FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 25, 1998
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, Florida 32202
(Address of principal executive offices) (Zip Code)
(904) 359-3100
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last
report.)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of September 25, 1998: 9,061,038 shares.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 1998
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters and Nine Months Ended September 25, 1998 and
September 26, 1997 3
2. Consolidated Statement of Cash Flows-
Nine Months Ended September 25, 1998 and September 26, 1997 4
3. Consolidated Statement of Financial Position-
At September 25, 1998 and December 26, 1997 5
Notes to Consolidated Financial Statements 6
Item 2:
Management's Analysis and Results of Operations 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signature 17
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
Quarters Ended Nine Months Ended
---------------------------- ----------------------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1998 1997 1998 1997
------------- -------------- ----------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUE
Merchandise $ 787 $ 794 $ 2,460 $ 2,461
Coal 381 390 1,120 1,161
Other 33 31 121 93
---------- ----------- ---------- ----------
Total 1,201 1,215 3,701 3,715
---------- ----------- ---------- ----------
OPERATING EXPENSE
Labor and Fringe Benefits 484 480 1,466 1,430
Materials, Supplies and Other 226 165 617 506
Related Party Service Fees 88 74 238 209
Equipment Rent 92 87 265 259
Depreciation 112 108 336 325
Fuel 57 66 186 223
Restructuring Credit (30) - (30) -
---------- ----------- ---------- ----------
Total 1,029 980 3,078 2,952
---------- ----------- ---------- ----------
OPERATING INCOME 172 235 623 763
Other Income (Expense) (48) 14 (99) 8
Interest Expense 17 18 49 53
---------- ----------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 107 231 475 718
Income Tax Expense 40 95 177 280
---------- ----------- ---------- ----------
NET EARNINGS $ 67 $ 136 $ 298 $ 438
========== =========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Millions of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
-------------------------
Sept. 25, Sept. 26,
1998 1997
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 298 $ 438
Adjustments to Reconcile Net Earnings
to Net Cash Provided
Depreciation 336 325
Deferred Income Taxes 103 132
Restructuring Credit (30) -
Productivity/Restructuring Charge Payments (21) (35)
Other Operating Activities (21) (23)
Changes in Operating Assets and Liabilities
Accounts Receivable (27) (70)
Materials and Supplies (25) (13)
Other Current Assets (33) (35)
Accounts Payable 22 21
Other Current Liabilities (20) 14
---------- ---------
Net Cash Provided by Operating Activities 582 754
---------- ---------
INVESTING ACTIVITIES
Property Additions (825) (398)
Other Investing Activities (33) 9
---------- ---------
Net Cash Used by Investing Activities (858) (389)
---------- ---------
FINANCING ACTIVITIES
Long-Term Debt Issued 166 5
Long-Term Debt Repaid (54) (60)
Dividends Paid (104) (104)
Other Financing Activities (1) (3)
---------- ---------
Net Cash Provided (Used) by Financing Activities 7 (162)
---------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents (269) 203
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Period 474 207
---------- ---------
Cash and Cash Equivalents at End of Period $ 205 $ 410
========== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Financial Position
(Millions of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
Sept. 25, Dec. 26,
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 205 $ 474
Accounts Receivable 165 138
Materials and Supplies 156 131
Deferred Income Taxes 154 116
Other Current Assets 72 39
------------ ------------
Total Current Assets 752 898
Properties 14,810 14,261
Accumulated Depreciation (4,422) (4,245)
------------ ------------
Properties-Net 10,388 10,016
Affiliates and Other Companies 217 207
Other Long-Term Assets 331 282
------------ ------------
Total Assets $ 11,688 $ 11,403
============ ============
LIABILITIES
Current Liabilities
Accounts Payable $ 614 $ 595
Labor and Fringe Benefits Payable 260 334
Casualty, Environmental and Other Reserves 168 182
Current Maturities of Long-Term Debt 101 164
Due to Parent Company 25 22
Due to Affiliate 90 90
Other Current Liabilities 75 21
------------ ------------
Total Current Liabilities 1,333 1,408
Casualty, Environmental and Other Reserves 515 582
Long-Term Debt 923 839
Deferred Income Taxes 2,738 2,582
Other Long-Term Liabilities 659 693
------------ ------------
Total Liabilities 6,168 6,104
------------ ------------
SHAREHOLDER'S EQUITY
Common Stock, $20 Par Value:
Authorized 10,000,000 Shares;
Issued and Outstanding 9,061,038 Shares 181 181
Other Capital 1,294 1,263
Retained Earnings 4,045 3,855
------------ ------------
Total Shareholder's Equity 5,520 5,299
------------ ------------
Total Liabilities and Shareholder's Equity $ 11,688 $ 11,403
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of CSX Transportation, Inc. (CSXT) and its majority-owned subsidiaries
at September 25, 1998 and December 26, 1997, the results of their operations for
the quarters and nine months ended September 25, 1998 and September 26, 1997,
and their cash flows for the nine months ended September 25, 1998 and September
26, 1997, such adjustments being of a normal recurring nature. CSXT is a
wholly-owned subsidiary of CSX Corporation (CSX).
