FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

For the quarter ended July 1, 2005

OR

o		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 (State or other jurisdiction of incorporation or organization)		62-1051971 (I.R.S. Employer Identification No.)
500 Water Street, 15th Floor, Jacksonville, FL (Address of principal executive offices)		32202 (Zip Code)

(904) 359-3200
(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 þ  No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 1, 2005: 216,959,519 shares.

 

 

CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 1, 2005
INDEX

						Page Number
PART I:				FINANCIAL INFORMATION
Item 1:				Financial Statements
				Consolidated Income Statements (Unaudited) — Quarters and Six Months Ended July 1, 2005 and June 25, 2004			3
				Consolidated Balance Sheets — At July 1, 2005 (Unaudited) and December 31, 2004			4
				Consolidated Cash Flow Statements (Unaudited) — Six Months Ended July 1, 2005 and June 25, 2004			5
				Notes to Consolidated Financial Statements (Unaudited)			6
Item 2:				Management’s Discussion and Analysis of Results of Operations and Financial Condition			28
Item 3:				Quantitative and Qualitative Disclosures about Market Risk			49
Item 4:				Controls and Procedures			50
PART II:				OTHER INFORMATION
Item 1:				Legal Proceedings			51
Item 2:				Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3:				Defaults upon Senior Securities			51
Item 4:				Submission of Matters to a Vote of Security Holders			51
Item 5:				Other Information			52
Item 6:				Exhibits			53
Signature							53
Section 302 Certification of Chairman and CEO
Section 302 Certification of Executive VP & CFO
Section 906 Certification of Chairman and CEO
Section 906 Certification of Executive VP & CFO

CSX CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS
(Unaudited)

(Dollars in Millions, Except Per Share Amounts)		Quarters Ended								Six Months Ended
		July 1,				June 25,				July 1,				June 25,
		2005				2004				2005				2004
Operating Revenue		$	2,166			$	1,997			$	4,274			$	3,917
Operating Expense
Labor and Fringe			707				665				1,403				1,343
Materials, Supplies and Other			438				435				907				859
Depreciation			205				159				410				321
Fuel			176				151				355				305
Building and Equipment Rent			127				140				259				277
Inland Transportation			64				70				120				144
Conrail Rents Fees and Services			19				82				39				169
Restructuring Charge			—				15				—				68
Miscellaneous			(1	)			(2	)			(4	)			(3	)
Total Operating Expenses			1,735				1,715				3,489				3,483
Operating Income			431				282				785				434
Other Income (Expense)
Other Income — Net (Note 9)			30				5				28				1
Debt Repurchase Expense (Note 4)			(192	)			—				(192	)			—
Interest Expense			(110	)			(109	)			(224	)			(217	)
Earnings
Earnings from Continuing Operations before Income Taxes			159				178				397				218
Income Tax (Benefit) Expense			(6	)			60				78				73
Earnings from Continuing Operations			165				118				319				145
Discontinued Operations — Net of Tax (Note 3)			—				1				425				4
Net Earnings		$	165			$	119			$	744			$	149
Per Common Share
Earnings Per Share (Note 2):
Income from Continuing Operations		$	0.76			$	0.55			$	1.48			$	0.68
Discontinued Operations			—				—				1.97				0.01
Net Earnings		$	0.76			$	0.55			$	3.45			$	0.69
Earnings Per Share, Assuming Dilution (Note 2):
Income from Continuing Operations		$	0.73			$	0.53			$	1.41			$	0.66
Discontinued Operations			—				—				1.88				0.01
Net Earnings		$	0.73			$	0.53			$	3.29			$	0.67
Average Common Shares Outstanding (Thousands)			216,418				214,734				215,887				214,702
Average Common Shares Outstanding, Assuming Dilution (Thousands)			227,453				224,877				226,850				224,879
Cash Dividends Paid Per Common Share		$	0.10			$	0.10			$	0.20			$	0.20

See accompanying Notes to Consolidated Financial Statements.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

		(Unaudited)
(Dollars in Millions)		July 1, 2005				December 31, 2004
ASSETS
Current Assets:
Cash, Cash Equivalents and Short-term Investments (Note 1)		$	513			$	859
Accounts Receivable — Net (Note 8)			1,123				1,143
Materials and Supplies			196				165
Deferred Income Taxes			120				20
Other Current Assets — Net (Note 8)			252				157
International Terminals Assets Held for Sale (Note 3)			—				643
Total Current Assets			2,204				2,987
Properties			26,121				25,852
Accumulated Depreciation			(6,240	)			(5,907	)
Properties — Net			19,881				19,945
Investment in Conrail (Note 7)			583				574
Affiliates and Other Companies			310				296
Other Long-term Assets — Net (Note 8)			772				804
Total Assets		$	23,750			$	24,606
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable		$	885			$	879
Labor and Fringe Benefits Payable			429				371
Casualty, Environmental and Other Reserves (Note 11)			315				312
Current Maturities of Long-term Debt			618				983
Short-term Debt			3				101
Income and Other Taxes Payable			206				170
Other Current Liabilities			53				115
International Terminals Liabilities Held for Sale (Note 3)			—				386
Total Current Liabilities			2,509				3,317
Casualty, Environmental and Other Reserves (Note 11)			697				735
Long-term Debt			5,399				6,234
Deferred Income Taxes			6,006				5,979
Other Long-term Liabilities			1,522				1,530
Total Liabilities			16,133				17,795
Shareholders’ Equity:
Common Stock, $1 Par Value			217				216
Other Capital			1,678				1,605
Retained Earnings			5,912				5,210
Accumulated Other Comprehensive Loss (Note 1)			(190	)			(220	)
Total Shareholders’ Equity			7,617				6,811
Total Liabilities and Shareholders’ Equity		$	23,750			$	24,606

See accompanying Notes to Consolidated Financial Statements.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS

CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)

