Properties

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



(Dollars in Millions)				Accumulated			Net Book		Annual Depreciation	Estimated Useful Life	Depreciation
December 2017		Cost		Depreciation			Value		Rate	( Avg. Years)	Method ^(a)
Road
	Rail and Other Track Material	$	7,694	$	(1,606	)	$	6,088	2.5%	40	Group Life
	Ties	5,665		(1,446		)	4,219		3.7%	27	Group Life
	Grading	2,662		(542		)	2,120		1.4%	90	Group Life
	Ballast	2,994		(921		)	2,073		2.7%	37	Group Life
	Bridges, Trestles, and Culverts	2,405		(356		)	2,049		1.6%	70	Group Life
	Signals and Interlockers	2,759		(588		)	2,171		4.0%	25	Group Life/ Straight Line
	Buildings	1,278		(464		)	814		2.5%	40	Group Life
	Other	4,634		(1,867		)	2,767		4.2%	24	Group Life
Total Road		30,091		(7,790		)	22,301
Equipment
	Locomotive	6,083		(2,490		)	3,593		3.5%	29	Group Life
	Freight Cars	3,262		(998		)	2,264		2.9%	35	Group Life
	Work Equipment and Other	2,261		(1,282		)	979		7.4%	14	Group Life/ Straight Line
Total Equipment		11,606		(4,770		)	6,836
Land		1,849		—			1,849		N/A	N/A	N/A
Construction In Progress		778		—			778		N/A	N/A	N/A
Total Properties		$	44,324	$	(12,560	)	$	31,764

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

NOTE 6. Properties, continued



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

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

NOTE 6. Properties, continued

Capital Expenditures

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

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


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


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


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


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


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


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


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


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


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


•	other track materials.

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

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

NOTE 6. Properties, continued

Depreciation Method

The depreciable assets of the Company are depreciated using either the group-life or straight-line method of accounting, which are both acceptable depreciation methods in accordance with GAAP. The Company depreciates its railroad assets, including main-line track, locomotives and freight cars, using the group-life method. Assets depreciated under the group-life method comprise 86% of total fixed assets of $44 billion on a gross basis as of December 2017. The remaining depreciable assets of the Company, including non-railroad assets and assets under capital leases, are depreciated using the straight-line method on a per asset basis. Land is not depreciated.

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 group’s recoverable life. The Company currently utilizes different depreciable asset categories to account for depreciation expense for the railroad assets that are depreciated under the group-life method. 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 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.

Estimated Useful Life

Management performs a review of depreciation expense and useful lives on a regular basis. Under the group-life method, 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 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 every three years for equipment assets (e.g. locomotives and freight cars) and every six years for road and track assets (e.g. bridges, signals, rail, ties, and ballast). 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. The Company plans to complete the next depreciation study for equipment assets in 2019 and road and track assets in 2020.

Group-Life Assets Sales and Retirements

Since the rail network is one contiguous, connected network it is impractical to maintain specific identification records for these assets. For track assets (e.g. rail, ties, and ballast), CSX utilizes a first-in, first-out approach to asset retirements. Equipment assets (e.g. locomotives and freight cars) are specifically identified at retirement. When an equipment asset is retired that has been depreciated using the group-life method, the cost is reduced from the cost base and recorded in accumulated depreciation.

NOTE 6. Properties, continued

For sales or retirements of assets depreciated under the group-life method 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 immediately recognized. This practice is consistent with accounting treatment normally prescribed under the group-life method. As part of the depreciation study, an assessment of the recorded amount of accumulated depreciation is made to determine if it is deficient (or in excess) of the appropriate amount indicated by the study. Any such deficiency (or excess), including any deferred gains or losses, is amortized as a component of depreciation expense over the remaining service life of the asset group until the next required depreciation study. Since the overall assumption with the group-life method 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.

For sales or retirements of assets depreciated under the group-life method that do not occur in the ordinary course of business, a gain or loss may be recognized if the sale or retirement meets each of the following three criteria: (i) it is unusual, (ii) it is material in amount, and (iii) it varies significantly from the retirement profile identified through our depreciation studies. No material gains or losses were recognized on the sale of assets depreciated using the group-life method in 2017, 2016, or 2015.

Land and Straight-line Assets Sales and Retirements

A gain or loss is recognized in operating income when we sell or retire land, land-related easements or assets depreciated under the straight-line method. In 2017 and 2016, the Company recognized gains on the sale of operating properties of $14 million and $110 million, respectively, which are recognized in materials, supplies and other on the consolidated statements of income. During 2015, the Company recognized a gain of $59 million related to the sale of non-operating easements, which is recognized in other income on the consolidated statements of income. (For additional information regarding cost reimbursements related to this sale, see Note 10, Other Income.)

Impairment Review

Properties and other long-lived assets are reviewed for impairment whenever events or business conditions indicate the carrying amount of such assets may not be fully recoverable. Initial assessments of recoverability are based on estimates of undiscounted future net cash flows associated with an asset or a group of assets in accordance with the Property, Plant, and Equipment Topic in the ASC. Where impairment is indicated, the assets are evaluated and their carrying amount is reduced to fair value based on discounted net cash flows or other estimates of fair value. In 2017, impairment expense of $25 million was recorded in materials, supplies and other expense primarily due to the discontinuation of certain in-progress projects. There were no material impairments recorded during 2016 or 2015.