form_10q.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 June 26, 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 392,190,182 shares of common stock outstanding on June 26, 2009 (the latest practicable date that is closest to the filing date).

 
1
 


CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 26, 2009
       
     
Page
PART I.
FINANCIAL INFORMATION
  
Item 1.
Financial Statements
  
       
 
3
   
Quarters and Six Months Ended June 26, 2009
  
   
and June 27, 2008
  
       
 
4
   
At June 26, 2009 (Unaudited) and December 26, 2008
  
       
 
5
   
Six Months Ended June 26, 2009 and June 27, 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.
47
       
Item 6.
48
       
   
49




2
CSX CORPORATION
ITEM 1. FINANCIAL STATEMENTS
 

CONSOLIDATED INCOME STATEMENTS (Unaudited)
(Dollars in Millions, Except Per Share Amounts)
Table of Contents
 
     
Second Quarters
  
Six Months
     
2009
2008
  
2009
2008
Revenue
  
 $2,185
 $2,907
  
 $4,432
 $5,620
Expense
            
 
Labor and Fringe
  
 654
 733
  
 1,316
 1,478
 
Materials, Supplies and Other
  
 368
 513
  
 845
 1,018
 
Fuel
  
 185
 537
  
 376
 978
 
Depreciation
  
 229
 227
  
 453
 449
 
Equipment and Other Rents
  
 98
 112
  
 211
 223
 
Inland Transportation
  
 69
 68
  
 127
 131
 
Total Expense
  
 1,603
 2,190
  
 3,328
 4,277
               
Operating Income
  
 582
 717
  
 1,104
 1,343
               
Interest Expense
  
 (139)
 (133)
  
 (280)
 (252)
Other Income - Net (Note 8)
 10
 17
  
 13
 89
Earnings From Continuing Operations
            
 
Before Income Taxes
 453
 601
  
 837
 1,180
               
Income Tax Expense (Note 9)
  
 (168)
 (209)
  
 (298)
 (426)
Earnings From Continuing Operations
  
 285
 392
  
 539
 754
               
Discontinued Operations (Note 11)
  
 23
 (7)
  
 15
 (18)
Net Earnings
  
 $308
$385
  
 $554
 $736
               
Per Common Share (Note 2)
            
Net Earnings Per Share, Basic
            
 
Continuing Operations
  
 $0.73
 $0.97
  
 $1.37
 $1.86
 
Discontinued Operations
  
 0.06
 (0.02)
  
 0.04
 (0.04)
 
Net Earnings
  
 $0.79
 $0.95
  
 $1.41
 $1.82
               
Net Earnings Per Share, Assuming Dilution
          
 
Continuing Operations
  
 $0.72
 $0.95
  
 $1.36
 $1.82
 
Discontinued Operations
  
 0.06
 (0.02)
  
 0.04
 (0.04)
 
Net Earnings
  
 $0.78
 $0.93
  
 $1.40
 $1.78
               
Average Shares Outstanding (Thousands)
 392,027
 406,205
  
 391,594
 405,278
               
Average Shares Outstanding,
          
 
Assuming Dilution (Thousands)
  
 395,370
 415,112
  
 394,735
 415,161
               
Cash Dividends Paid Per Common Share
 $0.22
 $0.18
  
 $0.44
 $0.33


See accompanying notes to consolidated financial statements.
 
3
CSX CORPORATION
ITEM 1. FINANCIAL STATEMENTS


Table of Contents
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)

 
     
(Unaudited)
  
     
June 26,
December 26,
     
2009
2008
ASSETS
Current Assets
      
 
Cash and Cash Equivalents
  
 $1,108
 $669
 
Short-term Investments
  
 70
 76
 
Accounts Receivable - Net (Note 1)
 885
 1,107
 
Materials and Supplies
  
 254
 217
 
Deferred Income Taxes
  
 159
 203
 
Other Current Assets
  
 160
 119
 
  Total Current Assets
  
 2,636
 2,391
         
Properties
  
 30,584
 30,208
Accumulated Depreciation
 (7,697)
 (7,520)
 
  Properties - Net
  
 22,887
 22,688
         
Investment in Conrail (Note 10)
  
