Properties

A detail of the Company’s net properties are as follows:



(Dollars in Millions)				Accumulated			Net Book		Annual Depreciation	Estimated Useful Life	Depreciation
December 2016		Cost		Depreciation			Value		Rate	( Avg. Years)	Method ^(a)
Road
	Rail and Other Track Material	$	7,326	$	(1,493	)	$	5,833	2.5%	40	Group Life
	Ties	5,368		(1,292		)	4,076		3.7%	27	Group Life
	Grading	2,600		(514		)	2,086		1.4%	90	Group Life
	Ballast	2,897		(860		)	2,037		2.7%	37	Group Life
	Bridges, Trestles, and Culverts	2,306		(317		)	1,989		1.6%	70	Group Life
	Signals and Interlockers	2,523		(496		)	2,027		4.0%	25	Group Life/ Straight Line
	Buildings	1,238		(447		)	791		2.5%	40	Group Life
	Other	4,566		(1,905		)	2,661		4.2%	24	Group Life
Total Road		28,824		(7,324		)	21,500
Equipment
	Locomotive	6,110		(2,504		)	3,606		3.5%	29	Group Life
	Freight Cars	3,386		(1,046		)	2,340		2.9%	35	Group Life
	Work Equipment and Other	2,108		(1,190		)	918		7.4%	14	Group Life/ Straight Line
Total Equipment		11,604		(4,740		)	6,864
Land		1,833		—			1,833		N/A	N/A	N/A
Construction In Progress		913		—			913		N/A	N/A	N/A
Other		53		(13		)	40		N/A	32	Straight Line
Total Properties		$	43,227	$	(12,077	)	$	31,150

(a) For depreciation method, certain asset categories contain technology-related assets, which are depreciated using the straight-line method.

NOTE 6. Properties, continued



(Dollars in Millions)				Accumulated			Net Book		Annual Depreciation	Estimated Useful Life	Depreciation
December 2015		Cost		Depreciation			Value		Rate	(Avg. Years)	Method ^(a)
Road
	Rail and Other Track Material	$	7,150	$	(1,414	)	$	5,736	2.5%	40	Group Life
	Ties	5,077		(1,147		)	3,930		3.7%	27	Group Life
	Grading	2,533		(479		)	2,054		1.4%	90	Group Life
	Ballast	2,793		(802		)	1,991		2.7%	37	Group Life
	Bridges, Trestles, and Culverts	2,238		(283		)	1,955		1.6%	70	Group Life
	Signals and Interlockers	2,315		(416		)	1,899		4.0%	25	Group Life/ Straight Line
	Buildings	1,152		(424		)	728		2.5%	40	Group Life
	Other	4,306		(1,793		)	2,513		4.2%	24	Group Life
Total Road		27,564		(6,758		)	20,806
Equipment
	Locomotive	5,673		(2,461		)	3,212		3.6%	28	Group Life
	Freight Cars	3,362		(1,018		)	2,344		3.2%	31	Group Life
	Work Equipment and Other	2,073		(1,154		)	919		7.1%	13	Group Life/ Straight Line
Total Equipment		11,108		(4,633		)	6,475
Land		1,858		—			1,858		N/A	N/A	N/A
Construction In Progress		1,003		—			1,003		N/A	N/A	N/A
Other		41		(9		)	32		N/A	32	Straight Line
Total Properties		$	41,574	$	(11,400	)	$	30,174

(a) For depreciation method, certain asset categories contain technology-related assets, which are depreciated using the straight-line method.

Railroad Assets

The Company depreciates its railroad assets, including main-line track, locomotives and freight cars, using the group-life method of accounting. Assets depreciated under the group-life method of accounting comprise 86% of total fixed assets of $43 billion on a gross basis as of December 2016. The remaining depreciable assets of the Company are depreciated on a straight-line basis. 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 its recoverable life.

The Company currently utilizes more than 130 different depreciable asset categories to account for depreciation expense for the railroad assets that are depreciated under the group-life method of accounting. Examples of depreciable asset categories include 18 different categories for crossties due to the different combinations of density classifications and asset types. By utilizing various depreciable categories, the Company can more accurately account for the use of its assets. All assets of the Company are depreciated on a time or life basis.

