FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended March 26, 2004April 1, 2005
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from |
Commission File Number 1-3359
CSX TRANSPORTATION, INC.
Virginia | 54-6000720 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
500 Water Street, Jacksonville, Florida | 32202 | |
(Address of principal executive offices) | (Zip Code) |
(904) 359-3100
(Registrant’s telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X)þ No ( )o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
1
CSX TRANSPORTATION, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 26, 2004INDEXAPRIL 1, 2005
Table of Contents
2
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
Consolidated Income Statements CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(Dollars in Millions) | Quarters Ended | |||||||||||||||
April 1, | March 26, | |||||||||||||||
Quarters Ended | 2005 | 2004 | ||||||||||||||
March 26, | March 28, | |||||||||||||||
(Dollars in Millions) | 2004 | 2003 | ||||||||||||||
OPERATING REVENUE | ||||||||||||||||
Operating Revenue | ||||||||||||||||
Merchandise | $ | 958 | $ | 922 | $ | 1,038 | $ | 958 | ||||||||
Automotive | 202 | 208 | 208 | 202 | ||||||||||||
Coal, Coke & Iron Ore | 422 | 383 | 506 | 422 | ||||||||||||
Other | 23 | 18 | 27 | 23 | ||||||||||||
Total | 1,605 | 1,531 | 1,779 | 1,605 | ||||||||||||
OPERATING EXPENSE | ||||||||||||||||
Operating Expense | ||||||||||||||||
Labor and Fringe | 640 | 624 | 654 | 640 | ||||||||||||
Materials, Supplies and Other | 312 | 297 | 364 | 312 | ||||||||||||
Conrail Rents, Fees and Services | 92 | 87 | ||||||||||||||
Related Party Service Fees | 46 | 46 | ||||||||||||||
Equipment Rent | 99 | 104 | ||||||||||||||
Depreciation | 142 | 138 | 186 | 142 | ||||||||||||
Fuel | 154 | 158 | 180 | 154 | ||||||||||||
Restructuring Charge | 35 | — | ||||||||||||||
Equipment Rent | 98 | 99 | ||||||||||||||
Related Party Service Fees | 40 | 46 | ||||||||||||||
Conrail Rents, Fees and Services | 23 | 92 | ||||||||||||||
Restructuring Charge (Note 10) | — | 35 | ||||||||||||||
Total | 1,520 | 1,454 | 1,545 | 1,520 | ||||||||||||
Operating Income | 85 | 77 | 234 | 85 | ||||||||||||
Other Income (Expense) | 4 | (10 | ) | |||||||||||||
Other Income and Expense | ||||||||||||||||
Other Income — Net (Note 5) | 4 | 4 | ||||||||||||||
Interest Expense | 26 | 26 | 39 | 26 | ||||||||||||
Earnings Before Income Taxes and Cumulative Effect of Accounting Change | 63 | 41 | ||||||||||||||
Earnings | ||||||||||||||||
Earnings Before Income Taxes | 199 | 63 | ||||||||||||||
Income Tax Expense | 25 | 25 | 68 | 25 | ||||||||||||
Earnings Before Cumulative Effect of Accounting Change | 38 | 16 | ||||||||||||||
Cumulative Effect of Accounting Change - Net of Tax | — | 57 | ||||||||||||||
Net Earnings | $ | 38 | $ | 73 | $ | 131 | $ | 38 | ||||||||
See accompanying Notes to Consolidated Financial Statements.
3
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)CONSOLIDATED BALANCE SHEETS
(Unaudited) | ||||||||||||||||
March 26, | December 26, | April 1, | December 31, | |||||||||||||
(Dollars in Millions) | 2004 | 2003 | 2005 | 2004 | ||||||||||||
ASSETS | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and Cash Equivalents | $ | 16 | $ | 14 | $ | 86 | $ | 19 | ||||||||
Accounts Receivable – Net | 1,036 | 1,004 | ||||||||||||||
Accounts Receivable - Net (Note 4) | 1,090 | 1,049 | ||||||||||||||
Materials and Supplies | 167 | 160 | 181 | 156 | ||||||||||||
Income Taxes Receivable | 31 | 31 | 2 | 2 | ||||||||||||
Deferred Income Taxes | 116 | 115 | 95 | 98 | ||||||||||||
Other Current Assets | 70 | 23 | ||||||||||||||
Other Current Assets - Net (Note 4) | 257 | 122 | ||||||||||||||
Total Current Assets | 1,436 | 1,347 | 1,711 | 1,446 | ||||||||||||
Properties | 18,232 | 17,967 | 24,770 | 24,674 | ||||||||||||
Accumulated Depreciation | (5,052 | ) | (4,916 | ) | (5,441 | ) | (5,288 | ) | ||||||||
Properties – Net | 13,180 | 13,051 | ||||||||||||||
Properties - Net | 19,329 | 19,386 | ||||||||||||||
Affiliates and Other Companies | 211 | 248 | 374 | 368 | ||||||||||||
Other Long-term Assets | 704 | 628 | ||||||||||||||
Other Long-term Assets - Net (Note 4) | 589 | 610 | ||||||||||||||
Total Assets | $ | 15,531 | $ | 15,274 | $ | 22,003 | $ | 21,810 | ||||||||
LIABILITIES AND SHAREHOLDER’S EQUITY | ||||||||||||||||
LIABILITIES | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Accounts Payable | $ | 630 | $ | 609 | $ | 709 | $ | 670 | ||||||||
Labor and Fringe Benefits Payable | 300 | 321 | 321 | 333 | ||||||||||||
Casualty, Environmental and Other Reserves | 243 | 211 | ||||||||||||||
Casualty, Environmental and Other Reserves (Note 8) | 265 | 261 | ||||||||||||||
Current Maturities of Long-term Debt | 103 | 102 | 125 | 121 | ||||||||||||
Income and Other Taxes Payable | 62 | 68 | 64 | 46 | ||||||||||||
Due to Parent Company | 2,619 | 2,479 | 1,722 | 1,685 | ||||||||||||
Due to Affiliate | 294 | 251 | ||||||||||||||
Due to Affiliate (Note 6) | 379 | 439 | ||||||||||||||
Other Current Liabilities | 55 | 97 | 38 | 80 | ||||||||||||
Total Current Liabilities | 4,306 | 4,138 | 3,623 | 3,635 | ||||||||||||
Deferred Income Taxes | 3,652 | 3,596 | 6,110 | 6,031 | ||||||||||||
Long-term Debt | 717 | 710 | 1,128 | 1,142 | ||||||||||||
Casualty, Environmental and Other Reserves | 653 | 674 | ||||||||||||||
Casualty, Environmental and Other Reserves (Note 8) | 578 | 579 | ||||||||||||||
Other Long-term Liabilities | 618 | 575 | 652 | 658 | ||||||||||||
Total Liabilities | 9,946 | 9,693 | 12,091 | 12,045 | ||||||||||||
Shareholder’s Equity: | ||||||||||||||||
SHAREHOLDER’S EQUITY | ||||||||||||||||
Common Stock, $20 Par Value: | ||||||||||||||||
Authorized 10,000,000 Shares; | ||||||||||||||||
Issued and Outstanding 9,061,038 Shares | 181 | 181 | 181 | 181 | ||||||||||||
Other Capital | 1,380 | 1,380 | 5,358 | 5,358 | ||||||||||||
Retained Earnings | 4,005 | 4,014 | 4,235 | 4,154 | ||||||||||||
Accumulated Other Comprehensive Earnings | 19 | 6 | ||||||||||||||
Accumulated Other Comprehensive Earnings (Note 1) | 138 | 72 | ||||||||||||||
Total Shareholder’s Equity | 5,585 | 5,581 | 9,912 | 9,765 | ||||||||||||
Total Liabilities and Shareholder’s Equity | $ | 15,531 | $ | 15,274 | $ | 22,003 | $ | 21,810 | ||||||||
See accompanying Notes to Consolidated Financial Statements.
