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 June 30, 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 June 30, 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 JUNE 30, 2000
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1:
Financial Statements
1. Consolidated Statement of Earnings-
Quarters and Six Months Ended June 30, 2000 and July 2, 1999 3
2. Consolidated Statement of Cash Flows-
Six Months Ended June 30, 2000 and July 2, 1999 4
3. Consolidated Statement of Financial Position-
At June 30, 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 19
Signature 19
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
(Millions of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
Quarters Ended Six Months Ended
----------------------- --------------------------
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUE
Merchandise $ 892 $ 776 $ 1,781 $ 1,532
Automotive 238 177 465 331
Coal, Coke & Iron Ore 403 370 793 742
Other 15 11 24 26
----------- ---------- ----------- ----------
Total 1,548 1,334 3,063 2,631
----------- ---------- ----------- ----------
OPERATING EXPENSE
Labor and Fringe Benefits 620 529 1,250 1,030
Materials, Supplies and Other 314 216 571 416
Conrail Operating Fee, Rent and 99 40 200 40
Services
Related Party Service Fees 58 144 116 245
Equipment Rent 140 105 276 214
Depreciation 121 115 245 238
Fuel 133 64 271 118
----------- ---------- ----------- ----------
Total 1,485 1,213 2,929 2,301
----------- ---------- ----------- ----------
OPERATING INCOME 63 121 134 330
Other Income (Expense) 1 (28) (11) (83)
Interest Expense 25 20 47 38
----------- ---------- ----------- ----------
EARNINGS BEFORE INCOME TAXES 39 73 76 209
Income Tax Expense 15 28 30 79
----------- ---------- ----------- ----------
NET EARNINGS $ 24 $ 45 $ 46 $ 130
=========== ========== =========== ==========
</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)
Six Months Ended
-------------------------
June 30, July 2,
2000 1999
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 46 $ 130
Adjustments to Reconcile Net Earnings
to Net Cash Provided
Depreciation 245 238
Deferred Income Taxes 27 55
Other Operating Activities 41 1
Changes in Operating Assets and Liabilities
Accounts and Notes Receivable 118 (244)
Materials and Supplies (55) (19)
Other Current Assets (22) 4
Accounts Payable (6) 9
Other Current Liabilities (57) 109
--------- ----------
Net Cash Provided by Operating Activities 337 283
--------- ----------
INVESTING ACTIVITIES
Property Additions (384) (480)
Other Investing Activities (27) (20)
--------- ----------
Net Cash Used by Investing Activities (411) (500)
--------- ----------
FINANCING ACTIVITIES
Long-Term Debt Issued 184 195
Long-Term Debt Repaid (71) (58)
Cash Dividends Paid (110) (96)
Other Financing Activities 35 (1)
--------- ----------
Net Cash Provided by Financing Activities 38 40
--------- ----------
Net Decrease in Cash and Cash Equivalents (36) 177
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents at Beginning of Period 36 177
--------- ----------
Cash and Cash Equivalents at End of Period $ - $ -
========= ==========
</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)
June 30, December 31,
2000 1999
------------ -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents (principally investment
in CSX Cash Management Plan - see Note 6) $ - $ 36
Accounts and Notes Receivable 264 382
Materials and Supplies 248 193
Deferred Income Taxes 119 124
Other Current Assets 89 66
----------- -----------
Total Current Assets 720 801
Properties 16,252 16,067
Accumulated Depreciation (4,677) (4,631)
----------- -----------
Properties-Net 11,575 11,436
Affiliates and Other Companies 253 194
Other Long-Term Assets 592 549
----------- -----------
Total Assets $ 13,140 $ 12,980
=========== ===========
LIABILITIES
Current Liabilities
Accounts Payable $ 836 $ 1,046
Labor and Fringe Benefits Payable 326 309
Current Portion of Casualty, Environmental and
Other Reserves 181 181
Current Maturities of Long-Term Debt 107 95
Due to Parent Company 229 24
Due to Affiliate 125 90
Other Current Liabilities 267 341
----------- -----------
Total Current Liabilities 2,071 2,086
Casualty, Environmental and Other Reserves 595 576
Long-Term Debt 1,187 1,087
Deferred Income Taxes 3,009 2,987
Other Long-Term Liabilities 685 619
----------- -----------
Total Liabilities 7,547 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 4,020 4,084
----------- -----------
Total Shareholder's Equity 5,593 5,625
----------- -----------
Total Liabilities and Shareholder's Equity $ 13,140 $ 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 June 30, 2000 and December 31, 1999, the
results of their operations and their cash flows for the quarters and six months
ended June 30, 2000 and July 2, 1999, such adjustments being of a normal
recurring nature. CSXT is a wholly-owned subsidiary of CSX Corporation (CSX).
