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 September 29, 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 September 29, 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 SEPTEMBER 29, 2000
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters and Nine Months Ended September 29, 2000 and
October 1, 1999 3
2. Consolidated Statement of Cash Flows-
Nine Months Ended September 29, 2000 and October 1, 1999 4
3. Consolidated Statement of Financial Position-
At September 29, 2000 and December 31, 1999 5
Notes to Consolidated Financial Statements 6
Item 2:
Management's Analysis and Results of Operations 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signature 20
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
Quarters Ended Nine Months Ended
----------------------- --------------------------
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUE
Merchandise $ 870 $ 844 $ 2,651 $ 2,376
Automotive 196 203 661 534
Coal, Coke & Iron Ore 416 421 1,209 1,163
Other 18 17 42 43
----------- ---------- ----------- ----------
Total 1,500 1,485 4,563 4,116
----------- ---------- ----------- ----------
OPERATING EXPENSE
Labor and Fringe Benefits 606 591 1,856 1,621
Materials, Supplies and Other 274 291 845 760
Conrail Operating Fee, Rent and Services 90 101 290 141
Related Party Service Fees 56 48 172 240
Equipment Rent 124 134 400 348
Depreciation 122 115 367 353
Fuel 138 86 409 204
----------- ---------- ----------- ----------
Total 1,410 1,366 4,339 3,667
----------- ---------- ----------- ----------
OPERATING INCOME 90 119 224 449
Other Income (Expense) (20) 6 (31) (77)
Interest Expense 29 18 76 56
----------- ---------- ----------- ----------
EARNINGS BEFORE INCOME TAXES 41 107 117 316
Income Tax Expense 14 51 44 130
----------- ---------- ----------- ----------
NET EARNINGS $ 27 $ 56 $ 73 $ 186
=========== ========== =========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Millions of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
Nine Months Ended
-------------------------
Sept. 29, Oct. 1,
2000 1999
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 73 $ 186
Adjustments to Reconcile Net Earnings
to Net Cash Provided
Depreciation 367 353
Deferred Income Taxes 42 112
Productivity/Restructuring Charge Payments (9) (10)
Other Operating Activities 33 37
Changes in Operating Assets and Liabilities
Accounts and Notes Receivable 58 (123)
Materials and Supplies (55) (17)
Other Current Assets (38) 59
Accounts Payable (151) 31
Other Current Liabilities 281 32
--------- ----------
Net Cash Provided by Operating Activities 601 660
--------- ----------
INVESTING ACTIVITIES
Property Additions (577) (727)
Other Investing Activities (28) (53)
--------- ----------
Net Cash Used by Investing Activities (605) (780)
--------- ----------
FINANCING ACTIVITIES
Long-Term Debt Issued 184 193
Long-Term Debt Repaid (87) (83)
Cash Dividends Paid (165) (158)
Other Financing Activities 36 -
--------- ----------
Net Cash Used by Financing Activities (32) (48)
--------- ----------
Net Decrease in Cash and Cash Equivalents (36) (168)
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Period 36 177
--------- ----------
Cash and Cash Equivalents at End of Period $ - $ 9
========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Financial Position
(Millions of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
Oct. 1, Dec. 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 324 382
Materials and Supplies 248 193
Deferred Income Taxes 122 124
Other Current Assets 104 66
----------- -----------
Total Current Assets 798 801
Properties 16,533 16,067
Accumulated Depreciation (4,752) (4,631)
----------- -----------
Properties-Net 11,781 11,436
Affiliates and Other Companies 258 194
Other Long-Term Assets 609 549
----------- -----------
Total Assets $ 13,446 $ 12,980
=========== ===========
LIABILITIES
Current Liabilities
Accounts Payable $ 895 $ 1,046
Labor and Fringe Benefits Payable 356 309
Current Portion of Casualty, Environmental and
Other Reserves 183 181
Current Maturities of Long-Term Debt 106 95
Due to Parent Company 319 24
Due to Affiliate 125 90
Other Current Liabilities 332 341
----------- -----------
Total Current Liabilities 2,316 2,086
Casualty, Environmental and Other Reserves 603 576
Long-Term Debt 1,173 1,087
Deferred Income Taxes 3,027 2,987
Other Long-Term Liabilities 762 619
----------- -----------
Total Liabilities 5,565 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 1,392 1,360
Retained Earnings 3,992 4,084
----------- -----------
Total Shareholder's Equity 5,565 5,625
----------- -----------
Total Liabilities and Shareholder's Equity $ 13,446 $ 12,980
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(All Tables in Millions of Dollars)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of CSX Transportation, Inc. (CSXT or the "company") and its
