Edgar Filing: CSX CORP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 30, 2016

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________



Commission File Number 1-8022
CSX CORPORATION
(Exact name of registrant as specified in its charter)
Virginia		62-1051971
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

500 Water Street, 15th Floor, Jacksonville, FL	32202	(904) 359-3200
(Address of principal executive offices)	(Zip Code)	(Telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Name of exchange on which registered
Common Stock, $1 Par Value	Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes (X) No ( )

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ( ) No (X)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes (X) No ( )

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes (X) No ( )

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (as defined in Exchange Act Rule 12b-2).

Large Accelerated Filer (X) Accelerated Filer ( ) Non-accelerated Filer ( ) Smaller reporting company ( )

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes ( ) No (X)

On June 24, 2016 (which is the last day of the second quarter and the required date to use), the aggregate market value of the Registrant’s voting stock held by non-affiliates was approximately $24 billion (based on the New York Stock Exchange closing price on such date).

There were 926,446,993 shares of Common Stock outstanding on January 27, 2017 (the latest practicable date that is closest to the filing date).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Definitive Proxy Statement (the “Proxy Statement”) to be filed no later than 120 days after the end of the fiscal year with respect to its 2017 annual meeting of shareholders.

CSX 2016 Form 10-K p. 1



CSX CORPORATION
FORM 10-K
TABLE OF CONTENTS

Item No.			Page

PART I
1.	Business		3
	1A. Risk Factors		7
	1B. Unresolved Staff Comments		11
2.	Properties		12
3.	Legal Proceedings		17
4.	Mine Safety Disclosures		17
	Executive Officers of the Registrant		18

PART II
5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		20
6.	Selected Financial Data		23
7.	Management's Discussion and Analysis of Financial Condition and Results of Operations		24
		· Terms Used by CSX	24
		· Strategic Overview	26
		· 2016 Highlights	29
		· Results of Operations	29
		· Liquidity and Capital Resources	41
		· Schedule of Contractual Obligations and Commercial Commitments	46
		· Off-Balance Sheet Arrangements	46
		· Critical Accounting Estimates	47
		· Forward-Looking Statements	54
7A.	Quantitative and Qualitative Disclosures about Market Risk		56
8.	Financial Statements and Supplementary Data		57
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		114
9A.	Controls and Procedures		114
9B.	Other Information		116

PART III
10.	Directors, Executive Officers of the Registrant and Corporate Governance		116
11.	Executive Compensation		116
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		116
13.	Certain Relationships and Related Transactions, and Director Independence		116
14.	Principal Accounting Fees and Services		116

PART IV
15.	Exhibits, Financial Statement Schedules		116

Signatures			121

CSX 2016 Form 10-K p. 2

CSX CORPORATION

PART I

Item 1. Business

CSX Corporation (“CSX”), and together with its subsidiaries (the “Company”), based in Jacksonville, Florida, is one of the nation's leading transportation companies. The Company provides rail-based transportation services including traditional rail service and the transport of intermodal containers and trailers.

The Company’s number of employees was approximately 27,000 as of December 2016, which includes approximately 22,000 union employees. Most of the Company’s employees provide or support transportation services.

CSX Transportation, Inc.

CSX’s principal operating subsidiary, CSX Transportation, Inc. (“CSXT”), provides an important link to the transportation supply chain through its approximately 21,000 route mile rail network, which serves major population centers in 23 states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec. It has access to over 70 ocean, river and lake port terminals along the Atlantic and Gulf Coasts, the Mississippi River, the Great Lakes and the St. Lawrence Seaway. The Company’s intermodal business links customers to railroads via trucks and terminals. CSXT also serves thousands of production and distribution facilities through track connections to approximately 240 short-line and regional railroads.

Lines of Business

During 2016, the Company's services generated $11.1 billion of revenue and served three primary lines of business:


•	The merchandise business shipped 2.8 million carloads and generated 64% of revenue and 43% of volume in 2016. The Company’s merchandise business is comprised of shipments in the following diverse markets: agricultural and food products, fertilizers, chemicals, automotive, metals and equipment, minerals and forest products.

•

The coal business shipped 838 thousand carloads and accounted for 17% of revenue and 13% of volume in 2016. The Company transports domestic coal, coke and iron ore to electricity-generating power plants, steel manufacturers and industrial plants as well as export coal to deep-water port facilities. Roughly one-third of export coal and the majority of the domestic coal that the Company transports is used for generating electricity.

•

The intermodal business accounted for 16% of revenue and 44% of volume in 2016. The intermodal business combines the superior economics of rail transportation with the short-haul flexibility of trucks and offers a cost advantage over long-haul trucking. Through a network of more than 50 terminals, the intermodal business serves all major markets east of the Mississippi River and transports mainly manufactured consumer goods in containers, providing customers with truck-like service for longer shipments.

Other revenue accounted for 3% of the Company’s total revenue in 2016. This category includes revenue from regional subsidiary railroads, demurrage, revenue for customer volume commitments not met, switching, other incidental charges and adjustments to revenue reserves. Revenue from regional railroads includes shipments by railroads that the Company does not directly operate. Demurrage represents charges assessed when freight cars are held beyond a specified period of time. Switching revenue is primarily generated when CSXT switches cars for a customer or another railroad.

CSX 2016 Form 10-K p. 3

CSX CORPORATION

PART I

Other Entities

In addition to CSXT, the Company’s subsidiaries include CSX Intermodal Terminals, Inc. (“CSX Intermodal Terminals”), Total Distribution Services, Inc. (“TDSI”), Transflo Terminal Services, Inc. (“Transflo”), CSX Technology, Inc. (“CSX Technology”) and other subsidiaries. CSX Intermodal Terminals owns and operates a system of intermodal terminals, predominantly in the eastern United States and also performs drayage services (the pickup and delivery of intermodal shipments) for certain customers and trucking dispatch operations. TDSI serves the automotive industry with distribution centers and storage locations. Transflo connects non-rail served customers to the many benefits of rail by transferring products from rail to trucks. The biggest Transflo markets are chemicals and agriculture, which includes shipments of plastics and ethanol. CSX Technology and other subsidiaries provide support services for the Company.

CSX’s other holdings include CSX Real Property, Inc., a subsidiary responsible for the Company’s operating and non-operating real estate sales, leasing, acquisition and management and development activities. These activities are classified in either operating income or other income - net depending upon the nature of the activity. Results of these activities fluctuate with the timing of real estate transactions.

Financial Information

See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for operating revenue, operating income and total assets for each of the last three fiscal years.

Company History

A leader in freight rail transportation for nearly 190 years, the Company’s heritage dates back to the early nineteenth century when The Baltimore and Ohio Railroad Company (“B&O”) – the nation’s first common carrier – was chartered in 1827. Since that time, the Company has built on this foundation to create a railroad that could safely and reliably service the ever-increasing demands of a growing nation.

Since its founding, numerous railroads have combined with the former B&O through merger and consolidation to create what has become CSX. Each of the railroads that combined into the CSX family brought new geographical reach to valuable markets, gateways, cities, ports and transportation corridors.

CSX was incorporated in 1978 under Virginia law. In 1980, the Company completed the merger of the Chessie System and Seaboard Coast Line Industries into CSX. The merger allowed the Company to connect northern population centers and Appalachian coal fields to growing southeastern markets. Later, the Company’s acquisition of key portions of Conrail, Inc. ("Conrail") allowed CSXT to link the northeast, including New England and the New York metropolitan area, with Chicago and midwestern markets as well as the growing areas in the Southeast already served by CSXT. This current rail network allows the Company to directly serve every major market in the eastern United States with safe, dependable, environmentally responsible and fuel efficient freight transportation and intermodal service.

Competition

The business environment in which the Company operates is highly competitive. Shippers typically select transportation providers that offer the most compelling combination of service and price. Service requirements, both in terms of transit time and reliability, vary by shipper and commodity. As a result, the Company’s primary competition varies by commodity, geographic location and mode of available transportation and includes other railroads, motor carriers that operate similar routes across its service area and, to a less significant extent, barges, ships and pipelines.

CSXT’s primary rail competitor is Norfolk Southern Railway, which operates throughout much of the Company’s territory. Other railroads also operate in parts of the Company’s territory. Depending on the specific market, competing railroads and deregulated motor carriers may exert pressure on price and service levels. For further discussion on the risk of competition to the Company, see Item 1A. Risk Factors.

CSX 2016 Form 10-K p. 4

CSX CORPORATION

PART I

Regulatory Environment

The Company's operations are subject to various federal, state, provincial (Canada) and local laws and regulations generally applicable to businesses operating in the United States and Canada. In the U.S., the railroad operations conducted by the Company's subsidiaries, including CSXT, are subject to the regulatory jurisdiction of the Surface Transportation Board (“STB”), the Federal Railroad Administration (“FRA”), and its sister agency within the U.S. Department of Transportation ("DOT"), the Pipeline and Hazardous Materials Safety Administration (“PHMSA”). Together, FRA and PHMSA have broad jurisdiction over railroad operating standards and practices, including track, freight cars, locomotives and hazardous materials requirements. In addition, the U.S. Environmental Protection Agency (“EPA”) has regulatory authority with respect to matters that impact the Company's properties and operations. The EPA is considering regulatory action directed towards the railroad industry governing the disposal of creosote cross-ties and seeking to increase air emission regulations that may impact our operations or increase costs. Similarly, the Transportation Security Administration (“TSA”), a component of the Department of Homeland Security, has broad authority over railroad operating practices that may have homeland security implications. In Canada, the railroad operations conducted by the Company’s subsidiaries, including CSXT, are subject to the regulatory jurisdiction of the Canadian Transportation Agency.

Although the Staggers Act of 1980 significantly deregulated the U.S. rail industry, the STB has broad jurisdiction over rail carriers. The STB regulates routes, fuel surcharges, conditions of service, rates for non-exempt traffic, acquisitions of control over rail common carriers and the transfer, extension or abandonment of rail lines, among other railroad activities.

Positive Train Control

In 2008, Congress enacted the Rail Safety Improvement Act (the “RSIA”). The legislation included a mandate that all Class I freight railroads implement an interoperable positive train control system (“PTC”) by December 31, 2015. Implementation of a PTC system is designed to prevent train-to-train collisions, over-speed derailments, incursions into established work-zone limits, and train diversions onto another set of tracks. On October 29, 2015, the President of the United States signed the Positive Train Control Enforcement and Implementation Act of 2015 into law extending the deadline. This Act requires the installation of all PTC hardware be completed by December 31, 2018, and, assuming certain conditions are met, requires that the PTC system be fully operational by December 31, 2020.

PTC must be installed on all main lines with passenger and commuter operations as well as most of those over which toxic-by-inhalation hazardous materials are transported. The Company expects to incur significant capital costs in connection with the implementation of PTC as well as related ongoing operating expenses. CSX currently estimates that the total multi-year cost of PTC implementation will be approximately $2.4 billion for the Company. Total PTC investment through 2016 was $1.8 billion.

STB Proceedings

In 2012, the STB announced it would accept comments on a proposal by the National Industrial Transportation League that would require Class I railroads to provide a form of "competitive access" to customers served solely by one railroad. Under this proposal, CSX would be required to allow a competing railroad to access certain customers that are currently solely served by CSX's network. In early 2013, shippers, railroads and other parties submitted comments on the proposal, and the STB held a hearing in March 2014 to receive further input from participating parties. Since the hearing, the STB has taken no further action in the proceeding.

CSX 2016 Form 10-K p. 5

CSX CORPORATION

PART I

In April 2014, the STB announced it would receive comments to explore its methodology for determining railroad revenue adequacy. The revenue adequacy standard represents the level of profitability for a healthy carrier. Shippers, railroads and other parties filed comments in late 2014. More recently, the STB held a hearing in July 2015 to receive further input from participating parties. Since the hearing, the STB has taken no further action in the proceeding.

New rules regarding, among other things, competitive access or revenue adequacy could have a material adverse effect on the Company's financial condition, results of operations and liquidity as well as its ability to invest in enhancing and maintaining vital infrastructure. For further discussion on regulatory risks to the Company, see Item 1A. Risk Factors.

Other Information

CSX makes available on its website www.csx.com, free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission (“SEC”). The information on the CSX website is not part of this annual report on Form 10-K. Additionally, the Company has posted its code of ethics on its website, which is also available to any shareholder who requests it. This Form 10-K and other SEC filings made by CSX are also accessible through the SEC’s website at www.sec.gov.

CSX has included the certifications of its Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) required by Section 302 of the Sarbanes-Oxley Act of 2002 (“the Act”) as Exhibit 31, as well as Section 906 of the Act as Exhibit 32 to this Form 10-K report.

The information set forth in Item 6. Selected Financial Data is incorporated herein by reference. For additional information concerning business conducted by the Company during 2016, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

CSX 2016 Form 10-K p. 6

CSX CORPORATION

PART I

Item 1A. Risk Factors

The risks set forth in the following risk factors could have a materially adverse effect on the Company's financial condition, results of operations or liquidity, and could cause those results to differ materially from those expressed or implied in the Company's forward-looking statements. Additional risks and uncertainties not currently known to the Company or that the Company currently does not deem to be material also may materially impact the Company's financial condition, results of operations or liquidity.

New legislation or regulatory changes could impact the Company's earnings or restrict its ability to independently negotiate prices.

Legislation passed by Congress, new regulations issued by federal agencies or executive orders issued by the President of the United States could significantly affect the revenues, costs and profitability of the Company's business. For instance, several of the proposals under consideration by the STB could have a significant negative impact on the Company's ability to negotiate prices for the value of rail services provided and meet service standards, which could force a reduction in capital spending. In addition, statutes imposing price constraints or affecting rail-to-rail competition could adversely affect the Company's profitability.

Government regulation and compliance risks may adversely affect the Company's operations and financial results.

The Company is subject to the jurisdiction of various regulatory agencies, including the STB, FRA, PHMSA, TSA, EPA and other state, provincial and federal regulatory agencies for a variety of economic, health, safety, labor, environmental, tax, legal and other matters. New or modified rules or regulations by these agencies could increase the Company's operating costs or reduce operating efficiencies and impact service performance. For example, the RSIA mandates that the installation of PTC hardware be completed by December 31, 2018 and, assuming certain conditions are met, requires that the PTC system be fully operational by December 31, 2020 on main lines that carry certain hazardous materials and on lines that have commuter or passenger operations. Noncompliance with these and other applicable laws or regulations could erode public confidence in the Company and can subject the Company to fines, penalties and other legal or regulatory sanctions.