4
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Consolidated Cash Flow Statements CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
(Dollars in Millions) | Quarters Ended | |||||||||||||||
April 1, | March 26, | |||||||||||||||
Quarters Ended | 2005 | 2004 | ||||||||||||||
March 26, | March 28, | |||||||||||||||
(Dollars in Millions) | 2004 | 2003 | ||||||||||||||
OPERATING ACTIVITIES | ||||||||||||||||
Net Earnings | $ | 38 | $ | 73 | $ | 131 | $ | 38 | ||||||||
Adjustments to Reconcile Net Earnings to Net Cash Used In or Provided By: | ||||||||||||||||
Depreciation | 142 | 138 | 186 | 142 | ||||||||||||
Deferred Income Taxes | 22 | 24 | 41 | 20 | ||||||||||||
Restructuring Charge | 35 | — | ||||||||||||||
Cumulative Effect of Accounting Change – Net of Tax | — | (57 | ) | |||||||||||||
Restructuring Charge (Note 10) | — | 35 | ||||||||||||||
Other Operating Activities | (8 | ) | 8 | 5 | (8 | ) | ||||||||||
Changes in Operating Assets and Liabilities: | ||||||||||||||||
Accounts Receivable | (23 | ) | (26 | ) | ||||||||||||
Termination of Sale of Receivables | — | (58 | ) | |||||||||||||
Accounts and Notes Receivable | (41 | ) | (23 | ) | ||||||||||||
Accounts Receivable Affiliates | (63 | ) | 112 | |||||||||||||
Income Tax Receivable | — | 2 | ||||||||||||||
Other Current Assets | (52 | ) | (27 | ) | (45 | ) | (52 | ) | ||||||||
Accounts Payable | 62 | 22 | 59 | (50 | ) | |||||||||||
Labor and Fringe Payable | (11 | ) | (22 | ) | ||||||||||||
Income and Other Taxes Payable | 19 | (7 | ) | |||||||||||||
Current Casualty and Other Environmental Reserves | 5 | (1 | ) | |||||||||||||
Other Current Liabilities | (32 | ) | (116 | ) | (43 | ) | (2 | ) | ||||||||
Net Cash Used In or Provided By Operating Activities | 184 | (19 | ) | |||||||||||||
Net Cash Provided By Operating Activities | 243 | 184 | ||||||||||||||
INVESTING ACTIVITIES | ||||||||||||||||
Property Additions | (250 | ) | (124 | ) | (151 | ) | (250 | ) | ||||||||
Proceeds from Property Dispositions | 4 | — | — | 4 | ||||||||||||
Other Investing Activities | — | (1 | ) | |||||||||||||
Net Cash Used In Investing Activities | (246 | ) | (125 | ) | (151 | ) | (246 | ) | ||||||||
FINANCING ACTIVITIES | ||||||||||||||||
Advances from CSX | 141 | 296 | ||||||||||||||
Long-term Debt Issued | — | 1 | 26 | — | ||||||||||||
Long-term Debt Repaid | (30 | ) | (67 | ) | (36 | ) | (30 | ) | ||||||||
Advances from CSX | 41 | 141 | ||||||||||||||
Dividends Paid | (47 | ) | (57 | ) | (50 | ) | (47 | ) | ||||||||
Other Financing Activities | (6 | ) | — | |||||||||||||
Net Cash Provided by Financing Activities | 64 | 173 | ||||||||||||||
Net Cash (Used In) Provided by Financing Activities | (25 | ) | 64 | |||||||||||||
Net Increase in Cash and Cash Equivalents | 2 | 29 | 67 | 2 | ||||||||||||
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS | ||||||||||||||||
Cash and Cash Equivalents at Beginning of Period | 14 | — | 19 | 14 | ||||||||||||
Cash and Cash Equivalents at End of Period | $ | 16 | $ | 29 | $ | 86 | $ | 16 | ||||||||
See accompanying Notes to Consolidated Financial Statements.
5
CSX TRANSPORTATION, INC. AND SUBSIDIARIESITEM 1: FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATIONBasis of Presentation
In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to fairly present the financial position of CSX Transportation, Inc. and subsidiaries (“CSXT” or the “Company”) at March 26,April 1, 2005 and December 31, 2004 and December 26, 2003,the Consolidated Income and the results of its operations and cash flowsCash Flow Statements for the quarters ended April 1, 2005 and March 26, 2004, and March 28, 2003, such adjustments being of a normal recurring nature. Certain prior-year data have been reclassified to conform to the 20042005 presentation. CSXT is a wholly owned subsidiary of CSX Corporation (“CSX”).
The Company suggests that these financial statements be read in conjunction with the audited financial statements and the notes included in CSXT’s most recent Form 10-K.
CSXT follows a 52/53 week fiscal reporting calendar. Fiscal year 2005 consists of 52 weeks ending on December 30, 2005. Fiscal year 2004 consistsconsisted of a 53-week year ending on December 31, 2004. Fiscal year 2003 consisted of 52 weeks ended on December 26, 2003. The financial statements presented are for the 13-week quarters ended April 1, 2005 and March 26, 2004 and March 28, 2003, and as of December 26, 2003.2004. In 2004, the fourth quarter ending December 31, 2004, will consistconsisted of 14 weeks.
Accumulated Other Comprehensive Earnings consists of the following:
Balance | Net Gain | Balance | ||||||||||
(Dollars in Millions) | December 31, 2004 | (Loss) | April 1, 2005 | |||||||||
Fair Value of Fuel Derivatives | $ | 72 | $ | 67 | $ | 139 | ||||||
(net of $45 and $88 of taxes as of December 31, 2004 and April 1, 2005, respectively) | ||||||||||||
Other | — | (1 | ) | (1 | ) | |||||||
Total | $ | 72 | $ | 66 | $ | 138 | ||||||
Other comprehensive income for the first quarter ofthree months ended March 26, 2004 was $13 million after tax resulting from the increase in fair value of fuel derivative instruments. (See Note 7, Derivative Financial Instruments) Comprehensive income approximated net earnings for the first quarter of 2003.hedging activities.
NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES
Statement of FinancialNew Accounting Standard (“SFAS”) 143, “Accounting for Asset Retirement Obligations” was issued in 2001. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. In conjunction with the group-life method of accounting for asset costs, the Company historically accrued crosstie removal costs as a component of depreciation, which is not permitted under SFAS 143. With the adoption of SFAS 143 in fiscal year 2003, CSXT recorded pretax income of $93 million, $57 million after tax, as a cumulative effect of an accounting change in the first quarter, representing the reversal of the accrued liability for crosstie removal costs. The adoption of SFAS 143 did not have a material effect on prior reporting periods, and the Company does not believe it will have a material effect on future earnings.Pronouncements
In 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” which requires a variable interest entity (“VIE”) to be consolidated by a company that is subject to a majority of the risk of loss from the variable interest entity’sVIE’s activities or is entitled to receive a majority of the entity’s residual returns, or both. Interpretation No. 46 also requires disclosures about VIEs that the company is not required to consolidate but in which it has a significant variable interest. Also in 2003, Interpretation 46 (“46R”), a revision to FASB Interpretation No. 46, was issued to clarify some of the provisions of, and to exempt certain entities from Interpretation 46 requirements. Under the rules of the new guidance, CSXT consolidated Four Rivers Transportation, Inc. (“FRT”), a shortline railroad, into its financial statements at the beginning of fiscal year 2004. The adoption of Interpretation No. 46 will not have a material impact on the results of operations in future reporting periods. Previously, FRT was accounted for under the equity method of accounting. The first quarter of 2004 includes revenues, operating expenses, and after-tax income of approximately $14 million, $10 million, and $1 million for FRT, respectively. The quarter ended March 28, 2003, includes net equity earnings of FRT of approximately $1 million (included in other income). Total consolidated assets as of March 26, 2004 include $24 million and $145 million of current and long-term assets, respectively, for FRT. Total consolidated liabilities as of March 26, 2004 include $27 million and $60 million of current and long-term liabilities, respectively, for FRT.
6
CSX TRANSPORTATION, INC. AND SUBSIDIARIESITEM 1:NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements (Unaudited)
NOTE 3. INTEGRATED RAIL OPERATIONS WITH CONRAIL
BackgroundInvestment In and Integrated Rail Operations with Conrail
CSX and Norfolk Southern Corporation (“NS”) acquiredIn August 2004, the ownership of portions of the Conrail Inc. (“Conrail”) in May 1997. Conrail owns a principal freight railroad system serving the Northeastern United States, and its rail network extends throughout several midwestern states and into Canada.already operated by CSX and NS, through CRR Holdings LLCTransportation, Inc (“CRR Holdings”CSXT”), a jointly owned acquisition entity, hold economic interests in Conrail of 42% and 58%, respectively, and voting interests of 50% each. CSX and NS operate over allocated portions of the Conrail lines.
