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 July 2, 1999
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 July 2, 1999: 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.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 2, 1999
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters and Six Months Ended July 2, 1999 and June 26, 1998 3
2. Consolidated Statement of Cash Flows-
Six Months Ended July 2, 1999 and June 26, 1998 4
3. Consolidated Statement of Financial Position-
At July 2, 1999 and December 25, 1998 5
Notes to Consolidated Financial Statements 6
Item 2:
Management's Analysis and Results of Operations 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signature 18
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<PAGE>
<TABLE>
<CAPTION>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars)
(Unaudited)
Quarters Ended Six Months Ended
------------------------ ------------------------
July 2, June 26, July 2, June 26,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUE
Merchandise $ 958 $ 842 $ 1,864 $ 1,673
Coal 337 373 690 739
Other 39 38 77 96
---------- ---------- ----------- ----------
Total 1,334 1,253 2,631 2,508
---------- ---------- ----------- ----------
OPERATING EXPENSE
Labor and Fringe Benefits 529 473 1,030 982
Materials, Supplies and Other 216 205 416 391
Conrail Operating Fee, Rent and Services 40 - 40 -
Related Party Service Fees 144 70 245 150
Equipment Rent 105 93 214 181
Depreciation 115 112 238 224
Fuel 64 62 118 129
---------- ---------- ----------- ----------
Total 1,213 1,015 2,301 2,057
---------- ---------- ----------- ----------
OPERATING INCOME 121 238 330 451
Other Income (Expense) (28) (27) (83) (51)
Interest Expense 20 16 38 32
---------- ---------- ----------- ----------
EARNINGS BEFORE INCOME TAXES 73 195 209 368
Income Tax Expense 28 71 79 137
---------- ---------- ----------- ----------
NET EARNINGS $ 45 $ 124 $ 130 $ 231
========== ========== =========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
<TABLE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Millions of Dollars)
<CAPTION>
(Unaudited)
Six Months Ended
-------------------------
July 2, June 26,
1999 1998
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 130 $ 231
Adjustments to Reconcile Net Earnings
to Net Cash Provided
Depreciation 238 223
Deferred Income Taxes 55 84
Productivity/Restructuring Charge Payments (6) (17)
Other Operating Activities 7 (18)
Changes in Operating Assets and Liabilities
Accounts and Notes Receivable (244) 38
Materials and Supplies (19) (39)
Other Current Assets 4 (35)
Accounts Payable 9 83
Other Current Liabilities 109 (66)
--------- ----------
Net Cash Provided by Operating Activities 283 484
--------- ----------
INVESTING ACTIVITIES
Property Additions (480) (554)
Other Investing Activities (20) (37)
--------- ----------
Net Cash Used by Investing Activities (500) (591)
--------- ----------
FINANCING ACTIVITIES
Long-Term Debt Issued 195 166
Long-Term Debt Repaid (58) (46)
Cash Dividends Paid (96) (74)
Other Financing Activities (1) (1)
--------- ----------
Net Cash Provided by Financing Activities 40 45
--------- ----------
Net Decrease in Cash and Cash Equivalents (177) (62)
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Period 177 474
--------- ----------
Cash and Cash Equivalents at End of Period $ 0 $ 412
========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
<TABLE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Financial Position
(Millions of Dollars)
<CAPTION>
(Unaudited)
July 2, December 25,
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents (principally investment
in CSX Cash Management Plan - see Note 7) $ - $ 177
Accounts and Notes Receivable 430 170
Materials and Supplies 189 171
Deferred Income Taxes 131 111
Other Current Assets 162 102
----------- -----------
Total Current Assets 912 731
Properties 15,693 15,215
Accumulated Depreciation (4,797) (4,559)
----------- -----------
Properties-Net 10,896 10,656
Affiliates and Other Companies 231 223
Other Long-Term Assets 418 287
----------- -----------
Total Assets $ 12,457 $ 11,897
=========== ===========
LIABILITIES
Current Liabilities
Accounts Payable $ 776 $ 751
Labor and Fringe Benefits Payable 258 278
Casualty, Environmental and Other Reserves 175 174
Current Maturities of Long-Term Debt 112 100
Due to Parent Company 118 25
Due to Affiliate 90 90
Other Current Liabilities 291 50
----------- -----------
Total Current Liabilities 1,820 1,468
Casualty, Environmental and Other Reserves 505 521
Long-Term Debt 1,030 906
Deferred Income Taxes 2,851 2,776
Other Long-Term Liabilities 652 661
----------- -----------
Total Liabilities 6,858 6,332
----------- -----------
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 1,294
Retained Earnings 4,124 4,090
----------- -----------
Total Shareholder's Equity 5,599 5,565
----------- -----------
Total Liabilities and Shareholder's Equity $ 12,457 $ 11,897
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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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
as of July 2, 1999 and December 25, 1998, the results of their operations and
their cash flows for the quarters and six months ended July 2, 1999 and June 26,
1998, 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. Certain prior-year data have been
reclassified to conform to the 1999 presentation.
