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 June 26, 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 June 26, 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 JUNE 26, 1998
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters Ended June 26, 1998 and June 27, 1997 3
2. Consolidated Statement of Cash Flows-
Six Months Ended June 26, 1998 and June 27, 1997 4
3. Consolidated Statement of Financial Position-
At June 26, 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 15
Signature 15
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
Quarters Ended Six Months Ended
------------------------ ------------------------
June 26, June 27, June 26, June 27,
1998 1997 1998 1997
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUE
Merchandise $ 842 $ 841 $ 1,673 $ 1,667
Coal 373 382 739 771
Other 34 30 88 62
---------- ---------- ---------- ----------
Total 1,249 1,253 2,500 2,500
OPERATING EXPENSE
Labor and Fringe Benefits 473 469 982 950
Materials, Supplies and Other 205 161 391 341
Related Party Service Fees 70 62 150 135
Equipment Rent 89 86 173 172
Depreciation 112 109 224 217
Fuel 62 73 129 157
---------- ---------- ---------- ----------
Total 1,011 960 2,049 1,972
OPERATING INCOME 238 293 451 528
Other Income (Expense) (27) (1) (51) (6)
Interest Expense 16 17 32 35
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES 195 275 368 487
Income Tax Expense 71 104 137 185
---------- ---------- ---------- ----------
NET EARNINGS $ 124 $ 171 $ 231 $ 302
========== ========== ========== ==========
</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)
Six Months Ended
-----------------------
June 26, June 27,
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 231 $ 302
Adjustments to Reconcile Net Earnings to Net Cash
Provided
Depreciation 223 217
Deferred Income Taxes 84 60
Productivity/Restructuring Charge Payments (17) (22)
Other Operating Activities (18) (8)
Changes in Operating Assets and Liabilities
Accounts Receivable 38 (26)
Materials and Supplies (39) (7)
Other Current Assets (35) (30)
Accounts Payable 83 18
Other Current Liabilities (66) 62
---------- ----------
Net Cash Provided by Operating Activities 484 566
---------- ----------
INVESTING ACTIVITIES
Property Additions (554) (219)
Other Investing Activities (37) 15
---------- ----------
Net Cash Used by Investing Activities (591) (204)
---------- ----------
FINANCING ACTIVITIES
Long-Term Debt Issued 166 5
Long-Term Debt Repaid (46) (50)
Dividends Paid (74) (69)
Other Financing Activities (1) (2)
---------- ----------
Net Cash Provided (Used) by Financing Activities 45 ( 116)
---------- ----------
Net (Decrease) Increase in Cash and Cash Equivalents (62) 246
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Period 474 207
---------- ----------
Cash and Cash Equivalents at End of Period $ 412 $ 453
========== ==========
</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)
June 26, December 26,
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents (principally $ 412 $ 474
investment in CSX Cash Management Plan-see Note 7)
Accounts Receivable 99 138
Materials and Supplies 170 131
Deferred Income Taxes 114 116
Other Current Assets 73 39
------------ ------------
Total Current Assets 868 898
Properties 14,610 14,261
Accumulated Depreciation (4,381) (4,245)
--------- ---------
Properties-Net 10,229 10,016
Affiliates and Other Companies 214 207
Other Long-Term Assets 351 282
------------ ------------
Total Assets $ 11,662 $ 11,403
============ ============
LIABILITIES
Current Liabilities
Accounts Payable $ 684 $ 595
Labor and Fringe Benefits Payable 269 334
Casualty, Environmental and Other Reserves 188 182
Current Maturities of Long-Term Debt 83 164
Due to Parent Company 16 22
Due to Affiliate 90 90
Other Current Liabilities 21 21
------------ ------------
Total Current Liabilities 1,351 1,408
Casualty, Environmental and Other Reserves 540 582
Long-Term Debt 948 839
Deferred Income Taxes 2,679 2,582
Other Long-Term Liabilities 663 693
------------ ------------
Total Liabilities 6,181 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 1,288 1,263
Retained Earnings 4,012 3,855
------------ ------------
Total Shareholder's Equity 5,481 5,299
------------ ------------
Total Liabilities and Shareholder's Equity $ 11,662 $ 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 June 26, 1998 and December 26, 1997, the results of their operations for the
quarters and six months ended June 26, 1998 and June 27, 1997, and their cash
flows for the six months ended June 26, 1998 and June 27, 1997, such adjustments
being of a normal recurring nature. Certain prior-year data have been
reclassified to conform to the 1998 presentation. CSXT is a wholly-owned
subsidiary of CSX Corporation (CSX).
