UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 27, 200231, 2004
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period fromto |
For the transition period fromtoCommission File Number 1-3359
Commission file number 1-3359
CSX TRANSPORTATION, INC.
Virginia Identification No.) 500 Water Street, 15th Floor, Jacksonville, 32202 (Address of principal executive offices) (Zip Code)Virginia 54-600072054-6000720 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) (I.R.S. EmployerFL.
(904) 359-3100
(Registrant’s telephone number, including area codecode)
Securities registered pursuant to Section 12(b) of the Act:
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Monon Railroad 6% Income Debentures, due January 1, 2007 | New York Stock Exchange | |
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REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
FORMAT
Securities Registered Pursuantregistered pursuant to Section 12(g) of the Act: None.
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X)þ No ( )
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)
Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2). Yes ( ).Yeso No (X)
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State the aggregate market value of the voting stock held by nonaffiliatesnon-affiliates of the registrant. The aggregate market value of the voting stock at June 28, 2002,25, 2004 was $-0-, excluding the voting stock held by the parent of the registrant.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. The registrant has 9,061,038 shares of common stock, par value $20.00 outstanding at January 24, 2003.
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CSX TRANSPORTATION, INC. AND SUBSIDIARIES
10-K
2002 FORM 10-K ANNUAL REPORT
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PART I | ||||
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2. | 4 | |||
3. | 5 | |||
4. | 5 | |||
PART II | ||||
5. | Market for Registrant’s Common Stock and Related Stockholder Matters | 6 | ||
6. | 6 | |||
7. | 6 | |||
7.A. | 6 | |||
8. | 6 | |||
9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 6 | ||
PART III | ||||
10. | Directors, Executive Officers, Promoters and Control Persons of the Registrant | 7 | ||
11. | 7 | |||
12. | Security Ownership of Certain Beneficial Owners and Management | 7 | ||
13. | 7 | |||
PART IV | ||||
14. | 8 | |||
15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K | 8 | ||
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CSX TRANSPORTATION, INC.
ITEMS 1. & 2. BUSINESS AND PROPERTIESBusiness and Properties
General
CSX Transportation, Inc. (“CSXT” or the “Company”) isoperates one of the largest rail networknetworks in the Eastern United States, providingand provides rail freight transportation over a network of more than 23,00022,000 route miles in 23 states, the District of Columbia, and two Canadian provinces. Headquartered in Jacksonville, Florida, CSXT conducts railroad operations in its own name and through railroad subsidiaries, employingsubsidiaries.
CSXT employed an average of approximately 33,50032,074 employees during its2004. The Company considers employee relations to be good. Most of CSXT’s employees are represented by labor unions and are covered by collective bargaining agreements. Some of these agreements are scheduled to expire in 2005. CSXT is in the process of renegotiating most recent fiscal year.of these agreements, but the outcome of these negotiations is uncertain at this time. These negotiations have generally taken place over a number of years and have previously not resulted in any extended work stoppages. The existing agreements have remained in effect and will continue to remain in effect until new agreements are reached or the Railway Labor Act’s procedures (which include mediation, cooling-off periods, and the possibility of Presidential intervention) are exhausted.
CSXT is a wholly-owned subsidiary of CSX Corporation (“CSX”). CSX is a publicly-owned corporation, with headquarters at 500 Water Street, 15th15th Floor, Jacksonville, Florida 32202. CSX also owns other transportation businesses, including CSX Intermodal Inc.The Company makes available free of charge through its website atwww.csx.com, an intermodalits annual reports on Form 10-K, quarterly reports on Form 10-Q and trucking company; CSX World Terminals LLC, a container-freight terminal company;current reports on Form 8-K, and CSX Lines LLC, a domestic container-shipping company which isall amendments thereto, as soon as reasonably practicable after such reports are filed with or furnished to the subject of an agreement under which CSX would convey most of its interest in CSX Lines LLC in return for cashSecurities and securities of a new venture, Horizon Lines LLC. CSX also has interests in real estate, resorts and resort management.Exchange Commission.
For information concerning business conducted by CSXT during 2002, see “Management’s Narrative Analysis of the Results of Operations” on pages 38-47.
Rail Lines
On December 27, 2002,31, 2004, CSXT’s consolidated railroad system consisted of 40,29938,732 miles of track consisting of the following:
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following. Included in the abovebelow are the following arrangements for use of track not owned by CSXT:
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Track | ||||
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| First Main | 22,153 | |||
| Way and Yard Switching | 9,908 | |||
| Second Main and All Other Main | 5,498 | |||
| Running, Passing, Crossovers and Turnouts | 1,173 | |||
| Total | 38,732 | |||
| Track | ||||
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| Track under Operating Contracts | 6,456 | |||
| Leased Track | 1,156 | |||
| Track under Trackage Right Agreements | 263 | |||
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CSX TRANSPORTATION, INC.
PART I
ITEMS 1. & 2. BUSINESS AND PROPERTIES,Business and Properties, Continued
Equipment
On December 27, 2002,31, 2004, CSXT and subsidiaries owned or leased the following:
| Owned | Leased | Total | ||||||||||
Locomotives | ||||||||||||
| Freight | 2,495 | 811 | 3,306 | |||||||||
| Switching | 207 | 7 | 214 | |||||||||
| Auxiliary Units | 176 | 14 | 190 | |||||||||
Total | 2,878 | 832 | 3,710 | |||||||||
Freight Cars | ||||||||||||
| Gondolas | 17,368 | 13,441 | 30,809 | |||||||||
| Open Top Hoppers | 14,701 | 5,212 | 19,913 | |||||||||
| Flat Cars | 846 | 18,202 | 19,048 | |||||||||
| Covered Hoppers | 12,442 | 4,821 | 17,263 | |||||||||
| Box Cars | 11,182 | 4,842 | 16,024 | |||||||||
| Refrigarator | 2 | 1,044 | 1,046 | |||||||||
| Other | 606 | 5 | 611 | |||||||||
Total | 57,147 | 47,567 | 104,714 | |||||||||
Owned | Leased | Total | ||||
Locomotives | ||||||
Freight | 2,349 | 844 | 3,193 | |||
Switching | 159 | 29 | 188 | |||
Auxiliary Units | 181 | 11 | 192 | |||
Total | 2,689 | 884 | 3,573 | |||
Freight Cars | ||||||
Gondolas | 15,503 | 15,867 | 31,370 | |||
Open Top Hoppers | 13,774 | 8,441 | 22,215 | |||
Box Cars | 10,086 | 7,931 | 18,017 | |||
Covered Hoppers | 10,849 | 6,880 | 17,729 | |||
Flat Cars | 917 | 18,918 | 19,835 | |||
Other | 643 | 6 | 649 | |||
Total | 51,772 | 58,043 | 109,815 | |||
Included in leased equipment are 518 locomotives and 17,130 freight cars leased from Conrail.
ITEM 3. LEGAL PROCEEDINGSLegal 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 compensatory as well as punitive 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 income statement, balance sheet 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 quarters received.
Please In further response to this Item, see the information set forth on pages 43 of this document in “Management’s Narrative Analysis of the Results of Operations,” under the caption “Casualty, LegalFootnote 15, Commitments and Environmental Reserves”.Contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSSubmission of Matters to a Vote of Security Holders
Information omitted in accordance with General Instruction I(2)I (2)(c).
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CSX TRANSPORTATION, INC.
ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERSMarket for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
CSXT is a wholly-owned subsidiary of CSX, and accordingly, there is no market for its common stock. During the years 2002, 20012004, 2003 and 2000,2002, CSXT paid dividends to CSX on its common stock of $190 million, $230 million and $200 million, $212 million and $220 million, respectively.
ITEM 6. SELECTED FINANCIAL DATASelected Financial Data
Information omitted in accordance with General Instruction I(2)I (2)(a).
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CSX TRANSPORTATION, INC.
PART II
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSISManagement’s Discussion and Analysis
Information omitted in accordance with General Instruction I(2)(a). However, in compliance with said Instruction, see “Management’s Narrative Analysis of the Results of Operations” on pages 38-47.the following pages.
Management’s Narrative Analysis of the Results of Operations
Financial Results of Operations
CSXT follows a 52/53-week fiscal reporting calendar. Fiscal year 2004 consisted of 53 weeks ending on December 31, 2004. Fiscal year 2003 consisted of 52 weeks ending on December 26, 2003.
2004 vs. 2003
Operating Revenue
CSXT categorizes revenues in three main areas: merchandise, automotive and coal, coke and iron ore. Overall revenues were up $512 million to $6.7 billion in 2004 from $6.2 billion in 2003.
Merchandise Revenue
Merchandise showed strength during 2004 with revenue up 8% on 3% volume growth. All markets showed year-over-year revenue improvement due to pricing, yield management strategies and the Company’s fuel surcharge program. All markets, except agricultural products, experienced increased volumes. Metals realized the most improvement, with 17% revenue growth on 9% volume growth. Strong demand existed across all steel commodity lines as steel production and mill utilization rates were at high levels. Forest products revenue grew 9% on 1% volume growth as a result of strength in panel and lumber markets driven by strong residential construction. Food and consumer revenues grew 7% on 1% volume growth. Food and consumer and forest products volumes were favorable year-over-year primarily due to the 53 week fiscal reporting calendar in 2004. Chemicals revenue grew 8% on 4% volume growth driven by strong customer demand and a rebound in U.S. chemical exports. Emerging markets revenues grew 7% on 6% volume growth, largely driven by strength in aggregates, cement, lime and fly ash. New industrial development is helping serve off-rail markets. Phosphate and fertilizer revenues grew 4% on 2% volume growth. Fertilizer production levels were mixed as high fertilizer prices and hurricane disruptions caused curtailments in production. Although ethanol shipments contributed to growth in agricultural products, revenue increased 3% on declining volume due to a decline in export and bean markets.
Automotive Revenue
Volumes declined largely due to a 100,000 unit year-over-year decrease in North American light vehicle production. Downtime at CSXT-served plants also contributed to volume weakness. Price increases drove improvements in revenue-per-car.
Coal, Coke and Iron Ore Revenue
Coal, coke and iron ore revenue increased 11% on 6% volume growth. All lines of business reflect year-over-year revenue-per-car improvements. Volume growth was driven by gains in export, metallurgical and utility markets. Strength in exports was due to high demand primarily related to Asia steel market needs.
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CSX TRANSPORTATION, INC.
PART II
ITEM 7. MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
Other
Other revenue for the fiscal year 2004 includes $63 million for FRT, a short-line railroad consolidated in 2004 pursuant to Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities”. Prior to 2004, FRT was accounted for under the equity method.
Carload and revenue data by service group and commodity is as follows:
Fiscal Years Ended December 31, 2004, December 26, 2003 and December 27, 2002
| Carloads | Revenue | |||||||||||||||||||||||
| (Thousands) | (Dollars in Millions) | |||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||||||||
Merchandise | ||||||||||||||||||||||||
| Phosphates and Fertilizer | 471 | 460 | 463 | $ | 341 | $ | 329 | $ | 324 | |||||||||||||||
| Metals | 380 | 348 | 319 | 511 | 435 | 401 | ||||||||||||||||||
| Forest Products | 465 | 459 | 449 | 681 | 622 | 600 | ||||||||||||||||||
| Food and Consumer | 245 | 242 | 235 | 377 | 351 | 330 | ||||||||||||||||||
| Agricultural Products | 356 | 363 | 361 | 512 | 497 | 494 | ||||||||||||||||||
| Chemicals | 564 | 541 | 539 | 1,069 | 989 | 959 | ||||||||||||||||||
| Emerging Markets | 506 | 476 | 424 | 504 | 471 | 398 | ||||||||||||||||||
Total Merchandise | 2,987 | 2,889 | 2,790 | 3,995 | 3,694 | 3,506 | ||||||||||||||||||
Automotive | 507 | 529 | 538 | 835 | 853 | 845 | ||||||||||||||||||
Coal, Coke & Iron Ore | ||||||||||||||||||||||||
| Coal | 1,659 | 1,570 | 1,574 | 1,714 | 1,543 | 1,529 | ||||||||||||||||||
| Coke and Iron Ore | 71 | 65 | 70 | 66 | 57 | 69 | ||||||||||||||||||
Total Coal, Coke & Iron Ore | 1,730 | 1,635 | 1,644 | 1,780 | 1,600 | 1,598 | ||||||||||||||||||
Other | — | — | — | 84 | 35 | 54 | ||||||||||||||||||
Total | 5,224 | 5,053 | 4,972 | $ | 6,694 | $ | 6,182 | $ | 6,003 | |||||||||||||||
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CSX TRANSPORTATION, INC.
PART II
ITEM 7. MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
Operating Expense
Total operating expenses increased $199 million to $6.1 billion, or 3% in 2004 as compared to operating expenses of $5.9 million in 2003.
Labor and fringe expense increased $147 million or 6% compared to the prior year primarily attributable to the effects of inflation, consolidation of FRT and increases in the Company’s incentive compensation plan and pension costs. These costs were partially offset by benefits realized from reduced staffing levels.
Materials, supplies and other expenses increased $163 million, or 14%, year-over-year primarily due to increased maintenance and crew travel costs, property and sales taxes, coupled with higher track, locomotive, car repair and other costs. Additionally, due to the adoption of SFAS 143, “Accounting for Asset Retirement Obligations,” as discussed in Note 1, Nature of Operations and Significant Accounting Policies, depreciation expense has been decreased and materials, supplies and other expense increased to account for the discontinuation of the accrual of cross-tie removal as a component of depreciation expense.
Conrail rents, fees and services expense decreased $77 million or 22% in 2004 as compared to the prior year, as a result of the Conrail spin-off transaction, which decreased rents paid to Conrail as assets previously leased from Conrail are now owned directly by CSXT. (See Note 2, Investment In and Integrated Rail Operations with Conrail.)
Related party service fees decreased $25 million or 14% year-over-year as a result of the decrease in service fees paid by the CSX Technology subsidiary and an increase in the CSX Intermodal credit.
Building and equipment rent remained relatively consistent year-over-year with the slight increase in 2004 resulting from unfavorable asset utilization.
Depreciation increased $84 million or 15% compared to the prior year primarily attributable to the Conrail spin-off transaction and the rail segment had property additions of approximately $1 billion, Additionally, due to the adoption of SFAS 143, “Accounting for Asset Retirement Obligations,” as discussed in Note 1. Nature of Operations and Significant Accounting Policies, depreciation expense has been decreased and materials, supplies and other expense increased to account for the discontinuation of the accrual of cross-tie removal as a component of depreciation expense.
Fuel expense increased $90 million or 16% in 2004, net of $63 million of fuel hedging benefits, compared to the prior year primarily due to fuel price increases, while increased volumes were also a factor. The average price per gallon of diesel fuel, including benefits from CSX’s fuel hedging program, was $1.0950 in 2004 versus $0.9564 in 2003. In addition, the fuel surcharge programs and contractual cost escalation clauses used in most multi-year customer contracts partially offset fuel cost increases.
For the fiscal year ended December 31, 2004, the Company recorded expense of $50 million for separation expense, pension and post-retirement benefit curtailment charges, stock compensation expense and other related expenses. (See Note 3, Management Restructuring.)
Operating expense for the fiscal year ended December 26, 2003, included a charge of $229 million recorded in conjunction with the Company’s change in estimate for its casualty reserves to include an estimate of incurred but not reported claims for asbestos and other occupational injuries that could be received over the next seven years. This charge is reflected as “Provision for Casualty Claims” in the operating expense detail in the Income Statement. (See Note 10, Casualty, Environmental and Other Reserves.)
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CSX TRANSPORTATION, INC.
PART II
ITEM 7. MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
Operating Income
Operating income increased $313 million to $602 million in 2004, compared to $289 million in 2003 primarily due to an 8% increase in revenue coupled with the absence of $229 million provision for casualty claims, offset by $50 million of management restructuring charges and other expense increases as previously discussed.
Other Income
Other income remained consistent with the prior year.
Interest Expense
Interest expense increased by $11 million in 2004, as compared to 2003, due to the exchange of Conrail debt resulting from the Conrail spin-off transaction.
Net Earnings
The Company reported net earnings for 2004 of $330 million compared to $196 million in 2003. The year ended December 26, 2003 included an after-tax cumulative effect of accounting change benefit of $57 million related to the adoption of Statement of Financial Accounting Standard (“SFAS”) 143, “Accounting for Asset Retirement Obligations.” Earnings before the cumulative effect of accounting change were $139 million in 2003. The $134 million year-over-year increase in net earnings primarily results from increased revenues, partially offset by increased expenses.
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CSX TRANSPORTATION, INC.
PART II
CSXT addresses the risk of volatility in its fuel costs through the use of derivative financial instruments. The Company is subjectdoes not hold or issue derivative financial instruments for trading purposes.
