CSX TRANSPORTATION INC, 10-K405, 2000-03-14

CSX TRANSPORTATION INC
10-K405, 2000-03-14
RAILROADS, LINE-HAUL OPERATING

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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1999

( ) 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, FL. 32202
----------------------------------- -----
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (904) 359-3100
--------------

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange on which each
Title of each class class is registered
------------------------------ -------------------------
Louisville and Nashville Railroad
Company First and Refunding Mortgage
3-3/8% Bonds, Series F, due April 1, 2003 New York Stock Exchange

Louisville and Nashville Railroad
Company First and Refunding Mortgage
2-7/8% Bonds, Series G, due April 1, 2003 New York Stock Exchange

Monon Railroad 6% Income Debentures,
due January 1, 2007 New York Stock Exchange

Exhibit Index can be found on page 8.

- 1 -
<PAGE>

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1) (a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.

Securities Registered Pursuant to Section 12(g) of the Act: None.

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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)

State the aggregate market value of the voting stock held by nonaffiliates of
the registrant. The aggregate market value of the voting stock at February 25,
2000, was $-0-, excluding the voting stock held by the parent of the registrant.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. The registrant has 9,061,038
shares of common stock, par value $20.00, outstanding at February 25, 2000.

- 2 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
1999 FORM 10-K ANNUAL REPORT
Table of Contents

Item No. Page

PART I

1 Business 4-5
2. Properties 4-5
3. Legal Proceedings 5-7
4. Submission of Matters to a Vote of Security Holders 7

PART II

5. Market for Registrant's Common Stock and Related Stockholder
Matters 7
6. Selected Financial Data 7
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
7.A. Quantitative and Qualitative Disclosures About Market Risk 7
8. Financial Statements and Supplementary Data 7
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 7

PART III

10. Directors, Executive Officers, Promoters and Control Persons of
the Registrant 7
11. Executive Compensation 8
12. Security Ownership of Certain Beneficial Owners and Management 8
13. Certain Relationships and Related Transactions 8

PART IV

14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 8-9

Signatures 10

Index to Consolidated Financial Statements 11

- 3 -

<PAGE>

PART I

Items 1. & 2. Business and Properties.

General

CSX Transportation, Inc. (CSXT) is engaged principally in the
business of railroad transportation and operates a system comprising
approximately 23,400 miles of first main line track in 23 states, the District
of Columbia and two Canadian provinces, employing an average of approximately
32,000 employees during its most recent fiscal year. It conducts railroad
operations in its own name and through railroad subsidiaries.

In 1999, CSXT's rail system expanded significantly with the
integration of Conrail Inc. (Conrail) lines in the Northeast, brought about
by the joint CSX Corporation/Norfolk Southern Corporation acquisition of
Conrail that was approved by federal regulators in 1998. CSXT now
operates in every major market east of the Mississippi River and serves more
ports than any railroad in the country.

CSXT is a wholly-owned subsidiary of CSX Corporation (CSX). CSX is a
publicly-owned Virginia corporation with headquarters at One James Center, 901
East Cary Street, Richmond, Virginia, 23219-4031. CSX also owns other
transportation businesses which include CSX Intermodal, Inc., an intermodal and
trucking company; CSX Lines LLC, an ocean container-shipping company; CSX World
Terminals LLC, a container-freight terminal company; and Customized
Transportation, Inc., a contract logistics service supplier. CSX also has
interests in real estate, resorts and resort management.

For information concerning business conducted by CSXT during 1999,
see "Management's Narrative Analysis and Results of Operations" on pages 31 -
34.

Roadway

On December 31, 1999, CSXT's consolidated system consisted of 40,683
miles of track as follows:

Track
Miles
-------
First Main 23,357
Second Main 5,516
Passing, Crossovers and Turnouts 2,830
Way and Yard Switching 8,980
-------

Total 40,683
=======

Included above are 983 miles of leased track, 6,511 miles of track
under trackage rights agreements with other railroads (including 5,852 miles of
track leased from Conrail) and 244 miles of track under operating contracts.

- 4 -
<PAGE>

Equipment
---------

On December 31, 1999, CSXT and subsidiaries owned or leased the
following:

Owned Leased Total
--------- -------- ---------
Locomotives
Freight 2,147 1,236 3,383
Switching 225 55 280
Auxiliary Units 182 15 197
--------- -------- ---------

Total 2,554 1,306 3,860
========= ======== =========

Freight Cars
Open Top Hoppers 13,648 14,866 28,514
Gondolas 16,144 20,084 36,228
Covered Hoppers 11,548 7,998 19,546
Box Cars 9,705 9,423 19,128
Flat Cars 775 17,378 18,153
Other 1,312 1,614 2,926
--------- -------- ---------

Total 53,132 71,363 124,495
========= ======== =========

Included in leased equipment are 773 locomotives and 19,082 freight cars leased
from Conrail.

Item 3. Legal Proceedings.

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 was 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 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

- 5 -

<PAGE>

New Orleans Tank Car Fire, Continued
- ------------------------------------

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 damages, 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 18 of those 20
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 its
overall results of operations or financial position, although it could be
material to results of operations in a particular quarterly accounting period.

Environmental
- -------------

CSXT generates and transports hazardous and nonhazardous waste in its
current and former operations, and is subject to federal, state and local
environmental laws and regulations. The company has identified 243 sites at
which it is or may be liable for remediation costs associated with alleged
contamination or for alleged violations of environmental requirements.
Approximately 115 of these sites are or may be subject to remedial action under
the federal Superfund statute or similar state statutes. Certain federal
legislation imposes joint and several liability for the remediation of
identified sites. Consequently, CSXT's ultimate environmental liability may
include costs relating to other parties, in addition to costs relating to its
own activities at each site.

A liability of $53 million has been accrued for future costs at all
sites where the company's obligation is probable and where such costs can be
reasonably estimated. However, the ultimate cost could be higher or lower than
the amounts currently provided. The liability includes future costs for
remediation and restoration of sites, as well as for ongoing monitoring costs,
but excludes any anticipated recoveries from third parties. Cost estimates were
based on information available for each site, financial viability of other
potentially responsible parties (PRPs), and existing technology, laws and
regulations. CSXT believes it has made adequate provision for its ultimate share
of costs at sites subject to joint and several liability. However, the ultimate
liability for remediation is difficult to determine with certainty because of
the number of PRPs involved, site-specific cost-sharing arrangements with other
PRPs, the degree of contamination by various wastes, the scarcity and quality of
data related to many of the sites, and/or the speculative nature of remediation
costs. The majority of the year-end 1999 environmental liability is expected to
be paid out over the next five to seven years, funded by cash generated from
operations. Total expenditures associated with protecting the environment and
remedial environmental cleanup and monitoring efforts amounted to $35 million in
1999, compared with $34 million in 1998 and $36 million in 1997. During 2000,
the company expects to incur preventive and remedial environmental expenditures
in the range of $35 million to $45 million. Future environmental obligations are
not expected to have a material impact on the results of operations or financial
position of the company.

- 6 -
<PAGE>

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 such actions
cannot be predicted with certainty, management does not currently expect that
resolution of these matters will have a material adverse effect on the
consolidated results of operations, financial position or cash flows of the
company. The company 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.

Item 4. Submission of Matters to a Vote of Security Holders.

Information omitted in accordance with General Instruction I(2)(c).

PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.