While the company 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 26-week periods ended June 26, 1998 and June 27, 1997, and the
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 ended June 26, 1998 and June 27,
1997; in addition, there were no accumulated other comprehensive earnings at
June 26, 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 the disclosure requirements
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 financial instruments, but would expect to adopt this statement in
the fourth quarter of 1999 to the
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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
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. ACCOUNTS RECEIVABLE
CSXT has an ongoing agreement to sell without recourse, on a revolving
basis each month, an undivided percentage ownership interest in all its rail
freight accounts receivable to CSX Trade Receivables Corporation, a wholly-owned
subsidiary of CSX. Accounts receivable sold under this agreement totaled $705
million at June 26, 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 $46 million at June 26, 1998 and December 26, 1997. 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 sales of receivables were $15 million and $30 million for the quarter and
six months ended June 26, 1998, respectively, and $15 million and $29 million
for the quarter and six months ended June 27, 1997, respectively.
NOTE 4. OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
--------------------- ---------------------
June 26, June 27, June 26, June 27,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest Income $ 8 $ 7 $ 15 $ 13
Income from Real Estate Operations(1) 9 4 14 6
Net Losses from Accounts Receivable Sold (15) (15) (30) (29)
Conrail Transition Expenses (31) - (50) -
Miscellaneous 2 3 - 4
--------- --------- --------- ---------
Total $ (27) $ (1) $ (51) $ (6)
========= ========= ========= =========
</TABLE>
(1) Gross revenue from real estate operations was $17 million and $29 million
for the quarter and six months ended June 26, 1998, respectively, and $11
million and $20 million for the quarter and six months ended June 27, 1997,
respectively.
NOTE 5. COMMITMENTS AND CONTINGENCIES
Telecommunications Contract
- ---------------------------
In July 1998, CSXT entered into an agreement with a major
telecommunications 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. It replaces an agreement with another
telecommunications vendor that expired on June 30, 1998.
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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. COMMITMENTS AND CONTINGENCIES, Continued
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 approximately 105 environmentally
impaired sites that are or may be subject to remedial action under the Federal
Superfund statute (Superfund) or similar state statutes. A number of these
proceedings are based on allegations that CSXT, or its 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 253 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.
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 June 26, 1998 and December 26, 1997, were $87 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 June 26, 1998
environmental liability is expected to be paid out over the next five to seven
years, funded by cash generated from operations.
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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. COMMITMENTS AND CONTINGENCIES, Continued
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.
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 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 6. RELATED PARTIES
Cash and cash equivalents at June 26, 1998 and December 26, 1997,
includes $420 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.
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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. RELATED PARTIES, Continued
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 (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 June 26, 1998, $90 million was outstanding under the agreement.
Interest on the loan is payable monthly at .25% over the LIBOR rate, and was
5.91% at June 26, 1998. Interest expense incurred for the quarter and six months
ended June 26, 1998 was $2 million and $3 million, respectively, and $2 million
and $3 million for the quarter and six months ended June 27, 1997, relating to
this loan agreement.
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS
Net earnings for the second quarter of 1998 were $124 million versus
$171 million in the prior year period. The company achieved operating income of
$238 million, 19 percent below last year's second quarter. Total operating
revenue of $1.25 billion was level with 1997's second quarter.
Operating expense for the quarter increased 5 percent to $1.01 billion.
<TABLE>
<CAPTION>
OPERATING INCOME
(Millions of Dollars)
----------------------------------------------------------------------
Quarters Ended Six Months Ended
------------------------ -----------------------
June 26, June 27, Percent June 26, June 27, Percent
1998 1997 Change 1998 1997 Change
---------- ----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue
Merchandise $ 842 $ 841 -% $ 1,673 $ 1,667 -%
Coal 373 382 (2)% 739 771 (4)%
Other 34 30 13% 88 62 42%
---------- ----------- ---------- ----------
Total 1,249 1,253 -% 2,500 2,500 -%
Operating Expense 1,011 960 5% 2,049 1,972 4%
---------- ----------- ---------- ----------
Operating Income $ 238 $ 293 (19)% $ 451 $ 528 (15)%
========== =========== ========== ==========
</TABLE>
Coal volume declined 1 percent, to 40.3 million tons, significantly
impacted by a 22 percent decline in higher-rated export coal. Total coal revenue
declined 2 percent from the 1997 period. Total merchandise traffic rose 3
percent due to generally strong demand. The largest increases were in autos and
parts, minerals, and metals (each up 6 percent); and phosphates and fertilizer
(up 7 percent). On the downside, food and consumer products fell 10 percent. Due
to changes in the traffic mix, total merchandise revenue remained almost level
with the prior-year period.