From time to time, CSX and NS, as the indirect owners of Conrail, may have to make capital contributions, loans or advances to Conrail under the terms of the Transaction Agreement among CSX, NS and Conrail in order to satisfy the retained liabilities and other obligations as provided under such transaction agreement.
CSXT and Norfolk Southern Railway Company (“NSR”), the rail subsidiary of NS, each operate separate portions of the Conrail system pursuantwere transferred to various operating agreements. Under these agreements, the railroads pay operating fees to Conrail for the use of right-of-way and rent for the use of equipment. Conrail continues to provide rail services in certain shared geographic areas (“Shared Asset Areas”) for the joint benefit of CSXT and NSR, for which it is compensated on the basis of usage by the respective railroads.
In June 2003, CSX, NS and Conrail jointly filed a petition with the Surface Transportation Board (“STB”) to establish direct ownership and control by CSX’s and NS’ respective subsidiaries, CSXT and NSR, of CSX’s and NS’ portions of the Conrail system already operated by them separately and independently under various agreements. These portions of the Conrail system are currentlytherefore directly owned by Conrail’s subsidiaries, New York Central Lines, LLC (“NYC”) and Pennsylvania Lines, LLC (“PRR”). The ownership of NYC and PRR would ultimately be transferred (“spun off”) to CSXT and NSR, respectively. Conrail would continue to own, manage and operate the Shared Asset Areas as previously approved by the STB. STB approval to proceed with the spin-off transaction and a favorable ruling from the Internal Revenue Service (“IRS”) qualifying the transaction as a non-taxable distribution were received in November 2003. On April 23, 2004, CSXT and NSR each filed a Registration Statement on Form S-4 with the Securities and Exchange Commission (“SEC”) that describes an offer to exchange new unsecured securities of subsidiaries of CSXT and NSR, and cashthe parties consummated an exchange offer of new unsecured securities for unsecured securities of Conrail. The filings initiate the final stage in implementing the restructuring of Conrail’s unsecured indebtedness as described in the parties’ joint petition filed June 4, 2003 with the STB. The transaction remains subject to a number of other conditions.
If all necessary conditions are satisfied, unsecured debt securities of newly formed subsidiaries of CSXT and NSR would be offered in an approximate 42%/58% ratio along with cash payments in exchange for Conrail’s unsecured debentures. The debt securities issued by its respective subsidiary would be fully and unconditionally guaranteed by CSXT or NSR. Upon completion of the proposed transaction, the subsidiaries would be merged into CSXT and NSR, respectively, and the new debt securities thus would become direct unsecured obligations of CSXT or NSR. Conrail’s secured debt and lease obligations will remain obligations of Conrail and are expected to be supported by new leases and subleases which upon completion of the proposed transaction, would bebecame the direct lease and sublease obligations also in an approximate 42%/58% ratio, of CSXT and NSR. CSXT will record
The Company recorded this transaction at fair value based on the results of an independent valuation.
7
CSX TRANSPORTATION INC. AND SUBSIDIARIESITEM 1: FINANCIAL STATEMENTSNotes to Consolidated Financial Statements (Unaudited)
NOTE 3. INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
CSX, NS and Conrail are working to complete all necessary steps to consummate Since September 2004, the spin-off transaction in 2004. Upon consummationimpact of the proposed transaction CSX’s investmenthas been included in Conrail will no longer include the amounts related to NYCCompany’s Consolidated Balance Sheets and PRR. InsteadConsolidated Income Statements.
As a result of the transaction, the assets and liabilities of NYC will betransferred to CSXT are reflected in their respective line items in CSX’s consolidated balance sheet. Conrail will continue to own, manage and operate the Shared Asset Areas.Company’s Consolidated Balance Sheets.
Additional information about this transaction is included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.
Accounting and Financial Reporting Effects
CSX’sPrior to the spin-off transaction, CSXT’s rail and intermodal operating revenue includesincluded revenue from traffic moving on Conrail property. OperatingCurrently, operating expenses include costs incurred to handle such traffic and operate the Conrail lines. Rail operating expense includes an expense category, “Conrail Rents, Fees and Services,” which reflects:
1. | Right-of-way usage fees to | |||
2. | Equipment rental payments to | |||
3. | Transportation, switching and terminal service charges provided by Conrail in the Shared |
Conrail will continue to own, manage, and operate the Shared Assets Areas for the joint benefit of CSXT and NSR. However, this transaction effectively decreased rents paid to Conrail after the transaction date, as assets previously leased from Conrail are now owned by CSXT.
Transactions with Conrail
As listed below, CSXT has amounts payable to Conrail representing expenses incurred under the operating, equipment and Shared Asset Area agreements.shared area agreements with Conrail.
(Dollars in Millions) | ||||||||||||||||
March 26, | December 26, | April 1, 2005 | December 31, 2004 | |||||||||||||
(Dollars in Millions) | 2004 | 2003 | ||||||||||||||
Payable to Conrail | $ | 82 | $ | 71 | $ | 53 | $ | 59 | ||||||||
On March 31, 2005, CSXT executed a long-term promissory note with a subsidiary of Conrail for $23 million which is included in Long-term Debt in the Company’s Consolidated Balance Sheet as of April 1, 2005. The note bears interest at 4.52% and matures on March 31, 2035.
7
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. Investment In and Integrated Rail Operations with Conrail, Continued
The agreement under which CSXT operatesoperated its allocated portion of the Conrail route system has an initial term of 25 years and may be renewed at CSXT’s option for two five-year terms. Operating fees paid to Conrail under the agreement are subject to adjustment every six years based on the fair valuewas terminated upon consummation of the underlyingspin-off transaction, as CSXT then became the direct owner of its allocated portion of the Conrail system. Lease agreementsAgreements for thesubleasing Conrail equipment operated by CSXT cover varying terms. CSXT is responsible for all costs of operating, maintaining, and improving the routes and equipment under these agreements. Upon consummation of the spin-off transaction, the agreement covering the NYC portion of the Conrail system will terminate, as CSX will then directly own its allocated portion of the Conrail system.
8
CSX TRANSPORTATION INC. AND SUBSIDIARIESITEM 1: FINANCIAL STATEMENTSNotes to Consolidated Financial Statements (Unaudited)
NOTE 4. ACCOUNTS RECEIVABLE
Sale of Accounts Receivable
As of June 27, 2003, CSXT discontinued its accounts receivable securitization program, which resulted in an $869 million increase in accounts receivable and increased commercial paper borrowings included in short-term debt. Prior to June 27, 2003, CSXT sold, without recourse, a revolving pool of accounts receivable to CSX Trade Receivables Corporation (“CTRC”), a bankruptcy-remote entity wholly owned by CSX. CTRC transferred the accounts receivable to a master trust and caused the trust to issue multiple series of certificates representing undivided interests in the receivables. The certificates issued by the master trust were sold to investors, and the proceeds from those sales were paid to CSXT. There were no net losses associated with the sale of receivables for the first quarter of 2004. Net losses associated with the sale of receivables were $18 million for the quarter ended March 28, 2003.
