Back to GetFilings.com



Table of Contents
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarter ended September 27, 2002
 
OR
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
 
Commission File Number 1-3359
 
 
CSX TRANSPORTATION, INC.
(Exact name of registrant as specified in its charter)
 
 
Virginia
  
54-6000720
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
 
500 Water Street, Jacksonville, Florida
  
32202
(Address of principal executive offices)
  
(Zip Code)
 
(904) 359-3100
(Registrant’s telephone number, including area code)
 
No Change
(Former name, former address and former fiscal year, if changed since last report.)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨
 
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
 

Table of Contents
CSX TRANSPORTATION, INC.
 
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED September 27, 2002
INDEX
 
           
Page Number
PART I.
   
FINANCIAL INFORMATION
       
Item 1:
   
Financial Statements
       
         
3
         
4
         
5
         
6
Item 2:
        
13
Item 3:
        
18
Item 4:
        
18
PART II.
   
OTHER INFORMATION
       
Item 6:
        
19
    
19
    
20

2

Table of Contents
 
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
 
Consolidated Statement of Earnings
(Millions of Dollars)
 
      
Quarter Ended
       
Nine Months Ended
  
      
September 27, 2002
       
September 28, 2001
       
September 27, 2002
     
September 28, 2001
  
      
(Unaudited)
  
OPERATING REVENUE
                                          
Merchandise
     
$
871
 
     
$
852
 
     
$
2,632
     
$
2,623
 
Automotive
     
 
195
 
     
 
184
 
     
 
626
     
 
591
 
Coal, Coke & Iron Ore
     
 
401
 
     
 
435
 
     
 
1,196
     
 
1,301
 
Other
     
 
6
 
     
 
24
 
     
 
43
     
 
68
 
      
    
    
    
Total
     
 
1,473
 
     
 
1,495
 
     
 
4,497
     
 
4,583
 
      
    
    
    
OPERATING EXPENSE
                                          
Labor and Fringe
     
 
611
 
     
 
606
 
     
 
1,830
     
 
1,854
 
Materials, Supplies and Other
     
 
261
 
     
 
282
 
     
 
832
     
 
837
 
Conrail Operating Fee, Rent and Services
     
 
86
 
     
 
84
 
     
 
260
     
 
261
 
Related Party Service Fees
     
 
(9
)
     
 
44
 
     
 
138
     
 
140
 
Building and Equipment Rent
     
 
112
 
     
 
102
 
     
 
311
     
 
317
 
Depreciation
     
 
136
 
     
 
130
 
     
 
397
     
 
392
 
Fuel
     
 
109
 
     
 
123
 
     
 
325
     
 
408
 
      
    
    
    
Total
     
 
1,306
 
     
 
1,371
 
     
 
4,093
     
 
4,209
 
      
    
    
    
OPERATING INCOME
     
 
167
 
     
 
124
 
     
 
404
     
 
374
 
Other Income (Expense)
     
 
16
 
     
 
(6
)
     
 
17
     
 
(1
)
Interest Expense
     
 
28
 
     
 
30
 
     
 
86
     
 
97
 
      
    
    
    
EARNINGS BEFORE INCOME TAXES
     
 
155
 
     
 
88
 
     
 
335
     
 
276
 
Income Tax Expense
     
 
58
 
     
 
31
 
     
 
127
     
 
104
 
      
    
    
    
NET EARNINGS
     
$
97
 
     
$
57
 
     
$
208
     
$
172
 
      
    
    
    
 
See accompanying Notes to Consolidated Financial Statements.

3

Table of Contents
 
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
 
Consolidated Statement of Cash Flows
(Millions of Dollars)
 
          
      
Nine Months Ended
  
      
September 27, 2002
       
September 28, 2001
  
      
(Unaudited)
  
OPERATING ACTIVITIES
                      
Net Earnings
     
$
208
 
     
$
172
 
Adjustments to Reconcile Net Earnings to Net Cash Provided:
                      
Depreciation
     
 
397
 
     
 
392
 
Deferred Income Taxes
     
 
144
 
     
 
87
 
Other Operating Activities
     
 
5
 
     
 
(17
)
Changes in Operating Assets and Liabilities:
                      
