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 26, 1997
OR
( ) 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 1-3359
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.
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 February 20,
1998, 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 February 20, 1998.
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
1997 FORM 10-K ANNUAL REPORT
Table of Contents
Item No. Page
- -------- ----
PART I
1 Business 4
2. Properties 4
3. Legal Proceedings 4-5
4. Submission of Matters to a Vote of Security Holders 5
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 6
13. Certain Relationships and Related Transactions 6
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 7
Signatures 8
Index to Consolidated Financial Statements 9
<PAGE>
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 18,285 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 27,864 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 1997, see
"Management's Narrative Analysis and Results of Operations" on pages 29 - 31.
Roadway
On December 26, 1997, CSXT's consolidated system consisted of 30,941 miles
of track as follows:
Track
Miles
First Main 18,285
Second Main 2,690
Passing, Crossovers and Turnouts 2,344
Way and Yard Switching 7,622
------
Total 30,941
======
Included above are 870 miles of leased track, 2,401 miles of track under
trackage rights agreements with other railroads and 198 miles of track under
operating contracts.
<PAGE>
Equipment
On December 26, 1997, CSXT and subsidiaries owned or leased the following:
Owned Leased Total
-------- --------- -------
Locomotives
Freight 1,889 503 2,392
Switching 212 15 227
Auxiliary Units 162 -- 162
-------- --------- -------
Total 2,263 518 2,781
======== ========= =======
Freight Cars
Open Top Hoppers 14,333 9,811 24,144
Gondolas 13,433 11,846 25,279
Covered Hoppers 11,077 7,279 18,356
Box Cars 9,142 5,989 15,131
Flat Cars 677 11,483 12,160
Other 1,350 1,058 2,408
-------- --------- -------
Total 50,012 47,466 97,478
======== ========= =======
Item 3. Legal Proceedings.
In September 1997, a state court jury in New Orleans returned a $2.5
billion punitive damages award against CSXT. The award was made in a
class-action lawsuit against a group of nine companies based on personal
injuries alleged to have arisen from a 1987 fire. The fire was caused by a
leaking chemical tank car parked on CSXT tracks and resulted in the 36-hour
evacuation of a New Orleans neighborhood. In the same case, the court awarded a
group of 20 plaintiffs compensatory damages of approximately $2 million against
the defendants, including CSXT, to which the jury assigned 15% of the
responsibility for the incident. CSXT's liability under that compensatory
damages award is not material.
In October 1997, the Louisiana Supreme Court set aside the punitive damages
judgment, ruling the judgment should not have been entered until all liability
issues were resolved. CSXT believes this decision means that 8,000 other cases
must be resolved before the punitive damage claims can be decided. CSXT is
pursuing an aggressive strategy on all legal fronts, and management believes
that any adverse outcome will not be material to CSXT's overall results of
operations or financial position, although it could be material to results of
operations in a particular quarterly accounting period.
A number of other 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 resolution
of these matters will have a material adverse effect on the consolidated results
of operations, financial position or 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 clean-up or from whom such costs may be
recovered.
The wide range of costs of the possible remediation alternatives, changing
clean-up 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.
<PAGE>
CSXT has identified and maintains reserves for approximately 250
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 accounting 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.
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 1997, 1996 and 1995, CSXT paid
dividends on its common stock aggregating $138 million, $886 million
and $158 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 29 and 30.
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).
<PAGE>
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 by reference to Exhibit 3.1 to Form 10-K
dated March 8, 1996).
(3.2) By-laws of the Registrant, as amended
(incorporated by reference to Exhibit 3.2 to Form 10-K
dated March 8, 1996).
(27) Financial Data Schedule
(b) Reports on Form 8-K.
None.
<PAGE>
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 3rd day of
March, 1998.
