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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(X)        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarter ended September 24, 2004

OR

(    )        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 For the transition period from __________ to __________

Commission File Number 1-3359

CSX TRANSPORTATION, INC.

(Exact name of registrant as specified in its charter)
     
Virginia   54-6000720
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
500 Water Street, 15th Floor, Jacksonville, FL   32202
(Address of principal executive offices)   (Zip Code)

(904) 359-3100
(Registrant’s telephone number, including area code)

No Change
(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes (X) No (  )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes (  ) No (X)

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

1

CSX TRANSPORTATION, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 24, 2004

INDEX
             
        Page Number
PART I:  
FINANCIAL INFORMATION
        
Item 1:          
        3  
        4  
        5  
        6  
Item 2:       22  
Item 3:       30  
Item 4:       30  
PART II:          
Item 1:       30  
Item 2:       30  
Item 3:       30  
Item 4:       30  
Item 5:       30  
Item 6:       31  
Signature  
 
     31  
 Certificate of Principal Executive Officer
 Certificate of Principal Financial Officer
 Section 906 Certification of Principal Executive Officer
 Section 906 Certification of Principal Financial Officer

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CSX TRANSPORTATION, INC.

ITEM 1: FINANCIAL STATEMENTS

Consolidated Income Statements (Unaudited)

                                 
    Quarters Ended
   Nine Months Ended
    September 24,   September 26,   September 24,   September 26,
(Dollars in Millions)
   2004
   2003
   2004
   2003
OPERATING REVENUE
                                
Merchandise
   $ 971     $ 917     $ 2,920     $ 2,766  
Automotive
     185       193       607       625  
Coal, Coke and Iron Ore
     438       398       1,302       1,197  
Other
     22       2       64       26  
 
    
 		      
 		      
 		      
 		  
Total
     1,616       1,510       4,893       4,614  
OPERATING EXPENSE
                                
Labor and Fringe
     637       617       1,909       1,858  
Materials, Supplies and Other
     309       268       938       846  
Conrail Rents, Fees and Services
     68       90       250       268  
Related Party Service Fees
     30       42       120       135  
Building and Equipment Rent
     102       106       301       298  
Depreciation
     154       137       435       415  
Fuel
     161       132       466       426  
Restructuring Charge
     3       —       50       —  
Provision for Casualty Claims
     —       229       —       229  
 
    
 		      
 		      
 		      
 		  
Total
     1,464       1,621       4,469       4,475  
Operating Income (Expense)
     152       (111 )     424       139  
Other Income
     9       6       8       7  
Interest Expense
     26       23       75       79  
 
    
 		      
 		      
 		      
 		  
Earnings (Loss) before Income Taxes and Cumulative Effect of Accounting Change
     135       (128 )     357       67  
Income Tax Expense
     51       (60 )     138       26  
 
    
 		      
 		      
 		      
 		  
Earnings (Loss) before Cumulative Effect of Accounting Change - Net of Tax
     84       (68 )     219       41  
Cumulative Effect of Accounting Change - - Net of Tax
     —       —       —       57  
 
    
 		      
 		      
 		      
 		  
Net Earnings (Loss)
   $ 84     $ (68 )   $ 219     $ 98  
 
    
 		      
 		      
 		      
 		  

See accompanying Notes to Consolidated Financial Statements (unaudited).

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CSX TRANSPORTATION, INC.
ITEM 1: FINANCIAL STATEMENTS

Consolidated Balance Sheets

                 
    (Unaudited)    
    September 24,   December 26,
(Dollars in Millions)
   2004
   2003
ASSETS
                
Current Assets:
                
Cash and Cash Equivalents
   $ 18     $ 14  
Accounts Receivable - Net
     1,030       1,004  
Materials and Supplies
     155       160  
Income Taxes Receivable
     2       31  
Deferred Income Taxes
     117       115  
Other Current Assets
     186       23  
 
    
 		      
 		  
Total Current Assets
     1,508       1,347  
Properties
     24,533       17,967  
Accumulated Depreciation
     (5,200 )     (4,916 )
 
