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EX-31 - RULE 13A-14(A) CERTIFICATION - CSX CORPexhibit_31.htm
EX-32 - SECTION 1350 CERTIFICATION - CSX CORPexhibit_32.htm

 
 

 

UNITED STATES
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 quarterly period ended September 25, 2009

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 1-8022
 
CSX CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
 
62-1051971
(State or other jurisdiction of incorporation or organization)
     
(I.R.S. Employer Identification No.)
 
500 Water Street, 15th Floor, Jacksonville, FL
 
32202
 
(904) 359-3200
(Address of principal executive offices)
 
(Zip Code)
 
(Telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes (X)   No (  )

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes (X)  No ( )

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one)
Large Accelerated Filer (X)             Accelerated Filer (  )             Non-accelerated Filer (  )

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (  )    No (X)

There were 392,558,925 shares of common stock outstanding on September 25, 2009 (the latest practicable date that is closest to the filing date).

 
1

 

 
 
CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 2009
       
     
Page
PART I.
FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
       
 
3
   
  Quarters and Nine Months Ended September 25, 2009
 
   
  and September 26, 2008
 
       
 
4
   
  At September 25, 2009 (Unaudited) and December 26, 2008
 
       
 
5
   
  Nine Months Ended September 25, 2009 and September 26, 2008
 
       
 
6
       
Item 2.
31
 
  and Results of Operations
       
Item 3.
45
       
Item 4.
45
       
PART II.
OTHER INFORMATION
 
       
Item 1.
45
       
Item 1A.
45
       
Item 2.
46
       
Item 3.
46
       
Item 4.
46
       
Item 5.
46
       
Item 6.
47
       
   
48

2

CSX CORPORATION
ITEM 1: FINANCIAL STATEMENTS
 
 
(Dollars in Millions, Except Per Share Amounts)


     
Third Quarters
 
Nine Months Ended
     
2009
2008
 
2009
2008
Revenue
 $2,289
 $2,961
 
 $6,721
 $8,581
Expense
         
 
Labor and Fringe
 653
 754
 
 1,969
 2,232
 
Materials, Supplies and Other
 428
 568
 
 1,273
 1,586
 
Fuel
 223
 508
 
 599
 1,486
 
Depreciation
 228
 227
 
 681
 676
 
Equipment and Other Rents
 92
 106
 
 303
 329
 
Inland Transportation
 67
 65
 
 194
 196
 
Total Expense
 1,691
 2,228
 
 5,019
 6,505
               
Operating Income
 598
 733
 
 1,702
 2,076
               
Interest Expense
 (140)
 (131)
 
 (420)
 (383)
Other Income - Net (Note 8)
 6
 5
 
 19
 94
Earnings From Continuing Operations
         
 
Before Income Taxes
 464
 607
 
 1,301
 1,787
               
Income Tax Expense (Note 9)
 (171)
 (227)
 
 (469)
 (653)
Earnings From Continuing Operations
 293
 380
 
 832
 1,134
               
Discontinued Operations (Note 11)
 -
 2
 
 15
 (16)
Net Earnings
 $293
 $382
 
 $847
 $1,118
               
Per Common Share (Note 2)
         
Net Earnings Per Share, Basic
         
 
Continuing Operations
 $0.75
 $0.94
 
 $2.12
 $2.81
 
Discontinued Operations
 -
 0.01
 
 0.04
 (0.04)
 
Net Earnings
 $0.75
 $0.95
 
 $2.16
 $2.77
               
Net Earnings Per Share, Assuming Dilution
         
 
Continuing Operations
 $0.74
 $0.93
 
 $2.10
 $2.75
 
Discontinued Operations
 -
 0.01
 
 0.04
 (0.04)
 
Net Earnings
 $0.74
 $0.94
 
 $2.14
 $2.71
               
Average Shares Outstanding (Thousands)
 392,352
 402,224
 
 391,847
 404,260
               
Average Shares Outstanding,
         
 
Assuming Dilution (Thousands)
 396,333
 408,486
 
 395,268
 412,936
               
Cash Dividends Paid Per Common Share
 $0.22
 $0.22
 
 $0.66
 $0.55

See accompanying notes to consolidated financial statements.

3

CSX CORPORATION
ITEM 1: FINANCIAL STATEMENTS
 

(Dollars in Millions)
     
(Unaudited)
 
     
September 25,
December 26,
     
2009
2008
ASSETS
Current Assets
     
 
Cash and Cash Equivalents
 
 $1,240
 $669
 
Short-term Investments
 
 81
 76
 
Accounts Receivable - Net (Note 1)
 928
 1,107
 
Materials and Supplies
 
 239
 217
 
Deferred Income Taxes
 
 171
 203
 
Other Current Assets
 
 111
 119
 
  Total Current Assets
 
 2,770
 2,391
         
Properties
 
 30,805
 30,208
Accumulated Depreciation
 
 (7,765)
 (7,520)
 
  Properties - Net
 
 23,040
 22,688
         
Investment in Conrail (Note 10)
 
 626
 609
Affiliates and Other Companies
 
 411
 406
Other Long-term Assets
 
 173
 194
 
  Total Assets
 
 $27,020
 $26,288
         
LIABILITIES AND SHAREHOLDERS' EQUITY
       
Current Liabilities
     
 
Accounts Payable
 
 $963
 $973
 
Labor and Fringe Benefits Payable
 402
 465
 
Casualty, Environmental and Other Reserves (Note 4)
 179
 236
 
Current Maturities of Long-term Debt (Note 7)
 316
 319
 
Income and Other Taxes Payable
 
 121
 125
 
Other Current Liabilities
 
 95
 286
 
  Total Current Liabilities
 
 2,076
 2,404
         
Casualty, Environmental and Other Reserves (Note 4)
 580
 643
Long-term Debt (Note 7)
 
 7,906
 7,512
Deferred Income Taxes
 
 6,551
 6,235
Other Long-term Liabilities
 
 1,218
 1,426
 
  Total Liabilities
 
 18,331
 18,220
         
Common Stock $1 Par Value
 
 393
 391
Other Capital
 
 48
 -
Retained Earnings
 
 8,963
 8,398
Accumulated Other Comprehensive Loss (Note 1)
 (728)
 (741)
Noncontrolling Minority Interest
 
 13
 20
 
Total Shareholders' Equity
 
 8,689
 8,068
 
Total Liabilities and Shareholders' Equity
 $27,020
 $26,288


See accompanying notes to consolidated financial statements.

4

CSX CORPORATION
ITEM 1: FINANCIAL STATEMENTS
 

 (Dollars in Millions)


         
Nine Months Ended
 
2009
2008
OPERATING ACTIVITIES
   
 
Net Earnings
 $847
 $1,118
 
Adjustments to Reconcile Net Earnings to Net Cash Provided
 
 
by Operating Activities:
   
 
Depreciation
 679
 686
 
Deferred Income Taxes
 330
 356
   
Contributions to Qualified Pension Plans
 (166)
 (50)
 
Other Operating Activities
 (150)
 (14)
 
Changes in Operating Assets and Liabilities:
   
 
Accounts Receivable
 159
 (76)
 
Other Current Assets
 (50)
 (4)
 
Accounts Payable
 (4)
 86
 
Income and Other Taxes Payable
 39
 54
 
Other Current Liabilities
 (80)
 35
   
Net Cash Provided by Operating Activities
 1,604
 2,191
             
INVESTING ACTIVITIES
   
 
Property Additions (Note 1)
 (1,046)
 (1,308)
 
Purchases of Short-term Investments
 -
 (25)
 
Proceeds from Sales of Short-term Investments
 -
 280
 
Other Investing Activities
 51
 27
   
Net Cash Used in Investing Activities
 (995)
 (1,026)
             
FINANCING ACTIVITIES
   
 
Long-term Debt Issued (Note 7)
 500
 1,000
 
Long-term Debt Repaid (Note 7)
 (110)
 (220)
 
Dividends Paid
 (259)
 (222)
 
Stock Options Exercised (Note 3)
 19
 75
 
Shares Repurchased
 -
 (1,307)
 
Other Financing Activities (Note 1)
 (188)
 36
   
Net Cash Used in Financing Activities
 (38)
 (638)
             
 
Net Increase in Cash and Cash Equivalents
 571
 527
             
CASH AND CASH EQUIVALENTS
   
 
Cash and Cash Equivalents at Beginning of Period
 669
 368
   
Cash and Cash Equivalents at End of Period
 $1,240
 $895

See accompanying notes to consolidated financial statements.


