incorporation or organization) Identification No.) ( ) ( ) (X) Quarters and Nine Months Ended September 28, 2007 Nine Months Ended September 28, 2007 and September 29, 2006 Item 3: Item 4: Item 1: Item 1A: Item 2: Item 3: Item 4: Item 5: Operating Revenue Operating Expense: Labor and Fringe Materials, Supplies and Other Fuel Depreciation Equipment and Other Rents Inland Transportation Gain on Insurance Recoveries (Note 7) Total Operating Expense Operating Income Other Income and Expense Other Income (Expense) - Net (Note 10) Interest Expense Earnings Earnings before Income Taxes Income Tax Expense Net Earnings Per Common Share (Note 2): Earnings Per Share: Net Earnings Earnings Per Share, Assuming Dilution: Net Earnings Average Common Shares Outstanding (Thousands) Average Common Shares Outstanding, Assuming Dilution (Thousands) Cash Dividends Paid Per Common Share ASSETS Current Assets: Cash and Cash Equivalents Short-term Investments Accounts Receivable, net of allowance for doubtful accounts of $76 and $82, respectively Materials and Supplies Deferred Income Taxes Other Current Assets Total Current Assets Properties Accumulated Depreciation Properties - Net Investment in Conrail (Note 13) Affiliates and Other Companies Other Long-term Assets Total Assets LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts Payable Labor and Fringe Benefits Payable Casualty, Environmental and Other Reserves (Note 5) Current Maturities of Long-term Debt Short-term Debt Income and Other Taxes Payable Other Current Liabilities Total Current Liabilities Casualty, Environmental and Other Reserves (Note 5) Long-term Debt Deferred Income Taxes Other Long-term Liabilities Total Liabilities Shareholders’ Equity: Common Stock, $1 Par Value Other Capital Retained Earnings (Note 4) Accumulated Other Comprehensive Loss Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity Operating Activities Net Earnings Adjustments to Reconcile Net Earnings to Net Cash Provided: Depreciation Deferred Income Taxes Gain on Insurance Recoveries (Note 7) Insurance Proceeds (Note 7) Other Operating Activities Changes in Operating Assets and Liabilities: Accounts Receivable Other Current Assets Accounts Payable Income and Other Taxes Payable Other Current Liabilities Net Cash Provided by Operating Activities Investing Activities Property Additions Insurance Proceeds (Note 7) Purchases of Short-term Investments Proceeds from Sales of Short-term Investments Other Investing Activities Net Cash Used in Investing Activities Financing Activities Short-term Debt - Net Long-term Debt Issued Long-term Debt Repaid Dividends Paid Stock Options Exercised (Note 3) Shares Repurchased (Note 3) Other Financing Activities Net Cash (Used in) Provided by Financing Activities Net Increase in Cash and Cash Equivalents Cash And Cash Equivalents Cash and Cash Equivalents at Beginning of Period Cash and Cash Equivalents at End of Period activities. corresponding period of the prior year. plans was as follows: The following table sets forth the computation of basic earnings per share and earnings per share, assuming dilution: Numerator (Millions): Net Earnings Interest Expense on Convertible Debt - Net of Tax Net Earnings, If-Converted Denominator (Thousands): Average Common Shares Outstanding Convertible Debt Stock Options Other Potentially Dilutive Common Shares Average Common Shares Outstanding, Assuming Dilution Basic Earnings Per Share Earnings Per Share, Assuming Dilution Contents Share-Based Compensation Expense Income Tax Benefit The following table provides information about stock options First Quarters Number of Stock Options Exercised exercised: CORPORATION penalties. At the end of the third quarter 2007, the Company had $26 million accrued for interest and $0 accrued for penalties. The decrease for interest is primarily related to the income tax benefit recorded as discontinued operations in the third quarter of 2007. Casualty Separation Environmental Other Total CSXT retains an independent actuarial firm to assist management in assessing the likely cost of personal injury claims and cases. An analysis is performed by the independent actuarial firm semi-annually and is reviewed by management. The methodology used by the actuary includes a development factor to reflect growth or reduction in the value of these personal injury claims. It is based largely on CSXT’s historical claims and settlement experience. Actual results may vary from estimates due to the type and severity of the injury, costs of medical treatments, and uncertainties in litigation. Other reserves include liabilities for various claims, such as longshoremen disability claims, freight claims and claims for property, automobile and general liability. These liabilities are accrued at the estimable and probable amount in accordance with SFAS 5. Contingencies, continued Guarantee of approximately Guarantee of approximately Notional Amount (Millions) Fixed Interest at March 30, 2007 at December 29, 2006 Fixed Rate Note May 1, 2007 May 1, 2032 Total/Average Variable Rate Note June 30, 2011 expense. had expired prior to that time. First Quarters Net earnings Other Comprehensive Income (Loss): Fair Value of Fuel Derivatives Other Comprehensive Income Interest Income Income (Loss) from Real Estate and Resort Operations(a) Minority Interest Miscellaneous(b) Other Income (Expense) - Net NOTE First Quarter 2007 Revenues from External Customers Segment Operating Income First Quarter 2006 Revenues from External Customers Segment Operating Income CSX made contributions of $21 million during the nine months of 2007 to its defined benefit pension plans. Additional contributions may be made based on management’s discretion. Service Cost Interest Cost Expected Return on Plan Assets Amortization of Prior Service Cost Amortization of Net Loss Net Periodic Benefit Cost Post-Retirement Benefits First Quarters Service Cost Interest Cost Amortization of Prior Service Cost Amortization of Net Loss Net Periodic Benefit Cost Conrail, and Conrail’s equity earnings are included in Materials, Supplies and Other in the Consolidated Income Statements. Balance Sheet Information: CSX Payable to Conrail Promissory Notes Payable to Conrail Subsidiary 4.40% CSX Promissory Note due October 2035 4.52% CSXT Promissory Note due March 2035 Income Statement Information: Interest Expense Related to Conrail Conrail Rents, Fees, and Services(a) marketplace that is increasingly favoring rail transportation. market. categories. Improvement (Decline) % Service Measurements Personal Injury Frequency Index(Per 200,000 man hours) FRA Train Accidents Frequency(Per million train miles) On-Time Originations On-Time Arrivals Average System Dwell Time(hours)(b) Average Total Cars-On-Line Average Velocity, All Trains(miles per hour) Average Recrews(per day) Increase/ (Decrease) Resources Route Miles Locomotives(owned and long-term leased) Freight Cars(owned and long-term leased) based on expected results through 2010, CSX before the payment of dividends. Operating Revenue Operating Expense Operating Income Other Income Interest Expense Income Tax Expense Net Earnings the effects of inflation and higher third quarter 2006 gains on insurance recoveries. income. Interest Expense 2007. matters related to former activities of the container shipping and marine service businesses. This benefit is associated with tax basis adjustments, foreign dividends and foreign tax credits from operations over a multi-year period. $.91. The principal elements of this increase are: Increase/ (Decrease) Revenue Operating Expense: Labor and Fringe Materials, Supplies and Other Fuel Depreciation Equipment and Other Rents Inland Transportation Gain on Insurance Recoveries Total Expense Operating Income Operating Ratio Chemicals Emerging Markets Forest Products Agricultural Products Metals Phosphates and Fertilizers Food and Consumer Total Merchandise Coal Coke and Iron Ore Total Coal Automotive Other Total Rail International Domestic Other Total Intermodal Total Surface Transportation For both tables, prior periods have been reclassified to conform to the current presentation. products. Revenue and revenue per unit increased due to year-over-year North American light vehicle production. affiliated businesses. Domestic– Intermodal Operating Expense operations were largely offset by significantly lower gains on insurance recoveries recognized during 2007 and the effects of inflation. Katrina, under Part I, Item 1 of this Quarterly Report on Form 10-Q. 10-Q. CORPORATION Income Taxes CSX CORPORATION The timing, method, amount of repurchase transactions and the sources of funds to effect any repurchases will be determined by the Company's management based on their evaluation of market conditions, share price and other factors. While it is not management’s intention, the program may be suspended or discontinued at any time. Total Number of Shares Purchased (a) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs Beginning first quarter balance(b) January (December 30, 2006 - January 26, 2007) February (January 27, 2007 - February 14, 2007) Remaining authority terminated New authority granted (February 15, 2007 - February 23, 2007) March (February 24, 2007 - March 30, 2007) Total/Ending Balance ITEM 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.x(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 March 30,September 28, 2007¨( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-8022 CSX CORPORATION(Exact name of registrant as specified in its charter) No Change (Former name, former address and former fiscal year, if changed since last report.) No Change(Former name, former address and former fiscal year, if changed since last report.)x(X) No ¨x(X) Accelerated Filer ¨( ) Non-accelerated Filer ¨¨( ) No xissuer’sissuer's classes of common stock, as of the latest practicable date, March 30,September 28, 2007: 437,156,732420,425,477 shares.Page Item 1: Financial Statements PagePART I: FINANCIAL INFORMATION Item 1:3 and September 29, 2006 4 At March 30,September 28, 2007 (Unaudited) and December 29, 2006 45 6 Item 2: Item 2: 28 2446 3646 36 46 3646 3647 3748 3948 3948 39Item 6: 48 Item 6: 393949 First Quarters 2007 2006 $ 2,422 $ 2,331 734 720 561 472 259 253 221 211 120 123 57 56 (18 ) - 1,934 1,835 488 496 (11 ) (3 ) (99 ) (98 ) 378 395 (138 ) (150 ) $ 240 $ 245 $ 0.55 $ 0.56 $ 0.52 $ 0.53 437,637 439,362 463,176 464,364 $ 0.12 $ 0.065 All share and per share data has been retroactively restated to reflect the 2006 stock split.See accompanying Notes to Consolidated Financial Statements. 