    
 		      
 		  
Properties - Net
     19,333       13,051  
Affiliates and Other Companies
     359       248  
Other Long-term Assets
     678       628  
 
    
 		      
 		  
Total Assets
   $ 21,878     $ 15,274  
 
    
 		      
 		  
LIABILITIES AND SHAREHOLDER’S EQUITY
                
Current Liabilities:
                
Accounts Payable
   $ 624     $ 609  
Labor and Fringe Benefits Payable
     383       321  
Casualty, Environmental and Other Reserves
     185       211  
Current Maturities of Long-term Debt
     109       102  
Income and Other Taxes Payable
     55       68  
Due to Parent Company
     1,496       2,479  
Due to Affiliate
     759       251  
Other Current Liabilities
     39       97  
 
    
 		      
 		  
Total Current Liabilities
     3,650       4,138  
Casualty, Environmental and Other Reserves
     645       674  
Long-term Debt
     1,175       710  
Deferred Income Taxes
     6,022       3,596  
Other Long-term Liabilities
     615       575  
 
    
 		      
 		  
Total Liabilities
     12,107       9,693  
 
    
 		      
 		  
Shareholder’s Equity:
                
Common Stock, $20 Par Value:
                
Authorized 10,000,000 Shares Issued and Outstanding 9,061,038 Shares
     181       181  
Other Capital
     5,392       1,380  
Retained Earnings
     4,091       4,014  
Accumulated Other Comprehensive Earnings
     107       6  
 
    
 		      
 		  
Total Shareholder’s Equity
     9,771       5,581  
 
    
 		      
 		  
Total Liabilities and Shareholder’s Equity
   $ 21,878     $ 15,274  
 
    
 		      
 		  

See accompanying Notes to Consolidated Financial Statements (unaudited).

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CSX TRANSPORTATION, INC.
ITEM 1: FINANCIAL STATEMENTS

Consolidated Cash Flow Statements

                 
    Nine Months Ended (Unaudited)
(Dollars in Millions)
   September 24, 2004
   September 26, 2003
OPERATING ACTIVITIES
                
Net Earnings
   $ 219     $ 98  
Adjustments to Reconcile Net Earnings to Net Cash Provided:
                
Depreciation
     435       415  
Deferred Income Taxes
     123       30  
Restructuring Charge
     50       —  
Cumulative Effect of Accounting Change - Net of Tax
     —       (57 )
Provision for Casualty Claims
     —       229  
Other Operating Activities
     (85 )     17  
Changes in Operating Assets and Liabilities:
                
Accounts Receivable
     (16 )     16  
Termination of Sale of Receivables
     —       (869 )
Other Current Assets
     (20 )     (13 )
Accounts Payable
     (5 )     (53 )
Accounts Receivable Affiliates
     531       4  
Income Tax Receivable
     29       —  
Labor and Fringe Payable
     60       (31 )
Income and Other Taxes Payable
     (14 )     2  
Current Casualty and Other Environmental Reserves
     (4 )     (8 )
Other Current Liabilities
     (17 )     (42 )
 
    
 		      
 		  
Net Cash Provided By (Used In) Operating Activities
     1,286       (262 )
 
    
 		      
 		  
INVESTING ACTIVITIES
                
Property Additions
     (681 )     (676 )
Proceeds from Property Dispositions
     15       —  
Other Investing Activities
     —       5  
 
    
 		      
 		  
Net Cash Used In Investing Activities
     (666 )     (671 )
 
    
 		      
 		  
FINANCING ACTIVITIES
                
Advances from Parent Company
     (377 )     1,377  
Long-term Debt Repaid
     (94 )     (263 )
Dividends Paid
     (143 )     (173 )
Other Financing Activities
     (2 )     1  
 
    
 		      
 		  
Net Cash (Used In) Provided by Financing Activities
     (616 )     942  
 
    
 		      
 		  
Net Increase in Cash and Cash Equivalents
     4       9  
CASH AND CASH EQUIVALENTS
                
Cash and Cash Equivalents at Beginning of Period
     14       —  
 
    
 		      
 		  
Cash and Cash Equivalents at End of Period
   $ 18     $ 9  
 
    
 		      
 		  

See accompanying Notes to Consolidated Financial Statements (unaudited).