Failure to complete negotiations on collective bargaining agreements could result in strikes and/or work stoppages.

Most of CSX's employees are represented by labor unions and are covered by collective bargaining agreements. Most of these agreements are bargained for nationally by the National Carriers Conference Committee and negotiated over the course of several years and previously have not resulted in any extended work stoppages. Under the Railway Labor Act's procedures (which include mediation, cooling-off periods and the possibility of an intervention of the U.S. President), during negotiations neither party may take action until the procedures are exhausted. If, however, CSX is unable to negotiate acceptable agreements, or if terms of existing agreements are disputed, the employees covered by the Railway Labor Act could strike, which could result in loss of business and increased operating costs as a result of higher wages or benefits paid to union members.

Capacity constraints could have a negative impact on service and operating efficiency.

CSXT may experience rail network difficulties related to: (i) increased volume; (ii) locomotive or crew shortages; (iii) extreme weather conditions; (iv) increased passenger activities, including high-speed rail; or (v) regulatory changes impacting where and how fast CSXT can transport freight or maintain routes, which could have a negative effect on CSXT's operational fluidity, leading to deterioration of service, asset utilization and overall efficiency.

CSX 2016 Form 10-K p. 7

CSX CORPORATION

PART I

Global economic conditions could negatively affect demand for commodities and other freight.

A decline or disruption in general domestic and global economic conditions that affects demand for the commodities and products the Company transports, including import and export volume, could reduce revenues or have other adverse effects on the Company's cost structure and profitability. For example, if the rate of economic growth in Asia slows or if European economies contract, U.S. export coal volume could be adversely impacted resulting in lower revenue for CSX. If the Company experiences significant declines in demand for its transportation services with respect to one or more commodities and products, the Company may experience reduced revenue and increased operating costs associated with the storage of locomotives, railcars and other equipment, workforce adjustments, and other related activities, which could have a material adverse effect on the Company's financial condition, results of operations and liquidity.

Changing dynamics in the U.S. and global energy markets could negatively impact profitability.

Over the past few years, production of natural gas in the U.S. has also increased dramatically, which has resulted in lower natural gas prices. As a result of sustained low natural gas prices, many coal-fired power plants have been displaced by natural gas-fired power generation facilities. If natural gas prices were to remain low, additional coal-fired plants could be displaced, which would likely further reduce the Company's domestic coal volumes and revenues.

Additionally, depressed crude oil prices due to increased supply or lower demand could result in a further decrease in domestic crude oil production, which could have an adverse effect on crude oil volumes for CSX. In addition, new regulations related to the shipment of crude oil by rail, including proposed rail car safety standards, could increase costs for CSX, negatively impact network fluidity or have an adverse impact on customers.

CSXT, as a common carrier by rail, is required by law to transport hazardous materials, which could expose the Company to significant costs and claims.

A train accident involving the transport of hazardous materials could result in significant claims arising from personal injury, property or natural resource damage, environmental penalties and remediation obligations. Such claims, if insured, could exceed existing insurance coverage or insurance may not continue to be available at commercially reasonable rates. Under federal regulations, CSXT is required to transport hazardous materials under the legal duty referred to as the common carrier mandate.

CSXT is also required to comply with regulations regarding the handling of hazardous materials. In November 2008, the TSA issued final rules placing significant new security and safety requirements on passenger and freight railroad carriers, rail transit systems and facilities that ship hazardous materials by rail. Noncompliance with these rules can subject the Company to significant penalties and could be a factor in litigation arising out of a train accident. Finally, legislation preventing the transport of hazardous materials through certain cities could result in network congestion and increase the length of haul for hazardous substances, which could increase operating costs, reduce operating efficiency or increase the risk of an accident involving the transport of hazardous materials.

Climate change and other emissions-related laws and regulations could adversely affect the Company's operations and financial results.

Climate change and other emissions-related laws and regulations have been proposed and, in some cases adopted, on the federal, state, provincial and local levels. These final and proposed laws and regulations take the form of restrictions, caps, taxes or other controls on emissions. In particular, the EPA has issued various regulations and may issue additional regulations targeting emissions, including rules and standards governing emissions from certain stationary sources and from vehicles.

CSX 2016 Form 10-K p. 8

CSX CORPORATION

PART I

Any of these pending or proposed laws or regulations could adversely affect the Company's operations and financial results by, among other things: (i) reducing coal-fired electricity generation due to mandated emission standards; (ii) reducing the consumption of coal as a viable energy resource in the United States and Canada; (iii) increasing the Company's fuel, capital and other operating costs and negatively affecting operating and fuel efficiencies; and (iv) making it difficult for the Company's customers in the U.S. and Canada to produce products in a cost competitive manner. Any of these factors could reduce the amount of shipments the Company handles and have a material adverse effect on the Company's financial condition, results of operations or liquidity.

The Company is subject to environmental laws and regulations that may result in significant costs.

The Company is subject to wide-ranging federal, state, provincial and local environmental laws and regulations concerning, among other things, emissions into the air, ground and water; the handling, storage, use, generation, transportation and disposal of waste and other materials; the clean-up of hazardous material and petroleum releases and the health and safety of our employees. If the Company violates or fails to comply with these laws and regulations, CSX could be fined or otherwise sanctioned by regulators. The Company can also be held liable for consequences arising out of human exposure to any hazardous substances for which CSX is responsible. In certain circumstances, environmental liability can extend to formerly owned or operated properties, leased properties, adjacent properties and properties owned by third parties or Company predecessors, as well as to properties currently owned, leased or used by the Company.

The Company has been, and may in the future be, subject to allegations or findings to the effect that it has violated, or is strictly liable under, environmental laws or regulations, and such violations can result in the Company's incurring fines, penalties or costs relating to the clean-up of environmental contamination. Although the Company believes it has appropriately recorded current and long-term liabilities for known and reasonably estimable future environmental costs, it could incur significant costs that exceed reserves or require unanticipated cash expenditures as a result of any of the foregoing. The Company also may be required to incur significant expenses to investigate and remediate known, unknown or future environmental contamination.

The Company relies on the security, stability and availability of its technology systems to operate its business.

The Company relies on information technology in all aspects of its business. The performance and reliability of the Company's technology systems are critical to its ability to operate and compete safely and effectively. A cybersecurity attack, which is a deliberate theft of data or impairment of information technology systems, or other significant disruption or failure, could result in a service interruption, train accident, misappropriation of confidential information, process failure, security breach or other operational difficulties. Such an event could result in increased capital, insurance or operating costs, including increased security costs to protect the Company's infrastructure. A disruption or compromise of the Company's information technology systems, even for short periods of time, could have a material adverse effect on the Company.

Disruption of the supply chain could negatively affect operating efficiency and increase costs.

The capital intensive nature and sophistication of core rail equipment (including rolling stock equipment, locomotives, rail, and ties) limits the number of railroad equipment suppliers. If any of the current manufacturers stops production or experiences a supply shortage, CSXT could experience a significant cost increase or material shortage. In addition, a few critical railroad suppliers are foreign and, as such, adverse developments in international relations, new trade regulations, disruptions in international shipping or increases in global demand could make procurement of these supplies more difficult or increase CSXT's operating costs. Additionally, if a fuel supply shortage were to arise, whether due to production restrictions, lower refinery outputs, a disruption of oil imports, adverse political developments or otherwise, the Company would be negatively impacted.

CSX 2016 Form 10-K p. 9

CSX CORPORATION

PART I

The Company faces competition from other transportation providers.

The Company experiences competition in pricing, service, reliability and other factors from various transportation providers including railroads and motor carriers that operate similar routes across its service area and, to a less significant extent, barges, ships and pipelines. Other transportation providers generally use public rights-of-way that are built and maintained by governmental entities, while CSXT and other railroads must build and maintain rail networks largely using internal resources. Any future improvements or expenditures materially increasing the quality or reducing the cost of alternative modes of transportation, or legislation providing for less stringent size or weight restrictions on trucks, could negatively impact the Company's competitive position. Additionally, any future consolidation in the rail industry could materially affect the regulatory and competitive environment in which the Company operates.

Future acts of terrorism, war or regulatory changes to combat the risk of terrorism may cause significant disruptions in the Company's operations.

Terrorist attacks, along with any government response to those attacks, may adversely affect the Company's financial condition, results of operations or liquidity. CSXT's rail lines, other key infrastructure and information technology systems may be direct targets or indirect casualties of acts of terror or war. This risk could cause significant business interruption and result in increased costs and liabilities and decreased revenues. In addition, premiums charged for some or all of the insurance coverage currently maintained by the Company could increase dramatically, or the coverage may no longer be available.

Furthermore, in response to the heightened risk of terrorism, federal, state and local governmental bodies are proposing and, in some cases, have adopted legislation and regulations relating to security issues that impact the transportation industry. For example, the Department of Homeland Security adopted regulations that require freight railroads to implement additional security protocols when transporting hazardous materials. Complying with these or future regulations could continue to increase the Company's operating costs and reduce operating efficiencies.

Severe weather or other natural occurrences could result in significant business interruptions and expenditures in excess of available insurance coverage.

The Company's operations may be affected by external factors such as severe weather and other natural occurrences, including floods, fires, hurricanes and earthquakes. As a result, the Company's rail network may be damaged, its workforce may be unavailable, fuel costs may rise and significant business interruptions could occur. In addition, the performance of locomotives and railcars could be adversely affected by extreme weather conditions. Insurance maintained by the Company to protect against loss of business and other related consequences resulting from these natural occurrences is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be sufficient to cover all of the Company's damages or damages to others, and this insurance may not continue to be available at commercially reasonable rates. Even with insurance, if any natural occurrence leads to a catastrophic interruption of service, the Company may not be able to restore service without a significant interruption in operations.

The Company could be adversely impacted by actions of activist stockholders, and such activism could impact the value of the Company’s securities.

While the Company continually engages with shareholders and considers their views on business and strategy, responding to activist shareholders can be costly and time-consuming, disrupt operations and divert the attention of management and employees. The uncertainties associated with such activities could interfere with the Company’s ability to effectively execute its strategic plan, impact customer retention and long-term growth, and limit the Company's ability to hire and retain personnel. In addition, a proxy contest for the election of directors could require the Company to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and the board of directors. Uncertainties related to, or the results of, such activism could affect the market price and volatility of the Company's securities.

CSX 2016 Form 10-K p. 10

CSX CORPORATION

PART I

The Company may be subject to various claims and lawsuits that could result in significant expenditures.

As part of its railroad and other operations, the Company is subject to various claims and lawsuits related to disputes over commercial practices, labor and unemployment matters, occupational and personal injury claims, property damage, environmental and other matters. The Company may experience material judgments or incur significant costs to defend existing and future lawsuits. Although the Company maintains insurance to cover some of these types of claims and establishes reserves when appropriate, final amounts determined to be due on any outstanding matters may exceed the Company's insurance coverage or differ materially from the recorded reserves. Additionally, the Company is subject to adverse developments not currently reflected in the Company's reserve estimates.

The unavailability of critical resources could adversely affect the Company’s operational efficiency and ability to meet demand.

Marketplace conditions for resources like locomotives as well as the availability of qualified personnel, particularly engineers and trainmen, could each have a negative impact on the Company’s ability to meet demand for rail service. Although the Company believes that it has adequate personnel for the current business environment, unpredictable increases in demand for rail services or extreme weather conditions may exacerbate such risks, which could have a negative impact on the Company’s operational efficiency and otherwise have a material adverse effect on the Company’s financial condition, results of operations, or liquidity in a particular period.

Weaknesses in the capital and credit markets could negatively impact the Company’s access to capital.

Due to the significant capital expenditures required to operate and maintain a safe and efficient railroad, the Company regularly relies on capital markets for the issuance of long-term debt instruments as well as on bank financing from time to time. Instability or disruptions of the capital markets, including credit markets, or the deterioration of the Company’s financial condition due to internal or external factors, could restrict or prohibit access and could increase the cost of financing sources. A significant deterioration of the Company’s financial condition could also reduce credit ratings and could limit or affect its access to external sources of capital and increase the costs of short and long-term debt financing.

Item 1B. Unresolved Staff Comments

None

CSX 2016 Form 10-K p. 11

CSX CORPORATION

PART I

Item 2. Properties

The Company’s properties primarily consist of track and its related infrastructure, locomotives and freight cars and equipment. These categories and the geography of the network are described below.

Track and Infrastructure

Serving 23 states, the District of Columbia, and the Canadian provinces of Ontario and Quebec, the CSXT rail network serves, among other markets, New York, Philadelphia and Boston in the Northeast and Mid-Atlantic, the southeast markets of Atlanta, Miami and New Orleans, and the midwestern cities of St. Louis, Memphis and Chicago.

CSXT’s track structure includes main thoroughfares, connecting terminals and yards (known as mainline track), track within terminals and switching yards, track adjacent to the mainlines used for passing trains, track connecting the mainline track to customer locations and track that diverts trains from one track to another known as turnouts. Total track miles are greater than CSXT’s approximately 21,000 route miles, which reflect the size of CSXT’s network that connects markets, customers and western railroads. At December 2016, the breakdown of track miles was as follows:



	Track
	Miles
Mainline track	26,530
Terminals and switching yards	9,396
Passing sidings and turnouts	937
Total	36,863

In addition to its physical track structure, the Company operates numerous yards and terminals for rail and intermodal service. These serve as hubs between the Company and its local customers and as sorting facilities where railcars and intermodal containers often are received, re-sorted and placed onto new outbound trains. The Company’s ten largest yards and terminals based on annual volume (number of railcars or intermodal containers processed) are listed in the table below.



Yards and Terminals	Annual Volume (number of units processed)
Chicago, IL (Bedford Park) - Intermodal	1,136,124
North Baltimore, OH (Northwest Ohio) - Intermodal	809,254
Waycross, GA	677,003
Selkirk, NY	545,310
Nashville, TN	539,407
Willard, OH	515,335
Cincinnati, OH	496,299
Indianapolis, IN	496,235
Hamlet, NC	458,760
Louisville, KY	417,679

CSX 2016 Form 10-K p. 12

CSX CORPORATION

PART I

Network Geography

CSXT’s operations are primarily focused on four major transportation networks and corridors which are defined geographically and by commodity flows below.

