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 September 30, 2005

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

For the transition period from                      to                     

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 by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock,
as of September 30, 2005: 217,239,119 shares.

 

 

CSX CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
INDEX

				Page Number
PART I:		FINANCIAL INFORMATION
Item 1:		Financial Statements
		Consolidated Income Statements (Unaudited) -
		Quarters and Nine Months Ended September 30, 2005 and September 24, 2004			3
		Consolidated Balance Sheets -
		At September 30, 2005 (Unaudited) and December 31, 2004			4
		Consolidated Cash Flow Statements (Unaudited) -
		Nine Months Ended September 30, 2005 and September 24, 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			51
Item 6:		Exhibits			52
Signature					52
Section 302 Certification of PEO
Section 302 Certification of PFO
Section 906 Certification of PEO
Section 906 Certification of PFO

CSX CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(Dollars in Millions, Except Per Share Amounts)		Quarters Ended								Nine Months Ended
		Sept. 30,				Sept. 24,				Sept. 30,				Sept. 24,
		2005				2004				2005				2004
Operating Revenue		$	2,125			$	1,943			$	6,399			$	5,860
Operating Expense
Labor and Fringe			727				671				2,130				2,014
Materials, Supplies and Other			462				410				1,365				1,266
Depreciation			207				172				617				493
Fuel			188				162				543				467
Building and Equipment Rent			124				140				383				417
Inland Transportation			55				72				175				216
Conrail Rents, Fees and Services			9				63				48				232
Restructuring Charge			—				3				—				71
Total Operating Expenses			1,772				1,693				5,261				5,176
Operating Income			353				250				1,138				684
Other Income (Expense)
Other Income — Net (Note 10)			11				32				39				33
Debt Repurchase Expense (Note 5)			—				—				(192	)			—
Interest Expense			(100	)			(106	)			(324	)			(323	)
Earnings
Earnings from Continuing Operations before Income Taxes			264				176				661				394
Income Tax Expense			(100	)			(62	)			(178	)			(135	)
Earnings from Continuing Operations			164				114				483				259
Discontinued Operations — Net of Tax (Note 4)			—				9				425				13
Net Earnings		$	164			$	123			$	908			$	272
Per Common Share
Earnings Per Share (Note 3):
Income from Continuing Operations		$	0.75			$	0.53			$	2.23			$	1.21
Discontinued Operations			—				0.04				1.97				0.06
Net Earnings		$	0.75			$	0.57			$	4.20			$	1.27
Earnings Per Share, Assuming Dilution (Note 3):
Income from Continuing Operations		$	0.72			$	0.51			$	2.12			$	1.16
Discontinued Operations			—				0.04				1.88				0.06
Net Earnings		$	0.72			$	0.55			$	4.00			$	1.22
Average Common Shares Outstanding (Thousands)			216,705				214,821				216,160				214,740
Average Common Shares Outstanding, Assuming Dilution (Thousands)			228,423				224,980				227,374				224,911
Cash Dividends Paid Per Common Share		$	0.10			$	0.10			$	0.30			$	0.30

 

See accompanying Notes to Consolidated Financial Statements.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

		(Unaudited)
(Dollars in Millions)		Sept. 30, 2005				Dec. 31, 2004
ASSETS
Current Assets:
Cash, Cash Equivalents and Short-term
Investments (Note 1)		$	590			$	859
Accounts Receivable — Net (Note 9)			1,274				1,159
Materials and Supplies			203				165
Deferred Income Taxes			141				20
Other Current Assets — Net (Note 9)			239				157
International Terminals Assets Held for Sale (Note 4)			—				643
Total Current Assets			2,447				3,003
Properties			26,275				25,852
Accumulated Depreciation			(6,300	)			(5,907	)
Properties — Net			19,975				19,945
Investment in Conrail (Note 8)			603				574
Affiliates and Other Companies			317				296
Other Long-term Assets			679				802
Total Assets		$	24,021			$	24,620
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable		$	930			$	879
Labor and Fringe Benefits Payable			513				371
Casualty, Environmental and Other Reserves (Note 13)			312				312
Current Maturities of Long-term Debt			947				983
Short-term Debt			3				101
Income and Other Taxes Payable			341				170
Other Current Liabilities			94				115
International Terminals Liabilities Held for Sale (Note 4)			—				386
Total Current Liabilities			3,140				3,317
Casualty, Environmental and Other Reserves (Note 13)			703				735
Long-term Debt			5,058				6,248
Deferred Income Taxes			6,011				5,979
Other Long-term Liabilities			1,347				1,530
Total Liabilities			16,259				17,809
Shareholders’ Equity:
Common Stock, $1 Par Value			217				216
Other Capital			1,698				1,605
Retained Earnings			6,053				5,210
Accumulated Other Comprehensive Loss (Note 2)			(206	)			(220	)
Total Shareholders’ Equity			7,762				6,811
Total Liabilities and Shareholders’ Equity		$	24,021			$	24,620