While management believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these financial
statements be read in conjunction with the financial statements and the notes
included in CSXT's latest Form 10-K. Certain prior-year data have been
reclassified to conform to the 2000 presentation.
CSXT follows a 52/53 week fiscal reporting calendar. Fiscal year 2000
will consist of 52 weeks ending on December 29, 2000. Fiscal year 1999 consisted
of 53 weeks ended December 31, 1999. The financial statements presented are for
the 13-week quarters ended June 30, 2000 and July 2, 1999, the 26-week period
ended June 30, 2000, the 27-week period ended July 2, 1999, and as of December
31, 1999.
NOTE 2. INTEGRATED RAIL OPERATIONS WITH CONRAIL.
Background
----------
CSX and Norfolk Southern Corporation (Norfolk Southern) completed the
joint acquisition of Conrail Inc. (Conrail) in May 1997. Conrail owns the
primary freight railroad system serving the Northeastern United States, and its
rail network extends into several midwestern states and into Canada. CSX and
Norfolk Southern, through a jointly owned acquisition entity, hold economic
interests in Conrail of 42% and 58%, respectively, and voting interests of 50%
each. CSX and Norfolk Southern received regulatory approval from the Surface
Transportation Board (STB) to exercise joint control over Conrail in August
1998, and their respective rail subsidiaries subsequently began integrated
operations over allocated portions of the Conrail lines in June 1999.
CSXT and Norfolk Southern Railway Company (Norfolk Southern Railway),
the rail subsidiary of Norfolk Southern, operate their respective portions of
the Conrail system pursuant to various operating agreements that took effect on
June 1, 1999. Under these agreements, the railroads pay operating fees to
Conrail for the use of right-of-way and rent for the use of equipment. Conrail
continues to provide rail services in certain shared geographic areas for the
joint benefit of CSXT and Norfolk Southern Railway for which it is compensated
on the basis of usage by the respective railroads.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (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 June 30, 2000 and December 31, 1999, CSXT had $9 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 $90 million and $105 million at June 30,
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 $987
million at June 30, 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 June 30, 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 $20 million for the quarter and $39 million for
the six months ended June 30, 2000, and $14 million for the quarter and $27
million for the six months ended July 2, 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 Six Months Ended
-------------------- --------------------
June 30, July 2, June 30, July 2
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest Income - CSX Cash Management Plan $ - $ 1 $ - $ 2
Interest Income - Other (2) - (3) 4
Income from Real Estate Operations(1) 22 12 33 14
Net Losses from Accounts Receivable Sold (20) (14) (39) (27)
Conrail Transition Expenses - (28) - (67)
Miscellaneous 1 1 (2) (9)
--------- --------- --------- ---------
Total $ 1 $ (28) $ (11) $ (83)
========= ========= ========= =========
</TABLE>
(1) Gross revenue from real estate operations was $31 million for the quarter
and $50 million for the six months ended June 30, 2000, and $19 million and
$28 million for the quarter and six months ended July 2, 1999.
NOTE 5. COMMITMENTS AND CONTINGENCIES
New Orleans Tank Car Fire
-------------------------
In September 1997, a state court jury in New Orleans, Louisiana returned
a $2.5 billion punitive damages award against CSXT. The award was made in a
class-action lawsuit against a group of nine companies based on personal
injuries alleged to have arisen from a 1987 fire. The fire was caused by a
leaking chemical tank car parked on CSXT tracks and resulted in the 36-hour
evacuation of a New Orleans neighborhood. In the same case, the court awarded a
group of 20 plaintiffs compensatory damages of approximately $2 million against
the defendants, including CSXT, to which the jury assigned 15 percent of the
responsibility for the incident. CSXT's liability under that compensatory
damages award is not material, and adequate provision has been made for the
award.