While management believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these financial
statements be read in conjunction with the financial statements and the notes
included in CSXT's latest Form 10-K.
The company's fiscal year is composed of 52 weeks ending on the last
Friday in December. The financial statements presented are for the 13-week
quarters and 39-week periods ended September 25, 1998 and September 26, 1997.
The current fiscal year will end on December 25, 1998; and the prior fiscal year
ended December 26, 1997.
NOTE 2. ACCOUNTING PRONOUNCEMENTS
CSXT adopted Financial Accounting Standards Board (FASB) Statement No.
130, "Reporting Comprehensive Income", at the beginning of fiscal year 1998.
Statement No. 130 establishes standards for reporting and display of
comprehensive earnings and its components in financial statements; however, the
adoption of this Statement had no impact on the company's net earnings or
shareholder's equity. There were no differences between net earnings and
comprehensive earnings for the fiscal quarters and nine months ended September
25, 1998 and September 26, 1997; in addition, there were no accumulated other
comprehensive earnings at September 25, 1998 and December 26, 1997.
The FASB has issued two accounting pronouncements which the company will
adopt in the fourth quarter of 1998. FASB Statement No. 131 "Disclosures about
Segments of an Enterprise and Related Information" 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.
FASB Statement No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106"
requires revised disclosures about pension and other postretirement benefit
plans. The company does not expect that adoption of this pronouncement will have
a material impact on its financial statements.
The FASB has also issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires companies to record
derivatives on the statement of financial position, measured at fair value. The
statement also sets forth new accounting rules for gains or losses resulting
from changes in the values of derivatives. The company does not currently use
derivative
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 2. ACCOUNTING PRONOUNCEMENTS, Continued
financial instruments, but would expect to adopt this statement in the fourth
quarter of 1999 to the extent it may apply at that time. The company would not
expect the adoption of Statement No. 133 to have a material impact on its
financial statements.
NOTE 3. RESTRUCTURING CREDIT
In July 1998, CSXT entered into an agreement with a third-party vendor
to provide telecommunications services for a five-year term. The agreement
replaced a 1995 contract with a previous vendor. At the inception of the 1995
contract, CSXT recorded a restructuring charge which included a provision for
separation and labor protection payments to employees whose positions were
expected to be eliminated. As a result of the 1998 agreement, certain of those
positions will not be eliminated and the related separation and labor protection
costs will not be incurred. Accordingly, the company recorded a restructuring
credit of $30 million, $19 million after tax, during the quarter ended September
25, 1998.