(Dollars in Millions)		Six Months Ended
		July 1,				June 25,
		2005				2004
OPERATING ACTIVITIES
Net Earnings		$	744			$	149
Adjustments to Reconcile Net Earnings to Net Cash Provided:
Depreciation			418				332
Deferred Income Taxes			(51	)			67
Gain on Sale of International Terminals — Net of Tax (Note 3)			(428	)			—
Restructuring Charge (Note 15)			—				68
Other Operating Activities			(124	)			(38	)
Changes in Operating Assets and Liabilities:
Accounts Receivable			41				(47	)
Other Current Assets			(45	)			(18	)
Accounts Payable			16				31
Other Current Liabilities			(242	)			(25	)
Net Cash Provided by Operating Activities			329				519
INVESTING ACTIVITIES
Property Additions			(381	)			(484	)
Net Proceeds from Sale of International Terminals (Note 3)			1,110				—
Purchase of Minority Interest in an International Terminals’ Subsidiary (Note 3)			(110	)			—
Purchases of Short-term Investments			(1,576	)			(719	)
Proceeds from Sale of Short-term Investments			1,679				644
Other Investing Activities			1				(37	)
Net Cash Provided by (Used in) Investing Activities			723				(596	)
FINANCING ACTIVITIES
Short-term Debt — Net			(98	)			702
Long-term Debt Issued			27				62
Long-term Debt Repaid			(1,213	)			(379	)
Dividends Paid			(44	)			(43	)
Other Financing Activities			55				3
Net Cash (Used in) Provided by Financing Activities			(1,273	)			345
Net (Decrease) Increase in Cash and Cash Equivalents			(221	)			268
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and Cash Equivalents at Beginning of Period			522				296
Cash and Cash Equivalents at End of Period			301				564
Short-term Investments at End of Period			212				164
Cash, Cash Equivalents and Short-term Investments at End of Period		$	513			$	728

See accompanying Notes to Consolidated Financial Statements.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
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 Corporation and subsidiaries (“CSX” or the “Company”) at July 1, 2005 and December 31, 2004, and the Consolidated Income and Cash Flow Statements for the quarters and six months ended July 1, 2005 and June 25, 2004, such adjustments being of a normal recurring nature. Certain prior-year data have been reclassified to conform to the 2005 presentation.

     The Company suggests that these financial statements be read in conjunction with the audited financial statements and the notes included in the Company’s most recent Annual Report and Form 10-K, 2005 First Quarterly Report on Form 10-Q and any Current Reports on Form 8-K.

     CSX follows a 52/53 week fiscal reporting calendar. Fiscal year 2005 consists of 52 weeks ending on December 30, 2005. Fiscal year 2004 consisted of 53 weeks ending on December 31, 2004. The financial statements presented are for the 13-week quarters ended July 1, 2005 and June 25, 2004, the 26-week periods ended July 1, 2005 and June 25, 2004 and as of December 31, 2004. In 2004, the fourth quarter ending December 31, 2004, consisted of 14 weeks.

     Accumulated Other Comprehensive Loss consists of the following:

		Balance				Net Gain				Balance
(Dollars in Millions)		December 31, 2004				(Loss)				July 1, 2005
Minimum Pension Liability (net of $161 of taxes as of December 31, 2004 and July 1, 2005)		$	(292	)		$	—			$	(292	)
Fair Value of Fuel Derivatives (net of $45 and $65 of taxes as of December 31, 2004 and July 1, 2005, respectively)			72				31				103
Other			—				(1	)			(1	)
Total		$	(220	)		$	30			$	(190	)

     Other comprehensive income for the second quarter of 2004 was $28 million, after tax resulting from the increase in fair value of fuel derivative instruments. Other comprehensive income for the six months ended June 25, 2004 was $95 million after tax resulting from the increase in fair value of fuel derivative instruments and a reduction in the Company’s additional minimum pension liability. (See Note 10. Derivative Financial Instruments.)

     CSX acquires auction rate securities and classifies these investments as available for sale. Accordingly, these investments are included in current assets as Short-term Investments on the Consolidated Balance Sheets. On the Consolidated Cash Flow Statements, purchases and sales of these assets are classified as investing activities.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 2. Earnings Per Share

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

(Dollars In Millions, Except Per Share Amounts)		Quarters Ended								Six Months Ended
		July 1,				June 25,				July 1,				June 25,
		2005				2004				2005				2004
Numerator:
Earnings from Continuing Operations		$	165			$	118			$	319			$	145
Interest Expense on Convertible Debt — Net of Tax			1				1				2				2
Net Earnings from Continuing Operations, If-Converted			166				119				321				147
Discontinued Operations — Net of Tax			—				1				425				4
Net Earnings, If-Converted			166				120				746				151
Interest Expense on Convertible Debt — Net of Tax			(1	)			(1	)			(2	)			(2	)
Net Earnings		$	165			$	119			$	744			$	149
Denominator (Thousands):
Average Common Shares Outstanding			216,418				214,734				215,887				214,702
Convertible Debt			9,728				9,728				9,728				9,728
Effect of Potentially Dilutive Common Shares			1,307				415				1,235				449
Average Common Shares Outstanding, Assuming Dilution			227,453				224,877				226,850				224,879
Earnings Per Share:
Income from Continuing Operations		$	0.76			$	0.55			$	1.48			$	0.68
Discontinued Operations			—				—				1.97				0.01
Net Earnings		$	0.76			$	0.55			$	3.45			$	0.69
Earnings Per Share, Assuming Dilution:
Income from Continuing Operations		$	0.73			$	0.53			$	1.41			$	0.66
Discontinued Operations			—				—				1.88				0.01
Net Earnings		$	0.73			$	0.53			$	3.29			$	0.67

     Basic earnings per share is based on the weighted-average number of common shares outstanding. Earnings per share, assuming dilution, is based on the weighted-average number of common shares outstanding adjusted for the effect of potentially dilutive common shares from convertible debt and employee stock options and awards.