During 2003, the Company began a program to risk relatinghedge its exposure to changesfuel price volatility through swap transactions. As of December 31, 2004, CSX had hedged approximately 48%, and 9% of fuel purchases for 2005 and 2006, respectively. At December 31, 2004, a 1% change in fuel prices would result in an increase or decrease in the priceasset related to the swaps of diesel fuel. At the end of 2002, the Company had not entered into any long-term commitments for forward fuel purchases.approximately $4 million. The Company’s average annual fuel consumption is approximately 570615 million gallons. A one-cent change in the price per gallon of fuel would impactaffect fuel expense by approximately $6 million.$5 million annually.
CSXT participatesThe Company is exposed to loss in the CSX cash management plan, under which excess cash is advancedevent of non-performance by any counter-party to CSX for investment. CSX than makes cash funds available to CSXT as needed for use in its operations. CSXTthe fuel hedging agreements. The Company does not anticipate non-performance by such counter-parties, and CSX are committed to repay all amounts due on demand should circumstances require. CSXT is charged for borrowings or compensated for investments based on returns earned by the plan portfolio. At December 27, 2002 and December 28, 2001,no material loss would be expected from non-performance.
CSXT had deficit balances of $1.3 billion and $1.1 billion, respectively, relating to its participation in the CSX cash management plan, which is included in Due to Parent Company in the Statement of Financial Position. A 1% change in interest rates would have impacted annual interest expense on the plan by approximately $13 million in 2002 and $11 million in 2001.
CSXT had $101 million and $108$60 million of floating rate debt outstanding at December 27, 2002 and December 28, 2001, respectively.31, 2004. A 1% changevariance in interest rates would have impactedon average affect annual interest expense on floating-rate debt by approximately $1 million in 2002million.
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CSX TRANSPORTATION, INC.
PART II
INDEX
Index to Consolidated Financial Statements
CSX Transportation, Inc.
Consolidated Financial Statements and 2001.Notes to Consolidated Financial Statements Submitted Herewith:
| • | December 31, 2004 | |||
| • | December 26, 2003 | |||
| • | December 27, 2002 | |||
| • | December 31, 2004 | |||
| • | December 26, 2003 | |||
| • | December 31, 2004 | |||
| • | December 26, 2003 | |||
| • | December 27, 2002 | |||
| • | December 31, 2004 | |||
| • | December 26, 2003 | |||
| • | December 27, 2002 | |||
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CSX TRANSPORTATION, INC.
PART II
REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholder and Board of of CSX Transportation, Inc. We have audited the accompanying consolidated We conducted our audits in accordance with In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CSX Transportation, Inc. As discussed in Note 1 to the Consolidated Financial Statements, in 2003 the Company changed its method of accounting for railroad tie removal costs and stock-based compensation. /s/ Jacksonville, FloridaSUPPLEMENTARYSUPPLEMENTAL DATAThe consolidated financial statements of CSXT and notes thereto required in response to this item are included herein (refer to Index to Consolidated Financial Statements on page 12).ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.-6-PART IIIITEM10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANTInformation omitted in accordance with General Instruction I(2)(c).ITEM 11. EXECUTIVE COMPENSATIONInformation omitted in accordance with General Instruction I(2)(c).ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTInformation omitted in accordance with General Instruction I(2)(c).ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSInformation omitted in accordance with General Instruction I(2)(c).-7-PART IVITEM 14. CONTROLS AND PROCEDURESAs of February 18, 2002, under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of February 18, 2002. There were no significant changes in the Company’s internal controls or in the other factors that could significantly affect those controls subsequent to the date of the evaluation.ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K(a)1. Financial StatementsSee Index to Consolidated Financial Statements on page 12.2. Financial Statement SchedulesThe information required by Schedule II is included in Note 9, “Casualty, Environmental and Other Reserves,” to the consolidated financial statements. All other financial statement schedules are not applicable.3. Exhibits(3.1)Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to Form 10-K dated March 8, 1996)(3.2)*By-laws of the Registrant, as amended(4.1)Articles of Incorporation, as amended (See Exhibit 3.1)(4.2)*By-laws of the Registrant, as amended (See Exhibit 3.2)Pursuant to Regulation S-K, Item 601 (b)(4)(iii), instruments that define the rights of holders of the Registrant’s long-term debt securities, where the long-term debt securities authorized under each instrument do not exceed 10% of the Registrants’ total assets, have been omitted and will be furnished to the Commission upon request.(10.1)Transaction Agreement, dated as of June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation, and CRR Holdings LLC, with certain schedules thereto (incorporated by reference to Exhibit 10.1 to Form 8-K dated June 11, 1999)-8-ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K, Continued(a)3. Exhibits, Continued(10.2)Amendment No. 1, dated as of August 22, 1998, to the Transaction Agreement, dated as of June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation, and CRR Holdings LLC (incorporated by reference to Exhibit 10.2 to Form 8-K dated June 11, 1999)(10.3)Amendment No. 2, dated as of June 1, 1999, to the Transaction Agreement, dated June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation, and CRR Holdings, LLC (incorporated by reference to Exhibit 10.3 to Form 8-K dated June 11, 1999)(10.4)Amendment No. 3, dated as of August 1, 2000, to the Transaction Agreement by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation, and CRR Holdings LLC.(10.5)Operating Agreement, dated as of June 1, 1999, by and between New York Central Lines LLC and CSX Transportation, Inc. (incorporated by reference to Exhibit 10.4 to Form 8-K dated June 11, 1999)(10.6)Shared Assets Area Operating Agreement for North Jersey, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibit thereto (incorporated by reference to Exhibit 10.5 to Form 8-K dated June 11, 1999)(10.7)Shared Assets Area Operating Agreement for Southern Jersey/Philadelphia, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Company, with exhibit thereto (incorporated by reference to Exhibit 10.6 to Form 8-K dated June 11, 1999)(10.8)Shared Assets Area Operating Agreement for Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc., and Norfolk Southern Railway Corporation, with exhibit thereto (incorporated by reference to Exhibit 10.7 to Form 8-K dated June 11, 1999)(10.9)Monongahela Usage Agreement, dated as of June 1, 1999, by and among CSX Transportation, Inc., Norfolk Southern Railway Company, Pennsylvania Lines LLC, and New York Central Lines LLC, with exhibit thereto (incorporated by reference to Exhibit 10.8 to Form 8-K dated June 11, 1999)-9-ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K, Continued(a)3. Exhibits, Continued(21)Omitted in accordance with General Instruction I(2)(c)(24)*Powers of Attorney(99.1)*CEO Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(99.2)*CFO Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(b)Reports on Form 8-KNone*Filed Herewith-10-Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 25th day of February, 2003.CSX TRANSPORTATION, INC./S/ CAROLYN T. SIZEMORECarolyn T. Sizemore(Principal Accounting Officer)Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.NameTitle/S/ MICHAEL J. WARD Michael J. Ward*Chairman of the Board, Presidentand Chief Executive Officer and Director(Principal Executive Officer)/S/ ALAN F. CROWN Alan F. Crown*Executive Vice PresidentTransportation and Director/S/ ANDREW B. FOGARTY Andrew B. Fogarty*Director/S/ P. MICHAEL GIFTOS P. Michael Giftos*Executive Vice President andChief Commercial Officer and Director/S/ PAUL R. GOODWIN Paul R. Goodwin*Director/S/ FREDERICK J. FAVORITE Frederick J. Favorite*Senior Vice-President-Finance(Principal Finance Officer)*By: /S/ RACHEL GEIERSBACHRachel GeiersbachAttorney-in-Fact-11-CERTIFICATE OF PRINCIPAL EXECUTIVE OFFICERI, Michael J. Ward, certify that:1.I have reviewed this annual report on Form 10-K of CSX Transportation Inc.;2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); andc)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; andb)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and6.The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Date:February 25, 2003/s/ MICHAEL J. WARDMichael J. WardPrincipal Executive Officer-12-CERTIFICATE OF PRINCIPAL FINANCIAL OFFICERI, Frederick J. Favorite Jr., certify that:1.I have reviewed this annual report on Form 10-K of CSX Transportation Inc.;2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;b)evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); andc)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;5.The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; andb)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and6.The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.Date:February 25, 2003/s/ FREDERICK J. FAVORITE JR. Frederick J. Favorite Jr.Principal Financial OfficerCSX TRANSPORTATION INC. AND SUBSIDIARIESIndex to Consolidated Financial StatementsPageReport of Independent Auditors15CSX Transportation Inc. and SubsidiariesConsolidated Financial Statements and Notes to Consolidated Financial Statements Submitted Herewith:Consolidated Statement of Earnings—Fiscal Years Ended December 27, 2002, December 28, 2001 and December 29, 200016Consolidated Statement of Cash Flows—Fiscal Years Ended December 27, 2002, December 28, 2001 and December 29, 200017Consolidated Statement of Financial Position—December 27, 2002 and December 28, 200118Consolidated Statement of Retained Earnings Fiscal Years Ended December 27, 2002, December 28, 2001 and December 29, 200019Notes to Consolidated Financial Statements20-14-ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Directorsstatements of financial positionBalance Sheets of CSX Transportation, Inc. and subsidiaries as of December 27, 200231, 2004 and December 28, 2001,26, 2003, and the related consolidated statements of earnings,income, cash flows, and retained earningschanges in shareholder’s equity for each of the three fiscal years in the period ended December 27, 2002.31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.auditingthe standards generally accepted inof the United States.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.and subsidiaries at December 27, 200231, 2004 and December 28, 2001,26, 2003, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 27, 2002,31, 2004, in conformity with accounting principles generally accepted in the United States.ERNSTErnst & YOUNGYoung LLP
March 2, 2005February 11, 200312-15-
CSX TRANSPORTATION, INC.
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUBSIDIARIESSUPPLEMENTAL DATA
Consolidated Statement of Earnings
(Millions of Dollars)
Fiscal Years Ended | |||||||||||
December 27, 2002 | December 28, 2001 | December 29, 2000 | |||||||||
OPERATING REVENUE | |||||||||||
Merchandise | $ | 3,507 | $ | 3,460 |
| $ | 3,513 |
| |||
Automotive |
| 845 |
| 794 |
|
| 869 |
| |||
Coal, Coke and Iron Ore |
| 1,597 |
| 1,739 |
|
| 1,623 |
| |||
Other |
| 54 |
| 89 |
|
| 70 |
| |||
Total |
| 6,003 |
| 6,082 |
|
| 6,075 |
| |||
OPERATING EXPENSE | |||||||||||
Labor and Fringe |
| 2,443 |
| 2,464 |
|
| 2,463 |
| |||
Materials, Supplies and Other |
| 1,052 |
| 1,100 |
|
| 1,102 |
| |||
Conrail Operating Fees, Rents and Services |
| 346 |
| 353 |
|
| 383 |
| |||
Related Party Service Fees |
| 187 |
| 186 |
|
| 214 |
| |||
Building & Equipment Rent |
| 406 |
| 413 |
|
| 517 |
| |||
Depreciation |
| 543 |
| 522 |
|
| 494 |
| |||
Fuel |
| 449 |
| 525 |
|
| 577 |
| |||
New Orleans Litigation Provision |
| — |
| 60 |
|
| — |
| |||
Total |
| 5,426 |
| 5,623 |
|
| 5,750 |
| |||
OPERATING INCOME |
| 577 |
| 459 |
|
| 325 |
| |||
Other Income (Expense) |
| 15 |
| (5 | ) |
| (35 | ) | |||
Interest Expense |
| 113 |
| 130 |
|
| 120 |
| |||
EARNINGS BEFORE INCOME TAXES |
| 479 |
| 324 |
|
| 170 |
| |||
Income Tax Expense |
| 183 |
| 121 |
|
| 73 |
| |||
NET EARNINGS | $ | 296 | $ | 203 |
| $ | 97 |
| |||
CONSOLIDATED INCOME STATEMENTS
| Fiscal Years Ended | ||||||||||||
| December 31, | December 26, | December 27, | ||||||||||
| (Dollars in Millions) | 2004 | 2003 | 2002 | |||||||||
Operating Revenue | ||||||||||||
| Merchandise | $ | 3,995 | $ | 3,694 | $ | 3,507 | ||||||
| Automotive | 835 | 853 | 845 | |||||||||
| Coal, Coke and Iron Ore | 1,780 | 1,600 | 1,597 | |||||||||
| Other | 84 | 35 | 54 | |||||||||
| Total | $ | 6,694 | $ | 6,182 | $ | 6,003 | ||||||
Operating Expense | ||||||||||||
| Labor and Fringe | $ | 2,605 | $ | 2,458 | $ | 2,443 | ||||||
| Materials, Supplies and Other | 1,304 | 1,141 | 1,052 | |||||||||
| Conrail Operating Fees, Rents and Services | 280 | 357 | 346 | |||||||||
| Related Party Service Fees | 152 | 177 | 187 | |||||||||
| Building & Equipment Rent | 413 | 404 | 406 | |||||||||
| Depreciation | 632 | 548 | 543 | |||||||||
| Fuel | 656 | 566 | 449 | |||||||||
| Provision for Casualty Claims | — | 229 | — | |||||||||
| Restructuring Charge —Net | 50 | 13 | — | |||||||||
| Total | $ | 6,092 | $ | 5,893 | $ | 5,426 | ||||||
Operating Income | 602 | 289 | 577 | |||||||||
Other Income and Expense | ||||||||||||
| Other Income | 27 | 28 | 15 | |||||||||
| Interest Expense | 112 | 101 | 113 | |||||||||
Earnings | ||||||||||||
| Earnings Before Income Taxes | 517 | 216 | 479 | |||||||||
| Income Tax Expense | 187 | 77 | 183 | |||||||||
| Earnings before Cumulative Effect of Accounting Change | 330 | 139 | 296 | |||||||||
| Cumulative Effect of Accounting Change | — | 57 | — | |||||||||
Net Earnings | $ | 330 | $ | 196 | $ | 296 | ||||||
See accompanyingAccompanying Notes to Consolidated Financial Statements.
13
-16-
CSX TRANSPORTATION, INC.