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
- ----------------------
Alvin R. Carpenter* (Principal Executive Officer) and
Director
/s/ Gerald L. Nichols Vice Chairman 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
- -------------------
Michael J. Ward* (Principal Finance Officer) and
Director
/s/ Patricia J. Aftoora
- -----------------------
*Patricia J. Aftoora
(Attorney-in-Fact)
March 3, 1998
<PAGE>
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 26, 1997
December 27, 1996 and December 29, 1995 11
Consolidated Statement of Cash Flows -
Fiscal Years Ended December 26, 1997,
December 27, 1996 and December 29, 1995 12
Consolidated Statement of Financial Position -
December 26, 1997 and December 27, 1996 13
Consolidated Statement of Retained Earnings
Fiscal Years Ended December 26, 1997,
December 27, 1996 and December 29, 1995 14
Notes to Consolidated Financial Statements 15
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholder and Board of Directors
of CSX Transportation, Inc.
We have audited the accompanying consolidated statements of financial
position of CSX Transportation, Inc. and subsidiaries as of December 26, 1997
and December 27, 1996, and the related consolidated statements of earnings, cash
flows, and retained earnings for each of the three fiscal years in the period
ended December 26, 1997. 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 11-28) present fairly, in all material respects, the
consolidated financial position of CSX Transportation, Inc. and subsidiaries at
December 26, 1997 and December 27, 1996, and the consolidated results of their
operations and their cash flows for each of the three fiscal years in the period
ended December 26, 1997, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
-----------------
Ernst & Young LLP
Richmond, Virginia
January 30, 1998
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Millions of Dollars)
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------------------
Dec. 26, Dec. 27, Dec. 29,
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
OPERATING REVENUE
Merchandise $ 3,299 $ 3,181 $ 3,151
Coal 1,560 1,584 1,530
Other 130 144 138
---------- ---------- -----------
Total 4,989 4,909 4,819
---------- ---------- -----------
OPERATING EXPENSE
Labor and Fringe Benefits 1,921 1,890 1,855
Materials, Supplies and Other 955 1,006 1,076
Equipment Rent 347 366 391
Depreciation 427 413 385
Fuel 299 308 255
Restructuring Charge -- -- 196
---------- ---------- -----------
Total 3,949 3,983 4,158
---------- ---------- -----------
OPERATING INCOME 1,040 926 661
Other Income 11 46 37
Interest Expense 74 70 46
---------- ---------- -----------
EARNINGS BEFORE INCOME TAXES 977 902 652
Income Tax Expense 352 325 244
---------- ---------- -----------
NET EARNINGS $ 625 $ 577 $ 408
========== ========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------
Dec. 26, Dec. 27, Dec. 29,
1997 1996 1995
------------- ----------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 625 $ 577 $ 408
Adjustments to Reconcile Net Earnings
to Net Cash Provided
Depreciation 427 413 385
Deferred Income Taxes 155 198 52
Restructuring Charge Provision -- -- 196
Productivity/Restructuring Charge Payments (49) (77) (105)
Proceeds from Real Estate Sales 50 29 24
Gain from Disposition of Properties (34) (20) (20)
Other Operating Activities (23) (21) 38
Changes in Operating Assets and Liabilities
Accounts Receivable (76) (37) 42
Sale of Accounts Receivable - Net 20 41 25
Other Current Assets (8) (22) (7)
Accounts Payable and Other Current Liabilities 31 (39) 29
--------- --------- --------
Net Cash Provided by Operating Activities 1,118 1,042 1,067
--------- --------- --------
INVESTING ACTIVITIES
Property Additions (712) (764) (765)
Proceeds from Property Dispositions 28 56 76
Affiliated Company Activity 1 40 (37)
Other Investing Activities (35) 10 (1)
--------- --------- --------
Net Cash Used by Investing Activities (718) (658) (727)
--------- --------- --------
FINANCING ACTIVITIES
Long-Term Debt Issued 82 118 121
Long-Term Debt Repaid (75) (80) (114)
Cash Dividends Paid (138) (886) (158)
Parent Company Advances Repaid -- (19) --
Affiliated Company Activity -- 56 --
Other Financing Activities (2) 1 (8)
--------- --------- --------
Net Cash Used by Financing Activities (133) ( 810) (159)
--------- --------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 267 ( 426) 181
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Period 207 633 452
--------- --------- --------
Cash and Cash Equivalents at End of Period $ 474 $ 207 $ 633
========= ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid - Net of Amounts Capitalized $ 70 $ 63 $ 50
========= ========= ========
Income Taxes Paid $ 232 $ 135 $ 227
========= ========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Millions of Dollars)
<TABLE>
<CAPTION>
Dec. 26, Dec. 27,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 474 $ 207
