FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-3359
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CSX TRANSPORTATION, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-6000720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Water Street, Jacksonville, FL. 32202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 359-3100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which each
Title of each class class is registered
- ---------------------------------- -------------------------------------
Hocking Valley Railroad Company
First Consolidated Mortgage 4-1/2%
Bonds, due July 1, 1999 New York Stock Exchange
Louisville and Nashville Railroad
Company First and Refunding Mortgage
3-3/8% Bonds, Series F, due April 1, 2003 New York Stock Exchange
Louisville and Nashville Railroad
Company First and Refunding Mortgage
2-7/8% Bonds, Series G, due April 1, 2003 New York Stock Exchange
Monon Railroad 6% Income Debentures,
due January 1, 2007 New York Stock Exchange
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1) (a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
- 1 -
Securities Registered Pursuant to Section 12(g) of the Act: None.
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 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 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)
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant. The aggregate market value of the voting stock at March 19,
1997, was $-0-, excluding the voting stock held by the parent of the registrant.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. The registrant has 9,061,038
shares of common stock, par value $20.00, outstanding at March 19, 1997.
- 2 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
1996 FORM 10-K ANNUAL REPORT
Table of Contents
Item No. Page
- -------- ----
PART I
1. Business 4
2. Properties 4
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 6
PART II
5. Market for Registrant's Common Stock and Related
Stockholder Matters 6
6. Selected Financial Data 6
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
8. Financial Statements and Supplementary Data 6
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 6
PART III
10. Directors, Executive Officers, Promoters
and Control Persons of the Registrant 6
11. Executive Compensation 6
12. Security Ownership of Certain Beneficial
Owners and Management 7
13. Certain Relationships and Related Transactions 7
PART IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 7
Signatures 8
Index to Consolidated Financial Statements 9
- 3 -
PART I
Items 1. & 2. Business and Properties.
General
-------
CSX Transportation, Inc. (CSXT) is engaged principally in the business
of railroad transportation and operates a system comprising 18,504 miles of
first main line track in 20 states principally east of the Mississippi River
(exclusive of New England), southern Ontario and the District of Columbia,
employing an average of 28,559 employees during its most recent fiscal year.
It conducts railroad operations in its own name and through railroad
subsidiaries.
CSXT is a wholly-owned subsidiary of CSX Corporation (CSX). CSX is a
publicly-owned Virginia corporation with headquarters at One James Center, 901
East Cary Street, Richmond, Virginia, 23219-4031. CSX also controls other
transportation businesses which include Sea-Land Service, Inc., an ocean
container-shipping company; CSX Intermodal, Inc., an intermodal and trucking
company; American Commercial Lines, Inc., an inland barging and other
marine-related activities business; and Customized Transportation, Inc., a
contract logistics service supplier. CSX also has interests in real estate,
resorts and resort management.
For information concerning business conducted by CSXT during 1996, see
"Management's Narrative Analysis and Results of Operations" on pages 32 and 33.
Roadway
-------
On December 27, 1996, CSXT's consolidated system consisted of 31,365
miles of track as follows:
Track
Miles
-----
First Main 18,504
Second Main 2,674
Passing, Crossovers
and Turnouts 2,369
Way and Yard Switching 7,818
------
Total 31,365
======
Included above are 865 miles of leased track, 2,408 miles of track
under trackage rights agreements with other railroads and 198 miles of track
under operating contracts.
- 4 -
Equipment
---------
On December 27, 1996, CSXT and subsidiaries owned or leased the
following:
Owned Leased Total
----- ------ ------
Locomotives
Freight 1,874 525 2,399
Switching 205 15 220
Auxiliary Units 162 0 162
------- ------- -------
Total 2,241 540 2,781
======= ======= =======
Freight Cars
Open Top Hoppers 14,713 10,047 24,760
Gondolas 9,800 14,733 24,533
Covered Hoppers 11,233 7,015 18,248
Box Cars 9,306 5,566 14,872
Flat Cars 684 11,946 12,630
Other 1,479 1,270 2,749
------- ------- -------
Total 47,215 50,577 97,792
======= ======= =======
Item 3. Legal Proceedings.
A number of legal actions, other than the environmental matters
described below, are pending against CSXT in which claims are made in
substantial amounts. While the ultimate results of such actions cannot be
predicted with certainty, management does not currently expect that these
matters will have a material adverse effect on the consolidated financial
position, results of operations and cash flows of the company.
CSXT has been identified, together with other parties, as a
potentially responsible party in a number of governmental investigations and
actions relating to environmentally impaired sites. Such sites frequently
involve other waste generators and disposal companies that may pay some or all
of such costs associated with site investigation and cleanup or from whom such
costs may be recovered.
The wide range of costs of the possible remediation alternatives,
changing cleanup technology, the length of time over which these matters develop
and evolving governmental standards make it impossible to estimate precisely the
company's potential liability for the costs associated with the assessment and
remediation of contaminated sites.
CSXT has identified and maintains reserves for approximately 270
environmental sites at which the company is or may be liable for remediation
costs. CSXT reviews its environmental reserves at least quarterly to determine
whether additional provisions are necessary. Based on current information, CSXT
believes its reserves are adequate to meet remedial actions and to comply with
present laws and regulations. Although CSXT's financial results could be
significantly affected in any quarterly reporting period in which CSXT incurred
substantial remedial expenses at a number of these and other sites, CSXT
believes the ultimate liability for these matters will not materially affect its
overall results of operations and financial condition.
- 5 -
Item 4. Submission of Matters to a Vote of Security Holders.
Information omitted in accordance with General Instruction I(2)(c).
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
There is no market for CSXT's common stock as CSXT is a wholly-
owned subsidiary of CSX. During the years 1996, 1995 and 1994, CSXT paid
dividends on its common stock aggregating $886 million, $158 million and $28
million, respectively.
Item 6. Selected Financial Data.
Information omitted in accordance with General Instruction I(2)(a).
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Information omitted in accordance with General Instruction I(2)(a).
However, in compliance with said Instruction, see "Management's
Narrative Analysis and Results of Operations" on pages 32 and 33.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of CSXT and notes thereto
required in response to this item are included herein (refer to Index to
Consolidated Financial Statements on page 9).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons
of the Registrant.