Accounts and Notes Receivable
     
 
(15
)
     
 
(26
)
Sale of Accounts Receivable, Net
     
 
(29
)
     
 
10
 
Other Current Assets
     
 
(39
)
     
 
(14
)
Accounts Payable
     
 
(81
)
     
 
(145
)
Other Current Liabilities
     
 
(108
)
     
 
66
 
      
    
Net Cash Provided by Operating Activities
     
 
482
 
     
 
525
 
      
    
INVESTING ACTIVITIES
                      
Property Additions
     
 
(647
)
     
 
(566
)
Short-term Investments
     
 
220
 
     
 
—  
 
Other Investing Activities
     
 
(5
)
     
 
1
 
      
    
Net Cash Used by Investing Activities
     
 
(432
)
     
 
(565
)
      
    
FINANCING ACTIVITIES
                      
Long-term Debt Repaid
     
 
(172
)
     
 
(134
)
Advances from CSX
     
 
244
 
     
 
324
 
Dividends Paid
     
 
(150
)
     
 
(159
)
Other Financing Activities
     
 
1
 
     
 
4
 
      
    
Net Cash (Used) Provided by Financing Activities
     
 
(77
)
     
 
35
 
      
    
Net Decrease in Cash and Cash Equivalents
     
 
(27
)
     
 
(5
)
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
                      
Cash and Cash Equivalents at Beginning of Period
     
 
27
 
     
 
28
 
      
    
Cash and Cash Equivalents at End of Period
     
 
—  
 
     
 
23
 
Short-term Investments at End of Period
     
 
—  
 
     
 
—  
 
      
    
Cash, Cash Equivalents and Short-term Investments at End of Period
     
$
—  
 
     
$
23
 
      
    
 
See accompanying Notes to Consolidated Financial Statements.

4

Table of Contents
 
CSX TRANSPORTATION, INC. AND SUBSIDIARIES
 
Consolidated Statement of Financial Position
(Millions of Dollars)
 
    
September 27, 2002
     
December 28, 2001
  
    
(Unaudited)
         
ASSETS
                  
Current Assets
                  
Cash, Cash Equivalents and Short-term Investments
   
$
—  
 
   
$
247
 
Accounts Receivable, Net
   
 
275
 
   
 
289
 
Notes Receivable
   
 
52
 
   
 
62
 
Materials and Supplies
   
 
183
 
   
 
181
 
Deferred Income Taxes
   
 
101
 
   
 
142
 
Income Taxes Receivable
   
 
78
 
   
 
78
 
Other Current Assets
   
 
63
 
   
 
32
 
    
  
Total Current Assets
   
 
752
 
   
 
1,031
 
Properties
   
 
16,992
 
   
 
16,644
 
Accumulated Depreciation
   
 
(4,539
)
   
 
(4,427
)
    
  
Properties-Net
   
 
12,453
 
   
 
12,217
 
Affiliates and Other Companies
   
 
212
 
   
 
198
 
Other Long-term Assets
   
 
609
 
   
 
567
 
    
  
Total Assets
   
$
14,026
 
   
$
14,013
 
    
  
LIABILITIES
                  
Current Liabilities
                  
Accounts Payable
   
$
624
 
   
$
736
 
Labor and Fringe Benefits Payable
   
 
286
 
   
 
320
 
Casualty, Environmental and Other Reserves
   
 
174
 
   
 
178
 
Current Maturities of Long-term Debt
   
 
207
 
   
 
170
 
Income and Other Taxes Payable
   
 
207
 
   
 
192
 
Due to Parent Company
   
 
1,338
 
   
 
1,107
 
Due to Affiliate
   
 
201
 
   
 
209
 
Other Current Liabilities
   
 
76
 
   
 
196
 
    
  
Total Current Liabilities
   
 
3,113
 
   
 
3,108
 
Casualty, Environmental and Other Reserves
   
 
507
 
   
 
532
 
Long-term Debt
   
 
880
 
   
 
1,033
 
Deferred Income Taxes
   
 
3,353
 
   
 
3,250
 
Other Long-term Liabilities
   
 
602
 
   
 
577
 
    
  
Total Liabilities
   
 
8,455
 
   
 
8,500
 
    
  
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
   
 
4,010
 
   
 
3,952
 
    
  
Total Shareholder’s Equity
   
 
5,571
 
   
 
5,513
 
    
  
Total Liabilities and Shareholder’s Equity
   
$
14,026
 
   
$
14,013
 
    
  
 
See accompanying Notes to Consolidated Financial Statements.

