PAGE 1FORM
10-K/A10-KSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549(X)
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 26, 2003OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 30, 1994 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- -------------------
o 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(Exact name of registrant as specified in its charter)Virginia 54-6000720 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 Water Street, Jacksonville, FL. 32202 (Address of principal executive offices) (Zip Code) Registrant's
Virginia 54-6000720 (State or other jurisdiction of
incorporation or organization)(I.R.S. Employer
Identification No.)500 Water Street, Jacksonville, FL. 32202 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (904) 359-3100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which each Title of each class class is registered - ---------------------------------- ------------------------------------- Hocking Valley Railroad Company First Consolidated Mortgage 4-1/2% Bonds, due July 1, 1999 New York Stock Exchange Louisville and Nashville Railroad Company First and Refunding Mortgage 3-3/8% Bonds, Series F, due April
Title of each class Name of each exchange on which each
class is registeredMonon Railroad 6% Income Debentures,
due January 1, 2007New York Stock Exchange -1-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003New York Stock Exchange Louisville and Nashville Railroad Company First and Refunding Mortgage 2-7/8% Bonds, Series G, due April 1, 2003 New York Stock Exchange Monon Railroad 6% Income Debentures, due January 1, 2007 New York Stock ExchangeFORM 10-KREGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
JI (1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.- 1 - PAGE 2Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2). Yes ( ) No (X)
State the aggregate market value of the voting stock held by
nonaffiliatesnon-affiliates of the registrant. The aggregate market value of the voting stock atMarch 9, 1995,January 23, 2004, was $-0-, excluding the voting stock held by the parent of the registrant.Indicate the number of shares outstanding of each of the
registrant'sregistrant’s classes of common stock, as of the latest practicable date. The registrant has 9,061,038 shares of common stock, par value $20.00, outstanding atMarch 9, 1995. - 2 - PAGE 3January 23, 2004.-2-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
1994
2003 FORM 10-KANNUAL REPORTTable of Contents
Item No. Page - -------- ----
Item No. Page PART I 4 4 5 6 PART II 6 6 6 20 21 47 47 PART III 47 47 47 47 47 PART IV 47 50 -3-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PARTI 1. Business 4 2. Properties 4 3. Legal Proceedings 5 4. Submission of Matters to a Vote of Security Holders 5 PARTII5. Market for Registrant's Common Stock and Related Stockholder Matters 5 6. Selected Financial Data 5 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 8. Financial Statements and Supplementary Data 6 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 6 PART III 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant 6 11. Executive Compensation 6 12. Security Ownership of Certain Beneficial Owners and Management 6 13. Certain Relationships and Related Transactions 6 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 6 Signatures 8 Index to Financial Statements 9 - 3 - PAGE 4 PART I ItemsITEMS 1. & 2.
Business and Properties.BUSINESS AND PROPERTIESGeneral
-------CSX Transportation Inc.
(CSXT)(“CSXT” or “Company”) isengaged principallythe largest rail network in thebusinessEastern United States, providing rail freight transportation over a network ofrailroad transportation and operates a system comprising 18,759more than 23,000 route milesof first main line trackin2023 states,principally east of the Mississippi River (exclusive of New England), southern Ontario andthe District of Columbia,employing an average of 28,773 employees. Itand two Canadian provinces. Headquartered in Jacksonville, Florida, CSXT conducts railroad operations in its own name and through railroad subsidiaries.CSXT employed an average of 32,892 employees during 2003. The Company considers employee relations to be good. Most of CSXT’s employees are represented by labor unions and are covered by collective bargaining agreements. Some of these agreements are scheduled to expire in 2004. CSXT is in the process of renegotiating most of these agreements, but the outcome of these negotiations is uncertain at this time. These negotiations have generally taken place over a number of years and have previously not resulted in any extended work stoppages. The existing agreements have remained in effect and will continue to remain in effect until new agreements are reached or the Railway Labor Act’s procedures (which include mediation, cooling-off periods, and the possibility of Presidential intervention) are exhausted.
CSXT is a wholly-owned subsidiary of CSX Corporation
(CSX). CSX is a publicly-owned Virginia corporation(“CSX”), with headquarters atOne James Center, 901 East Cary500 Water Street,Richmond, Virginia, 23219-4031. Also in15th Floor, Jacksonville, Florida 32202. The Company makes available free of charge through its website at www.csx.com, its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, as soon as reasonably practicable after such reports are filed with or furnished to thetransportation field, CSX controls Sea-Land Service, Inc., an ocean container-shipping company, CSX Intermodal, Inc., an intermodalSecurities andtrucking company, American Commercial Lines, Inc., which engages in inland barging and other marine-related businesses, and Customized Transportation, Inc., a contract logistics service supplier. CSX also has interests in real estate holdings, resort management and operations, and information technology.Exchange Commission.For additional information concerning business
doneconducted by CSXT during1994,2003, see"Management's“Management’s Narrative Analysisandof the Results ofOperations"Operations” on pages33 through 40. Roadway -------7-21.Rail Lines
On December
30, 1994, CSXT's26, 2003, CSXT’s consolidated railroad system consisted of32,46239,826 miles of trackas follows: Track Miles ----- First Main 18,759 Second Main 2,945 Passing, Crossovers and Turnouts 2,436 Way and Yard Switching 8,322 ------ Total 32,462 ======consisting of the following:Included in the above are
886 miles of leased track, 2,856 milesthe following arrangements for use of trackunder trackage rights agreements with other railroads and 185 miles of track under operating contracts. - 4 - PAGE 5not owned by CSXT:
Track Miles First Main 22,841 Second Main 5,492 Passing, Crossovers and Turnouts 1,172 Way and Yard Switching 10,321 Total 39,826
Track Miles Leased Track 6,547 Track under Trackage Right Agreements 6,507 (including 5,626 miles of Conrail track) Track under Operating Contracts 265 -4-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART IIITEMS 1. & 2. BUSINESS AND PROPERTIES, Continued
Equipment
---------On December
30, 1994,26, 2003, CSXT and subsidiaries owned or leased the following:Owned Leased Total ----- ------ ------ Locomotives Freight 1,895 567 2,462 Switching 143 15 158 Auxiliary Units 165 --- 165 ------- ------- ------- Total 2,203 582 2,785 ======= ======= ======= Freight Cars Open Top Hoppers 24,931 10,678 35,609 Gondolas 6,744 13,879 20,623 Covered Hoppers 11,246 7,543 18,789 Box Cars 9,454 5,264 14,718 Flat Cars 476 10,789 11,265 Other 2,236 1,591 3,827 ------- ------- ------- Total 55,087 49,744 104,831 ======= ======= ======= Item
Owned Leased Total Locomotives Freight 2,365 842 3,207 Switching 206 13 219 Auxiliary Units 180 10 190
Total 2,751 865 3,616
Freight Cars Gondolas 16,342 14,835 31,177 Open Top Hoppers 13,860 6,692 20,552 Box Cars 11,440 6,040 17,480 Covered Hoppers 12,665 5,107 17,772 Flat Cars 896 18,342 19,238 Other 645 5 650
Total 55,848 51,021 106,869
Included in leased equipment are 502 locomotives and 15,676 freight cars leased from Conrail.
ITEM 3.
Legal Proceedings. ALEGAL PROCEEDINGSCSXT is involved in routine litigation incidental to its business and is a party to a number of legal actions
other than theand claims, various governmental proceedings and private civil lawsuits, including those related to environmental matters,described below, are pending againstFederal Employers’ Liability Act claims by employees, other personal injury claims, and disputes and complaints involving certain transportation rates and charges. Some of the legal proceedings include claims for punitive as well as compensatory damages, and others purport to be class actions. While the final outcome of these matters cannot be predicted with certainty, considering among other things the meritorious legal defenses available and liabilities that have been recorded along with applicable insurance, it is the opinion of CSXTin which claims are made in substantial amounts. Management does not currently expectmanagement that none of thesemattersitems will have a material adverse effect on theconsolidated financial position,results of operations,and cash flowsfinancial position or liquidity of CSXT. However, an unexpected adverse resolution of one or more of these items could have a material adverse effect on theCompany. CSXT has been identified, together with other parties, asresults of operations in apotentially responsibleparticular quarter or fiscal year. The Company is also a partyinto a number ofgovernmental investigations andactions,relating to environmentally impaired sites. Such sites frequently involve other waste generators and disposal companies to whom costs associated with site investigation and cleanup may be allocated or from whom such costs may be recovered. Due tothenumberresolution ofparties involved at many of these sites, the wide range of costs of possible remediation alternatives, changing cleanup technology, the length of time overwhichthese matters develop and evolving governmental standards, it is not always possible to estimate precisely the Company's liability for the costs associated with the assessment and remediation of contaminated sites. CSXT maintained reserves for 106 environmental sites at year-end 1994. CSXT periodically reviews its environmental reserves to determine whether additional provisions are necessary. Based on current information, CSXT believes its reserves are adequate to meet remedial actions to comply with present laws and regulations. Although CSXT's financial resultscould result in gain realization in amounts that could besignificantly affected in any future quarterly reporting period in which CSXT incurred substantial remedial expenses at a number of these and other sites, CSXT believes the ultimate liability for these matters will not materially affect its overall financial position,material to results of operationsand cash flows. - 5 - PAGE 6in the quarter received.In further response to this Item,
4. Submission of Matters to a Vote of Security Holders. Information omittedsee the information set forth inaccordance with General Instruction J(2)(c). PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters. There is no market for CSXT's common stock as CSXT is a wholly- owned subsidiary of CSX. During the years 1994, 1993 and 1992, CSXT paid dividends on its common stock aggregating $28 million, $28 million and $74 million, respectively. Item 6. Selected Financial Data. Information omitted in accordance with General Instruction J(2)(a). However, included as part of "Management's Narrative Analysis and Results of Operations" on page 33 is various selected financial and statistical information. Item 7. Management's“Management’s Discussion and Analysis of Financial Condition and Results ofOperations.Operations,” of this document under the caption “Casualty, Legal and Environmental Reserves” and under the caption “Commitments and Contingencies.”-5-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART IIITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information omitted in accordance with General Instruction
J(2)I(2)(c).ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
CSXT is a wholly-owned subsidiary of CSX, and accordingly, there is no market for its common stock. During the years 2003, 2002 and 2001, CSXT paid dividends to CSX on its common stock of $230 million, $200 million and $212 million, respectively.
ITEM 6. SELECTED FINANCIAL DATA
Information omitted in accordance with General Instruction I(2)(a)
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
Information omitted in accordance with General Instruction I(2)(a). However, in compliance with said Instruction, see
"Management's“Management’s Narrative Analysisandof the Results ofOperations"Operations” on pages33 through 40. Item 8. Financial Statements7-21.-6-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSOverview
General
CSX Transportation (“CSXT” or the “Company”) operates one of the largest rail networks in the United States. The Company generated revenue of $6.2 billion in 2003 compared to $6.0 billion in 2002. Operating income was $289 million in 2003 compared to $577 million in 2002. In 2003, CSXT revenue and
Supplementary Data. The consolidated financial statements of CSXT and notes thereto requiredvolume grew in response tothis item are included herein (referstrategies toIndexpersuade new customers toFinancial Statementsship via a combination of rail and truck, the introduction of new customer services, and the economic recovery. However, as discussed below increased costs and operating inefficiency in the network decreased overall profitability.CSXT’s rail system is a network, defined by its more than 23,000 route miles, through which goods and services flow. The inefficiency of any one element in that network can have an effect on
page 9). Item 9. Changes inother components, andDisagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors, Executive Officers, Promoters and Control Personsultimately affect the operating efficiency of theRegistrant. Information omittedentire network. The decline inaccordanceoperating efficiency, coupled withGeneral Instruction J(2)(c). Item 11. Executive Compensation. Information omittedthe increased price of fuel and other higher costs, reduced CSXT’s profit inaccordance2003.In addition to reviewing various financial measures, CSXT management uses non-financial indicators to monitor performance and operating efficiency of its network. Those include:
% Improvement Key Non-Financial Performance Indicators 2003 2002 (Decline) Personal Injury Frequency Index (Per 100 Employees) 2.20 1.98 (11 )% FRA Train Accidents Frequency (Per Million Train Miles) 4.37 3.34 (31 ) Average Velocity, All Trains (Miles Per Hour) 21.1 22.5 (6 ) Average System Dwell Time (Hours) 25.3 23.2 (9 ) Average Total Cars-On-Line 229,926 229,609 — On-Time Originations 62.0 % 76.4 % (19 ) On-Time Arrivals 56.9 % 76.9 % (26 ) Average Recrews (Per Day) 50 26 (92 )%
The decline in these non-financial performance measures contributed to higher operating expenses and resulted in a higher operating ratio, which increased to 91.2% in 2003 from 86.1% in 2002. The number of injuries per 100 employees increased by 11%, while the number of FRA-reportable train accidents per million train miles showed a 31% increase from 2002 to 2003. Average train velocity, which is a measure of efficiency, decreased 6% from 22.5 miles per hour in 2002 to 21.1 miles per hour in 2003. The average system dwell time, which measures the amount of time between car arrival and departure from yards, increased 9% from 2002 to 2003. The percent of scheduled trains departing the origin station at or prior to the scheduled departure time and the percent of scheduled trains arriving at the destination station within two hours of the scheduled arrival time both showed year-over-year declines. The number of relief crews called per day on average, which is an indicator of efficiency in the use of crews, showed the largest percent decline, increasing from 26 to 50.
CSXT management is taking steps to identify the source of operating inefficiencies and reduce operating expenses. Management also is evaluating ways to restore the network operating efficiency, while maintaining volume. This includes reducing both gross ton-miles and the number of times a railcar is handled, or switched, en route to its final destination. Because American industry has changed significantly in recent years, management believes there are portions of CSXT’s non-core network that could be more efficiently used by third parties. The Company is currently evaluating the lease or sale of up to 3,000 miles of its non-core network. This will allow CSXT to return approximately 50 locomotives to the core network, reduce capital outlays and decrease operating expenses.
These changes will allow for and require organizational improvements. CSXT is undertaking a major management restructuring that began in November 2003 and is expected to conclude near the end of the first quarter of 2004.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSFinancial Results of Operations
CSXT follows a 52/53-week fiscal reporting calendar. Fiscal years 2003 and 2002 consisted of 52 weeks ending on December 26, 2003 and December 27, 2002, respectively.
2003 vs. 2002
Operating Revenue
CSXT categorizes revenues in three main areas: 1. Merchandise, which includes the following markets: — Phosphates and fertilizer — Metals — Forest and Industrial — Agricultural and Food — Chemicals — Emerging markets 2. Automotive 3. Coal, Coke and Iron Ore Overall revenues were up $179 million to $6.2 billion in 2003 from $6.0 billion in 2002.
Merchandise Revenue
Merchandise showed strength during 2003 with
General Instruction J(2)(c). - 6 - PAGErevenue up 5% on 4% volume growth. All markets showed year-over-year revenue improvement, and all except phosphates and fertilizers experienced increased volumes. Emerging markets realized the most improvement, with 18% revenue growth on 12% volume growth. Aggregates and cement traffic grew faster than average industry growth rates due to new industrial development and increased conversions of truck traffic to rail traffic. Ammunition volumes increased throughout the year and strength continued in waste markets. The metals sector also showed strength in 2003. Revenue improved 8% on 9% volume growth, driven by strong global steel demand, particularly for scrap and sheet steel. Other factors contributing to improvement include strength in semi-finish metals and continued increases in modal conversions. Demand for building products, lumber and paper products resulted in an increase in forest and industrial revenue of 5% on 2% volume growth. The agricultural and food and chemical sectors also realized revenue increases, while volumes remained consistent with 2002. Phosphates and fertilizers revenues increased slightly year-over-year despite decreased volume, due to domestic phosphates and ammonia strength.Automotive Revenue
Volume declined largely due to a 200,000 unit year-over-year decrease in North American light vehicle production. Haul extensions and price increases drove improvements in revenue per car.
Coal, Coke and Iron Ore Revenue
Coal, coke and iron ore volumes and revenue remained consistent with results in the prior year. Export moves were strong due to high European steam coal demand for electricity generation. Steel related traffic was weak throughout the year, but showed renewed strength during the fourth quarter due to consolidation in the steel industry and shifts in scrap metal demands that resulted in increased traffic and revenue for CSX. Utility revenue was favorable due to pricing initiatives and higher average length of haul. Improvements in these areas were offset by abnormally harsh winter weather during the first quarter which adversely affected lake loadings, as lakes were frozen.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7Item 12. Security Ownership
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSRESULTS OF OPERATIONS, Continued
Carload and revenue data by service group and commodity is as follows:
Fiscal Years Ended December 26, 2003, December 27, 2002 and December 26, 2001
Carloads Revenue (Thousands) (Dollars in Millions) 2003 2002 2001 2003 2002 2001 Merchandise Phosphates and Fertilizer 460 463 441 $ 329 $ 324 $ 306 Metals 348 319 320 435 401 395 Forest and Industrial 604 590 596 806 771 777 Agricultural and Food 457 452 467 660 648 661 Chemicals 544 542 540 993 964 937 Emerging Markets 476 424 435 471 398 384
Total Merchandise 2,889 2,790 2,799 3,694 3,506 3,460 Automotive 529 538 516 853 845 794 Coal, Coke & Iron Ore Coal 1,570 1,574 1,722 1,543 1,529 1,671 Coke and Iron Ore 65 70 77 57 69 68
Total Coal, Coke & Iron Ore 1,635 1,644 1,799 1,600 1,598 1,739 Other — — — 35 54 89
Total 5,053 4,972 5,114 $ 6,182 $ 6,003 $ 6,082
Operating Expense
Total operating expenses increased to $5.9 billion, or 9% in 2003 as compared to 2002. The primary component of
Certain Beneficial Ownersthe expense increase was a charge of $229 million recorded in conjunction with the Company’s change in estimate for its casualty reserves to include an estimate of incurred but not reported claims for asbestos andManagement. Information omittedother occupational injuries that may be received over the next seven years. This charge is reflected as “Provision for Casualty Claims” inaccordance with General Instruction J(2)(c). Item 13. Certain Relationshipsthe financial statements. (See Note 10, Casualty, Environmental andRelated Transactions. Information omittedOther Reserves.)Labor and fringe expense increased slightly year-over-year. The cost of labor inflation was offset by December-over-December reductions in
accordance with General Instruction J(2)(c). PART IV Item 14. Exhibits, Financial Statement Schedulesstaff of approximately 1,000 andReports on Form 8-K. (a) 1. Financial Statements. See Index to Financial Statements on page 9. 2. Financial Statement Schedules. All schedules are omitted becausethe favorable impact of the absence of a management bonus in 2003, as approximately $33 million of such expense was recorded in 2002.-9-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSRESULTS OF OPERATIONS, Continued
Materials, supplies and other expenses increased $89 million, or 8%, year-over-year. One of the
conditionsprimary drivers was approximately $80 million of increased cost for personal injury and related safety issues. An additional $20 million of the expense deterioration is due to increased cost of derailments. Additionally, due to the adoption of Statement of Financial Accounting Standard (“SFAS”) 143, “Accounting for Asset Retirement Obligations,” as discussed below, depreciation expense has been decreased and materials, supplies and other increased to account for the discontinuation of the accrual of cross-tie removal costs as a component of depreciation expense.Conrail rents, fees & services expense increased $11 million in 2003, as compared to the prior year, as a result of increased usage of Shared Asset Areas, a contractual increase in the rental fee for Shared Area facilities, and a favorable tax adjustment in the prior year.