Information omitted in accordance with General Instruction I(2)(c).
Item 11. Executive Compensation.
Information omitted in accordance with General Instruction I(2)(c).
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information omitted in accordance with General Instruction I(2)(c).
- 6 -
Item 13. Certain Relationships and Related Transactions.
Information omitted in accordance with General Instruction I(2)(c).
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements.
See Index to Consolidated Financial Statements on page 9.
2. Financial Statement Schedules.
All schedules are omitted because of the absence of the
conditions under which they are required or because the
required information is set forth in the financial statements
or related notes thereto.
3. Exhibits.
(3.1) Articles of Incorporation, as amended, incorporated herein
by reference from Registrant's report on Form 10-K for the
year ended December 29, 1995.
(3.2) By-laws of the Registrant, as amended, incorporated herein
by reference from Registrant's report on Form 10-K for the
year ended December 29, 1995.
(27) Financial Data Schedule - Schedule II
(b) Reports on Form 8-K.
None.
- 7 -
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 19th day of
March, 1997.
CSX TRANSPORTATION, INC.
/s/ JAMES L. ROSS
------------------------------
James L. Ross
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title
- ----------------------- -------------------------------------
/s/ John W. Snow Chairman of the Board and Director
- -----------------
John W. Snow*
/s/ Alvin R. Carpenter President and Chief Executive Officer
- ----------------------- (Principal Executive Officer) and
Alvin R. Carpenter* Director
/s/ Gerald L. Nichols Executive Vice President and Chief
- ---------------------- Operating Officer and Director
Gerald L. Nichols*
/s/ Mark G. Aron Director
- -----------------
Mark G. Aron*
/s/ Paul R. Goodwin Director
- --------------------
Paul R. Goodwin*
/s/ Michael J. Ward Executive Vice President-Finance
- -------------------- (Principal Finance Officer) and
Michael J. Ward* Director
/s/ Patricia J. Aftoora
- -----------------------
*Patricia J. Aftoora
(Attorney-in-Fact)
March 19, 1997
- 8 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
----
Report of Independent Auditors 10
CSX Transportation, Inc. and Subsidiaries:
Consolidated Financial Statements and Notes to Consolidated
Financial Statements Submitted Herewith:
Consolidated Statement of Earnings -
Fiscal Years Ended December 27, 1996,
December 29, 1995 and December 30, 1994 11
Consolidated Statement of Cash Flows -
Fiscal Years Ended December 27, 1996,
December 29, 1995 and December 30, 1994 12
Consolidated Statement of Financial Position -
December 27, 1996 and December 29, 1995 14
Consolidated Statement of Retained Earnings
Fiscal Years Ended December 27, 1996,
December 29, 1995 and December 30, 1994 15
Notes to Consolidated Financial Statements 16
- 9 -
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
-------------------------------------------------
To the Shareholder and Board of Directors
of CSX Transportation, Inc.
We have audited the accompanying consolidated statement of financial
position of CSX Transportation, Inc. and subsidiaries as of December 27, 1996
and December 29, 1995, and the related consolidated statements of earnings, cash
flows and retained earnings for each of the three years in the period ended
December 27, 1996. 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 generally accepted auditing
standards. 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 consolidated financial statements referred to
above (appearing on pages 11-31) present fairly, in all material respects, the
consolidated financial position of CSX Transportation, Inc. and subsidiaries at
December 27, 1996 and December 29, 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 27, 1996, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
---------------------
Ernst & Young LLP
Richmond, Virginia
January 31, 1997
- 10 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Millions of Dollars)
Fiscal Years Ended
--------------------------------
Dec. 27, Dec. 29, Dec. 30,
1996 1995 1994
------- ------- -------
OPERATING REVENUE
Merchandise $ 3,181 $ 3,158 $ 3,048
Coal 1,584 1,523 1,465
Other 144 138 112
------- ------- -------
Total 4,909 4,819 4,625
------- ------- -------
OPERATING EXPENSE
Labor and Fringe Benefits 1,890 1,855 1,856
Materials, Supplies and Other 1,006 1,076 1,022
Equipment Rent 366 391 392
Depreciation 413 385 371
Fuel 308 255 251
Restructuring Charge --- 196 ---
------- ------- -------
Total 3,983 4,158 3,892
------- ------- -------
OPERATING INCOME 926 661 733
Other Income 46 37 96
Interest Expense 70 46 45
------- ------- -------
EARNINGS BEFORE INCOME TAXES 902 652 784
Income Tax Expense 325 244 289
------- ------- -------
NET EARNINGS $ 577 $ 408 $ 495
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
- 11 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of Dollars)
Fiscal Years Ended
---------------------------
Dec. 27, Dec. 29, Dec. 30,
1996 1995 1994
-------- -------- -------
OPERATING ACTIVITIES
Net Earnings $ 577 $ 408 $ 495
Adjustments to Reconcile Net Earnings
to Cash Provided
Depreciation 413 385 371
Deferred Income Taxes 198 52 171
Restructuring Charge Provision --- 196 ---
Productivity/Restructuring Charge Payments (77) (105) (129)
Proceeds from Real Estate Sales 29 24 42
Gain on Sale of South Florida Track --- --- (91)
Gain from Disposition of Properties (20) (20) (38)
Other Operating Activities (21) 38 66
Changes in Operating Assets and Liabilities
Accounts Receivable (37) 42 (27)
Sale of Accounts Receivable-Net 41 25 20
Other Current Assets (22) (7) 31
Accounts Payable and Other Current
Liabilities (39) 29 (15)
------- ------- -------
Net Cash Provided by Operating Activities 1,042 1,067 896
------- ------- -------
INVESTING ACTIVITIES
Property Additions (764) (765) (676)
Proceeds from Property Dispositions 56 76 18
Affiliated Company Activity 40 (37) (37)
Proceeds from Sale of South Florida Track --- --- 130
Other Investing Activities 10 (1) (35)
------- ------- -------
Net Cash Used by Investing Activities (658) (727) (600)
------- ------- -------
- 12 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED
(Millions of Dollars)
Fiscal Years Ended
---------------------------
Dec. 27, Dec. 29, Dec. 30,
1996 1995 1994
-------- -------- -------
FINANCING ACTIVITIES
Long-Term Debt Issued 118 121 92
Long-Term Debt Repaid (80) (114) (93)
Cash Dividends Paid (886) (158) (28)
Parent Company Advances Repaid (19) --- (86)
Affiliated Company Activity 56 --- ---