 

See accompanying Notes to Consolidated Financial Statements.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS

CONSOLIDATED CASH FLOW STATEMENTS

(Dollars in Millions)		Nine Months Ended
		Sept. 30,				Sept. 24,
		2005				2004
OPERATING ACTIVITIES
Net Earnings		$	908			$	272
Adjustments to Reconcile Net Earnings to Net Cash Provided:
Depreciation			620				511
Deferred Income Taxes			(132	)			115
Gain on Sale of International Terminals — Net of Tax (Note 4)			(428	)			—
Restructuring Charge (Note 17)			—				71
Net Gain on Conrail Spin-off After Tax			—				(16	)
Other Operating Activities			27				(105	)
Changes in Operating Assets and Liabilities:
Accounts Receivable			(74	)			2
Other Current Assets			(37	)			4
Accounts Payable			62				(1	)
Other Current Liabilities			(168	)			12
Net Cash Provided by Operating Activities			778				865
INVESTING ACTIVITIES
Property Additions			(726	)			(734	)
Net Proceeds from Sale of International Terminals (Note 4)			1,108				—
Purchase of Minority Interest in an International Terminals’ Subsidiary (Note 4)			(110	)			—
Proceeds from Divestitures			—				55
Purchases of Short-term Investments			(2,041	)			(1,285	)
Proceeds from Sale of Short-term Investments			2,050				936
Other Investing Activities			26				(24	)
Net Cash Provided by (Used in) Investing Activities			307				(1,052	)
FINANCING ACTIVITIES
Short-term Debt — Net			(98	)			101
Long-term Debt Issued			29				412
Long-term Debt Repaid			(1,239	)			(385	)
Dividends Paid			(65	)			(64	)
Other Financing Activities			44				18
Net Cash (Used in) Provided by Financing Activities			(1,329	)			82
Net (Decrease) Increase in Cash and Cash Equivalents			(244	)			(105	)
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			278				191
Short-term Investments at End of Period			312				438
Cash, Cash Equivalents and Short-term Investments at End of Period		$	590			$	629

 

See accompanying Notes to Consolidated Financial Statements.

CSX CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION

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 (“CSX”) and subsidiaries (CSX, together with such subsidiaries, the “Company”) at September 30, 2005 and December 31, 2004, and the Consolidated Income Statements for the quarters and nine months ended September 30, 2005 and September 24, 2004, and Consolidated Cash Flow Statements for the nine months ended September 30, 2005 and September 24, 2004, such adjustments being of a normal recurring nature. Certain prior-year data have been reclassified to conform to the 2005 presentation.

     These financial statements should be read in conjunction with the audited financial statements and the notes included in its most recent Annual Report and Form 10-K, the unaudited financial statements and the notes included in its 2005 First and Second Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. The Company’s SEC reports are accessible on the SEC’s website at www.sec.gov and the Company’s website at www.csx.com.

     The Company 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 September 30, 2005 and September 24, 2004, the 39-week periods ended September 30, 2005 and September 24, 2004 and as of December 31, 2004. In 2004, the fourth quarter ending December 31, 2004, consisted of 14 weeks.

     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.

NOTE 2. Accumulated Other Comprehensive Loss

     Other comprehensive loss for the quarter ended September 30, 2005 was $16 million, after tax, resulting from a decrease in the quantity of fuel derivative contracts outstanding. CSX has suspended entering into new swaps in its fuel hedge program since the third quarter of 2004. (See Note 12. Derivative Financial Instruments.)

     Other comprehensive income for the nine months ended September 30, 2005 was $14 million, after tax. Despite a decline in the quantity of outstanding contracts, the fair value of fuel derivative instruments continues to rise with the price of fuel.

		Balance				Net Gain				Balance
(Dollars in Millions)		Dec. 31, 2004				(Loss)				Sept. 30, 2005
Minimum Pension Liability		$	(292	)		$	—			$	(292	)
Fair Value of Fuel Derivatives			72				15				87
Other			—				(1	)			(1	)
Total		$	(220	)		$	14			$	(206	)

     Other comprehensive income for the quarter ended September 24, 2004 was $60 million, after tax, resulting from the increase in fair value of fuel derivative instruments primarily derived from higher fuel prices.