CSXT retained responsibility for servicing accounts receivables held by the master trust. The average servicing period was approximately one month. No servicing asset or liability was recorded since the fees CSXT received approximated its related costs.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for the estimated probable losses on uncollectible accounts and other receivables. The allowance is based onupon the expected collectibilitycredit worthiness of all accounts receivable.customers, historical experience, the age of the receivable and current market and economic conditions. Uncollectible amounts are charged against the allowance account. The allowance for doubtful accounts is maintained against both current and long-term asset accounts. Allowance for doubtful accounts of $108 million and $79 million is included in the balance sheetConsolidated Balance Sheets as follows:
March 26, | December 26, | |||||||
(Dollars in Millions) | 2004 | 2003 | ||||||
Allowance for Doubtful Accounts | $ | 26 | $ | 27 | ||||
NOTE 5. OTHER INCOME (EXPENSE)
Other income (expense) consists of the following:
Quarters Ended | ||||||||
March 26, | March 28, | |||||||
(Dollars in Millions) | 2004 | 2003 | ||||||
Income from Real Estate Operations | $ | — | $ | 9 | ||||
Discounts on Sales of Accounts Receivable | — | (18 | ) | |||||
Miscellaneous | 4 | (1 | ) | |||||
Total | $ | 4 | $ | (10 | ) | |||
Gross Revenue from Real Estate Operations Included in Other Income | $ | 9 | $ | 17 | ||||
98
CSX TRANSPORTATION, INC. AND SUBSIDIARIESITEM 1:NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements (Unaudited)
NOTE 5. Other Income (Expense)
Other Income (Expense) consists of the following:
(Dollars in Millions) | Quarters Ended | |||||||
April 1, | March 26, | |||||||
2005 | 2004 | |||||||
Income from Real Estate Operations | $ | 6 | $ | — | ||||
Miscellaneous | (2 | ) | 4 | |||||
Other Income (Expense) | $ | 4 | $ | 4 | ||||
NOTE 6. RELATED PARTIESRelated Parties
At April 1, 2005 and March 26, 2004, and December 26, 2003, CSXT had $2.6$2.3 billion and $2.5$2.6 billion deficit balances, respectively relating to CSXT’s participation in the CSX cash management plan. The amount is included in Due to Parent Company in the statement of financial position.Balance Sheet. Under this plan, excess cash is advanced to CSX for investment and CSX makes cash funds available to its subsidiaries as needed for use in their operations. CSXT and CSX are committed to repay all amounts due each other on demand should circumstances require. The companies are charged for borrowings or compensated for investments based on the short term applicable federal rate, which was 3.05% as of April 1, 2005. For the period ending March 26, 2004, the companies were charged for borrowings or compensated for investments based on returns earned by the plan portfolio, which was 1.09% and 1.33% at March 26, 2004 and March 28, 2003, respectively. Interest. The interest expense related to this plan was $13$18 million and $10$13 million for the three months endedperiods ending April 1, 2005 and March 26, 2004, and March 28, 2003, respectively.
Detail of Related Party Service Fees (as included in the Consolidated Income Statement)Statements)
(Dollars in Millions) | Quarters Ended | |||||||||||||||
April 1, | March 26, | |||||||||||||||
Quarters Ended | 2005 | 2004 | ||||||||||||||
March 26, | March 28, | |||||||||||||||
(Dollars in Millions) | 2004 | 2003 | ||||||||||||||
CSXI | $ | (101 | ) | $ | (99 | ) | $ | (105 | ) | $ | (101 | ) | ||||
CSX Management Service Fee | 62 | 60 | 67 | 62 | ||||||||||||
CSX Technology | 50 | 51 | 44 | 50 | ||||||||||||
TDSI | 15 | 14 | 15 | 15 | ||||||||||||
TRANSFLO | 20 | 20 | 19 | 20 | ||||||||||||
Total Related Party Service Fees | $ | 46 | $ | 46 | $ | 40 | $ | 46 | ||||||||
Related Party Service Fees consist of amounts related to:
• | CSX Intermodal Inc. (“CSXI”) Reimbursements – Reimbursement from CSXI under an operating agreement for costs incurred by CSXT related to intermodal operations. This reimbursement is based on an amount, which approximates actual costs. | |||
• | CSX Management Service Fee | |||
109
CSX TRANSPORTATION, INC. AND SUBSIDIARIESITEM 1:NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements (Unaudited)
NOTE 6. RELATED PARTIES, continuedRelated Parties, Continued
• | CSX Technology Inc. (“CSX Technology”) Charges — Data processing charges from CSX Technology for the development, implementation and maintenance of computer systems, software and associated documentation for the day-to-day operations of the Company. These charges are based on a mark-up of direct costs. |
• | Total Distribution Services Inc. (“TDSI”) Charges | |||
• | TRANSFLO Terminal Services Inc. (“TRANSFLO”) Charges – Charges from TRANSFLO for services provided to CSXT at bulk commodity facilities. These charges are calculated based on direct costs. |
CSXI, CSX Technology, CSXI, TDSI, and TRANSFLO are wholly ownedwholly-owned subsidiaries of CSX.
Detail of Due to Affiliate (as included in the Consolidated Balance Sheet)
March 26, | December 26, | |||||||||||||||
(Dollars in Millions) | 2004 | 2003 | ||||||||||||||
April 1, 2005 | December 31, 2004 | |||||||||||||||
CSXI | $ | 105 | $ | 49 | $ | 25 | $ | 32 | ||||||||
CSX Technology | 49 | 55 | 234 | 268 | ||||||||||||
TDSI | 5 | 12 | 5 | 4 | ||||||||||||
TRANSFLO | 8 | 15 | 8 | 9 | ||||||||||||
CSX Insurance | 118 | 115 | 98 | 105 | ||||||||||||
Other | 9 | 5 | 9 | 21 | ||||||||||||
Total Due to Affiliate | $ | 294 | $ | 251 | $ | 379 | $ | 439 | ||||||||
Due to Affiliates consists of amounts related to:
CSXI, CSX Technology, TDSI, and TRANSFLO previously explained. | ||||
• | CSX Insurance Company – CSXT and CSX Insurance Company (“CSX Insurance”), a wholly owned subsidiary of CSX, have entered into a loan agreement whereby CSXT may borrow up to $125 million from CSX Insurance. The loan is payable in full on demand. At |
CSXT participates with CSX Container Leasing, LLC “CCL”(“CCL”), a wholly owned subsidiaryan affiliate of CSX, in sale-leaseback arrangements. Under these arrangements, CCL sold equipment to a third party and CSXT leased the equipment and assigned the lease to CCL. CCL is obligated for all lease payments and other associated equipment expenses. If CCL defaults on its obligations under the arrangements, CSXT would assume the asset lease rights and obligations of approximately $5 million and $10 million and $23 million at March 26, 2004April 1, 2005 and December 26, 2003,31, 2004, respectively. These leases were either assumed by Maersk as part of its purchase of the CSX international liner business or were assumed by Horizon Lines LLC (formerly CSX Lines) as part of its ongoing domestic shipping business. CSXT believes that Maersk and Horizon Lines will fulfill their contractual commitments with respect to such leases and that CSXT will have no further liability for those obligations.
1110
CSX TRANSPORTATION, INC. AND SUBSIDIARIESITEM 1:NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements (Unaudited)
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTSDerivative Financial Instruments
Fuel Hedging
In the third quarter of 2003, CSXCSXT began a program to hedge a portion of its future locomotive fuel purchases. This program was established to manage exposure to fuel price fluctuations. In order to minimize this risk, CSXthe Company has entered into a series of swaps in order to fix the price of a portion of its estimated future fuel purchases.
Following is a summary of outstanding fuel swaps:
April 1, | ||||
2005 | ||||
Approximate Gallons Hedged (Millions) | ||||
Average Price Per Gallon | $ | |||
Swap Maturities | April 2005 - July 2006 |
March 2004 - March 2006 | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Estimated % of Future Fuel Consumption Hedged at March 26, 2004 | 22 | % | 32 | % | 2 | % |
2005 | 2006 | |||||||
Estimated % of Future Fuel Consumption Hedged at April 1, 2005 | 47 | % | 9 | % | ||||
The program limits fuel hedges to a 24 month duration and a maximum of 80% of CSXT’s average monthly fuel purchased for any month within the 24-month period, and places the hedges among selected counterparties. Fuel hedging activity did not have afavorably impacted fuel expense for the quarter ended April 1, 2005 by $51 million. There was no material affectimpact on fuel expense for the quarter ended March 26, 2004. Ineffectiveness, or the extent to which changes in the fair values of the fuel swaps did not offset changes in the fair values of the expected fuel purchases, was immaterial.
These instruments qualify, and are designated by management, as cash-flow hedges of variability in expected future cash flows attributable to fluctuations in fuel prices. The fair values of fuel derivative instruments are determined based upon current fair market values as quoted by third party dealers and are recorded on the balance sheetConsolidated Balance Sheets with offsetting adjustments to Accumulated Other Comprehensive Income,Earnings, a component of Shareholders’Shareholder’s Equity. Amounts are reclassified from Accumulated Other Comprehensive Income included approximately $19 million and $6 millionEarnings as of March 26, 2004 and December 26, 2003, respectively, related tothe underlying fuel derivative instruments.that was hedged is consumed by rail operations. Fair value adjustments are noncashnon-cash transactions and, accordingly, are excluded fromhave no cash impact on the Consolidated Cash Flow Statement.Statements. See Note 1. Basis of Presentation, for the impact of fuel hedging activity on Accumulated Other Comprehensive Income.
The Company is exposedhas temporarily suspended entering into new swaps in its fuel hedge program since the third quarter of 2004. The Company will continue to monitor and assess the current issues facing the global fuel market place to decide when to resume hedging under the program.