(In Thousands)

Quarters Ended

Six Months Ended

July 1, 2005

June 25, 2004

July 1, 2005

June 25, 2004

Number of Stock Options Exercised

382

114

1,466

192

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 2. Earnings Per Share, Continued

     Certain potentially dilutive common shares at July 1, 2005, and June 25, 2004 were excluded from the computation of earnings per share, assuming dilution, since their related option exercise prices were greater than the average market price of the common shares during the period. The following table indicates information about potentially dilutive common shares excluded from the computation of earnings per share:

		Quarters Ended
		July 1, 2005				June 25, 2004
Number of Shares (Millions)			7				22
Average Exercise / Conversion Price		$	47.61			$	40.82

     In September 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share.” The EITF states that contingently convertible debt instruments are subject to the “if-converted” method under SFAS 128, Earnings Per Share, regardless of fulfillment of any of the contingent features included in the instrument. Consequently, CSX is required to include approximately 10 million shares underlying its convertible debentures using the “if-converted” method in the computation of earnings per share, assuming dilution. Additionally, earnings per share, assuming dilution, has been restated for all prior periods presented.

     A substantial increase in the fair market value of the Company’s stock price could trigger contingent conditions for conversion and allow holders to convert their debentures into CSX common stock and thus negatively impact basic earnings per share.

NOTE 3. Discontinued Operations

     CSX sold its International Terminals business, which included the capital stock of SL Service, Inc. (“SLSI”), in February 2005 for closing cash consideration of $1.142 billion, subject to final working capital and long-term debt adjustments that have yet to be determined. Of the gross proceeds, approximately $110 million was paid for the purchase of a minority interest in an International Terminals’ subsidiary, acquired during the first quarter of 2005 and divested as part of the sale to Dubai Ports International FZE (“DPI”). Other related cash transaction costs amounted to approximately $32 million. The Company has paid and expects to make additional substantial income tax payments attributable to the transaction.

     CSX recognized income of $683 million pretax, $428 million after tax, for the six months ended July 1, 2005 as a result of the sale. Discontinued Operations for the six months ended July 1, 2005 also includes revenue of $14 million and an after-tax loss on operations of $3 million from the International Terminals business through the closing date of the transaction in February 2005. Discontinued operations for the quarter and six months ended June 25, 2004 include revenue of $38 million and $86 million, respectively.

     SLSI also holds certain residual assets and liabilities as a result of prior divestitures and discontinuances. A wholly-owned subsidiary of CSX retains the rights to those assets and indemnifies DPI, SLSI and related entities against those liabilities pursuant to a separate agreement. CSX guarantees the obligations of its subsidiary under this separate agreement.

     The results of operations and financial position of the Company’s former International Terminals business are reported as Discontinued Operations for all periods presented. Additional information about the sale is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 4. Debt and Credit Agreements

     In June 2005, the Company repurchased $1.0 billion of its publicly-traded notes listed below pursuant to offers to purchase that commenced in May 2005, and expired in June 2005.

(Dollars in Millions)

						Aggregate Principal
						Amount of Tendered
		Principal Amount				Notes Accepted for
Notes		Outstanding				Purchase
CSX 2.75% Notes due 2006		$	200			$	186
CSX 9% Notes due 2006			300				206
CSX Floating Rate Notes due 2006			300				58
CSX 8.625% Notes due 2022			200				84
CSX 7.95% Notes due 2027			500				227
CSX 8.10% Notes due 2022			150				57
CSX 7.25% Notes due 2027			250				167
CSX 7.90% Notes due 2017			400				15
		$	2,300			$	1,000

     The total consideration paid for these notes totaled $1.2 billion, which includes a pretax charge of $192 million for costs to repurchase the debt which primarily reflects the market value above original issue value. The Company used cash on hand to finance this repurchase.

     The Company has a $1.2 billion five-year unsecured revolving credit facility expiring in May 2009 and a $400 million 364-day unsecured revolving credit facility expiring in May 2006. The facilities were entered into in May 2004 and May 2005, respectively, on terms substantially similar to the facilities they replaced: a $1.0 billion unsecured revolving credit facility that would have expired in May 2006 and a $400 million unsecured revolving credit facility that would have expired in May 2005. Generally, these facilities may be used for general corporate purposes, to support the Company’s commercial paper, and for working capital. Neither of the credit facilities was drawn on as of July 1, 2005. Commitment fees and interest rates payable under the facilities are similar to fees and rates available to comparably rated investment-grade borrowers. These credit facilities allow for borrowings at floating (LIBOR-based) rates, plus a spread, depending upon our senior unsecured debt ratings. At July 1, 2005, the Company was in compliance with all covenant requirements under the facilities.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 5. Share-Based Compensation

     As permitted under SFAS 148, the Company has adopted the fair value recognition provisions on a prospective basis and, accordingly, recognized expense for stock options granted in May 2003.

(Dollars in Millions)		Quarters Ended								Six Months Ended
		July 1,				June 25,				July 1,				June 25,
		2005				2004				2005				2004
Stock Option Compensation Expense		$	1			$	2			$	2			$	9

     Stock compensation expense includes $5 million recorded in conjunction with the Company’s management restructuring for the six-month period ended June 25, 2004 related to recognition of unamortized expense for 2003 stock option awards retained by terminated employees (see Note 15. Management Restructuring). In addition to stock option expense, stock-based employee compensation expense included in reported net income consists of restricted stock awards, stock issued to directors and the Company’s long-term incentive compensation program for all periods presented.

     The following table illustrates the pro forma effect on net earnings and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period:

(Dollars in Millions, Except Per Share Amounts)		Quarters Ended								Six Months Ended
		July 1,				June 25,				July 1,				June 25,
		2005				2004				2005				2004
Net Earnings — As Reported		$	165			$	119			$	744			$	149
Add: Stock-Based Employee Compensation Expense Included in Reported Net Income — Net of Tax			7				3				11				8
Deduct: Total Stock-Based Employee Compensation Expense Determined under the Fair Value Based Method for All Awards — Net of Tax			(8	)			(5	)			(14	)			(19	)
Pro Forma Net Earnings		$	164			$	117			$	741			$	138
Interest Expense on Convertible Debt — Net of Tax			1				1				2				2
Pro Forma Net Earnings, If-Converted		$	165			$	118			$	743			$	140
Earnings Per Share:
Basic — As Reported		$	0.76			$	0.55			$	3.45			$	0.69
Basic — Pro Forma		$	0.76			$	0.54			$	3.43			$	0.64
Diluted — As Reported		$	0.73			$	0.53			$	3.29			$	0.67
Diluted — Pro Forma		$	0.73			$	0.52			$	3.28			$	0.62