     Other comprehensive income for the nine months ended September 24, 2004 was $155 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.

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

NOTE 3. 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								Nine Months Ended
		Sept. 30,				Sept. 24,				Sept. 30,				Sept. 24,
		2005				2004				2005				2004
Numerator:
Earnings from Continuing Operations		$	164			$	114			$	483			$	259
Interest Expense on Convertible Debt — Net of Tax			1				1				3				3
Net Earnings from Continuing Operations, If-Converted			165				115				486				262
Discontinued Operations — Net of Tax			—				9				425				13
Net Earnings, If-Converted			165				124				911				275
Interest Expense on Convertible Debt — Net of Tax			(1	)			(1	)			(3	)			(3	)
Net Earnings		$	164			$	123			$	908			$	272
Denominator (Thousands):
Average Common Shares Outstanding			216,705				214,821				216,160				214,740
Convertible Debt			9,728				9,728				9,728				9,728
Stock Options			1,585				282				1,230				305
Other Potentially Dilutive Common Shares			405				149				256				138
Average Common Shares Outstanding, Assuming Dilution			228,423				224,980				227,374				224,911
Earnings Per Share:
Income from Continuing Operations		$	0.75			$	0.53			$	2.23			$	1.21
Discontinued Operations			—				0.04				1.97				0.06
Net Earnings		$	0.75			$	0.57			$	4.20			$	1.27
Earnings Per Share, Assuming Dilution:
Income from Continuing Operations		$	0.72			$	0.51			$	2.12			$	1.16
Discontinued Operations			—				0.04				1.88				0.06
Net Earnings		$	0.72			$	0.55			$	4.00			$	1.22

     Basic earnings per share are 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

Nine Months Ended

Sept. 30, 2005

Sept. 24, 2004

Sept. 30, 2005

Sept. 24, 2004

Number of Stock Options Exercised

316

67

1,802

259

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

NOTE 3. Earnings Per Share, Continued

     Certain potentially dilutive stock options at September 30, 2005, and September 24, 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 stock options excluded from the computation of earnings per share:

		Quarters Ended
		Sept. 30, 2005				Sept. 24, 2004
Number of Shares (Thousands)			6,006				20,801
Average Exercise / Conversion Price		$	48.34			$	40.92

     The CSX Long Term Incentive Program is designed to reward participants for the attainment of CSX financial and certain strategic initiatives leading to share price appreciation for shareholders and employees. The objective of the plan is to motivate and reward key members of management and executives for achieving and exceeding a two-year modified free cash flow goal, at which time the award is payable in cash and CSX common stock. If the Company achieves the maximum payout under the program by the end of 2005, approximately 1,196 thousand shares could be issued under the plan

     In addition, 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” in September 2004. 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 CSX’s stock price could trigger contingent conditions for conversion allowing holders to convert their debentures into CSX common stock, as well as causing an increase in the exercise of stock options. Thus, both could negatively impact basic earnings per share.

NOTE 4. Discontinued Operations

     CSX sold its International Terminals business, which included the capital stock of SL Service, Inc. (“SLSI”), in February 2005 to Dubai Ports International FZE (“DPI”) for closing cash consideration of $1.142 billion. 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 DPI. Other related cash transaction costs amounted to approximately $34 million, including resolution of working capital and long-term debt adjustments. CSX 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 nine months ended September 30, 2005 as a result of the sale. Discontinued Operations for the nine months ended September 30, 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 nine months ended September 24, 2004 include revenue of $42 million and $128 million, respectively.

     SLSI also held certain residual assets and liabilities as a result of prior divestitures and discontinuances. The Company retained those assets and indemnifies DPI, SLSI and related entities against those liabilities pursuant to a separate agreement. CSX guarantees the obligations under this separate agreement. (See Note 14. Commitments and Contingencies.)

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

NOTE 4. Discontinued Operations, Continued

     The results of operations and financial position of CSX’s former International Terminals business are reported as Discontinued Operations and International Terminals Assets and Liabilities Held for Sale for all periods presented on the Consolidated Income Statements and Balance Sheets, respectively. Additional information about the sale is included in CSX’s Annual Report on Form 10-K for the year ended December 31, 2004.