The counterparties to the fuel hedge agreements expose the Company to credit loss in the event of nonperformance by other parties to fuel swap agreements.non-performance. The Company does not anticipate nonperformancenon-performance by the counterparties.
1211
CSX TRANSPORTATION, INC. AND SUBSIDIARIESITEM 1:NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements (Unaudited)
NOTE 8. CASUALTY, ENVIRONMENTAL AND OTHER RESERVESCasualty, Environmental and Other Reserves
Casualty, environmental and other reserves are provided for in the balance sheet as follows:
(Dollars in Millions) | (Dollars in Millions) | |||||||||||||||||||||||||||||||||||||||||||||||
April 1, 2005 | December 31, 2004 | |||||||||||||||||||||||||||||||||||||||||||||||
March 26, 2004 | December 26, 2003 | Current | Long-term | Total | Current | Long-term | Total | |||||||||||||||||||||||||||||||||||||||||
(Dollars in Millions) | Current | Long-term | Total | Current | Long-term | Total | ||||||||||||||||||||||||||||||||||||||||||
Casualty and Other | $ | 142 | $ | 485 | $ | 627 | $ | 142 | $ | 503 | $ | 645 | $ | 230 | $ | 408 | $ | 638 | $ | 225 | $ | 405 | $ | 630 | ||||||||||||||||||||||||
Separation | 71 | 151 | 222 | 39 | 156 | 195 | 15 | 130 | 145 | 16 | 135 | 151 | ||||||||||||||||||||||||||||||||||||
Environmental | 30 | 17 | 47 | 30 | 15 | 45 | 20 | 40 | 60 | 20 | 39 | 59 | ||||||||||||||||||||||||||||||||||||
Total | $ | 243 | $ | 653 | $ | 896 | $ | 211 | $ | 674 | $ | 885 | $ | 265 | $ | 578 | $ | 843 | $ | 261 | $ | 579 | $ | 840 | ||||||||||||||||||||||||
Casualty Reserves
Casualty reserves represent accruals for the uninsured portion of personal injury and occupational injury andclaims.
Personal Injury
CSXT retains an independent actuarial firm to assist management in assessing the value of CSXT’s personal injury portfolio. An analysis is performed by the independent actuarial firm semi-annually. The methodology used by the actuary includes a development factor to reflect growth in the value of the Company’s personal injury claims. TheThis methodology is based largely on CSXT’s historical claims and settlement activity. Actual results may vary from estimates due to the type and severity of the injury, costs of medical treatments, and uncertainties surrounding the litigation process. Reserves for personal injury claims are $285 million and $272 million at April 1, 2005 and December 31, 2004, respectively.
While the final outcome of casualty-related matters cannot be predicted with certainty, considering among other things the meritorious legal defenses available and liabilities that have been recorded, it is the opinion of CSXT management that none of these items, when finally resolved, will have a material adverse effect on the Company’s estimatefinancial position or liquidity. However, should a number of casualty reserves includes an estimatethese items occur in the same period, it could have a material adverse effect on the results of incurred but not reported claims for asbestos and other occupational injuries to be received over the next seven years. Other occupationaloperations in a particular quarter or fiscal year.
Occupational
Occupational claims include allegations of exposure to certain materials in the work place, such as asbestos, solvents, and diesel fuel, or alleged physical injuries, such as carpal tunnel syndrome or hearing loss.
Asbestos and Other Occupational Injuries
The Company is assisted by third party professionals to project thea number of asbestos and other occupational injury claims to be received over the next seven years and the related costs. Based on this analysis the Company established reserves for the probable and reasonably estimable asbestos and other occupational injury liabilities.
The methodology used by the third party to project future occupational injury claims was based largely on CSXT’s recent experience, including claim-filing and settlement rates, injury and disease mix, open claims and claim settlement costs. However, projecting future occupational injury claims and settlements costs is subject to numerous variables that are difficult to predict. In addition to the significant uncertainties surrounding the number of claims that might be received, other variables, including the type and severity of the injury or disease alleged by each claimant, the long latency period associated with exposure, dismissal rates, costs of medical treatment, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case and the impact of changes in legislative or judicial standards, may cause actual results to differ significantly from estimates. Furthermore, predictions with respect to these variables are subject to greater uncertainty as the projection period lengthens. In light of these uncertainties, CSXT believes that seven years is the most reasonable period for estimating future claims, and that claims received after that period are not reasonably estimable. CSXT’s reserve for asbestos and other occupational claims on an undiscounted basis amountedby employees exposed to $322 million at March 26, 2004, comparedasbestos in the workplace. The heaviest exposure for CSXT employees was due to $331 million at December 26, 2003.work conducted in and around the use of steam locomotive engines that were phased out between the early 1950’s and late 1960’s. However, other types of exposures, including exposure from locomotive component parts and building materials, continued after 1967, until it was substantially eliminated by 1985.
1312
CSX TRANSPORTATION, INC. AND SUBSIDIARIESITEM 1:NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements (Unaudited)
NOTE 8. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES,Casualty, Environmental and Other Reserves, Continued
Casualty Reserves, Continued Asbestos and other occupational claim filings against the Company have been inconsistent. Accordingly, while the Company had concluded that a probable loss had occurred, it did not believe it could estimate the range of reasonably possible loss because of the lack of experience with such claims and the lack of detailed employment records for the population of exposed employees. Claim filings increased and when they continued into 2003, the Company concluded that an estimate for incurred but not reported asbestos exposure liability needed to be recorded.
CSXT engaged a third party, who has extensive experience in performing asbestos and other occupational studies, to assist in assessing the unasserted liability exposure. The analysis is performed by the specialist semi-annually. The objective of the analysis is to determine the number of estimated incurred but not reported claims and the estimated average cost per claim to be received over the next seven years. Seven years was determined by management to be the time period in which claim filings and claim values could be estimated with more certainty.
The methodology used by the specialists includes an estimate of future anticipated claims based on the Company’s average historical claim filing rates, future anticipated dismissal rates and settlement rates. CSXT’s future liability for incurred but not reported claims is estimated by multiplying the future anticipated claims by the average settlement values.
A summary of existing asbestos and other occupational claims activity is as follows:
Quarter Ended | Fiscal Year Ended | Quarter Ended | Fiscal Year Ended | |||||||||||||
March 26, 2004 | December 26, 2003 | April 1, 2005 | December 31, 2004 | |||||||||||||
Asserted Claims: | ||||||||||||||||
Open Claims – Beginning of Period | 7,395 | 8,788 | ||||||||||||||
Open Claims - Beginning of Period | 5,476 | 7,541 | ||||||||||||||
New Claims Filed | 259 | 2,305 | 259 | 1,103 | ||||||||||||
Claims Settled | (936 | ) | (3,338 | ) | (350 | ) | (2,740 | ) | ||||||||
Claims Dismissed | (37 | ) | (360 | ) | (40 | ) | (428 | ) | ||||||||
Open Claims – End of Period | 6,681 | 7,395 | ||||||||||||||
Open Claims - End of Period | 5,345 | 5,476 | ||||||||||||||
Separation LiabilityThe amounts recorded by CSXT for the occupational liabilities are based upon currently known facts. Projecting future events, such as the number of new claims to be filed each year, the average cost of disposing of claims, as well as the numerous uncertainties surrounding asbestos and other occupational litigation in the United States, could cause the actual costs to be higher or lower than projected.
Separation liabilitiesReserves for asbestos related claims are $194 million and $199 million at March 26, 2004,April 1, 2005 and December 26, 2003, include productivity charges recorded in 199131, 2004, respectively. Reserves for other occupational related claims are $96 million and 1992 to provide for the estimated costs of implementing workforce reductions, improvements in productivity$99 million at April 1, 2005 and other cost reductions at the Company’s major transportation units. The remaining separation liabilities are expected to be paid out over the next 15 to 20 years. Separation liabilities also include amounts payable under the Company’s management restructuring programs. (See Note 10, Management Restructuring)December 31, 2004, respectively.