Related party service fees decreased slightly year-over-year as a result of paying its management service fee at a lower rate. The percentage of revenue on which the fee is charged was lowered in mid-2002, resulting in only a portion of 2002 benefiting from the lower rate, while the lower rate was in effect for the entire year of 2003.
Building and equipment rent decreased $2 million in 2003 compared to the prior year principally as a result of reduced car rentals from other railroads.
Depreciation remained consistent year-over-year. The Company had capital additions of $940 million, but the additional depreciation was offset by the reduction in depreciation associated with the adoption of SFAS 143, “Accounting for Asset Retirement Obligations.” In conjunction with the group-life method of accounting for asset costs, the Company historically accrued crosstie removal costs as a component of depreciation, which is not permitted under
which theySFAS 143. The effect is to decrease depreciation expense and increase material, supplies and other expense.Fuel expense increased $117 million in 2003, as compared to the prior year. The expense increase is primarily due to $102 million in fuel price increases, while increased volumes were also a factor. The average price per gallon of fuel was 96 cents per gallon for 2003 compared to 78 cents per gallon for 2002. In order to minimize future exposure to fuel price fluctuation risk, during 2003 the Company entered into a series of swaps in order to fix the price of a portion of its estimated future fuel purchases. As of December 26, 2003, 18% and 21% of 2004 and 2005, respectively, estimated fuel purchases were hedged. Fuel swaps did not have an effect on fuel expense for the year ended December 26, 2003.
The net $13 million restructuring charge in 2003 represents the cost of CSXT’s reorganization charges offset by reductions in 1991/1992 separation reserves. (See Note 3, Restructuring.)
Operating Income
Operating income decreased $288 million to $289 million in 2003, compared to $577 million in 2002 primarily due to the $229 million provision for casualty claims, the $13 million net restructuring charge and other expense increases as previously discussed.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSRESULTS OF OPERATIONS, Continued
Other Income
Other income increased $13 million in 2003 as compared to 2002, due mainly to a decrease in discounts on sales of accounts receivable due to the discontinuance of the sale of accounts receivable program mid year.
Interest Expense
Interest expense was reduced by $11 million in 2003 as compared to 2002, due to lower interest rates on floating rate debt.
Net Earnings
The Company reported net earnings for 2003 of $196 million compared to $296 million in 2002. The year ended December 26, 2003 included an after-tax cumulative effect of accounting change benefit of $57 million related to the adoption of Statement of Financial Accounting Standard (“SFAS”) 143, “Accounting for Asset Retirement Obligations.” Earnings before the cumulative effect of accounting change were $139 million in 2003. The $100 million year-over-year decrease in net earnings primarily results from a $143 million after-tax charge to increase the Company’s provision for casualty reserves and a $9 million net after-tax charge to record amounts associated with the management restructuring and the change in estimate related to certain separation liabilities, offset by $57 million related to the cumulative effect of an accounting change.
The remaining decrease results from the decline in operating income as discussed above, somewhat offset by the favorable impact of decreased interest expenses and income taxes.
Liquidity and Capital Resources
Operating Activities
Cash provided by operations for 2003 was $258 million, compared to $932 million for 2002, and $847 million in 2001. The $674 million decrease in 2003, as compared to the prior year, reflects the $869 million termination of the accounts receivable facility. (See Note 8, Accounts Receivable). Excluding that, cash provided by operating activities was higher than 2002, at $1.2 billion.
In 2002 cash provided from operations was $932 million, an $85 million increase over 2001. Higher operating income, lower interest expense and significant cash flow relating to real estate activities contributed to the increase, while there was a $85 million negative effect attributable to the New Orleans tank car fire settlement payment.
Investing Activities
Property additions totaled $940 million in 2003, $981 million in 2002 and $848 million in 2001. Of the $940 million in 2003 capital expenditures, substantially all related to replacing track, locomotives and other costs necessary to maintain the Company’s rail system. Capital expenditures for 2004 are
requiredexpected to be approximately $900 million.Financing Activities
Financing activities provided cash of $680 million during 2003 and $224 million in 2001, compared to a $195 million use of cash during 2002.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSSchedule of Contractual Obligations and Commercial Commitments
(Dollars in Millions)
The following table sets forth maturities of the Company’s contractual obligations:
Type of Obligation 2004 2005 2006 2007 2008 Thereafter Total $ 102 $ 99 $ 96 $ 93 $ 80 $ 342 $ 812 132 130 105 106 89 380 942 260 247 236 229 224 3,118 4,314 132 138 166 171 171 1,866 2,644
Total Contractual Obligations $ 626 $ 614 $ 603 $ 599 $ 564 $ 5,706 $ 8,712
(a) Capital leases of $57 million are included in long-term debt. (b) CSXT has entered into various operating lease agreements primarily for rail transportation. (c) Agreements with Conrail represents commitments to pay Conrail per various agreements. (d) Other commercial commitments consists of a $2.6 billion maintenance program which expires in 2026 relating to CSX’s fleet of locomotives. This program replaced an internal maintenance program. MARKET RISK
CSXT addresses market risk exposure to the risk of volatility in its fuel costs through the use of derivative financial instruments. The Company does not hold or
becauseissue derivative financial instruments for trading purposes.The Company is subject to risk relating to changes in the
required informationprice of diesel fuel. During 2003, the Company began a program to hedge its exposure to fuel price volatility through swap transactions. As of December 26, 2003, CSXT has hedged approximately 18% and 21% of expected requirements for 2004 and 2005, respectively. The Company expects that by the end of 2004 the programs will result in an increase in the amount of fuel hedged to approximately 80% of 2005 annual purchases. At December 26, 2003, a 1% change in fuel prices would result in an increase or decrease in the asset related to the swaps of approximately $1 million. At the end of 2003, the Company had not entered into any long-term commitments for forward fuel purchases. The Company’s rail unit average annual fuel consumption isset forthapproximately 570 million gallons. A one-cent change in the price per gallon of fuel would impact fuel expense by approximately $6 million.The Company is exposed to loss in the event of non-performance by any counter-party to the fuel hedging agreements. The Company does not anticipate non-performance by such counter-parties, and no material loss would be expected from non-performance.
At December 26, 2003 and December 27, 2002, CSXT had approximately $66 million and $101 million, respectively, of floating rate debt outstanding. A 1% variance on interest rates would on average affect annual interest expense by approximately $1 million.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSINTEGRATED RAIL OPERATIONS WITH CONRAIL
See background and accounting and financial reporting effects in Note 2, Integrated Rail Operations with Conrail.
RESTRUCTURING
In November 2003, the CSX Corporation (“CSX”), the Company’s sole shareholder, announced a management restructuring plan to streamline the structure at a number of its companies, eliminate organizational layers and realign certain functions. The initiative will reduce the non-union workforce by 600 to 750 positions over the last quarter of 2003 and the first half of 2004. As of December 26, 2003, 16 employees have been terminated under this program. The Company recorded an initial charge related to this reduction of $25 million in 2003, to record the lowest amount of expense to be incurred under this program. The total estimated cost of the program is expected to be in the range of $45 million to $60 million. The majority of separation benefits will be paid from CSX Corporation’s qualified pension plans, with the remainder being paid from general corporate funds.
Also in 2003, CSX recorded a $10 million restructuring charge related to other workforce reduction programs. Substantially all of this amount had been paid out at December 27, 2003.
In 2003, CSX recorded a $22 million pretax credit related to a favorable change in estimate related to the 1991 and 1992 separation plans. These plans provided for workforce reductions, improvements in productivity and other cost reductions. The reduction in estimate for these plans results from lower railroad retirement taxes and other benefits than had been included in the initial $1.3 billion charge.
A net $13 million restructuring charge was recorded representing the cost of the restructuring initiatives offset by reductions in 1991/1992 separation reserves. The associated expense is included in operating expense on the Income Statement as “Restructuring Charge — Net.”
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of certain revenues and expenses during the reporting period. Actual results may differ from those estimates. Significant estimates using management judgment are made for the following areas:
1. Casualty, legal and environmental reserves
2. Pension and postretirement medical plan accounting
3. Depreciation polices for its assets under the group-life method
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSCRITICAL ACCOUNTING ESTIMATES, Continued
1. Casualty, Legal and Environmental Reserves
Casualty Reserve Management
Casualty reserves represent accruals for the uninsured portion of occupational injury and personal injury claims. These reserves are recorded upon the first reporting of a claim, and estimates are updated as information develops. The amount of liability accrued is based on the type and severity of the claim, and an estimate of future claims development based on current trends and historical data. The Company believes it has recorded liabilities in sufficient amounts to cover all identified claims and estimates of incurred but not reported personal injury claims. During 2003, the Company retained third party professionals to work with it to project the number of asbestos and other occupational injury claims to be received over the next seven years and the related costs. Based on this analysis the Company established reserves for the probable and reasonably estimable asbestos and other occupational injury liabilities. Other occupational claims include allegations of exposure to certain materials in the work place, such as solvents and diesel fuel, or alleged physical injuries, such as carpal tunnel syndrome or hearing loss. In conjunction with the change in estimate, in 2003 the Company recorded a charge of $203 million to increase its provision for these claims. Approximately $138 million of this amount relates to asbestos claims. Additionally, the provision for personal injury claims was increased by $26 million as a result of a change in estimate.
Estimates for all of these claims are subject to significant uncertainty relating to the outcomes of negotiated settlements and other developments. As facts and circumstances change, the Company may have to change its estimates, and changes could have a material impact on the Company’s financial results. Such events as adverse verdicts, catastrophic accidents and legal settlements will cause the Company to revise its estimated liabilities, which the Company reviews and appropriately adjusts quarterly. Personal and occupational injury liabilities amount to $645 million and $395 million at December 26, 2003 and December 27, 2002, respectively. See additional information in Note 10, Casualty, Environmental and Other Reserves.
Legal Reserves
In accordance with SFAS 5, “Accounting for Contingencies,” an accrual for a loss contingency is established if information available prior to issuance of the financial statements indicates that it is (1) probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and (2) the amount of loss can be reasonably estimated. If no accrual is made for a loss contingency because one or both of these conditions is not met, or if an exposure to loss exists in excess of the amount accrued, disclosure of the contingency is made when there is at least a reasonable possibility that a loss or an additional loss may have been incurred. The Company evaluates all exposures relating to legal liabilities on an ongoing basis and records reserves when appropriate under the guidance noted above.
In 2001 Duke Energy Corporation (“Duke”) filed a complaint before the U.S. Surface Transportation Board alleging that certain CSXT common carrier coal rates are unreasonably high. In February 2004, the STB issued a decision finding that the CSXT common carrier rates were reasonable. While approving the rate levels, the STB also invited Duke to request a phase-in of rate increases over some time period. The nature and amount of any such phase-in is uncertain, and would only apply to billings subsequent to December 2001. CSXT will continue to consider and pursue all available legal defenses in this matter. Administrative and legal appeals are possible, and could take several years to resolve. An unfavorable outcome to this complaint would not have a material effect on the Company.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSCRITICAL ACCOUNTING ESTIMATES, Continued
Environmental Management
CSXT is a party to various proceedings, including administrative and judicial proceedings, involving private parties and regulatory agencies related
notes thereto. 3. Exhibits. (3.1) Articlesto environmental issues. CSXT has been identified as a potentially responsible party (“PRP”) at approximately 260 environmentally impaired sites, many ofIncorporation,which 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. Some of the proceedings involve property formerly or currently owned by CSXT or its railroad predecessors. Proceedings arising under Superfund or similar state statutes can involve numerous other companies who generated the waste or owned or operated the property and involve the allocation of liability for costs associated with site investigation and cleanup, which could be substantial.At least once each quarter, CSXT reviews its role with respect to each such location, giving consideration to a number of factors, including:
• the type of cleanup required,
• the nature of CSXT’s alleged connection to the location (e.g., generator of waste sent to the site, or owner or operator of the site),
• the extent of CSXT’s alleged connection (e.g., 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 viability of other named and unnamed PRP’s at the location.
Based on the review process, CSXT has recorded reserves to cover estimated contingent future environmental costs with respect to such sites. The recorded liabilities for estimated future environmental costs at December 26, 2003, and December 27, 2002 were $45 million and $35 million, respectively. These liabilities, which are undiscounted, include amounts representing CSXT’s estimate of unasserted claims, which CSXT believes to be immaterial. The liability includes future costs for all sites where the Company’s obligation is (1) deemed probable and (2) the amount can be reasonably estimated. The liability includes future costs for remediation and restoration of sites as
amended, incorporated hereinwell as any significant ongoing monitoring costs, but excludes any anticipated insurance recoveries. During 2003, the Company increased its estimate for environmental liabilities byreference from Registrant's reporta net $10 million due to continuing evaluation of the adequacy of the reserve. The majority of the December 26, 2003 environmental liability is expected to be paid out over the next seven years.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. Also, changes in federal and state laws and regulations may impact, favorably or unfavorably, the effort required to remediate sites. 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 its environmental reserves are adequate to accomplish remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters, if any, will not materially affect its overall results of operations and financial condition.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSCRITICAL ACCOUNTING ESTIMATES, Continued
2. Pension and Postretirement Medical Plan Accounting
CSXT is allocated expense relating to pension and postretirement medical plans sponsored by its parent, CSX Corporation. The accounting for these plans at the CSX Corporation level is subject to the guidance provided in SFAS No. 87, “Employers Accounting for Pensions,” and SFAS No. 106, “Employers Accounting for Postretirement Benefits Other than Pensions.” Both of these statements require CSX to make certain assumptions relating to the following:
• Long-term rate of return of plan assets
• Discount rates used to measure future obligations and interest expense
• Salary scale inflation
• Health care cost trend rates and other assumptions
All of these assumptions and estimates can have a significant impact on CSX’s accounting for these plans and the amount of expense recorded in a reporting period.
Pension Benefits Postretirement
Benefits(Dollars in Millions) 2003 2002 2003 2002 Expected Long-term Return on Plan Assets: Benefit Cost for Plan Year 8.90 % 9.50 % n/a n/a Benefit Obligation at End of Plan Year 8.90 % 8.90 % n/a n/a Discount Rates: Benefit Cost for Plan Year 6.50 % 7.25 % 5.50 % 7.25 % Benefit Obligation at End of Plan Year 6.00 % 6.50 % 5.00 % 5.50 % Salary Scale Inflation 3.30 % 3.30 % 3.30 % 3.30 % In December 2003, the President of the United States signed into law the “Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“the Act”), which introduces a prescription drug benefit under Medicare Part D as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is actuarially equivalent to Medicare Part D. SFAS 106 requires that changes in the law that take effect in the future and affect future benefit coverage shall be considered in current-period benefit measurements. However, as significant uncertainties exist for how to account for the subsidy a plan sponsor may not have sufficient information available to measure effects of the Act, prepare related actuarial valuations, and ensure proper accounting. Therefore, FASB has issued staff position No. FAS 106-1 which allows a plan sponsor to elect to defer recognizing the effects of the Act until authoritative guidance on the accounting for the federal subsidy is issued, or until certain other events occur. When guidance is issued, it may cause CSX to revise previously reported information. CSX is currently evaluating how the legislation may impact its postretirement benefit plans. (See Note 14, “Employee Benefit Plans.”)
For further discussion of CSX’s pension and postretirement assumptions, see CSX Corporation’s Form 10-K for the year ended December
31, 1987. (3.2) By-laws of the Registrant, incorporated herein by reference from Registrant's report on Form 10-K for the year ended December 31, 1992. (b) Reports on Form 8-K. None. - 7 - PAGE 8 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 18th day of January, 1996. CSX TRANSPORTATION, INC. /s/ GREGORY R. WEBER ------------------------------ Gregory R. Weber (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title - ----------------------- ------------------------------------- /s/ John W. Snow Chairman of the Board and Director - ----------------- John W. Snow* /s/ Alvin R. Carpenter President and Chief Executive Officer - ----------------------- (Principal Executive Officer) and Alvin R. Carpenter* Director /s/ Gerald L. Nichols Executive Vice-President and Chief - ---------------------- Operating Officer and Director Gerald L. Nichols* /s/ Mark G. Aron Director - ----------------- Mark G. Aron* /s/ James Ermer Director - ---------------- James Ermer* /s/ Paul R. Goodwin Director - -------------------- Paul R. Goodwin* /s/ Michael J. Ward Senior Vice President-Finance - -------------------- (Principal Finance Officer) Michael J. Ward* /s/ PATRICIA J. AFTOORA - ----------------------- *Patricia J. Aftoora (Attorney-in-Fact) January 18, 1996 - 8 - PAGE 926, 2003.-16-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSCRITICAL ACCOUNTING ESTIMATES, Continued
3. Depreciation Policies Under the Group-Life Method
The Company accounts for its rail assets, including main-line track, locomotives and freight cars, using the group-life method. This method pools similar assets by road and equipment type and then depreciates each group as a whole. These assets represent 94% of the Company’s total fixed assets and amounted to $12.9 billion on a net basis at December 26, 2003. Under the group-life method, the useful lives of rail assets are determined by the performance of a life-study, which includes:
• statistical analysis of historical retirements for each group of property • evaluation of the current operations • previous assessment of the condition of the assets and outlook for their continued use • comparison of assets to the same asset groups with other companies. The results of the life study process determine the service lives for each asset group. These studies are conducted by a third party expert and analyzed by the Company’s management. Changes in asset lives due to the results of the life studies could significantly impact future periods depreciation expense and thus the Company’s results of operations. Events that could cause the Company to change its estimates relating to the lives of its asset groups could be changes in historical results, technological improvements and changes in specific assets. In 2003, the Company completed life studies for all of its rail assets. The effect of theses studies was to increase the average useful lives on its equipment and track assets, while decreasing the average useful lives on many of the roadway assets. These changes in average useful lives of the assets will have minimal net reduction on depreciation expense in the future. As a result, the net increase in depreciation expense was $1 million in 2003, while the impact will be a decrease of approximately $13 million in 2004 and thereafter.