NOTE 5. Debt and Credit Agreements

     In June 2005, CSX 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. CSX used cash on hand to finance this repurchase.

     Pursuant to the terms of CSX’s Zero Coupon Convertible Debentures (“Debentures”) due October 30, 2021, the holders of such Debentures have the right to require CSX to purchase their Debentures on October 30, 2005. CSX notified these holders of this right on September 30, 2005. Holders must submit notice for purchase by October 24, 2005 and have the right to withdraw such notice by October 27, 2005. If any of the Debentures are required to be purchased by CSX, they will be purchased for cash. As of September 30, 2005, the Company’s cash and short-term investments balance was $590 million, which is more than adequate to fund the potential purchase of the Debentures if CSX is required to do so on October 30, 2005. As of September 30, 2005, the aggregate value of the Debentures is approximately $467 million and is included in Current Maturities of Long-term Debt within the Consolidated Balance Sheets.

     CSX 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. Generally, these facilities may be used for general corporate purposes, to support CSX’s commercial paper, and for working capital. Neither of the credit facilities was drawn on as of September 30, 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 CSX’s senior unsecured debt ratings. At September 30, 2005, CSX 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 6. Share-Based Compensation

     As permitted under SFAS 148, CSX 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								Nine Months Ended
		Sept. 30,				Sept. 24,				Sept. 30,				Sept. 24,
		2005				2004				2005				2004
Stock Option Compensation Expense		$	1			$	2			$	3			$	11

     Stock compensation expense includes $5 million recorded in conjunction with the Company’s management restructuring for the nine-month period ended September 24, 2004 related to recognition of unamortized expense for 2003 stock option awards retained by terminated employees (see Note 17. 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 CSX directors and the Company’s Long Term Incentive 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								Nine Months Ended
		Sept. 30,				Sept. 24,				Sept. 30,				Sept. 24,
		2005				2004				2005				2004
Net Earnings — As Reported		$	164			$	123			$	908			$	272
Add: Stock-Based Employee Compensation Expense Included in Reported Net Income — Net of Tax			7				2				18				10
Deduct: Total Stock-Based Employee Compensation Expense Determined under the Fair Value Based Method for All Awards — Net of Tax			(8	)			(5	)			(22	)			(24	)
Pro Forma Net Earnings		$	163			$	120			$	904			$	258
Interest Expense on Convertible Debt — Net of Tax			1				1				3				3
Pro Forma Net Earnings, If-Converted		$	164			$	121			$	907			$	261
Earnings Per Share:
Basic — As Reported		$	0.75			$	0.57			$	4.20			$	1.27
Basic — Pro Forma		$	0.75			$	0.56			$	4.18			$	1.20
Diluted — As Reported		$	0.72			$	0.55			$	4.00			$	1.22
Diluted — Pro Forma		$	0.72			$	0.54			$	3.99			$	1.16

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

NOTE 7. 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, CSX 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. CSX 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 of SFAS 123 would have been estimated as described in the disclosure of pro forma net income and earnings per share in Note 6. 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, CSX’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 CSX allows vesting beyond 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 CSX’s recognizing this expense over a shorter period of time.

NOTE 8. 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.

     CSX 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 CSX’s Consolidated Balance Sheets and Consolidated Income and Cash Flow 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 CSX’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 8. Investment in and Integrated Rail Operations with Conrail, Continued

Accounting and Financial Reporting Effects

     For periods prior to the spin-off transaction, the Company’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. The spin-off transaction, however, effectively decreased rents paid to Conrail after the transaction date, as some assets previously leased from Conrail are now owned by CSXT or NSR.

Transactions with Conrail

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

(Dollars in Millions)		Periods Ended
		Sept. 30,				Dec. 31,
		2005				2004
CSXT Payable to Conrail		$	45			$	59

     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 September 30, 2005. The note bears interest at 4.52% and matures in March 2035. Interest expense on this promissory note was not material for the quarter or nine months ended September 30, 2005.

     As a result of the spin-off transaction, liabilities associated with Conrail advances to CSX were transferred to CSXT. As of September 30, 2005, there was no advance between CSX and Conrail or any related interest expense. For the quarter and nine months ended September 24, 2004, interest expense on Conrail advances amounted to $3 million and $7 million, respectively.

     In October 2005, CSX executed a long-term promissory note with a subsidiary of Conrail for $73 million. The note bears interest at 4.40% and matures in October 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 the railroad assets comprising 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 9. 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 current asset accounts. Allowance for doubtful accounts of $118 million and $95 million is included in the Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004.

