UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

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

For the quarterly period ended June 25,September 24, 2010

OR

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

For the transition period from __________ to __________


Commission File Number 1-8022
 
CSX CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 62-1051971
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
 
500 Water Street, 15th Floor, Jacksonville, FL 32202 (904) 359-3200
(Address of principal executive offices) (Zip Code) (Telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last report.)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes (X)   No (  )

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes (X)  No ( )

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one)
Large Accelerated Filer (X)                                                                Accelerated Filer (  )
Non-accelerated Filer (  )                                                                           Smaller Reporting Company (  )

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (  )    No (X)

There were 379,647,450374,184,621 shares of common stock outstanding on June 25,September 24, 2010 (the latest practicable date that is closest to the filing date).

 
1


 
CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 25,SEPTEMBER 24, 2010
INDEX
    
   Page
PART I.FINANCIAL INFORMATION 
Item 1.Financial Statements 
    
 
Consolidated Income Statements (Unaudited) -
3
  Quarters and SixNine Months Ended June 25,September 24, 2010 
  and June 26,September 25, 2009 
    
 
Consolidated Balance Sheets -
4
  At June 25,September 24, 2010 (Unaudited) and December 25, 2009 
    
 
Consolidated Cash Flow Statements (Unaudited) -
5
  SixNine Months Ended June 25,September 24, 2010 and June 26,September 25, 2009 
    
 
Notes to Consolidated Financial Statements (Unaudited)
6
    
Item 2.
Management's Discussion and Analysis of Financial Condition
3230
and Results of Operations
 
    
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
4643
    
Item 4.
Controls and Procedures
4643
    
PART II.OTHER INFORMATION 
    
Item 1.
Legal Proceedings
4643
    
Item 1A.
Risk Factors
4644
    
Item 2.
CSX Purchases of Equity Securities
4745
    
Item 3.
Defaults upon Senior Securities
4846
    
Item 4.
Removed and Reserved
4846
    
Item 5.
Other Information
4846
    
Item 6.
Exhibits
4846
    
Signature
  4947

 
2

 
CSX CORPORATION

PART I FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS


CONSOCONSOLIDATED LIDATED INCOME STATEMENTS (Unaudited)(a)
(Dollars in Millions, Except Per Share Amounts)


 Second Quarters  Six Months   Third Quarters Nine Months
 2010  2009  2010  2009   20102009 20102009
    (Adjusted)*     (Adjusted)*    
(Adjusted) (a)
  
(Adjusted) (a)
Revenue $2,663  $2,185  $5,154  $4,432 Revenue $2,666 $2,289  $7,820 $6,721
Expense                Expense    
Labor and Fringe  721   654   1,450   1,316 
Materials, Supplies and Other (Note 1)  551   444   1,070   982 
Fuel  304   185   587   376 
Depreciation  230   227   458   450 
Equipment and Other Rents  89   98   189   211 
Total Expense  1,895   1,608   3,754   3,335 
Labor and Fringe 731 653  2,181 1,969
Materials, Supplies and Other (Note 1) 509 500  1,579 1,482
Fuel 279 223  866 599
Depreciation 232 227  690 677
Equipment and Other Rents 90 92  279 303
Total Expense 1,841 1,695  5,595 5,030
                      
Operating Income  768   577   1,400   1,097 Operating Income 825 594  2,225 1,691
                      
Interest Expense  (135)  (139)  (277)  (280)Interest Expense (131) (140)  (408) (420)
Other Income - Net (Note 8)  9   10   20   13 Other Income - Net (Note 8) 8 6  28 19
Earnings From Continuing Operations                Earnings From Continuing Operations    
Before Income Taxes  642   448   1,143   830 
Before Income Taxes 702 460  1,845 1,290
                      
Income Tax Expense (Note 9)  (228)  (166)  (424)  (295)Income Tax Expense (Note 9) (288) (170)  (712) (465)
Earnings From Continuing Operations  414   282   719   535 Earnings From Continuing Operations 414 290  1,133 825
                      
Discontinued Operations (Note 10)  -   23   -   15 Discontinued Operations (Note 10) - -  - 15
Net Earnings $414  $305  $719  $550 Net Earnings $414 $290  $1,133 $840
                      
Per Common Share (Note 2)                Per Common Share (Note 2)    
Net Earnings Per Share, Basic                Net Earnings Per Share, Basic    
Continuing Operations $1.08  $0.72  $1.86  $1.36 
Discontinued Operations  -   0.06   -   0.04 
Net Earnings $1.08  $0.78  $1.86  $1.40 
Continuing Operations $1.09 $0.74  $2.95 $2.10
Discontinued Operations - -  - 0.04
Net Earnings $1.09 $0.74  $2.95 $2.14
                      
Net Earnings Per Share, Assuming Dilution                Net Earnings Per Share, Assuming Dilution    
Continuing Operations $1.07  $0.71  $1.84  $1.35 
Discontinued Operations  -   0.06   -   0.04 
Net Earnings $1.07  $0.77  $1.84  $1.39 
Continuing Operations $1.08 $0.73  $2.92 $2.08
Discontinued Operations - -  - 0.04
Net Earnings $1.08 $0.73  $2.92 $2.12
                      
Average Shares Outstanding (Thousands)
  383,164   392,027   387,121   391,594 
Average Shares Outstanding (Thousands)
 378,050 392,352  384,102 391,847
                      
Average Shares Outstanding,                Average Shares Outstanding,    
Assuming Dilution (Thousands)
  386,391   395,370   390,357   394,735 
Assuming Dilution (Thousands)
381,822 396,333  387,516 395,268
                      
Cash Dividends Paid Per Common Share $0.24  $0.22  $0.48  $0.44 Cash Dividends Paid Per Common Share $0.24 $0.22  $0.72 $0.66


(a)  Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (see Note 1).

See accompanying notes to consolidated financial statements.


 
3
CSX CORPORATION

ITEM 1: FINANCIAL STATEMENTS


CONCONSOLIDATEDSOLIDATED BALANCE SHEETS
(Dollars in Millions)

 (Unaudited)      (Unaudited) 
 June 25,  December 25,   September 24,December 25,
 2010  2009   20102009
    
(Adjusted)*
    
(Adjusted) (a)
ASSETSASSETS ASSETS
Current Assets      Current Assets   
Cash and Cash Equivalents $633  $1,029 
Short-term Investments  56   61 
Accounts Receivable - Net (Note 1)  938   995 
Materials and Supplies  223   203 
Deferred Income Taxes  185   158 
Other Current Assets  108   124 
Total Current Assets  2,143   2,570 
Cash and Cash Equivalents  $636 $1,029
Short-term Investments  40 61
Accounts Receivable - Net (Note 1) 1,001 995
Materials and Supplies  225 203
Deferred Income Taxes  206 158
Other Current Assets  97 124
  Total Current Assets  2,205 2,570
            
Properties  31,191   30,907 Properties  31,457 30,907
Accumulated Depreciation  (8,018)  (7,843)Accumulated Depreciation  (8,123) (7,843)
Properties - Net  23,173   23,064 
  Properties - Net  23,334 23,064
            
Investment in Conrail  658   650 Investment in Conrail  660 650
Affiliates and Other Companies  451   438 Affiliates and Other Companies  466 438
Other Long-term Assets  319   165 Other Long-term Assets  364 165
Total Assets $26,744  $26,887 
  Total Assets  $27,029 $26,887
            
LIABILITIES AND SHAREHOLDERS' EQUITYLIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES AND SHAREHOLDERS' EQUITY
            
Current Liabilities        Current Liabilities   
Accounts Payable $922  $967 
Labor and Fringe Benefits Payable  390   383 
Casualty, Environmental and Other Reserves (Note 4)  190   190 
Current Maturities of Long-term Debt (Note 7)  614   113 
Income and Other Taxes Payable  125   112 
Other Current Liabilities  113   100 
Total Current Liabilities  2,354   1,865 
Accounts Payable  $981 $967
Labor and Fringe Benefits Payable 473 383
Casualty, Environmental and Other Reserves (Note 4) 187 190
Current Maturities of Long-term Debt (Note 7) 605 113
Income and Other Taxes Payable 179 112
Other Current Liabilities  115 100
  Total Current Liabilities  2,540 1,865
            
Casualty, Environmental and Other Reserves (Note 4)  544   547 Casualty, Environmental and Other Reserves (Note 4) 534 547
Long-term Debt (Note 7)  7,320   7,895 Long-term Debt (Note 7)  7,297 7,895
Deferred Income Taxes  6,650   6,528 Deferred Income Taxes  6,732 6,528
Other Long-term Liabilities  1,299   1,284 Other Long-term Liabilities  1,288 1,284
Total Liabilities  18,167   18,119 
  Total Liabilities  18,391 18,119
            
Common Stock $1 Par Value  380   393 Common Stock $1 Par Value  374 393
Other Capital  -   80 Other Capital  - 80
Retained Earnings  8,968   9,090 Retained Earnings  9,022 9,090
Accumulated Other Comprehensive Loss (Note 1)  (787)  (809)Accumulated Other Comprehensive Loss (Note 1) (771) (809)
Noncontrolling Interest  16   14 Noncontrolling Interest  13 14
Total Shareholders' Equity  8,577   8,768 
Total Liabilities and Shareholders' Equity $26,744  $26,887 
Total Shareholders' Equity  8,638 8,768
Total Liabilities and Shareholders' Equity $27,029 $26,887

* (a) Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (see Note 1).

See accompanying notes to consolidated financial statements.

 
4
CSX CORPORATION

ITEM 1: FINANCIAL STATEMENTS

CONSOCONSOLIDATED LIDATED CASH FLOW STATEMENTS (Unaudited)
 (Dollars in Millions)



  Six Months 
  2010  2009 
     (Adjusted)* 
OPERATING ACTIVITIES      
Net Earnings $719  $550 
Adjustments to Reconcile Net Earnings to Net Cash Provided     
by Operating Activities:        
Depreciation  458   451 
Deferred Income Taxes  79   209 
Other Operating Activities  79   (172)
Changes in Operating Assets and Liabilities:        
Accounts Receivable  57   202 
Other Current Assets  (52)  (83)
Accounts Payable  (34)  (56)
Income and Other Taxes Payable  94   (13)
Other Current Liabilities  22   (117)
Net Cash Provided by Operating Activities  1,422   971 
         
INVESTING ACTIVITIES        
Property Additions (Note 1)  (687)  (657)
Other Investing Activities  68   49 
Net Cash Used in Investing Activities  (619)  (608)
         
FINANCING ACTIVITIES        
Long-term Debt Issued (Note 7)  -   500 
Long-term Debt Repaid (Note 7)  (71)  (83)
Dividends Paid  (184)  (176)
Stock Options Exercised (Note 3)  16   12 
Shares Repurchased  (823)  - 
Other Financing Activities (Note 1)  (137)  (177)
Net Cash (Used in) Provided by Financing Activities  (1,199)  76 
         
Net (Decrease) Increase in Cash and Cash Equivalents  (396)  439 
         
CASH AND CASH EQUIVALENTS        
Cash and Cash Equivalents at Beginning of Period  1,029   669 
Cash and Cash Equivalents at End of Period $633  $1,108 
     Nine Months
 20102009
      
(Adjusted) (a)
OPERATING ACTIVITIES  
 Net Earnings $1,133 $840
 Adjustments to Reconcile Net Earnings to Net Cash Provided 
 by Operating Activities:  
 Depreciation 690 675
 Deferred Income Taxes 139 326
  Contributions to Qualified Pension Plans - (166)
 Other Operating Activities 80 (150)
 Changes in Operating Assets and Liabilities:  
 Accounts Receivable (6) 159
 Other Current Assets (44) (50)
 Accounts Payable 27 (4)
 Income and Other Taxes Payable 150 39
 Other Current Liabilities 97 (80)
  Net Cash Provided by Operating Activities 2,266 1,589
       
INVESTING ACTIVITIES  
 Property Additions (Note 1) (1,092) (1,031)
 Other Investing Activities 41 51
  Net Cash Used in Investing Activities (1,051) (980)
       
FINANCING ACTIVITIES  
 Long-term Debt Issued (Note 7) - 500
 Long-term Debt Repaid (Note 7) (103) (110)
 Dividends Paid (275) (259)
 Stock Options Exercised (Note 3) 21 19
 Shares Repurchased (1,123) -
 Other Financing Activities (Note 1) (128) (188)
  Net Cash Used in Financing Activities (1,608) (38)
       
 Net (Decrease) Increase in Cash and Cash Equivalents (393) 571
       
CASH AND CASH EQUIVALENTS  
 Cash and Cash Equivalents at Beginning of Period 1,029 669
  Cash and Cash Equivalents at End of Period $636 $1,240


*(a) Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (see Note 1).

See accompanying notes to consolidated financial statements.


 
5
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1.                                 Nature of Operations and Significant Accounting Policies

Background

CSX Corporation (“CSX”), and together with its subsidiaries (the “Company”), based in Jacksonville, Florida, is one of the nation's leading transportation suppliers.  The Company provides rail-based transportation services including traditional rail service and the transport of intermodal containers and trailers.

CSX’s principal operating subsidiary, CSX Transportation, Inc. (“CSXT”), provides an important link to the transportation supply chain through its approximately 21,000 route mile rail network, which serves major population centers in 23 states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec. 

Other entities

In addition to CSXT, the Company’s subsidiaries include CSX Intermodal Terminals, Inc. (“CSX Intermodal Terminals”), Total Distribution Services, Inc. (“TDSI”), Transflo Terminal Services, Inc. (“Transflo”), CSX Technology, Inc. (“CSX Technology”) and other subsidiaries.  CSX Intermodal provides transportationTerminals owns and operates a system of intermodal terminals, predominantly in the eastern United States and arranges drayage services linking customers to railroads via trucks and terminals. for certain CSXT intermodal customers.  TDSI serves the automotive industry with distribution centers and storage locations, while Transflo provides logistical solutions for transferring products from rail to trucks.  CSX Technology and other subsidiaries provide support services for the Company.

CSX’s other holdings include CSX Real Property, Inc., a subsidiary responsible for the Company’s real estate sales, leasing, acquisition and management and development activities.  These activities are classified in other income – net because they are not considered by the Company to be operating activities.  Results of these activities fluctuate with the timing of non-operating real estate transactions.

Beginning inCSX Intermodal, Inc. (“Intermodal”) was a subsidiary of CSX until it merged with CSXT on June 26, 2010 (which was the second quarterfirst day of 2010, the third quarter).  Prior to the merger, Intermodal was the parent company of CSX Intermodal Terminals, and conducted the sales and marketing activities associated with intermodal transportation service now provided by CSXT, as well as the drayage and trucking dispatch operations now being provided by CSX Intermodal Terminals.

The Company is no longer reflectingreflects the intermodal business as a separate segment.  This change iswas a result of the strategic business review and change in CSX’sthe Company’s intermodal service associated with the start of the UMAX program as well as certain management realignments. The UMAX program, which began thisin the second quarter, is a domestic interline container program.  CSX’s chairman nowpresident views intermodal similarly to merchandise and coal.  Also, Inland Transportationinland transportation expense has been reclassified to Materials, Suppliesmaterials, supplies and Other.other.  Intermodal revenue will continue to be viewed as a separate revenue group; however, a separate income statement and operating ratio will no longer be provided and business segment disclosures are no longer required.  All prior periods have been revisedrevise d to reflect this change.