Accounts and Notes Receivable 138 62
Materials and Supplies 131 121
Deferred Income Taxes 116 183
Other Current Assets 39 41
----------- ----------
Total Current Assets 898 614
Properties-Net 10,016 9,750
Affiliates and Other Companies 207 148
Other Long-Term Assets 282 288
----------- ----------
Total Assets $ 11,403 $ 10,800
=========== ==========
LIABILITIES
Current Liabilities
Accounts Payable $ 595 $ 547
Labor and Fringe Benefits Payable 334 353
Casualty, Environmental and Other Reserves 182 199
Current Maturities of Long-Term Debt 164 77
Due to Parent Company 22 25
Due to Affiliate 90 90
Other Current Liabilities 21 37
----------- ----------
Total Current Liabilities 1,408 1,328
Casualty, Environmental and Other Reserves 582 597
Long-Term Debt 839 886
Deferred Income Taxes 2,582 2,493
Other Long-Term Liabilities 693 684
----------- ----------
Total Liabilities 6,104 5,988
----------- ----------
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 1,263
Retained Earnings 3,855 3,368
----------- ----------
Total Shareholder's Equity 5,299 4,812
----------- ----------
Total Liabilities and Shareholder's Equity $ 11,403 $ 10,800
=========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(Millions of Dollars)
<TABLE>
<CAPTION>
Dec. 26, Dec. 27, Dec. 29,
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Beginning Balance $ 3,368 $ 3,674 $ 3,424
Net Earnings 625 577 408
Dividends - Common (138) (886) (158)
Other -- 3 --
------------ ------------ --------------
Ending Balance $ 3,855 $ 3,368 $ 3,674
============ ============ ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
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 18,285 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 Dec. 26,
1997, Dec. 27, 1996 and Dec. 29, 1995. 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 Dec. 26, 1997 and Dec. 27, 1996, accounts receivable sold
under this agreement totaled $664 million and $644 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. Accounts receivable sold under this
agreement totaled $46 million at Dec. 26, 1997 and Dec. 27, 1996. The sales of
receivables have been reflected as reductions of "Accounts and Notes Receivable"
in the Consolidated Statement of Financial Position. The net losses associated
with the sales of receivables were $57 million in 1997, $55 million in 1996 and
$54 million in 1995.
<PAGE>
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 enforced by the Surface Transportation Board (STB) of the U.S.
Department of Transportation require periodic formal studies of ultimate service
lives for all railroad assets. Resulting service life estimates are subject to
review and approval by the STB. 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 that 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,
less an allowance for accumulated depreciation.
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. 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
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.
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES, Continued.
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 Dec. 26, 1997.
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 to the company 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 1997
presentation.
Accounting Pronouncements
The FASB has issued Statement No. 130 "Reporting Comprehensive Income" and
Statement No. 131 "Disclosures about Segments of an Enterprise and Related
Information," both of which the company will adopt in 1998. Statement No. 130
establishes standards for reporting and display of comprehensive income and its
components in financial statements. Comprehensive income generally represents
all changes in shareholders' equity except those resulting from investments by
or distributions to shareholders. With the exception of net earnings, such
changes are generally not significant to the company; and the adoption of
Statement No. 130, including the required comparative presentation for prior
periods, is not expected to have a material impact on its financial statements.
Statement No. 131 requires that a public enterprise report financial and
descriptive information about its operating segments in financial statements
issued to shareholders for interim and annual periods. The Statement also
requires additional disclosures with respect to products and services,
geographic areas of operation and major customers. Adoption of Statement No. 131
is not expected to have a material impact on the company's financial statements.
NOTE 2. RESTRUCTURING CHARGE.
In 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.
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 2. RESTRUCTURING CHARGE, Continued.
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 in the final stages of negotiating a multiyear
agreement with a successor telecommunications vendor and expects to have service
arrangements with that vendor in place prior to June 30, 1998.