5

Table of Contents

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited)
(All tables in Millions of Dollars)

 
NOTE 1.    BASIS OF PRESENTATION
 
In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position of CSX Transportation, Inc. and its subsidiaries (“CSXT” or the “Company”) at September 27, 2002 and December 28, 2001, the results of its operations for the quarters and nine months ended September 27, 2002 and September 28, 2001, and its cash flows for the nine months ended September 27, 2002 and September 28, 2001, such adjustments being of a normal recurring nature. Certain prior-year data have been reclassified to conform to the 2002 presentation. CSXT is a wholly-owned subsidiary of CSX Corporation (“CSX”).
 
The Company believes that the disclosures presented are accurate and not misleading, but suggests that these financial statements be read in conjunction with the financial statements and the notes included in CSXT’s latest Form 10-K.
 
CSXT follows a 52/53 week fiscal reporting calendar. Fiscal years 2002 and 2001 consist of 52 weeks ending on December 27, 2002 and December 28, 2001, respectively. The financial statements presented are for the 13-week quarters ended September 27, 2002 and September 28, 2001, the 39-week periods ended September 27, 2002 and September 28, 2001, and as of December 28, 2001.
 
NOTE 2.    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 into 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 certain 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.

6

Table of Contents

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited), Continued
(All tables in Millions of Dollars)

 
NOTE 2.    INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued
 
Accounting and Financial Reporting Effects
 
CSXT’s operating revenue and expense includes activity from traffic moving on the territory acquired in the Conrail transaction. Operating expenses also include an expense category, “Conrail Operating Fee, Rent and Services,” which reflects payments to Conrail for the use of Conrail right-of-way and equipment, as well as charges for transportation, switching and terminal services in the Shared Asset Areas that Conrail operates for the joint benefit of CSXT and Norfolk Southern Railway.
 
Transactions with Conrail
 
The agreement under which CSXT operates 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 value of the underlying Conrail railroad system. Lease agreements for the 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.
 
As listed below, CSXT has amounts payable to Conrail, representing expenses incurred under the operating, equipment and shared area agreements with Conrail. At December 28, 2001, CSXT also had receivables from Conrail, principally for reimbursement of certain capital improvement costs.
 
      
September 27, 2002
     
December 28, 2001
CSXT Payable to Conrail
     
$
70
     
$
88
CSXT Receivable from Conrail
     
 
—  
     
 
3
 
NOTE 3.    ACCOUNTS RECEIVABLE
 
CSXT has an ongoing agreement to sell without recourse, on a revolving basis each month, an undivided percentage ownership interest in all rail freight accounts receivable to CSX Trade Receivables Corporation (“CTRC”), a wholly-owned subsidiary of CSX. Outstanding accounts receivable sold under this agreement totaled $936 million at September 27, 2002 and $966 million at December 28, 2001. In addition, through November 2001, CSXT had a revolving agreement with a financial institution to sell with recourse on a monthly basis an undivided percentage ownership interest in all miscellaneous accounts receivable. Accounts receivable sold under this agreement were $47 million at September 28, 2001. The sales of receivables have been reflected as reductions of Accounts Receivable in the Consolidated Statement of Financial Position. The net losses associated with sales of receivables were $18 million for the quarter and $56 million for the nine months ended September 27, 2002, and $19 million for the quarter and $58 million for the nine months ended September 28, 2001.

7

Table of Contents

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited), Continued
(All tables in Millions of Dollars)

 
NOTE 3.    ACCOUNTS RECEIVABLE, Continued
 
CSXT has retained the responsibility for servicing accounts receivable sold to CTRC. The average servicing period is approximately one month. No servicing asset or liability has been recorded since the fees CSXT receives for servicing the receivables approximates the related costs.
 