NOTE 4. ACCOUNTS RECEIVABLE
CSXT has an ongoing agreement to sell without recourse, on a revolving
basis each month, an undivided percentage ownership interest in all rail freight
accounts receivable to CSX Trade Receivables Corporation, a wholly-owned
subsidiary of CSX. Accounts receivable sold under this agreement totaled $618
million at September 25, 1998 and $664 million at December 26, 1997. 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 $47 million at September 25, 1998 and December 26, 1997. The
sales of receivables have been reflected as reductions of "Accounts Receivable"
in the Consolidated Statement of Financial Position. The net losses associated
with sales of receivables were $14 million and $44 million for the quarter and
nine months ended September 25, 1998, respectively, and $13 million and $42
million for the quarter and nine months ended September 26, 1997, respectively.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 5. OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
--------------------- ---------------------
Sept. 25 Sept. 26 Sept. 25 Sept. 26
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest Income $ 6 $ 8 $ 21 $ 21
Income from Real Estate Operations(1) 4 23 18 29
Net Losses from Accounts Receivable Sold (14) (13) (44) (42)
Conrail Transition Expenses (40) (3) (90) (3)
Miscellaneous (4) (1) (4) 3
--------- --------- --------- ---------
Total $ (48) $ 14 $ (99) $ 8
========= ========= ========= =========
</TABLE>
(1) Gross revenue from real estate operations was $12 million and $41 million
for the quarter and nine months ended September 25, 1998, respectively, and
$30 million and $50 million for the quarter and nine months ended September
26, 1997, respectively.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Telecommunications Contract
- ---------------------------
In July 1998, CSXT entered into an agreement with a third-party vendor
to provide and manage its domestic and international data and voice
communications networks. The contract extends five years at a total cost of
approximately $350 million.
Environmental Contingencies
- ---------------------------
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 106 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 cleanup, which could be substantial.
CSXT is involved in a number of administrative and judicial proceedings
and other clean-up efforts at 246 sites, including 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.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 6. COMMITMENTS AND CONTINGENCIES, Continued
Environmental Contingencies, Continued
- --------------------------------------
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.
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 September 25, 1998 and December 26, 1997, were $80 million and $99 million,
respectively. These recorded liabilities, which are undiscounted, 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 September 25,
1998 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.
Litigation and Other Contingencies
- ----------------------------------
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 percent of the
responsibility for the incident. CSXT's liability under that compensatory
damages award is not material and adequate provision was made for the award in a
prior year.
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
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 6. COMMITMENTS AND CONTINGENCIES, Continued
Litigation and Other Contingencies, Continued
- ---------------------------------------------
decided. CSXT is pursuing an aggressive legal strategy, and management believes
that any adverse outcome will not be material to its 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 resolution of these matters
will have a material adverse effect on the consolidated financial position,
results of operations or cash flows of the company.
NOTE 7. RELATED PARTIES
Cash and cash equivalents at September 25, 1998 and December 26, 1997,
includes $238 million and $496 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.
Related Party Service Fees expense consists of amounts related to a
management service fee charged by CSX, data processing related charges from CSX
Technology, Inc. (CSX Technology); the reimbursement, under an operating
agreement, from CSX Intermodal, Inc. (CSXI), for costs incurred by CSXT related
to intermodal operations; charges from Total Distribution Services, Inc. (TDSI),
for services provided at automobile ramps; and charges from Bulk Intermodal
Distribution Services, Inc. (BIDS) for services provided at bulk commodity
facilities. The management service fee charge 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 fee is calculated as a percentage of
CSX's investment in CSXT which is identical to the method used to determine the
management fee charged to all other major subsidiaries of CSX. Management
believes this to be a reasonable method. 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, CSXI, TDSI, and BIDS are
wholly-owned subsidiaries of CSX.
In March 1996, CSXT entered into a loan agreement with CSX Insurance
Company, 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 September
25, 1998, $90 million was outstanding under the agreement. Interest on the loan
is payable monthly at .25% over the LIBOR rate, and was 5.63% at September 25,
1998. Interest expense on the loan was $1 million and $4 million for the quarter
and nine months ended September 25, 1998, respectively, and $1 million and $4
million for the quarter and nine months ended September 26, 1997, respectively.
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Net earnings for the third quarter of 1998 were $67 million versus $136
million in the prior year period. The company produced operating income of $172
million, 27 percent below last year's third quarter. Operating revenue decreased
1 percent to $1.20 billion, while operating expense rose 5 percent to $1.03
billion. Operating expense was negatively impacted by a shift in mix to lower
margin cargo, increases in certain casualty and litigation reserves and Year
2000 preparations, partially offset by the restructuring credit and lower fuel
prices.
For the first nine months of 1998, net earnings totaled $298 million,
down 32 percent from the prior year period. Operating revenue was level with
1997, while operating expenses increased by 4 percent, resulting in an 18
percent decrease in operating income compared to the 1997 period.