NOTE 10. Other Income — Net

     Other Income — Net consists of the following:

(Dollars in Millions)		Quarters Ended								Nine Months Ended
		Sept. 30,				Sept. 24,				Sept. 30,				Sept. 24,
		2005				2004				2005				2004
Interest Income		$	7			$	5			$	30			$	13
Income from Real Estate and Resort Operations			10				19				26				17
Minority Interest Expense			(4	)			(5	)			(14	)			(12	)
Net Gain on Conrail Spin-off — After Tax			—				16				—				16
Miscellaneous			(2	)			(3	)			(3	)			(1	)
Other Income — Net		$	11			$	32			$	39			$	33

NOTE 11. Hurricane Katrina

     In late August 2005, Hurricane Katrina caused extensive damage to Company assets on the Gulf Coast. The most significant damage is concentrated on CSXT’s approximately 100-mile route starting in New Orleans, LA and going east to Pascagoula, MS and includes damage to track infrastructure and bridges.

     The Company incurred losses resulting from damage to the rail infrastructure, business interruption and other incremental expenses associated with storm damage. The Company expects that insurance over its self-insured retention of $25 million will be adequate to cover these losses. Subject to the foregoing deductible, the Company’s limits for insurance coverage are expected to exceed the storm losses, currently estimated to be approximately $250 million. Actual covered expenses from Hurricane Katrina could differ materially from current estimates. The Company has multiple applicable layers of insurance coverage and received its first insurance payment for Hurricane Katrina damage in October 2005. Further insurance recovery payments are expected to be paid as claims are incurred, submitted and the appropriate documentation becomes available for review by the Company’s insurers.

     In the third quarter of 2005, the net book values of damaged assets as a result of Hurricane Katrina are currently estimated at $41 million and have been recognized as a loss within the Consolidated Income Statements. Accordingly, these damaged assets are no longer being depreciated, which resulted in an immaterial effect on depreciation expense for the quarter. Other incremental expenses incurred as a result of the storm amounted to $19 million for the third quarter. The Company recognized corresponding insurance recoveries of $55 million, which represents recovery of these losses less $5 million of the $25 million self-insured deductible, which has been allocated in proportion to the estimated insurance recoveries. The remaining self-insured deductible will be applied and recognized in the Company’s results of operations as expected gains from insurance recoveries relating to fixed asset losses and business interruption lost profits are recognized.

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

NOTE 11. Hurricane Katrina, Continued

     Materials, Supplies and Other expenses within the Consolidated Income Statements include losses and insurance recoveries for the quarter ended September 30, 2005 as follows:

(Dollars in Millions)

										Net
						Insurance				Loss
		Loss				Recovery				Recognized
Fixed Asset Impairment		$	(41	)		$	41			$	—
Incremental Business Expenses			(19	)			14				(5	)
Totals		$	(60	)		$	55			$	(5	)

      While management expects losses above the self-insured deductible will be covered, certain insurance recoveries related to business interruption lost profits will be recognized in the Company’s results of operations as settlements are reached with the Company’s insurers. Also, the Company believes replacement value for damaged fixed assets may exceed book value, which could result in gain realization in accordance with FASB Interpretation No. 30, “Accounting for Involuntary Conversions of Nonmonetary Assets to Monetary Assets.” These gains could be material to results of operations in the quarters received.

NOTE 12. 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 long-term interest rate swap agreements on the following fixed rate notes:

(Dollars in Millions)

						Fixed Interest
Maturity Date		Notional Amount				Rate
May 1, 2007		$	450				7.45	%
May 1, 2032			150				8.30	%
Total/Average		$	600				7.66	%

     Under these agreements, CSX 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. CSX’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 $8 million and $26 million for the fair market value of the interest rate swap agreements at September 30, 2005 and December 31, 2004, respectively.

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

NOTE 12. Derivative Financial Instruments, Continued

     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 nine months ended September 30, 2005, CSX reduced interest expense by approximately $3 million and $11 million, respectively, as a result of the interest rate swap agreements that were in place during each period. For the quarter and nine-month period ended September 24, 2004, CSX reduced interest expense by approximately $5 million and $26 million, respectively. Fair value adjustments are non-cash transactions and, accordingly, have no cash impact on the Consolidated Cash Flow Statements.

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

Fuel Hedging

     In 2003, CSX began a program to hedge a portion of CSXT’s future diesel 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 CSXT’s estimated future fuel purchases.

