital investment, pension contributions, working capital requirements, improvements in productivity and other cost reductions at CSX’s major transportation units. The transactions noted above were determined to be an extinguishment of the existing debt, resulting in recognition of $115 million of debt repurchase expense in 2016 related to $1.4 billion of note repayments.

During 2015, CSX issued $600 million of 3.95% notes due 2050 and $600 million of 3.35% notes due 2025. Proceeds were used for general corporate purposes, which may include repurchases of CSX’s common stock, capital investment, working capital requirements, improvements in productivity and other cost reductions at CSX’s major transportation units.

CSX 2016 Form 10-K p. 95

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 9. Debt and Credit Agreements, continued

Long-term Debt Maturities (Net of Discounts, Premiums and Issuance Costs)

(Dollars in Millions)Maturities as of
Fiscal Years EndingDecember 2016
2017$331
201820
201918
2020745
2021371
Thereafter9,808
Total Long-term Debt Maturities, including current portion$11,293

Credit Facilities

CSX has a $1 billion unsecured, revolving credit facility backed by a diverse syndicate of banks. This facility expires in May 2020, and as of the date of this filing, the Company has no outstanding balances under this facility. The facility allows borrowings at floating (LIBOR-based) interest rates, plus a spread, depending upon CSX's senior unsecured debt ratings. LIBOR is the London Interbank Offered Rate which is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds.

Commitment fees and interest rates payable under the facility were similar to fees and rates available to comparably rated investment-grade borrowers. At December 2016, CSX was in compliance with all covenant requirements under the facility.

Receivables Securitization Facility

In September 2016, the Company renewed and modified its existing receivables securitization facility. The facility was extended with a three-year term scheduled to expire in September 2019. It was modified to provide liquidity of up to $200 million, changed from $250 million, along with modifications to other terms. The purpose of this facility is to provide an alternative to commercial paper and a low cost source of short-term liquidity. Under the terms of this facility, CSXT transfers eligible third-party receivables to CSX Trade Receivables, LLC, a bankruptcy-remote special purpose subsidiary. A separate subsidiary of CSX services the receivables. Upon transfer, the receivables become assets of CSX Trade Receivables and are not available to the creditors of CSX or any of its other subsidiaries. In the event CSX Trade Receivables draws under this facility, the Company will record an equivalent amount of debt on its consolidated financial statements. As of December 30, 2016 and the date of this filing, the Company has no outstanding balances under this facility.

CSX 2016 Form 10-K p. 96

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 10. Other Income - Net

The Company derives income from items that are not considered operating activities. Income from these items is reported net of related expense. Income from non-operating real estate activities includes the results of the Company’s non-operating real estate sales, leasing, acquisition and management and development activities and may fluctuate as a function of timing of real estate sales. Miscellaneous income (expense) includes equity earnings or losses, investment gains and losses and other non-operating activities and may fluctuate due to timing. Other income – net consisted of the following:

Fiscal Years
(Dollars in Millions)201620152014
Interest Income$10$6$5
Income from Non-operating Real Estate Activities278323
Miscellaneous Income (Expense)99(36)
Total Other Income (Expense) - Net$46$98$(8)
Gross Revenue from Real Estate
Operations included above$56$104$47

Income from non-operating real estate activities decreased from 2015 to 2016 primarily due to a $59 million gain in 2015 from the sale of non-operating easements. For additional information, see Note 6, Properties. Miscellaneous income increased from 2014 to 2015 related to lower environmental costs as well as the reimbursement of environmental costs related to the sale of non-operating easements. Additionally, miscellaneous income (expense) for 2014 previously included debt repurchase expense, which is now included as a separate line on the income statement.