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUBSIDIARIESSUPPLEMENTAL DATA
Consolidated Statement of Cash Flows
(Millions of Dollars)
Fiscal Years Ended | ||||||||||||
December 27, 2002 | December 28, 2001 | December 29, 2000 | ||||||||||
OPERATING ACTIVITIES | ||||||||||||
Net Earnings | $ | 296 |
| $ | 203 |
| $ | 97 |
| |||
Adjustments to Reconcile Net Earnings to Net Cash Provided: | ||||||||||||
Depreciation |
| 543 |
|
| 522 |
|
| 494 |
| |||
Deferred Income Taxes |
| 205 |
|
| 131 |
|
| 100 |
| |||
Other Operating Activities |
| (67 | ) |
| 6 |
|
| (4 | ) | |||
Changes in Operating Assets and Liabilities: | ||||||||||||
Accounts and Notes Receivable |
| 123 |
|
| 2 |
|
| 173 |
| |||
Sale of Accounts Receivable—Net |
| (52 | ) |
| (28 | ) |
| (4 | ) | |||
Other Current Assets |
| 7 |
|
| (20 | ) |
| (37 | ) | |||
Accounts Payable |
| (84 | ) |
| 20 |
|
| (199 | ) | |||
Other Current Liabilities |
| (39 | ) |
| 11 |
|
| (144 | ) | |||
Net Cash Provided by Operating Activities |
| 932 |
|
| 847 |
|
| 476 |
| |||
INVESTING ACTIVITIES | ||||||||||||
Property Additions |
| (981 | ) |
| (848 | ) |
| (822 | ) | |||
Short-term Investments |
| 220 |
|
| (220 | ) |
| — |
| |||
Other Investing Activities |
| (3 | ) |
| (4 | ) |
| (2 | ) | |||
Net Cash Used by Investing Activities |
| (764 | ) |
| (1,072 | ) |
| (824 | ) | |||
FINANCING ACTIVITIES | ||||||||||||
Long-term Debt Issued |
| — |
|
| — |
|
| 185 |
| |||
Long-term Debt Repaid |
| (196 | ) |
| (185 | ) |
| (102 | ) | |||
Advances from CSX |
| 199 |
|
| 619 |
|
| 446 |
| |||
Dividends Paid |
| (200 | ) |
| (212 | ) |
| (220 | ) | |||
Other Financing Activities |
| 2 |
|
| 2 |
|
| 31 |
| |||
Net Cash (Used) Provided by Financing Activities |
| (195 | ) |
| 224 |
|
| 340 |
| |||
Net Decrease in Cash and Cash Equivalents |
| (27 | ) |
| (1 | ) |
| (8 | ) | |||
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS | ||||||||||||
Cash and Cash Equivalents at Beginning of Year |
| 27 |
|
| 28 |
|
| 36 |
| |||
Cash and Cash Equivalents at End of Year |
| — |
|
| 27 |
|
| 28 |
| |||
Short-term Investments at End of Year |
| — |
|
| 220 |
|
| — |
| |||
Cash, Cash Equivalents and Short-term Investments at End of Year | $ | — |
| $ | 247 |
| $ | 28 |
| |||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||||||
Interest Paid—Net of Amounts Capitalized | $ | 78 |
| $ | 98 |
| $ | 103 |
| |||
come Taxes Paid | $ | 3 |
| $ | 59 |
| $ | 5 |
| |||
CONSOLIDATED BALANCE SHEETS
| Fiscal Years Ended | ||||||||
| December 31, | December 26, | |||||||
| (Dollars in Millions) | 2004 | 2003 | ||||||
ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and Cash Equivalents | $ | 19 | $ | 14 | ||||
| Accounts Receivable — Net | 1,049 | 1,004 | ||||||
| Materials and Supplies | 156 | 160 | ||||||
| Income Taxes Receivable | 2 | 31 | ||||||
| Deferred Income Taxes | 98 | 115 | ||||||
| Other Current Assets | 122 | 23 | ||||||
| Total Current Assets | 1,446 | 1,347 | ||||||
| Properties | 24,674 | 17,967 | ||||||
| Accumulated Depreciation | (5,288 | ) | (4,916 | ) | ||||
| Properties —Net | 19,386 | 13,051 | ||||||
| Affiliates and Other Companies | 368 | 248 | ||||||
| Other Long-term Assets | 610 | 628 | ||||||
| Total Assets | $ | 21,810 | $ | 15,274 | ||||
LIABILITIES | ||||||||
| Currents Liabilities | ||||||||
| Accounts Payable | $ | 670 | $ | 609 | ||||
| Labor and Fringe Benefits Payable | 333 | 321 | ||||||
| Casualty, Environmental and Other Reserves | 261 | 211 | ||||||
| Currents Maturities of Long-term Debt | 121 | 102 | ||||||
| Income and Other Taxes Payable | 46 | 68 | ||||||
| Due to Parent Company | 1,685 | 2,479 | ||||||
| Due to Affiliate | 439 | 251 | ||||||
| Other Current Liabilities | 80 | 97 | ||||||
| Total Current Liabilities | 3,635 | 4,138 | ||||||
| Casualty, Environmental and Other Reserves | 579 | 674 | ||||||
| Long-term Debt | 1,142 | 710 | ||||||
| Deferred Income Taxes | 6,031 | 3,596 | ||||||
| Other Long-term Liabilities | 658 | 575 | ||||||
| Total Liabilities | 12,045 | 9,693 | ||||||
SHAREHOLDER’S EQUITY | ||||||||
| Common Stock, $20 Par Value: | ||||||||
| Authorized 10,000,000 Shares; Issued and Outstanding 9,061,038 Shares | 181 | 181 | ||||||
| Other Capital | 5,358 | 1,380 | ||||||
| Accumulated Other Comprehensive Earnings | 72 | 6 | ||||||
| Retained Earnings | 4,154 | 4,014 | ||||||
| Total Shareholder’s Equity | 9,765 | 5,581 | ||||||
| Total Liabilities and Shareholder’s Equity | $ | 21,810 | $ | 15,274 | ||||
See accompanyingAccompanying Notes to Consolidated Financial Statements.
14
-17-
CSX TRANSPORTATION, INC.
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUBSIDIARIESSUPPLEMENTAL DATA
Consolidated Statement of Financial Position
(Millions of Dollars)
December 27, 2002 | December 28, 2001 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash, Cash Equivalents and Short-term Investments | $ | — |
| $ | 247 |
| ||
Accounts Receivable—Net |
| 235 |
|
| 289 |
| ||
Notes Receivable |
| — |
|
| 62 |
| ||
Materials and Supplies |
| 171 |
|
| 181 |
| ||
Deferred Income Taxes |
| 110 |
|
| 142 |
| ||
Other Current Assets |
| 18 |
|
| 32 |
| ||
Total Current Assets |
| 534 |
|
| 953 |
| ||
Properties |
| 17,354 |
|
| 16,644 |
| ||
Accumulated Depreciation |
| (4,730 | ) |
| (4,427 | ) | ||
Properties—Net |
| 12,624 |
|
| 12,217 |
| ||
Affiliates and Other Companies |
| 217 |
|
| 198 |
| ||
Other Long-term Assets |
| 627 |
|
| 567 |
| ||
Total Assets | $ | 14,002 |
| $ | 13,935 |
| ||
LIABILITIES | ||||||||
Current Liabilities | ||||||||
Accounts Payable | $ | 618 |
| $ | 736 |
| ||
Labor and Fringe Benefits Payable |
| 319 |
|
| 320 |
| ||
Casualty, Environmental and Other Reserves |
| 173 |
|
| 178 |
| ||
Current Maturities of Long-term Debt |
| 213 |
|
| 170 |
| ||
Income and Other Taxes Payable |
| 98 |
|
| 114 |
| ||
Due to Parent Company |
| 1,297 |
|
| 1,107 |
| ||
Due to Affiliate |
| 200 |
|
| 209 |
| ||
Other Current Liabilities |
| 132 |
|
| 196 |
| ||
Total Current Liabilities |
| 3,050 |
|
| 3,030 |
| ||
Casualty, Environmental and Other Reserves |
| 467 |
|
| 532 |
| ||
Long-term Debt |
| 873 |
|
| 1,033 |
| ||
Deferred Income Taxes |
| 3,424 |
|
| 3,250 |
| ||
Other Long-term Liabilities |
| 579 |
|
| 577 |
| ||
Total Liabilities |
| 8,393 |
|
| 8,422 |
| ||
SHAREHOLDER’S EQUITY | ||||||||
Common Stock, $20 Par Value: | ||||||||
Authorized 10,000,000 Shares; | ||||||||
Issued and Outstanding 9,061,038 Shares |
| 181 |
|
| 181 |
| ||
Other Capital |
| 1,380 |
|
| 1,380 |
| ||
Retained Earnings |
| 4,048 |
|
| 3,952 |
| ||
Total Shareholder’s Equity |
| 5,609 |
|
| 5,513 |
| ||
Total Liabilities and Shareholder’s Equity | $ | 14,002 |
| $ | 13,935 |
| ||
CONSOLIDATED CASH FLOW STATEMENTS
| Fiscal Years Ended | ||||||||||||
| December 31, | December 26, | December 27, | ||||||||||
| (Dollars in Millions) | 2004 | 2003 | 2002 | |||||||||
OPERATING ACTIVITIES | ||||||||||||
| Net Earnings | $ | 330 | $ | 196 | $ | 296 | ||||||
| Adjustments to Reconcile Net Earnings to Net Cash Provided: | ||||||||||||
| Depreciation | 632 | 548 | 543 | |||||||||
| Deferred Income Taxes | 190 | 123 | 205 | |||||||||
| Provision for Casualty Claims | — | 229 | — | |||||||||
| Restructuring | 50 | 24 | (32 | ) | ||||||||
| Cumulative Effect of Accounting Change | — | (57 | ) | — | ||||||||
| Other Operating Activities | (38 | ) | 27 | (35 | ) | |||||||
| Changes in Operating Assets and Liabilities: | ||||||||||||
| Accounts and Notes Receivable | (44 | ) | 82 | 121 | ||||||||
| Termination of Sale of Receivables | — | (869 | ) | (51 | ) | |||||||
| Other Current Assets | 5 | 10 | 7 | |||||||||
| Accounts Payable | 101 | (157 | ) | (85 | ) | |||||||
| Accounts Receivable Affiliates | 161 | 195 | 1 | |||||||||
| Income Tax Receivable | 29 | (243 | ) | 1 | ||||||||
| Labor and Fringe Payable | 51 | 2 | (1 | ) | ||||||||
| Income and Other Taxes Payable | (23 | ) | 184 | (15 | ) | |||||||
| Current Casualty and Other Environmental Reserves | (11 | ) | 14 | (5 | ) | |||||||
| Other Current Liabilities | 33 | (50 | ) | (18 | ) | |||||||
| Net Cash Provided by Operating Activities | 1,466 | 258 | 932 | |||||||||
INVESTING ACTIVITIES | ||||||||||||
| Property Additions | (978 | ) | (940 | ) | (981 | ) | ||||||
| Short-term Investments | — | — | 220 | |||||||||
| Proceeds from Property Dispositions | 33 | — | — | |||||||||
| Other Investing Activities | — | 16 | (3 | ) | ||||||||
| Net Cash Used by Investing Activities | (945 | ) | (924 | ) | (764 | ) | ||||||
FINANCIAL ACTIVITIES | ||||||||||||
| Long-term Debt Repaid | (116 | ) | (274 | ) | (196 | ) | ||||||
| Advance from CSX | (198 | ) | 1,185 | 199 | ||||||||
| Dividends Paid | (190 | ) | (230 | ) | (200 | ) | ||||||
| Other Financing Activities | (12 | ) | (1 | ) | 2 | |||||||
| Net Cash (Used) Provided by Financing Activities | (516 | ) | 680 | (195 | ) | |||||||
| Net Increase (Decrease) in Cash and Cash Equivalents | 5 | 14 | (27 | ) | ||||||||
CASH AND CASH EQUIVALENTS | ||||||||||||
| Cash and Cash Equivalents at Beginning of Year | 14 | — | 27 | |||||||||
| Cash and Cash Equivalents at End of Year | $ | 19 | $ | 14 | $ | — | ||||||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||||||||
| Interest Paid —Net of Amounts Capitalized | $ | 51 | $ | 63 | $ | 78 | ||||||
| Income Taxes Paid | $ | 16 | $ | 1 | $ | 3 | ||||||
See accompanyingAccompanying Notes to Consolidated Financial Statements.
15
-18-
CSX TRANSPORTATION, INC.
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUBSIDIARIESSUPPLEMENTAL DATA
Consolidated Statement of Retained Earnings
(Millions of Dollars)
December 27, 2002 | December 28, 2001 | December 29, 2000 | ||||||||||
Beginning Balance | $ | 3,952 |
| $ | 3,961 |
| $ | 4,084 |
| |||
Net Earnings |
| 296 |
|
| 203 |
|
| 97 |
| |||
Dividends—Common |
| (200 | ) |
| (212 | ) |
| (220 | ) | |||
Ending Balance | $ | 4,048 |
| $ | 3,952 |
| $ | 3,961 |
| |||
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
| Accumulated | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Common | Other | Retained | Comprehensive | |||||||||||||||||
| (Dollars in Millions) | Stock | Capital | Earnings | Loss | Total | |||||||||||||||
| Balance Dec. 28, 2001 | $ | 181 | $ | 1,380 | $ | 3,952 | $ | — | $ | 5,513 | ||||||||||
| Comprehensive Earnings: | ||||||||||||||||||||
| Net Earnings | — | — | 296 | — | 296 | |||||||||||||||
| Comprehensive Earnings | 296 | |||||||||||||||||||
| Dividends | — | — | (200 | ) | — | (200 | ) | |||||||||||||
| Balance Dec. 27, 2002 | $ | 181 | $ | 1,380 | $ | 4,048 | $ | — | $ | 5,609 | ||||||||||
| Comprehensive Earnings: | ||||||||||||||||||||
| Net Earnings | — | — | 196 | — | 196 | |||||||||||||||
| Fuel Hedge Adjustment (Net of $3 taxes) | — | — | — | 6 | 6 | |||||||||||||||
| Comprehensive Earnings | 202 | |||||||||||||||||||
| Dividends | — | — | (230 | ) | — | (230 | ) | |||||||||||||
| Balance Dec. 26, 2003 | $ | 181 | $ | 1,380 | $ | 4,014 | $ | 6 | $ | 5,581 | ||||||||||
| Comprehensive Earnings: | ||||||||||||||||||||
| Net Earnings | — | — | 330 | — | 330 | |||||||||||||||
| Fuel Hedge Adjustment (Net of $42 taxes) | — | — | — | 66 | 66 | |||||||||||||||
| Conrail Spin-Off (See Note 2) | — | 3,978 | — | — | 3,978 | |||||||||||||||
| Comprehensive Earnings | 4,374 | |||||||||||||||||||
| Dividends | — | — | (190 | ) | — | (190 | ) | |||||||||||||
| Balance Dec. 31, 2004 | $ | 181 | $ | 5,358 | $ | 4,154 | $ | 72 | $ | 9,765 | ||||||||||
See accompanyingAccompanying Notes to Consolidated Financial Statements.
16
-19-
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
| NOTE 1. | Nature of Operations and Significant Accounting Policies |
Basis of Presentation
In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to fairly present the financial position of CSXT at December 31, 2004 and December 26, 2003, the Consolidated Income Statements, Cash Flows and Changes in Shareholders’ Equity for the fiscal years ended December 31, 2004, December 26, 2003 and December 27, 2002, such adjustments being of a normal recurring nature. Certain prior-year data have been reclassified to conform to the 2004 presentation.
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
CSX Transportation Inc. (“CSXT” or “Company”)CSXT is the largest rail network in the Eastern United States, providing rail freight transportation over a network of more than 23,00022,000 route miles in 23 states, the District of Columbia and two Canadian provinces. CSXT is a wholly-owned subsidiary of CSX Corporation (“CSX”).CSX.
Rail shipments include merchandise, automotive products, and coal, coke and iron ore. ShipmentsService groups as a percent of rail revenue are as follows:
Fiscal Years Ended | ||||||
2002 | 2001 | |||||
Merchandise | 58 | % | 57 | % | ||
Automotive | 14 | % | 13 | % | ||
Coal, Coke and Iron Ore | 27 | % | 29 | % | ||
Other | 1 | % | 1 | % | ||
Total | 100 | % | 100 | % | ||
| Fiscal Years Ended | ||||||||
| December 31, | December 26, | |||||||
| 2004 | 2003 | |||||||
| Merchandise | 60 | % | 60 | % | ||||
| Automotive | 12 | % | 14 | % | ||||
| Coal, Coke and Iron Ore | 27 | % | 26 | % | ||||
| Other | 1 | % | 0 | % | ||||
| Total | 100 | % | 100 | % | ||||
Merchandise traffic includes the following markets:
| • | Phosphates and Fertilizer | |||
• | Metals | |||
| • | Forest Products | |||
| • | Food and Consumer | |||
• | Agricultural Products | |||
| ||||
• | Chemicals | |||
| ||||
• | Emerging Markets | |||
Coal shipments originate mainly from mining locations in the Eastern United States and primarily supply domestic utility and export marketsmarkets.
Principles of Consolidation
The consolidated financial statements include CSXT and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in companies that are not majority-owned are carried at cost (if less than 20% owned and the Company has no significant influence) or equity (if the Company has significant influence).
17
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 1. | Nature of Operations and Significant Accounting Policies, Continued |
Fiscal Year
CSXT follows a 52/53 week fiscal reporting calendar. Fiscal year 2004 consisted of 53 weeks. Fiscal years 2002, 20012003 and 20002002 consisted of 52 weeks. A 52-week fiscal year has four 13-week quarters. A 53-week year occurs periodically, with the next one occurring in 2004. Fiscal years 2002, 20012004, 2003 and 20002002 ended on:
| December 31, 2004 | ||||
| • | December 26, 2003 | |||
| • | December 27, 2002 | |||
-20-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES, Continued
Cash and Cash Equivalents and Short-term Investments
CSXT participates in the CSX cash management plan, under which excess cash is advanced to CSX for investment. CSX then makes cash available to CSXT as needed. Cash and cash equivalents and short-term investments consists of cash in banks and highly liquid investments having an original maturity of three months or less at the date of acquisition. At December 28, 2001, this included $220 million of deposits relating to the New Orleans litigation settlement that was paid in 2002.
Materials and Supplies
Materials and supplies consist primarily of fuel and items for replacement and maintenance of track and equipment, and are carried at average cost.
Properties
All properties are stated at cost, less an allowance for accumulated depreciation. Rail assets, including main-line track, locomotives and freight cars are depreciated using the group-life method. This method, which pools similar assets by road and equipment type and then depreciates each group as a whole. The majorityThese assets represent approximately 99% of the Company’s total property is accounted for under the group-life method. Otherfixed assets and amounted to $19.3 billion on a net basis at December 31, 2004. The majority of non-rail property is depreciated using the straight-line method on a per asset basis.