5

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
Background

CSX Corporation (“CSX”) together with its subsidiaries (the “Company”), based in Jacksonville, Florida, is one of the nation's leading transportation suppliers.  The Company’s rail and intermodal businesses provide rail-based transportation services including traditional rail service and the transport of intermodal containers and trailers.

CSX’s principal operating subsidiary, CSX Transportation, Inc. (“CSXT”), provides an important link to the transportation supply chain through its approximately 21,000 route mile rail network, which serves major population centers 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.

Other entities

In addition to CSXT, the rail segment includes non-railroad subsidiaries Total Distribution Services, Inc. (“TDSI”), Transflo Terminal Services, Inc. (“Transflo”), CSX Technology, Inc. (“CSX Technology”) and other subsidiaries.  TDSI serves the automotive industry with distribution centers and storage locations, while Transflo provides logistical solutions for transferring products from rail to trucks.  Technology and other support services are provided by CSX Technology and other subsidiaries.

CSX’s other holdings include CSX Real Property, Inc., a subsidiary responsible for the Company’s real estate sales, leasing, acquisition and management and development activities.  These activities are classified in other income – net because they are not considered by the Company to be operating activities and results may fluctuate with the timing of real estate sales.  In May 2009, CSX sold the stock of a subsidiary that indirectly owned Greenbrier Hotel Corporation, owner of The Greenbrier resort.  For more information, see Note 11, Discontinued Operations.
 

Basis of Presentation

In the opinion of management, the accompanying consolidated financial statements contain all normal, recurring adjustments necessary to fairly present the following:

·  
Consolidated income statements for the quarters and nine months ended September 25, 2009 and September 26, 2008;

·  
Consolidated balance sheets at September 25, 2009 and December 26, 2008; and

·  
Consolidated cash flow statements for the nine months ended September 25, 2009 and September 26, 2008.


6

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1.                      Nature of Operations and Significant Accounting Policies, continued
 
In addition, management has evaluated and disclosed all material events occurring subsequent to the date of the financial statements up to the date this quarterly report is filed on Form 10-Q.

Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted from these interim financial statements.  CSX suggests that these financial statements be read in conjunction with the audited financial statements and the notes included in CSX's most recent Annual Report on Form 10-K, its subsequent Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

Fiscal Year

CSX follows a 52/53 week fiscal reporting calendar with the last day of each reporting period ending on a Friday:

·  
The third fiscal quarter of 2009 and 2008 consisted of 13 weeks ending on September 25, 2009 and September 26, 2008, respectively.

·  
The nine month periods of 2009 and 2008 consisted of 39 weeks ending on September 25, 2009 and September 26, 2008, respectively.

·  
Fiscal year 2008 consisted of 52 weeks ending on December 26, 2008.

·  
Fiscal year 2009 will consist of 52 weeks ending on December 25, 2009.

·  
Fiscal year 2010 will consist of 53 weeks ending on December 31, 2010.

Except as otherwise specified, references to “third quarter(s)” or “nine months” indicate CSX’s fiscal periods ending September 25, 2009 or September 26, 2008, and references to year-end indicate the fiscal year ended December 26, 2008.


Total comprehensive earnings are defined as all changes in shareholders' equity during a period, other than those resulting from investments by and distributions to shareholders (i.e., issuance of equity securities and dividends).  Generally, for CSX, total comprehensive earnings equals net earnings plus or minus adjustments for pension and other post-retirement liabilities.  Total comprehensive earnings represent the activity for a period net of related tax effects and were $300 million and $383 million for third quarters 2009 and 2008, respectively, and $860 million and $1.1 billion for nine months 2009 and 2008, respectively.

 

7

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1.                    Nature of Operations and Significant Accounting Policies, continued
 
    While total comprehensive earnings is the activity in a period and is largely driven by net earnings in that period, accumulated other comprehensive income or loss (“AOCI”) represents the cumulative balance of other comprehensive income, net of tax, as of the balance sheet date.  For CSX, AOCI is primarily the cumulative balance related to the pension and other post-retirement adjustments and reduced overall equity by $728 million and $741 million as of September 2009 and December 2008, respectively.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts on uncollectible accounts related to freight receivables, public projects (work done by CSX on behalf of a government agency), claims for damages and other various receivables. The allowance is based upon the credit worthiness of customers, historical experience, the age of the receivable and current market and economic conditions. Uncollectible amounts are charged against the allowance account. Allowance for doubtful accounts of $55 million and $70 million is included in the Consolidated Balance Sheets as of September 2009 and December 2008.

Capital Expenditures

   Property additions, which are classified as investing activities on the consolidated cash flow statements, consisted of $1 billion and $1.3 billion for nine months 2009 and 2008, respectively. Total capital expenditures for nine months 2009 also include approximately $160 million of new assets purchased using seller financing, which are included in other financing activities on the consolidated cash flow statements. There were no purchases of new assets under seller financing agreements during 2008.  For 2009, the Company plans to spend $1.6 billion for total capital expenditures.  
 
New Accounting Pronouncements and Changes in Accounting Policy

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.  This statement modifies the Generally Accepted Accounting Principles (“GAAP”) hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards Codification (“ASC”), also known collectively as the “Codification,” is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC.  Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance.  It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation.  This statement applies beginning in third quarter 2009.  All accounting references have been updated, and therefore SFAS references have been replaced with ASC references.



8

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1.                      Nature of Operations and Significant Accounting Policies, continued
 
Effective beginning second quarter 2009, the Financial Instruments Topic, ASC 825-10-65-1(a), requires disclosures about fair value of financial instruments in quarterly reports as well as in annual reports.  For CSX, this statement applies to certain investments and long-term debt.  (See Note 12, Fair Value Measurements.)

Effective beginning first quarter 2009, the Consolidation Topic, ASC 810-10-45-16, revised the accounting treatment for noncontrolling minority interests of partially-owned subsidiaries.  Noncontrolling minority interests represent the portion of earnings that is not within the parent company’s control. These amounts are now required to be reported as equity instead of as a liability on the balance sheet.  This change resulted in a $20 million reclassification from other long-term liabilities to shareholders’ equity on the December 2008 consolidated balance sheet and are primarily related to CSX’s investments in Four Rivers Transportation Inc. and The Indiana Rail Road Company.  Additionally, this statement requires net income from noncontrolling minority interests to be shown separately on the consolidated income statements.  These amounts are not material for CSX and therefore are not shown separately.





