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 September 27, 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 September 27, 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 SEPTEMBER 27, 1996 INDEX PART I. FINANCIAL INFORMATION Page Number Item 1. Financial Statements 1. Consolidated Statement of Earnings - Quarters and Nine Months Ended September 27, 1996 and September 29, 1995 3 2. Consolidated Statement of Cash Flows - Nine Months Ended September 27, 1996 and September 29, 1995 4 3. Consolidated Statement of Financial Position - At September 27, 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 - 2 - PAGE 3 CSX TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statement of Earnings (Millions of Dollars) (Unaudited) Quarters Ended Nine Months Ended ------------------- ------------------ Sept. 27, Sept. 29, Sept. 27, Sept. 29, 1996 1995 1996 1995 -------- -------- -------- -------- OPERATING REVENUE Merchandise $ 772 $ 767 $ 2,374 $ 2,363 Coal 404 388 1,178 1,133 Other 35 36 109 100 ------ ------ ------- ------- Transportation 1,211 1,191 3,661 3,596 OPERATING EXPENSE Labor and Fringe Benefits 474 461 1,424 1,395 Materials, Supplies and Other 251 263 759 797 Equipment Rent 89 93 278 295 Depreciation 104 97 308 290 Fuel 69 60 217 189 Restructuring Charge --- --- --- 196 ------ ------ ------- ------- Total 987 974 2,986 3,162 OPERATING INCOME 224 217 675 434 Other Income (Expense) 5 13 29 12 Interest Expense 16 13 55 35 ------ ------ ------- ------- EARNINGS BEFORE INCOME TAXES 213 217 649 411 Income Tax Expense 80 79 245 150 ------ ------ ------- ------- NET EARNINGS $ 133 $ 138 $ 404 $ 261 ====== ====== ======= ======= See accompanying Notes to Consolidated Financial Statements. - 3 - PAGE 4 CSX TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows (Millions of Dollars) (Unaudited) Nine Months Ended -------------------- Sept. 27, Sept. 29, 1996 1995 ------ ------ OPERATING ACTIVITIES Net Earnings $ 404 $ 261 Adjustments to Reconcile Net Earnings to Net Cash Provided Depreciation 309 290 Deferred Income Taxes 151 32 Restructuring Charge Provision --- 196 Productivity/Restructuring Charge Payments (58) (78) Other Operating Activities (19) 28 Changes in Operating Assets and Liabilities Accounts Receivable (31) (80) Materials and Supplies 3 (5) Other Current Assets (11) (13) Accounts Payable and Other Current Liabilities (80) 55 ------ ------ Net Cash Provided by Operating Activities 668 686 ------ ------ INVESTING ACTIVITIES Property Additions (571) (567) Other Investing Activities 97 23 ------ ------ Net Cash Used by Investing Activities (474) (544) ------ ------ FINANCING ACTIVITIES Long-Term Debt Issued 117 115 Long-Term Debt Repaid (67) (70) Cash Dividends Paid (471) (37) Other Financing Activities 61 3 ------ ------ Net Cash (Used) Provided by Financing Activities (360) 11 ------ ------ Net (Decrease) Increase in Cash and Cash Equivalents (166) 153 CASH AND CASH EQUIVALENTS Cash and Cash Equivalents at Beginning of Period 633 452 ------ ------ Cash and Cash Equivalents at End of Period $ 467 $ 605 ====== ====== See accompanying Notes to Consolidated Financial Statements. - 4 - PAGE 5 CSX TRANSPORTATION, INC. AND SUBSIDIARIES Consolidated Statement of Financial Position (Millions of Dollars) (Unaudited) Sept. 27, December 29, 1996 1995 ------------ ------------ ASSETS Current Assets Cash and Cash Equivalents $ 467 $ 633 Accounts and Notes Receivable 97 66 Materials and Supplies 114 116 Deferred Income Taxes 197 201 Other Current Assets 33 15 ------- ------- Total Current Assets 908 1,031 Properties-Net 9,637 9,189 Affiliates and Other Companies 147 226 Other Long-Term Assets 288 183 ------- ------- Total Assets $10,980 $10,629 ======= ======= LIABILITIES Current Liabilities Accounts Payable $ 541 $ 558 Labor and Fringe Benefits Payable 344 377 Casualty, Environmental and Other Reserves 183 194 Current Maturities of Long-Term Debt 76 74 Due to Parent Company 26 24 Due to Affiliate 90 --- Other Current Liabilities 18 6 ------- ------- Total Current Liabilities 1,278 1,233 Casualty, Environmental and Other Reserves 634 683 Long-Term Debt 843 613 Deferred Income Taxes 2,454 2,265 Due to Parent Company 19 --- Other Long-Term Liabilities 702 787 ------- ------- Total Liabilities 5,930 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 1,262 1,193 Retained Earnings 3,607 3,674 ------- ------- Total