Regulations enforced by the Surface Transportation Board (“STB”) of the United StatesU.S. Department of Transportation require periodic formal studies of ultimate service lives for all railroad assets. Factors taken into account during the life-study include:
| • | Statistical analysis of historical retirements for each group of property; | |||
| • | Evaluation of the current operations; | |||
| • | Evaluation of technological advances and maintenance schedules; | |||
| • | Previous assessment of the condition of the assets and outlook for their continued use; | |||
| • | Expected net salvage expected to be received upon retirement; and | |||
| • | Comparison of assets to the same asset groups with other companies. | |||
The results of the life study process determine the service lives for each asset group under the group-life method. These studies are conducted by a third party expert and analyzed by the Company’s management. Resulting service life estimates are subject to review and approval by the STB. Road assets, including main-line track, have estimated service lives ranging from 75 years for system roadway machinery to 81 years.80 years for grading. Equipment assets, including locomotives and freight cars, have estimated service lives ranging from 56 years for vehicles to 28 years.35 years for work equipment.
18
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 1. | Nature of Operations and Significant Accounting Policies, Continued |
Changes in asset lives due to the results of the life studies are applied at the completion of the life-study and continue until the next required life-study. The life-studies may also indicate that the recorded amount of accumulated depreciation is deficient (or in excess) of the amount indicated by the study. Any such deficiency (or excess) is amortized as a component of depreciation expense over the remaining useful life of the asset group until the next required life-study.
For retirements or disposals of depreciable rail assets that occur in the ordinary course of business, the asset cost (net of salvage value or sales proceeds) is charged to accumulated depreciation and no gain or loss is recognized. For retirements or disposals of non-rail depreciable assets, infrequent disposal of rail assets outside the normal course of business and for all dispositions of land, the resulting gains or losses are recognized at the time of disposal. Expenditures that significantly increase asset values or extend useful lives are capitalized. Repair and maintenance expenditures are charged to operating expense when the work is performed.
Properties and other long-lived assets are reviewed for impairment whenever events or business conditions indicate the carrying amount of such assets may not be fully recoverable. Initial assessments of recoverability are based on estimates of undiscounted future net cash flows associated with an asset or a group of assets.assets in accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Where impairment is indicated, the assets are evaluated, and their carrying amount is reduced to fair value based on discountedundiscounted net cash flows or other estimates of fair value.
-21-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES, Continued
Revenue & Expense Recognition
The Company recognizes revenue using Free-On-Board (“FOB”) Origin pursuant to Emerging Issues Task Force (“EITF”) 1991-9Revenue and Expense Recognition for Freight Services in Process. The Company uses method (5) in the EITF, which provides for the allocation of revenue between reporting periods based on relative transit time in each reporting period. Expenses are recognized as incurred.
Transportation Four key estimates are included in the recognition and measurement of revenue and expense is recognized proportionately as freight moves from origin to destination. Other revenue, which includes switching, demurrage and incidental service charges, as well as interline switching settlements, is recognized whenrelated accounts receivable under the service is performed.policies described above:
| (1) | unbilled revenue on shipments that have been delivered; | |||
| (2) | revenue associated with shipments in transit; | |||
| (3) | future adjustments to revenue or accounts receivable for billing corrections and bad debts; and | |||
| (4) | future adjustments to revenue for overcharge claims filed by customers. | |||
Environmental Costs
The Company incurs costs for environmental corrective efforts, such asregularly updates the study and clean-up of environmental contamination. 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. Liabilities for environmental corrective efforts are recorded when CSXT’s responsibility is (1) deemed probable, and (2) the amount can be reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study or the Company’s commitment to a formal plan of action. Environmental reserves at December 27, 2002 and December 28, 2001 were $35 million and $32 million, respectively.
Casualty Reserves
Casualty reserves represent accruals for the uninsured portion of personal injury, occupational injury (asbestos, carpal tunnel, etc.) and accident claims. These reserves are recorded upon the first reporting of a claim, and estimates are updated as information develops. The amount of liability accrued isdescribed above based on the type and severity of the claim and an estimate of future claims development based on current trends and historical data. The Company believes it has recorded liabilities in sufficient amounts to cover all identified claims and estimates of incurred but not reported personal injury and accident claims. Unreported occupational injuries are not subject to reasonable estimation, thus no provision is made for incurred but not reported occupational injuries. Personal injury, occupational injury and accident liabilities amount to $395 million and $435 million at December 27, 2002 and December 28, 2001, respectively.experience.
19
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 1. | Nature of Operations and Significant Accounting Policies, Continued |
Common Stock and Other Capital
There have been no changes in common stock during the last three years. Other capital has increased substantially due to the acquisition of Conrail during the spin-off transaction consummated during 2004.
Derivative Financial Instruments
The Company recognizes all derivatives as either assets or liabilities in the Consolidated Balance Sheet and measures those instruments at fair value. (See Note 12, Derivative Financial Instruments.)
New Accounting Pronouncements and Change in Accounting Policy
In 2002, Statement of Financial Accounting Standards (SFAS) No.SFAS 143, “Accounting for Asset Retirement Obligations,”Obligations” was issued.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 asset retirement costs. CSXT is required to adopt this statement for fiscal year 2003. UnderIn conjunction with the group-life method of accounting for asset costs, the Company accrueshistorically accrued crosstie removal costs as parta component of its depreciation, expense. This effectively resultswhich is not permitted under SFAS 143. With the adoption of SFAS 143 in establishing a liability in accumulated depreciation in excessfiscal year 2003, CSX recorded pretax income of any salvage value for cross ties. The Company is assessing the effect of adopting this statement and expects that it will record$93 million, $57 million after tax as a cumulative effect of an accounting change, to remove any suchrepresenting the reversal of the accrued liability accrued to date infor crosstie removal costs. The adoption of SFAS 143 did not have a material effect on prior reporting periods, and the first quarter of 2003.Company does not believe it will have a material effect on future earnings. On an ongoing basis, depreciation expense will be reduced, while materiallabor and fringe and materials, supplies and other expensesexpense will be increased. The change in operating income is expected to be immaterial.increased by approximately $12 million as a result of the adoption of SFAS 143.
20
-22-
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
| NOTE 1. | Nature of Operations and Significant Accounting Policies, Continued |
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES, ContinuedIn 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 VIE’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 Income Statement in future reporting periods. Previously, FRT was accounted for under the equity method of accounting. Other income includes net equity earnings for FRT for the year ended December 26, 2003. The following table indicates the impact of consolidating FRT in 2004 compared to equity method accounting in 2003.
| (Dollars in Millions) | ||||||||
| Years Ended | ||||||||
| December 31, | December 26, | |||||||
| 2004 | 2003 | |||||||
| Revenues | $ | 63 | $ | — | ||||
| Operating Expense | 35 | — | ||||||
| Net Equity Earnings | — | 4 | ||||||
| Net Income | 6 | — | ||||||
| Current Assets | 32 | — | ||||||
| Long-term Assets | 146 | 44 | ||||||
| Current Liabilities | 26 | — | ||||||
| Long-term Liabilities | $ | 101 | $ | — | ||||
In 2002, the FASB issued Financial Accounting Standard Interpretation (“FASI”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This statement requires that certain guarantees be recorded at fair value on the Balance Sheet and additional disclosures be made about guarantees. CSXT did not realize a financial statement impact with the adoption of the accounting provisions of this statement in fiscal year 2003 and does not anticipate a future impact. (See Note 15, Commitments and Contingencies.)
Prior-Year Data
Certain prior-year data has been reclassified to conform to the 2002 presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of certain revenues and expenses during the reporting period. Actual results may differ from those estimates. SignificantCritical accounting estimates using management judgment are made for the following areas:
| 1. | Casualty, legal and environmental |
| 2. | Pension and postretirement accounting; | |||
| 3. | Depreciation policies for its assets under the group-life | |||
| Income taxes. | ||||
21
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2. |
NOTE 2. INTEGRATED RAIL OPERATIONS WITH CONRAIL
Background
In June 2003 CSX, and Norfolk Southern Corporation (“Norfolk Southern”NS”) completed the acquisition of, and Conrail, Inc. (“Conrail”) in May 1997. Conrail ownsjointly filed a petition with the primary freight railroad system serving the Northeastern United States,STB to establish direct ownership and its rail network extends throughout several Midwestern statescontrol by CSX’s and into Canada. CSX and Norfolk Southern, through a jointly owned acquisition entity, hold economic interests in Conrail of 42% and 58%, respectively, and voting interests of 50% each. CSX and Norfolk Southern operate over allocated portions of the Conrail lines.
NS’ respective subsidiaries, CSXT and Norfolk Southern Railway Company (“Norfolk Southern Railway”NSR”), the rail subsidiary of Norfolk Southern, operate their respectiveCSX’s and NS’ portions of the Conrail system pursuantalready operated by them separately and independently under various agreements. These portions of the Conrail system were owned by Conrail’s subsidiaries, New York Central Lines, LLC (“NYC”) and Pennsylvania Lines, LLC (“PRR”). In August 2004, the following events occurred: (i) the ownership of NYC and PRR was transferred (“Spun-off”) to various operating agreements. Under these agreements,CSXT and NSR, respectively, and (ii) the railroads pay operating fees to Conrail for the useparties consummated an exchange offer of right-of-way and rent for the usenew unsecured securities of equipment. Conrail continues to provide rail services in certain shared geographic areas (“Shared Asset Areas”) for the joint benefitsubsidiaries of CSXT and Norfolk Southern Railway,NSR for unsecured securities of Conrail. The exchange offer was the final stage in the restructuring of Conrail’s unsecured indebtedness as described in the parties’ joint petition filed with the STB.
CSXT and NSR offered unsecured debt securities of newly formed subsidiaries in an approximate 42%/58% ratio in exchange for Conrail’s unsecured debentures. The debt securities issued by each respective subsidiary were fully and unconditionally guaranteed by CSXT and NSR. Upon completion of the transaction, the subsidiaries merged into CSXT and NSR, respectively, and the new debt securities thus became direct unsecured obligations of CSXT and NSR. Conrail’s secured debt and lease obligations are supported by new leases and subleases which it is compensatedbecame the direct lease and sublease obligations, also in an approximate 42%/58% ratio, of CSXT and NSR.
Prior to the transaction, CSX’s and NS’ indirect ownership interest in NYC and PRR mirrored their ownership interest in Conrail (42% for CSX and 58% for NS). As a result of the transaction, CSXT obtained direct ownership of NYC and NSR obtained direct ownership of PRR. Thus, CSXT in effect received NS’s 58% indirect ownership in NYC and NSR in effect received CSX’s 42% indirect ownership of PRR. The receipt of the interest not already indirectly owned by CSX was accounted for at fair value. The receipt of the NYC interest already indirectly owned by CSX was accounted for using CSX’s basis in amounts already included within CSX’s investment in Conrail. At the conclusion of the transaction, NYC was merged into CSXT and PRR was merged into NSR.
22
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2. | Investment In and Integrated Rail Operations with Conrail, Continued |
The Company recorded this transaction at fair value based on the basisresults of usagean independent valuation. The following table summarizes the estimated fair value of the acquired assets and liabilities assumed at the date of the spin-off and at the end of the prior year and its effects on the Company’s Consolidated Balance Sheets as of September 24, 2004. Fair value adjustments are non-cash transactions and, accordingly, have no cash impact on the Consolidated Cash Flow Statements:
| (Dollars in Millions) | ||||||||||
| Current Assets | $ | 611 | Current Liabilities | $ | (8 | ) | ||||
| Properties — Net | 5,983 | Long-term Debt | 528 | |||||||
| Other Long-term Assets | 136 | Deferred Income Taxes | 2,213 | |||||||
| Long-term Liabilities | 15 | |||||||||
| Other Capital | 3,978 | |||||||||
| Retained Earnings | 4 | |||||||||
Total Assets | $ | 6,730 | Total Liabilities and Retained Earnings | $ | 6,730 | |||||
23
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2. | Investment In and Integrated Rail Operations with Conrail, Continued |
The following table summarizes the estimated fair value of the acquired assets and liabilities assumed at the date of the spin-off and at the end of the prior year and its effects on the Company’s Consolidated Balance Sheets as of December 26, 2003.
| (Unaudited) Pro Forma | |||||||||||||
| Reported December 26, | Effects of | Spin-off Effects | |||||||||||
| (Dollars in Millions) | 2003 | Spin-off | December 26, 2003 | ||||||||||
| ASSETS | |||||||||||||
| Current Assets: | |||||||||||||
| Cash and Cash Equivalents | $ | 14 | $ | — | $ | 14 | |||||||
| Accounts Receivable - Net | 1,004 | — | 1,004 | ||||||||||
| Materials and Supplies | 160 | — | 160 | ||||||||||
| Income Taxes Receivable | 31 | — | 31 | ||||||||||
| Deferred Income Taxes | 115 | — | 115 | ||||||||||
| Other Current Assets | 23 | 573 | 596 | ||||||||||
| Total Current Assets | 1,347 | 573 | 1,920 | ||||||||||
| Properties - Net | 13,051 | 6,151 | 19,202 | ||||||||||
| Affiliates and Other Companies | 248 | — | 248 | ||||||||||
| Other Long-term Assets | 628 | 136 | 764 | ||||||||||
| Total Assets | $ | 15,274 | $ | 6,860 | $ | 22,134 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||
| Current Liabilities: | |||||||||||||
| Accounts Payable | $ | 609 | — | 609 | |||||||||
| Labor and Fringe Benefits Payable | 321 | — | 321 | ||||||||||
| Casualty, Environmental and Other Reserves | 211 | — | 211 | ||||||||||
| Current Maturities of Long-term Debt | 102 | — | 102 | ||||||||||
| Income and Other Taxes Payable | 68 | — | 68 | ||||||||||
| Due to Parent Company | 2,479 | — | 2,479 | ||||||||||
| Due to Affiliate | 251 | — | 251 | ||||||||||
| Other Current Liabilities | 97 | (8 | ) | 89 | |||||||||
| Total Current Liabilities | 4,138 | (8 | ) | 4,130 | |||||||||
| Casualty, Environmental and Other Reserves | 674 | 6 | 680 | ||||||||||
| Long-term Debt | 710 | 528 | 1,238 | ||||||||||
| Deferred Income Taxes | 3,596 | 2,269 | 5,865 | ||||||||||
| Other Long-term Liabilities | 575 | 9 | 584 | ||||||||||
| Total Liabilities | 9,693 | 2,804 | 12,497 | ||||||||||
| Shareholders’ Equity: | |||||||||||||
| Common Stock, $1 Par Value | 181 | — | 181 | ||||||||||
| Authorized 300,000,000 Shares | |||||||||||||
| Issued and Outstanding 214,829,471 Shares | |||||||||||||
| Other Capital | 1,380 | 4,056 | 5,436 | ||||||||||
| Retained Earnings | 4,014 | — | 4,014 | ||||||||||
| Accumulated Other Comprehensive Earnings | 6 | — | 6 | ||||||||||
| Total Shareholders’ Equity | 5,581 | 4,056 | 9,637 | ||||||||||
| Total Liabilities and Shareholders’ Equity | $ | 15,274 | $ | 6,860 | $ | 22,134 | |||||||
24
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 2. | Investment In and Integrated Rail Operations with Conrail, Continued |
The following table illustrates the pro forma effect on the Consolidated Income Statements as if the spin-off transaction had been completed as of the beginning of the periods.
| (Dollars in Millions, Except Per Share Amounts) | ||||||||||||||||||||||||
| Year Ended | Year Ended | |||||||||||||||||||||||
| December 31, 2004 | December 26, 2003 | |||||||||||||||||||||||
| Effect of | Effect of | |||||||||||||||||||||||
| As reported | Spin-off | Pro Forma | As reported | Spin-off | Pro Forma | |||||||||||||||||||
| Operating Revenue | $ | 6,694 | $ | — | $ | 6,694 | $ | 6,182 | $ | — | $ | 6,182 | ||||||||||||
| Earnings before Cumulative Effect of Accounting Change | 330 | 21 | 351 | 139 | 24 | 163 | ||||||||||||||||||
| Cumulative Effect of Accounting Change - Net of Tax | — | — | — | 57 | — | 57 | ||||||||||||||||||
| Net Earnings | 330 | 21 | 351 | 196 | 24 | 220 | ||||||||||||||||||
Since September of 2004, the impact of the transaction has been included in the Company’s Consolidated Income Statement.
As previously reported, Conrail will continue to own, manage, and operate the Shared Assets Areas. However, this transaction effectively decreased rents paid to Conrail after the transaction date, as assets previously leased from Conrail are now owned by the respective railroads.CSXT.