 622
 609
Affiliates and Other Companies
  
 405
 406
Other Long-term Assets
  
 185
 194
 
  Total Assets
  
 $26,735
 $26,288
         
LIABILITIES AND SHAREHOLDERS' EQUITY
       
Current Liabilities
      
 
Accounts Payable
  
 $904
 $973
 
Labor and Fringe Benefits Payable
 349
 465
 
Casualty, Environmental and Other Reserves (Note 4)
 181
 236
 
Current Maturities of Long-term Debt (Note 7)
 318
 319
 
Income and Other Taxes Payable
 110
 125
 
Other Current Liabilities
  
 99
 286
 
  Total Current Liabilities
  
 1,961
 2,404
         
Casualty, Environmental and Other Reserves (Note 4)
 579
 643
Long-term Debt (Note 7)
  
 7,933
 7,512
Deferred Income Taxes
  
 6,417
 6,235
Other Long-term Liabilities
  
 1,389
 1,426
 
  Total Liabilities
  
 18,279
 18,220
         
Common Stock $1 Par Value
  
 392
 391
Other Capital
  
 29
 -
Retained Earnings
  
 8,757
 8,398
Accumulated Other Comprehensive Loss (Note 1)
 (735)
 (741)
Noncontrolling Minority Interest
  
 13
 20
 
Total Shareholders' Equity
  
 8,456
 8,068
 
Total Liabilities and Shareholders' Equity
 $26,735
 $26,288


See accompanying notes to consolidated financial statements.
 
4
CSX CORPORATION
ITEM 1. FINANCIAL STATEMENTS


Table of Contents
CONSOLIDATED CASH FLOW STATEMENTS (Unaudited)
 (Dollars in Millions)

 
 
Six Months
 
2009
2008
OPERATING ACTIVITIES
    
 
Net Earnings
 $554
 $736
 
Adjustments to Reconcile Net Earnings to Net Cash Provided
    
 
by Operating Activities:
    
 
Depreciation
 454
 456
 
Deferred Income Taxes
 212
 201
 
Other Operating Activities
 (172)
 (30)
 
Changes in Operating Assets and Liabilities:
    
 
Accounts Receivable
 202
 (44)
 
Other Current Assets
 (83)
 (16)
 
Accounts Payable
 (56)
 35
 
Income and Other Taxes Payable
 (13)
 9
 
Other Current Liabilities
 (117)
 (4)
   
Net Cash Provided by Operating Activities
 981
 1,343
             
INVESTING ACTIVITIES
    
 
Property Additions
 (667)
 (912)
 
Purchases of Short-term Investments
 -
 (25)
 
Proceeds from Sales of Short-term Investments
 -
 280
 
Other Investing Activities
 49
 (1)
   
Net Cash Used in Investing Activities
 (618)
 (658)
             
FINANCING ACTIVITIES
    
 
Long-term Debt Issued (Note 7)
 500
 1,000
 
Long-term Debt Repaid (Note 7)
 (83)
 (176)
 
Dividends Paid
 (176)
 (134)
 
Stock Options Exercised (Note 3)
 12
 65
 
Shares Repurchased
 -
 (453)
 
Other Financing Activities
 (177)
 43
   
Net Cash Provided by Financing Activities
 76
 345
             
 
Net Increase in Cash and Cash Equivalents
 439
 1,030
             
CASH AND CASH EQUIVALENTS
    
 
Cash and Cash Equivalents at Beginning of Period
 669
 368
   
Cash and Cash Equivalents at End of Period
 $1,108
 $1,398


See accompanying notes to consolidated financial statements.

5
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
NOTE 1.                                         Nature of Operations and Significant Accounting Policies

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.  In May 2009, CSX sold the stock of The 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 six months ended June 26, 2009 and June 27, 2008;

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

·  
Consolidated cash flow statements for the six months ended June 26, 2009 and June 27, 2008.

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.



6
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
NOTE 1.                                         Nature of Operations and Significant Accounting Policies, continued

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 accounting principles generally accepted in the United States of America 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 second fiscal quarter of 2009 and 2008 consisted of 13 weeks ending on June 26, 2009 and June 27, 2008, respectively.

