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 March 31, 2000
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 March 31, 2000: 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 MARCH 31, 2000
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters Ended March 31, 2000 and April 2, 1999 3
2. Consolidated Statement of Cash Flows-
Quarters Ended March 31, 2000 and April 2, 1999 4
3. Consolidated Statement of Financial Position-
At March 31, 2000 and December 31, 1999 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>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars)
<CAPTION>
(Unaudited)
Quarters Ended
---------------------------
March 31, April 2,
2000 1999
------------ ------------
<S> <C> <C>
OPERATING REVENUE
Merchandise $ 889 $ 756
Automotive 227 154
Coal, Coke & Iron Ore 390 372
Other 9 15
----------- -----------
Total 1,515 1,297
----------- -----------
OPERATING EXPENSE
Labor and Fringe Benefits 630 501
Materials, Supplies and Other 257 200
Conrail Operating Fee, Rent and Services 101 -
Related Party Service Fees 58 101
Equipment Rent 136 109
Depreciation 124 123
Fuel 138 54
----------- -----------
Total 1,444 1,088
----------- -----------
OPERATING INCOME 71 209
Other Income (Expense) (12) (55)
Interest Expense 23 18
----------- -----------
EARNINGS BEFORE INCOME TAXES 36 136
Income Tax Expense 14 51
----------- -----------
NET EARNINGS $ 22 $ 85
=========== ===========
</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)
Quarters Ended
-------------------------
March 31, April 2,
2000 1999
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 22 $ 85
Adjustments to Reconcile Net Earnings
to Net Cash Provided (Used):
Depreciation 124 123
Deferred Income Taxes 8 53
Other Operating Activities 18 2
Changes in Operating Assets and Liabilities
Accounts and Notes Receivable 46 (132)
Materials and Supplies (42) (11)
Other Current Assets 9 24
Accounts Payable (1) (107)
Other Current Liabilities (46) (49)
--------- ----------
Net Cash Provided (Used) by Operating Activities 138 (12)
--------- ----------
INVESTING ACTIVITIES
Property Additions (92) (151)
Other Investing Activities 5 (12)
--------- ----------
Net Cash Used by Investing Activities (87) (163)
--------- ----------
FINANCING ACTIVITIES
Long-Term Debt Issued - 79
Long-Term Debt Repaid (34) (30)
Cash Dividends Paid (55) (35)
Other Financing Activities 2 (1)
--------- ----------
Net Cash Provided (Used) by Financing Activities (87) 13
--------- ----------
Net Decrease in Cash and Cash Equivalents (36) (162)
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Period 36 177
--------- ----------
Cash and Cash Equivalents at End of Period $ - $ 15
========= ==========
</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)
March 31, December 31,
2000 1999
------------ -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents (principally investment
in CSX Cash Management Plan - see Note 6) $ - $ 36
Accounts and Notes Receivable 336 382
Materials and Supplies 235 193
Deferred Income Taxes 128 124
Other Current Assets 121 66
----------- -----------
Total Current Assets 820 801
Properties 16,042 16,067
Accumulated Depreciation (4,642) (4,631)
----------- -----------
Properties-Net 11,400 11,436
Affiliates and Other Companies 250 194
Other Long-Term Assets 562 549
----------- -----------
Total Assets $ 13,032 $ 12,980
=========== ===========
LIABILITIES
Current Liabilities
Accounts Payable $ 986 $ 1,046
Labor and Fringe Benefits Payable 360 309
Casualty, Environmental and Other Reserves 180 181
Current Maturities of Long-Term Debt 97 95
Due to Parent Company 83 24
Due to Affiliate 90 90
Other Current Liabilities 307 341
----------- -----------
Total Current Liabilities 2,103 2,086
Casualty, Environmental and Other Reserves 583 576
Long-Term Debt 1,051 1,087
Deferred Income Taxes 2,999 2,987
Other Long-Term Liabilities 671 619
----------- -----------
Total Liabilities 7,407 7,355
----------- -----------
SHAREHOLDER'S EQUITY
Common Stock, $20 Par Value:
Authorized 10,000,000 Shares;
Issued and Outstanding 9,061,038 Shares 181 181
Other Capital 1,393 1,360
Retained Earnings 4,051 4,084
----------- -----------
Total Shareholder's Equity 5,625 5,625
----------- -----------
Total Liabilities and Shareholder's Equity $ 13,032 $ 12,980
=========== ===========
</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 March 31, 2000 and December 31, 1999, the results of their operations and
their cash flows for the quarters ended March 31, 2000 and April 2, 1999, 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 2000 presentation.
