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 April 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 April 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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CSX TRANSPORTATION, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED APRIL 2, 1999
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters Ended April 2, 1999 and March 27, 1998 3
2. Consolidated Statement of Cash Flows-
Quarters Ended April 2, 1999 and March 27, 1998 4
3. Consolidated Statement of Financial Position-
At April 2, 1999 and December 25, 1998 5
Notes to Consolidated Financial Statements 6
Item 2:
Management's Analysis and Results of Operations 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signature 18
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CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars)
(Unaudited)
Quarters Ended
---------------------------
April 2, March 27,
1999 1998
------------ ------------
OPERATING REVENUE
Merchandise $ 906 $ 831
Coal 353 366
Other 38 58
----------- ----------
Transportation 1,297 1,255
----------- ----------
OPERATING EXPENSE
Labor and Fringe Benefits 501 509
Materials, Supplies and Other 200 182
Related Party Service Fees 101 84
Equipment Rent 109 88
Depreciation 123 112
Fuel 54 67
----------- ----------
Total 1,088 1,042
----------- ----------
OPERATING INCOME 209 213
Other Income (Expense) (55) (24)
Interest Expense 18 16
----------- ----------
EARNINGS BEFORE INCOME TAXES 136 173
Income Tax Expense 51 66
----------- ----------
NET EARNINGS $ 85 $ 107
=========== ==========
See accompanying Notes to Consolidated Financial Statements.
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<TABLE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Millions of Dollars)
<CAPTION>
(Unaudited)
Quarters Ended
-------------------------
April 2, March 27,
1999 1998
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 85 $ 107
Adjustments to Reconcile Net Earnings
to Net Cash (Used) Provided
Depreciation 123 112
Deferred Income Taxes 53 25
Productivity/Restructuring Charge Payments (3) (8)
Other Operating Activities 5 (26)
Changes in Operating Assets and Liabilities
Accounts and Notes Receivable (132) (15)
Materials and Supplies (11) (32)
Other Current Assets 24 (21)
Accounts Payable (107) (10)
Other Current Liabilities (49) (11)
---------- ----------
Net Cash (Used) Provided by Operating Activities (12) 121
---------- ----------
INVESTING ACTIVITIES
Property Additions (151) (235)
Other Investing Activities (12) 8
---------- ----------
Net Cash Used by Investing Activities (163) (227)
---------- ----------
FINANCING ACTIVITIES
Long-Term Debt Issued 79 5
Long-Term Debt Repaid (30) (30)
Cash Dividends Paid (35) (35)
Other Financing Activities (1) -
---------- ----------
Net Cash Provided (Used) by Financing Activities 13 (60)
---------- ----------
Net Decrease in Cash and Cash Equivalents (162) (166)
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Period 177 474
---------- ----------
Cash and Cash Equivalents at End of Period $ 15 $ 308
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<TABLE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Financial Position
(Millions of Dollars)
<CAPTION>
(Unaudited)
April 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) $ 15 $ 177
Accounts and Notes Receivable 315 170
Materials and Supplies 182 171
Deferred Income Taxes 117 111
Other Current Assets 79 102
----------- -----------
Total Current Assets 708 731
Properties 15,363 15,215
Accumulated Depreciation (4,675) (4,559)
----------- -----------
Properties-Net 10,688 10,656
Affiliates and Other Companies 227 223
Other Long-Term Assets 394 287
----------- -----------
Total Assets $ 12,017 $ 11,897
=========== ===========
LIABILITIES
Current Liabilities
Accounts Payable $ 621 $ 751
Labor and Fringe Benefits Payable 289 278
Casualty, Environmental and Other Reserves 173 174
Current Maturities of Long-Term Debt 104 100
Due to Parent Company 65 25
Due to Affiliate 90 90
Other Current Liabilities 128 50
----------- -----------
Total Current Liabilities 1,470 1,468
Casualty, Environmental and Other Reserves 508 521
Long-Term Debt 951 906
Deferred Income Taxes 2,816 2,776
Other Long-Term Liabilities 656 661
----------- -----------
Total Liabilities 6,401 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 4,141 4,090
----------- -----------
Total Shareholder's Equity 5,616 5,565
----------- -----------
Total Liabilities and Shareholder's Equity $ 12,017 $ 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 April 2, 1999 and December 25, 1998, the results of their operations and
their cash flows for the quarters ended April 2, 1999 and March 27, 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 will consist 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 14-week quarter ended April
2, 1999, the 13-week quarter ended March 27, 1998, and as of December 25, 1998.