<TABLE>
<CAPTION>
OPERATING INCOME
(Millions of Dollars)
----------------------------------------------------------------------
Quarters Ended Nine Months Ended
------------------------ -----------------------
Sept. 25, Sept. 26, Percent Sept. 25, Sept. 26, Percent
1998 1997 Change 1998 1997 Change
---------- ----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue
Merchandise $ 787 $ 794 (1)% $ 2,460 $ 2,461 -
Coal 381 390 (2)% 1,120 1,161 (4)%
Other 33 31 6% 121 93 30%
---------- ----------- ---------- ----------
Total 1,201 1,215 (1)% 3,701 3,715 -
Operating Expense 1,029 980 5% 3,078 2,952 4%
---------- ----------- ---------- ----------
Operating Income $ 172 $ 235 (27)% $ 623 $ 763 (18)%
========== =========== ========== ==========
Operating Income,
Excluding
Restructuring Credit $ 142 $ 235 (40)% $ 593 $ 763 (22)%
========== =========== ========== ==========
</TABLE>
Coal volume totaled 40.5 million tons during the third quarter of 1998
versus 41.3 million tons in the 1997 quarter as a result of a further decline in
the export coal market. Coal revenue for the quarter declined 2 percent to $381
million.
Total merchandise carloads rose 2 percent to 744,000 during the third
quarter of 1998, while revenue declined 1 percent to $787 million. The biggest
traffic gain was seen in phosphates and fertilizer shipments, up 8 percent
reflecting increased production and the extended spring season. Agricultural
carloads grew 7 percent on higher demand for Midwest grains by Southeast feed
mills. Western railroad service problems led to an 8 percent decline in food and
consumer product shipments. Auto revenue decreased 8 percent despite a 2 percent
increase in carloads, as the General Motors strike reduced long haul traffic.
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
Outlook
- -------
As CSXT enters the fourth quarter of 1998, the major focus is on the
integration of Conrail operations, which is expected in early 1999. Rail
operations will reflect costs for hiring and training of employees as well as
other costs necessary to achieve a smooth integration. Demand for export steam
coal is expected to remain weak because of the strength of the U.S. dollar
versus currencies of other coal exporting countries. Merchandise strengths in
the agricultural products and minerals markets are being offset by weaknesses in
the chemicals, paper and metals markets. Automotive production is expected to be
strong through the end of the year.
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 among the parties, appropriate
portions of the Conrail rail system are expected to be integrated with the CSXT
system.
CSX and Norfolk Southern filed an application for control of Conrail
with the STB in June 1997. On July 23, 1998, following an extensive review, the
STB issued a written decision approving the application with limited conditions.
The decision permitted CSX and Norfolk Southern to exercise joint control over
Conrail on August 22, 1998.
CSXT is actively planning for the smooth integration of Conrail
operations into its rail system. 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
operations; marketing; technology; labor agreements; and administration. Related
capital improvements to certain routes and facilities on the CSXT rail system
also have been initiated. The integration of rail operations is expected to take
place once operating and technology systems are in place and necessary
implementing agreements have been reached, which currently is anticipated in
early 1999.
CSXT is incurring significant expenditures in connection with the
integration of Conrail operations. Transition expenses, principally costs
related to information technology integration, totaled $40 million for the
quarter and $90 million for the nine months ended September 25, 1998. Capital
expenditures, principally a major track construction project to accommodate
increased traffic flows in a primary service corridor after integration, totaled
$100 million and $188 million for the quarter and nine months ended September
25, 1998.
Upon integration, CSXT will separately operate designated routes,
facilities, and equipment pursuant to various operating agreements with Conrail
and its subsidiaries. Certain other Conrail assets will be operated for the
benefit of CSXT and Norfolk Southern, or jointly by CSXT and Norfolk Southern.
Under the operating agreements, CSXT will pay Conrail for the use of assets and
for services Conrail provides. Substantially all of Conrail's customer freight
contracts will be assumed by CSXT or other subsidiaries of CSX, or to Norfolk
Southern. As CSX and Norfolk Southern move to integrate the Conrail operations,
as expected, they will compete for traffic located in markets formerly served
solely by Conrail. The company expects that as a result of this process of
entering new markets, there may be changes in the historic rate and traffic
patterns, including some rate
-12-
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
Other Matters, Continued
- ------------------------
Conrail Transaction, Continued
reductions and traffic volume shifts. The process will be driven by market
conditions, and the company presently cannot assess the impact of these
transition effects on either the timing or realization of the projected benefits
of the Conrail transaction. The majority of Conrail's operations workforce will
be employed by CSXT or other subsidiaries of CSX, or by Norfolk Southern,
although certain operations personnel, as well as certain management and
administrative employees, will remain at Conrail to oversee its ongoing business
activities.