·  
The six month periods of 2009 and 2008 consisted of 26 weeks ending on June 26, 2009 and June 27, 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.

Except as otherwise specified, references to “second quarter(s)” or “six months” indicate CSX’s fiscal periods ending June 26, 2009 or June 27, 2008, and references to year-end indicate the fiscal year ended December 26, 2008.


7
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
NOTE 1.                                Nature of Operations and Significant Accounting Policies, continued

Comprehensive Earnings

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 $314 million and $387 million for second quarters 2009 and 2008, respectively, and $560 million and $740 million for six months 2009 and 2008, respectively.

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 specifically the cumulative balance related to the pension and other post-retirement adjustments and reduced overall equity by $735 million and $741 million as of June 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 $60 million and $70 million is included in the Consolidated Balance Sheets as of June 2009 and December 2008.

New Accounting Pronouncements and Changes in Accounting Policy

    In 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements - An amendment of ARB No. 51 (“SFAS 160”). This statement requires that noncontrolling minority interests should be reported as equity instead of a liability on the balance sheet.  Additionally, it requires disclosure of consolidated net income attributable to the parent and to the noncontrolling interest on the face of the income statement.  CSX has noncontrolling minority interests primarily in its investments in Four Rivers Transportation Inc. and The Indiana Rail Road Company.  For CSX, SFAS 160 is effective beginning fiscal year 2009 and resulted in a $20 million reclassification of noncontrolling minority interests from other long-term liabilities to shareholders’ equity on the December 2008 consolidated balance sheet.  Noncontrolling minority interest expense is included in other income in the consolidated income statements and is not material to CSX.  Therefore, the Company did not present income attributable to non-controlling interests separately in the consolidated income statements.

8
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
NOTE 1.                                Nature of Operations and Significant Accounting Policies, continued

FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments and APB Opinion No. 28, Interim Financial Reporting, to require disclosures about fair value of financial instruments in quarterly reports as well as in annual reports, as previously required. For CSX, this statement applies to certain investments and long-term debt and is effective beginning second quarter 2009.  (See Note 12, Fair Value Measurements.)

NOTE 2.                                Earnings Per Share

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

     
Second Quarters
Six Months
     
2009
2008
2009
2008
Numerator (Dollars in millions):
          
 
Earnings from Continuing Operations
  
 $285
 $392
 $539
 $754
 
Interest Expense on Convertible Debt - Net of Tax
 -
 -
 -
 1
 
Earnings from Continuing Operations, If Converted
 285
 392
 539
 755
 
Discontinued Operations - Net of Tax (a)
  
23
(7)
15
(18)
 
Net Earnings, If Converted
  
308
385
554
737
 
Interest Expense on Convertible Debt - Net of Tax
 -
 -
 -
(1)
 
Net Earnings
  
 $308
 $385
 $554
 $736
             
Denominator (Units in thousands):
          
 
Average Common Shares Outstanding
  
 392,027
 406,205
 391,594
 405,278
 
Convertible Debt
  
 1,118
 3,729
 1,118
 4,723
 
Stock Option Common Stock Equivalents (b)
 1,989
 4,170
 1,906
 4,266
 
Other Potentially Dilutive Common Shares
  
 236
 1,008
 117
 894
 
Average Common Shares Outstanding, Assuming Dilution
 395,370
 415,112
 394,735
 415,161
             
Net Earnings Per Share, Basic:
          
 
Continuing Operations
  
 $0.73
 $0.97
 $1.37
 $1.86
 
Discontinued Operations
  
 0.06
 (0.02)
 0.04
 (0.04)
 
Net Earnings
  
 $0.79
 $0.95
 $1.41
 $1.82
             
Net Earnings Per Share, Assuming Dilution:
          
 
Continuing Operations
  
 $0.72
 $0.95
 $1.36
 $1.82
 
Discontinued Operations
  
 0.06
 (0.02)
 0.04
 (0.04)
 
Net Earnings
  
 $0.78
 $0.93
 $1.40
 $1.78

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

(b)  
In calculating diluted earnings per share, SFAS 128, Earnings Per Share 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.