A summary of the restructuring charge and related activity through Dec. 26,
1997 is as follows:
<TABLE>
<CAPTION>
Separation
and Labor
Obsolete Protection
Assets Costs Total
--------- ----------- ----------
<S> <C> <C> <C>
Restructuring Charge $ 163 $ 33 $ 196
Amounts Utilized through Dec. 26, 1997 163 (3) (166)
-------- ---------- ---------
Remaining Reserve as of Dec. 26, 1997 $ -- $ 30 $ 30
========= =========== ==========
</TABLE>
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 Dec. 26, 1997, 59 employee separations have been finalized. The company
expects the remaining affected employees to be impacted within the next four
years.
NOTE 3. SUPPLEMENTAL STATEMENT OF EARNINGS FINANCIAL DATA.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Selling, General and Administrative Expense $778 $776 $808
==== ==== ====
</TABLE>
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 4. OTHER INCOME.
1997 1996 1995
--------- --------- ---------
Interest Income - CSX Cash Management Plan $ 26 $ 33 $ 34
Interest Income - Other 4 9 17
Income from Real Estate Operations(a) 57 51 43
Net Losses from Accounts Receivable Sold (57) (55) (54)
Miscellaneous (19) 8 (3)
--------- --------- ---------
Total $ 11 $ 46 $ 37
========= ========= =========
(a) Gross revenue from real estate operations was $87 million, $76 million
and $68 million in 1997, 1996 and 1995, respectively.
NOTE 5. INCOME TAXES.
Income tax expense information is as follows:
1997 1996 1995
-------- -------- --------
Current
Federal $ 173 $ 106 $ 169
State and Foreign 24 21 23
-------- -------- --------
Total 197 127 192
-------- -------- --------
Deferred
Federal 134 202 55
State 21 (4) (3)
-------- -------- --------
Total 155 198 52
-------- -------- --------
Total Expense $ 352 $ 325 $ 244
======== ======== ========
Income tax expense reconciled to the tax computed at statutory rates is as
follows:
1997 1996 1995
------------- ------------- -------------
Tax at Statutory Rates $ 342 35% $ 316 35% $ 228 35%
State Income Taxes 29 3 10 1 13 2
Other (19) (2) (1) -- 3 --
======= ===== ======= ===== ======= ====
Total Expense $ 352 36% $ 325 36% $ 244 37%
======= ===== ======= ===== ======= ====
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 5. INCOME TAXES, Continued.
The significant components of deferred tax assets and liabilities include:
Dec. 26, Dec. 27,
1997 1996
-------- --------
Deferred Tax Assets
Productivity/Restructuring Charges $ 143 $ 154
Employee Benefit Plans 165 206
Alternative Minimum Tax Credits -- 5
Other 290 269
-------- --------
Total 598 634
-------- --------
Deferred Tax Liabilities
Accelerated Depreciation 2,789 2,685
Other 275 259
-------- --------
Total 3,064 2,944
-------- --------
Net Deferred Tax Liabilities $ 2,466 $ 2,310
======== ========
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. At Dec. 26, 1997 and Dec. 27, 1996, approximately $150
million and $110 million, respectively, of income taxes due from CSX were
included in Other Current Liabilities.
Examinations of the federal income tax returns of CSX and its principal
subsidiaries have been completed through 1990. Returns for 1991 through 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 Dec. 26, 1997 and Dec. 27, 1996, includes $496
million and $250 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.
As of Dec. 26, 1997 and Dec. 27, 1996, CSXT had sold $664 million and $644
million, respectively, of accounts receivable to CTRC. The sale of accounts
receivable is more fully described in Note 1.
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 $38 million in 1997, $32 million in 1996 and $26 million in 1995.
During 1996, CSXT also received $113 million in pension assets, $70 million
after-tax, from CSX through a capital contribution.
<PAGE>
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 $216 million, $212 million and $202 million in
1997, 1996 and 1995, 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 Dec. 26, 1997, $90 million was outstanding under the agreement.
Interest on the loan is payable monthly at .25% over the LIBOR rate, and was
6.22% at Dec. 26, 1997. Interest expense related to the loan was $5 million and
$4 million for the fiscal years ended Dec. 26, 1997 and Dec. 27, 1996,
respectively.