CSXT follows a 52/53 week fiscal reporting calendar. Fiscal year 2000
will consist of 52 weeks ending on December 29, 2000. Fiscal year 1999 consisted
of 53 weeks ended December 31, 1999. The financial statements presented are for
the 13-week quarter ended March 31, 2000, the 14-week quarter ended April 2,
1999, and as of December 31, 1999.
NOTE 2. INTEGRATED RAIL OPERATIONS WITH CONRAIL.
Background
- ----------
CSX and Norfolk Southern Corporation (Norfolk Southern) completed the
joint acquisition of Conrail Inc. (Conrail) in May 1997. Conrail owns the
primary freight railroad system serving the Northeastern United States, and its
rail network extends into several midwestern states and into Canada. CSX and
Norfolk Southern, through a jointly owned acquisition entity, hold economic
interests in Conrail of 42% and 58%, respectively, and voting interests of 50%
each. CSX and Norfolk Southern received regulatory approval from the Surface
Transportation Board (STB) to exercise joint control over Conrail in August
1998, and their respective rail subsidiaries subsequently began integrated
operations over allocated portions of the Conrail lines in June 1999.
CSXT and Norfolk Southern Railway Company (Norfolk Southern Railway),
the rail subsidiary of Norfolk Southern, operate their respective portions of
the Conrail system pursuant to various operating agreements that took effect on
June 1, 1999. Under these agreements, 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 services in certain shared geographic areas for the
joint benefit of CSXT and Norfolk Southern Railway for which it is compensated
on the basis of usage by the respective railroads.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)
NOTE 2. INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued.
CSXT's Accounting for its Integrated Rail Operations With Conrail
- -----------------------------------------------------------------
Upon integration, substantially all of Conrail's customer freight
contracts were assumed by CSXT and Norfolk Southern Railway. 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, operating expenses also include an 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 in the shared areas Conrail
operates for the joint benefit of CSXT and Norfolk Southern Railway.
Transactions With Conrail
- -------------------------
The agreement under which CSXT operates its allocated portion of the
Conrail route system has an initial term of 25 years and may be renewed at
CSXT's option for two five-year terms. Operating fees paid to Conrail under the
agreement are subject to adjustment every six years based on the fair value of
the underlying system. Lease agreements for the Conrail equipment operated by
CSXT cover varying terms. CSXT is responsible for all costs of operating,
maintaining, and improving the routes and equipment under these agreements.
At March 31, 2000 and Dec. 31, 1999, CSXT had $26 million and $53
million, respectively, in amounts receivable from Conrail, principally for
reimbursement of certain capital improvement costs. CSXT also had amounts
payable to Conrail of approximately $118 million and $105 million at March
31, 2000 and December 31, 1999, respectively, representing expenses incurred
under the operating, equipment, and shared area agreements.
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 $961
million at March 31, 2000 and $951 million at December 31, 1999. 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 March 31, 2000 and December 31, 1999. 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 $19 million and $13 million for the quarters
ended March 31, 2000 and April 2, 1999, respectively.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 4. OTHER INCOME (EXPENSE)
Quarters Ended
-------------------------
March 31, April 2,
2000 1999
---------- -----------
Interest Income - CSX Cash Management Plan $ - $ 1
Interest (Expense) Income - Other (1) 4
Income from Real Estate Operations(a) 11 2
Net Losses from Accounts Receivable Sold (19) (13)
Conrail Transition Expenses - (39)
Miscellaneous (3) (10)
---------- -----------
Total $ (12) $ (55)
========== ===========
(a) Gross revenue from real estate operations was $19 million and $9 million for
the quarters ended March 31, 2000 and April 2, 1999, 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.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 5. COMMITMENTS AND CONTINGENCIES, Continued
New Orleans Tank Car Fire, Continued
- ------------------------------------
The new trial motion was denied by the trial court in August 1999. On
November 5, 1999, the trial court issued an opinion that 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) 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. A judgment reflecting the $850
million punitive award has been entered against CSXT. CSXT has obtained and
posted an appeal bond in the amount of $895 million, which will allow it to
appeal the 1997 compensatory and punitive awards, as reduced by the trial judge.
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 punitive damages award was
unwarranted.
CSXT continues to pursue an aggressive legal strategy. Management
believes that an adverse outcome, if any, is not likely to 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.
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 104 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 5. 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 March 31, 2000 and December 31, 1999, were $49 million and $53 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 March 31,
2000 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 legal actions are pending against CSXT in which claims are
made in substantial amounts. While the ultimate results of environmental
investigations, lawsuits and claims against the company cannot be predicted with
certainty, management does not currently expect that resolution of these matters
will have a material adverse effect on the company's consolidated financial
position, results of operations or cash flows. CSXT is also party to a number of
actions, the resolution of which could result in gain realization in amounts
that could be material to results of operations in the quarter received.