The company's fiscal year is composed of 52 or 53 weeks ending on the
last Friday in December. Fiscal year 1999 consists of 53 weeks ending on
December 31, 1999. Fiscal year 1998 consisted of 52 weeks ended December 25,
1998. The financial statements presented are for the 13-week quarters ended July
2, 1999 and June 26, 1998, the 27-week period ended July 2, 1999, the 26- week
period ended June 26, 1998, and as of December 25, 1998.
NOTE 2. ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" which postpones the effective date of
FASB Statement No. 133 until fiscal quarters of all fiscal years beginning after
June 15, 2000. Statement No. 133 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. While CSXT does not currently use derivative financial
instruments, and its historical use of such instruments has not been material,
the company plans to adopt this statement in the first quarter of 2001 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. INTEGRATION OF CONRAIL
On June 1, 1999, CSXT and Norfolk Southern Corporation's (Norfolk
Southern) rail subsidiary formally began integrated operations over their
respective portions of the Conrail Inc. (Conrail) rail systems. This step
implements the operating plan envisioned by CSX and Norfolk Southern when they
completed the joint acquisition of Conrail in May 1997 and later received
regulatory approval permitting them to exercise joint control over Conrail in
August 1998.
The respective railroads operate designated portions of the Conrail
system pursuant to various operating agreements which took effect on June 1.
Under these agreements, which have terms of 25 years plus options to extend, the
railroads pay operating fees to Conrail for the use of right-of-way and rent for
the use of equipment. Conrail continues to provide rail service in certain
shared geographic areas for the joint benefit of CSXT and Norfolk Southern for
which it is compensated on the basis of
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 3. INTEGRATION OF CONRAIL, Continued
usage by the respective railroads. CSX and Norfolk Southern, through a joint
acquisition entity, hold economic interests in Conrail of 42% and 58%,
respectively, and voting interests of 50% each.
Upon integration, substantially all of Conrail's customer freight
contracts were assumed by CSX (either CSXT or a sister company, CSX Intermodal,
Inc.) or by Norfolk Southern. As a result, beginning June 1, 1999, CSXT's
operating revenue includes revenue from traffic previously moving on Conrail.
Operating expenses reflect corresponding increases for costs incurred to handle
the new traffic and operate the former Conrail lines. Effective June 1, 1999,
CSXT's expenses also include a new expense category, "Conrail Operating Fee,
Rent and Services", which reflects payments to Conrail for the use of
right-of-way and equipment; as well as charges for transportation, switching,
and terminal services provided by Conrail in three geographic areas operated for
the joint benefit of CSX and Norfolk Southern.