In October 1997, the Louisiana Supreme Court set aside the punitive
damages judgment, ruling the judgment should not have been entered until all
liability issues were resolved. In February 1999, the Louisiana Supreme Court
issued a further decision, authorizing and instructing the trial court to enter
individual punitive damages judgments in favor of the 20 plaintiffs who had
received awards of compensatory damages, in amounts representing an appropriate
share of the jury's award. The trial court on April 8, 1999 entered judgment
awarding approximately $2 million in compensatory damages and approximately $8.5
million in punitive damages to those 20 plaintiffs. Approximately $6.2 million
of the punitive damages awarded were assessed against CSXT. CSXT then filed
post-trial motions for a new trial and for judgment notwithstanding the verdict
as to the April 8 judgment.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 5. COMMITMENTS AND CONTINGENCIES, Continued
New Orleans Tank Car Fire, Continued
------------------------------------
The new trial motion was denied by the trial court in August 1999. On
November 5, 1999, the trial court issued an opinion that granted CSXT's motion
for judgment notwithstanding the verdict and effectively reduced the amount of
the punitive damages verdict from $2.5 billion to $850 million. CSXT believes
that this amount (or any amount of punitive damages) is unwarranted and intends
to pursue its full appellate remedies with respect to the 1997 trial as well as
the trial judge's decision on the motion for judgment notwithstanding the
verdict. The compensatory damages awarded by the jury in the 1997 trial were
also substantially reduced by the trial judge. A judgment reflecting the $850
million punitive award has been entered against CSXT. CSXT has obtained and
posted an appeal bond in the amount of $895 million, which will allow it to
appeal the 1997 compensatory and punitive awards, as reduced by the trial judge.
A trial for the claims of 20 additional plaintiffs for compensatory
damages began on May 24, 1999. In early July, the jury in that trial rendered
verdicts totaling approximately $330 thousand in favor of eighteen of those
twenty plaintiffs. Two plaintiffs received nothing; that is, the jury found that
they had not proved any damages. Management believes that this result, while
still excessive, supports CSXT's contention that the punitive damages award was
unwarranted.
CSXT continues to pursue an aggressive legal strategy. Management
believes that an adverse outcome, if any, is not likely to be material to CSXT's
overall results of operations or financial position, although it could be
material to results of operations in a particular quarterly accounting period.
Environmental Contingencies
---------------------------
CSXT is a party to various proceedings involving private parties and
regulatory agencies related to environmental issues. CSXT has been identified as
a potentially responsible party (PRP) at approximately 110 environmentally
impaired sites that are or may be subject to remedial action under the Federal
Superfund statute (Superfund) or similar state statutes. A number of these
proceedings are based on allegations that CSXT, or its railroad predecessors,
sent hazardous substances to the facilities in question for disposal. Such
proceedings arising under Superfund or similar state statutes can involve
numerous other waste generators and disposal companies and seek to allocate or
recover costs associated with site investigation and cleanup, which could be
substantial.
CSXT is involved in a number of administrative and judicial proceedings
and other clean-up efforts at 240 sites, including sites addressed under the
Federal Superfund statute or similar state statutes, where it is participating
in the study and/or clean-up of alleged environmental contamination. The
assessment of the required response and remedial costs associated with most
sites is extremely complex. Cost estimates are based on information available
for each site, financial viability of other PRPs, where available, and existing
technology, laws and regulations. CSXT's best estimates of the allocation method
and percentage of liability when other PRPs are involved are based on
assessments by consultants, agreements among PRPs, or determinations by the U.S.
Environmental Protection Agency or other regulatory agencies.
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 5. COMMITMENTS AND CONTINGENCIES, Continued
Environmental Contingencies, Continued
--------------------------------------
At least once each quarter, CSXT reviews its role, if any, with respect
to each such location, giving consideration to the nature of CSXT's alleged
connection to the location (i.e., generator, owner or operator), the extent of
CSXT's alleged connection (i.e., volume of waste sent to the location and other
relevant factors), the accuracy and strength of evidence connecting CSXT to the
location, and the number, connection and financial position of other named and
unnamed PRPs at the location. The ultimate liability for remediation can be
difficult to determine with certainty because of the number and creditworthiness
of PRPs involved. Through the assessment process, CSXT monitors the
creditworthiness of such PRPs in determining ultimate liability.