1413
CSX TRANSPORTATION, INC. AND SUBSIDIARIESITEM 1:NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements (Unaudited)
NOTE 8. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES,Casualty, Environmental and Other Reserves, Continued
Environmental Reserves
CSXT is a party to various proceedings, including administrative and judicial proceedings, involving private parties and regulatory agencies related to environmental issues. CSXT has been identified as a potentially responsible party (“PRP”) at approximately 230251 environmentally impaired sites, many of which are, or may be, subject to remedial action under the Federal Superfund statute (“Superfund”) or similar state statutes. A number of these proceedings are based on allegations that CSXT, or its railroad predecessors, sent hazardous substances to the facilities in question for disposal. Some
In addition, some of CSXT’s land holdings are and have been used for industrial or transportation-related purposes or leased to commercial or industrial companies whose activities may have resulted in releases onto the property. Therefore, CSXT is subject to environmental cleanup and enforcement actions including the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), also known as the Superfund law, as well as similar state laws that may impose joint and several liability for cleanup and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the proceedings involve property formerly or currently owned by CSXT or its railroad predecessors. Proceedings arising under Superfund or similar state statutes can involve numerous other companies who generated the waste or owned or operated the property and involve the allocation of liability for costs associated with site investigation and cleanup,original conduct, which could be substantial. In the fourth quarter of 2004, CSXT added approximately $6 million of Conrail environmental claims, due to the spin-off transaction.
At least once eacha quarter, CSXT reviews its role with respect to each such location, giving consideration to a number of factors, including the type of cleanup required, the nature of CSXT’s alleged connection to the location (e.g., generator of waste sent to the site or owner or operator of the site), the extent of CSXT’s alleged connection (e.g., volume of waste sent to the location and other relevant factors), the accuracy and strength of evidence connecting CSXT to the location, and the number, connection, and financial viability of other named and unnamed PRP’s at the location.
identified. Based on the review process, CSXT has recorded reserves to cover estimated contingent future environmental costs with respect to such sites. Environmental costs are charged to expense when they relate to an existing condition caused by past operations and do not contribute to current or future revenue generation. The recorded liabilities for estimated future environmental costs at March 26, 2004,April 1, 2005 and December 26, 200331, 2004, were $47$60 million and $45$59 million, respectively. These liabilities, which are undiscounted, include amounts representing CSXT’s estimate of unasserted claims, which CSXT believes to be immaterial. The liability includes future costs for all sites where the Company’s obligation is (1) deemed probable and (2) where such costs can be reasonably estimated. The liability includes future costs for remediation and restoration of sites as well as any significant ongoing monitoring costs, but excludes any anticipated insurance recoveries. The majority of the March 26, 2004 environmental liability is expected to be paid out over the next seven years.
The Company does not currently possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, on some sites until completion of future environmental studies. In addition, latent conditions at any given location could result in exposure, the amount and materiality of which cannot presently be reliably estimated. Based upon information currently available, however, the Company believes its environmental reserves are adequate to accomplish remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters, if any, will not materially affect its overall results of operations and financial condition.
Separation Liability
Separation liabilities at April 1, 2005 and December 31, 2004, provide for the estimated costs of implementing workforce reductions, improvements in productivity and other cost reductions at the Company’s major transportation units since 1991. These liabilities are expected to be paid out over the next 15 to 20 years through general corporate funds.
14
CSX TRANSPORTATION, INC. AND SUBSIDIARIESITEM 1:NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotes to Consolidated Financial Statements (Unaudited)
NOTE 9. COMMITMENTS AND CONTINGENCIESCommitments and Contingencies
Purchase Commitments
The Company has a commitment under a long-term maintenance program for approximately 40% of CSXT’sits fleet of locomotives. The agreement expires in 2026 and approximates $2.6$5.8 billion. The long-term maintenance program is intended to provide CSXT access to efficient, high-quality locomotive maintenance services at fixed price levels through the term of the program. Under the program, CSXT paid $37$41 million and $33$37 million in the quarters ended April 1, 2005 and March 26, 2004, and March 28, 2003, respectively.
In September 2003, the Company entered into fuel purchase agreements for approximately 14% of its fuel requirements over the next five months. These agreements amounted to approximately 88 million gallons in commitments at a weighted average of 75 cents per gallon. These contracts required the Company to take monthly delivery of specified quantities of fuel at a fixed price through February 2004. These contracts could not be net settled. As of March 26, 2004, no forward physical purchase commitments were in place.
Self-Insurance
The Company obtainsuses a combination of third-party and self-insurance, obtaining substantial amounts of commercial insurance for potential losses for third-party liability and property damages. Specified levels of risk (up to $35 million for property and $25 million for liability per occurrence) are retained on a self-insurance basis. The Company uses a combination of third-party and self-insurance in its risk management program.
STB Proceeding
In 2001 Duke Energy Corporation (“Duke”) filed a complaint before the U.S. Surface Transportation Board (“STB”)STB alleging that certain CSXT common carrier coal rates arewere unreasonably high. In February 2004, the STB issued a decision finding that the CSXT common carrier rates were reasonable. While approving the rate levels, the STB also invited Duke to request a phase-in of rate increases over some time period. The nature and amount of any such phase-in is uncertain, and would only apply to billings subsequent to December 2001. In October 2004, the STB issued a decision denying Duke’s petition for reconsideration of its February 2004 ruling. In November 2004, Duke advised the STB that it would request phase-in relief, and filed a Petition for Review of the STB’s decisions in the United States Court of Appeals for the District of Columbia Circuit. CSXT will continue to consider and pursue all available legal defenses in this matter. Administrative proceedings and legal appeals are possible, and could take several years to resolve. An unfavorableA favorable outcome to this complaint would not have acould result in gain realization in amounts that could be material effect on the Company’s financial position.
Contract Settlement
In 2002, the Company received $44 million as the first of two payments to settle a contract dispute. During 2002, the Company recognized approximately $7 million of the first payment in other income as this amount related to prior periods. The remaining $37 million, of which $23 million was received in 2003, will be recognized over the contract period, which ends in 2020. The results of this settlement will provide approximately $3 millionoperations in annual pretax earnings through 2020.
16
CSX TRANSPORTATION INC. AND SUBSIDIARIESITEM 1: FINANCIAL STATEMENTSNotes to Consolidated Financial Statements (Unaudited)
NOTE 9. COMMITMENTS AND CONTINGENCIES, continuedthe quarters received.
Other Legal Proceedings
CSXT is involved in routine litigation incidental to its business and is a party to a number of legal actions and claims, various governmental proceedings and private civil lawsuits, including those related to environmental matters, Federal Employers’ Liability Act claims by employees, other personal injury claims, and disputes and complaints involving certain transportation rates and charges. Some of the legal proceedings include claims for punitive as well as compensatory damages, and others purport to be class actions. While the final outcome of these matters cannot be predicted with certainty, considering among other things, the meritorious legal defenses available and liabilities that have been recorded along with applicable insurance, it is the opinion of CSXT management that none of these items will have a material adverse effect on the results of operations, financial position or liquidity of CSXT. However, an unexpected adverse resolution of one or more of these items could have a material adverse effect on the results of operations in a particular quarter or fiscal year. The Company is also a party to a number of actions, the resolution of which could result in gain realization in amounts that could be material to results of operations in the quarterquarters received.
15
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10. MANAGEMENT RESTRUCTURINGManagement Restructuring
In the first quarter ofDuring 2004, the Company recorded separation expenses forincurred restructuring charges related to the management restructuring announced in November 2003 of $35 million.
In November 2003, the Company announced a management restructuring plan to streamline the structure, at a number of its companies, eliminate organizational layers and realign certain functions. The initiative will reduceFor the non-union workforce by approximately 550 positions. As ofquarter ended March 26, 2004, 388 employees have been terminated under this program. The Company recorded an initial pretax charge related to this reduction of $25 million in 2003. In the first quarter of 2004, the Company recorded an additionalexpense of $35 million of expense related to the management restructuring for separation expense, pension and post-retirement benefit curtailment charges, stock compensation expense and other related expenses.
The majority of separation benefits will be paid from CSX’s qualified pension plans, with the remainder being paid from general corporate funds. See the table below for a rollforward of significant components of the restructuring charge.
First | ||||||||||||||||
Balance | Quarter | Balance | ||||||||||||||
December 26, | 2004 | March 26, | ||||||||||||||
(Dollars in Millions) | 2003 | Expense | Payments | 2004 | ||||||||||||
Pension and Postretirement Separation Expense | $ | 24 | $ | 19 | $ | (7 | ) | $ | 36 | |||||||
Restructuring Total | $ | 24 | $ | 19 | $ | (7 | ) | $ | 36 | |||||||
Pension and Postretirement Curtailment Charges | 16 | |||||||||||||||
First Quarter 2004 Expense | $ | 35 | ||||||||||||||
1716
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
CSXT follows a 52/53 week fiscal reporting calendar. Fiscal year 2005 consists of 52 weeks ended on December 30, 2005. Fiscal year 2004 consistsconsisted of a 53-week year ending on December 31, 2004. Fiscal year 2003 consisted of 52 weeks ended on December 26, 2003. The financial statements presented are for the 13-week quarters ended April 1, 2005 and March 26, 2004 and March 28, 2003, and as of December 26, 2003.2004. In 2004, the fourth quarter ending December 31, 2004, will consistconsisted of 14 weeks.