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 $605
million at July 2, 1999 and $642 million at December 25, 1998. 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 July 2, 1999 and December 25, 1998. 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 $14 million for the quarter and $27 million for the
six months ended July 2, 1999, and $15 million for the quarter and $30 million
for the six months ended June 26, 1998.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
<TABLE>
NOTE 5. OTHER INCOME (EXPENSE)
<CAPTION>
Quarters Ended Six Months Ended
-------------------- --------------------
July 2, June 26, July 2, June 26,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest Income - CSX Cash Management Plan $ 1 $ - $ 2 $ -
Interest Income - Other - 8 4 15
Income from Real Estate Operations(1) 12 9 14 14
Net Losses from Accounts Receivable Sold (14) (15) (27) (30)
Conrail Transition Expenses (28) (31) (67) (50)
Miscellaneous 1 2 (9) -
--------- --------- --------- ---------
Total $ (28) $ (27) $ (83) $ (51)
========= ========= ========= =========
</TABLE>
(1) Gross revenue from real estate operations was $19 million for the quarter
and $28 million for the six months ended July 2, 1999, and $17 million and
$29 million for the quarter and six months ended June 26, 1998.
NOTE 6. COMMITMENTS AND CONTINGENCIES
New Orleans Tank Car Fire
- -------------------------
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 has been made for the
award.
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. In February 1999, the Louisiana Supreme Court
issued a further decision, authorizing and instructing the trial court to enter
individual punitive damages judgments in favor of the 20 plaintiffs who had
received awards of compensatory damages, in amounts representing an appropriate
share of the jury's award. The trial court on April 8, 1999 entered judgment
awarding approximately $2 million in compensatory damages and approximately $8.5
million in punitive damages to those 20 plaintiffs. Approximately $6.2 million
of the punitive damages awarded were assessed against CSXT. CSXT then filed
post-trial motions, for a new trial and for judgment notwithstanding the
verdict, as to the April 8 judgment. CSXT believes that these recent judicial
decisions will expedite the process of full appellate review of the 1997 trial.
A trial for the claims of 20 additional plaintiffs for compensatory
damages began on May 24, 1999. In early July, the jury in that trial rendered
verdicts of approximately $330,000 in favor of eighteen of those twenty
plaintiffs. Two plaintiffs received nothing; that is, the jury found that they
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CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 6. COMMITMENTS AND CONTINGENCIES, Continued
New Orleans Tank Car Fire, Continued
- ------------------------------------
had not proved any damages. Management believes that this result, while still
excessive, supports CSXT's contention that the $2.5 billion punitive damages
award was unwarranted.
CSXT continues to pursue an aggressive legal strategy. Management
believes that any adverse outcome will not be material to CSX's or CSXT's
overall results of operations or financial position, although it could be
material to results of operations in a particular quarterly accounting period.
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 108 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.
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 July 2, 1999 and December 25, 1998, were $69 million and $75 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
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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
- --------------------------------------
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 July 2,
1999 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.
Other Legal Proceedings
- -----------------------
A number of other legal actions are pending against CSXT in which claims
are made in substantial amounts. While the ultimate results of 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 and cash
flows of the company.
NOTE 7. RELATED PARTIES
Cash and cash equivalents at December 25, 1998 includes $229 million,
representing amounts due from CSX for CSXT's participation in the CSX cash
management plan. At July 2, 1999, CSXT had a deficit balance in the plan of $92
million which is included in Due to Parent Company in the statement of financial
position. 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 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 Customized Transportation, Inc. (CTI) for
transportation, warehousing and managed transportation services provided to
CSXT; 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 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 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
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 7. RELATED PARTIES, Continued
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, CTI, 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 July 2, 1999 and December 25, 1998, $90 million was outstanding under
the agreement. Interest on the loan is payable monthly at .25% over the LIBOR
rate, and was 5.43% at July 2, 1999 and 5.91% at June 26, 1998.
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
CSXT follows a 52/53-week fiscal calendar. Fiscal year 1999 consists of
53 weeks. The six month period ended July 2, 1999 consisted of 27 weeks and the
six month period ended June 26, 1998 consisted of 26 weeks.