Based upon such reviews and updates of the sites with which it is
involved, CSXT has recorded, and reviews at least quarterly for adequacy,
reserves to cover estimated contingent future environmental costs with respect
to such sites. The recorded liabilities for estimated future environmental costs
at June 30, 2000 and December 31, 1999, were $45 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 June 30, 2000
environmental liability is expected to be paid out over the next five to seven
years, funded by cash generated from operations.
The company does not currently possess sufficient information to
reasonably estimate the amounts of additional liabilities, if any, on some sites
until completion of future environmental studies. In addition, latent conditions
at any given location could result in exposure, the amount and materiality of
which cannot presently be reliably estimated. Based upon information currently
available, however, the company believes that its environmental reserves are
adequate to accomplish remedial actions to comply with present laws and
regulations, and that the ultimate liability for these matters will not
materially affect its overall results of operations and financial condition.
Other Legal Proceedings
-----------------------
A number of legal actions are pending against CSXT in which claims are
made in substantial amounts. While the ultimate results of environmental
investigations, lawsuits and claims against the company cannot be predicted with
certainty, management does not currently expect that resolution of these matters
will have a material adverse effect on the company's consolidated financial
position, results of operations or cash flows. CSXT is also party to a number of
actions, the resolution of which could result in gain realization in amounts
that could be material to results of operations in the quarter received.
NOTE 6. RELATED PARTIES
Cash and cash equivalents at December 31, 1999 includes $55 million,
representing amounts due from CSX for CSXT's participation in the CSX cash
management plan. At June 30, 2000, CSXT had a deficit balance in the plan of
$202 million which is included in Due to Parent Company
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<PAGE>
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited), Continued
(All Tables in Millions of Dollars)
NOTE 6. RELATED PARTIES, Continued
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 six months ended June 30, 2000, CSXT was in a net borrowing
position in the cash management plan. The interest rate charged for borrowings
at June 30, 2000 was 6.89%, and interest expense incurred for the related
quarter and six month periods was $2.0 million and $2.2 million, respectively.
For the quarter and six months ended July 2, 1999, CSXT was in a net investing
position in the cash management plan. The yield on funds invested at July 2,
1999 was 5.25%, and investment income earned for the related quarter and six
month periods was $.6 million and $1.9 million, respectively.
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, CTI, TDSI, and BIDS are wholly-owned subsidiaries of CSX.
CSXT and CSX Insurance Company (CSX Insurance), a wholly-owned
subsidiary of CSX, have entered into a loan agreement whereby CSXT may borrow up
to $125 million from CSX Insurance. The loan is payable in full on demand. At
June 30, 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 June 30, 2000 and July 2, 1999 were 7.10% and 5.43%, respectively.
Interest expense on the loan totaled $2 million and $3 million for the quarter
and six months ended June 30, 2000, respectively, and $1 million and $2 million
for the quarter and six months ended July 2, 1999, respectively.
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 $68 million at June 30, 2000.
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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 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 June
30, 2000 and July 2, 1999 consisted of 13 weeks, the six month period ended June
30, 2000 consisted of 26 weeks, and the six month period ended July 2, 1999
consisted of 27 weeks.
CSXT reported net earnings of $46 million for the six months ended June
30, 2000. In the prior year period, the company earned $130 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 six months, while the first half of
1999 included only one month of integrated Conrail operations, distorting
comparisons.
Operating income of $134 million for the first six months of 2000 was
59% below the first six months of 1999. Operating revenue of $3.1 billion for
the first six months of 2000 was 16% higher than the 1999 period as a result of
the Conrail integration and relatively strong demand across most commodity
groups. Operating expense rose 27% to $2.9 billion for the six months ended June
30, 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 six months ended June 30, 2000 and July 2, 1999.