NOTE 11. Income Taxes

Earnings before income taxes of $2.7 billion, $3.1 billion and $3.0 billion for fiscal years 2016, 2015 and 2014, respectively, represent earnings from domestic operations. The breakdown of income tax expense between current and deferred is as follows:

Fiscal Years
(Dollars in Millions)201620152014
Current:
Federal$540$619$729
State829590
Subtotal Current622714819
Deferred:
Federal355414291
State50427
Subtotal Deferred405456298
Total$1,027$1,170$1,117

CSX 2016 Form 10-K p. 97

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 11. Income Taxes, continued

Income tax expense reconciled to the tax computed at statutory rates is presented in the table below. In 2016, the Company recorded an income tax expense adjustment of $10 million as a result of a change in the apportionment of state income taxes and the related impact on the valuation of deferred taxes. The Company recorded a tax benefit of $7 million, $4 million and $31 million in 2016, 2015 and 2014, respectively, primarily as a result of federal and state legislative changes as well as the resolution of other federal and state tax matters. Each year's benefit is included in the state income tax and other lines in the table below.

Fiscal Years
(Dollars In Millions)201620152014
Federal Income Taxes$95935.0%$1,09835.0%$1,06635.0%
State Income Taxes833.0%862.7%612.0%
Other(15)(0.5)%(14)(0.4)%(10)(0.3)%
Income Tax Expense/Rate$1,02737.5%$1,17037.3%$1,11736.7%

In September 2013, the IRS issued final regulations governing the income tax treatment of the acquisition, disposition and repair of tangible property. The regulations were effective beginning in 2014. These new regulations did not have a material impact on the financial statements.

The significant components of deferred income tax assets and liabilities include:

20162015
(Dollars in Millions)AssetsLiabilitiesAssetsLiabilities
Pension Plans$125$—$207$—
Other Employee Benefit Plans272—258—
Accelerated Depreciation—9,925—9,614
Other225293261291
Total$622$10,218$726$9,905
Net Deferred Income Tax Liabilities$9,596$9,179

The primary factors in the change in year-end net deferred income tax liability balances include:

•annual provision for deferred income tax expense and
•accumulated other comprehensive loss.

The Company files a consolidated federal income tax return, which includes its principal domestic subsidiaries. CSX and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. CSX participated in a contemporaneous IRS audit of tax year 2016. Federal examinations of original federal income tax returns for all years through 2015 are resolved.

CSX 2016 Form 10-K p. 98

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 11. Income Taxes, continued

As of December 2016, 2015 and 2014, the Company had approximately $25 million, $23 million and $21 million, respectively, of total unrecognized tax benefits. Net tax benefits of $16 million, $15 million and $13 million in 2016, 2015 and 2014, respectively, could favorably impact the effective income tax rate in each year. The Company does not expect that unrecognized tax benefits as of December 2016 for various state and federal income tax matters will significantly change over the next 12 months. The final outcome of these uncertain tax positions is not yet determinable. The change to the total gross unrecognized tax benefits and prior year audit resolutions of the Company during the fiscal year ended December 2016 is reconciled in the table below.

Uncertain Tax Positions:Fiscal Year
(Dollars in Millions)201620152014
Balance at beginning of the year$23$21$23
Additions based on tax positions related to current year112
Additions based on tax positions related to prior years443
Reductions based on tax positions related to prior years———
Settlements with taxing authorities—1—
Lapse of statute of limitations(3)(4)(7)
Balance at end of the year$25$23$21

CSX’s continuing practice is to recognize net interest and penalties related to income tax matters in income tax expense. Included in the consolidated income statements are expenses of $2 million in 2016, $2 million in 2015 and $1 million in 2014, respectively, for changes to reserves for interest and penalties for all prior year tax positions. The Company had $6 million, $4 million and $1 million accrued for interest and penalties at 2016, 2015 and 2014, respectively, for all prior year tax positions.

CSX 2016 Form 10-K p. 99

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 12. Related Party Transactions

Conrail

Through a limited liability company, CSX and Norfolk Southern Corporation (“NS”) jointly own Conrail. CSX has a 42% economic interest and 50% voting interest in the jointly-owned entity, and NS has the remainder of the economic and voting interests. Pursuant to the Investments-Equity Method and Joint Venture Topic in the ASC, CSX applies the equity method of accounting to its investment in Conrail.