Interstate 90 (I-90) Corridor – This CSXT corridor links Chicago and the Midwest to metropolitan areas in New York and New England. This route, also known as the “waterlevel route,” has minimal hills and grades and nearly all of it has two main tracks (referred to as double track). These superior engineering attributes permit the corridor to support consistent, high-speed intermodal, automotive and merchandise service. This corridor is a primary route for import traffic coming from the far east through western ports moving eastward across the country, through Chicago and into the population centers in the Northeast. The I-90 Corridor is also a critical link between ports in New York, New Jersey, and Pennsylvania and consumption markets in the Midwest. This route carries goods from all three of the Company’s major markets – merchandise, coal and intermodal.

Interstate 95 (I-95) Corridor – The CSXT I-95 Corridor connects Charleston, Jacksonville, Miami and many other cities throughout the Southeast with the heavily populated mid-Atlantic and northeastern cities of Baltimore, Philadelphia and New York. CSXT primarily transports food and consumer products, as well as metals and chemicals along this line. It is the leading rail corridor along the eastern seaboard south of the District of Columbia, and provides access to major eastern ports.

Southeastern Corridor – This critical part of the network runs between CSXT’s western gateways of Chicago, St. Louis and Memphis through the cities of Nashville, Birmingham, and Atlanta and markets in the Southeast. The Southeastern Corridor is the premier rail route connecting these key cities, gateways, and markets and positions CSXT to efficiently handle projected traffic volumes of intermodal, automotive and general merchandise traffic. The corridor also provides direct rail service between the coal reserves of the southern Illinois basin and the demand for coal in the Southeast.

Coal Network – The CSXT coal network connects the coal mining operations in the Appalachian mountain region and Illinois basin with industrial areas in the Southeast, Northeast and Mid-Atlantic, as well as many river, lake, and deep water port facilities. The domestic coal market has declined significantly over the past several years and export coal remains subject to a high degree of volatility. CSXT’s coal network remains well positioned to supply utility markets in both the Northeast and Southeast and to transport coal shipments for export outside of the U.S. Roughly one-third of the tons of export coal and the majority of the domestic coal that the Company transports is used for generating electricity.

See the following pages for maps of the CSX Rail Network and CSX Intermodal Rail Network.

CSX 2016 Form 10-K p. 13

CSX CORPORATION

PART I

CSX Rail Network

CSX 2016 Form 10-K p. 14

CSX CORPORATION

PART I

CSX Intermodal Rail Network

CSX 2016 Form 10-K p. 15

CSX CORPORATION

PART I

Locomotives

At December 2016, CSXT owned 4,400 locomotives. From time to time, the Company also short-term leases locomotives based on business needs. Freight locomotives are the power source used primarily to pull trains. Switching locomotives are used in yards to sort railcars so that the right railcar is attached to the right train in order to deliver it to its final destination. Auxiliary units are typically used to provide extra traction for heavy trains in hilly terrain. At December 2016, CSXT’s fleet of owned locomotives consisted of the following types:



	Locomotives	%		Average Age (years)
Freight	3,880	88	%	20
Switching	311	7	%	37
Auxiliary Units	209	5	%	24
Total	4,400	100	%	20

Equipment

In 2016, the average daily fleet of cars on line consisted of approximately 208,000 cars. At any time, over half of the railcars on the CSXT system are not owned or leased by the Company. Examples of these include railcars owned by other railroads (which are utilized by CSXT), shipper-furnished or private cars (which are generally used only in that shipper’s service), multi-level railcars used to transport automobiles (which are shared between railroads) and doublestack railcars, or well cars (which are industry pooled), that allow for two intermodal containers to be loaded one above the other.

At December 2016, the Company’s owned and long-term leased equipment consisted of the following:



Equipment	Number of Units	%
Gondolas	23,802	37	%
Multi-level flat cars	12,069	19	%
Open-top hoppers	11,089	17	%
Covered hoppers	10,030	15	%
Box cars	7,151	11	%
Flat cars	648	1	%
Other cars	370	—	%
Subtotal freight cars	65,159	100	%
Containers	18,147
Total equipment	83,306

CSX 2016 Form 10-K p. 16

CSX CORPORATION

PART I

The Company’s revenue-generating equipment, either owned or long-term leased, consists of freight cars and containers as described below.

Gondolas – Support CSXT’s metals markets and provide transport for woodchips and other bulk commodities. Some gondolas are equipped with special hoods for protecting products like coil and sheet steel.

Multi-level flat cars – Transport finished automobiles and are differentiated by the number of levels: bi-levels for large vehicles such as pickup trucks and SUVs and tri-levels for sedans and smaller automobiles.

Open-top hoppers – Transport heavy dry bulk commodities such as coal, coke, stone, sand, ores and gravel that are resistant to weather conditions.

Covered hoppers – Have a permanent roof and are segregated based upon commodity density. Lighter bulk commodities such as grain, fertilizer, flour, salt, sugar, clay and lime are shipped in large cars called jumbo covered hoppers. Heavier commodities like cement, ground limestone and industrial sand are shipped in small cube covered hoppers.

Box cars – Include a variety of tonnages, sizes, door configurations and heights to accommodate a wide range of finished products, including paper, auto parts, appliances and building materials. Insulated box cars deliver food products, canned goods, beer and wine.

Flat cars – Used for shipping intermodal containers and trailers or bulk and finished goods, such as lumber, pipe, plywood, drywall and pulpwood.

Other cars – Primarily leased refrigerator cars and slab steel cars.

Containers – Weather-proof boxes used for bulk shipment of freight.

Item 3. Legal Proceedings

For further details, please refer to Note 7. Commitments and Contingencies of this annual report on Form 10-K.

Environmental Proceedings That Could Result in Fines Above $100,000

In connection with a CSXT train derailment in Mount Carbon, West Virginia in February 2015, the Company has entered into discussions with the U.S. Department of Justice and the U.S. Environmental Protection Agency concerning a regulatory penalty related to a release of product into the environment. Although final resolution of this matter is subject to further discussions and potential litigation, the Company does not believe that the outcome will have a material adverse effect on its financial position, results of operations or liquidity.

Item 4. Mine Safety Disclosure

Not Applicable

CSX 2016 Form 10-K p. 17

CSX CORPORATION

PART I

Executive Officers of the Registrant

Executive officers of the Company are elected by the CSX Board of Directors and generally hold office until the next annual election of officers. There are no family relationships or any arrangement or understanding between any officer and any other person pursuant to which such officer was elected. As of the date of this filing, the executive officers’ names, ages and business experience are:



Name and Age	Business Experience During Past Five Years
Michael J. Ward, 66 Chairman and Chief Executive Officer	A 39-year veteran of the Company, Ward has served as Chairman and Chief Executive Officer of CSX since January 2003. Ward’s distinguished railroad career has included key executive positions in nearly all aspects of the Company’s business, including sales and marketing, operations and finance.
Clarence W. Gooden, 65 President	Clarence Gooden has served as President of CSX since September 2015 with responsibility for operations and sales and marketing. In this role, he is responsible for safe and reliable operations as well as a highly diversified market portfolio serving all facets of the North American economy. As an employee of the Company for 46 years, Gooden previously served as Executive Vice President and Chief Commercial Officer since 2004 where he was responsible for generating customer revenue, forecasting business trends and developing CSX's model for future revenue growth. Gooden has also held key executive positions in both operations and sales and marketing.
Frank A. Lonegro, 48 Executive Vice President and Chief Financial Officer	Lonegro has served as Executive Vice President and Chief Financial Officer of CSX since September 2015. In this capacity, he directs all financial and strategic planning activities, including accounting, financial planning, purchasing, tax, treasury and investor relations. During his 16-year tenure with the Company, Lonegro also served as Vice President Internal Audit, President of CSX Technology, Vice President Mechanical and Vice President Service Design. Additionally, he led development and implementation of Positive Train Control, an advanced train control system, to further enhance the Company’s safety performance.
Cindy M. Sanborn, 52 Executive Vice President and Chief Operating Officer	Sanborn has served as Executive Vice President and Chief Operating Officer of CSXT since September 2015. In this capacity, she is responsible for all aspects of safe, reliable and cost-effective service delivery. She directs daily train operations, maintains the Company's locomotive and rail car fleet as well as maintains and upgrades the Company’s more than 21,000-route-mile network in the eastern United States and two Canadian provinces. Since joining the Company in 1987, she also served as Executive Vice President - Operations, Vice President and Chief Transportation Officer, Vice President of Operations for the Northern Region and various other key roles in network operations, locomotive management and division operations.

CSX 2016 Form 10-K p. 18

CSX CORPORATION

PART I



Name and Age	Business Experience During Past Five Years
Fredrik J. Eliasson, 46 Executive Vice President and Chief Sales and Marketing Officer	Eliasson has served as Executive Vice President and Chief Sales and Marketing Officer of CSX since September 2015. In this capacity, he directs all customer-facing aspects of the Company’s business, including market growth, forecasting business trends and development of strategic plans for revenue growth. During his 21-year tenure with the Company, he also served as Executive Vice President and Chief Financial Officer. Prior to becoming CFO, he led development of two of the Company’s major markets as Vice President of Chemicals and Fertilizer and Vice President of Emerging Markets. He also supported Sales and Marketing in a previous position as Vice President of Commercial Finance.
Ellen M. Fitzsimmons, 56 Executive Vice President of Law and Public Affairs, General Counsel and Corporate Secretary	Fitzsimmons has been the Executive Vice President of Law and Public Affairs, General Counsel, and Corporate Secretary of CSX since December 2003. She serves as the Company’s Chief Legal Officer and oversees all government relations and public affairs activities as well as internal audit and other risk management functions. During her 25-year tenure with the Company, her broad responsibilities have included key roles in major risk and corporate governance-related areas.
Cressie D. Brown, 55 Senior Vice President and Chief Administrative Officer	Brown has served as Senior Vice President and Chief Administrative Officer since July 2016. She is responsible for human resources, employee compensation and benefits, labor relations, real estate, facilities and aviation. During her 28-year tenure with the Company, Brown previously served as Vice President of Labor Relations and Vice President of Service Design and Advanced Technology. She also has significant experience in technology, finance and customer service.
Kathleen Brandt, 53 Senior Vice President and Chief Information Officer	Brandt has been Senior Vice President and Chief Information Officer since July 2016. In this role, she directs the information technology to support the company's strategic objectives and leads the development and application of the tools and information to maximize safety, service excellence, and efficiency. During her 31-year tenure with the Company, she previously served as President CSX Technology and has also made significant contributions to organizational strategy and capital planning.
Carolyn T. Sizemore, 54 Vice President and Controller	Sizemore has served as Vice President and Controller of CSX since April 2002. She is responsible for financial and regulatory reporting, freight billing and collections, payroll, accounts payable and various other accounting processes. Sizemore’s responsibilities during her 27-year tenure with the Company have included roles in finance and audit-related areas including a variety of positions in accounting, finance strategies, budgets and performance analysis.

CSX 2016 Form 10-K p. 19

CSX CORPORATION

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

CSX’s common stock is listed on the Nasdaq Global Select Market, which is its principal trading market, and is traded over-the-counter and on exchanges nationwide. The official trading symbol is “CSX.”

Description of Common and Preferred Stock

A total of 1.8 billion shares of common stock are authorized, of which 928,179,723 shares were outstanding as of December 30, 2016. Each share is entitled to one vote in all matters requiring a vote of shareholders. There are no pre-emptive rights, which are privileges extended to select shareholders that would allow them to purchase additional shares before other members of the general public in the event of an offering. At January 27, 2017, the latest practicable date that is closest to the filing date, there were 28,956 common stock shareholders of record. The weighted average of common shares outstanding, which was used in the calculation of diluted earnings per share, was 948 million as of December 30, 2016. (See Note 2, Earnings Per Share.) A total of 25 million shares of preferred stock is authorized, none of which is currently outstanding.

The following table sets forth, for the quarters indicated, the dividends declared and the high and low share prices of CSX common stock.



	Quarter
	1st		2nd		3rd		4th		Year
2016
Dividends	$	0.18	$	0.18	$	0.18	$	0.18	$	0.72
Common Stock Price
High	$	27.27	$	27.97	$	30.11	$	37.42	$	37.42
Low	$	21.33	$	24.36	$	24.43	$	29.39	$	21.33
2015
Dividends	$	0.16	$	0.18	$	0.18	$	0.18	$	0.70
Common Stock Price
High	$	36.96	$	37.67	$	33.63	$	30.53	$	37.67
Low	$	32.71	$	31.87	$	24.47	$	24.58	$	24.47

CSX 2016 Form 10-K p. 20

CSX CORPORATION

PART II

Stock Performance Graph

The cumulative shareholder returns, assuming reinvestment of dividends, on $100 invested at December 31, 2011 are illustrated on the graph below. The Company references the Standard & Poor 500 Stock Index (“S&P 500”), which is a registered trademark of the McGraw-Hill Companies, Inc., and the Dow Jones U.S. Transportation Average Index, which provide comparisons to a broad-based market index and other companies in the transportation industry.

CSX 2016 Form 10-K p. 21

CSX CORPORATION

PART II

CSX Purchases of Equity Securities

CSX purchases its own shares for two primary reasons: (1) to further its goals under its share repurchase program and (2) to fund the Company’s contribution required to be paid in CSX common stock under a 401(k) plan that covers certain union employees.

In April 2015, the Company announced a $2 billion share repurchase program, which is expected to be completed by April 2017. Management's assessment of market conditions and other factors guide the timing and volume of repurchases. Future share repurchases are expected to be funded by cash on hand, cash generated from operations and debt issuances. During 2016, 2015, and 2014, CSX repurchased $1.1 billion or 38 million shares, $804 million or 26 million shares, and $517 million or 17 million shares, respectively, of common stock. Shares are retired immediately upon repurchase. In accordance with the Equity Topic in the Accounting Standards Codification ("ASC"), the excess of repurchase price over par value is recorded in retained earnings. Generally, retained earnings are only impacted by net earnings and dividends.