9
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.

EITF 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings Per Share, requires CSX to include additional shares in the computation of earnings per share, assuming dilution.  The amount, included in diluted earnings per share, represents the number of shares that would be issued if all 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 second quarter 2008, $102 million of face value of convertible debentures were converted into 4 million shares of CSX common stock.  There were no conversions of convertible debentures during 2009.  As of June 2009, approximately $32 million of convertible debentures at face value remained outstanding, which are convertible into approximately 1 million shares of CSX common stock.

NOTE 3.                                Share-Based Compensation

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:


 
Second Quarters
  
Six Months
(Dollars in millions)
2009
2008
  
2009
2008
Share-Based Compensation Expense (a)
 $11
 $10
  
 $3
 $24
Income Tax Benefit
 (4)
 (4)
  
 (1)
 (9)


 
 
(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.

10
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
NOTE 3.                                Share-Based Compensation, continued

The following table provides information about stock options exercised.


 
Second Quarters
  
Six Months
(In thousands)
2009
2008
  
2009
2008
Number of Stock Options Exercised
 492
 1,562
  
 566
 3,420


    As of December 2008, all outstanding options are vested, and therefore, there will be no future expense related to these options.  As of June 2009, CSX had approximately 7 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).

NOTE 4.                                Casualty, Environmental and Other Reserves

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:


   
June 2009
  
December 2008
(Dollars in millions)
Current
Long-term
Total
  
Current
Long-term
Total
                 
Casualty:
              
 
Personal Injury
 $79
 $223
 $302
  
 $104
 $258
 $362
 
Occupational
 22
 165
 187
  
 32
 172
 204
 
Total Casualty
 101
 388
 489
  
 136
 430
 566
Separation
 15
 64
 79
  
 16
 71
 87
Environmental
 37
 56
 93
  
 42
 58
 100
Other
 28
 71
 99
  
 42
 84
 126
 
Total
 $181
 $579
 $760
  
 $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 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.

11
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.  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 with a corresponding receivable for insurance recoveries.  Personal injury and occupational claims are presented on a gross basis and in accordance with SFAS No. 5, Accounting for Contingencies (“SFAS 5”).  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 were related to CSXT unless otherwise noted.

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. The Company is presently self-insured up to $25 million per injury for personal injury and occupational-related claims.

Personal Injury

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 continual reduction of the Company’s FRA personal injury rate.  Additionally, the trend in the severity of injuries has significantly declined.

12
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
NOTE 4.                                Casualty, Environmental and Other Reserves, continued

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.

An analysis is performed semi-annually by an independent third party and reviewed by management.  The methodology used includes an estimate of future anticipated claims based on the Company’s trends in average historical claim filing rates, future anticipated dismissal rates and settlement rates.  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 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 257 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.

13
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
NOTE 4.                                Casualty, Environmental and Other Reserves, continued

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.

In accordance with Statement of Position 96-1, Environmental Remediation Liabilities, 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, 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 SFAS 5.

NOTE 5.                                Commitments and Contingencies

Insurance

The Company maintains numerous insurance programs, most notably for third-party casualty liability and for Company property damage and business interruption, with substantial limits.  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.

14
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 $41 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’s secured notes because these notes are included on CSX’s consolidated balance sheet.

As of second quarter 2009, the Company’s guarantees primarily related to the following:

·  
Guarantee of approximately $37 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 second 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.

15
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 5.                                Commitments and Contingencies, continued

Fuel Surcharge Antitrust Litigation

Since 2007, at least 31 putative class action suits have been filed in various federal district courts against CSXT and three other U.S.-based Class I railroads.  The lawsuits contain substantially similar allegations to the effect that the defendants’ fuel surcharge practices relating to contract and unregulated traffic resulted from an illegal conspiracy in violation of antitrust laws.  The suits seek unquantified treble damages (three times the amount of actual damages) allegedly sustained by purported class members, attorneys’ fees and other relief.  All but three of the lawsuits purport to be filed on behalf of a class of shippers that allegedly purchased rail freight transportation services from the defendants through the use of contracts or through other means exempt from rate regulation during defined periods commencing as early as June 2003 and that were assessed fuel surcharges.  Three of the lawsuits purport to be on behalf of indirect purchasers of rail services.  The district court has dismissed all of the indirect purchasers’ causes of action seeking damages but has not dismissed their request for injunctive relief.  The indirect purchasers have appealed that decision and the district court case has been stayed pending the appeal.