NOTE 6. RELATED PARTIES
Cash and cash equivalents at December 31, 1999 includes $55 million,
representing amounts due from CSX for CSXT's participation in the CSX cash
management plan. At March 31, 2000,
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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
CSXT had a deficit balance in the plan of $56 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. During the first quarter of 2000, CSX assumed $33 million in
stock compensation liabilities from CSXT. This assumption is reflected as a
reduction in liabilities and an increase in Other Capital.
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.
CSXT and CSX Insurance Company (CSX Insurance), a wholly-owned
subsidiary of CSX, have entered into a loan agreement whereby CSXT may borrow up
to $100 million from CSX Insurance. The loan is payable in full on demand. At
March 31, 2000, $90 million was outstanding under the agreement. Interest on the
loan is payable monthly at .25% over the LIBOR rate, and was 6.38% at March 31,
2000 and 5.94% at April 2, 1999. Interest expense incurred for each of the
quarters ended March 31, 2000 and April 2, 1999 was $1 million relating to this
loan agreement.
During 1988, CSXT participated with Sea-Land Service, Inc. (Sea-Land), a
wholly-owned subsidiary of CSX, in four sale-leaseback arrangements. Under these
arrangements, Sea-Land sold equipment to a third party and CSXT leased the
equipment and assigned the lease to Sea-Land. Sea-Land is obligated for all
lease payments and other associated equipment expenses. If Sea-Land defaults on
its obligations under the arrangements, CSXT would assume the asset lease rights
and obligations of $68 million at March 31, 2000.
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ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CSXT follows a 52/53-week fiscal calendar. Fiscal year 2000 consists of
52 weeks, and fiscal year 1999 consisted of 53 weeks. The quarter ended March
31, 2000 consisted of 13 weeks and the quarter ended April 2, 1999 consisted of
14 weeks.
CSXT reported net earnings of $22 million for the quarter ended March
31, 2000. In the prior year quarter, the company earned $85 million.
The integration of Conrail operations affects the comparability of
CSXT's first quarter 2000 operating results with the prior year. Since first
quarter 1999 preceded the integration, results for that period do not include
revenues and expenses associated with operations over CSXT's allocated portion
of the Conrail network. Additionally, as mentioned above, under the company's
fiscal calendar, first quarter 1999 included an extra week compared to first
quarter 2000.
Operating income of $71 million was 66% below last year's first quarter.
Operating revenue of $1.5 billion was 17% higher than the 1999 period as a
result of the Conrail integration and relatively strong demand across most
commodity groups. Operating expense rose 33% to $1.4 billion, primarily due to
the integration, network congestion, significantly higher fuel costs, and wage
inflation.
The following table provides rail carload and revenue data by service
group and commodity for the quarters ended March 31, 2000 and April 2, 1999.
<TABLE>
<CAPTION>
Carloads Revenue
(Thousands) (Millions of Dollars)
---------------------- ----------------------
March 31, April 2, March 31, April 2,
2000 1999 2000 1999
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Merchandise
Phosphates and Fertilizer 131 148 $ 92 $ 90
Metals 91 72 107 82
Food and Consumer Products 41 34 53 39
Paper and Forest Products 137 121 168 137
Agricultural Products 92 76 122 104
Chemicals 149 121 247 205
Minerals 101 101 95 92
Government 3 3 5 7
----------- ---------- ----------- ---------
Total Merchandise 745 676 889 756
Automotive 158 119 227 154
Coal, Coke & Iron Ore
Coal 396 396 371 353
Coke 12 12 12 12
Iron Ore 8 7 7 7
----------- ---------- ----------- ---------
Total Coal, Coke & Iron Ore 416 415 390 372
Other - - 9 15
----------- ---------- ----------- ---------
Total Rail 1,319 1,210 $ 1,515 $ 1,297
=========== ========== =========== =========
</TABLE>
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, Continued
Overall freight revenue was significantly higher than the first quarter
of 1999 due to the Conrail integration, although the increase in coal revenue
was tempered by mild winter weather in the East and continuing weakness in
export coal shipments. Merchandise demand was strong, particularly in the
chemicals, metals, food and consumer products, and paper and forest products
commodity groups. Automotive revenue was up significantly, benefiting from
the Conrail integration, continued strength in U.S. vehicle production, and
rate increases on some auto shipments.