NOTE 4.    OTHER INCOME (EXPENSE)
 
      
Quarters Ended
       
Nine Months Ended
  
      
September 27, 2002
       
September 28, 2001
       
September 27, 2002
       
September 28, 2001
  
Income from Real Estate Operations(1)
     
$
33
 
     
$
15
 
     
$
76
 
     
$
65
 
Net Losses from Accounts Receivable Sold
     
 
(18
)
     
 
(19
)
     
 
(56
)
     
 
(58
)
Miscellaneous
     
 
1
 
     
 
(2
)
     
 
(3
)
     
 
(8
)
      
    
    
    
Total
     
$
16
 
     
$
(6
)
     
$
17
 
     
$
(1
)
      
    
    
    
(1)
 
Gross revenue from real estate operations was $42 million for the quarter and $102 million for the nine months ended September 27, 2002, and $21 million and $86 million for the quarter and nine months ended September 28, 2001.
 
NOTE 5.    RELATED PARTIES
 
At September 27, 2002 and December 28, 2001, 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 shown as Due to Parent Company in the Consolidated Statement of Financial Position. 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 returns earned by the plan portfolio, which was 2.79% and 4.19% at September 27, 2002 and September 28, 2001, respectively. Interest expense related to this plan was $8.0 million and $24.5 million for the quarter and nine months ended September 27, 2002, and $6.8 million and $23.7 million for the quarter and nine months ended September 28, 2001.
 
Related Party Service Fees consists of amounts related to:
 
 
•
 
CSX Intermodal, Inc. (“CSXI”) Reimbursements—Reimbursement from CSXI under an operating agreement for costs incurred by the Company related to intermodal operations. This reimbursement is based on an amount which approximates actual costs. The Company also collects certain revenue on behalf of CSXI under the operating agreement.
 
 
•
 
Total Distribution Services, Inc. (“TDSI”) Charges—Charges from TDSI for services provided to CSXT at automobile ramps. These charges are calculated based on direct costs.
 
 
•
 
TRANSFLO Terminal Services, Inc. (“TRANSFLO”) Charges—Charges from TRANSFLO for services provided to CSXT at bulk commodity facilities. These charges are calculated based on direct costs.

8

Table of Contents

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited), Continued
(All tables in Millions of Dollars)

 
NOTE 5.    RELATED PARTIES, Continued
 
 
•
 
CSX Management Service Fee—A management service fee charged by CSX as compensation for certain corporate services provided to the Company. These services include, but are not limited to, the areas of human resources, finance, administration, benefits, legal, tax, internal controls and corporate communications, as well as strategic management services. The fee for 2002 is calculated as a percentage of CSXT’s revenue. Prior to 2002, the fee was calculated as a percentage of CSX’s investment in CSXT.
 
 
•
 
CSX Technology, Inc. (“CSX Technology”) Charges—Data processing charges from CSX Technology as compensation to CSX Technology for the development, implementation and maintenance of computer systems, software and associated documentation for the day-to-day operations of the Company. These charges are based on a mark-up of direct costs.
 
 
•
 
CTRC Reimbursement—During the quarter ended September 27, 2002, the Company charged CTRC for accounts receivable reserves recorded by the Company in current and prior periods related to receivables sold to CTRC.
 
CSX Technology, CSXI, TDSI, and TRANSFLO are wholly-owned subsidiaries of CSX.
 
Detail Of Due to Affiliate
 
      
Quarters Ended
      
September 27, 2002
     
December 28, 2001
CSXI
     
$
34
     
$
24
TDSI
     
 
—  
     
 
4
TRANSFLO
     
 
9
     
 
5
CSX Technology
     
 
37
     
 
44
CSX Insurance
     
 
115
     
 
125
CTRC
     
 
6
     
 
6
Other
     
 
—  
     
 
1
      
    
Total Due to Affiliate
     
$
201
     
$
209
      
    
 
Detail of Related Party Service Fees
 
      
Quarters Ended
       
Nine Months Ended
  
      
September 27, 2002
       
September 28, 2001
       
September 27, 2002
       
September 28, 2001
  
CSXI
     
$
(94
)
     
$
(94
)
     
$
(272
)
     