Share repurchase activity of $278 million for the fourth quarter 2016 was as follows:



CSX Purchases of Equity Securities for the Quarter
Fourth Quarter ^(a)	Total Number of Shares Purchased^(b)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs^(b)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Beginning Balance					$	548,855,151
October	2,757,869	$	30.39	2,736,609		465,695,348
November	3,117,190		32.02	3,116,900		365,903,976
December	2,634,900		36.30	2,634,900		270,270,134
Ending Balance	8,509,959	$	32.82	8,488,409	$	270,270,134

(a) Fourth quarter 2016 consisted of the following fiscal periods: October (September 24, 2016 - October 21, 2016), November (October 22, 2016 - November 25, 2016), and December (November 26, 2015 - December 30, 2016).

(b) The difference of 21,550 shares between the "Total Number of Shares Purchased" and the "Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs" for the quarter represents shares purchased to fund the Company's contribution to a 401(k) plan that covers certain union employees.

CSX 2016 Form 10-K p. 22

CSX CORPORATION

PART II

Item 6. Selected Financial Data

Selected financial data related to the Company’s financial results for the last five fiscal years are listed below.



		Fiscal Years
(Dollars and Shares in Millions, Except Per Share Amounts)		2016			2015			2014			2013			2012
Financial Performance
	Revenue	$	11,069		$	11,811		$	12,669		$	12,026		$	11,763
	Expense	7,680			8,227			9,056			8,553			8,299
	Operating Income	$	3,389		$	3,584		$	3,613		$	3,473		$	3,464
Net Earnings from Continuing Operations		1,714			1,968			1,927			1,864			1,863
	Operating Ratio	69.4		%	69.7		%	71.5		%	71.1		%	70.6		%
Net Earnings Per Share:
	From Continuing Operations, Basic	$	1.81		$	2.00		$	1.93		$	1.83		$	1.80
	From Continuing Operations, Assuming Dilution	1.81			2.00			1.92			1.83			1.79
Average Common Shares Outstanding
	Basic	947			983			1,001			1,019			1,038
	Assuming Dilution	948			984			1,002			1,019			1,040
Financial Position
	Cash, Cash Equivalents and Short-term Investments	$	1,020		$	1,438		$	961		$	1,079		$	1,371
	Total Assets	35,414			34,745			32,747			31,462			30,436
	Long-term Debt	10,962			10,515			9,349			8,857			8,884
	Shareholders' Equity	11,694			11,668			11,176			10,504			9,136
	Dividend Per Share	$	0.72		$	0.70		$	0.63		$	0.59		$	0.54
Additional Data
	Capital Expenditures ^(a)	$	2,705		$	2,562		$	2,449		$	2,313		$	2,341
	Employees -- Annual Averages (estimated)	27,350			31,285			31,511			31,254			32,120
	Employees -- Year-end Count (estimated)	26,628			29,410			32,287			31,413			30,787

(a)

Capital expenditures include investments related to reimbursable public-private partnerships. These partnership investments of $41 million, $14 million, $8 million, $40 million and $166 million in 2016, 2015, 2014, 2013 and 2012, respectively, are projects that are partially or wholly reimbursed to CSX through either government grants or other funding sources such as cash received from a property sale. These reimbursements may not be fully received in a given year; therefore, the timing of receipts may differ from the timing of the investment. See the capital expenditures table on page 46 for additional information.

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

CSX 2016 Form 10-K p. 23

CSX CORPORATION

PART II

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

TERMS USED BY CSX

When used in this report, unless otherwise indicated by the context, these terms are used to mean the following:

Car hire - A charge paid by one railroad for its use of cars belonging to another railroad or car owner.

Class I freight railroad - One of the largest line haul freight railroads as determined based on operating revenue; the exact revenue required to be in each class is periodically adjusted for inflation by the Surface Transportation Board. Smaller railroads are classified as Class II or Class III.

Common carrier mandate - A federal mandate that requires U.S. railroads to accommodate reasonable requests from shippers to carry any freight, including hazardous materials.

Demurrage - A charge assessed by railroads for the use of rail cars by shippers or receivers of freight beyond a specified free time.

Department of Transportation ("DOT") - A U.S Government agency with jurisdiction over matters of all modes of transportation.

Depreciation study (also referred to as a "life study") - A periodic statistical analysis of fixed asset service lives, salvage values, accumulated depreciation, and other factors for group assets along with a comparison of similar asset groups at other companies conducted by a third-party specialist.

Double-stack - Stacking containers two-high on specially equipped cars.

Drayage - The pickup or delivery of intermodal shipments by truck.

Federal Railroad Administration ("FRA") - The branch of the DOT that is responsible for developing and enforcing railroad safety regulations, including safety standards for rail infrastructure and equipment.

Free cash flow - The calculation of a non-GAAP measure by using net cash provided by operating activities and adjusting for property additions and certain other investing activities. Free cash flow is a measure of cash available for paying dividends, share repurchases and principal reduction on outstanding debt.

Group-life method - A type of depreciation in which assets with similar useful lives and characteristics are aggregated into groups. Instead of calculating depreciation for individual assets, depreciation is calculated for each group.

Highway-to-rail - An initiative to assist new and existing customers in identifying freight moves that would benefit from converting from a highway-only move to one that utilizes intermodal containers on rail and local drayage by truck.

Incidental revenue - Revenue for switching, demurrage, storage, etc.

Intermodal - A flexible way of transporting freight over water, highway and rail without being removed from the original transportation equipment, namely a container or trailer.

Mainline - The main track thoroughfare, exclusive of terminals, yards, sidings and turnouts.

CSX 2016 Form 10-K p. 24

CSX CORPORATION

PART II

National Gateway - A multi-phase construction initiative aimed at increasing intermodal capacity on the CSX network by clearing key corridors between mid-Atlantic ports and the Midwest for double-stack trains. Construction on National Gateway projects is funded by CSX, the federal government, and individual states.

Revenue adequacy - The achievement of a rate of return on investment at least equal to the cost of investment capital, as measured by the STB.

Shipper - A customer shipping freight via rail.

Siding - Track adjacent to the mainline used for passing trains.

Staggers Act of 1980 - Congressional law which significantly deregulated the rail industry, replacing the regulatory structure in existence since the 1887 Interstate Commerce Act. Where previously rates were controlled by the Interstate Commerce Commission, the Staggers Act allowed railroads to establish their own rates for shipments, enhancing their ability to compete with other modes of transportation.

Surface Transportation Board ("STB") - An independent governmental adjudicatory body administratively housed within the DOT, responsible for the economic regulation of interstate surface transportation within the United States.

Switching - Putting cars in a specific order, placing cars for loading, retrieving empty cars or adding or removing cars from a train at an intermediate point.

Terminal - A facility, typically owned by a railroad, for the handling of freight and for the breaking up, making up, forwarding and servicing of trains.

TTX Company ("TTX") - A Company that provides 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 remainder is owned by the other leading North American railroads and their affiliates.

Turnout - A track that diverts trains from one track to another.

Yard - A system of tracks, other than main tracks and sidings, used for making up trains, storing cars and other purposes.

CSX 2016 Form 10-K p. 25

CSX CORPORATION

PART II

STRATEGIC OVERVIEW

CSX provides rail-based freight transportation services including traditional rail service, the transport of intermodal containers and trailers, as well as other transportation services such as rail-to-truck transfers and bulk commodity operations. The Company and the rail industry provide customers with access to an expansive and interconnected transportation network that plays a key role in North American commerce and is critical to the long-term economic success and improved global competitiveness of the United States. In addition, freight railroads provide the most economical and environmentally efficient means to transport goods over land.

CSX's transportation solutions connect industries and population centers across the United States with each other and with global markets through access to over 70 port facilities allowing the Company to meet the dynamic transportation needs of manufacturers, industrial producers, construction companies, farmers and feed mills, wholesalers and retailers, energy producers and the U.S. Armed Forces. Through its network, the Company transports a diverse portfolio of commodities and products to meet the country's needs. These products range from agricultural goods, such as grains, to chemicals, automobiles, metals, building materials, paper, consumer products, and energy sources like coal, ethanol and liquefied petroleum gas. The Company categorizes these products into three primary lines of business: merchandise, intermodal and coal.

To support long-term growth and value creation consistent with the evolving trends in freight transportation, CSX has launched a new strategic initiative known as the CSX of Tomorrow: a safe, highly automated, resource-efficient railroad enabling Service Excellence, profitable growth and improved cash flow. The CSX of Tomorrow is comprised of four distinct strategic pillars and builds on the Company’s vision, purpose and core values.

CSX of Tomorrow Strategic Initiatives

Network of Tomorrow

The CSX of Tomorrow relies on the reach, capability and efficiency of the Company’s rail network to safely and effectively meet the demands of the evolving marketplace and provide increasingly flexible and responsive service to more diverse customers. To facilitate future productivity and growth, CSX is implementing a fundamentally new approach to the network—transforming the railroad into two interconnected networks: a primary network and a local network. The Company is expanding capacity in its primary network to enable increasingly dense traffic while providing improved service for customers and enabling future growth. Further, the Company’s capacity investments along the primary network will allow for additional train lengthening, improving efficiency and profitability. The local network will be operated at lower density and speed and will better allow for new customer site development as a result of easier access to the local network and the Company’s enhanced focus on local pickup and delivery of freight to customers.

Expanding capacity on U.S. rail networks provides substantial public benefits including job creation, increased business activity at U.S. ports, reduced highway congestion and lower air emissions. Therefore, CSX and its government partners are jointly working to invest in multi-year rail infrastructure projects. These public-private partnerships are a critical part of the Network of Tomorrow strategy for the Company. An example of one of these initiatives is the National Gateway, which is a public-private partnership that will increase intermodal capacity and create substantial environmental and efficiency advantages by clearing key corridors between mid-Atlantic ports and the Midwest for double-stack intermodal trains.

CSX 2016 Form 10-K p. 26

CSX CORPORATION

PART II

The modernization of the Virginia Avenue Tunnel in Washington, D.C. is the capstone project for the second, and final phase, of the National Gateway. This project improves the flow of freight traffic through the District of Columbia and eliminates a rail traffic bottleneck that also impacts commuter and passenger trains in the region. CSX completed the first of two new double-stack-cleared tunnels in 2016, and the second tunnel will be finished in late 2018. With the completion of the first tunnel, 95% of CSX intermodal freight now moves in double-stack service. Going forward, CSX will continue to explore other opportunities to partner with the public sector to maximize the many public benefits of freight rail.

Going forward, CSX will continue to explore other opportunities to partner with the public sector to maximize the many public benefits of freight rail. The Network of Tomorrow, along with enhanced operational efficiency, will allow CSX to continue to improve safety, lower the cost structure and provide superior service to customers.

Service Excellence

Service Excellence has long been a core component of CSX’s culture that engages all employees to focus on delivering value to customers through improved service levels, communications tools and advanced technologies. As part of the CSX of Tomorrow, the Company will continually strive to consistently meet, or exceed, customer commitments while ensuring all interactions with customers result in a positive experience. Improving the customer experience will allow CSX to continue delivering a safe, reliable and competitive product while enhancing the ability to profitably grow the business and continue to value price its service product. In addition, Service Excellence across the Network of Tomorrow will enable additional volume growth opportunities with new and existing customers, especially in the Company’s intermodal and merchandise businesses.

For example, CSX’s intermodal network connects all major population centers east of the Mississippi River and positions the Company to capture a significant share of the growing domestic intermodal market opportunity, currently estimated at nine million truckloads in the eastern United States that move over 550 miles. The company’s highway-to-rail initiative assists in growing this traffic by helping customers identify new conversion opportunities for both domestic intermodal moves and the U.S. portion of international intermodal moves.

To further enhance the Company’s intermodal offering and support future growth, CSX announced a new terminal in eastern North Carolina, known as the Carolina Connector, to capture local, regional, national and international intermodal freight movement opportunities prevalent in the vibrant mid-Atlantic market. This new terminal will be poised to replicate and leverage the success of the Northwest Ohio intermodal terminal by expanding the reach of the Company’s hub and spoke network strategy to provide further profitable growth, network connectivity and density, especially in smaller and mid-sized markets.

CSX continues to proactively seek the right opportunities to profitably grow the merchandise business. The Company will continue capitalizing on new opportunities to locate industries on the CSX network, especially on the local network where network connectivity costs will generally be the lowest for customers. Through industrial development, the Company helps new and existing customers grow their business and target new markets by providing access to pre-certified locations as well as project management services.

The Company’s coal markets have shifted dramatically over the past several years and continue to rapidly evolve. Domestic utility coal demand decreased again in 2016 relative to previous years while export coal remains subject to a high degree of volatility as a result of changes in the global economy, competition from foreign producers and regulatory impacts on coal mining in the United States. Longer-term, downward pressure on domestic utility coal volumes will likely persist as a result of continued low natural gas prices while global coal demand will likely be mixed as developing countries become more urbanized and industrialized countries continue to use an increasing amount of alternative fuels, other than coal, for electrical power generation. CSX will continue to provide a competitive service product amid coal’s market shifts while efficiently capitalizing on short-term demand fluctuations.

CSX 2016 Form 10-K p. 27

CSX CORPORATION

PART II

Highly Automated Railroad

For many years, CSX has utilized technology to enhance operational performance and decision-making. The CSX of Tomorrow will build upon this expertise and increasingly leverage technology (focusing on automation, advanced analytics and the use of mobility tools), innovation and process improvement. CSX is accelerating its technology investments to improve safety, resource efficiency, asset reliability and service levels for customers. Several key initiatives aimed at generating long-term value are focused on automating and optimizing critical operations across the Company. CSX will continue to implement specific workforce and regulatory strategies to ensure the safe, effective adoption of new technologies as the Company progresses towards becoming a Highly Automated Railroad.

Team of Tomorrow

CSX’s approximately 27,000 dedicated employees are the driving force behind the CSX of Tomorrow, contributing to the successful development and implementation of all strategic initiatives. As the CSX of Tomorrow requires an increasingly diverse skillset, the Team of Tomorrow will be a highly-capable, flexible, collaborative team, relentlessly focused on safety, service and value creation. To attract, retain and motivate the best talent in the marketplace, CSX will continue to provide a compelling value proposition for its employees. The Company is going to further enhance its investment in employee development, provide career opportunities, have market-competitive employee benefits and continue to reward the creation of customer and employee excellence. Through the Team of Tomorrow initiative, CSX strives to align our people with a culture that embraces the Company’s vision, purpose and core values, to safely and efficiently serve our customers and help ensure the successful implementation of the CSX of Tomorrow.