2006 2006 $ 2,418 $ 7,170 Labor and Fringe 737 2,175 Materials, Supplies and Other 496 1,455 Fuel 300 841 Depreciation 214 641 Equipment and Other Rents 134 387 Inland Transportation 63 181 Gain on Insurance Recoveries (Note 8) (15) (141) Total Operating Expense 1,929 5,539 489 1,631 Other Income - Net (Note 11) 25 33 Interest Expense (97) (293) 417 1,371 Income Tax Expense (89) (408) 328 963 Discontinued Operations (Note 4) - - $ 328 $ 963 From Continuing Operations $ 0.75 $ 2.18 Discontinued Operations $ 0.75 $ 2.18 From Continuing Operations $ 0.71 $ 2.07 Discontinued Operations - - $ 0.71 $ 2.07 440,088 441,088 465,641 466,737 $ 0.10 $ 0.23 See accompanying Notes to Consolidated Financial Statements. (Unaudited)
March 30,
2007 December 29,
2006 $ 512 $ 461 425 439 1,112 1,174 217 204 239 251 103 143 2,608 2,672 28,051 27,715 (6,958 ) (6,792 ) 21,093 20,923 613 607 342 336 269 591 $ 24,925 $ 25,129 $ 977 $ 974 434 495 255 253 742 592 9 8 128 114 110 86 2,655 2,522 695 668 5,182 5,362 5,828 6,110 1,447 1,525 15,807 16,187 437 438 1,423 1,469 7,648 7,427 (390 ) (392 ) 9,118 8,942 $ 24,925 $ 25,129 See accompanying Notes to Consolidated Financial Statements.Cash and Cash Equivalents $ 461 Short-term Investments 439 Accounts Receivable, net of allowance for doubtful accounts of $76 and $82, respectively Materials and Supplies Deferred Income Taxes 251 Other Current Assets 143 Properties 27,715 Accumulated Depreciation Investment in Conrail (Note 14) Affiliates and Other Companies 336 Other Long-term Assets $ 5,129 Accounts Payable 974 Labor and Fringe Benefits Payable Casualty, Environmental and Other Reserves (Note 5) 253 Current Maturities of Long-term Debt 592 Short-term Debt 8 Income and Other Taxes Payable 114 Other Current Liabilities 2,522 Casualty, Environmental and Other Reserves (Note 5) Long-term Debt (Note 7) Deferred Income Taxes Other Long-term Liabilities 1,525 16,187 Common Stock, $1 Par Value 438 Other Capital Retained Earnings (Note 4) 7,427 Accumulated Other Comprehensive Loss (392) $ 25,129 See accompanying Notes to Consolidated Financial Statements. First Quarters 2007 2006 $ 240 $ 245 225 212 14 26 (18 ) - 9 50 43 50 62 (70 ) (63 ) 2 13 42 109 39 (37 ) (151 ) 597 445 (428 ) (367 ) 10 - (530 ) (416 ) 558 378 (12 ) (15 ) (402 ) (420 ) 1 2 - 3 (29 ) (71 ) (53 ) (29 ) 89 129 (179 ) - 27 8 (144 ) 42 51 67 461 309 $ 512 $ 376 See accompanying Notes to Consolidated Financial Statements.2006 Net Earnings $ 963 Adjustments to Reconcile Net Earnings to Net Cash Provided: Depreciation 648 Deferred Income Taxes 46 Non-cash Discontinued Operations (Note 4) - Gain on Insurance Recoveries (Note 8) (141) Insurance Proceeds (Note 8) 104 Other Operating Activities (63) Changes in Operating Assets and Liabilities: Accounts Receivable (133) Other Current Assets 73 Accounts Payable 51 Income and Other Taxes Payable (61) Other Current Liabilities 1,367 Property Additions (1,204) Insurance Proceeds (Note 8) 130 Purchases of Short-term Investments (1,023) Proceeds from Sales of Short-term Investments 1,072 Other Investing Activities (9) (1,034) Short-term Debt - Net 12 Long-term Debt Issued (Note 7) 473 Long-term Debt Repaid (499) Dividends Paid (101) Stock Options Exercised (Note 3) 237 Shares Repurchased (Note 1) (422) Other Financing Activities 46 (254) Net Increase in Cash and Cash Equivalents 79 Cash and Cash Equivalents at Beginning of Period 309 See accompanying Notes to Consolidated Financial Statements. nation’snation's leading transportation companies. Surface Transportation, which includes the Company’s rail and intermodal businesses, provides rail-based transportation services including traditional rail service and the transport of intermodal containers and trailers.operatesprovides a crucial link to the largest railroad in the eastern United States with atransportation supply chain through its 21,000 mile rail network, of approximately 21,000 route miles, linking marketswhich serves every major population center in 23 states east of the Mississippi River, the District of Columbia and the Canadian provinces of Ontario and Quebec. CSX Intermodal, Inc. (“Intermodal”), one of the nation’s largest coast-to-coast intermodal transportation providers,is a stand-alone, integrated intermodal company linking customers to railroads via trucks and terminals.the management, sale, lease,real estate sales, leasing, acquisition and management and development of company properties.Consolidated Balance Sheets at March 30, 2007 and December 29, 2006;Consolidated Income Statements for the quarters ended March 30, 2007 and March 31, 2006; and· Consolidated Balance Sheets at September 28, 2007 and December 29, 2006; Consolidated Cash Flow Statements for the quarters ended March 30, 2007 and March 31, 2006.· Consolidated Income Statements for the quarters and nine months ended September 28, 2007 and September 29, 2006; and · Consolidated Cash Flow Statements for the nine months ended September 28, 2007 and September 29, 2006. CSX’sCSX's most recent Annual Report on Form 10-K, prior Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.calendar.The first fiscal quartercalendar with the last day of 2007 and 2006 consisted of 13 weekseach reporting period ending on March 30, 2007 and March 31, 2006, respectively.Fiscal year 2006 consisted of 52 weeks ending on December 29, 2006.Fiscal year 2007 will consist of 52 weeks ending on December 28, 2007.· The third fiscal quarters of 2007 and 2006 consisted of 13 weeks ending on September 28, 2007 and September 29, 2006, respectively. · The nine month periods of 2007 and 2006 consisted of 39 weeks ending on September 28, 2007 and September 29, 2006, respectively. quarters“third quarter(s)” or “nine months” indicate CSX’s fiscal periods ending March 30,September 28, 2007 or March 31,September 29, 2006, and referencescomparisons are to year-end indicates the fiscal year ending December 29, 2006.In February 2007,announced a $2.0has the authority to purchase up to $3 billion share repurchase program and increased the quarterly dividend on the Company’sof its outstanding common stock by 20% to $0.12 per share. The Companystock. CSX intends to complete at least $1the $3 billion of the repurchase program by the end of 2007 and the remainder during 2008. The timing, andmethod, amount of repurchase transactions and the source of funds to effect any repurchase will be determined by the Company’sCompany's management based on theirits evaluation of market conditions, share price and other factors. While it is not management’s intention, the program may be suspended or discontinued at any time. During first quarter 2007, CSX repurchased 3.5 million sharesthis program. No shares were purchased during first quarter 2006 under aall publicly announced program. On a cumulative basis, during the past 4 quarters, the Company has repurchased 19.4 million shares under various share repurchase programs. 2006 2006 Number of Shares Repurchased 9 13 Value of Shares Repurchased $ 272 $ 422 CSX had a two-for-one split of its common stock in July 2006. Pursuant to SFAS 128,Earnings Per Share, all share and per share disclosures have been retroactively restated to reflect the stock split. First Quarters 2007 2006 $ 240 $ 245 1 1 241 246 437,637 439,362 19,456 19,456 5,545 5,430 538 116 463,176 464,364 $ 0.55 $ 0.56 $ 0.52 $ 0.53 2006 2006 Numerator (Millions): Earnings from Continuing Operations $ 328 $ 963 Interest Expense on Convertible Debt - Net of Tax 1 3 Net Earnings from Continuing Operations, If-Converted 329 966 Discontinued Operations - Net of Tax - - Net Earnings, If-Converted 329 966 Interest Expense on Convertible Debt - Net of Tax (1) (3) Net Earnings $ 328 $ 963 Denominator (Thousands): Average Common Shares Outstanding 440,088 441,088 Convertible Debt 19,456 19,456 5,708 5,985 Other Potentially Dilutive Common Shares 389 208 Average Common Shares Outstanding, Assuming Dilution 465,641 466,737 Basic Earnings Per Share: Income from Continuing Operations $ 0.75 $ 2.18 Discontinued Operations - - Net Earnings $ 0.75 $ 2.18 Earnings Per Share, Assuming Dilution: Income from Continuing Operations $ 0.71 $ 2.07 Discontinued Operations - - Net Earnings $ 0.71 $ 2.07 convertible debt,employee stock options, and· convertible debt, other equity awards, which include unvested restricted stock and long-term incentive awards.