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 $116 million at Dec. 26, 1997.
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 7. PROPERTIES.
Dec. 26, 1997
-------------------------------------
Accumulated
Cost Depreciation Net
--------- -------------- ---------
Transportation
Road $ 9,603 $ 2,658 $ 6,945
Equipment 4,400 1,580 2,820
---------- --------- ---------
14,003 4,238 9,765
Non Transportation 258 7 251
---------- --------- ---------
Total $14,261 $ 4,245 $10,016
========== ========= =========
Dec. 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
========== ========= =========
NOTE 8. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES.
Activity relating to casualty, environmental and other reserves is as
follows:
<TABLE>
<CAPTION>
Casualty Environmental Separation
Reserves(a)(b)Reserves (a) Liabilities Total
(a)(c)
----------- ---------------- -------------- ---------
<S> <C> <C> <C> <C>
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
Charged to Expense and Other Additions 141 12 -- 153
Payments and Other Reductions (135) (30) (20) (185)
======= ======= ======== ========
Balance Dec. 26, 1997 $ 335 $ 99 $ 330 $ 764
======= ======= ======== ========
</TABLE>
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 8. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued.
(a) Balances include current portion of casualty and environmental reserves and
separation liabilities, respectively, of $137 million, $20 million and $25
million at Dec. 26, 1997, $135 million, $20 million and $44 million at Dec.
27, 1996 and $147 million, $20 million and $27 million at Dec. 29, 1995.
(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 $300 million at Dec. 26, 1997, $318 million
at Dec. 27, 1996 and $344 million at Dec. 29, 1995 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.
NOTE 9. LONG-TERM DEBT.
Average
Interest Rates at Dec. 26, Dec. 27,
Type and Maturity Date Dec. 26, 1997 1997 1996
- --------------------------- -------------------- ------------ ------------
Equipment Obligations
(1998-2011) 7% $ 761 $ 711
Mortgage Bonds
(1998-2003) 3% 75 76
Other Obligations
(1998-2021) 6% 167 176
-------- -------
Total 7% 1,003 963
Less Debt Due Within One 164 77
Year
-------- -------
Total Long-Term Debt $ 839 $ 886
======== =======
CSXT has long-term debt maturities for 1998 through 2002 aggregating $164
million, $89 million, $67 million, $60 million and $108 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 Dec. 26, 1997, the fair value of long-term debt, including
current maturities, was $1.042 billion, compared with a carrying amount of
$1.003 billion. At Dec. 27, 1996, the fair value of long-term debt, including
current maturities, was $989 million, compared with a carrying amount of $963
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.
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
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.
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 $18
million for 1997, $15 million for 1996 and $22 million for 1995.
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:
<TABLE>
<CAPTION>
Medical Plan Life Insurance Plan
(at Valuation Date) (at Valuation Date)
-------------------- ---------------------
Sept. 30, Sept. 30 Sept. 30 Sept. 30,
1997 1996 1997 1996
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Accumulated Post-Retirement Benefit
Obligation:
Retirees $ 160 $ 168 $ 54 $ 55
Fully Eligible Active Participants 19 17 2 2
Other Active Participants 20 20 1 1
--------- --------- --------- ----------
Accumulated Post-Retirement Benefit
Obligation 199 205 57 58
Unrecognized Prior Service Cost 2 6 2 3
Unrecognized Net (Loss) Gain (30) (41) 1 1
Claim Payments, Oct. 1 through Year-End (4) (5) (1) (1)
--------- --------- --------- ----------
Net Post-Retirement Benefit Obligation
at Year-End $ 167 $ 165 $ 59 $ 61
========= ========= ========= ==========
</TABLE>
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 11. EMPLOYEE BENEFIT PLANS, Continued
Net expense for post-retirement benefits was $22 million for each of years
1997, 1996 and 1995. The net post-retirement benefit obligation was determined
using the assumption that the health care cost trend rate for medical plans was
9.5% 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 Dec. 26, 1997 by $14 million and net post-retirement benefit expense for 1997
by $2 million. The discount rate used in determining the accumulated
post-retirement benefit obligation was 7.5% for 1997, 1996 and 1995.