Balanced Approach to Cash Deployment

CSX remains highly committed to delivering value to shareholders through a balanced approach to deploying cash that includes investments in the business, dividend growth and share repurchases. In 2016, the Company invested $2.7 billion to further enhance the safety, reliability, efficiency, flexibility and capability of its network and its overall business. In addition, during 2016, CSX repaid $1.4 billion in outstanding debt to capitalize on the lower interest rate environment.

The Company continues to return value to its shareholders in the form of dividends and share repurchases. During 2016, the Company paid a quarterly cash dividend of $0.18 per common share, with total dividends paid to shareholders of $680 million for the year. Also in 2016, CSX continued share repurchases under its $2.0 billion program which began in 2015 and is expected to be completed by April 2017. CSX repurchased $1.1 billion, or 38 million shares, during 2016 under this program. As part of this balanced approach, the Company is committed to maintaining a credit profile consistent with a BBB+ rating by Standard & Poor’s and a Baa1 rating by Moody’s Investment Services.

Summary

The strategic initiatives and opportunities, as well as the strategic investments discussed above, provide a foundation for volume growth, continued value pricing, productivity improvement, enhanced customer service and continued advancements in the safety and reliability of operations. To continue these types of investments, the Company must be able to operate in a balanced regulatory environment in which it can generate adequate returns and drive shareholder value. These investments will enable the Company to deliver the CSX of Tomorrow: a safe, highly automated, resource-efficient railroad enabling Service Excellence, profitable growth and improved cash flow.

CSX 2016 Form 10-K p. 28

CSX CORPORATION

PART II

2016 HIGHLIGHTS

• Revenue of $11.1 billion decreased $742 million or six percent versus the prior year.

• Expenses of $7.7 billion decreased $547 million or seven percent year over year.

• Operating income of $3.4 billion decreased $195 million or five percent year over year.

• Operating ratio of 69.4 percent improved 30 basis points from 69.7 percent.


•	Earnings per diluted share of $1.81 decreased $0.19 or 10 percent year over year.

RESULTS OF OPERATIONS

2016 vs. 2015 Results of Operations ^(a)



	Fiscal Years
	2016			2015			$ Change			% Change
(Dollars in Millions)
Revenue	$	11,069		$	11,811		$	(742	)	(6	)%
Expense
Labor and Fringe	3,159			3,290			131			4
Materials, Supplies and Other	2,069			2,336			267			11
Fuel	713			957			244			25
Depreciation	1,301			1,208			(93		)	(8	)
Equipment and Other Rents	438			436			(2		)	—
Total Expense	7,680			8,227			547			7
Operating Income	3,389			3,584			(195		)	(5	)
Interest Expense	(579		)	(544		)	(35		)	(6	)
Debt Repurchase Expense	(115		)	—			(115		)	(100	)
Other Income - Net	46			98			(52		)	(53	)
Income Tax Expense	(1,027		)	(1,170		)	143			12
Net Earnings	$	1,714		$	1,968		$	(254	)	(13	)
Earnings Per Diluted Share:
Net Earnings	$	1.81		$	2.00		$	(0.19	)	(10	)%
Operating Ratio	69.4		%	69.7		%				30		bps

(a) CSX follows a 52/53 week fiscal reporting calendar. Fiscal year 2016 included 53 weeks and fiscal year 2015 included 52 weeks. All 2016 information presented in Results of Operations is on a 53-week basis, under Generally Accepted Accounting Principles ("GAAP").

CSX 2016 Form 10-K p. 29

CSX CORPORATION

PART II

2016 vs. 2015 Results of Operations, continued



Volume and Revenue (Unaudited) ^(b)
Volume (Thousands of units); Revenue (Dollars in Millions); Revenue Per Unit (Dollars)
	Volume				Revenue						Revenue Per Unit
	2016	2015	% Change		2016		2015		% Change		2016		2015		% Change
Agricultural
Agricultural and Food Products^(a)	477	503	(5	)%	$	1,286	$	1,345	(4	)%	$	2,696	$	2,674	1	%
Fertilizers ^(a)	300	301	—		463		489		(5	)	1,543		1,625		(5	)
Industrial
Chemicals ^(a)	700	726	(4	)	2,191		2,284		(4	)	3,130		3,146		(1	)
Automotive	482	450	7		1,261		1,175		7		2,616		2,611		—
Metals and Equipment ^(a)	259	284	(9	)	704		723		(3	)	2,718		2,546		7
Housing and Construction
Minerals ^(a)	310	306	1		464		459		1		1,497		1,500		—
Forest Products	274	290	(6	)	773		796		(3	)	2,821		2,745		3
Total Merchandise	2,802	2,860	(2	)	7,142		7,271		(2	)	2,549		2,542		—
Coal	838	1,063	(21	)	1,833		2,300		(20	)	2,187		2,164		1
Intermodal	2,811	2,838	(1	)	1,726		1,762		(2	)	614		621		(1	)
Other	—	—	—		368		478		(23	)	—		—		—
Total	6,451	6,761	(5	)%	$	11,069	$	11,811	(6	)%	$	1,716	$	1,747	(2	)%

(a) In order to better align markets with the Company's business strategy, changes were made to the categorization of certain lines of business during the third quarter 2016. Prior periods have been reclassified to conform to the current presentation and are posted on the Company's website at csx.com under the investors section.


•	Agricultural and Food Products includes the combination of the previous Agricultural Products and Food and Consumer markets.


•	Fertilizers was previously named Phosphates and Fertilizers.


•	Metals and Equipment includes the Equipment portion of the previous Waste and Equipment market.


•	Chemicals includes the Waste portion of the previous Waste and Equipment market. Chemicals also includes fly ash for remediation purposes (a form of waste) which was previously included within the Minerals market.

(b) CSX follows a 52/53 week fiscal reporting calendar and 2016 included 53 weeks. The revenue impact of the extra week was $178 million.

CSX 2016 Form 10-K p. 30

CSX CORPORATION

PART II

Revenue

In 2016, revenue decreased $742 million, or six percent, due to a five percent decline in volume (including the $178 million positive impact of an extra week of volume) and a significant decline in fuel recoveries, partially offset by pricing strength.

Merchandise

Agricultural

Agricultural and Food Products - Volume declined as the strong U.S. dollar continued to support import grain and a robust Southeastern crop spurred additional local truck sourcing, displacing grain shipments by rail. Additionally, ethanol market dynamics shifted to favor the Gulf region for storage and export, precluding CSX from participation in shipments from Western origins to the Gulf.

Fertilizers - Volume was flat as the strong U.S. dollar, which drove high levels of imported sulfur, displaced rail transport, and nitrogen demand fell in anticipation of further commodity price deterioration. This offset growth in phosphate rock, driven by operational efficiency that allowed for additional rail traffic conversion that would otherwise move by truck.

Industrial

Chemicals - Volume declined as energy market headwinds significantly reduced crude oil and frac sand shipments. This reduction was partially offset by the ramp up of a fly ash remediation project and a modest increase in core chemical markets.

Automotive - Volume increased as a result of strong North American light vehicle production and growth across several customers. Additionally, movement of trucks and SUVs continued to outpace passenger cars, consistent with customer buying patterns.

Metals and Equipment - Volume was down as the strong U.S. dollar allowed for continued high levels of steel imports, which led to reduced domestic steel production, mill closures and the loss of associated rail moves. These declines were partially offset by strength in the wind-energy and power generation markets.

Housing and Construction

Minerals - Volume was up slightly due to strong gains in aggregates (which include crushed stone, sand and gravel), particularly for highway and non-residential construction in southern markets. The growth was partially offset by headwinds in salt and lime, reflecting mild winter weather and steel production challenges, respectively.

Forest Products - Volume declined as headwinds from electronic substitution and reduced paper products demand drove industry consolidation that reduced rail volume. Further, excess truck capacity in 2016 captured some volume that traditionally moved by rail.

Coal

Domestic - Volume declined as mild winter weather in the beginning of the year and low natural gas prices reduced utility coal burn rates and resulted in inflated coal stockpiles. Further, the weak domestic integrated steel market drove volume decreases in coke.

Export - Volume was down in both metallurgical and thermal coal as a result of the strong U.S. dollar and global oversupply which impacted U.S. competitiveness in the world market, particularly in the first half of the year.

CSX 2016 Form 10-K p. 31

CSX CORPORATION

PART II

Intermodal

Domestic - Volume increased as secular growth from the highway-to-rail conversion program and new service offerings were partially offset by excess truck capacity headwinds and a short-haul competitive loss.

International - Volume declined as headwinds from competitive losses more than offset moderate growth across other customers.

Other

Other revenue decreased $110 million versus prior year primarily due to payments received in 2015 from customers that did not meet volume commitments. Further decreases in incidental revenue as well as lower coal revenue from affiliates were partially offset by adjustments to revenue reserves.

CSX 2016 Form 10-K p. 32

CSX CORPORATION

PART II

Expense

In 2016, total expenses decreased $547 million, or seven percent, compared to prior year. Descriptions of each expense category as well as significant year-over-year changes are described below. Year-over-year changes related to the extra week are estimated incremental expenses of $116 million incurred for the week of December 24 through December 30, 2016.

Labor and Fringe expenses include employee wages and related payroll taxes, health and welfare costs, pension, other post-retirement benefits and incentive compensation. These expenses decreased $131 million due to the following items:


•	Efficiency savings of $249 million were driven by lower T&E and operating support costs as a result of structural changes, reduced crew training and the Company's train length initiative that began in the second quarter of 2015.


•	Volume-related costs were $116 million lower.


•	Incentive compensation was $111 million higher reflecting the expected award payouts on existing plans.


•	Inflation resulted in $106 million of additional cost driven by increased health and welfare costs.


•	The extra week resulted in $51 million of additional cost.


•	Restructuring costs decreased $37 million due to the 2015 workforce reduction initiatives costs that nearly all occurred in 2015.


•	Various other costs increased $3 million.

Materials, Supplies and Other expenses consist primarily of contracted services to maintain infrastructure and equipment, terminal and coal pier services and professional services. This category also includes costs related to materials, travel, casualty claims, environmental remediation, train accidents, property and sales tax, utilities and other items. Total materials, supplies and other expenses decreased $267 million driven by the following:


•	Real estate gains increased $98 million primarily related to a current year gain of $115 million related to the sale of an operating property and other related income partially offset by a prior year real estate gain.


•	Efficiency savings of $95 million were primarily related to lower operating support costs driven by structural changes and broad cost containment.


•	Train accident and casualty costs were $70 million lower due to the continuing declines in the severity of train accidents as well as injuries.


•	Inflation resulted in $34 million of additional costs.


•	The extra week resulted in $18 million of additional cost.


•	Volume-related costs were $11 million lower.


•	Various other costs decreased $45 million.

Fuel expense includes locomotive diesel fuel as well as non-locomotive fuel. This expense is largely driven by the market price and locomotive consumption of diesel fuel. Fuel expense decreased $244 million driven by the following:


•	Average fuel price per gallon decreased 18 percent, from $1.80 to $1.48 per gallon versus the prior year, which reduced expenses by $137 million.


•	Efficiency savings of $60 million were primarily related to locomotive fuel reduction technology and process improvement.


•	Volume-related costs were $58 million lower.


•	The extra week resulted in $15 million of additional cost.


•	Various other costs decreased $4 million.

CSX 2016 Form 10-K p. 33

CSX CORPORATION

PART II

Depreciation expense primarily relates to recognizing the costs of a capital asset, such as locomotives, railcars and track structure, over its useful life. This expense is impacted primarily by the capital expenditures made each year. Depreciation expense increased $93 million due to a larger asset base and the $25 million impact of the extra week in 2016.

Equipment and Other expenses include rent paid for freight cars owned by other railroads or private companies, net of rents received by CSXT for use of its equipment. This category of expenses also includes lease expenses for locomotives, railcars, containers and trailers, offices and other rentals. These expenses increased $2 million driven by the following:


•	Inflation resulted in $18 million of additional cost primarily related to rates on automotive freight cars.


•	Volume related costs were $14 million higher due primarily to growth in automotive volume.


•	The extra week resulted in $7 million of additional cost.


•	Efficiency savings of $23 million were due to improved car cycle times.


•	Net other costs decreased $14 million.

Interest Expense increased $35 million to $579 million due to higher average debt balances in addition to $11 million of additional expense related to the extra week in 2016, partially offset by lower average interest rates.

Debt Repurchase Expense increased to $115 million due to the repurchase of certain notes that were expected to mature in 2017, 2018 and 2019.

Other Income (Expense) - net decreased $52 million to $46 million primarily due to a prior year $59 million gain on a sale of non-operating easements and reimbursement of environmental costs of $21 million related to this sale. This decrease was partially offset by other non-operating items, none of which were individually significant.

Income Tax Expense decreased $143 million to $1.0 billion primarily due to lower earnings.

Net Earnings decreased $254 million to $1.7 billion, and earnings per diluted share decreased $0.19 to $1.81 due to the factors mentioned above. Lower average shares outstanding resulting from higher share repurchase activity had a positive impact on earnings per diluted share.