· employee stock options, and · other equity awards, which include unvested restricted stock and long-term incentive awards. approximately 19 millionadditional shares in the computation of earnings per share, assuming dilution. The amount included in diluted earnings per share represents the number of shares that would be issued if all the Company’sof CSX’s convertible debentures were converted. Debentures previouslyconverted into CSX common stock.reflectedincluded in the calculation of both basic and diluted earnings per share calculation.In 2006, certainshare. During third quarter and nine months of 2007, $37 million and $374 million of face value convertible debentures were converted into 1 million and 13 million shares of CSX common stock, respectively. No material conversions occurred during 2006. At September 2007, $174 million face value remained outstanding convertible into 6 million shares.wereare excluded from the computation of earnings per share, assuming dilution, since their relatedwhen option exercise prices wereare greater than the average market price of the common shares during the period. In 2007, all stock options were dilutive. Therefore, no stock options were excluded from the earnings per share calculation. The following table presents information about potentially dilutive stock options excluded from the computationearnings per share: First Quarters 2007 2006 Number of Shares (Thousands)-1,240Average Exercise Price$ - $ 28.50directors.Directors. CSX has not granted stock options since 2003. Awards granted under the various plans wereare determined and approved by the Compensation Committee of the Board of Directors or, in limitedcertain circumstances, by the CEOChief Executive Officer for awards to management employees other than senior executives. The Governance Committee of the Board of Directors approves awards granted to the Company’s non-management Directors.iswas as follows:(Dollars in Millions) First Quarters 2007 2006 $ 15 $ 3 6 1 2006 2006 $ 11 $ 23 Income Tax Benefit 4 8 CSX’s long-term incentive plans were not approved and granted until May 2006. Share-based compensation expense is lower in first quarter 2006 since no expense wasfor nine months 2007 primarily included amounts incurred forfrom the two long-term incentive programs approved in May 2006 and the long-term incentive program that was approved in May 2007. Overall, share-based compensation expense increased for nine months 2007 due to the timing of when the 2006 plans during that period.were approved and the addition of the 2007 plan.CSX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)NOTE 3. Share-Based Compensation, continuedexercised.(In Thousands) 2007 2006 4,318 5,732 2006 2006 Number of Stock Options Exercised 692 10,988 accounted forrecorded as ana cumulative effect adjustment to the beginning balance of retained earnings on the Balance Sheet. Including the cumulative effect decrease, atbenefits.benefits after adjustment for the $34 million decrease to reserves mentioned above. Of this total, $197 million (net of the federal benefit on state issues) representsrepresented the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.and its subsidiaries are subject to U.S.had approximately $60 million of total gross unrecognized tax benefits. Of this total, $50 million (net of federal benefit on state issues) represented the amount of unrecognized tax benefits that, if recognized, would favorably impact the effective income tax as well as incomerate. The decrease in unrecognized tax benefits primarily related to the discontinued operations benefit of multiple state jurisdictions.$110 million. The Company has substantially concluded all U.S.estimates that approximately $15 million of the unrecognized tax benefits for various state and federal income tax matters for years through 1998. Substantially all material state and local, and foreign income tax matters have been concluded for years through 1993. Federal income tax returns for 1999 through 2005 are currently under examination.In connection withwill be resolved over the Internal Revenue Service (“IRS”) examinationnext 12 months.does not anticipate the adjustments would result in a material change to the results of operations, financial condition, or liquidity.TheAs of the beginning of 2007, the Company had $52 million accrued for interest and $0 accrued for penalties at December 2006.CSX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)NoteNOTE 5. Casualty, Environmental and Other Reserves(Dollars in Millions) March 30, 2007 December 29, 2006 Current Long-term Total Current Long-term Total $ 171 $ 476 $ 647 $ 172 $ 465 $ 637 20 96 116 20 100 120 26 61 87 26 45 71 38 62 100 35 58 93 $ 255 $ 695 $ 950 $ 253 $ 668 $ 921 December 29, 2006 Current Long-term Total Casualty $ 172 $ 465 $ 637 Separation 20 100 120 Environmental 26 45 71 Other 35 58 93 Total $ 253 $ 668 $ 921 and settlements could differ. The final outcome of these matters cannot be predicted with certainty. Considering the legal defenses available, the liabilities that have been recorded and other factors, it is the opinion of management that none of these items, when finally resolved, will have a material effect on the Company’s results of operations, financial condition or liquidity. However, should a number of these items occur in the same period, they could have a material effect on the results of operations, financial condition or liquidity in a particular quarter or fiscal year. injury claims. Currently, no individual claim is expected to exceed the Company’s self-insured retention amount. To the extent the value of an individual claim exceeds the self-insured retention amount, CSX would present the liability on a gross basis with a corresponding receivable for insurance recoveries. Personal injury and occupational claims are presented on a gross basis and in accordance with SFASStatement of Financial Accounting Standards (“SFAS”) 5,Accounting for Contingencies (“SFAS 5”).third-partiesthird parties reviewed by management, offset by the timing of individual payments. Most of the claims were related to CSXT.third-partythird party injuries. Work-related injuries for CSXT employees are primarily subject to the Federal Employers’ Liability Act (“FELA”). In addition to the above FELA liabilities, employees of other CSX subsidiaries are covered by various state workers’workers' compensation laws, the Federal Longshore and Harbor Worker’sWorker's Compensation Program or the Maritime Jones Act.CSX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)NOTE 5. Casualty, Environmental and Other Reserves, continuedexposureexposures to certain materials in the work place. Examples of exposures would beworkplace, such as asbestos, solvents (which include soaps and chemicals), and diesel fuel and allegedfuels or allegations of chronic physical injuries resulting from work conditions. Examples of claims arising from work conditions, would besuch as repetitive stress injuries, carpal tunnel syndrome orand hearing loss.ofin average historical claim filing rates, future anticipated dismissal rates and settlement rates.Company’sCompany's major transportation units since 1991. These liabilities are expected to be paid out over the next 15 to 20 years from general corporate funds and may fluctuate depending on the timing of payments and associated taxes.CSX CORPORATIONEnvironmentalNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)NOTE 5. Casualty, Environmental and Other Reserves, continuedEnvironmental256244 environmentally impaired sites. Many of those are, or may be, subject to remedial action under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, also known as the Superfund law, or similar state statutes. Most of these proceedings arose from environmental conditions on properties used for ongoing or discontinued railroad operations. However, a number of these proceedings are based on allegations that the Company, or its predecessors, sent hazardous substances to facilities owned or operated by others.others for treatment or disposal. In addition, some of the Company’s land holdings were leased to others for commercial or industrial uses that may have resulted in releases of hazardous substances or other regulated materials onto the property and could give rise to proceedings against the Company. at least once a quarter, the Company reviews its role with respect to each site identified.identified at least once a quarter. Based on the review process, the Company has recorded amounts to cover anticipated contingent future environmental remediation costs with respect to each site to the extent such costs are estimable and probable. The recorded liabilities for estimated future environmental costs are undiscounted and include amounts representing the Company’sCompany's estimate of unasserted claims, which the Company believes to be immaterial. 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.accomplishfund 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, financial condition andor liquidity.CSX CORPORATIONOtherNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)NOTE 5. Casualty, Environmental and Other Reserves, continuedOther42%43% of CSXT’s fleet of locomotives. The agreement is based upon the maintenance cycle for each locomotive and is currently predicted tolocomotive. Under CSXT’s current obligations, the agreement will expire no earlier than 20272028 and as late asmay last until 2031 depending uponon the timing of when additionalcertain locomotives are placed in service. The costs expected to be incurred throughout the duration of the agreement fluctuate as locomotives are placed into, or removed from, service or as required maintenance isschedules are adjusted. CSXT may terminate the agreement at its option after 2012, though such action would trigger certain liquidated damages provisions. Under this program, CSXT paid $50 million 2006 2006 Amounts Paid $ 47 $ 136 $41 million during the first quarters ended in 2007 and 2006, respectively.7,8, Hurricane Katrina.