NOTE 2. ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which requires
companies to record derivatives on the statement of financial position, measured
at fair value. The statement also sets forth new accounting rules for gains or
losses resulting from changes in the values of derivatives. 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 2000 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. 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 $583
million at April 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 April 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 $13 million and $15 million for the quarters
ended April 2, 1999 and March 27, 1998, respectively.
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CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 4. OTHER INCOME (EXPENSE)
Quarters Ended
-------------------------
April 2, March 27,
1999 1998
----------- -----------
Interest Income - CSX Cash Management Plan $ 1 $ 7
Interest Income - Other 4 -
Income from Real Estate Operations(a) 2 5
Net Losses from Accounts Receivable Sold (13)
(15)
Conrail Transition Expenses (39) (19)
Miscellaneous (10) (2)
----------- ----------
Total $ (55) $ (24)
=========== ==========
(a) Gross revenue from real estate operations was $9 million and $12 million for
the quarters ended April 2, 1999 and March 27, 1998, respectively.
NOTE 5. 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 will
begin in May 1999.
CSXT is pursuing an aggressive legal strategy. Management believes that
any adverse outcome will not be material to CSXT's overall results of operations
or financial position, although it could be material to results of operations in
a particular quarterly accounting period.
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CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 5. COMMITMENTS AND CONTINGENCIES, Continued
Environmental Contingencies
- ---------------------------
CSXT is a party to various proceedings involving private parties and
regulatory agencies related to environmental issues. CSXT has been identified as
a potentially responsible party (PRP) at approximately 105 environmentally
impaired sites that are or may be subject to remedial action under the Federal
Superfund statute (Superfund) or similar state statutes. A number of these
proceedings are based on allegations that CSXT, or its railroad predecessors,
sent hazardous substances to the facilities in question for disposal. Such
proceedings arising under Superfund or similar state statutes can involve
numerous other waste generators and disposal companies and seek to allocate or
recover costs associated with site investigation and cleanup, which could be
substantial.
CSXT is involved in a number of administrative and judicial proceedings
and other clean-up efforts at 243 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 April 2, 1999 and December 25, 1998, were $72 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 April 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
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CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 5. COMMITMENTS AND CONTINGENCIES, Continued
Environmental Contingencies, Continued
- --------------------------------------
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 6. 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 April 2, 1999, CSXT had a deficit balance in the plan of $35
million which was classified as 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
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.
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CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 6. RELATED PARTIES, Continued
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 April 2, 1999, $90 million was outstanding under the agreement.
Interest on the loan is payable monthly at .25% over the LIBOR rate, and was
5.94% at April 2, 1999 and March 27, 1998. Interest expense incurred for each of
the quarters ended April 2, 1999 and March 27, 1998 was $1 million relating to
this loan agreement.
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ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS
CSXT follows a 52/53-week fiscal calendar. Fiscal year 1999 includes 53
weeks. The quarter ended April 2, 1999 consisted of 14 weeks, compared with 13
weeks in the prior year's first quarter.
Net earnings for the first quarter of 1999 were $85 million versus $107
million in the prior year period. The company achieved operating income of $209
million, 2 percent below last year's first quarter.
Operating revenue of $1.3 billion was 3 percent higher than the 1998
period. Operating expense rose 4 percent to $1.1 billion, primarily due to
traffic mix and severe winter weather that caused congestion early in the
quarter, partially offset by lower fuel costs and a favorable experience credit
on medical claims that reduced fringe benefits expense.
OPERATING INCOME
(Millions of Dollars)
--------------------------------------
Quarters Ended
--------------------------
April 2, March 27, Percent
1999 1998 Change
----------- ----------- ----------
Operating Revenue
Merchandise $ 906 $ 831 9%
Coal 353 366 (4)%
Other 38 58 (34)%
----------- ----------- ----------
Total 1,297 1,255 3%
Operating Expense 1,088 1,042 4%
----------- ----------- ----------
Operating Income $ 209 $ 213 (2)%
=========== =========== ==========
Coal volume declined 2 percent, to 39 million tons, reflecting reduced
demand from overseas and from electric utilities. As a result, coal revenue fell
4 percent from the 1998 period. Total merchandise traffic and revenue were both
9 percent higher than the prior year quarter, led by significant increases in
automotive traffic and revenue that reflected continued strong demand for
vehicles and parts. Other merchandise categories were mixed, with strength in
minerals offset by weakness in metals and paper and forest products.
OUTLOOK
- -------
Training and implementation efforts are currently on schedule to achieve
the planned integration of CSXT and Conrail operations on June 1, 1999.
Technology systems are currently being tested, and all labor agreements are
expected to be in place prior to integration.