NOTE 6. Properties, continued

The Company believes the group-life method of depreciation closely approximates the straight-line method of depreciation. Additionally, due to the nature of most of its assets (e.g. track is one contiguous, connected asset) the Company believes that this is the most effective way to properly depreciate its assets.

Management performs a detailed review of depreciation expense and useful lives on a regular basis. Under the group-life method of accounting, the service lives and salvage values for each group of assets are determined by completing periodic depreciation studies and applying management’s assumptions regarding the service lives of its properties. A depreciation study (also referred to as a life study) is the periodic review of asset service lives, salvage values, accumulated depreciation, and other related factors for group assets conducted by a third-party specialist, analyzed by the Company’s management and approved by the STB, the regulatory board that has broad jurisdiction over railroad practices. The STB requires depreciation studies be performed for equipment assets generally every three years and for road (e.g. bridges and signals) and track (e.g. rail, ties and ballast) assets generally every six years. The Company believes the frequency currently required by the STB provides adequate review of asset service lives and that a more frequent review would not result in a material change due to the long-lived nature of most of the assets. In 2016, the Company completed a deprecation study for its equipment assets. In 2014, the Company completed a depreciation study for its road and track assets. The Company plans to complete the next depreciation study for equipment assets in 2019 and road and track assets in 2020.

The results of the depreciation study process determine the service lives for each asset group under the group-life method. Road assets, including main-line track, have estimated service lives ranging from eight years for system roadway machinery to 90 years for grading (construction of protection for the roadway, tracks and embankments). Equipment assets, including locomotives and freight cars, have estimated service lives ranging from four years for technology assets to 40 years for work equipment. Changes in asset service lives due to the results of the depreciation studies are applied on a prospective basis and could significantly impact future periods’ depreciation expense, and thus, the Company's results of operations.

There are several factors taken into account during the depreciation study and they include:


•	statistical analysis of historical life and salvage data for each group of property;


•	statistical analysis of historical retirements for each group of property;


•	evaluation of current operations;


•	evaluation of technological advances and maintenance schedules;


•	previous assessment of the condition of the assets;


•	management's outlook on the future use of certain asset groups;


•	expected net salvage to be received upon retirement; and


•	comparison of assets to the same asset groups with other companies.

Recent experience with depreciation studies has resulted in depreciation rate changes that did not materially affect the Company’s annual depreciation expense of $1.3 billion, $1.2 billion and $1.2 billion for 2016, 2015 and 2014, respectively. In general, changes in depreciation rates result from updated average asset service lives as determined during depreciation studies.

NOTE 6. Properties, continued

For retirements or disposals of depreciable rail assets that occur in the ordinary course of business, the asset cost (net of salvage value or sales proceeds) is charged to accumulated depreciation and no gain or loss is recognized. As individual assets within a specific group are retired or disposed of, resulting gains and losses are recorded in accumulated depreciation. This practice is consistent with accounting treatment normally prescribed under the group-life method. As part of the depreciation study, an assessment of the recorded amount of accumulated depreciation is made to determine if it is deficient (or in excess) of the appropriate amount indicated by the study. Any such deficiency (or excess), including any deferred gains or losses, is amortized as a component of depreciation expense over the remaining service life of the asset group until the next required depreciation study. Since the overall assumption with the group-life method of accounting is that the assets within the group on average have the same service life and characteristics, it is therefore concluded that the deferred gains and losses offset over time.

Since the rail network is one contiguous, connected network it is impractical to maintain specific identification records for these assets. For road assets (such as rail and track related items), CSX utilizes a first-in, first-out approach to asset retirements. The historical cost of these replaced assets is estimated using inflation indices previously published by the Bureau of Labor Statistics, adjusted using Consumer Price Index inflationary figures, applied to the replacement value based on the age of the retired asset. The indices are used because they closely correlate with the major cost of the materials comprising the applicable road assets.

Equipment assets (such as locomotives and freight cars) are specifically identified at retirement. When an equipment asset is retired that has been depreciated using the group-life method, the cost is reduced from the cost base and recorded in accumulated depreciation.