Shareholder's Equity 5,050 5,048 ------- ------- Total Liabilities and Shareholder's Equity $10,980 $10,629 ======= ======= See accompanying Notes to Consolidated Financial Statements. - 5 - PAGE 6 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (All Tables in Millions of Dollars) NOTE 1. BASIS OF PRESENTATION. In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position of CSX Transportation, Inc. ("CSXT") and its majority-owned subsidiaries as of September 27, 1996, and December 29, 1995, and the results of their operations for the quarters and nine months ended September 27, 1996 and September 29, 1995 and their cash flows for the nine months ended September 27, 1996 and September 29, 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. Beginning with the quarter ended June 28, 1996, the company changed its earnings presentation 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 39-week periods ended September 27, 1996 and September 29, 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 September 27, 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 $586 million at September 27, 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 September 27, 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 (UNAUDITED), CONTINUED (All Tables in Millions of Dollars) NOTE 4. ACCOUNTS RECEIVABLES, Continued The net costs associated with sales of receivables were $14 million and $41 million for the quarter and nine months ended September 27, 1996, respectively, and $13 million and $40 million for the quarter and nine months ended September 29, 1995, respectively. NOTE 5. OTHER INCOME (EXPENSE). Quarters Ended Nine Months Ended Sept. 27, Sept. 29, Sept. 27, Sept 29, 1996 1995 1996 1995 -------- -------- -------- -------- Interest Income $ 8 $ 17 $ 31 $ 38 Income from Real Estate Operations (1) 8 7 33 16 Net Costs for Accounts Receivable Sold (14) (13) (41) (40) Miscellaneous 3 2 6 (2) ----- ----- ----- ----- Total $ 5 $ 13 $ 29 $ 12 ===== ===== ===== ===== (1) Gross revenue from real estate operations was $13 million and $52 million for the quarter and nine months ended September 27, 1996, respectively, and $12 million and $34 million for the quarter and nine months ended September 29, 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. Certain terms and conditions of the agreement with AT&T are currently in dispute and are expected to be resolved without any disruption to existing service. During 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 September 27, 1996, a total of 108 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 104 environmentally impaired sites that are or may be subject to remedial action under the Federal Superfund statute ("Superfund") or corresponding state statutes. A number of these proceedings are based on allegations that CSXT, or its railroad predecessors, - 7 - PAGE 8 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED (All Tables in Millions of Dollars) NOTE 6. COMMITMENTS AND CONTINGENCIES, Continued 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 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 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 September 27, 1996 and December 29, 1995 were $121 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 September 27, 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 - 8 - PAGE 9 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED (All Tables in Millions of Dollars) NOTE 6. COMMITMENTS AND CONTINGENCIES, Continued matters will not materially affect its overall results of operations and financial condition. 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 September 27, 1996 and December 29, 1995, includes $492 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. (CTI), 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 $74 million and $212 million for the quarter and nine months ended September 27, 1996, respectively, and $69 million and $209 million for the quarter and nine months ended September 29, 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 - 9 - PAGE 10 CSX TRANSPORTATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED (All Tables in Millions of Dollars) NOTE 6. RELATED PARTIES, Continued 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 $4 million of rent expense in the first quarter of 1996 associated with these leases prior to their termination. Rent expense for the third quarter and first nine months of 1995 totaled $6 million and $16 million, respectively. 