Other Financing Activities 1 (8) (1)
------- ------- -------
Cash Used by Financing Activities (810) (159) (116)
------- ------- -------
Increase (Decrease) in Cash and Cash
Equivalents (426) 181 180
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Year 633 452 272
------- ------- -------
Cash and Cash Equivalents at End of Year $ 207 $ 633 $ 452
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid - Net of Amounts Capitalized $ 63 $ 50 $ 53
======= ======= =======
Income Taxes Paid $ 135 $ 227 $ 192
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
- 13 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Millions of Dollars)
Dec. 27, Dec. 29,
1996 1995
-------- --------
ASSETS
Current Assets
Cash and Cash Equivalents $ 207 $ 633
Accounts and Notes Receivable 62 66
Materials and Supplies 121 116
Deferred Income Taxes 183 201
Other Current Assets 41 15
------- -------
Total Current Assets 614 1,031
Properties-Net 9,750 9,189
Affiliates and Other Companies 148 226
Other Long-Term Assets 288 183
------- -------
Total Assets $10,800 $10,629
======= =======
LIABILITIES
Current Liabilities
Accounts Payable $ 547 $ 558
Labor and Fringe Benefits Payable 353 377
Casualty, Environmental and Other Reserves 199 194
Current Maturities of Long-Term Debt 77 74
Due to Parent Company 25 24
Due to Affiliate 90 ---
Other Current Liabilities 37 6
------- -------
Total Current Liabilities 1,328 1,233
Casualty, Environmental and Other Reserves 597 683
Long-Term Debt 886 613
Deferred Income Taxes 2,493 2,265
Other Long-Term Liabilities 684 787
------- -------
Total Liabilities 5,988 5,581
------- -------
SHAREHOLDER'S EQUITY
Common Stock, $20 Par Value;
Authorized 10,000,000 Shares;
Issued and Outstanding 9,061,038 Shares 181 181
Other Capital 1,263 1,193
Retained Earnings 3,368 3,674
------- -------
Total Shareholder's Equity 4,812 5,048
------- -------
Total Liabilities and Shareholder's Equity $10,800 $10,629
======= =======
See accompanying Notes to Consolidated Financial Statements.
- 14 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(Millions of Dollars)
Dec. 27, Dec. 29, Dec. 30,
1996 1995 1994
------ ------ ------
Beginning Balance $3,674 $3,424 $2,957
Net Earnings 577 408 495
Dividends - Common (886) (158) (28)
Minimum Pension Liability Adjustments
and Other 3 --- ---
------ ------ ------
Ending Balance $3,368 $3,674 $3,424
====== ====== ======
See accompanying Notes to Consolidated Financial Statements.
- 15 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Tables in Millions of Dollars)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES.
Nature of Operations
CSX Transportation, Inc. (CSXT) is a rail freight transportation
company operating a system composed of 18,504 route miles of track in 20 states
in the eastern, midwestern, and southern portions of the United States and in
Ontario, Canada. Coal, bulk products, and manufactured products each contribute
approximately one-third of the company's transportation revenue. Coal shipments
primarily supply domestic utility and export markets. Shipments of bulk
products for domestic and export markets include chemicals, minerals,
agricultural products, and phosphates and fertilizer. Shipments of manufactured
products for domestic and export markets include automobiles, forest products,
metals, and food and consumer products.
CSXT is a wholly-owned subsidiary of CSX Corporation (CSX).
Principles of Consolidation
The Consolidated Financial Statements include CSXT and its majority-
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated. Investments in companies that are not majority-owned are
carried at either cost or equity, depending on the extent of control.
Fiscal Year
The company's fiscal reporting period ends on the last Friday in
December. The financial statements presented are for the fiscal periods ended
December 27, 1996, December 29, 1995 and December 30, 1994. Each fiscal year
consists of four 13-week quarters.
Cash and Cash Equivalents
Cash and cash equivalents primarily represent amounts due from CSX for
CSXT's participation in the CSX cash management plan and are net of outstanding
checks which are funded daily as presented for payment.
Accounts Receivable
CSXT has an ongoing agreement to sell without recourse, on a revolving
basis each month, an undivided percentage ownership interest in all freight
accounts receivable to CSX Trade Receivables Corporation (CTRC), a wholly-owned
subsidiary of CSX. At December 27, 1996 and December 29, 1995, accounts
receivable sold under this agreement totaled $644 million and $603 million,
respectively. In addition, CSXT has a revolving agreement with a financial
institution to sell with recourse on a monthly basis an undivided percentage
ownership interest in all miscellaneous accounts receivable. At December 27,
1996 and December 29, 1995, accounts receivable sold under this agreement
totaled $46 million. The sales of receivables have been reflected as reductions
of "Accounts and Notes Receivable" in the Consolidated Statement of Financial
Position. The net costs associated with the sales of receivables were $55
million in 1996, $54 million in 1995 and $45 million in 1994.
- 16 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES, Continued.
Materials and Supplies
Materials and supplies consist primarily of fuel and items for
maintenance of property and equipment, and are carried at average cost.
Properties
Main line track is depreciated on a group basis using a unit-of-
property method. All other property and equipment is depreciated on a straight-
line basis over estimated useful lives of three to 50 years.
Regulations established by the former Interstate Commerce Commission
and currently monitored by the Surface Transportation Board of the U.S.
Department of Transportation (DOT) require periodic formal studies of ultimate
service lives for all railroad assets. Resulting service life estimates are
subject to review and approval by the DOT. Significant premature retirements
for all properties, which would include major casualty losses, abandonments,
sales and obsolescence of assets, are recorded as gains or losses at the time of
their occurrence. Expenditures which significantly increase asset values or
extend useful lives are capitalized. Repair and maintenance expenditures are
charged to operating expense when the work is performed. All properties are
stated at cost.
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 group of assets. Where impairment is indicated, the assets are
evaluated for sale or other disposition, and their carrying amount is reduced to
fair value based on discounted net cash flows or other estimates of fair value.