Net earnings for the first half of 1999 were $130 million versus $231
million in the prior year period. The company reported operating income of $330
million, 27 percent below last year's period.
Operating revenue of $2.63 billion was 5 percent higher than the 1998
period and operating expense rose 12 percent to $2.30 billion. The year over
year increases in revenues and expenses are due largely to the integration of
Conrail rail operations for one month in 1999, as well as the extra week in the
1999 period. Costs related to the preparation and start-up of the Conrail
integration adversely affected the 1999 earnings.
OPERATING INCOME
(Millions of Dollars)
----------------------------------
Six Months Ended
------------------------
July 2, June 26, Percent
1999 1998 Change
---------- ---------- ---------
Operating Revenue
Merchandise $ 1,864 $ 1,673 11%
Coal 690 739 (7)
Other 77 96 (20)
---------- ----------
Total 2,631 2,508 5
Operating Expense 2,301 2,057 (12)
---------- ----------
Operating Income $ 330 $ 451 (27)
========== ==========
Coal volume for the first half of the year declined 4 percent, to 76.4
million tons, reflecting reduced demand from overseas markets and from electric
utilities. As a result, coal revenue fell 7 percent from the 1998 period. Total
merchandise carloads were 9 percent higher and revenue was 11 percent higher
than the prior year period, led by significant increases in automotive traffic
and revenue that reflected the integration of Conrail business, continued strong
demand for vehicles and parts, and the strike at major General Motors plants
that adversely affected 1998 revenue. Metals revenue increased 12 percent due to
former Conrail volumes and general strength in the iron ore market. Chemicals
revenue was up 10% with the new traffic from the Conrail integration and overall
growth in the plastics industry.
CONRAIL INTEGRATION
- -------------------
On June 1, 1999, CSXT and Norfolk Southern Corporation's (Norfolk
Southern) rail subsidiary formally began integrated operations over their
respective portions of the Conrail Inc. (Conrail) rail systems. This step
implements the operating plan envisioned by CSX and Norfolk Southern when they
completed the joint acquisition of Conrail in May 1997 and later received
regulatory approval permitting them to exercise joint control over Conrail in
August 1998.
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS
CONRAIL INTEGRATION, Continued
- ------------------------------
The respective railroads operate designated portions of the Conrail
system pursuant to various operating agreements which took effect on June 1.
Under these agreements, which have terms of 25 years plus options to extend, the
railroads pay operating fees to Conrail for the use of right-of-way and rent for
the use of equipment. Conrail continues to provide rail service in certain
shared geographic areas for the joint benefit of CSXT and Norfolk Southern for
which it is compensated on the basis of usage by the respective railroads. CSX
and Norfolk Southern, through a joint acquisition entity, hold economic
interests in Conrail of 42% and 58%, respectively, and voting interests of 50%
each.
Upon integration, substantially all of Conrail's customer freight
contracts were assumed by CSX (either CSXT or a sister company, CSX Intermodal,
Inc.) or by Norfolk Southern. As a result, beginning June 1, 1999, CSXT's
operating revenue includes revenue from traffic previously moving on Conrail.
Operating expenses reflect corresponding increases for costs incurred to handle
the new traffic and operate the former Conrail lines. Effective June 1, 1999,
CSXT's expenses also include a new expense category, "Conrail Operating Fee,
Rent and Services", which reflects payments to Conrail for the use of
right-of-way and equipment; as well as charges for transportation, switching,
and terminal services provided by Conrail in three geographic areas operated for
the joint benefit of CSX and Norfolk Southern.
