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 October 1, 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 October 1, 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 OCTOBER 1, 1999
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters and Nine Months Ended October 1, 1999 and
September 25, 1998 3
2. Consolidated Statement of Cash Flows-
Nine Months Ended October 1, 1999 and September 25, 1998 4
3. Consolidated Statement of Financial Position-
At October 1, 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 19
Signature 19
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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
------------------------ ------------------------
Oct. 1, Sept. 25, Oct. 1, Sept. 25,
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUE
Merchandise $ 844 $ 681 $ 2,376 $ 2,088
Automotive 203 111 534 383
Coal, Coke & Iron Ore 421 403 1,163 1,185
Other 17 9 43 56
----------- ---------- ----------- ----------
Total 1,485 1,204 4,116 3,712
----------- ---------- ----------- ----------
OPERATING EXPENSE
Labor and Fringe Benefits 591 484 1,621 1,466
Materials, Supplies and Other 291 226 760 617
Conrail Operating Fee, Rent and 101 - 141 -
Services
Related Party Service Fees 48 88 240 238
Equipment Rent 134 95 348 276
Depreciation 115 112 353 336
Fuel 86 57 204 186
Restructuring Credit - (30) - (30)
----------- ---------- ----------- ----------
Total 1,366 1,032 3,667 3,089
----------- ---------- ----------- ----------
OPERATING INCOME 119 172 449 623
Other Income (Expense) 6 (48) (77) (99)
Interest Expense 18 17 56 49
----------- ---------- ----------- ----------
EARNINGS BEFORE INCOME TAXES 107 107 316 475
Income Tax Expense 51 40 130 177
----------- ---------- ----------- ----------
NET EARNINGS $ 56 $ 67 $ 186 $ 298
=========== ========== =========== ==========
</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
-------------------------
Oct. 1, Sept. 25,
1999 1998
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 186 $ 298
Adjustments to Reconcile Net Earnings
to Net Cash Provided
Depreciation 353 336
Deferred Income Taxes 112 103
Restructuring Credit - (30)
Productivity/Restructuring Charge Payments (10) (21)
Other Operating Activities 37 (21)
Changes in Operating Assets and Liabilities
Accounts and Notes Receivable (123) (27)
Materials and Supplies (17) (25)
Other Current Assets 59 (33)
Accounts Payable 31 22
Other Current Liabilities 32 (20)
--------- ----------
Net Cash Provided by Operating Activities 660 582
--------- ----------
INVESTING ACTIVITIES
Property Additions (727) (825)
Other Investing Activities (53) (33)
--------- ----------
Net Cash Used by Investing Activities (780) (858)
--------- ----------
FINANCING ACTIVITIES
Long-Term Debt Issued 193 166
Long-Term Debt Repaid (83) (54)
Cash Dividends Paid (158) (104)
Other Financing Activities - (1)
--------- ----------
Net Cash Provided (Used) by Financing Activities (48) 7
--------- ----------
Net Decrease in Cash and Cash Equivalents (168) (269)
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Period 177 474
--------- ----------
Cash and Cash Equivalents at End of Period $ 9 $ 205
========= ==========
</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)
Oct. 1, Dec. 25,
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents (principally investment
in CSX Cash Management Plan - see Note 7) $ 9 $ 177
Accounts and Notes Receivable 408 170
Materials and Supplies 188 171
Deferred Income Taxes 129 111
Other Current Assets 43 102
----------- -----------
Total Current Assets 777 731
Properties 15,940 15,215
Accumulated Depreciation (4,917) (4,559)
----------- -----------
Properties-Net 11,023 10,656
Affiliates and Other Companies 234 223
Other Long-Term Assets 428 287
----------- -----------
Total Assets $ 12,462 $ 11,897
=========== ===========
LIABILITIES
Current Liabilities
Accounts Payable $ 797 $ 751
Labor and Fringe Benefits Payable 306 278
Casualty, Environmental and Other Reserves 177 174
Current Maturities of Long-Term Debt 95 100
Due to Parent Company 27 25
Due to Affiliate 90 90
Other Current Liabilities 280 50
----------- -----------
Total Current Liabilities 1,772 1,468
Casualty, Environmental and Other Reserves 524 521
Long-Term Debt 1,021 906
Deferred Income Taxes 2,896 2,776
Other Long-Term Liabilities 657 661
----------- -----------
Total Liabilities 6,870 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 1,293 1,294
Retained Earnings 4,118 4,090
----------- -----------
Total Shareholder's Equity 5,592 5,565
----------- -----------
Total Liabilities and Shareholder's Equity $ 12,462 $ 11,897
=========== ===========
</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
as of October 1, 1999 and December 25, 1998, the results of their operations for
the quarters and nine months ended October 1, 1999 and September 25, 1998, and
their cash flows for the nine months ended October 1, 1999 and September 25,
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
October 1, 1999 and September 25, 1998, the 40-week period ended October 1,