There is no market for CSXT's common stock as CSXT is a wholly-owned
subsidiary of CSX. During the years 1999, 1998 and 1997, CSXT paid
dividends on its common stock aggregating $219 million, $138 million
and $138 million, respectively.

Item 6. Selected Financial Data.

Information omitted in accordance with General Instruction I(2)(a)

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Information omitted in accordance with General Instruction I(2)(a).
However, in compliance with said Instruction, see "Management's
Narrative Analysis and Results of Operations" on pages 31 - 34.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The company does not have any market risks requiring disclosure under
this item.

Item 8. Financial Statements and Supplementary Data.

The consolidated financial statements of CSXT and notes thereto
required in response to this item are included herein (refer to Index
to Consolidated Financial Statements on page 11).

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

PART III

Item 10. Directors, Executive Officers, Promoters and Control Persons of the
Registrant.

Information omitted in accordance with General Instruction I(2)(c).

- 7 -

<PAGE>

Item 11. Executive Compensation.

Information omitted in accordance with General Instruction I(2)(c).

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Information omitted in accordance with General Instruction I(2)(c).

Item 13. Certain Relationships and Related Transactions.

Information omitted in accordance with General Instruction I(2)(c).

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a) 1. Financial Statements.

See Index to Consolidated Financial Statements on page 11.

2. Financial Statement Schedules.

The information required by Schedule II is included in
Note 10 to the consolidated financial statements. All
other financial statement schedules are not applicable.

3. Exhibits.

(3.1) Articles of Incorporation, as amended (incorporated
by reference to Exhibit 3.1 to Form 10-K dated
March 8, 1996)

(3.2) By-laws of the Registrant, as amended to May 17,
1999

(10.1) Transaction Agreement, dated as of June 10, 1997,
by and among CSX Corporation, CSX Transportation,
Inc., Norfolk Southern Corporation, Norfolk
Southern Railway Company, Conrail Inc.,
Consolidated Rail Corporation, and CRR Holdings
LLC, with certain schedules thereto (incorporated
by reference to Exhibit 10.1 to Form 8-K dated June
11, 1999)

(10.2) Amendment No. 1, dated as of August 22, 1998, to
the Transaction Agreement, dated as of June 10,
1997, by and among CSX Corporation, CSX
Transportation, Inc., Norfolk Southern Corporation,
Norfolk Southern Railway Company, Conrail Inc.,
Consolidated Rail Corporation, and CRR Holdings LLC
(incorporated by reference to Exhibit 10.2 to Form
8-K dated June 11, 1999)

- 8 -
<PAGE>

(10.3) Amendment No. 2, dated as of June 1, 1999, to the
Transaction Agreement, dated June 10, 1997, by and
among CSX Corporation, CSX Transportation, Inc.,
Norfolk Southern Corporation, Norfolk Southern
Railway Company, Conrail Inc., Consolidated Rail
Corporation, and CRR Holdings, LLC (incorporated by
reference to Exhibit 10.3 to Form 8-K dated June
11, 1999)

(10.4) Operating Agreement, dated as of June 1, 1999, by
and between New York Central Lines LLC and CSX
Transportation, Inc. (incorporated by reference to
Exhibit 10.4 to Form 8-K dated June 11, 1999)

(10.5) Shared Assets Area Operating Agreement for North
Jersey, dated as of June 1, 1999, by and among
Consolidated Rail Corporation, CSX Transportation,
Inc., and Norfolk Southern Railway Company, with
exhibit thereto (incorporated by reference to
Exhibit 10.5 to Form 8-K dated June 11, 1999)

(10.6) Shared Assets Area Operating Agreement for Southern
Jersey/Philadelphia, dated as of June 1, 1999, by
and among Consolidated Rail Corporation, CSX
Transportation, Inc., and Norfolk Southern Railway
Company, with exhibit thereto (incorporated by
reference to Exhibit 10.6 to Form 8-K dated June
11, 1999)

(10.7) Shared Assets Area Operating Agreement for Detroit,
dated as of June 1, 1999, by and among Consolidated
Rail Corporation, CSX Transportation, Inc., and
Norfolk Southern Railway Corporation, with exhibit
thereto (incorporated by reference to Exhibit 10.7
to Form 8-K dated June 11, 1999)

(10.8) Monongahela Usage Agreement, dated as of June 1,
1999, by and among CSX Transportation, Inc.,
Norfolk Southern Railway Company, Pennsylvania
Lines LLC, and New York Central Lines LLC, with
exhibit thereto (incorporated by reference to
Exhibit 10.8 to Form 8-K dated June 11, 1999)

(21) Omitted in accordance with General Instruction I(2)
(c)

(24) Powers of Attorney

(27) Financial Data Schedule

(b) Reports on Form 8-K.

None.

- 9 -
<PAGE>

Signatures
----------

Pursuant to the requirements of Section 13 or 15(d) 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, on the 13th day of
March, 2000.

CSX TRANSPORTATION, INC.

/s/ JAMES L. ROSS
-------------
James L. Ross
(Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signatures Title
---------- -----

/s/ John W. Snow Chairman of the Board and Director
- ----------------
John W. Snow*

/s/ Alvin R. Carpenter Director
- ---------------------
Alvin R. Carpenter*

/s/ Mark G. Aron Director
- ----------------
Mark G. Aron*

/s/ Ronald J. Conway President (Principal Executive Officer)
- -------------------- and Director
Ronald J. Conway*

/s/ Paul R. Goodwin Director
- -------------------
Paul R. Goodwin*

/s/ Michael J. Ward Executive Vice President-Coal Service
- ------------------- Group and Director
Michael J. Ward*

/s/ Frederick J. Favorite Senior Vice-President-Finance
- ------------------------- (Principal Finance Officer)
Frederick J. Favorite*

/s/ Patricia J. Aftoora
*Patricia J. Aftoora
(Attorney-in-Fact)

March 13, 2000

- 10 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements

Page
----

Report of Independent Auditors 12

CSX Transportation, Inc. and Subsidiaries:

Consolidated Financial Statements and Notes to Consolidated
Financial Statements Submitted Herewith:

Consolidated Statement of Earnings -
Fiscal Years Ended December 31, 1999
December 25, 1998 and December 26, 1997 13

Consolidated Statement of Cash Flows -
Fiscal Years Ended December 31, 1999,
December 25, 1998 and December 26, 1997 14

Consolidated Statement of Financial Position -
December 31, 1999 and December 25, 1998 15

Consolidated Statement of Retained Earnings
Fiscal Years Ended December 31, 1999,
December 25, 1998 and December 26, 1997 16

Notes to Consolidated Financial Statements 17

- 11 -

<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
-------------------------------------------------

To the Shareholder and Board of Directors
of CSX Transportation, Inc.

We have audited the accompanying consolidated statements of financial
position of CSX Transportation, Inc. and subsidiaries as of December 31, 1999
and December 25, 1998, and the related consolidated statements of earnings, cash
flows, and retained earnings for each of the three fiscal years in the period
ended December 31, 1999. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above (appearing on pages 13-30) present fairly, in all material respects, the
consolidated financial position of CSX Transportation, Inc. and subsidiaries at
December 31, 1999 and December 25, 1998, and the consolidated results of their
operations and their cash flows for each of the three fiscal years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.