 
6
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1.                      Nature of Operations and Significant Accounting Policies, continued

Basis of Presentation

In the opinion of management, the accompanying consolidated financial statements contain all normal, recurring adjustments necessary to fairly present the following:

·  Consolidated income statements for the quarters and sixnine months ended June 25,September 24, 2010 and June 26,September 25, 2009;

·  Consolidated balance sheets at June 25,September 24, 2010 and December 25, 2009; and

·  Consolidated cash flow statements for the sixnine months ended June 25,September 24, 2010 and June 26,September 25, 2009.

Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been omitted from these interim financial statements.  CSX suggests that these financial statements be read in conjunction with the audited financial statements and the notes included in CSX's most recent Annual Report on Form 10-K and any Current Reports on Form 8-K.

Fiscal Year

CSX follows a 52/53 week fiscal reporting calendar with the last day of each reporting period ending on a Friday:

·  The secondthird fiscal quarter of 2010 and 2009 consisted of 13 weeks ending on June 25,September 24, 2010 and June 26,September 25, 2009, respectively.

·  The sixnine month periods of 2010 and 2009 consisted of 2639 weeks ending on June 25,September 24, 2010 and June 26,September 25, 2009, respectively.

·  Fiscal year 2009 consisted of 52 weeks ending on December 25, 2009.

·  Please note that fiscalFiscal year 2010 consists of 53 weeks ending on December 31, 2010. Therefore, fourth quarter 2010 will consist of 14 weeks.

Except as otherwise specified, references to “second“third quarter(s)” or “six“nine months” indicate CSX’s fiscal periods ending June 25,September 24, 2010 and June 26,September 25, 2009, and references to year-end indicate the fiscal year ended December 25, 2009.


 
7
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1.                      Nature of Operations and Significant Accounting Policies, continued

Comprehensive Earnings

CSX reports comprehensive earnings or loss in accordance with the Comprehensive Income Topic in the Accounting Standards Codification (“ASC”) in the Consolidated Statement of Changes in Shareholders' Equity.  Total comprehensive earnings are defined as all changes in shareholders' equity during a period, other than those resulting from investments by and distributions to shareholders (e.g., issuance of equity securities and dividends).  Generally, for CSX, total comprehensive earnings equals net earnings plus or minus certain reclassifications for pension and other post-retirement liabilities.  Total comprehensive earnings represent the activity for a period net of related tax effects and were $424 million$431 m illion and $311$297 million for secondthird quarters 2010 and 2009, respectively, and $741 million$1.2 billion and $556$853 million for sixnine months 2010 and 2009, respectively.

While total comprehensive earnings is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income, net of tax, as of the balance sheet date.  For CSX, AOCI is primarily the cumulative balance related to pension and other post-retirement reclassifications. Overall equity was reduced by $787$771 million and $809 million as of JuneSeptember 2010 and December 2009, respectively, primarily as a result of normal quarterly pension reclassifications.  In general, for CSX, AOCI is not materially impacted by other items.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts on uncollectible amounts related to freight receivables, public project receivables (work done by the Company on behalf of a government agency), claims for damages and other various receivables. The allowance is based upon the credit worthiness of customers, historical experience, the age of the receivable and current market and economic conditions. Uncollectible amounts are charged against the allowance account.  Allowance for doubtful accounts of $43$39 million and $47 million is included in the consolidated balance sheets as of JuneSeptember 2010 and December 2009, respectively.

Capital Expenditures

Property additions, which are classified as investing activities on the consolidated cash flow statements, consisted of $687 million$1.1 billion and $657 million$1 billion for second quartersnine months 2010 and 2009, respectively.  Total capital expenditures for the nine months of 2009 included purchases of new assets using seller financing of approximately $160 million, for which payments are included in other financing activities on the consolidated cash flow statements.  There were no purchases of new assets using seller financing agreements during second quarterthe nine months of 2010.  The Company plans to spend $1.7approximately $1.8 billion for total capital expenditures in 2010.


 
8
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1.                      Nature of Operations and Significant Accounting Policies, continued

New Accounting Pronouncements and Changes in Accounting Policy

Change in Accounting Principle
 
Effective in the second quarter of 2010, CSX changed the accounting policy for rail grinding costs from a capitalization method, under which the cost of rail grinding was capitalized and then depreciated, to a direct expense method, under which rail grinding costs are expensed as incurred. This represents a change from an acceptable method under GAAP to a preferable method, and is consistent with recent changes in industry practice.
 
The direct expense method eliminates the subjectivity in determining the period of benefit over which to depreciate the capitalized costs associated with rail grinding. The application of the change in accounting principle is presented retrospectively to all periods presented.
 
The balance sheet effects of the adjustments through the beginning of fiscal year 2009 resulted in a decrease in net properties, deferred income taxes, and shareholders’ equity by $134 million, $51 million, and $83 million, respectively.  The effect of this change is not material to the financial condition, results of operations or liquidity for any of the periods presented.

 
9
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1.                      Nature of Operations and Significant Accounting Policies, continued
 
The following tables show the effects of the change in policy for rail grinding costs on the consolidated financial statements:statements.  The Accounting Changes and Error Corrections Topic in the ASC requires CSX to present both prior period amounts that have been previously reported as well as current period amounts as computed under both the prior method and as reported.
         
2010
Consolidated Income Statements 3rd Quarter 9 months
Dollars in Millions, Except Per Share Amounts Computed under Prior MethodImpact of AdjustmentAs Reported Computed under Prior MethodImpact of AdjustmentAs Reported
Materials, Supplies and Other  $503 $6 $509  $1,564 $15 $1,579
Depreciation  234 (2) 232  694 (4) 690
Total Expense  1,837 4 1,841  5,584 11 5,595
Operating Income  829 (4) 825  2,236 (11) 2,225
Earnings from Continuing Operations        
       Before Taxes  706 (4) 702  1,856 (11) 1,845
Income Tax Expense  (289) 1 (288)  (716) 4 (712)
Earnings from Continuing Operations  417 (3) 414  1,140 (7) 1,133
Net Earnings  417 (3) 414  1,140 (7) 1,133
Net Earnings Per Share, Basic        
       Continuing Operations  $1.10 $(0.01) $1.09  $2.97 $(0.02) $2.95
       Net Earnings  $1.10 $(0.01) $1.09  $2.97 $(0.02) $2.95
Net Earnings Per Share, Assuming Dilution        
       Continuing Operations  $1.09 $(0.01) $1.08  $2.94 $(0.02) $2.92
       Net Earnings  $1.09 $(0.01) $1.08  $2.94 $(0.02) $2.92
         
2009
Consolidated Income Statements 3rd Quarter 9 months
Dollars in Millions, Except Per Share Amounts As Previously ReportedImpact of AdjustmentAs Adjusted As Previously ReportedImpact of AdjustmentAs Adjusted
Materials, Supplies and Other  $495 $5 $500  $1,467 $15 $1,482
Depreciation  228 (1) 227  681 (4) 677
Total Expense  1,691 4 1,695  5,019 11 5,030
Operating Income  598 (4) 594  1,702 (11) 1,691
Earnings from Continuing Operations  464 (4) 460  1,301 (11) 1,290
       Before Taxes        
Income Tax Expense  (171) 1 (170)  (469) 4 (465)
Earnings from Continuing Operations  293 (3) 290  832 (7) 825
Net Earnings  293 (3) 290  847 (7) 840
Net Earnings Per Share, Basic        
       Continuing Operations  $0.75 $(0.01) $0.74  $2.12 $(0.02) $2.10
       Net Earnings  $0.75 $(0.01) $0.74  $2.16 $(0.02) $2.14
Net Earnings Per Share, Assuming Dilution        
       Continuing Operations  $0.74 $(0.01) $0.73  $2.10 $(0.02) $2.08
       Net Earnings  $0.74 $(0.01) $0.73  $2.14 $(0.02) $2.12
 
2010 
Consolidated Income Statements1st Quarter 2nd Quarter 6 months 
Dollars in Millions, Except Per Share AmountsAs Previously Reported Impact of Adjustment As Adjusted Computed under Prior Method Impact of Adjustment As Reported Computed under Prior Method Impact of Adjustment As Reported 
Materials, Supplies and Other$516 $3 $519 $545 $6 $551 $1,061 $9 $1,070 
Depreciation 229  (1) 228  231  (1)  230  460  (2) 458 
Total Expense 1,857  2  1,859  1,890  5  1,895  3,747  7  3,754 
Operating Income 634  (2) 632  773  (5)  768  1,407  (7) 1,400 
Earnings from Continuing Operations Before Taxes 503  (2) 501  647  (5)  642  1,150  (7) 1,143 
Income Tax Expense (197)  1  (196) (230)  2  (228)  (427) 3  (424)
Earnings from Continuing Operations 306  (1) 305  417  (3)  414  723  (4) 719 
Net Earnings 306  (1) 305  417  (3)  414  723  (4) 719 
Earnings Per Share, Basic                           
    Continuing Operations
$0.78 $- $0.78 $1.09 $(0.01) $1.08 $1.87 $(0.01) $1.86 
     Net Earnings$0.78 $- $0.78 $1.09 $(0.01) $1.08 $1.87 $(0.01) $1.86 
 Net Earnings Per Share, Assuming Dilution                           
    Continuing Operations
$0.78 $- $0.78 $1.08 $(0.01) $1.07 $1.85 $(0.01) $1.84 
     Net Earnings$0.78 $- $ 0.78 $ 1.08 $(0.01) $ 1.07 $1.85 $(0.01) $1.84 
       
 2009 
Consolidated Income Statements1st Quarter 2nd Quarter 6 months 
Dollars in Millions, Except Per Share AmountsAs Previously Reported Impact of Adjustment As Adjusted As Previously Reported Impact of Adjustment As Adjusted As Previously Reported Impact of Adjustment As Adjusted 
Materials, Supplies and Other$535 $3 $538 $437 $7 $444 $972 $10 $982 
Depreciation 224  (1) 223  229  (2)  227  453  (3) 450 
Total Expense 1,725  2  1,727  1,603  5  1,608  3,328  7  3,335 
Operating Income 522  (2) 520  582  (5)  577  1,104  (7) 1,097 
Earnings from Continuing Operations Before Taxes 384  (2) 382  453  (5)  448  837  (7) 830 
Income Tax Expense (130)  1  (129) (168)  2  (166)  (298) 3  (295)
Earnings from Continuing Operations 254  (1) 253  285  (3)  282  539  (4) 535 
Net Earnings 246  (1) 245  308  (3)  305  554  (4) 550 
Net Earnings Per Share, Basic                           
     Continuing Operations
$0.65 $- $0.65 $0.73 $(0.01) $0.72 $1.37 $(0.01)$1.36 
     Net Earnings$0.63 $- $0.63 $ 0.79 $ (0.01) $ 0.78 $ 1.41 $ (0.01) $1.40 
Net Earnings Per Share, Assuming Dilution                           
    Continuing Operations$0.64 $ - $ 0.64 $ 0.72 $ (0.01) $ 0.71 $1.36 $ (0.01) $ 1.35 
    Net Earnings
$0.62 $- $0.62 $0.78 $(0.01) $0.77 $1.40 $(0.01)$1.39 
                            
Consolidated Balance SheetsJune 2010 December 2009          
Dollars in MillionsComputed under Prior Method Impact of Adjustment As Reported As Previously Reported Impact of Adjustment As Adjusted          
Net Properties$23,329 $(156)$23,173 $23,213 $(149) $23,064          
Total Assets 26,900  (156) 26,744  27,036  (149)  26,887          
Deferred Income Taxes 6,710  (60) 6,650  6,585  (57)  6,528          
Total Liabilities 18,227  (60) 18,167  18,176  (57)  18,119          
Retained Earnings 9,064  (96) 8,968  9,182  (92)  9,090          
Total Shareholders' Equity 8,673  (96) 8,577  8,860  (92)  8,768          
Total Liabilities and Shareholders' Equity 26,900  (156) 26,744  27,036  (149)  26,887          

 
Certain prior year data has been reclassified to conform to the current presentation.

 
10
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1.   Nature of Operations and Significant Accounting Policies, continued


Consolidated Balance Sheets September 2010 December 2009
Dollars in Millions Computed under Prior MethodImpact of AdjustmentAs Reported As Previously ReportedImpact of AdjustmentAs Adjusted
Properties - Net  $23,494 $(160) $23,334  $23,213 $(149) $23,064
Total Assets  27,189 (160) 27,029  27,036 (149) 26,887
Deferred Income Taxes  6,793 (61) 6,732  6,585 (57) 6,528
Total Liabilities  18,452 (61) 18,391  18,176 (57) 18,119
Retained Earnings  9,121 (99) 9,022  9,182 (92) 9,090
Total Shareholders' Equity  8,737 (99) 8,638  8,860 (92) 8,768
Total Liabilities and Shareholders' Equity  27,189 (160) 27,029  27,036 (149) 26,887
       
       
20102010 2010    
Consolidated Cash Flow Statements 3 months 6 months  9 months    
Dollars in Millions As Previously Reported Impact of Adjustment As Adjusted Computed under Prior Method Impact of Adjustment As Reported  Computed under Prior MethodImpact of AdjustmentAs Reported    
Net Earnings $306 $(1)$305 $723 $(4)$719   $1,140 $(7) $1,133    
Depreciation  229  (1) 228  460  (2) 458   694 (4) 690    
Deferred Income Taxes  47  (1) 46  82  (3) 79   143 (4) 139    
Cash Provided by Operating Activities  747  (3) 744  1,431  (9) 1,422 
Net Cash Provided by Operating Activities  2,281 (15) 2,266    
Property Additions  (331) 3  (328) (696) 9  (687)  (1,107) 15 (1,092)    
Cash Used in Investing Activities  (313) 3  (310) (628) 9  (619)
Net Cash Used in Investing Activities  (1,066) 15 (1,051)    
        
2009 2009 2009    
Consolidated Cash Flow Statements 3 months 6 months  9 months    
Dollars in Millions As Previously Reported Impact of Adjustment As Adjusted As Previously Reported Impact of Adjustment As Adjusted  As Previously ReportedImpact of AdjustmentAs Adjusted    
Net Earnings $246 $(1)$245 $554 $(4)$550   $847 $(7) $840    
Depreciation  224  (1) 223  454  (3) 451   679 (4) 675    
Deferred Income Taxes  79  (1) 78  212  (3) 209   330 (4) 326    
Cash Provided by Operating Activities  449  (3) 446  981  (10) 971 
Net Cash Provided by Operating Activities  1,604 (15) 1,589    
Property Additions  (309) 3  (306) (667) 10  (657)  (1,046) 15 (1,031)    
Cash Used in Investing Activities  (272) 3  (269) (618) 10  (608)
Net Cash Used in Investing Activities  (995) 15 (980)    

Other Items

Retained Earnings

During secondthird quarter 2010, CSX's other capital balance was reduced to zero as a result of share repurchases. In accordance with the Equity Topic in the ASC, other capital cannot be negative.  Therefore, a reclassification of $540$272 million was made between retained earnings and other capital to bring the other capital balance to zero.  Generally, retained earnings is only impacted by net earnings and dividends.