     Following is a summary of outstanding fuel swaps:

		Sept. 30,
		2005
Approximate Gallons Hedged (Millions)			115
Average Price Per Gallon		$	0.83
Swap Maturities		October 2005 - July 2006

		2005				2006
		Q4				Q1				Q2				Q3
Estimated % of Future Fuel Purchases Hedged at end of period			37	%			25	%			11	%			1	%

     The program limits fuel hedges to a 24-month duration and a maximum of 80% of CSXT’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 nine months ended September 30, 2005 by $77 million and $191 million, respectively. Fuel hedging activity favorably impacted fuel expense for the quarter and nine months ended September 24, 2004 by $13 million and $17 million, respectively. 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. The fair value of fuel derivative instruments was $142 million and $118 million as of September 30, 2005 and December 31, 2004, respectively. 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.

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

NOTE 12. Derivative Financial Instruments, Continued

     CSX suspended entering into new swaps in its fuel hedge program since the third quarter of 2004. CSX will continue to monitor and assess the global fuel marketplace to decide if and when to resume hedging under the program.

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

NOTE 13. Casualty, Environmental and Other Reserves

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

(Dollars in Millions)		Sept. 30, 2005												Dec. 31, 2004
		Current				Long-term				Total				Current				Long-term				Total
Casualty		$	228			$	494			$	722			$	230			$	475			$	705
Separation			19				111				130				20				135				155
Environmental			20				40				60				20				40				60
Other			45				58				103				42				85				127
Total		$	312			$	703			$	1,015			$	312			$	735			$	1,047

Casualty

     Casualty reserves represent accruals for the uninsured portion of personal injury and occupational injury claims. The majority of claims are related to CSXT unless otherwise noted.

Personal Injury

     CSXT retains an independent actuarial firm to assist management in assessing the value of CSXT’s 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 in the value of CSXT’s personal injury claims. This methodology is based largely on CSXT’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 in litigation. Reserves for personal injury claims are $420 million and $383 million at September 30, 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 $195 million and $212 million at September 30, 2005 and December 31, 2004, respectively. Reserves for other occupational related claims are $107 million and $110 million at September 30, 2005 and December 31, 2004, respectively.

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

     The Company is party to a number of occupational claims by employees exposed to asbestos in the workplace. According to rail industry statistics, the heaviest exposure for 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 until it was substantially eliminated by 1985.

     The Company retains 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 probable 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 trends of average historical claim filing rates, future anticipated dismissal rates and settlement rates. The Company’s future liability for incurred but not reported claims is estimated by multiplying the future anticipated claims by the average settlement values.

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

		Nine Months Ended Sept.				Twelve Months Ended
		30, 2005				Dec. 31, 2004
Asserted Claims:
Open Claims — Beginning of Period			11,461				13,479
New Claims Filed			551				1,178
Claims Resolved			(973	)			(2,758	)
Claims Dismissed			(350	)			(438	)
Open Claims — End of Period			10,689				11,461

     Approximately 6,000 of the open claims at September 30, 2005 are asbestos claims against the Company’s previously owned international container shipping business. Because these claims are against multiple vessel owners, the Company’s reserves reflect its portion of those claims. The Company had approximately $11 million and $13 million reserved for those shipping business claims at September 30, 2005 and December 31, 2004, respectively. The remaining open claims have been asserted against CSXT.

      The amounts recorded by the Company for asbestos and other occupational liabilities are based upon currently known information and judgements based upon that information. 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. Recent asbestos filing rates have declined. Continued declining filing rates could become a trend that would result in a reduction of the reserve for asbestos related claims. Because the pace of asbestos claim filings has been inconsistent, the Company has not yet determined the decline to be a trend.

     While the final outcome of casualty-related matters cannot be predicted with certainty, considering among other items the meritorious legal defenses available and the liabilities that have been recorded, it is the opinion of management that none of these items, when finally resolved, will have a material adverse effect on the Company’s results of operations, financial position or liquidity. Should a number of these items occur in the same period, however, they 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 13. Casualty, Environmental and Other Reserves, Continued

Separation

     Separation liabilities at September 30, 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

     The Company is a party to various proceedings, including administrative and judicial proceedings, involving private parties and regulatory agencies related to environmental issues. The Company 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 CSXT, or its railroad predecessors, sent hazardous substances to the facilities in question for disposal.

     In addition, some of the Company’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 of various regulated materials onto the property. Therefore, the Company 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, the Company reviews its role with respect to each site identified. Based on the review process, the Company 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 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 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.