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 $152 million, $142
million and $148 million, respectively, were made to these plans in 1997, 1996
and 1995.
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 Dec. 26, 1997,
minimum equipment rentals under non-cancelable operating leases totaled
approximately $173 million for 1998, $149 million for 1999, $131 million for
2000, $125 million for 2001, $119 million for 2002 and $895 million thereafter.
Rent expense on equipment operating leases, including net daily rental
charges on railroad operating equipment of $201 million, $205 million and $218
million in 1997, 1996 and 1995, respectively, amounted to $347 million in 1997,
$366 million in 1996 and $390 million in 1995.
Purchase Commitment
CSXT entered into agreements during 1993, 1996 and 1997 to purchase 450
locomotives. These large orders cover normal locomotive replacement needs for
1994 through 1998 and introduced alternating current traction technology to the
locomotive fleet. CSXT has taken delivery of 50 direct current and 301
alternating current locomotives through Dec. 26, 1997. The remaining 99
alternating current units will be delivered in 1998.
<PAGE>
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.
Commitments Related to Conrail Transaction
In April 1997, CSXT entered into certain agreements pertaining to the joint
acquisition of Conrail, Inc. (Conrail) by CSX and Norfolk Southern Corporation
(Norfolk Southern). Under these agreements and other agreements to be completed
or executed prior to the date that CSX and Norfolk Southern are permitted by the
STB to exercise control over Conrail appropriate portions of the Conrail rail
system are expected to be integrated with the CSXT system. Once the integration
of the CSXT and Conrail lines occurs, CSXT will have material multi-year
commitments under various leasing and operating agreements with certain Conrail
entities. The amounts of these commitments have not yet been determined.
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 relating
to leased equipment, joint ventures and joint facilities. These contingent
obligations were immaterial to the company's results of operations and financial
position at Dec. 26, 1997.
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 120 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 railroad predecessors,
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 clean-up, which could be
substantial.
CSXT is involved in a number of administrative and judicial proceedings and
other clean-up efforts at approximately 250 sites, including the sites addressed
under the Federal Superfund statute or similar state statutes, where it is
participating in the study and/or clean-up of alleged environmental
contamination. The assessment of the required response and remedial costs
associated with most sites is extremely complex. Cost estimates are based on
information available for each site, financial viability of other 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 (i.e., generator, owner or operator), the extent of
CSXT's alleged connection (i.e., 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.
<PAGE>
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.
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 Dec.
26, 1997 and Dec. 27, 1996 were $99 million and $117 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 Dec. 26, 1997, 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 position.
Legal Proceedings
In September 1997, a state court jury in New Orleans returned a $2.5
billion punitive damages award against CSXT. The award was made in a
class-action lawsuit against a group of nine companies based on personal
injuries alleged to have arisen from a 1987 fire. The fire was caused by a
leaking chemical tank car parked on CSXT tracks and resulted in the 36-hour
evacuation of a New Orleans neighborhood. In the same case, the court awarded a
group of 20 plaintiffs compensatory damages of approximately $2 million against
the defendants, including CSXT, to which the jury assigned 15% of the
responsibility for the incident. CSXT's liability under that compensatory
damages award is not material.
In October 1997, the Louisiana Supreme Court set aside the punitive damages
judgment, ruling the judgment should not have been entered until all liability
issues were resolved. CSXT believes this decision means that 8,000 other cases
must be resolved before the punitive damage claims can be decided. CSXT is
pursuing an aggressive strategy on all legal fronts, and management believes
that any adverse outcome will not be material to CSXT's overall results of
operations or financial position, although it could be material to results of
operations in a particular quarterly accounting period.
A number of other legal actions 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 that these matters will have a
material adverse effect on the consolidated results of operations, financial
position and cash flows of the company.
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 13. QUARTERLY DATA (Unaudited).