Accounting and Financial Reporting Effects
Prior to the spin-off transaction, CSXT’s rail and intermodal operating revenue includesincluded revenue from traffic previously moving on Conrail. OperatingConrail property. Currently, operating expenses include costs incurred to handle thatsuch traffic and operate the former Conrail lines. OperatingRail operating expense includes an expense category, “Conrail OperatingRents, Fees Rents and Services,” which reflects:
| 1. | Right-of-way usage fees | |||
| 2. | Equipment rental payments to Conrail through August 2004; and | |||
| 3. | Transportation, switching and terminal service charges provided by Conrail in the Shared | |||
-23-25
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
| NOTE 2. | Investment In and Integrated Rail Operations with Conrail, Continued |
Transactions with Conrail
NOTE 2. INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
Conrail Operating Fees, Rents and Services is as follows:
Fiscal Years Ended | |||||||||
(millions of dollars) | 2002 | 2001 | 2000 | ||||||
Operating Fees, Rents and Services | $ | 346 | $ | 353 | $ | 383 | |||
As a result of the integration, a number of employees’ positions at Conrail were eliminated and certain duplicate facilities were closed. Under the agreements among the parties, CSXT and Norfolk Southern Railway assumed various obligations related to these actions. During 2002, 2001, and 2000, CSXT incurred approximately $30, $35, and $42 million, respectively, of costs related to lease payments on certain Conrail facilities no longer being used after the integration, and separation and relocation costs of Conrail employees. These costs are reflected in “Materials, Supplies and Other” expense in the consolidated statement of earnings.
Transactions With Conrail
As listed below, CSXT has amounts payable to Conrail representing expenses incurred under the operating, equipment and shared area agreements.agreements with Conrail.
| (Dollars in Millions) | ||||||||
| December 31, | December 26, | |||||||
| 2004 | 2003 | |||||||
| Payable to Conrail | $ | 59 | $ | 71 | ||||
(millions of dollars) | December 27, 2002 | December 28, 2001 | ||||
CSX Payable to Conrail | $ | 69 | $ | 88 | ||
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. On December 27, 2002, future minimum payments to Conrail under the operating, equipment and shared area agreements were as follows:
| Future Minimum Payments | ||||||||
| (Dollars in Millions) | ||||||||
| 2005 | $ | 21 | ||||||
| 2006 | 19 | |||||||
| 2007 | 19 | |||||||
| 2008 | 16 | |||||||
| 2009 | 13 | |||||||
| Thereafter | 26 | |||||||
| Total | $ | 114 | ||||||
26
(millions of dollars) | Future Minimum Payments | ||
2003 | $ | 251 | |
2004 |
| 253 | |
2005 |
| 245 | |
2006 |
| 234 | |
2007 |
| 227 | |
Thereafter |
| 3,311 | |
Total | $ | 4,521 | |
-24-
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
| NOTE 3. | Management Restructuring |
NOTE 3. SUPPLEMENTAL CONSOLIDATED STATEMENT OF EARNINGS FINANCIAL DATAThe Company incurred restructuring charges related to the November 2003 management restructuring plan to streamline the structure, eliminate organizational layers and realign certain functions. For the fiscal year ended December 31, 2004, the Company recorded expense of $50 million for separation expenses. The Company recorded an initial pretax charge related to this reduction of $25 million in 2003. The restructuring initiatives have reduced the non-contract workforce by 644 positions as of December 31, 2004.
The total cost of the program through the fiscal year December 31, 2004, is $75 million. The majority of separation benefits will be paid from CSX’s qualified pension plan, with the remainder being paid from general corporate funds. See the table below for a rollforward of significant components of the restructuring charge.
| Balance | Balance | |||||||||||||||
| December 26, | 2004 | December 31, | ||||||||||||||
| (Dollars in Millions) | 2003 | Expense | Payments (a) | 2004 | ||||||||||||
| Restructuring Liability | $ | 25 | $ | 30 | $ | (54 | ) | $ | 1 | |||||||
| Pension and Postretirement Curtailment Charges | 20 | |||||||||||||||
| 2004 Expense | $ | 50 | ||||||||||||||
| (a) | Includes payments from the qualified pension plan and general corporate funds. |
In 2003, the Company recorded a $22 million pretax credit related to a favorable change in estimate related to railroad retirement taxes and other benefits included in the 1991 and 1992 separation plans. These plans provided for workforce reductions, improvements in productivity and other cost reductions.
Also in 2003, the Company recorded a $10 million restructuring charge related to another workforce reduction program, substantially all of which had been paid out at December 26, 2003.
A net $13 million restructuring charge was recorded in 2003 representing the cost of the restructuring initiatives offset by reductions in 1991/1992 separation reserves. The associated expense is included in operating expense on the Income Statement as “Restructuring Charge — Net.”
| NOTE 4. | Supplemental Consolidated Income Statement Financial Data |
Operating expense includes the following:
| Fiscal Years Ended | ||||||||||||
| December 31, | December 26, | December 27, | ||||||||||
| (Dollars in Millions) | 2004 | 2003 | 2002 | |||||||||
| Selling, General and Administrative Expense | $ | 803 | $ | 758 | $ | 816 | ||||||
27
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 5. | Other Income (Expense) |
Fiscal Years Ended | |||||||||
(millions of dollars) | 2002 | 2001 | 2000 | ||||||
Selling, General and Administrative Expense | $ | 854 | $ | 911 | $ | 731 | |||
NOTE 4. OTHER INCOME (EXPENSE)
Other income (expense) consists of the following:
| Fiscal Years Ended | ||||||||||||
| December 31, | December 26, | December 27, | ||||||||||
| (Dollars in Millions) | 2004 | 2003 | 2002 | |||||||||
| Income from Real Estate Operations | $ | 28 | $ | 64 | $ | 90 | ||||||
| Discount on Sales of Accounts Receivable | — | (36 | ) | (75 | ) | |||||||
| Miscellaneous | (1 | ) | — | — | ||||||||
| Total | 27 | 28 | 15 | |||||||||
| Gross Revenue from Real Estate Operations | $ | 64 | $ | 105 | $ | 119 | ||||||
| NOTE 6. | Income Taxes |
Fiscal Years Ended | ||||||||||||
(millions of dollars) | 2002 | 2001 | 2000 | |||||||||
Income from Real Estate Operations | $ | 90 |
| $ | 83 |
| $ | 47 |
| |||
Discount on Sales of Accounts Receivable |
| (75 | ) |
| (78 | ) |
| (77 | ) | |||
Miscellaneous |
| — |
|
| (10 | ) |
| (5 | ) | |||
Total | $ | 15 |
| $ | (5 | ) | $ | (35 | ) | |||
Gross Revenue from Real Estate Operations | $ | 119 |
| $ | 114 |
| $ | 77 |
| |||
-25-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 5. INCOME TAXES
The breakdown of income tax expense (benefit) between current and deferred is as follows:
| Fiscal Years Ended | ||||||||||||
| December 31, | December 26, | December 27, | ||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| (Dollars in Millions) | ||||||||||||
| Current: | ||||||||||||
| Federal | $ | 11 | $ | (52 | ) | $ | (22 | ) | ||||
| State | 4 | 3 | — | |||||||||
| Total Current | $ | 15 | $ | (49 | ) | $ | (22 | ) | ||||
| Deferred: | ||||||||||||
| Federal | $ | 167 | $ | 123 | $ | 180 | ||||||
| State | 5 | 3 | 25 | |||||||||
| Total Deferred | $ | 172 | $ | 126 | $ | 205 | ||||||
| Total | $ | 187 | $ | 77 | $ | 183 | ||||||
28
Fiscal Years Ended | ||||||||||||
(millions of dollars) | 2002 | 2001 | 2000 | |||||||||
Current: | ||||||||||||
Federal | $ | (22 | ) | $ | (11 | ) | $ | (33 | ) | |||
State and Foreign |
| — |
|
| 1 |
|
| 6 |
| |||
Total Current | $ | (22 | ) | $ | (10 | ) | $ | (27 | ) | |||
Deferred: | ||||||||||||
Federal | $ | 180 |
| $ | 117 |
| $ | 85 |
| |||
State and Foreign |
| 25 |
|
| 14 |
|
| 15 |
| |||
Total Deferred | $ | 205 |
| $ | 131 |
| $ | 100 |
| |||
Total Expense | $ | 183 |
| $ | 121 |
| $ | 73 |
| |||
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 6. | Income Taxes, Continued |
Income tax expense reconciled to the tax computed at statutory rates is as follows:
| Fiscal Years Ended | ||||||||||||||||||||||||
| December 31, | December 26, | December 27, | ||||||||||||||||||||||
| (Dollars in Millions) | 2004 | 2003 | 2002 | |||||||||||||||||||||
| Tax at Statutory Rates | $ | 181 | 35 | % | $ | 76 | 35 | % | $ | 168 | 35 | % | ||||||||||||
| State Income Taxes | 7 | 1 | % | 4 | 2 | % | 16 | 3 | % | |||||||||||||||
| Other | (1 | ) | 0 | % | (3 | ) | -1 | % | (1 | ) | 0 | % | ||||||||||||
| Total Expense | $ | 187 | 36 | % | $ | 77 | 36 | % | $ | 183 | 38 | % | ||||||||||||
Fiscal Years Ended | ||||||||||||||||||||
(millions of dollars) | 2002 | 2001 | 2000 | |||||||||||||||||
Tax at Statutory Rates | $ | 168 |
| 35 | % | $ | 113 |
| 35 | % | $ | 60 | 35 | % | ||||||
State Income Taxes |
| 16 |
| 3 | % |
| 10 |
| 3 | % |
| 13 | 8 | % | ||||||
Other |
| (1 | ) | — | % |
| (2 | ) | (1 | )% |
| — | — | % | ||||||
Total Expense | $ | 183 |
| 38 | % | $ | 121 |
| 37 | % | $ | 73 | 43 | % | ||||||
The significant components of deferred tax assets and liabilities include amounts associated with:
| December 31, 2004 | December 26, 2003 | |||||||||||||||
| (Dollars in Millions) | Assets | Liabilities | Assets | Liabilities | ||||||||||||
| Productivity/Restructuring Charges | $ | 61 | $ | — | $ | 81 | $ | — | ||||||||
| Employee Benefit Plans | 131 | — | 109 | — | ||||||||||||
| Accelerated Depreciation | — | 6,132 | — | 3,880 | ||||||||||||
| Other | 534 | 527 | 542 | 333 | ||||||||||||
| Total | $ | 726 | $ | 6,659 | $ | 732 | $ | 4,213 | ||||||||
| Net Deferred Tax Liabilities | $ | 5,933 | $ | 3,481 | ||||||||||||
December 27, 2002 | December 28, 2001 | |||||||||||
(millions of dollars) | Assets | Liabilities | Assets | Liabilities | ||||||||
Productivity/Restructuring Charges | $ | 90 | $ | — | $ | 102 | $ | — | ||||
Employee Benefit Plans |
| 105 |
| — |
| 97 |
| — | ||||
Accelerated Depreciation |
| — |
| 3,656 |
| — |
| 3,451 | ||||
Other |
| 384 |
| 237 |
| 429 |
| 285 | ||||
Total | $ | 579 | $ | 3,893 | $ | 628 | $ | 3,736 | ||||
Net Deferred Tax Liabilities | $ | 3,314 | $ | 3,108 | ||||||||
The primary factorfactors in the change in year-end net deferred income tax liability balances is the annual provision for deferred income tax expense.include:
| • | Annual provision for deferred income tax expense | |||
| • | Consolidation of FRT (see Note 1, Nature of Operations and Significant Accounting Policies) | |||
| • | Conrail spin-off transaction (see Note 2, Investment In and Integrated Rail Operations with Conrail) | |||
| • | Fuel hedging adjustments to Accumulated Other Comprehensive Loss | |||
-26-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 5. INCOME TAXES, Continued
CSXT and its subsidiaries are included in theThe Company files a consolidated federal income tax return filed by CSX.return. The consolidated current federal income tax expense or benefit is allocated to CSXT and its subsidiaries as though CSXT had filed a separate consolidated federal return. Income taxes due to CSX are included in current liabilities as follows:
(millions of dollars) | December 27, 2002 | December 28, 2001 | ||||
Income Taxes Payable | $ | 33 | $ | 32 | ||
Examinations of the federal income tax returns of CSX have been completed through 1993. TaxFederal income tax returns for 1994 through 19982003 currently are currently under examination. Management believes adequate provision has been made for any adjustments that might be assessed. While the final outcome of these matters cannot be predicted with certainty, it is the opinion of CSX management that none of these items will have a material adverse effect on the results of operations, financial position or liquidity of CSX. 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 fiscal quarter or fiscal year. The Company is party to a number of legal and administrative proceedings, the resolution of which could result in gain realization in amounts that could be material to results of operations in a particular fiscal quarter or fiscal year.
29
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 7. | Related Parties |
NOTE 6. RELATED PARTIES
At December 27, 200231, 2004 and December 28, 2001,26, 2003, CSXT had $1.3$2.3 billion and $1.1$2.5 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 2.45% as of December 31, 2004. For the year ending December 26, 2003, the companies were charged for borrowings or compensated for investments based on returns earned by the plan portfolio, which was 1.46% and 3.36% at December 27, 2002 and December 28, 2001, respectively.1.21%. Interest expense related to this plan was $39 million, $42 million and $33 million $30 millionin 2004, 2003 and $13 million in 2002, 2001 and 2000, respectively.
Detail of Related Party Service Fees (as included in the Statement of Earnings)Consolidated Income Statements)
| (Dollars in Millions) | ||||||||||||
| Fiscal Years Ended | ||||||||||||
| December 31, | December 26, | December 27, | ||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| CSXI | $ | (421 | ) | $ | (399 | ) | $ | (365 | ) | |||
| CSX Management Service Fee | 248 | 241 | 275 | |||||||||
| CSX Technology | 182 | 199 | 208 | |||||||||
| TDSI | 61 | 53 | 43 | |||||||||
| TRANSFLO | 82 | 83 | 79 | |||||||||
| CTRC | — | — | (53 | ) | ||||||||
| Total Related Party Service Fees | $ | 152 | $ | 177 | $ | 187 | ||||||
Fiscal Years Ended | ||||||||||||
(millions of dollars) | 2002 | 2001 | 2000 | |||||||||
CSXI | $ | (365 | ) | $ | (371 | ) | $ | (387 | ) | |||
CSX Management Service Fee |
| 275 |
|
| 237 |
|
| 241 |
| |||
CSX Technology |
| 208 |
|
| 218 |
|
| 220 |
| |||
TDSI |
| 43 |
|
| 51 |
|
| 59 |
| |||
TRANSFLO |
| 79 |
|
| 51 |
|
| 48 |
| |||
CTRC |
| (53 | ) |
| — |
|
| — |
| |||
Other |
| — |
|
| — |
|
| 33 |
| |||
Total Related Party Service Fees | $ | 187 |
| $ | 186 |
| $ | 214 |
| |||
Related Party Service Fees consists of amounts related to:
| • | CSX Intermodal Inc. (“CSXI”) |
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 6. RELATED PARTIES, Continued
| • | CSX Management Service | |||
| • | CSX Technology Inc. (“CSX Technology”) | |||
| • | Total Distribution Services Inc. (“TDSI”) | |||
| • | TRANSFLO Terminal Services Inc. (“TRANSFLO”) | |||
| • | CSX Trade Receivables Corporation (“CTRC”) | |||
| CSX Technology, CSXI, TDSI, and TRANSFLO are wholly-owned subsidiaries of CSX. |
30
CSX Technology, CSXI, TDSI, and TRANSFLO are wholly-owned subsidiaries of CSX.TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 7. | Related Parties, Continued |
Detail Ofof Due to Affiliate (as included in the Statement of Financial Position)Consolidated Balance Sheets)
| (Dollars in Millions) | ||||||||
| December 31, | December 26, | |||||||
| 2004 | 2003 | |||||||
| CSXI | $ | 32 | $ | 49 | ||||
| CSX Technology | 268 | 55 | ||||||
| TDSI | 4 | 12 | ||||||
| TRANSFLO | 9 | 15 | ||||||
| CSX Insurance | 105 | 115 | ||||||
| Other | 21 | 5 | ||||||
| Total Due to Affiliate | $ | 439 | $ | 251 | ||||
(millions of dollars) | December 27, 2002 | December 28, 2001 | ||||
CSXI | $ | 25 | $ | 24 | ||
CSX Technology |
| 41 |
| 44 | ||
TDSI |
| 5 |
| 4 | ||
TRANSFLO |
| 8 |
| 5 | ||
CTRC |
| 6 |
| 6 | ||
CSX Insurance |
| 115 |
| 125 | ||
Other |
| 1 |
| 1 | ||
Total Due to Affiliate | $ | 201 | $ | 209 | ||
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 December 27, 2002,31, 2004, and December 28, 2001,26, 2003, $105 million and $115 million and $125 million, respectively, was outstanding under the agreement.agreement, respectively. Interest on the loan is payable monthly at 0.45% over the LIBOR rate, andwhich was 1.46%2.42% at December 27, 200231, 2004 and 2.56%1.21% at December 28, 2001.26, 2003. Interest expense related to the loan was $3$2 million, $6$2 million and $7$3 million for the fiscal years ended December 31, 2004, December 26, 2003, and December 27, 2002, December 28, 2001, and December 29, 2000, respectively.