OTHER MATTERS
- -------------
Year 2000 Planning
- ------------------
State of Year 2000 Readiness
Technology systems and embedded computer chips that are not Year 2000
ready are unable to distinguish between the calendar year 1900 and the calendar
year 2000. CSX recognizes that it must work to minimize the risks that its
business operations will be adversely affected by transition to the upcoming
calendar year 2000. Accordingly, in 1996, CSX and each of its transportation
subsidiaries began a comprehensive plan to address the potential exposure. The
plan fully encompasses all CSXT systems and operations. The company's Year 2000
plan includes 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 readiness efforts are focused, first and foremost, on the
continued safe operation of its rail and other transportation systems. That
includes employee safety, the safety of the general public, and the safety of
the environments in which the company operates. Maintaining service continuity
both to customers and with vendors before, during, and after the millennium
change also is a priority.
CSXT has material relationships with third parties whose failure to be
Year 2000 ready could have adverse impacts on the company's business, operations
or financial condition. Third parties CSXT considers to be in this category
include significant suppliers, large customers and financial institutions.
Accordingly, the company has met with or surveyed those parties to assess their
Year 2000 readiness and, where applicable, is conducting interface tests with
them upon completion of
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS, Continued
Year 2000 Planning, Continued
- -----------------------------
State of Year 2000 Readiness, Continued
internal testing of remediated applications. Based on the results of those
tests, and the information received, follow-up action or contingency plans will
be made by the company as it deems appropriate.
CSXT also is 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 Association of
American Railroads since 1997 and is largely complete, with final work scheduled
in the third quarter of 1999.
Overall, substantial completion of key areas of CSXT's Year 2000
readiness plan is expected by the end of the third quarter of 1999. The
company's readiness efforts are organized in five areas, which have the
following status:
<TABLE>
<CAPTION>
Estimated Substantial
Effort Completion Current Phase
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Core Information Systems Third Quarter 1999 Remediation and Validation
Distributed Information Technology Third Quarter 1999 Remediation and Validation
Electronic Commerce Third Quarter 1999 Remediation and Validation
Non-information Technology
(embedded systems) Third Quarter 1999 Remediation and Validation
Trading Partners Fourth Quarter 1999 Validation
</TABLE>
During the second quarter of 1999, the integration of Conrail operations
was formally implemented and Conrail's Year 2000 effort was incorporated into
the Year 2000 efforts of CSX and Norfolk Southern.
Year 2000 Costs
CSXT has incurred total costs of $46 million to date related to Year
2000 readiness, which represents approximately 81% of the estimated expenditures
for the entire plan. To provide a consistent, objective method for identifying
costs of the Year 2000 plan, the company classifies expenditures as Year 2000
plan costs for reporting purposes only if they remedy only Year 2000 risks and
would otherwise be unnecessary in the normal course of business. The cost of the
Year 2000 plan is being expensed as incurred and funded by cash generated from
operations. Projections of the remaining cost and completion dates for the Year
2000 plan are based on management's current estimates, which are derived
utilizing 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 readiness efforts, and CSX is periodically
assessing its Year 2000 progress with respect to CSXT systems with the
assistance of outside consultants.
Contingency Plans
Contingency planning is an established and ongoing effort within CSX and
CSXT to address many types of potential operating disruptions which may include
Year 2000 issues. For example, detailed emergency operating plans already exist
for unanticipated outages of electricity,
- 14 -
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS, Continued
- ------------------------
Year 2000 Planning, Continued
- -----------------------------
Contingency Plans, Continued
telecommunications, and other essential services. The companies are not in a
position to identify or to avoid all possible Year 2000 scenarios or to estimate
their overall business impacts. However, the companies are currently assessing
possible problems and making plans to mitigate the impacts.
These plans may include identifying alternate suppliers, vendors,
procedures and operational sites; generating equipment lists; conducting staff
training; and developing communication plans. CSX defines three primary types of
most reasonably likely worst-case scenarios, and anticipates that detailed
contingency measures with respect to CSXT 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 may employ
manual fallback plans for non-transportation functions and may maintain a
safe and orderly shutdown of affected transportation operations.