Property TransactionDividend Increase

DuringOn September 29, 2010, CSX announced an 8 percent increase to its quarterly cash dividend to 26 cents per share payable on December 15, 2010 to shareholders of record on November 30, 2010.  This is the second quarter of 2010, the Company closed an operating property transaction with the Commonwealth of Massachusetts.  The Company received $50 million of cash related to this transaction and recordedeighth dividend increase which represents a net book loss of $30 million pre-tax or $0.05 per share. This property is35 percent compounded annual growth rate over a former Conrail acquired property.  This loss is reflected in materials, supplies and other.


five-year period.

 
11
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 2.                      Earnings Per Share

The following table sets forth the computation of basic earnings per share and earnings per share, assuming dilution:


  Second Quarters  Six Months 
  2010  2009  2010  2009 
     (Adjusted)*     (Adjusted)* 
Numerator (Dollars in millions):
            
Earnings from Continuing Operations $414  $282  $719  $535 
Discontinued Operations - Net of Tax (a)
  -   23   -   15 
Net Earnings $414  $305  $719  $550 
                 
Denominator (Units in thousands):
                
Average Common Shares Outstanding  383,164   392,027   387,121   391,594 
Convertible Debt  997   1,118   1,019   1,118 
Stock Option Common Stock Equivalents (b)
  2,056   1,989   2,094   1,906 
Other Potentially Dilutive Common Shares  174   236   123   117 
Average Common Shares Outstanding, Assuming Dilution  386,391   395,370   390,357   394,735 
                 
Net Earnings Per Share, Basic:                
Continuing Operations $1.08  $0.72  $1.86  $1.36 
Discontinued Operations  -   0.06   -   0.04 
Net Earnings $1.08  $0.78  $1.86  $1.40 
                 
Net Earnings Per Share, Assuming Dilution:                
Continuing Operations $1.07  $0.71  $1.84  $1.35 
Discontinued Operations  -   0.06   -   0.04 
Net Earnings $1.07  $0.77  $1.84  $1.39 

* Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (See Note 1).
   Third QuartersNine Months
   2010200920102009
    
(Adjusted) (a)
 
(Adjusted) (a)
Numerator (Dollars in millions):
     
 Earnings from Continuing Operations  $414 $290 $1,133 $825
 
Discontinued Operations - Net of Tax (b)
  - - - 15
 Net Earnings  $414 $290 $1,133 $840
       
Denominator (Units in thousands):
     
 Average Common Shares Outstanding 378,050 392,352 384,102 391,847
 Convertible Debt  987 1,116 1,008 1,117
 
Stock Option Common Stock Equivalents (c)
  1,865 2,417 2,018 2,076
 Other Potentially Dilutive Common Shares  920 448 388 228
 Average Common Shares Outstanding, Assuming Dilution 381,822 396,333 387,516 395,268
       
Net Earnings Per Share, Basic:     
 Continuing Operations  $1.09 $0.74 $2.95 $2.10
 Discontinued Operations  - - - 0.04
 Net Earnings  $1.09 $0.74 $2.95 $2.14
       
Net Earnings Per Share, Assuming Dilution:     
 Continuing Operations  $1.08 $0.73 $2.92 $2.08
 Discontinued Operations  - - - 0.04
 Net Earnings  $1.08 $0.73 $2.92 $2.12

(a)Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (See Note 1).

(b)  For additional information regarding discontinued operations, see Note 10, Discontinued Operations.

(b)(c)  
When calculating diluted earnings per share for stock option common stock equivalents, the Earnings Per Share Topic in the ASC requires CSX to include the potential shares that would be outstanding if all outstanding stock options were exercised.   This is offset by shares CSX could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent.  This number is different from outstanding stock options, which is included in Note 3, Share-Based Compensation.  All stock options were dilutive for the periods presented; therefore, no stock options were excluded from the diluted earnings per share calculation.


 
12
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 2.                      Earnings Per Share, continued

Basic earnings per share is based on the weighted-average number of shares of common stock outstanding.  Earnings per share, assuming dilution, is based on the weighted-average number of shares of common stock outstanding adjusted for the effects of common stock that may be issued as a result of the following types of potentially dilutive instruments:

·  convertible debt;

·  employee stock options; and

·  other equity awards, which include long-term incentive awards.

The Earnings Per Share Topic in the ASC requires CSX to include additional shares in the computation of earnings per share, assuming dilution.  The additional shares included in diluted earnings per share represents the number of shares that would be issued if all of the above potentially dilutive instruments were converted into CSX common stock.

As a result, diluted shares outstanding are not impacted when debentures are converted into CSX common stock because those shares were already included in the diluted shares calculation.  Shares outstanding for basic earnings per share, however, are impacted on a weighted-average basis when conversions occur.  During secondthird quarter 2010, $200,000approximately $300 thousand of face value of convertible debentures were converted into 7,00010 thousand shares of CSX common stock.  There were no conversionsDuring third quarter 2009, $275 thousand of face value of convertible debentures during second quarter 2009.were converted into approximately 10 thousand shares of CSX common stock.  As of JuneSeptember 2010, approximately $28 million of convertible debentures at face value remained outstanding, which are convertible into approximatelyap proximately 1 million shares of CSX common stock.

NOTE 3.                      Share-Based Compensation

CSX share-based compensation plans primarily include performance grants, restricted stock awards, stock options and stock plans for directors.  CSX has not granted stock options since 2003.  Awards granted under the various plans are determined and approved by the Compensation Committee of the Board of Directors or, in certain circumstances, by the Chief Executive Officer for awards to management employees other than senior executives.  The Board of Directors approves awards granted to the Company’s non-management directors upon recommendation of the Governance Committee of the Board of Directors.

 
13
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 3.                      Share-Based Compensation, continued

On May 4,5, 2010, 402,000 target performance units were granted to key members of management under a new long-term incentive plan (LTIP) adopted under the CSX OmnibusStock and Incentive Award Plan.  This LTIP plan provides for a three-year cycle ending in fiscal year 2012.  Similar to the two existing plans, the financial target upon which payments are based is operating ratio, which is defined as operating expenses divided by operating revenue and is calculated excluding certain non-recurring items.  Target grantsGrants were made in performance units, with each unit being equivalent to one share of CSX common stock, and payouts will be made in CSX common stock.  The payout range for participants will be between 0% and 200% of the original target grant based upon CSX’s attainmentsattainment of pre-established operating ratio targets for fiscal year 2012.& #160; Payouts to certain senior executive officers are subject to a reduction of up to 30% at the discretion of the Compensation Committee of the Board of Directors based upon Company performance against certain CSX strategic initiatives.
 
AsAdditionally, on May 5, 2010, as part of this plan,its overall long-term incentive compensation program, the Company granted 134,000 time-based restricted stock units were granted to key members of management.  The restricted stock units vest three years after the date of grant and participants receive cash dividend equivalents on the unvested shares during the restriction period.  These awards are not based upon CSX’s attainment of operational targets.
 
 
For information related to the Company’s other outstanding long-term incentive plans,compensation, see CSX’s most recent annual reportAnnual Report on Form 10-K.
 
Total pre-tax expense associated with all share-based compensation and its related income tax benefit is as follows:

 Second Quarters  Six Months Third Quarters Nine Months
(Dollars in millions) 2010  2009  2010  2009 20102009 20102009
Share-Based Compensation Expense (a)
 $9  $11   32   3  $13 $9 $46$12
Income Tax Benefit  3   4   12   1  5 3 17 4

 (a) Share-based compensation expense may fluctuate with estimates of the number of performance-based awards that are expected to be awarded in future periods.

14
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 3.      Share-Based Compensation, continued

The following table provides information about stock options exercised.


Second Quarters Six MonthsThird Quarters Nine Months
(In thousands)20102009 2010200920102009 20102009
      
Number of Stock Options Exercised 554 492 913566 280 386 1,193952


As of December 2009, all outstanding options arewere vested, and therefore, there will be no future expense related to these options.  As of JuneSeptember 2010, CSX had approximately 54 million stock options outstanding.  However, the impact of options to diluted earnings per share is much smaller (see note (b) to the table in Note 2, Earnings Per Share for more information).

14
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 4.                      Casualty, Environmental and Other Reserves

Casualty, environmental and other reserves were determined to be critical accounting estimates due to the need for significant management judgments. They are provided for in the consolidated balance sheets as follows:


 June 2010  December 2009  September 2010 December 2009
(Dollars in millions) Current  Long-term  Total  Current  Long-term  Total (Dollars in millions)CurrentLong-termTotal CurrentLong-termTotal
                          
Casualty:                  Casualty:       
Personal Injury $78  $199  $277  $85  $215  $300 
Occupational  31   128   159   27   132   159 
Total Casualty  109   327   436   112   347   459 
Personal Injury $78 $191 $269  $85 $215 $300
Occupational 31 116 147  27 132 159
Total Casualty 109 307 416  112 347 459
Separation  15   51   66   16   57   73 Separation 15 48 63  16 57 73
Environmental  37   61   98   37   60   97 Environmental 37 70 107  37 60 97
Other  29   105   134   25   83   108 Other 26 109 135  25 83 108
Total $190  $544  $734  $190  $547  $737 
Total $187 $534 $721  $190 $547 $737

Details with respect to each type of reserve are described below.  Actual settlements and claims received could differ.  The final outcome of these matters cannot be predicted with certainty.  Considering the legal defenses available, the liabilities that have been recorded and other factors, it is the opinion of management that none of these items, when finally resolved, will have a material effect on the Company’s financial condition, results of operations or liquidity.  Should a number of these items occur in the same period, however, they could have a material effect on the Company’s financial condition, results of operations or liquidity in that particular period.



15
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 4.      Casualty, Environmental and Other Reserves, continued

During the second quarter of 2010, the Company reduced casualty reserves by a net $9 million, most of which is related to the reduction in CSXT personal injury reserves of $13 million as noted below.  There were no significant adjustments to casualty reserves in the third quarter of 2010.

During the second quarter of 2009, the Company reduced casualty reserves by a net $85 million, or $0.22 per share.  The majority of this reduction is related to personal injury and asbestos and is described below.  Also included in the net reduction is a write-off of $11 million of reinsurance receivables (expected receivables from outside insurance companies).  This receivable write-off is not included in the reserve amounts disclosed above.


15
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 4.                      Casualty, Environmental and Other Reserves, continued

Casualty

Casualty reserves represent accruals for personal injury and occupational injury claims.  During the second quarter of 2010 the Company increased its self-insured retention amount for these claims from $25 million to $50 million per injury for claims occurring on or after June 1, 2010.  Currently, no individual claim is expected to exceed the self-insured retention amount.  In accordance with the Contingencies Topic in the ASC, to the extent the value of an individual claim exceeds the self-insured retention amount,amount; the Company would present the liability on a gross basis with a corresponding receivable for insurance recoveries.  These reserves fluctuate based upon the timing of payments as well as changes in independent third-party estimates,estima tes, which are reviewed by management.  The claims relate to CSXT unless otherwise noted below.  Defense and processing costs, which historically have been insignificant and are anticipated to be insignificant in the future, are not included in the recorded liabilities.

Personal Injury

Personal injury reserves represent liabilities for employee work-related and third-party injuries.  Work-related injuries for CSXT employees are primarily subject to the Federal Employers’ Liability Act (“FELA”).  In addition to FELA liabilities, employees of other CSX subsidiaries or former subsidiaries are covered by various state workers’ compensation laws, the Federal Longshore and Harbor Workers’ Compensation Program or the Maritime Jones Act.

CSXT retains an independent actuarial firm to assist management in assessing the value of personal injury claims and cases.  An analysis is performed by the independent actuarial firm semi-annually and is reviewed by management. The methodology used by the actuary includes a development factor to reflect growth or reduction in the value of these personal injury claims. It is based largely on CSXT’s historical claims and settlement experience.  Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation.

16
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 4.       Casualty, Environmental and Other Reserves, continued

During second quarters of 2010 and 2009, the Company reduced personal injury reserves by $13 million and $78 million, respectively, based on management’s review of the actuarial analysis performed by an independent actuarial firm.  These reductions are a direct result of the Company’s improvement in safety.  Claims have shown a continued downward trend in the number of injuries, resulting in a continual reduction of the Company’s FRA personal injury frequency index.  Additionally, the trend in the severity of injuries has significantly declined.  There were no significant adjustments to personal injury reserves in the third quarter of 2010.

Occupational

Occupational claims arise from allegations of exposure to certain materials in the workplace, such as asbestos, solvents (which include soaps and chemicals) and diesel fuels or allegations of chronic physical injuries resulting from work conditions, such as repetitive stress injuries, carpal tunnel syndrome and hearing loss.

16
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 4.                      Casualty, Environmental and Other Reserves, continued

An analysis of occupational claims is performed semi-annually by an independent third party and reviewed by management.  The methodology used includes estimates of future anticipated incurred but not reported claims based on the Company’s trends in average historical claim filing rates, future anticipated dismissal rates and future settlement rates.  Actual claims may vary from these estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation.

During second quarter 2009, the Company reduced its asbestos reserves by $18 million.  This reserve reduction is related to approximately 1,5001500 claims that were deemed to have no medical merit and, therefore, have been determined to have no value.  AsbestosThere were no significant adjustments to asbestos reserves were not adjusted during 2010 as a result of the semi-annual review by the independent third party.in 2010.

Separation
 
Separation liabilities represent the estimated benefits provided to certain union employees as a result of implementing workforce reductions, improvements in productivity and certain other cost reductions at the Company's major transportation units since 1991. These liabilities are expected to be paid out over the next 10 to 15 years from general corporate funds and may fluctuate depending on the timing of payments and associated taxes.

17
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 4.     Casualty, Environmental and Other Reserves, continued

Environmental

The Company is a party to various proceedings related to environmental issues, including administrative and judicial proceedings, involving private parties and regulatory agencies. The Company has been identified as a potentially responsible party at approximately 255265 environmentally impaired sites. Many of these are, or may be, subject to remedial action under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, also known as the Superfund Law, or similar state statutes.  Most of these proceedings arose from environmental conditions on properties used for ongoing or discontinued railroad operations.  A number of these proceedings, however, are based on allegations that the Company, or its predecessors, sent hazardous substances to facilities owned or operated by othersothe rs for treatment or disposal.  In addition, some of the Company’s land holdings were leased to others for commercial or industrial uses that may have resulted in releases of hazardous substances or other regulated materials onto the property and could give rise to proceedings against the Company.

In any such proceedings, the Company is subject to environmental clean-up and enforcement actions under the Superfund Law, as well as similar state laws that may impose joint and several liability for clean-up and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct.  These costs could be substantial.