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 September 27, 1996, $90 million was outstanding under the agreement. Interest on the loan is payable monthly at .25% over the LIBOR rate, and was 5.69% at September 27, 1996. Interest expense incurred for the quarter and nine months ended September 27, 1996 was $1 million and $3 million, respectively, relating to this loan agreement. - 10 - PAGE 11 ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS Third Quarter 1996 Compared With 1995 - -------------------------------------- Net earnings for the 1996 third quarter were $133 million versus $138 million for last year's third quarter. Operating income increased $7 million or 3 percent, to $224 million for the third quarter of 1996, from $217 million in the prior-year quarter. OPERATING INCOME (Millions of Dollars) --------------------- Quarters Ended Nine Months Ended ------------------ ------------------- Sept. 27, Sept. 29, Percent Sept. 27, Sept. 29, Percent 1996 1995 Change 1996 1995 Change -------- -------- ------- -------- -------- ------- Operating Revenue Merchandise $ 772 $ 767 1 % $ 2,374 $ 2,363 - % Coal 404 388 4 % 1,178 1,133 4 % Other 35 36 (3)% 109 100 9 % ------- ------ ------- ------- Total 1,211 1,191 2 % 3,661 3,596 2 % Operating Expense 987 974 1 % 2,986 3,162 (6)% ------- ------ ------- ------- Operating Income $ 224 $ 217 3 % $ 675 $ 434 56 % ======= ====== ======= ======= Operating Income (a) $ 224 $ 217 3 % $ 675 $ 630 7 % ======= ====== ======= ======= (a) Pro forma basis, excluding $196 million restructuring charge in 1995. Revenue increased 2 percent to $1.21 billion, while traffic remained level with 1995's third quarter. Despite expenses associated with Hurricane Fran and higher fuel prices, operating expense increased just $13 million to $987 million. Coal revenue rose 4 percent and coal tonnage rose 3 percent, largely due to higher utility coal volume. Total merchandise traffic decreased 1 percent, while merchandise revenue rose 1 percent. First Nine Months 1996 Compared With 1995 - ----------------------------------------- For the first nine months of the year, net earnings for the company rose to $404 million. These results represent a 6 percent increase over the $382 million earned in the first nine months of 1995, exclusive of the 1995 charge. Continuing cost control efforts held operating expense near 1995 levels, exclusive of the charge, while revenue was up 2 percent despite flat carload volume. - 11 - PAGE 12 ITEM 2. MANAGEMENT'S ANALYSIS AND RESULTS OF OPERATIONS, CONTINUED OUTLOOK - ------- As the fourth quarter of 1996 begins, CSXT continues to benefit from strong demand from domestic coal markets. Merchandise traffic is expected to be flat throughout the balance of the year. Automotive traffic levels could be negatively impacted by the pending labor dispute between General Motors Corporation and the United Auto Workers. CSXT, through the National Carriers Conference Committee, now has agreements with all labor organizations except the Dispatchers organization. All such agreements are in effect, and the parties are in the process of implementing their terms and conditions. Negotiations continue with the Dispatchers. OTHER MATTERS - ------------- On October 14, 1996, CSX Corporation and Conrail, Inc. (Conrail) entered into a merger agreement whereby CSX will acquire all of Conrail's outstanding shares for a combination of cash and CSX shares initially valued at approximately $8.4 billion. Consummation of the merger is subject to approval of the shareholders of CSX and Conrail and approval of the Surface Transportation Board (STB). The application for STB approval is expected to be filed in early 1997, and the parties will propose a schedule that contemplates completion of the transaction by the end of that year. On October 23, 1996, Norfolk Southern Corporation announced an all-cash competing bid for all outstanding shares of Conrail. CSX remains optimistic about its prospects for completing the merger with Conrail. ------------------------- 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 (a) Exhibits 1. None. (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. By: /s/ JAMES L. ROSS ------------------------ James L. Ross Dated: October 31, 1996 (Principal Accounting Officer) - 13 -