9

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



The following table sets forth the computation of basic earnings per share and earnings per share, assuming dilution:

     
Third Quarters
Nine Months Ended
     
2009
2008
2009
2008
Numerator (Dollars in millions):
         
 
Earnings from Continuing Operations
 
 $293
 $380
 $832
 $1,134
 
Interest Expense on Convertible Debt - Net of Tax
 
 -
 -
 -
 1
 
Earnings from Continuing Operations, If Converted
 
 293
 380
 832
 1,135
 
Discontinued Operations - Net of Tax (a)
 
 -
 2
 15
 (16)
 
Net Earnings, If Converted
 
 293
 382
 847
 1,119
 
Interest Expense on Convertible Debt - Net of Tax
 
 -
 -
 -
 (1)
 
Net Earnings
 
 $293
 $382
 $847
 $1,118
             
Denominator (Units in thousands):
         
 
Average Common Shares Outstanding
 
 392,352
 402,224
 391,847
 404,260
 
Convertible Debt
 
 1,116
 1,390
 1,117
 3,612
 
Stock Option Common Stock Equivalents (b)
 
 2,417
 3,634
 2,076
 4,055
 
Other Potentially Dilutive Common Shares
 
 448
 1,238
 228
 1,009
 
Average Common Shares Outstanding, Assuming Dilution
 396,333
 408,486
 395,268
 412,936
             
Net Earnings Per Share, Basic:
         
 
Continuing Operations
 
 $0.75
 $0.94
 $2.12
 $2.81
 
Discontinued Operations
 
 -
 0.01
 0.04
 (0.04)
 
Net Earnings
 
 $0.75
 $0.95
 $2.16
 $2.77
             
Net Earnings Per Share, Assuming Dilution:
         
 
Continuing Operations
 
 $0.74
 $0.93
 $2.10
 $2.75
 
Discontinued Operations
 
 -
 0.01
 0.04
 (0.04)
 
Net Earnings
 
 $0.74
 $0.94
 $2.14
 $2.71

(a)  
For additional information regarding discontinued operations, see Note 11, Discontinued Operations.

(b)  
When calculating diluted earnings per share for stock option common stock equivalents, the Earnings Per Share Topic, ASC 260, requires CSX to include the potential shares that would be outstanding if all outstanding stock options were exercised.   This is offset by shares CSX could repurchase using the proceeds from these hypothetical exercises to obtain the common stock equivalent.  This number is different from outstanding stock options, which is included in Note 3, Share-Based Compensation.  All stock options were dilutive for the periods presented; therefore, no stock options were excluded from the diluted earnings per share calculation.

10

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 2.                      Earnings Per Share, continued

Basic earnings per share is based on the weighted-average number of shares of common stock outstanding.  Earnings per share, assuming dilution, is based on the weighted-average number of shares of common stock outstanding adjusted for the effects of common stock that may be issued as a result of the following types of potentially dilutive instruments:

·  
convertible debt,

·  
employee stock options, and

·  
other equity awards, which include long-term incentive awards.

The Earnings Per Share Topic, ASC 260, requires CSX to include additional shares in the computation of earnings per share, assuming dilution.  The additional shares included in diluted earnings per share represents the number of shares that would be issued if all of CSX’s outstanding convertible debentures were converted into CSX common stock.

As a result, diluted shares outstanding are not impacted when debentures are converted into CSX common stock because those shares were already included in the diluted shares calculation.  Shares outstanding for basic earnings per share, however, are impacted on a weighted average basis when conversions occur.  During third quarter 2008, $15 million of face value of convertible debentures were converted into 530,000 shares of CSX common stock.  There were no material conversions of convertible debentures during third quarter 2009.  As of September 2009, approximately $31 million of convertible debentures at face value remained outstanding, which are convertible into approximately 1 million shares of CSX common stock.


CSX share-based compensation plans primarily include performance grants, restricted stock awards, stock options and stock plans for directors.  CSX has not granted stock options since 2003.  Awards granted under the various plans are determined and approved by the Compensation Committee of the Board of Directors or, in certain circumstances, by the Chief Executive Officer for awards to management employees other than senior executives.  The Board of Directors approves awards granted to the Company’s non-management Directors upon recommendation of the Governance Committee.

Total pre-tax expense associated with share-based compensation and its related income tax benefit is as follows:

 
Third Quarters
 
Nine Months Ended
(Dollars in millions)
2009
2008
 
2009
2008
Share-Based Compensation Expense (a)
 $9
 $24
 
 $12
 $48
Income Tax Benefit
 (3)
 (9)
 
 (4)
 (18)

 
(a) Share-based compensation expense may fluctuate with estimates of the number of performance-based awards that are expected to be awarded in future periods.

11

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 3.                      Share-Based Compensation, continued

The following table provides information about stock options exercised.


 
Third Quarters
 
Nine Months Ended
(In thousands)
2009
2008
 
2009
2008
           
Number of Stock Options Exercised
 386
 521
 
 952
 3,940

As of December 2008, all outstanding options are vested, and therefore, there will be no future expense related to these options.  As of September 2009, CSX had approximately 6 million stock options outstanding.  However, the impact of options to diluted earnings per share is much smaller (see footnote b in Note 2, Earnings Per Share for more information).


Casualty, environmental and other reserves were determined to be critical accounting estimates due to the need for significant management judgments. They are provided for in the consolidated balance sheets as follows:


   
September 2009
 
December 2008
(Dollars in millions)
Current
Long-term
Total
 
Current
Long-term
Total
                 
Casualty:
             
 
Personal Injury
 $78
 $223
 $301
 
 $104
 $258
 $362
 
Occupational
 22
 165
 187
 
 32
 172
 204
 
Total Casualty
 100
 388
 488
 
 136
 430
 566
Separation
 15
 61
 76
 
 16
 71
 87
Environmental
 37
 60
 97
 
 42
 58
 100
Other
 27
 71
 98
 
 42
 84
 126
 
Total
 $179
 $580
 $759
 
 $236
 $643
 $879

Details with respect to each type of reserve are described below.  Actual settlements and claims received could differ.  The final outcome of these matters cannot be predicted with certainty.  Considering the legal defenses asserted, 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 financial condition, results of operations or liquidity.  However, should a number of these items occur in the same period, they could have a material effect on the Company’s financial condition, results of operations or liquidity in that particular period.

During the second quarter of 2009, the Company reduced casualty reserves by a net $85 million.  The majority of this reduction is related to personal injury and asbestos claims and is described below.  Also included in the net reduction is a write-off of $11 million of reinsurance receivables (expected receivables from outside insurance companies).  This receivable write-off is not included in the reserve amounts disclosed above.

12

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 4.                      Casualty, Environmental and Other Reserves, continued

Casualty

Casualty reserves represent accruals for personal injury and occupational injury claims.  Currently, no individual claim is expected to exceed the Company’s self-insured retention amount of $25 million per injury.  To the extent the value of an individual claim exceeds the self-insured retention amount, the Company would present the liability on a gross basis in accordance with the Contingencies Topic, ASC 450, with a corresponding receivable for insurance recoveries.  These reserves fluctuate based upon the timing of payments as well as changes in independent third party estimates, which are reviewed by management.  Most of the claims relate to CSXT unless otherwise noted below.  Defense and processing costs, which historically have been insignificant and are anticipated to be insignificant in the future, are not included in the recorded liabilities.

 
Personal injury reserves represent liabilities for employee work-related and third-party injuries.  Work-related injuries for CSXT employees are primarily subject to the Federal Employers’ Liability Act (“FELA”).  In addition to FELA liabilities, employees of other former and current CSX subsidiaries are covered by various state workers' compensation laws, the Federal Longshore and Harbor Workers’ Compensation Program or the Maritime Jones Act.

CSXT retains an independent actuarial firm to assist management in assessing the value 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 number, type and severity of the injury, costs of medical treatments and uncertainties in litigation.

During second quarter 2009, the Company reduced personal injury reserves by $78 million based on management’s review of the actuarial analysis performed by an independent actuarial firm.  This reduction is a direct result of the Company’s improvement in safety.  Claims have shown a continued downward trend in the number of injuries, resulting in a continued reduction of the Company’s FRA personal injury rate.  Additionally, the trend in the severity of injuries has significantly declined.

Occupational

Occupational claims arise from allegations of exposure to certain materials in the workplace, such as asbestos, solvents (which include soaps and chemicals) and diesel fuels or allegations of chronic physical injuries resulting from work conditions, such as repetitive stress injuries, carpal tunnel syndrome and hearing loss.


13

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 4.                      Casualty, Environmental and Other Reserves, continued
 
 
An analysis of occupational claims is performed semi-annually by an independent third party and reviewed by management.  The methodology used includes an estimate of future anticipated incurred but not reported claims based on the Company’s trends in average historical claim filing rates, future anticipated dismissal rates and settlement rates.  Actual claims may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation.