majority-owned subsidiaries as of September 29, 2000 and December 31, 1999, the
results of their operations for the quarters and nine months ended September 29,
2000 and October 1, 1999, and their cash flows for the nine months ended
September 29, 2000 and October, 1, 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 quarters ended September 29, 2000 and October 1, 1999, the 39-week
period ended September 29, 2000, the 40-week period ended October 1, 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 (Unaudited), 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, for
periods after 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. For periods after 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 additional 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 September 29, 2000 and December 31, 1999, CSXT had $14 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 $87 million and $105 million at September
29, 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 $912
million at September 29, 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 September 29, 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 for the quarter and $58
million for the nine months ended September 29, 2000, and $17 million for the
quarter and $44 million for the nine months ended October 1, 1999.
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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)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
-------------------- --------------------
Sept. 29, Oct. 1, Sept. 29, Oct. 1
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest Income (Expense) $ (5) $ - $ (7) $ 6
Income from Real Estate Operations(1) 5 22 38 36
Net Losses from Accounts Receivable Sold (19) (17) (58) (44)
Conrail Transition Expenses - - - (67)
Miscellaneous (1) 1 (4) (8)
--------- --------- --------- ---------
Total $ (20) $ 6 $ (31) $ (77)
========= ========= ========= =========
</TABLE>
(1) Gross revenue from real estate operations was $13 million and $63 million
for the quarter and nine months ended September 29, 2000, respectively and
$29 million and $57 million for the quarter and nine months ended October 1,
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.
In 1999, six of the nine defendants in the case reached a tentative
settlement with the plaintiffs group. The basis of that settlement is an
agreement that all claims for compensatory and punitive damages against the six
defendants would be compromised for the sum of $215 million. That settlement was
approved by the trial court earlier this year.
The City of New Orleans recently was granted permission by the trial
court to assert an amended claim against CSXT, including a newly asserted claim
for punitive damages. The City's case was originally filed in 1988, and while
based on the 1987 tank car fire, is not considered to be part of the class
action.
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 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 cleanup, which could be
substantial.
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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
--------------------------------------
CSXT is involved in a number of administrative and judicial proceedings
and other clean-up efforts at 230 sites, including sites addressed under the
Federal Superfund statute or similar state statutes, where it is participating
in the study and/or clean-up of alleged environmental contamination. The
assessment of the required response and remedial costs associated with most
sites is extremely complex. Cost estimates are based on information available
for each site, financial viability of other PRPs, where available, and existing
technology, laws and regulations. CSXT's best estimates of the allocation method
and percentage of liability when other PRPs are involved are based on
assessments by consultants, agreements among PRPs, or determinations by the U.S.
Environmental Protection Agency or other regulatory agencies.
At least once each quarter, CSXT reviews its role, if any, with respect
to each such location, giving consideration to the nature of CSXT's alleged
connection to the location (i.e., generator, owner or operator), the extent of
CSXT's alleged connection (i.e., volume of waste sent to the location and other
relevant factors), the accuracy and strength of evidence connecting CSXT to the
location, and the number, connection and financial position of other named and
unnamed PRPs at the location. The ultimate liability for remediation can be
difficult to determine with certainty because of the number and creditworthiness
of PRPs involved. Through the assessment process, CSXT monitors the
creditworthiness of such PRPs in determining ultimate liability.