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 6. New Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123(R), “Share-Based Payment”, which is a revision of SFAS 123, “Accounting for Stock-Based Compensation”. Currently, the Company uses the Black-Scholes-Merton formula to estimate the value of stock options granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of SFAS 123(R) on January 1, 2006. Compensation cost for unvested awards that were not recognized under SFAS 123 will be recognized under SFAS 123(R). The new rules must be applied to new and existing unvested awards on the effective date. The Company adopted SFAS 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date). Had CSX adopted SFAS 123(R) in prior periods, the impact would have estimated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 5. Share-Based Compensation. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company is currently evaluating the impact of SFAS 123(R) on its consolidated financial statements, but does not expect the impact to be material.

     Currently, the Company’s stock-based employee compensation expense is recognized over the amortization period which could continue beyond the date an employee is eligible for retirement. Upon adoption of SFAS 123(R), if the Company allows retirement eligibility (which is based on age and years of service) for new stock awards granted, the expense recognition period for these awards will not extend beyond the date an employee is eligible for retirement, resulting in the Company recognizing this expense over a shorter period of time.

NOTE 7. Investment in and Integrated Rail Operations with Conrail

     In August 2004, the ownership of portions of the Conrail Inc. (“Conrail”) system already operated by CSX Transportation, Inc. (“CSXT”) and Norfolk Southern Railway Company (“NSR”), were transferred to and therefore directly owned by CSXT and NSR, and the parties consummated an exchange offer of new unsecured securities for unsecured securities of Conrail. Conrail’s secured debt and lease obligations are supported by new leases and subleases which became the direct lease and sublease obligations of CSXT and NSR.

     The Company recorded this spin-off transaction at fair value based on the results of an independent valuation. Since September 2004, the impact of the transaction has been included in the Company’s Consolidated Balance Sheets and Consolidated Income Statements.

     As a result of the transaction, the assets and liabilities transferred to CSXT are reflected in their respective line items in CSX’s Consolidated Balance Sheet.

     Additional information about this transaction is included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 7. Investment in and Integrated Rail Operations with Conrail, Continued

Accounting and Financial Reporting Effects

     For periods prior to the spin-off transaction, CSX’s rail and intermodal operating revenue included revenue from traffic moving on the Conrail property. Operating expenses included costs incurred to handle such traffic and to operate the Conrail lines. Rail operating expense included an expense category, “Conrail Rents, Fees and Services,” which reflected:

	1.		Right-of-way usage fees paid to Conrail through August 2004.
	2.		Equipment rental payments to Conrail through August 2004.
	3.		Transportation, switching, and terminal service charges levied by Conrail in the Shared Assets Areas that Conrail operates for the joint benefit of CSXT and NSR.
	4.		Amortization of the fair value write-up arising from the acquisition of Conrail and certain other adjustments.
	5.		CSX’s 42% share of Conrail’s income before the cumulative effect of accounting change recognized under the equity method of accounting.

     Conrail will continue to own, manage, and operate the Shared Assets Areas for the joint benefit of CSXT and NSR. However, the spin-off transaction effectively decreased rents paid to Conrail after the transaction date, as some assets previously leased from Conrail are now owned by CSXT.

Transactions with Conrail

     As listed below, CSX owes certain amounts to Conrail representing expenses incurred under the operating, equipment and Shared Assets Area agreements with Conrail.

(Dollars in Millions)		Periods Ended
		July 1,				December 31,
		2005				2004
CSX Payable to Conrail		$	39			$	59

     As a result of the spin-off transaction, liabilities associated with Conrail advances to CSX were transferred to CSXT. Consequently, there is no longer an advance between CSX and Conrail. For the quarter and six months ended June 25, 2004, interest expense on Conrail advances amounts to $2 million and $4 million, respectively.

     In March 2005, CSXT executed a long-term promissory note with a subsidiary of Conrail for $23 million, which is included in Long-term Debt in the Company’s Consolidated Balance Sheet as of April 1, 2005. The note bears interest at 4.52% and matures in March 2035.

     The agreement under which CSXT operated its allocated portion of the Conrail route system was terminated upon consummation of the spin-off transaction as CSXT then became the direct owner of its allocated portion of the Conrail system. Leases and subleases of Conrail equipment operated by CSXT cover varying terms. CSXT is responsible for all costs of operating, maintaining, and improving the equipment under these agreements.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 8. Allowance for Doubtful Accounts

     The Company maintains an allowance for doubtful accounts for the estimated probable losses on uncollectible accounts and other receivables. The allowance is based upon the creditworthiness of customers, historical experience, the age of the receivable and current market and economic conditions. Uncollectible amounts are charged against the allowance account. The allowance for doubtful accounts is maintained against both current and long-term asset accounts. Allowance for doubtful accounts of $123 million and $95 million is included in the Consolidated Balance Sheets as of July 1, 2005 and December 31, 2004.

NOTE 9. Other Income — Net

     Other Income — Net consists of the following:

(Dollars in Millions)		Quarters Ended								Six Months Ended
		July 1,				June 25,				July 1,				June 25,
		2005				2004				2005				2004
Interest Income		$	15			$	5			$	22			$	8
Income (Loss) from Real Estate and Resort Operations			24				5				16				(2	)
Minority Interest			(7	)			(4	)			(10	)			(7	)
Miscellaneous			(2	)			(1	)			—				2
Other Income — Net		$	30			$	5			$	28			$	1

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 10. Derivative Financial Instruments

     CSX uses derivative financial instruments to manage its overall exposure to fluctuations in interest rates and fuel costs.