During second quarter 2009, the Company reduced its asbestos reserves by $18 million.  This reserve reduction is related to approximately 1,500 claims that were deemed to have no medical merit and therefore have been determined to have no value.

Separation
 
Separation liabilities include the estimated benefits provided to certain union employees as a result of implementing workforce reductions, improvements in productivity and certain other cost reductions at the Company's major transportation units since 1991. These liabilities are expected to be paid out over the next 10 to 15 years from general corporate funds and may fluctuate depending on the timing of payments and associated taxes.

Environmental

The Company is a party to various proceedings related to environmental issues, including administrative and judicial proceedings, involving private parties and regulatory agencies. The Company has been identified as a potentially responsible party at approximately 263 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 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.

In any such proceedings, the Company is subject to environmental clean-up and enforcement actions under the Superfund Law, as well as similar state laws that may impose joint and several liability for clean-up and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct.  These costs could be substantial.


14

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 4.                      Casualty, Environmental and Other Reserves, continued

In accordance with the Asset Retirement and Environmental Obligations Topic, ASC 410-30, the Company reviews its role with respect to each site 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'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.  Payments related to these liabilities are expected to be made over the next several years.

Currently, the Company does not possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, on some sites until completion of future environmental studies.  In addition, changes in conditions, or conditions that are currently unknown could, at any given location, 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 fund 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 financial condition, results of operations or liquidity.

Other

 Other reserves include liabilities for various claims, such as longshoremen disability claims primarily associated with former subsidiaries’ activities, freight claims and claims for property, automobile and general liability.  These liabilities are accrued at the estimable and probable amount in accordance with the Contingencies Topic, ASC 450.


Insurance

The Company maintains numerous insurance programs with substantial limits for third-party casualty liability and Company property damage and business interruption.  A certain amount of risk is retained by the Company on each of the casualty and property programs.  For the first event in any given year, the Company has a $25 million deductible for each of the casualty and non-catastrophic property programs and a $50 million deductible for the catastrophic property program.


15

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 5.                      Commitments and Contingencies, continued

Guarantees

CSX and certain of its subsidiaries are contingently liable, individually and jointly with others, as guarantors of approximately $42 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.  These guarantees do not include CSX’s guarantee of applicable CSXT secured notes because these notes are included on CSX’s consolidated balance sheet.
 
As of third quarter 2009, the Company’s guarantees primarily related to the following:

·  
Guarantee of approximately $38 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 entity against payments made with respect to this guarantee.   Management does not expect that CSX 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.

·  
Guarantee of approximately $4 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.

As of third quarter 2009, the Company has not recognized any liabilities in its financial statements in connection with any guarantee arrangements described above.  The maximum amount of future payments the Company could be required to make under these guarantees is the sum of the guaranteed amounts noted above.

16

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 5.                      Commitments and Contingencies, continued
 
Legal Proceedings
 
There were no material developments during the quarter concerning the fuel surcharge anti-trust litigation or the Seminole Electric Cooperative, Inc. rate case.  For further details, see Note 6, Commitments and Contingencies, in CSX’s most recent Annual Report on Form 10-K.

In addition to these matters, the Company is involved in 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 and property damage 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 purport to be, class actions.  While the final outcome of these matters cannot be predicted with certainty, considering, among other things, the 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 financial condition, results of operations or liquidity.  An unexpected adverse resolution of one or more of these matters, however, could have a material adverse effect on the Company’s financial condition, results of operations or liquidity in a particular quarter or fiscal year.
 

The Company sponsors defined benefit pension plans principally for salaried, management personnel.  The plans provide eligible employees with retirement benefits based predominantly on years of service and compensation rates near retirement.  For employees hired after December 31, 2002, benefits are determined based on a cash balance formula, which provides benefits by utilizing interest and pays credits based upon age, service and compensation.
 
In addition to these plans, CSX sponsors a post-retirement medical plan and a life insurance plan that provide benefits to full-time, salaried, management employees hired on or before December 31, 2002 upon their retirement if certain eligibility requirements are met.  The post-retirement medical plan is contributory (partially funded by retirees), with retiree contributions adjusted annually.  The life insurance plan is non-contributory.

17

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 6.                      Employee Benefit Plans, continued
 
The Company engages independent, external actuaries to compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company selects.  The following table describes the components of expense/(income) related to net periodic benefit cost:


   
Pension Benefits
(Dollars in millions)
Third Quarters
 
Nine Months Ended
 
2009
2008
 
2009
2008
Service Cost
 $8
 $8
 
 $24
 $25
Interest Cost
 32
 29
 
 94
 89
Expected Return on Plan Assets
 (37)
 (36)
 
 (108)
 (108)
Amortization of Prior Service Cost
 1
 1
 
 2
 2
Amortization of Net Loss
 6
 6
 
 19
 17
 
Net Periodic Benefit Cost
 $10
 $8
 
 $31
 $25
             
             
   
Other Post-retirement Benefits
(Dollars in millions)
Third Quarters
 
Nine Months Ended
 
2009
2008
 
2009
2008
Service Cost
 $2
 $2
 
 $4
 $5
Interest Cost
 5
 5
 
 17
 15
Amortization of Prior Service Cost
 -
 -
 
 -
 (1)
Amortization of Net Loss
 1
 -
 
 3
 2
 
Net Periodic Benefit Cost
 $8
 $7
 
 $24
 $21


In accordance with the Pension Protection Act (“the Act”) of 2006, companies are required to be 94% funded for their outstanding qualified pension obligations as of January 1, 2009 in order to avoid a scheduled series of required annual contributions.  Recent market volatility and overall investment losses of pension assets reduced the funded status of CSX’s qualified plans; however, required minimum contributions under funding rules for 2009 were approximately $5 million.  The Company intends to pre-fund contributions up to $250 million pre-tax, or $160 million after-tax due to likely contribution requirements over the next several years.  Through September 2009, the Company made contributions of $166 million and currently anticipates that additional contributions of up to $84 million may be made in the remainder of 2009.  For further details, see Note 7, Employee Benefit Plans, in CSX’s most recent Annual Report on Form 10-K.




18

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Debt

Total activity related to long-term debt as of September 2009 was as follows:


(Dollars in millions)
Current Portion
Long-term Portion
Total Long-term Debt Activity
Total long-term debt at December 2008
 $319
 $7,512
 $7,831
2009 activity:
     
 
Issued
 -
 500
 500
 
Repaid
 (110)
 -
 (110)
 
Reclassifications
 107
 (107)
 -
 
Other
 -
 1
 1
Total long-term debt at September 2009
 $316
 $7,906
 $8,222
 
For fair value information related to the Company’s long-term debt, see Note 12, Fair Value Measurements.

Revolving Credit Facility

CSX has a $1.25 billion unsecured revolving credit facility with a syndicate of banks. The facility allows borrowings at floating rates based on the London interbank offered rate ("LIBOR"), plus a spread depending upon ratings assigned by Moody's Investors Service and Standard & Poor's Ratings Group to CSX's senior, unsecured, long-term indebtedness for borrowed money. The facility requires CSX to maintain a ratio of total debt to total capitalization below a prescribed limit.  The facility does not require CSX to post collateral under any circumstances.  As of September 2009, this facility was not drawn on, and CSX was in compliance with all covenant requirements under the facility.  This facility expires in 2012.

Receivables Securitization Facility

On September 28, 2009, following the end of the fiscal quarter, the Company entered into a $250 million receivables securitization facility.  The purpose of this facility is to provide an alternative to commercial paper and a low cost source of short-term liquidity. This facility has a 364-day term.  As of the date of this filing, CSX has not drawn on this facility.  Under the terms of this facility, CSX Transportation and CSX Intermodal transfer eligible third-party receivables to CSX Trade Receivables, a bankruptcy-remote special purpose subsidiary.  A separate subsidiary of CSX will service the receivables.  Upon transfer, the receivables become assets of CSX Trade Receivables and are not available to the creditors of CSX or any of its other subsidiaries. The cash received in exchange for these receivables when CSX Trade Receivables monetizes them by selling them to third party lenders will be recorded as debt on CSX’s consolidated financial statements.