17
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 4.                      Casualty, Environmental and Other Reserves, continued

In accordance with the Asset Retirement and Environmental Obligations Topic in the ASC, the Company reviews its role with respect to each site identified at least quarterly, giving consideration to a number of factors such as:

·  the type of clean-up required;

·  the nature of the Company’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 the Company’s alleged connection (e.g., volume of waste sent to the location and other relevant factors); and

·  the number, connection and financial viability of other named and unnamed potentially responsible parties at the location.

18
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 4.     Casualty, Environmental and Other Reserves, continued

Based on the review process, the Company has recorded amounts to cover anticipated contingent future environmental remediation costs with respect to each site to the extent such costs are estimable and probable.  The recorded liabilities for estimated future environmental costs are undiscounted.  The liability includes future costs for remediation and restoration of sites as well as any significant ongoing monitoring costs, but excludes any anticipated insurance recoveries.  Payments related to these liabilities are expected to be made over the next several years.  Environmental remediation costs are included in materials, supplies and other on the consolidated income statement.

Currently, the Company does not possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, related to some sites, and will not possess such information until completion of future environmental studies.  In addition, conditions that are currently unknown could, at any given location, result in liabilities, 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 fund 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 financial condition, results of operations or liquidity.

See Item 1, Legal proceedings in Part II of this quarterly report on Form 10-Q for information related to an environmental settlement.

Other

 Other reserves include liabilities for various claims, such as longshoremen disability claims primarily associated with former subsidiaries’ activities, freight claims and claims for property, automobile and general liability.  These liabilities are accrued at the estimable and probable amount in accordance with the Contingencies Topic in the ASC.


18
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 5.                      Commitments and Contingencies

Insurance

The Company maintains numerous insurance programs with substantial limits for third-party casualty liability and Company property damage and business interruption.  A certain amount of risk is retained by the Company on each of the casualty and property programs.  For the first event in any given year, the Company has a $25 million deductible for non-catastrophic property programs and a $50 million deductible for casualty and catastrophic property programs.

While the Company’s current insurance coverage is adequate to cover its damages, future claims could exceed existing insurance coverage or insurance may not continue to be available at commercially reasonable rates.

19
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 5.    Commitments and Contingencies, continued

Guarantees

As of June 2010, the Company wasis no longer liable for the guarantee related to CSX Energy.  Additionally, the guarantee for A.P. Moller-Maersk is currently less than $1 million.

Legal Proceedings

There were no material developments duringFor information related to the quarter concerning the fuel surcharge antitrust litigation or theSeminole Electric Cooperative, Inc. rate case.For further details,Company’s legal proceedings, see Note 7, Commitments and Contingencies,Item 1, Legal proceedings in CSX’s most recent Annual ReportPart II of this quarterly report on Form 10-K.10-Q.

In addition to the matters referenced above, the Company is involved in 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, but not limited to, those related to environmental matters, FELA 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 compensatory as well as punitive damages and others are, or are purported to be, class actions.  While the final outcome of these matters cannot be predicted with certainty, considering, among other things, the legal defenses available and liabilities that have been recorded along with applicable insurance, it is currently the opinion of CSX management that none of these items will have a material adverse effect on the Company’s financial condition, results of operations or liquidity.  An unexpected adverse resolution of one or more of these items, however, could have a material adverse effect on the Company’s financial condition, results of operations or liquidity in a particular quarter or fiscal year.

NOTE 6.                      Employee Benefit Plans

The Company sponsors defined benefit pension plans principally for salaried, management personnel.  The plans provide eligible employees with retirement benefits based predominantly on years of service and compensation rates near retirement.  For employees hired after December 31, 2002, benefits are determined based on a cash balance formula, which provides benefits by utilizing interest and pays credits based upon age, service and compensation.

In addition to these plans, the Company sponsors a post-retirement medical plan and a life insurance plan that provide benefits to full-time, salaried, management employees hired on or before December 31, 2002 upon their retirement if certain eligibility requirements are met.  The post-retirement medical plan is contributory (partially funded by retirees), with retiree contributions adjusted annually.  The life insurance plan is non-contributory.

The Company engages independent, external actuaries to compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company selects.  These amounts are reviewed by management.  The following table describes the components of expense/(income) related to net periodic benefit cost:

 
2019
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 6.                      Employee Benefit Plans,continued
  Pension Benefits 
(Dollars in millions) Second Quarters  Six Months 
  2010  2009  2010  2009 
Service Cost $11  $8  $21  $16 
Interest Cost  30   32   61   62 
Expected Return on Plan Assets  (41)  (36)  (82)  (71)
Amortization of Prior Service Cost  (1)  -   -   1 
Amortization of Net Loss  14   7   29   13 
Net Periodic Benefit Cost $13  $11  $29  $21 
                 
                 
  Other Post-retirement Benefits 
(Dollars in millions) Second Quarters  Six Months 
   2010   2009   2010   2009 
Service Cost $1  $1  $2  $2 
Interest Cost  4   6   9   12 
Amortization of Net Loss  2   1   4   2 
Net Periodic Benefit Cost $7  $8  $15  $16 


  Pension Benefits
(Dollars in millions)Third Quarters Nine Months
 20102009 20102009
Service Cost $10 $8  $31 $24
Interest Cost 30 32  91 94
Expected Return on Plan Assets (42) (37)  (124) (108)
Amortization of Prior Service Cost - 1  - 2
Amortization of Net Loss 15 6  44 19
 Net Periodic Benefit Cost $13 $10  $42 $31
       
       
  Other Post-retirement Benefits
(Dollars in millions)Third Quarters Nine Months
 20102009 20102009
Service Cost $2 $2  $4 $4
Interest Cost 5 5  14 17
Amortization of Net Loss 1 1  5 3
 Net Periodic Benefit Cost $8 $8  $23 $24

Qualified pension plan obligations are funded in accordance with prescribed regulatory requirements and with an objective of meeting minimum funding requirements necessary to avoid restrictions on flexibility of plan operation and benefit payments.  The Company made pension plan contributions of $250 million to its qualified defined benefit pension plans in 2009.  At this time, the Company anticipates that no contributions to its qualified pension plans will be required in 2010.  For further details, see Note 8, Employee Benefit Plans, in CSX’s most recent Annual Report on Form 10-K.

NOTE 7.    Debt and Credit Agreements

Total activity related to long-term debt as of JuneSeptember 2010 was as follows:


(Dollars in millions) Current Portion  Long-term Portion  Total Long-term Debt Activity Current PortionLong-term PortionTotal Long-term Debt Activity
Total long-term debt at December 2009 $113  $7,895  $8,008  $113 $7,895 $8,008
2010 activity:             
Issued  -   -   - 
Repaid  (71)  -   (71)
Long-term Debt Issued -
Long-term Debt Repaid (103) - (103)
Reclassifications  575   (575)  -  598 (598) -
Converted into CSX stock  (3)  -   (3) (3) - (3)
Total long-term debt at June 2010 $614  $7,320  $7,934 
Discount and premium activity -
Total long-term debt at September 2010 $605 $7,297 $7,902



 
2120
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 7.    Debt and Credit Agreements, continued

Debt Exchange

On March 24, 2010, CSX exchanged $660 million of notes of multiple series (the “Existing Notes”), bearing interest at an average annual rate of 7.74% with maturities ranging from 2017 to 2038.  These Existing Notes were exchanged for $660 million of debt securities (the “New Notes”) bearing interest at an average annual rate of 6.22% and due April 30, 2040.  In addition, CSX paid approximately $141 million to the debtholders as cash consideration.  CSX also paid the debtholders any accrued and unpaid interest on the Existing Notes.  In accordance with the Debt Topic in the ASC, this transaction has been accounted for as a debt exchange.  As such, the $141 million of cash consideration paid to the debtholders is includedwas recorded in other long-terml ong-term assets.  This cash consideration and the unamortized discount and issue costs from the Existing Notes will beare being amortized as an adjustment of interest expense over the term of the New Notes.  There was no gain or loss recognized as a result of this exchange.  However, all costs related to the debt exchange and due to parties other than the debtholders were included in interest expense during first quarter 2010.  These costs totaled approximately $3 million.  There were no additional costs incurred during second quarter 2010.

In JuneJuly 2010, CSX offered to exchangeexchanged the New Notes for substantially identical notes registered under the Securities Act of 1933, as amended, pursuant to a registration rights agreement entered into in connection with the exchange offer.  This offer will expire at 5:00 p.m. eastern standard time on July 15, 2010, unless otherwise extended.

For fair value information related to the Company’s long-term debt, see Note 11, Fair Value Measurements.

Revolving Credit Facility

CSX has a $1.25 billion unsecured revolving credit facility with a syndicate of banks. The facility allows borrowings at floating rates based on the London interbank offered rate ("LIBOR"), plus a spread, depending upon CSX’s senior unsecured debt ratings.  The facility requires CSX to maintain a ratio of total debt to total capitalization below a prescribed limit.  The facility does not require CSX to post collateral under any circumstances.  As of JuneSeptember 2010, this facility was not drawn on, and CSX was in compliance with all covenant requirements under the facility.  This facility expires in 2012.

22
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 7.    Debt and Credit Agreements, continued

Receivables Securitization Facility

On June 16, 2010, the Company renewed itsThe Company’s $250 million receivables securitization facility.facility has a 364-day term and expires in June 2011.  The purpose of this facility is to provide an alternative to commercial paper and a low cost source of short-term liquidity. This facility has a 364-day term and expires on June 15, 2011.  As of the date of this filing, the Company has not drawn on this facility.  Under the terms of this facility, CSX Transportation and CSX Intermodal transferredtransfers eligible third-party receivables to CSX Trade Receivables, a bankruptcy-remote special purpose subsidiary.  A separate subsidiary of CSX will service the receivables.  Upon transfer, the receivables become assets of CSX Trade Receivables and are not available to the creditors of CSX or any of its other subsidiaries. In the event CSX Trade Receivables draws under this facility, the Company will record an equivalentequivalen t amount of debt on its consolidated financial statements.

21
NOTE 8.                      Other Income - Net

The Company derives income from items that are not considered operating activities.  Income from these items is reported net of related expense.  Other income -– net consisted of the following:


 Second Quarters  Six Months  Third Quarters Nine Months
(Dollars in millions) 2010  2009  2010  2009 (Dollars in millions)20102009 20102009
Interest Income $2  $3  $3  $7 Interest Income $1 $2  $4 $9
Income from Real Estate  8   6   15   7 Income from Real Estate 5 11  20 18
Miscellaneous Income (Expense)  (1)  1   2   (1)Miscellaneous Income (Expense) 2 (7)  4 (8)
Total Other Income - Net $9  $10  $20  $13 
Total Other Income - Net $8 $6  $28 $19


NOTE 9.                      Income Taxes

During the secondthird quarter of 2010, the Joint CommitteeCompany recorded an income tax charge of Taxation, which is a committee of the United States Congress, approved the refund$22 million or $0.06 per share primarily related to the resolutionmerger of the 2004 – 2006 federal income tax audit.  The final issue for this audit cycle related to a dispute over the value of the donation of appreciated property.Company’s former Intermodal subsidiary with CSXT.  As a result of this resolution, the Company recorded amerger, CSXT’s effective state tax rate has increased and interest benefit of $19 million.  Additionally, there were other tax expense items that partially offset this resultingresulted in a net benefit of $15 million or $0.04 per share in the second quarter of 2010. In addition, the Company has reduced gross unrecognized tax benefits by $32 million.  As of June 2010 and December 2009, the Company had approximately $25 million and $50 million, respectively, of total unrecognized tax benefits.  Of these total unrecognized tax benefits and after considerationrevaluation of the impact of federaldeferred tax benefits, as of June 2010 and December 2009, $17 million and $41 million, respectively, could favorably affectliabilities. There were no material changes to the effective incomeCompany’s uncertain tax rate.


23
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)positions during the quarter.


NOTE 10.                  Discontinued Operations

The Greenbrier

In the second quarter of 2009, CSX sold the stock of a subsidiary that indirectly owned Greenbrier Hotel Corporation (“The Greenbrier”) to Justice Family Group, LLC for approximately $21 million in cash.LLC.  CSX recognized a gain on the sale of $25 million which includes a tax benefit of  $3 million.  In addition, theThe Greenbrier incurred $2$10 million of losses from operations in the second quarter ofduring nine months 2009.

Previously, all amounts associated with the operations of The Greenbrier were included in other income – net.  All prior periods have been reclassified to reflect discontinued operations.  The Greenbrier had revenue of $26 million and $33 million and pre-tax income including(including the gain on sale,sale) of $17 million and $5 million during second quarter and six months 2009 through the date of sale, respectively.  There was no activity in 2010.

NOTE 11.                  Fair Value Measurements

The Financial Instruments Topic in the ASC requires disclosures about fair value of financial instruments in annual reports as well as in quarterly reports.  For CSX, this statement applies to certain investments and long-term debt.  In addition, disclosureDisclosure of the fair value of pension plan assets is only required annually.

Various inputs are considered when determining the value of the Company’s investments, pension plan assets and long-term debt.  The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities.  These inputs are summarized in the three broad levels listed below.

22
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 11.                                Fair Value Measurements, continued

·  Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets

·  Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.)

·  Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)

The valuation methods described below may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

24
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 11.       Fair Value Measurements, continued

Investments

The Company’s investment assets consist primarily of corporate bonds and are carried at fair value, as determined with the assistance of a third party trustee, on the consolidated balance sheet per the Fair Value Measurements and Disclosures Topic in the ASC.  Level 2 inputs were used to determine fair value of the Company’s investment assets.  The fair value and amortized cost of these bonds are as follows:

    
(Dollars in Millions)  
June
2010
 
December
2009
Fair Value $91  $96
Amortized Cost $87  $91
      
(Dollars in millions)  
September
2010
 
December
2009
 Fair Value   $125  $96
 Amortized Cost   $122  $91

These investments have the following maturities:

(Dollars in millions)
September
2010
Less than 1 year $22
1 - 2 years (a)
 81
2 - 5 years 17
Greater than 5 years 5
Total $125

(a) This amount includes approximately $18 million of callable bonds which mature in 1 – 2 years, but are classified as short-term investments on the consolidated balance sheet.


23
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 11.                                Fair Value Measurements, continued

Long-term Debt

Long-term debt is reported at carrying amount on the consolidated balance sheet and isencompasses the Company’s only financial instrument with fair values significantly different from its carrying amounts.  The majority of the Company’s long-term debt is valued with the assistance of an independent third party.  For those instruments not valued with the assistance of a third party, the fair value has been estimated using discounted cash flow analysis based upon the yields provided by the same independent third party.  All inputs used to determine the fair value of the Company’s long-term debt qualify as level 2 inputs.