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CSX TRANSPORTATION, INC.
ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. BASIS OF PRESENTATION

     In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to fairly present the financial position of CSX Transportation, Inc. and subsidiaries (“CSXT” or the “Company”) at September 24, 2004 and December 26, 2003, and the results of its operations and for the quarters and nine months ended September 24, 2004 and September 26, 2003, and cash flows for the nine months ended September 24, 2004, such adjustments being of a normal recurring nature. Certain prior-year data have been reclassified to conform to the 2004 presentation. CSXT is a wholly owned subsidiary of CSX Corporation (“CSX”).

     The Company suggests that these financial statements be read in conjunction with the financial statements and the notes included in The Company’s most recent Annual Report on Form 10-K, 2004 First and Second Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

     CSXT follows a 52/53 week fiscal reporting calendar. Fiscal year 2004 consists of a 53-week year ending on December 31, 2004. Fiscal year 2003 consisted of 52 weeks ended on December 26, 2003. The financial statements presented are for the 13-week quarters ended September 24, 2004 and September 26, 2003, the 39-week periods ended September 24, 2004 and September 26, 2003, and as of December 26, 2003. In 2004, the fourth quarter ending December 31, 2004 will consist of 14 weeks.

     Accumulated Other Comprehensive earnings for the third quarter and nine months of 2004 was $60 million and $107 million, respectively, after tax, resulting from the increase in fair value of fuel derivative instruments. (See Note 7, Derivative Financial Instruments.) Total comprehensive earnings approximated net earnings for the quarter and nine months ended September 26, 2003.

NOTE 2.  NEW ACCOUNTING PRONOUNCEMENTS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES

     Statement of Financial Accounting Standards (“SFAS”) 143, “Accounting for Asset Retirement Obligations” was issued in 2001. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. In conjunction with the group-life method of accounting for asset costs, the Company historically accrued crosstie removal costs as a component of depreciation, which is not permitted under SFAS 143. With the adoption of SFAS 143 in fiscal year 2003, CSXT recorded pretax income of $93 million, $57 million after tax, as a cumulative effect of an accounting change in the first quarter, representing the reversal of the accrued liability for crosstie removal costs. The adoption of SFAS 143 did not have a material effect on prior reporting periods and will not have a material effect on future earnings.

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CSX TRANSPORTATION, INC.
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)

NOTE 2.  NEW ACCOUNTING PRONOUNCEMENTS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES, Continued

     In 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” which requires a variable interest entity (“VIE”) to be consolidated by a company that is subject to a majority of the risk of loss from the VIE’s activities or is entitled to receive a majority of the entity’s residual returns, or both. Under that guidance, CSXT consolidated Four Rivers Transportation, Inc. (“FRT”), a shortline railroad, into its financial statements at the beginning of fiscal 2004. Previously, FRT was accounted for under the equity method of accounting. Other income includes net equity earnings for FRT for the quarter and nine months ended September 26, 2003. The following table indicates the impact of consolidating FRT in 2004 compared to equity method accounting in 2003.

                                 
    Income Statement Impact
    Quarters Ended
   Nine Months Ended
    September 24,   September 26,   September 24,   September 26,
(Dollars in Millions)
   2004
   2003
   2004
   2003
Revenues
   $ 16     $ —       46     $ —  
Operating Expense
     9       —       27       —  
Net Equity Earnings
     —       —       —       2  
Net Income
     1       —       4       —  
                 
    Balance Sheet Impact
    September 24,   December 26,
(Dollars in Millions)
   2004
   2003
Current Assets
   $ 30     $ —  
Long-term Assets
     145       44  
Current Liabilities
     28       —  
Long-term Liabilities
     95       —  

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CSX TRANSPORTATION, INC.
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)