Operating expense rose 5 percent to $1.01 billion. The principal items
contributing to the increase in operating expense were preparation for Year 2000
together with higher costs related to litigation, casualty claims and equipment
repairs, partially offset by lower fuel costs.
Outlook
- -------
Entering the third quarter, weak export coal demand and the General
Motors strike are among the factors expected to impact rail traffic and
revenues. CSXT will continue working on service improvements, which should help
it gain merchandise traffic. The company also will continue to prepare for the
smooth integration of its portion of Conrail, which promises to open markets.
Rail operations will reflect increased costs over the balance of the year for
hiring and training of employees and other activities related to the Conrail
integration.
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
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS
to be integrated with the CSXT system. 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 was
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. On July 23, 1998, following an extensive review, the
STB issued a written decision approving the application with limited conditions.
On August 22, 1998, that decision is expected to become effective so that CSX
and Norfolk Southern will be permitted to exercise joint control over Conrail.
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 operations; 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 or early 1999.
Year 2000 Planning
In 1996, CSX began a comprehensive initiative to address and resolve
potential exposure associated with the functioning of its information technology
systems and non-information technology systems that include embedded technology
with respect to dates in the Year 2000 and beyond. The scope of the project
includes all CSXT operations. Overall, the Year 2000 initiative is currently
proceeding on schedule with completion of all key areas expected by mid-1999.
With respect to core mainframe information technology, CSX estimates
that it has addressed and resolved the Year 2000 issue with respect to 87% of
the COBOL applications and 22% of the non-COBOL applications affecting CSXT. The
remediation of data center hardware and software is progressing, and a major
portion of software and hardware products have been upgraded. In cases where a
vendor has not yet released a Year 2000 ready version of their product,
installation will be scheduled when the compliant version becomes available. CSX
anticipates that it will have resolved the Year 2000 issue for all of CSXT's
mission critical applications by the end of 1998 and for all non-mission
critical applications by June 1999.
With respect to distributed information technology, project managers
have been assigned to assess and remediate CSXT's distributed applications with
a view to completion by early 1999.
With respect to electronic commerce transmissions, applications are
being upgraded to Year 2000 standards as part of the regular application
maintenance effort. Because the potential exists that not all of CSXT's trading
partners will achieve Year 2000 compliance, preparations are being made to
accommodate non-Year 2000 electronic commerce transmissions as well as Year 2000
ready transmissions.
With respect to non-information technology systems, assessments of
CSXT's rail classification yards and office facilities are currently being
conducted. These assessments are expected to be
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS
completed by October 1998. In July 1997, CSXT's rail transportation dispatch
systems were tested for Year 2000 complications with the vendor and, based on
the results of the tests, the vendor has been making upgrades to such systems
which are expected to be completed by the end of 1998.
As part of its Year 2000 initiative, communication is in place with
CSXT's significant suppliers, large customers and financial institutions to
assess their Year 2000 readiness. Interface tests with CSXT's external trading
partners are expected to be conducted in 1999 upon completion of internal
testing of remediated applications.
In connection with the integration of the CSXT and Conrail rail systems,
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 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.
CSXT has incurred total expense of $18 million to date related to the
Year 2000 issue, which represents approximately 7% of its budget for information
technology services for the related periods. The remaining cost of the Year 2000
initiative is presently estimated at $32 million which will be expensed as
incurred. The cost of the initiative is being funded by cash generated from
operations. The remaining cost and the date on which CSXT believes the Year 2000
initiative will be completed 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. The
Year 2000 initiative has not had a significant impact on other CSXT information
technology development projects.
CSXT believes the planning and remediation efforts currently underway
are adequate to address its Year 2000 concerns. There can be no assurance,
however, that those efforts will be successful in a task of this size and
complexity. The company is currently assessing the consequences of its Year 2000
initiative not being completed on schedule or its remediation efforts not being
successful. Upon completion of such assessment, the company will begin
contingency planning, including efforts to address potential disruptions in
third-party services, such as telecommunications and electricity, on which its
systems and operations rely. There can be no assurance that these contingency
plans or efforts with respect to third parties will prevent a material adverse
effect on CSXT's operations or financial condition.
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.
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS
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 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) cost 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, and the impact of the General Motors strike, may
adversely affect the businesses of the company, (v) legislative or regulatory
changes 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.
- 14 -
<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
1. 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: August 10, 1998
- 15 -
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