The company acquired $255 million in property in 1996 which did not
require an immediate outlay of cash. These property additions included the
acquisition of $164 million in railcars and locomotives, formerly leased from a
CSX-affiliated company, in exchange for the assumption of corresponding debt.
The property additions also included the early delivery of 55 alternating
current locomotives under an arrangement in which payment of the $91 million
aggregate purchase price was deferred to the subsequent periods in which the
locomotives would have originally been delivered. Under generally accepted
accounting principles, these noncash transactions are not reflected in the
Consolidated Statement of Cash Flows.
Revenue Recognition
Transportation revenue is recognized proportionately as shipments move
from origin to destination.
Environmental Costs
Environmental costs that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to remediating an existing
- 17 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES, Continued.
condition caused by past operations, and which do not contribute to current or
future revenue generation, are expensed. Liabilities are recorded when CSXT's
responsibility for environmental remedial efforts is deemed probable, and the
costs can be reasonably estimated. Generally, the timing of these accruals
coincides with the completion of a feasibility study or CSXT's commitment to a
formal plan of action.
Derivative Financial Instruments
CSX may use derivative financial instruments from time to time in the
management of its interest, foreign currency and commodity exposure on behalf of
CSXT and other CSX subsidiaries. Such derivative financial instruments are
accounted for on an accrual basis, and income and expense are recorded in the
same category as that of the underlying asset or liability. Gains and losses
related to hedges of existing assets or liabilities are deferred and recognized
over the expected remaining life of the related asset or liability. Gains and
losses related to hedges of anticipated transactions are also deferred and
recognized in income in the same period as the hedged transaction. CSX had no
significant derivative financial instruments outstanding at December 27, 1996.
Common Stock and Other Capital
There have been no changes in common stock during the last three
years. During 1996, CSX contributed to the company $70 million in net pension
assets. During 1995, $146 million in capital stock of CSX Realty, Inc. and
related subsidiaries was contributed by CSX.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates in
reporting the amounts of certain revenues and expenses for each fiscal year and
certain assets and liabilities at the end of each fiscal year. Actual results
may differ from those estimates.
Prior-Year Data
Certain prior-year data have been reclassified to conform to the 1996
presentation.
Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which establishes new guidelines for accounting and disclosure
related to transfers of trade accounts receivable and other financial assets.
In addition, the American Institute of Certified Public Accountants has issued
Statement of Position No. 96-1 "Environmental Remediation Liabilities," which
provides revised guidance on accounting and disclosure relative to environmental
- 18 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES, Continued.
obligations. The company will adopt both pronouncements in 1997 and does not
expect either pronouncement to have a material impact on its financial
statements.
NOTE 2. RESTRUCTURING CHARGE.
In the second quarter of 1995, the company recorded a $196 million
pretax restructuring charge to recognize the costs associated with a contractual
agreement with a major telecommunications vendor to replace, manage, and
technologically enhance its existing private telecommunications network. The
initiative resulted in a write-down of assets rendered technologically obsolete
and a provision for separation and labor protection payments to affected
employees.
The agreement, which originally was to expire in May 2005, provided
for the vendor to supply and manage new technology to replace CSXT's existing
telecommunications system, thereby rendering it commercially obsolete. These
assets, comprising CSXT's internal companywide telecommunications network,
including existing microwave and fiber optic communications systems, have no
alternative use and their net realizable value is not significant. As a result
of the agreement, the net book value of the assets to be replaced was reduced by
$163 million.
During 1996, CSXT and the vendor amended the agreement to change the
termination date to June 30, 1998, to increase the payments required over the
revised service period, and to relieve the vendor's obligations to replace
certain technology. CSXT is currently evaluating options for proceeding with
further telecommunications initiatives.
A summary of the restructuring charge and related activity through
December 27, 1996 is as follows:
Separation
and Labor
Obsolete Protection
Assets Costs Total
-------- ----------- -----
Restructuring Charge $163 $33 $196
Amounts Utilized through
December 27, 1996 163 1 164
---- --- ----
Remaining Reserve as of
December 27, 1996 $--- $32 $ 32
==== === ====
The total provision for separation and labor protection payments
relates to approximately 275 affected employees and was based on existing
collective bargaining agreements with members of clerical, electrical, and
signal crafts. Through December 27, 1996, 29 employee separations have been
finalized. The company expects the remaining affected employees to be impacted
within the next four years.
- 19 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 3. SUPPLEMENTAL STATEMENT OF EARNINGS FINANCIAL DATA.
1996 1995 1994
------ ------ ------
Selling, General and Administrative Expense $800 $846 $849
==== ==== ====
NOTE 4. OTHER INCOME.
1996 1995 1994
---- ---- ----
Interest Income - Other $ 9 $ 17 $ 20
Interest Income - CSX Cash Management Plan 33 34 13
Income from Real Estate Operations (a) 51 43 47
Loss on Investment Transactions --- --- (26)
Gain on South Florida Track Sale (b) --- --- 91
Fees Related to Accounts Receivable Sold (55) (54) (45)
Miscellaneous 8 (3) (4)
---- ---- ----
Total $ 46 $ 37 $ 96
==== ==== ====
(a) Gross revenue from real estate operations was $76 million, $68
million and $78 million in 1996, 1995 and 1994, respectively.
(b) In May 1988, CSXT sold approximately 80 miles of track and right
of way in Broward, Dade and Palm Beach counties to the State of Florida for $264
million subject to annual appropriations which were accounted for on an
installment basis. In December 1994, the State of Florida elected to satisfy
its remaining unfunded obligation issued in 1988 to consummate the purchase of
track and right-of-way. The transaction resulted in cash proceeds of $102
million and a pretax gain of $69 million. The scheduled payment resulted in a
$22 million gain in 1994.
- 20 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 5. INCOME TAXES.