The class action suits have been consolidated in federal court in the District of Columbia.  The court denied the railroads’ request to first proceed with discovery relating to the appropriateness of class certification, and then permit merits discovery only if a class is certified.  The court, however, agreed with the railroads that class certification should be decided as early as possible, rejecting plaintiffs’ proposal that certification be determined after the close of all discovery and close to trial.

CSXT believes that its fuel surcharge practices are lawful.  Accordingly, CSXT intends to vigorously defend itself against the purported class actions, which it believes are without merit.  CSXT cannot predict the outcome of the private lawsuits, which are in their preliminary stages, or of any government investigations, charges or additional litigation that may be filed in the future.  Penalties for violating antitrust laws can be severe, involving both potential criminal and civil liability.  CSXT is unable to assess at this time the possible financial impact of this litigation.  CSXT has not accrued any liability for an adverse outcome in the litigation.  If a material adverse outcome were to occur and be sustained, it could have a material adverse impact on the Company’s financial condition, results of operations or liquidity.  For more information, please refer to CSX’s most recent Annual Report on Form 10-K.
 
STB Rate Cases

During 2008, Seminole Electric Cooperative, Inc. (“Seminole”) filed a complaint before the U.S. Surface Transportation Board (“STB”) against CSXT.   CSXT and Seminole were parties to a railroad transportation contract that expired on December 31, 2008.  Seminole is contesting tariff rates that went into effect on January 1, 2009 for movements of coal to its existing and planned facilities.  Because of the preliminary nature of this case, CSXT is not able to assess at this time the possible financial impact of the STB proceeding.  However, the Company will continue to consider and pursue all available legal defenses in this matter.

16
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 5.                                Commitments and Contingencies, continued
 
    Also, during 2008, E.I. du Pont de Nemours and Company filed a complaint before the STB against CSXT, contesting tariff rates that went into effect on December 1, 2008 for movements of various commodities from and/or to certain of its existing facilities.    CSXT and DuPont engaged in mediation sponsored by the STB and reached a confidential settlement.  The complaint has been voluntarily dismissed.

Other Legal Proceedings

In addition to the matters described above, 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 items, 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.
 
NOTE 6.                                Employee Benefit Plans

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 following table describes the components of expense/(income) related to net periodic benefit cost:


   
Pension Benefits
(Dollars in millions)
Second Quarters
  
Six Months
 
2009
2008
  
2009
2008
Service Cost
 $8
 $9
  
 $16
 $17
Interest Cost
 32
 30
  
 62
 60
Expected Return on Plan Assets
 (36)
 (36)
  
 (71)
 (72)
Amortization of Prior Service Cost
 -
 -
  
 1
 1
Amortization of Net Loss
 7
 6
  
 13
 11
 
Net Periodic Benefit Cost
 $11
 $9
  
 $21
 $17
             
             
   
Other Post-retirement Benefits
(Dollars in millions)
Second Quarters
  
Six Months
 
2009
2008
  
2009
2008
Service Cost
 $1
 $1
  
 $2
 $3
Interest Cost
 6
 5
  
 12
 10
Amortization of Prior Service Cost
 -
 -
  
 -
 (1)
Amortization of Net Loss
 1
 1
  
 2
 2
 
Net Periodic Benefit Cost
 $8
 $7
  
 $16
 $14


    In accordance with the Pension Protection 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.  Due to recent market volatility and overall investment losses of pension assets for 2008, the Company will be required to make additional contributions to maintain at least a 94% funding target.  While required minimum contributions in 2009 are estimated to be approximately $5 million, the Company intends to pre-fund future contributions up to $250 million, or $160 million after-tax, to its pension plans in 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)

 
NOTE 7.                Debt and Credit Agreements

Total activity related to long-term debt as of June 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
 (83)
 -
 (83)
 
Reclassifications
 82
 (82)
 -
 
Other
 -
 3
 3
Total long-term debt at June 2009
 $318
 $7,933
 $8,251


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 contains no provisions that would require CSX to post collateral.  As of June 2009, this facility was not drawn on, and CSX was in compliance with all covenant requirements under the facility.  This facility expires in 2012.