Other

     Other claims include amounts reserved for longshoremen disability claims, freight loss and damage, and other related injuries and losses.

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

NOTE 14. Commitments and Contingencies

Purchase Commitments

     CSXT has a commitment under a long-term maintenance program that currently covers approximately 40% of CSXT’s fleet of locomotives. The agreement is based on the maintenance cycle for each locomotive and is currently predicted to expire in 2026. The costs expected to be incurred through the duration of the agreement total approximately $6.8 billion. CSXT may terminate the agreement at its convenience though such action might trigger certain liquidated damages provisions that could result in damages adjusted over the predicted term of the agreement. Under the program, CSXT paid $43 million and $127 million for the quarter and nine months ending September 30, 2005, respectively. CSXT paid $39 million and $114 million during the quarter and nine months ended September 24, 2004, respectively.

Insurance

     The Company maintains numerous insurance programs, most notably for third party casualty liability and for Company 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. For information on insurance issues resulting from the effects of Hurricane Katrina on the Company’s operations and assets, see Note 11. Hurricane Katrina.

Guarantees

     CSX and its subsidiaries are contingently liable individually and jointly with others as guarantors of approximately $351 million in 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 September 30, 2005, the Company’s three main guarantees are as follows:

	1.		Guarantee of approximately $245 million relating to leases assumed as part of the conveyance of its interest in a former subsidiary, CSX Lines, subsequently renamed Horizon Lines LLC (“Horizon”). 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. CSX 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 CSX 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 CSX 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.

     The maximum amount of future payments CSX 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 14. Commitments and Contingencies, Continued

Other Legal Proceedings

     The Company 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 the Company. An unexpected adverse resolution of one or more of these items, however, 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 15. Business Segments

     The Company operates primarily in two business segments: rail and intermodal. The rail segment provides rail freight transportation over a network of approximately 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.

     Consolidated operating income includes the results of operations of Surface Transportation and other operating income. Other operating income includes the gain amortization on the CSX Lines conveyance, net sublease income from assets formerly included in the Company’s Marine Services segment, and other items.

     The International Terminals business segment has been reclassified to Discontinued Operations (see Note 4. Discontinued Operations).

     Business segment information for the quarters ended September 30, 2005 and September 24, 2004 is as follows:

(Dollars in Millions)

		Surface Transportation
		Rail				Intermodal				Total				Other				Total
Quarter Ended September 30, 2005
Revenues from External Customers		$	1,788			$	337			$	2,125			$	—			$	2,125
Segment Operating Income			293				68				361				(8	)			353
Quarter Ended September 24, 2004
Revenues from External Customers		$	1,616			$	327			$	1,943			$	—			$	1,943
Segment Operating Income			216				31				247				3				250
Nine Months Ended September 30, 2005
Revenues from External Customers		$	5,403			$	996			$	6,399			$	—			$	6,399
Segment Operating Income			959				175				1,134				4				1,138
Assets			20,719				861				21,580				—				21,580
Nine Months Ended September 24, 2004
Revenues from External Customers		$	4,893			$	967			$	5,860			$	—			$	5,860
Segment Operating Income			597				81				678				6				684
Assets			19,929				651				20,580				1,065				21,645

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

NOTE 15. 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
		Sept. 30,				Sept. 24,
		2005				2004
Assets:
Assets for Business Segments		$	21,580			$	21,645
Investment in Conrail			603				567
Elimination of Intersegment Payables (Receivables)			(581	)			(499	)
Non-segment Assets			2,419				2,652
Total Consolidated Assets		$	24,021			$	24,365

NOTE 16. 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. Employees hired after December 31, 2002 are covered by a cash balance plan. The cash balance plan provides benefits by utilizing interest and pay credits based upon age, service and compensation.

     In addition to the defined benefit pension plans, CSX sponsors one post-retirement medical plan and one life insurance plan that provide benefits to full-time, salaried, management employees hired prior to 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.