19

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



The Company derives income from items that are not considered operating activities.  Income from these items is reported net of related expense in other income – net on the consolidated income statements.  Other income – net consists primarily of interest income, income from real estate and miscellaneous income (expense).

 Interest income fluctuates as a result of interest rates and balances that earn interest based on CSX’s cash, cash equivalents and short-term investments.  Income from real estate includes the results of operations of the Company’s non-operating real estate sales, leasing, acquisition and management and development activities.  This real estate income may fluctuate as a function of timing of real estate sales.  Miscellaneous income includes a number of items which can be income or expense.  Examples of these items are equity earnings or losses, noncontrolling minority interest expense, investment gains and losses and other non-operating activities.  Other income – net consisted of the following:


   
Third Quarters
 
Nine Months Ended
(Dollars in millions)
2009
2008
 
2009
2008
Interest Income
 $2
 $10
 
 $9
 $31
Income from Real Estate
 11
 3
 
 18
 36
Miscellaneous Income (Expense) (a)
 (7)
 (8)
 
 (8)
 27
 
Total Other Income - Net
 $6
 $5
 
 $19
 $94
 
(a)  In first quarter 2008, CSX recorded additional income of $30 million for an adjustment to correct equity earnings from a non-consolidated subsidiary.

Previously, the results of operations from The Greenbrier resort were included in other income – net.  In May 2009, CSX sold the stock of a subsidiary that indirectly owned Greenbrier Hotel Corporation, owner of The Greenbrier resort. The results of this resort are now presented in discontinued operations on the consolidated income statements and all prior periods have been reclassified.  For more information, see Note 11, Discontinued Operations.

 NOTE 9.                      Income Taxes

As of September 2009 and December 2008, the Company had approximately $50 million and $57 million of total unrecognized tax benefits, respectively.  For the same periods, after consideration of the impact of federal tax benefits, $42 million and $50 million, respectively, of net unrecognized tax benefits could favorably affect the effective income tax rate.  As of September 2009, the Company estimates that approximately $13 million of the net unrecognized tax benefits for various state and federal income tax matters will be resolved over the next 12 months.  Approximately $4 million of this total will be recognizable upon the expiration of various statutes of limitation.  The final outcome of the remaining uncertain tax positions, however, is not yet determinable.

20

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 9.                      Income Taxes, continued

During second quarter 2008, the Internal Revenue Service (“IRS”) completed its examination of tax years 2004 through 2006.  As a result of this examination and the resolution of other income tax matters, the Company recorded an income tax benefit of $18 million.

The Company files a consolidated federal income tax return, which includes its principal domestic subsidiaries.  CSX and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions.  During 2008, the Internal Revenue Service (“IRS”) completed examinations of tax years 2004 through 2006 as well as for 2007. The Company has appealed a tax adjustment proposed by the IRS with respect to the 2004 through 2006 period and a related amount is included in the uncertain tax positions above.  This appeals process is expected to last more than one year.  Federal examinations of original federal income tax returns for all years through 2007 are otherwise resolved.  During the third quarter of 2009, the IRS began its examination of the 2008 federal income tax return.

CSX’s continuing practice is to recognize interest and penalties (net of related federal or state tax benefits or expense) associated with income tax matters in income tax expense.  As of September 2009 and December 2008, the Company had a $6 million and a $2 million gross payable before the consideration of state tax impacts, respectively, accrued for interest and penalties.

NOTE 10.                      Related Party Transactions

Through a limited liability company, CSX and Norfolk Southern Corporation (“NS”) jointly own Conrail, Inc. (“Conrail”).  CSX has a 42% economic interest and 50% voting interest in the jointly-owned entity, and NS has the remainder of the economic and voting interests.  Pursuant to the Investments - Equity Method and Joint Ventures Topic, ASC 323, CSX applies the equity method of accounting to its investment in Conrail.  At September 2009 and December 2008, CSX’s investment in Conrail was $626 million and $609 million, respectively.

CSX’s income statement is impacted in several ways by the joint ownership of Conrail.  First, Conrail owns and operates rail infrastructure for the joint benefit of CSX and NS.  This is known as the shared asset area.  Conrail charges fees for right-of way usage, equipment rentals and transportation, and switching and terminal service charges in the shared asset area.   In addition, because of CSX’s equity interest in Conrail, CSX also includes a share of Conrail’s income which is recorded as a contra-expense and reduces the total amount of expense recorded for Conrail.  Also, purchase price amortization primarily represents the additional after-tax depreciation expense related to the write-up of Conrail’s fixed assets when the original purchase price, from the 1997 acquisition of Conrail, was allocated based on fair value.  Lastly, interest expense is recorded on long-term payables to Conrail.

21

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 10.                   Related Party Transactions, continued

Dollar amounts of these items impacting the consolidated income statements were as follows:


 
Third Quarters
 
Nine Months Ended
(Dollars in millions)
2009
2008
 
2009
2008
Income Statement Information:
         
Rents, Fees and Services
 $26
 $31
 
 $76
 $84
Equity in Income of Conrail
 (6)
 (6)
 
 (20)
 (18)
Purchase Price Amortization and Other
 1
 1
 
3
 3
Interest Expense Related to Conrail
 1
 1
 
3
 3
Income Statement Impact
 $22
 $27
 
 $62
 $72

Additional information about the investment in Conrail is included in CSX’s most recent Annual Report on Form 10-K.


As previously reported in March 2009, Greenbrier Hotel Corporation (“GHC”), owner of The Greenbrier resort and then an indirect subsidiary of CSX, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Eastern District of Virginia, Richmond Division (“Bankruptcy Court”).  In conjunction with the bankruptcy, GHC also announced an agreement to sell the resort pursuant to an asset purchase agreement (the “APA”) with Marriott Hotel Services, Inc.

In May 2009, CSX sold the stock of a subsidiary that indirectly owned GHC to Justice Family Group, LLC (“JFG”) for approximately $21 million in cash.  CSX recognized a gain on the sale of $25 million after tax in the second quarter of 2009. The gain was calculated using cash proceeds, net book value, deal-related costs incurred and tax benefits.   The previously reported bankruptcy financing that CSX made available to The Greenbrier was paid down and no amounts were outstanding at the time of the sale.  Also in May 2009, the Bankruptcy Court entered an order dismissing GHC’s bankruptcy proceeding and terminating the APA.  CSX has no continuing obligations to finance post-sale resort operations.  CSX has retained responsibility for certain pre-closing Greenbrier pension obligations.

This transaction is reportable as discontinued operations under the subsection Impairment or Disposal of Long-Lived Assets, ASC 360-10-45-2.  Therefore, the gain on sale as well as results from operations are reported as discontinued operations.  Previously, all amounts associated with the operations of The Greenbrier were included in Other Income - Net.  All prior periods have been reclassified to reflect this change.

22

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 11.                     Discontinued Operations, continued

Income statement information:

 
Third Quarters
 
Nine Months Ended
(Dollars in millions)
2009
2008
 
2009
2008
Net Income (Loss) From Operations, after tax
 $ -
 $2
 
 $(10)
 $(16)
Gain on Sale, after tax
 -
 -
 
 25
 -
Net Income (Loss) From Discontinued Operations
 $ -
 $2
 
 $15
 $(16)
           
Earnings per Share
         
From Discontinued Operations, Assuming Dilution
 $ -
 $0.01
 
 $0.04
 $(0.04)

NOTE 12.                      Fair Value Measurements

Effective beginning second quarter 2009, the Financial Instruments Topic, ASC 825, requires disclosures about fair value of financial instruments in quarterly reports as well as in annual reports.  For CSX, this statement applies to certain investments and long-term debt.  Also, the Fair Value Measurements and Disclosures Topic, ASC 820, clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.   