19
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 8.                                Other Income - Net

    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 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.  Income from real estate 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 and/or losses, noncontrolling minority interest expense, investment gains and losses and other non-operating activities.  Other income – net consists of the following:

   
Second Quarters
  
Six Months
(Dollars in millions)
2009
2008
  
2009
2008
Interest Income
 $3
 $13
  
 $7
 $21
Income from Real Estate
 6
 3
  
 7
 33
Miscellaneous Income (Expense)(a)
 1
 1
  
 (1)
 35
 
Total Other Income - Net
 $10
 $17
  
 $13
 $89


 
(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 in included in other income – net.  In May 2009, CSX sold the stock of The Greenbrier Hotel Corporation, owner of The Greenbrier resort. The results of The Greenbrier’s operations 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 June 2009 and December 2008, the Company had approximately $49 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 June 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.

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

20
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 9.                                Income Taxes, continued

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.
 
    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 June 2009 and December 2008, the Company had a $5 million gross receivable and a $2 million gross payable before the consideration of state tax impacts, respectively, accrued for interest and penalties.  The payable changed to a receivable due to the expiration of statutes of limitation noted above.

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 APB Opinion 18, The Equity Method of Accounting for Investments in Common Stock, CSX applies the equity method of accounting to its investment in Conrail.  At June 2009 and December 2008, CSX's investment in Conrail was $622 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.   Next, 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:


 
Second Quarters
  
Six Months
(Dollars in millions)
2009
2008
  
2009
2008
Income Statement Information:
          
Rents, Fees and Services
 $26
 $27
  
 $50
 $53
Equity in Income of Conrail
 (7)
 (6)
  
 (14)
 (12)
Purchase Price Amortization and Other
 1
 1
  
2
 2
Interest Expense Related to Conrail
 1
 1
  
2
 2
Income Statement Impact
 $21
 $23
  
 $40
 $45

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

NOTE 11.                                Discontinued Operations
 
    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 with Marriott Hotel Services, Inc. (the “APA”).

 On May 6, 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 thereunder at the time of the sale.  On May 21, 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 SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets (“SFAS 144”).  Therefore, the gain on sale as well as losses from operations will be reported as discontinued operations.  Previously, all amounts associated with the operations of The Greenbrier were included in Other Income.  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:

 
Second Quarters
  
Six Months
(Dollars in millions)
2009
2008
  
2009
2008
Net Losses From Operations, after tax
 $(2)
 $(7)
  
 $(10)
 $(18)
Gain on Sale, after tax
 25
 -
  
 25
 -
Net Income (Loss) From Discontinued Operations
 $23
 $(7)
  
 $15
 $(18)
           
Earnings per Share
          
From Discontinued Operations, Assuming Dilution
 $0.06
 $(0.02)
  
 $0.04
 $(0.04)


NOTE 12.                                Fair Value Measurements

In May 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which 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 and is effective beginning second quarter 2009. SFAS No. 157, Fair Value Measurements 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.  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 June 2009, these bonds had a fair value of $115 million.  All inputs used to determine fair value are considered level 2 inputs.
 