NOTE 3.  INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL

Background

     As previously reported, in June 2003 CSX, Norfolk Southern Corporation (“NS”), and Conrail Inc. (“Conrail”) jointly filed a petition with the Surface Transportation Board (“STB”) to establish direct ownership and control by CSX’s and NS’ respective subsidiaries, CSXT and Norfolk Southern Railway Company (“NSR”), of CSX’s and NS’ portions of the Conrail system already operated by them separately and independently under various agreements. These portions of the Conrail system were owned by Conrail’s subsidiaries, New York Central Lines, LLC (“NYC”) and Pennsylvania Lines, LLC (“PRR”). In August 2004, the following events occurred: (i) the ownership of NYC and PRR was transferred to CSXT and NSR, respectively, and (ii) CSXT consummated an exchange offer of new unsecured securities of subsidiaries of CSXT and NSR for unsecured securities of Conrail. The exchange offer was the final stage in the restructuring of Conrail’s unsecured indebtedness as described in the parties joint petition filed with the STB.

     CSXT and NSR offered unsecured debt securities of newly formed subsidiaries in an approximate 42%/58% ratio in exchange for Conrail’s unsecured debentures. The debt securities issued by each respective subsidiary were fully and unconditionally guaranteed by CSXT and NSR. Upon completion of the transaction, the subsidiaries merged into CSXT and NSR, respectively, and the new debt securities thus became direct unsecured obligations of CSXT and NSR. Conrail’s secured debt and lease obligations remained obligations of CSXT or NSR. Conrail’s secured debt and lease obligations of Conrail are supported by new leases and subleases which became the direct lease and sublease obligations, also in an approximate 42%/58% ratio, of CSXT and NSR.

     Prior to the transaction, CSX’s and NS’ indirect ownership interest in NYC and PRR mirror their ownership interest in Conrail (42% for CSX and 58% for NS). Subsequent to the transaction, CSXT obtained direct ownership of all NYC and NSR obtained direct ownership PRR. Thus, CSX in effect received NS’s 58% indirect ownership in NYC and NS in effect received CSX’s 42% indirect ownership of PRR. The receipt of the interests not already indirectly owned by CSX was accounted for at fair value. The receipt of the NYC interest already indirectly owned by CSX was accounted for using CSX’s basis in amounts already included within CSX’s investment in Conrail.

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CSX TRANSPORTATION, INC.
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)

NOTE 3. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued

     The Company recorded this transaction at fair value based on the preliminary results of an independent valuation. The accounting for the transaction could be adjusted upon receipt of the final third party valuation and allocation of fair value to individual assets. The following tables summarize the estimated fair value of the acquired assets and liabilities assumed at the date of the spin-off and at the end of the prior year and its effects on the Company’s Consolidated Balance Sheets as of September 24, 2004 and December 26, 2003. Fair value adjustments are non-cash transactions and, accordingly, have no cash impact on the Consolidated Cash Flow Statements.

                         
                    (Unaudited)
    Before Spin-off Effects   Effects of   Reported September 24,
(Dollars in Millions)
   September 24, 2004
   Spin-off
   2004
ASSETS
                        
Current Assets:
                        
Cash and Cash Equivalents
   $ 18     $ —     $ 18  
Accounts Receivable — Net
     1,030       —       1,030  
Materials and Supplies
     155       —       155  
Income Tax Receivable
     2       —       2  
Deferred Income Taxes
     117       —       117  
Other Current Assets
     (425 )     611       186  
 
    
 		      
 		      
 		  
Total Current Assets
     897       611       1,508  
Properties — Net
     13,315       6,018       19,333  
Affiliates and Other Companies
     359       —       359  
Other Long-term Assets
     542       136       678  
 
    
 		      
 		      
 		  
Total Assets
     15,113       6,765     $ 21,878  
 
    
 		      
 		      
 		  
LIABILITIES AND SHAREHOLDER’S EQUITY
                        
Current Liabilities:
                        