Based upon such reviews and updates of the sites with which it is
involved, CSXT has recorded, and reviews at least quarterly for adequacy,
reserves to cover estimated contingent future environmental costs with respect
to such sites. The recorded liabilities for estimated future environmental costs
at September 29, 2000 and December 31, 1999, were $43 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 September 29,
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.
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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
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 September 29, 2000, CSXT had a deficit balance in the plan
of $293 million which is included in Due to Parent Company in the statement of
financial position. Under this plan, excess cash is advanced to CSX for
investment and CSX makes cash funds available to its subsidiaries as needed for
use in their operations. CSX is committed to return all amounts invested and the
subsidiaries are committed to repay all borrowings on demand should
circumstances require. The companies are charged for borrowings or compensated
for investments based on returns earned by the plan portfolio. For the quarter
and nine months ended September 29, 2000, CSXT was in a net borrowing position
in the cash management plan. The interest rate charged for borrowings at
September 29, 2000 was 6.83%, and interest expense incurred for the related
quarter and nine month periods was $4.5 million and $6.7 million, respectively.
For the quarter ended October 1, 1999, CSXT was in a net borrowing position in
the cash management plan. The interest rate charged for borrowing at October 1,
1999 was 5.57%, and interest expense was $0.7 million. For the nine months ended
October 1, 1999, CSXT was in a net investing position in the cash management
plan. The yield on funds invested at October 1, 1999 was 5.57%, and interest
earned for the nine month periods was $1.2 million.
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 CTI Logistx (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, TDSI, and BIDS are wholly-owned subsidiaries of CSX. CTI was a
wholly-owned subsidiary of CSX until it was sold on September 22, 2000.
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 $125 million from CSX Insurance. The loan is payable in full on demand. At
September 29, 2000, $125 million was outstanding under the agreement. Interest
on the loan is payable monthly at .45% over the LIBOR rate. The interest rates
in effect at September 29, 2000 and October 1, 1999 were 7.08% and 5.65%,
respectively. Interest expense on the loan totaled $2 million and $5 million for
the quarter and nine months ended September 29, 2000, respectively, and $1
million and $3 million for the quarter and nine months ended October 1, 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 6. RELATED PARTIES, Continued
During 1988, CSXT participated with SL Service, Inc. (SL, formerly
Sea-Land Service, Inc.), a wholly-owned subsidiary of CSX, in four
sale-leaseback arrangements. Under these arrangements, SL sold equipment to a
third party and CSXT leased the equipment and assigned the lease to SL. SL is
obligated for all lease payments and other associated equipment expenses. If SL
defaults on its obligations under the arrangements, CSXT would assume the asset
lease rights and obligations of $66.1 million at September 29, 2000.
During the first quarter of fiscal year 2000, CSX relieved its
wholly-owned subsidiaries of the obligation to make payments to the parent
company to satisfy certain elements of compensation paid to employees in the
form of CSX stock. As a result, CSXT recorded a $32 million increase in other
capital.
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CSXT follows a 52/53-week fiscal calendar. Fiscal year 2000 consists of
52 weeks, and fiscal year 1999 consisted of 53 weeks. The quarters ended
September 29, 2000 and October 1, 1999 consisted of 13 weeks, the nine month
period ended September 29, 2000 consisted of 39 weeks, and the nine month period
ended October 1, 1999 consisted of 40 weeks.
CSXT reported net earnings of $73 million for the nine months ended
September 29, 2000. In the prior year period, the company earned $186 million.
The integration of Conrail operations affects the comparability of
CSXT's 2000 operating results with the prior year. Fiscal year 2000 includes
integrated Conrail operations for the entire nine months, while the first nine
months of 1999 included only four months of integrated Conrail operations,
distorting comparisons.
Operating income of $224 million for the first nine months of 2000 was
50% below the first nine months of 1999. Operating revenue of $4.6 billion for
the first nine months of 2000 was 11% higher than the 1999 period as a result of
the Conrail integration and relatively strong demand across most commodity
groups. Operating expense rose 18% to $4.3 billion for the nine months ended
September 29, 2000, 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 nine months ended September 29, 2000 and October 1,
1999.