Long-term debt is the only financial instrument of CSX 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 CSX'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 and carrying value of the Company’s long-term debt is as follows:

 
             
(Dollars in millions)
      
June
2009
  
December
2008
Long-term Debt Including Current Maturities:
        
 
Fair Value
      
 $8,568
  
 $7,415
 
Carrying Value
      
 $8,251
  
 $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 the 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:



Second Quarters
         
CSX
  
(Dollars in millions)
Rail (a)
Intermodal
Consolidated
  
 
2009
2008
2009
2008
2009
2008
$ Change
Revenues from External Customers
 $1,894
 $2,522
 $291
 $385
 $2,185
 $2,907
 $(722)
               
Segment Operating Income
 546
 641
 36
 76
 582
 717
 (135)


Six Months
         
CSX
  
(Dollars in millions)
Rail (a)
Intermodal
Consolidated
  
 
2009
2008
2009
2008
2009
2008
$ Change
Revenues from External Customers
 $3,871
 $4,887
 $561
 $733
 $4,432
 $5,620
 $(1,188)
               
Segment Operating Income
 1,044
 1,206
 60
 137
 1,104
 1,343
 (239)

(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 June 2009
CSX Corporation
CSX Transportation
Other
Eliminations
Consolidated
Operating Revenue
 $-
 $1,879
 $332
 $(26)
 $2,185
Operating Expense
 (63)
 1,395
 294
 (23)
 1,603
Operating Income
 63
 484
 38
 (3)
 582
           
Equity in Earnings of Subsidiaries
 308
 -
 -
 (308)
 -
Interest Expense
 (125)
 (28)
 (3)
 17
 (139)
Other Income - Net
 (22)
 (3)
 49
 (14)
 10
           
Earnings From Continuing Operations
          
 
Before Income Taxes
 224
 453
 84
 (308)
 453
Income Tax Benefit (Expense)
 52
 (179)
 (41)
 -
 (168)
Earnings From Continuing Operations
 276
 274
 43
 (308)
 285
Discontinued Operations
 32
 -
 (9)
 -
 23
Net Earnings
 $308
 $274
 $34
 $(308)
 $308
             
             
Quarter Ended June 2008
CSX Corporation
CSX Transportation
Other
Eliminations
Consolidated
Operating Revenue
 $-
 $2,501
 $439
 $(33)
 $2,907
Operating Expense
 (33)
 1,929
 324
 (30)
 2,190
Operating Income
 33
 572
 115
 (3)
 717
           
Equity in Earnings of Subsidiaries
 421
 -
 -
 (421)
 -
Interest Expense
 (138)
 (34)
 (6)
 45
 (133)
Other Income - Net
 24
 20
 15
 (42)
 17
           
Earnings From Continuing Operations
          
 
Before Income Taxes
 340
 558
 124
 (421)
 601
Income Tax Benefit (Expense)
 45
 (208)
 (46)
 -
 (209)
Earnings From Continuing Operations
 385
 350
 78
 (421)
 392
Discontinued Operations
 -
 -
 (7)
 -
 (7)
Net Earnings
 $385
 $350
 $71
 $(421)
 $385




26
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 14.                                Summarized Consolidating Financial Data, continued



Consolidating Income Statements
(Dollars in Millions)
             
Six Months Ended June 2009
CSX Corporation
CSX Transportation
Other
Eliminations
Consolidated
Operating Revenue
 $-
 $3,839
 $645
 $(52)
 $4,432
Operating Expense
 (142)
 2,958
 559
 (47)
 3,328
Operating Income
 142
 881
 86
 (5)
 1,104
           
Equity in Earnings of Subsidiaries
 563
 -
 -
 (563)
 -
Interest Expense
 (249)
 (59)
 (4)
 32
 (280)
Other Income - Net
 280
 3
 (243)
 (27)
 13
           
Earnings From Continuing Operations
          
 
Before Income Taxes
 736
 825
 (161)
 (563)
 837
Income Tax Benefit (Expense)
 (214)
 (319)
 235
 -
 (298)
Earnings From Continuing Operations
 522
 506
 74
 (563)
 539
Discontinued Operations
 32
 -
 (17)
 -
 15
Net Earnings
 $554
 $506
 $57
 $(563)
 $554
             
             
Six Months Ended June 2008
CSX Corporation
CSX Transportation
Other
Eliminations
Consolidated
Operating Revenue
 $-
 $4,845
 $845
 $(70)
 $5,620
Operating Expense
 (90)
 3,792
 639
 (64)
 4,277
Operating Income
 90
 1,053
 206
 (6)
 1,343
           
Equity in Earnings of Subsidiaries
 792
 -
 -
 (792)
 -
Interest Expense
 (272)
 (77)
 (13)
 110
 (252)
Other Income - Net
 64
 90
 39
 (104)
 89
           