Additionally, with the adoption of Statement of Financial Accounting Standard (“SFAS”) 143, “Accounting for Asset Retirement Obligations” in 2003, CSX recorded pretax income of $93 million, $57 million after tax as a cumulative effect of an accounting change, representing the reversal of the accrued liability for crosstie removal costs. On an ongoing basis, depreciation expense will be reduced, while labor and fringe and materials, supplies and other expense will be increased by approximately $12 million annually.
In 2003, the Accounting Standards Executive Committee (AcSEC) of the American Institute of Certified Public Accountants voted to approve the Statement of Position (SOP) Accounting for Certain Costs and Activities related to Property, Plant and Equipment and presented it to the Financial Accounting Standards Board (FASB) for approval. If the FASB causes the SOP to be applicable, certain costs and activities that are currently capitalized may require immediate recognition and alternatively, some costs and activities that are currently expensed may require capitalization. In addition, the SOP will require additional refinement in asset componentization. potentially altering the amount of depreciation expense recognized. While the Company is evaluating the proposal, it has not yet determined what effect it may have if passed by the FASB. However, the effect could be material.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSNew Accounting Pronouncements and Change In Accounting Policy
SFAS 143, “Accounting for Asset Retirement Obligations” was issued in 2001. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. In conjunction with the group-life method of accounting for asset costs, the Company historically accrued crosstie removal costs as a component of depreciation, which is not permitted under SFAS 143. As noted above, with the adoption of SFAS 143 in fiscal year 2003, CSX recorded pretax income of $93 million, $57 million after tax as a cumulative effect of an accounting change, representing the reversal of the accrued liability for crosstie removal costs. The adoption of SFAS 143 did not have a material effect on prior reporting periods, and the Company does not believe it will have a material effect on future earnings. On an ongoing basis, depreciation expense will be reduced, while labor and fringe and materials, supplies and other expense will be increased by approximately $12 million annually.
SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” was issued in December 2002. SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition to Statement 123’s fair value method of accounting for stock-based employee compensation and require disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation. Effective beginning with fiscal year 2003, CSXT has voluntarily adopted the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” and adopted the disclosure requirements of SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of SFAS 123.” In accordance with the prospective method of adoption permitted under SFAS 148, stock-based awards issued subsequent to fiscal year 2002 are accounted for under the fair value recognition provisions of SFAS 123 utilizing the Black-Scholes valuation method and, accordingly, are expensed.
In 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” which requires a variable interest entity (“VIE”) to be consolidated by a company that is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns, or both. Interpretation No. 46 also requires disclosures about VIEs that the company is not required to consolidate but in which it has a significant variable interest. Also in 2003, Interpretation 46 (“46R”), a revision to FASB Interpretation No. 46 was issued, to clarify some of the provisions of, and to exempt certain entities from Interpretation 46 requirements. Under the new guidance, CSX will consolidate Four Rivers Transportation, Inc. (“FRT”), a short line railroad, into its financial statements beginning December 27, 2003. Presently, FRT is accounted for under the equity method of accounting. The adoption of Interpretation No. 46 will not have a material impact on results of operations in future reporting periods.
In 2002, the FASB issued Financial Accounting Standard Interpretation (“FASI”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This statement requires that certain guarantees be recorded at fair value on the statement of financial position and additional disclosures be made about guarantees. CSX did not realize a financial statement impact with the adoption of the accounting provisions of this statement in fiscal year 2003 and does not anticipate a future impact. (See Note 15, Commitments and Contingencies.)
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSRegulation and Legislation
Rail operations are subject to the regulatory jurisdiction of the Surface Transportation Board (“STB”) of the United States Department of Transportation (“DOT”), the Federal Railroad Administration of DOT and other state and regulatory agencies. The regulation and legislation passed by these organizations can significantly affect the costs and profitability of the Company’s business.
In response to the heightened threat of terrorism in the wake of the September 2001 attacks on the World Trade Center, Pentagon and airline infrastructure, federal, state and local regulatory agencies are evaluating various proposals with respect to the transportation industry. Some of these proposals relate to the transport of hazardous material. Certain metropolitan areas considered at high risk for a terrorist attack may be the subjects of future regulation. The ultimate legislation passed by federal, state and local regulators related to issues of security has the potential to severely affect CSX’s operations and costs.
Factors Expected to Influence 2004
During the upcoming year, there are several key areas which continue to affect the operations and profitability of CSXT. The Company must remain focused on improving its cost structure and restoring higher service levels. General economic factors, including the cost of fuel, may also influence 2004 operating results.
Improving operating efficiency while maintaining volume is critical to success in lowering the operating ratio, and in turn improving financial performance. To do so, management believes that CSXT must optimize its network routing including a reduction in both gross ton miles and the number of times a car is handled or switched en route to the final destination.
Fuel represents a significant expense of CSXT operations and was a key factor in 2003 expense increases. Fuel prices can vary significantly from period to period and significantly impact future results. Although the Company has implemented a fuel price hedging program, it will remain subject to fuel price fluctuations for the majority of 2004 fuel purchases. Approximately 18% of 2004 fuel purchases are currently hedged at an average cost of 70 cents per gallon, exclusive of taxes and transportation costs. Each month, the Company is systematically increasing its hedged amount so that in July of 2005, 80% of the estimated fuel purchases should be hedged for a 24 month period.
The Company faces inherent business risk of exposure to property damage and personal injury claims in the event of train accidents, including derailments. The Company is also subject to exposure to occupational injury claims. While CSX is working diligently to enhance its safety programs and to continue to raise the awareness levels of our employees concerning safety, we cannot ensure that we will not experience any material property damage, personal or occupational claims in the future or that we will not incur significant costs to defend such claims. Additionally, the Company cannot ensure that existing claims will not suffer adverse development not currently reflected in reserve estimates, as the ultimate outcome of existing claims is subject to numerous factors which are outside of our control. The Company does engage outside parties to assist with the evaluation of certain of the occupational and personal injury claims, and believes that it is adequately reserved to cover all potential claims. However, final amounts determined to be due to any outstanding matters may differ materially from the recorded reserves.
The ability of the Company to effectively implement the management restructuring will be an important factor in future success. Once complete, the organization of the Company should be conducive to enhanced accountability, faster, more reliable communication, better decision making and a more competitive cost structure. Executing the restructuring while minimizing the impact of the possible disruption associated with the elimination of a significant portion of the Company’s existing management will be critical to the Company’s short-term success.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSForward-Looking Statements
This Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act with respect to, among other items:
• projections and estimates of earnings, revenues, cost-savings, expenses, or other financial items; • statements of management’s plans, strategies and objectives for future operations, and management’s expectations as to future performance and operations and the time by which objectives will be achieved; • statements concerning proposed new products and services; and • statements regarding future economic, industry or market conditions or performance. Forward-looking statements are typically identified by words or phrases such as “believe”, “expect”, “anticipate”, “project”, and similar expressions. The Company cautions against placing undue reliance on forward-looking statements, which reflect its current beliefs and are based on information currently available to it as of the date the forward-looking statement is made. The Company undertakes no obligation to update or revise any forward-looking statement. If the Company does update any forward-looking statement, no inference should be drawn that the Company will make additional updates with respect to that statement or any other forward-looking statements.
Forward-looking statements are subject to a number of risks and uncertainties, and actual performance or results could differ materially from that anticipated by these forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others:
Operating factors — the Company’s success in implementing its financial and operational initiatives, the extent to which the Company is successful in gaining long-term relationships with new customers or retaining existing relationships with current customers, changes in operating conditions and costs, competition, commodity concentrations, computer viruses, changes in labor costs and labor difficulties including stoppages affecting either the Company’s operations or our customers’ ability to deliver goods to the Company for shipment, loss of essential services such as electricity, and natural occurrences such as extreme weather conditions, floods and earthquakes or other disruptions of the Company’s operations, systems, property or equipment;General economic and industry factors — material changes in domestic or international economic or business conditions, including those affecting the rail industry such as customer demand, effects of adverse economic conditions affecting shippers, adverse economic conditions in the industries and geographic areas that consume and produce freight, competition from other modes of freight transportation such as trucking, competition and consolidation within the transportation industry generally, changes in fuel prices and changes in securities and capital markets;Legal and regulatory factors — developments and changes in laws and regulations, the ultimate outcome of shipper and rate claims subject to adjudication, environmental investigations or proceedings and the outcome of other types of claims and litigation involving or affecting the Company.Other important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified elsewhere in this Annual Report and in the Company’s other SEC reports, accessible on the SEC’s website atwww.sec.govand the Company’s website atwww.csx.com.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in Part II, Item 7, “Management’s Narrative Analysis of the Results of Operations” under the heading “Market Risk.”
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial StatementsPage ---- Report of Independent Auditors 10
Page Report of Independent Certified Public Accountants 22 CSX Transportation Inc. and Subsidiaries Consolidated Financial Statements and Notes to Consolidated Financial Statements Submitted Herewith: Consolidated Income Statement - Fiscal Years Ended December 26, 2003, December 27, 2002 and December 28, 2001 23 Consolidated Balance Sheet - December 26, 2003 and December 27, 2002 24 Consolidated Cash Flow Statement - Fiscal Years Ended December 26, 2003, December 27, 2002 and December 28, 2001 25 Consolidated Statement of Shareholder’s Equity Fiscal Years Ended December 26, 2003, December 27, 2002 and December 28, 2001 26 Notes to Consolidated Financial Statements 28 -21-
CSX
Transportation, Inc. and Subsidiaries: Consolidated Financial Statements and Notes to Consolidated Financial Statements Submitted Herewith: Consolidated Statement of Earnings - Fiscal Years Ended December 30, 1994, and December 31, 1993 and 1992 11 Consolidated Statement of Cash Flows - Fiscal Years Ended December 30, 1994, and December 31, 1993 and 1992 12 Consolidated Statement of Financial Position - December 30, 1994 and December 31, 1993 14 Consolidated Statement of Retained Earnings - Fiscal Years Ended December 30, 1994 and December 31, 1993 and 1992 15 Notes to Consolidated Financial Statements 16 - 9 - PAGE 10TRANSPORTATION INC. AND SUBSIDIARIES
REPORT OF ERNST & YOUNG LLP, INDEPENDENTAUDITORS -------------------------------------------------CERTIFIED PUBLIC ACCOUNTANTSTo the Shareholder and Board of Directors
of CSX Transportation Inc.We have audited the accompanying consolidated
statement of financial positionbalance sheet of CSX Transportation, Inc. and subsidiaries as of December30, 199426, 2003 and December31, 1993,27, 2002, and the related consolidated statements ofearnings,income, cash flows, andretained earningschanges in shareholder’s equity for each of the three fiscal years in the period ended December30, 1994.26, 2003. These consolidated financial statements are the responsibility of theCompany'scompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with auditing standards generally accepted
auditing standards.in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above
(appearing on pages 11-32)present fairly, in all material respects, the consolidated financial position of CSX TransportationInc.and subsidiaries at December30, 199426, 2003 and December31, 1993,27, 2002, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December30, 1994,26, 2003, in conformity with accounting principles generally accepted in the United States.As discussed in Note 1 to the Consolidated Financial Statements, in 2003 the Company changed its method of accounting
principles. /s/ ERNST & YOUNG LLP --------------------- Ernst & Young LLP Richmond, Virginia January 27, 1995 -for railroad tie removal costs and stock-based compensation.Jacksonville, Florida
February 10,- PAGE 112004-22-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
CONSOLIDATEDSTATEMENT OF EARNINGS (Millions of Dollars) Fiscal Year Ended -------------------------------- Dec. 30, Dec. 31, Dec. 31, 1994 1993 1992 ------- ------- ------- OPERATING REVENUE Merchandise $ 3,048 $ 2,909 $ 2,770 Coal 1,465 1,363 1,565 Other 112 108 99 ------- ------- ------- Transportation 4,625 4,380 4,434 Non-Transportation 78 64 74 ------- ------- ------- Total 4,703 4,444 4,508 ------- ------- ------- OPERATING EXPENSE Labor and Fringe Benefits 1,856 1,809 1,830 Materials, Supplies and Other 1,022 1,011 973 Equipment Rent 392 387 383 Depreciation 371 371 354 Fuel 251 253 262 Productivity Charge --- --- 664 ------- ------- ------- Transportation 3,892 3,831 4,466 Non-Transportation 31 22 20 ------- ------- ------- Total 3,923 3,853 4,486 ------- ------- ------- OPERATINGINCOME780 591 22 Other Income 49 11 1 Interest Expense 45 60 73 ------- ------- ------- EARNINGS (LOSS) BEFORE INCOME TAXES 784 542 (50) Income Tax Expense (Benefit) 289 234 (33) ------- ------- ------- NET EARNINGS (LOSS) $ 495 $ 308 $ (17) ======= ======= =======STATEMENT
(Dollars in Millions)
Fiscal Years Ended December 26, December 27, December 28, 2003 2002 2001 Merchandise $ 3,694 $ 3,507 $ 3,460 Automotive 853 845 794 Coal, Coke and Iron Ore 1,600 1,597 1,739 Other 35 54 89
Total 6,182 6,003 6,082
Labor and Fringe 2,458 2,443 2,464 Materials, Supplies and Other 1,141 1,052 1,100 Conrail Operating Fees, Rents and Services 357 346 353 Related Party Service Fees 177 187 186 Building & Equipment Rent 404 406 413 Depreciation 548 543 522 Fuel 566 449 525 Provision for Casualty Claims 229 — — Restructuring Charge — Net 13 — — New Orleans Litigation Provision — — 60
Total 5,893 5,426 5,623
289 577 459 Other Income (Expense) 28 15 (5 ) Interest Expense 101 113 130
Earnings From Continuing Operations Before Income Taxes 216 479 324 Income Tax Expense 77 183 121
Earnings before Cumulative Effect of Accounting Change 139 296 203 Cumulative Effect of Accounting Change 57 — —
Net Earnings $ 196 $ 296 $ 203
See accompanying Notes to Consolidated Financial Statements.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
CONSOLIDATEDSTATEMENT OF CASH FLOWS (Millions of Dollars) Fiscal Year Ended --------------------------- Dec. 30, Dec. 31, Dec. 31, 1994 1993 1992 -------- -------- ------- OPERATING ACTIVITIES Net Earnings (Loss) $ 495 $ 308 $ (17) Adjustments to Reconcile Net Earnings (Loss) to Cash Provided Depreciation 371 371 354 Deferred Income Taxes (Benefit) 171 183 (52) Productivity Charge - Provision --- --- 664 - Payments (129) (245) (353) Proceeds from Real Estate Sales 42 28 41 (Gain) Loss on Investment Transactions 26 (26) --- Gain on Sale of South Florida Track (91) (20) (7) Gain from Disposition of Properties (38) (25) (38) Other Operating Activities 40 12 (31) ChangesBALANCE SHEET
(Dollars inOperating Assets and Liabilities Accounts Receivable (27) 27 30 Sale of Accounts Receivable-Net 20 6 200 Materials and Supplies (1) (4) 10 Other Current Assets 32 22 20 Accounts Payable and Other Current Liabilities (15) (7) (96) ------- ------- ------- Cash Provided by Operating Activities 896 630 725 ------- ------- ------- INVESTING ACTIVITIES Property Additions (676) (569) (539) Proceeds from Property Dispositions 18 36 41 Affiliated Company Activity (37) --- --- Proceeds/(Loss) from Investment Transactions (26) 26 --- Proceeds from Sale of South Florida Track 130 26 10 Other Investing Activities (9) 3 (18) ------- ------- ------- Cash Used by Investing Activities (600) (478) (506) ------- ------- ------- - 12 - PAGE 13 CSX TRANSPORTATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED (Millions of Dollars) Fiscal Year Ended --------------------------- Dec. 30, Dec. 31, Dec. 31, 1994 1993 1992 -------- -------- ------- FINANCING ACTIVITIES Long-Term Debt Issued 92 80 148 Long-Term Debt Repaid (93) (160) (213) Cash Dividends Paid (28) (28) (74) Parent Company Advances Issued --- --- 30 Parent Company Advances Repaid (86) (18) (153) Other Financing Activities (1) (2) 4 ------- ------- ------- Cash Used by Financing Activities (116) (128) (258) ------- ------- ------- CASH AND CASH EQUIVALENTS Increase (Decrease) in Cash and Cash Equivalents 180 24 (39) Cash and Cash Equivalents at Beginning of Year 272 248 287 ------- ------- ------- Cash and Cash Equivalents at End of Year $ 452 $ 272 $ 248 ======= ======= =======Millions)
December 26, December 27, 2003 2002 ASSETS Current Assets Cash, Cash Equivalents and Short-term Investments $ 14 $ — Accounts Receivable — Net 1,004 235 Materials and Supplies 160 171 Income Taxes Receivable 31 — Deferred Income Taxes 115 110 Other Current Assets 23 18
Total Current Assets 1,347 534 Properties 17,967 17,354 Accumulated Depreciation (4,916 ) (4,730 )
Properties — Net 13,051 12,624 Affiliates and Other Companies 248 217 Other Long-term Assets 628 627
Total Assets $ 15,274 $ 14,002
LIABILITIES Current Liabilities Accounts Payable $ 609 $ 618 Labor and Fringe Benefits Payable 321 319 Casualty, Environmental and Other Reserves 211 173 Current Maturities of Long-term Debt 102 213 Income and Other Taxes Payable 68 98 Due to Parent Company 2,479 1,297 Due to Affiliate 251 200 Other Current Liabilities 97 132
Total Current Liabilities 4,138 3,050 Casualty, Environmental and Other Reserves 674 467 Long-term Debt 710 873 Deferred Income Taxes 3,596 3,424 Other Long-term Liabilities 575 579
Total Liabilities 9,693 8,393
SHAREHOLDER’S EQUITY Common Stock, $20 Par Value: Authorized 10,000,000 Shares; Issued and Outstanding 9,061,038 Shares 181 181 Other Capital 1,380 1,380 Accumulated Other Comprehensive Earnings 6 — Retained Earnings 4,014 4,048
Total Shareholder’s Equity 5,581 5,609
Total Liabilities and Shareholder’s Equity $ 15,274 $ 14,002
See accompanying Notes to Consolidated Financial Statements.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTOF FINANCIAL POSITION (Millions of Dollars) Dec. 30, Dec. 31, 1994 1993 -------- -------- ASSETS Current Assets Cash and Cash Equivalents $ 452 $ 272 Accounts and Notes Receivable 93 98 Materials and Supplies 117 116 Deferred Income Taxes 241 103 Other Current Assets 57 43 ------- ------ Total Current Assets 960 632 ------- ------ Properties and Other Assets Properties-Net 8,897 8,631 Affiliates and Other Companies 189 155 Other Assets 195 235 ------- ------ Total Properties and Other Assets 9,281 9,021 ------- ------ Total Assets $10,241 $9,653 ======= ====== LIABILITIES Current Liabilities Accounts Payable and Other Current Liabilities $ 1,159 $1,111 Current Maturities of Long-Term Debt 89 87 Due to Parent Company 23 40 ------- ------ Total Current Liabilities 1,271 1,238 ------- ------ Long-Term Debt 591 593 ------- ------ Due to Parent Company --- 69 ------- ------ Deferred Income Taxes 2,246 1,937 ------- ------ Casualty, Environmental and Other Reserves 724 965 ------- ------ Other Liabilities and Deferred Gains 757 666 ------- ------ SHAREHOLDER'S EQUITY Common Stock, $20 Par Value; Authorized 10,000,000 Shares; 9,061,038 Shares Issued and Outstanding 181 181 Other Capital 1,047 1,047 Retained Earnings 3,424 2,957 ------- ------ Total Shareholder's Equity 4,652 4,185 ------- ------ Total Liabilities and Shareholder's Equity $10,241 $9,653 ======= ======
(Dollars in Millions)
Fiscal Years Ended December 27, December 27, December 28, 2003 2002 2001 OPERATING ACTIVITIES Net Earnings $ 196 $ 296 $ 203 Adjustments to Reconcile Net Earnings to Net Cash Provided: Depreciation 548 543 522 Deferred Income Taxes 126 205 131 Provision for Casualty Claims 229 — — Restructuring, net 13 — — Cumulative Effect of Accounting Change (57 ) — — Other Operating Activities 35 (67 ) 6 Changes in Operating Assets and Liabilities: Accounts and Notes Receivable 52 123 2 Termination of Sale of Receivables (869 ) (52 ) (28 ) Other Current Assets 10 7 (20 ) Accounts Payable 39 (84 ) 20 Other Current Liabilities (64 ) (39 ) 11
Net Cash Provided by Operating Activities 258 932 847
INVESTING ACTIVITIES Property Additions (940 ) (981 ) (848 ) Short-term Investments — 220 (220 ) Other Investing Activities 16 (3 ) (4 )
Net Cash Used by Investing Activities (924 ) (764 ) (1,072 )
FINANCING ACTIVITIES Long-term Debt Issued — — — Long-term Debt Repaid (274 ) (196 ) (185 ) Advances from CSX 1,185 199 619 Dividends Paid (230 ) (200 ) (212 ) Other Financing Activities (1 ) 2 2
Net Cash (Used) Provided by Financing Activities 680 (195 ) 224
Net Decrease in Cash and Cash Equivalents 14 (27 ) (1 ) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash and Cash Equivalents at Beginning of Year — 27 28
Cash and Cash Equivalents at End of Year 14 — 27 Short-term Investments at End of Year — — 220 Cash, Cash Equivalents and Short-term Investments at End of Year $ 14 $ — $ 247
SUPPLEMENTAL CASH FLOW INFORMATION Interest Paid — Net of Amounts Capitalized $ 63 $ 78 $ 98 Income Taxes Paid $ 1 $ 3 $ 59 See accompanying Notes to Consolidated Financial Statements.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OFRETAINED EARNINGS (Millions of Dollars) Dec. 30, Dec. 31, Dec. 31, 1994 1993 1992 ------ ------ ------ Beginning Balance $2,957 $2,675 $2,764 Net Earnings (Loss) 495 308 (17) Dividends - Common (28) (28) (74) Minimum Pension Liability Adjustments and Other --- 2 2 ------ ------ ------ Ending Balance $3,424 $2,957 $2,675 ====== ====== ======SHAREHOLDER’S EQUITY
(Dollars in Millions)
Accumulated Other Common Other Retained Comprehensive Stock Capital Earnings Loss Total Balance Dec. 29, 2000 $ 181 $ 1,380 $ 3,961 $ — $ 5,522 Comprehensive Earnings: Net Earnings — — 203 — 203 Comprehensive Earnings — 203 Dividends — — (212 ) — (212 ) Balance Dec. 28, 2001 $ 181 $ 1,380 $ 3,952 $ — $ 5,513 Comprehensive Earnings: Net earnings — — 296 — 296 Comprehensive Earnings 296 Dividends — — (200 ) — (200 ) Balance Dec. 27, 2002 $ 181 $ 1,380 $ 4,048 $ — $ 5,609 Comprehensive Earnings: Net Earnings 196 196 Fuel Hedge Adjustment (Net of $3 taxes) 6 6 Comprehensive Earnings 202 Dividends — — (230 ) — (230 ) Balance Dec. 26, 2003 $ 181 $ 1,380 $ 4,014 $ 6 $ 5,581 See accompanying Notes to Consolidated Financial Statements.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(All Tables in Millions of Dollars)NOTE 1. SIGNIFICANT ACCOUNTING
POLICIES.POLICIESNature of Operations
CSX Transportation Inc. (“CSXT” or “Company”) is the largest rail network in the Eastern United States, providing rail freight transportation over a network of more than 23,000 route miles in 23 states, the District of Columbia and two Canadian provinces. CSXT is a wholly-owned subsidiary of CSX Corporation (“CSX”).