Interest Rate Swaps

     CSX has entered into various interest rate swap agreements on the following fixed rate notes:

(Dollars in Millions)

Maturity Date		Notional Amount				Fixed Interest Rate
August 15, 2006		$	94				9.00	%
May 1, 2007			450				7.45	%
May 1, 2032			150				8.30	%
Total/Average		$	694				7.84	%

     Under these agreements, the Company will pay variable interest based on LIBOR in exchange for a fixed rate, effectively transforming the notes to floating rate obligations. The interest rate swap agreements are designated and qualify as fair value hedges and the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the fixed rate note attributable to the hedged risk, are recognized in current earnings during the period of change in fair values. Hedge effectiveness is measured at least quarterly based on the relative change in fair value of the derivative contract in comparison with changes over time in the fair value of the fixed rate notes. Any change in fair value resulting from ineffectiveness, as defined by SFAS 133, “Accounting For Derivative Instruments and Hedging Activities,” is recognized immediately in earnings. The Company’s interest rate swaps qualify as perfectly effective fair value hedges, as defined by SFAS 133. As such, there was no ineffective portion to the hedge recognized in earnings during the current or prior year periods. Long-term debt has been increased by $11 million and $26 million for the fair market value of the interest rate swap agreements at July 1, 2005 and December 31, 2004, respectively.

     The differential to be paid or received under these agreements is accrued based on the terms of the agreements and is recognized in interest expense over the term of the related debt. The related amounts payable to or receivable from counterparties are included in other current liabilities or assets. Cash flows related to interest rate swap agreements are classified as Operating Activities in the Consolidated Cash Flow Statements. For the quarter and six months ended July 1, 2005, the Company reduced interest expense by approximately $3 million and $8 million, respectively, as a result of the interest rate swap agreements that were in place during each period. For the quarter and six-month period ended June 25, 2004, the Company reduced interest expense by approximately $8 million and $21 million, respectively. Fair value adjustments are non-cash transactions and, accordingly, have no cash impact on the Consolidated Cash Flow Statements.

     In June 2005, the Company purchased $206 million in aggregate principal amount of its publicly-traded 9% Notes due 2006 (see Note 4. Debt and Credit Agreements), and settled an identical portion of the corresponding interest rate swap agreement. The partial settlement of this interest rate swap agreement resulted in no effect on results of operations for the quarter ended July 1, 2005.

     The counterparties to the interest rate swap agreements expose the Company to credit loss in the event of non-performance. The Company does not anticipate non-performance by the counterparties.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 10. Derivative Financial Instruments, Continued

Fuel Hedging

     In 2003, CSX began a program to hedge a portion of its future locomotive fuel purchases. This program was established to manage exposure to fuel price fluctuations. In order to minimize this risk, CSX has entered into a series of swaps in order to fix the price of a portion of its estimated future fuel purchases.

     Following is a summary of outstanding fuel swaps:

		July 1,
		2005
Approximate Gallons Hedged (Millions)		187
Average Price Per Gallon		$0.81
Swap Maturities		July 2005 — July 2006

		2005				2006
Estimated % of Future Fuel Purchases Hedged at end of period			43	%			9	%

     The program limits fuel hedges to a 24-month duration and a maximum of 80% of CSX’s average monthly fuel purchased for any month within the 24-month period, and places the hedges among selected counterparties. Fuel hedging activity favorably impacted fuel expense for the quarter and six months ended July 1, 2005 by $63 million and $114 million, respectively. Fuel hedging activity favorably impacted fuel expense for the quarter and six months ended June 25, 2004 by $4 million. Ineffectiveness, or the extent to which changes in the fair values of the fuel swaps did not offset changes in the fair values of the expected fuel purchases, was immaterial.

     These instruments qualify, and are designated by management, as cash-flow hedges of variability in expected future cash flows attributable to fluctuations in fuel prices. The fair values of fuel derivative instruments are determined based upon current fair market values as quoted by third party dealers and are recorded on the Consolidated Balance Sheets with offsetting adjustments to Accumulated Other Comprehensive Loss, a component of Shareholders’ Equity. Amounts are reclassified from Accumulated Other Comprehensive Loss as the underlying fuel that was hedged is consumed by rail operations. Fair value adjustments are non-cash transactions and, accordingly, have no cash impact on the Consolidated Cash Flow Statements. See Note 1. Basis of Presentation, for the impact of fuel hedging activity on Accumulated Other Comprehensive Loss.

     The Company has temporarily suspended entering into new swaps in its fuel hedge program since the third quarter of 2004. The Company will continue to monitor and assess the current issues facing the global fuel marketplace to decide whether and when to resume hedging under the program.

     The counterparties to the fuel hedge agreements expose the Company to credit loss in the event of non-performance. The Company does not anticipate non-performance by the counterparties.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 11. Casualty, Environmental and Other Reserves

     Casualty, environmental and other reserves are provided for in the Consolidated Balance Sheets as follows:

(Dollars in Millions)		July 1, 2005												December 31, 2004
		Current				Long-term				Total				Current				Long-term				Total
Casualty and Other		$	275			$	543			$	818			$	272			$	561			$	833
Separation			20				114				134				20				135				155
Environmental			20				40				60				20				39				59
Total		$	315			$	697			$	1,012			$	312			$	735			$	1,047

Casualty Reserves

     Casualty reserves represent accruals for the uninsured portion of personal injury and occupational injury claims.

Personal Injury

     CSX retains an independent actuarial firm to assist management in assessing the value of CSX’s personal injury portfolio. An analysis is performed by the independent actuarial firm semi-annually. The methodology used by the actuary includes a development factor to reflect growth in the value of the Company’s personal injury claims. This methodology is based largely on CSX’s historical claims and settlement activity. Actual results may vary from estimates due to the type and severity of the injury, costs of medical treatments, and uncertainties surrounding the litigation process. Reserves for personal injury claims are $401 million and $383 million at July 1, 2005 and December 31, 2004, respectively.

Occupational

     Occupational claims include allegations of exposure to certain materials in the work place, such as asbestos, solvents, and diesel fuel, or alleged physical injuries, such as carpal tunnel syndrome or hearing loss.

     Reserves for asbestos related claims are $198 million and $212 million at July 1, 2005 and December 31, 2004, respectively. Reserves for other occupational related claims are $108 million and $110 million at July 1, 2005 and December 31, 2004, respectively.

