Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Changes in interest rates may impact the cost of future long-term debt issued by the Company, and as a result, represent interest rate risk to the Company. In an effort to manage this risk, CSX may use certain financial instruments such as interest rate forward contracts. The following information, together with information included in Note 10, Debt and Credit Agreements, describes the key aspects of such contracts and the related market risk to CSX.

Changes in interest rates could impact the fair value of the Company's forward starting interest rate swap. In 2020, the Company executed two forward starting interest rate swaps with a notional value of $250 million for an aggregate notional value of $500 million. These swaps were effected to hedge the benchmark interest rate associated with future interest payments related to the anticipated refinancing of notes due in 2027. The Company recognized an unrealized gain of $80 million and $8 million net of tax during the years ended December 31, 2022 and 2021, respectively, in the consolidated statements of comprehensive income with the related asset on the balance sheet as of December 31, 2022. In fourth quarter 2022, CSX settled a portion equal to $160 million notional value of the aggregate $500 million cash flow hedges, which resulted in CSX receiving a cash payment of $52 million. The gain associated with the settled portion of the hedges will continue to be classified in accumulated other comprehensive income (“AOCI”) until the associated debt instrument is issued in the future. Upon final settlement of the swaps, which expire in 2027, the unrealized gain or loss in AOCI will be recognized in earnings as an adjustment to interest expense over the same period during which the hedged transaction affects earnings. As of December 31, 2022, the potential change in fair value resulting from a hypothetical 10% change in interest rates would not be material.

Changes in interest rates could impact the fair value of the Company's fixed-to-floating interest rate swaps. In 2022, CSX entered into five separate fixed-to-floating interest rate swaps classified as fair value hedges. The swaps are designed to hedge 10 years of interest rate risk associated with market fluctuations attributable to the Secured Overnight Financing Rate on a cumulative $800 million of fixed rate outstanding notes, which are due between 2036 and 2040. As of December 31, 2022, the cumulative fair value of these swaps was a $118 million liability, which is included in other long-term liabilities on the consolidated balance sheet. The associated cumulative adjustment to the hedged notes is included in long-term debt. Gains and losses resulting from changes in fair value of the interest rate swaps offset changes in the fair value of the hedged portion of the underlying debt with no gain or loss recognized due to hedge ineffectiveness. The difference in the net fixed-to-float interest settlement on the derivatives is recognized in interest expense and was not material for the year ending at December 31, 2022. The swaps will expire in 2032. If settled early, the remaining liability or asset will be amortized over the remaining life of the associated notes. As of December 31, 2022, the potential change in fair value resulting from a hypothetical 10% change in interest rates would not be material.

As of December 31, 2022, CSX has no floating rate notes outstanding. However, changes in interest rates could impact the fair value (but not the carrying value) of the Company's fixed rate long-term debt. The potential decrease in fair value of the Company's fixed rate long-term debt resulting from a hypothetical 10% increase in U.S. Treasury rates, or approximately 40 basis points, is estimated to be $709 million as of December 31, 2022, and $448 million as of December 31, 2021. The underlying fair values of the Company's long-term debt were estimated based on quoted market prices or on the current rates offered for debt with similar terms and maturities.

CSX 2022 Form 10-K p.44

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
						Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)						46
CSX Corporation
Consolidated Financial Statements and Notes to Consolidated Financial Statements
			Herewith:
Consolidated Income Statements for the Years Ended:						48
			December 31, 2022
			December 31, 2021
			December 31, 2020
Consolidated Comprehensive Income Statements for the Years Ended:						49
			December 31, 2022
			December 31, 2021
			December 31, 2020
Consolidated Balance Sheets as of:						50
			December 31, 2022
			December 31, 2021
Consolidated Cash Flow Statements for Years Ended:						51
			December 31, 2022
			December 31, 2021
			December 31, 2020
Consolidated Statements of Changes in Shareholders' Equity:						52
			December 31, 2022
			December 31, 2021
			December 31, 2020
Notes to Consolidated Financial Statements						53

CSX 2022 Form 10-K p.45

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of CSX Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of CSX Corporation (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, cash flows, and changes in shareholders’ equity for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 15, 2023 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosure to which it relates.