CSX 2016 Form 10-K p. 34

CSX CORPORATION

PART II

2015 vs. 2014 Results of Operations



	Fiscal Years
	2015			2014			$ Change			% Change
(Dollars in Millions)
Revenue	$	11,811		$	12,669		$	(858	)	(7	)%
Expense
Labor and Fringe	3,290			3,377			87			3
Materials, Supplies and Other	2,336			2,484			148			6
Fuel	957			1,616			659			41
Depreciation	1,208			1,151			(57		)	(5	)
Equipment and Other Rents	436			428			(8		)	(2	)
Total Expense	8,227			9,056			829			9
Operating Income	3,584			3,613			(29		)	(1	)
Interest Expense	(544		)	(545		)	1			—
Debt Repurchase Expense	—			(16		)	16			125
Other Income - Net	98			(8		)	106			(1,325	)
Income Tax Expense	(1,170		)	(1,117		)	(53		)	(5	)
Net Earnings	$	1,968		$	1,927		$	41		2
Earnings Per Diluted Share:
Net Earnings	$	2.00		$	1.92		$	0.08		4	%
Operating Ratio	69.7		%	71.5		%				180		bps

CSX 2016 Form 10-K p. 35

CSX CORPORATION

PART II

2015 vs. 2014 Results of Operations, continued



Volume and Revenue (Unaudited)
Volume (Thousands of units); Revenue (Dollars in Millions); Revenue Per Unit (Dollars)
	Volume				Revenue						Revenue Per Unit
	2015	2014	% Change		2015		2014		% Change		2015		2014		% Change
Agricultural
Agricultural and Food Products^(a)	503	513	(2	)%	$	1,345	$	1,395	(4	)%	$	2,674	$	2,719	(2	)%
Fertilizers ^(a)	301	330	(9	)	489		534		(8	)	1,625		1,618		—
Industrial
Chemicals ^(a)	726	728	—		2,284		2,375		(4	)	3,146		3,262		(4	)
Automotive	450	435	3		1,175		1,213		(3	)	2,611		2,789		(6	)
Metals and Equipment ^(a)	284	331	(14	)	723		824		(12	)	2,546		2,489		2
Housing and Construction
Minerals ^(a)	306	288	6		459		448		2		1,500		1,556		(4	)
Forest Products	290	307	(6	)	796		819		(3	)	2,745		2,668		3
Total Merchandise	2,860	2,932	(2	)	7,271		7,608		(4	)	2,542		2,595		(2	)
Coal	1,063	1,262	(16	)	2,300		2,849		(19	)	2,164		2,258		(4	)
Intermodal	2,838	2,728	4		1,762		1,790		(2	)	621		656		(5	)
Other	—	—	—		478		422		13		—		—		—
Total	6,761	6,922	(2	)%	$	11,811	$	12,669	(7	)%	$	1,747	$	1,830	(5	)%


•	Agricultural and Food Products includes the combination of the previous Agricultural Products and Food and Consumer markets.


•	Fertilizers was previously named Phosphates and Fertilizers.


•	Metals and Equipment includes the Equipment portion of the previous Waste and Equipment market.


•	Chemicals includes the Waste portion of the previous Waste and Equipment market. Chemicals also includes fly ash for

remediation purposes (a form of waste) which was previously included within the Minerals market.

CSX 2016 Form 10-K p. 36

CSX CORPORATION

PART II

Revenue

In 2015, revenue decreased $858 million, or seven percent, mostly due to the decline in fuel surcharge of $646 million. Additionally, the decline in volume of two percent and unfavorable mix were partially offset by pricing strength.

Merchandise

Agricultural

Agricultural and Food Products - Volume declined due to challenging world market conditions and a strong U.S. dollar. Specifically, high levels of imported ethanol reduced rail moves to Eastern markets and the strong dollar hampered export grain competitiveness. Additionally, excess truck capacity led to lower shipments of food products. These declines were partially offset by strength in feed grain and domestic soybean moves, reflecting the record 2014-2015 harvest.

Fertilizers - Volume was down, reflecting weak demand driven by oversupply of fertilizer, low corn prices and a challenged export market due to strength of the U.S. dollar.

Industrial

Chemicals - Volume was flat as strong gains in LPG and petroleum products were offset by the slowdown in crude oil and frac sand due to low oil prices and the conclusion of major waste remediation projects.

Automotive - Volume increased as gains in auto movement, especially SUVs and trucks, resulted from strong North American light vehicle production and consumer demand.

Metals and Equipment - Volume declined primarily due to high levels of steel imports which resulted from the strength of the U.S. dollar and led to lower production of domestic steel.

Housing and Construction

Minerals - Volume growth reflects strength in aggregates (which include crushed stone, sand and gravel) due to increased highway and non-residential construction activity.

Forest Products - Volume declines reflect high inventories of building products in the housing sector as well as declining demand due to electronic substitution in paper products.

Coal

Domestic - Volume declined as a result of mild weather, high stockpiles and low natural gas prices favoring natural gas power generation.

Export - Reductions in both metallurgical and thermal coal volume resulted from ongoing weak market conditions due to global oversupply and the strength of the U.S. dollar.

Intermodal

Domestic - Domestic volume increased 12 percent due to customer growth, continued success with CSX’s highway-to-rail conversion program and new service offerings.

International - Competitive losses resulted in a five percent international volume decline during a volatile year marked by West Coast port disruption, a subsequent volume surge and then a weak peak season.

Other

Other revenue increased $56 million as a result of higher revenue from customers who did not meet

minimum contractual volumes as well as higher incidental revenue.

CSX 2016 Form 10-K p. 37

CSX CORPORATION

PART II

Expense

In 2015, total expenses decreased $829 million, or nine percent, compared to prior year. Descriptions of each expense category as well as significant year-over-year changes are described below.


•	Inflation resulted in $128 million of additional cost driven by increased wages partially offset by reduced health and welfare costs.


•	Incentive compensation was $97 million lower reflecting reduced award payouts on existing plans.


•	Efficiency savings of $84 million were primarily a result of reduced crew starts due to the Company's train length initiatives, lower operating support costs and reduced management headcount.


•	Volume-related costs were $66 million lower.


•	Restructuring costs were $2 million higher versus prior year. See Note 1, Nature of Operations and Significant Accounting Policies under the caption, “Workforce Reduction Plans, Separation and Other Costs.”


•	Various other costs increased $30 million.

Materials, Supplies and Other expenses consist primarily of contracted services to maintain infrastructure and equipment, terminal services at automotive facilities and professional services. This category also includes costs related to materials, travel, casualty claims, environmental remediation, train accidents, property and sales tax, utilities and other items. Total materials, supplies and other expenses decreased

$148 million driven by the following:


•	Efficiency savings of $91 million were driven by a reduction in professional costs as well as lower operating support costs.


•	Volume-related costs were $52 million lower.


•	Real estate gains were $23 million higher primarily related to the sale of operating rail corridor.


•	Inflation resulted in $47 million of additional costs.


•	Various other costs decreased $29 million.


•	Average fuel price per gallon decreased 39 percent, from $2.95 to $1.80 per gallon, versus the prior year which reduced expenses by $560 million.


•	Volume-related costs were $66 million lower.


•	Other fuel savings of $33 million were primarily due to lower non-locomotive fuel price.

CSX 2016 Form 10-K p. 38

CSX CORPORATION

PART II

Equipment and Other includes rent paid for freight cars owned by other railroads or private companies, net of rents received by CSXT for use of its equipment. This category of expenses also includes lease expenses for locomotives, railcars, containers and trailers, offices and other rentals. These expenses increased $8 million driven by the following:


•	Inflation resulted in $16 million of additional cost related to rates on automotive and intermodal cars.


•	Efficiency savings of $15 million were due to improved car cycle times.


•	Net other costs increased $7 million.

Interest Expense decreased $1 million to $544 million due to lower average interest rates partially offset by higher average debt balances.

Debt Repurchase Expense decreased $16 million associated with costs incurred in 2014 related to the early redemption of long-term debt did not repeat in the current year.

Other Income (Expense) - net increased $122 million to $98 million primarily due to a $59 million gain on a sale of non-operating easements and a reimbursement of environmental costs of $21 million related to this sale. Additionally, 2015 environmental costs were $21 million lower than 2014.

Income Tax Expense increased $53 million to $1.2 billion primarily due to higher earnings as well as prior year favorable state legislative changes that did not repeat in the current year.

Net Earnings increased $41 million to $2.0 billion, and earnings per diluted share increased $0.08 to $2.00 due to the factors mentioned above. Lower average shares outstanding resulting from higher share repurchase activity also had a positive impact on earnings per diluted share.

CSX 2016 Form 10-K p. 39

CSX CORPORATION

PART II

Operating Statistics (Estimated)



	Fiscal Years
	2016		2015		Improvement/ (Deterioration)
Safety and Service Measurements
FRA Personal Injury Frequency Index	1.02		0.94		(9	)%
FRA Train Accident Rate	2.62		2.61		—
On-Time Train Originations	84	%	67	%	25
On-Time Destination Arrivals	65	%	51	%	27
Dwell	25.7		25.8		—
Train Velocity	20.8		20.5		1
Cars-On-Line	207,943		206,078		(1	)

Certain operating statistics are estimated and can continue to be updated as actuals settle.

Key Performance Measures Definitions

FRA Personal Injury Frequency Index - Number of FRA-reportable injuries per 200,000 man-hours.

FRA Train Accident Rate - Number of FRA-reportable train accidents per million train-miles.

On-Time Train Originations - Percent of scheduled road trains that depart the origin yard on-time or ahead of schedule.

On-Time Destination Arrivals - Percent of scheduled road trains that arrive at the destination yard on-time or earlier to two hours late (30 minutes for intermodal trains).

Dwell - Average amount of time in hours between car arrival at and departure from the yard. It does not include cars moving through the yard on the same train.

Train Velocity - Average train speed between terminals in miles per hour (does not include locals, yard jobs, work trains or passenger trains).

Cars-On-Line - An average count of all cars on the network (does not include locomotives, cabooses, trailers, containers or maintenance equipment).

The Company measures and reports safety and service performance. The Company strives for continuous improvement in these measures through training, innovation and investment. CSX's safety and train accident prevention programs rely on the latest tools, programs and employee participation that are designed to continuously strengthen the safety culture. Increased investment in training and technology also is designed to allow CSX employees to have an additional layer of protection that can detect and avoid many types of human factor incidents. The Company's safety programs are designed to prevent incidents that can adversely impact employees, customers and communities.

Continued capital investment in the Company's assets, including track, bridges, signals, equipment and detection technology also supports safety performance. CSX has established formal relationships with industry groups, leading universities and suppliers to develop, implement and deploy the latest technology that can detect infrastructure problems before they happen. To illustrate, through a waiver granted by the FRA, CSX is using advanced continuous rail testing methods that are being adopted by other railroads as the system’s value is proven.

The Company constantly collaborates with the FRA and industry organizations as well as federal, state and local governments on safety innovations and initiatives. For example, CSX and other freight railroads have actively worked with the U.S. DOT and other key stakeholders to evaluate and implement far-reaching safety enhancements for transportation of certain flammable materials, including essential energy products, on the nation’s freight railroad network.

CSX 2016 Form 10-K p. 40

CSX CORPORATION

PART II

At CSX, operational success is built on employee commitment to maintaining a constant focus on safety. Although the number of FRA reportable personal injuries decreased 10 percent year-over-year, the FRA reportable personal injury frequency index increased 9 percent to 1.02 due to a 17 percent decrease in labor hours versus 2015. While the reported FRA train accident frequency rate has remained flat year-over-year at 2.62, both overall FRA train accidents and train miles have decreased 14 percent year-over-year.

The Company made strong improvements to network reliability and service measures in 2016 while delivering a record level of productivity. On-time originations improved 25 percent year-over-year to 84 percent, and on-time arrivals increased 27 percent year-over-year to 65 percent. Terminal dwell remained flat at 25.7 hours versus 2015 and average train velocity increased one percent to 20.8 miles per hour.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a company’s ability to generate adequate amounts of cash to meet both current and future needs for obligations as they mature and to provide for planned capital expenditures, including those to address regulatory and legislative requirements. To have a complete picture of a company’s liquidity, its balance sheet, sources and uses of cash flow and external factors should be reviewed.

Material Changes in the Consolidated Balance Sheets and Significant Cash Flows

Consolidated Balance Sheets

CSX's balance sheet reflects its strong capital base and the impact of CSX's balanced approach in deploying capital for the benefit of its shareholders, which includes investments in infrastructure, dividend payments and share repurchases.

Total assets as well as total liabilities and shareholders' equity increased $669 million from prior year. The increase in assets was driven by higher net properties of $976 million resulting from capital investments, partially offset by payments of about $300 million made on debt related to assets purchased in 2015 under seller financing. The increase in total liabilities and shareholders' equity combined was driven by an increase in net borrowings of about $450 million (including payments made on debt for assets purchased in 2015 under seller financing) and an increase in deferred income tax liabilities of $417 million. Partially offsetting these increases was a reduction in other long-term liabilities due to voluntary pension contributions of $250 million.

Significant cash flows

The following charts present net cash provided by (used in) operating, investing and financing activities for full years 2014, 2015 and 2016.

CSX 2016 Form 10-K p. 41

CSX CORPORATION

PART II

Sources of Cash

The Company has multiple sources of cash. First, the Company generates cash from operations. In 2016, the Company generated $3.0 billion of cash from operating activities which was $329 million lower than prior year primarily driven by $250 million in voluntary contributions to the Company's qualified pension plans. In 2015, the Company generated $3.4 billion of cash from operating activities which was $27 million higher than 2014 primarily driven by higher collections of freight account receivables.

Second, CSX has access to numerous financing sources including a $1 billion five-year unsecured revolving credit facility that expires in May 2020. As of the date of this filing, the Company has no outstanding balances under this facility. See Note 9, Debt and Credit Agreements for more information.

Third, CSX filed a new shelf registration statement with the SEC in February 2016 which is unlimited as to amount and may be used to issue debt or equity securities at CSX’s discretion, subject to market conditions and CSX Board authorization. While CSX seeks to give itself flexibility with respect to cash requirements, there can be no assurance that market conditions would permit CSX to sell such securities on acceptable terms at any given time, or at all.

Uses of Cash

CSX continued to invest in its business to create long-term value for shareholders. In 2016, net cash used in investing activities was $1.8 billion, a decrease of $1.1 billion from the prior year primarily driven by lower net purchases of short-term investments and lower property additions. In 2015, net cash used in investing activities was $2.9 billion, an increase in net investing of $709 million from 2014 primarily driven by fewer net sales of short-term investments.

The Company is committed to maintaining and improving its existing infrastructure and to positioning itself for long-term growth through expanding network and terminal capacity. Funds used for property additions are further described below.



	Fiscal Years
Capital Expenditures (Dollars in Millions)	2016		2015		2014
Track	$	714	$	866	$	750
Bridges, Signals and Other	433		491		538
Total Infrastructure	1,147		1,357		1,288
Freight Cars	82		218		329
Capacity and Commercial Facilities	406		295		452
Regulatory (including PTC)	313		341		321
Locomotives	409		337		51
Public-Private Partnerships - net ^(a)	41		14		8
Total Property Additions	2,398		2,562		2,449
Cash paid for new assets using seller financing ^(b)	307		$	—	$	—
Total Capital Expenditures ^(a)	$	2,705	2,562		2,449

(a)

Total capital expenditures shown above include investments related to reimbursable public-private partnerships. These partnership investments are for projects that are partially or wholly reimbursed to CSX through either government grants or other funding sources such as cash received from a property sale. These reimbursements may not be fully received in a given year; therefore the timing of receipts may differ from the timing of the investment.