$86$75 million in obligations principally relating to leased equipment, vessels and joint facilities used by the Company in its current and former business operations. Utilizing the Company’s guarantee for these obligations allows the obligor to take advantage of lower interest rates and obtain other favorable terms. Guarantees are contingent commitments issued by the Company that could require CSX or one of its affiliates to make payment to or to perform certain actions for the beneficiary of the guarantee based on another entity’s failure to perform.CSX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)NOTE 6. Commitments and Contingencies, continuedfirstthird quarter 2007, the Company’s guarantees primarily related to the following:1.·$73$64 million of obligations of a former subsidiary, CSX Energy, in connection with a sale-leaseback transaction. CSX is, in turn, indemnified by several subsequent owners of the subsidiary against payments made with respect to this guarantee. Management does not expect that the Company will be required to make any payments under this guarantee for which CSX will not be reimbursed. CSX’s obligation under this guarantee will be completed in 2012.2.·$13$11 million of lease commitments assumed by A.P. Moller-Maersk (“Maersk”) for which CSX is contingently liable. CSX believes Maersk will fulfill its contractual commitments with respect to such lease commitments, and CSX will have no further liabilities for those obligations. CSX’s obligation under this guarantee will be completed in 2011.firstthird quarter 2007, the Company has not recognized any liabilities in its financial statements in connection with any guarantee arrangements. The maximum amount of future payments the Company could be required to make under these guarantees is the amount of the guarantees themselves.The 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, but not limited to, those related to environmental matters, FELA claims by employees, other personal injury claims and disputes and complaints involving certain transportation rates and charges. Some of the legal proceedings include claims for compensatory as well as punitive damages and others are, or are purported to be, class actions. While the final outcome of these matters cannot be predicted with certainty, considering, among other things, the meritorious legal defenses available and liabilities that have been recorded along with applicable insurance, it is currently the opinion of CSX management that none of these items will have a material adverse effect on the Company’s results of operations, financial condition or liquidity of the Company.liquidity. An unexpected adverse resolution of one or more of these items, however, could have a material adverse effect on the Company’s results of operations, financial condition or liquidity of the Company in a particular quarter or fiscal year. $ 5,954 2007 Long-term Debt Activity: Issued 2,000 Repaid (712) Converted into CSX stock (374) Discount amortization and other 40 $ 6,908 the first quarterSeptember 2007, the Company had collected insurance payments of $357$359 million.In first quarter of 2007, CSX recognized gains of $18 million recoveries from claims related to Hurricane Katrina. This gain was calculated using $19 million of cash proceeds received less $1 million related to incremental expense. NoKatrina were as follows: 2006 2006 Gain on Insurance Recoveries $ 15 $ 141 recognized in the first quarter of 2006. The gains are attributable to recovering amounts in excess of the net book value of damaged fixed assets and to recording recoveries related to lost profits. Additional cash proceeds are expected and will result in future gain recognition.$9$10 million and $50$104 million for first quartersthe nine months ended 2007 and 2006, respectively, since these were related directly to revenue and expenses from operations. Allocated cash proceeds for fixed asset damage are classified as investing activities and were $10$12 million and $130 million for first quarterthe nine months ended 2007 and 2006, respectively, since they had a direct relationship to money CSXthe Company spent on property additions to repair the hurricane-damaged assets and were recorded in the same category. No amounts were classified as investing activities for first quarter 2006.2006most recent Annual Report on Form 10-K.8.9. Derivative Financial Instrumentshas entered into various interest rate swap agreements onrepaid $450 million of debentures that matured and called $150 million of debentures due in 2032. As a result, CSX also settled the following fixed and variable rate notes: Variable Rate Maturity Date
Rate $ 450 7.45 % 8.59 % 8.59 % 150 8.30 % 6.95 % 6.96 % $ 600 7.66 % $ 40 5.43 % 5.36 % 5.37 % Under the fixed rate agreements, CSX will pay variable interest based on LIBOR in exchange for a fixed rate, effectively transforming the notes to floating-rate obligations. In contrast, under the variable rate agreement, CSX will pay a fixed interest in exchange for a variable rate based on LIBOR. The interest rate swap agreements qualify and are designated as fair value hedges, and the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the fixed rate note attributed to the hedged risk, were recognized in current earnings during the period of change in fair values.Hedge effectiveness is measured at least quarterly based on the relative change in fair value of the derivative contract in comparison with changes over time in the fair value of the fixed-rate notes. Any change in fair value resulting from ineffectiveness, as defined by SFAS 133,Accounting For Derivative Instruments and Hedging Activities(“SFAS 133”), is recognized immediately in earnings. CSX’s interest rate swaps qualify as perfectly effective fair value hedges, as defined by SFAS 133. As such, there was no ineffective portion to the hedge recognized in earnings during the current or prior year periods. Fair value adjustments were immaterial for the first quarter of 2007 and have no cash impact on the Consolidated Cash Flow Statements since they are non-cash transactions.CSX CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)NOTE 8. Derivative Financial Instruments, continuedThe differential to be paid or received under these agreements is accrued based on the terms of the agreements and is recognized in interest expense over the term of the related debt. The related amounts payable to or receivable from counterparties were included in Other Current Liabilities or Assets in the Consolidated Balance Sheets. Cash flows related to these debentures. As of September 2007, CSX had a $35 million outstanding interest rate swap. This swap agreements were classified as Operating Activities in the Consolidated Cash Flow Statements. These agreements did not have a material impact on interest expense for first quarters 2007 and 2006.The counterparties to the interest rate swap agreements expose CSX to credit loss in the event of non-performance. CSX does not anticipate non-performance by the counterparties.swaps in order to fix the price of a portion of CSXT’s estimated future fuel purchases.swaps. CSX suspended entering into new swaps in its fuel hedge program in the third quarter of 2004 and there are currently no outstanding contracts.firstthird quarter and nine months of 2006 by $35 million.$1 million and $55 million, respectively. Since fourth quarter 2006, there has been no benefitimpact on fuel expense because all contracts have expired.9.10. Other Comprehensive Income (Loss)Statement.Statements. Under existing accounting standards, other comprehensive income (loss) for CSX may include the amortization of unrecognized gains and losses and prior service cost related to pension and other postretirement benefit plans and accounting foractivity related to derivative financial instruments designated as cash flow hedges.(Dollars in Millions) 2007 2006 $ 240 $ 245 - (19) 2 (1) $ 242 $ 225 2006 2006 Net Earnings $ 328 $ 963 Other Comprehensive Income (Loss): Pension and Other Postretirement Benefit Costs - - Fair Value of Fuel Derivatives - (30) Other - (1) Comprehensive Income $ 328 $ 932 8,9, Derivative Financial Instruments.)10.11. Other Income (Expense) – Net (Expense) – Net consists of the following:(Dollars in Millions) First Quarters 2007 2006 $ 13 $ 9 (16) (9) (5) (5) (3) 2 $ (11) $ (3) 2006 2006 10 29 13 6 (5) (16) 7 14 Other Income - Net $ 25 $ 33 (a) Income from Real Estate and Resort Operations includes the results of operations of the Company’s real estate sales, leasing, acquisition, and management and development activities as well as the results of operations from CSX Hotels, Inc., a resort doing business as The Greenbrier, located in White Sulphur Springs, West Virginia.(b) Miscellaneous income is comprised of earnings from certain CSX owned or partially owned companies, investment gains and losses and other non-operating activities.11.12. Business SegmentsNature of Operations and Significant Accounting Policies, in the CSX 2006CSX’s most recent Annual Report on Form 10-K.conveyance,a former Marine Services subsidiary, net sublease income from assets formerly included in the Company’s Marine Services segment and other items.11.12. Business Segments, continuedthe firstthird quarters ofand nine months 2007 and 2006 is as follows:(Dollars in Millions) Surface Transportation Rail Intermodal Total Other Total $ 2,104 $ 318 $ 2,422 $ - $ 2,422 438 49 $487 1 488 1,997 334 2,331 - 2,331 425 62 487 9 496 Third Quarter - 2007 Revenues from External Customers $ 2,164 $ 337 $ 2,501 $ - $ 2,501 Segment Operating Income 489 63 552 3 555 Third Quarter - 2006 Revenues from External Customers $ 2,054 $ 364 $ 2,418 $ - $ 2,418 Segment Operating Income 414 75 489 - 489 Nine Months - 2007 Revenues from External Customers $ 6,455 $ 998 $ 7,453 $ - $ 7,453 Segment Operating Income 1,459 183 1,642 5 1,647 Nine Months - 2006 Revenues from External Customers $ 6,116 $ 1,054 $ 7,170 $ - $ 7,170 Segment Operating Income 1,421 200 1,621 10 1,631 12.13. Employee Benefit PlansEmployeesFor employees hired after December 31, 2002, benefits are covered bydetermined based on a cash balance plan,formula, which provides benefits by utilizing interest and pay credits based upon age, service and compensation.12.13. Employee Benefit Plans, continuedtable describestables describe the components of net periodic benefit cost:(Dollars in Millions) Pension Benefits