-28-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 6. RELATED PARTIES, Continued
CSXT participates with SL Service Inc.CSX Container Leasing, LLC (“SL Service”CCL”), a wholly-owned subsidiaryan affiliate of CSX, in sale-leaseback arrangements. Under these arrangements, SL ServiceCCL sold equipment to a third party and CSXT leased the equipment and assigned the lease to SL Service. SL ServiceCCL. CCL is obligated for all lease payments and other associated equipment expenses. If SL ServiceCCL defaults on its obligations under the arrangements, CSXT would assume the asset lease rights and obligations of approximately $37$10 million and $23 million at December 27, 2002.31, 2004 and December 26, 2003, respectively. These leases were either assumed by Maersk as part of its purchase of the CSX international liner business and will beor 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 obligationsobligations.
31
NOTE 7. ACCOUNTS RECEIVABLE
CSX TRANSPORTATION, INC. Sale of Accounts Receivable As of June 2003, CSXT (millions of dollars) December 27, 2002 December 28, 2001 Outstanding Accounts Receivable Sold $ 914 $ 966 to investors, and the proceeds from those sales were paid to CSXT. Net losses associated with the Allowance for Doubtful Accounts The Company maintains an allowance for doubtful accounts based on the expected collectibility of all accounts receivable. The allowance for doubtful accounts is included in the Balance Sheet as follows: Fiscal Year Ended (millions of dollars) 2002 2001 2000 Discounts on Accounts Receivable Sold $ 75 $ 78 $ 77 Properties consist of the following: 32 December 27, 2002 December 28, 2001 (millions of dollars) Cost Accumulated Depreciation Net Cost Accumulated Depreciation Net Road $ 11,541 $ 2,498 $ 9,043 $ 11,024 $ 2,343 $ 8,681 Equipment 5,671 2,225 3,446 5,477 2,077 3,400 Other 142 7 135 143 7 136 Total $ 17,354 $ 4,730 $ 12,624 $ 16,644 $ 4,427 $ 12,217
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 8. Accounts Receivable sells, generallydiscontinued its accounts receivable securitization program. Prior to that, CSXT sold, without recourse, a revolving pool of accounts receivable to CSX Trade Receivables Corporation (“CTRC”), a bankruptcy-remote (special purpose) entity wholly-ownedwholly owned by CSX. Once these receivables are sold they are no longer onCTRC transferred the Company’s statement of financial position.Outstanding 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 under this agreement are as follows: salessale of receivables arewere $36 million and $75 million for the fiscal years ended December 26, 2003 and December 27, 2002. (Dollars in Millions) December 31, December 26, 2004 2003 Allowance for Doubtful Accounts $ 80 $ 63 CSXT has retained responsibility for servicing the accounts receivables held by the master trust. The average servicing period is less than one month. No servicing asset or liability has been recorded since the fees CSXT receives approximate its related costs.The accounts receivable program is accounted for in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”-29-CSX TRANSPORTATION INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS, ContinuedNOTE 8. PROPERTIESNOTE 9. Properties December 31, 2004 December 26, 2003 Accumulated Accumulated (Dollars in Millions) Cost Depreciation Net Cost Depreciation Net Road $ 18,358 $ 2,918 $ 15,440 $ 12,147 $ 2,683 $ 9,464 Equipment 6,181 2,363 3,818 5,686 2,225 3,461 Other 135 7 128 134 8 126 Total $ 24,674 $ 5,288 $ 19,386 $ 17,967 $ 4,916 $ 13,051
NOTE 9. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 10. | Casualty, Environmental and Other Reserves |
Activity relating to casualty, environmental and other reserves is as follows:
(millions of dollars) | Casualty Reserves | Separation Liabilities | Environmental Reserves | Total | ||||||||||||
Balance December 31, 1999 | $ | 435 |
| $ | 269 |
| $ | 53 |
| $ | 757 |
| ||||
Charged to Expense |
| 209 |
|
| — |
|
| — |
|
| 209 |
| ||||
Payments |
| (187 | ) |
| (12 | ) |
| (12 | ) |
| (211 | ) | ||||
Balance December 29, 2000 |
| 457 |
|
| 257 |
|
| 41 |
|
| 755 |
| ||||
Charged to Expense |
| 155 |
|
| — |
|
| 1 |
|
| 156 |
| ||||
Payments |
| (177 | ) |
| (14 | ) |
| (10 | ) |
| (201 | ) | ||||
Balance December 28, 2001 |
| 435 |
|
| 243 |
|
| 32 |
|
| 710 |
| ||||
Charged to Expense |
| 166 |
|
| — |
|
| 18 |
|
| 184 |
| ||||
Payments |
| (206 | ) |
| (33 | ) |
| (15 | ) |
| (254 | ) | ||||
Balance December 27, 2002 | $ | 395 |
| $ | 210 |
| $ | 35 |
| $ | 640 |
| ||||
-30-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 9. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued
| Casualty and Other | Separation | Environmental | ||||||||||||||
| (Dollars in Millions) | Reserves | Liabilities | Reserves | Total | ||||||||||||
| Balance December 28, 2001 | $ | 435 | $ | 243 | $ | 32 | $ | 710 | ||||||||
| Charged to Expense | 166 | — | 18 | 184 | ||||||||||||
| Payments | (206 | ) | (33 | ) | (15 | ) | (254 | ) | ||||||||
| Balance December 27, 2002 | $ | 395 | $ | 210 | $ | 35 | $ | 640 | ||||||||
| Charged to Expense | 228 | 35 | 23 | 286 | ||||||||||||
| Changes in Estimate | 229 | (22 | ) | — | 207 | |||||||||||
| Payments | (207 | ) | (28 | ) | (13 | ) | (248 | ) | ||||||||
| Balance December 26, 2003 | $ | 645 | $ | 195 | $ | 45 | $ | 885 | ||||||||
| Charged to Expense | 242 | 11 | 29 | 282 | ||||||||||||
| Conrail spin-off transaction | — | — | 6 | 6 | ||||||||||||
| Payments/Adjustments | (257 | ) | (55 | ) | (21 | ) | (333 | ) | ||||||||
| Balance December 31, 2004 | $ | 630 | $ | 151 | $ | 59 | $ | 840 | ||||||||
Reserve balances are as follows:
| December 31, | December 26, | |||||||
| (Dollars in Millions) | 2004 | 2003 | ||||||
| Current Reserves: | ||||||||
| Casualty | $ | 225 | $ | 142 | ||||
| Separation | 16 | 39 | ||||||
| Environmental | 20 | 30 | ||||||
| Total Current Reserves | $ | 261 | $ | 211 | ||||
| Long-term Casualty, Environmental and Other Reserves | 579 | 674 | ||||||
| Total Casualty, Environmental and Other Reserves | $ | 840 | $ | 885 | ||||
Casualty Reserves Management
(millions of dollars) | December 27, 2002 | December 28, 2001 | ||||
Current Reserves: | ||||||
Casualty | $ | 143 | $ | 148 | ||
Separation |
| 15 |
| 15 | ||
Environmental |
| 15 |
| 15 | ||
Total Current Reserves | $ | 173 | $ | 178 | ||
Long-term Casualty, Environmental and Other Reserves |
| 467 |
| 532 | ||
Total Casualty, Environmental and Other Reserves | $ | 640 | $ | 710 | ||
Casualty Reserves
Casualty reserves represent accruals for the uninsured portion of personal injury and occupational injury (asbestos, carpal tunnel, etc.) and accidentclaims.
33
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 10. | Casualty, Environmental and Other Reserves, Continued |
Personal Injury
In 2003, CSXT retained 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. These reserves are recorded upon the first reporting of a claim, and estimates are updated as information develops. The amount of liability accruedThis 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. In conjunction with the change in estimate during the third quarter of 2003, the Company recorded a charge of $26 million for personal injury liabilities. Reserves for personal injury claims are $272 million and $253 million at December 31, 2004 and December 26, 2003, 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 financial position or liquidity. However, should a number of these items occur in the same period, it could have a material adverse effect on the results of operations 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
The Company is party to a number of occupational claims by employees exposed to asbestos in the workplace. The heaviest exposure for CSXT employees was due to 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.
Asbestos 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.
In 2003, 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 objective of futurethe assessment was to determine the number of estimated incurred but not reported asbestos claims development based on current trends and historical data.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.
34
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 10. | Casualty, Environmental and Other Reserves, Continued |
The Company, believeswith the assistance of the third party, first determined its exposed population from which it has recorded liabilities in sufficient amountswas able to cover all identified claims and estimatesderive the estimated number of incurred but not reported personal injury and accident claims. Unreported occupational injuriesThe estimated average cost per claim was then determined utilizing recent actual average cost per claim data. Based on the assessment, in September 2003 the Company recorded an undiscounted $138 million pre-tax charge for unasserted asbestos claims. Key elements of the assessment included the following:
| • | Because CSXT did not have detailed employment records in order to compute the population of potentially exposed employees, it computed an estimate using a ratio of Company employee data to national employment for select years starting in 1938-2001 using railroad industry historical census data. | |||
| • | The projected incidence of disease was estimated based on epidemiological studies using employees’ age, duration and intensity of exposure while employed. | |||
| • | An estimate of the future anticipated claims filing rate by type of disease, non-malignant, cancer and mesothelioma, was computed using the Company’s average historical claim filing rates for the period 2001-2002 calibration period (i.e. the years management felt was representative of future filing rates). | |||
| • | An estimate of the future anticipated dismissal rate by type of claim was computed using the Company’s historical average dismissal rates observed in 2001-2003. | |||
| • | An estimate of the future anticipated settlement by type of disease was computed using the Company’s historical average of dollars paid per claim for pending and future claims using the average settlement by type of incidence observed during 2001-2003. | |||
From these assumptions CSXT projected the incidence of each type of disease to the estimated population to arrive at an estimate of the total number of employees that could potentially assert a claim. Historical claim filing rates were applied for each type of disease to the total number of employees that could potentially assert a claim to determine the total number of anticipated claim filings by disease type. Historical dismissal rates, which represent claims that are not subjectclosed without payment, were deducted to reasonable estimation, thus no provision is madecalculate the number of future claims by disease type that would likely require payment by the Company. Finally, the number of such claims was multiplied by the average settlement value to estimate CSXT’s future liability for incurred but not reported occupational injuries.asbestos claims.
The estimated future filing rates and estimated average claim values are the most sensitive assumptions for this reserve. Asbestos claim filings are typically sporadic and may include large batches of claims solicited by law firms. To reflect these factors, CSXT used a two-year calibration period during its initial assessment because the Company believed it would be most representative of its future claim experience. In addition, for non-malignant claims, the number of future claims to be filed against CSXT declines at a rate consistent with both mortality and age as there is a decreasing propensity to file a claim as the population ages. CSXT believes the average claim values by type of disease from the historical period 2001-2002 are most representative of future claim values. Non-malignant claims, which represent approximately 90% of the total number and 91% of the cost of estimated future asbestos claims, were valued by age of the projected claimants. Historically, the ultimate settlement value of these types of claims is most sensitive to the age of the claimant. A 10% increase or decrease in either the forecasted number of incurred but not reported claims or the average claim values would result in an approximate $14 million increase or decrease in the liability recorded for unasserted asbestos claims.
In the fourth quarter of 2004, management updated their assessment of the unasserted liability exposure with the assistance of the third party specialists. In 2004, individual asbestos claims continued to be sporadic and proved to be submitted at a low rate for the year. In further review of the data, the bulk claims filed by the law firms appear to be filed against the Company every other year. As a result, management reassessed the calibration period to a 4-year average (2000-2004) to capture the most recent filing experience within the context of the bulk law firm filings.
35
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 10. | Casualty, Environmental and Other Reserves, Continued |
Separation Liability
Separation liabilities at December 27, 2002 relate to productivity charges recorded in 1991 and 1992 to provide forCSXT will obtain semi-annual updates of the estimated costsstudy. On a quarterly basis, CSXT will monitor actual experience against the number of implementing workforce reductions, improvements in productivity and other cost reductions. The remaining liabilities are expectedforecasted claims to be paid outreceived and expected claim payments. Adjustments to our estimates will be recorded quarterly if necessary. More periodic updates to the study will occur if trends necessitate a change. At December 31, 2004, the Company had recorded undiscounted liabilities of $199 million for asbestos-related claims. Of the amount recorded, $131 million is related to incurred but not reported claims while $68 million is related to asserted claims. As of December 26, 2003, the Company had recorded liabilities of $233 million for asbestos-related claims. Current liabilities include $37 million and $20 million of asbestos-related claims as of December 31, 2004 and December 26, 2003, respectively. Defense and processing costs, which historically have been and are anticipated in the future to be insignificant, are not included in the recorded liability. The Company is presently self-insured for asbestos-related claims.
Other Occupational
In the third quarter of 2003, the Company changed its estimate of occupational reserves to include an estimate of incurred but not reported claims for other occupational injuries as well as asbestos as noted above. The Company engaged a third party specialist to assist in projecting the number of other occupational injury claims to be received over the next 15seven years and the related costs. Based on this analysis, the Company established reserves for the probable and reasonably estimable other occupational injury liabilities. In the third quarter of 2003, the Company recorded an undiscounted $65 million pre-tax charge for incurred but not reported other occupational claims. Similar to 20 years.the asbestos liability estimation process, the key elements of the assessment included the following:
| • | An estimate of the potentially exposed population for other occupational diseases was calculated by projecting active versus retired work force from 2002 to 2010 using a growth rate projection for overall railroad employment made by the Railroad Retirement Board in its June 2003 report. | |||
| • | An estimate of the future anticipated claims filing rate by type of injury, employee type, and active versus retired employee was computed using the Company’s average historical claim filing rates for the calibration period 2002-2003 for all diseases except hearing loss. Because the filing rate for hearing loss claims has been decreasing since 1998, the latest year filing of 2003 was used. These calibration periods are the time periods in which management felt was representative of future filing rates. An estimate was made to forecast future claims by using the filing rates by disease and the active and retired CSXT population each year. | |||
| • | An estimate of the future anticipated settlement by type of injury was computed using the Company’s historical average of dollars paid per claim for pending and future claims using the average settlement by type of injury observed during 2001-2003. | |||
At December 31, 2004, the Company had recorded undiscounted liabilities of $99 million for other occupational-related claims. Of the amount recorded, $56 million is related to incurred but not reported claims while $43 million is related to asserted claims. As of December 26, 2003, the Company had recorded undiscounted liabilities of $99 million for other occupational-related claims. Current liabilities include $18 million and $4 million of other occupational-related claims as of December 31, 2004 and December 26, 2003, respectively. Defense and processing costs, which historically have been and are anticipated in the future to be insignificant, are not included in the recorded liability. The Company is presently self-insured for other occupational-related claims.
36
EnvironmentalCSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 10. | Casualty, Environmental and Other Reserves, Continued |
A summary of existing asbestos and other occupational claims activity is as follows:
| Fiscal Year Ended | Fiscal Year Ended | |||||||
| December 31, 2004 | December 26, 2003 | |||||||
| Asserted Claims: | ||||||||
| Open Claims — Beginning of Period | 7,395 | 8,788 | ||||||
| New Claims Filed | 909 | 2,305 | ||||||
| Claims Settled | (2,662 | ) | (3,338 | ) | ||||
| Claims Dismissed | (294 | ) | (360 | ) | ||||
| Open Claims — End of Period | 5,348 | 7,395 | ||||||
The amounts recorded by CSXT for the occupational liability were 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.
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 94252 environmentally impaired sites, thatmany of which are, or may be, subject to remedial action under the Federal Superfund Statutestatute (“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. Such proceedings arising under
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 orlaw, as well as similar state statutes can involve numerous other waste generatorslaws that may impose joint and disposal companiesseveral liability for cleanup and seekenforcement costs on current and former owners and operators of a site without regard to allocatefault or recover costs associated with site investigation and cleanup,the legality of the 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.
-31-
CSX TRANSPORTATION INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 9. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued
CSXT is involved in a number of administrative and judicial proceedings and other clean-up efforts at approximately 230 sites, which include the 94 Superfund sites noted previously where it is participating in the study or clean-up of alleged environmental contamination. At least once eacha 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 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 PRPs at the location.
identified. Based uponon 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 December 27, 200231, 2004 and December 28, 2001,26, 2003, were $35$59 million and $32$45 million, respectively. These recorded liabilities, which are undiscounted, include amounts representing CSXT’s estimate of unasserted claims, which CSXT believes to be immaterial. AThe liability has been accrued forincludes future costs offor 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 December 27, 2002 environmental liability is expected to be paid out over the next seven years, funded by cash generated from operations.