Income tax expense information is as follows:
1996 1995 1994
------- ------- -------
Current
Federal $106 $169 $106
State and Foreign 21 23 12
---- ---- ----
Total Current 127 192 118
---- ---- ----
Deferred
Federal 202 55 164
State (4) (3) 7
---- ---- ----
Total Deferred 198 52 171
---- ---- ----
Total Expense $325 $244 $289
==== ==== ====
Income tax expense reconciled to the tax computed at statutory rates
is as follows:
1996 1995 1994
----------- ----------- -----------
Tax at Statutory Rates $316 35% $228 35% $274 35%
State Income Taxes 10 1 13 2 13 2
Other (1) -- 3 -- 2 --
---- -- ---- -- ---- --
Total Expense $325 36% $244 37% $289 37%
==== == ==== == ==== ==
The significant components of deferred tax assets and liabilities
include:
Dec. 27, Dec. 29,
1996 1995
------ ------
Deferred Tax Assets
Productivity/Restructuring Charges $ 154 $ 220
Employee Benefit Plans 206 209
Alternative Minimum Tax Credits 5 93
Other 269 274
------ ------
Total 634 796
------ ------
Deferred Tax Liabilities
Accelerated Depreciation 2,685 2,684
Other 259 176
------ ------
Total 2,944 2,860
------ ------
Net Deferred Tax Liabilities $2,310 $2,064
====== ======
- 21 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 5. INCOME TAXES, Continued.
CSXT and its subsidiaries are included in the consolidated federal
income tax return filed by CSX. The consolidated federal income tax expense or
benefit is allocated to CSXT and its subsidiaries as though CSXT had filed a
separate consolidated return.
Examinations of the federal income tax returns of CSX and its
principal subsidiaries have been completed through 1990. Returns for 1991-1993
are currently under examination. Management believes adequate provision has
been made for any adjustments that might be assessed.
NOTE 6. RELATED PARTIES.
Cash and cash equivalents at December 27, 1996 and December 29, 1995,
includes $250 million and $677 million, respectively, representing amounts due
from CSX for CSXT's participation in the CSX cash management plan. Under this
plan, excess cash is advanced to CSX for investment and CSX makes cash funds
available to its subsidiaries as needed for use in their operations. CSX is
committed to repay all amounts due on demand should circumstances require. The
companies are charged for borrowings or compensated for investments based on
returns earned by the plan portfolio.
During 1994, CSXT entered into a loan agreement with Customized
Transportation, Inc. (CTI), a wholly-owned subsidiary of CSX, whereby CTI
borrowed $40 million at prevailing interest rates from CSXT. On March 1, 1996,
the loan was sold at book value to another CSX affiliate.
During 1992, CSXT entered into an agreement with CTRC to sell, on a
revolving basis, without recourse, all existing accounts receivable to CTRC. In
1993, this agreement was amended to sell only freight accounts receivable to
CTRC. As of December 27, 1996 and December 29, 1995, CSXT had sold $644 million
and $603 million, respectively, of accounts receivable to CTRC.
During 1994, CSXT repaid the remaining formal long-term borrowings
from CSX outstanding at December 31, 1993. No long-term borrowings from CSX
were outstanding during either 1996 or 1995. Interest expense on borrowings
from CSX was $3 million in 1994.
During 1989, CSXT's pension plan for salaried employees was merged
with the CSX Pension Plan, and all assets of CSXT's plan were transferred to the
merged plan. Since the plans were merged, CSX has allocated to CSXT a portion
of the net pension expense for the CSX Pension Plan based on CSXT's relative
level of participation in the merged plan, which considers the assets and
personnel previously in the CSXT plan. The allocated expense from the CSX
Pension Plan amounted to $32 million in 1996, $26 million in 1995 and $42
million in 1994. During 1996, CSXT also received $113 million in pension
assets, $70 million after-tax, from CSX through a capital contribution.
- 22 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 6. RELATED PARTIES, Continued.
Included in Materials, Supplies and Other expense are amounts related
to a management service fee charged by CSX, data processing related charges from
CSX Technology, Inc.(CSX Technology), and the reimbursement, under an operating
agreement, from CSX Intermodal, Inc. (CSXI), for costs incurred by CSXT related
to intermodal operations. The management service fee charged by CSX represents
compensation for certain corporate services provided to CSXT. These services
include, but are not limited to, development of corporate policy and long-range
strategic plans, allocation of capital, placement of debt, maintenance of
employee benefit plans, internal audit and tax administration. The data
processing related charges are compensation to CSX Technology for the
development, implementation and maintenance of computer systems, software and
associated documentation for the day-to-day operations of CSXT. CSX Technology
and CSXI are wholly-owned subsidiaries of CSX. Materials, Supplies and Other
expense includes net expense of $212 million, $202 million and $203 million in
1996, 1995 and 1994, respectively, relating to the above arrangements.
CSXT entered into operating lease agreements with CSXI in October 1991
and December 1992 under which it agreed to lease 3,400 rebuilt coal gondola cars
through March 2006 and 65 locomotives through May 2008, respectively. Effective
March 1, 1996, the operating leases were terminated and CSXT purchased the cars
and locomotives from CSXI for $164 million, an amount approximating CSXI's net
book value. In conjunction with this transaction, CSXT assumed $145 million in
long-term debt secured by the equipment and $19 million of advances payable from
CSXI to CSX. CSXT repaid the $19 million advances due to CSX in December 1996.
In March 1996, CSXT entered into a loan agreement with CSX Insurance
Company (CSX Insurance), a wholly-owned subsidiary of CSX, whereby CSXT may
borrow up to $100 million from CSX Insurance. The loan is payable in full on
demand. At December 27, 1996, $90 million was outstanding under the agreement.
Interest on the loan is payable monthly at .25% over the LIBOR rate, and was
5.84% at December 27, 1996. Interest expense incurred for the fiscal year ended
December 27, 1996 was $4 million relating to this loan agreement.
During 1988, CSXT participated with Sea-Land Service, Inc. (Sea-Land),
a wholly-owned subsidiary of CSX, in four sale-leaseback arrangements. Under
these arrangements, Sea-Land sold equipment to a third party and CSXT leased the
equipment and assigned the lease to Sea-Land. Sea-Land is obligated for all
lease payments and other associated equipment expenses. If Sea-Land defaults on
its obligations, under the arrangements CSXT would assume the asset lease rights
and obligations of $131 million at December 27, 1996.
- 23 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 7. PROPERTIES.