First Quarters 2007 2006 $ 8 $ 9 28 26 (29 ) (29 ) 1 1 8 9 $ 16 $ 16 (Dollars in Millions) 2007 2006 $ 1 $ 2 5 5 (1 ) (1 ) 1 2 $ 6 $ 8 2006 2006 Service Cost $ 10 $ 28 Interest Cost 26 79 Expected Return on Plan Assets (29) (88) Amortization of Prior Service Cost 1 3 Amortization of Net Loss 8 25 Net Periodic Benefit Cost $ 16 $ 47 2006 2006 Service Cost $ 2 $ 5 Interest Cost 5 16 Amortization of Prior Service Cost (1) (4) Amortization of Net Loss 2 6 Net Periodic Benefit Cost 8 19 23 13.14. Related Party TransactionsConrail.(Dollars in Millions) March 30,
2007 December 29,
2006 $ 57 $ 48 $ 73 $ 73 $ 23 $ 23 (Dollars in Millions) First Quarters 2007 2006 $ 1 $ 1 $ 23 $ 23 December 29, 2006 CSX Payable to Conrail $ 48 Promissory Notes Payable to Conrail Subsidiary 4.40% CSX Promissory Note due October 2035 $ 73 4.52% CSXT Promissory Note due March 2035 $ 23 (a)Interest expense from the promissory notes with a subsidiary of Conrail and Conrail Rents, Fees, and Services represent expenses paid to Conrail related to right-of-way usage fees, equipment rental, other service related charges and fair value write-up amortization. Beginning in 2007, these amounts have been included in Materials, Supplies and Other on the Consolidated Income Statement. The amounts disclosed above do not include CSX’s 42% portion of Conrail’s earnings, which is also included in Materials, Supplies and Other and amounted to $3 million and $4 million for first quarters 2007 and 2006, respectively.expense was as follows: 2006 2006 Interest Expense Related to Conrail $ 1 $ 3 $ 22 $ 68 2006most recent Annual Report on Form 10-K.MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONCOMPANY STRATEGIC OVERVIEWbasedprovides customers access to a modern transportation network that connects ports, production and distribution centers to markets in Jacksonville, Florida, is one of the nation’s leading transportation companies. Surface Transportation, which includes the Company’s rail and intermodal businesses, provides rail-based transportation services including traditional rail serviceNortheast, Midwest and the transportrapidly growing southern states. The Company transports a diversified portfolio of intermodal containersproducts, from domestically abundant coal to emerging ethanol, from automobiles produced by traditional American manufacturers to “new domestic” factories owned by European, Japanese and trailers.CSX’s principal operating company, CSX Transportation Inc. (“CSXT”), operatesKorean companies, and from life-essential chemicals to life-enriching consumer electronics. Additionally, the largest railroadCompany serves every major market in the eastern United States and has direct access to all Atlantic and Gulf Coast ports, as well as access to Pacific ports through alliances with a railwestern railroads. Overall, the Company’s transportation network ofencompasses approximately 21,000 route miles linking marketsof track in 23 states, the District of Columbia and the Canadian provinces of Ontario and Quebec. CSX Intermodal Inc. (“Intermodal”), onelargest coast-to-coast intermodal transportation providers,consumption.stand-alone, integrated intermodal Company linking customersthree-pronged approach that includes:· Share repurchases – CSX has a $3 billion share repurchase program in place that is expected to be completed by the end of 2008. Prior to this repurchase program being instituted, CSX repurchased over $500 million in shares beginning in second quarter 2006. · Dividends – In September 2007, CSX increased its dividend 25%, which represents a tripling in quarterly dividend payments in just two years. · Investments in the future – In 2007, the Company expects to invest about $1.7 billion in infrastructure, locomotives, freight cars, technology and new capacity. CSX expects to invest nearly $5 billion in capital expenditures between 2008 and 2010. railroads via trucks and terminals.CSX’s other holdings include CSX Hotels, Inc.,capitalize on a resort doing business as The Greenbrier, located in White Sulphur Springs, West Virginia, and CSX Real Property, Inc., an organization responsible for the management, sale, lease, acquisition and development of company properties.FIRSTTHIRD QUARTER 2007 SURFACE TRANSPORTATION HIGHLIGHTSSURFACE TRANSPORTATIONSurface TransportationRevenue grew 4% to $2.4 billionExpenses increased $91 million to $1.9 billion· Revenue grew $83 million or 3% to $2.5 billion Steady Operating Income despite softer volumes· Expenses increased only $20 million or 1% to $1.9 billion · Surface Transportation Operating Income, which excludes Other Operating Income, was up $63 million to $552 million due to strong yield management initiatives and continued improvements in service and safety measures. 4%3% and 8%, respectively, driven by strong yield management initiatives on a volume decline of 4%.initiatives. The Company was able to achieve substantial pricing gains predominantly due to the overall cost and service advantageadvantages that rail-based solutions provide versus other modes of transportation.Merchandise markets declined due largely to weaknessestransportation, which adds value for customers.more than offsetrelated markets, which are shown in the volume gains in two merchandise markets. The automotive, coal, and intermodal markets also experienced volume declines in first quarter 2007.derailment related costs as well as the overall impacteffects of inflation. Gaininflation and higher prior year gains on insurance recoveries, which were recorded as a reduction to operating expenses. Lower third quarter 2007 volume and productivity gains from improved operations partially offset the effects of $18 million helped to offset otherinflation for certain expense increases.2935 through 37. respectively.MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONThere were several high-profile train derailments in the first quarter, and the 2006 % Personal Injury Frequency Index 1.50 % FRA Train Accidents Frequency 3.24 On-Time Originations 76.5% On-Time Arrivals 63.4% Average System Dwell Time (hours) 24.4 Average Total Cars-On-Line 225,270 Average Velocity, All Trains (miles per hour) 19.8 Average Recrews (per day) 55 % Route Miles 21,207 % is investigating causes and CSX safety programs. CSX is working closely with the FRA and believes its continued focus on safety contributed to a reduction in the frequencyTrain Accident Frequency– The number of both personal injuries and train accidents. Personal injury frequency declined 6% while FRA reportableFRA-reportable train accidents declined 23% on a year over year basis.Key operating measurements were mixed, but generally stable, despite harsher winter conditions when comparedper million train-miles.unseasonably mild weatherminute, whereas the industry norm considers originations up to two hours late to be on time.first quarter 2006hours between railcar arrival at and network disruptions caused by significant train derailments indeparture from the quarter. Velocity and on-time train originations declined slightly when compared to prior year performance. However, on-time train arrivals improved to 64% versus 61% in 2006. Average daily recrews increased significantly, from an average of 58 in 2006 to 71 in 2007. The additional recrews were focused in locations adversely affected by either weather or train accidents.yard. This does not include railcars moving through the yard on the same train. Average system dwell improved to 24.9 hourstime is a key measure of terminal performance.terminals remained fluid.RAIL OPERATING STATISTICS First Quarters 2007(a) 2006 1.35 1.44 6 % 2.84 3.68 23 73.7% 74.4% (1) 63.9% 61.3% 4 24.9 26.6 6 225,317 224,299 - 19.9 20.0 (1) 71 58 (22) % 21,167 21,287 (1) % 3,917 3,780 4 100,588 102,794 (2) % (a) Amounts for 2007 are estimated.