Quarters endedQuarter Ended April 1, 2005 Compared to Quarter Ended March 26, 2004 Compared to March 28, 2003
Operating Revenue
The following table provides carload and revenue data by service group and commodity for the quarters ended April 1, 2005 and March 26, 2004 and March 28, 2003:2004.
CSX TRANSPORTATION TRAFFIC AND REVENUE(a)
Loads (Thousands); Revenue (Dollars in Millions)
Carloads | Revenue | First Quarter Loads | First Quarter Revenue | |||||||||||||||||||||||||||||||||||||||||||||
(Thousands) | (Dollars in Millions) | 2005 | 2004 | % Change | 2005 | 2004 | % Change | |||||||||||||||||||||||||||||||||||||||||
2004 | 2003 | % Change | 2004 | 2003 | % Change | |||||||||||||||||||||||||||||||||||||||||||
Merchandise | ||||||||||||||||||||||||||||||||||||||||||||||||
Phosphates and Fertilizer | 120 | 117 | 3 | % | $ | 89 | $ | 87 | 2 | % | ||||||||||||||||||||||||||||||||||||||
Phosphates and Fertilizers | 117 | 120 | (3 | )% | $ | 90 | $ | 89 | 1 | % | ||||||||||||||||||||||||||||||||||||||
Metals | 94 | 88 | 7 | 119 | 110 | 8 | 93 | 94 | (1 | ) | 138 | 119 | 16 | |||||||||||||||||||||||||||||||||||
Forest and Industrial Products | 150 | 148 | 1 | 205 | 195 | 5 | ||||||||||||||||||||||||||||||||||||||||||
Agricultural and Food | 115 | 115 | — | 172 | 168 | 2 | ||||||||||||||||||||||||||||||||||||||||||
Forest Products | 113 | 114 | (1 | ) | 176 | 159 | 11 | |||||||||||||||||||||||||||||||||||||||||
Food and Consumer | 63 | 59 | 7 | 105 | 88 | 19 | ||||||||||||||||||||||||||||||||||||||||||
Agricultural Products | 92 | 92 | — | 137 | 131 | 5 | ||||||||||||||||||||||||||||||||||||||||||
Chemicals | 139 | 137 | 1 | 256 | 250 | 2 | 140 | 139 | 1 | 275 | 256 | 7 | ||||||||||||||||||||||||||||||||||||
Emerging Markets | 112 | 101 | 11 | 117 | 112 | 4 | 115 | 112 | 3 | 117 | 116 | 1 | ||||||||||||||||||||||||||||||||||||
Total Merchandise | 730 | 706 | 3 | 958 | 922 | 4 | 733 | 730 | 0 | 1,038 | 958 | 8 | ||||||||||||||||||||||||||||||||||||
Automotive | 125 | 131 | (5 | ) | 202 | 208 | (3 | ) | 125 | 125 | — | 208 | 202 | 3 | ||||||||||||||||||||||||||||||||||
Coal, Coke & Iron Ore | ||||||||||||||||||||||||||||||||||||||||||||||||
Coal, Coke and Iron Ore | ||||||||||||||||||||||||||||||||||||||||||||||||
Coal | 403 | 373 | 8 | 405 | 370 | 9 | 437 | 403 | 8 | 482 | 405 | 19 | ||||||||||||||||||||||||||||||||||||
Coke and Iron Ore | 17 | 12 | 42 | 17 | 13 | 31 | 21 | 17 | 24 | 24 | 17 | 41 | ||||||||||||||||||||||||||||||||||||
Total Coal, Coke & Iron Ore | 420 | 385 | 9 | 422 | 383 | 10 | ||||||||||||||||||||||||||||||||||||||||||
Total Coal, Coke and Iron Ore | 458 | 420 | 9 | 506 | 422 | 20 | ||||||||||||||||||||||||||||||||||||||||||
Other | — | — | — | 23 | 18 | 28 | — | — | — | 27 | 23 | 17 | ||||||||||||||||||||||||||||||||||||
Total | 1,275 | 1,222 | 4 | % | $ | 1,605 | $ | 1,531 | 5 | % | 1,316 | 1,275 | 3 | % | 1,779 | 1,605 | 11 | % | ||||||||||||||||||||||||||||||
18
(a) | Prior periods have been reclassified to conform to the current presentation. |
17
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
Quarters ended March 26, 2004 Compared to March 28, 2003,RESULTS OF OPERATIONS, Continued
Operating Revenue Continued
Revenue increased $74$174 million, or 511 percent in the quarter ended March 26, 2004, asApril 1, 2005, compared to the quarter ended March 28, 2003.
Merchandise26, 2004.
Merchandise again showed strong growth in
Merchandise revenue was up 8% on relatively flat volume during the first quarter with revenues up 4 percent on volume growth of 3 percent.2005. All markets showed year-over-year improvementsimprovement in revenue per car due to continued price increases and volume.the Company’s fuel surcharge program.
• | Phosphates and Fertilizers– |
• | Metals– Despite a 1% decline in volume, metals revenue grew 16% due to market pricing and favorable |
• | Forest Products– Paper markets produced significantly higher revenue despite lower volume in several lines of business. Volume strength in lumber and panel markets was offset by declines in several paper markets. U.S. newsprint demand dropped over 4% during the first two months of the year, while imports continue to affect domestic paper production. |
• | Food and Consumer– Volume was favorable by 7%, led by gains in building products and alcoholic beverages. Even stronger revenue gains of 19% were driven by continued yield management success and gains in transportation equipment. |
• | Agricultural Products– Volume was flat due to weakness in domestic beans and processed products markets. However, revenue was favorable on strength in |
• | Chemicals– Revenue grew 7% on relatively flat volume. Gains were strongest in textile chemicals, bleach/paper chemicals, and petroleum products. The plastics market experienced volatility during the quarter as buyers reduced existing inventories; but revenue still grew 4%. Sand shipments were down due to car shortages and losses of marginal traffic. |
• | Emerging Markets– Volume was favorable overall as strength in most lines of business offset weakness in | |||
Automotive
Revenue and volume results were unfavorable year over year. Despite a 4 percent increase in vehicle sales year over year, inventories remain high with production flat. Several CSXT-served assembly plants were down for inventory adjustments. Plant closure and industry strikes also impacted performance. Aggressive new vehicle incentives weakened the remarketed vehicle market.
1918
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
Quarters ended March 26, 2004 ComparedRESULTS OF OPERATIONS, Continued
Automotive
Revenue increased 3% on flat volume as a result of yield improvements. North American light vehicle production decreased 179,285 units, or roughly 4%, year over year. Inventory levels remain high, at 69 days for most manufacturers and 79 days for the Big 3. Manufacturers are using production downtime and incentives to March 28, 2003, Continuedaddress excess inventory.
Operating Revenue, Continued
Coal, Coke and Iron Ore
Coal, Overall coal, coke and iron ore experienced 10 percent revenue growth on 9 percentrevenues were favorable 20% year over year. Volume was favorable 9% or 38,000 carloads. Growth was driven by volume growth, primarily due to strengthgains in export, riverindustrial, coke, and southern utilitiesnorthern utility markets. Strength in export resulted from continued high European steam coal demandRevenue per car growth was the result of market price increases and increased demand from Asia. Pricing and modal conversions also contributed to gains.the Company’s fuel surcharge program offsetting slightly unfavorable mix. All lines of business experiencedreflect favorable year-over-year gains except northern utilities.year over year revenue-per-car gains.
OtherRail Operating Expense
Other revenue for 2004 includesLabor and Fringeexpenses increased $14 million in the first quarter of 2005 versus the prior year quarter. The effects of inflation continue to drive labor and fringe expense increases, along with increases in incentive compensation. These costs were partially offset by benefits realized from reduced staffing levels.
Materials, Supplies and Otherexpenses increased $52 million during the first quarter of 2005 as compared to the prior year quarter. The increase is associated with volume and inflation related expenses as well as an increase in expenses related to the resolution of certain legal matters and higher reserve requirements for Four Rivers Transportation (“FRT”), a short-line railroad consolidatednon-trade uncollectible accounts.