December 27, 1996
-------------------------------------------
Accumulated
Cost Depreciation Net
-------------------------------------------
Transportation
Road $ 9,308 $2,619 $6,689
Equipment 4,220 1,427 2,793
------- ------ ------
13,528 4,046 9,482
Non Transportation 275 7 268
------- ------ ------
Total $13,803 $4,053 $9,750
======= ====== ======
December 29, 1995
-------------------------------------------
Accumulated
Cost Depreciation Net
-------------------------------------------
Transportation
Road $ 9,157 $2,620 $6,537
Equipment 3,829 1,417 2,412
------- ------ ------
12,986 4,037 8,949
Non Transportation 246 6 240
------- ------ ------
Total $13,232 $4,043 $9,189
======= ====== ======
- 24 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 8. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES.
Activity relating to casualty, environmental and other reserves is as
follows:
Casualty(a) Environmental Separation (a)
Reserves(b) Reserves(a) Liabilities(c) Total
----------- ------------- -------------- ------
Balance Dec. 31, 1993 $ 379 $ 131 $ 622 $1,132
Charged to Expense
and Other Additions 164 32 --- 196
Payments and Other
Reductions (184) (23) (228)(d) (435)
----- ----- ----- ------
Balance Dec. 30, 1994 359 140 394 893
Charged to Expense
and Other Additions 179 22 33 234
Payments and Other
Reductions (174) (25) (51) (250)
----- ----- ----- ------
Balance Dec. 29, 1995 364 137 376 877
Charged to Expense
and Other Additions 116 16 --- 132
Payments and Other
Reductions (151) (36) (26) (213)
----- ----- ----- ------
Balance Dec. 27, 1996 $ 329 $ 117 $ 350 $ 796
===== ===== ===== ======
(a) Balances include current portion of casualty and environmental reserves and
separation liabilities, respectively, of $135 million, $20 million, and $45
million at December 27, 1996, $147 million, $20 million and $27 million at
December 29, 1995 and $133 million, $20 million and $14 million at
December 30, 1994.
(b) Casualty reserves are estimated based upon the first reporting of an
accident or personal injury to an employee. Liabilities for accidents are
based upon field reports and liabilities for personal injuries are based
upon the type and severity of the injury and the use of current trends and
historical data.
(c) Separation liabilities include $318 million at December 27, 1996, $344
million at December 29, 1995 and $376 million at December 30, 1994 related
to productivity charges recorded in 1991 and 1992 to provide for the
estimated costs of implementing workforce reductions, improvements in
productivity and other cost reductions. The remaining liabilities are
expected to be paid out over the next 20 to 25 years.
(d) Includes the transfer of $156 million in 1994 to a separation-related
pension obligation, representing the future cost of pensions for certain
train crew employees impacted by the buyout of trip-based compensation
provided for in the 1992 productivity charge.
- 25 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 9. LONG-TERM DEBT.
Average
Type and Interest Rates Dec. 27, Dec. 29,
Maturity Dates at Dec. 27, 1996 1996 1995
- ----------------- ---------------- -------- --------
Equipment Obligations
(1997-2011) 8% $ 711 $ 427
Mortgage Bonds
(1998-2003) 4% 76 76
Other Obligations
(1997-2021) 6% 176 184
------ ------
Total 7% 963 687
Less Debt Due Within One Year 77 74
------ ------
Total Long-Term Debt $ 886 $ 613
====== ======
CSXT has long-term debt maturities for 1997 through 2001 aggregating
$77 million, $80 million, $89 million, $69 million and $60 million,
respectively.
A portion of the properties and certain other assets of CSXT and its
subsidiaries are pledged as security for various long-term debt issues.
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS.
Fair values of the company's financial instruments are estimated by
reference to quoted prices from market sources and financial institutions, as
well as other valuation techniques. Long-term debt is the only financial
instrument of the company with a fair value significantly different from its
carrying amount. At December 27, 1996, the fair value of long-term debt,
including current maturities, was $989 million, compared with a carrying amount
of $963 million. At December 29, 1995, the fair value of long-term debt,
including current maturities, was $720 million, compared with a carrying amount
of $687 million. The fair value of long-term debt has been estimated using
discounted cash flow analyses based upon the company's current incremental
borrowing rates for similar types of financing arrangements.
NOTE 11. EMPLOYEE BENEFIT PLANS.
Pension Plans
CSX and its subsidiaries, including CSXT, sponsor defined benefit
pension plans principally for salaried employees. The plans provide eligible
employees with retirement benefits based principally on years of service and
compensation rates near retirement. Annual contributions to the plans are
sufficient to meet the minimum funding standards set forth in the Employee
Retirement Income Security Act of 1974, as amended. See Note 6 for the
allocated pension expense from the CSX Pension Plan.
- 26 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 11. EMPLOYEE BENEFIT PLANS, Continued.
Savings Plans
CSXT maintains savings plans for virtually all full-time salaried
employees and certain employees covered by collective bargaining agreements of
CSXT and subsidiary companies. Eligible employees may contribute from 1% to 15%
of their annual compensation in 1% multiples to these plans. CSXT matches
eligible employees' contributions in an amount equal to the lesser of 50% of
each participating employee's contribution or 3% of their annual compensation.
In addition, CSXT contributes fixed amounts for participating employees covered
by certain collective bargaining agreements. Expense for these plans was $15
million for 1996 and $22 million for each of the years 1995 and 1994.
Other Post-Retirement Benefit Plans
In addition to the CSX defined benefit pension plans, CSXT
participates with CSX and other affiliates in two defined benefit post-
retirement plans which cover most full-time salaried employees. One plan
provides medical benefits and the other provides life insurance benefits. The
post-retirement medical plan is contributory, with retiree contributions
adjusted annually, and contains other cost-sharing features such as deductibles
and coinsurance. The net benefit obligation for the medical plan anticipates
future cost-sharing changes consistent with the company's expressed intent to
increase retiree contribution rates annually in line with expected medical cost
inflation rates. The life insurance plan is non-contributory.
