PAGE 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 28, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- ---------------- Commission File Number 1-3359 CSX TRANSPORTATION, INC. (Exact name of registrant as specified in its charter) Virginia 54-6000720 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 Water Street, Jacksonville, Florida 32202 (Address of principal executive offices) (Zip Code) (904) 359-3100 (Registrant's telephone number, including area code) No Change (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of July 26, 1996: 9,061,038 shares REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. - 1 - PAGE 2 CSX TRANSPORTATION, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 28, 1996 INDEX PART I. FINANCIAL INFORMATION Page Number Item 1. Financial Statements 1. Consolidated Statement of Earnings - Quarters and Six Months Ended June 28, 1996 and June 30, 1995 3 2. Consolidated Statement of Cash Flows - Six Months Ended June 28, 1996 and June 30, 1995 4 3. Consolidated Statement of Financial Position - At June 28, 1996 and December 29, 1995 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Analysis and Results of Operations 11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 Signature 13 Please note that through clerical error the Company's Second Quarter Form 10-Q was received on July 30, 1996 by the SEC as a test filing instead of as an official filing on that date. The Company's press release issued on July 18, 1996 contains the Company's condensed consolidated unaudited financial statements, and the textual portion of the release highlights the significant financial results. Immediately upon learning of the filing error, the Company resubmitted the filing to the SEC. - 2 - PAGE 3 CSX TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statement of Earnings (Millions of Dollars) (Unaudited) Quarters Ended Six Months Ended ------------------- ------------------ June 28, June 30, June 28, June 30, 1996 1995 1996 1995 -------- -------- -------- -------- OPERATING REVENUE Merchandise $ 814 $ 797 $ 1,602 $ 1,596 Coal 403 379 774 745 Other 38 35 74 64 ------ ------ ------- ------- Transportation 1,255 1,211 2,450 2,405 OPERATING EXPENSE Labor and Fringe Benefits 474 463 950 934 Materials, Supplies and Other 244 272 508 534 Equipment Rent 91 98 189 202 Depreciation 102 97 204 193 Fuel 75 64 148 129 Restructuring Charge --- 196 --- 196 ------ ------ ------- ------- Total 986 1,190 1,999 2,188 OPERATING INCOME 269 21 451 217 Other Income (Expense) 21 3 24 (1) Interest Expense 28 12 39 22 ------ ------ ------- ------- EARNINGS BEFORE INCOME TAXES 262 12 436 194 Income Tax Expense 98 3 165 71 ------ ------ ------- ------- NET EARNINGS $ 164 $ 9 $ 271 $ 123 ====== ====== ======= ======= See accompanying Notes to Consolidated Financial Statements. - 3 - PAGE 4 CSX TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows (Millions of Dollars) (Unaudited) Six Months Ended -------------------- June 28, June 30, 1996 1995 ------ ------ OPERATING ACTIVITIES Net Earnings $ 271 $ 123 Adjustments to Reconcile Net Earnings to Net Cash Provided Depreciation 204 193 Deferred Income Taxes (Benefit) 71 (10) Restructuring Charge Provision --- 196 Productivity/Restructuring Charge Payments (42) (31) Other Operating Activities (11) (16) Changes in Operating Assets and Liabilities Accounts Receivable 10 35 Materials and Supplies (7) (24) Other Current Assets (11) (18) Accounts Payable and Other Current Liabilities 16 5 ------ ------ Net Cash Provided by Operating Activities 501 453 ------ ------ INVESTING ACTIVITIES Property Additions (380) (414) Other Investing Activities 77 54 ------ ------ Net Cash Used by Investing Activities (303) (360) ------ ------ FINANCING ACTIVITIES Long-Term Debt Issued 117 115 Long-Term Debt Repaid (57) (56) Cash Dividends Paid (437) (28) Other Financing Activities 62 1 ------ ------ Net Cash (Used) Provided by Financing Activities (315) 32 ------ ------ Net (Decrease) Increase in Cash and Cash Equivalents (117) 125 CASH AND CASH EQUIVALENTS Cash and Cash Equivalents at Beginning of Period 633 452 ------ ------ Cash and Cash Equivalents at End of Period $ 516 $ 577 ====== ====== See accompanying Notes to Consolidated Financial Statements. - 4 - PAGE 5 CSX TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statement of Financial Position (Millions of Dollars) (Unaudited) June 28, December 29, 1996 1995 ------------ ------------ ASSETS Current Assets Cash and Cash Equivalents $ 516 $ 633 Accounts and Notes Receivable 56 66 Materials and Supplies 124 116 Deferred Income Taxes 197 201 Other Current Assets 33 15 ------- ------- Total Current Assets 926 1,031 Properties-Net 9,521 9,189 Affiliates and Other Companies 152 226 Other Long-Term Assets 287 183 ------- ------- Total Assets $10,886 $10,629 ======= ======= LIABILITIES Current Liabilities Accounts Payable $ 586 $ 558 Labor and Fringe Benefits Payable 340 377 Casualty, Environmental and Other Reserves 188 194 Current Maturities of Long-Term Debt 72 74 Due to Parent Company 28 24 Due to Affiliate 90 --- Other Current Liabilities 65 6 ------- ------- Total Current Liabilities 1,369 1,233 Casualty, Environmental and Other Reserves 643 683 Long-Term Debt 820 613 Deferred Income Taxes 2,374 2,265 Due to Parent 19 --- Other Long-Term Liabilities 709 787 ------- ------- Total Liabilities 5,934 5,581 ------- ------- SHAREHOLDER'S EQUITY Common Stock, $20 Par Value; Authorized 10,000,000 Shares; Issued and Outstanding 9,061,038 Shares 181 181 Other Capital 1,263 1,193 Retained Earnings 3,508 3,674 ------- ------- Total Shareholder's Equity 4,952 5,048 ------- ------- Total Liabilities and Shareholder's Equity $10,886 $10,629 ======= ======= See accompanying Notes to Consolidated Financial Statements. - 5 - PAGE 6 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All Tables in Millions of Dollars) NOTE 1. BASIS OF PRESENTATION. In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position of CSX Transportation, Inc. ("CSXT") and its majority-owned subsidiaries as of June 28, 1996, and December 29, 1995, and the results of its operations for the quarters and six months ended June 28, 1996 and June 30, 1995 and its cash flows for the six months ended June 28, 1996 and June 30, 1995, such adjustments being of a normal recurring nature. CSXT is a wholly-owned subsidiary of CSX Corporation ("CSX"). While management believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the financial statements and the notes included in CSXT's latest Form 10-K. The company changed its earnings presentation for the quarter and six months ended June 28, 1996 to exclude real estate activities from operating revenue and expense. These activities are now included in "Other Income (Expense)." Prior-year data have been reclassified to conform to the 1996 presentation. NOTE 2. FISCAL REPORTING PERIODS. The company's fiscal year is composed of 52 weeks ending on the last Friday in December. The financial statements presented are for the 13-week quarters and 26-week periods ended June 28, 1996 and June 30, 1995 and the fiscal year ended December 29, 1995. NOTE 3. RESTRUCTURING CHARGE. In the second quarter of 1995, the company recorded a $196 million pretax restructuring charge to recognize the estimated costs associated with a contractual agreement with AT&T to replace and technologically enhance its existing private telecommunications network. At June 28, 1996 and December 29, 1995, a reserve of $32 million remained for the payment of employee separation and labor protection costs related to this initiative. NOTE 4. ACCOUNTS RECEIVABLE. CSXT has an ongoing agreement to sell without recourse, on a revolving basis each month, an undivided percentage ownership interest in all its rail freight accounts receivable to CSX Trade Receivables Corporation, a wholly-owned subsidiary of CSX. Accounts receivable sold under this agreement totaled $649 million at June 28, 1996 and $603 million at December 29, 1995. In addition, CSXT has a revolving agreement with a financial institution to sell with recourse on a monthly basis an undivided percentage ownership interest in all miscellaneous accounts receivable. Accounts receivable sold under this agreement totaled $46 million at June 28, 1996 and December 29, 1995. The sales of receivables have been reflected as reductions of "Accounts and Notes Receivable" in the Consolidated Statement of Financial Position. - 6 - PAGE 7 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (All Tables in Millions of Dollars) NOTE 4. ACCOUNTS RECEIVABLES, Continued The net costs associated with sales of receivables were $14 million and $27 million for the quarter and six months ended June 28, 1996, respectively, and $13 million and $27 million for the quarter and six months ended June 30, 1995, respectively. NOTE 5. OTHER