Depreciationincreased $44 million for the first quarter of 2005 due to an increased depreciation base, mainly attributable to the Conrail transaction, as assets previously leased from Conrail are now owned directly by CSX.
Fuelincreased $26 million for the quarter versus the prior year due to higher fuel prices, net of hedging benefits.
Conrail Rents, Fees and Servicesdecreased $69 million for the quarter primarily due to the Conrail transaction completed in the third quarter of 2004. This transaction decreased rents paid to Conrail, as assets previously leased from Conrail are now owned directly by CSX.
Restructuring Chargeof $35 million represents the 2004 pursuantcharge for separation expenses related to FASB Interpretation No. 46. Prior to 2004, FRT was accounted for under the equity method.management restructuring announced in November 2003 at Surface Transportation.
Operating Expense
2019
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
QuartersRESULTS OF OPERATIONS, Continued
Operating Income
Operating income was $234 million for the quarter ended April 1, 2005 compared to $85 million for the quarter ended March 26, 2004 Compared to March 28, 2003, Continued2004.
Operating IncomeInterest Expense
Operating incomeInterest expense increased $8$13 million quarter-over-quarter to $85 million in the first quarter of 2004, compared to operating income of $77 million in 2003. Although revenue and volume increased over the prior year comparable quarter,period due to the declinehigher rate of Conrail debt included in operating income is principally the Consolidated Balance Sheets as a result of $35 million of charges associated with management restructuring initiatives.the Conrail asset transfer in August 2004.
Other Income(Expense)Income Tax Expense
OtherThe income tax expense for the period ended April 1, 2005 increased $14$43 million compared to the prior year comparable quarter, due towhich is the net effectresult of discontinuing the accounts receivable securitization programhigher earnings before income taxes offset by lower real estate transactions.a one-time, non-cash deferred income tax expense reduction stemming from the enactment of income tax legislation in one jurisdiction during the period.
Interest ExpenseNet Earnings
Interest expense remained constant at $26Net earnings were $131 million for the quarter ended March 26, 2004, asApril, 1, 2005 compared to the prior year period.
Income Tax Expense
Income tax expense for the three months ended March 28, 2003 includes $9 million for the increase in the Company’s deferred effective state income tax rate, which is applied to CSXT’s cumulative temporary differences, as a result of the conveyance of certain CSX assets to a new venture.
Net Earnings
Net earnings were $38 million for the quarter ended March 26, 2004, compared to income of $73 million for the same period of the prior year. Net earnings for the quarter ended March 28, 2003 included a cumulative effect of an accounting change of $93 million, $57 million after tax, representing the reversal of the accrued liability for crosstie removal costs related to the adoption of SFAS 143, “Accounting for Asset Retirement Obligations”.
21
CSX TRANSPORTATION INC. AND SUBSIDIARIESITEM 2: MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
FACTORS EXPECTED TO INFLUENCE 2004
As more fully discussed in the Company’s most recent Annual Report and Form 10-K, management believes that in addition to general economic factors, including variability in the cost of fuel, there are several key factors that may influence 2004 operating results. These include the Company’s ability to improve operating efficiency while maintaining volume and the Company’s ability to effectively implement its management restructuring program. Additionally, the Company faces inherent business risks of exposure to property damage and personal injury claims in the event of train accidents, including derailments.2004.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of certain revenues and expenses during the reporting period. Actual results may differ from those estimates. SignificantCritical accounting estimates using management judgment are made for the following areas:
1. | Casualty, legal and environmental | |||
2. | Pension and postretirement | |||
3. | Depreciation policies for its assets under the group-life | |||
4. | Income taxes. |
These estimates and assumptions are discussed with the Audit Committee of the Board of Directors of CSX on a regular basis.
For information regarding CSXT’s significant estimates using management judgment, see Management’s narrative analysis of the results of operations in the Company’s Form 10-K for the year ended December 26, 2003.31, 2004.
2220
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
ITEM 2: MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Quarterly Report containsCertain statements in this report and in other materials filed with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made by the Company, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act with respect to,of 1933 and the Securities Exchange Act of 1934. These forward-looking statements include, among other items:others, statements regarding:
• | ||||
• | Expectations as to the effect of claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements on our financial condition; | |||
Management’s plans, goals, strategies and objectives for future operations 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; | ||||
• |
Forward-looking statements are typically identified by words or phrases such as “believe”, “expect”, “anticipate”, “project”, and similar expressions. The Company cautions against placing undue reliance on forward-looking statements, which reflect its currentgood 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 times that, or by which, such performance or results will be achieved.
Forward-looking statements are subject to a number of risks and uncertainties and actual performance or results could differ materially from that anticipated by these forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statement. If the Company does update any forward-looking statement, no inference should be drawn that the Company will make additional updates with respect to that statement or any other forward-looking statements.
Forward-looking statements are subject The following important factors, in addition to a number of risks and uncertainties, and actual performance or results could differ materially from that anticipated by these forward-looking statements. Factors thatthose discussed elsewhere, may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others:statements:
• | ||||
• | Changes in operating conditions and costs | |||
• | ||||
• | Labor costs and labor difficulties, including stoppages affecting either the Company’s operations or the customers’ ability to deliver goods to the Company for shipment; | |||
The inherent risks associated with safety and security, including adverse economic or operational effects from terrorist activities and any governmental response; | ||||
• | Changes in fuel prices; |
21
CSX TRANSPORTATION, INC.
ITEM 2: MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS, Continued
• | Legislative, regulatory, | |||
• | Competition from other modes of freight transportation such as trucking and competition and consolidation within the transportation industry generally; | |||
• | Natural events such as extreme weather conditions, fire, floods, earthquakes, or | |||
• | The outcome of |
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 Quarterly Reportreport and in the Company’s other SEC reports, accessible on the SEC’s website atwww.sec.gov and the Company’s website at www.csx.com.www.csx.com.
2322
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
PART I: ITEMS 3 & 4
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During 2003, the Company began a program to hedge its exposure to fuel price volatility through swap transactions. As of March 26, 2004, CSXT has hedged approximately 22% and 32% of expected requirements for 2004 and 2005, respectively. The Company expects that by the end of 2004 the programs will resultInformation omitted in an increase in the amount of fuel hedged to approximately 76% of 2005 annual purchases. At March 26, 2004, a 1% change in fuel prices would result in an increase or decrease in the asset related to the swaps of approximately $3 million. The Company is subject to risk relating to changes in the price of diesel fuel. As of March 26, 2004, the Company had not entered into any long-term commitments for forward fuel purchases. The Company’s rail unit average annual fuel consumption is approximately 617 million gallons. A one-cent change in the price per gallon of fuel would impact fuel expense by approximately $5 million.
The Company is exposed to loss in the event of non-performance by any counter-party to the fuel hedging agreements. The Company does not anticipate non-performance by such counter-parties, and no material loss would be expected from non-performance.accordance with General Instruction H(2)(b).
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
As of March 26, 2004,April 1, 2005, under the supervision and with the participation of the Company’s ChiefPrincipal Executive Officer (“CEO”) and the ChiefPrincipal 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 CEOPrincipal Executive Officer and CFOthe Principal Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of March 26, 2004.April 1, 2005. There were no changes in the Company’s internal controls over financial reporting during the fiscalfirst quarter covered by this quarterly reportof 2005 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
2423
CSX TRANSPORTATION INC. AND SUBSIDIARIESITEM 1: LEGAL PROCEEDINGS
For information relating to CSXT’s settlements and other legal proceedings, see Note 9. Commitments and Contingencies.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Information omitted in accordance with General Instruction H(2)(b).
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Information omitted in accordance with General Instruction H(2)(b).
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information omitted in accordance with General Instruction H(2)(b).
ITEM 5: OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits | ||
31.1* | Principal Executive Officer Certification Pursuant to | |
31.2* | Principal Financial Officer Certification Pursuant to | |
32.1* | Principal Executive Officer Certification Pursuant to | |
32.2* | Principal Financial Officer Certification Pursuant to |
None24
* Filed herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CSX TRANSPORTATION, INC. | ||||
(Registrant) | ||||
By: | /s/ CAROLYN T. SIZEMORE | |||
Carolyn T. Sizemore | ||||
Vice President and Controller | ||||
(Principal Accounting Officer) | ||||
Dated: May 2, 2005 |
Dated: May 4, 2004
25