37
CSX TRANSPORTATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 10. | Casualty, Environmental and Other Reserves, Continued |
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. However, based onBased 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.
-32-
CSX TRANSPORTATION INC. AND SUBSIDIARIESSeparation Liability
Separation liabilities at December 31, 2004, and December 26, 2003, include productivity charges recorded in 1991, 1992, 2003 and 2004 to provide for the estimated costs of implementing workforce reductions, improvements in productivity 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 through general corporate funds under the Company’s management restructuring programs. (See Note 3, Management Restructuring.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
NOTE 10. LONG-TERM DEBT
| NOTE 11. | Long-Term Debt |
Debt is as follows:
(millions of dollars) | Maturity | Average Interest Rates at December 27, 2002 | December 27, 2002 | December 28, 2001 | ||||||
Equipment Obligations | 2003-2015 | 7.1% | $ | 855 | $ | 950 | ||||
Capital Leases | 2003-2009 | 8.2% |
| 125 |
| 147 | ||||
Mortgage Bonds | 2003 | 3.2% |
| 55 |
| 55 | ||||
Other Obligations | 2007-2021 | 6.2% |
| 51 |
| 51 | ||||
Total |
| 1,086 |
| 1,203 | ||||||
Less Debt Due Within One Year |
| 213 |
| 170 | ||||||
Total Long-Term Debt | $ | 873 | $ | 1,033 | ||||||
| Average Interest | ||||||||||||||||
| Rates at | ||||||||||||||||
| (Dollars in Millions) | Maturity | December 31, 2004 | December 31, 2004 | December 26, 2003 | ||||||||||||
| Equipment Obligations | 2005-2015 | 7.0 | % | $ | 651 | $ | 704 | |||||||||
| Capital Leases | 2005-2015 | 8.0 | % | 126 | 58 | |||||||||||
| Other Obligations | 2007-2021 | 6.4 | % | 486 | 50 | |||||||||||
| Total Current Maturities and Long Term Debt | 1,263 | 812 | ||||||||||||||
| Less Debt Due Within One Year | (121 | ) | (102 | ) | ||||||||||||
| Total Long Term Debt | $ | 1,142 | $ | 710 | ||||||||||||
Long-term debt maturities are as follows:
(millions of dollars) | |||
2003 | $ | 213 | |
2004 |
| 113 | |
2005 |
| 111 | |
2006 |
| 107 | |
2007 |
| 119 | |
Thereafter |
| 423 | |
Total | $ | 1,086 | |
| (Dollars in Millions) | ||||
| 2005 | $ | 121 | ||
| 2006 | 123 | |||
| 2007 | 126 | |||
| 2008 | 94 | |||
| 2009 | 77 | |||
| Thereafter | 722 | |||
| Total | $ | 1,263 | ||
Certain of CSXT’s properties are pledged as security for various long-term debt issues.
38
-33-
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
| NOTE 12. | Derivative Financial Instruments |
Fuel Hedging
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTSIn the third quarter of 2003, CSXT 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, CSXT 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:
| December 31, 2004 | ||||
| Approximate Gallons Hedged (Millions) | 359 | |||
| Average Price Per Gallon | $ | 0.81 | ||
| Swap Maturities | January 2005 - July 2006 | |||
| 2005 | 2006 | |||||||
| Estimated % of Future Fuel Purchases | ||||||||
| Hedged at December 31, 2004 | 48 | % | 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 favorably impacted fuel expense for the fiscal year ended December 31, 2004 by $63 million. Fuel hedging activity had no impact on fuel expense for the fiscal year ended December 26, 2003. Ineffectiveness, or the extent to which changes in the fair values of the fuel swaps did not offset changes in the fair values of the expected fuel purchases, was immaterial.
These instruments qualify, and are designated by management, as cash-flow hedges of variability in expected future cash flows attributable to fluctuations in fuel prices. The fair values of fuel derivative instruments are determined based upon current fair market values as quoted by third party dealers and are recorded on the Consolidated Balance Sheet with offsetting adjustments to Accumulated Other Comprehensive Income, a component of Shareholders’ Equity. Accumulated Other Comprehensive Income included a gain, net of tax of approximately $66 million and $6 million as of December 31, 2004 and December 26, 2003, respectively, related to fuel derivative instruments. Amounts are reclassified from Accumulated Other Comprehensive Income as the underlying fuel that was hedged is consumed by rail operations. Fair value adjustments are non-cash transactions and, accordingly, have no cash impact on the Consolidated Cash Flow Statements.
The Company has 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 trading under the program.
The counterparties to the fuel hedge agreements expose the Company to credit loss in the event of non-performance. The Company does not anticipate non-performance by the counterparties.
| NOTE 13. | Fair Value of Financial Instruments |
Fair values of the Company’s financial instruments are estimated by reference to quoted prices from market sources and financial institutions, as well as other valuation techniques. Long-term debt is the only financial instrument of the Company with a fair valuevalues significantly different from itstheir carrying amount.amounts. At December 27, 2002,31, 2004, the fair value of long-term debt, including current maturities, was $1.2$1.4 billion, compared with a carrying amount of $1.1 billion.$1.3 million. At December 28, 2001,26, 2003, the fair value of long-term debt, including current maturities, was $1.3 billion,$904 million, compared with a carrying amount of $1.2 billion.$812 million. The fair value of long-term debt has been estimated using discounted cash flow analyses based upon the Company’s current incremental borrowing rates for similar types of financing arrangements. The Company’s fuel hedging agreements at December 31, 2004 and December 26, 2003 had a fair value of $117 million and $9 million, respectively.
39
NOTE 12. EMPLOYEE BENEFIT PLANS
CSX TRANSPORTATION, INC. Pension and Other Postretirement Benefit Plans CSXT, in conjunction with CSX, In addition to the defined benefit pension plans, CSXT participates with CSX to sponsor one medical plan and As permitted by SFAS 87, the Company has elected to use a plan fiscal year of October 1 through September 30 to actuarially value its pension and Other Plans CSXT maintains savings plans for virtually all full-time salaried employees and certain employees covered by collective bargaining agreements of CSXT and subsidiary companies. Expense associated with these plans was $15 million, $13 million and $12 million for 2004, 2003 and 2002, Under collective bargaining agreements, the Company participates in a number of union-sponsored, multi-employer benefit plans. Payments to these plans are made as part of aggregate assessments generally based on number of employees covered, hours worked, tonnage moved or a combination thereof. Total contributions of Certain officers and key employees of CSXT participate in stock purchase, performance and award plans of CSX. CSXT is allocated its share of any cost to participate in these plans. 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 14. Employee Benefit Plans and its subsidiaries, sponsors defined benefit pension plans principally for salaried employees.non-contract personnel. The plans provide eligible employees with retirement benefits based principallypredominately on years of service and compensation rates near retirement. CSX allocates to CSXT a portion of the pension expense or benefit for the CSX pension plans based on CSXT’s relative level of participation. The allocated expense from the various CSX pension plans amounted to creditsexpense of $16 million and $1 million in 2004 and 2003, respectively, and a credit of $4 million in 2002, $3 million in 2001 and $2 million in 2000.2002.other affiliates in two plansone life insurance plan that provide medical and life insurance benefits to most full-time salaried, non-contract employees hired prior to January 1, 2003, upon their retirement.retirement if certain eligibility requirements are met. The postretirement medical plan isplans are contributory (partially funded by retiree)retirees), with retiree contributions adjusted annually. The life insurance plan is non-contributory. CSX allocates to CSXT a portion of the expense for these plans based on CSXT’s relative level of participation. The allocated expense amounted to $40 million in 2004, $36 million in 2003, and $41 million in 2002, $31 million in 2001,2002.$22 million in 2000.postretirement plans as it provides for more timely analysis. The Company engages independent, external actuaries to compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company selects as of the beginning of the plan year.Other Plans$13 million for 2001, and $14 million for 2000.respectively.$312$368 million, $285$360 million, and $242$312 million respectively, were made to these plans in 2004, 2003 and 2002, 2001 and 2000.respectively.-34-
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
| NOTE 15. | Commitments and Contingencies |
Lease Commitments
NOTE 13. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has various equipment leases with other parties under agreements with terms of up to 2942 years. Non-cancelable, long-term leases generally include provisions for maintenance, options to purchase at fair value and options to extend the terms. Lease arrangements allow the Company to efficiently gain the use of equipment which it does not wish to own. At December 27, 2002,31, 2004, minimum building equipment rentals under these operating leases are as follows:
| Operating | Sublease | Net Lease | ||||||||||
| (Dollars in Millions) | Leases | Income | Commitments | |||||||||
| 2005 | $ | 174 | $ | 22 | $ | 152 | ||||||
| 2006 | 144 | 21 | 123 | |||||||||
| 2007 | 136 | 21 | 115 | |||||||||
| 2008 | 116 | 19 | 97 | |||||||||
| 2009 | 93 | 14 | 79 | |||||||||
| Thereafter | 340 | 16 | 324 | |||||||||
| Total | $ | 1,003 | $ | 113 | $ | 890 | ||||||
(millions of dollars) | Operating Leases | Sublease Income | Net Lease Commitments | ||||||
2003 | $ | 148 | $ | 15 | $ | 133 | |||
2004 |
| 144 |
| 15 |
| 129 | |||
2005 |
| 141 |
| 15 |
| 126 | |||
2006 |
| 117 |
| 15 |
| 102 | |||
2007 |
| 118 |
| 16 |
| 102 | |||
Thereafter |
| 470 |
| 19 |
| 451 | |||
Total | $ | 1,138 | $ | 95 | $ | 1,043 | |||
Rent expense for operating leases totaled $413 million in 2004, $404 million in 2003, and $406 million in 2002, $413 million in 2001, and $517 million in 2000.2002. These amounts include net daily rental charges on railroad operating equipment ofaggregating $304 million, $296 million and $294 million $289 millionin 2004, 2003, and $369 million in 2002, 2001, and 2000, respectively, which are not long-term commitments. In addition to these commitments, the Company also has agreements covering routes and equipment leased from Conrail. See Note 2, Investment In and Integrated Operations with Conrail, for a description of these commitments.
Purchase Commitments
The Company has a commitment under a long-term maintenance program for approximately 40% of its fleet of locomotives. The agreement expires in 2026 and totals $2.8approximates $5.8 billion. Minimum payments under this agreement are as follows:
(millions of dollars) | Minimum Payments | ||
2003 | $ | 130 | |
2004 |
| 132 | |
2005 |
| 138 | |
2006 |
| 166 | |
2007 |
| 171 | |
Thereafter |
| 2,036 | |
Total | $ | 2,773 | |
The long-term maintenance program assuresis intended to provide CSXT access to efficient, high-quality locomotive maintenance services at settledfixed price levels through the term of the program. Under thisthe program, CSXCSXT paid $124$151 million, $126$130 million and $121$124 million in fiscal years 2004, 2003 and 2002, 2001 and 2000, respectively. Minimum payments are as follows:
| (Dollars in Millions) | Minimum Payments | |||
| 2005 | $ | 167 | ||
| 2006 | 216 | |||
| 2007 | 224 | |||
| 2008 | 232 | |||
| 2009 | 218 | |||
| Thereafter | 4,733 | |||
| Total | $ | 5,790 | ||
41
-35-
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
| NOTE 15. | Commitments and Contingencies, Continued |
STB Proceeding
In 2001 Duke Energy Corporation (“Duke”) filed a complaint before the STB alleging that certain CSXT common carrier coal rates were 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 could take several years to resolve. An unfavorable outcome to this complaint would not have a material effect on the Company’s financial position.
NOTE 13. COMMITMENTS AND CONTINGENCIES, ContinuedSelf-Insurance
Long-term Operating Agreements
In addition to its contractual arrangement to operate specified portions of Conrail’s rail system, CSXT has various long-term railroad operating agreements that allow for exclusive operating rights over various railroad lines. Under these agreements, CSXT is obligated to pay usage fees of approximately $10 million annually. The terms of these agreements range from 30 to 40 years.
Self-Insurance
The Company 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. ReasonableSpecified levels of risk ($35(up to $35 million for property and $25 million for liability per occurrence) are also retained on a self-insurance basis. Using a combination of third party and self-insurance allows the Company to realize savings on insurance premium costs and preserves flexibility in achieving the best insurance solutions for various categories of risks.
Contract Settlement
Contract Settlement
In July 2002, the Company received $44 million as the first of two payments to settle a contract dispute. During 2002, the Company recognized approximately $7 million of thisthe first payment in other income as this amount related to prior periods. The remaining $37 million will be recognized ratably over the contract period, which ends in 2020.2020. The second payment of $23 million was received on January 2,in 2003 and will be recognized over the contract period, which ends in 2020. The results of this settlement will provide approximately $3 million in annual pretax earnings through 2020.
Other Legal Proceedings
ACSXT is involved in routine litigation incidental to its business and is a party to a number of other legal actions are pending against CSXT in whichand claims, are made in substantial amounts.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 ultimate resultsfinal outcome of these legal actionsmatters 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 does not currently expect that the resolutionnone of these mattersitems will have a material adverse effect on CSXT’s consolidated financial position,the results of operations, financial position or cash flows.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 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.
42
For information regarding environmental proceedings see Note 9, Casualty, Environmental and Other Reserves.
-36-
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 14. QUARTERLY DATA (Unaudited)(a)
Quarter | ||||||||||||
(millions of dollars) | 1st | 2nd | 3rd | 4th(b) | ||||||||
2002 | ||||||||||||
Operating Revenue | $ | 1,486 | $ | 1,538 | $ | 1,473 | $ | 1,506 | ||||
Operating Income | $ | 89 | $ | 148 | $ | 167 | $ | 173 | ||||
Net Earnings | $ | 47 | $ | 64 | $ | 97 | $ | 88 | ||||
2001 | ||||||||||||
Operating Revenue | $ | 1,532 | $ | 1,556 | $ | 1,495 | $ | 1,499 | ||||
Operating Income | $ | 98 | $ | 152 | $ | 124 | $ | 85 | ||||
Net Earnings | $ | 31 | $ | 84 | $ | 57 | $ | 31 | ||||
| NOTE 16. | Quarterly Data (Unaudited) |
| Quarter(a) | ||||||||||||||||
| (Dollars in Millions) | 1st | 2nd | 3rd | 4th | ||||||||||||
2004 | ||||||||||||||||
| Operating Revenue | $ | 1,605 | $ | 1,672 | $ | 1,616 | $ | 1,801 | ||||||||
| Operating Income | $ | 85 | $ | 187 | $ | 152 | $ | 178 | ||||||||
| Net Earnings | $ | 38 | $ | 97 | $ | 84 | $ | 111 | ||||||||
2003 | ||||||||||||||||
| Operating Revenue | $ | 1,531 | $ | 1,573 | $ | 1,510 | $ | 1,568 | ||||||||
| Operating Income (Loss)(b) | $ | 77 | $ | 173 | $ | (111 | ) | $ | 150 | |||||||
| Net Earnings (Loss)(b) | $ | 73 | $ | 93 | $ | (68 | ) | $ | 98 | |||||||
| (a) | Periods presented are 13-week quarters |
| (b) | During the 3rd quarter of 2003, CSX recorded a |
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
-37-ITEM 9A. Controls and Procedures
As of December 31, 2004, under the supervision and with the participation of the Company’s Principal Executive Officer and the Principal Financial Officer, management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Principal Executive Officer and the Principal Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2004. There were no changes in the Company’s internal controls over financial reporting during the fourth quarter of 2004 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
ITEM 9B. Other Information
None.
43
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
ITEM 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant
Information omitted in accordance with General Instruction I(2)(c).
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONSITEM 11. Executive Compensation
Information omitted in accordance with General Instruction I(2)(c).
RESULTS OF OPERATIONSITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information omitted in accordance with General Instruction I(2)(c).
Operating RevenueITEM 13. Certain Relationships and Related Transactions
Information omitted in accordance with General Instruction I(2)(c).
CSXT categorizes revenuesITEM 14. Principal Accounting Fees and Services
Information omitted in three main areas:accordance with General Instruction I(2)(c).
44
ITEM 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
See Index to Consolidated Financial Statements on page 11.
2. Financial Statement Schedules
The information required by Schedule II is included in Note 9, “Casualty, Environmental and Other Reserves,” to the consolidated financial statements. All other financial statement schedules are not applicable.