Since the integration of Conrail, CSXT has experienced operating
difficulties and diminished service performance, particularly in high-volume
corridors of its network and during periods of peak traffic demand. Key
performance statistics that track average train velocity, the number of freight
cars on the network, and dwell time for trains in terminals and classification
yards have not shown sustainable improvement. As a result, the unit continued to
experience lost revenues during the first quarter as customers diverted traffic
to trucks or other carriers. Operating expenses include significant costs
related to the congestion problems, including lease costs for higher numbers of
locomotives and freight cars on the system and incremental labor costs for
train crews and yard personnel. Significantly higher fuel prices and
cost-of-living increases for union employees under previously-negotiated
contracts also had a substantial effect on operating expenses for the quarter.
The average price per gallon of diesel fuel was 86 cents vs. 45 cents in the
prior year quarter, accounting for $66 million of the increase in rail operating
expense. As discussed in a later section of Management's Analysis, CSXT has
various initiatives underway to relieve congestion, improve operations, and
reduce operating expenses.
OUTLOOK
CSXT's financial performance during the second quarter and the balance
of fiscal 2000 will be largely dependent on the company's success in achieving
operational improvements that restore fluidity on the rail network, improve
customer service, eliminate substantial excess costs, and allow the realization
of planned merger synergies. Management expects to make steady progress toward
these goals as the year progresses.
Entering the second quarter of 2000, merchandise and automotive traffic
remain strong, and coal traffic is showing some signs of strengthening. The
company expects to continue to look at price increases on rail shipments where
appropriate and competitively feasible, particularly where traffic demand is
creating capacity constraints on the system. Fuel prices have moderated over the
past month, but are expected to remain at levels significantly higher than the
prior year.
OTHER MATTERS
Integrated Rail Operations with Conrail
- ---------------------------------------
Background
CSX and Norfolk Southern Corporation (Norfolk Southern) completed the
acquisition of Conrail Inc. (Conrail) in May 1997. Conrail owns the primary
freight railroad system serving the northeastern United States, and its rail
network extends into several midwestern states and into Canada. CSX and Norfolk
Southern, through a jointly owned acquisition entity, hold economic interests in
Conrail of 42% and 58%, respectively, and voting interests of 50% each. CSX and
Norfolk
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS, Continued
Integrated Rail Operations with Conrail, Continued
- --------------------------------------------------
Background, Continued
Southern received regulatory approval from the Surface Transportation Board
(STB) to exercise joint control over Conrail in August 1998 and
subsequently began integrated operations over allocated portions of the Conrail
lines in June 1999.
CSXT and Norfolk Southern Railway Company (Norfolk Southern Railway),
Norfolk Southern's rail subsidiary, operate their respective portions of the
Conrail system pursuant to various operating agreements that took effect on June
1, 1999. Under these agreements, 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 Railway for which it is compensated on the basis of
usage by the respective railroads.
Accounting and Financial Reporting Effects
CSXT and Norfolk Southern Railway assumed substantially all of Conrail's
customer freight contracts at the June 1999 integration date. CSXT's operating
revenue since that date include 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. Operating
expenses after the integration also include an expense category, "Conrail
Operating Fee, Rent and Services," which reflects payment to Conrail for the use
of right-of-way and equipment, as well as charges for transportation, switching,
and terminal services in the shared areas Conrail operates for the joint benefit
of CSXT and Norfolk Southern Railway.
Operating and Financial Effects
The integration of Conrail in June 1999 initially resulted in congestion
and traffic delays on parts of the new CSXT network and on the shared areas
operated by Conrail. Although substantial progress was made during the summer of
1999 in stabilizing post-integration operations and restoring service levels,
these improvements have not been sustained across the CSXT system. Network
disruptions created by Hurricane Floyd in September 1999, followed by heavy
seasonal traffic build-up in the fourth quarter, adversely affected operating
and service recovery efforts. As peak traffic levels subsided and the company
implemented network simplification plans throughout the system, congestion
problems eased and service levels improved in key areas. During the first
quarter of 2000, overall operations on the northern portion of the CSXT system
(generally the lines allocated to CSXT in the Conrail acquisition) improved;
however, operations in the south deteriorated. From a systemwide perspective,
key performance statistics that track average train velocity, the number of
freight cars on the network, and dwell time for trains in terminals and
classification yards did not shown sustainable improvement during the quarter.
As a result, the company continued to experience lost revenue opportunities,
significant incremental operating costs, and delays in realizing merger
synergies.