$
(280
)
TDSI
     
 
7
 
     
 
11
 
     
 
31
 
     
 
38
 
TRANSFLO
     
 
20
 
     
 
13
 
     
 
60
 
     
 
39
 
CSX Management Service Fee
     
 
59
 
     
 
60
 
     
 
213
 
     
 
179
 
CSX Technology
     
 
52
 
     
 
54
 
     
 
159
 
     
 
164
 
CTRC
     
 
(53
)
     
 
—  
 
     
 
(53
)
     
 
—  
 
      
    
    
    
Total Related Party Service Fees
     
$
(9
)
     
$
44
 
     
$
138
 
     
$
140
 
      
    
    
    

9

Table of Contents

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited), Continued
(All tables in Millions of Dollars)

 
NOTE 5.    RELATED PARTIES, Continued
 
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 September 27, 2002 and December 28, 2001, $115 million and $125 million, respectively, was outstanding. Interest on the loan is payable monthly at 0.45% over the LIBOR rate, and was 1.82% at September 27, 2002 and 2.56% at December 28, 2001. Interest expense related to the loan was $0.6 million and $1.9 million for the quarter and nine months ended September 27, 2002, respectively, and $1.4 million and $4.9 million for the quarter and nine months ended September 28, 2001, respectively.
 
CSXT participates with SL Service, Inc., a wholly-owned subsidiary of CSX, in sale-leaseback arrangements. Under these arrangements, SL Service, Inc. sold equipment to a third party and CSXT leased the equipment and assigned the lease to SL Service, Inc. SL Service, Inc. is obligated for all lease payments and other associated equipment expenses. If SL Service, Inc. defaults on its obligations under the arrangements, CSXT would assume the asset lease rights and obligations of $27 million at September 27, 2002. These leases were assumed by Maersk as part of its purchase of the CSX international liner business. CSXT believes that Maersk will fulfill its contractual commitments with respect to such leases and that CSXT will have no further liability for those obligations.
 
NOTE 6.    COMMITMENTS AND CONTINGENCIES
 
Purchase Commitments
 
The Company has entered into fuel purchase agreements for approximately 50% of its fuel requirements over the next three months. The Company has not entered into any fuel purchase agreements for 2003. At September 27, 2002, the agreements amount to approximately 70 million gallons in commitments at a weighted average of 78 cents per gallon. These contracts require the Company to take monthly delivery of specified quantities of fuel at a fixed price.
 
CSXT also has a commitment under a long-term maintenance program for approximately 40% of the Company’s fleet of locomotives. The agreement expires in 2025 and totals $2.6 billion.
 
Contingencies
 
Self-Insurance
 
The Company obtains substantial amounts of commercial insurance for potential losses for third-party liability and property damages. It also self-insures at reasonable levels, based on its assessment of market risks and practices.

10

Table of Contents

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited), Continued
(All tables in Millions of Dollars)

 
NOTE 6.    COMMITMENTS AND CONTINGENCIES, Continued
 
Contingencies, Continued
 
Casualty
 
CSXT incurs claims for occupational injuries, personal injuries and accidents. Casualty reserves are estimated based upon the first reporting of an accident or personal injury, and updated as information develops. Liabilities for accidents are based upon the type and severity of the injury or claim and the use of 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. Occupational injury, personal injury and accident liabilities amount to $425 million and $435 million at September 27, 2002 and December 28, 2001, respectively.
 
Environmental
 
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 89 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 206 sites. The 206 sites where it is participating in the study or clean-up of alleged environmental contamination include the 89 Superfund sites noted above.
 
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, 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 of evidence connecting CSXT to the location, and the number, connection, financial position and ability to pay of other named and unnamed PRPs at the location.
 
Based upon the assessment review process, CSXT has recorded, and reviews at least quarterly for adequacy, reserves to cover estimated contingent future environmental costs with respect to such sites. The recorded liabilities for estimated future environmental costs at September 27, 2002, and December 28, 2001 were $34 and $32 million, respectively. These recorded liabilities, which are undiscounted, include amounts representing CSXT’s estimate of unasserted claims, which CSXT believes to be immaterial. The liability has been accrued for future costs for all sites where the Company’s obligation is probable and where such costs can be reasonably estimated. The liability includes future costs for remediation and restoration of sites as well as any significant ongoing monitoring costs, but excludes any anticipated insurance recoveries. The majority of the September 27, 2002 environmental liability is expected to be paid out over the next five to seven years, funded by cash generated from operations.