The company's current policy is to fund the cost of the post-
retirement medical and life insurance benefits on a pay-as-you-go basis, as in
prior years. The amounts recorded for the plans in CSXT's statement of
financial position are as follows:
Medical Plan Life Insurance Plan
(at Valuation Date) (at Valuation Date)
------------------- -------------------
Sept. 30, Dec. 29, Sept. 30, Dec. 29,
1996 1995 1996 1995
------- ------- ------- -------
Accumulated Post-Retirement
Benefit Obligation:
Retirees $168 $155 $55 $63
Fully Eligible Active Participants 17 13 2 2
Other Active Participants 20 20 1 1
---- ---- --- ---
Accumulated Post-Retirement
Benefit Obligation 205 188 58 66
Unrecognized Prior Service Cost 6 9 3 3
Unrecognized Net(Loss) Gain (41) (32) 1 (8)
Claim Payments, Oct. 1 through Year-End (5) (a) (1) (a)
---- ---- --- ---
Net Post-Retirement Benefit Obligation
at Year-End $165 $165 $61 $61
==== ==== === ===
(a) In 1996, the company changed the measurement date for valuing its post-
retirement benefit obligation to September 30. The change in measurement date
had no effect on 1996 or prior years' net expense for post-retirement benefits.
- 27 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 11. EMPLOYEE BENEFIT PLANS, Continued
Other Post-Retirement Benefit Plans, Continued
Net expense for post-retirement benefits was $22 million, $22 million,
and $21 million for 1996, 1995 and 1994, respectively. The net post-retirement
benefit obligation was determined using the assumption that the health care cost
trend rate for medical plans was 10% for 1996-1997, decreasing gradually to 5.5%
by 2005 and remaining at that level thereafter. A 1% increase in the assumed
health care cost trend rate would increase the accumulated post-retirement
benefit obligation for medical plans as of December 27, 1996 by $14 million and
net post-retirement benefit expense for 1996 by $2 million. The discount rate
used in determining the accumulated post-retirement benefit obligation was 7.50%
for 1996 and 1995, and 8.25% for 1994.
Other Plans
Under collective bargaining agreements, the company participates in a
number of union-sponsored, multi-employer benefit plans. Payments to these
plans are made as part of aggregate assessments generally based on number of
employees covered, hours worked, tonnage moved or a combination thereof. The
administrators of the multi-employer plans generally allocate funds received
from participating companies to various health and welfare benefit plans and
pension plans. Current information regarding such allocations has not been
provided by the administrators. Total contributions of $142 million, $148
million and $125 million, respectively, were made to these plans in 1996, 1995
and 1994.
Certain officers and key employees of CSXT participate in stock
purchase, performance and award plans of CSX. CSXT is allocated its share of
any cost to participate in these plans.
NOTE 12. SUMMARY OF COMMITMENTS AND CONTINGENCIES.
Lease Commitments
CSXT leases equipment under agreements with terms up to 21 years.
Non-cancelable, long-term leases generally include provisions for maintenance,
and options to purchase at fair value and to extend the terms. At December 27,
1996, minimum equipment rentals under non-cancelable operating leases totaled
approximately $165 million for 1997, $164 million for 1998, $147 million for
1999, $129 million for 2000, $122 million for 2001 and $1 billion thereafter.
Rent expense on equipment operating leases, including net daily rental
charges on railroad operating equipment of $205 million, $218 million and $220
million in 1996, 1995 and 1994, respectively, amounted to $366 million in 1996,
$390 million in 1995 and $392 million in 1994.
Purchase Commitment
CSXT entered into agreements during 1993 and 1996 to purchase 380
locomotives. These large orders cover normal locomotive replacement needs
- 28 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 12. SUMMARY OF COMMITMENTS AND CONTINGENCIES, Continued.
for 1994 through 1997 and introduced alternating current traction technology to
the locomotive fleet. CSXT has taken delivery of 50 direct current and 255
alternating current locomotives through December 27, 1996. The remaining 75
alternating current units will be delivered in 1997.
Other Commitments
During 1995, CSXT entered into an agreement with a major
telecommunications vendor to supply and manage its telecommunications needs
through May 2005. As discussed in Note 2 - Restructuring Charge, the agreement
was amended in 1996 to significantly reduce the service period, increase
contractual payment amounts over the revised service period, and relieve the
vendor of obligations to replace certain telecommunications technology. The
amended agreement provides for a revised termination date of June 30, 1998, and
requires minimum payments totaling $56 million over the remaining service
period.
Contingent Liabilities and Long-Term Operating Agreements
CSXT and its subsidiaries are contingently liable individually and
jointly with others as guarantors of long-term debt and obligations principally
related to leased equipment, joint ventures and joint facilities. These
contingent obligations were immaterial to the company's results of operations
and financial position at December 27, 1996.
CSXT has various long-term railroad operating agreements that allow
for exclusive operating rights over various railroad lines. Under these
agreements, CSXT is obligated to pay usage fees of approximately $9 million
annually. The terms of these agreements range from 30 to 40 years.
CSXT is a party to various proceedings involving private parties and
regulatory agencies related to environmental issues. CSXT has been identified
as a potentially responsible party (PRP) at approximately 105 environmentally
impaired sites that are or may be subject to remedial action under the Federal
Superfund statute (Superfund) or similar state statutes. A number of these
proceedings are based on allegations that CSXT, or its predecessor railroads,
sent hazardous substances to the facilities in question for disposal. Such
proceedings arising under Superfund or similar state statutes can involve
numerous other waste generators and disposal companies and seek to allocate or
recover costs associated with site investigation and cleanup, which could be
substantial.
CSXT is involved in a number of administrative and judicial
proceedings and other cleanup efforts at approximately 270 sites, including
sites addressed under the Federal Superfund statute or similar state statutes,
at which it is participating in the study and/or cleanup of alleged
environmental contamination. The assessment of the required response and
remedial costs associated with many sites is extremely complex. Cost estimates
are based on information available for each site, financial viability of other
- 29 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 12. SUMMARY OF COMMITMENTS AND CONTINGENCIES, Continued
PRPs, where available, and existing technology, laws and regulations. CSXT's
best estimates of the allocation method and percentage of liability when other
PRPs are involved are based on assessments by consultants, agreements among
PRPs, or determinations by the U.S. Environmental Protection Agency or other
regulatory agencies.
At least once each quarter, CSXT reviews its role, if any, with
respect to each such location, giving consideration to the nature of CSXT's
alleged connection to the location (e.g., generator, owner or operator), the
extent of CSXT's alleged connection (e.g., volume of waste sent to the location
and other relevant factors), the accuracy and strength of evidence connecting
CSXT to the location, and the number, connection and financial position of other
named and unnamed PRPs at the location. The ultimate liability for remediation
can be difficult to determine with certainty because of the number and
creditworthiness of PRPs involved. Through the assessment process, CSXT
monitors the creditworthiness of such PRPs in determining ultimate liability.