Rail shipments include merchandise, automotive products, and coal, coke and iron ore. Services as a percent of rail revenue are as follows:
Fiscal Years Ended 2003 2002 Merchandise 60 % 58 % Automotive 14 % 14 % Coal, Coke and Iron Ore 26 % 27 % Other — 1 %
Total 100 % 100 %
Merchandise traffic includes the following markets:
– Phosphates and Fertilizer – Agricultural and Food – Metals – Chemicals – Forest and Industrial – Emerging Markets Coal shipments originate mainly from mining locations in the Eastern United States and primarily supply domestic utility and export markets.
Principles of Consolidation
The
Consolidated Financial Statements reflect the results of operations, cash flows andconsolidated financialposition ofstatements include CSXT and its majority-ownedsubsidiaries as a single entity.subsidiaries. All significant intercompany accounts and transactions have been eliminated.CSXT is a wholly-owned subsidiary of CSX Corporation (CSX).Investments in companies that are not majority-owned are carried ateithercost (if less than 20% owned and the Company has no significant influence) or equitydepending on(if theextent of control. Change inCompany has significant influence).Fiscal
Reporting Periods Effective January 1, 1994, the company changed itsYearCSXT follows a 52/53 week fiscal reporting
period from a calendar year to acalendar. Fiscal years 2003, 2002 and 2001 consisted of 52 weeks. A 52-week fiscal yearending onhas four 13-week quarters. A 53-week year occurs periodically, with thelast Fridaynext one occurring inDecember. The financial statements presented are for the fiscal2004. Fiscal years 2003, 2002 and 2001 endedDecember 30, 1994, and December 31, 1993 and 1992.on:
• December 26, 2003 • December 27, 2002 • December 28, 2001 -27-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1. SIGNIFICANT ACCOUNTING POLICIES, Continued
Cash,
andCash EquivalentsCashandcash equivalents primarily represent amounts due from CSX for CSXT's participationShort-term InvestmentsCSXT participates in the CSX cash management plan,
and are net of outstanding checksunder whichare funded daily as presented for payment. Accounts Receivable CSXT has an ongoing agreement to sell without recourse, on a revolving basis each month, an undivided percentage ownership interest in all freight accounts receivableexcess cash is advanced to CSXTrade Receivable Corporation (CTRC), a wholly-owned subsidiaryfor investment. CSX then makes cash available to CSXT as needed. Cash, cash equivalents and short-term investments consists ofCSX. At December 30, 1994, December 31, 1993cash in banks andDecember 31, 1992, accounts receivable sold under this agreement totaled $579 million, $556 million and $600 million, respectively. In addition, CSXT hashighly liquid investments having anagreement to sell with recourse on a monthly basis, an undivided ownership interest in all miscellaneous accounts receivable to a financial institution. At December 30, 1994 and December 31, 1993, accounts receivable sold under this agreement totaled $46 million and $50 million, respectively. The salesoriginal maturity ofreceivables have been reflected as reductionsthree months or less at the date of"Accounts and Notes Receivable" in the Consolidated Statement of Financial Position. The discounts on the sales of the receivables and related servicing costs were $45 million in 1994, $44 million in 1993 and $17 million in 1992. These costs have been reported in "Other Income" in the Consolidated Statement of Earnings.acquisition.Materials and Supplies
Materials and supplies consist primarily of fuel and items for replacement and maintenance of track and equipment, and are carried at average cost.
Properties
Main lineAll properties are stated at cost, less an allowance for accumulated depreciation. Rail assets, including main-line track, locomotives and freight cars are depreciated using the group-life method. This method pools similar assets by road and equipment type and then depreciates each group as a whole. These assets represent approximately 98% of the Company’s total fixed assets and amounted to $12.9 billion on a net basis at December 26, 2003. The majority of other property is depreciated using the straight-line method on a
group basis using a unit-of- - 16 - PAGE 17 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOTE 1. SIGNIFICANT ACCOUNTING POLICIES, Continued production method. All other property and equipment are depreciated on a straight-line basis over their estimated useful livesper asset basis.Regulations enforced by the Surface Transportation Board (“STB”) of
seven to 42 years. Interstate Commerce Commission (ICC) regulationsthe U.S. Department of Transportation require periodic formal studies of ultimate service lives for all railroadassets.assets, which include:
– statistical analysis of historical retirements for each group of property – evaluation of the current operations – previous assessment of the condition of the assets and outlook for their continued use – comparison of assets to the same asset groups with other companies. The results of the life study process determine the service lives for each asset group under the group-life method. These studies are conducted by a third party expert and analyzed by the Company’s management. Resulting service life estimates are subject to review and approval by the
ICC. Significant prematureSTB. Road assets, including main-line track, have estimated service lives ranging from 5 (system roadway machinery) to 80 (grading) years. Equipment assets, including locomotives and freight cars, have estimated service lives ranging from 6 (vehicles) to 29 (work equipment) years.Changes in asset lives due to the results of the life studies could significantly impact future periods depreciation expense and thus the Company’s results of operations. Events that could cause the Company to change its estimates relating to the lives of its asset groups could be changes in historical results, technological improvements and changes in specific assets. The Company completed life studies on road, track and equipment in 2003 and has partially reflected the results in its 2003 financial statements. As a result, the net increase in depreciation expense was $1 million in 2003, while the impact will be a decrease of approximately $13 million in 2004 and thereafter.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1. SIGNIFICANT ACCOUNTING POLICIES, Continued
For retirements
which would include major casualty losses, abandonments,or disposals of depreciable rail assets that occur in the ordinary course of business, the asset cost (net of salvage value or sales proceeds) is charged to accumulated depreciation andobsolescenceno gain or loss is recognized. For retirements or disposals of non-rail depreciable assets,are recorded asinfrequent disposal of rail assets outside the normal course of business and for all dispositions of land, the resulting gains or losses are recognized at the time oftheir occurrence.disposal. Expenditureswhichthat significantly increase asset values or extend useful lives are capitalized. Repair and maintenance expenditures are charged to operating expense when the work is performed.All properties are stated at cost. CSXT uses the specific identification method to assess potential impairment of propertiesProperties and other
assets. CSXT compareslong-lived assets are reviewed for impairment whenever events or business conditions indicate theestimated recoverable valuecarrying amount ofa specific asset to its book value. If the recoverable valuesuch assets may not be fully recoverable. Initial assessments of recoverability are based on estimates of undiscounted future net cash flows associated with an asset or a group of assets in accordance with SFAS No. 144. Where impairment isless than its bookindicated, the assets are evaluated, and their carrying amount is reduced to fair valuethe asset is considered for write-down to its recoverablebased on undiscounted net cash flows or other estimates of fair value.Revenue & Expense Recognition
Transportation revenue and expense is recognized proportionately as
a shipmentfreight moves from origin todestinationdestination. Other revenue, which includes switching, demurrage and incidental service charges, as well as interline switching settlements, is recognized when the service is performed.Casualty Reserves
Casualty reserves represent accruals for the uninsured portion of occupational injury and personal injury claims. These reserves are recorded upon the first reporting of a claim, and estimates are updated as information develops. The amount of liability accrued is based on the
CSXT system.type and severity of the claim and an estimate of future claims development based on current trends and historical data. The Company believes it has recorded liabilities in sufficient amounts to cover all identified claims and estimates of incurred but not reported personal injury and accident claims. In 2003, the Company changed its estimate of casualty reserves to also include an estimate of incurred but not reported claims for asbestos and other occupational injuries to be received over the next seven years. Other occupational claims include allegations of exposure to certain materials in the work place, such as solvents and diesel fuel, or alleged physical injuries, such as carpal tunnel syndrome or hearing loss. In conjunction with the change in estimate, in 2003 the Company recorded a pretax charge of $203 million to increase its provision for these claims (approximately $138 million of this amount relates to asbestos claims). Additionally, the provision for personal injury claims was increased by $26 million pretax as a result of a change in estimate.Personal and occupational injury liabilities amount to $645 million and $395 million at December 26, 2003 and December 27, 2002, respectively.
Environmental Costs
The Company incurs costs for environmental corrective efforts, such as the study and clean-up of environmental contamination. Environmental costs
thatare charged to expense when they relate tocurrent operations are expensed or capitalized as appropriate. Expenditures that relate to remediatingan existing condition caused by past operations andwhichdo not contribute to current or future revenuegeneration, are expensed.generation. Liabilities for environmental corrective efforts are recorded whenCSXT'sCSX’s responsibilityfor environmental remedial effortsis (1) deemed probable and (2) thecostsamount can be reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study orCSXT'sthe Company’s commitment to a formal plan of action.Financial Instruments The company does not and has not traded in derivative financial instruments and there were no significant derivative financial instruments outstandingEnvironmental reserves at December30, 1994.26, 2003 and December 27, 2002 were $45 million and $35 million, respectively.-29-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES, Continued Common Stock and Other Capital
There have been no changes in common stock during the last three years.
Prior YearDerivative Financial Instruments
The Company recognizes all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value.
Fuel Hedging
In 2003, CSXT began a program to hedge a portion of its 2004 and 2005 locomotive fuel purchases. In order to minimize exposure to fuel price fluctuation risk, the Company has entered into a series of swaps in order to fix the price of a portion of its estimated future fuel purchases.
The program limits fuel hedges to a 24-month duration and a maximum of 80% of CSXT’s average monthly fuel purchased for any month within the 24-month period, and places the hedges among selected counterparties. Fuel hedging activity did not have an effect on fuel expense for the year ended December 26, 2003. Ineffectiveness, or the extent to which changes in the fair values of the fuel swaps did not offset changes in the fair values of the expected fuel purchases, was immaterial.
These instruments qualify, and are designated by management, as cash-flow hedges of variability in expected future cash flows attributable to fluctuations in fuel prices. The fair values of fuel derivative instruments are determined based upon quoted market prices and are recorded on the balance sheet with offsetting adjustments to Accumulated Other Comprehensive Income, a component of Shareholders’ Equity. As of December 26, 2003, this component was $6 million after tax. The amounts recorded in Accumulated Other Comprehensive Income will be recorded in earnings in the period in which the hedged fuel is consumed. Fair value adjustments are noncash transactions, and accordingly, are excluded from the Cash Flow Statement.
The Company is exposed to credit loss in the event of nonperformance by other parties to fuel swap agreements. However, the Company does not anticipate nonperformance by the counterparties.
New Accounting Pronouncements
Statement of Financial Accounting Standard (“SFAS”) 143, “Accounting for Asset Retirement Obligations” was issued in 2001. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. In conjunction with the group-life method of accounting for asset costs, the Company historically accrued crosstie removal costs as a component of depreciation, which is not permitted under SFAS 143. With the adoption of SFAS 143 in fiscal year 2003, CSX recorded pretax income of $93 million, $57 million after tax as a cumulative effect of an accounting change, representing the reversal of the accrued liability for crosstie removal costs. The adoption of SFAS 143 did not have a material effect on prior reporting periods, and the Company does not believe it will have a material effect on future earnings. On an ongoing basis, depreciation expense will be reduced, while labor and fringe and materials, supplies and other expense will be increased.
SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” was issued in December 2002. SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition to Statement 123’s fair value method of accounting for stock-based employee compensation and require disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation. Effective beginning with fiscal year 2003, CSXT has voluntarily adopted the fair value recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” and adopted the disclosure requirements of SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of SFAS 123.” In accordance with the prospective method of adoption permitted under SFAS 148, stock-based awards issued subsequent to fiscal year 2002 are accounted for under the fair value recognition provisions of SFAS 123 utilizing the Black-Scholes valuation method and, accordingly, are expensed.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES, Continued In 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” requires a variable interest entity (“VIE”) to be consolidated by a company that is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns, or both. Interpretation No. 46 also requires disclosures about VIEs that the company is not required to consolidate but in which it has a significant variable interest. Also in 2003, Interpretation 46 (“46R”), a revision to FASB Interpretation No. 46, to clarify some of the provisions of, and to exempt certain entities from Interpretation 46 requirements. Under the new guidance, CSX will consolidate Four Rivers Transportation, Inc. (“FRT”), a short line railroad, into its financial statements beginning December 27, 2003. Presently, FRT is accounted for under the equity method of accounting. The adoption of Interpretation No. 46 will not have a material impact on future reporting periods.
In 2002, the FASB issued Financial Accounting Standard Interpretation (“FASI”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This statement requires that certain guarantees be recorded at fair value on the statement of financial position and additional disclosures be made about guarantees. CSX did not realize a financial statement impact with the adoption of the accounting provisions of this statement in fiscal year 2003 and does not anticipate a future impact. (See Note 15, Commitments and Contingencies.)
Prior-Year Data
Certain prior-year data
havehas been reclassified to conform to the19942003 presentation.- 17 - PAGE 18Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of certain revenues and expenses during the reporting period. Actual results may differ from those estimates. Significant estimates using management judgment are made for the following areas:
1. Casualty, legal and environmental reserves 2. Depreciation policies for its assets under the group-life method 3. Pension and postretirement medical plan accounting
NOTE 2. INTEGRATED RAIL OPERATIONS WITH CONRAIL Background
CSX and Norfolk Southern Corporation (“Norfolk Southern”) acquired Conrail Inc. (“Conrail”) in May 1997. Conrail owns the primary freight railroad system serving the Northeastern United States, and its rail network extends throughout 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 operate over allocated portions of the Conrail lines.
CSXT and Norfolk Southern Railway Company (“Norfolk Southern Railway”), the rail subsidiary of Norfolk Southern, each operate separate portions of the Conrail system pursuant to various operating agreements. 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 (“Shared Asset 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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CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED NOTE 2. PRODUCTIVITY CHARGES.