The fair value of outstanding debt fluctuates with changes in a number of factors.  Such factors include, but are not limited to, interest rates, market conditions, the value of similar financial instruments, size of the transaction, cash flow projections and comparable trades.  Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued.  The fair value of a company’s debt is a measure of its current value under present market conditions.  It does not impact the financial statements under current accounting rules.  The carrying value of a company’s debt fluctuates with payments and/or new debt issuances.  The fair value and carrying value of the Company’s long-term debt areis as follows:

    
(Dollars in Millions)  
June
2010
 
December
2009
Long-term Debt Including Current Maturities:    
   Fair Value $8,993  $8,780
   Carrying Value $7,934  $8,008
       
(Dollars in millions)   
September
2010
 
December
2009
Long-term Debt Including Current Maturities:    
 Fair Value    $9,226  $8,780
 Carrying Value    $7,902  $8,008


25
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 12.                      Summarized Consolidating Financial Data

In 2007 and 2008, CSXT sold, in registered public offerings, secured equipment notes maturing in 2023 and 2014, respectively.  CSX has fully and unconditionally guaranteed the notes. In connection with the notes, the Company is providing the following condensed consolidating financial information in accordance with SEC disclosure requirements. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation and the allocation of certain expenses of CSX incurred for the benefit of its subsidiaries.
 
Condensed consolidating financial information for the obligor, CSXT, and the parent guarantor, CSX, is as follows:


 
2624
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 12.                      Summarized Consolidating Financial Data, continued


Consolidating Income StatementsConsolidating Income Statements Consolidating Income Statements
(Dollars in Millions) 
Quarter Ended June 2010 CSX Corporation  CSX Transportation  Other  Eliminations  Consolidated 
(Dollars in millions)(Dollars in millions)
Quarter Ended September 2010Quarter Ended September 2010
CSX
Corporation
CSX
Transportation
OtherEliminationsConsolidated
Revenue $-  $2,337  $352  $(26) $2,663 Revenue$-$2,650$41$(25)$2,666
Expense  (46)  1,672   295   (26)  1,895 Expense(46)1,84171(25)1,841
Operating Income  46   665   57   -   768 Operating Income46809(30)-825
                        
Equity in Earnings of Subsidiaries  492   -   -   (492)  - Equity in Earnings of Subsidiaries492--(492)-
Interest Expense  (122)  (27)  (6)  20   (135)Interest Expense(119)(22)(6)16(131)
Other Income - Net  4   20   5   (20)  9 Other Income - Net3174(16)8
                        
Earnings From Continuing Operations                    Earnings From Continuing Operations   
Before Income Taxes  420   658   56   (492)  642 
Before Income Taxes422804(32)(492)702
Income Tax Benefit (Expense)  (6)  (236)  14   -   (228)Income Tax Benefit (Expense)(9)(327)48-(288)
Earnings From Continuing Operations  414   422   70   (492)  414 Earnings From Continuing Operations41347716(492)414
Discontinued Operations  -   -   -   -   - Discontinued Operations---
Net Earnings $414  $422  $70  $(492) $414 Net Earnings$413$477$16$(492)$414
                        
                        
Quarter Ended June 2009 (Adjusted)*
 CSX Corporation  CSX Transportation  Other  Eliminations  Consolidated 
Quarter Ended September 2009 (Adjusted) (a)
Quarter Ended September 2009 (Adjusted) (a)
CSX
Corporation
CSX
Transportation
OtherEliminationsConsolidated
Revenue $-  $1,879  $332  $(26) $2,185 Revenue$-$1,971$344$(26)$2,289
Expense  (63)  1,400   294   (23)  1,608 Expense(69)1,496291(23)1,695
Operating Income  63   479   38   (3)  577 Operating Income6947553(3)594
                        
Equity in Earnings of Subsidiaries  305   -   -   (305)  - Equity in Earnings of Subsidiaries340--(340)-
Interest Expense  (125)  (28)  (3)  17   (139)Interest Expense(126)(29)(2)17(140)
Other Income - Net  (22)  (3)  49   (14)  10 Other Income - Net2410(14)(14)6
                        
Earnings From Continuing Operations                    Earnings From Continuing Operations   
Before Income Taxes  221   448   84   (305)  448 
Before Income Taxes30745637(340)460
Income Tax Benefit (Expense)  52   (177)  (41)  -   (166)Income Tax Benefit (Expense)(17)(168)15-(170)
Earnings From Continuing Operations  273   271   43   (305)  282 Earnings From Continuing Operations29028852(340)290
Discontinued Operations  32   -   (9)  -   23 Discontinued Operations---
Net Earnings $305  $271  $34  $(305) $305 Net Earnings$290$288$52$(340)$290

*
(a) Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (See Note 1).

 
2725
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 12.                      Summarized Consolidating Financial Data, continued

Consolidating Income StatementsConsolidating Income Statements Consolidating Income Statements
(Dollars in Millions) 
               
Six Months Ended June 2010 CSX Corporation  CSX Transportation  Other  Eliminations  Consolidated 
(Dollars in millions)(Dollars in millions)
Nine Months Ended September 2010Nine Months Ended September 2010
CSX
Corporation
CSX
Transportation
OtherEliminationsConsolidated
Revenue $-  $4,489  $717  $(52) $5,154 Revenue $- $7,139 $758 $(77) $7,820
Expense  (83)  3,279   610   (52)  3,754 Expense (129) 5,120 681 (77) 5,595
Operating Income  83   1,210   107   -   1,400 Operating Income 129 2,019 77 - 2,225
                          
Equity in Earnings of Subsidiaries  889   -   -   (889)  - Equity in Earnings of Subsidiaries 1,381 - - (1,381) -
Interest Expense  (248)  (55)  (12)  38   (277)Interest Expense (367) (77) (18) 54 (408)
Other Income - Net  10   38   10   (38)  20 Other Income - Net 13 55 14 (54) 28
                          
Earnings From Continuing Operations                    Earnings From Continuing Operations     
Before Income Taxes  734   1,193   105   (889)  1,143 
Before Income Taxes 1,156 1,997 73 (1,381) 1,845
Income Tax Benefit (Expense)  (15)  (445)  36   -   (424)Income Tax Benefit (Expense) (23) (772) 83 - (712)
Earnings From Continuing Operations  719   748   141   (889)  719 Earnings From Continuing Operations 1,133 1,225 156 (1,381) 1,133
Discontinued Operations  -   -   -   -   - Discontinued Operations - - - - -
Net Earnings $719  $748  $141  $(889) $719 Net Earnings $1,133 $1,225 $156 $(1,381) $1,133
                          
                          
Six Months Ended June 2009 (Adjusted)*
 CSX Corporation  CSX Transportation  Other  Eliminations  Consolidated 
Nine Months Ended September 2009 (Adjusted) (a)
Nine Months Ended September 2009 (Adjusted) (a)
CSX
Corporation
CSX
Transportation
OtherEliminationsConsolidated
Revenue $-  $3,839  $645  $(52) $4,432 Revenue $- $5,810 $989 $(78) $6,721
Expense  (142)  2,965   559   (47)  3,335 Expense (211) 4,461 850 (70) 5,030
Operating Income  142   874   86   (5)  1,097 Operating Income 211 1,349 139 (8) 1,691
                          
Equity in Earnings of Subsidiaries  559   -   -   (559)  - Equity in Earnings of Subsidiaries 899 - - (899) -
Interest Expense  (249)  (59)  (4)  32   (280)Interest Expense (375) (88) (6) 49 (420)
Other Income - Net  280   3   (243)  (27)  13 Other Income - Net 304 13 (257) (41) 19
                          
Earnings From Continuing Operations                    Earnings From Continuing Operations     
Before Income Taxes  732   818   (161)  (559)  830 
Before Income Taxes 1,039 1,274 (124) (899) 1,290
Income Tax Benefit (Expense)  (214)  (316)  235   -   (295)Income Tax Benefit (Expense) (231) (484) 250 - (465)
Earnings From Continuing Operations  518   502   74   (559)  535 Earnings From Continuing Operations 808 790 126 (899) 825
Discontinued Operations  32   -   (17)  -   15 Discontinued Operations 32 - (17) - 15
Net Earnings $550  $502  $57  $(559) $550 Net Earnings $840 $790 $109 $(899) $840

*(a) Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (See Note 1).

 
2826
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Consolidating Balance Sheet
Consolidating Balance Sheet
 Consolidating Balance Sheet
(Dollars in Millions) 
(Dollars in millions)(Dollars in millions)
                 CSXCSX   
 CSX  CSX          
As of June 2010 Corporation  Transportation  Other  Eliminations  Consolidated 
As of September 2010As of September 2010 CorporationTransportationOtherEliminationsConsolidated
                      
ASSETSASSETS ASSETS
Current Assets               Current Assets      
Cash and Cash Equivalents $435  $97  $101  $-  $633 
Short-term Investments  -   -   56   -   56 
Accounts Receivable - Net  4   877   607   (550)  938 
Materials and Supplies  -   223   -   -   223 
Deferred Income Taxes  15   153   17   -   185 
Other Current Assets  56   64   29   (41)  108 
Total Current Assets  510   1,414   810   (591)  2,143 
Cash and Cash Equivalents $463$111$62$-$636
Short-term Investments --40-40
Accounts Receivable - Net 4952677(632)1,001
Materials and Supplies -225--225
Deferred Income Taxes 151847-206
Other Current Assets 11054(41)(26)97
Total Current Assets 5921,526745(658)2,205
                           
Properties  8   29,857   1,326   -   31,191 Properties 830,1361,313-31,457
Accumulated Depreciation  (8)  (7,196)  (814)  -   (8,018)Accumulated Depreciation (8)(7,284)(831)-(8,123)
Properties - Net  -   22,661   512   -   23,173 
Properties - Net -22,852482-23,334
                           
Investments in Conrail  -   -   658   -   658 Investments in Conrail --660-660
Affiliates and Other Companies  -   581   (130)  -   451 Affiliates and Other Companies -598(132)-466
Investments in Consolidated Subsidiaries  15,920   -   48   (15,968)  - Investments in Consolidated Subsidiaries16,245-50(16,295)-
Other Long-term Assets  181   82   100   (44)  319 Other Long-term Assets 176104127(43)364
Total Assets $16,611  $24,738  $1,998  $(16,603) $26,744 
Total Assets $17,013$25,080$1,932$(16,996)$27,029
                           
LIABILITIES AND SHAREHOLDERS' EQUITYLIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities                    Current Liabilities      
Accounts Payable $117  $761  $44  $-  $922 
Labor and Fringe Benefits Payable  39   314   37   -   390 
Payable to Affiliates  1,027   310   (787)  (550)  - 
Casualty, Environmental and Other Reserves  -   172   18   -   190 
Current Maturities of Long-term Debt  507   104   3   -   614 
Income and Other Taxes Payable  86   307   (268)  -   125 
Other Current Liabilities  3   100   51   (41)  113 
Total Current Liabilities  1,779   2,068   (902)  (591)  2,354 
Accounts Payable $118$840$23$-$981
Labor and Fringe Benefits Payable3939539-473
Payable to (from) Affiliates 1,482(188)(662)(632)-
Casualty, Environmental and Other Reserves-17215-187
Current Maturities of Long-term Debt507953-605
Income and Other Taxes Payable(2)600(419)-179
Other Current Liabilities411225(26)115
Total Current Liabilities 2,1482,026(976)(658)2,540
                           
Casualty, Environmental and Other Reserves  -   442   102   -   544 Casualty, Environmental and Other Reserves-43896-534
Long-term Debt  6,049   1,268   3   -   7,320 Long-term Debt 6,0491,2453-7,297
Deferred Income Taxes  (302)  6,897   55   -   6,650 Deferred Income Taxes (296)6,93989-6,732
Long-term Payable to Affiliates  -   -   44   (44)  - Long-term Payable to Affiliates --44(44)-
Other Long-term Liabilities  524   513   262   -   1,299 Other Long-term Liabilities 487545256-1,288
Total Liabilities  8,050   11,188   (436)  (635)  18,167 
Total Liabilities 8,38811,193(488)(702)18,391
                           
Shareholders' Equity                    Shareholders' Equity      
Common Stock, $1 Par Value  380   181   -   (181)  380 Common Stock, $1 Par Value 374181-(181)374
Other Capital  -   5,575   1,968   (7,543)  - Other Capital -5,6272,312(7,939)-
Retained Earnings  8,968   7,844   485   (8,329)  8,968 Retained Earnings 9,0228,127125(8,252)9,022
Accumulated Other Comprehensive Loss  (787)  (74)  (63)  137   (787)Accumulated Other Comprehensive Loss(771)(69)(63)132(771)
Noncontrolling Interest  -   24   44   (52)  16 Noncontrolling Interest -2146(54)13
Total Shareholders' Equity  8,561   13,550   2,434   (15,968)  8,577 
Total Liabilities and Shareholders' Equity $16,611  $24,738  $1,998  $(16,603) $26,744 
Total Shareholders' Equity 8,62513,8872,420(16,294)8,638
Total Liabilities and Shareholders' Equity$17,013$25,080$1,932$(16,996)$27,029



 
2927
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 12.                      Summarized Consolidating Financial Data, continued


Consolidating Balance SheetConsolidating Balance Sheet Consolidating Balance Sheet
(Dollars in Millions) 
(Dollars in millions)(Dollars in millions)
  CSXCSX  
As of December 2009 (Adjusted) (a)
As of December 2009 (Adjusted) (a)
 CorporationTransportationOtherEliminationsConsolidated
ASSETSASSETS
Current AssetsCurrent Assets     
               Cash and Cash Equivalents  $918 $30 $81 $- $1,029
 CSX  CSX          Short-term Investments  - - 61 - 61
As of December 2009 (Adjusted)*
 Corporation  Transportation  Other  Eliminations  Consolidated 
 Accounts Receivable - Net  4 888 103 - 995
ASSETS 
Current Assets               
Cash and Cash Equivalents $918  $30  $81  $-  $1,029 
Short-term Investments  -   -   61   -   61 
Accounts Receivable - Net  4   888   103   -   995 
Materials and Supplies  -   203   -   -   203 
Deferred Income Taxes  13   137   8   -   158 
Other Current Assets  19   32   533   (460)  124 
Total Current Assets  954   1,290   786   (460)  2,570 
Materials and Supplies  - 203 - - 203
Deferred Income Taxes  13 137 8 - 158
Other Current Assets  19 32 533 (460) 124
  Total Current Assets  954 1,290 786 (460) 2,570
                          
Properties  4   29,565   1,338   -   30,907 Properties  4 29,565 1,338 - 30,907
Accumulated Depreciation  (6)  (7,011)  (826)  -   (7,843)Accumulated Depreciation  (6) (7,011) (826) - (7,843)
Properties - Net  (2)  22,554   512   -   23,064 
Properties - Net  (2) 22,554 512 - 23,064
                          
Investments in Conrail  -   -   650   -   650 Investments in Conrail  - - 650 - 650
Affiliates and Other Companies  -   566   (128)  -   438 Affiliates and Other Companies  - 566 (128) - 438
Investments in Consolidated Subsidiaries  15,382   -   139   (15,521)  - Investments in Consolidated Subsidiaries 15,382 - 139 (15,521) -
Other Long-term Assets  46   75   87   (43)  165 Other Long-term Assets  46 75 87 (43) 165
Total Assets $16,380  $24,485  $2,046  $(16,024) $26,887 
  Total Assets  $16,380 $24,485 $2,046 $(16,024) $26,887
                          