<TABLE>
<CAPTION>
Carloads Revenue
Nine Months Ended Nine Months Ended
(Thousands) (Millions of Dollars)
--------------------- ----------------------
Sept. 29, Oct. 1, Sept. 29, Oct. 1,
2000 1999 2000 1999
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Merchandise
Phosphates and Fertilizer 369 403 $ 242 $ 239
Metals 266 235 316 270
Food and Consumer Products 120 108 165 130
Paper and Forest Products 400 374 497 439
Agricultural Products 265 233 355 316
Chemicals 453 397 751 669
Minerals 334 317 303 290
Government 8 9 22 23
----------- --------- ----------- ---------
Total Merchandise 2,215 2,076 2,651 2,376
Automotive 448 396 661 534
Coal, Coke & Iron Ore
Coal 1,238 1,201 1,151 1,093
Coke 36 42 36 39
Iron Ore 35 48 22 31
----------- --------- ----------- ---------
Total Coal, Coke & Iron Ore 1,309 1,291 1,209 1,163
Other - - 42 43
----------- --------- ----------- ---------
Total Rail 3,972 3,763 $ 4,563 $ 4,116
=========== ========= =========== =========
</TABLE>
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, Continued
As mentioned above, overall freight revenue was significantly higher for
the first nine months than in 1999 as the Conrail integration impacted all nine
months of 2000 compared to four months of 1999. The increase in coal revenue was
tempered by generally mild weather conditions in the East and continuing
weakness in export coal shipments. Merchandise demand was generally 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 and rate increases on some auto
shipments.
Following the integration of Conrail in 1999, the railroad 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 or
classification yards did not show sustainable improvement through the end of the
first quarter of 2000. At the beginning of the second quarter, the company
announced key management changes and operational initiatives aimed at
accelerating the pace of operational and service recovery. Additional action
plans were implemented in the third quarter to prepare the network for
seasonally higher traffic demand typically experienced in the fall. The railroad
has seen steady and significant improvement in most operating measures since
these initiatives were implemented. With the improved fluidity across the
network, the company began to realize operating expense savings in some
categories, although continuing high fuel prices and resourcing to accommodate
the higher fall traffic have limited improvements to operating income through
the third quarter.
OUTLOOK
CSXT's financial performance during the fourth quarter of fiscal 2000
will be dependent on its success in achieving cost reductions and maintaining
fluidity on its rail network while dealing with a potentially slowing economy.
Demand remains level with prior year across most commodity groups and management
continues to be confident that the company will recapture traffic that has moved
to other modes of transportation as the company continues on the improvement
seen in customer service in the third quarter of 2000. With recent heavy capital
spending to prepare for the Conrail integration and modest economic growth
expected over the next several quarters, CSXT expects to constrain capital
spending in the next fiscal period. Significant attention is being given to
resource management which will enable the company to reduce excess costs and
achieve planned synergies associated with the Conrail transaction. However,
there can be no assurance that these objectives will be met, or met within a
specific time frame. The company will continue its initiative to review and
increase prices on rail and intermodal shipments where appropriate and
competitively feasible, and has initiated a fuel surcharge program that will
impact the fourth quarter as fuel expense is expected to remain at levels
significantly higher than the prior year.
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
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 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 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. 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 the company made subsequent progress in
stabilizing post-integration operations and restoring service levels, peak
traffic volume in the fall of 1999 and network disruptions from Hurricane Floyd
adversely affected operating and service recovery efforts. 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.
At the beginning of the second quarter, the company announced key
management changes and operational initiatives aimed at accelerating the pace of
operational and service recovery. Additional action plans were implemented in
the third quarter to prepare the network for the higher seasonal traffic levels.
The railroad has seen steady and significant improvement in most operating
measures since these initiatives were implemented. Through the end of the third
quarter, the improved operations have resulted in some cost
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<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
savings; however, high fuel prices, heavier resources on the network to
accommodate the fall traffic levels, and some softening of traffic demand have
mitigated the benefit to operating income. Entering the fourth quarter, CSXT's
rail network is fluid, and major emphasis is being placed on the reduction of
operating expenses through productivity improvement teams. The company is also
continuing its review of pricing policies and implementing rate increases where
competitively appropriate. A fuel-price surcharge was implemented in October
2000 to facilitate recovery of a portion of the railroad's higher fuel costs.