/s/ ERNST & YOUNG LLP

Jacksonville, Florida
February 9, 2000

- 12 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Millions of Dollars)

Fiscal Years Ended
---------------------------------------------------
Dec. 31, Dec. 25, Dec. 26,
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>

OPERATING REVENUE
Merchandise $ 3,238 $ 2,766 $ 2,742
Automotive 760 540 543
Coal, Coke & Iron Ore 1,565 1,583 1,662
Other 60 67 42
----------- ----------- -----------

Total 5,623 4,956 4,989
----------- ----------- -----------

OPERATING EXPENSE
Labor and Fringe Benefits 2,225 1,949 1,921
Materials, Supplies and Other 1,029 818 668
Conrail Operating Fee, Rent & 249 - -
Services
Related Party Service Fees 287 330 287
Equipment Rent 495 381 347
Depreciation 468 448 427
Fuel 317 251 299
Workforce Reduction Program 53 - -
Restructuring Credit - (30) -
----------- ----------- -----------

Total 5,123 4,147 3,949
----------- ----------- -----------

OPERATING INCOME 500 809 1,040

Other Income (Expense) (53) (134) 11

Interest Expense 75 77 74
----------- ----------- -----------

EARNINGS BEFORE INCOME TAXES 372 598 977

Income Tax Expense 159 220 352
----------- ----------- -----------

NET EARNINGS $ 213 $ 378 $ 625
=========== =========== ===========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

- 13 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of Dollars)
<TABLE>
<CAPTION>

Fiscal Years Ended
------------------------------------------
Dec. 31, Dec. 25, Dec. 26,
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 213 $ 378 $ 625
Adjustments to Reconcile Net Earnings
to Net Cash Provided
Depreciation 468 448 427
Deferred Income Taxes 155 185 155
Workforce Reduction Program 53 - -
Other Operating Activities 15 (48) (56)
Changes in Operating Assets and Liabilities
Accounts and Notes Receivable (467) (9) (76)
Sale of Accounts Receivable - Net 310 (23) 20
Other Current Assets 77 (103) (8)
Accounts Payable 284 106 22
Other Current Liabilities 87 37 9
--------- ---------- ----------

Net Cash Provided by Operating Activities 1,195 971 1,118
--------- ---------- ----------

INVESTING ACTIVITIES
Property Additions (1,299) (1,212) (712)
Proceeds from Property Dispositions 43 5 28
Other Investing Activities 4 (15) (34)
--------- ---------- ----------

Net Cash Used by Investing Activities (1,252) (1,222) (718)
--------- ---------- ----------

FINANCING ACTIVITIES
Long-Term Debt Issued 284 166 82
Long-Term Debt Repaid (107) (72) (75)
Cash Dividends Paid (219) (138) (138)
Other Financing Activities (42) (2) (2)
--------- ---------- ----------

Net Cash Used by Financing Activities (84) (46) (133)
--------- ---------- ----------

Net Increase (Decrease) in Cash and Cash Equivalents (141) (297) 267

CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Period 177 474 207
--------- ---------- ----------

Cash and Cash Equivalents at End of Period $ 36 $ 177 $ 474
========= ========== ==========

SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid - Net of Amounts Capitalized $ 75 $ 77 $ 70
========= ========== ==========
Income Taxes Paid $ 5 $ 67 $ 232
========= ========== ==========

</TABLE>

See accompanying Notes to Consolidated Financial Statements.

- 14 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Millions of Dollars)
<TABLE>
<CAPTION>

Dec. 31, Dec. 25,
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash (principally investment in CSX Cash
Management Plan - see Note 7) $ 36 $ 177
Accounts and Notes Receivable 382 170
Materials and Supplies 193 171
Deferred Income Taxes 124 111
Other Current Assets 66 102
----------- ------------

Total Current Assets 801 731
----------- ------------

Properties 16,067 15,215
Accumulated Depreciation (4,631) (4,559)
----------- ------------

Properties-Net 11,436 10,656
----------- ------------

Affiliates and Other Companies 194 223
Other Long-Term Assets 549 287
----------- ------------

Total Assets $ 12,980 $ 11,897
=========== ============

LIABILITIES
Current Liabilities
Accounts Payable $ 1,046 $ 751
Labor and Fringe Benefits Payable 309 278
Casualty, Environmental and Other Reserves 181 174
Current Maturities of Long-Term Debt 95 100
Due to Parent Company 24 25
Due to Affiliate 90 90
Other Current Liabilities 341 50
----------- ------------

Total Current Liabilities 2,086 1,468

Casualty, Environmental and Other Reserves 576 521
Long-Term Debt 1,087 906
Deferred Income Taxes 2,987 2,776
Other Long-Term Liabilities 619 661
----------- ------------

Total Liabilities 7,355 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 1,360 1,294
Retained Earnings 4,084 4,090
----------- ------------

Total Shareholder's Equity 5,625 5,565
----------- ------------

Total Liabilities and Shareholder's Equity $ 12,980 $ 11,897
=========== ============
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

- 15 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(Millions of Dollars)

Dec. 31, Dec. 25, Dec. 26,
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Beginning Balance $ 4,090 $ 3,855 $ 3,368

Net Earnings 213 378 625

Dividends - Common (219) (138) (138)

Other - (5) -
------------ ------------ --------------

Ending Balance $ 4,084 $ 4,090 $ 3,855
============ ============ ==============
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

- 16 -

<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Tables in Millions of Dollars)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES.

Nature of Operations

CSX Transportation, Inc. (CSXT) is a rail freight transportation
company operating a system composed of 23,357 route miles of track in 23 states,
the District of Columbia and two Canadian provinces. Rail shipments include
merchandise traffic, automobiles and related products, and coal, coke and iron
ore. Merchandise traffic comprised nearly 60% of rail revenue in 1999, while
automotive traffic accounted for nearly 15% and coal, coke and iron ore
accounted for slightly more than 25%. Merchandise traffic includes chemicals,
paper and forest products, agricultural products, minerals, metals, phosphates
and fertilizer, and food and consumer products. Coal shipments originate
principally from mining locations in the eastern United States and primarily
supply domestic utility and export markets.

CSXT is a wholly-owned subsidiary of CSX Corporation (CSX).

Principles of Consolidation

The Consolidated Financial Statements include CSXT and its
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in companies that are not
majority-owned are carried at either cost or equity, depending on the extent of
control.

Fiscal Year

CSXT follows a 52/53 week fiscal reporting calendar. Fiscal year 1999
consisted of 53 weeks. Fiscal years 1998 and 1997 consisted of 52 weeks. A
52-week fiscal year consists of four 13-week quarters; a 53-week year reports an
extra week in the first quarter.

Cash and Cash Equivalents

Cash and cash equivalents primarily represent amounts due from CSX
for CSXT's participation in the CSX cash management plan.

Materials and Supplies

Materials and supplies consist primarily of fuel and items for
maintenance of property and equipment, and are carried at average cost.

Properties

All properties are stated at cost, less an allowance for accumulated
depreciation. Main-line track is depreciated using a composite straight-line
method. All other property and equipment is depreciated on a straight-line basis
over estimated useful lives of three to 50 years.

Regulations enforced by the Surface Transportation Board (STB) of the
U.S. Department of Transportation require periodic formal studies of ultimate
service lives for all railroad assets. Resulting service life estimates are
subject to review and approval by the STB. For retirements or

- 17 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES, Continued.