Accounts Payable
     624       —     $ 624  
Labor and Fringe Benefits Payable
     383       —       383  
Casualty, Environmental and Other Reserves
     185       —       185  
Current Maturities of Long-term Debt
     109       —       109  
Income and Other Taxes Payable
     55       —       55  
Due to Parent Company
     1,496       —       1,496  
Due to Affiliate
     759       —       759  
Other Current Liabilities
     47       (8 )     39  
 
    
 		      
 		      
 		  
Total Current Liabilities
     3,658       (8 )     3,650  
Casualty, Environmental and Other Reserves
     639       6       645  
Long-term Debt
     647       528       1,175  
Deferred Income Taxes
     3,809       2,213       6,022  
Other Long-term Liabilities
     606       9       615  
 
    
 		      
 		      
 		  
Total Liabilities
     9,359       2,748       12,107  
 
    
 		      
 		      
 		  
Shareholder’s Equity:
                        
Common Stock, $20 Par Value
     181       —       181  
Authorized 10,000,000 Shares
                       
Issued and Outstanding 9,061,038 Shares
                       
Other Capital
     1,379       4,013       5,392  
Retained Earnings
     4,087       4       4,091  
Accumulated Other Comprehensive Earnings
     107       —       107  
 
    
 		      
 		      
 		  
Total Shareholder’s Equity
     5,754       4,017       9,771  
 
    
 		      
 		      
 		  
Total Liabilities and Shareholder’s Equity
     15,113       6,765     $ 21,878  
 
    
 		      
 		      
 		  

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CSX TRANSPORTATION, INC.
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)

NOTE 3. INVESTMENT IN AND INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued

                         
                    Proforma Spin-off
    Reported December 26,   Effects of   Effects December
(Dollars in Millions)
   2003
   Spin-off
   26, 2003
ASSETS
                        
Current Assets:
                        
Cash and Cash Equivalents
   $ 14     $ —     $ 14  
Accounts Receivable - Net
     1,004       —       1,004  
Materials and Supplies
     160       —       160  
Income Tax Receivable
     31       —       31  
Deferred Income Taxes
     115       —       115  
Other Current Assets
     23       573       596  
 
    
 		      
 		      
 		  
Total Current Assets
     1,347       573       1,920  
Properties - Net
     13,051       6,151       19,202  
Affiliates and Other Companies
     248       —       248  
Other Long-term Assets
     628       136       764  
 
    
 		      
 		      
 		  
Total Assets
   $ 15,274       6,860       22,134  
 
    
 		      
 		      
 		  
LIABILITIES AND SHAREHOLDER’S EQUITY
                        
Current Liabilities:
                        
Accounts Payable
   $ 609       —       609  
Labor and Fringe Benefits Payable
     321       —       321  
Casualty, Environmental and Other Reserves
     211       —       211  
Current Maturities of Long-term Debt
     102       —       102  
Income and Other Taxes Payable
     68       —       68  
Due to Parent Company
     2,479       —       2,479  
Due to Affiliate
     251       —       251  
Other Current Liabilities
     97       (8 )     89  
 
    
 		      
 		      
 		  
Total Current Liabilities
     4,138       (8 )     4,130  
Casualty, Environmental and Other Reserves
     674       6       674  
Long-term Debt
     710       528       1,238  
Deferred Income Taxes
     3,596       2,269       5,865  
Other Long-term Liabilities
     575       9       590  
 
    
 		      
 		      
 		  
Total Liabilities
     9,693       2,804       12,497  
 
    
 		      
 		      
 		  
Shareholder’s Equity:
                        
Common Stock, $20 Par Value
     181       —       181  
Authorized 10,000,000 Shares
                       
Issued and Outstanding 9,061,038 Shares
                       
Other Capital
     1,380       4,056       5,436  
Retained Earnings
     4,014       —       4,014  
Accumulated Other Comprehensive Earnings
     6       —       6  
 
    
 		      
 		      
 		  
Total Shareholder’s Equity
     5,581       4,056       9,637  
 
    
 		      
 		      
 		  
Total Liabilities and Shareholder’s Equity
   $ 15,274       6,860       22,134  
 
    
 		      
 		      
 		  

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