On its base business, the company continues to experience diminished
coal traffic. Export coal volumes remain weak, with no recovery expected in
1999. The domestic utility coal market is also experiencing weakness as a result
of the mild winter weather and fuel substitution. Merchandise traffic remains
strong, particularly in the automotive category, which continues to benefit from
consumer demand and increased production levels at the auto plants.
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ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS
- -------------
Conrail Transaction
In April 1997, CSXT entered into certain agreements pertaining to the
joint acquisition of Conrail by CSX and Norfolk Southern. Under these agreements
and other agreements to be completed or executed among the parties, appropriate
portions of the Conrail rail system are expected to be integrated with the CSXT
system.
CSX and Norfolk Southern filed an application for control of Conrail
with the Surface Transportation Board (STB) in June 1997. On July 23, 1998,
following an extensive review, the STB issued a written decision approving the
application with limited conditions. The decision permitted CSX and Norfolk
Southern to exercise joint control over Conrail on August 22, 1998.
CSX and Norfolk Southern currently expect to implement integrated
operations with Conrail on June 1, 1999. On that date, the parties will begin
operating specified portions of the Conrail routes and other assets pursuant to
various operating agreements. Certain Conrail assets will be operated for the
joint benefit of CSX and Norfolk Southern.
CSXT is actively planning for the smooth integration of Conrail
operations into its rail system. Plans involve all facets of combining the two
systems, including: safety; customer service; train scheduling, switching and
routing; equipment utilization and track programs; commuter and passenger rail
operations; marketing; technology; labor agreements; and administration. Related
capital improvements to certain routes and facilities on the CSXT rail system
are substantially complete. Preparations leading up to the June 1 implementation
date will be concentrated on the completion and testing of technology systems.
CSXT is incurring significant expenditures in connection with the
integration of Conrail operations. Transition expenses, principally costs
related to information technology integration, totaled $39 million and $19
million for the quarters ended April 2, 1999 and March 27, 1998, respectively.
Capital expenditures, including a major track construction project to
accommodate increased traffic flows in a primary service corridor after
integration, totaled $52 million and $42 million for the quarters ended April 2,
1999 and March 27, 1998, respectively.
Under the operating agreements with Conrail, CSXT will pay Conrail for
the use of assets and for services Conrail provides. Substantially all of
Conrail's customer freight contracts will be assumed by CSXT or other
subsidiaries of CSX, or by Norfolk Southern. As CSX and Norfolk Southern move to
integrate the Conrail operations, as expected, they will compete for traffic
located in markets formerly served solely by Conrail. The company expects that
as a result of this process of entering new markets, there may be changes in the
historic rate and traffic patterns, including some rate reductions and traffic
volume shifts. The process will be driven by market conditions, and the company
presently cannot assess the impact of these transition effects on either the
timing or realization of the projected benefits of the Conrail transaction. The
majority of Conrail's operations workforce will be employed by CSXT or other
subsidiaries of CSX, or by Norfolk Southern, although certain operations
personnel, as well as certain management and administrative employees, will
remain at Conrail to oversee its ongoing business activities.
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ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS, Continued
- ------------------------
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 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.
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ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS, Continued
- ------------------------
Year 2000 Planning, Continued
- -----------------------------
State of Year 2000 Readiness, Continued
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:
Estimated
Substantial
Effort Completion Current Phase
- --------------------------------------------------------------------------------
Core Information Systems Third Quarter 1999 Remediation and Validation
Distributed Information
Technology Third Quarter 1999 Assessment and Remediation
Electronic Commerce Third Quarter 1999 Remediation and Validation
Non-information Technology
(embedded systems) Third Quarter 1999 Assessment and Remediation
Trading Partners Fourth Quarter 1999 Assessment and Validation
Year 2000 Costs
CSXT has incurred total costs of $41 million to date related to Year
2000 readiness, which represents approximately 72% 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.
In connection with the integration of Conrail, CSX and Norfolk Southern
are jointly addressing the Year 2000 readiness of Conrail's core information
technology applications and non-information technology embedded systems. Certain
of Conrail's operations systems are being made Year 2000 ready as a contingency
in the event that there are unexpected delays in the integration or Conrail
continues to operate such systems after the integration is completed. Conrail's
estimated cost for its Year 2000 plan is approximately $16 million.
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 are currently assessing possible problems and making
plans to mitigate the impacts.
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ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS, Continued
- ------------------------
Year 2000 Planning, Continued
- -----------------------------
Contingency Plans, Continued
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 will
begin in May 1999.
CSXT is pursuing an aggressive legal strategy. Management believes that
any adverse outcome will not be material to CSXT's overall results of operations
or financial position, although it could be material to results of operations in
a particular quarterly accounting period.
-------------------------------------
- 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. 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: May 6, 1999
- 18 -
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