<TABLE>
<CAPTION>
Carloads Revenue
Six Months Ended Six Months Ended
(Thousands) (Millions of Dollars)
--------------------- ----------------------
June 30, July 2, June 30, July 2,
2000 1999 2000 1999
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Merchandise
Phosphates and Fertilizer 254 276 $ 167 $ 168
Metals 181 150 214 170
Food and Consumer Products 80 69 108 80
Paper and Forest Products 272 242 337 279
Agricultural Products 179 149 239 204
Chemicals 303 250 502 424
Minerals 218 210 199 191
Government 6 6 15 16
----------- --------- ----------- ---------
Total Merchandise 1,493 1,352 1,781 1,532
Automotive 316 251 465 331
Coal, Coke & Iron Ore
Coal 805 773 754 697
Coke 24 27 25 25
Iron Ore 21 29 14 20
----------- --------- ----------- ---------
Total Coal, Coke & Iron Ore 850 829 793 742
Other - - 24 26
----------- --------- ----------- ---------
Total Rail 2,659 2,432 $ 3,063 $ 2,631
=========== ========= =========== =========
</TABLE>
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<PAGE>
ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, Continued
Overall freight revenue was significantly higher than the first six
months of 1999 due to the Conrail integration, although the increase in coal
revenue was tempered by generally mild winter, spring, and early summer 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, continued strength in U.S. vehicle production, and rate increases
on some auto shipments.
Since the integration of Conrail, CSXT has experienced operating
difficulties and diminished service performance, particularly in high-volume
corridors of its network and during periods of peak traffic demand. Key
performance statistics that track average train velocity, the number of freight
cars on the network, and dwell time for trains in terminals and classification
yards did not show sustainable improvement through the end of the first quarter
of 2000. While significant improvements were realized during the second quarter,
CSXT experienced lost revenues during the first half of the year as customers
diverted traffic to trucks or other carriers. Operating expenses include
significant costs related to the congestion problems, including lease costs for
higher numbers of locomotives and freight cars on the system and incremental
labor costs for train crews and yard personnel. Significantly higher fuel prices
and cost-of-living increases for union employees under previously-negotiated
contracts also had a substantial effect on operating expenses for the first six
months. As discussed in a later section of Management's Analysis, CSXT undertook
various initiatives during the second quarter to relieve congestion, improve
operations, and reduce operating expenses. With these initiatives in place,
substantial progress was made by the end of the second quarter in restoring
network fluidity across the system.
OUTLOOK
CSXT's financial performance during the second half of fiscal 2000 will
be largely dependent on its success in maintaining fluidity on the rail network,
improving customer service, and eliminating substantial excess costs
attributable to recent network congestion and service recovery initiatives.
Demand remains strong across most commodity groups, and management is optimistic
that the company will begin recapturing traffic that had moved to alternate
modes of transportation as a result of the recent rail service problems in the
Eastern United States. CSXT will concentrate on improving operating performance
and service levels heading into the fall traffic peak. Significant attention is
also being focused on reducing and eliminating excess costs and beginning to
achieve a number of the planned merger synergies associated with the Conrail
transaction. However, there can be no assurance that these objectives will be
met, or met within a specified time frame. The company will also continue its
initiative to review and increase prices on rail and intermodal shipments where
appropriate and competitively feasible, particularly where traffic demand is
creating capacity constraints on the system. 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 substantial progress was made during the summer of
1999 in stabilizing post-integration operations and restoring service levels,
these improvements have not been sustained across the CSXT system. Network
disruptions created by Hurricane Floyd in September 1999, followed by heavy
seasonal traffic build-up in the fourth quarter, adversely affected operating
and service recovery efforts. As peak traffic levels subsided and the company
implemented network simplification plans throughout the system, congestion
problems eased and service levels improved in key areas. During the first
quarter of 2000, overall operations on the northern portion of the CSXT system
(generally the lines allocated to CSXT in the Conrail acquisition) improved;
however, operations in the south deteriorated. From a systemwide perspective,
key performance statistics that track average train velocity, the number of
freight cars on the network, and dwell time for trains in terminals and
classification yards did not show sustainable improvement during the first
quarter.