(b)	In 2016, CSX made payments related to locomotive purchases made in 2015 using seller financing of $307 million.

CSX 2016 Form 10-K p. 42

CSX CORPORATION

PART II

Planned capital investments for 2017 are expected to be $2.2 billion, including about $270 million for PTC. This $2.2 billion excludes investments related to partially or wholly reimbursable public-private partnerships where reimbursements may not be fully received in the year the reimbursement obligation arises. Approximately half of the 2017 investment will be used to sustain the core infrastructure. The remaining amounts will be allocated to locomotives, freight cars and high return projects supporting long-term profitable growth, productivity initiatives and service improvements to optimize performance. CSX intends to fund capital investments through cash generated from operations.

The Company expects to continue incurring significant capital costs in connection with the implementation of PTC. CSX estimates that the total multi-year cost of PTC implementation will be approximately $2.4 billion. This estimate includes costs for installing the new system along tracks, upgrading locomotives, adding communication equipment and developing new technologies. Total PTC spending through 2016 was $1.8 billion.

In addition to capital investments, the Company uses cash for scheduled payments of debt and leases, share repurchases and to pay dividends to shareholders. In 2016, net cash used in financing activities was $1.3 billion, which represents an increase in spending of $749 million from the prior year primarily driven by the repayment of seller-financed assets, higher share repurchases, and lower net debt issued. In 2015, net cash used in financing activities was $519 million, which represents a decrease in spending of $564 million from the prior year primarily driven by higher net long-term debt issued of $904 million (net of lower debt repayments) partially offset by higher share repurchases of $287 million.

CSX is continually evaluating market and regulatory conditions that could affect the Company’s ability to generate sufficient returns on capital investments. CSX may revise its future estimates for capital spending as a result of changes in business conditions, tax legislation or the enactment of new laws or regulations which could have a material adverse effect on the Company’s operations and financial performance in the future (see Risk Factors under Item 1A of this Form 10-K).

Liquidity and Working Capital

Currently, CSX is well positioned from a liquidity standpoint. The Company ended the year with $1.0 billion of cash, cash equivalents and short-term investments. 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. Additionally in 2016, CSX issued a total of $2.2 billion of new long-term debt, $1.4 billion of which was used to repay outstanding debt, to capitalize on the lower interest rate environment. CSX uses current cash balances for general corporate purposes, which may include repayment of additional indebtedness outstanding from time to time, repurchases of CSX's common stock, capital investments, working capital requirements and improvements in productivity and other cost reduction initiatives. See Note 9, Debt and Credit Agreements.

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 the $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, 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 the date of this filing, the Company has no outstanding balances under this facility.

CSX 2016 Form 10-K p. 43

CSX CORPORATION

PART II

Working capital can also be considered a measure of a company’s ability to meet its short-term needs. CSX had a working capital surplus of $447 million at December 2016 and $888 million (after reclassification of current deferred taxes) at December 2015. This decrease since the prior year end is primarily due to an increase in long-term debt maturing within a year of $311 million and cash from operations used for property additions, share repurchases and dividend payments.

The Company’s working capital balance varies due to factors such as the timing of scheduled debt payments and changes in cash and cash equivalent balances as discussed above. Although the Company currently has a surplus, a working capital deficit is not unusual for CSX or other companies in the industry and does not indicate a lack of liquidity. The Company continues to maintain adequate current assets to satisfy current liabilities and maturing obligations when they come due. Furthermore, CSX has sufficient financial capacity, including its revolving credit facility, trade receivable facility and shelf registration statement to manage its day-to-day cash requirements and any anticipated obligations. The Company from time to time accesses the credit markets for additional liquidity.

Credit Ratings

Credit ratings reflect an independent agency’s judgment on the likelihood that a borrower will repay a debt obligation at maturity. The ratings reflect many considerations, such as the nature of the borrower’s industry and its competitive position, the size of the company, its liquidity and access to capital and the sensitivity of a company’s cash flows to changes in the economy. The two largest rating agencies, Standard & Poor’s Ratings Services (“S&P”) and Moody’s Investors Service (“Moody’s”), use alphanumeric codes to designate their ratings. The highest quality rating for long-term credit obligations is AAA and Aaa for S&P and Moody’s, respectively. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency.

The cost and availability of unsecured financing are materially affected by CSX's long-term credit ratings. CSX's credit ratings remained stable during 2016. As of December 2015 and December 2016, S&P's long-term rating on CSX was BBB+ (Stable), and Moody's was Baa1 (Stable). Ratings of BBB- and Baa3 or better by S&P and Moody’s, respectively, reflect ratings on debt obligations that fall within a band of credit quality considered to be investment grade. If CSX's credit ratings were to decline to below investment grade levels, the Company could experience significant increases in its interest cost for new debt. In addition, a decline in CSX’s credit ratings to below investment grade levels could adversely affect the market’s demand, and thus the Company’s ability to readily issue new debt.

CSX 2016 Form 10-K p. 44

CSX CORPORATION

PART II

Free Cash Flow (Non-GAAP Measure)

Free cash flow is considered a non-GAAP financial measure under SEC Regulation G and Reg S-K Item 10(e). Management believes that free cash flow is useful to investors as it is important in evaluating the Company’s financial performance. More specifically, free cash flow measures cash generated by the business after reinvestment. This measure represents cash available for both equity and bond investors to be used for dividends, share repurchases or principal reduction on outstanding debt. Free cash flow should be considered in addition to, rather than a substitute for, cash provided by operating activities. Free cash flow is calculated by using net cash from operations and adjusting for property additions and certain other investing activities. Free cash flow before dividends decreased $145 million year-over-year to $847 million. The decrease in free cash flow from the prior year is primarily due to voluntary contributions to the Company's qualified pension plans of $250 million in 2016, partially offset by lower property additions of $164 million.

The following table reconciles cash provided by operating activities (GAAP measure) to free cash flow (non-GAAP measure).



	Fiscal Years
	2016			2015			2014
(Dollars in Millions)
Net cash provided by operating activities	$	3,041		$	3,370		$	3,343
Property additions ^(a)	(2,398		)	(2,562		)	(2,449		)
Proceeds from property dispositions	195			147			62
Other investing activities	9			37			(37		)
Free Cash Flow (before payment of dividends)	$	847		$	992		$	919

(a)

Property additions include investments related to reimbursable public-private partnerships. These partnership investments of $41 million, $14 million and $8 million in 2016, 2015 and 2014, respectively, are projects that are partially or wholly reimbursed to CSX through either government grants or other funding sources such as cash received from a property sale. These reimbursements may not be fully received in a given year; therefore, the timing of receipts may differ from the timing of the investment. Also, property additions for 2016 above do not include $307 million for locomotives purchased in 2015 using seller financing with payment made in 2016.

CSX 2016 Form 10-K p. 45

CSX CORPORATION

PART II

SCHEDULE OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following tables set forth maturities of the Company's contractual obligations and other significant commitments:



Type of Obligation	2017		2018		2019		2020		2021		Thereafter		Total
(Dollars in Millions) (Unaudited)
Contractual Obligations
Total Debt (See Note 9)	$	331	$	20	$	18	$	745	$	371	$	9,808	$	11,293
Interest on Debt	539		523		521		509		497		8,657		11,246
Purchase Obligations (See Note 7)	363		336		312		316		310		3,943		5,580
Other Post-Employment Benefits (See Note 8) ^(a)	54		43		41		40		38		165		381
Operating Leases - Net (See Note 7) ^(b)	48		36		32		19		10		72		217
Agreements with Conrail (See Note 12) ^(b)	27		27		27		27		27		74		209
Total Contractual Obligations	$	1,362	$	985	$	951	$	1,656	$	1,253	$	22,719	$	28,926

Other Commitments ^(c)	$	110	$	3	$	2	$	2	$	2	$	2	$	121


(a)	Other post-employment benefits include estimated other post-retirement medical and life insurance payments and payments under non-qualified pension plans which are unfunded. No amounts are included for funded pension obligations as no contributions are currently required.


(b)	Agreements with Conrail represent minimum future lease payments of $209 million under the shared asset area agreements (see Note 12, Related Party Transactions). These amounts plus total operating leases-net of $217 million above equals total net lease commitments of $426 million disclosed in Note 7, Commitments and Contingencies.

(c)

Other commitments of $121 million consisted of surety bonds, letters of credit, uncertain tax positions and public private partnerships. Surety bonds of $48 million and letters of credit of $33 million arise from assurances issued by a third-party that CSX will fulfill certain obligations and are typically a contract, state, federal or court requirement. Uncertain tax positions of $25 million, which include interest and penalties, are all included in year 2017 as the year of settlement cannot be reasonably estimated. Contractual commitments related to public-private partnerships are $15 million.

OFF-BALANCE SHEET ARRANGEMENTS

For detailed information about the Company’s guarantees, operating leases and purchase obligations, see Note 7, Commitments and Contingencies. There are no off-balance sheet arrangements that are reasonably likely to have a material effect on the Company’s financial condition, results of operations or liquidity.

CSX 2016 Form 10-K p. 46

CSX CORPORATION

PART II

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and certain revenues and expenses during the reporting period. Actual results may differ from those estimates. These estimates and assumptions are discussed with the Audit Committee of the Board of Directors on a regular basis. Consistent with the prior year, significant estimates using management judgment are made for the following areas:


•	casualty, environmental and legal reserves;


•	pension and post-retirement medical plan accounting;


•	depreciation policies for assets under the group-life method; and


•	income taxes.

Casualty, Environmental and Legal Reserves

Casualty

Casualty reserves of $229 million and $269 million for 2016 and 2015, respectively, represent accruals for personal injury, occupational disease and occupational injury claims. A majority of the casualty reserves relate to personal injuries. The Company's self-insured retention amount for these claims is $50 million per occurrence. Currently, no individual claim is expected to exceed the self-insured retention amount. In accordance with the Contingencies Topic in the ASC, to the extent the value of an individual claim exceeds the self-insured retention amount, the Company would present the liability on a gross basis with a corresponding receivable for insurance recoveries. These reserves fluctuate based upon the timing of payments as well as changes in estimate. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation. Most of the Company's casualty claims relate to CSXT unless otherwise noted below. Defense and processing costs, which historically have been insignificant and are anticipated to be insignificant in the future, are not included in the recorded liabilities.

Personal Injury

Personal Injury reserves of $170 million and $204 million for 2016 and 2015, represent liabilities for employee work-related and third-party injuries. Work-related injuries for CSXT employees are primarily subject to FELA. In addition to FELA liabilities, employees of other current or former CSX subsidiaries are covered by various state workers’ compensation laws, the Federal Longshore and Harbor Workers’ Compensation Program or the Maritime Jones Act.

CSXT retains an independent actuary to assist management in assessing the value of personal injury claims. An analysis is performed by the actuary quarterly and is reviewed by management. The methodology used by the actuary includes a development factor to reflect growth or reduction in the value of these personal injury claims. It is based largely on CSXT's historical claims and settlement experience.

As a direct result of improvements in safety in recent years, the Company has experienced a downward trend in the severity of injuries which has resulted in a decrease in the estimate of costs per incident. During 2016, the Company reduced casualty reserves, primarily personal injury reserves, by $28 million, resulting in after-tax effect on earnings from continuing operations and net earnings of $18 million and an after-tax effect on earnings per share of $0.02. The personal injury reserve reductions were included in materials, supplies and other on the consolidated income statements. During 2015 and 2014, there were no significant changes in estimate recorded to adjust casualty reserves.

CSX 2016 Form 10-K p. 47

CSX CORPORATION

PART II

Critical Accounting Estimates, continued

Occupational

Occupational reserves of $59 million and $65 million for 2016 and 2015, respectively, represent liabilities for occupational disease claims and occupational injury claims. Occupational disease claims arise primarily from allegations of exposure to asbestos in the workplace. Occupational injury claims arise from allegations of exposure to certain other materials in the workplace, such as solvents, soaps, chemicals (collectively referred to as “irritants”) and diesel fuels (like exhaust fumes) or allegations of chronic physical injuries resulting from work conditions, such as repetitive stress injuries. The Company has experienced a downward trend in the number of occupational claims and reserves for these claims have decreased to a level that is no longer material to the Company's financial condition, results of operations or liquidity.

Environmental

Environmental reserves were $95 million and $82 million and 2016 and 2015, respectively. The Company is a party to various proceedings related to environmental issues, including administrative and judicial proceedings involving private parties and regulatory agencies. The Company has been identified as a potentially responsible party at approximately 222 environmentally impaired sites. Many of these are, or may be, subject to remedial action under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), also known as the Superfund Law, or similar state statutes. Most of these proceedings arose from environmental conditions on properties used for ongoing or discontinued railroad operations. A number of these proceedings, however, are based on allegations that the Company, or its predecessors, sent hazardous substances to facilities owned or operated by others for treatment, recycling or disposal. In addition, some of the Company’s land holdings were leased to others for commercial or industrial uses that may have resulted in releases of hazardous substances or other regulated materials onto the property and could give rise to proceedings against the Company.

In any such proceedings, the Company is subject to environmental clean-up and enforcement actions under the Superfund Law, as well as similar state laws that may impose joint and several liability for clean-up and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct. These costs could be substantial.

In accordance with the Asset Retirement and Environmental Obligations Topic in the ASC, the Company reviews its role with respect to each site identified at least quarterly, giving consideration to a number of factors such as:


•	type of clean-up required;


•	nature of the Company’s alleged connection to the location (e.g., generator of waste sent to the site or owner or operator of the site);


•	extent of the Company’s alleged connection (e.g., volume of waste sent to the location and other relevant factors); and


•	number, connection and financial viability of other named and unnamed potentially responsible parties at the location.

CSX 2016 Form 10-K p. 48

CSX CORPORATION

PART II

Critical Accounting Estimates, continued

Based on the review process, the Company has recorded amounts to cover contingent anticipated future environmental remediation costs with respect to each site to the extent such costs are reasonably estimable and probable. The recorded liabilities for estimated future environmental costs are undiscounted. The liability includes future costs for remediation and restoration of sites as well as any significant ongoing monitoring costs, but excludes any anticipated insurance recoveries. Payments related to these liabilities are expected to be made over the next several years. Environmental remediation costs are included in materials, supplies and other on the consolidated income statement.