1999, the 39-week period ended September 25, 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. INTEGRATED RAIL OPERATIONS WITH 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 system. 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. INTEGRATED RAIL OPERATIONS WITH 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. VOLUNTARY EARLY RETIREMENT AND SEPARATION PROGRAM
In October 1999, CSX initiated a voluntary early retirement and
separation program intended to reduce the non-union workforce at its rail and
intermodal units and an affiliated technology subsidiary. CSXT expects an
overall workforce reduction of approximately 650 to 700 employees with
annualized expense savings of approximately $65 million. Employees have until
early December to apply for the program. The company has the right to accept or
reject employee applications, as well as delay their departures to ensure
appropriate staffing levels to meet business needs. The company expects that
most of the retirements and separations will occur by the end of the year, with
the remainder occurring by the end of first quarter 2000. Fourth quarter 1999
financial results will include a pre-tax charge estimated between $45 million
and $65 million to reflect the cost of the program. Early retirement benefits
under the program will be paid from CSX's pension plan, while separation
benefits will be paid from cash generated by operations.
NOTE 5. 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 $853
million at October 1, 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 October 1, 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 $17 million for the quarter and $44 million for
the nine months ended October 1, 1999, and $14 million for the quarter and $44
million for the nine months ended September 25, 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 6. OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
-------------------- --------------------
Oct. 1, Sept. 25, Oct. 1, Sept.25,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest Income - CSX Cash Management Plan $ - $ 5 $ 2 $ 18
Interest Income - Other - 1 4 3
Income from Real Estate Operations(1) 22 4 36 18
Net Losses from Accounts Receivable Sold (17) (14) (44) (44)
Conrail Transition Expenses - (40) (67) (90)
Miscellaneous 1 (4) (8) (4)
--------- --------- --------- ---------
Total $ 6 $ (48) $ (77) $ (99)
========= ========= ========= =========
</TABLE>
(1) Gross revenue from real estate operations was $29 million and $57 million
for the quarter and nine months ended October 1, 1999, respectively, and $12
million and $41 million for the quarter and nine months ended September 25,
1998, respectively.
NOTE 7. 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.
The new trial motion was denied by the trial court in August of 1999. On
November 5, 1999, the trial court issued an opinion which granted CSXT's motion
for judgment notwithstanding the verdict and effectively reduced the amount of
the punitive damages verdict from $2.5 billion to $850
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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. COMMITMENTS AND CONTINGENCIES, Continued
New Orleans Tank Car Fire, Continued
- ------------------------------------
million. CSXT believes that this amount (or any amount of punitive damages, for
that matter) is unwarranted and intends to pursue its full appellate remedies
with respect to the 1997 trial as well as the trial judge's decision on the
motion for judgment notwithstanding the verdict. The compensatory damages
awarded by the jury in the 1997 trial were also substantially reduced by the
trial judge. CSXT believes that the trial judge will probably reduce the
judgment in favor of 20 plaintiffs entered on April 8, 1999 to reflect the lower
compensatory and punitive amounts reflected in its November 5, 1999 decision.
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 totaling approximately $330 thousand 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, now reduced to $850 million, 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 113 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 241 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 7. 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 October 1, 1999 and December 25, 1998, were $66 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 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 October 1,
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.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 8. RELATED PARTIES
Cash and cash equivalents at October 1, 1999 and December 25, 1998
includes $47 million and $229 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 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
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 October 1, 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 5.65% at October 1, 1999 and 5.63% at September 25, 1998.
The pending sale of certain CSX assets is projected to increase the
effective deferred state income tax rate which is applied to CSXT's cumulative
temporary differences.