Various inputs are considered when determining the value of the Company’s investments and long-term debt.  The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities.  These inputs are summarized in the three broad levels listed below.

·  
Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets

·  
Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.)

·  
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)

The Company’s investment assets are valued by a third-party trustee, consist primarily of corporate bonds and are carried at fair value on the consolidated balance sheet.  As of September 2009, these bonds had a fair value of $116 million.  All inputs used to determine fair value are considered level 2 inputs.

Long-term debt is the Company’s only financial instrument with fair values significantly different from their carrying amounts.  The fair value of long-term debt has been estimated using discounted cash flow analysis based upon the Company's current incremental borrowing rates for similar types of financing arrangements which are considered level 2 inputs.

23

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 12.                           Fair Value Measurements, continued

The fair value of outstanding debt fluctuates with changes in applicable interest rates.  Fair value will exceed carrying value when the current market interest rate is lower than the interest rate at which the debt was originally issued.  The fair value of a company’s debt is a measure of its current value under present market conditions.  It does not impact the financial statements under current accounting rules.  The fair value and carrying value of the Company’s long-term debt is as follows:

             
(Dollars in millions)
     
September
2009
 
December
2008
Long-term Debt Including Current Maturities:
       
 
Fair Value
     
 $9,192
 
 $7,415
 
Carrying Value
     
 $8,222
 
 $7,831

NOTE 13.                      Business Segments

The Company’s consolidated operating income results are comprised of two business segments: Rail and Intermodal.  The Rail segment provides rail freight transportation over a network of approximately 21,000 route miles in 23 states, the District of Columbia and the Canadian provinces of Ontario and Quebec. The Intermodal segment provides integrated rail and truck transportation services and operates a network of dedicated intermodal facilities across North America.  These segments are strategic business units that offer different services and are managed separately.  Performance of each segment is evaluated and resources are allocated based on several factors, of which the principal financial measures are business segment operating income and operating ratio.  The accounting policies of the segments are the same as those described in Note 1, Nature of Operations and Significant Accounting Policies, in CSX’s most recent Annual Report on Form 10-K.  Business segment information is as follows:
 
 

Third Quarters
         
CSX
 
(Dollars in millions)
Rail (a)
Intermodal
Consolidated
 
 
2009
2008
2009
2008
2009
2008
$ Change
Revenues from External Customers
 $1,986
 $2,562
 $303
 $399
 $2,289
 $2,961
 $(672)
               
Segment Operating Income
 559
 636
 39
 97
 598
 733
 (135)
               
Nine Months Ended
         
CSX
 
(Dollars in millions)
Rail (a)
Intermodal
Consolidated
 
 
2009
2008
2009
2008
2009
2008
$ Change
Revenues from External Customers
 $5,857
 $7,449
 $864
 $1,132
 $6,721
 $8,581
 $(1,860)
               
Segment Operating Income
 1,603
 1,842
 99
 234
 1,702
 2,076
 (374)

(a)  
In addition to CSXT, the Rail segment includes non-railroad subsidiaries such as TDSI, Transflo, CSX Technology and other subsidiaries.

24

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 NOTE 14.                                Summarized Consolidating Financial Data

In December 2007, CSXT sold secured equipment notes maturing in 2023 and in October 2008, CSXT sold additional secured equipment notes maturing in 2014 in registered public offerings.  CSX has fully and unconditionally guaranteed the notes. In connection with the notes, the Company is providing the following condensed consolidating financial information in accordance with SEC disclosure requirements. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation and the allocation of certain expenses of CSX incurred for the benefit of its subsidiaries.
 
Condensed consolidating financial information for the obligor, CSXT, and parent guarantor, CSX, is as follows:


25

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 14.                      Summarized Consolidating Financial Data, continued


Consolidating Income Statements
(Dollars in Millions)
             
Quarter Ended September 2009
CSX Corporation
CSX Transportation
Other
Eliminations
Consolidated
Operating Revenue
 $ -
 $1,971
 $344
 $(26)
 $2,289
Operating Expense
 (69)
 1,492
 291
 (23)
 1,691
Operating Income
 69
 479
 53
 (3)
 598
           
Equity in Earnings of Subsidiaries
 343
 -
 -
 (343)
 -
Interest Expense
 (126)
 (29)
 (2)
 17
 (140)
Other Income - Net
 24
 10
 (14)
 (14)
 6
           
Earnings From Continuing Operations
         
 
Before Income Taxes
 310
 460
 37
 (343)
 464
Income Tax Benefit (Expense)
 (17)
 (169)
 15
 -
 (171)
Earnings From Continuing Operations
 293
 291
 52
 (343)
 293
Discontinued Operations
 -
 -
 -
 -
 -
Net Earnings
 $293
 $291
 $52
 $(343)
 $293
             
             
Quarter Ended September 2008
CSX Corporation
CSX Transportation
Other
Eliminations
Consolidated
Operating Revenue
 $ -
 $2,544
 $448
 $(31)
 $2,961
Operating Expense
 (33)
 1,963
 327
 (29)
 2,228
Operating Income
 33
 581
 121
 (2)
 733
           
Equity in Earnings of Subsidiaries
 444
 -
 -
 (444)
 -
Interest Expense
 (142)
 (38)
 (5)
 54
 (131)
Other Income - Net
 62
 16
 (21)
 (52)
 5
           
Earnings From Continuing Operations
         
 
Before Income Taxes
 397
 559
 95
 (444)
 607
Income Tax Benefit (Expense)
 (15)
 (192)
 (20)
 -
 (227)
Earnings From Continuing Operations
 382
 367
 75
 (444)
 380
Discontinued Operations
 -
 -
 2
 -
 2
Net Earnings
 $382
 $367
 $77
 $(444)
 $382


26

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 14.                      Summarized Consolidating Financial Data, continued


Consolidating Income Statements
(Dollars in Millions)
             
Nine Months Ended September 2009
CSX Corporation
CSX Transportation
Other
Eliminations
Consolidated
Operating Revenue
 $ -
 $5,810
 $989
 $(78)
 $6,721
Operating Expense
 (211)
 4,450
 850
 (70)
 5,019
Operating Income
 211
 1,360
 139
 (8)
 1,702
           
Equity in Earnings of Subsidiaries
 906
 -
 -
 (906)
 -
Interest Expense
 (375)
 (88)
 (6)
 49
 (420)
Other Income - Net
 304
 13
 (257)
 (41)
 19
           
Earnings From Continuing Operations
         
 
Before Income Taxes
 1,046
 1,285
 (124)
 (906)
 1,301
Income Tax Benefit (Expense)
 (231)
 (488)
 250
 -
 (469)
Earnings From Continuing Operations
 815
 797
 126
 (906)
 832
Discontinued Operations
 32
 -
 (17)
 -
 15
Net Earnings
 $847
 $797
 $109
 $(906)
 $847
             
             
Nine Months Ended September 2008
CSX Corporation
CSX Transportation
Other
Eliminations
Consolidated
Operating Revenue
 $ -
 $7,389
 $1,293
 $(101)
 $8,581
Operating Expense
 (123)
 5,755
 966
 (93)
 6,505
Operating Income
 123
 1,634
 327
 (8)
 2,076
           
Equity in Earnings of Subsidiaries
 1,236
 -
 -
 (1,236)
 -
Interest Expense
 (414)
 (115)
 (18)
 164
 (383)
Other Income - Net
 126
 106
 18
 (156)
 94
           
Earnings From Continuing Operations
         
 
Before Income Taxes
 1,071
 1,625
 327
 (1,236)
 1,787
Income Tax Benefit (Expense)
 47
 (593)
 (107)
 -
 (653)
Earnings From Continuing Operations
 1,118
 1,032
 220
 (1,236)
 1,134
Discontinued Operations
 -
 -
 (16)
 -
 (16)
Net Earnings
 $1,118
 $1,032
 $204
 $(1,236)
 $1,118