Properties, Continued.

disposals of depreciable rail assets that occur in the ordinary course of
business, the asset cost (net of salvage value or sales proceeds) is charged to
accumulated depreciation and no gain or loss is recognized. For retirements or
disposals of depreciable non-operating property, and for all dispositions of
land, gains or losses are recognized at the time of disposal. Expenditures that
significantly increase asset values or extend useful lives are capitalized.
Repair and maintenance expenditures are charged to operating expense when the
work is performed.

Properties and other long-lived assets are reviewed for impairment
whenever events or business conditions indicate the carrying amount of such
assets may not be fully recoverable. Initial assessments of recoverability are
based on estimates of undiscounted future net cash flows associated with an
asset or group of assets. Where impairment is indicated, the assets are
evaluated for sale or other disposition, and their carrying amount is reduced to
fair value based on discounted net cash flows or other estimates of fair value.

Revenue

Transportation revenue is recognized proportionately as shipments
move from origin to destination.

Other revenue includes switching, demurrage and incidental service
charges, as well as interline switching settlements.

Environmental Costs

Environmental costs that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to remediating an existing
condition caused by past operations, and which do not contribute to current or
future revenue generation, are expensed. Liabilities are recorded when CSXT's
responsibility for environmental remedial efforts is deemed probable, and the
costs can be reasonably estimated. Generally, the timing of these accruals
coincides with the completion of a feasibility study or CSXT's commitment to a
formal plan of action.

Common Stock and Other Capital

There have been no changes in common stock during the last three
years. In 1999, CSX contributed $66 million of pension assets (net of tax) to
CSXT in connection with the transfer of certain assets and obligations from
Conrail Inc.'s pension plan to the pension plans of CSX and Norfolk Southern
Corporation. During 1998, CSX contributed $24 million in net pension assets to
CSXT in connection with the spin-off of certain assets and liabilities from
CSX's pension plan to several new plans.

- 18 -

<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES, Continued.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires that management make
estimates in reporting the amounts of certain revenues and expenses for each
fiscal year and certain assets and liabilities at the end of each fiscal year.
Actual results may differ from those estimates.

Prior-Year Data

Certain prior-year data have been reclassified to conform to the 1999
presentation.

Accounting Pronouncements

The FASB has issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of 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 the company 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 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. The majority of Conrail's
operations workforce transferred to CSXT or Norfolk Southern Railway, although
certain operations personnel, as well as certain management and administrative
employees, remain at Conrail to oversee its ongoing business activities.

- 19 -
<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 lines. 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 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 the shared areas operated for the joint benefit of CSXT and Norfolk Southern
Railway.

As a result of the integration, a number of employees' positions at
Conrail were eliminated and certain duplicate facilities were closed. Under the
agreements among the parties, CSXT and Norfolk Southern Railway assumed various
obligations related to these actions. During 1999, CSXT incurred approximately
$66 million of costs for separation and relocation of Conrail employees and for
lease payments on certain Conrail facilities no longer being used after the
integration. These costs are reflected in "Materials, Supplies and Other"
expense in CSXT's consolidated statement of earnings.

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.
Future minimum payments to Conrail under the operating, equipment, and shared
area agreements total $247 million for 2000, $240 million for 2001, $248 million
for 2002, $256 million for 2003, $261 million for 2004, and $4.4 billion for
years after 2004.

At Dec. 31, 1999, CSXT had $53 million in amounts receivable from
Conrail, principally for reimbursement of certain capital improvement costs and
accrued vacation for former Conrail employees who joined CSXT in June 1999. CSXT
has recorded a corresponding vacation liability and will pay the employees as
they take vacation. CSXT also had amounts payable to Conrail of approximately
$105 million representing expenses incurred under the operating, equipment, and
shared area agreements.

NOTE 3. WORKFORCE REDUCTION PROGRAM.

- 20 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)

NOTE 3. WORKFORCE REDUCTION PROGRAM, Continued.

offered under the voluntary program accounted for $20 million of the charge and
will be paid from CSX's pension and postretirement benefit plans. Separation
benefits are being paid from cash generated by operations. Approximately half of
the separation benefits were paid in 1999. Substantially all of the remaining
amounts will be paid in fiscal year 2000 and are included in "Labor and Fringe
Benefits Payable" in the consolidated statement of financial position.

NOTE 4. SUPPLEMENTAL CONSOLIDATED STATEMENT OF EARNINGS FINANCIAL DATA.

Operating expense includes the following:
1999 1998 1997
---- ---- ----

Selling, General and Administrative Expense $935 $832 $778
==== ==== ====

NOTE 5. OTHER INCOME (EXPENSE).

1999 1998 1997
-------- -------- ---------

Interest Income - CSX Cash Management Plan $ 3 $ 22 $ 26
Interest Income - Other 4 3 4
Income from Real Estate Operations(a) 66 33 57
Net Losses from Accounts Receivable Sold (63) (58) (57)
Conrail Transition Expenses (67) (143) (25)
Miscellaneous 4 9 6
-------- -------- ---------

Total $ (53) $ (134) $ 11
======== ======== =========

(a) Gross revenue from real estate operations was $95 million, $67 million
and $87 million in 1999, 1998
and 1997, respectively.

NOTE 6. INCOME TAXES.

Income tax expense information is as follows:

1999 1998 1997
---------- ---------- ---------

Current
Federal $ 15 $ 41 $ 173
State and Foreign (11) (6) 24
---------- ---------- ---------
Total 4 35 197
---------- ---------- ---------

Deferred
Federal 94 153 134
State 61 32 21
---------- ---------- ---------
Total 155 185 155
---------- ---------- ---------

Total Expense $ 159 $ 220 $ 352
========== ========== =========

- 21 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)

NOTE 6. INCOME TAXES, Continued

Income tax expense reconciled to the tax computed at statutory rates
is as follows:

1999 1998 1997
-------------- ------------- -------------

Tax at Statutory Rates $ 130 35% $ 209 35% $ 342 35%
State Income Taxes 33 9 17 3 29 3
Other (4) (1) (6) (1) (19) (2)
------- ------ ------------- ------- -----
Total Expense $ 159 43% $ 220 37% $ 352 36%
======= ====== ============= ======= =====

Deferred state income tax expense in 1999 includes $27 million for
the increase in the company's effective deferred state income tax rate, which is
applied to CSXT's cumulative temporary differences, as a result of the sale of
certain CSX assets.

The significant components of deferred tax assets and liabilities include:

Dec. 31, Dec. 25,
1999 1998
--------- ---------

Deferred Tax Assets
Productivity/Restructuring Charges $ 116 $ 120
Employee Benefit Plans 184 175
Other 316 259
--------- ---------
Total 616 554
--------- ---------

Deferred Tax Liabilities
Accelerated Depreciation 3,157 2,933
Other 322 286
--------- ---------
Total 3,479 3,219
--------- ---------

Net Deferred Tax Liabilities $ 2,863 $ 2,665
========= =========

In addition to the annual provision for deferred income tax expense,
the year-end net deferred income tax liability balance includes the income tax
effect of the transfer of certain assets and obligations from Conrail's defined
benefit plan to the CSX pension plan in 1999.

CSXT and its subsidiaries are included in the consolidated federal
income tax return filed by CSX. The consolidated current federal income tax
expense or benefit is allocated to CSXT and its subsidiaries as though CSXT had
filed a separate consolidated federal return. At Dec. 31, 1999 and Dec. 25,
1998, approximately $81 million of income taxes due to CSX and $140 million of
income taxes due from CSX were included in Other Current Liabilities,
respectively.