INCOME (EXPENSE). Quarters Ended Six Months Ended June 28, June 30, June 28, June 30, 1996 1995 1996 1995 -------- -------- -------- -------- Interest Income $ 11 $ 11 $ 23 $ 21 Income from Real Estate Operations (1) 23 7 25 9 Net Costs for Accounts Receivable Sold (14) (13) (27) (27) Miscellaneous 1 (2) 3 (4) ----- ----- ----- ----- Total $ 21 $ 3 $ 24 $ (1) ===== ===== ===== ===== (1) Gross revenue from real estate operations was $31 million and $39 million for the quarter and six months ended June 28, 1996, respectively, and $14 million and $22 million for the quarter and six months ended June 30, 1995, respectively. NOTE 6. COMMITMENTS AND CONTINGENCIES. During 1995, CSXT entered into an agreement with AT&T to supply and manage its telecommunications needs through May 2005. The agreement requires minimum payments totaling approximately $330 million over the ten-year period. In July 1996, CSXT reached agreements with two manufacturers for the purchase of 80 alternating current traction locomotives to be delivered during the remainder of 1996 and 1997. These agreements represent commitments for additional locomotives above the company's 1993 order covering 300 units for 1994-1997 delivery. As of July 30, 1996, a total of 127 locomotives remain for 1996 and 1997 delivery under the 1993 and 1996 purchase agreements. CSXT is a party to various proceedings involving private parties and regulatory agencies related to environmental issues. CSXT has been identified as a potentially responsible party ("PRP") in a number of investigations and actions. CSXT has identified approximately 102 environmentally impaired sites that are or may be subject to remedial action under the Federal Superfund statute ("Superfund") or corresponding state statutes. Many of these proceedings are based on allegations that CSXT, or its railroad predecessors, sent hazardous substances to the facilities in question for disposal. Such proceedings arising under Superfund or corresponding state statutes typically involve numerous other waste generators and disposal companies and seek to - 7 - PAGE 8 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (All Tables in Millions of Dollars) NOTE 6. COMMITMENTS AND CONTINGENCIES, Continued allocate or recover costs associated with site investigation and cleanup, which could be substantial. The assessment of the required response and remedial costs associated with most sites is extremely complex. Cost estimates are based on information available for each site, financial viability of other PRPs, where available, and existing technology, laws, and regulations. CSXT's best estimates of the allocation method and percentage of liability when other PRPs are involved are based on assessments by consultants, agreements among PRPs, or determinations by the U.S. Environmental Protection Agency or other regulatory agencies. At least once each quarter, CSXT reviews its role, if any, with respect to each such location, giving consideration to the nature of CSXT's alleged connection to the location (e.g., generator, owner or operator), 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 position of other named and unnamed PRPs at the location. The ultimate liability for remediation is difficult to determine with certainty because of the number and creditworthiness of PRPs involved. Through the assessment process, CSXT monitors the creditworthiness of such PRPs in determining ultimate liability. Based upon such reviews and updates of the sites with which it is involved, CSXT has recorded, and reviews at least quarterly for adequacy, reserves to cover estimated contingent future environmental costs with respect to such sites. The recorded liabilities for estimated future environmental costs at June 28, 1996 and December 29, 1995 were $124 million and $137 million, respectively. These recorded liabilities include amounts representing CSXT's estimate of unasserted claims, which CSXT believes to be immaterial. The liability has been accrued for future costs for all sites where the company's obligation is probable and where such costs can be reasonably estimated. The liability includes future costs for remediation and restoration of sites as well as any significant ongoing monitoring costs, but excludes any anticipated insurance recoveries. The majority of the June 28, 1996 environmental liability is expected to be paid out over the next five to seven years, funded