- - Movable asset failures -- In the event of a Year 2000 failure of a
transportation asset, such as a locomotive that does not have redundant
systems for operation, CSXT may temporarily remove the asset from service
and scale its operations accordingly.
Risks
CSX believes that its Year 2000 planning efforts are adequate to address
all major risks with CSXT's systems and operations. There can be no assurance,
however, that the company's systems or equipment, or those of third parties on
which CSXT relies, will be Year 2000 ready in a timely manner or that the
company's or third parties' contingency plans will mitigate the effects of the
transition to the calendar Year 2000. The failure of the systems or equipment of
CSXT or third parties (which the company believes is the most reasonably likely
worst case scenario) could result in the reduction or suspension of the
company's operations and could have a material adverse effect on the company's
results of operations, liquidity and financial condition.
- 15 -
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS, Continued
- ------------------------
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 has been made for the
award.
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. In February 1999, the Louisiana Supreme Court
issued a further decision, authorizing and instructing the trial court to enter
individual punitive damages judgments in favor of the 20 plaintiffs who had
received awards of compensatory damages, in amounts representing an appropriate
share of the jury's award. The trial court on April 8, 1999 entered judgment
awarding approximately $2 million in compensatory damages and approximately $8.5
million in punitive damages to those 20 plaintiffs. Approximately $6.2 million
of the punitive damages awarded were assessed against CSXT. CSXT then filed
post-trial motions, for a new trial and for judgment notwithstanding the
verdict, as to the April 8 judgment. CSXT believes that these recent judicial
decisions will expedite the process of full appellate review of the 1997 trial.
A trial for the claims of 20 additional plaintiffs for compensatory
damages began on May 24, 1999. In early July, the jury in that trial rendered
verdicts of approximately $330,000 in favor of eighteen of those twenty
plaintiffs. Two plaintiffs received nothing; that is, the jury found that they
had not proved any damages. Management believes that this result, while still
excessive, supports CSXT's contention that the $2.5 billion punitive damages
award was unwarranted.
CSXT continues to pursue an aggressive legal strategy. Management
believes that any adverse outcome will not be material to CSX's or CSXT's
overall results of operations or financial position, although it could be
material to results of operations in a particular quarterly accounting period.
-------------------------------------
- 16 -
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
Estimates and forecasts in Management's Analysis and Results of
Operations and in other sections of this Quarterly Report are based on many
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 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) cost 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, either nationally
or internationally, an increase in fuel prices, a tightening of the labor market
or changes in demands of organized labor resulting in higher wages, or 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 25, 1998.
- 17 -
<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. A report was filed on June 11, 1999, reporting Item 5, Other Events -
announcement of the integrated operations of CSX Corporation and Norfolk
Southern Corporation of their respective portions of the Conrail Inc. rail
system; plus Item 7, Financial Statements and Exhibits - (1) Transaction
Agreement dated June 10, 1997 by and among CSX Corporation, CSX
Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern
Railway Company, Conrail Inc., Consolidated Rail Corporation and CRR
Holdings LLC and; (2) Operating Agreement dated June 1, 1999 by and between
New York Central Lines LLC and CSX Transportation, Inc. and; (3) Amendments
to the Transaction Agreement dated June 10, 1997 by and among CSX
Corporation, CSX Transportation, Inc., Norfolk Southern Corporation,
Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail
Corporation and CRR Holdings LLC and; (4) Shared Assets Area Operating
Agreements for North Jersey, South Jersey/Philadelphia, and Detroit dated
June 1, 1999 by and among Consolidated Rail Corporation, CSX
Transportation, Inc. and Norfolk Southern Railway Company and; (5)
Monongahela Usage Agreement dated June 1, 1999 by and among CSX
Transportation, Inc., Norfolk Southern Railway Company, Pennsylvania Lines
LLC, and New York Central Lines LLC and; (7) a press release by CSX
Corporation dated June 1, 1999.
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 6, 1999
- 18 -
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