Conrail owns rail infrastructure and operates for the joint benefit of CSX and NS. This is known as the shared asset area. Conrail charges fees for right-of-way usage, equipment rentals and transportation, switching and terminal service charges in the shared asset area. These expenses are included in materials, supplies and other on the consolidated income statements. Future minimum lease payments due to Conrail under the shared asset area agreements are shown in the table below.

(Dollars in Millions)Conrail Shared
YearsAsset Agreement
2017$27
201827
201927
202027
202127
Thereafter74
Total$209

Also, included in materials, supplies and other are CSX’s 42 percent share of Conrail’s income and its amortization of the fair value write-up arising from the acquisition of Conrail and certain other adjustments. The amortization primarily represents the additional after-tax depreciation expense related to the write-up of Conrail’s fixed assets when the original purchase price, from the 1997 acquisition of Conrail, was allocated based on fair value. This write-up of fixed assets resulted in a difference between CSX's investment in Conrail and its share of Conrail's underlying net equity, which is $351 million as of December 2016.

The following table details the related Conrail amounts included in materials, supplies and other in the Company’s consolidated income statements:

Fiscal Years
(Dollars in Millions)201620152014
Rents, fees and services$114$123$124
Purchase price amortization and other444
Equity earnings of Conrail(37)(33)(31)
Total Conrail Expense$81$94$97

CSX 2016 Form 10-K p. 100

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 12. Related Party Transactions, continued

As required by the Related Party Disclosures Topic in the ASC, the Company has identified amounts below owed to Conrail, or its subsidiaries, representing liabilities under the operating, equipment and shared area agreements with Conrail. In 2014, the Company also executed two promissory notes with a subsidiary of Conrail which were included in long-term debt on the consolidated balance sheets. Interest expense from these promissory notes was $6 million for both 2016 and 2015, and $3 million for 2014.

DecemberDecember
(Dollars in Millions)20162015
Balance Sheet Information:
CSX payable to Conrail$91$65
Promissory notes payable to Conrail subsidiary
2.89% CSX promissory note due October 20447373
2.89% CSXT promissory note due October 2044151151

TTX Company

TTX Company ("TTX") is a privately-held corporation engaged in the business of providing its owner-railroads with standardized fleets of intermodal, automotive and general use railcars at time and mileage rates. CSX owns about 20 percent of TTX's common stock, and the remaining is owned by the other leading North American railroads and their affiliates. CSX's investment in TTX is $469 million and is included in affiliates and other companies in the consolidated balance sheet. Pursuant to the Investments-Equity Method topic in the ASC, CSX applies the equity method of accounting to its investment in TTX.

As required by the Related Party Disclosures Topic in the ASC, the following table discloses amounts related to TTX that are included in equipment and other rents in the Company’s consolidated income statements. Also included below is balance sheet information related to CSX's payable to TTX, which represents car rental liabilities.

Fiscal Years
(Dollars in Millions)201620152014
Income statement information:
Car hire rents$233$218$207
Equity earnings of TTX(26)(20)(21)
Total TTX expense$207$198$186
DecemberDecember
Balance sheet information:20162015
CSX payable to TTX$47$40

CSX 2016 Form 10-K p. 101

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 13. Fair Value Measurements

The Financial Instruments Topic in the ASC requires disclosures about fair value of financial instruments in annual reports as well as in quarterly reports. For CSX, this statement applies to certain investments, pension plan assets and long-term debt. Also, the Fair Value Measurements and Disclosures Topic in the ASC clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.

Various inputs are considered when determining the value of the Company's investments, pension plan assets and long-term debt. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below:

•Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets;
•Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.); and
•Level 3 – significant unobservable inputs (including the Company’s own assumptions about the assumptions market participants would use in determining the fair value of investments).