LIABILITIES AND SHAREHOLDERS' EQUITYLIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities                    Current Liabilities     
Accounts Payable $111  $628  $228  $-  $967 
Labor and Fringe Benefits Payable  37   307   39   -   383 
Payable to Affiliates  625   786   (962)  (449)  - 
Casualty, Environmental and Other Reserves  -   168   22   -   190 
Current Maturities of Long-term Debt  -   110   3   -   113 
Income and Other Taxes Payable  32   182   (102)  -   112 
Other Current Liabilities  1   97   13   (11)  100 
Total Current Liabilities  806   2,278   (759)  (460)  1,865 
Accounts Payable  $111 $628 $228 $- $967
Labor and Fringe Benefits Payable 37 307 39 - 383
Payable to (from) Affiliates  625 786 (962) (449) -
Casualty, Environmental and Other Reserves - 168 22 - 190
Current Maturities of Long-term Debt - 110 3 - 113
Income and Other Taxes Payable 32 182 (102) - 112
Other Current Liabilities 1 97 13 (11) 100
  Total Current Liabilities  806 2,278 (759) (460) 1,865
                          
Casualty, Environmental and Other Reserves  -   449   98   -   547 Casualty, Environmental and Other Reserves - 449 98 - 547
Long-term Debt  6,557   1,334   4   -   7,895 Long-term Debt  6,557 1,334 4 - 7,895
Deferred Income Taxes  (337)  6,814   51   -   6,528 Deferred Income Taxes  (337) 6,814 51 - 6,528
Long-term Payable to Affiliates  -   -   44   (44)  - Long-term Payable to Affiliates  - - 44 (44) -
Other Long-term Liabilities  600   522   162   -   1,284 Other Long-term Liabilities  600 522 162 - 1,284
Total Liabilities  7,626   11,397   (400)  (504)  18,119 
  Total Liabilities  7,626 11,397 (400) (504) 18,119
                          
Shareholders' Equity                    Shareholders' Equity     
Common Stock, $1 Par Value  393   181   -   (181)  393 Common Stock, $1 Par Value  393 181 - (181) 393
Other Capital  80   5,569   1,951   (7,520)  80 Other Capital  80 5,569 1,951 (7,520) 80
Retained Earnings  9,090   7,393   507   (7,900)  9,090 Retained Earnings  9,090 7,393 507 (7,900) 9,090
Accumulated Other Comprehensive Loss  (809)  (77)  (54)  131   (809)Accumulated Other Comprehensive Loss (809) (77) (54) 131 (809)
Noncontrolling Interest  -   22   42   (50)  14 Noncontrolling Interest  - 22 42 (50) 14
Total Shareholders' Equity  8,754   13,088   2,446   (15,520)  8,768 
Total Liabilities and Shareholders' Equity $16,380  $24,485  $2,046  $(16,024) $26,887 
Total Shareholders' Equity  8,754 13,088 2,446 (15,520) 8,768
Total Liabilities and Shareholders' Equity $16,380 $24,485 $2,046 $(16,024) $26,887
* (a)Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (See Note 1).

 
3028
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 12.                      Summarized Consolidating Financial Data, continued


Consolidating Cash Flow StatementsConsolidating Cash Flow Statements Consolidating Cash Flow Statements
(Dollars in Millions) 
(Dollars in millions)(Dollars in millions)
                CSXCSX  
 CSX  CSX          
Six Months Ended June 2010 Corporation  Transportation  Other  Eliminations  Consolidated 
Nine Months Ended September 2010Nine Months Ended September 2010CorporationTransportationOtherEliminationsConsolidated
                    
Operating Activities               Operating Activities    
Net Cash Provided by Operating Activities $283  $1,421  $13  $(295) $1,422 
Net Cash Provided by (Used in) Operating Activities $242 $2,450 $17 $(443) $2,266
                         
Investing Activities                    Investing Activities    
Property Additions  -   (648)  (39)  -   (687)Property Additions - (1,026) (66) - (1,092)
Other Investing Activities  (4)  (47)  12   107   68 Other Investing Activities (17) (86) (57) 201 41
Net Cash Provided by (Used in) Investing Activities  (4)  (695)  (27)  107   (619)
Net Cash (Used in) Provided by Investing Activities (17) (1,112) (123) 201 (1,051)
                         
Financing Activities                    Financing Activities    
Long-term Debt Repaid  -   (69)  (2)  -   (71)Long-term Debt Repaid - (101) (2) - (103)
Dividends Paid  (188)  (295)  4   295   (184)Dividends Paid (281) (443) 6 443 (275)
Stock Options Exercised  16   -   -   -   16 Stock Options Exercised 21 - - - 21
Shares Repurchased  (823)  -   -   -   (823)Shares Repurchased (1,123) - - - (1,123)
Other Financing Activities  233   (295)  32   (107)  (137)Other Financing Activities 703 (713) 83 (201) (128)
Net Cash Used in Financing Activities  (762)  (659)  34   188   (1,199)
Net Cash (Used in) Provided by Financing Activities (680) (1,257) 87 242 (1,608)
                         
Net Increase (Decrease) in Cash and Cash Equivalents  (483)  67   20   -   (396)Net Increase (Decrease) in Cash and Cash Equivalents (455) 81 (19) - (393)
Cash and Cash Equivalents at Beginning of Period  918   30   81   -   1,029 Cash and Cash Equivalents at Beginning of Period 918 30 81  1,029
Cash and Cash Equivalents at End of Period $435  $97  $101  $-  $633 Cash and Cash Equivalents at End of Period $463 $111 $62 $- $636
                         
                         
 CSX  CSX              CSXCSX  
Six Months Ended June 2009 (Adjusted)*
 Corporation  Transportation  Other  Eliminations  Consolidated 
Nine Months Ended September 2009 (Adjusted) (a)
Nine Months Ended September 2009 (Adjusted) (a)
CorporationTransportationOtherEliminationsConsolidated
Operating Activities                    Operating Activities    
Net Cash Provided by (Used in) Operating Activities $53  $1,016  $148  $(246) $971 
Net Cash Provided by (Used in) Operating Activities $(75) $1,706 $323 $(365) $1,589
                         
Investing Activities                    Investing Activities    
Property Additions  -   (634)  (23)  -   (657)Property Additions - (986) (45) - (1,031)
Other Investing Activities  (87)  27   23   86   49 Other Investing Activities (91) 5 48 89 51
Net Cash Provided by (Used in) Investing Activities  (87)  (607)  -   86   (608)
Net Cash (Used in) Provided by Investing Activities (91) (981) 3 89 (980)
                         
Financing Activities                    Financing Activities    
Long-term Debt Issued  500   -   -   -   500 Long-term Debt Issued 500 - - - 500
Long-term Debt Repaid  -   (81)  (2)  -   (83)Long-term Debt Repaid - (108) (2) - (110)
Dividends Paid  (176)  (238)  (8)  246   (176)Dividends Paid (264) (356) (4) 365 (259)
Stock Options Exercised  12   -   -   -   12 Stock Options Exercised 19 - - - 19
Other Financing Activities  107   (69)  (129)  (86)  (177)Other Financing Activities 449 (242) (306) (89) (188)
Net Cash Provided by (Used in) Financing Activities  443   (388)  (139)  160   76 
Net Cash Provided by (Used in) Financing Activities 704 (706) (312) 276 (38)
                         
Net Increase (Decrease) in Cash and Cash Equivalents  409   21   9   -   439 Net Increase (Decrease) in Cash and Cash Equivalents 538 19 14 - 571
Cash and Cash Equivalents at Beginning of Period  559   63   47   -   669 Cash and Cash Equivalents at Beginning of Period 559 63 47  669
Cash and Cash Equivalents at End of Period $968  $84  $56  $-  $1,108 Cash and Cash Equivalents at End of Period $1,097 $82 $61 $- $1,240
 *
(a) Certain amounts have been adjusted for the retrospective change in accounting principle for rail grinding (See Note 1).


 
3129
CSX CORPORATION
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



STRSTRATEGICATEGIC OVERVIEW

CSXThe Company and the rail industry provide customers with access to an expansive and interconnected transportation network that plays a key role in North American commerce.  CSX’sThe Company’s network is positioned to reach more than two-thirds of Americans, who account for about three-quarters of the nation’s consumption of goods. Through this network, the Company transports a broad portfolio of products, ranging from coal and new energy sources, like biodiesel and ethanol, to automobiles, chemicals, military equipment and consumer products.

InCSX remains highly committed to delivering value to shareholders through a balanced approach that includes investments in infrastructure, dividend improvement and share repurchases.  On September 29, 2010, CSX announced an 8 percent increase to its quarterly cash dividend to 26 cents per share.  This is the eighth dividend increase which represents a 35 percent compounded annual growth rate over a five-year period.  Additionally, CSX expects to deliver strong double-digit earnings per share growth.  This expectation is supported by strong volume and revenue growth, including export coal shipments of about 30repurchase an additional $645 million tons this year, and strong operating ratio improvement as well.  Our expectations are based on continued, gradual economic growth and can be impactedin shares by the strength and sustainabilityend of the economic recovery.

Additionally,first quarter 2011, representing the remainder of its existing $3 billion share repurchase program.  The Company also continues to invest in its network to further enhance safety and improve service and reliability for its customers. The Company plansis now planning to spend appro ximately $1.8 billion in 2010 for total capital expenditures.  This increase, from the $1.7 billion the Company had previously disclosed for total capital expenditures in 2010.this year, supports various strategic investments.  To continue these types of investments, adequately, the Company must be able to operate in an environment in which it can generate adequate returns and drive shareholder value. CSX will continue to advocate for a fair and balanced regulatory environment to ensure that the value of the Company’s rail service will be reflected in new legislation and policy.

As an example of the Company’s commitment to investing in its network and improving the flow of freight, the Company launched the National Gateway, a multi-year public-private infrastructure initiative which will significantly improve the efficiency of the freight network between the Mid-Atlantic ports and the Midwest. Total project costs are approximately $850 million, of which CSXthe Company expects to contribute approximately $400 million. A portion of the public funds needed to complete the National Gateway has been secured and CSX is working with its state partners to apply for the additional funding needed to complete the project.needed. When completed, the National Gateway is expected to reduce truck traffic and increase intermodal capacity on key corridors without increasing the number of trains. As a result, the Company’s customers will benefit fromfr om improved service and reliability, reduced transport times and expanded access to rail services, and substantial public benefits will be realized as well.

In 2008, Congress enacted the Rail Safety Improvement Act. The legislation includes a mandate that all Class I freight railroads implement Positive Train Control ("PTC"(“PTC”) by December 31, 2015. PTC must be installed on all lines with passenger or commuter operations as well as all main lines with over 5 million annual gross tons which transport toxic-by-inhalation hazardous materials. Significant capital costs are anticipated with the implementation of PTC as well as ongoing operating expenses. Currently, CSX estimates that the total multi-year cost of PTC implementation will be at least $1.2 billion for the Company.


 
3230
CSX CORPORATION
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



SECONDTHIRD QUARTER 2010 HIGHLIGHTS

·  Revenue increased $478$377 million or 22%16% to $2.7 billion driven by increases in volume and core pricing gains.

·  Expenses increased $287$146 million or 18%9% to $1.9$1.8 billion driven primarily by labor-related costs and higher fuel prices and a lower year over year favorable adjustment in casualty reserves.prices.

·  Operating income increased $191$231 million or 33%39% to $768$825 million and operating ratio improved to 71.2%69.1%, an all time record.both being all-time records.



 Second Quarters  Six Months Third Quarters Nine Months
(thousands) 2010  2009  2010  2009 
Carloads  1,598   1,411   3,084   2,830 
(millions)                
(in thousands)20102009 20102009
Volume1,6091,465 4,6934,295
     
(in millions)     
Revenue $2,663  $2,185  $5,154  $4,432  $2,666 $2,289  $7,820 $6,721
Expense  1,895   1,608   3,754   3,335  1,841 1,695  5,595 5,030
Operating Income $768  $577  $1,400  $1,097  $825 $594  $2,225 $1,691


CSX secondthird quarter results reflect continued strong year-over-year volume and revenue growth as compareda result of the improving marketplace and in comparison to the level of economic activity last year.  Revenue increased 22%16% from the prior year, to nearly $2.7 billion, with gains across mostall of the Company’s markets.markets with particular growth in coal and auto.  These gains were driven by a 13%10% increase in volume, pricing gains, and higher fuel recovery associated with the increase in fuel prices.

While revenue increased 22%16%, expenses increased by $287$146 million, or 18%only 9%, versus the prior year.  This increase was driven by a rise in fuel costs due to higher fuel prices a lower year-over-year favorable adjustment in casualty reserves, an operating property transaction loss and higher labor-related costs.

Beginning in the second quarter of 2010, the Company is no longer reflecting the intermodal business as a separate segment.  This change is a result of the strategic business review and change in CSX’s intermodal service associated with the start of the UMAX program as well as certain management realignments. The UMAX program, which began this quarter, is a domestic interline container program. CSX’s chairman now views intermodal similarly to merchandise and coal. Also, Inland Transportation expense has been reclassified to Materials, Supplies and Other.  Intermodal revenue will continue to be viewed as a separate revenue group; however, a separate income statement and operating ratio will no longer be provided and business segment disclosures are no longer required.  All prior periods have been revised to reflect this change.

For additional information, refer to Results of Operations discussed on pages 3634 through 38.
37.


 
3331
CSX CORPORATION
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



In addition to the financial highlights described above, the Company measures and reports safety and service performance.  The Company strives for continuous improvement in these measures through training, initiatives and investment.  For example, the Company’s safety and train accident prevention programs rely on broad employee involvement.  The programs utilize operating rules training, compliance measurement, root cause analysis and communication to create a safer environment for employees and the public.  Continued capital investment in CompanyCompany’s assets, including track, bridges, signals, equipment and detection technology also supports safety performance.

During secondthird quarter 2010, the Company continued to advance its efforts on safety and operating performance.  CSXT delivered the fifthsixth consecutive quarterly year-over-year improvement in Federal Railroad Administration (“FRA”) reportable personal injuries in secondthird quarter 2010.  The FRA reportable personal injuries frequency index improved to 1.13, a 14%1.06, an 8% improvement over 2009. ReportedThe reported FRA train accident frequency rate increased 7%decreased 13% to 2.78, but remained at relatively low historical levels.
2.25.

Key service metrics in secondthird quarter improved from first quarter levels, but were mixed compared todeclined slightly versus 2009.  On-time train originations and arrivals both declined to 78%77% and 71%69%, respectively.  Dwell time improvedincreased to 23.724.8 hours from 24.124.0 hours in same quarter of 2009.  Average train velocity declined 4%3% to 20.921.1 miles per hour.  The Company strivesWhile these key measures declined, they remain within the ranges experienced over the last several years and continue to sustain key operating measuressupport efficient and service reliability at high levels, while increasing operational efficiency.reliable train operations.