NOTE 2. INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued In June 2003, CSX, Norfolk Southern Corporation (“NS”) and Conrail jointly filed a petition with the Surface Transportation Board (“STB”) to establish direct ownership and control by CSX’s and NS’ respective subsidiaries, CSXT and Norfolk Southern Railway (“NSR”), of CSX’s and NS’ of their portions of the Conrail system already operated by them separately and independently under various agreements. These portions of the Conrail system are currently owned by Conrail’s subsidiaries, New York Central Lines, LLC (“NYC”) and Pennsylvania Lines, LLC (“PRR”). The ownership of NYC and PRR would be transferred (“spun off”) to CSXT and NSR, respectively. Conrail would continue to own, manage and operate the Shared Asset Areas as previously approved by the STB. STB approval to proceed with the spin-off transaction and a favorable ruling from the IRS qualifying the transaction as a non-taxable disposition were received in November 2003. The transaction remains subject to a number of other conditions.
If all necessary conditions are satisfied, unsecured debt securities of newly formed subsidiaries of CSXT and NSR would be offered in a 42%/58% ratio in exchange for Conrail’s unsecured debentures. The debt securities issued by its respective subsidiary would be fully and unconditionally guaranteed by CSXT or NSR. Upon completion of the proposed transaction, the subsidiaries would be merged into CSXT and NSR, respectively, and the new debt securities thus would become direct unsecured obligations of CSXT or NSR. Conrail’s secured debt and lease obligations will remain obligations of Conrail and are expected to be supported by new leases and subleases which, upon completion of the proposed transaction, would be the direct lease and sublease obligations, also on a 42%/58% ratio, of CSXT and NSR. CSXT will record this transaction at fair value based on the results of an independent valuation.
CSX, NSR and Conrail are working to complete all necessary steps to consummate the spin-off transaction in 2004. Upon consummation of the proposed transaction, CSX’s investment in Conrail will no longer include the amounts related to NYC and PRR. Instead the assets and liabilities or NYC will be reflected in their respective line items in CSX’s consolidated balance sheet. Conrail will continue to own, manage and operate the Shared Asset Areas.
Accounting and Financial Reporting Effects
CSXT’s operating revenue includes revenue from traffic moving on Conrail property. Operating expenses include costs incurred to handle such traffic and operate the Conrail lines. Operating expense includes an expense category, “Conrail Rents, Fees and Services,” which reflects:
1. Right of way usage fees and equipment rental payments to Conrail 2. Transportation, switching, and terminal service charges provided by Conrail in the Shared Asset Areas that Conrail operates for the joint benefit of CSX and Norfolk Southern As a result of the integration, a number of employees’ positions at Conrail were eliminated and certain duplicate facilities were closed. Under the agreements among the parties, CSXT and Norfolk Southern Railway assumed various obligations related to these actions. During 2003, 2002, and 2001, CSXT incurred approximately $18, $30, and $35 million, respectively, of costs related to lease payments on certain Conrail facilities no longer being used after the integration, and separation and relocation costs of Conrail employees. These costs are reflected in “Materials, Supplies and Other” expense in the consolidated statement of earnings.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued Transactions With Conrail
As listed below, CSXT has amounts payable to Conrail, representing expenses incurred under the operating, equipment and shared area agreements.
December 26, December 27, (Dollars in Millions) 2003 2002 Payable to Conrail $ 71 $ 69
The agreement under which CSXT operates its allocated portion of the Conrail route system has an initial term of 25 years and may be renewed at CSXT’s option for two five-year terms. Operating fees paid to Conrail under the agreement are subject to adjustment every six years based on the fair value of the underlying system. Lease agreements for the Conrail equipment operated by CSXT cover varying terms. CSXT is responsible for all costs of operating, maintaining, and improving the routes and equipment under these agreements.
On December 26, 2003, future minimum payments to Conrail under the operating, equipment and shared area agreements were as follows:
Future Minimum (Dollars in Millions) Payments 2004 $ 260 2005 247 2006 236 2007 229 2008 224 Thereafter 3,118
Total $ 4,314
In the
fourthevent of the consummation of the spin-off, the future minimum payments will be reduced.NOTE 3. RESTRUCTURING
In November 2003, the CSX Corporation (“CSX”), the Company’s sole shareholder, announced a management restructuring plan to streamline the structure at a number of its companies, eliminate organizational layers and realign certain functions. The initiative will reduce the non-union workforce by 600 to 750 positions over the last quarter of
1991, CSXT2003 and the first half of 2004. As of December 26, 2003, 16 employees have been terminated under this program. The Company recorded an initial charge related to this reduction of $25 million in 2003, to record the lowest amount of expense to be incurred under this program. The total estimated cost of the program is expected to be in the range of $45 million to $60 million. The majority of separation benefits will be paid from CSX’s qualified pension plans, with the remainder being paid from general corporate funds.Also in 2003, CSX recorded a charge of $10 million restructuring charge related to another workforce reduction program. Substantially all of this amount had been paid out at December 27, 2003.
In 2003, CSX recorded a $22 million pretax
chargecredit related toprovidea favorable change in estimate related to the 1991 and 1992 separation plans. These plans provided forthe estimated costs of implementing work forceworkforce reductions, improvements in productivity and other cost reductions. Thecharge amounted to $647 million on a pretax basisreduction in estimate for these plans results from lower railroad retirement taxes andreduced 1991 net earnings by $409 million. Inother benefits than had been included in thesecond quarter of 1992, CSXT recorded a charge principally to recognize the estimated additional costs of buying out certain trip-based compensation elements paid to train crew employees. These compensation elements were based upon collective bargaining agreements with train crew employees. The additional pretax charge amounted to $664 million and reduced net earnings for 1992 by $427 million. Theinitial $1.3 billionin combined charges includes $1.2 billion for reductions from three- to two-member train crews and for buying out productivity funds and short-crew allowances. CSXT has reached labor agreements across all portions of its rail system where it is allowed to operate trains with two- member crews. The trip-based compensation amounts vary by labor agreement. Upon ratificationcharge.A net $13 million restructuring charge was recorded representing the cost of the
labor agreements, each affected employee received a cash payment. Each employee then elected to receiverestructuring initiatives offset by reductions in 1991/1992 separation reserves. The associated expense is included in operating expense on theremainder of their negotiated settlement in the form of a lump-sum payment or deferral to be paid upon resignation, retirement or death. CSXT expects 90% of the payments will have been made by the year 2019. As of December 30, 1994, payments totaling $637 million have been recordedIncome Statement asa reduction of the aggregate liabilities for the productivity charges. The remaining liability consists of $376 million for employee separations and associated costs (see Note 9). Based upon current negotiated agreements, CSXT expects the remaining liability of $376 million to be adequate. NOTE 3. SUPPLEMENTAL STATEMENT OF EARNINGS FINANCIAL DATA. 1994 1993 1992 ------ ------ ------ Selling, General and Administrative Expense (a) $849 $802 $673 ==== ==== ==== (a) Selling, general and administrative expense during 1994 increased $47 million over 1993 and $176 million over 1992 primarily due to an increase in the management service fee charged by CSX and increases in certain employee related incentive costs. - 18 - PAGE 19“Restructuring Charge – Net.”-33-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED NOTE 4. OTHER INCOME. 1994 1993 1992 ---- ---- ---- Interest Income -
NOTE 4. SUPPLEMENTAL CONSOLIDATED INCOME STATEMENT FINANCIAL DATA Operating expense includes the following:
Fiscal Years Ended (Dollars in Millions) 2003 2002 2001 Selling, General and Administrative Expense $ 828 $ 854 $ 911
NOTE 5. OTHER INCOME (EXPENSE) Other
$ 20 $ 16 $ 18 Interest Income - CSX Cash Management Plan 13 12 9 Gain (Loss) on Investment Transactions (26) 26 --- Gain on South Florida Track Sale (a) 91 20 7 Fees Related to Accounts Receivable Sold (45) (44) (17) Miscellaneous (4) (19) (16) ---- ---- ---- Total $ 49 $ 11 $ 1 ==== ==== ==== (a) In May 1988, CSXT sold approximately 80 miles of track and right of way in Broward, Dade and Palm Beach counties to the state of Florida for $264 million subject to annual appropriations which were accounted for on an installment basis. On December 1, 1994, the state of Florida elected to satisfy its remaining unfunded obligation issued in 1988 to consummate the purchase of track and right of way. The transaction resulted in cash proceeds of $102 million and a pretax gain of $69 million. The scheduled payment resulted in a $22 million gain in 1994. NOTE 5. INCOME TAXES. Effective January 1, 1993, CSXT adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109 superseded SFAS No. 96, "Accounting for Income Taxes," which CSXT adopted in 1987. SFAS No. 109 requires that deferredincometax assets and liabilities be classified as current or non-current based upon the classification(expense) consists of therelated asset or liability for financial reporting. Net earnings for 1993 were not impacted by the adoptionfollowing:
Fiscal Years Ended (Dollars in Millions) 2003 2002 2001 Income from Real Estate Operations $ 64 $ 90 $ 83 Discount on Sales of Accounts Receivable (36 ) (75 ) (78 ) Miscellaneous — — (10 )
Total $ 28 $ 15 $ (5 )
Gross Revenue from Real Estate Operations $ 105 $ 119 $ 114
NOTE 6. INCOME TAXES The breakdown of
SFAS No. 109. As permitted under the new rules, prior-year financial statements have not been restated. Incomeincome tax expense (benefit)informationbetween current and deferred is as follows:1994 1993 1992 ------- ------- ------- Current Federal $106 $ 47 $ 17 State and Foreign 12 4 2 ---- ---- ---- Total Current 118 51 19 ---- ---- ---- Deferred Federal 164 166 (48) State 7 17 (4) ---- ---- ---- Total Deferred 171 183 (52) ---- ---- ---- Total Expense (Benefit) $289 $234 $(33) ==== ==== ==== - 19 - PAGE 20
Fiscal Years Ended (Dollars in Millions) 2003 2002 2001 Current: Federal $ (52 ) $ (22 ) $ (11 ) State and Foreign 3 — 1
Total Current $ (49 ) $ (22 ) $ (10 )
Deferred: Federal $ 123 $ 180 $ 117 State and Foreign 3 25 14
Total Deferred $ 126 $ 205 $ 131
Total Expense $ 77 $ 183 $ 121
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED NOTE 5.
NOTE 6. INCOME TAXES, Continued Income tax expense
(benefit)reconciled to the tax computed at statutoryraterates is as follows:1994 1993 1992 ----------- ----------- ----------- Tax at Statutory Rates $274 35% $190 35 % $(17) (34)% State Income Taxes 13 2 13 2 (2) (4) Prior Years' Income Taxes --- -- (15) (3) (10) (20) Increase in Statutory Rate (a) --- -- 46 9 --- -- Other 2 -- --- -- (4) (9) ---- -- ---- -- ---- -- Total Expense (Benefit) $289 37% $234 43 % $(33) (67)% ==== == ==== == ==== == (a) CSXT revised its annual effective tax rate in 1993 to reflect the change in the federal statutory rate from 34 to 35 percent. The effect of this change was to increase deferred income tax expense by $46 million related to applying the newly enacted statutory income tax rate to deferred tax balances as of January 1, 1993.
Fiscal Years Ended (Dollars in Millions) 2003 2002 2001 Tax at Statutory Rates $ 76 35 % $ 168 35 % $ 113 35 % State Income Taxes 4 2 % 16 3 % 10 3 % Other (3 ) (1) % (1 ) — % (2 ) (1 )%
Total Expense $ 77 36 % $ 183 38 % $ 121 37 %
The significant components of deferred tax assets and liabilities
after consideringinclude amounts associated with:
December 26, 2003 December 27, 2002 (Dollars in Millions) Assets Liabilities Assets Liabilities Productivity/Restructuring Charges $ 81 $ — $ 90 $ — Employee Benefit Plans 109 — 105 — Accelerated Depreciation — 3,880 — 3,656 Other 542 333 384 237
Total $ 732 $ 4,213 $ 579 $ 3,893
Net Deferred Tax Liabilities $ 3,481 $ 3,314
The primary factors in the
adoption of SFAS No. 109 include: December 30, December 31, January 1, 1994 1993 1993 ------ ------ ------ Deferred Tax Assets Productivity Charge $ 227 $ 289 $ 356 Employee Benefit Plans 151 167 143 Investment Tax Credits --- 100 126 Alternative Minimum Tax Credits 166 168 148 Other 268 215 206 ------ ------ ------ Total 812 939 979 ------ ------ ------ Deferred Tax Liabilities Accelerated Depreciation 2,600 2,556 2,455 Other 217 217 173 ------ ------ ------ Total 2,817 2,773 2,628 ------ ------ ------ Net Deferred Tax Liabilities $2,005 $1,834 $1,649 ====== ====== ====== In addition tochange in year-end net deferred income tax liability balances are the annual provision for deferred income tax expensethe change in the year-end net deferred income tax liability balances included the income tax benefit for the minimum pension liability adjustments in 1993. - 20 - PAGE 21 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED In late 1994, an additional income tax payment was made for $50 million for prepaymentand cumulative effects of1995 tax liabilities. Income tax payments during 1994, 1993 and 1992 totaled $192 million, $80 million and $56 million, respectively.accounting changes.CSXT and its subsidiaries are included in the consolidated federal income tax return filed by CSX. The consolidated current federal income tax expense or benefit is allocated to CSXT and its subsidiaries as though CSXT had filed a separate consolidated federal return.
Examinations of the federal income tax returns of CSX
and its principal subsidiarieshave been completed through1987. Returns1993. Tax returns for1988-19901994 through 2002 are currently under examination. Management believes adequate provision has been made for any adjustments that might be assessed.NOTE 6. RELATED PARTIES. Cash and cash equivalents at
NOTE 7. RELATED PARTIES At December
30, 199426, 2003 and December31, 1993, includes $510 million27, 2002, CSXT had $2.5 billion and$336 million,$1.3 billion deficit balances, respectivelyrepresenting amounts due from CSX for CSXT'srelating to CSXT’s participation in the CSX cash management plan. The amount 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. CSXT and CSXisare committed to repay all amounts due each other on demand should circumstances require. The companies are charged for borrowings or compensated for investments based on returns earned by the planportfolio. Effective January 1, 1994,portfolio, which was 1.21% and 1.46% at December 26, 2003 and December 27, 2002, respectively. Interest expense related to this plan was $42 million, $33 million and $30 million in 2002, 2002 and 2001, respectively.-35-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. RELATED PARTIES, Continued Detail of Related Party Service Fees (as included in the Consolidated Income Statement)
Fiscal Years Ended (Dollars in Millions) 2003 2002 2001 CSXI $ (399 ) $ (365 ) $ (371 ) CSX Management Service Fee 241 275 237 CSX Technology 199 208 218 TDSI 53 43 51 TRANSFLO 83 79 51 CTRC — (53 ) —
Total Related Party Service Fees $ 177 $ 187 $ 186
Related Party Service Fees consists of amounts related to:
• CSX Intermodal Inc. (“CSXI”) Reimbursements – Reimbursement from CSXI under an operating agreement for costs incurred by the Company related to intermodal operations. This reimbursement is based on an amount which approximates actual costs. The Company also collects certain revenue on behalf of CSXI under the operating agreement. • CSX Management Service Fee – A management service fee charged by CSX as compensation for certain corporate services provided to the Company. These services include, but are not limited to, the areas of human resources, finance, administration, benefits, legal, tax, internal audit, corporate communications, risk management and strategic management services. The fee is calculated as a percentage of CSXT’s revenue. • CSX Technology Inc. (“CSX Technology”) Charges – Data processing charges from CSX Technology for the development, implementation and maintenance of computer systems, software and associated documentation for the day-to-day operations of the Company. These charges are based on a mark-up of direct costs. • Total Distribution Services Inc. (“TDSI”) Charges – Charges from TDSI for services provided to CSXT at automobile ramps. These charges are calculated based on direct costs. • TRANSFLO Terminal Services Inc. (“TRANSFLO”) Charges – Charges from TRANSFLO for services provided to CSXT at bulk commodity facilities. These charges are calculated based on direct costs. • CSX Trade Receivables Corporation (“CTRC”) Reimbursement – The Company charged CTRC for accounts receivable reserves recorded by the Company related to receivables sold to CTRC. CSX Technology, CSXI, TDSI, and TRANSFLO are wholly-owned subsidiaries of CSX.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. RELATED PARTIES, Continued Detail of Due to Affiliate (as included in Consolidated Balance Sheet)
December 26, December 27, (Dollars in Millions) 2003 2002 CSXI $ 49 $ 25 CSX Technology 55 41 TDSI 12 5 TRANSFLO 15 8 CTRC 1 5 CSX Insurance 115 115 Other 4 1
Total Due to Affiliate $ 251 $ 200
CSXT
entered into a loan agreement with Customized Transportation, Inc. ("CTI"and CSX Insurance Company (“CSX Insurance”), a wholly-owned subsidiary of CSX, have entered into a loan agreement wherebyCTI borrowed $40CSXT may borrow up to $125 million fromCSXT.CSX Insurance. The loan is payable in full on demand. At December 26, 2003, and December 27, 2002, $115 million was outstanding under the agreement. Interest on the loan isdue from CTI semi- annually commencing June 30, 1994, withpayable monthly at 0.45% over theentire principal amount due on January 1, 2001.LIBOR rate, and was 1.21% at December 26, 2003 and 1.46% at December 27, 2002. Interestincomeexpense related to theCTIloan was $2million. During 1992, CSXT entered into an agreement with CTRC to sell, on a revolving basis, without recourse, all existing accounts receivable to CTRC. In 1993, this agreement was amended to sell only freight accounts receivable to CTRC. As ofmillion, $3 million and $6 million for the fiscal years ended December30, 199426, 2003, December 27, 2002, and December31, 1993,28, 2001, respectively.CSXT
had sold $579 million and $556 million, respectively, of accounts receivable to CTRC. During 1994, CSXT repaid the remaining formal long-term borrowings fromparticipates with CSXoutstanding at December 31, 1993. Interest expense on borrowings from CSX was $3 million, $9 million and $11 million in 1994, 1993 and 1992, respectively. During 1989, CSXT's pension plan for salaried employees was merged with the CSX Corporation Plan, and all assets of CSXT's plan were transferred to the CSX merged plan. Since the plans were merged, CSX has allocated to CSXT a portion of the net pension expense for the CSX Corporation Plan based on CSXT's relative level of participation in the merged plan which considers the assets and personnel previously in the CSXT plan. The allocated expense from the CSX Corporation Plan amounted to $42 million in 1994, $32 million in 1993 and $23 million in 1992. - 21 - PAGE 22 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOTE 6. RELATED PARTIES, Continued Included in Materials, Supplies and Other expense are amounts related to a management service fee charged by CSX, data processing related charges from CSX Technology, Inc., and the reimbursement, under an operating agreement, from CSX Intermodal, Inc. (CSXI), for costs incurred by CSXT related to intermodal operations. The management service fee charged by CSX represents compensation for certain corporate services provided to CSXT. These services include 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 data processing related charges are compensation to CSX Technology, Inc. for the development, implementation and maintenance of computer systems, software and associated documentation for the day to day operations of CSXT. CSX Technology and CSXI are wholly-owned subsidiaries of CSX. Materials, Supplies and Other expense includes net expense of $192 million, $214 million and $128 million in 1994, 1993 and 1992, respectively, relating to the above arrangements. The $86 million increase from 1992 to 1993 was predominately the result of an increase in the management fee charged by CSX and a one-time intercompany transfer to CSXI in 1992. During 1991, CSXT entered into an operating lease agreement with CSXI for 3,400 rebuilt coal gondola cars. The cars, which were previously owned and rebuilt by CSXT, were sold to CSXI for $117 million which resulted in no gain. These cars are presently being leased by CSXT through March 2006. In addition, CSXT is leasing 65 locomotives from CSXI pursuant to a pre-existing operating lease agreement acquired by CSXI from a third party at year-end 1992. These locomotives are being leased by CSXT through May 2008. The minimum lease payments for the locomotives and coal gondola cars discussed above are approximately $18 million annually. These lease payments are included in the minimum lease payments as discussed in Note 13. During 1988, CSXT participated with Sea-Land Service, Inc. (Sea-Land)Container Leasing, LLC “CCL”, a wholly-owned subsidiary of CSX, infoursale-leaseback arrangements. Under these arrangements,Sea-LandCCL sold equipment to a third party and CSXT leased the equipment and assigned the lease toSea-Land. Sea-LandCCL. CCL is obligated for all lease payments and other associated equipment expenses. IfSea-LandCCL defaults on its obligations under the arrangements, CSXT would assume the asset lease rights and obligations of$161approximately $23 million at December30, 1994, under the arrangements. CSX purchases futures and options contracts26, 2003. These leases were either assumed by Maersk asa partial hedge against fluctuations in fuel oil prices on behalfpart ofCSXT and other CSX subsidiaries. Gains and losses related to hedges of existing assets or liabilities are deferred and recognized over the expected remaining lifeits purchase of therelated assetCSX international liner business orliability. Gainswere assumed by Horizon Lines LLC (formerly CSX Lines) as part of its ongoing domestic shipping business. CSXT believes that Maersk andlosses relatedHorizon Lines will fulfill their contractual commitments with respect tohedgessuch leases and that CSXT will have no further liability for those obligations.