by cash generated from operations. The company does not currently possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, on some sites until completion of future environmental studies. In addition, latent conditions at any given location could result in exposure, the amount and materiality of which cannot presently be reliably estimated. Based upon information currently available, however, the company believes that its environmental reserves are adequate to accomplish remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters will not materially affect its overall results of operations and financial condition. - 8 - PAGE 9 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (All Tables in Millions of Dollars) NOTE 6. COMMITMENTS AND CONTINGENCIES, Continued A number of legal actions, other than environmental, are pending against CSXT in which claims are made in substantial amounts. While the ultimate results of environmental investigations, lawsuits and claims involving CSXT cannot be predicted with certainty, management does not currently expect that resolution of these matters will have a material adverse effect on the consolidated financial position, results of operations and cash flows of the company. NOTE 7. RELATED PARTIES. Cash and cash equivalents at June 28, 1996 and December 29, 1995, includes $553 million and $677 million, respectively, representing amounts due from CSX for CSXT's participation in the CSX cash management plan. Under this plan, excess cash is advanced to CSX for investment and CSX makes cash funds available to its subsidiaries as needed for use in their operations. CSX is committed to repay all amounts due on demand should circumstances require. The companies are charged for borrowings or compensated for investments based on returns earned by the plan portfolio. In 1994, CSXT entered into a loan agreement with Customized Transportation, Inc., a wholly-owned subsidiary of CSX, whereby CTI borrowed $40 million at prevailing interest rates from CSXT. On March 1, 1996, the loan was sold at book value to another CSX affiliate. Included in Materials, Supplies and Other expense are amounts related to a management service fee charged by CSX, data processing related charges from CSX Technology, Inc. ("Technology"), and the reimbursement, under an operating agreement, from CSX Intermodal, Inc. ("CSXI") for costs incurred by CSXT related to intermodal operations. The management service fee charged by CSX represents compensation for certain corporate services provided to CSXT. These services include, but are not limited to, development of corporate policy and long-range strategic plans, allocation of capital, placement of debt, maintenance of employee benefit plans, internal audit and tax administration. The data processing related charges are compensation to CSX Technology, Inc. for the development, implementation and maintenance of computer systems, software and associated documentation for the day-to-day operations of CSXT. Technology and CSXI are wholly-owned subsidiaries of CSX. Materials, Supplies and Other expense includes net expense of $69 million and $72 million, for the quarters ended June 28, 1996 and June 30, 1995, respectively, relating to the above arrangements. CSXT entered into operating lease arrangements with CSXI in October 1991 and December 1992 under which it agreed to lease 3,400 rebuilt coal gondola cars through March 2006 and 65 locomotives through May 2008, respectively. Effective March 1, 1996, the operating leases were terminated and CSXT purchased the cars and locomotives from CSXI for $164 million, an amount approximating CSXI's net book value. In conjunction with this transaction, CSXT assumed $145 million in long-term debt secured by the equipment and $19 million of advances payable from CSXI to CSX. CSXT incurred - 9 - PAGE 10 NOTE 6. RELATED PARTIES, Continued $4 million of rent expense in the first quarter of 1996 associated with these leases prior to their termination. Rent expense for the first quarter of 1995 totaled $5 million. In March 1996, CSXT entered into a loan agreement with CSX Insurance Company ("CSX Insurance"), a wholly-owned subsidiary of CSX, whereby CSXT may borrow up to $100 million from CSX Insurance. The note is payable in full on demand. At June 28, 1996, $90 million was outstanding under the agreement. Interest on the loan is payable monthly. Interest expense incurred for