Operating Statistics (Estimated)


   Third Quarters
   20102009
Improvement/
(Decline)
%
      
Safety andFRA Personal Injury Frequency Index1.061.15 8%
Service      
MeasurementsFRA Train Accident Rate2.252.59 13%
       
 On-Time Train Originations77%82% (6)%
 On-Time Destination Arrivals69%79% (13)%
       
 Dwell24.824.0 (3)%
 Cars-On-Line210,117214,987 2%
       
 Train Velocity 21.1 21.8 (3)%
       
     (Decrease)
ResourcesRoute Miles21,09121,190 -%
 Locomotives (owned and long-term leased)4,0684,092 (1)%
 Freight Cars (owned and long-term leased)80,91985,223 (5)%
 

 
3432
CSX CORPORATION
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Operating Statistics (Estimated)


   Second Quarters
   20102009
Improvement/
(Decline)
%
      
Safety andFRA Personal Injury Frequency Index1.131.32 14%
Service      
MeasurementsFRA Train Accident Rate2.782.59 (7)%
       
 On-Time Train Originations78%83% (6)%
 On-Time Destination Arrivals71%81% (12)%
       
 Dwell23.724.1 2%
 Cars-On-Line210,106218,313 4%
       
 Train Velocity 20.9 21.7 (4)%
       
     (Decrease)
ResourcesRoute Miles21,12321,190 -%
 Locomotives (owned and long-term leased)4,0674,108 (1)%
 Freight Cars (owned and long-term leased)80,47186,300 (7)%
Key Performance Measures Definitions

FRA Personal Injury Frequency Index – Number of FRA-reportable injuries per 200,000 man-hours.

FRA Train Accident Rate – Number of FRA-reportable train accidents per million train-miles.

On-Time Train Originations – Percent of scheduled road trains that depart the origin yard on-time or ahead of schedule.

On-Time Destination Arrivals – Percent of scheduled road trains that arrive at the destination yard on-time to two hours late (30 minutes for intermodal trains).

Dwell – Average amount of time in hours between car arrival at and departure from the yard.  It does not include cars moving through the yard on the same train.

Cars-On-Line – An average count of all cars on the network (does not include locomotives, cabooses, trailers, containers or maintenance equipment).

Train Velocity – Average train speed between terminals in miles per hour (does not include locals, yard jobs, work trains or passenger trains).











 
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CSX CORPORATION
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Volume and Revenue (Unaudited)
 
Volume (Thousands of units); Revenue (Dollars in millions); Revenue Per Unit (Dollars)
Third Quarters
                
 Volume Revenue Revenue Per Unit 
 20102009% Change 20102009% Change 20102009% Change 
  Chemicals 116 110 5%  $379 $332 14 % $3,267 $3,018 8% 
  Phosphates and Fertilizers 78 77 1   107 94 14   1,372 1,221 12  
  Automotive 82 57 44   196 127 54   2,390 2,228 7  
  Emerging Markets 113 109 4   163 159 3   1,442 1,459 (1)  
  Agricultural Products 104 101 3   246 223 10   2,365 2,208 7  
  Forest Products 67 67 -   150 140 7   2,239 2,090 7  
  Metals 57 55 4   125 111 13   2,193 2,018 9  
  Food and Consumer 26 26 -   62 57 9   2,385 2,192 9  
                
Total Merchandise 643 602 7   1,428 1,243 15   2,221 2,065 8  
                
Coal 392 382 3   835 680 23   2,130 1,780 20  
                
Intermodal (a)
 574 481 19   318 299 6   554 622 (11)  
             -   
Other - - -   85 67 27   - - -  
                
                
Total 1,609 1,465 10%  $2,666 $2,289 16 %  $1,657 $1,562 6 % 
 
Volume and Revenue (Unaudited)
 
Volume (Thousands of units); Revenue (Dollars in millions); Revenue Per Unit (Dollars) 
Second Quarters 
                            
  Volume  Revenue   Revenue Per Unit 
  2010  2009  % Change  2010  2009  % Change   2010  2009 % Change 
  Chemicals  116   105   10% $372  $308   21 %  $3,207  $2,933  9%
  Phosphates and
      Fertilizers
  80   74   8   109   94   16    1,363   1,270  7 
  Automotive  88   54   63   204   113   81    2,318   2,093  11 
  Emerging Markets  113   106   7   167   147   14    1,478   1,387  7 
  Agricultural Products  107   106   1   255   233   9    2,383   2,198  8 
  Forest Products  65   64   2   150   133   13    2,308   2,078  11 
  Metals  65   45   44   140   87   61    2,154   1,933  11 
  Food and Consumer  25   25   -   59   59   -    2,360   2,360  - 
                                     
Total Merchandise  659   579   14   1,456   1,174   24    2,209   2,028  9 
                                     
Coal  401   375   7   835   662   26    2,082   1,765  18 
                                     
Intermodal  538   457   18   304   285   7    565   624  (9)
                                -    
Other  -   -   -   68   64   6    -   -  - 
                                     
                                     
Total  1,598   1,411   13% $2,663  $2,185   22%  $1,666  $1,549  8%
 (a) The revenue-per-unit decline was primarily driven by the continued impact of terminating the prior interline agreement.  See the explanation for intermodal variances for further information.

Note regarding reclassifications:Automotive has moved to the Merchandise category. Coal and Intermodal have been stated as single totals, respectively (combined previously reported sub-categories) and Other revenue related to Rail and Intermodal has been combined into one Other line.  All prior periods have been revised to reflect these changes.

SecondThird Quarter 2010 Results of Operations
 
CSX secondthird quarter results reflect continued strong year-over-year volume and revenue growth as compareda result of the improving marketplace and in comparison to the level of economic activity last year.  The greatest volume increases occurred in the automotive metals and intermodal markets.  Ongoing emphasis on pricing above rail inflation and yield management, initiative andalong with higher fuel recovery associated with the increase in fuel prices drove revenue-per-unit increases in nearly all markets.

Volume and Revenue
Merchandise

Chemicals – Growth occurred across most chemical markets reflecting the overall improvement in demand for intermediate products used in the automotivemanufacturing automobiles and consumer goods markets.goods.

Phosphates and Fertilizers – This market's growthVolume was drivenrelatively flat as strength in domestic shipments, due to a strong planting season, was mostly offset by increaseda slight moderation in export and domestic phosphate shipments as well as domestic movements of potash to meet the demand from a robust planting season.volume.

Automotive – Strong volume growth was due to an increase in North American light vehicle production driven by higher sales and lower inventory levels.sales. 

Emerging Markets – Shipments of aggregates (which include crushed stone, sand and gravel) increased from depressed levels last year due towere flat, however volume growth was primarily driven by new business for the Company.shipments of limestone and cement.

 
3634
CSX CORPORATION
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Agricultural Products – Volume was relatively flat.  Increasedgrew with increased shipments of feed, wheat and ethanol.  Domestic shipments of feed and wheat increased due to reduced imports as a result of a worldwide shortage of wheat.  Ethanol shipments grew as the amount of ethanol were mostly offset by weaker demand for feed ingredients, soybeans and other processed products. in fuel continued to increase.

Forest Products – GrowthVolume was flat due to continued weakness in building products increased from the depressed levels of 2009, due in part to tax incentives offered for new home purchases that ended during the quarter. Paper products continued to see long-term, gradual volume declines likely resulting from electronic media substitution.construction and paper-related markets.
 
Metals – GrowthVolume growth was driven by reboundingincreased shipments of sheet steel consumption consistent with the gradual economic recovery.  Improved demand from automotivefor auto production and energy markets, combined with low inventories and reduced imports pushed domestic steel production higher.by increases in pipe shipments for energy-related uses.

Food and Consumer – Volume was flat as increased shipments of refrigerated products and canned goodsalcoholic beverages were offset by weakness in demand for appliances and alcoholic beverages.appliances.

Coal

Growth was driven by higher export shipments due to greater Asian demand for U.S. metallurgical coal, partially offset by lower shipments to utility customers as a result ofstockpiles continued high stockpileto moderate to more normal levels.  The increase in revenue per unit was driven by improved yield and longer length of haul.

Intermodal

Revenue gains during the quarter were driven by volume growth.  International volume increased due to new business, and higher imports as a result of U.S. inventory replenishments.replenishments, and early holiday shipping.  Domestic volume continued to grow with truckload conversions and expanded transcontinental service offerings like the new UMAX program, which began this quarter.offerings.  The revenue-per-unit decline was driven by the continued impact of switching from a purchased transportation arrangement toterminating the new UMAX domesticprior interline programagreement and was partly offset by increased fuel recovery and an improved pricing environment.

Other

Revenue gains were primarily driven by benefits for contract volume commitments not met as well as increases in intermodal container usage charges. 

Expense

Expenses increased $146 million from last year’s third quarter. Significant variances are described below.

Labor and Fringe expense increased $78 million. This increase was primarily driven by inflation, higher incentive compensation, and hiring and other costs.

Materials, Supplies and Other expense increased $9 million due to several items:

·  Inland transportation expense reductions of $44 million were related to continued impact of terminating the prior intermodal interline agreement.

·  Higher volume-related expenses were $24 million.

 
3735
CSX CORPORATION
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Expense

Expenses increased $287 million from last year’s second quarter.  Significant variances are described below.

Labor and Fringe expense increased $67 million.  This increase was primarily driven by inflation and higher incentive compensation costs and a 1% increase in headcount.

Materials, Supplies and Other expense increased $107 million due to several items:
·  As safety trends have continued to improve, benefitsPrior year expense reductions were taken in both years’ second quarters - $9$18 million in 2010 and $85 milliondid not recur in the prior yearcurrent quarter. This resulted in a year over year increase in expense of $76 million.

·  An operating property transaction with the Commonwealth of Massachusetts closed in the quarter and resulted in a $30 million net book loss.

·  Inland transportation expenseThese reductions of $43 millionwere primarily related to the new UMAX agreement.legal recoveries and lower bad debt expense due to improved collections.

·  Various other costs increased as a result of higher volume and other items.that are not expected to repeat.
    As additional information on the property transaction noted above, during the second quarter of 2010, the Company closed an operating property transaction with the Commonwealth of Massachusetts.  The Company received $50 million of cash related to this transaction and  recorded a net book loss of $30 million pre-tax or $0.05 per share. This property is a former Conrail acquired property.  This loss is reflected in materials, supplies and other.

Fuel expense increased $119$56 million primarily due to higher prices andas well as higher volume.

Depreciation expense increased $3$5 million due to a larger asset base related to higher capital spending, partially offset by lower depreciation rates resulting from the previous periodic review of asset useful lives.

Equipment and Other Rents expense decreased $9$2 million primarily due to current quarter’s cost savings associated with improved asset utilization and lower lease expense, partially offset by volume-related increases.

Consolidated Results of Operations

Interest Expense
                   
          Interest expense decreased $4$9 million to $135$131 million primarily due to lower average debt balances.

38
CSX CORPORATION
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Other Income - Net
    Other income decreased $1 million to $9 million driven primarily by lower average cash and investment balances and a lower average rate of return.

Income Tax Expense

Income tax expense increased $62$118 million to $228$288 million due to higher earnings.  The increase in earnings was slightly offset byand a net favorable tax benefitcharge of $15$22 million or $0.06 per share primarily duerelated to the resolutionmerger of prior years’ income tax audit. the Company’s former Intermodal subsidiary with CSXT.

Net Earnings

Net earnings increased $109$124 million to $414 million and earnings per diluted share increased $0.30$0.35 to $1.07$1.08 primarily due to higher revenue partially offset by labor-related costs, higher fuel various other expenses, including laborexpense and fringe andincome taxes.

 
3936
CSX CORPORATION
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




Volume and Revenue (Unaudited)
Volume and Revenue (Unaudited)
 
Volume and Revenue (Unaudited)
 
Volume (Thousands of units); Revenue (Dollars in millions); Revenue Per Unit (Dollars)Volume (Thousands of units); Revenue (Dollars in millions); Revenue Per Unit (Dollars) Volume (Thousands of units); Revenue (Dollars in millions); Revenue Per Unit (Dollars)
Six Months 
Nine MonthsNine Months
                                       
 Volume  Revenue  Revenue Per Unit Volume Revenue Revenue Per Unit 
 2010  2009  % Change  2010  2009  % Change  2010  2009  % Change 20102009% Change 20102009% Change 20102009% Change 
Chemicals  228   210   9% $723  $616   17 % $3,171  $2,933   8% 344 320 8%  $1,102 $948 16 % $3,203 $2,963 8% 
Phosphates and
Fertilizers
  159   134   19   232   181   28   1,459   1,351   8  237 211 12   339 275 23   1,430 1,303 10  
Automotive  162   99   64   374   208   80   2,309   2,101   10  244 156 56   570 335 70   2,336 2,147 9  
Emerging Markets  198   197   1   297   281   6   1,500   1,426   5  311 306 2   460 440 5   1,479 1,438 3  
Agricultural Products  221   215   3   522   482   8   2,362   2,242   5  325 316 3   768 705 9   2,363 2,231 6  
Forest Products  128   129   (1)  290   273   6   2,266   2,116   7  195 196 (1)   440 413 7   2,256 2,107 7  
Metals  126   93   35   268   184   46   2,127   1,978   8  183 148 24   393 295 33   2,148 1,993 8  
Food and Consumer  50   50   -   118   119   (1)  2,360   2,380   (1) 76 76 -   180 176 2   2,368 2,316 2  
                                    
Total Merchandise  1,272   1,127   13   2,824   2,344   20   2,220   2,080   7  1,915 1,729 11   4,252 3,587 19   2,220 2,075 7  
                                                
Coal  774   806   (4)  1,571   1,406   12   2,030   1,744   16  1,166 1,188 (2)   2,406 2,086 15   2,063 1,756 17  
                                                
Intermodal  1,038   897   16   623   552   13   600   615   (2)
Intermodal (a)
 1,612 1,378 17   941 851 11   584 618 (6)  
                                                
Other  -   -   -   136   130   5   -   -   -  - - -   221 197 12   - - -  
                                                
Total  3,084   2,830   9% $5,154  $4,432   16% $1,671  $1,566   7% 4,693 4,295 9%  $7,820 $6,721 16 %  $1,666 $1,565 6 % 
 (a) The revenue-per-unit decline was primarily driven by the continued impact of terminating the prior interline agreement.  See the explanation for intermodal variances for further information.

 Note regarding reclassifications:Automotive has moved to the Merchandise category. Coal and Intermodal have been stated as single totals, respectively (combined previously reported sub-categories) and Other revenue related to Rail and Intermodal has been combined into one Other line.  All prior periods have been revised to reflect these changes.

SixNine Month Results of Operations

Consolidated Results of Operations

Revenue

Revenue increased $722 million to $5.2$1.1 billion as a result of volume increases associated with the gradual economic recovery, ongoing yield management initiatives and higher fuel recovery due to an increase in fuel prices.

Operating Income

Operating income increased $303$534 million to $1.4 billion primarily due to higher revenue partially offset by increased fuel, labor-related costs and labor related costs.various other expenses.

Interest Expense

Interest expense decreased $3$12 million to $277$408 million primarily due to lower average debt balances.  This decrease was partially offset by expenses related to the first quarter 2010 debt exchange.

Other Income -– Net

Other income increased $7$9 million to $20$28 million driven by higher incomeprimarily due to non-operating expenses from real estate activities and other miscellaneous items.the prior year that did not repeat.