NOTE 8. ACCOUNTS RECEIVABLE Sale of
anticipated transactions are also deferredAccounts ReceivableDuring 2003, CSXT discontinued the sale of accounts receivable, which resulted in an $869 million increase in accounts receivable and
recognized in incomeincreased borrowings from CSX. Prior to 2003, CSXT sold, without recourse, a revolving pool of accounts receivable to CSX Trade Receivables Corporation (“CTRC”), a bankruptcy-remote entity wholly-owned by CSX Corporation. CTRC transferred the accounts receivable to a master trust and caused the trust to issue two series of certificates representing undivided interests in thesame period asreceivables. The certificates issued by thehedged transaction. CSX hadmaster trust were sold to investors, and the proceeds from those sales were paid to CSXT.There were no
significant hedging or derivative financial instruments employedaccounts receivable sold outstanding under this agreement at December30, 199426, 2003, and $914 million outstanding at December31, 1993. - 22 - PAGE 2327, 2002.Net losses associated with the sales of receivables are as follows:
Fiscal Year Ended (Dollars in Millions) 2003 2002 2001 Discounts on Accounts Receivable Sold $ 36 $ 75 $ 78
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED NOTE 7. PROPERTIES. Balance Retirement, Balance at Beginning Sales and at End
NOTE 8. ACCOUNTS RECEIVABLE, Continued CSXT retained responsibility for servicing accounts receivables held by the master trust. The average servicing period was approximately one month. No servicing asset or liability was recorded since the fees CSXT received approximated its related costs.
The Company maintains an allowance for doubtful accounts based on the expected collectibility of
Year Additions Other Changesall accounts receivable. The allowance for doubtful accounts is included in the balance sheet as follows:
(Dollars in Millions) December 26, December 27, 2003 2002 Allowance for Doubtful Accounts $ 27 $ 36
NOTE 9. PROPERTIES Properties consist of
Year ------------ --------- ------------- ------- 1994 Property: Transportation Road $ 9,026 $ 394 $(224) $ 9,196 Equipment 3,615 254 (143) 3,726 ------- ------ ----- ------- 12,641 648 (367) 12,922 Non-Transportation 63 28 (2) 89 ------- ------ ----- ------- Total $12,704 $ 676 $(369) $13,011 ======= ====== ===== ======= Accumulated Depreciation: Transportation Road $ 2,617 $ 211 $(219) $ 2,609 Equipment 1,452 160 (111) 1,501 ------- ------ ----- ------- 4,069 371 (330) 4,110 Non-Transportation 4 --- --- 4 ------- ------ ----- ------- Total $ 4,073 $ 371 $(330) $ 4,114 ======= ====== ===== ======= Properties - December 30, 1994 $ 8,897 ======= - 23 - PAGE 24 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOTE 7. PROPERTIES, Continued Balance Retirement, Balance at Beginning Sales and at End of Year Additions Other Changes of Year ------------ --------- ------------- ------- 1993 Property: Transportation Road $ 9,074 $ 323 $(371) $ 9,026 Equipment 3,567 243 (195) 3,615 ------- ------ ----- ------- 12,641 566 (566) 12,641 Non-Transportation 61 3 (1) 63 ------- ------ ----- ------- Total $12,702 $ 569 $(567) $12,704 ======= ====== ===== ======= Accumulated Depreciation: Transportation Road $ 2,781 $ 209 $(373) $ 2,617 Equipment 1,453 162 (163) 1,452 ------- ------ ----- ------- 4,234 371 (536) 4,069 Non-Transportation 5 --- (1) 4 ------- ------ ----- ------- Total $ 4,239 $ 371 $(537) $ 4,073 ======= ====== ===== ======= Properties - December 31, 1993 $ 8,631 ======= NOTE 8. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES. Dec. 30, Dec. 31, 1994 1993 ------ ------ Trade Accounts Payable $ 511 $ 457 Labor and Fringe Benefits(a) 374 337 Interest, Taxes and Other 141 180 Casualty Reserves 133 137 ------ ------ Total $1,159 $1,111 ====== ====== (a) Labor and Fringe Benefits includes separation liabilities of $10 million for 1994 and $26 million for 1993. - 24 - PAGE 25 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOTE 9. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES.the following:
December 26, 2003 December 27, 2002 Accumulated Accumulated (Dollars in Millions) Cost Depreciation Net Cost Depreciation Net Road $ 12,147 $ 2,683 $ 9,464 $ 11,541 $ 2,498 $ 9,043 Equipment 5,686 2,225 3,461 5,671 2,225 3,446 Other 134 8 126 142 7 135
Total $ 17,967 $ 4,916 $ 13,051 $ 17,354 $ 4,730 $ 12,624
NOTE 10. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES Activity relating to casualty, environmental and other reserves is as follows:
Casualty Separation Environmental (Dollars in Millions) Reserves Liabilities Reserves Total Balance December 29, 2000 $ 457 $ 257 $ 41 $ 755 Charged to Expense 155 — 1 156 Payments (177 ) (14 ) (10 ) (201 )
Balance December 28, 2001 $ 435 $ 243 $ 32 $ 710
Charged to Expense 166 — 18 184 Payments (206 ) (33 ) (15 ) (254 )
Balance December 27, 2002 $ 395 $ 210 $ 35 $ 640
Charged to Expense 228 35 23 286 Change in Estimate 229 (22 ) — 207 Payments (207 ) (28 ) (13 ) (248 )
Balance December 26, 2003 $ 645 $ 195 $ 45 $ 885
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued Reserve balances are as follows:
December 26, December 27, (Dollars in Millions) 2003 2002 Current Reserves: Casualty $ 142 $ 143 Separation 39 15 Environmental 30 15
Total Current Reserves $ 211 $ 173 Long-term Casualty, Environmental and Other Reserves 674 467
Total Casualty, Environmental and Other Reserves $ 885 $ 640
Casualty
Environmental Separation Reserves(a) Reserves(a) Liabilities(a) ----------- ------------ ----------- Balance 12/31/92 $ 369 $ 77 $ 917 ChargedReservesCasualty reserves represent accruals for the uninsured portion of occupational injury and personal injury claims. In the third quarter of 2003, the Company changed its estimate of casualty reserves to
Expenseinclude an estimate of incurred but not reported claims for asbestos and other occupational injuries to be received over the next seven years. Other occupational claims include allegations of exposure to certain materials in the work place, such as solvents and diesel fuel, or alleged physical injuries, such as carpal tunnel syndrome or hearing loss.In conjunction with the 2003 change in estimate, the Company recorded a charge of $229 million, $143 million after tax to increase its provision for these claims. Approximately $138 million relates to asbestos claims.
Asbestos and Other
Additions 189(b) 63 --- PaymentsOccupational InjuriesDuring 2003, the Company retained third party professionals to work with it to project the number of asbestos and
Other Reductions (179) (9) (295)(c) ----- ----- ----- Balance 12/31/93 379 131 622 Chargedother occupational injury claims toExpensebe received over the next seven years andOther Additions 159(b) 32 --- Paymentsthe related costs. Based on this analysis the Company established reserves for the probable andOther Reductions (184) (23) (228)(c) ----- ----- ----- Balance 12/30/94 $ 354 $ 140 $ 394 ===== ===== ===== (a) Balances include current portionreasonably estimable asbestos and other occupational injury liabilities.The methodology used by the third party to project future occupational injury claims was based largely on CSX’s recent experience, including claim-filing and settlement rates, injury and disease mix, open claims and claim settlement costs. However, projecting future occupational injury claims and settlements costs is subject to numerous variables that are difficult to predict. In addition to the significant uncertainties surrounding the number of
casualty and environmental reserves and separation liabilities, respectively, of $133 million, $20 million and $14 million at December 30, 1994 and $137 million, $1 million and $26 million at December 31, 1993. (b) Casualty reserves are estimated based upon the first reporting of an accident or personal injury to an employee. Liabilities for accidents are based upon field reports and liabilities for personal injuries are based uponclaims that might be received, other variables, including the type and severity of the injury or disease alleged by each claimant, the long latency period associated with exposure, dismissal rates, costs of medical treatment, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case and theuseimpact ofcurrent trendschanges in legislative or judicial standards, may cause actual results to differ significantly from estimates. Furthermore, predictions with respect to these variables are subject to greater uncertainty as the projection period lengthens. In light of these uncertainties, CSX believes that seven years is the most reasonable period for estimating future claims, andhistorical data. (c) Includesthat claims received after that period are not reasonably estimable.CSX increased its reserve for asbestos and other occupational claims by a net $203 million to cover the
transferestimate of$156incurred but not reported claims to be filed during the next seven years. Reflecting the additional provisions, CSX’s reserve for asbestos and other occupational claims on an undiscounted basis amounted to $331 millionin 1994at December 26, 2003, compared toa separation-related pension obligation and the reallocation of $95$161 millionin 1993 to other negotiated settlements contemplated by the 1991 Productivity Charge. The transfer for 1994 represents the future cost of a pension obligation for certain train crew employees arising from the 1992 buyout of trip-based compensation (see Note 2). The 1993 reallocation adjusted for an over accrual of separation liabilities and an under accrual of amounts recorded for other negotiated settlements. - 25 - PAGE 26at December 27, 2002.-39-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED NOTE 10. LONG-TERM DEBT. Type Average (Maturity Dates) Interest Rates 1994 1993 - ----------------- -------------- ------ ------ Equipment Obligations (1995-2009) 9% $ 381 $ 417 Mortgage Bonds (1998-2003) 3% 78 84 Other Obligations (1995-2021) 8% 221 179 ------ ------ Total 7% 680 680 Less Debt Due Within One Year 89 87 ------ ------ Total Long-Term Debt $ 591 $ 593 ====== ====== CSXT has long-term debt maturities during
NOTE 10. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued A summary of existing claims activity is as follows:
Fiscal Year Ended Dec. 26, 2003 Dec. 27, 2002 Asserted Claims: Open Claims - Beginning of Period 8,788 9,893 New Claims Filed 2,305 2,075 Claims Settled (3,338 ) (2,875 ) Claims Dismissed (360 ) (305 )
Open Claims - End of Period 7,395 8,788
Estimates for these claims are subject to significant uncertainty relating to the outcomes of negotiated settlements and other developments. As facts and circumstances change, the Company may have to change its estimates, and changes could have a material impact on the Company’s financial results. Such events as adverse verdicts, catastrophic accidents and legal settlements will cause the Company to revise its estimated liabilities, which the Company reviews and appropriately adjusts quarterly.
Personal Injury
During 2003, CSX retained an independent actuarial firm to assess the value of CSX’s personal injury portfolio. This firm’s methods and procedures yielded a slightly higher valuation for personal injury claims than previously recognized by CSX due to a higher estimated cost for adverse development. Utilizing the analysis provided, CSX increased its reserves for alleged personal injury claims by $26 million.
Separation Liability
Separation liabilities at December 26, 2003 relate to productivity charges recorded in 1991 and 1992 to provide for the estimated costs of implementing workforce reductions, improvements in productivity and other cost reductions. The remaining liabilities are expected to be paid out over the next
five years aggregating $8915 to 20 years.In 2003, the Company recorded a $22 million pretax credit related to revised estimates for railroad retirement taxes and the amount of benefits that will be paid to individuals under the $1.3 billion charges initially recorded in
1995, $68 million in 1996, $49 million in 1997, $47 million in 1998 and $63 million in 1999. Substantially all of the properties and certain other assets of CSXT and its subsidiaries are pledged as security for various long-term debt issues. Interest payments, net of amounts capitalized, totaled $53 million, $74 million and $85 million, respectively, for 1994, 19931991 and 1992.NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS. The following table presentsThis amount is netted with separation expenses related to thecarrying amounts and estimated fair values of financial instruments2003 management restructuring, asrequired by SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchangeddiscussed ina current transaction between willing parties. 1994 1993 ---------------- ---------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- Assets: Cash and Cash Equivalents $452 $452 $272 $272 Accounts and Notes Receivable 93 93 98 98 Liabilities: Accounts Payable 511 511 457 457 Long-Term Debt 680 650 680 714 - 26 - PAGE 27Note 3.-40-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUED NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued The following methods and assumptions were used by the company in estimating fair values for financial instruments: Cash and Cash Equivalents The carrying amounts approximate fair value because of the short-term maturity of the instruments. Current Assets and Current Liabilities The carrying amounts reported in the statement of financial position for current assets and current liabilities qualifying as financial instruments approximate their fair values. Long-Term Debt The fair values of the company's long-term debt have been estimated using discounted cash flow analyses based upon the company's current incremental borrowing rates for similar types of borrowing arrangements. NOTE 12. EMPLOYEE BENEFIT PLANS. Pension Plans CSX and its subsidiaries, including CSXT, have defined benefit pension plans principally for salaried employees. The plans provide for eligible employees to receive benefits primarily based on years of service and compensation rates near retirement. Contributions to the plans are made on the basis of not less than the minimum funding standards set forth in the Employee Retirement Income Security Act of 1974, as amended. See Note 6 for the allocated pension expense from the CSX Corporation Plan. Savings Plans CSXT has established savings plans for virtually all full-time salaried employees and certain employees covered by collective bargaining units of CSXT and subsidiary companies. Eligible employees may contribute from 1% to 15% of their annual compensation in 1% multiples to these plans. CSXT matches eligible employees' contributions in an amount equal to the lesser of 50% of each participating employees' contribution or 3% of their annual compensation. In addition CSXT contributes fixed amounts for each participating employee covered by a collective bargaining agreement. Expense for these plans was $22 million for each of the years 1994, 1993 and 1992. - 27 - PAGE 28 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOTE 12. EMPLOYEE BENEFIT PLANS, Continued Other Post-Retirement Benefit Plans In addition to the CSX defined benefit pension plans, CSXT participates in two defined benefit post-retirement plans along with CSX and other affiliates which cover most full-time salaried employees. One plan provides medical benefits and another provides life insurance benefits. The post-retirement health care plan is contributory, with retiree contributions adjusted annually, and contains other cost-sharing features such as deductibles and coinsurance. The accounting for the health care plan anticipates future cost-sharing changes to the written plan that are consistent with the company's expressed intent to increase the retiree contribution rate annually for the expected medical inflation rate for that year. The life insurance plan is non- contributory. The company's current policy is to fund the cost of the post- retirement health care and life insurance benefits on a pay-as-you-go basis, as in prior years. The following table shows the two plans' combined status reconciled with the amounts recognized in CSXT's statement of financial position: Life Medical Insurance Plan Plan 1994 1993 1994 1993 ---- ---- ---- ---- Accumulated Post-Retirement Benefit Obligation: Retirees $144 $154 $61 $67 Fully Eligible Active Participants 12 13 2 2 Other Active Participants 18 20 1 2 ---- ---- --- --- Accumulated Post-Retirement Benefit Obligation 174 187 64 71 Unrecognized Prior Service Cost 13 17 4 4 Unrecognized Net Loss (22) (40) (5) (10) ---- ---- --- --- Net Post-Retirement Benefit Obligation $165 $164 $63 $65 ==== ==== === === Net periodic post-retirement benefit expense for 1994, 1993 and 1992 was $21 million, $16 million and $22 million, respectively. - 28 - PAGE 29 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOTE 12. EMPLOYEE BENEFIT PLANS, Continued Other Post-Retirement Benefit Plans, Continued The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) for the medical plan is 11% for 1994-1995 and is assumed to decrease gradually to 5.5% by 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated post-retirement benefit obligation for the medical plan as of December 31, 1994 by 9%, and the aggregate of the service and interest cost components of net periodic post-retirement benefit expense for 1994 by $3 million. The weighted-average discount rate used in determining the accumulated post-retirement benefit obligation was 8.25% and 7.25% at December 30, 1994 and December 31, 1993, respectively. Other Plans Under collective bargaining agreements, the company participates in a number of union-sponsored, multi-employer benefit plans. Payments to these plans are made as part of aggregate assessments generally based on hours worked, tonnage moved or a combination thereof. The administrators of the multi- employer plans generally allocate funds received from participating companies to various health and welfare benefit plans and pension plans. Current information regarding such allocations has not been provided by the administrators. Total contributions of $125 million, $139 million and $125 million were made to these plans in 1994, 1993 and 1992, respectively. Certain officers and key employees of CSXT participate in stock purchase, performance and award plans of CSX. CSXT is allocated its share of any cost to participate in these plans. NOTE 13. SUMMARY OF COMMITMENTS AND CONTINGENCIES. Lease Commitments CSXT leases equipment under agreements with terms up to 20 years. Non-cancelable, long-term leases generally include provisions for maintenance, and options to purchase at fair value and to extend the terms. At December 30, 1994, minimum equipment rentals under non-cancelable operating leases totaled approximately $178 million for 1995, $171 million for 1996, $173 million for 1997, $176 million for 1998, $160 million for 1999 and $1.5 billion thereafter. Rent expense on equipment operating leases, including net daily rental charges on railroad operating equipment of $220 million, $214 million and $204 million in 1994, 1993 and 1992, respectively, amounted to $392 million in 1994, $387 million in 1993 and $383 million in 1992. Deferred gains arising from sale-leaseback transactions are being amortized over periods not exceeding 20 years and have reduced rent expense by $6 million in 1994, 1993 and 1992, respectively. - 29 - PAGE 30 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOTE 13. SUMMARY OF COMMITMENTS AND CONTINGENCIES, Continued Purchase Commitment CSXT entered into an agreement to purchase 300 locomotives. This large single order covers CSXT's normal locomotive replacement needs for 1994 through 1997. This purchase agreement will introduce alternating current traction technology to CSXT's locomotive fleet. CSXT took delivery of 50 direct current and 30 alternating current locomotives in 1994, and the remaining 220 alternating current units will be delivered during 1995-1997. Contingent Liabilities and Long-Term Operating Agreements CSXT and its subsidiaries are contingently liable individually and jointly with others principally as guarantors of long-term debt and obligations, primarily related to leased properties, joint ventures and joint facilities. These contingent obligations amounted to approximately $185 million at December 30, 1994. CSXT has various long-term railroad operating agreements that allow for exclusive operating rights over various railroad lines. Under these agreements, CSXT is obligated to pay usage fees of approximately $10 million annually. The terms of these agreements range from 30 to 40 years.