The valuation methods described below may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Investments

The Company's investment assets, valued with assistance from a third-party trustee, consist of certificates of deposits, commercial paper, corporate bonds, government securities and auction rate securities and are carried at fair value on the consolidated balance sheet per the Fair Value Measurements and Disclosures Topic in the ASC. There are several valuation methodologies used for those assets as described below:

•Certificates of Deposit and Commercial Paper (Level 2): Valued at amortized cost, which approximates fair value;
•Corporate Bonds and Government Securities (Level 2): Valued using broker quotes that utilize observable market inputs; and
•Auction Rate Securities (Level 3): Valued using pricing models for which the assumptions utilize management’s estimates of market participant assumptions, because there is currently no active market for trading.

The Company's investment assets are carried at fair value on the consolidated balance sheets as summarized in the table below. Additionally, the amortized cost basis of these investments was $500 million and $920 million as of December 30, 2016 and December 25, 2015, respectively.

CSX 2016 Form 10-K p. 102

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 13. Fair Value Measurements, continued

Fiscal Years
20162015
(Dollars in Millions)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Certificates of Deposit and Commercial Paper$—$415$—$415$—$810$—$810
Corporate Bonds—63—63—73—73
Government Securities—22—22—32—32
Auction Rate Securities——————44
Total investments at fair value$—$500$—$500$—$915$4$919

These investments have the following maturities and are represented on the consolidated balance sheet within short-term investments for investments with maturities of less than one year, and other long-term assets for investments with maturities of one year and greater:

(Dollars in Millions)December 2016December 2015
Less than 1 year$417$810
1 - 2 years129
2 - 5 years427
Greater than 5 years6773
Total investments at fair value$500$919

Long-term Debt

Long-term debt is reported at carrying amount on the consolidated balance sheets and is the Company's only financial instrument with fair values significantly different from their carrying amounts. The majority of the Company's long-term debt is valued with assistance from a third party that utilizes closing transactions, market quotes or market values of comparable debt. For those instruments not valued by the third party, the fair value has been estimated by applying market rates of similar instruments to the scheduled contractual debt payments and maturities. These market rates are provided by the same third party. All of the inputs used to determine the fair value of the Company's long-term debt are Level 2 inputs.

The fair value of outstanding debt fluctuates with changes in a number of factors. Such factors include, but are not limited to, interest rates, market conditions, credit ratings, values of similar financial instruments, size of the transaction, cash flow projections and comparable trades. Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued. The fair value of a company's debt is a measure of its current value under present market conditions. It does not impact the financial statements under current accounting rules.

CSX 2016 Form 10-K p. 103

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 13. Fair Value Measurements, continued

The fair value and carrying value of the Company's long-term debt is as follows:

(Dollars in Millions)December 2016December 2015
Long-term Debt (Including Current Maturities):
Fair Value$12,096$11,340
Carrying Value11,29310,535

Pension Plan Assets

Pension plan assets are reported at fair value on the consolidated balance sheet. The Investment Committee targets an allocation of pension assets to be generally 70% equity and 30% fixed income. There are several valuation methodologies used for those assets as described below.

Investments in the fair value hierarchy

•Common stock (Level 1): Valued at the closing price reported on the active market on which the individual securities are traded on the last day of the year and classified in level 1 of the fair value hierarchy.
•Mutual funds (Level 1): Valued at the net asset value of shares held at year end based on quoted market prices determined in an active market. These assets are classified in level 1 of the fair value hierarchy.
•Corporate bonds, government securities, asset-backed securities and derivatives (Level 2): Valued using price evaluations reflecting the bid and/or ask sides of the market for a similar investment at year end. Asset-backed securities include commercial mortgage-backed securities and collateralized mortgage obligations. These assets are classified in level 2 of the fair value hierarchy.