 
4037
CSX CORPORATION
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Income Tax Expense

Income tax expense increased $129$247 million to $424$712 million primarily due to higher earnings in 2010. earnings.

Net Earnings

Net earnings increased $169$293 million to $719 million$1.1 billion and earnings per diluted share increased $0.45$0.80 to $1.84$2.92 primarily due to higher revenue partially offset by increased fuel, labor-related costs, various other expenses and labor related costs as well as increased tax expense.income taxes.

LIQUIDITY AND CAPITAL RESOURCES

The following are material changes in the consolidated balance sheets and sources of liquidity and capital, which provide an update to the discussion included in CSX's most recent Annual Report on Form 10-K.

Material Changes in Consolidated Balance Sheets and Significant Cash Flows

Consolidated Balance Sheets

Properties increased $550 million due to capital spending, as CSX continued to invest in its business.  Other long-term assets increased $154 million primarily as a result of $141 million inof cash consideration paid in the exchange of debt securities (see Note 7, Debt and Credit Agreements).  Stockholder’s equity was reduceddecreased as a result of $823 million$1.1 billion of share repurchases since December 2009.

Consolidated Cash Flow Statements

Cash provided by operating activities increased $451$677 million primarily due to higher pre-tax earnings and lower incentive compensation payouts in 2010.earnings.  More cash was used for financing activities due to share repurhasesrepurchases of $823 million$1.1 billion during 2010. Additionally, the Company received $500 million from a debt issuance in 2009.  There have been no debt issuances in 2010. 

Liquidity and Working Capital

As of the end of the secondthird quarter, CSX had $633$636 million of cash and cash equivalents.  CSX also has available a $1.25 billion credit facility with a diverse syndicate of banks that was not drawn on.  CSX uses current cash balances for general corporate purposes, which may include capital expenditures, working capital requirements, improvements in productivity, dividend payments to shareholders and repurchases of CSX common stock.


 
4138
CSX CORPORATION
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



On June 16, 2010, the Company renewed itsThe Company’s $250 million receivables securitization facility.facility has a 364-day term and expires in June 2011.  The purpose of this facility is to provide an alternative to commercial paper and a low cost source of short-term liquidity. This facility has a 364-day term and expires on June 15, 2011.  As of the date of this filing, the Company has not drawn on this facility.  Under the terms of this facility, CSX Transportation and CSX Intermodal transferredtransfers eligible third-party receivables to CSX Trade Receivables, a bankruptcy-remote special purpose subsidiary.  A separate subsidiary of CSX will service the receivables.  Upon transfer, the receivables become assets of CSX Trade Receivables and are not available to the creditors of CSX or any of its other subsidiaries. In the event CSX Trade Receivables draws under this facility, the Company will record an equivalentequivalen t amount of debt on its consolidated financial statements.

Working capital can also be considered a measure of a company’s ability to meet its short-term needs.  CSX had a working capital deficit of $211$335 million as of JuneSeptember 2010 and a working capital surplus of $705 million as of December 2009.  The decline since December 2009 is primarily due to a $508 million reclassification from long-term debt to current maturities of long-term debt for amounts due within the next twelve months.

The Company’s working capital balance varies due to factors such as the timing of scheduled debt payments and changes in cash and cash equivalent balances as discussed above.  The Company continues to maintain adequate current assets to satisfy current liabilities and maturing obligations when they come due.  Furthermore, CSX has sufficient financial capacity, including its revolving credit facility, trade receivable facility and shelf registration statement to manage its day-to-day cash requirements and any anticipated obligations.  The Company from time to time accesses the credit markets for additional liquidity.

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 certain revenues and expenses during the reporting period.  Actual results may differ from those estimates. These estimates and assumptions are discussed with the Audit Committee of the Board of Directors on a regular basis.  Consistent with the prior year, significant estimates using management judgment are made for the following areas:
 
· casualty, environmental and legal reserves;

· pension and post-retirement medical plan accounting;

· depreciation policies for assets under the group-life method; and

· income taxes.

For further discussion of CSX’s critical accounting estimates, see the Company’s most recent Annual Report on Form 10-K.


 
4239
CSX CORPORATION
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



FORWARD-LOOKING STATEMENTS
 
Certain statements in this report and in other materials filed with the SEC, as well as information included in oral statements or other written statements made by the Company, are forward-looking statements.  The Company intends for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  These forward-looking statements within the meaning of the Private Securities Litigation Reform Act may contain, among others, statements regarding:
 
·  projections and estimates of earnings, revenues, volumes, rates, cost-savings, expenses, taxes or other financial items;

·  expectations as to results of operations and operational initiatives;

·  expectations as to the effect of claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements on the Company’s financial condition, results of operations or liquidity;

·  management’s plans, strategies and objectives for future operations, capital expenditures, proposed new services and other similar expressions concerning matters that are not historical facts, and management’s expectations as to future performance and operations and the time by which objectives will be achieved; and

·  future economic, industry or market conditions or performance and their effect on the Company’s financial condition, results of operations or liquidity.
 
Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “project,” “estimate,” “preliminary” and similar expressions. The Company cautions against placing undue reliance on forward-looking statements, which reflect its good faith beliefs with respect to future events and are based on information currently available to it as of the date the forward-looking statement is made.    Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the timing when, or by which, such performance or results will be achieved. 
 

 
4340
CSX CORPORATION
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



 
Forward-looking statements are subject to a number of risks and uncertainties and actual performance or results could differ materially from those anticipated by any forward-looking statements. 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.  The following important factors, in addition to those discussed in Part II, Item 1A (Risk Factors) of this quarterly report on Form 10-Q and elsewhere in this report, may cause actual results to differ materially from those contemplated by any forward-looking statements:
 
 
·  legislative, regulatory or legal developments involving transportation, including rail or intermodal transportation, the environment, hazardous materials,  taxation, including the outcome of tax claims and litigation, the potential enactment of initiatives to further regulate the rail industry and the ultimate outcome of shipper and rate claims subject to adjudication;
 
·  the outcome of litigation and claims, including, but not limited to, those related to fuel surcharge, environmental contamination, personal injuries and occupational illnesses;
 
·  changes in domestic or international economic, political or business conditions, including those affecting the transportation industry (such as the impact of industry competition, conditions, performance and consolidation);

·  worseningunanticipated conditions in the financial markets that may affect timely access to capital markets and the cost of capital, as well as the cost of capital;management’s decisions regarding share repurchases.

·  availability of insurance coverage at commercially reasonable rates or insufficient insurance coverage to cover claims or damages;

·  changes in fuel prices, surcharges for fuel and the availability of fuel;

·  the impact of increased passenger activities in capacity-constrained areas, including potential effects of high speed rail initiatives, or regulatory changes affecting when CSXT can transport freight or service routes;

·  natural events such as severe weather conditions, including floods, fire, hurricanes and earthquakes, a pandemic crisis affecting the health of the Company’s employees, its shippers or the consumers of goods, or other unforeseen disruptions of the Company’s operations, systems, property or equipment;

·  the cost of compliance with laws and regulations that differ from expectations (including those associated with PTC implementation) and costs, penalties and operational impacts associated with noncompliance with applicable laws or regulations;

 
4441
CSX CORPORATION
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS




·  the inherent business risks associated with safety and security, including the availability and cost of insurance, the availability and vulnerability of information technology, adverse economic or operational effects from actual or threatened war or terrorist activities and any governmental response;

·  labor and benefit costs and labor difficulties, including stoppages affecting either the Company’s operations or the customers’ ability to deliver goods to the Company for shipment;

·  competition from other modes of freight transportation, such as trucking and competition and consolidation within the transportation industry generally;

·  the Company’s success in implementing its strategic, financial and operational initiatives;

·  changes in operating conditions and costs or commodity concentrations; and

·  the inherent uncertainty associated with projecting full year 2010 economic and business conditions.

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 report and in CSX’s other SEC reports, accessible on the SEC’s website at www.sec.gov and the Company’s website at www.csx.com.  The information on the CSX website is not part of this quarterly report on Form 10-Q.



 
4542

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk from the information provided under Part II, Item 7A (Quantitative and Qualitative Disclosures about Market Risk) of CSX’s most recent Annual Report on Form 10-K.

ITITEM EM 4.  CONTROLS AND PROCEDURES

As of June 25,September 24, 2010, under the supervision and with the participation of CSX’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based on that evaluation, the CEO and CFO concluded that, as of June 25,September 24, 2010, the Company’s disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information required to be included in CSX’s periodic SEC reports.  There were no changes in the Company’s internal controls over financial reporting during secondthird quarter 2010 that have materially affected, or are reasonably likelyl ikely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

ITEM1. LEGAL PROCEEDINGS

For information relatingSurface Transportation Board Rate Case

In October 2008, Seminole Electric Cooperative, Inc. (“Seminole”) filed a complaint before the STB contesting CSXT’s tariff rates for movements of coal to Seminole’s power generating facility in Putnam County, Florida.  Since CSXT and Seminole were unable to agree upon a new transportation contract, the prior transportation contract expired and CSXT’s tariff rates took effect on January 1, 2009.  In September 2010, a settlement was reached and Seminole filed a motion to dismiss the case.  The parties have entered into a mutually agreeable transportation contract.  These events are not expected to have a material impact on the Company’s legal proceedings,financial condition, results of operations or liquidity.

Fuel Surcharge Antitrust Litigation

There were no material developments during the quarter concerning the fuel surcharge antitrust litigation. For further details, see Note 5,7, Commitments and Contingencies, under Part I, Item 1 (Financial Statements) of this Quarterlyin CSX’s most recent Annual Report on Form 10-Q incorporated herein10-K.


43

ITEM 1.  LEGAL PROCEEDINGS, continued

Environmental Settlement

During the third quarter of 2010, CSXT entered into an agreement in principle with the District of Columbia Department of the Environment (“DDOE”) in settlement of claims pertaining to petroleum impacted groundwater allegedly migrating into the creek leading to the Anacostia River at CSXT’s Benning Yard facility.  Although CSXT does not admit to the allegations, CSXT agreed to pay a civil penalty of $500,000.  CSXT will also make a $7.5 million payment to a fund to help DDOE finance its cleanup efforts at other private sector and government sites on the Anacostia River.  CSXT will be required to reimburse DDOE’s future oversight costs, conduct a site-wide investigation and natural resource damage assessment and clean up Benning Yard.  These future costs cannot be estimated at this time. The settlement agreement will be embodied in a consent decree to be negotiated between CSXT and DDOE.  The consent decree will be subject to public notice and comment and judicial approval. 

Other Legal Proceedings

In addition to the matters referenced above, the Company is involved in 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, but not limited to, those related to environmental matters, FELA claims by reference.employees, other personal injury claims and disputes and complaints involving certain transportation rates and charges.  Some of the legal proceedings include claims for compensatory as well as punitive damages and others are, or are purported to be, class actions.  While the final outcome of these matters cannot be predicted with certainty, considering, among other things, the legal defenses available and liabilities that have been recorded along with applicab le insurance, it is currently the opinion of CSX management that none of these items will have a material adverse effect on the Company’s financial condition, results of operations or liquidity.  An unexpected adverse resolution of one or more of these items, however, could have a material adverse effect on the Company’s financial condition, results of operations or liquidity in a particular quarter or fiscal year.

ITEM 1A.1A.  RISK FACTORS

For information regarding factors that could affect the Company’s results of operations, financial condition and liquidity, see the risk factors discussed under Part II, Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) of CSX’s most recent Annual Report on Form 10-K.  See also Part I, Item 2 (Forward-Looking Statements) of this Quarterly Report on Form 10-Q.  There have been no material changes from the risk factors previously disclosed in CSX’s most recent Annual Report on Form 10-K.

 
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ITEM 2. 2.  CSX Purchases of Equity Securities

CSX is required to disclose any purchases of its common stock for the most recent quarter.  The Company purchases shares of CSX common stock to further its goals under the Company’s share repurchase program.  Additional shares are purchased to fund the Company’s obligations under a 401(k) plan that covers certain union employees.

During the secondthird quarter 2010, CSX completed $594approximately $300 million of total share repurchases, which includes $576 million of share repurchases under the Company’s share repurchase program.  TheSince March 2008, CSX has completed approximately $2.35 billion in share repurchases.  Based on market and business conditions, the Company expects to complete the remaining shares$645 million of repurchases under its existing $3 billion share repurchase program by the end of the first quarter of 2011. 


 
 CSX Purchases of Equity Securities
for the Quarter
 
Third QuarterTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
 
Beginning Balance  $945,202,448
 
July
(June 26, 2010 - July 23, 2010) 1,175,900 $51.02 1,175,900  885,203,849
       
August
(July 24, 2010 - August 20, 2010) - - -  885,203,849
 
September
(August 21, 2010 - September 24, 2010) 4,538,300 52.88 4,538,300  645,208,174
   
Ending Balance 5,714,200 $52.50 5,714,200  $645,208,174
Note: There were purchasedno share repurchases during third quarter 2010 to fund the Company’s contribution to a 401(k) plan that covers certain union employees.  Since March 2008, CSX has completed $2 billion in share repurchases and has remaining share repurchase authority of approximately $945 million.  Future share repurchases will be based on market and business conditions.


  
CSX Purchases of Equity Securities
for the Quarter
   
  
Second Quarter Total Number of Shares Purchased  Average Price Paid per Share  
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a)
  Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs 
  
Beginning Balance  $1,521,108,801 
  
April 
(March 27, 2010 - April 23, 2010)  2,441,000  $54.57   2,114,000   1,405,752,106 
                 
May 
(April 24, 2010 - May 21, 2010)  8,151,000   56.48   8,151,000   945,407,748 
  
June 
(May 22, 2010 - June 25, 2010)  -   -   -   945,407,748 
      
Ending Balance  10,592,000  $56.04   10,265,000  $945,407,748 

(a)  The difference of 327,000 shares between the “Total Number of Shares Purchased” and the “Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs” for the quarter represents shares purchased to fund the Company’s contribution to a 401(k) plan that covers certain union employees.

 
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ITEM 3. 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. (REMOVED AND RESERVED)

ITEM5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibits

18          Independent Registered Public Accounting Firm’s Preferability LetterITEM 6. EXHIBITS

Exhibits

31*           Rule 13a-14(a) Certifications.

32*           Section 1350 Certifications.

 
101*
The following financial information from CSX Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 25,September 24, 2010 filed with the SEC on JulyOctober 15, 2010, formatted in XBRL includes: (i) Consolidated Income Statements for the fiscal periods ended June 25,September 24, 2010 and June 26,September 25, 2009, (ii) Consolidated Balance Sheets at June 25,September 24, 2010 and December 25, 2009, (iii) Consolidated Cash Flow Statements for the fiscal periods ended June 25,September 24, 2010 and June 26,September 25, 2009, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.Statements.


* Filed herewith





SIGNATURSIGNATUREE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CSX CORPORATION
(Registrant)

By:            /s/ Carolyn T. Sizemore___
Carolyn T. Sizemore
Vice President and Controller
(Principal Accounting Officer)
Dated: JulyOctober 15, 2010