27

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 14.                              Summarized Consolidating Financial Data, continued

               
Consolidating Balance Sheet
(Dollars in Millions)
               
     
CSX
CSX
     
As of September 2009
 
Corporation
Transportation
Other
Eliminations
Consolidated
               
ASSETS
Current Assets
           
 
Cash and Cash Equivalents
 
 $1,097
 $82
 $61
 $ -
 $1,240
 
Short-term Investments
 
 -
 -
 81
 -
 81
 
Accounts Receivable - Net
 
 3
 897
 28
 -
 928
 
Materials and Supplies
 
 -
 239
 -
 -
 239
 
Deferred Income Taxes
 
 13
 158
 -
 -
 171
 
Other Current Assets
 
 48
 64
 95
 (96)
 111
 
  Total Current Assets
 
 1,161
 1,440
 265
 (96)
 2,770
               
Properties
 
 4
 29,512
 1,289
 -
 30,805
Accumulated Depreciation
 
 (6)
 (6,951)
 (808)
 -
 (7,765)
 
Properties - Net
 
 (2)
 22,561
 481
 -
 23,040
               
Investments in Conrail
 
 -
 -
 626
 -
 626
Affiliates and Other Companies
 
 -
 537
 (126)
 -
 411
Investments in Consolidated Subsidiaries
 15,227
 -
 45
 (15,272)
 -
Other Long-term Assets
 
 53
 96
 67
 (43)
 173
 
  Total Assets
 
 $16,439
 $24,634
 $1,358
 $(15,411)
 $27,020
               
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
           
 
Accounts Payable
 
 $128
 $926
 $(91)
 $ -
 $963
 
Labor and Fringe Benefits Payable
 32
 336
 34
 -
 402
 
Payable to Affiliates
 
 503
 638
 (1,074)
 (67)
 -
 
Casualty, Environmental and Other Reserves
 -
 157
 22
 -
 179
 
Current Maturities of Long-term Debt
 200
 113
 3
 -
 316
 
Income and Other Taxes Payable
 101
 208
 (188)
 -
 121
 
Other Current Liabilities
 1
 93
 29
 (28)
 95
 
  Total Current Liabilities
 
 965
 2,471
 (1,265)
 (95)
 2,076
               
Casualty, Environmental and Other Reserves
 -
 509
 71
 -
 580
Long-term Debt
 
 6,557
 1,345
 4
 -
 7,906
Deferred Income Taxes
 
 (358)
 6,808
 101
 -
 6,551
Long-term Payable to Affiliates
 
 -
 -
 44
 (44)
 -
Other Long-term Liabilities
 
 599
 466
 153
 -
 1,218
 
  Total Liabilities
 
 7,763
 11,599
 (892)
 (139)
 18,331
               
Shareholders' Equity
           
Common Stock, $1 Par Value
 
 393
 181
 -
 (181)
 393
Other Capital
 
 48
 5,567
 1,950
 (7,517)
 48
Retained Earnings
 
 8,963
 7,312
 361
 (7,673)
 8,963
Accumulated Other Comprehensive Loss
 (728)
 (46)
 (101)
 147
 (728)
Noncontrolling Minority Interest
 
 -
 21
 40
 (48)
 13
 
Total Shareholders' Equity
 
 8,676
 13,035
 2,250
 (15,272)
 8,689
 
Total Liabilities and Shareholders' Equity
 $16,439
 $24,634
 $1,358
 $(15,411)
 $27,020



28

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 14.                      Summarized Consolidating Financial Data, continued

               
Consolidating Balance Sheet
(Dollars in Millions)
               
     
CSX
CSX
     
As of December 2008
 
Corporation
Transportation
Other
Eliminations
Consolidated
               
ASSETS
Current Assets
           
 
Cash and Cash Equivalents
 
 $559
 $63
 $47
 $ -
 $669
 
Short-term Investments
 
 -
 -
 76
 -
 76
 
Accounts Receivable - Net
 
 5
 1,046
 56
 -
 1,107
 
Materials and Supplies
 
 -
 217
 -
 -
 217
 
Deferred Income Taxes
 
 11
 187
 5
 -
 203
 
Other Current Assets
 
 112
 34
 52
 (79)
 119
 
  Total Current Assets
 
 687
 1,547
 236
 (79)
 2,391
               
Properties
 
 6
 28,958
 1,244
 -
 30,208
Accumulated Depreciation
 
 (9)
 (6,758)
 (753)
 -
 (7,520)
 
Properties - Net
 
 (3)
 22,200
 491
 -
 22,688
               
Investments in Conrail
 
 -
 -
 609
 -
 609
Affiliates and Other Companies
 
 -
 527
 (121)
 -
 406
Investments in Consolidated Subsidiaries
 14,566
 -
 41
 (14,607)
 -
Other Long-term Assets
 
 52
 76
 109
 (43)
 194
 
  Total Assets
 
 $15,302
 $24,350
 $1,365
 $(14,729)
 $26,288
               
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
           
 
Accounts Payable
 
 $99
 $739
 $135
 $ -
 $973
 
Labor and Fringe Benefits Payable
 40
 366
 59
 -
 465
 
Payable to Affiliates
 
 455
 765
 (1,153)
 (67)
 -
 
Casualty, Environmental and Other Reserves
 -
 211
 25
 -
 236
 
Current Maturities of Long-term Debt
 200
 116
 3
 -
 319
 
Income and Other Taxes Payable
 (2)
 208
 (81)
 -
 125
 
Other Current Liabilities
 2
 271
 24
 (11)
 286
 
  Total Current Liabilities
 
 794
 2,676
 (988)
 (78)
 2,404
               
Casualty, Environmental and Other Reserves
 1
 547
 95
 -
 643
Long-term Debt
 
 6,058
 1,447
 7
 -
 7,512
Deferred Income Taxes
 
 (629)
 6,591
 273
 -
 6,235
Long-term Payable to Affiliates
 
 -
 -
 44
 (44)
 -
Other Long-term Liabilities
 
 1,010
 493
 (36)
 (41)
 1,426
 
  Total Liabilities
 
 7,234
 11,754
 (605)
 (163)
 18,220
               
Shareholders' Equity
           
Common Stock, $1 Par Value
 
 391
 181
 -
 (181)
 391
Other Capital
 
 -
 5,566
 1,923
 (7,489)
 -
Retained Earnings
 
 8,398
 6,870
 148
 (7,018)
 8,398
Accumulated Other Comprehensive Loss
 (741)
 (41)
 (104)
 145
 (741)
Noncontrolling Minority Interest
 
 20
 20
 3
 (23)
 20
 
Total Shareholders' Equity
 
 8,068
 12,596
 1,970
 (14,566)
 8,068
 
Total Liabilities and Shareholders' Equity
 $15,302
 $24,350
 $1,365
 $(14,729)
 $26,288


29

CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 14.                      Summarized Consolidating Financial Data, continued

             
Consolidating Cash Flow Statements
(Dollars in Millions)
             
   
CSX
CSX
     
Nine Months Ended September 2009
Corporation
Transportation
Other
Eliminations
Consolidated
             
Operating Activities
         
 
Net Cash Provided by (Used in) Operating Activities
 $(75)
 $1,721
 $323
 $(365)
 $1,604
             
Investing Activities
         
Property Additions
 -
 (1,001)
 (45)
 -
 (1,046)
Purchases of Short-term Investments
 -
 -
 -
 -
 -
Proceeds from Sales of Short-term Investments
 -
 -
 -
 -
 -
Other Investing Activities
 (91)
 5
 48
 89
 51
 
Net Cash Provided by (Used in) Investing Activities
 (91)
 (996)
 3
 89
 (995)
             