the quarter and six months ended June 28, 1996 was $1 million. - 10 - PAGE 11 ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS Second Quarter 1996 Compared With 1995 - -------------------------------------- Net earnings for the 1996 second quarter were $164 million versus $9 million for last year's second quarter, which included a $196 million pretax restructuring charge. Without this charge, net earnings in the year-ago quarter would have been $130 million. Operating income increased $52 million or 24 percent, to $269 million for the second quarter of 1996, from $217 million, excluding the $196 million restructuring charge in the prior-year quarter. OPERATING INCOME (Millions of Dollars) --------------------- Quarters Ended Six Months Ended ------------------ ------------------- June 28, June 30, Percent June 28, June 30, Percent 1996 1995 Change 1996 1995 Change -------- -------- ------- -------- -------- ------- Operating Revenue Merchandise $ 814 $ 797 2 % $ 1,602 $ 1,596 --- % Coal 403 379 6 % 774 745 4 % Other 38 35 9 % 74 64 16 % ------- ------ ------- ------- Total 1,255 1,211 4 % 2,450 2,405 2 % Operating Expense 986 1,190 (17)% 1,999 2,188 (9)% ------- ------ ------- ------- Operating Income $ 269 $ 21 1181% $ 451 $ 217 108 % ======= ====== ======= ======= Operating Income (a) $ 269 $ 217 24% $ 451 $ 413 9 % ======= ====== ======= ======= (a) Pro forma basis, excluding $196 million restructuring charge in 1995. Revenue increased 4 percent to $1.26 billion, despite essentially flat traffic levels. Operating expense was held level with the 1995 period, excluding the restructuring charge, despite a 15 percent increase in fuel prices. Overall, coal revenue rose 6 percent and coal tonnage rose 6 percent, led by a 9 percent increase in utility coal volume and a 2 percent rise in export volume. Merchandise carloadings were down 1 percent, but revenue rose 2 percent, due to better mix, selective pricing initiatives and increased tonnage per car. First Six Months 1996 Compared With 1995 - ---------------------------------------- For the first six months of the year, earnings for the company rose to $271 million. These results represent an 11% increase over the $244 million earned in the first six months of 1995, exclusive of the 1995 charge. Continuing cost control efforts held operating expense at 1995 levels, exclusive of the charge, while revenue was up 2% despite slightly lower carload volume. - 11 - PAGE 12 ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED OUTLOOK - ------- As the third quarter of 1996 begins, the rail unit continues to benefit from strong demand from domestic and export coal markets. Merchandise traffic is expected to experience gradual improvement throughout the balance of the year. Automotive traffic levels could be impacted by the pending auto industry negotiations with the United Auto Workers. The rail unit, through the National Carriers Conference Committee, continues to participate in the current round of negotiations with rail labor. Tentative agreements have been reached with the Transportation Communication International Union, the Brotherhood of Maintenance of Way Employees and three shopcraft unions and are currently pending ratification by their memberships. Agreements previously have been reached with other rail labor organizations, including the United Transportation Union and the Brotherhood of Locomotive Engineers. Negotiations continue with two small shopcraft unions and the Dispatchers organization. ------------------------- To the extent that these written statements include predictions concerning future operations and results of operations, such statements are forward-looking statements that involve risks and uncertainties, and actual results may differ materially. Factors that could cause actual results to differ materially are described in the Company's Form 10-K for its most recent fiscal year and include general economic downturns, which may limit demand and pricing; labor matters, which may impact the costs and feasibility of certain operations; and commodity concentrations, which may affect traffic levels. - 12 - PAGE 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (b) Reports on Form 8-K 1. None. SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CSX TRANSPORTATION, INC. /s/ JAMES L. ROSS ------------------------ James L. Ross Dated: July 30, 1996 (Principal Accounting Officer) - 13 -