Investments measured at net asset value

•Partnerships: Net asset value of private equity is based on the fair market values associated with the underlying investments at year end. These funds have redemption restrictions that require advanced notice of 15 business days.
•Common collective trust funds: This class consists of private funds that invest in government and corporate securities and various short-term debt instruments and are measured at net asset value to estimate the fair value of the investments. The net asset value of the investments is determined by reference to the fair value of the underlying securities, which are valued primarily through the use of directly or indirectly observable inputs. These funds have redemption restrictions that require advanced notice of up to 15 business days.

CSX 2016 Form 10-K p. 104

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 13. Fair Value Measurements, continued

The pension plan assets at fair value by level, within the fair value hierarchy, as of calendar plan years 2016 and 2015 are shown in the table below. For additional information related to pension assets, see Note 8, Employee Benefit Plans.

Fiscal Years
20162015
(Dollars in Millions)Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Common Stock$940$—$—$940$738$—$—$738
Mutual funds12——1215——15
Cash equivalents1——18——8
Corporate bonds—497—497—480—480
Government securities—141—141—132—132
Asset-backed securities—14—14—14—14
Derivatives and other—11—11—6—6
Total investments in the fair value hierarchy$953$663$—$1,616$761$632$—$1,393
Investments measured at net asset value (a)n/an/an/a$923n/an/an/a$916
Investments at fair value$953$663$—$2,539$761$632$—$2,309

(a) Investments measured at net asset value represent certain investments that have been measured at net asset value per share (or its equivalent) and are thus are not classified in the fair value hierarchy. In accordance with ASC 820, Fair Value Measurements, the fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the pension assets disclosed in Note 8, Employee Benefit Plans.

CSX 2016 Form 10-K p. 105

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 14. Other Comprehensive Income / (Loss)

CSX reports comprehensive earnings or loss in accordance with the Comprehensive Income Topic in the ASC in the Consolidated Comprehensive Income Statement. Total comprehensive earnings are defined as all changes in shareholders' equity during a period, other than those resulting from investments by and distributions to shareholders (e.g. issuance of equity securities and dividends). Generally, for CSX, total comprehensive earnings equal net earnings plus or minus adjustments for pension and other post-retirement liabilities. Total comprehensive earnings represent the activity for a period net of tax and were $1.7 billion, $2.0 billion and $1.8 billion for 2016, 2015 and 2014, respectively.

While total comprehensive earnings is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income, net of tax, as of the balance sheet date. For CSX, AOCI is primarily the cumulative balance related to pension and other post-retirement benefit adjustments and CSX's share of AOCI of equity method investees.

Changes in the AOCI balance by component are shown in the table below. Amounts reclassified in pension and other post-employment benefits to net earnings relate to the amortization of actuarial losses and are included in labor and fringe on the consolidated income statements. See Note 8. Employee Benefit Plans for further information. Other primarily represents CSX's share of AOCI of equity method investees. Amounts reclassified in other to net earnings are included in materials, supplies and other on the consolidated income statements.

Pension and Other Post-Employment BenefitsOtherAccumulated Other Comprehensive Income (Loss)
(Dollars in millions)
Balance December 27, 2013 - Net of Tax$(462)$(61)$(523)
Other Comprehensive (Loss) Income
(Loss) Income Before Reclassifications(297)4(293)
Amounts Reclassified to Net Earnings60262
Tax Benefit88—88
Total Other Comprehensive (Loss) Income(149)6(143)
Balance December 26, 2014 - Net of Tax(611)(55)(666)
Other Comprehensive Income (Loss)
Loss Before Reclassifications(53)(8)(61)
Amounts Reclassified to Net Earnings71(2)69
Tax (Expense) Benefit(8)1(7)
Total Other Comprehensive Income (Loss)10(9)1
Balance December 25, 2015 - Net of Tax(601)(64)(665)
Other Comprehensive Income
(Loss) Income Before Reclassifications(16)3(13)
Amounts Reclassified to Net Earnings50151
Tax Expense(13)—(13)
Total Other Comprehensive Income21425
Balance December 30, 2016 - Net of Tax$(580)$(60)$(640)