Year 2000 Planning
State of Year 2000 Readiness
- ----------------------------
In 1996, CSX began a comprehensive initiative to address the potential
exposure associated with the functioning of its information technology systems
and non-information technology systems with respect to dates in the Year 2000
and beyond. The initiative fully encompasses all CSXT systems and operations.
The company is following a standard Year 2000 remediation model, consisting of
the following phases:
-Awareness - General education about the Year 2000 problem.
-Inventory - Cataloging of all systems and business relationships that
may be impacted by a Year 2000 date rollover.
-Assessment - Estimating the degree of severity of the Year 2000 problem
for cataloged items.
-Remediation - Repair, replacement, or retirement of non-Year 2000
compliant systems.
-Validation - Testing to confirm the compliance of Year 2000 remediated
systems.
CSX's remediation efforts are focused first and foremost on the
continued safe operation of its rail and other transportation systems,
encompassing both employee safety and the safety of the general public and the
environments in which the company operates. Maintaining service continuity both
to customers and with vendors before, during, and after the millennium change is
also a priority. CSX is also focusing efforts on ensuring that, after the safety
and service continuity issues are addressed, a Year 2000 issue does not disrupt
CSXT's revenue.
Overall, the Year 2000 initiative with respect to CSXT is currently
proceeding on schedule and planned completion of all key areas is expected by
mid-1999. The company's Year 2000 remediation efforts are organized in five
areas, which have the following status:
Effort Estimated Completion Current Phase
- ------------------------- ---------------------- --------------------------
Core Information Systems Second Quarter 1999 Remediation and Validation
Distributed Information
Technology Second Quarter 1999 Assessment and Remediation
Electronic Commerce Second Quarter 1999 Remediation
Non-Information Technology
(embedded) Systems Second Quarter 1999 Inventory and Assessment
Trading Partners Second Quarter 1999 Inventory
- 13 -
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
Other Matters, Continued
- ------------------------
Year 2000 Planning, Continued
State of Year 2000 Readiness, Continued
- ---------------------------------------
As part of its Year 2000 initiative, CSX and CSXT are in communication
with significant suppliers, large customers and financial institutions to assess
their Year 2000 readiness and expects to conduct interface tests with external
trading partners in 1999 upon completion of internal testing of remediated
applications.
CSXT is also participating in interface tests with other Class I
railroads to ensure that electronic data interchanges can be processed in a Year
2000 format. The industry effort has been coordinated by the American
Association of Railroads since 1997 and is scheduled for completion by the
second quarter of 1999.
Year 2000 Costs
- ---------------
CSXT has incurred total costs of $27 million to date related to the Year
2000 issue, which represents approximately 48% of the estimated expenditures for
the entire Year 2000 initiative. CSX estimates that over the life of the
project, Year 2000 costs will comprise approximately 10% of the total
information technology budget for CSXT. The cost of the Year 2000 initiative is
being expensed as incurred and funded by cash generated from operations.
Projections of the remaining cost and completion date for the Year 2000
initiative are based on management's current estimates, which are derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, and are inherently uncertain. No major
projects have been delayed as a result of Year 2000 remediation efforts, and CSX
is currently assessing its Year 2000 progress with respect to CSXT systems and
operations with the assistance of outside consultants.
In connection with the integration of Conrail, CSX and Norfolk Southern
are jointly addressing the Year 2000 compliance of Conrail's core information
technology applications and non-information technology embedded systems. Certain
of Conrail's operations systems are being made Year 2000 compliant as a
contingency in the event that there are delays in the integration or Conrail
continues to operate such systems after the integration is completed. Conrail's
estimated cost for its Year 2000 initiative is approximately $28 million.
There are a number of other major information technology projects
currently under development or deployment, some of which replaced legacy systems
that may or may not have been Year 2000 compliant. These projects were required
to increase CSX's operational capacity as a direct result of the integration of
Conrail. These projects are not included in the Year 2000 costs above.