11

Table of Contents

CSX TRANSPORTATION, INC. AND SUBSIDIARIES
 
Notes to Consolidated Financial Statements (Unaudited), Continued
(All tables in Millions of Dollars)

NOTE 6.    COMMITMENTS AND CONTINGENCIES, Continued
 
Contingencies, Continued
 
Environmental, 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. Based upon information currently available, however, the Company believes its environmental reserves are adequate to accomplish remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters will not materially affect its overall results of operations and financial condition.
 
New Orleans Tank Car Fire
 
CSXT’s settlement of the New Orleans Tank Car Fire Litigation was $220 million, of which approximately $135 million was funded by CSXT’s insurers, and was paid during the third quarter of 2002 to the plaintiffs’ representatives.
 
Contract Settlement
 
In July the Company received $44 million as the first of two payments to settle a contract dispute. In the quarter ended September 27, 2002, the Company recognized approximately $7 million of this 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. The second payment of $23 million is due in January 2003 and will likewise 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
 
A number of other legal actions are pending against CSXT in which claims are made in substantial amounts. While the ultimate results of these actions against CSXT cannot be predicted with certainty, management does not currently expect that resolution of these matters will have a material effect on CSXT’s consolidated financial position, results of operations or cash flows. 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 quarter received.

12

Table of Contents

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

 
RESULTS OF OPERATIONS
 
CSX Transportation, Inc. (“CSXT” or “Company”) follows a 52/53-week fiscal calendar. Fiscal years 2002 and 2001 consist of 52 weeks ending on December 27, 2002 and December 28, 2001, respectively. The financial statements presented are for the 13-week quarters ended September 27, 2002 and September 28, 2001, the 39-week periods ended September 27, 2002 and September 28, 2001, and as of December 28, 2001.
 
CSXT earned $167 million in operating income for the quarter ended September 27, 2002, compared to $124 million reported in the third quarter of 2001. The $43 million, or 35%, increase was primarily due to a related party charge.
 
Revenue decreased to $1.473 billion in the current period from $1.495 billion in the same quarter of the prior year. The $22 million decrease resulted from weaker coal demand, which offset increases in merchandise and automotive revenues.
 
Merchandise revenue was up $19 million or 2% over the prior year period due to volume and price increases. This increase was due to the continued strong performance of phosphates and fertilizers as well as year-over-year improvements in metals, paper and forest, and chemical volumes. Agriculture volumes were down in the quarter because of a decline in the demand for export grain. The phosphates and fertilizers, paper and forest, agricultural, chemicals, minerals, and emerging markets commodity groups realized yield improvements as compared to the prior year period.
 
Automotive revenue was up $11 million or 6% due to yield improvements driven primarily by favorable mix and extended linehauls. Automotive sales are favorably affected by continued dealer incentives. The continuing increase in light truck production capacity is driving volume growth.
 
Coal, coke and iron ore revenue was down $34 million versus the prior year. Coal volumes were down 6% and revenue was down 8%. Unfavorable export, metallurgical, lake, and industrial coal are a result of plant closings and reduced competitive standing of U.S. coal in international markets. Pricing and increased tons per car continue to improve revenue per car yield, but were offset by mix changes, including short-haul modal conversions to the river, and decline in higher revenue per car movements, such as export and long-haul southern utility traffic.
 
Operating expenses were at $1.31 billion and $1.37 billion for the quarters ended September 27, 2002 and September 28, 2001, respectively. Labor and fringe benefits, equipment rent and depreciation increased in the current year quarter, offset by related party fees, lower materials, supplies and other and favorable fuel expenses.
 
Labor and fringe benefits increased $5 million primarily due to inflation and increased healthcare costs, partially offset by decreases attributed to headcount reductions. Equipment rent increased $10 million or 10% primarily as a result of unanticipated car hire reclaims from another railroad, which should not recur.