     The Company is party to a number of occupational claims by employees exposed to asbestos in the workplace. The heaviest exposure for CSX employees was due to work conducted in and around the use of steam locomotive engines that were phased out between the early 1950’s and late 1960’s. However, other types of exposures, including exposure from locomotive component parts and building materials, continued after 1967, until it was substantially eliminated by 1985.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 11. Casualty, Environmental and Other Reserves, Continued

     CSX engaged a third party specialist, who has extensive experience in performing asbestos and other occupational studies, to assist in assessing the unasserted liability exposure. The analysis is performed by the specialist semi-annually. The objective of the analysis is to determine the number of estimated incurred but not reported claims and the estimated average cost per claim to be received over the next seven years. Seven years was determined by management to be the time period in which claim filings and claim values could be estimated with more certainty.

     The methodology used by the specialist includes an estimate of future anticipated claims based on the Company’s average historical claim filing rates, future anticipated dismissal rates and settlement rates. CSX’s future liability for incurred but not reported claims is estimated by multiplying the future anticipated claims by the average settlement values.

     In review of asbestos claims, the Company has observed that recent filing rates have declined. A trend in declining filing rates could result in a reduction of the reserve for asbestos related claims. Because the pace of asbestos claim filings have been inconsistent, the Company has not yet determined the decline to be a trend.

     A summary of existing asbestos and other occupational claims activity is as follows:

		Six Months Ended				Twelve Months Ended
		July 1, 2005				December 31, 2004
Asserted Claims:
Open Claims — Beginning of Period			11,460				13,478
New Claims Filed			432				1,178
Claims Settled			(746	)			(2,758	)
Claims Dismissed			(304	)			(438	)
Open Claims — End of Period			10,842				11,460

     Approximately 6,000 of the open claims at July 1, 2005 are asbestos claims against the Company’s previously owned international container-shipping business, Sea-Land. Because the Sea-Land claims are against multiple vessel owners, the Company’s reserves reflect its portion of those claims. The remaining open claims have been asserted against CSXT. The Company had approximately $13 million reserved for the Sea-Land claims at July 1, 2005 and December 31, 2004.

     The amounts recorded by CSX for the occupational liabilities are based upon currently known facts. Projecting future events, such as the number of new claims to be filed each year, the average cost of disposing of claims, as well as the numerous uncertainties surrounding asbestos and other occupational litigation in the United States, could cause the actual costs to be higher or lower than projected.

     While the final outcome of casualty-related matters cannot be predicted with certainty, considering among other things the meritorious legal defenses available and liabilities that have been recorded, it is the opinion of CSX management that none of these items, when finally resolved, will have a materially adverse effect on the Company’s financial position or liquidity. However, should a number of these items occur in the same period, it could have a materially adverse effect on the results of operations in a particular quarter or fiscal year.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 11. Casualty, Environmental and Other Reserves, Continued

Separation Liability

     Separation liabilities at July 1, 2005 and December 31, 2004 provide for the estimated costs of implementing workforce reductions, improvements in productivity and other cost reductions at the Company’s major transportation units since 1991. These liabilities are expected to be paid out over the next 15 to 20 years from general corporate funds.

Environmental Reserves

     CSX is a party to various proceedings, including administrative and judicial proceedings, involving private parties and regulatory agencies related to environmental issues. CSX has been identified as a potentially responsible party (“PRP”) at approximately 262 environmentally impaired sites, many of which are, or may be, subject to remedial action under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), also known as the Superfund law, or similar state statutes. A number of these proceedings are based on allegations that CSX, or its railroad predecessors, sent hazardous substances to the facilities in question for disposal.

     In addition, some of CSX’s land holdings are and have been used for industrial or transportation-related purposes or leased to commercial or industrial companies whose activities may have resulted in releases onto the property. Therefore, CSX is subject to environmental cleanup and enforcement actions under the Superfund law, as well as similar state laws that may impose joint and several liability for cleanup and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct, which could be substantial.

     At least once a quarter, CSX reviews its role with respect to each site identified. Based on the review process, CSX has recorded reserves to cover estimated contingent future environmental costs with respect to such sites. Environmental costs are charged to expense when they relate to an existing condition caused by past operations and do not contribute to current or future revenue generation. The recorded liabilities for estimated future environmental costs at July 1, 2005 and December 31, 2004 were $60 million and $59 million, respectively. These liabilities, which are undiscounted, include amounts representing CSX’s estimate of unasserted claims, which CSX believes to be immaterial. The liability includes future costs for all sites where the Company’s obligation is (1) deemed probable and (2) where such costs can be reasonably estimated. The liability includes future costs for remediation and restoration of sites as well as any significant ongoing monitoring costs, but excludes any anticipated insurance recoveries.

     The Company does not currently possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, on some sites until completion of future environmental studies. In addition, latent conditions at any given location could result in exposure, the amount and materiality of which cannot presently be reliably estimated. Based upon information currently available, however, the Company believes its environmental reserves are adequate to accomplish remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters, if any, will not materially affect its overall results of operations and financial condition.

NOTE 12. Commitments and Contingencies

Purchase Commitments

     The Company has a commitment under a long-term maintenance program for approximately 40% of CSX’s fleet of locomotives. The agreement expires in 2026 and the costs expected to be incurred under the agreement approximate $5.8 billion. The long-term maintenance program is intended to provide CSX access to efficient, high-quality locomotive maintenance services at fixed price levels through the term of the program. Under the program, CSX paid $43 million and $84 million for the quarter and six months ending July 1, 2005, respectively. The Company paid $38 million and $75 million during the quarter and six months ended June 25, 2004, respectively.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 12. Commitments and Contingencies, Continued

STB Proceeding

     In 2001 Duke Energy Corporation (“Duke”) filed a complaint before the STB alleging that certain CSXT common carrier coal rates were unreasonably high. In June 2005, CSXT and Duke reached a settlement agreement pursuant to which Duke dismissed the STB proceedings with prejudice. Consequently, the Company reversed a $17 million reserve which increased coal, coke and iron ore revenue in the second quarter of 2005. Duke and CSXT have entered into a transportation contract establishing commercial terms for the future transportation of coal to Duke power plants served by CSXT.