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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 nine month period ended October 1, 1999 consisted of 40 weeks and
the nine month period ended September 25, 1998 consisted of 39 weeks.
Net earnings for the first nine months of 1999 were $186 million versus
$298 million in the prior year period. The company reported operating income of
$449 million, 28 percent below last year's period.
Operating revenue of $4.1 billion was 11 percent higher than the 1998
period and operating expense rose 19 percent to $3.7 billion. The year over year
increases in revenues and expenses are due largely to the integration of Conrail
rail operations for four months 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)
------------------------------------
Nine Months Ended
----------------------------
Oct. 1, Sept. 25, Percent
1999 1998 Change
----------- ----------- ---------
Operating Revenue
Merchandise $ 2,376 $ 2,088 14%
Automotive 534 383 39
Coal, Coke & Iron Ore 1,163 1,185 (2)
Other 43 56 (23)
----------- -----------
Total 4,116 3,712 11
Operating Expense 3,667 3,089
----------- -----------
Operating Income $ 449 $ 623
=========== ===========
Coal volume for the first nine months of the year declined 2 percent, to
117.6 million tons, reflecting reduced demand from overseas markets and from
electric utilities. As a result, coal revenue fell 3 percent from the 1998
period. Total merchandise carloads were 9 percent higher and revenue was 14
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 14 percent due to former Conrail volumes and general strength in the
iron ore market. Chemicals revenue was up 17% with the new traffic from the
Conrail integration and overall growth in the plastics industry.
INTEGRATED RAIL OPERATIONS WITH 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
implemented 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
INTEGRATED RAIL OPERATIONS WITH CONRAIL, 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.
The integration of Conrail initially resulted in congestion and traffic
delays on parts of the new CSXT network and on the shared geographic areas
operated by Conrail for the joint benefit of CSXT and Norfolk Southern's rail
subsidiary. Substantial progress was made in July and August in stabilizing
post-integration operations and improving service; however, disruptions in the
rail network caused by Hurricane Floyd in September, combined with seasonal
traffic build-up in September and October, have adversely affected operating
performance. Efforts are being focused on improving operations through network
simplification. Some progress is expected by mid-December as peak traffic levels
begin to ease. Weather conditions during the winter months, particularly on the
northern portions of the new rail network, could adversely affect service
improvement initiatives.
While management believes that steady improvement across the rail
network will be achieved and will lead to increased customer satisfaction and
improved financial performance, there can be no assurance that these objectives
will be met, or met within a specified time frame. If these operating
improvements are successful, management anticipates that the company will begin
realizing many of the economic synergies envisioned from the integration of its
allocated portion of the Conrail network. These synergies include revenue
benefits from freight traffic that currently moves on other modes of
transportation (principally trucks), as well as cost savings from better
equipment utilization, more direct routing of freight traffic, fewer interchange
points, and the elimination of duplicate positions and facilities. CSXT and
Norfolk Southern's rail subsidiary now compete for traffic located in markets
formerly served solely by Conrail. As a result of this process of entering new
markets, there have been changes in the historic rate and traffic patterns,
including some rate reductions and traffic volume shifts. The process is being
driven by market conditions and, over time, may be affected by customer
satisfaction with service levels provided by the competing carriers. The company
cannot presently assess the impact of these transition effects on either the
timing or realization of the projected benefits of the Conrail transaction.
- 13 -
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS
- -------------
Voluntary Early Retirement and Separation Program
- -------------------------------------------------
In October 1999, CSX initiated a voluntary early retirement and
separation program intended to reduce the non-union workforce at its rail and
intermodal units and an affiliated technology subsidiary. CSXT expects an
overall workforce reduction of approximately 650 to 700 employees with
annualized expense savings of approximately $65 million. Employees have until
early December to apply for the program. The company has the right to accept or
reject employee applications, as well as delay their departures to ensure
appropriate staffing levels to meet business needs. The company expects that
most of the retirements and separations will occur by the end of the year, with
the remainder occurring by the end of first quarter 2000. Fourth quarter 1999
financial results will include a pre-tax charge estimated between $45 million
and $65 million to reflect the cost of the program. Early retirement benefits
under the program will be paid from CSX's pension plan, while separation
benefits will be paid from cash generated by operations.