CSX 2016 Form 10-K p. 106

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 15. Quarterly Financial Data (Unaudited)

Pursuant to Article 3 of the SEC’s Regulation S-X, the following are selected quarterly financial data:

Fiscal Year Ended December 2016 (53 weeks)Quarters
(Dollars in Millions, Except Per Share Amounts)1st2nd3rd4thFull Year
Revenue$2,618$2,704$2,710$3,037$11,069
Operating Income7048408411,0043,389
Net Earnings3564454554581,714
Earnings Per Share, Basic$0.37$0.47$0.48$0.49$1.81
Earnings Per Share, Assuming Dilution0.370.470.480.491.81
Fiscal Year Ended December 2015 (52 weeks)
Revenue$3,027$3,064$2,939$2,781$11,811
Operating Income8431,0179337913,584
Net Earnings4425535074661,968
Earnings Per Share, Basic$0.45$0.56$0.52$0.48$2.00
Earnings Per Share, Assuming Dilution0.450.560.520.482.00

NOTE 16. Summarized Consolidating Financial Data

In 2007, CSXT, a wholly-owned subsidiary of CSX Corporation, sold secured equipment notes maturing in 2023 in a registered public offering. CSX has fully and unconditionally guaranteed the notes. In connection with the notes, the Company is providing the following condensed consolidating financial information in accordance with SEC disclosure requirements. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation and the allocation of certain expenses of CSX incurred for the benefit of its subsidiaries. Condensed consolidating financial information for the obligor, CSXT, and parent guarantor, CSX, is shown in the tables below.

CSX 2016 Form 10-K p. 107

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 16. Summarized Consolidating Financial Data, continued

Consolidating Income Statements

(Dollars in Millions)

Fiscal Year Ended December 2016CSX CorporationCSX TransportationEliminations and OtherCSX Consolidated
Revenue$—$10,991$78$11,069
Expense(265)8,100(155)7,680
Operating Income2652,8912333,389
Equity in Earnings of Subsidiaries1,9972(1,999)—
Interest Expense(583)(35)39(579)
Other Income - Net(112)44(1)(69)
Earnings Before Income Taxes1,5672,902(1,728)2,741
Income Tax Benefit (Expense)147(1,081)(93)(1,027)
Net Earnings$1,714$1,821$(1,821)$1,714
Total Comprehensive Earnings$1,739$1,833$(1,833)$1,739
Fiscal Year Ended December 2015
Revenue$—$11,733$78$11,811
Expense(589)8,922(106)8,227
Operating Income5892,8111843,584
Equity in Earnings of Subsidiaries1,949—(1,949)—
Interest Expense(539)(33)28(544)
Other Income - Net(4)111(9)98
Earnings Before Income Taxes1,9952,889(1,746)3,138
Income Tax Expense(27)(1,083)(60)(1,170)
Net Earnings$1,968$1,806$(1,806)$1,968
Total Comprehensive Earnings$1,969$1,806$(1,806)$1,969
Fiscal Year Ended December 2014
Revenue$—$12,590$79$12,669
Expense(427)9,585(102)9,056
Operating Income4273,0051813,613
Equity in Earnings of Subsidiaries1,9961(1,997)—
Interest Expense(520)(46)21(545)
Other Income - Net(19)(4)(1)(24)
Earnings Before Income Taxes1,8842,956(1,796)3,044
Income Tax Benefit (Expense)43(1,093)(67)(1,117)
Net Earnings$1,927$1,863$(1,863)$1,927
Total Comprehensive Earnings$1,784$1,875$(1,875)$1,784

CSX 2016 Form 10-K p. 108

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 16. Summarized Consolidating Financial Data, continued

Consolidating Balance Sheets

(Dollars in Millions)