NOTE 10. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued Environmental
CSXT is a party
into various proceedings, including administrative and judicial proceedings, involving private parties and regulatory agencies related to environmental issues. CSXT has been identified as a potentially responsible partyin a number of investigations and actions relating to 106(“PRP”) at approximately 260 environmentally impaired sites,thatmany of which are, or may be, subject to remedial action under the Federal SuperfundStatute ("Superfund"statute (“Superfund”) orcorrespondingsimilar state statutes.ManyA number of these proceedings are based on allegations that CSXT, or its railroad predecessors, sent hazardous substances to the facilities in question for disposal.SuchSome of the proceedings involve property formerly or currently owned by CSXT or its railroad predecessors. Proceedings arising under Superfund orcorrespondingsimilar state statutestypicallycan involve numerous other companies who generated the wastegeneratorsor owned or operated the property anddisposal companies and seek to allocate or recoverinvolve the allocation of liability for costs associated with site investigation and cleanup, which could be substantial.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 potentially responsible parties, where available, and existing technology, laws and regulations. CSXT's best estimate of the allocation method and percentage of liability when other potentially responsible parties are involved are based on assessments by consultants, agreements among potentially responsible parties, or determinations by the EPA or other regulatory agencies.At least once each quarter, CSXT reviews its role
if any,with respect to each such location, giving consideration to a number of factors, including the type of cleanup required, the nature ofCSXT'sCSXT’s alleged connection to the location (e.g., generator of waste sent to the site, or owner oroperator)operator of the site), the extent ofCSXT'sCSXT’s alleged connection (e.g., volume of waste sent to the location and other relevant factors), the accuracy and strength of evidence connecting CSXT to the location,- 30 - PAGE 31 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED NOTE 13. SUMMARY OF COMMITMENTS AND CONTINGENCIES, Continuedand the number, connection, and financialpositionviability of other named and unnamedpotentially responsible partiesPRP’s at the location.The ultimate liability for remediation is difficult to determine with certainty because ofBased on the
number of and creditworthiness of PRPs involved. Through the assessmentreview process, CSXTmonitors the creditworthiness of such PRPs in determining ultimate liability. Based upon such reviews and updates of the sites with which it is involved, CSXThas recordedand at least quarterly reviews for adequacy,reserves to cover estimated contingent future environmental costs with respect to such sites. The recorded liabilities for estimated future environmental costs at December30, 199426, 2003, and December31, 199327, 2002 were$140$45 million and$131$35 million, respectively. Theserecordedliabilities, which are undiscounted, include amounts representingCSXT'sCSXT’s estimate of unasserted claims, which CSXT believes to be immaterial. The liabilityhas been accrued forincludes future costs for all sites where thecompany'sCompany’s obligation is (1) deemed probable and (2) where such costs can be reasonably estimated. The liability includesthe estimatedfuture 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 December30, 199426, 2003 environmental liability is expected to be paid out over the nextfive years, funded by cash generated from operations.seven years.The
companyCompany 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, thecompanyCompany believesthatits environmental reserves are adequate to accomplish remedial actions to comply with present laws andregulations. The company believesregulations, and that the ultimate liability for these matters, if any, will not materially affect its overall results of operations and financialcondition.condition
NOTE 11. LONG-TERM DEBT Debt is as follows:
Average Interest Rates at December 26, December 27, (Dollars in Millions) Maturity December 26, 2003 2003 2002 Equipment Obligations 2004 - 2015 7.0 % $ 704 $ 855 Capital Leases 2004 - 2009 8.0 % 58 125 Mortgage Bonds N/A N/A — 55 Other Obligations 2007 - 2021 6.4 % 50 51
Total 812 1,086 Less Debt Due Within One Year 102 213
Total Long-Term Debt $ 710 $ 873
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. LONG-TERM DEBT, Continued Long-term debt maturities are as follows:
(Dollars in Millions) 2004 $ 102 2005 99 2006 96 2007 93 2008 80 Thereafter 342
Total $ 812
Certain of CSXT’s properties are pledged as security for various long-term debt issues.
NOTE 12. DERIVATIVE FINANCIAL INSTRUMENTS Fuel Hedging
In 2003, CSX began a program to hedge a portion of its 2004 and 2005 locomotive fuel purchases. This program was established to manage exposure to fuel price fluctuations. In order to minimize this risk, CSX has entered into a series of swaps in order to fix the price of a portion of its estimated future fuel purchases.
Following is a summary of fuel swaps executed during the year:
Dec. 26, 2003 Approximate Gallons Hedged (Millions) 236 Average Price Per Gallon $ 0.70 Swap Maturities Feb. 2004 - Sept. 2005
2004 2005 Estimated % of Future Fuel Consumption Hedged at December 26, 2003 18 % 21 % The program limits fuel hedges to a 24-month duration and a maximum of 80% of CSX’s average monthly fuel purchased for any month within the 24-month period, and places the hedges among selected counterparties. Fuel hedging activity did not have an effect on fuel expense for the year ended December 26, 2003. Ineffectiveness, or the extent to which changes in the fair values of the fuel swaps did not offset changes in the fair values of the expected fuel purchases, was immaterial.
These instruments qualify, and are designated by management, as cash-flow hedges of variability in expected future cash flows attributable to fluctuations in fuel prices. The fair values of fuel derivative instruments are determined based upon current fair market values as quoted by third party dealers and are recorded on the balance sheet with offsetting adjustments to Accumulated Other Comprehensive Income, a component of Shareholders’ Equity. As of December 26, 2003 this component was $6 million. Fair value adjustments are noncash transactions, and accordingly, are excluded from the Cash Flow Statement.
The Company is exposed to credit loss in the event of nonperformance by other parties to fuel swap agreements. However, the Company does not anticipate nonperformance by the counterparties.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values of the Company’s financial instruments are estimated by reference to quoted prices from market sources and financial institutions, as well as other valuation techniques. Long-term debt is the only financial instrument of the Company with a fair value significantly different from its carrying amount. At December 26, 2003, the fair value of long-term debt, including current maturities, was $904 million, compared with a carrying amount of $812 million. At December 27, 2002, the fair value of long-term debt, including current maturities, was $1.2 billion, compared with a carrying amount of $1.1 billion. The fair value of long-term debt has been estimated using discounted cash flow analyses based upon the Company’s current incremental borrowing rates for similar types of financing arrangements. The Company’s fuel hedging agreements at December 26, 2003 had a positive value of $9 million. CSXT had no fuel hedge agreements at December 27, 2002.
NOTE 14. EMPLOYEE BENEFIT PLANS Pension and Other Postretirement Benefit Plans
CSXT, in conjunction with CSX and its subsidiaries, sponsors defined benefit pension plans principally for salaried employees. The plans provide eligible employees with retirement benefits based principally on years of service and compensation rates near retirement. CSX allocates to CSXT a portion of the pension expense or benefit for the CSX pension plans based on CSXT’s relative level of participation. The allocated expense from the various CSX pension plans amounted to expense of $1 million in 2003, and credits of $4 million and $3 million in 2002 and 2001, respectively.
In addition to the defined benefit pension plans, CSXT participates with CSX and other affiliates in two plans that provide medical and life insurance benefits to most full-time salaried employees upon their retirement. The postretirement medical plan is contributory (partially funded by retiree), with retiree contributions adjusted annually. The life insurance plan is non-contributory. CSX allocates to CSXT a portion of the expense for these plans based on CSXT’s relative level of participation. The allocated expense amounted to $36 million in 2003, $41 million in 2002, and $31 million in 2001.
In December 2003, the President of the United States signed into law the “Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“the Act”), which introduces a prescription drug benefit under Medicare Part D as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is actuarially equivalent to Medicare Part D. SFAS 106 requires that changes in the law that take effect in the future and affect future benefit coverage shall be considered in current-period benefit measurements. However, as significant uncertainties exist for how to account for the subsidy a plan sponsor may not have sufficient information available to measure effects of the Act, prepare related actuarial valuations, and ensure proper accounting. Therefore, FASB has issued staff position No. FAS 106-1 which allows a plan sponsor to elect to defer recognizing the effects of the Act until authoritative guidance on the accounting for the federal subsidy is issued, or until certain other events occur. When the guidance is issued, it may cause CSX to revise previously reported information. CSX is currently evaluating how this legislation may impact its postretirement benefit plans.
Other Plans
CSXT maintains savings plans for virtually all full-time salaried employees and certain employees covered by collective bargaining agreements of CSXT and subsidiary companies. Expense associated with these plans was $13 million in 2003, $12 million for 2002, and $13 million for 2001.
Under collective bargaining agreements, the Company participates in a number of union-sponsored, multi-employer benefit plans. Payments to these plans are made as part of aggregate assessments generally based on number of employees covered, hours worked, tonnage moved or a combination thereof. Total contributions of $360 million, $312 million, and $285 million, respectively, were made to these plans in 2003, 2002 and 2001.
Certain officers and key employees of CSXT participate in stock purchase, performance and award plans of CSX. CSXT is allocated its share of any cost to participate in these plans.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. COMMITMENTS AND CONTINGENCIES Lease Commitments
The Company has various equipment leases with other parties under agreements with terms of up to 42 years. Non-cancelable, long-term leases generally include provisions for maintenance, options to purchase and options to extend the terms. At December 26, 2003, minimum equipment rentals under these operating leases are as follows:
Operating Sublease Net Lease (Dollars in Millions) Leases Income Commitments 2004 $ 150 $ 18 $ 132 2005 147 17 130 2006 122 17 105 2007 122 16 106 2008 103 14 89 Thereafter 388 8 380
Total $ 1,032 $ 90 $ 942
Rent expense for operating leases totaled $404 million in 2003, $406 million in 2002, and $413 million in 2001. These amounts include net daily rental charges on railroad operating equipment of $296 million, $294 million and $289 million in 2003, 2002, and 2001, respectively, which are not long-term commitments. In addition to these commitments, the Company also has agreements covering routes and equipment leased from Conrail. See Note 2, Integrated Operations with Conrail, for a description of these commitments.
Purchase Commitments
The Company has a commitment under a long-term maintenance program for approximately 40% of its fleet of locomotives. The agreement expires in 2026 and approximates $2.6 billion. Minimum payments under this agreement are as follows:
Minimum (Dollars in Millions) Payments 2004 $ 132 2005 138 2006 166 2007 171 2008 171 Thereafter 1,866
Total $ 2,644
The long-term maintenance program assures CSXT access to efficient, high-quality locomotive maintenance services at settled price levels through the term of the program. Under the program, CSXT paid $130 million, $124 million and $126 million in fiscal years 2003, 2002 and 2001, respectively.
-44-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. COMMITMENTS AND CONTINGENCIES, Continued Long-term Operating Agreements
In addition to its contractual arrangement to operate specified portions of Conrail’s rail system, CSXT has various long-term railroad operating agreements that allow for exclusive operating rights over various railroad lines. Under these agreements, CSXT is obligated to pay usage fees of approximately $10 million annually. The terms of these agreements range from 30 to 40 years.
Self-Insurance
The Company obtains substantial amounts of commercial insurance for potential losses for third-party liability and property damages. Specified levels of risk (up to $35 million for property and $25 million for liability per occurrence) are retained on a self-insurance basis. The Company uses a combination of third-party and self-insurance to realize savings on insurance premium costs.
STB Proceeding
In 2001 Duke Energy Corporation (“Duke”) filed a complaint before the U.S. Surface Transportation Board (“STB”) alleging that certain CSXT common carrier coal rates are unreasonably high. In February 2004, the STB issued a decision finding that the CSXT common carrier rates were reasonable. While approving the rate levels, the STB also invited Duke to request a phase-in of rate increases over some time period. The nature and amount of any such phase-in is uncertain, and would only apply to billings subsequent to December 2001. CSXT will continue to consider and pursue all available legal defenses in this matter. Administrative and legal appeals are possible, and could take several years to resolve. An unfavorable outcome to this complaint would not have a material effect on the Company.
Contract Settlement
In July 2002, the Company received $44 million as the first of two payments to settle a contract dispute. During 2002, the Company recognized approximately $7 million of the first payment in other income as this amount related to prior periods. The remaining $37 million will be recognized over the contract period, which ends in 2020. The second payment of $23 million was received in 2003 and will be recognized over the contract period which ends in 2020. The results of this settlement will provide approximately $3 million in annual pretax earnings through 2020.
Other Legal Proceedings
ACSXT is involved in routine litigation incidental to its business and is a party to a number of legal actions and claims, various governmental proceedings and private civil lawsuits, including those related to environmental matters, Federal Employers’ Liability Act claims by employees, other
than environmental, are pending against CSXT in whichpersonal injury claims,are made in substantial amounts.and disputes and complaints involving certain transportation rates and charges. Some of the legal proceedings include claims for punitive as well as compensatory damages, and others purport to be class actions. While theultimate resultsfinal outcome ofenvironmental investigations, lawsuits and claims involving CSXTthese matters cannot be predicted with certainty, considering among other things the meritorious legal defenses available and liabilities that have been recorded along with applicable insurance, it is the opinion of CSXT managementdoes not currently expectthat none of thesemattersitems will have a material adverse effect on theconsolidated financial position,results of operations,and cash flowsfinancial position or liquidity of CSXT. However, an unexpected adverse resolution of one or more of these items could have a material adverse effect on thecompany. - 31 - PAGE 32results of operations in a particular quarter or fiscal year. The Company is also a 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.-45-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONTINUEDNOTE
14.16.QUARTERLY DATA (Unaudited). 1994(a) ----------------------------------------- 1st 2nd 3rd 4th(b) ------ ------ ------ ------ Operating Revenue $1,127 $1,190 $1,173 $1,213 Operating Income 135 230 184 231 Net Earnings 73 136 105 181 1993 ----------------------------------------- 1st 2nd 3rd(c) 4th(d) ------ ------ ------ ------ Operating Revenue $1,094 $1,134 $1,081 $1,135 Operating Income 105 172 123 191 Net Earnings 56 131 19 102 1992 ----------------------------------------- 1st 2nd(e) 3rd 4th ------ ------ ------ ------ Operating Revenue $1,123 $1,123 $1,104 $1,158 Operating Income (Loss) 125 (498) 149 246 Net Earnings (Loss) 65 (322) 80 160(a)Effective January 1, 1994,
Quarter(a) (Dollars in Millions) 1st 2nd 3rd 4th Operating Revenue $ 1,531 $ 1,573 $ 1,510 $ 1,568 $ 77 $ 173 $ (111 ) $ 150 $ 73 $ 93 $ (68 ) $ 98 Operating Revenue $ 1,486 $ 1,538 $ 1,473 $ 1,506 Operating Income $ 89 $ 148 $ 167 $ 173 Net Earnings $ 47 $ 64 $ 97 $ 88
(a) Periods presented are 13-week quarters (b) During the 3rd quarter of 2003, CSX recorded a $229 million pretax, $143 million after-tax charge in conjunction with the charge in estimate of casualty reserves to include an estimate of incurred but not reported claims for asbestos and other -46-
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURENone.
CONTROLS AND PROCEDURES As of December 26, 2003, under the supervision and with the participation of the Company’s Principal Executive Officer and the Principal Financial Officer, management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Principal Executive Officer and the Principal Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 26, 2003. There were no changes in the Company’s internal controls over financial reporting during the fourth quarter of 2003 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART III
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT Information omitted in accordance with General Instruction I(2)(c).
EXECUTIVE COMPENSATION Information omitted in accordance with General Instruction I(2)(c).
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information omitted in accordance with General Instruction I(2)(c).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information omitted in accordance with General Instruction I(2)(c).
PRINCIPAL ACCOUNTING FEES AND SERVICES Information omitted in accordance with General Instruction I(2)(c). PART IV
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements
See Index to Consolidated Financial Statements on page 21.2. Financial Statement Schedules The information required by Schedule II is included in Note 9,
“Casualty, Environmental and Other Reserves,” to the consolidated financial
statements. All other financial statement schedules are not applicable.-47-
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K, Continued 3. Exhibits
(3.1) Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to Form 10-K dated March 8, 1996) (3.2)* By-laws of the Registrant, as amended (4.1) Articles of Incorporation, as amended (See Exhibit 3.1) (4.2)* By-laws of the Registrant, as amended (See Exhibit 3.2) Pursuant to Regulation S-K, Item 601 (b)(4)(iii), instruments that define the
company changedrights of holders of the Registrant’s long-term debt securities, where the long-term debt securities authorized under each instrument do not exceed 10% of the Registrants’ total assets, have been omitted and will be furnished to the Commission upon request.