Earnings From Continuing Operations
          
 
Before Income Taxes
 674
 1,066
 232
 (792)
 1,180
Income Tax Benefit (Expense)
 62
 (401)
 (87)
 -
 (426)
Earnings From Continuing Operations
 736
 665
 145
 (792)
 754
Discontinued Operations
 -
 -
 (18)
 -
 (18)
Net Earnings
 $736
 $665
 $127
 $(792)
 $736



27
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

NOTE 14.                              Summarized Consolidating Financial Data, continued



               
Consolidating Balance Sheet
(Dollars in Millions)
               
     
CSX
CSX
      
June 2009
  
Corporation
Transportation
Other
Eliminations
Consolidated
               
ASSETS
Current Assets
            
 
Cash and Cash Equivalents
  
$968
 $84
 $56
 $-
 $1,108
 
Short-term Investments
  
-
 1
 69
 -
 70
 
Accounts Receivable - Net
  
5
 869
 11
 -
 885
 
Materials and Supplies
  
-
 254
 -
 -
 254
 
Deferred Income Taxes
  
 10
 146
 3
 -
 159
 
Other Current Assets
  
129
 81
 63
 (113)
 160
 
  Total Current Assets
  
 1,112
 1,435
 202
 (113)
 2,636
               
Properties
  
6
 29,312
 1,266
 -
 30,584
Accumulated Depreciation
  
 (9)
 (6,899)
 (789)
 -
 (7,697)
 
Properties - Net
  
 (3)
 22,413
 477
 -
 22,887
               
Investments in Conrail
  
 -
 -
 622
 -
 622
Affiliates and Other Companies
  
 -
 529
 (124)
 -
 405
Investments in Consolidated Subsidiaries
 15,001
 -
 44
 (15,045)
 -
Other Long-term Assets
  
 51
 77
 100
 (43)
 185
 
  Total Assets
  
 $16,161
 $24,454
 $1,321
 $(15,201)
 $26,735
               
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
            
 
Accounts Payable
  
$122
$ 578
$ 204
$ -
$ 904
 
Labor and Fringe Benefits Payable
 31
 286
 32
 -
 349
 
Payable to Affiliates
  
472
 985
 (1,390)
 (67)
 -
 
Casualty, Environmental and Other Reserves
-
 159
 22
 -
 181
 
Current Maturities of Long-term Debt
200
 115
 3
 -
 318
 
Income and Other Taxes Payable
 (4)
 286
 (172)
 -
 110
 
Other Current Liabilities
 1
 91
 53
 (46)
 99
 
  Total Current Liabilities
  
822
 2,500
 (1,248)
 (113)
 1,961
               
Casualty, Environmental and Other Reserves
1
 506
 72
 -
 579
Long-term Debt
  
6,556
 1,371
 6
 -
 7,933
Deferred Income Taxes
  
 (440)
 6,760
 97
 -
 6,417
Long-term Payable to Affiliates
  
 -
 -
 44
 (44)
 -
Other Long-term Liabilities
  
780
 459
 150
 -
 1,389
 
  Total Liabilities
  
 7,719
 11,596
 (879)
 (157)
 18,279
               
Shareholders' Equity
            
Common Stock, $1 Par Value
  
392
 181
 -
 (181)
 392
Other Capital
  
 29
 5,565
 1,950
 (7,515)
 29
Retained Earnings
  
8,756
 7,138
 313
 (7,450)
 8,757
Accumulated Other Comprehensive Loss
 (735)
 (47)
 (102)
 149
 (735)
Noncontrolling Minority Interest
  
-
 21
 39
 (47)
 13
 
Total Shareholders' Equity
  
 8,442
 12,858
 2,200
 (15,044)
 8,456
 
Total Liabilities and Shareholders' Equity
 $16,161
 $24,454
 $1,321
 $(15,201)
 $26,735


28
CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 14.                                Summarized Consolidating Financial Data, continued

               
Consolidating Balance Sheet
(Dollars in Millions)
               
     
CSX
CSX
      
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
 -