In the event that large groups of assets are removed from service as a result of unusual acts or sales, resulting gains and losses are recognized immediately. These acts are not considered to be in the normal course of business and are therefore recognized when incurred. Examples of such acts would be the major destruction of assets due to significant storm damage (e.g. major hurricanes), the sale of a rail line segment or the disposal of an entire class of assets (e.g. disposal of all refrigerated freight cars). Abnormal operating gains were $23 million in 2015 primarily related to the sale of an operating rail line segment. There were no abnormal operating gains or losses in 2016 or 2014.

NOTE 6. Properties, continued

Non-Railroad Assets, Capital Leases and Land

Non-railroad assets and assets under capital leases are not depreciated using the group-life method; rather, they are depreciated using the straight-line method on a per asset basis. The depreciable lives of these assets are periodically reviewed by the Company and any changes are applied on a prospective basis. Amortization expense recorded under capital leases is included in depreciation expense on the consolidated income statements. Land is not depreciated. For retirements or disposals of non-railroad depreciable assets and all dispositions of land, the resulting gains or losses are recognized in earnings at the time of disposal. During 2016, the Company recognized $115 million of earnings related to a $110 million gain on the sale of an operating property and a $5 million reimbursement of environmental costs related to the sale, which is recognized in materials, supplies and other on the consolidated statements of income. During 2015, the Company recognized a gain of $59 million related to the sale of non-operating easements, which is recognized in other income on the consolidated statements of income. (For additional information regarding cost reimbursements related to this sale, see Note 10, Other Income.) These gains and losses were not material in 2014.

Impairment Review

Properties and other long-lived assets are reviewed for impairment annually or whenever events or business conditions indicate the carrying amount of such assets may not be fully recoverable. Initial assessments of recoverability are based on estimates of undiscounted future net cash flows associated with an asset or a group of assets in accordance with the Property, Plant, and Equipment Topic in the ASC. Where impairment is indicated, the assets are evaluated and their carrying amount is reduced to fair value based on discounted net cash flows or other estimates of fair value.

Capital Expenditures

The Company’s capital investment includes purchased and self-constructed assets and property additions that substantially extend the service life or increase the utility of those assets. Indirect costs that can be specifically traced to capital projects are also capitalized. The Company is committed to maintaining and improving its existing infrastructure and expanding its network capacity for long-term growth. Rail operations are capital intensive and CSX accounts for these costs in accordance with GAAP and the Company’s capitalization policy. All properties are stated at historical cost less an allowance for accumulated depreciation.

NOTE 6. Properties, continued

The Company’s largest category of capital investment is the replacement of track assets and the acquisition or construction of new assets that enable CSX to enhance its operations or provide new capacity offerings to its customers. These construction projects are primarily completed by CSXT employees. Costs for track asset replacement and capacity projects that are capitalized include:


•	labor costs, because many of the assets are self-constructed;


•	costs to purchase or construct new track or to prepare ground for the laying of track;


•	welding (rail, field and plant) which are processes used to connect segments of rail;


•	new ballast, which is gravel and crushed stone that holds track in line;


•	fuels and lubricants associated with tie, rail and surfacing work which is the process of raising track to a designated elevation over an extended distance;


•	cross, switch and bridge ties which are the braces that support the rails on a track;


•	gauging which is the process of standardizing the distance between rails;


•	handling costs associated with installing rail, ties or ballast;


•	usage charge of machinery and equipment utilized in construction or installation; and


•	other track materials.

The primary cost in self-constructed track replacement work is labor. CSXT engineering employees directly charge their labor to the track replacement project (the capitalized depreciable property). These employees concurrently perform deconstruction and installation of track material. Because of this concurrent process, CSX must estimate the amount of labor that is related to deconstruction versus installation. Through analysis of CSXT’s track replacement process, CSX determined that approximately 20% of labor costs associated with track material installation is related to the deconstruction of old track and 80% is associated with the installation of new track.

Capital investment related to locomotives and freight cars comprises the second largest category of the Company’s capital assets. This category includes purchase costs of locomotives and freight cars as well as certain equipment leases that are considered to be capital leases in accordance with the Leases Topic in the ASC. In addition, costs to modify or rebuild these assets are capitalized if the investment incurred extends the asset’s service life or improves utilization. Improvement projects must meet specified dollar thresholds to be capitalized and are reviewed by management to determine proper accounting treatment. Routine repairs and maintenance costs, for all asset categories, are expensed as incurred.