As of December 30, 2016CSX CorporationCSX TransportationEliminations and OtherCSX Consolidated
ASSETS
Current Assets:
Cash and Cash Equivalents$305$281$17$603
Short-term Investments415—2417
Accounts Receivable - Net2215721938
Receivable from Affiliates1,1572,351(3,508)—
Materials and Supplies—407—407
Other Current Assets—10616122
Total Current Assets1,8793,360(2,752)2,487
Properties140,5182,70843,227
Accumulated Depreciation(1)(10,634)(1,442)(12,077)
Properties - Net—29,8841,26631,150
Investments in Conrail——840840
Affiliates and Other Companies(39)64315619
Investment in Consolidated Subsidiaries24,179—(24,179)—
Other Long-term Assets2607(291)318
Total Assets$26,021$34,494$(25,101)$35,414
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable$95$678$33$806
Labor and Fringe Benefits Payable4044065545
Payable to Affiliates3,457500(3,957)—
Casualty, Environmental and Other Reserves—10213115
Current Maturities of Long-term Debt31319(1)331
Income and Other Taxes Payable(346)45916129
Other Current Liabilities—1122114
Total Current Liabilities3,5592,310(3,829)2,040
Casualty, Environmental and Other Reserves—20851259
Long-term Debt10,203759—10,962
Deferred Income Taxes - Net(203)9,5412589,596
Other Long-term Liabilities783410(330)863
Total Liabilities14,34213,228(3,850)23,720
Shareholders' Equity:
Common Stock, $1 Par Value928181(181)928
Other Capital1385,095(5,095)138
Retained Earnings11,25315,994(15,994)11,253
Accumulated Other Comprehensive Loss(640)(19)19(640)
Noncontrolling Minority Interest—15—15
Total Shareholders' Equity11,67921,266(21,251)11,694
Total Liabilities and Shareholders' Equity$26,021$34,494$(25,101)$35,414

CSX 2016 Form 10-K p. 109

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 16. Summarized Consolidating Financial Data, continued

Consolidating Balance Sheets

(Dollars in Millions)

As of December 25, 2015CSX CorporationCSX TransportationEliminations and OtherCSX Consolidated
ASSETS
Current Assets
Cash and Cash Equivalents$444$175$9$628
Short-term Investments810——810
Accounts Receivable - Net1198783982
Receivable from Affiliates1,0922,038(3,130)—
Materials and Supplies—350—350
Other Current Assets(59)120970
Total Current Assets2,2882,881(2,329)2,840
Properties138,9642,60941,574
Accumulated Depreciation(1)(10,016)(1,383)(11,400)
Properties - Net—28,9481,22630,174
Investments in Conrail——803803
Affiliates and Other Companies(39)658(28)591
Investment in Consolidated Subsidiaries22,755—(22,755)—
Other Long-term Assets8399(70)337
Total Assets$25,012$32,886$(23,153)$34,745
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable$108$626$30$764
Labor and Fringe Benefits Payable3640747490
Payable to Affiliates2,954437(3,391)—
Casualty, Environmental and Other Reserves—11516131
Current Maturities of Long-term Debt119—20
Income and Other Taxes Payable(87)18312108
Other Current Liabilities—4372439
Total Current Liabilities3,0122,224(3,284)1,952
Casualty, Environmental and Other Reserves—21950269
Long-term Debt9,732783—10,515
Deferred Income Taxes - Net(188)9,1412269,179
Other Long-term Liabilities804484(126)1,162
Total Liabilities13,36012,851(3,134)23,077
Shareholders' Equity
Common Stock, $1 Par Value966181(181)966
Other Capital1135,091(5,091)113
Retained Earnings11,23814,774(14,774)11,238
Accumulated Other Comprehensive Loss(665)(31)31(665)
Noncontrolling Minority Interest—20(4)16
Total Shareholders' Equity11,65220,035(20,019)11,668
Total Liabilities and Shareholders' Equity$25,012$32,886$(23,153)$34,745

Certain prior year data has been reclassified to conform to the current presentation.