Examinations of the federal income tax returns of CSX and its
principal subsidiaries have been completed through 1990. Returns for 1991
through 1996 are currently under examination. Management believes adequate
provision has been made for any adjustments that might be assessed.

- 22 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)

NOTE 7. RELATED PARTIES.

Cash and cash equivalents at Dec. 31, 1999 and Dec. 25, 1998,
includes $55 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 amounts related to a
management service fee charged by CSX, data processing related charges from CSX
Technology, Inc. (CSX Technology); the reimbursement, under an operating
agreement, from CSX Intermodal, Inc. (CSXI), for costs incurred by CSXT related
to intermodal operations; charges from Total Distribution Services, Inc. (TDSI),
for services provided at automobile ramps; and charges from Bulk Intermodal
Distribution Services, Inc. (BIDS) for services provided at bulk commodity
facilities. The management service fee 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, 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 Dec. 31, 1999, $90 million was outstanding
under the agreement. Interest on the loan is payable monthly at .25% over the
LIBOR rate, and was 6.0725% at Dec. 31, 1999. Interest expense related to the
loan was $5 million for each of the fiscal years ended Dec. 31, 1999, Dec. 25,
1998, and Dec. 26, 1997.

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 $80 million at Dec. 31, 1999.

NOTE 8. 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 $951 million at Dec. 31, 1999 and $642 million at Dec. 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 Dec. 31, 1999 and Dec. 25, 1998. The sales of

- 23 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)

NOTE 8. ACCOUNTS RECEIVABLE, Continued.

receivables have been reflected as reductions of "Accounts Receivable" in the
Consolidated Statement of Financial Position. The net losses associated with
sales of receivables were $63 million and $58 million for the fiscal years ended
Dec. 31, 1999 and Dec. 25, 1998, respectively.

NOTE 9. PROPERTIES.
Dec. 31, 1999
---------------------------------------
Accumulated
Cost Depreciation Net
----------- -------------- ----------

Road $ 10,534 $ 2,641 $ 7,893
Equipment 5,243 1,983 3,260
Other 290 7 283
----------- ---------- -----------

Total $ 16,067 $ 4,631 $ 11,436
=========== ========== ===========

Dec. 25, 1998
---------------------------------------
Accumulated
Cost Depreciation Net
----------- -------------- ----------

Road $ 10,202 $ 2,745 $ 7,457
Equipment 4,762 1,806 2,956
Other 251 8 243
----------- ---------- ----------

Total $ 15,215 $ 4,559 $ 10,656
=========== ========== ==========

NOTE 10. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES.

Activity relating to casualty, environmental and other reserves is as
follows:
<TABLE>
<CAPTION>

Casualty Environmental Separation
Reserves(a)(b) Reserves (a) Liabilities(a)(c) Total
------------ ---------------- -------------- ---------
<S> <C> <C> <C> <C>

Balance Dec. 27, 1996 $ 329 $ 117 $ 350 $ 796
Charged to Expense 141 12 - 153
Payments (135) (30) (20) (185)
--------- -------- --------- ---------
Balance Dec. 26, 1997 335 99 330 764

Charged to Expense 161 3 - 164
Restructuring Credit - - (30) (30)
Payments (161) (27) (15) (203)
--------- -------- --------- ---------
Balance Dec. 25, 1998 335 75 285 695

Charged to Expense 266 3 - 269
Payments (166) (25) (16) (207)
--------- -------- --------- ---------
Balance Dec. 31, 1999 $ 435 $ 53 $ 269 $ 757
========= ======== ========= =========

</TABLE>
- 24 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)

NOTE 10. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued.

(a) Balances include current portion of casualty and environmental
reserves and separation liabilities, respectively, of $146 million, $20
million and $15 million at Dec. 31, 1999, $139 million, $20 million and
$15 million at Dec. 25, 1998 and $137 million, $20 million and $25 million
at Dec. 26, 1997.

(b) Casualty reserves are estimated based upon the first reporting of an
accident or personal injury. Liabilities for accidents are based upon field
reports and liabilities for personal injuries and occupational claims are
based upon the type and severity of the injury or claim and the use of
current trends and historical data. The company has recorded liabilities in
sufficient amounts to cover identified claims and an estimate of incurred,
but not reported, claims. Future liabilities for certain occupational
hazards are not subject to reasonable estimation.

(c) Separation liabilities at Dec. 31, 1999 relate to productivity charges
recorded in 1991 and 1992 to provide for the estimated costs of
implementing workforce reductions, improvements in productivity and other
cost reductions. The remaining liabilities are expected to be paid out over
the next 15 to 20 years. The remaining liability for separation costs
incurred in connection with the 1999 workforce reduction program is
included in "Labor and Fringe Benefits Payable" (See Note 3).

During 1998, CSXT recorded a restructuring credit of $30 million,
reflecting the reversal of certain separation and labor protection reserves
established as part of a 1995 restructuring charge. These reserves were
associated with planned work-force reductions that did not occur as a result of
a new telecommunications contract entered into in July 1998.

NOTE 11. LONG-TERM DEBT.
Average
Interest Rates at Dec. 31, Dec. 25,
Type and Maturity Date Dec. 31, 1999 1999 1998
- --------------------------------- ------------------- ------------- -----------

Equipment Obligations
(2000-2014) 7 % $ 940 $ 770
Mortgage Bonds (2002-2003) 3 % 56 72
Capital Leases and Other
Obligations (2000-2021) 7 % 186 164
--------- --------
Total 1,182 1,006

Less Debt Due Within One Year 95 100
--------- --------

Total Long-Term Debt $ 1,087 $ 906
========= ========

CSXT has long-term debt maturities for 2000 through 2004 aggregating
$95 million, $97 million, $134 million, $164 million and $91 million,
respectively.

A portion of the properties and certain other assets of CSXT and its
subsidiaries are pledged as security for various long-term debt issues.

- 25 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)

NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS.

Fair values of the company's financial instruments are estimated by
reference to quoted prices from market sources and financial institutions, as
well as other valuation techniques. Long-term debt is the only financial
instrument of the company with a fair value significantly different from its
carrying amount. At Dec. 31, 1999, the fair value of long-term debt, including
current maturities, was $1.157 billion, compared with a carrying amount of
$1.182 billion. At Dec. 25, 1998, the fair value of long-term debt, including
current maturities, was $1.058 billion, compared with a carrying amount of
$1.006 billion. The fair value of long-term debt has been estimated using
discounted cash flow analyses based upon the company's current incremental
borrowing rates for similar types of financing arrangements.

NOTE 13. EMPLOYEE BENEFIT PLANS.

Pension Plans

CSX and its subsidiaries, including CSXT, sponsor defined benefit
pension plans principally for salaried employees. The plans provide eligible
employees with retirement benefits based principally on years of service and
compensation rates near retirement. During 1989, CSXT's pension plan for
salaried employees was merged with the CSX Pension Plan, and all assets of
CSXT's plan were transferred to the merged plan. Since the plans were merged,
CSX has allocated to CSXT a portion of the net pension expense for the CSX
Pension Plan based on CSXT's relative level of participation in the merged plan,
which considers the assets and personnel previously in the CSXT plan. The
allocated expense from the CSX Pension Plan amounted to $33 million in 1999, $30
million in 1998 and $38 million in 1997. During 1999 and 1998, CSXT received
$109 million ($66 million after tax) and $38 million ($24 million after tax) in
pension assets from CSX through capital contributions.