13

Table of Contents

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, Continued

 
RESULTS OF OPERATIONS, Continued
 
Fuel costs were down $14 million, $13 million due to lower fuel price. The net impact on operating income of reduced fuel price was $4 million, since $9 million of fuel surcharge revenue was eliminated.
 
Materials, supplies and other expense improved by $21 million as compared to the prior year quarter primarily due to reductions in personal injuries, derailment and other costs. Expenses associated with the Baltimore tunnel fire last year were offset by insurance recoveries in the same period.
 
Related party service fees decreased $53 million due to the Company charging CTRC for accounts receivable reserves recorded by the Company in current and prior periods related to receivables sold to CTRC.
 
In addition, several cost categories reflected expenses associated with train speed restrictions due to the heat orders that were put in place during the height of the Company’s maintenance program in August and part of September.
 
The following tables provide rail carload and revenue data by service group and commodity for the quarters and nine months ended September 27, 2002 and September 28, 2001:
 
    
Third Quarter Loads
(Thousands)
     
Third Quarter Revenue
(Millions of Dollars)
  
    
2002
   
2001
     
% Change
     
2002
   
2001
     
% Change
  
Merchandise
                                          
Phosphates and Fertilizer
   
113
   
101
     
12
 
   
$
73
   
$
63
     
16
 
Metals
   
83
   
81
     
2
 
   
 
104
   
 
102
     
2
 
Food and Consumer
   
41
   
41
     
—  
 
   
 
53
   
 
54
     
(2
)
Paper and Forest
   
122
   
120
     
2
 
   
 
161
   
 
161
     
—  
 
Agricultural
   
86
   
88
     
(2
)
   
 
116
   
 
118
     
(2
)
Chemicals
   
124
   
123
     
1
 
   
 
224
   
 
216
     
4
 
Minerals
   
21
   
23
     
(9
)
   
 
33
   
 
36
     
(8
)
Emerging Markets
   
115
   
117
     
(2
)
   
 
107
   
 
102
     
5
 
    
  
    
  
  
    
Total Merchandise
   
705
   
694
     
2
 
   
 
871
   
 
852
     
2
 
Automotive
   
124
   
119
     
4
 
   
 
195
   
 
184
     
6
 
Coal, Coke and Iron Ore
                                          
Coal
   
395
   
422
     
(6
)
   
 
382
   
 
417
     
(8
)
Coke
   
9
   
10
     
(10
)
   
 
12
   
 
12
     
—  
 
Iron Ore
   
13
   
12
     
8
 
   
 
7
   
 
6
     
17
 
    
  
    
  
  
    
Total Coal, Coke and Iron Ore
   
417
   
444
     
(6
)
   
 
401
   
 
435
     
(8
)
Other
   
—  
   
—  
     
—  
 
   
 
6
   
 
24
     
(75
)
    
  
    
  
  
    
Total Rail
   
1,246
   
1,257
     
(1
)
   
$
1,473
   
$
1,495
     
(1
)
    
  
    
  
  
    

14

Table of Contents

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, Continued

 
RESULTS OF OPERATIONS, Continued
 
    
Nine Months Loads
(Thousands)
    
Nine Months Revenue
(Millions of Dollars)
 
    
2002
   
2001
     
% Change
     
2002
   
2001
     
% Change
  
Merchandise
                                          
Phosphates and Fertilizer
   
351
   
325
     
8
 
   
$
245
   
$
227
     
8
 
Metals
   
240
   
245
     
(2
)
   
 
302
   
 
304
     
(1
)
Food and Consumer
   
122
   
122
     
—  
 
   
 
161
   
 
163
     
(1
)
Paper and Forest
   
360
   
363
     
(1
)
   
 
479
   
 
482
     
(1
)
Agricultural
   
265
   
280
     
(5
)
   
 
362
   
 
377
     
(4
)
Chemicals
   
378
   
380
     
(1
)
   
 
681
   
 
673
     
1
 
Minerals
   
66
   
70
     
(6
)
   
 
101
   
 
107
     
(6
)
Emerging Markets
   
323
   
327
     
(1
)
   
 
301
   
 
290
     
4
 
    
  
    
  
  
    