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

NOTE 16. Employee Benefit Plans, Continued

     The following table presents components of net periodic benefit cost:

		Quarters Ended
(Dollars in Millions)		Pension Benefits								Other Benefits
		Sept. 30, 2005				Sept. 24, 2004				Sept. 30, 2005				Sept. 24, 2004
Expense/(Income) Components
Service Cost		$	8			$	9			$	2			$	2
Interest Cost			27				28				6				6
Expected Return on Plan Assets			(30	)			(33	)			N/A				N/A
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

		Nine Months Ended
(Dollars in Millions)		Pension Benefits								Other Benefits
		Sept. 30, 2005				Sept. 24, 2004				Sept. 30, 2005				Sept. 24, 2004
Expense/(Income) Components
Service Cost		$	24			$	29			$	6			$	6
Interest Cost			81				84				18				18
Expected Return on Plan Assets			(90	)			(100	)			N/A				N/A
Amortization of Prior Service Cost			3				3				(3	)			(3	)
Amortization of Net Loss			18				11				9				12
Net Periodic Benefit Cost		$	36			$	27			$	30			$	33
SFAS 88 Curtailment Charges			—				6				—				18
Net Periodic Benefit Cost, Including Termination Benefits		$	36			$	33			$	30			$	51

     As of September 30, 2005, CSX has contributed approximately $2 million to its pension plans.

     Due to the termination of employees under the management restructuring plan (see Note 17. Management Restructuring), a curtailment occurred in the Company’s defined benefit pension plans and post-retirement medical plan in 2004. The cost of the curtailments of $24 million was included in the management restructuring charge for the nine months ended September 24, 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 17. Management Restructuring

     During 2004, the Company incurred restructuring charges related to management restructuring plans to streamline the structure, eliminate organizational layers and realign certain functions. For the quarter and nine months ended September 24, 2004, the Company recorded expense of $3 million and $71 million, respectively, for separation expense, pension and postretirement benefit curtailment charges, stock compensation expense and other related expenses.

NOTE 18. Summarized Consolidating Financial Data

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

Consolidating Income Statement

(Dollars in Millions)
		CSX
		Corporation				Vessel Leasing				Other				Eliminations				Consolidated
Quarter Ended September 30, 2005
Operating Revenue		$	—			$	—			$	2,125			$	—			$	2,125
Operating Expense			(19	)			—				1,791				—				1,772
Operating Income			19				—				334				—				353
Equity in Earnings of Subsidiaries			272				—				—				(272	)			—
Other Income — Net			(40	)			1				112				(62	)			11
Debt Repurchase Expense			—				—				—				—				—
Interest Expense			(106	)			—				(56	)			62				(100	)
Earnings (Loss) from Continuing Operations before Income Taxes			145				1				390				(272	)			264
Income Tax (Benefit) Expense			(19	)			—				119				—				100
Net Earnings (Loss)		$	164			$	1			$	271			$	(272	)		$	164

		CSX
		Corporation				Vessel Leasing				Other				Eliminations				Consolidated
Quarter Ended September 24, 2004
Operating Revenue		$	—			$	—			$	1,943			$	—			$	1,943
Operating Expense			(39	)			—				1,732				—				1,693
Operating Income			39				—				211				—				250
Equity in Earnings of Subsidiaries			166				—				—				(166	)			—
Other Income — Net			(13	)			1				50				(6	)			32
Interest Expense			(88	)			—				(17	)			(1	)			(106	)
Earnings (Loss) from Continuing Operations before Income Taxes			104				1				244				(173	)			176
Income Tax (Benefit) Expense			(19	)			—				81				—				62
Earnings from Continuing Operations			123				1				163				(173	)			114
Discontinued Operations — Net of Tax			—				—				9				—				9
Net Earnings (Loss)		$	123			$	1			$	172			$	(173	)		$	123

 

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

NOTE 18. Summarized Consolidating Financial Data, Continued

Consolidating Income Statement

(Dollars in Millions)
		CSX				Vessel
		Corporation				Leasing				Other				Eliminations				Consolidated
Nine Months Ended September 30, 2005
Operating Revenue		$	—			$	—			$	6,399			$	—			$	6,399
Operating Expense			(94	)			—				5,355				—				5,261
Operating Income			94				—				1,044				—				1,138
Equity in Earnings of Subsidiaries			686				—				—				(686	)			—
Other Income — Net			91				3				83				(138	)			39
Debt Repurchase Expense			(192	)			—				—				—				(192	)
Interest Expense			(317	)			—				(145	)			138				(324	)
Earnings (Loss) from Continuing Operations before Income Taxes			362				3				982				(686	)			661
Income Tax (Benefit) Expense			(118	)			—				296				—				178
Earnings from Continuing Operations			480				3				686				(686	)			483
Discontinued Operations — Net of Tax			428				—				(3	)			—				425
Net Earnings (Loss)		$	908			$	3			$	683			$	(686	)		$	908