Management believes that the recent operational improvements will be
sustained and fluid conditions will be maintained across the rail system.
Financial results for the rail unit are expected to improve as the company
reduces operating costs, regains business which had been diverted to other modes
of transportation, and begins to realize many of the synergies envisioned with
the Conrail acquisition. However, there can be no assurance that these
objectives will be met, or met within a specified timeframe.
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 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 CSXT'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 through 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 during fiscal year 2000 to
address the issues raised in the audit and the commitments made in the Safety
Compliance Agreement, a portion of which will represent operating expenses for
fiscal 2000 and a portion of which will consist of capital expenditures to be
depreciated over the useful life of the related track improvements.
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
OTHER MATTERS, Continued
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 STB's deliberations on this matter were prompted by significant
public concerns expressed following the December 1999 announcement by the
Burlington Northern Santa Fe (BNSF) and Canadian National (CN) railroads of
plans to merge and combine their respective rail systems. The moratorium was
instituted to allow the STB time to address the potential downstream effects
that a rail merger might have on the railroad industry at the present time, and
to consider changes in the rules by which future rail mergers will be evaluated.
In October 2000, the STB issued proposed new rules for rail mergers that would
require companies to demonstrate how future mergers would enhance competition
and make companies more accountable for claimed merger benefits and service.
After considering public comments on the proposed new rules, the STB anticipates
issuing final rules in June 2001.
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 CSX'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
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<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 1999, 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.
In 1999, six of the nine defendants in the case reached a tentative
settlement with the plaintiffs group. The basis of that settlement is an
agreement that all claims for compensatory and punitive damages against the six
defendants would be compromised for the sum of $215 million. That settlement was
approved by the trial court earlier this year.
The City of New Orleans recently was granted permission by the trial
court to assert an amended claim against CSXT, including a newly asserted claim
for punitive damages. The City's case was originally filed in 1988, and while
based on the 1987 tank car fire, is not considered to be part of the class
action.
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.
Workforce Reduction
-------------------
In October 2000, the company communicated to employees plans to review
functions and staffing levels throughout the non-union workforce. The objective
of the review is to identify unnecessary or redundant work, or otherwise revise
or restructure work in a manner that will allow a meaningful reduction in the
workforce. The process will result in involuntary terminations of employees over
the next twelve to fourteen months. While the company has established separation
benefits to be paid to employees affected by this review, the number of
employees to be terminated has not yet been determined. Formal decisions on
terminations will be made on a departmental basis. The company anticipates
incurring expense for termination benefits. Substantially all termination
benefits will be paid from CSX's defined benefit pension plan in the form of a
lump-sum payment or an enhancement to employees' normal retirement benefits.
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
Estimates and forecasts in Management's Analysis and Results of
Operations and in other sections of this Quarterly Report are based on many
assumptions about complex economic and operating factors with respect to
industry performance, general business and economic conditions and other matters
that cannot be predicted accurately and that are subject to contingencies over
which the company has no control. Such forward-looking statements are subject to
uncertainties and other factors that may cause actual results to differ
materially from the views, beliefs, and projections expressed in such
statements. The words "believe", "expect", "anticipate", "project", and similar
expressions signify forward-looking statements. Readers are cautioned not to
place undue reliance on any forward-looking statements made by or on behalf of
the company. Any such statement speaks only as of the date the statement was
made. The company undertakes no obligation to update or revise any
forward-looking statement.
Factors that may cause actual results to differ materially from those
contemplated by these forward-looking statements include, among others, the
following possibilities: (I) 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.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. (27) Financial Data Schedule
(b) Reports on Form 8-K
None.
Signature
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CSX TRANSPORTATION, INC.
(Registrant)
By: /s/JAMES L. ROSS
----------------
James L. Ross
(Principal Accounting Officer)
Dated: November 1, 2000
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