Financing Activities
         
Long-term Debt Issued
 500
 -
 -
 -
 500
Long-term Debt Repaid
 -
 (108)
 (2)
 -
 (110)
Dividends Paid
 (264)
 (356)
 (4)
 365
 (259)
Stock Options Exercised
 19
 -
 -
 -
 19
Shares Repurchased
 -
 -
 -
 -
 -
Other Financing Activities
 449
 (242)
 (306)
 (89)
 (188)
 
Net Cash Provided by (Used in) Financing Activities
 704
 (706)
 (312)
 276
 (38)
             
Net Increase (Decrease) in Cash and Cash Equivalents
 538
 19
 14
 -
 571
Cash and Cash Equivalents at Beginning of Period
 559
 63
 47
 -
 669
Cash and Cash Equivalents at End of Period
 $1,097
 $82
 $61
 $ -
 $1,240
             
             
   
CSX
CSX
     
Nine Months Ended September 2008
Corporation
Transportation
Other
Eliminations
Consolidated
             
Operating Activities
         
 
Net Cash Provided by (Used in) Operating Activities
 $501
 $1,947
 $12
 $(269)
 $2,191
             
Investing Activities
         
Property Additions
 1
 (1,234)
 (75)
 -
 (1,308)
Purchases of Short-term Investments
 (25)
 -
 -
 -
 (25)
Proceeds from Sales of Short-term Investments
 280
 -
 -
 -
 280
Other Investing Activities
 (247)
 92
 148
 34
 27
 
Net Cash Provided by (Used in) Investing Activities
 9
 (1,142)
 73
 34
 (1,026)
             
Financing Activities
         
Long-term Debt Issued
 1,000
 -
 -
 -
 1,000
Long-term Debt Repaid
 (113)
 (102)
 (5)
 -
 (220)
Dividends Paid
 (227)
 (244)
 (20)
 269
 (222)
Stock Options Exercised
 75
 -
 -
 -
 75
Shares Repurchased
 (1,307)
 -
 -
 -
 (1,307)
Other Financing Activities
 546
 (439)
 (37)
 (34)
 36
 
Net Cash Provided by (Used in)  Financing Activities
 (26)
 (785)
 (62)
 235
 (638)
             
Net Increase (Decrease) in Cash and Cash Equivalents
 484
 20
 23
 -
 527
Cash and Cash Equivalents at Beginning of Period
 298
 55
 15
 -
 368
Cash and Cash Equivalents at End of Period
 $782
 $75
 $38
 $ -
 $895



30

CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The Company provides customers with access to an interconnected transportation network that links ports, production facilities and distribution centers to markets in the Northeast, Midwest and southern states.  The Company serves all major markets in the eastern United States and has direct access to all significant Atlantic and Gulf Coast ports, as well as the Mississippi River, the Great Lakes and the St. Lawrence Seaway.  The Company also has access to Pacific ports through commercial arrangements with western railroads.

The Company transports a broad portfolio of products, such as coal, forest products, ethanol, automobiles, chemicals and consumer-related products. Those goods are transported across the country in a way that, compared to alternative modes of transportation, reduces the impact on the environment, takes traffic off an already congested highway system and reduces fuel consumption and transportation costs.

The global recession that intensified in late 2008 has continued to impact CSX’s business in 2009.  Beginning in late 2008, the Company began taking aggressive actions to manage costs and right-size resources.  The Company will continue to stay focused on managing costs and resources and believes it is well positioned to take advantage of the early stages of an economic recovery.


·  
Revenue decreased $672 million or 23% to $2.3 billion as declines in volume and lower fuel surcharge revenue more than offset core pricing gains.

·  
Expenses decreased $537 million or 24% to $1.7 billion, reflecting the Company’s productivity gains and right-sizing efforts.

·  
Operating income decreased $135 million or 18% to $598 million.

·  
Operating ratio improved to 73.9%, a third quarter record.

CSX experienced another quarter of significant year-over-year volume and revenue declines caused by the broad-based weakness in the economy.  Third quarter revenues of $2.3 billion were down 23% from the prior year, driven by a 15% decline in volume and lower fuel surcharge recovery (associated with the sharp decline in fuel prices). Year-over-year volume declines were experienced across all markets with the exception of the domestic intermodal segment.  Despite a challenging environment, the Company continued to achieve pricing gains primarily due to the overall cost advantages that rail-based solutions provide to customers versus other modes of transportation. However, lower fuel recovery more than offset the Company’s ongoing yield management initiatives.  

At the same time, CSX was able to reduce expenses by $537 million, or 24%, versus the prior year.  These expense reductions helped partially offset the revenue decline and were a combined result of lower fuel expense, ongoing productivity initiatives and overall cost management efforts.  Because of the Company’s continued focus on cost control, CSX was able to achieve a third quarter record operating ratio of 73.9%.

31

CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For additional information, refer to Rail and Intermodal Results of Operations discussed on pages 35 through 36.

In addition to the financial highlights described above, the Company measures and reports safety and service performance.  CSX strives for continuous improvement in these measures through training, initiatives and investment.  For example, the Company’s safety and train accident prevention programs rely on broad employee involvement.  The programs utilize operating rules training, compliance measurement, root cause analysis and communication to create a safer environment for employees and the public.  Continued capital investment in Company assets, including track, bridges, signals, equipment and detection technology, also supports safety performance.

In third quarter 2009, the Company continued its focus on safety and operating performance.  CSX delivered improved quarterly results in both Federal Railroad Administration (“FRA”) personal injuries and train accidents.  The FRA personal injury index declined to 1.09, a 7% improvement in the quarter.  Reported FRA train accident frequency declined to 2.47, a 21% improvement compared to the same quarter of 2008.

Key service metrics improved significantly in the quarter versus a year ago.  On-time train originations and arrivals were 82% and 79%, respectively, during the quarter.  Average dwell declined slightly to 24.0 hours and average cars-on-line declined to 214,987 primarily due to lower demand levels.  Average train velocity improved to 21.8 miles per hour, as the network remained fluid.  The Company aims to maintain key operating measures and service reliability at high levels, while reducing resource utilization in response to current business conditions.

32

CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 


   
Third Quarters
   
2009
2008
Improvement
%
Safety and Service Measurements
       
FRA Personal Injuries Frequency Index
1.09
1.17
 7
%
           
FRA Train Accident Rate
2.47
3.14
 21
%
           
On-Time Train Originations
82%
77%
 6
%
On-Time Destination Arrivals
79%
67%
 18
%
           
Dwell
24.0
24.1
 -
%
Cars-On-Line
214,987
226,444
 5
%
           
System Train Velocity
 21.8
 20.1
 8
%
           
       
Increase/
 
Resources
   
(Decrease)
 
Route Miles
21,190
21,203
 -
%
Locomotives (owned and long-term leased)
4,092
4,133
 (1)
%
Freight Cars (owned and long-term leased)
85,223
91,833
 (7)
%


 Key Performance Measures Definitions

FRA Personal Injuries Frequency Index – Number of FRA-reportable injuries per 200,000 man-hours

FRA Train Accident Rate – Number of FRA-reportable train accidents per million train-miles

On-Time Train Originations – Percent of scheduled road trains that depart the origin yard on-time or ahead of schedule

On-Time Destination Arrivals – Percent of scheduled road trains that arrive at the destination yard on-time to two hours late (30 minutes for intermodal trains)

Dwell – Amount of time in hours between car arrival at and departure from the yard.  It does not include cars moving through the yard on the same train.

Cars-On-Line – A count of all cars on the network (does not include locomotives, cabooses, trailers, containers or maintenance equipment)

System Train Velocity – Average train speed between terminals in miles per hour (does not include locals, yard jobs, work trains or passenger trains)




33

CSX CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL RESULTS OF OPERATIONS

Results of Operations (Unaudited)
(Dollars in Millions)

Third Quarters

           
CSX
     
     
Rail (a)
Intermodal
Consolidated
     
     
2009
2008
2009
2008
2009
2008
$ Change
% Change
 
Revenue
 $1,986
 $2,562
 $303
 $399
 $2,289
 $2,961
 $(672)
 (23)
%
Expense