Savings Plans

CSXT maintains savings plans for virtually all full-time salaried
employees and certain employees covered by collective bargaining agreements of
CSXT and subsidiary companies. Expense for these plans was $20 million for 1999,
$15 million for 1998 and $18 million for 1997.

Other Postretirement Benefit Plans

In addition to the CSX defined benefit pension plans, CSXT
participates with CSX and other affiliates in two defined benefit postretirement
plans that provide medical and life insurance benefits to most full-time
salaried employees upon their retirement. The postretirement medical plan is
contributory, with retiree contributions adjusted annually. The life insurance
plan is non-contributory. CSX allocates to CSXT a portion of the expense for
these plans based on CSXT's relative level of participation. The allocated
expense amounted to $20 million in 1999, $19 million in 1998, and $22 million in
1997.

Other Plans

Under collective bargaining agreements, the company participates in a
number of union-sponsored, multi-employer benefit plans. Payments to these plans
are made as part of aggregate

- 26 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)

NOTE 13. EMPLOYEE BENEFIT PLANS, Continued.

Other Plans, Continued

assessments generally based on number of employees covered, hours worked,
tonnage moved or a combination thereof. Total contributions of $168 million,
$154 million and $152 million, respectively, were made to these plans in 1999,
1998 and 1997.

Certain officers and key employees of CSXT participate in stock
purchase, performance and award plans of CSX. CSXT is allocated its share of any
cost to participate in these plans.

NOTE 14. COMMITMENTS AND CONTINGENCIES.

Lease Commitments

In addition to the agreements covering routes and equipment leased
from Conrail, CSXT leases equipment from other parties under agreements with
terms up to 21 years. Non-cancelable, long-term leases generally include
provisions for maintenance, and options to purchase at fair value and to extend
the terms. At Dec. 31, 1999, minimum equipment rentals under non-cancelable
operating leases totaled approximately $143 million for 2000, $140 million for
2001, $130 million for 2002, $136 million for 2003, $181 million for 2004 and
$653 million thereafter.

Rent expense on equipment operating leases, including net daily
rental charges on railroad operating equipment of $341 million, $222 million and
$201 million in 1999, 1998 and 1997, respectively, amounted to $495 million in
1999, $381 million in 1998 and $347 million in 1997, exclusive of the Conrail
agreements.

Purchase Commitments

CSXT entered into various agreements in 1998 and 1999 to purchase 140
locomotives. These large orders cover normal locomotive replacement needs as
well as one-time locomotive power requirements related to the integration of
Conrail operations. CSXT has taken delivery of 101 of the locomotives through
Dec. 31, 1999. The remaining 39 units are scheduled to be delivered in 2000.

Long-Term Operating Agreements

In addition to its contractual arrangement to operate specified
portions of Conrail's rail system, CSXT has various long-term railroad operating
agreements that allow for exclusive operating rights over various railroad
lines. Under these agreements, CSXT is obligated to pay usage fees of
approximately $9 million annually. The terms of these agreements range from 30
to 40 years.

- 27 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)

NOTE 14. COMMITMENTS AND CONTINGENCIES, Continued.

Contingencies

New Orleans Tank Car Fire
- -------------------------

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 awards. 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 Nov. 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) 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 damages, as reduced by the trial
judge.

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.

- 28 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)

NOTE 14. COMMITMENTS AND CONTINGENCIES, Continued.

Contingencies, Continued.

Environmental
- -------------

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 115 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 clean-up, which could be substantial.

CSXT is involved in a number of administrative and judicial
proceedings and other clean-up efforts at 243 sites, including the 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 Dec. 31, 1999 and Dec. 25, 1998 were $53 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 Dec. 31,
1999, environmental liability is expected to be paid out over the next five to
seven years, funded by cash generated from operations.

- 29 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(All Tables in Millions of Dollars)

NOTE 14. COMMITMENTS AND CONTINGENCIES, Continued.

Contingencies, Continued.

Environmental, Continued
- ------------------------

The company does not currently possess sufficient information to
reasonably estimate the amounts of additional liabilities, if any, on some sites
until completion of future environmental studies. In addition, latent conditions
at any given location could result in exposure, the amount and materiality of
which cannot presently be reliably estimated. Based upon information currently
available, however, the company believes that its environmental reserves are
adequate to accomplish remedial actions to comply with present laws and
regulations, and that the ultimate liability for these matters will not
materially affect its overall results of operations and financial condition.

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 these matters will have a material adverse effect on
the consolidated results of operations, financial position and cash flows of the
company. 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 15. QUARTERLY DATA (Unaudited).

1999
---------------------------------------------
1st 2nd 3rd 4th
---------- ----------- ----------- ----------

Operating Revenue $ 1,297 $ 1,334 $ 1,485 $ 1,507
Operating Income 209 121 119 51
Net Earnings 85 45 56 27

1998
---------------------------------------------
1st 2nd 3rd 4th
---------- ----------- ----------- ----------

Operating Revenue $ 1,251 $ 1,249 $ 1,201 $ 1,255
Operating Income 213 238 172 186
Net Earnings 107 124 67 80

- 30 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
MANAGEMENT'S NARRATIVE ANALYSIS AND RESULTS OF OPERATIONS

1999 OPERATING RESULTS

Excluding its $53 million workforce reduction charge in 1999 and
the $30 million restructuring credit in the 1998 period, CSXT earned
$553 million of operating income in 1999, down 29% from 1998. Operating revenue
was 13% higher, at $5.62 billion. Operating expense rose 23% to $5.07 billion,
excluding the workforce reduction charge. The 1999 results included seven months
of integrated Conrail operations, distorting comparisons to 1998.

Traffic By Commodity
<TABLE>
<CAPTION>

Carloads Revenue
(Thousands) (Millions of Dollars)
-------------------- ---------------------
1999 1998 1999 1998
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Merchandise
Phosphates and Fertilizer 527 539 $ 318 $ 304
Metals 319 268 367 307
Food and Consumer Products 150 135 184 148
Paper and Forest Products 505 457 600 508
Agricultural Products 326 277 442 380
Chemicals 545 444 913 750
Minerals 422 396 386 353
Government 11 6 28 16
--------- ---------- ---------- ---------
Total Merchandise 2,805 2,522 3,238 2,766

Automotive 553 412 760 540

Coal, Coke & Iron Ore
Coal 1,614 1,651 1,476 1,503
Coke 55 60 51 53
Iron Ore 61 50 38 27
--------- ---------- ---------- ---------

Total Coal, Coke & Iron Ore 5,088 4,695 1,565 1,583
========= ==========

Other Revenue 60 67
---------- ---------

Total Operating Revenue $ 5,623 $ 4,956
========== =========
</TABLE>

Overall volumes increased due to the addition of former Conrail
traffic and relatively strong demand across most service groups. The largest
revenue increase was in automotive (up 41%) due to the new Conrail traffic,
strong vehicle production in 1999, and the strike at major General Motors plants
that adversely affected 1998 revenue. Merchandise revenue increased 17% largely
due to the new Conrail traffic. Added coal revenues from the former Conrail
territory were offset by continued weakness in export coal volume, resulting in
a net revenue decrease of 2%. The 25% increase in rail operating expense
reflects the expense associated with the new Conrail traffic, as well as
significant costs incurred in starting up combined operations and addressing
post-integration congestion and operating problems. In addition, Hurricane Floyd
disrupted operations for up to 10 days on key portions of the CSXT system in
North Carolina and New Jersey, resulting in repair costs and lost revenue. Fuel
expense was $66 million higher than 1998, reflecting a 2 cent increase in the
average price per gallon, and higher fuel consumption with the added Conrail
traffic.