Risks
- -----
CSX believes its Year 2000 planning efforts are adequate to address all
major risks with CSXT's systems and operations. However, if some or all of the
company's remediated or replaced internal computer systems fail the testing
phase, or if any software applications or embedded systems critical to the
company's operations are overlooked in the assessment and remediation phases,
- 14 -
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
Other Matters, Continued
- ------------------------
Year 2000 Planning, Continued
Risks, Continued
- ----------------
particularly if the result is a systemwide failure, there could be a material
adverse effect on the company's results of operations, liquidity and financial
condition.
Contingency Plans
- -----------------
Contingency planning is an established and ongoing effort within CSX and
CSXT to address many types of potential operating disruptions, including Year
2000 issues. For example, detailed emergency operating plans already exist for
unanticipated outages of electricity, telecommunications, and other essential
services. Detailed Year 2000 plans are expected to be complete by June 1999.
CSX is creating contingency plans to address the consequences to CSXT of
each of the primary failure scenarios outlined below. For each of the three
primary types of most reasonably likely worst-case scenarios, CSX anticipates
that detailed contingency measures will include the following:
-Systemwide failures - In the event of complete or nearly complete loss
of key assets or services throughout the entire CSXT system, CSXT will
conduct and maintain a safe and orderly shutdown of all operations that
depend on those systems.
-Geographically isolated failures - In the event of complete or nearly
complete loss of key assets or services throughout a region, CSXT will
conduct and maintain a safe and orderly shutdown of all affected
operations within that region.
-Movable asset failures - In the event of a Year 2000 failure of a
transportation asset, such as a locomotive, CSXT will remove the asset
from service and scale its operations accordingly. This is essentially
the same process currently used for non-Year 2000 failures.
Litigation
In September 1997, a state court jury in New Orleans, Louisiana 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 percent of the
responsibility for the incident. CSXT's liability under that compensatory
damages award is not material and adequate provision was made for the award in a
prior year.
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 legal strategy, and management believes that any
adverse
- 15 -
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS , CONTINUED
Other Matters, Continued
- ------------------------
Litigation, Continued
outcome will not be material to its overall results of operations or financial
position, although it could be material to results of operations in a particular
quarterly accounting period.
--------------------------------------------------
This Quarterly Report contains certain forward-looking statements about
the financial position, results of operations and business of the company after
the integration of Conrail. Such forward-looking statements are subject to
certain uncertainties and other factors that may cause actual results to differ
materially from the views, beliefs, and projections expressed in such
statements. The words "believe", "expect", "anticipate", "project", and similar
expressions signify forward-looking statements. Readers are cautioned not to
place undue reliance on any forward-looking statements made by or on behalf of
the company. Any such statement speaks only as of the date the statement was
made. The company undertakes no obligation to update or revise any
forward-looking statement.
Factors that may cause actual results to differ materially from those
contemplated by these forward-looking statements include, among others, the
following possibilities: (i) costs savings expected from the integration of
Conrail may not be fully realized or realized within the time frame anticipated,
(ii) revenues following the integration of Conrail may be lower than expected,
(iii) costs or difficulties related to the integration of Conrail may be greater
than expected, (iv) general economic or business conditions, including an
increase in fuel prices, a tightening of the labor market or changes in demands
of organized labor resulting in higher wages, increased benefits or other costs
or disruption of operations, may adversely affect the businesses of the company,
(v) legislative or regulatory changes, including possible enactment of
initiatives to re-regulate the rail industry, may adversely affect the
businesses of the company, (vi) changes may occur in the securities markets, and
(vii) disruptions of the operations of the company or any other governmental or
private entity may occur as a result of issues related to the Year 2000. For
additional factors, please refer to the company's annual report on Form 10-K for
the fiscal year ended December 26, 1997.
- 16 -
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. (27) Financial Data Schedule
(b) Reports on Form 8-K
None.
Signature
Pursuant to the requirements 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.
CSX TRANSPORTATION, INC.
(Registrant)
By: /s/JAMES L. ROSS
----------------
James L. Ross
(Principal Accounting Officer)
Dated: November 9, 1998
- 17 -
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