Total Merchandise
   
2,105
   
2,112
     
—  
 
   
 
2,632
   
 
2,623
     
—  
 
Automotive
   
401
   
385
     
4
 
   
 
626
   
 
591
     
6
 
Coal, Coke and Iron Ore
                                          
Coal
   
1,178
   
1,291
     
(9
)
   
 
1,142
   
 
1,248
     
(8
)
Coke
   
26
   
31
     
(16
)
   
 
39
   
 
36
     
8
 
Iron Ore
   
26
   
30
     
(13
)
   
 
15
   
 
17
     
(12
)
    
  
    
  
  
    
Total Coal, Coke and Iron Ore
   
1,230
   
1,352
     
(9
)
   
 
1,196
   
 
1,301
     
(8
)
Other
   
—  
   
—  
     
—  
 
   
 
43
   
 
68
     
(37
)
    
  
    
  
  
    
Total Rail
   
3,736
   
3,849
     
(3
)
   
$
4,497
   
$
4,583
     
(2
)
    
  
    
  
  
    

15

Table of Contents

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, Continued

OTHER MATTERS
 
New Orleans Tank Car Fire
 
CSXT’s settlement of the New Orleans Tank Car Fire Litigation was $220 million, of which approximately $135 million was funded by CSXT’s insurers, and was paid during the third quarter of 2002 to the plaintiffs’ representatives.

16

Table of Contents

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS, Continued

FORWARD LOOKING STATEMENTS
 
This Quarterly 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.
 
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 Quarterly 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.

17

Table of Contents
ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The Company is subject to risk relating to changes in the price of diesel fuel. Forward purchase agreements have been entered into with various suppliers for approximately 70 million gallons of fuel, which is approximately 50% of the requirement over the next three months, at a weighted average price of 78 cents per gallon. The Company is subject to fluctuations in prices for the remainder of its 2002 needs. A one cent change in the price per gallon of fuel would affect fuel expense for the remainder of 2002 by approximately $0.7 million. The Company has not entered into any fuel purchase contracts for 2003.
 
CSXT participates in the CSX cash management plan, under which excess cash is advanced to CSX for investment. CSX than makes cash funds available to CSXT as needed for use in its operations CSXT 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 September 27, 2002 and December 28, 2001, 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. CSXT also had $108 million of floating rate debt outstanding at September 27, 2002 and December 28, 2001. A 1% increase or decrease in the interest rates would have an approximately $1.1 million effect on annual interest expense.
 
ITEM 4:     DISCLOSURE CONTROL AND PROCEDURES
 
As of October 23, 2002, 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 October 23, 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 evaluation.

18

Table of Contents
PART II.    OTHER INFORMATION
 
Item 6.     Exhibits and Reports on Form 8-K
 
(a)    Exhibits
 
99.1
   
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
99.2
   
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
 
(b)    Reports on Form 8-K
 
None
 
Signature
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
CSX TRANSPORTATION, INC.
(Registrant)
 
By:
  
/s/    CAROLYN T. SIZEMORE        
   
Carolyn T. Sizemore
(Principal Accounting Officer)
 
Dated: October 28, 2002

19

Table of Contents
 
CERTIFICATE OF PRINCIPAL EXECUTIVE OFFICER
 
I, Michael J. Ward, certify that:
 
 
1.
 
I have reviewed this quarterly report on Form 10-Q of CSX Transportation, Inc.;
 
 
2.
 
Based on my knowledge, this quarterly 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 quarterly report;
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly 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; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
 
6.
 
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not 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: October 28, 2002
/s/    MICHAEL J. WARD        
Michael J. Ward
Principal Executive Officer

20

Table of Contents
 
CERTIFICATE OF PRINCIPAL FINANCIAL OFFICER
 
I, Frederick J. Favorite Jr., certify that:
 
 
1.
 
I have reviewed this quarterly report on Form 10-Q of CSX Transportation, Inc.;
 
 
2.
 
Based on my knowledge, this quarterly 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 quarterly report;
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly 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; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
 
6.
 
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not 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: October 28, 2002
/s/    FREDERICK J. FAVORITE JR.        
Frederick J. Favorite Jr.
Principal Financial Officer

21