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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
In April 2000, a number of key management changes were announced at CSXT
aimed at accelerating the pace of operational and service recovery. At that
time, the company implemented a 90-day action plan targeting significant
improvements in seventeen key operating and service measures. Most of these
operating goals were met and substantial progress was made by the end of the
second quarter in restoring network fluidity across the system. Financial
results for the first six months of fiscal year 2000 reflect significant costs
attributable to network congestion and the recovery initiatives.
Entering the third quarter of 2000, efforts are being focused on
ensuring that the rail system is well-prepared to handle peak traffic demand in
the fall. To achieve this goal, a 60-day action plan was implemented at the
beginning of the quarter that targets further improvements in most key service
measures. Major initiatives are also being undertaken to identify and eliminate
substantial excess costs associated with the poor network performance. The
company is also continuing its review of pricing policies and implementing rate
increases where competitively appropriate.
Management believes that the trend of operational improvement across the
rail network will be continued and the company will be prepared to handle the
increased fall traffic. 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 time
frame.
Federal Railroad Administration Track Audit
-------------------------------------------
In March 2000, the Federal Railroad Administration (FRA) released a
draft report of the results of a two-week audit of track conditions on CSXT's
rail system. The audit identified track defects on certain portions of the
system, the nature of which led the FRA to question the effectiveness of the
quality control procedures in CSX's track maintenance and inspection programs.
CSXT responded to the findings immediately by making necessary track repairs and
by restricting train speeds on certain portions of track until repairs could be
completed.
As a result of the audit, CSXT and the FRA entered into a Safety
Compliance Agreement in April 2000 that includes measures to improve the
railroad's track inspection and maintenance processes. Under the agreement,
which is effective 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 moratorium is intended to address the potential downstream
effects that a rail merger might have on the railroad industry at the present
time given the lingering difficulties and service issues attributable to recent
rail mergers, and to allow the STB time to consider changes in the rules by
which future rail mergers will be evaluated. The STB moratorium precluded the
anticipated filing of an application by the Burlington Northern Santa Fe (BNSF)
and Canadian National (CN) railroads to combine their respective systems. BNSF
and CN challenged the STB decision in federal appeals court. The court issued a
ruling in July 2000 that upheld the STB moratorium. The moratorium expires 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.
CSXT continues to pursue an aggressive legal strategy. Management
believes that an adverse outcome, if any, is not likely to be material to CSXT's
overall results of operations or financial position, although it could be
material to results of operations in a particular quarterly accounting period.
-------------------------------------
Estimates and forecasts in Management's Analysis and Results of
Operations and in other sections of this Quarterly Report are based on many
assumptions about complex economic and operating factors with respect to
industry performance, general business and economic conditions and other matters
that cannot be predicted accurately and that are subject to contingencies over
which the company has no control. Such forward-looking statements are subject to
uncertainties and other factors that may cause actual results to differ
materially from the views, beliefs, and projections expressed in such
statements. The words "believe", "expect", "anticipate", "project", and similar
expressions signify forward-looking statements. Readers are cautioned not to
place undue reliance on any forward-looking statements made by or on behalf of
the company. Any such statement speaks only as of the date the statement was
made. The company undertakes no obligation to update or revise any
forward-looking statement.
Factors that may cause actual results to differ materially from those
contemplated by these forward-looking statements include, among others, the
following possibilities: (i) revenue and synergies expected from the integration
of Conrail may not be fully realized or realized within the time frame
anticipated, (ii) costs and operating difficulties related to the integration of
Conrail may not be eliminated or resolved within the time frame currently
anticipated, (iii) general economic or business conditions, either nationally or
internationally, an increase in fuel prices, a tightening of the labor market or
changes in demands of organized labor resulting in higher wages, or increased
benefits or other costs or disruption of operations may adversely affect the
company, (iv) legislative or regulatory changes, including possible enactment of
initiatives to reregulate the rail industry, may adversely affect the company,
(v) possible additional consolidation of the rail industry in the near future
may adversely affect the operations and business of the company, and (vi)
changes may occur in the securities and capital markets.
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<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1. (27) Financial Data Schedule
(b) Reports on Form 8-K
None.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CSX TRANSPORTATION, INC.
(Registrant)
By: /s/JAMES L. ROSS
-----------------
James L. Ross
(Principal Accounting Officer)
Dated: August 7, 2000
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