Insurance

     The Company maintains numerous insurance programs, most notably for third party casualty liability and the CSX property damage and business interruption property insurance with substantial limits; a specific amount of risk ($25 million per occurrence) is retained by the Company on both programs.

Guarantees

     The Company and its subsidiaries are contingently liable individually and jointly with others as guarantors of obligations principally relating to leased equipment, joint ventures and joint facilities used by the Company in its 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 guaranteed party based on another entity’s failure to perform. As of July 1, 2005, the Company’s three main guarantees are as follows:

	1.		Guarantees of approximately $249 million relating to leases assumed as part of the conveyance of its interest in a former subsidiary, CSX Lines, (subsequently renamed to Horizon Lines LLC “Horizon”). CSX guarantees approximately $249 million relating to leases assumed as part of this conveyance. CSX believes Horizon will fulfill its contractual commitments with respect to such leases, and CSX will have no further liabilities for those obligations.
	2.		Guarantee of approximately $87 million of obligations of a former subsidiary, CSX Energy, in connection with a sale-leaseback transaction. The Company is, in turn, indemnified by several subsequent owners of the subsidiary against payments made with respect to this guarantee. CSX management does not expect that the Company will be required to make any payments under this guarantee for which CSX will not be reimbursed.
	3.		Guarantee of approximately $13 million of lease commitments assumed by A.P. Moller-Maersk (“Maersk”) for which the Company is contingently liable. CSX believes Maersk will fulfill its contractual commitments with respect to such lease, and CSX will have no further liabilities for those obligations. During the second quarter of 2005, Maersk assumed and the Company was consequently released from approximately $301 million of its obligation for other lease commitments.

     The maximum amount of future payments the Company could be required to make under these guarantees is the amount of the guarantees themselves.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 12. Commitments and Contingencies, Continued

Other Legal Proceedings

     CSX is involved in routine litigation incidental to its business and is a party to a number of legal actions and claims, various governmental proceedings and private civil lawsuits, including those related to environmental matters, Federal Employers’ Liability Act claims by employees, other personal injury claims, and disputes and complaints involving certain transportation rates and charges. Some of the legal proceedings include claims for compensatory as well as punitive damages, and others purport to be class actions. While the final outcome of these matters cannot be predicted with certainty, considering among other things, the meritorious legal defenses available and liabilities that have been recorded along with applicable insurance, it is the opinion of CSX management that none of these items will have a materially adverse effect on the results of operations, financial position or liquidity of CSX. However, an unexpected adverse resolution of one or more of these items could have a materially adverse effect on the results of operations in a particular quarter or fiscal year. The Company is also party to a number of actions, the resolution of which could result in gain realization in amounts that could be material to results of operations in the quarters received.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 13. Business Segments

     The Company operates primarily in two business segments: rail and intermodal. The rail segment provides rail freight transportation over a network of more than 22,000 route miles in 23 states, the District of Columbia and two Canadian provinces. The intermodal segment provides integrated rail and truck transportation services and operates a network of dedicated intermodal facilities across North America. The Company’s segments are strategic business units that offer different services and are managed separately. The rail and intermodal segments are also viewed on a combined basis as Surface Transportation operations.

     The Company evaluates performance and allocates resources based on several factors, of which the primary financial measure is business segment operating income. The accounting policies of the segments are the same as those described in Nature of Operations and Significant Accounting Policies (Note 1) in the CSX 2004 Annual Report on Form 10-K.

     Prior to the conveyance of CSX Lines, it was a segment of CSX and was presented with International Terminals on a combined basis as the Marine Services operations of the Company. Results for CSX Lines are now presented in the Other column, which primarily represents the pretax gain amortization of approximately $127 million as a result of the conveyance being recognized over the 12-year sublease term. The Other column also includes net sublease income from assets formerly included in the Marine Services segment and other items.

     The International Terminals business segment has been reclassified to Discontinued Operations. (See Note 3. Discontinued Operations.)

     Business segment information for the quarters ended July 1, 2005 and June 25, 2004 is as follows:

(Dollars in Millions)

		Surface Transportation
		Rail				Intermodal				Total				Other				Total
Quarter Ended July 1, 2005
Revenues from External Customers		$	1,836			$	330			$	2,166			$	—			$	2,166
Segment Operating Income			367				55				422				9				431
Assets			20,401				797				21,198				—				21,198
Quarter Ended June 25, 2004
Revenues from External Customers		$	1,672			$	325			$	1,997			$	—			$	1,997
Segment Operating Income			249				31				280				2				282
Assets			13,119				623				13,742				1,045				14,787
Six Months Ended July 1, 2005
Revenues from External Customers		$	3,615			$	659			$	4,274			$	—			$	4,274
Segment Operating Income			666				107				773				12				785
Assets			20,401				797				21,198				—				21,198
Six Months Ended June 25, 2004
Revenues from External Customers		$	3,277			$	640			$	3,917			$	—			$	3,917
Segment Operating Income			381				50				431				3				434
Assets			13,119				623				13,742				1,045				14,787

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 13. Business Segments, Continued

     A reconciliation of the totals reported for the business segments to the applicable line items in the consolidated financial statements is as follows:

(Dollars in Millions)

		Quarter Ended
		July 1,				June 25,
		2005				2004
Assets:
Assets for Business Segments		$	21,223			$	14,787
Investment in Conrail			583				4,691
Elimination of Intersegment Payables (Receivables)			(622	)			131
Non-segment Assets			2,566				2,843
Total Consolidated Assets		$	23,750			$	22,452

NOTE 14. Employee Benefit Plans

     The Company sponsors defined benefit pension plans, principally for salaried, non-contract personnel. The plans provide eligible employees with retirement benefits based predominantly on years of service and compensation rates near retirement.