3. Exhibits
| (2.1) | ||
| (3.1) | Articles of Incorporation, as amended (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 29, 1995, filed with the Commission on March 8, 1996) | |
| (3.2) | By-laws of the Registrant, as amended (incorporated in by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 26, 2003, filed with the Commission on March 10, 2004) | |
| (4.1)* | Indenture, dated August 27, 2004, between NYC Newco Inc., as Issuer, the Registrant as Guarantor and the Bank of New York as Trustee | |
| (4.2) | Form of 9 3/4% Global Note due 2020 (incorporated herein by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-114796), filed with the Commission on July 21, 2004) | |
| (4.3) | Form of 7 7/8% Global Note due 2043 (incorporated herein by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-4 (Registration No. 333-114796), filed with the Commission on July 21, 2004) |
Pursuant to Regulation S-K, Item 601 (b)(4)(iii), instruments that define the rights of holders of the Registrant’s long-term debt securities, where the long-term debt securities authorized under each instrument do not exceed 10% of the Registrants’ total assets, have been omitted and will be furnished to the Commission upon request.
| (10.1) |
45
| (10.2) |
| (10.3) |
| (10.4) |
| (10.5) |
| (10.6) |
| (10.7) |
Overall rail revenues were down $79 million to $6.0 billion in 2002, with increases in merchandise and automotive revenues being offset by lower coal revenues. CSXT’s pricing programs and product mix helped overcome a 3% decrease in carloads in 2002.
Merchandise Revenue
Overall merchandise revenues were up 1%, or $47 million in 2002 over 2001. Improvements in phosphates and fertilizers, chemicals, emerging markets, metals and paper and forest products more than offset decreases in minerals, agricultural products and food and consumer products. Pricing programs and favorable mix helped the Company offset a small decrease in merchandise carloads in 2002 as compared to 2001.
Automotive Revenue
Automotive revenues improved 6%, or $51 million in 2002 as a result of yield improvement driven by favorable mix and extended linehauls. Year-over-year volume increases were driven by higher light truck production levels and aggressive manufacturer incentives that stimulated automobile sales during 2002.
Coal, Coke and Iron Ore Revenue
Coal revenues had a significant impact on 2002 financial results. Coal revenue was down 9%, or $143 million from 2001’s strong performance due to reduced volumes. Export movements were down significantly as a result of the reduced competitive standing of U.S. coal in the international market. Also, metallurgical and industrial markets were down in the second half of 2002.
Other Revenue
Other revenue decreased $35 million in 2002 as compared to 2001 primarily because there were lower fuel surcharges billed to customers.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, Continued
Carload and revenue data by service group and commodity is as follows:
Carloads | Revenue | ||||||||||||||
(Thousands) | (Millions of Dollars) | ||||||||||||||
2002 | 2001 | 2000 | 2002 | 2001 | 2000 | ||||||||||
Merchandise | |||||||||||||||
Phosphates and Fertilizer | 463 | 441 | 486 | $ | 324 | $ | 306 | $ | 316 | ||||||
Metals | 319 | 319 | 344 |
| 401 |
| 395 |
| 407 | ||||||
Food and Consumer | 162 | 163 | 157 |
| 217 |
| 218 |
| 206 | ||||||
Paper and Forest | 477 | 478 | 523 |
| 637 |
| 633 |
| 657 | ||||||
Agricultural | 358 | 372 | 361 |
| 489 |
| 501 |
| 483 | ||||||
Chemicals | 500 | 499 | 523 |
| 907 |
| 883 |
| 922 | ||||||
Minerals | 88 | 92 | 101 |
| 135 |
| 140 |
| 154 | ||||||
Emerging Markets | 424 | 435 | 430 |
| 397 |
| 384 |
| 368 | ||||||
Total Merchandise | 2,791 | 2,799 | 2,925 |
| 3,507 |
| 3,460 |
| 3,513 | ||||||
Automotive | 538 | 516 | 586 |
| 845 |
| 794 |
| 869 | ||||||
Coal, Coke and Iron Ore | |||||||||||||||
Coal | 1,573 | 1,722 | 1,660 |
| 1,528 |
| 1,671 |
| 1,546 | ||||||
Coke | 34 | 39 | 46 |
| 49 |
| 46 |
| 47 | ||||||
Iron Ore | 36 | 38 | 49 |
| 20 |
| 22 |
| 30 | ||||||
Total Coal, Coke and Iron Ore | 1,643 | 1,799 | 1,755 |
| 1,597 |
| 1,739 |
| 1,623 | ||||||
Other | — | — | — |
| 54 |
| 89 |
| 70 | ||||||
Total | 4,972 | 5,114 | 5,266 | $ | 6,003 | $ | 6,082 | $ | 6,075 | ||||||
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, Continued
Operating Expense
Total operating expenses decreased $197 million, or 4% in 2002 as compared to 2001. Cost reductions in most expense categories were somewhat offset by increases in depreciation. Also, 2001 included $60 million relating to the New Orleans litigation settlement.
Fuel costs decreased $76 million in 2002, of which $69 million is attributable to lower fuel prices. The net impact on operating income of reduced fuel price was $44 million since $25 million of fuel surcharge revenue was discontinued.
Labor and fringe costs decreased $21 million year-over-year including savings from reductions in overall employment. These savings were offset by increased labor costs relating to cost of living wage increases. Employee count was approximately 950 lower at the end of 2002 as compared to 2001.
Building and equipment costs were down $7 million mainly due to continued reductions in car hire, as the railroad took cars offline and ran more efficiently.
Conrail operating fees, rents and services decreased $7 million in 2002, compared to 2001. Decreased costs in operating the shared asset areas, tax settlements, efficiency improvements and adjustments to reflect lower reserve requirements for car hire, overcharges, interline and other claims all reduced this expense.
Materials, supplies and other costs were down $48 million in 2002 as compared to 2001, due to reduced transportation costs, fewer accidents as a result of vigorous safety initiatives and adjustments to estimated state and local tax liabilities to reflect actual assessments. These decreases were offset by higher legal fees and maintenance costs, and $40 million in favorable insurance settlements received in 2001 that were not repeated in 2002.
Depreciation expense increased $21 million compared to 2001, as a result of a higher depreciable asset base.
Operating Income
Operating income increased by $118 million to $577 million in 2002 as compared to 2001, due to operating expense decreases noted previously and the New Orleans litigation provision, which adversely affected 2001 operating income. Excluding the 2001 charge for the New Orleans litigation provision, operating income was up $58 million or 11% for the year.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS, CONTINUED
MARKET RISK
The Company is subject to risk relating to changes in the price of diesel fuel. At the end of 2002, the Company had not entered into any commitments for forward fuel purchases. The Company’s average annual fuel consumption is approximately 570 million gallons. A one-cent change in the price per gallon of fuel would impact fuel expense by approximately $6 million.
INTEGRATED RAIL OPERATIONS WITH CONRAIL
Background
CSX and Norfolk Southern Corporation (“Norfolk Southern”) completed the acquisition of Conrail Inc. (“Conrail”) in May 1997. Conrail owns the primary freight railroad system serving the Northeastern United States, and its rail network extends throughout several Midwestern states and into Canada. CSX and Norfolk Southern, through a jointly owned acquisition entity, hold ownership interests in Conrail of 42% and 58%, respectively, and voting interests of 50% each. CSX and Norfolk Southern operate over allocated portions of the Conrail lines.
CSXT and Norfolk Southern Railway Company (“Norfolk Southern Railway”), the rail subsidiary of Norfolk Southern, operate their respective portions of the Conrail system pursuant to various operating agreements. Under these agreements, the railroads pay operating fees to Conrail for the use of right-of-way and rent for the use of equipment. Conrail continues to provide rail services in certain shared geographic areas (“Shared Asset Areas”) for the joint benefit of CSXT and Norfolk Southern Railway for which it is compensated on the basis of usage by the respective railroads.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS, CONTINUED
INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
Accounting and Financial Reporting Effects
CSXT’s operating revenue includes revenue from traffic previously moving on Conrail. Operating expenses reflect corresponding increases for costs incurred to handle the new traffic and operate the former Conrail lines. Operating expense includes an expense category, “Conrail Operating Fees, Rents and Services,” which reflects:
| (10.9) |
46
Conrail Operating Fees, Rents and Services is as follows:
Fiscal Years Ended | |||||||||
(millions of dollars) | 2002 | 2001 | 2000 | ||||||
Operating Fees, Rents and Services | $ | 346 | $ | 353 | $ | 383 | |||
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of certain revenues and expenses during the reporting period. Actual results may differ from those estimates. Significant estimates using management judgment are made for the following areas:
| (10.10) | ||
| (10.11) | Shared Assets Area Operating Agreement for Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Corporation, with exhibit thereto (incorporated herein by reference to Exhibit 10.7 to the Registrant’s Form 8-K filed with the Commission on June 11, 1999) | |
| (10.12) | Monongahela Usage Agreement, dated as of June 1, 1999, by and among CSX Transportation, Inc., Norfolk Southern Railway Company, Pennsylvania Lines LLC and New York Central Lines LLC, with exhibit thereto (incorporated herein by reference to Exhibit 10.8 to the Registrant’s Form 8-K filed with the Commission on June 11, 1999) | |
| (21) | Omitted in accordance with General Instruction I(2)(c) | |
| (24)* | Powers of Attorney | |
| (31.1)* | Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| (31.2)* | Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| (32.1)* | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| (32.2)* | Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| * | Filed Herewith |
47
CSX TRANSPORTATION, INC.
PART IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 8th day of March, 2005.
| /s/ CAROLYN T. SIZEMORE | ||
| Carolyn T. Sizemore | ||
| (Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Signatures |
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS, CONTINUED
CRITICAL ACCOUNTING ESTIMATES, Continued
1. Casualty, legal and environmental reserves
Casualty Reserve Management
Casualty reserves represent accruals for the uninsured portion of personal injury, occupational injury (asbestos, carpal tunnel, etc.) and accident claims. These reserves are recorded upon the first reporting of a claim, and estimates are updated as information develops. The amount of liability accrued is based on the type and severity of the claim and estimate of future claims development based on current trends and historical data. The Company believes it has recorded liabilities in sufficient amounts to cover all identified claims and estimates of incurred but not reported personal injury and accident claims. Unreported occupational injuries are not subject to reasonable estimation, thus no provision is made for incurred but not reported occupational injuries.
Estimates for all of these claims are subject to significant uncertainty relating to the outcomes of negotiated settlements and other developments. As facts and circumstances change, the Company may have to change its estimates, and changes could have a material impact on the Company’s financial results. The Company reviews its reserves quarterly and makes adjustments accordingly. Adverse verdicts, catastrophic accidents and legal settlements are events that have caused the Company to revise estimates in the past. Occupational injury, personal injury and accident liabilities amount to $395 million and $435 million at December 27, 2002 and December 28, 2001, respectively. The net decrease of this liability in 2002 is the result of cash payments being greater than expense recorded.
See additional information in Note 9, Casualty, Environmental and Other Reserves.
Legal Reserves
In accordance with SFAS 5, “Accounting for Contingencies,” an accrual for a loss contingency is established if information available prior to issuance of the financial statements indicates that it is (1) probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and (2) the amount of loss can be reasonably estimated. If no accrual is made for a loss contingency because one or both of these conditions is not met, or if an exposure to loss exists in excess of the amount accrued, disclosure of the contingency is made when there is at least a reasonable possibility that a loss or an additional loss may have been incurred. The Company evaluates all exposures relating to legal liabilities on an ongoing basis and records reserves when appropriate under the guidance noted above. The Company increased a reserve in 2001 to account for the impact of the negotiated settlement of the New Orleans tank car fire. This negotiation resulted in the Company recording an additional charge of $60 million pretax, $43 million after tax in 2001.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS, CONTINUED
CRITICAL ACCOUNTING ESTIMATES, Continued
Environmental Management
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”) at approximately 94 environmentally impaired sites that 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. Such proceedings arising under Superfund or similar state statutes can 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.
CSXT is involved in a number of administrative and judicial proceedings and other clean-up efforts at approximately 230 sites, which include the 94 Superfund sites noted above where it is participating in the study or clean-up of alleged environmental contamination. 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 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 PRPs at the location.
Based upon the review process, CSXT has recorded reserves to cover estimated contingent future environmental costs with respect to such sites. The recorded liabilities for estimated future environmental costs at December 27, 2002 and December 28, 2001, were $35 million and $32 million, respectively. These liabilities, which are undiscounted, include amounts representing CSXT’s estimate of unasserted claims, which CSXT believes to be immaterial. A liability has been accrued for future costs of 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 December 27, 2002 environmental liability is expected to be paid out over the next 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. However, based on information currently available 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 will not materially affect its overall results of operations and financial condition. The Company has not had any material changes in estimates relating to environmental reserves in 2002, 2001 or 2000 and has spent $18 million, $1 million and no amount, respectively, in these years.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS, CONTINUED
CRITICAL ACCOUNTING ESTIMATES, Continued
2. Establishing depreciation policies for its assets under the group-life method
The Company accounts for its rail assets, including main-line track, locomotives and freight cars, using the group-life method. These assets comprise the majority of the Company’s total fixed assets at December 27, 2002. Under the group-life method, the useful lives of rail assets are determined by the performance of a life-study which includes:
Michael J. Ward |
Oscar Munoz |
Clarence W. Gooden |
Carolyn T. Sizemore |
The results of the life study process determine the service lives for each asset group. These studies are conducted by a third party expert and analyzed by the Company’s management. Changes in asset lives due to the results of the life studies could significantly impact future periods depreciation expense and thus the Company’s results of operations. Events that could cause the Company to change its estimates relating to the lives of its asset groups could be changes in historical results, technological improvements and changes in specific assets. The Company is currently completing life studies on road, track and equipment and will reflect the results in its 2003 financial statements.
3. Pension and postretirement medical plan accounting
CSXT is allocated expense relating to pension and postretirement medical plans sponsored by its parent, CSX Corporation. The accounting for these plans at the CSX Corporation level is subject to the guidance provided in SFAS No. 87, “Employers Accounting for Pensions,” and SFAS No. 106, “Employers Accounting for Postretirement Benefits Other than Pensions.” Both of these statements require CSX to make certain assumptions relating to the following:
Ellen M. Fitzsimmons | Attorney-in-Fact |
48
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS, CONTINUED
CRITICAL ACCOUNTING ESTIMATES, Continued
All of these assumptions and estimates can have a significant impact on CSX’s accounting for these plans and the amount of expense recorded in a reporting period.
Pension Benefits | Postretirement Benefits | |||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||
Expected long-term return on plan assets: | ||||||||||||
Benefit cost for plan year | 9.50 | % | 9.50 | % | n/a |
| n/a |
| ||||
Benefit obligation at end of plan year | 8.90 | % | 9.50 | % | n/a |
| n/a |
| ||||
Discount rates: | ||||||||||||
Benefit cost for plan year | 7.25 | % | 7.75 | % | 7.25 | % | 7.75 | % | ||||
Benefit obligation at end of plan year | 6.50 | % | 7.25 | % | 5.50 | % | 7.25 | % | ||||
Salary scale inflation | 3.30 | % | 4.50 | % | 3.30 | % | 4.50 | % | ||||
For further discussion of CSX’s pension and postretirement assumptions, see CSX Corporation’s Form 10-K for the year ended December 27, 2002.
NEW ACCOUNTING PRONOUNCEMENTS
In 2002, Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” was issued. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. CSXT is required to adopt this statement for fiscal year 2003. Under the group-life method, the Company accrued removal costs as part of its depreciation expense. This effectively resulted in establishing a liability in accumulated depreciation in excess of any salvage value for cross ties. The Company is assessing the effect of adopting this statement and expects that it will record a cumulative effect of accounting change to remove any such liability accrued to date in the first quarter of 2003. On an ongoing basis, depreciation expense will be reduced, while material supplies and other expenses will be increased. The change in operating expense is expected to be immaterial.
FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act with respect to, among other items: projections and estimates of earnings, revenues, cost-savings, expenses, or other financial items; statements of management’s plans, strategies and objectives for future operations, and management’s expectations as to future performance and operations and the time by which objectives will be achieved; statements concerning proposed new products and services; and statements regarding future economic, industry or market conditions or performance. Forward-looking statements are typically identified by words or phrases such as “believe”, “expect”, “anticipate”, “project”, and similar expressions. Forward-looking statements speak only as of the date they are made, and 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.
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CSX TRANSPORTATION INC. AND SUBSIDIARIES
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS, CONTINUED
FORWARD LOOKING STATEMENTS, Continued
Forward-looking statements are subject to a number of risks and uncertainties, and actual performance or results could differ materially from that anticipated by these forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others: (i) the Company’s success in implementing its financial and operational initiatives, (ii) changes in domestic or international economic or business conditions, including those affecting the rail industry (such as the impact of industry competition, conditions, performance and consolidation); (iii) legislative or regulatory changes; and (iv) the outcome of claims and litigation involving or affecting the Company. Other important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified elsewhere in this Annual Report and in the Company’s other SEC reports, accessible on the SEC’s website at www.sec.gov and the Company’s website at www.csx.com.
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