(b) In October 2005,reported by the Association of American Railroads adopted a new dwell calculation in an effort to standardize publicly reported dwell times on the AAR Railroad Performance Measures website. Dwell times in this filing represent the Company’s historical method for calculating dwell for internal management and analysis. Regardless of which methodRailroads. This does not include locomotives, trailers, containers or maintenance equipment. It is used trends foras a measure of fluidity.two are the same. Dwell times using the AAR calculation were 24.5 hours for the first quarteruse of 2007 and 26.1 hours for the first quartercrews.MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONSURFACE TRANSPORTATION EXPECTATIONSexpects that its financial performance in 2007 will be consistent withupdated its long-term financial targets ofto include double-digit compounded annual growth rates for Surface Transportationin comparable operating income consolidatedand earnings per share andfrom continuing operations on the improved 2007 base. Additionally, CSX expects to improve its operating ratio to the mid to low 70s by 2010. Finally, the Company expects free cash flow throughin 2007 to be approximately $100 million. Free cash flow is anticipated to reach $800 million to $1 billion in 2010, due to momentum in its underlying business performance. CSX expects strong revenue growth, driven by a continuing robust pricing environment and modest volume growth.FirstThird Quarter Consolidated Results of Operationsthe firstthird quarters of 2007 and 2006. Except as otherwise specified, references to yearsthird quarters indicate the Company’s fiscal quarterquarters as noted previously. (See Note 1, Significant Accounting Policies.) CONSOLIDATED Includes Surface Transportation and Other Operating Income First Quarters $ Change % Change (Dollars in Millions) 2007 2006 $ 2,422 $ 2,331 $ 91 4% 1,934 1,835 99 5 488 496 (8) (2) (11) (3) (8) (267) (99) (98) (1) (1) (138) (150) 12 8 $ 240 $ 245 $ (5) (2)% 2006 Operating Revenue $ 2,418 % Operating Expense 1,929 489 Other Income 25 Interest Expense (97) Income Tax Expense (89) Discontinued Operations - $ 328 % $91$83 million to $2.5 billion in third quarter 2007 due to continued pricing efforts which were partially offset by lower volume.firstthird quarter 2007 to $2.4 billion. The increase was driven primarily2007. Operating revenue gains and productivity gains from improved operations during the quarter were partially offset by continued pricing efforts.OperatingTable of ContentsOperating$488$17 million in firstthird quarter 2007. Operating revenue gains during the quarter were offset by increased derailment related expenses and the effects of inflation.Other IncomeOther Income decreased $8 million2007 due to lower real estate and resort and other miscellaneous activity.CSX CORPORATIONITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONSexpense was $99Expense increased $5 million to $102 million due primarily to higher average debt balances in firstthird quarter 2007, consistent with the prior year quarter.decreased $12increased $84 million to $138$173 million, which was caused primarily by higher operating income in 2007 and the cycling of a $69 million prior year income tax benefit principally related to the resolution of an income tax audit for the 1994 – 1996 period.proportionthird quarter 2007 was due to earnings and the resolution of certain stateincome tax matters.decreased $5increased $79 million to $240$407 million, and Earnings Per Diluted Share decreased $.01increased $.20 to $.52. These changes were primarily due to pricing gains offset by derailment related expenses and inflationary impacts on operating expenses.(a) higher earnings from continuing operations before income taxes due to pricing gains being more than offset by a prior year income tax benefit to result in lower earnings from continuing operations and (b) the $110 million current quarter gain related to the resolution of certain tax matters associated with previously discontinued operations. MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 2006 2006 2006 $ 2,054 $ 364 $ 2,418 Labor and Fringe 716 20 736 Materials, Supplies and Other 452 45 497 Fuel 300 - 300 Depreciation 205 8 213 Equipment and Other Rents 101 34 135 Inland Transportation (119) 182 63 Gain on Insurance Recoveries (15) - - (15) 1,640 289 1,929 (20) $ 414 $ 75 $ 489 79.8% 79.4% 79.8% 2006 2006 2006 Chemicals 133 $ 313 $ 2,353 Emerging Markets 133 150 1,128 Forest Products 100 200 2,000 Agricultural Products 102 176 1,725 Metals 91 176 1,934 Phosphates and Fertilizers 93 82 882 Food and Consumer 61 123 2,016 713 1,220 1,711 Coal 451 571 1,266 Coke and Iron Ore 24 31 1,292 475 602 1,267 100 183 1,830 - 1,288 2,054 1,595 International 338 158 467 Domestic 226 198 876 Other - 8 564 364 645 1,852 $ 2,418 $ 1,306 Surface Transportation Results of OperationsSURFACE TRANSPORTATION DETAIL (Unaudited)(Dollars in Millions)First Quarter Rail Intermodal Surface
Transportation 2007 2006 2007 2006 2007 2006 $ 2,104 $ 1,997 $ 318 $ 334 $ 2,422 $ 2,331 $ 91 712 698 20 20 732 718 14 519 438 44 44 563 482 81 259 253 - - 259 253 6 211 201 10 10 221 211 10 92 93 29 31 121 124 (3 ) (109 ) (111 ) 166 167 57 56 1 (18 ) - - - (18 ) - (18 ) 1,666 1,572 269 272 1,935 1,844 91 $ 438 $ 425 $ 49 $ 62 $ 487 $ 487 $ - 79.2 % 78.7 % 84.6 % 81.4 % 79.9 % 79.1 % SURFACE TRANSPORTATION VOLUME AND REVENUEVolume (Thousands); Revenue (Dollars in Millions); Revenue Per Unit (Dollars)First Quarter Volume Revenue Revenue Per Unit 2007 2006 % Change 2007 2006 % Change 2007 2006 % Change 133 135 (1 )% $ 317 $ 295 7 % $ 2,383 $ 2,185 9 % 112 124 (10 ) 137 134 2 1,223 1,081 13 92 106 (13 ) 183 191 (4 ) 1,989 1,802 10 97 96 1 179 157 14 1,845 1,635 13 93 94 (1 ) 176 164 7 1,892 1,745 8 92 88 5 106 90 18 1,152 1,023 13 56 64 (13 ) 111 118 (6 ) 1,982 1,844 7 675 707 (5 ) 1,209 1,149 5 1,791 1,625 10 441 456 (3 ) 603 552 9 1,367 1,211 13 21 20 5 30 27 11 1,429 1,350 6 462 476 (3 ) 633 579 9 1,370 1,216 13 109 127 (14 ) 203 231 (12 ) 1,862 1,819 2 - - - 59 38 55 - - - 1,246 1,310 (5 ) 2,104 1,997 5 1,689 1,524 11 292 302 (3 ) 133 132 1 455 437 4 217 214 1 180 186 (3 ) 829 869 (5 ) - - - 5 16 (69 ) - - - 509 516 (1 ) 318 334 (5 ) 625 647 (3 ) 1,755 1,826 (4 )% $ 2,422 $ 2,331 4 % $ 1,380 $ 1,277 8 % MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONFirstThird Quarter Rail Results of OperationsFirst$2.4 billion represents the 20th consecutive quarter of year-over-yearquarter-over-quarter revenue gains. A favorableImproved pricing environment wasdue to the primary drivercompetitive advantage of revenue gains offsetting volume weakness related to lower housing constructionrail-based transportation solutions and lower domestic automobile production.MerchandiseChemicals – A favorable pricing environmenthigh levels of customer service continued to be the primary driverdrivers of revenue gains. Plastic volumesgains offsetting weakness in housing construction and related markets.soft as the industry recovered from excess inventory levels. Shipments ofdriven by continued yield management improvements. While overall volume was down, there were increases in biodiesel and chemicals used for paper production also declined due to continued softness in the paper market.plastics production. These gains were more than offset by volume declines in chlorine, plastics and petroleum product shipments. yield improvements. Declinesa reduction in imported cement. Total volume declined primarily due to lower aggregate shipments, which include crushed stone, sand and gravel, as a result of continued weakness in residential construction resulted in fewer shipments of aggregates, which include rocks and minerals.construction.Forest productsRevenue was down even with continued yield management initiatives which led to gains in revenue per unit. Volume declines were seen in lumber and panel shipments especially lumber, continueddriven by the downturn in residential construction. Volumes were also negatively affected by lower paper production due to be challenged by a weak residential construction market which resulted in lower volume. Continued emphasis on more profitable shipments favorably impacted revenue-per-unit growth.electronic media substitution.Revenue-per-unitPricing gains drove increases in revenue and revenue per unit. Continued growth remained strongin ethanol and feed ingredients were more than offset by weak grain and export volumes driven by higher commodity prices and an increased Southeastern crop which lessened the need for long-haul rail transportation.favorable pricing and increased fuel surcharge coverage. Rapid growthweakness in the northeast ethanol market helped volume; however, thishousing market. This decline was partially offset by lower grain shipments.Metals – Revenuestrength in steel exports and increased on slightly unfavorable volumesscrap metal shipments due to continued emphasis on improving yields and growth in higher revenue per unit export shipments. Towards the end of the quarter, volumes strengthened due to reductions in steel inventories.inventory replenishment.VolumeLower global demand for domestically produced phosphates led to lower volume. This decline was uppartially offset by higher fertilizer shipments due to increased shipments of fertilizers to farmers partially in response to the higher demand for corn from ethanol producers. Revenue-per-unit growth was attributable to these longer-haul shipments of fertilizer and potash.Food and Consumer – Emphasis on price and yield management resulted in strong revenue-per-unit growth. A weak residential construction market drove volume declines in building products and roofing granules, which are used to make shingles.CSX CORPORATIONITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONSCoalapricing and changes in traffic mix.environment and strong demand for export coal. However, these volume increasesefforts. Volume declined slightly as increased exports were more than offset by lower shipments to electric utilities due to coalutility inventories being at target levels.AutomotiveDeclineslevels and a resulting decrease in volumedomestic coal shipments.decreasesan increase in automobile production mainly due to lower demand for truck and sport utility vehicles. Revenue per unit increased due to continued pricing efforts.businessrevenue generated by the Company’s short line railroads.