Based upon such reviews and updates of the sites with which it is
involved, CSXT has recorded, and reviews at least quarterly for adequacy,
reserves to cover estimated contingent future environmental costs with respect
to such sites. The recorded liabilities for estimated future environmental
costs at December 27, 1996 and December 29, 1995 were $117 million and $137
million, respectively. These recorded liabilities include amounts representing
CSXT's estimate of unasserted claims, which CSXT believes to be immaterial. The
liability has been accrued for future costs for all sites where the company's
obligation is probable and where such costs can be reasonably estimated. 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. The majority of the December 27, 1996 environmental
liability is expected to be paid out over the next five to seven years, funded
by cash generated from operations.
The company does not currently possess sufficient information to
reasonably estimate the amounts of additional liabilities, if any, on some sites
until completion of future environmental studies. In addition, latent
conditions at any given location could result in exposure, the amount and
materiality of which cannot presently be reliably estimated. Based upon
information currently available, however, the company believes that its
environmental reserves are adequate to accomplish remedial actions to comply
with present laws and regulations, and that the ultimate liability for these
matters will not materially affect its overall results of operations and
financial condition.
Legal Proceedings
A number of legal actions, other than environmental, are pending
against CSXT in which claims are made in substantial amounts. While the
ultimate results of environmental investigations, lawsuits and claims involving
CSXT cannot be predicted with certainty, management does not currently expect
- 30 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 12. SUMMARY OF COMMITMENTS AND CONTINGENCIES, Continued
that these matters will have a material adverse effect on the consolidated
financial position, results of operations and cash flows of the company.
NOTE 13. QUARTERLY DATA (Unaudited).
1996
-----------------------------------------
1st 2nd(a) 3rd 4th
------ ------ ------ ------
Operating Revenue $1,195 $1,255 $1,211 $1,248
Operating Income 182 269 224 251
Net Earnings 107 164 133 173
1995
-----------------------------------------
1st 2nd(b) 3rd 4th
------ ------ ------ ------
Operating Revenue $1,194 $1,211 $1,191 $1,223
Operating Income 196 21 217 227
Net Earnings 114 9 138 147
(a) In the second quarter of 1996, the company changed its earnings
presentation to exclude real estate activities from operating revenue
and expense. These activities are now included in other income in the
consolidated statement of earnings. Amounts for prior quarters have
been restated to conform to the new presentation.
(b) The company recorded a $196 million pretax restructuring charge in the
second quarter of 1995 to recognize the costs associated with a
contractual agreement with a major telecommunications vendor to
replace, manage and technologically enhance its existing private
telecommunications network. The charge included a $163 million write-
down of technologically obsolete telecommunications assets and
provisions for employee separations. The restructuring charge reduced
net earnings by $121 million.
- 31 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
MANAGEMENT'S NARRATIVE ANALYSIS AND RESULTS OF OPERATIONS
CSXT posted record operating income of $926 million in 1996, 8% above
1995's comparable $857 million. The results are primarily due to strong
performances by the coal and auto business units, continued selective rate
increases and ongoing cost control efforts.
Improved pricing and volume strength combined to produce operating
revenue of $4.9 billion, a 2% increase over 1995.
CSXT COMMODITIES BY CARLOADS AND REVENUE
Carloads Revenue
(Thousands) (Millions of Dollars)
------------ ---------------------
1996 1995 1996 1995
----- ----- ----- ------
Automotive 367 357 $ 520 $ 503
Chemicals 408 406 719 700
Minerals 428 414 379 375
Food and Consumer 167 179 199 207
Agricultural Products 254 280 323 336
Metals 277 301 290 291
Forest Products 443 456 472 464
Phosphates and Fertilizer 511 512 279 282
Coal 1,711 1,678 1,584 1,523
----- ----- ------ ------
Total 4,566 4,583 4,765 4,681
===== =====
Other Revenue 144 138
------ ------
Total Operating Revenue $4,909 $4,819
====== ======
Shipments of coal, CSXT's major commodity, remained strong in 1996,
with total coal volume increasing to 163.6 million tons vs. 158.5 million tons
in 1995. Total merchandise traffic of 2.9 million carloads remained level with
1995. Chemical traffic remained strong, comparable to the 1995 level, due to
steady demand for plastic production. Driven by strong demand for trucks and
sport utility vehicles, the automotive market experienced a 3% increase in
carloads and a like increase in revenues in 1996.
A late harvest caused grain shipments to be less robust than in the
prior year. This resulted in a 9% decrease in carloads and a 4% decrease in
revenues for agricultural products. Demand for phosphates and fertilizer
remained solid. Carloads were level with 1995, while revenue decreased 1%.
Throughout the year, CSXT continued its emphasis on cost control.
Despite bad weather earlier in the first quarter and a 20% rise in the average
price of diesel fuel, rail operating expense rose only 1% over 1995, excluding
the 1995 second-quarter charge.
- 32 -
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
MANAGEMENT'S NARRATIVE ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
The ongoing efforts of the company's Performance Improvement Teams
(PITs) resulted in cost savings of more than $106 million. PIT initiatives also
resulted in more cost-effective procedures for locomotive and car repair, as
well as maintenance of way.
Labor and fringe benefits expense increased 2% to $1.89 billion, vs.
$1.86 billion in 1995. Rail management successfully negotiated, without a
strike, a union contract that provides for competitive increases in labor and
fringe benefits over the next five years.
OTHER MATTERS
CSX Corporation is negotiating the final details of a transaction to
combine key components of the current Conrail, Inc. operations into the CSX rail
system. Discussions with Norfolk Southern Corporation are expected to lead to a
roughly equal division of the Conrail system between the two remaining major
rail carriers in the East. The final terms of the acquisition will remain
subject to a number of conditions, including the approval by the Surface
Transportation Board, which has the authority to modify terms and impose
additional conditions.
- 33 -
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<FISCAL-YEAR-END> DEC-27-1996
<PERIOD-END> DEC-27-1996
<CASH> 207
<SECURITIES> 0
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0
0
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<DISCONTINUED> 0
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</TABLE>