Federal Court Decision Affecting Coal Mining Operations
- -------------------------------------------------------
In October 1999, a federal district court judge in West Virginia
ruled that the Federal Clean Water Act was not being properly enforced with
respect to strip mining operations. The decision, which is currently under
appeal, could adversely affect CSXT's coal traffic and revenues if upheld.
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:
o Awareness - General education about the Year 2000 problem.
o Inventory - Cataloging of all systems and business relationships that
may be impacted by a Year 2000 date rollover.
o Assessment - Estimating the degree of severity of the Year 2000 problem for
cataloged items.
o Remediation - Repair, replacement, or retirement of non-Year 2000 compliant
systems.
o 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
- 14 -
<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. In addition, date forward testing with customers is currently being
conducted.
CSXT, along with the other three major Class I railroads, recently
underwent a Year 2000 audit commissioned by the Federal Railroad Administration
(FRA). According to the audit summary, "these four large railroads are ready for
Year 2000," and, based on the assessment, the "American public and all
organizations who ship their goods over the rails should expect no degradation
of service caused by Year 2000 problems." In addition, the summary stated that
the "railroads are continuing their Year 2000 program across the millennium" and
for the final quarter of 1999 "are concentrating their efforts on end-to-end
testing for additional self-assurance and contingency planning to further
minimize risk."
CSXT's Year 2000 readiness efforts are organized in five areas Overall,
these key areas of CSXT's Year 2000 readiness plan were substantially completed
at the end of the third quarter of 1999:
<TABLE>
<CAPTION>
Estimated
Substantial
Effort Completion Current Phase
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Core Information Systems Third Quarter 1999 Substantially Complete
Distributed Information Technology Third Quarter 1999 Substantially Complete
Electronic Commerce Third Quarter 1999 Substantially Complete
Non-information Technology
(embedded systems) Third Quarter 1999 Substantially Complete
Trading Partners Fourth Quarter 1999 Validation
</TABLE>
Entering the fourth quarter of 1999, CSXT is progressing the final
stages of its readiness plan, which include:
o End-to-end system tests - final tests to provide additional
assurances that Year 2000 programming functions as intended in an
integrated, multiple systems environment;
o Contingency Planning - review and refinement of contingency plans to
provide additional assurances as to completeness and effectiveness
leading up to the millennium change;
o Rollover/Event Planning - positioning resources and finalizing
communication strategy for the critical time period immediately
before, during, and after the millennium change date.
- 15 -
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS, Continued
- ------------------------
Year 2000 Planning, Continued
- -----------------------------
Year 2000 Costs
CSXT has incurred total costs of $49 million to date related to Year
2000 readiness, which represents approximately 87% 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. No major projects have been delayed as a result of Year 2000
readiness efforts.
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, 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 have assessed possible problems and made plans to
mitigate the impacts, with primary emphasis on scenarios having a high or
moderate risk to the company with high or moderate probability of occurrence.
These plans 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, for which detailed contingency measures
with respect to CSXT will include the following:
o 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.
o 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.
o 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.
- 16 -
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, 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.
The new trial motion was denied by the trial court in August of 1999. On
November 5, 1999, the trial court issued an opinion which granted CSXT's motion
for judgment notwithstanding the verdict and effectively reduced the amount of
the punitive damages verdict from $2.5 billion to $850 million. CSXT believes
that this amount (or any amount of punitive damages, for that matter) is
unwarranted and intends to pursue its full appellate remedies with respect to
the 1997 trial as well as the trial judge's decision on the motion for judgment
notwithstanding the verdict. The compensatory damages awarded by the jury in the
1997 trial were also substantially reduced by the trial judge. CSXT believes
that the trial judge will probably reduce the judgment in favor of 20 plaintiffs
entered on April 8, 1999 to reflect the lower compensatory and punitive amounts
reflected in its November 5, 1999 decision.
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 totaling approximately $330 thousand 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, now reduced to $850 million, 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.
-------------------------------------
- 17 -
<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
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) costs or difficulties related to the integration of Conrail may be greater
than expected, (iii) 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, (iv) legislative or regulatory changes, including
possible enactment of initiatives to re-regulate the rail industry, may
adversely affect the businesses of the company, (v) changes may occur in the
securities markets, and (vi) 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.
- 18 -
<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 15, 1999
- 19 -
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