<TABLE>
<CAPTION>
1997
---------------------------------------------
1st 2nd 3rd 4th
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Operating Revenue $ 1,247 $ 1,253 $ 1,215 $ 1,274
Operating Income 235 293 235 277
Net Earnings 131 171 136 187
1996
---------------------------------------------
1st 2nd 3rd 4th
---------- ----------- ----------- ----------
Operating Revenue $ 1,195 $ 1,255 $ 1,211 $ 1,248
Operating Income 182 269 224 251
Net Earnings 107 164 133 173
</TABLE>
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
MANAGEMENT'S NARRATIVE ANALYSIS AND RESULTS OF OPERATIONS
1997 OPERATING RESULTS
CSXT reported positive operating results in 1997. Operating revenue totaled
$4.989 billion, an increase of $80 million or 2% over 1996. Operating income was
a record $1.04 billion, a 12% increase over 1996. The 1997 results were
primarily driven by strength in merchandise traffic, as well as continued
emphasis on cost reduction.
Traffic By Commodity
<TABLE>
<CAPTION>
Carloads Revenue
(Thousands) (Millions of
Dollars)
-------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Automotive 387 367 $ 543 $ 520
Chemicals 435 409 747 721
Minerals 445 430 394 381
Food and Consumer 149 134 163 148
Agricultural Products 269 261 347 343
Metals 316 277 314 290
Forest Products 471 466 499 499
Phosphates and Fertilizer 506 511 292 279
Coal 1,714 1,711 1,560 1,584
--------- --------- --------- ----------
Total 4,692 4,566 4,859 4,765
========= =======
Other Revenue 130 144
-------- --------
Total Operating Revenue $ 4,989 $ 4,909
========= ==========
</TABLE>
CSXT enjoyed growth in practically all merchandise commodity groups during
1997. Total merchandise traffic increased 4% over 1996, to 2.98 million
carloads. This growth was largely attributable to targeted marketing efforts and
stronger general demand.
Demand for automobiles and light trucks remained strong in 1997, resulting
in a 5% increase in carloads and a 4% increase in revenue over 1996. Chemical
traffic benefited from steady demand for plastics as well as the success of the
railroad's efforts to target truck traffic. The company hauled 435,000 carloads
of chemicals, an increase of 6% over 1996. Corresponding revenues were $747
million in 1997 vs. $721 million in 1996.
Shipments of coal were level with 1996 at 1.71 million carloads. Coal
revenue totaled $1.56 billion in 1997, vs $1.58 billion in 1996. These results
were adversely affected by mild temperatures across the eastern United States
during the year, as well as weak demand for U.S. export coal due to the strong
dollar.
Cost control remained a priority. Operating expense was $3.95 billion vs.
$3.98 billion in 1996. Lower operating expense was, to a large degree, achieved
through the efforts of the company's Performance Improvement Teams (PITs), which
removed approximately $115 million in costs through reductions of overtime and
absenteeism, foreign car-hire days and maintenance costs. Cost reduction was
furthered by the introduction of a new rail car distribution optimization
system, which in its early stages yielded significant improvements in car
utilization.
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
MANAGEMENT'S NARRATIVE ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS
Conrail Transaction
In April, 1997, CSXT entered into certain agreements pertaining to the
joint acquisition of Conrail by CSX and Norfolk Southern. Under these agreements
and other agreements to be completed or executed prior to the date that CSX and
Norfolk Southern are permitted by the STB to exercise control over Conrail,
appropriate portions of the Conrail rail system are expected to be integrated
with the CSXT system. Following approval by the STB as described below,
Conrail's assets will be segregated within Conrail, and CSX and Norfolk Southern
will each benefit from the operation of a specified portion of the Conrail
routes and other assets through the use of various operating arrangements.
Certain Conrail assets will be operated for the joint benefit of CSX and Norfolk
Southern.
The exercise of control over Conrail by CSX and Norfolk Southern remains
subject to a number of conditions and approvals, including approval by the STB,
which has the authority to modify contract terms and impose additional
conditions. CSX and Norfolk Southern filed an application for control of Conrail
with the STB in June 1997. The STB has adopted a schedule that contemplates a
decision in late July 1998. CSX believes that the STB will approve the joint
application for control without imposing onerous conditions.