$14$10 million primarily due to wage and benefit inflation,the effect of inflation. The increase was partially offset by a reduction in train crew headcount due to lower volume and productivity gains from improved operations and lower volume, which resulted in a reduction of crew expenses.operations.$81$3 million primarily due to aninflation. The increase in train accident related expenses. Additionally, current year inflation on material and rising insurance costs were higher than a year ago. Also contributing to the increase were various other items.Fuel expense increased $6 million primarily due to a reduction in hedge benefit resulting from the expiration of the fuel hedge program,was mostly offset by a decrease in costs associated with the reduction in train accidents and related costs reflecting continued improvement in safety performance.volume and price.volume.$10 million due to a$6 million. A larger asset base related to higher capital spending.spending was partially offset by lower depreciation rates resulting from an equipment life study completed earlier this year.$18$1 million representedrepresents insurance recoveries related to Hurricane Katrina property damage and lost profits. The $14 million decrease from last year’s quarter is due to timing of cash receipts. FirstTable of Contents Despite a reduction in higher revenue-per-unit traffic from long-haul markets, revenue per unit increased due to continued strength in pricing. Volumes were lower primarily due to the termination of certain customer contracts, losses due to select steamship carriers withdrawing from certain markets and slower growth from Asian markets. Also, volume was impacted by the closing of a temporal slowdown in international freight shipments.terminal facility earlier this year. Despite pricing gains, revenue per unit decreased due to unfavorable mix changes.CSX CORPORATIONITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONSVolumesRevenue and volumes increased slightly due to a new shorter-haul train service. The unfavorable mix impact on revenue per unit from this new traffic more than offset pricingprice gains in the remaining domestic business.Other – The primary driver of this revenue decrease was the termination of two agreements relating to the storage of containers and other ancillary services. slightly declined predominantly due to improved productivity as well as lower volumevolume.2006 Operating Revenue $ 7,170 % Operating Expense 5,539 1,631 Other Income 33 Interest Expense (293) Income Tax Expense (408) Discontinued Operations - $ 963 % productivity.(a) slightly lower earnings from continuing operations primarily due to pricing gains being more than offset by higher prior year gains on insurance recoveries and tax benefits and (b) the $110 million current year gain related to the resolution of certain tax matters associated with previously discontinued operations. 2006 2006 2006 $ 6,116 $ 1,054 $ 7,170 Labor and Fringe 2,109 60 2,169 Materials, Supplies and Other 1,325 143 1,468 Fuel 841 - 841 Depreciation 612 28 640 Equipment and Other Rents 293 98 391 Inland Transportation (346) 527 181 Gain on Insurance Recoveries (139) (2) (141) 4,695 854 5,549 $ 1,421 $ 200 $ 1,621 76.8% 81.0% 77.4% 2006 2006 2006 % Change Chemicals 402 $ 913 $ 2,271 Emerging Markets 401 442 1,102 Forest Products 309 585 1,893 Agricultural Products 294 497 1,690 Metals 280 513 1,832 Phosphates and Fertilizers 275 265 964 Food and Consumer 188 361 1,920 2,149 3,576 1,664 Coal 1,353 1,685 1,245 Coke and Iron Ore 68 89 1,309 1,421 1,774 1,248 351 637 1,815 - 129 3,921 6,116 1,560 International 966 438 453 Domestic 661 582 880 Other - 34 1,627 1,054 648 5,548 $ 7,170 $ 1,292 CSX’sCSX's most recent Annual Report on Form 10-K.Current Maturities of Long-term Debt increased $150 million, or 25%, from December 2006 as CSX expects to refinance an additional $150 million of notes in the second quarter of 2007 thatpreviously classified as Long-term Debt.Dueseveral large reclassifications due to the adoption of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48,48”), which required companies to reclassify uncertain tax positions into Income and Other Taxes Payable,Payable. Other Long-term Assets decreased $313$373 million and Long-term Deferred Income Taxes decreased $282$179 million.the first quarters ofnine months 2007 and 2006 included insurance proceeds of $19$22 million and $50$234 million, respectively, representing cash receipts from insurers related to Hurricane Katrina. The receipts included in operating activities represent reimbursements for business interruption related expenses, such as incremental expenses for debris removal and lost profits. The receipts included in investing activities included reimbursements for monies CSXthe Company spent to repair the hurricane-damaged assets. For additional information on the impacts of Hurricane Katrina, see Note 7,8, Hurricane Katrina.the first quarter ofnine months 2007 included $179 million$1.6 billion of cash used to repurchase shares of CSX’s common stock on the open market. SeeThis increase was largely offset by a net increase of $1.3 billion in long-term debt issued versus long-term debt repaid. For additional information, see Note 7, Debt and Credit Agreements, and Note 1, Significant Accounting Policies, under Part II,I, Item 21 of this Quarterly Report on Form 10-Q for additional details on the repurchases.MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONdeficitsurplus was $47$812 million at MarchSeptember 2007, compared to a surplus of $150 million at December 2006. This decreaseincrease was primarily due to $150 milliona reduction in Current Maturities of Long-term Debt partially offset by the reclassification of Long-term Debt to Current Maturities of Long-term Debt.was reclassified into Current Liabilitiesa borrower will repay a debt obligation at maturity. The ratings reflect many considerations, such as the nature of the borrower’s industry and its competitive position, the size of the company, its liquidity and access to capital and the sensitivity of a company’s cash flows to changes in 2007 since the Company expectseconomy. The two largest rating agencies, Standard & Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”), use alphanumeric codes to redeem thisdesignate their ratings. The highest quality rating for long-term credit obligations is AAA+ and Aaa1 for S&P and Moody’s, respectively. For short-term obligations, such as commercial paper, the highest quality ratings are A-1 and P-1 for S&P and Moody’s, respectively.inobligations that fall within a band of credit quality considered to be “investment grade.” Currently, the long-term ratings for CSX’s obligations, along with the other large U.S. Class 1 freight railroads, fall within the investment grade band of credit quality.2007.A working capital deficit2007, S&P and Moody’s both lowered their ratings of CSX's long-term unsecured debt obligations from BBB and Baa2, respectively, to BBB- and Baa3, respectively, due to the Company’s plan to repurchase an additional $1 billion of CSX stock. Additionally, they lowered their short-term ratings on CSX from A-2 and P-2, to A-3 and P-3, respectively. Both of these agencies indicate their outlook is not unusual for the Company or other companies in the industry“Stable” and these ratings continue to be investment grade. CSX maintained these credit ratings during third quarter 2007 and does not indicate a lack ofexpect that this reduction in credit ratings will materially increase its borrowing costs or materially affect its liquidity. The Company continuesIf CSX's credit ratings were to maintain adequate current assetsdecline to satisfy current liabilities and maturing obligations when they come due, and has sufficient financial capacity, including from CSX’s primary revolving credit agreement, to manage its day-to-day cash requirements and anticipated obligations.Anticipated Debt IssuanceCSX plans to issue up to $1 billion in unsecured notes during the second quarter of 2007. However there can be no assurance that market conditions will permitlower levels, the Company to sell such securities. It is anticipated that approximately $600 millioncould experience more significant increases in its interest cost for new debt, and the market’s demand for new debt could become further influenced by the economic and credit market environment. common stock, capital expenditures, working capital requirements, improvements in productivity and other cost reductions at our major transportation units.Casualty, environmental and legal reservesPension and post-retirement medical plan accounting· Casualty, environmental and legal reserves Depreciation policies for assets under the group-life methodIncome taxes· Pension and post-retirement medical plan accounting · Depreciation policies for assets under the group-life method · Income taxes CSX CORPORATIONITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONSFASBFinancial Accounting Standards Board issued InterpretationFIN 48,Accounting for Uncertainty in Income Taxes (“FIN 48”), which became effective for CSX beginning in 2007. FIN 48 addressed the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The impact of the Company’s reassessment of its tax positions in accordance with FIN 48 did not have a material impact on the Company’s results of operations, financial condition or liquidity.the 2006CSX’s most recent Annual Report on Form 10-K.Expectations as to results of operations and operational improvements;Expectations as to the effect of claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements on the Company’s financial condition;· Expectations as to results of operations and operational improvements; Management’s plans, goals, strategies and objectives for future operations and other similar expressions concerning matters that are not historical facts, and management’s expectations as to future performance and operations and the time by which objectives will be achieved; andFuture economic, industry or market conditions or performance.