Currently, the Company does not possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, on some sites until completion of future environmental studies. In addition, conditions that are currently unknown could, at any given location, result in additional exposure, the amount and materiality of which cannot presently be reasonably estimated. Based upon information currently available, however, the Company believes its environmental reserves accurately reflect the cost of remedial actions currently required.

Legal

In accordance with the Contingencies Topic in the ASC, an accrual for a loss contingency is established if information available prior to issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and the amount of loss can be reasonably estimated. If no accrual is made for a loss contingency because one or both of these conditions are not met, or if an exposure to loss exists in excess of the amount accrued, disclosure of the contingency is made when there is at least a reasonable possibility that a loss or an additional loss may have been incurred.

The Company evaluates all exposures relating to legal liabilities at least quarterly and adjusts reserves when appropriate under the guidance noted above. The amount of a particular reserve may be influenced by factors that include official rulings, newly discovered or developed evidence, or changes in laws, regulations and evidentiary standards. See Item 3. Legal Proceedings for further discussion of these items.

Pension and Post-retirement Medical Plan Accounting

The Company sponsors defined benefit pension plans principally for salaried, management personnel. For employees hired prior to 2003, the plans provide eligible employees with retirement benefits based predominantly on years of service and compensation rates near retirement. For employees hired in 2003 or thereafter, benefits are determined based on a cash balance formula, which provides benefits by utilizing interest and pay credits based upon age, service and compensation. As of December 2016, the projected benefit obligation for the Company’s pension plans was $2.9 billion.

In addition to these plans, the Company sponsors a post-retirement medical plan and a life insurance plan that provide certain benefits to full-time, salaried, management employees, hired prior to 2003, upon their retirement if certain eligibility requirements are met. Eligible retirees who are age 65 years or older (Medicare-eligible) are covered by a health reimbursement arrangement, which is an employer-funded account that can be used for reimbursement of eligible medical expenses. Eligible retirees younger than 65 years (non-Medicare eligible) are covered by a self-insured program partially funded by participating retirees. The life insurance plan is non-contributory. As of December 2016, the projected benefit obligation for the Company’s other post-retirement benefit plans was $274 million.

For information related to the funded status of the Company's pension and other post-retirement benefit plans, see Note 8, Employee Benefit Plans.

CSX 2016 Form 10-K p. 49

CSX CORPORATION

PART II

Critical Accounting Estimates, continued

The accounting for these plans is subject to the guidance provided in the Compensation-Retirement Benefits Topic in the ASC. This rule requires that management make certain assumptions relating to the following:


•	discount rates used to measure future obligations and interest expense;


•	long-term rate of return on plan assets;


•	salary scale inflation rates; and


•	other assumptions.

The Company engages independent actuaries to compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company determines are appropriate based on historical trends, current market rates and future projections. These amounts are reviewed by management.

Discount Rates

Discount rates affect the amount of liability recorded and the interest expense component of pension and post-retirement expense. Discount rates reflect the rates at which pension and other post-retirement benefits could be effectively settled, or in other words, how much it would cost the Company to buy enough high quality bonds to generate cash flow equal to the Company's expected future benefit payments. The Company determines the discount rate based on the market yield as of year-end for high quality corporate bonds whose maturities match the plans' expected benefit payments.

The discount rates used by the Company to value its 2016 pension and post-retirement obligations are 4.08 percent and 3.71 percent, respectively. For 2015, the discount rate used by the Company to value its pension and post-retirement obligations was 4.30 percent and 3.85 percent, respectively. Discount rates may differ for pension and post-retirement benefits due to varying duration of the liabilities for projected payments for each plan. As of December 2016, the estimated duration of pensions and post-retirement benefits is approximately 12 years and eight years, respectively.

Each year, these discount rates are reevaluated and adjusted using the current market interest rates for high quality corporate bonds to reflect the best estimate of the current effective settlement rates. In general, if interest rates decline or rise, the assumed discount rates will change.

Long-term Rate of Return on Plan Assets

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. As this assumption is long-term, the annual review may result in less frequent adjustment than other assumptions used in pension accounting. The long-term rate of return on plan assets used by the Company to value its benefit cost for the subsequent plan year was 6.75 percent and 7 percent in 2016 and 2015, respectively.

CSX 2016 Form 10-K p. 50

CSX CORPORATION

PART II

Critical Accounting Estimates, continued

Salary Scale Inflation Rates

Salary scale inflation rates are based on current trends and historical data accumulated by the Company. The Company reviews recent wage increases and management incentive compensation payments over the past five years in its assessment of salary scale inflation rates. The Company used a salary scale rate of 4.60 percent in both 2016 and 2015 to value its pension obligations.

Other Assumptions

The calculations made by the actuaries also include assumptions relating to health care cost trend rates, mortality rates, turnover and retirement age. These assumptions are based upon historical data, recent plan experience and industry trends and are determined by management.

2017 Estimated Pension and Post-retirement Expense

Net pension expense and post-retirement benefits expense for 2017 are each expected to be approximately $10 million, compared to $58 million and $17 million, respectively, in 2016. The decrease in expense is primarily due to a change in approach to measuring service and interest costs, the impact of $250 million in voluntary pension contributions and other favorable plan experience.

In 2017, the Company will measure the service 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 liability 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 liabilities are applied to the relevant projected cash flows at the relevant maturity. The calculated pension and post-retirement benefits liabilities are consistent under both the traditional and spot rate approaches. The Company accounted for this change on a prospective basis as a change in accounting estimate.

The following sensitivity analysis illustrates the effects of a one percent change in certain assumptions like discount rates, long-term rate of return and salaries on the 2017 estimated pension and post-retirement expense:



(Dollars in Millions)	Pension Expense		Post-Retirement Expense
Discount Rate	$	15	$	1
Long-term Rate of Return	$	26	N/A
Salary Inflation	$	9	N/A

CSX 2016 Form 10-K p. 51

CSX CORPORATION

PART II

Critical Accounting Estimates, continued

Depreciation Policies for Assets Utilizing the Group-Life Method

The Company depreciates its rail assets, including main-line track, locomotives and freight cars, using the group-life method of accounting. Assets depreciated under the group-life method comprise 86 percent of total fixed assets of $43 billion on a gross basis at December 2016. All other 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.

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 depreciation 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 road and track assets in 2020 and for equipment assets in 2019.

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.

CSX 2016 Form 10-K p. 52

CSX CORPORATION

PART II

Critical Accounting Estimates, continued

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. A 1% change in the average life of all group-life assets would result in an approximate $12 million change to the Company’s annual depreciation expense.

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, 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 group-life 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.

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 to another railroad or the disposal of an entire class of assets (e.g., disposal of all refrigerated freight cars).

Income Taxes

CSX accounts for income taxes in accordance with the Income Taxes Topic in the ASC that addresses how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this topic, the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The amount recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.

CSX 2016 Form 10-K p. 53

CSX CORPORATION

PART II

Critical Accounting Estimates, continued

CSX files a consolidated federal income tax return, which includes its principal domestic subsidiaries. Examinations of the federal income tax returns of CSX have been completed through 2015. During 2016, the Company participated in a contemporaneous Internal Revenue Service (“IRS”) audit of tax year 2016. Management believes an adequate provision has been made for any adjustments that might be assessed. While the final outcome of these matters cannot be predicted with certainty, it is the opinion of CSX management that none of these items will have a material adverse effect on the financial condition, results of operations or liquidity of CSX. An unexpected adverse resolution of one or more of these items, however, could have a material adverse effect on the results of operations in a particular fiscal quarter or fiscal year. As of December 2016, the Company’s uncertain tax positions were $25 million.

New Accounting Pronouncements and Changes in Accounting Policy

See Note 1, Nature of Operations and Significant Accounting Policies under the caption, “New Accounting Pronouncements and Changes in Accounting Policy.”

FORWARD-LOOKING STATEMENTS

Certain statements in this report and in other materials filed with the SEC, as well as information included in oral statements or other written statements made by the Company, are forward-looking statements. The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements within the meaning of the Private Securities Litigation Reform Act may contain, among others, statements regarding:


•	projections and estimates of earnings, revenues, margins, volumes, rates, cost-savings, expenses, taxes or other financial items;


•	expectations as to results of operations and operational initiatives;


•	expectations as to the effect of claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements on the Company's financial condition, results of operations or liquidity;


•	management's plans, strategies and objectives for future operations, capital expenditures, dividends, share repurchases, safety and service performance, proposed new services and other matters that are not historical facts, and management's expectations as to future performance and operations and the time by which objectives will be achieved; and


•	future economic, industry or market conditions or performance and their effect on the Company's financial condition, results of operations or liquidity.

Forward-looking statements are typically identified by words or phrases such as "will," "should," “believe,” “expect,” “anticipate,” “project,” “estimate,” “preliminary” and similar expressions. The Company cautions against placing undue reliance on forward-looking statements, which reflect its good faith beliefs with respect to future events and are based on information currently available to it as of the date the forward-looking statement is made. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the timing when, or by which, such performance or results will be achieved.

CSX 2016 Form 10-K p. 54

CSX CORPORATION

PART II

Forward-looking statements are subject to a number of risks and uncertainties and actual performance or results could differ materially from those anticipated by any forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statement. If the Company does update any forward-looking statement, no inference should be drawn that the Company will make additional updates with respect to that statement or any other forward-looking statements. The following important factors, in addition to those discussed in Part II, Item 1A (Risk Factors) and elsewhere in this report, may cause actual results to differ materially from those contemplated by any forward-looking statements:


•	legislative, regulatory or legal developments involving transportation, including rail or intermodal transportation, the environment, hazardous materials, taxation, international trade and initiatives to further regulate the rail industry;


•	the outcome of litigation, claims and other contingent liabilities, including, but not limited to, those related to fuel surcharge, environmental matters, taxes, shipper and rate claims subject to adjudication, personal injuries and occupational illnesses;


•	changes in domestic or international economic, political or business conditions, including those affecting the transportation industry (such as the impact of industry competition, conditions, performance and consolidation) and the level of demand for products carried by CSXT;


•	natural events such as severe weather conditions, including floods, fire, hurricanes and earthquakes, a pandemic crisis affecting the health of the Company's employees, its shippers or the consumers of goods, or other unforeseen disruptions of the Company's operations, systems, property or equipment;


•	competition from other modes of freight transportation, such as trucking and competition and consolidation or financial distress within the transportation industry generally;


•	the cost of compliance with laws and regulations that differ from expectations (including those associated with PTC implementation) as well as costs, penalties and operational and liquidity impacts associated with noncompliance with applicable laws or regulations;


•	the impact of increased passenger activities in capacity-constrained areas, including potential effects of high speed rail initiatives, or regulatory changes affecting when CSXT can transport freight or service routes;


•	unanticipated conditions in the financial markets that may affect timely access to capital markets and the cost of capital, as well as management's decisions regarding share repurchases;


•	changes in fuel prices, surcharges for fuel and the availability of fuel;


•	the impact of natural gas prices on coal-fired electricity generation;


•	availability of insurance coverage at commercially reasonable rates or insufficient insurance coverage to cover claims or damages;


•	the inherent business risks associated with safety and security, including the transportation of hazardous materials or a cybersecurity attack which would threaten the availability and vulnerability of information technology;


•	adverse economic or operational effects from actual or threatened war or terrorist activities and any governmental response;

CSX 2016 Form 10-K p. 55

CSX CORPORATION

PART II


•	labor and benefit costs and labor difficulties, including stoppages affecting either the Company's operations or customers' ability to deliver goods to the Company for shipment;


•	the Company's success in implementing its strategic, financial and operational initiatives;


•	changes in operating conditions and costs or commodity concentrations; and


•	the inherent uncertainty associated with projecting economic and business conditions.

Other important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified elsewhere in this report and in CSX's other SEC reports, which are accessible on the SEC's website at www.sec.gov and the Company's website at www.csx.com. The information on the CSX website is not part of this annual report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

CSX does not hold or issue derivative financial instruments for trading purposes. Historically, the Company has used derivative financial instruments to address market risk exposure to fluctuations in interest rates. As of December 2016, CSX does not have a material amount of floating rate debt obligations outstanding, and therefore fluctuations in the interest rate would not have a material impact on the Company's financial condition, results of operations or liquidity.

CSX 2016 Form 10-K p. 56

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
Report of Independent Registered Public Accounting Firm		58

CSX Corporation

Consolidated Financial Statements and Notes to Consolidated Financial Statements
	Herewith:

Consolidated Income Statements for the Fiscal Years Ended:		59
	December 30, 2016
	December 25, 2015
	December 26, 2014

Consolidated Comprehensive Income Statements for the Fiscal Years Ended:		60
	December 30, 2016
	December 25, 2015
	December 26, 2014

Consolidated Balance Sheets as of:		61
	December 30, 2016
	December 25, 2015

Consolidated Cash Flow Statements for Fiscal Years Ended:		62
	December 30, 2016
	December 25, 2015
	December 26, 2014

Consolidated Statements of Changes in Shareholders' Equity:		63
	December 30, 2016
	December 25, 2015
	December 26, 2014

Notes to Consolidated Financial Statements		64

CSX 2016 Form 10-K p. 57

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of CSX Corporation

We have audited the accompanying consolidated balance sheets of CSX Corporation as of December 30, 2016 and December 25, 2015, and the related consolidated statements of income, comprehensive income, cash flows, and changes in shareholders’ equity for each of the three fiscal years in the period ended December 30, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CSX Corporation at December 30, 2016 and December 25, 2015, and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended December 30, 2016, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CSX Corporation's internal control over financial reporting as of December 30, 2016, 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 14, 2017 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Certified Public Accountants

Jacksonville, Florida

February 14, 2017

CSX 2016 Form 10-K p. 58

CSX CORPORATION

PART II

Item 8. Financial Statements and Supplementary Data

CONSOLIDATED INCOME STATEMENTS

(Dollars in Millions, Except Per Share Amounts)



	Fiscal Years
	2016		2015		2014
Revenue	$	11,069	$	11,811	$	12,669
Expense
Labor and Fringe	3,159