- 31 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
MANAGEMENT'S NARRATIVE ANALYSIS AND RESULTS OF OPERATIONS
CONTINUED

OTHER MATTERS

Integrated Rail Operations with Conrail
- ---------------------------------------

Background and Integration

On June 1, 1999, CSXT and Norfolk Southern Railway Company (Norfolk
Southern Railway), Norfolk Southern's rail subsidiary, formally began integrated
operations over their respective portions of the Conrail rail system. This step
implemented the operating plan envisioned by CSX and Norfolk Southern when they
completed the joint acquisition of Conrail in May 1997 and received regulatory
approval permitting them to exercise joint control over Conrail in August 1998.

Under this operating plan, CSXT added approximately 4,400 route miles
of track in the Northeastern and Midwestern United States and in Canada to its
existing lines concentrated in the Middle Atlantic and Southeastern United
States. To service the new operations, approximately 5,600 former Conrail
employees joined the company. CSXT now operates a network of more than 23,400
route miles in 23 states, the District of Columbia, and two Canadian provinces.
CSXT and its sister company, CSX Intermodal Inc., employ approximately 35,000
employees across the combined system.

CSXT and Norfolk Southern Railway operate their respective
portions of the Conrail system pursuant to various operating
agreements that took effect on June 1. 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. 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.

Financial Effects

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, rail operating 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 the shared areas operated for the joint benefit of CSXT and Norfolk Southern
Railway.

The integration of Conrail initially resulted in congestion and
traffic delays on parts of the new CSXT network and on the shared areas operated
by Conrail. As a result, the company incurred increased costs and experienced
lost revenues as customers directed business to other modes of transportation.
Substantial progress was made during 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 from September through December, adversely affected operating
performance. Efforts have been focused on improving operations through network
simplification and progress since mid-December has been encouraging.

- 32 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
MANAGEMENT'S NARRATIVE ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED

OTHER MATTERS, Continued

Integrated Rail Operations with Conrail, Continued
- --------------------------------------------------

Financial Effects, Continued

While management believes it will continue to see steady improvement
across the rail network that will lead to increased customer satisfaction, the
return of business diverted to other modes of transportation and improved
financial performance, there can be no assurance that these objectives will be
met, or met within a specified time frame. If recent operating improvements are
sustained, 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 Railway 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.

Workforce Reduction Program
- ---------------------------

CSXT recorded a charge of $53 million, $32 million after tax, in the
fourth quarter of 1999 to recognize the cost of a program to reduce its
non-union workforce by approximately 725 positions. A voluntary early retirement
program completed in December accounted for approximately 640 of the position
reductions, with the remainder achieved through a combination of involuntary
terminations and normal attrition. Approximately 75% of the retirements and
separations occurred by the end of the year, with the remainder scheduled to
occur over the first half of fiscal year 2000 as their job responsibilities are
reorganized or transitioned to other personnel. Early retirement benefits
offered under the voluntary program accounted for $20 million of the charge and
will be paid from CSX's pension and postretirement benefit plans. Separation
benefits are being paid from cash generated by operations. Approximately half of
the separation benefits were paid in 1999. Substantially all of the remaining
amounts will be paid in fiscal year 2000 and are included in "Labor and Fringe
Benefits Payable" in the consolidated statement of financial position.

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.

Year 2000 Computer Transition
- -----------------------------

In 1996, CSXT began a comprehensive plan to address the potential
exposure associated with the Year 2000 computer problem. By the fourth quarter
of 1999, all key phases of the company's Year 2000 readiness plan were completed
and project teams made final preparations for the transition to January 1, 2000.
During the Year 2000 rollover weekend, no major problems surfaced.

- 33 -
<PAGE>

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
MANAGEMENT'S NARRATIVE ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED

Year 2000 Computer Transition, Continued
- ----------------------------------------

CSXT believes that its readiness plan was successfully executed, key
objectives were met, and project teams adequately addressed all significant Year
2000 issues. The company continues to assess technology-related problems as they
occur to determine if they are Year 2000 related. Detailed contingency plans
remain in place and can be implemented if any Year 2000 problems occur. However,
based on the information gathered since January, CSXT does not expect the Year
2000 event to cause any interruptions in business operations or to adversely
affect its customers.

The company has incurred total Year 2000 related costs of $51 million
through the end of fiscal year 1999 and expects to incur additional costs of
less than $2 million. To provide a consistent, objective method for identifying
costs of the Year 2000 plan, the company has classified expenditures as Year
2000 plan costs for reporting purposes only if they remedied only Year 2000
risks and were otherwise unnecessary in the normal course of business. The cost
of the Year 2000 plan was expensed as incurred and funded by cash generated from
operations.

Forward Looking Statements
- --------------------------

Estimates and forecasts in Management's Narrative Analysis and
Results of Operations 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.

------------------------------

- 34 -

BY-LAWS

CSX TRANSPORTATION, INC.
(As Amended to May 17, 1999)

ARTICLE I.

Stockholders' Meetings.

SECTION 1. Annual meeting. The annual meeting of stockholders of the Company
---------------
shall be held on the second Tuesday in March, either within or without the State
of Virginia.

SECTION 2. Special Meetings. Special meetings of the stockholders of
-----------------
the Company may be held at such places within or without that State as
provided in the notice of the meeting, and may be called by the Chairman or
a majority of all of the Directors.

SECTION 3. Actions without meeting. Any action which may be taken at a meeting
------------------------
of the shareholders may be taken without a meeting, if a consent or consents in
writing, setting forth the action so taken, shall be signed by all of the
shareholders who would be entitled to vote at a meeting for such purpose and
shall be filed with the Secretary.

ARTICLE II.

Board of Directors.

SECTION 1. Number, term and election. The Board of Directors shall be elected at
-------------------------
the annual meeting of the stockholders or at any special meeting held in lieu
thereof. The number of Directors shall be seven. This number may be increased or
decreased at any time by amendment of these by-laws, but shall always be a
number of not less than three. No person shall be eligible for election as a
Director, nor shall any Director be eligible for re-election, if he shall have
attained the age of 70 years at the time of such election. Directors shall hold
office until removed or until the next annual meeting of the stockholders is
held and their successors are elected.

SECTION 2. Quorum. A majority of the Directors shall constitute a quorum.
-------
Less than a quorum may adjourn the meeting to a fixed time and place, no further
notice of any adjourned meeting being required.

SECTION 3. Removal and vacancies. The stockholders at any meeting, by a vote of
---------------------
the holders of a majority of all the shares of Capital Stock at the time
outstanding and having voting power, may remove any Director and fill any
vacancy. Vacancies arising among the Directors, including a vacancy resulting
from an increase by the Board of Directors in the number of directors, so long
as the increase so created is not more than two, may be filled by the remaining
Directors, though less than a quorum of the Board, unless sooner filled by the
stockholders.