(10.1) Transaction Agreement, dated as of June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation, and CRR Holdings LLC, with certain schedules thereto (incorporated by reference to Exhibit 10.1 to Form 8-K dated June 11, 1999) (10.2) Amendment No. 1, dated as of August 22, 1998, to the Transaction Agreement, dated as of June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation, and CRR Holdings LLC (incorporated by reference to Exhibit 10.2 to Form 8-K dated June 11, 1999) (10.3) Amendment No. 2, dated as of June 1, 1999, to the Transaction Agreement, dated June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation, and CRR Holdings, LLC (incorporated by reference to Exhibit 10.3 to Form 8-K dated June 11, 1999) -48-
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K, Continued
(10.4) Amendment No. 3, dated as of August 1, 2000, to the Transaction Agreement by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation, and CRR Holdings LLC. (10.5) Operating Agreement, dated as of June 1, 1999, by and between New York Central Lines LLC and CSX Transportation, Inc. (incorporated by reference to Exhibit 10.4 to Form 8-K dated June 11, 1999) (10.6) Shared Assets Area Operating Agreement for North Jersey, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibit thereto (incorporated by reference to Exhibit 10.5 to Form 8-K dated June 11, 1999) (10.7) Shared Assets Area Operating Agreement for Southern Jersey/Philadelphia, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibit thereto (incorporated by reference to Exhibit 10.6 to Form 8-K dated June 11, 1999) (10.8) Shared Assets Area Operating Agreement for Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Corporation, with exhibit thereto (incorporated by reference to Exhibit 10.7 to Form 8-K dated June 11, 1999) (10.9) Monongahela Usage Agreement, dated as of June 1, 1999, by and among CSX Transportation, Inc., Norfolk Southern Railway Company, Pennsylvania Lines LLC, and New York Central Lines LLC, with exhibit thereto (incorporated by reference to Exhibit 10.8 to Form 8-K dated June 11, 1999) (21) Omitted in accordance with General Instruction I(2)(c) (31.1)* Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (31.2)* Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (32.1)* Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32.2)* Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K None * Filed Herewith -49-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
fiscal reporting periods from four calendar quartersbehalf by the undersigned, thereunto duly authorized, on the 10th day of March, 2004.
CSX TRANSPORTATION, INC. /s/ CAROLYN T. SIZEMORE Carolyn T. Sizemore
(Principal Accounting Officer)Pursuant to
four 13-week quarters. Fiscal 1994 beganthe requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons onJanuary 1, 1994,behalf of the Registrant andincluded 52 weeks. The four 13- week quarters ended on April 1, July 1, September 30 and December 30, 1994. (b) On December 1, 1994, the state of Florida elected to satisfy its remaining unfunded obligation issued in 1988 to consummate the purchase of 80 miles of track and right of way. The transaction resulted in cash proceeds of $102 million and a pretax gain of $69 million. (c) CSXT revised its estimated annual effective tax ratein thethird quarter of 1993 to reflectcapacities and on thechange in the federal statutory rate from 34 to 35 percent. The effect of this change was to increase income tax expense for the third quarter of 1993 by $50 million. Of this amount, $46 million related to applying the newly enacted statutory income tax rate to deferred tax balances as of January 1, 1993. (d) The quarterly results were affected by certain adjustments, including credits of $12 million for favorable experience on health and welfare benefits. Other adjustments were not significant to the operating results for the quarter. (e) Includes impact of $664 million pretax productivity charge, $427 million after tax, to reflect the estimated costs of implementing work-force reductions. - 32 - PAGE 33 CSX TRANSPORTATION, INC. AND SUBSIDIARIES MANAGEMENT'S NARRATIVE ANALYSIS AND RESULTS OF OPERATIONS (Millions of Dollars) The following information should be read in conjunction with all other items in this report including "Business", "Properties" and "Financial Statements and Supplementary Data." Selected Financial & Statistical Information -------------------------------------------- 1994 1993 1992(a) 1991(b)(c) 1990 ------- ------ ----- ----- ----- Selected Earnings Data: Operating Revenue $ 4,703 $4,444 $4,508 $4,424 $4,551 Operating Expense 3,923 3,853 3,822 3,886 3,929 Productivity Charge --- --- 664 647 --- ------- ------ ------ ------ ------ Operating Income (Loss) 780 591 22 (109) 622 Other Income 49 11 1 20 --- Interest Expense 45 60 73 87 111 Income Tax Expense (Benefit) Productivity Charge --- --- (237) (238) --- Other 289 234 204 167 164 Cumulative Effect of Change in Accounting --- --- --- (159) --- ------- ------ ------ ------ ------ Net Earnings (Loss) $ 495 $ 308 $ (17) $ (264) $ 347 ======= ====== ====== ====== ====== Selected Cash Flow Data: Cash Provided by Operating Activities $ 896 $ 630 $ 725 $ 525 $ 814 Cash Used by Investing Activities $ (600) $ (478) $ (506) $ (395) $ (394) Cash Used by Financing Activities $ (116) $ (128) $ (258) $ (86) $ (364) Selected Financial Position Data: Cash and Cash Equivalents $ 452 $ 272 $ 248 $ 287 $ 243 Working Capital (Deficit) $ (311) $ (606) $ (931) $ (773) $ (707) Total Assets $10,191 $9,653 $9,475 $9,629 $9,510 Long-Term Debt $ 591 $ 593 $ 646 $ 639 $ 742 Due to Parent Company: Long-Term Advances $ --- $ 69 $ 86 $ 178 $ 157 Shareholder's Equity $ 4,652 $4,185 $3,903 $3,992 $4,368 (a) Includes impact of $664 million pretax productivity charge, $427 million after tax. (b) Includes impact of $647 million pretax productivity charge, $409 million after tax. (c) Net earnings for 1991 were decreased by $159 million by the cumulative effect of the change in accounting related to the adoption of SFAS No. 106. - 33 - PAGE 34 CSX TRANSPORTATION, INC. AND SUBSIDIARIES MANAGEMENT'S NARRATIVE ANALYSIS AND RESULTS OF OPERATIONS Results of Operations --------------------- CSXT posted three consecutive quarters of record operating income in 1994. These results were due to strong traffic across virtually all merchandise commodities and continued success in cost reductions. CSXT also rebounded from the 1993 coal strikes to yield notable increases in domestic coal tonnage. These results were achieved in spite of lower export coal loadings. CSXT operating income in 1994 totaled $780 million, $189 million above 1993's $591 million and $94 million above 1992's comparable $686 million. This latter figure excludes a net productivity charge of $664 million associated with labor reductions. Including this charge, rail operating income was $22 million in 1992. CSXT COMMODITIES BY CARLOADS AND REVENUE Market Share (a) Carloads Revenue (Percent) (Thousands) (Millions of Dollars) --------- -------------------- ---------------------- 1994 1994 1993 1992 1994 1993 1992 ---- ----- ----- ----- ----- ------ ------ Automotive 28 354 326 288 $ 493 $ 461 $ 413 Chemicals 39 386 371 356 685 652 619 Minerals 38 419 374 345 365 332 310 Food and Consumer 33 176 166 161 204 196 196 Agricultural Products 28 263 284 264 318 327 297 Metals 28 292 258 225 285 243 219 Forest Products 33 442 435 441 444 442 448 Phosphates and Fertilizer 76 470 423 457 254 256 268 Coal 40 1,678 1,566 1,760 1,465 1,363 1,565 ----- ----- ----- ----- ------ ------ Total 4,480 4,203 4,297 4,513 4,272 4,335 ===== ===== ===== Other Revenue 112 108 99 ------ ------ ------ Total Transportation Operating Revenue $4,625 $4,380 $4,434 ====== ====== ====== (a) Market share is defined as CSXT carloads versus carloads handled by all major Eastern railroads. - 34 - PAGE 35 PRODUCTIVITY CHARGES -------------------- (Millions of Dollars) 1992 1991 ---- ---- Provision: Severance Costs $664 $583 Exit, Settlement and Other Costs --- 64 ---- ---- Total Provision 664 647 ---- ---- Payments and Other Reductions: Severance Costs (288) (583) Exit, Settlement and Other Costs --- (64) ---- ---- Balance December 30, 1994 $376 $--- ==== ==== Transportation operating revenue rose to $4.63 billion, a 6% increase from 1993 and a 4% increase over 1992, driven primarily by a rebound in domestic coal tonnage and exceptional merchandise traffic. Transportation operating revenue totaled $4.38 billion in 1993 and $4.43 billion in 1992. CSXT overcame severe winter conditions in early 1994 and weaker than expected export coal traffic to increase coal tonnage to 153.7 million tons vs. 144.1 million tons in 1993. Domestic coal shipments rose 8% as utility demand, driven by the need to rebuild stockpiles depleted from the 1993 strikes and the harsh winter weather, surged during the year. CSXT's export shipments faced a number of market obstacles, including decreased demand and increased foreign competition. In 1994, export coal shipments decreased to 16 million tons from 16.7 million tons in 1993. CSXT anticipates a modest recovery in the U.S. export coal market and slightly better domestic coal loadings in 1995. The implementation of Phase I of the Clean Air Act in 1995 is expected to provide a net tonnage gain for CSXT, as an increase in the production of high-quality, low-sulfur coal at CSXT-served mines should more than offset any displacement caused by the Act. CSXT's total merchandise carloads and revenue increased 6% and 5%, respectively, over 1993 levels, reflecting the strength of the U.S. economy and successful efforts to expand market share. These same figures both rose 10% vs. 1992's volume and revenue. CSXT's automotive carloads increased 9% from a strong 1993 traffic base. This growth, driven by increased U.S. auto production, soaring consumer demand and improved service, pushed automotive revenue up 7% in 1994. Demand for plastic products from the auto industry, housing construction and the consumer goods market helped spur a 4% carload growth in the chemicals market. Bulk Intermodal Distribution (BIDS) terminals, where customers transfer and store bulk chemicals, gave CSXT a significant competitive advantage in this market. The customer response to this service is reflected in the 5% increase in chemicals revenue for 1994. - 35 - PAGE 36 Minerals traffic and revenue for the year improved 12% and 10%, respectively, propelled by growth in highway construction and demand for sand used in auto castings. Shipments in the food and consumer category, which includes government traffic and consumer durables, increased 6%, reflecting strong industrial production, particularly in appliances. Agricultural products experienced a surge in export grain traffic late in the year, but it was not enough to offset the devastating effect of the 1993 floods that caused a short supply of grain through the first three quarters of 1994. Strong domestic feed grain loadings to the Southeast poultry farms provided a solid base of traffic during the year. Carloads declined 7%, while revenue decreased only 3% as a result of favorable yield and mix changes. The metals industry enjoyed one of its best years ever, as strong demand from steel mini-mills led to a 13% carload increase in 1994. New service packages offered by CSXT improved market share and contributed to a 17% gain in revenue. Forest products traffic, which includes lumber, paper and construction materials, improved 2% due to continued housing demand and steady recovery of the paper business. CSXT's market position in lumber was aided by the addition of several new lumber distribution centers. The phosphates and fertilizer category experienced an 11% growth in traffic as export loads rose with increased foreign demand. The distance CSXT hauls export shipments of phosphate from Florida's Bone Valley to the Port of Tampa is far less than that for domestic moves to the U.S. Midwest, leading to lower revenue-per-carload comparisons. Although merchandise traffic experienced significant gains in 1994, CSXT anticipates continued strength in the principal markets it serves in the U.S. industrial sector in 1995. Combined with selective price increases, a modest improvement is expected in merchandise traffic and revenue in 1995. CSXT undertook an effort to re-engineer key components of its service delivery to meet customer needs better and enhance service reliability in 1994. In the future, the unit hopes to strengthen traffic levels in the various commodity groups by further satisfying customers through improved performance. CSXT transportation operating expense for 1994 was $3.9 billion, a 2% increase over 1993 and 1992, excluding the previously mentioned 1992 productivity charge. These results reflect the continuing efforts of the rail unit to reduce expenses and control costs while retaining its customer focus. Labor and fringe benefits expense increased 3% to $1.86 billion, vs. $1.8 billion in 1993 and $1.83 billion in 1992. Despite the increased traffic levels, which required a greater number of crew starts, and the impact of a 4% wage increase, CSXT controlled labor and fringe benefits expense. The company will continue to implement work-force reductions over the next few years. - 36 - PAGE 37 As the implementation of two-member crews extends throughout the rail system, the average crew size continues to fall. At year-end 1994, the average crew size was 2.5 members. In the next few years, reductions in yard and local crews will result in an average crew size of 2.25 members. CSXT, as a participant in national bargaining, is actively engaged in contract negotiations with rail labor organizations. CSXT seeks to improve the future competitiveness of its labor force through these negotiations. CSXT continued to reduce accidents and injuries in 1994, and it remains one of the safest railroads in the industry. Reportable injuries to employees were reduced 20% and train accidents fell 21% by year-end, helping CSXT maintain one of the highest rankings among Class I railroads. The company's progress in safety not only continues to save lives, but increases the quality and reliability of rail service while driving out unnecessary expense. Performance Improvement Team initiatives reduced expenses by more than $350 million from 1991 through 1994. Besides shrinking the cost base, this program has helped conserve capital as improvements are realized in reliability, performance and efficiency throughout the system. All areas of rail operations and administration - from repair and maintenance of locomotives and freight cars to purchases of office supplies - were targeted. Further savings of more than $100 million have been targeted by CSXT for each of the next three years. CSXT will continue to lower its cost base in 1995 and beyond through increased asset utilization, crew-size reductions, improved safety and continued Performance Improvement Team savings. CSXT's property additions for 1994 increased to $676 million from 1993's $569 million and 1992's $539 million. Expenditures for roadway improvements totaled $404 million, or 60% of the total. CSXT's maintenance-of- way program installed or replaced 289 miles of rail in 1994, compared with 400 miles in both 1993 and 1992. The remaining rail property additions included $131 million for locomotives and $109 million for the car fleet. Property Additions --------------------- (Millions of Dollars) Property Additions 1994 1993 1992 - ------------------ ---- ---- ---- Merchandise Cars $105 $ 68 $ 45 Coal Cars 4 5 4 ---- ---- ---- Total Freight Cars 109 73 49 ---- ---- ---- Locomotives 131 120 134 Roadway 404 323 306 Other Equipment and Properties 32 53 50 ---- ---- ---- Total Property Additions $676 $569 $539 ==== ==== ==== - 37 - PAGE 38 CSXT reduced its locomotive fleet size by 1% to 2,785 in 1994. Eighty new locomotives were added to the fleet, including 30 alternating-current (AC) locomotives. This new AC technology, which provides substantially better tractive effort, or pulling power, will allow CSXT to replace an average of two older units in its existing fleet with each new unit. These AC locomotives are the first of 250 fuel-efficient units to be delivered to CSXT through 1997. In late 1994, CSXT resumed repairing and rebuilding freight cars at its Raceland Car Shop in Kentucky. The facility plans to refurbish or rebuild 4,000 coal hopper cars in 1995. Notwithstanding this program, enhanced utilization through improved car turn times will yield a net reduction in the overall car fleet. CSXT is engaged in preliminary negotiations to obtain all its telecommunication services from AT&T. The goal of this transaction would be to provide CSXT with the strategic opportunity to obtain state-of-the-art technology, equipment and services from AT&T, without diverting CSXT's capital and management resources from its core business. The arrangement, if consummated, would enable CSXT to leverage technological enhancements as they become available in the rapidly changing telecommunications industry. The transaction could result in a significant future charge to cover the writedown of certain telecommunications assets and labor separation costs. In 1995, CSXT expects to improve equipment utilization further and increase capital expenditures by approximately 10%, the majority of which will go to the Raceland car program. - 38 - PAGE 39 Financial Condition Liquidity and Capital Resources ------------------------------- Cash provided by operating activities totaled $896 million, an increase of $266 million from 1993 and an increase of $171 million from 1992. Cash provided by operating activities included an increase of $20 million for 1994, an increase of $6 million for 1993 and an increase of $200 million for 1992, relating to the amount of accounts receivable sold. In addition, cash provided by operating activities included payments for productivity and restructuring charges of $129 million, $245 million and $353 million for 1994, 1993 and 1992, respectively. Excluding the effect of the sale of receivables and the productivity charge payments, cash provided by operating activities would have been $1,005 million in 1994, $869 million in 1993 and $878 million in 1992. Cash used by investing activities was $600 million which was $122 million higher than the $478 million used in 1993 and $94 million higher than the $506 million used in 1992. Property additions of $676 million in 1994 increased $107 million from $569 million in 1993, and $137 million from $539 million in 1991. In the late 1980's, the company launched a major roadway, equipment and locomotive improvement program. Completion of this program has allowed a return to a normalized capital budget that assures the required level of routine maintenance, customer service and safe operation. Cash used by financing activities decreased to $116 million in 1994 from $128 million in 1993 and decreased $142 million from $258 million in 1992. The 1994 decrease in cash used was primarily the result of lower repayments of public and affiliated company debt. Cash and cash equivalents increased $180 million during 1994 to a level of $452 million versus $272 million at the end of 1993 and increased $204 million over the 1992 level of $248 million. Working capital increased by $295 million to a year-end deficit of $311 million in 1994, compared to $606 million in 1993 and $931 million in 1991. A working capital deficit is not unusual for CSXT and does not indicate a lack of liquidity. CSXT maintains adequate current assets to satisfy current liabilities when they are due and has sufficient financial resource capacity, primarily from access to advances from CSX, to manage its day-to-day cash requirements. Environmental concerns have drawn considerable attention. CSXT, like many American companies today, faces the challenge of dealing with this issue and is addressing its environmental responsibilities and managing the related expenditures. Environmental management is an important part of CSXT's strategic planning, which includes promotion of policies and procedures that emphasize environmental awareness throughout the company. - 39 - PAGE 40 The following financial ratios are measures of the condition of CSXT and its subsidiaries as of the respective year ends: 1994 1993 1992 ---- ---- ---- Current Ratio .7 .5 .4 Debt-to-Total Capitalization Ratio 11.3% 13.7% 15.8% Return on Assets 4.9% 3.2% (0.2)% Return on Equity 10.6% 7.4% (0.4)% Ratio of Earnings to Fixed Charges 7.1X 4.8X 0.6x Excluding the impacts of the 1992 productivity charge, the 1992 measures would have been as follows: 1992 ---- Current Ratio .4 Debt-to-Total Capitalization Ratio 14.5% Return on Assets 4.3% Return on Equity 9.5% Ratio of Earnings to Fixed Charges 4.6X - 40 -dates indicated.
Signatures Title /s/ Michael J. Ward
Michael J. WardChairman of the Board, President and Chief
Executive Officer and Director
(Principal Executive Officer)/s/ Oscar Munoz
Oscar MunozExecutive Vice-President
and Chief Financial Officer
(Principal Finance Officer)/s/ Clarence W. Gooden
Clarence W. GoodenDirector -50-