Fair Value Measurements

12 Months Ended

Dec. 30, 2011

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

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


•	Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets


•	Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.)


•	Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)

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

NOTE 15. Fair Value Measurements, continued

Investments

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


•	Certificates of Deposit (Level 2): Valued by discounting the related cash flows based on current yields of similar instruments with comparable durations.


•	Corporate Bonds and U.S. Treasury Obligations (Level 2): Valued using price evaluations reflecting the bid and/or ask sides of the market for a similar investment as of the last day of the calendar plan year.


•	Auction Rate Securities (Level 3): Valued using a discounted cash flow model, because there is currently no active market for trading.

The amortized cost basis of investments was $643 million and $136 million as of December 30, 2011 and December 31, 2010, respectively. The following is a summary of the fair value of the Company's investment assets:



	Fiscal Years
	2011								2010
(Dollars in Millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Certificates of Deposit	$	—	$	477	$	—	$	477	$	—	$	—	$	—	$	—
Corporate Bonds	—		98		—		98		—		89		—		89
U.S. Treasury Obligations	—		53		—		53		—		34		—		34
Auction Rate Securities	—		—		15		15		—		—		15		15
Total investments at fair value	$	—	$	628	$	15	$	643	$	—	$	123	$	15	$	138

These investments have the following maturities:



(Dollars in Millions)	December 2011		December 2010
Less than 1 year	$	523	$	54
1 - 2 years	32		40
2 - 5 years	73		26
Greater than 5 years	15		18
Total investments at fair value	$	643	$	138

NOTE 15. Fair Value Measurements, continued

Long-term Debt

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

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



(Dollars in Millions)	December 2011		December 2010
Long-term Debt Including Current Maturities:
Fair Value	$	10,708	$	9,624
Carrying Value	$	9,241	$	8,664

Pension Plan Assets

Pension plan assets are reported at fair value on the consolidated balance sheet. The Investment Committee targets an allocation of pension assets to be generally 60% equity and 40% fixed income. There are several valuation methodologies used for those assets as described below.


•	Common stock (Level 1): Valued at the closing price reported on the active market on which the individual securities are traded on the last day of the plan year and classified in level 1 of the fair value hierarchy.


•	Common trust funds (Level 2): The net asset value of the common trusts is determined by reference to the fair value of the underlying securities of the trust, which are valued primarily through the use of directly or indirectly observable inputs. These assets are classified in level 2 of the fair value hierarchy.

•

Corporate bonds, derivatives, government securities, and asset-backed securities (Level 2): Valued using price evaluations reflecting the bid and/or ask sides of the market for a similar investment as of the last day of the calendar plan year. Asset-backed securities include commercial mortgage-backed securities and collateralized mortgage obligations. These assets are classified in level 2 of the fair value hierarchy.


•	Partnerships (Level 3): Private equity valued using the fair market values associated with the underlying investments at year end using net asset per share and is classified in level 3 of the fair value hierarchy.

NOTE 15. Fair Value Measurements, continued

The pension plan assets at fair value by level, within the fair value hierarchy, as of calendar plan years 2011 and 2010:



	Fiscal Years
	2011										2010
(Dollars in Millions)	Level 1		Level 2			Level 3		Total			Level 1		Level 2			Level 3		Total
Common Stock:
Information technology	$	137	$	—		$	—	$	137		$	161	$	—		$	—	$	161
Consumer discretionary	88		—			—		88			109		—			—		109
Health care	70		—			—		70			68		—			—		68
Industrials	65		—			—		65			70		—			—		70
Energy	61		—			—		61			63		—			—		63
Financials	53		—			—		53			65		—			—		65
Consumer staples	42		—			—		42			33		—			—		33
Materials	24		—			—		24			25		—			—		25
Other	18		—			—		18			20		—			—		20
Corporate securities	—		605			—		605			—		613			—		613
Common trust funds	—		380			—		380			—		419			—		419
Derivatives liabilities	—		(247		)	—		(247		)	—		(211		)	—		(211		)
Derivatives assets	—		245			—		245			—		211			—		211
Partnerships	—		—			175		175			—		—			101		101
Government securities	—		124			—		124			—		88			—		88
Asset-backed securities	—		10			—		10			—		16			—		16
Total investments at fair value	$	558	$	1,117		$	175	$	1,850		$	614	$	1,136		$	101	$	1,851

For additional information related to pension assets, see Note 8, Employee Benefit Plans.

The summary of changes in the fair value of the Company’s level 3 pension plan assets for the calendar plan year 2011 is shown below.



(Dollars in Millions)	2011		2010
Balance, Beginning of Year	$	101	$	95
Purchases	71		—
Unrealized Gains	3		6
Balance, End of Year	$	175	$	101

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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