SECTION 4. Meetings and notices. Meetings of the Board may be called to meet at
--------------------
any time and place by the Secretary or an Assistant Secretary by direction of
the Chairman of the Board, or a President, or at the request of any three
members of the Board. Notice of any meeting may be given orally or by mailing or
delivering such notice to each Director at his residence or business address or
by telephone or telegraphing it to him. Any such notice shall state the time and
place of the meeting. Meetings may be held without notice if all of the
Directors are present or those not present waive notice before or after the
meeting.

<PAGE>

Any action which may be taken at a meeting of the Board may be
taken without a meeting, if a consent or consents in writing setting forth the
action so taken shall be signed by all of the Directors and shall be filed with
the Secretary.

Any action required to be taken at a meeting of the Board may be
taken by means of a conference telephone or similar communications equipment
whereby all persons participating in the meeting can hear each other, and
participation by such means shall constitute presence in person at such meeting.
When such meeting is conducted, a written record shall be made of the action
taken at such meeting.

ARTICLE III.

Officers.

At the first meeting of the Board of Directors held after the
annual meeting of the stockholders, the Board of Directors shall elect officers
of the Company as follows: A Chairman of the Board, a President, one or more
Vice-Presidents, a Secretary and a Treasurer.

All officers elected by the Board of Directors shall, unless
removed by the Board of Directors as hereinafter set forth, hold office until
the first meeting of the Board of Directors after the next annual meeting of the
stockholders and until their successors are elected.

The Board of Directors may elect a Vice-Chairman of the Board
from among the members thereof.

A President may appoint such additional officers and subordinate
officials as he may deem necessary for the efficient conduct of the affairs of
the Company.

The powers, duties, and responsibilities of officers, employees,
and agents of the Company not prescribed in these by-laws shall be established
from time to time by the Board of Directors or by a President.

Any officer shall be subject to removal at any time if elected by
the Board of Directors, by the affirmative vote of a majority of all of the
members of the Board of Directors, or, if appointed by a President, by that
President.

ARTICLE IV.

Chairman of the Board.

The Chairman of the Board of Directors shall be elected from
among the Directors. He shall preside at all meetings of the Board of Directors.
He shall, from time to time, secure information concerning all affairs of the
Company and shall communicate same to the Board. He shall also, from time to
time, communicate to the officers such action of the Board as may in his
judgment affect the performance of their official duties.

- 2 -
<PAGE>

ARTICLE V.

President.

The President, or if there be more than one, then each of them,
shall, subject to the direction and control of the Board of Directors and the
Chairman, participate in the supervision of the policies and operations of the
Company and shall be the chief administrative officer or officers of the
Company. In general, each President shall perform all duties incident to the
office of President, and such other duties as from time to time may be
prescribed by the Board of Directors or the Chairman. In the absence of the
Chairman, a President, as designated by the Chairman or the Board of Directors,
shall preside at meetings of stockholders and of the Board of Directors.

ARTICLE VI.

Secretary.

SECTION 1. The Secretary shall attend all meetings of the stockholders and the
Board of Directors and record their proceedings, unless a temporary secretary be
appointed. He shall give due notice as required of all meetings of the
stockholders and Directors. He shall keep or cause to be kept at a place or
places required by law a record of the stockholders of the Company, giving the
names and addresses of all stockholders and the number, class, and series of the
shares held by each. He shall be custodian of the seal of the Company, and of
all records, contracts, leases, and other papers and documents of the Company,
unless otherwise directed by the Board of Directors, and shall perform such
other duties as may be assigned to him by the Board of Directors or the Chairman
of the Board or a President.

SECTION 2. In case of the Secretary's absence or incapacity, the Chairman shall
designate an appropriate officer to perform the duties of the Secretary.

ARTICLE VII.

Treasurer

SECTION 1. The Treasurer shall receive, keep and disburse all moneys belonging
or coming to the Company, shall keep regular, true and full accounts of all
receipts and disbursements and make detailed reports of the same to the Board of
Directors whenever required. He shall also perform such other duties in
connection with the administration of the financial affairs of the Company as
the Board of Directors, or a President, shall assign to him.

SECTION 2. In case of the Treasurer's absence or incapacity, the Chairman shall
designate an appro-priate officer to perform the duties of the Treasurer.

ARTICLE VIII.

Compensation.

The Board of Directors or a committee thereof shall fix salaries
above a level established from time to time by the Board of Directors and shall
determine and fix other compensation for officers and employees of the Company
and shall implement, monitor, and review the employee compensation and

- 3 -
<PAGE>

employee benefit plans of the Company. No member of the Board of Directors or
such committee shall vote on any matter involving the amount of his own
compensation. The salaries of officers and employees below the level established
by the Board of Directors shall be fixed by the President.

ARTICLE IX.

Depositaries.

The money of the Company shall be kept in such bank or banks as
the Board of Directors shall from time to time direct or approve. All checks and
other instruments for the disbursement of funds shall be executed manually or by
facsimile by such officers or agents of the Company as may be authorized by the
Board of Directors.

ARTICLE X.

Seal.

The seal of the Company, of which there may be any number of
counterparts, shall be circular in the form and shall bear the words, "CSX
Transportation, Inc. 1944".

ARTICLE XI.

Fiscal Year.

The fiscal year of the Company shall begin immediately after
midnight of the last Friday in December and shall end at midnight on the last
Friday of December of each calendar year.

- 4 -

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS that the undersigned directors of CSX
Transportation, Inc., a Virginia Corporation, which is to file with the
Securities and Exchange Commission, Washington, D. C., under the provisions of
the Securities Act of 1934, as amended, a Form 10-K Annual Report pursuant to
Section 13 of the Securities Act of 1934, hereby constitutes and appoints
Patricia J. Aftoora his true and lawful attorney-in-fact and agent, for him and
his name, place and stead to sign said Form 10-K, and any and all amendments
thereto, with power where appropriate to affix the corporate seal of said
corporation thereto, and to attest said seal, and to file said Form 10-K, and
any and all amendments thereto, with all exhibits thereto, and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorney-in-fact and agent full power and authority
to do and perform any and all acts and things requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned have hereunto set their hands
this 8th day of March, 2000.

/s/JOHN W. SNOW
---------------
John W. Snow

/s/ALVIN R. CARPENTER
------------------
Alvin R. Carpenter

/s/MARK G. ARON
---------------
Mark G. Aron

/s/RONALD J. CONWAY
----------------
Ronald J. Conway

/s/PAUL R. GOODWIN
----------------
Paul R. Goodwin

/s/MICHAEL J. WARD
----------------
Michael J. Ward

/s/FREDERICK J. FAVORITE
---------------------
Frederick J. Favorite

<ARTICLE> 5
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-26-1998
<PERIOD-END> DEC-31-1999
<CASH> 36
<SECURITIES> 0
<RECEIVABLES> 382
<ALLOWANCES> 0
<INVENTORY> 193
<CURRENT-ASSETS> 801
<PP&E> 16,067
<DEPRECIATION> 4,631
<TOTAL-ASSETS> 12,980
<CURRENT-LIABILITIES> 2,086
<BONDS> 1,087
0
0
<COMMON> 181
<OTHER-SE> 5,444
<TOTAL-LIABILITY-AND-EQUITY> 12,980
<SALES> 0
<TOTAL-REVENUES> 5,623
<CGS> 0
<TOTAL-COSTS> 5,123
<OTHER-EXPENSES> 53
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75
<INCOME-PRETAX> 372
<INCOME-TAX> 159
<INCOME-CONTINUING> 213
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 213
<EPS-BASIC> 0
<EPS-DILUTED> 0

</TABLE>