· Expectations as to the effect of claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements on the Company’s financial condition; · Management’s plans, goals, strategies and objectives for future operations and other similar expressions concerning matters that are not historical facts, and management’s expectations as to future performance and operations and the time by which objectives will be achieved; and · Future economic, industry or market conditions or performance, including, but not limited to, the discussion regarding 2007 Expectations on page 32. “project”“project,” “estimate” and similar expressions. The Company cautions against placing undue reliance on forward-looking statements, which reflect its good faith beliefs with respect to future events and are based on information currently available to it as of the date the forward-looking statement is made. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the times that,timing when, or by which, such performance or results will be achieved.CSX CORPORATIONITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS· Legislative, regulatory or legal developments involving transportation, including rail or intermodal transportation, the environment, hazardous materials, taxation, including the outcome of tax claims and litigation, the potential enactment of initiatives to re-regulate the rail industry and the ultimate outcome of shipper and rate claims subject to adjudication; · The outcome of litigation and claims, including, but not limited to, those related to fuel surcharge, environmental contamination, personal injuries and occupational illnesses; The outcome of litigation and claims, including, but not limited to, those related to environmental contamination, personal injuries and occupational illnesses;Material changes in domestic or international economic or business conditions, including those affecting the transportation industry such as access to capital markets, ability to revise debt arrangements as contemplated, customer demand, customer acceptance of price increases, effects of adverse economic conditions affecting shippers and adverse economic conditions in the industries and geographic areas that consume and produce freight;The inherent risks associated with safety and security, including the availability and cost of insurance, the availability and vulnerability of information technology, adverse economic or operational effects from actual or threatened war or terrorist activities and any governmental response;The Company’s success in implementing its operational objectives and improving Surface Transportation operating efficiency;Labor costs and labor difficulties, including stoppages affecting either the Company’s operations or the customers’ ability to deliver goods to the Company for shipment;Changes in operating conditions and costs or commodity concentrations;Changes in fuel prices, surcharges for fuel and the availability of fuel;Competition from other modes of freight transportation, such as trucking and competition and consolidation within the transportation industry generally; andNatural events such as severe weather conditions, including floods, fire, hurricanes and earthquakes, a pandemic affecting the health of the Company’s employees, its shippers or the consumers of goods such as may result from avian flu or other unforeseen disruptions of the Company’s operations, systems, property or equipment.MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION· Material changes in domestic or international economic or business conditions, including those affecting the transportation industry such as access to capital markets, ability to revise debt arrangements as contemplated, customer demand, customer acceptance of price increases, effects of adverse economic conditions affecting shippers and adverse economic conditions in the industries and geographic areas that consume and produce freight; · The inherent risks associated with safety and security, including the availability and cost of insurance, the availability and vulnerability of information technology, adverse economic or operational effects from actual or threatened war or terrorist activities and any governmental response; · The Company’s success in implementing its strategic plans and operational objectives and improving Surface Transportation operating efficiency; · Labor costs and labor difficulties, including stoppages affecting either the Company’s operations or the customers’ ability to deliver goods to the Company for shipment; · Changes in operating conditions and costs or commodity concentrations; · Changes in fuel prices, surcharges for fuel and the availability of fuel; · Competition from other modes of freight transportation, such as trucking and competition and consolidation within the transportation industry generally; and · Natural events such as severe weather conditions, including floods, fire, hurricanes and earthquakes, a pandemic crisis affecting the health of the Company’s employees, its shippers or the consumers of goods, or other unforeseen disruptions of the Company’s operations, systems, property or equipment. ITEM 3: QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK2006most recent Annual Report on Form 10-K.ITEM 4: CONTROLS AND PROCEDURESfirst quarterSeptember 28, 2007, under the supervision and with the participation of CSX’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that, as of firstthird quarter 2007, the Company’s disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information required to be included in CSX’s periodic SEC reports. There were no changes in the Company’s internal controls over financial reporting during the firstthird quarter of 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.ITEM 1: LEGAL PROCEEDINGSITEM 1A. RISK FACTORS“Management’s“Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of CSX’s 2006most recent Annual Report on Form 10-K. See also “Forward-Looking Statements,”Statements” included in Item 2 of this Quarterly Report on Form 10-Q. There have been no material changes from the risk factors previously disclosed in CSX’s most recent Annual Report on Form 10-K.ITEM 2: CSX PURCHASES OF EQUITY SECURITIESthreetwo primary reasons: (1) to further its goals under the Company’s share repurchase program; (2)program and to fund the Company’s contribution required to be paid in CSX common stock under 401(k) plans which cover certain union employees; and (3)employees.satisfy tax withholding obligations on the distributions of shares that were formerly deferred or on the vesting of restricted stock.During the first quarter of 2007, CSX bought back shares as partpurchase $3 billion of its share repurchase program and to meet minimum statutory tax withholding obligations. On February 14, 2007, the Board of Directors terminated the unused portion of the $500 million authority granted in July 2006 and replaced it with a new authority of up to $2.0 billion so that CSX may purchase additional shares of itsoutstanding common stock. CSX intends to complete the purchase of shares from time to time by the end of 2008.firstthird quarter 2007 was as follows: $ 2,321,700,364 July (June 30, 2007 - July 27, 2007) 3,001,587 $ 48.26 3,001,587 $ 2,176,838,936 August (July 28, 2007 - August 24, 2007) 8,371,000 $ 44.16 8,371,000 $ 1,807,134,410 September (August 25, 2007 - September 28, 2007) 9,214,300 $ 39.87 9,214,300 $ 1,439,716,780 Total/Ending Balance 20,586,887 $ 42.84 20,586,887 $ 1,439,716,780 CSX Purchases of Equity Securities for the Quarter First Quarter $ 183,902,865 1,433,783 $ 34.70 1,402,300 $ 135,233,226 1,389 $ 36.10 - $ 135,233,226 $ (135,233,226 ) $ 2,000,000,000 - - $ 2,000,000,000 3,494,638 $ 37.39 3,491,471 $ 1,869,464,987 4,929,810 $ 36.60 4,893,771 $ 1,869,464,987 (a) The difference of 36,039 in the total number of shares purchased versus total shares purchased as part of publicly announced plans for the quarter is due to shares purchased to meet minimum statutory tax obligations.(b) The beginning balance for the first quarter of $184 million represents the original $500 million authority level (as granted in July 2006) less the third and fourth quarter 2006 repurchases of $316 million.CSX CORPORATIONITEM 3: DEFAULTS UPON SENIOR SECURITIESITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5: OTHER INFORMATIONOn March 15, 2007, CSX received notice from The Children’s Investment Fund Management (U.K.) LLP that it had made a filing under the Hart-Scott-Rodino Antitrust Improvements Act to acquire more than $500 million of CSX stock. That firm has also advised CSX that it currently holds a significant economic position through common stock ownership and derivative contracts tied to the value of CSX stock. The Company is voluntarily furnishing this information.ITEM 6: EXHIBITS3.2 Bylaws of the Registrant, amended effective as of September 12, 2007 (incorporated herein by reference to Exhibit 3.2 of the Registrant's Current Report on Form 8-K filed with the Commission on September 14, 2007). Exhibits31.1* 31.1**Filed herewithCSX CORPORATION(Registrant)By:/s/ CAROLYN T. SIZEMORECarolyn T. SizemoreVice President and Controller(Principal Accounting Officer)April 17,October 22, 200739