CSX 2022 Form 10-K p.46

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, continued

			Depreciation Policies for Assets Utilizing the Group-Life Method
Description of the Matter			As of December 31, 2022, assets depreciated under the group-life method comprised 84% of total gross fixed assets of $48.1 billion. As discussed in Note 6 of the consolidated financial statements, the group-life method aggregates assets with similar lives and characteristics into groups and depreciates each of these groups as a whole. When using the group-life method, an underlying assumption is that each group of assets, as a whole, is used and depreciated to the end of the group’s recoverable life. The Company utilizes different depreciable asset categories to account for depreciation expense for the railroad assets that are depreciated under the group-life method. Under the group-life method, depreciation studies are conducted by a third-party specialist and analyzed by the Company’s management to review asset service lives, salvage values, accumulated depreciation and other factors related to group assets. Depreciation studies are performed every three years for equipment assets and every six years for road and track assets. In years when depreciation studies are not performed, annual data reviews are conducted by a third-party specialist and analyzed by the Company’s management to review the asset service lives. A depreciation study was performed in 2022 for equipment assets. For road and track assets, the most recent depreciation study was performed in 2020 and was evaluated in the current year through an annual data review. Auditing depreciation expense for assets subject to the group-life method was complex and required the involvement of specialists due to the nature of the methods used in the depreciation studies to determine the useful service lives and salvage values of the Company’s assets. These methods have a significant effect on depreciation expense.
How We Addressed the Matter in Our Audit			We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process related to the assessment of periodic depreciation studies and annual data reviews of its group-life assets. For example, we tested controls over management’s review of the depreciation study for equipment assets and review of depreciation expense and estimated useful lives. We also tested controls over management’s annual data review of asset activity and assumptions that could impact the estimated useful lives determined in the most recent depreciation study of road and track assets. To test the estimated useful lives and salvage values of the Company’s group-life assets, we performed audit procedures that included, among others: obtaining the periodic depreciation studies and annual data reviews performed by the Company’s third-party specialist and reviewed by management; assessing the completeness and accuracy of the data provided by management to the third-party specialist; and including a specialist on our team to evaluate the methods used by the third-party specialist and reviewed by management in determining the estimated useful lives and salvage values of assets resulting from the depreciation studies and any changes to the estimated useful lives and salvage values, if any, resulting from the annual data reviews. We compared the methods used by management to those used throughout the industry and within other depreciation studies. We assessed the historical accuracy of management’s estimates via retrospective review and independently calculated the current year depreciation rates.

We have served as the Company’s auditor since 1981.

/s/ Ernst & Young LLP

Jacksonville, Florida

February 15, 2023

CSX 2022 Form 10-K p.47

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

CONSOLIDATED INCOME STATEMENTS

(Dollars in Millions, Except Per Share Amounts)

			Years Ended
			2022						2021						2020
Revenue			$	14,853					$	12,522					$	10,583
Expense
Labor and Fringe			2,861						2,550						2,275
Purchased Services and Other			2,685						2,135						1,719
Fuel			1,626						913						541
Depreciation and Amortization			1,500						1,420						1,383
Equipment and Other Rents			396						364						338
Gains on Property Dispositions			(238)						(454)						(35)
Total Expense			8,830						6,928						6,221
Operating Income			6,023						5,594						4,362
Interest Expense			(742)						(722)						(754)
Other Income - Net (Note 14)			133						79						19
Earnings Before Income Taxes			5,414						4,951						3,627
Income Tax Expense (Note 12)			(1,248)						(1,170)						(862)
Net Earnings			$	4,166					$	3,781					$	2,765
Per Common Share (Note 2)
Net Earnings Per Share
Basic			$	1.95					$	1.68					$	1.20
Assuming Dilution			$	1.95					$	1.68					$	1.20
Average Common Shares Outstanding (Millions)
Basic			2,136						2,250						2,300
Assuming Dilution			2,141						2,255						2,305

See accompanying Notes to Consolidated Financial Statements.

CSX 2022 Form 10-K p.48

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS

(Dollars in Millions)

			Years Ended
			2022			2021			2020
Net Earnings			$	4,166		$	3,781		$	2,765
Other Comprehensive Income (Loss) - Net of Tax:
Pension and Other Post-Employment Benefits			(66)			167			21
Interest Rate Derivatives			80			8			62
Other			6			15			(6)
Total Other Comprehensive Income (Loss) (Note 16)			20			190			77
Comprehensive Earnings			$	4,186		$	3,971		$	2,842

See accompanying Notes to Consolidated Financial Statements.

CSX 2022 Form 10-K p.49

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

CONSOLIDATED BALANCE SHEETS

(Dollars in Millions)

			December						December
			2022						2021
ASSETS
Current Assets:
Cash and Cash Equivalents			$	1,958					$	2,239
Short-term Investments			129						77
Accounts Receivable - Net (Note 11)			1,313						1,148
Materials and Supplies			341						339
Other Current Assets			108						70
Total Current Assets			3,849						3,873
Properties			48,105						46,505
Accumulated Depreciation			(13,863)						(13,490)
Properties - Net (Note 6)			34,242						33,015
Investment in Affiliates and Other Companies (Note 15)			2,292						2,099
Right of Use Lease Asset (Note 7)			505						501
Goodwill and Other Intangible Assets - Net (Note 18)			502						451
Other Long-term Assets			522						592
Total Assets			$	41,912					$	40,531
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable			$	1,130					$	963
Labor and Fringe Benefits Payable			707						630
Casualty, Environmental and Other Reserves (Note 5)			144						118
Current Maturities of Long-term Debt (Note 10)			151						181
Income and Other Taxes Payable			111						134
Other Current Liabilities			228						207
Total Current Liabilities			2,471						2,233
Casualty, Environmental and Other Reserves (Note 5)			292						250
Long-term Debt (Note 10)			17,896						16,185
Deferred Income Taxes - Net (Note 12)			7,569						7,383
Long-term Lease Liability (Note 7)			488						478
Other Long-term Liabilities			571						502
Total Liabilities			29,287						27,031
Shareholders' Equity:
Common Stock, $1 Par Value (Note 3)			2,066						2,202
Other Capital			574						66
Retained Earnings			10,363						11,630
Accumulated Other Comprehensive Loss (Note 16)			(388)						(408)
Non-controlling Minority Interest			10						10
Total Shareholders' Equity			12,625						13,500
Total Liabilities and Shareholders' Equity			$	41,912					$	40,531

See accompanying Notes to Consolidated Financial Statements.

CSX 2022 Form 10-K p.50

CSX CORPORATION

PART II