     In addition to the defined benefit pension plans, the Company sponsors one medical plan and one life insurance plan that provide benefits to full-time, salaried, non-contract employees hired prior to January 2003, upon their retirement if certain eligibility requirements are met. The postretirement medical plans are contributory (partially funded by retirees), with retiree contributions adjusted annually. The life insurance plan is non-contributory.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 14. Employee Benefit Plans, Continued

     The following table presents components of net periodic benefit cost:

		Quarters Ended
(Dollars in Millions)		Pension Benefits								Other Benefits
		July 1, 2005				June 25, 2004				July 1, 2005				June 25, 2004
Service Cost		$	8			$	9			$	2			$	2
Interest Cost			27				28				6				6
Expected Return on Plan Assets			(30	)			(33	)			—				—
Amortization of Prior Service Cost			1				1				(1	)			(1	)
Amortization of Net Loss			6				4				3				4
Net Periodic Benefit Cost		$	12			$	9			$	10			$	11
SFAS 88 Curtailment Charges			—				—				—				3
Net Periodic Benefit Cost, Including Termination Benefits		$	12			$	9			$	10			$	14

		Six Months Ended
(Dollars in Millions)		Pension Benefits								Other Benefits
		July 1, 2005				June 25, 2004				July 1, 2005				June 25, 2004
Service Cost		$	16			$	20			$	4			$	4
Interest Cost			54				56				12				12
Expected Return on Plan Assets			(60	)			(67	)			—				—
Amortization of Prior Service Cost			2				2				(2	)			(2	)
Amortization of Net Loss			12				7				6				8
Net Periodic Benefit Cost		$	24			$	18			$	20			$	22
SFAS 88 Curtailment Charges			—				6				—				18
Net Periodic Benefit Cost, Including Termination Benefits		$	24			$	24			$	20			$	40

     The Company expects to contribute $2 million to its pension plans in 2005. As of July 1, 2005, CSX has contributed approximately $1 million to its pension plans.

     Due to the termination of employees under the management restructuring plan (see Note 15. Management Restructuring), a curtailment occurred in the Company’s defined benefit pension plans and postretirement medical plan. The estimated cost of the curtailments of $24 million was included in the management restructuring charge for the six months ended June 25, 2004.

     The Company is required to estimate and record the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Act”). The Company believes its medical plan’s prescription drug benefit will qualify as actuarially equivalent to Medicare Part D based upon a review by the plan’s health and welfare actuary of the plan’s prescription drug benefit compared with the prescription drug benefit that would be paid under Medicare Part D beginning in 2006.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 15. Management Restructuring

     During 2004, Surface Transportation incurred restructuring charges related to management restructuring plans to streamline the structure, eliminate organizational layers and realign certain functions. For the quarter and six months ended June 25, 2004, the Company recorded expense of $15 million and $68 million, respectively, for separation expense, pension and postretirement benefit curtailment charges, stock compensation expense and other related expenses.

NOTE 16. Summarized Consolidating Financial Data

     During 1987, a subsidiary of the Company entered into agreements to sell and lease back, by charter, three new U.S.-built, U.S.-flag, D-7 class container ships. CSX has guaranteed certain obligations which, along with the container ships, serve as collateral for debt securities registered with the Securities and Exchange Commission (“SEC”). Another CSX entity became the obligor in 2003. In accordance with SEC disclosure requirements, consolidating summarized financial information for the parent and obligor follows. Certain prior year amounts have been reclassified to conform to the current presentation.

Consolidating Income Statement

(Dollars in Millions)

		CSX Corporation				CSX Vessel Leasing				Other				Eliminations				Consolidated
Quarter Ended July 1, 2005
Operating Revenue		$	—			$	—			$	2,166			$	—			$	2,166
Operating Expense			(26	)			—				1,761				—				1,735
Operating Income			26				—				405				—				431
Equity in Earnings of Subsidiaries			272				—				—				(272	)			—
Other Income — Net			89				1				(4	)			(56	)			30
Debt Repurchase Expense			(192	)			—				—				—				(192	)
Interest Expense			(117	)			—				(49	)			56				(110	)
Earnings (Loss) from Continuing Operations before Income Taxes			78				1				352				(272	)			159
Income Tax (Benefit) Expense			(97	)			—				91				—				(6	)
Net Earnings (Loss)		$	175			$	1			$	261			$	(272	)		$	165

		CSX Corporation				CSX Vessel Leasing				Other				Eliminations				Consolidated
Quarter Ended June 25, 2004
Operating Revenue		$	—			$	—			$	1,997			$	—			$	1,997
Operating Expense			(38	)			—				1,753				—				1,715
Operating Income			38				—				244				—				282
Equity in Earnings of Subsidiaries			169				—				—				(169	)			—
Other Income — Net			(8	)			2				22				(11	)			5
Interest Expense			(101	)			—				(16	)			8				(109	)
Earnings (Loss) from Continuing Operations before Income Taxes			98				2				250				(172	)			178
Income Tax (Benefit) Expense			(21	)			—				81				—				60
Earnings from Continuing Operations			119				2				169				(172	)			118
Discontinued Operations — Net of Tax			—				—				1				—				1
Net Earnings (Loss)		$	119			$	2			$	170			$	(172	)		$	119

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 16. Summarized Consolidating Financial Data, Continued

Consolidating Income Statement

(Dollars in Millions)

		CSX Corporation				CSX Vessel Leasing				Other				Eliminations				Consolidated
Six Months Ended July 1, 2005
Operating Revenue		$	—			$	—			$	4,274			$	—			$	4,274
Operating Expense			(74	)			—				3,563				—				3,489
Operating Income			74				—				711				—				785
Equity in Earnings of Subsidiaries			414				—				—				(414	)			—
Other Income — Net			90				2				13				(77	)			28
Debt Repurchase Expense			(192	)			—				—				—				(192	)
Interest Expense			(210	)			—				(91	)			77				(224	)
Earnings (Loss) from Continuing Operations before Income Taxes			176				2				633				(414	)			397
Income Tax (Benefit) Expense			(110	)			—				188				—				78
Earnings from Continuing Operations			286				2				445				(414	)			319
Discontinued Operations — Net of Tax			428				—				(3	)			—				425
Net Earnings (Loss)		$	714			$	2			$	442			$	(414	)		$	744