- 14 -
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS, Continued
Integrated Rail Operations with Conrail, Continued
- --------------------------------------------------
Operating and Financial Effects, Continued
In April 2000, a number of key management changes were announced at CSXT
that are aimed at accelerating the pace of operational and service recovery. The
company has a number of initiatives underway to achieve this goal. Although
progress is expected to be gradual, management expects steady improvement over
the coming quarters will result in improved network fluidity across the system
in adequate time to meet peak traffic demand in the fall. In conjunction with
the operational and service improvement initiatives, efforts are being focused
on reducing operating costs and realizing planned merger synergies that will
deliver significant improvements in earnings and cash flow. The company is also
closely reviewing its pricing policies and implementing rate increases where
competitively appropriate.
Management believes that steady improvement across the rail network will
be achieved, leading to increased customer satisfaction, the return of business
which had been diverted to other modes of transportation, and improved financial
performance. However, there can be no assurance that these objectives will be
met, or met within a specified time frame.
Federal Railroad Administration Track Audit
- -------------------------------------------
In March 2000, the Federal Railroad Administration (FRA) released a
draft report of the results of a two-week audit of track conditions on CSXT's
rail system. The audit, which began on February 22, identified track defects on
certain portions of the system, the nature of which led the FRA to question the
effectiveness of the quality control procedures in CSX's track maintenance and
inspection programs. CSXT responded to the findings immediately by making
necessary track repairs and by restricting train speeds on certain portions of
track until repairs could be completed.
As a result of the audit, CSXT and the FRA entered into a Safety
Compliance Agreement in April 2000 that includes measures to improve the
railroad's track inspection and maintenance processes. Under the agreement,
which is effective though May 1, 2001, CSXT will increase the frequency of
automated track inspections, enhance management oversight of track inspection
and large scale maintenance operations, and implement a new track inspection
procedures manual developed in a joint effort with the FRA and Brotherhood of
Maintenance of Way Employees.
CSXT estimates that it will incur approximately $20 million to $30
million in additional costs over the remainder of fiscal year 2000 to address
the issues raised in the audit and the commitments made in the Safety Compliance
Agreement. The company is in the process of refining those cost estimates and
expects that a portion will represent operating expenses for fiscal 2000 and a
portion will consist of capital expenditures to be depreciated over the useful
life of the related track improvements.
Surface Transportation Board Moratorium on Rail Merger Applications
- -------------------------------------------------------------------
In March 2000, the Surface Transportation Board (STB) issued a decision
establishing a moratorium on rail merger applications for a 15-month time
period. The moratorium precluded the anticipated filing of an application by the
Burlington Northern Santa Fe (BNSF) and Canadian
- 15 -
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS, Continued
Surface Transportation Board Moratorium on Rail Merger Applications, Continued
- ------------------------------------------------------------------------------
National (CN) railroads to combine their respective systems. The moratorium is
intended to address the potential downstream effects that a rail merger might
have on the railroad industry at the present time, given the lingering
difficulties and service issues attributable to recent rail mergers. In the
STB's public hearings on the matter, particular concern was expressed that a
combination by BNSF and CN might precipitate further merger activity among other
Class I railroads at an unstable time in the industry. The STB's decision had
the support of CSXT and other major railroads, as well as many shippers and
other constituents of the rail industry. BNSF and CN are currently challenging
the STB decision in the federal courts.
Federal Court Decision Affecting Coal Mining Operations
- -------------------------------------------------------
In October 1999, a federal district court judge ruled that certain
mountaintop coal mining practices in West Virginia were in violation of the
federal Clean Water Act and the federal Surface Mining and Control Reclamation
Act. The decision, which is currently under appeal, could adversely affect
CSXT's coal traffic and revenues if upheld.
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 1999. On
November 5, 1999, the trial court issued an opinion that 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) 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. A judgment reflecting the $850
million punitive award has been entered against CSXT. CSXT has obtained and
- 16 -
<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS, Continued
Litigation, Continued
- ---------------------
posted an appeal bond in the amount of $895 million, which will allow it to
appeal the 1997 compensatory and punitive awards, as reduced by the trial judge.
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 punitive damages award was
unwarranted.
CSXT continues to pursue an aggressive legal strategy. Management
believes that an adverse outcome, if any, is not likely to 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.
-------------------------------------
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) revenue and synergies expected from the integration
of Conrail may not be fully realized or realized within the time frame
anticipated, (ii) costs and operating difficulties related to the integration of
Conrail may not be eliminated or resolved within the time frame currently
anticipated, (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
company, (iv) legislative or regulatory changes, including possible enactment of
initiatives to reregulate the rail industry, may adversely affect the company,
(v) possible additional consolidation of the rail industry in the near future
may adversely affect the operations and business of the company, and (vi)
changes may occur in the securities and capital markets.
- 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 12, 2000
- 18 -
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