CSXT is actively planning for the smooth integration of Conrail operations
into its rail system after the STB control date. Plans involve all facets of
combining the two systems, including: safety; customer service; train
scheduling, switching, and routing; equipment utilization and track programs;
commuter and passenger rail; marketing; technology; labor agreements; and
administration. Related capital improvements to certain routes and facilities on
the CSXT rail system also have been initiated. Operational integration is
expected to take place once the necessary implementing agreements have been
reached, which currently is anticipated in late 1998.
Safety Review
On October 16, 1997, the Federal Railroad Administration (FRA) issued a
report on a joint review of safety on the CSXT rail system. The review was
undertaken as a cooperative effort with CSXT and rail labor, and was conducted
between July and September 1997. CSXT and its labor representatives, in
cooperation with the FRA, are actively addressing the issues cited in the report
and have already initiated numerous actions to ensure that all issues are fully
resolved. CSXT has improved its safety record dramatically over the past decade
and, in recent years, has been among the safest Class I freight railroads in the
nation. The cooperative effort with rail labor and the FRA reaffirms the
commitment to safety by all parties involved and helps ensure that safety will
remain the top priority as CSXT plans the integration of Conrail lines into its
system.
Labor
Discussions with labor representatives in connection with the Conrail
acquisition are underway. In January 1998, the United Transportation Union
(UTU), which represents approximately 27% of CSXT's unionized workforce,
announced its support for the CSX/Norfolk Southern joint acquisition of Conrail.
In February 1998, the Brotherhood of Locomotive Engineers (BLE), which
represents approximately 18% of CSXT's unionized workforce, announced that it
was withdrawing its opposition to the transaction.
Under CSXT's latest national agreement with the UTU and the BLE, study
commissions were established to address key issues such as basis of pay, quality
of work life and productivity improvements through work rule modifications.
These commissions are meeting regularly and exploring projects that could lead
to reaching consensus or creating a set of recommendations covering these
important matters. At the request of the parties, the National Mediation Board
is facilitating the discussions.
<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
MANAGEMENT'S NARRATIVE ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS, continued.
Year 2000 Planning
CSXT has determined it will need to modify or replace portions of its
software so its computer systems will function properly with respect to dates in
the year 2000 and beyond. The company also has initiated discussions with its
significant suppliers, large customers and financial institutions to ensure that
those parties have appropriate plans to remediate Year 2000 issues where their
systems interface with CSXT systems or otherwise impact the company's
operations. The company is assessing the extent to which its operations are
vulnerable should those organizations fail to remediate properly their computer
systems.
The company's comprehensive Year 2000 initiative is centrally managed by
technology staff, utilizing outside consultants as necessary. The team's
activities are designed to ensure that there is no adverse effect on CSXT core
business operations and that transactions with customers, suppliers, and
financial institutions are fully supported. The company is well under way with
these efforts, which are scheduled to be completed in mid-1999. While the
company believes its planning efforts are adequate to address its Year 2000
concerns, there can be no guarantee that the systems of other companies on which
CSXT systems and operations rely will be converted on a timely basis and will
not have a material effect on the company. The cost of the Year 2000 initiatives
is not expected to be material to the company's results of operations or
financial position.
Forward Looking Statements
Estimates and forecasts in Management's Narrative Analysis and Results of
Operations are based on many estimates and assumptions about complex economic
and operating factors with respect to industry performance, general business and
economic conditions and other matters that cannot be predicted accurately and
that are subject to contingencies over which the company has no control. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of the company to differ materially from any future results,
performance or achievements expressed or implied by such statements. Certain of
those risks, uncertainties and other important factors that could cause actual
results to differ materially include: future economic conditions in the markets
in which CSXT and Conrail operate; financial market conditions; inflation rates;
changing competition; changes in the economic regulatory climate in the U.S.
railroad industry; the ability to eliminate duplicative administrative
functions; and adverse changes in applicable laws, regulations or rules
governing environmental, tax or accounting matters. These forward-looking
statements speak only as of the date of this filing. CSXT disclaims any
obligation or undertaking to disseminate any updates or revisions to any such
statement to reflect changes in CSXT's expectations or any change in events,
conditions or circumstances on which any such statements are based.
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