CSX 2016 Form 10-K p. 110

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 16. Summarized Consolidating Financial Data, continued

Consolidating Cash Flow Statements

(Dollars in Millions)

Fiscal Year Ended December 2016CSX CorporationCSX TransportationEliminations and OtherCSX Consolidated
Operating Activities
Net Cash Provided by (Used in) Operating Activities$453$2,950$(362)$3,041
Investing Activities
Property Additions—(2,208)(190)(2,398)
Purchases of Short-term Investments(929)——(929)
Proceeds from Sales of Short-term Investments1,325——1,325
Proceeds from Property Dispositions—195—195
Other Investing Activities(41)91(41)9
Net Cash Provided by (Used in) Investing Activities355(1,922)(231)(1,798)
Financing Activities
Long-term Debt Issued2,200——2,200
Long-term Debt Repaid(1,400)(19)—(1,419)
Dividends Paid(680)(600)600(680)
Shares Repurchased(1,056)——(1,056)
Other Financing Activities(11)(303)1(313)
Net Cash Provided by (Used in) Financing Activities(947)(922)601(1,268)
Net Decrease in Cash and Cash Equivalents(139)1068(25)
Cash and Cash Equivalents at Beginning of Period4441759628
Cash and Cash Equivalents at End of Period$305$281$17$603

CSX 2016 Form 10-K p. 111

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 16. Summarized Consolidating Financial Data, continued

Consolidating Cash Flow Statements

(Dollars in Millions)

Fiscal Year Ended December 2015CSX CorporationCSX TransportationEliminations and OtherCSX Consolidated
Operating Activities
Net Cash Provided by (Used in) Operating Activities$983$2,974$(587)$3,370
Investing Activities
Property Additions—(2,400)(162)(2,562)
Purchases of Short-term Investments(1,734)—(5)(1,739)
Proceeds from Sales of Short-term Investments1,175—501,225
Proceeds from Property Dispositions—147—147
Other Investing Activities(10)132(85)37
Net Cash Provided by (Used in) Investing Activities(569)(2,121)(202)(2,892)
Financing Activities
Long-term Debt Issued1,200——1,200
Long-term Debt Repaid(200)(29)—(229)
Dividends Paid(686)(750)750(686)
Shares Repurchased(804)——(804)
Other Financing Activities101(11)—
Net Cash Provided by (Used in) Financing Activities(480)(778)739(519)
Net (Decrease) Increase in Cash and Cash Equivalents(66)75(50)(41)
Cash and Cash Equivalents at Beginning of Period51010059669
Cash and Cash Equivalents at End of Period$444$175$9$628

CSX 2016 Form 10-K p. 112

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

NOTE 16. Summarized Consolidating Financial Data, continued

Consolidating Cash Flow Statements

(Dollars in Millions)

Fiscal Year Ended December 2014CSX CorporationCSX TransportationEliminations and OtherCSX Consolidated
Operating Activities
Net Cash Provided by (Used in) Operating Activities$583$3,278$(518)$3,343
Investing Activities
Property Additions—(2,192)(257)(2,449)
Purchases of Short-term Investments(1,419)—(14)(1,433)
Proceeds from Sales of Short-term Investments1,642—321,674
Proceeds from Property Dispositions—62—62
Other Investing Activities—(128)91(37)
Net Cash Provided by (Used in) Investing Activities223(2,258)(148)(2,183)
Financing Activities
Long-term Debt Issued1,000——1,000
Long-term Debt Repaid(600)(333)—(933)
Dividends Paid(629)(660)660(629)
Shares Repurchased(517)——(517)
Other Financing Activities11(18)3(4)
Net Cash Provided by (Used in) Financing Activities(735)(1,011)663(1,083)
Net (Decrease) Increase in Cash and Cash Equivalents719(3)77
Cash and Cash Equivalents at Beginning of Period4399162592
Cash and Cash Equivalents at End of Period$510$100$59$669

CSX 2016 Form 10-K p. 113

CSX CORPORATION

PART II

Previous: Item 7A. Quantitative and Qualitative Disclosures about Market Risk · Next: Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure