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CSX 10-K 2006
CSX Corporation
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the fiscal year ended December 30, 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
  62-1051971
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
500 Water Street, 15th Floor,
Jacksonville, FL
(Address of principal executive offices)
  32202
(Zip Code)
(904) 359-3200
(Telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class   Name of exchange on which registered
     
Common Stock, $1 Par Value   New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
      Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).    Yes þ         No o
      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o         No þ
      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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o
      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).
         Large Accelerated Filer    þ Accelerated Filer    o Non-accelerated Filer    o         
      Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes o         No þ
      On July 1, 2005 (which is the last day of the second quarter and the required date to use), the aggregate market value of the Registrant’s voting stock held by non-affiliates was approximately $7.5 billion (based on the New York Stock Exchange closing price on such date).
      On January 27, 2006, there were 219,431,371 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
      Portions of the Registrant’s Definitive Proxy Statement (the “Proxy Statement”) to be filed with respect to its annual meeting of shareholders scheduled to be held on May 3, 2006.
 
 


 

CSX CORPORATION
FORM 10-K
TABLE OF CONTENTS
                   
Item No.       Page
         
 PART I
 1.    Business     3  
 1A.    Risk Factors     4  
 1B.    Unresolved Staff Comments     4  
 2.    Properties     5  
 3.    Legal Proceedings     7  
 4.    Submission of Matters to a Vote of Security Holders     7  
 
 PART II
 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     10  
 6.    Selected Financial Data     12  
 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations     14  
         • Executive Summary     14  
           • 2005 Surface Transportation Highlights and Challenges     14  
           • 2006 Expectations     18  
           • Risk Factors     20  
         • Forward-Looking Statements     23  
         • Financial Results of Operations     24  
        • Liquidity and Capital Resources     36  
        • Schedule of Contractual Obligations and Commercial Commitments     38  
        • Off-Balance Sheet Arrangements     38  
        • Critical Accounting Estimates     38  
 7A.    Quantitative and Qualitative Disclosures about Market Risk     47  
 8.    Financial Statements and Supplementary Data     48  
 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     101  
 9A.    Controls and Procedures     101  
 9B.    Other Information     101  
 
 PART III
 10.    Directors and Executive Officers of the Registrant     102  
 11.    Executive Compensation     102  
 12.    Security Ownership of Certain Beneficial Owners and Management     102  
 13.    Certain Relationships and Related Transactions     102  
 14.    Principal Accounting Fees and Services     102  
 
 PART IV
 15.    Exhibits and Financial Statement Schedules     103  

 Signatures
    107  
 Omnibus Incentive Plan as amended
 Restricted Stock Award Certificate
 Restricted Stock Award Agreement
 Subsidiaries
 Consent of Ernst & Young LLP
 Consent of Ernst & Young LLP and KPMG LLP
 Powers of Attorney
 Section 302 Certification of PEO
 Section 302 Certification of PFO
 Section 906 Certification of PEO
 Section 906 Certification of PFO
 Unaudited Consolidated Financial Statements

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CSX CORPORATION
PART I
Item 1. Business
      CSX Corporation (“CSX” and, together with its subsidiaries, the “Company”), based in Jacksonville, FL, owns companies providing rail, intermodal and rail-to-truck transload services that combine to form one of the nation’s leading transportation companies, connecting more than 70 ocean, river and lake ports.
Surface Transportation
CSX Transportation Inc.
      CSX’s principal operating company, CSX Transportation Inc. (“CSXT”), operates the largest railroad in the eastern United States with approximately 21,000-mile rail network linking commercial markets in 23 states, the District of Columbia, and the Canadian provinces of Ontario and Quebec.
CSX Intermodal Inc.
      CSX Intermodal Inc. (“Intermodal”), one of the nation’s largest coast-to-coast intermodal transportation providers, is a stand-alone, integrated intermodal company serving customers from origin to destination with its own truck and terminal operations, plus a dedicated domestic container fleet. Containers and trailers are loaded and unloaded from trains, with trucks providing the link between intermodal terminals and the customer.
Surface Transportation Businesses
      The rail and intermodal companies are viewed by the Company on a combined basis as Surface Transportation businesses. Together, they serve four primary lines of business:
  •  Merchandise generated approximately 49% of the Company’s total revenue in 2005 with 2.9 million carloads. The Company’s merchandise business is made up of seven market segments: phosphates and fertilizers; metals; forest products; food and consumer; agricultural products; chemicals; and emerging markets. Emerging markets target high-growth business opportunities in specialized markets such as aggregates, processed materials (for example, cement), waste, military cargo, and machinery.
 
  •  Coal, which delivered more than 1.8 million carloads of coal, coke and iron ore to electric utilities and manufacturers in 2005, accounted for approximately 24% of the Company’s total 2005 revenue. The Company serves more than 130 coal mines in nine states, including three of the nation’s top four coal-producing states.
 
  •  Intermodal, as described above, offers a cost advantage over long-haul trucking by combining the better economics of longer hauls provided by rail with the short-haul flexibility of trucks through a network of dedicated terminals across North America. Intermodal accounted for approximately 2.2 million units and 16% of the Company’s total revenue in 2005.
 
  •  Automotive, which serves plants in eight states and delivers both finished vehicles and auto parts, transported 488,000 carloads generating 10% of the Company’s total revenue in 2005.
 
  •  Other revenue, such as demurrage, switching, and other incidental charges, accounted for 1% of the Company’s total 2005 revenue. Demurrage represents charges assessed by railroads for the retention of cars by shippers or receivers of freight beyond a specified period of time. Switching revenue is generated when CSX switches cars between trains for a customer or other railroad.

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Divestitures
International Terminals
      In February 2005, CSX sold its International Terminals business. CSX recognized a gain of $683 million pretax, $428 million after tax, in the fiscal year ended December 30, 2005. These amounts are reported as Discontinued Operations in the Company’s Consolidated Income Statements. All prior activities for this business are presented as Discontinued Operations. (See Note 4. Discontinued Operations.)
Domestic Container Shipping
      In February 2003, CSX conveyed its interest in the Domestic Container-Shipping business. CSX continues to sublease vessels and equipment to this former business through 2014. Due to these continuing obligations, CSX deferred the gain of $127 million pretax and is amortizing it over the 12-year sub-lease term. (See Note 3. Divestitures.)
Financial Information about Operating Segments
      See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for operating revenue, operating income and total assets by segment for each of the last three fiscal years.
General
      The Company makes available, free of charge through its website at www.csx.com, its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission. Additionally, the Company has posted its code of ethics on its website.
      The Company has included the CEO and CFO certifications regarding the Company’s public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to this report. Additionally, CSX filed with the NYSE the CEO’s certification regarding the Company’s compliance with the NYSE’s Corporate Governance Listing Standards (“Listing Standards”) pursuant to Section 303A.12(a) of the Listing Standards, which was dated May 26, 2005 and indicated that the CEO was not aware of any violations of the Listing Standards by the Company.
      For additional information concerning business conducted by the Company during 2005, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data — Note 20. Business Segments.
Employees
      The Company’s annual average of employees was approximately 35,000 people in 2005 primarily working to provide transportation services.
      The information set forth in Item 6. Selected Financial Data is incorporated herein by reference.
Item 1A.     Risk Factors
      The information set forth in Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations under the caption “Risk Factors” is incorporated by reference.
Item 1B.     Unresolved Staff Comments
      Not applicable.

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Item 2. Properties
      CSX’s properties primarily consist of track and its related infrastructure, locomotives and freight cars and each category is described below.
     Track and Infrastructure
      Serving 23 states, the District of Columbia, Ontario and Quebec, the CSXT rail network extends from New York, Philadelphia and Boston to the Southeast markets of Atlanta, Miami and New Orleans and to the Midwestern cities of East St. Louis, Memphis and Chicago.
      The Company’s track structure includes main thoroughfares connecting terminals and yards (referred to as mainline track); track within terminals and switching yards; track adjacent to the mainlines used for passing trains; and track connecting the mainline track to customer locations. As of December 30, 2005, the breakdown of these track miles is as follows:
         
    Track
    Miles
     
Mainline Track
    26,865  
Terminals and Switching Yards
    9,774  
Passing Sidings and Turnouts
    1,031  
       
Total
    37,670  
       
      In addition to its physical track structure, CSXT operates 36 major yards and terminals, plus a number of smaller facilities. These sites serve as the links between the Company and its local customers and as sorting facilities where shipments are classified and routed to other areas around the nation. CSXT’s train operations are focused around four major transportation networks: the Coal Network, the Southeastern Corridor, the Interstate 90 Corridor, and the Interstate 95 Corridor.
Coal Network
      Coal is used to generate more than half of the electricity in the United States. The CSX coal network connects mining operations in nine states with industrial areas in the Northeast as well as many river, lake and seaport facilities. These routes also support CSXT’s strong and growing utility market in the Southeast.
Southeastern Corridor
      This section of the network runs on the western side of CSXT’s system from Chicago and the Western gateways, through the cities of Atlanta, Nashville and Birmingham to markets throughout the Southeast. The Southeastern Corridor is a vital route for CSXT’s merchandise and Intermodal’s traffic as well as automotive services.
Interstate 90 (I-90) Corridor
      Chicago and metropolitan areas in New York and New England are linked by CSX’s I-90 corridor. Much of this route has two lanes of track side by side (referred to as double mainline track) supporting high-speed intermodal and automotive services. The I-90 corridor is also a primary route for import traffic moving across the country, through Chicago and into the population centers in the Northeast.
Interstate 95 (I-95) Corridor
      Charleston, Jacksonville, Miami and many other cities throughout the growing Southeast are connected to the heavily populated northeastern cities of Baltimore, Philadelphia and New York

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along CSXT’s I-95 corridor. This route is used for certain CSX merchandise business, which primarily includes food and consumer products along with metals and chemicals.
     Locomotives
      CSXT operates more than 3,700 locomotives, of which approximately 500 are under short-term lease arrangements. Freight locomotives are the power used primarily to pull trains. Switching locomotives are used in yards to sort rail cars so that the right rail car gets attached to the right train in order to get it to its final destination. Auxiliary units are typically used to provide extra traction for heavy trains in hilly terrain.
                                   
    December 30, 2005
     
    Owned   Leased   Total   %
                 
Locomotives
                               
 
Freight
    2,922       462       3,384       89 %
 
Switching
    217             217       6 %
 
Auxiliary Units
    189             189       5 %
                         
 
Total
    3,328       462       3,790       100 %
                         
     Freight Car Fleet
      CSXT provides specialized equipment to safely deliver freight from the source to distributors or end users:
  •  Gondolas support CSXT’s coal and metals markets and provide transport for woodchips and other bulk commodities.
 
  •  Open-top hoppers handle heavy dry bulk commodities that are impervious to weather conditions such as coal, coke, stone, sand, ores and gravel.
 
  •  Flat Cars for shipping intermodal containers and trailers.
 
  •  Box Cars transport commodities that must be protected from the weather, such as paper products, appliances and building materials. Insulated boxcars deliver food products, canned goods, and certain beverages.
 
  •  Covered hoppers have a permanent roof. Lighter bulk commodities such as grain, fertilizer, flour, salt, sugar, clay and lime are shipped in large cars called jumbo covered hoppers. Heavier commodities like cement, ground limestone and glass sand are shipped in small cube-covered hoppers.
 
  •  Other cars on the network include but are not limited to center beam cars for transporting lumber and building products.
                                   
    December 30, 2005
     
    Owned   Leased   Total   %
                 
Freight Cars
                               
 
Gondolas
    22,174       8,070       30,244       29 %
 
Open-top Hoppers
    16,354       3,299       19,653       19 %
 
Flat Cars
    1,053       18,439       19,492       19 %
 
Box Cars
    13,240       2,737       15,977       16 %
 
Covered Hoppers
    13,199       3,301       16,500       16 %
 
Other Cars
    431       1,017       1,448       1 %
                         
 
Total
    66,451       36,863       103,314       100 %
                         

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      At any point in time, over half of the railcars on the CSXT system are not owned buy CSXT. Examples of these are railcars owned by other railroads, which are interchanged to CSXT; shipper-furnished (“private”) cars, which are generally used only in that shipper’s services; and multi-level railcars. These multi-level railcars are used to transport finished motor vehicles, such as sport utility vehicles and light trucks in bi-level cars, while sedans and smaller automobiles are shipped in try-level cars. Multi-level railcars are used jointly by participating railroads, and the fleet is managed as a nationwide pool to serve the automobile industry. As noted, in certain markets, CSXT uses railcars supplied by railroad customers. For example, chemical shippers typically supply tank cars for the transportation of hazardous and non-hazardous material.
      The information set forth in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Depreciation Policies Under the Group Life Method”, is incorporated herein by reference.
      The information set forth in Item 8. Financial Statements and Supplementary Data, Note 1. Nature of Operations and Significant Accounting Policies under the caption “Properties”, and Note 10. Properties, is incorporated herein by reference.
Item 3. 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 material 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 material adverse effect on the results of operations, financial position or liquidity of the Company in a particular quarter or fiscal year.
      See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption “Critical Accounting Estimates, Casualty, Environmental and Legal Reserves.”
Item 4. Submission of Matters to a Vote of Security Holders
      There were no matters submitted to a vote of security holders in the fourth quarter of 2005.
Executive Officers of the Registrant
      Executive officers of CSX are elected by the CSX Board of Directors and generally hold office until the next annual election of officers. There are no family relationships or any arrangement or

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understanding between any officer and any other person pursuant to which such officer was selected. Effective February 23, 2006, the executive officers are as follows:
     
Name and Age   Business Experience During Past 5 Years
     
Michael J. Ward, 55
  Chairman of the Board, President and Chief Executive Officer of CSX, having been elected as Chairman and Chief Executive Officer in January 2003 and as President in July 2002. He has also served CSX Transportation, Inc., the Company’s rail subsidiary, as President since November 2000 and as President and Chief Executive Officer since October 2002. Previously, Mr. Ward served CSX Transportation as Executive Vice President — Operations from April through November 2000, and as Executive Vice President — Coal Service Group from August 1999 to April 2000.
 
Ellen M. Fitzsimmons, 45   Senior Vice President — Law and Public Affairs of CSX and CSX Transportation, Inc. since December 2003. Before December 2003, Ms. Fitzsimmons served as Senior Vice President — Law and Corporate Secretary from May 2003 and as Senior Vice President — Law from February 2001 to May 2003. Prior thereto, she served as General Counsel — Corporate at CSX.
 
Clarence W. Gooden, 54   Executive Vice President and Chief Commercial Officer of CSX and CSX Transportation, Inc. since April 2004. Before April 2004, Mr. Gooden served as Senior Vice President — Merchandise Service Group, CSX Transportation, Inc. from 2002. Prior to 2002, Mr. Gooden served as President of CSX Intermodal from 2001 to 2002; Senior Vice President — Coal Service Group from 2000 to 2001; and Vice President — System Transportation from 1999 to 2000.
 
Robert J. Haulter, 52   Senior Vice President — Human Resources and Labor Relations of CSX and CSX Transportation, Inc. since December 2003. Before December 2003, Mr. Haulter served as CSX Senior Vice President — Human Resources from July 2002. Before July 2002, he served CSX Transportation, Inc. as Senior Vice President — Human Resources from May 2002 to July 2002; as Vice President — Human Resources from December 2000 to May 2002; as Assistant Vice President of Operations Support from September 2000 to December 2000; and as Assistant Vice President — Strategic Development from November 1999 to September 2000.

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Name and Age   Business Experience During Past 5 Years
     
Tony L. Ingram, 57   Executive Vice President and Chief Operating Officer of CSX Transportation, Inc. since March 2004. Before March 2004, Mr. Ingram served as Senior Vice President — Transportation, Network and Mechanical, Norfolk Southern Corporation, from February 2003 to March 2004; and Vice President, Transportation — Operations from March 2000 to February 2003.
 
Oscar Munoz, 47   Executive Vice President and Chief Financial Officer of CSX and CSX Transportation, Inc. since May 2003. Before May 2003, Mr. Munoz served as Chief Financial Officer and Vice President, Consumer Services, AT&T Corporation, from January 2001 to May 2003; as Senior Vice President — Finance & Administration, Qwest Communications International, Inc. from June to December 2000; and as Chief Financial Officer & Vice President, U.S. West Retail Markets from April 1999 to May 2000.
 
Carolyn T. Sizemore, 43   Vice President and Controller of CSX and CSX Transportation, Inc. since April 2002. Prior to April 2002, Ms. Sizemore served CSX as Assistant Vice President and Assistant Controller from July 2001 to April 2002, and as Assistant Vice President, Financial Planning from June 1999 to July 2001.

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CSX CORPORATION
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
      CSX’s common stock is listed on the New York stock exchange and trades with unlisted privileges on the Midwest, Boston, Cincinnati, Pacific and Philadelphia stock exchanges. The official trading symbol is “CSX.”
Description of Common and Preferred Stocks
      A total of 300 million shares of common stock is authorized, of which 218,202,519 shares were outstanding as of December 30, 2005. Each share is entitled to one vote in all matters requiring a vote of shareholders. There are no pre-emptive rights. At January 27, 2006, there were 49,859 common stock shareholders of record. Weighted average common shares outstanding used in the calculation of diluted earnings per share was approximately 228 million as of December 30, 2005, and is expected to increase in 2006 due to anticipated stock option exercises and other incentive programs. (See Note 15. Earnings Per Share.)
      A total of 25 million shares of preferred stock is authorized, none of which is currently outstanding.
      The following table sets forth, for the quarters indicated, the dividends declared and the high and low share prices of the Company’s common stock. In 2005, the Company increased dividends by 30% from 10 cents to 13 cents per common share.
                                             
    Quarter    
         
    1st   2nd   3rd   4th   Year
                     
2005
                                       
 
Dividends
  $ 0.10     $ 0.10     $ 0.10     $ 0.13     $ 0.43  
 
Common Stock Price
                                       
   
High
  $ 43.54     $ 44.10     $ 46.89     $ 51.60     $ 51.60  
   
Low
  $ 36.90     $ 38.01     $ 42.48     $ 42.70     $ 36.90  
2004
                                       
 
Dividends
  $ 0.10     $ 0.10     $ 0.10     $ 0.10     $ 0.40  
 
Common Stock Price
                                       
   
High
  $ 36.26     $ 33.04     $ 34.28     $ 40.46     $ 40.46  
   
Low
  $ 28.80     $ 29.28     $ 29.96     $ 33.09     $ 28.80  
Issuer Purchases of Equity Securities Information
      As required by SEC Regulation S-K for the quarter ended December 30, 2005, the following table summarizes common shares withheld by CSX on behalf of current and retired employees to

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settle the employee’s minimum statutory tax obligation on the distribution of shares that were formerly deferred and any restricted stock that has vested.
Issuer Purchases of Equity Securities
                                   
                (d)
            (c)   Maximum
            Total Number of   Number of
    (a)       Shares   Shares that
    Total   (b)   Purchased as   May Yet Be
    Number of   Average   Part of Publicly   Purchased
    Shares   Price Paid   Announced Plans   Under the Plan
Period   Purchased   per Share   or Programs   or Programs
                 
October
    6,318     $ 42.07              
 
(October 1, 2005 –
                               
 
October 28, 2005)
                               
November
    3,219       45.78              
 
(October 29, 2005 –
                               
 
November 27, 2005)
                               
December
    1,363       50.44              
 
(November 28, 2005
                               
 
December 30, 2005)
                               
                         
Total
    10,900     $ 44.21              
                         

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Item 6. Selected Financial Data
                                           
    Fiscal Years Ended
     
    2005   2004   2003   2002   2001
                     
    (Dollars in millions, except per share amounts)
    (Unaudited)
Earnings from Continuing Operations
                                       
Operating Revenue
  $ 8,618     $ 8,040     $ 7,573     $ 7,916     $ 7,853  
Operating Expense
    7,068       7,040       7,053       6,897       7,003  
                               
Operating Income
  $ 1,550     $ 1,000     $ 520     $ 1,019     $ 850  
                               
Net Earnings from Continuing Operations
  $ 720     $ 418     $ 137     $ 410     $ 243  
                               
Earnings Per Share:
                                       
 
From Continuing Operations
  $ 3.33     $ 1.95     $ 0.64     $ 1.93     $ 1.15  
 
From Continuing Operations, Assuming Dilution
  $ 3.17     $ 1.87     $ 0.63     $ 1.85     $ 1.13  
 
From Cumulative Effect of Accounting Change
  $     $     $ 0.26     $ (0.20 )   $  
 
From Cumulative Effect of Accounting Change, Assuming Dilution
  $     $     $ 0.25     $ (0.19 )   $  
                               
Financial Position
                                       
Cash, Cash Equivalents and Short-term Investments
  $ 602     $ 859     $ 368     $ 264     $ 618  
Total Assets
    24,232       24,605       21,760       20,951       20,801  
Long-term Debt
    5,093       6,248       6,886       6,519       5,839  
Shareholders’ Equity
    7,954       6,811       6,448       6,241       6,120  
                               
Other Data Per Common Share
                                       
Cash Dividends
  $ 0.43     $ 0.40     $ 0.40     $ 0.40     $ 0.80  
Employees — Annual Averages
                                       
Rail
    32,033       32,074       32,892       33,468       35,014  
Other
    3,076       3,833       4,624       6,471       6,446  
                               
Total
    35,109       35,907       37,516       39,939       41,460  
                               
See accompanying Consolidated Financial Statements

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Significant events included in Earnings from Continuing Operations are as follows:
2005 —  CSX repurchased $1.0 billion of outstanding debt. CSX recognized a charge of $192 million pretax, $123 million after tax, to repurchase the debt, which primarily reflects the increase in current market value above original issue value. (See Note 12. Debt and Credit Agreements.)
 
      —  Ohio enacted legislation to gradually eliminate its corporate franchise tax. This legislative change resulted in an income tax benefit of $71 million. (See Note 8. Income Taxes.)
 
      —  CSX updated its assessment of the unasserted liability exposure for asbestos and other claims, which resulted in recognition of a $38 million pretax, $23 million after tax, favorable change in estimate. (See Note 11. Casualty, Environmental, and Other Reserves.)
 
2004 —  A charge of $71 million pretax, $44 million after tax, was recognized for separation expenses related to the management restructuring at Surface Transportation. (See Note 5. Management Restructuring.)
 
      —  Revenues, operating expenses and after tax income include approximately $63 million, $35 million and $6 million, respectively, representing consolidation of Four Rivers Transportation (“FRT”), a short-line railroad previously accounted for under the equity method, in conjunction with adoption of FASB Interpretation 46, Consolidation of Variable Interest Entities. Net equity earnings of FRT of approximately $4 million were included in other income in 2003.
 
      —  CSX completed a corporate reorganization of Conrail that resulted in the direct ownership of certain Conrail assets by CSXT. This transaction was accounted for at fair value and resulted in a net gain of $16 million after tax, which is included in other income. (See Note 2. Investment In and Integrated Rail Operations with Conrail.)
 
2003 —  Income of $93 million pretax, $57 million after tax, was recognized as a cumulative effect of accounting change, representing the reversal of the accrued liability for crosstie removal costs in conjunction with the adoption of SFAS 143 Accounting for Asset Retirement Obligations. (See Note 1. Nature of Operations and Significant Accounting Policies.)
 
      —  CSX conveyed most of its interest in its domestic container-shipping subsidiary, CSX Lines, to a new venture formed with the Carlyle Group for approximately $300 million in cash and securities. CSX Lines was subsequently renamed Horizon. A deferred pretax gain of approximately $127 million resulting from the transaction is being recognized over the 12-year sub-lease term during which the Company continues to sublease vessels and equipment to Horizon. (See Note 3. Divestitures.)
 
      —  A charge of $232 million pretax, $145 million after tax, was recognized in conjunction with the change in estimate of casualty reserves to include an estimate of incurred but not reported claims for asbestos and other occupational injuries to be received over the next seven years. (See Note 11. Casualty, Environmental, and Other Reserves.)
 
      —  A charge of $108 million pretax, $67 million after tax, was recognized to account for CSX’s entering into two settlement agreements with Maersk that resolved all material disputes pending between the companies arising out of the 1999 sale of the international container-shipping assets. (See Note 19. Commitments and Contingencies.)

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      —  A charge of $34 million pretax, $21 million after tax, was recognized as the initial charge for separation expenses related to the management restructuring announced in 2003. In addition, the Company recorded a credit of $22 million pretax, $13 million after tax related to revised estimates for railroad retirement taxes and the amount of benefits that will be paid to individuals under the 1991 and 1992 separation plans. The net restructuring charge of $22 million, $13 million after tax includes these items. (See Note 5. Management Restructuring.)
 
2002 —  A charge of $83 million pretax, $43 million after tax, was recognized to write down indefinite lived intangible assets as a cumulative effect of an accounting change and consideration of minority interest.
 
2001 —  A charge of $60 million pretax, $37 million after tax, was recognized to account for the settlement of the 1987 New Orleans tank car fire litigation.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
EXECUTIVE SUMMARY
2005 Surface Transportation Highlights and Challenges
Operating Results
      CSX follows a 52/53 week fiscal reporting calendar. This fiscal calendar allows every quarter to consistently end on a Friday and to be of equal duration (13 weeks). However, in order to maintain this type of reporting calendar, every sixth or seventh year (depending on the Gregorian calendar and when leap year falls), an extra week will be included in one quarter (a 14 week quarter) and, therefore, the full year will have 53 weeks. Fiscal 2004 included 53 weeks while fiscal year 2005 had 52 weeks. All comparisons below utilize these respective years’ reported results.
Revenue
      Surface Transportation’s revenue in 2005 increased by 7% or $578 million to a record $8.6 billion while volume decreased by 2%, or 180,000 units. A portion of this volume decrease was due to the additional week included in fiscal year 2004. Revenue per unit increased by 10%, or $105, of which approximately 50% was due to continued pricing efforts and 50% was due to the Company’s fuel surcharge program and traffic mix.
      Revenue increased across all commodities. A strong industrial economy, coupled with a shortage of rail, truck and barge capacity allowed for substantial price increases within all merchandise groups. While North American automotive production was relatively flat compared to the prior year, automotive revenue and revenue-per-unit benefited from contractual price escalations and higher fuel surcharges recoveries. Coal volumes and revenue improved significantly due to both increased electrical generation by CSXT-served utilities and price increases. The overall competitive position of Intermodal improved compared to the trucking industry due to shortage of truck capacity and higher fuel prices creating a stronger pricing environment for Intermodal services.

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      A detailed discussion of significant factors driving changes in volume and revenue is provided under the caption, “Results of Operations”.
                                   
    Years Ended        
             
    52 Weeks   53 Weeks        
    2005   2004   $ Change   % Change
                 
    (Dollars in millions, except per share amounts)
Revenue and Expense
                               
 
Surface Transportation Revenue
  $ 8,618     $ 8,040     $ 578       7 %
Operating Expense
                               
 
Labor and Fringe
    2,856       2,741       115       4  
 
Materials, Supplies and Other
    1,784       1,759       25       1  
 
Depreciation
    818       702       116       17  
 
Fuel
    783       656       127       19  
 
Building and Equipment Rent
    533       582       (49 )     (8 )
 
Inland Transportation
    230       280       (50 )     (18 )
 
Conrail Rents, Fees and Services
    65       256       (191 )     (75 )
 
Restructuring Charge — Net
          71       (71 )     NM  
 
Provision for Casualty Claims
    (38 )           (38 )     NM  
                         
Surface Transportation Expense
    7,031       7,047       (16 )      
                         
Surface Transportation Operating Income
  $ 1,587     $ 993     $ 594       60 %
                         
Operating Ratio
    81.6 %     87.6 %                
 
Prior periods have been reclassified to conform to the current presentation.
NM — not meaningful
Fuel Costs and Fuel Surcharge Program
      Fuel expenses increased 19% to $783 million in 2005, net of $249 million of fuel hedging benefits, due principally to the rising price per gallon of diesel fuel. Fuel hedging activity had a $63 million favorable impact on fuel expense for the fiscal year ended December 31, 2004. The average price per gallon of diesel fuel, including benefits from CSX’s fuel hedging program, was $1.31 in 2005 versus $1.10 in 2004.
      Fuel cost recovery programs are commonly used within the transportation industry. When the cost of fuel exceeds certain thresholds, CSX shares a portion of the increase with its customers through its fuel surcharge program. In 2005, approximately 50% and 31% of CSX’s revenue was subject to fuel surcharges and cost escalation clauses (which include a fuel element), respectively. As existing contracts are renewed or new contracts are executed, CSX is increasing the number of contracts which include fuel surcharge mechanisms.
Operations
      As illustrated in the table below, key service measures show mixed results in 2005. Average train velocity, system dwell and recrew performance declined, while on-time train originations improved compared to the prior year. Cars on line remained essentially flat, indicating that CSXT’s network remained relatively fluid through 2005.
      The Company’s Surface Transportation businesses remained focused on producing continuous improvement through several key initiatives. In 2004, CSXT instituted a new network operating plan called the ONE Plan, which defines CSXT’s scheduled train network and is designed to improve service reliability and efficiency. Although anticipated benefits have not been realized on a sustained

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basis, CSXT believes the ONE Plan benefits will be attained and remains committed to this initiative. Efforts are ongoing to improve plan execution and to refine the operating plan to reflect changing traffic volumes, operating capabilities, and service requirements.
      CSXT is investing to ensure that adequate resources are in place to achieve higher levels of plan execution. CSXT acquired 100 additional locomotives and started implementing a new locomotive plan in late 2005. Locomotive availability and reliability are critical to plan execution. CSXT also hired and trained approximately 2,000 train and engine employees to keep pace with high attrition rates, particularly conductors and engineers. Finally, a two-year program to expand capacity in key corridors commenced in 2005. This expanded capacity will accommodate future growth, improve service reliability and improve efficiency on the targeted corridors.
      Hurricane Katrina, which struck the Gulf Coast in late August, had a significant impact on operations in the latter part of 2005. Approximately 100 miles of CSXT’s infrastructure was destroyed by the storm, effectively severing CSXT’s route to and from the New Orleans gateway. CSXT continued service to customers outside of the storm-affected area by rerouting rail traffic through alternative western gateways, including East St. Louis, IL, Memphis, TN, Birmingham, AL, Mobile, AL, and Montgomery, AL. Rerouted traffic added volume to busy corridors and resulted in additional network congestion, which adversely affected overall train velocity and system dwell. Service to local businesses on the Gulf Coast has been restored and previously rerouted Merchandise trains have returned to the New Orleans gateway. Operations should be normalized to pre-hurricane conditions by the end of the first quarter of 2006. A description of the corresponding financial statement implications is presented below under the caption “Hurricane Katrina”.
RAIL OPERATING STATISTICS(a)
                             
        Fiscal Years Ended
         
        2005   2004   % Change
                 
Service Measurements
 
Average Velocity, All Trains (Miles Per Hour)
    19.2       20.3       (5 )%
   
Average System Dwell Time (Hours)(b)
    29.7       28.7       (3 )
   
Average Total Cars-On-Line
    233,118       233,271        
   
On-Time Originations
    51.1 %     49.0 %     4  
   
On-Time Arrivals
    40.1 %     40.9 %     (2 )
   
Average Recrews (Per Day)
    68       63       (8 )%
 
(a) Amounts for 2005 are estimated.
 
(b) Beginning in October 2005, the American Association of Railroads adopted a new dwell calculation in an effort to standardize reporting across U.S. railroads. Beginning in 2006 and forward, CSX will adopt this new method.
Safety
      CSXT’s continued efforts to reduce the frequency of personal injuries and train accidents produced significant positive results in 2005. Continued focus on CSXT’s safety leadership and train accident prevention processes produced improvements in both its FRA personal injury frequency index and FRA train accident frequency compared to 2004 results. Both processes use training, awareness, compliance measurement and root cause analysis to prevent incidents and create a safer work environment.

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RAIL OPERATING STATISTICS(a)
                             
        Fiscal Years Ended
         
        2005   2004   % Change
                 
Service Measurements
 
FRA Personal Injury Frequency Index
(Per 200,000 Man Hours)
    1.71       2.29       25 %
   
FRA Train Accidents Frequency
(Per Million Train Miles)
    3.99       4.79       17 %
 
(a) Amounts for 2005 are estimated.
Hurricane Katrina
      The following table summarizes the financial impact of Hurricane Katrina during 2005: (See Note 6. Hurricane Katrina.)
                                     
    Income Statement Impact
     
        Net
        Insurance   Income
        Deductible   Recoveries   Statement
    Losses   Recognized   Recognized(a)   Impact
                 
    (Dollars in millions)
Capital
                               
 
Fixed assets damages
  $ (41 )   $     $ 41     $  
Business Interruption
                               
 
Incremental expenses
    (80 )     (8 )     72       (8 )
 
Lost profits
    (30 )                 (30 )
                         
   
Total
  $ (151 )   $ (8 )   $ 113     $ (38 )
                         
 
(a)  Amounts recorded as receivables from insurance companies. See tables in Note 6. Hurricane Katrina
      As of December 30, 2005, The Company has collected insurance payments of $70 million. Through February 2006, the Company has collected an additional $50 million in insurance recoveries for a total of $120 million.
Capital Investments
      Surface Transportation capital expenditures totaled $1.1 billion and $960 million for fiscal years 2005 and 2004, respectively.
International Terminals Disposal
      In February 2005, CSX sold its International Terminals business for net cash proceeds of $1,108 billion. CSX recognized a gain of $683 million pretax, $428 million after tax, for the fiscal year ended December 30, 2005. (See Note 4. Discontinued Operations.)
Debt Repurchase
      In June 2005, CSX repurchased $1.0 billion of its publicly-traded notes. The consideration paid for these notes totaled $1.2 billion, including a pretax charge of $192 million for costs to repurchase the debt which primarily reflected the market value above original issue value. CSX used cash on hand to finance this repurchase. During 2005, CSX improved its overall financial position by reducing debt balances from $7.2 billion at December 31, 2004 to $6.0 billion as of December 30,

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2005. Corresponding interest expense benefits associated with lower outstanding debt helped offset rising variable interest rates. See Note 12. Debt and Credit Agreements.
Free Cash Flow
      Free cash flow is considered a non-GAAP financial measure under SEC Regulation G. Management believes, however, that free cash flow is important in evaluating its financial performance and measures an ability to generate cash without incurring additional external financings. Free cash flow is calculated by taking cash provided by operating activities less property additions, other investing activities, and dividends paid plus Conrail free cash flow and proceeds from sale of businesses. Free cash flow should be considered in addition to, rather than a substitute for, cash provided by operating activities. The following table reconciles free cash flow (non-GAAP measure) to cash provided by operating activities (GAAP measure):
                   
    Fiscal Years Ended
     
    December 30,   December 31,
    2005   2004
         
    (Dollars in millions)
Free Cash Flow(a)
  $ 1,030     $ 461  
Add (Deduct) Items from Consolidated Cash Flow Statements:
               
 
Short-term Investments — Net(b)
    33       (247 )
 
Dividends Paid
    93       86  
 
Net Cash Used in Investing Activities(c)
    36       1,240  
Add (Deduct) Items Not Included in Consolidated Free Cash Flow:
               
 
Conrail Free Cash Flow(d)
    (103 )     (115 )
 
Other Deposits(e)
    21       21  
             
Net Cash Provided by Operating Activities
  $ 1,110     $ 1,446  
             
 
(a)  Free cash flow as of December 30, 2005 includes net cash proceeds (net of taxes paid) from the International Terminals’ disposition of $640 million and net debt repurchase costs of $123 million.
(b) Short-term Investments — Net represents the net source or (use) of cash resulting from sales and purchases of short-term investments included in the investing section of the Consolidated Cash Flow Statements.
 
(c) Net Cash Used in Investing Activities includes property additions offset by net cash proceeds (before taxes paid) from the International Terminals’ disposition of $998 million and other investing items.
 
(d) Conrail Free Cash Flow represents CSX’s 42% economic interest which is not consolidated in the CSX amounts.
 
(e) Other Deposits are not included in the Company’s Free Cash Flow as these deposits represent assets that are set aside for certain future debt payments.
Revenue
      During 2006, CSX expects revenue growth, based in part on continuance of the robust pricing environment experienced in 2005. In addition, the Company expects volume increases of 2-3%. Longer-term, CSX expects average annual revenue growth of 4-6% over the next five years due to

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continued strong transportation demand, the Company’s emphasis on price, and volume growth. Lower contributory traffic will continue to be re-priced or replaced by longer haul, more profitable business. The amount of any revenue and volume increase will depend on several factors:
        Economy: Favorable economic conditions are expected to continue based on the forecasts for key economic indicators such as the gross domestic product, industrial production and overall import levels. Generally, the Company’s revenue is fairly diversified and a large portion is relatively insensitive to significant fluctuations in the general economy. Changes, however, in the macroeconomic environment can impact overall revenue growth.
 
        Operational Performance: Service is expected to improve with more consistent execution of the network operating plan, which should result in improved average velocity and more reliable service. Consequently, additional volume may be captured as freight car availability increases due to improved asset utilization and reduced transit times.
 
        Fuel Prices: Because of the fuel surcharge program and cost escalation clauses in long-term contracts, which include a fuel element, a portion of the Company’s revenue varies with the price of fuel. In 2004, CSX suspended entering into new swaps in its fuel hedge program and fuel surcharges became the primary vehicle through which CSX manages fuel price volatility. Consequently, CSX anticipates increases in estimated fuel expenses to approach $100 million in 2006, depending on fluctuations in fuel prices.
Operations
      CSXT expects key operating measurements to improve in 2006 versus the prior year as the initiatives mentioned previously gain momentum, and the emphasis on plan execution continues. Management believes current resource plans are adequate to handle anticipated business levels and to keep the network fluid. CSXT plans to hire approximately 1,860 new train and engine employees, which include locomotive engineers and conductors, to offset anticipated attrition. In addition, CSXT will acquire 100 new high-horsepower locomotives in 2006. Planned capacity and infrastructure investments will also support improved service reliability and volume growth as they are completed throughout the year.
Capital Investments
      The Company continues to invest in its rail infrastructure, locomotives, freight cars and technology to accommodate safe, efficient and reliable train operations. In anticipation of future volume growth in key corridors, the Company plans to make strategic infrastructure investments as profitability targets are met. Investments include locomotives mentioned previously, track and terminal infrastructure expansion such as the Southeastern corridor between Chicago and Florida and the River Line from Albany to New York City. Investments in the Southeastern corridor are intended, among other things, to support Western coal sourcing from the Colorado, Illinois and Powder River basins, consumer goods shipments from West Coast ports and merchandise and automobile shipments. Investments in the River Line are designed to increase long-term capacity for the I-90 corridor between Chicago and New York.
      As a result of these investments and the ongoing needs of the business, the Company expects capital spending of approximately $1.4 billion in 2006 and between $1.3 billion and $1.4 billion in 2007, excluding the impact of Hurricane Katrina.
Free Cash Flow
      CSX will continue to focus on free cash flow in 2006, with a target of approximately $300 million, including approximately $100 million in anticipated insurance recoveries related to Hurricane Katrina.

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Enterprise Risk Management
      In the provision of transportation services, the Company must identify, manage and mitigate the inherent business risks that are an integral component of the Company’s business activities. Financial risk, legal, regulatory, and compliance issues, operational risk, and workforce planning are primary risks to the Company’s business. In 2005, the Company began implementation of a formal Enterprise Risk Management (“ERM”) program in order to identify, quantify, monitor, and potentially mitigate these risks. ERM is a systematic and ongoing process used to help recognize and manage the critical risks that could impact the Company. ERM assists management’s allocation of financial resources and mitigation efforts and enhances risk oversight by the Board of Directors with oversight by the Board or Board Committees, management is responsible for the development and implementation of risk mitigation policies and directing day-to-day risk management.
      The following important risk factors could have a material adverse effect on the Company’s results of operations, financial condition and liquidity, and could cause those results to differ materially from those expressed or implied in the Company’s forward-looking statements.
Competition
      The Company experiences competition in the form of pricing, service, reliability and other factors from other transportation providers including railroads and motor carriers that operate similar routes across its service area, and to a less significant extent, barges, ships and pipelines. Transportation providers such as motor carriers and barges utilize public rights-of-way that are built and maintained by governmental entities while CSXT and other railroads must build and maintain rail networks using largely internal resources. The Company could be negatively impacted if the scope and quality of these alternative methods of transportation materially increase, or if legislation is passed providing materially greater opportunities for motor carriers with respect to size or weight restrictions.
Operations and Workforce Planning
      In an environment of continued high demand for rail services, CSXT has experienced some network difficulties, including congestion and reduced velocity on its rail system. In addition, changes in demographics, training requirements and the availability of qualified personnel, could each have a negative impact on CSXT’s ability to meet demand for rail service. To meet these challenges, CSXT started implementation of the new network operating plan referred to as the ONE Plan, acquired additional locomotives, started implementing a new locomotive plan, and is hiring and training significant numbers of employees to keep pace with high attrition rates. In 2005, the Company also commenced a two-year program to expand capacity in key corridors. Though these steps have been taken, CSXT cannot be sure that these measures will fully or adequately address the operational issues. The Company also cannot be sure that it will not experience other difficulties related to network capacity, dramatic and unplanned increases in demand for rail service in one or more of our commodity groups, or other events that could have a negative impact on our operational efficiency, any one of which could have a material adverse effect on our results of operations, financial condition, and liquidity.
Employees and Labor Union Relationships
      CSXT considers relations with its unions and union employees generally to be good. Most of CSXT’s employees are represented by labor unions and are covered by collective bargaining agreements. The bargaining agreements contain a moratorium clause that precludes serving new bargaining demands until a certain date. Generally speaking, these agreements are bargained nationally by the National Railway Labor Conference, so all bargaining on agreement changes

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begins at the same time. The round of bargaining that started in 2000 was recently concluded when agreements were reached with all of the unions.
      Most of the moratoriums negotiated in the 2000 round have expired and in November 2004 the parties were free under the collective bargaining agreements to serve new bargaining demands and start a new round of national bargaining. The current status of 2004 negotiations is that CSXT and the other railroads participating in national bargaining are in mediation with eight unions, are bargaining with four other unions and have not started bargaining with one union. The railroads had asked the National Mediation Board for a release from mediation with respect to seven of the eight unions in mediation, but now have informed the National Mediation Board that they are voluntarily withdrawing that request pending a decision in the lawsuit brought by the United Transportation Union which challenges certain aspects of the railroads’ bargaining demands. The outcome of the 2004 round of negotiations is uncertain at this time.
      In the rail industry, negotiations have generally taken place over a number of years and previously have not resulted in any extended work stoppages. The agreements reached in the 2000 round of bargaining will continue to remain in effect until new agreements are reached. The parties are not permitted to either strike or lockout until the Railway Labor Act’s lengthy procedures (which include mediation, cooling-off periods, and the possibility of Presidential intervention) are exhausted.
Environmental Laws and Regulation
      The Company’s operations are subject to wide-ranging federal, state and local environmental laws and regulations concerning, among other things, emissions to the air, discharges to water, the handling, storage, transportation and disposal of waste and other materials, and cleanup of hazardous material or petroleum releases. The Company generates and transports hazardous and non-hazardous waste and materials in its current operations, and it has done so in its former operations. In certain circumstances, environmental liability can extend to formerly owned or operated properties, leased properties and properties owned by third parties or Company predecessors, as well as to properties currently owned and used by the Company. Environmental liabilities have arisen and may also arise from claims asserted by adjacent landowners or other third parties in toxic tort litigation. The Company has been and may be subject to allegations or findings to the effect that it has violated, or is strictly liable under, environmental laws or regulations, and such violations can result in the Company’s incurring fines, penalties or costs relating to the cleanup of environmental contamination. Although the Company believes it has appropriately recorded current and long-term liabilities for known future environmental costs, it could incur significant costs as a result of any of the foregoing, and may be required to incur significant expenses to investigate and remediate known, unknown or future environmental contamination.
Fuel Costs
      Fuel costs represent a significant expense of the Company’s Surface Transportation operations. Fuel prices can vary significantly from period to period and significant increases may have a material adverse effect on results of operations. Furthermore, fuel prices and supply are influenced considerably by international political and economic circumstances. A fuel surcharge recovery program is in place with a considerable number of customers. This program has historically permitted the Company’s Surface Transportation businesses to recover a significant portion of increased fuel costs. Despite the fuel surcharge program, the Company could be negatively impacted if a fuel supply shortage were to arise, whether due to OPEC or other production restrictions, lower refinery outputs, a disruption of oil imports or otherwise, and any subsequent price increases could further increase the potential impact.

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Future Acts of Terrorism or War
      Terrorist attacks, such as those that occurred in the United States in September 2001, in Spain in March 2004, or in England in July 2005, and any government response thereto or war may adversely affect results of operations, financial condition and liquidity. The Company’s rail lines and physical plant may be direct targets or indirect casualties of acts of terror or war, which could cause significant business interruption and result in increased costs and liabilities and decreased revenues and have a material adverse effect on results of operations, financial condition or liquidity. In addition, insurance premiums charged for some or all of the coverage currently maintained by the Company could increase dramatically or the coverage may no longer be available.
Regulation and Legislation
      The Company is subject to various regulatory jurisdictions, including the Surface Transportation Board (“STB”) of the United States Department of Transportation (“DOT”), the Federal Railroad Administration of DOT and other state and federal regulatory agencies for a variety of economic, health, safety, labor, environmental, tax, legal and other matters. Legislation passed by Congress or regulations issued by these agencies can significantly affect the revenues, costs and profitability of the Company’s business. Moreover, the Company could be negatively affected by failure to comply with applicable laws and regulations. In addition, Congressional efforts to reduce or eliminate funding for Amtrak, if successful, could result in significant costs to CSXT, including, but not limited to: loss of revenue from trackage rights; uncertainty relating to operating agreements; loss of other contractual rights, such as indemnification; adverse network implications, such as potential coordination with numerous state commuter rail agencies; and increased payments into the Railroad Retirement system to supplement lost contributions from Amtrak and its employees.
      In response to the heightened threat of terrorism in the wake of the September 11, 2001 attacks, federal, state and local governmental bodies are proposing and beginning to adopt various legislation and regulations relating to security issues that impact the transportation industry, including rules and regulations that affect the transportation of hazardous materials. For instance, the District of Columbia enacted legislation that prohibits rail carriers, including CSXT, from transporting certain hazardous materials through the District. CSXT, supported by the United States, is currently challenging the validity of this legislation in the federal courts. Although CSXT and the Federal Government have secured favorable rulings from the US Court of Appeals for the District of Columbia Circuit and the STB, legal proceedings continue, and the ultimate outcome is uncertain. The extent to which other governmental bodies will ultimately take similar or related steps is also uncertain. The Company could be negatively impacted by any legislation, regulations, or rules enacted by federal, state or local governmental bodies relating to security issues that affect rail and intermodal transportation.
Safety
      The Company faces inherent business risk from exposure to property damage and personal injury claims resulting from train accidents, including derailments. The Company is also subject to exposure to occupational injury claims. While the Company is working diligently to enhance its safety programs and to continue to raise the awareness levels of its employees concerning safety, the Company cannot ensure that it will not experience any material property damage or personal injury or occupational claims in the future or that it will not incur significant costs to defend such claims. Additionally, the Company cannot ensure that existing claims will not suffer adverse development not currently reflected in reserve estimates, as the ultimate outcome of existing claims is subject to numerous factors outside of the Company’s control. The Company engages outside parties to assist with the evaluation of certain of the occupational and personal injury claims, and believes that it is adequately reserved to cover all potential claims. Final amounts determined to be due, however, on any outstanding matters may differ materially from the recorded reserves.

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Severe Weather
      The Company may face severe weather conditions and other natural occurrences, including floods, fires, hurricanes and earthquakes which may cause significant disruptions to the Company’s operations, and result in increased costs and liabilities and decreased revenues. For information on insurance issues resulting from the effects of Hurricane Katrina on the Company’s results of operations, financial position or liquidity, see Note 6. Hurricane Katrina.
FORWARD-LOOKING STATEMENTS
      Certain statements in this report and in other materials filed with the SEC, as well as information included in oral statements or other written statements made by the Company, are forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements include, among others, statements regarding:
  •  Expectations as to results of operations and operational improvements;
 
  •  Expectations as to the effect of claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements on the Company’s financial condition;
 
  •  Management’s plans, goals, strategies and objectives for future operations and other similar expressions concerning matters that are not historical facts, and management’s expectations as to future performance and operations and the time by which objectives will be achieved; and
 
  •  Future economic, industry or market conditions or performance.
      Forward-looking statements are typically identified by words or phrases such as “believe”, “expect”, “anticipate”, “project”, and similar expressions. The Company cautions against placing undue reliance on forward-looking statements, which reflect its good faith beliefs with respect to future events and are based on information currently available to it as of the date the forward-looking statement is made. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times that, or by which, such performance or results will be achieved.
      Forward-looking statements are subject to a number of risks and uncertainties and actual performance or results could differ materially from those anticipated by these forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statement. If the Company does update any forward-looking statement, no inference should be drawn that the Company will make additional updates with respect to that statement or any other forward-looking statements. The following important factors, in addition to those discussed elsewhere, may cause actual results to differ materially from those contemplated by these forward-looking statements:
  •  The Company’s success in implementing its operational objectives and improving Surface Transportation operating efficiency;
 
  •  Changes in operating conditions and costs or commodity concentrations;
 
  •  Material changes in domestic or international economic or business conditions, including those affecting the rail industry such as customer demand, effects of adverse economic conditions affecting shippers, and adverse economic conditions in the industries and geographic areas that consume and produce freight;
 
  •  Labor costs and labor difficulties, including stoppages affecting either the Company’s operations or the customers’ ability to deliver goods to the Company for shipment;
 
  •  The inherent risks associated with safety and security, including adverse economic or operational effects from terrorist activities and any governmental response;

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  •  Changes in fuel prices;
 
  •  Legislative, regulatory, or legal developments involving taxation, including the outcome of tax claims and litigation; the potential enactment of initiatives to re-regulate the rail industry and the ultimate outcome of shipper and rate claims subject to adjudication;
 
  •  Competition from other modes of freight transportation such as trucking and competition and consolidation within the transportation industry generally;
 
  •  Natural events such as severe weather conditions, including floods, fire, hurricanes and earthquakes, or other unforeseen disruptions of the Company’s operations, systems, property or equipment; and
 
  •  The outcome of litigation and claims, including those related to environmental contamination, personal injuries and occupational illnesses.
      Additionally, important factors resulting from Hurricane Katrina that may cause actual results to differ materially from those contemplated by these forward-looking statements include: the ability to fully restore service in affected areas of CSXT’s rail network; further assessments of the extent of storm-related losses; the price and availability of continued supplies of fuel; the effect of inefficiencies in Company operations and increased operating expenses resulting from storm-related disruptions; loss of customers to competitors that have not been affected by the storm to the same degree in the same locales; and the extent of insurance coverage for the Company’s losses. Other important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified elsewhere in this report and in the Company’s other SEC reports, accessible on the SEC’s website at www.sec.gov and the Company’s website at www.csx.com.
Financial Results of Operations
     2005 vs. 2004 Consolidated Results of Operations
      CSX follows a 52/53 week fiscal reporting calendar. Fiscal year 2005 consisted of 52 weeks ending on December 30, 2005. Fiscal year 2004 consisted of 53 weeks ending on December 31, 2004.
                                   
    Consolidated
     
    52 Weeks   53 Weeks    
    2005   2004   $ Change   % Change
                 
    (Dollars in millions)
Operating Revenue
  $ 8,618     $ 8,040     $ 578       7 %
Operating Expense
                               
Labor and Fringe
    2,864       2,744       120       4  
Materials, Supplies and Other
    1,828       1,753       75       4  
Depreciation
    826       711       115       16  
Fuel
    783       656       127       19  
Building and Equipment Rent
    510       569       (59 )     (10 )
Inland Transportation
    230       280       (50 )     (18 )
Conrail Rents, Fees & Services
    65       256       (191 )     (75 )
Restructuring Charge — Net
          71       (71 )     NM  
Provision for Casualty Claims
    (38 )           (38 )     NM  
                         
 
Total Operating Expense
    7,068       7,040       28        
                         
Operating Income
  $ 1,550     $ 1,000     $ 550       55 %
                         
 
Prior periods have been reclassified to conform to the current presentation.
NM — not meaningful

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Operating Revenue
      Operating Revenue increased $578 million for the year ended December 30, 2005 to $8.6 billion, compared to $8.0 billion for the prior year as continued yield management efforts coupled with the Company’s fuel surcharge program drove revenue-per-unit improvements across all major markets.
Operating Income
      Operating Income for the year ended December 30, 2005 increased $550 million to $1.6 billion as a result of increased operating revenue. Operating expenses remained relatively flat compared to the prior year.
Other Income
      Despite the absence of the $16 million net gain after tax related to the Conrail spin-off transaction, Other Income increased $29 million to $101 million for the year ended December 30, 2005, primarily as a result of gains from real estate sales.
Interest Expense
      Interest Expense decreased $12 million to $423 million for the year ended December 30, 2005 compared to the prior year comparable period. In June 2005, CSX repurchased $1.0 billion of its publicly-traded notes. As a result of the debt repurchase, interest expense was reduced. The savings (from June through December) were mostly offset by rising variable interest rates.
Net Earnings
      Earnings from Continuing Operations were $720 million, or $3.17 per diluted share, for the year ended December 30, 2005 compared to $418 million, or $1.87 per diluted share for the prior year.
      Income tax expense increased $97 million to $316 million for the year ended December 30, 2005 as a result of higher Earnings from Continuing Operations. Additionally, the effective income tax rate decreased from 34% in 2004 to 30% in 2005 primarily attributable to legislative changes in Ohio that will gradually eliminate the Ohio corporate franchise tax.
      Income from Discontinued Operations, net of tax, was $425 million, or $1.87 per diluted share, for the year ended December 30, 2005 compared to a loss of $79 million, or 35 cents per diluted share, for the prior year. CSX recognized income of $683 million pretax, $428 million after tax, for the fiscal year ended December 30, 2005 as a result of the sale of its International Terminals’ business. Discontinued Operations for the period ended December 31, 2004, includes International Terminals’ net earnings as well as additional income tax expense of $97 million related to undistributed foreign earnings.
      Net Earnings were $1.1 billion, or $5.04 per diluted share, for the year ended December 30, 2005, compared to $339 million, or $1.52 per diluted share, for the prior year.

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2004 vs. 2003 Consolidated Results of Operations
      CSX follows a 52/53 week fiscal reporting calendar. Fiscal year 2004 consisted of 53 weeks ending on December 31, 2004. Fiscal year 2003 consisted of 52 weeks ending on December 26, 2003.
                                   
    Consolidated
     
    53 Weeks   52 weeks    
    2004   2003   $ Change   % Change
                 
    (Dollars in millions)
Operating Revenue
  $ 8,040     $ 7,573     $ 467       6 %
Operating Expense
                               
Labor and Fringe
    2,744       2,656       88       3  
Materials, Supplies and Other
    1,753       1,622       131       8  
Depreciation
    711       620       91       15  
Fuel
    656       581       75       13  
Building and Equipment Rent
    569       565       4       1  
Inland Transportation
    280       305       (25 )     (8 )
Conrail Rents, Fees & Services
    256       342       (86 )     (25 )
Restructuring Charge — Net
    71       22       49       223  
Provision for Casualty Claims
          232       (232 )     NM  
Additional Loss on Sale
          108       (108 )     NM  
                         
 
Total Operating Expense
    7,040       7,053       (13 )      
                         
Operating Income
  $ 1,000     $ 520     $ 480       92 %
                         
 
Prior periods have been reclassified to conform to the current presentation.
NM — not meaningful
Operating Revenue
      Operating Revenue increased $467 million for the year ended December 31, 2004 to $8.0 billion, compared to $7.6 billion for the prior year primarily due to continued yield management strategies as all major markets showed year-over-year improvement in revenue-per-unit coupled with the Company’s fuel surcharge program.
Operating Income
      Operating Income for the year ended December 31, 2004 increased $480 million to $1.0 billion, compared to $520 million in the prior year. Operating expenses decreased principally due to the absence of charges totaling $340 million taken in 2003 for (1) the Provision for Casualty Claims, and (2) the Additional Loss on Sale.
Other Income
      Other Income decreased $21 million to $72 million for the year ended December 31, 2004, compared to $93 million for the prior year primarily due to a decline in income from real estate and resort operations. This decrease was partially offset by the net gain of $16 million, after tax, related to the Conrail spin-off transaction.

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Interest Expense
      Interest Expense increased $17 million for the year ended December 31, 2004 compared to the prior year comparable period due to decreased benefits from interest rate swaps and the exchange of Conrail debt as a result of the Conrail spin-off transaction.
Net Earnings
      Earnings from Continuing Operations were $418 million, or $1.87 per diluted share, for the year ended December 31, 2004 compared to $137 million, or 63 cents per diluted share, for the prior year.
      Losses from Discontinued Operations, net of tax, were $79 million, or 35 cents per diluted share, for the year ended December 31, 2004 compared to earnings of $52 million, or 23 cents per diluted share, for the prior year. Discontinued Operations for the period ended December 31, 2004, include International Terminals’ net earnings as well as additional tax expense of $97 million related to undistributed foreign earnings.
      The year ended December 26, 2003 includes an after-tax cumulative effect of accounting change benefit of $57 million, related to the adoption of Statement of Financial Accounting Standard (“SFAS”) 143, Accounting for Asset Retirement Obligations (“SFAS 143”).
      Net Earnings were $339 million, or $1.52 per diluted share, for the year ended December 31, 2004, compared to $246 million, or $1.11 per diluted share, for the prior year.
      The increase in the 2004 effective income tax rate compared to the prior year is primarily attributable to a larger percentage of total pretax earnings being attributable to Conrail equity earnings in 2004 than in 2003. Additionally, 2003 income tax expense was favorably impacted by the cumulative effect of changes in the Company’s deferred effective state income tax rates.
2005 vs. 2004 Rail Results of Operations
      CSX follows a 52/53 week fiscal reporting calendar. Fiscal year 2005 consisted of 52 weeks ending on December 30, 2005. Fiscal year 2004 consisted of 53 weeks ending on December 31, 2004.
                                   
    Rail
     
    52 Weeks   53 weeks    
    2005   2004   $ Change   % Change
                 
    (Dollars in millions)
Operating Revenue
  $ 7,256     $ 6,694     $ 562       8 %
Operating Expense
                               
Labor and Fringe
    2,777       2,663       114       4  
Materials, Supplies and Other
    1,622       1,540       82       5  
Depreciation
    779       664       115       17  
Fuel
    783       656       127       19  
Building and Equipment Rent
    400       428       (28 )     (7 )
Inland Transportation
    (433 )     (421 )     (12 )     3  
Conrail Rents, Fees & Services
    65       256       (191 )     (75 )
Restructuring Charge — Net
          67       (67 )     NM  
Provision for Casualty Claims
    (38 )           (38 )     NM  
                         
 
Total Operating Expense
    5,955       5,853       102       2  
                         
Operating Income
  $ 1,301     $ 841     $ 460       55 %
                         
Operating Ratio
    82.1 %     87.4 %                
Total Assets
  $ 23,177     $ 22,927                  
 
Prior periods have been reclassified to conform to the current presentation.
NM — not meaningful

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    Rail Traffic, Revenue and Revenue per Unit
     
    Volume   Revenue   Revenue Per Unit
             
    52 Weeks   53 Weeks   52 Weeks   53 Weeks   52 Weeks   53 Weeks
    2005   2004   2005   2004   2005   2004
                         
    Volume (thousands); Revenue (dollars in millions), Revenue Per Unit
    (dollars)
Merchandise
                                               
 
Phosphates and Fertilizers
    444       471     $ 351     $ 341     $ 791     $ 724  
 
Metals
    361       380       570       511       1,579       1,345  
 
Forest Products
    439       465       717       681       1,633       1,465  
 
Food and Consumer
    249       245       438       377       1,759       1,539  
 
Agricultural Products
    357       356       550       512       1,541       1,438  
 
Chemicals
    533       564       1,089       1,069       2,043       1,895  
 
Emerging Markets
    505       506       513       504       1,016       996  
                                     
Total Merchandise
    2,888       2,987       4,228       3,995       1,464       1,337  
Automotive
    488       507       844       835       1,730       1,647  
Coal, Coke and Iron Ore
                                               
 
Coal
    1,726       1,659       1,992       1,714       1,154       1,033  
 
Coke and Iron Ore
    83       71       88       66       1,060       930  
                                     
Total Coal, Coke and Iron Ore
    1,809       1,730       2,080       1,780       1,150       1,029  
Other
                104       84              
                                     
Total Rail
    5,185       5,224     $ 7,256     $ 6,694     $ 1,399     $ 1,281  
                                     
 
Prior periods have been reclassified to conform to the current presentation.
Operating Revenue
      CSX categorizes rail revenue in three main lines of business: merchandise, automotive and coal, coke and iron ore. Overall revenue increased $562 million, or 8%, to $7.3 billion in 2005 from $6.7 billion in 2004.
Merchandise
      All merchandise markets experienced revenue growth primarily driven by yield improvement efforts and the Company’s fuel surcharge program. Overall merchandise revenue grew 6% to a record $4.2 billion while revenue-per-unit also achieved record levels increasing 9%. Volume declined 3% due to several factors including an additional week included in the fiscal year ended December 31, 2004, impacts of Hurricane Katrina and shedding of low margin traffic. Food and consumer experienced volume growth due to a continued shift of traffic previously handled by trucks to rail and the acquisition of newly finished railcars to other shippers. Despite strong soybean and corn harvests and increased export demand for grain, volume in agricultural products was flat due to declines in processed products such as flour, sweeteners, and vegetable oils. Emerging markets volumes and revenue were negatively impacted by a significant reduction in shipments of high revenue per unit military traffic. While metals volumes decreased by 5%, the pricing environment remained very favorable and resulted in the highest revenue per unit growth within merchandise at 17%.
      Forest products also experienced high revenue per unit increases because of both a favorable pricing environment and a favorable mix shift from short haul low margin traffic towards longer haul more profitable traffic. In addition to production disruption from both Hurricanes Katrina and Rita, chemical volumes were negatively impacted by high natural gas prices and generally high raw materials inventories. Phosphate and fertilizer volumes were down due to high international inventories of phosphates during the first half of the year and several CSX-served plant curtailments

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or closures during 2005. Both the chemicals and phosphate and fertilizer groups experienced high revenue per unit increases of 8% and 9%, respectively.
Automotive
      Overall volume was down 4% as North American light vehicle production was flat compared to the prior year. However, vehicle production for the Big 3 was unfavorable 6%, including permanent closures of three General Motors plants served by the Company. Growth in new shipments from the newly-opened Hyundai plant in Montgomery, AL continued to partially offset these declines. Revenue-per-unit grew 5% on strong yield management and increases in fuel surcharge rates and coverage resulting in record revenue-per-unit levels. Revenue-per-unit gains more than offset volume weakness and drove overall revenue growth of 1% compared to the prior year.
Coal, Coke & Iron Ore
      Revenues increased by 17% to a record $2.1 billion due to both strong volume growth of 5%, and revenue per unit improvements of 12% driven by a favorable pricing environment and the Company’s fuel surcharge program. Most markets experienced strong demand as utility inventory levels remained below target levels. CSXT also reached a settlement agreement in a rate case that resulted in an additional $17 million of revenue in 2005.
Operating Expense
      Total rail operating expenses increased $102 million, or 2% for the year ended December 30, 2005, compared to 2004.
      Labor and Fringe Expense increased $114 million or 4% compared to the prior year primarily attributable to increases in incentive compensation and the effects of inflation.
      Materials, Supplies and Other expenses increased $82 million, or 5%, primarily due to the effects of inflation, higher reserve requirements for uncollectible accounts, and increased legal fees resulting from the litigation and resolution of certain matters.
      Depreciation expense increased $115 million or 17% compared to the prior year primarily attributable to additional assets received as a result of the Conrail spin-off transaction. The rail segment had property additions of approximately $1.1 billion.
      Fuel expense increased $127 million or 19% in 2005, net of $249 million of fuel hedging benefits, compared to the prior year primarily due to fuel price increases. Fuel hedging activity had a $63 million favorable impact on fuel expense for the fiscal year ended December 31, 2004. The average price per gallon of diesel fuel, including benefits from CSX’s fuel hedging program, was $1.31 in 2005 versus $1.10 in 2004. In addition, the fuel surcharge programs and contractual cost escalation clauses used in most multi-year customer contracts partially offset fuel cost increases.
      Building and Equipment Rent decreased $28 million or 7% in 2005, compared to the prior year, as a result of decreased overall volume and lower locomotive lease expense.
      Inland transportation, which represents Intermodal’s use of the CSXT rail network, decreased $12 million compared to the prior year. The offsetting expense associated with this amount is reflected in Intermodal’s operating expense, and is thus eliminated at the consolidated level.
      Conrail Rents, Fees & Services expense decreased $191 million or 75% in 2005, compared to the prior year, as a result of the Conrail spin-off transaction, which decreased rents paid to Conrail as assets previously leased from Conrail are now owned directly by CSXT. Additionally, Conrail received a tax benefit from the resolution of various federal income tax audit adjustments during 2005, which increases CSX’s equity earnings and offsets Conrail Rents, Fees & Services. (See Note 2. Investment In and Integrated Rail Operations with Conrail.)

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Table of Contents

      Rail operating expense for the fiscal year ended December 30, 2005, included net favorable reserve adjustments of $38 million related to decreasing claim trends. This adjustment is reflected as “Provision for Casualty Claims” in the operating expense detail above. (See Note 11. Casualty, Environmental and Other Reserves.)
      For the fiscal year ended December 31, 2004, the rail business segment recorded expense of $67 million for separation expense, pension and postretirement benefit curtailment charges, stock compensation expense and other related expenses. (See Note 5. Management Restructuring.)
Operating Income
      Operating income increased $460 million to $1.3 billion in 2005, compared to $841 million in 2004 primarily due to an 8% increase in revenue.
2004 vs. 2003 Rail Results of Operations
      CSX follows a 52/53 week fiscal reporting calendar. Fiscal year 2004 consisted of 53 weeks ending on December 31, 2004. Fiscal year 2003 consisted of 52 weeks ending on December 26, 2003.
                                   
    Rail
     
    53 weeks   52 weeks    
    2004   2003   $ Change   % Change
                 
    (Dollars in millions)
Operating Revenue
  $ 6,694     $ 6,182     $ 512       8 %
Operating Expense
                               
Labor and Fringe
    2,663       2,522       141       6  
Materials, Supplies and Other
    1,540       1,358       182       13  
Depreciation
    664       579       85       15  
Fuel
    656       566       90       16  
Building and Equipment Rent
    428       422       6       1  
Inland Transportation
    (421 )     (399 )     (22 )     6  
Conrail Rents, Fees & Services
    256       342       (86 )     (25 )
Provision for Casualty Claims
          229       (229 )     NM  
Restructuring Charge — Net
    67       22       45       NM  
                         
 
Total Operating Expense
    5,853       5,641       212       4  
                         
Operating Income
  $ 841     $ 541     $ 300       55 %
                         
Operating Ratio
    87.4 %     91.2 %                
Total Assets
  $ 22,927     $ 16,333                  
 
Prior periods have been reclassified to conform to the current presentation.
NM — not meaningful

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    Rail Traffic, Revenue and Revenue per Unit
     
    Volume   Revenue   Revenue Per Unit
             
    53 Weeks   52 Weeks   53 Weeks   52 Weeks   53 Weeks   52 Weeks
    2004   2003   2004   2003   2004   2003
                         
    Volume (thousands); Revenue (dollars in millions), Revenue Per Unit
    (dollars)
Merchandise
                                               
 
Phosphates and Fertilizers
    471       460     $ 341     $ 329     $ 724     $ 715  
 
Metals
    380       348       511       435       1,345       1,250  
 
Forest Products
    465       459       681       622       1,465       1,355  
 
Food and Consumer
    245       242       377       351       1,539       1,450  
 
Agricultural Products
    356       363       512       497       1,438       1,369  
 
Chemicals
    564       541       1,069       989       1,895       1,828  
 
Emerging Markets
    506       476       504       471       996       989  
                                     
Total Merchandise
    2,987       2,889       3,995       3,694       1,337       1,279  
Automotive
    507       529       835       853       1,647       1,612  
Coal, Coke and Iron Ore
                                               
 
Coal
    1,659       1,570       1,714       1,543       1,033       983  
 
Coke and Iron Ore
    71       65       66       57       930       877  
                                     
Total Coal, Coke and Iron Ore
    1,730       1,635       1,780       1,600       1,029       979  
Other
                84       35              
                                     
Total Rail
    5,224       5,053     $ 6,694     $ 6,182     $ 1,281     $ 1,223  
                                     
 
Prior periods have been reclassified to conform to the current presentation.
Operating Revenue
      CSXT categorizes revenues in three main areas: merchandise, automotive and coal, coke and iron ore. Overall revenues were up $512 million to $6.7 billion in 2004 from $6.2 billion in 2003.
Merchandise
      Merchandise showed strength during 2004 with revenue up 8% on 3% volume growth. All markets showed year-over-year revenue improvement due to pricing, yield management strategies and the Company’s fuel surcharge program. All markets, except agricultural products, experienced increased volumes. Metals realized the most improvement, with 17% revenue growth on 9% volume growth. Strong demand existed across all steel commodity lines as steel production and mill utilization rates were at high levels. Forest products revenue grew 9% on 1% volume growth as a result of strength in panel and lumber markets driven by strong residential construction. Food and consumer revenues grew 7% on 1% volume growth. Food and consumer and forest products volumes were favorable year-over-year primarily due to the 53 week fiscal reporting calendar in 2004. Chemicals revenue grew 8% on 4% volume growth driven by strong customer demand and a rebound in U.S. chemical exports. Emerging markets revenues grew 7% on 6% volume growth, largely driven by strength in aggregates, cement, lime and fly ash. New industrial development is helping serve off — rail markets. Phosphate and fertilizer revenues grew 4% on 2% volume growth. Fertilizer production levels were mixed as high fertilizer prices and hurricane disruptions caused curtailments in production. Although ethanol shipments contributed to growth in agricultural products, revenue increased 3% on declining volume due to a decline in export and bean markets.

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Automotive
      Volumes declined largely due to a 100,000 unit year-over-year decrease in North American light vehicle production. Downtime at CSXT-served plants also contributed to volume weakness. Price increases drove improvements in revenue-per-unit.
Coal, Coke and Iron Ore
      Coal, coke and iron ore revenue increased 11% on 6% volume growth. All lines of business reflect year-over-year revenue-per-unit improvements. Volume growth was driven by gains in export, metallurgical and utility markets. Strength in exports was due to high demand primarily related to Asian steel market needs.
Other
      Other revenue for the fiscal year 2004 includes $63 million for FRT, a short-line railroad consolidated in 2004 pursuant to Financial Accounting Standards Board (“FASB”) Interpretation 46 Consolidation of Variable Interest Entities. Prior to 2004, FRT was accounted for under the equity method.
Operating Expense
      Total rail operating expenses increased $212 million, or 4% for the year ended December 31, 2004, compared to 2003.
      Labor and Fringe Expense increased $141 million or 6% compared to the prior year primarily attributable to the effects of inflation, consolidation of FRT and increases in incentive compensation plan and pension costs. These costs were partially offset by benefits realized from reduced staffing levels.
      Materials, Supplies and Other expenses increased $182 million, or 13%, year-over-year primarily due to increased maintenance and crew travel costs, property and sales taxes, coupled with higher track, locomotive, car repair and other costs. Additionally, due to the adoption of SFAS 143 as discussed below, depreciation expense has been decreased and materials, supplies and other expense increased to account for the discontinuance of the accrual of cross-tie removal as a component of depreciation expense.
      Depreciation expense increased $85 million or 15% compared to the prior year primarily attributable to assets received as a result of the Conrail spin-off transaction. The rail segment had property additions of approximately $1 billion, but the additional depreciation was offset by the reduction in depreciation associated with the adoption of SFAS 143. In conjunction with the group-life method of accounting for asset costs, CSXT historically accrued crosstie removal costs as a component of depreciation, which is not permitted under SFAS 143. The effect is to decrease depreciation expense and increase Materials, Supplies and Other expense.
      Fuel expense increased $90 million or 16% in 2004, net of $63 million of fuel hedging benefits, compared to the prior year primarily due to fuel price increases, while increased volumes were also a factor. The average price per gallon of diesel fuel, including benefits from CSX’s fuel hedging program, was $1.10 in 2004 versus $0.96 in 2003. In addition, the fuel surcharge programs and contractual cost escalation clauses used in most multi-year customer contracts partially offset fuel cost increases.
      Building and Equipment Rent remained relatively consistent year-over-year with the slight increase in 2004 resulting from unfavorable asset utilization.
      Inland transportation, which represents Intermodal’s use of the CSXT rail network, reduced operating expense by $22 million or 6% year-over-year. The offsetting expense associated with this amount is reflected in Intermodal’s operating expense, and thus eliminates at the consolidated level.

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      Conrail Rents, Fees & Services expense decreased $86 million or 25% in 2004, compared to the prior year, as a result of the Conrail spin-off transaction, which decreased rents paid to Conrail as assets previously leased from Conrail are now owned directly by CSXT. (See Note 2. Investment In and Integrated Rail Operations with Conrail.)
      For the fiscal year ended December 31, 2004, the rail business segment recorded expense of $67 million for separation expense, pension and postretirement benefit curtailment charges, stock compensation expense and other related expenses. (See Note 5. Management Restructuring.)
      Rail operating expense for the fiscal year ended December 26, 2003, included a charge of $229 million recorded in conjunction with CSXT’s change in estimate for its casualty reserves to include an estimate of incurred but not reported claims for asbestos and other occupational injuries that could be received over the next seven years. This charge is reflected as “Provision for Casualty Claims” in the operating expense detail above. (See Note 11. Casualty, Environmental and Other Reserves.)
Operating Income
      Operating income increased $300 million to $841 million in 2004, compared to $541 million in 2003 primarily due to an 8% increase in revenue coupled with the absence of $229 million provision for casualty claims, offset by $67 million of management restructuring charges and other expense increases as previously discussed.
2005 vs. 2004 Intermodal Results of Operations
      CSX follows a 52/53 week fiscal reporting calendar. Fiscal year 2005 consisted of 52 weeks ending on December 30, 2005. Fiscal year 2004 consisted of 53 weeks ending on December 31, 2004.
                                   
    Intermodal
     
    52 Weeks   53 Weeks    
    2005   2004   $ Change   % Change
                 
    (Dollars in millions)
Operating Revenue
  $ 1,362     $ 1,346     $ 16       1 %
Operating Expense
                               
Labor and Fringe
    79       78       1       1  
Materials, Supplies and Other
    200       219       (19 )     (9 )
Depreciation
    39       38       1       3  
Building and Equipment Rent
    133       154       (21 )     (14 )
Inland Transportation
    663       701       (38 )     (5 )
Restructuring Charge — Net
          4       (4 )     NM  
                         
 
Total Operating Expense
    1,114       1,194       (80 )     (7 )
                         
Operating Income
  $ 248     $ 152     $ 96       63 %
                         
Operating Ratio
    81.8 %     88.7 %                
Total Assets
  $ 305     $ 313                  
 
Prior periods have been reclassified to conform to the current presentation.
NM — not meaningful

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    Intermodal Traffic, Revenue and Revenue-per-Unit
     
    Volume   Revenue   Revenue Per Unit
             
    52 Weeks   53 Weeks   52 Weeks   53 Weeks   52 Weeks   53 Weeks
    2005   2004   2005   2004   2005   2004
                         
    Volume (thousands); Revenue (dollars in millions), Revenue per unit (dollars)
Intermodal
                                               
 
Domestic
    891       1,028     $ 738     $ 795     $ 828     $ 773  
 
International
    1,274       1,278       499       501       392       392  
 
Other
                125       50              
                                     
Total Intermodal
    2,165       2,306     $ 1,362     $ 1,346     $ 629     $ 584  
                                     
 
Prior periods have been reclassified to conform to the current presentation.
Operating Revenue
      Intermodal revenue improved 1% due to higher fuel surcharge rates, customer coverage and continued emphasis on multiple ancillary charges, including premise use and per diem charges related to asset utilization. In the domestic market, continued focus on longer hauls in higher density lanes coupled with sustained strength in pricing increased revenue per unit by 7%. Overall, domestic volumes were down compared to the prior year due to ongoing yield management efforts. Strong demand from the parcel sector partially offset volume declines and increased revenue. International volumes and revenue remained flat compared to the prior year. Pricing initiatives were offset by a reduction in long-haul shipments from the west coast. The shift of traffic to east coast ports caused an increase in shorter-haul moves, which negatively impacted revenue per unit.
Operating Expense
      Intermodal expenses decreased 7% compared to the prior year due to continued service improvements, an emphasis on equipment utilization, and decrease in volume as discussed above. A decline in trucking expenses associated with line-haul moves led to a significant decrease in operating costs associated with a reduction in services. Several productivity initiatives within terminal operations generated efficiencies driving per-unit cost reductions compared to the prior year.

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2004 vs. 2003 Intermodal Results of Operations
      CSX follows a 52/53 week fiscal reporting calendar. Fiscal year 2004 consisted of 53 weeks ending on December 31, 2004. Fiscal year 2003 consisted of 52 weeks ending on December 26, 2003.
                                   
    Intermodal
     
    53 Weeks   52 Weeks    
    2004   2003   $ Change   % Change
                 
    (Dollars in millions)
Operating Revenue
  $ 1,346     $ 1,264     $ 82       6 %
Operating Expense
                               
Labor and Fringe
    78       73       5       7  
Materials, Supplies and Other
    219       214       5       2  
Depreciation
    38       32       6       19  
Building and Equipment Rent
    154       147       7       5  
Inland Transportation
    701       688       13       2  
Restructuring Charge — Net
    4             4       NM  
                         
 
Total Operating Expense
    1,194       1,154       40       3  
                         
Operating Income
  $ 152     $ 110     $ 42       38 %
                         
Operating Ratio
    88.7 %     91.3 %                
Total Assets
  $ 313     $ 400                  
 
Prior periods have been reclassified to conform to the current presentation.
NM — not meaningful
                                                   
    Intermodal Traffic, Revenue and Revenue Per Unit
     
    Volume   Revenue   Revenue Per Unit
             
    53 Weeks   52 Weeks   53 Weeks   52 Weeks   53 Weeks   52 Weeks
    2004   2003   2004   2003   2004   2003
                         
    Volume (thousands); Revenue (dollars in millions), Revenue Per Unit
    (dollars)
Intermodal
                                               
 
Domestic
    1,028       1,060     $ 795     $ 784     $ 773     $ 740  
 
International
    1,278       1,170       501       469       392       401  
 
Other
                50       11              
                                     
Total Intermodal
    2,306       2,230     $ 1,346     $ 1,264     $ 584     $ 567  
                                     
 
Prior periods have been reclassified to conform to the current presentation.
      Operating Revenue
      Intermodal revenue improved 6% on a 3% volume increase due to strength in most business commodities. Strong gains in truck brokerage continued with the implementation of deal space technology, which is incorporated into the broader Pegasus system. Deal space technology is designed as a pricing, scheduling and capacity reservation system and provides CSX Trucking solicitors real-time information on costs, competitive prices, preferred routes and service. The parcel and international sectors also continued to show year-over-year strength. The parcel group showed improvement in most markets while international volume gains were based on general import growth. The domestic channel did not experience year-over-year growth due to Intermodal’s Network Simplification Initiative which led to overall service improvements across the network, limited some terminals to containers only and improved the profitability of the traffic.

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Operating Expense
      Intermodal operating expense increased $40 million compared to the prior year due primarily to increases in volume and inflationary factors. Operating income increased to $152 million in 2004, compared to $110 million in the prior year, a 38% improvement.
Cash and Cash Equivalents
      Cash and cash equivalents decreased $213 million to $309 million at December 30, 2005, from $522 million at December 31, 2004. The decrease in cash is primarily due to the net effect of total consolidated debt repaid of $1.3 billion (see Debt Repurchase below) offset by the net cash proceeds from the sale of CSX’s International Terminals business of $1.1 billion.
Debt Repurchase
      In June 2005, CSX repurchased $1.0 billion of its publicly-traded notes. 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 proceeds from the disposition of CSX’s International Terminals business to finance this repurchase. During 2005, CSX improved its overall financial position by reducing debt balances from $7.2 billion at December 31, 2004 to $6.0 billion as of December 30, 2005. As a result of the debt repurchase, CSX expects interest expense savings of approximately $68 million per year. However, these savings will be offset by rising short-term interest rates associated with $1.1 billion of variable rate debt which terms are based on LIBOR. (See Note 12. Debt and Credit Agreements.)
Convertible Debentures
      In October 2005, holders had the option to require CSX to purchase their debentures at a purchase price equal to the accreted value of $852.48 per $1,000 principal amount at maturity. As a result, CSX purchased an immaterial aggregate principal amount at maturity of the debentures with cash on hand. The debentures allow holders to require CSX to purchase their debentures in October 2006, October 2008, October 2011, and October 2016, at a purchase price equal to the accreted value of the debentures at the time. The debentures are classified in Current Maturities of Long-term Debt in the Consolidated Balance Sheets.
Debt Issuances
      In August 2004, CSX issued $300 million of floating rate notes with a maturity date of August 3, 2006. The notes bear interest at a rate that varies with LIBOR plus an applicable spread. These notes are not redeemable prior to maturity.
Operating Activities
      Cash provided by operations in 2005 was $1.1 billion, compared to $1.4 billion for 2004. Earnings from Continuing Operations were substantially higher than the previous year. However, the Company made significant tax payments attributable to these higher earnings as well as related taxes paid on the sale of CSX’s International Terminals business in 2005.
Investing Activities
      Net cash used by investing activities was $36 million in 2005 compared to $1.2 billion in 2004. Included in investing activities is cash spent for capital additions of $1.1 billion and $1.0 billion in 2005 and 2004 respectively. Offsetting the cash spent in 2005, are the net cash proceeds from the disposition of CSX’s International Terminals business.

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Financing Activities
      Financing activities used cash of $1.3 billion during 2005 compared to providing cash of $20 million during 2004 primarily as a result of the debt repurchase completed in June 2005, and an increase in dividends paid, which was partially offset by the proceeds from the exercise of stock options.
Dividends
      CSX paid $93 million, $86 million, and $86 million in dividends in fiscal years 2005, 2004 and 2003, respectively. The increase in 2005 is a result of the Company increasing dividends by 30%, in the fourth quarter, from 10 cents to 13 cents per share.
Working Capital
      The Company’s working capital at December 30, 2005 was a deficit of $607 million, compared to a deficit of $314 million at December 31, 2004, primarily driven by reductions in cash and cash equivalents and short-term investments combined with the absence of net assets from CSX’s former International Terminals business. A working capital deficit is not unusual for the Company and other railroads and does not indicate a lack of liquidity. The Company continues to maintain adequate current assets to satisfy current liabilities and maturing obligations when they come due and has sufficient financial capacity to manage its day-to-day cash requirements and any anticipated obligations arising from legal, tax and other regulatory rulings.
Credit Facilities
      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 December 30, 2005. Commitment fees and interest rates payable under the facilities are similar to fees and rates available to comparably rated investment-grade borrowers. In 2005, CSX paid approximately $2 million for total fees associated with the undrawn facility. These credit facilities allow for borrowings at floating (LIBOR-based) rates, plus a spread, depending upon CSX’s senior unsecured debt ratings. At December 30, 2005, CSX was in compliance with all covenant requirements under the facilities.
Stock Repurchases
      The Board of Directors has authorized CSX to purchase shares of its common stock from time to time in an amount up to approximately $150 million in any fiscal year. Pursuant to this authority, CSX intends to purchase shares of CSX common stock in the open market or in privately negotiated transactions.
Credit Ratings
      As of December 30, 2005, CSX’s long-term unsecured debt obligations were rated BBB and Baa2 by Standard and Poor’s and Moody’s Investor Service, respectively. In May 2005, Standard and Poor’s raised CSX’s short-term rating from A-3 to A-2 and revised the outlook from negative to stable. In July 2004, Moody’s Investor Service reaffirmed CSX’s short and long-term unsecured debt ratings, but adjusted the outlook from stable to negative. CSX’s short-term commercial paper program is rated A-2 and P-2 by Standard and Poor’s and Moody’s Investor Service, respectively. If CSX’s long-term unsecured bond ratings were reduced to BBB- and Baa3, its undrawn borrowing costs under the $1.2 billion and $400 million revolving credit facilities would not materially increase. If CSX’s short-term commercial paper ratings were reduced to A-3 and P-3, it would increase CSX’s

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borrowing costs in the commercial paper market and reduce its access to this source of funds because of the more limited demand for lower rated commercial paper. CSX had no commercial paper outstanding at December 30, 2005 or December 31, 2004.
Shelf Registration Statements
      CSX currently has $900 million of capacity under an effective shelf registration that may be used, subject to market conditions and board authorization, to issue debt or equity securities at CSX’s discretion. CSX presently intends to use the proceeds from the sale of any securities issued under its shelf registration statement to finance cash requirements, including refinancing existing debt as it matures. While CSX seeks to give itself flexibility with respect to meeting such needs, there can be no assurance that market conditions would permit CSX to sell such securities on acceptable terms at any given time, or at all.
Schedule of Contractual Obligations and Commercial Commitments
      The following table sets forth maturities of the Company’s contractual obligations:
                                                         
Type of Obligation   2006   2007   2008   2009   2010   Thereafter   Total
                             
    (Dollars in millions)(Unaudited)
Long-term Debt (See Note 12)
  $ 1,016     $ 595     $ 633     $ 296     $ 94     $ 3,474     $ 6,108  
Operating Leases — Net (See Note 19)
    176       165       120       87       75       264       956  
Agreements with Conrail (See Note 2)
    18       18       16       13       9       17       91  
Purchase Obligations (See Note 19)
    397       423       342       338       353       5,855       7,708  
                                           
Total Contractual Obligations
  $ 1,607     $ 1,201     $ 1,111     $ 734     $ 531     $ 9,610     $ 14,863  
                                           
      The following table sets forth maturities of the Company’s other commitments:
                                                         
Type of Obligation   2006   2007   2008   2009   2010   Thereafter   Total
                             
    (Dollars in millions)(Unaudited)
Unused Lines of Credit (See Note 12)
  $ 400     $     $     $ 1,200     $     $     $ 1,600  
Guarantees (See Note 19)
    21       22       16       16       16       26       117  
Other
    43       15             1             1       60  
                                           
Total Other Commitments
  $ 464     $ 37     $ 16     $ 1,217     $ 16     $ 27     $ 1,777  
                                           
      There are no off-balance sheet arrangements that are reasonably likely to have a material effect on the Company’s financial condition, results of operations or liquidity.
Investment In and Integrated Rail Operations with Conrail
      See background, accounting and financial reporting effects and summary financial information in Note 2. Investment In and Integrated Rail Operations with Conrail.
      The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of certain revenues and expenses during the reporting

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period. Actual results may differ from those estimates. Consistent with the prior year, significant estimates using management judgment are made for the following areas:
  •  Casualty, Environmental and Legal Reserves
 
  •  Pension and Postretirement Medical Plan Accounting
 
  •  Depreciation Policies for Assets Under the Group-Life Method
 
  •  Income Taxes
      These estimates and assumptions are discussed with the Audit Committee of the Board of Directors on a regular basis.
Casualty, Environmental and Legal Reserves
Casualty
      Casualty reserves represent accruals for personal injury and occupational injury claims. Currently, none of these claims are covered by insurance since no individual claim value is expected to exceed the Company’s self-insured retention amount. Personal injury and occupational claims are presented on a gross basis in accordance with SFAS 5, Accounting for Contingencies (“SFAS 5”). To the extent the value of an individual claim were to exceed the self-insured retention amount, CSX would present the liability on a gross basis with a corresponding receivable for insurance recoveries. Most of the 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 claims and cases. An analysis is performed by the independent actuarial firm semi-annually and is reviewed by management. The methodology used by the actuary includes a development factor to reflect growth or reduction in the value of 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.
      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 material adverse effect on the Company’s results of operations, financial condition, or liquidity. However, should a number of these items occur in the same period, they could have a material adverse effect on the results of operations, financial condition or liquidity in a particular quarter or fiscal year.
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 repetitive stress injuries, carpal tunnel syndrome or hearing loss.
Occupational — Asbestos
      The Company is party to a number of occupational claims by employees alleging exposure to asbestos in the workplace. The heaviest possible exposure for employees was due to work conducted in and around steam locomotive engines that were phased out in the 1950’s, according to rail industry statistics. However, other types of exposures, including exposure from locomotive component parts and building materials, continued until it was substantially eliminated by 1985.

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      Asbestos claim filings against the Company have been inconsistent. Accordingly, while the Company had concluded that a probable loss had occurred, prior to 2003 it did not believe it could estimate the range of reasonably possible loss because of the lack of experience with such claims and the lack of detailed employment records for the population of exposed employees. Claim filings increased and when they continued into 2003, the Company concluded that an estimate for incurred but not reported (“IBNR”) asbestos exposure liability needed to be recorded. Currently, there is recurring pending legislation regarding the establishment of an asbestos liability trust fund. The impact to the Company of this pending legislation is unknown at this time.
2003 Provision for Asbestos Change in Estimate
      In 2003, the Company changed its estimate of asbestos reserves to include an estimate of IBNR claims and retained a third party specialist who has extensive experience in performing asbestos and other occupational studies to assist in this estimate. The analysis is performed by the specialist semi-annually and is reviewed by management. The objective of the analysis is to determine the number of estimated IBNR 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 Company, with the assistance of the third party specialist, first determined its potentially exposed population from which it was able to derive the estimated number of IBNR claims. The estimated average cost per claim was then determined utilizing recent actual average cost per claim data and national industry data. Based on the assessment, in September 2003 the Company recorded an undiscounted $141 million pre-tax charge for unasserted asbestos claims. Key elements of the assessment included the following:
  •  An estimate was computed using a ratio of Company employee data to national employment for select years during the period 1938-2001. The Company used railroad industry historical census data because it did not have detailed employment records in order to compute the population of potentially exposed employees.
 
  •  The projected incidence of disease was estimated based on epidemiological studies using employees’ age and the duration and intensity of potential exposure while employed.
 
  •  An estimate of the future anticipated claims filing rate by type of disease (non-malignant, cancer and mesothelioma) was computed using the Company’s average historical claim filing rates for a 2-year calibration period (i.e. the years management felt were representative of future filing rates).
 
  •  An estimate of the future anticipated dismissal rate by type of claim was computed using the Company’s historical average dismissal rates observed for two years.
 
  •  An estimate of the future anticipated settlement by type of disease was computed using the Company’s historical average of dollars paid per claim for pending and future claims using the average settlement by type of incident observed during a 3-year time period.
      From these assumptions, the Company projected the incidence of each type of disease to the estimated population to determine the total estimated number of employees that could potentially assert a claim. Historical claim filing rates were applied for each type of disease to the total number of employees that could potentially assert a claim to determine the total number of anticipated claim filings by disease type. Historical dismissal rates, which represent claims that are closed without payment, were deducted to calculate the number of future claims by disease type that would likely require payment by the Company. Finally, the number of such claims was multiplied by the average settlement value to estimate the Company’s future liability for IBNR asbestos claims.
      Asbestos claim filings are typically sporadic and may include large batches of claims solicited by law firms. To reflect these factors, CSX used a 2-year calibration period during its initial assessment

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because the Company believed it would be most representative of its future claim experience. In addition, for non-malignant claims, the number of future claims to be filed against CSX declines at a rate consistent with both mortality and age as there is a decreasing probability of filing claims as the population ages. CSX believes the average claim values by type of disease from the historical 2-year period were most representative of future claim values.
2005 Provision for Asbestos Change in Estimate
      In 2004, management had no changes in estimate for asbestos liabilities. In 2005, management updated their assessment of the unasserted liability exposure with the assistance of the third party specialists, which resulted in recognition of a $48 million favorable change in estimate associated with asbestos liabilities. During 2004 and 2005, asbestos related disease claims filed against CSX dropped substantially, particularly bulk claims filed by certain law firms. In 2003, the Company received a significant number of filings. The Company believes the number was attributable to an attempt to file before a new, more restrictive venue law took effect in West Virginia in mid-2003. As a result, management reassessed the calibration period to a 3-year average, excluding the surge in claims originating in West Virginia. Management believes this calibration period provides the best estimate of future filing rates.
      The estimated future filing rates and estimated average claim values are the most sensitive assumptions for this reserve. A 10% increase or decrease in either the forecasted number of IBNR claims or the average claim values would result in an approximate $7 million increase or decrease in the liability recorded for unasserted asbestos claims.
      The Company, with the assistance of the third party specialist, obtains semi-annual updates of the study. The Company will monitor actual experience against the number of forecasted claims to be received and expected claim payments. More periodic updates to the study will occur if trends necessitate a change.
Other Occupational
2003 Provision for Other Occupational Change in Estimate
      In 2003, the Company changed its estimate of occupational reserves to include an estimate of IBNR claims for other occupational injuries as well as asbestos as noted above. The Company engaged a third party specialist to assist in projecting the number of other occupational injury claims to be received over the next seven years. Based on this analysis, the Company established reserves for the probable and reasonably estimable other occupational injury liabilities. In 2003, the Company recorded an undiscounted $65 million pre-tax charge for IBNR other occupational claims for similar reasons as asbestos discussed above.
      Similar to the asbestos liability estimation process, the key elements of the assessment included the following:
  •  An estimate of the potentially exposed population for other occupational diseases was calculated by projecting active versus retired work force from 2002 to 2010 using a growth rate projection for overall railroad employment made by the Railroad Retirement Board in its June 2003 report.
 
  •  An estimate of the future anticipated claims filing rate by type of injury, employee type, and active versus retired employee was computed using the Company’s average historical claim filing rates for the 2-year calibration period for all diseases except hearing loss. Because the filing rate for hearing loss claims has been decreasing since 1998, the latest year filing rate was viewed as representative. These calibration periods are the time periods which management felt were representative of future filing rates. An estimate was made to forecast future claims by using the filing rates by disease and the active and retired CSX population each year.

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  •  An estimate of the future anticipated settlement by type of injury was computed using the Company’s historical average of dollars paid per claim for pending and future claims using the average settlement by type of injury observed during a 3-year time period.
2005 Provision for Other Occupational Change in Estimate
      In 2004, management had no changes in estimate for other occupational liabilities. During 2005, CSX experienced an unfavorable trend in settlement values for repetitive stress and other injuries, which resulted in the recognition of a $10 million unfavorable change in estimate associated with these liabilities. In connection with the semi-annual updates of the study, the Company will monitor actual experience against the number of forecasted claims to be received and expected claim payments. More periodic updates to the study will occur if trends necessitate a change.
      The estimated future filing rates and estimated average claim values are the most sensitive assumptions for this reserve. A 10% increase or decrease in either the forecasted number of IBNR claims or the average claim values would result in an approximate $7 million increase or decrease in the liability recorded for unasserted other occupational claims.
Summary
      The amounts recorded by the Company for asbestos and other occupational liabilities are based upon currently known information and judgments 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 or legislation 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 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 effect on the Company’s results of operations, financial position or liquidity. However, should a number of these items occur in the same period, they could have a material effect on the results of operations, financial condition or liquidity in a particular quarter or fiscal year.
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 259 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 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. In 2004, the Company assumed $6 million of Conrail environmental liabilities, due to the Conrail spin-off transaction.

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      At least once each quarter, CSXT reviews its role with respect to each such location, giving consideration to a number of factors, including:
  •  Type of cleanup required;
 
  •  Nature of CSXT’s alleged connection to the location (e.g., generator of waste sent to the site, or owner or operator of the site);
 
  •  Extent of CSXT’s alleged connection (e.g., volume of waste sent to the location and other relevant factors);
 
  •  Accuracy and strength of evidence connecting CSXT to the location; and
 
  •  Number, connection, and financial viability of other named and unnamed PRP’s at the location.
      CSXT management estimates its environmental liabilities using guidance from Statement of Position (“SOP”) 96-1, Environmental Remediation Liabilities. Each site is periodically evaluated and the liability is adjusted to the most recent estimates made by management. 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.
      Currently, the Company does not possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, on some sites until completion of future environmental studies. In addition, 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, financial condition and liquidity.
Legal
      In accordance with SFAS 5, an accrual for a loss contingency is established if information available prior to issuance of the financial statements indicates that it is (1) probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and (2) the amount of loss can be reasonably estimated. If no accrual is made for a loss contingency because one or both of these conditions are not met, or if an exposure to loss exists in excess of the amount accrued, disclosure of the contingency is made when there is at least a reasonable possibility that a loss or an additional loss may have been incurred.
      The Company evaluates all exposures relating to legal liabilities twice quarterly and adjusts reserves when appropriate under the guidance noted above. The amount of a particular reserve may be influenced by factors that include official rulings, newly discovered or developed evidence, or changes in laws, regulations, and evidentiary standards.
Pension and Postretirement Medical Plan Accounting
      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. In addition to the defined benefit pension

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plans, the Company sponsors one medical plan and one life insurance plan that provide benefits to full-time, salaried, management employees hired prior to January 1, 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.
      The accounting for these plans is subject to the guidance provided in SFAS 87, Employers Accounting for Pensions (“SFAS 87”), and SFAS 106, Employers’ Accounting for Postretirement Benefits Other than Pensions (“SFAS 106”). Both of these statements require that management make certain assumptions relating to the following:
  •  Long-term rate of return of plan assets;
 
  •  Discount rates used to measure future obligations and interest expense;
 
  •  Salary scale inflation rates;
 
  •  Health care cost trend rates; and
 
  •  Other assumptions.
      These assumptions are determined as of the beginning of the year. As permitted by SFAS 87, the Company has elected to use a plan measurement date of September 30 to actuarially value its pension and postretirement plans as it provides for more timely analysis. The Company engages independent, external actuaries to compute the amounts of liabilities and expenses relating to these plans subject to the assumptions that the Company selects as of the beginning of the plan year. The Company reviews the discount, salary scale inflation, and health care cost trend rates on an annual basis and makes modifications to the assumptions based on current rates and trends as appropriate. Because the Company reduced its expected long-term rate of return on assets in 2004, management does not anticipate revising this assumption for the next several years to maintain consistency with market cycles.
Long-term Rate of Return on Plan Assets
      The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested or to be invested to provide for benefits included in the projected benefit obligation. In estimating that rate, the Company gives appropriate consideration to the returns being earned by the plan assets in the funds and the rates of return expected to be available for reinvestment. The expected long-term rate of return on plan assets is used in conjunction with the market-related value of assets to compute the expected return on assets.
      The Company’s expected long-term average rate of return on assets considers the current and projected asset mix of the funds. Management balances market expectations obtained from various investment managers and economists with both market and actual plan historical returns to develop a reasonable estimate of the expected long-term rate of return on assets. As this assumption is long-term, it is adjusted less frequently than other assumptions used in pension accounting.
Discount Rates
      Discount rates affect the amount of liability recorded and the interest expense component of pension and postretirement expense. Assumed discount rates reflect the rates at which the pension and postretirement benefits could be effectively settled. It is appropriate in estimating those rates to look to available information about rates implicit in current prices of annuity contracts that could be used to effect settlement of the obligation. In making those estimates, employers may also look to rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits. The Company determines the discount rate based on a hypothetical portfolio of high quality bonds with cash flows matching the

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plans’ expected benefit payments. CSX uses a different discount rate for pension and postretirement benefits due to the different time horizons of future payments for each of the plans.
      Each year these discount rates are reevaluated and adjusted to reflect the best estimate of the current effective settlement rates. If interest rates generally decline or rise, the assumed discount rates will change.
Salary Scale Inflation Rates
      Salary scale inflation rates are based on current trends and historical data accumulated by the Company. The Company reviews recent merit increases and management incentive compensation payments over the past five years in assessment of salary scale inflation rates.
Health Care Cost Trend Rates
      Health care cost trend rates are based on recent plan experience and industry trends. The Company uses actuarial data to substantiate the inflation assumption for health care costs, representing increases in total plan costs, which include claims and administrative fee cost components. The current assumed health care cost trend rate is 11% for Medicare eligible participants and 12% for non-Medicare eligible participants and is expected to increase slightly before decreasing gradually until reaching 4.5% in 2013 based upon current actuarial projections.
Other Assumptions
      The calculations made by the actuaries also include assumptions relating to mortality rates, turnover, and retirement age. These assumptions are based on historical data and are approved by management.
2006 Estimated Pension and Postretirement Expense
      As a result of changes in assumptions for fiscal year 2006, net periodic pension benefit cost and postretirement benefit costs for 2006 are expected to be approximately $62 million and $30 million, respectively, compared to $46 million and $40 million, respectively in 2005. Currently, there is proposed legislation regarding pension plan funding requirements. If the proposed legislation is passed, pension plan funding requirements will be increased. The impact to the Company of this proposed legislation is unknown at this time.
                   
    Increase/
    (Decrease) in 2006
    Estimated Expense
     
    Pension   OPEB
         
    (Millions of dollars)
Discount Rate:
               
 
0.25% increase
  $ (4 )   $  
 
0.25% decrease
    5        
Salary Scale Inflation Rate:
               
 
0.25% increase
    3        
 
0.25% decrease
    (3 )      
Health Care Cost Trend Rate:
               
 
1% increase
    N/A       3  
 
1% decrease
    N/A       (3 )
Medicare Prescription Drug, Improvement and Modernization Act of 2003
      The Company is required to estimate and record the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Act”). The Company determined that its medical

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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 benefit compared with the benefit that would be paid under Medicare Part D. The reduction in the postretirement benefit obligation as a result of the Act was approximately $56 million as of December 31, 2005. (See Note 18. Employee Benefit Plans.)
      The Company has applied for the tax free 28% federal reimbursement of total prescription drug claims from $250 to $5,000 paid after January 1, 2006. Combining the financial implications of both cash receipts and lower tax deductible business expenses resulting from the subsidy, the Company expects after tax cash flow savings of approximately $5 million for fiscal year 2006. Additionally, projected postretirement benefit expenses for fiscal year 2006 were reduced by approximately $7 million due to the Act.
Depreciation Policies for Assets Under the Group-Life Method
      CSXT accounts for its rail assets, including main-line track, locomotives and freight cars, using the group-life method. The group-life method pools similar assets by type and then depreciates each group as a whole. Under the group-life method, the service lives for each group of rail assets are determined by the performance of periodic life studies and management’s assumptions concerning the service lives of its properties. These studies, called life studies, are conducted by a third party expert, analyzed by the Company’s management and approved by the Surface Transportation Board (“STB”) of the U.S. Department of Transportation. Life studies for equipment assets are completed every three years, whereas road and track life studies are completed every six years as required by the STB.
      Changes in asset lives due to the results of the life studies could significantly impact future periods’ depreciation expense and thus the Company’s results of operations. Factors taken into account during the life study include:
  •  Statistical analysis of historical retirements for each group of property;
 
  •  Evaluation of current operations;
 
  •  Evaluation of technological advances and maintenance schedules;
 
  •  Previous assessment of the condition of the assets and outlook for their continued use;
 
  •  Expected net salvage expected to be received upon retirement; and
 
  •  Comparison of assets to the same asset groups with other companies.
      The life studies may also indicate that the recorded amount of accumulated depreciation is deficient (or in excess) of the appropriate amount indicated by the study. Any such deficiency (or excess) is amortized as a component of depreciation expense over the remaining useful life of the asset group until the next required life study.
      Although recent experience with life studies has resulted in depreciation rate changes, these modifications have not significantly affected the Company’s annual depreciation expense. In 2003, the Company completed life studies for all of its rail, equipment and track assets, resulting in an increase in the average useful lives of equipment and track assets, while decreasing the average useful lives of many roadway assets. The combination of these adjustments increased depreciation expense by $1 million in 2003 with a decrease of approximately $13 million in 2004. No life studies were required or completed during 2005.
      Assets depreciated under the group-life method comprise 95% of the Company’s total fixed assets of $19.5 billion on a net basis at December 30, 2005. The Company’s depreciation expense for the year ended December 30, 2005 amounted to $826 million. A one-percentage point increase (or decrease) in the average life of all group-life assets would result in an $8 million increase (or decrease) to the Company’s annual depreciation expense.

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Income Taxes
      Management uses factors such as applicable law, current information and past experience with similar issues in computing its income tax expense. The Company has not materially changed its methodology for calculating income tax expense for the years presented. The Company does not anticipate any material change in the methodology or assumptions used in determining the Company’s income tax expense.
      The Company files a consolidated federal income tax return, which includes its principal domestic subsidiaries. Examinations of the federal income tax returns of CSX have been completed through 1993. Federal income tax returns for 1994 through 2003 currently are under examination. Management believes adequate provision has been made for any adjustments that might be assessed. While the final outcome of these matters cannot be predicted with certainty, it is the opinion of CSX management that none of these items will have a material adverse effect on the results of operations, financial position or liquidity of CSX. An unexpected adverse resolution of one or more of these items, however, could have a material adverse effect on the results of operations, financial condition or liquidity in a particular fiscal quarter or fiscal year. Also, the Company is party to a number of legal and administrative proceedings, the resolution of which could result in gain realization in amounts that could be material to results of operations, financial condition or liquidity in a particular fiscal quarter or fiscal year.
New Accounting Pronouncements and Change in Accounting Policy
      See Note 1. Nature of Operations and Significant Accounting Policies under the caption “New Accounting Pronouncements and Change in Accounting Policy.”
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
      CSX addresses market risk exposure to fluctuations in interest rates and the risk of volatility in its fuel costs through the use of derivative financial instruments. CSX does not hold or issue derivative financial instruments for trading purposes.
      CSX addresses its exposure to interest rate market risk through a controlled program of risk management that includes the use of interest rate swap agreements. The table below illustrates CSX’s long-term interest rate swap sensitivity.
         
    December 30, 2005
     
    (Dollars in millions)
Interest Rate Swap Agreements
  $ 600  
Effect of 1% Increase or Decrease in LIBOR Interest Rate
    6  
      During 2003, CSX began a program to hedge its exposure to fuel price volatility through swap transactions. As of December 30, 2005, CSX had hedged approximately 9% of fuel purchases for 2006. At December 30, 2005, a 1% change in fuel prices would result in an increase or decrease in the asset related to the swaps of approximately $1 million. CSX’s rail unit average annual fuel consumption is approximately 603 million gallons. A one-cent change in the price per gallon, excluding gallons hedged, of fuel would affect fuel expense by approximately $5 million annually.
      CSX is exposed to loss in the event of non-performance by any counter-party to the interest rate swap or fuel hedging agreements. CSX does not anticipate non-performance by such counter-parties, and no material loss would be expected from non-performance.
      The following table highlights CSX’s floating rate debt outstanding exclusive of derivative contracts that essentially convert fixed interest rate notes to floating interest rates.
         
    December 30, 2005
     
    (Dollars in millions)
Floating Rate Debt Outstanding
  $ 378  
Effect of 1% Variance in Interest Rates
    4  

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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
           
    Page
     
    49  
CSX Corporation
       
Consolidated Financial Statements and Notes to Consolidated Financial Statements Submitted Herewith:
       
    51  
 
• December 30, 2005
       
 
• December 31, 2004
       
 
• December 26, 2003
       
    52  
 
• December 30, 2005
       
 
• December 31, 2004
       
    53  
 
• December 30, 2005
       
 
• December 31, 2004
       
 
• December 26, 2003
       
    54  
 
• December 30, 2005
       
 
• December 31, 2004
       
 
• December 26, 2003
       
    55  

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of CSX Corporation
      We have audited the accompanying consolidated balance sheets of CSX Corporation and subsidiaries as of December 30, 2005 and December 31, 2004, and the related consolidated statements of income, cash flows, and changes in shareholders’ equity for each of the three fiscal years in the period ended December 30, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
      We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CSX Corporation and subsidiaries at December 30, 2005 and December 31, 2004, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 30, 2005, in conformity with U.S. generally accepted accounting principles.
      As discussed in Note 1 to the consolidated financial statements, in 2004 the Company changed its method of calculating earnings per share, and in 2003 the Company changed its method of accounting for railroad tie removal costs and stock-based compensation.
      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of CSX Corporation’s internal control over financial reporting as of December 30, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 13, 2006, expressed an unqualified opinion thereon.
  /s/ Ernst & Young LLP
  Independent Certified Public Accountants
Jacksonville, Florida
February 13, 2006

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders and Board of Directors of CSX Corporation
      We have audited management’s assessment, included in the accompanying CSX Corporation Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that CSX Corporation maintained effective internal control over financial reporting as of December 30, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). CSX Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
      In our opinion, management’s assessment that CSX Corporation maintained effective internal control over financial reporting as of December 30, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, CSX Corporation maintained, in all material respects, effective internal control over financial reporting as of December 30, 2005, based on the COSO criteria.
      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2005 consolidated financial statements of CSX Corporation and our report dated February 13, 2006, expressed an unqualified opinion thereon.
  /s/ Ernst & Young LLP
  Independent Certified Public Accountants
Jacksonville, Florida
February 13, 2006

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CSX CORPORATION
CONSOLIDATED INCOME STATEMENTS
                             
    Fiscal Years Ended
     
    December 30,   December 31,   December 26,
    2005   2004   2003
             
    (Dollars in millions, except per share amounts)
Operating Revenue
  $ 8,618     $ 8,040     $ 7,573  
Operating Expense
                       
 
Labor and Fringe
    2,864       2,744       2,656  
 
Materials, Supplies and Other
    1,828       1,753       1,622  
 
Depreciation
    826       711       620  
 
Fuel
    783       656       581  
 
Building and Equipment Rent
    510       569       565  
 
Inland Transportation
    230       280       305  
 
Conrail Rents, Fees and Services
    65       256       342  
 
Restructuring Charge — Net
          71       22  
 
Provision for Casualty Claims
    (38 )           232  
 
Additional Loss on Sale
                108  
                   
Total Operating Expenses
    7,068       7,040       7,053  
Operating Income
    1,550       1,000       520  
Other Income and Expense
                       
 
Other Income (Note 7)
    101       72       93  
 
Debt Repurchase Expense (Note 12)
    (192 )            
 
Interest Expense
    (423 )     (435 )     (418 )
                   
Earnings
                       
 
Earnings before Income Taxes
    1,036       637       195  
 
Income Tax Expense (Note 8)
    (316 )     (219 )     (58 )
                   
 
Earnings from Continuing Operations
    720       418       137  
 
Discontinued Operations — Net of Tax (Note 4)
    425       (79 )     52  
 
Cumulative Effect of Accounting Change — Net of Tax
                57  
                   
 
Net Earnings
  $ 1,145     $ 339     $ 246  
                   
Per Common Share (Note 15)
                       
Earnings Per Share:
                       
   
From Continuing Operations
  $ 3.33     $ 1.95     $ 0.64  
   
Discontinued Operations
    1.96       (0.37 )     0.24  
   
Cumulative Effect of Accounting Change
                0.26  
                   
   
Net Earnings
  $ 5.29     $ 1.58     $ 1.14  
                   
Earnings Per Share, Assuming Dilution:
                       
   
From Continuing Operations
  $ 3.17     $ 1.87     $ 0.63  
   
Discontinued Operations
    1.87       (0.35 )     0.23  
   
Cumulative Effect of Accounting Change
                0.25  
                   
   
Net Earnings
  $ 5.04     $ 1.52     $ 1.11  
                   
Average Common Shares Outstanding (Thousands)
    216,425       214,796       213,964  
                   
Average Common Shares Outstanding, Assuming Dilution (Thousands)
    228,024       225,030       224,328  
                   
Cash Dividends Paid Per Common Share
  $ 0.43     $ 0.40     $ 0.40  
                   
See accompanying Notes to Consolidated Financial Statements.

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CSX CORPORATION
CONSOLIDATED BALANCE SHEETS
                         
    December 30,   December 31,
    2005   2004
         
    (Dollars in millions)
ASSETS
 
Current Assets:
               
   
Cash and Cash Equivalents (Note 1)
  $ 309     $ 522  
   
Short-term Investments
    293       337  
   
Accounts Receivable — Net (Note 9)
    1,202       1,159  
   
Materials and Supplies
    199       165  
   
Deferred Income Taxes
    225       20  
   
Other Current Assets
    144       157  
   
International Terminals Assets Held for Sale (Note 4)
          643  
             
       
Total Current Assets
    2,372       3,003  
 
Properties
    26,538       25,852  
 
Accumulated Depreciation
    (6,375 )     (5,907 )
             
     
Properties — Net (Note 10)
    20,163       19,945  
 
Investment in Conrail (Note 2)
    603       574  
 
Affiliates and Other Companies
    304       281  
 
Other Long-term Assets (Note 21)
    790       802  
             
       
Total Assets
  $ 24,232     $ 24,605  
             
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Current Liabilities:
               
   
Accounts Payable
  $ 954     $ 870  
   
Labor and Fringe Benefits Payable
    565       380  
   
Casualty, Environmental and Other Reserves (Note 11)
    311       312  
   
Current Maturities of Long-term Debt (Note 12)
    936       983  
   
Short-term Debt (Note 12)
    1       101  
   
Income and Other Taxes Payable
    102       170  
   
Other Current Liabilities
    110       115  
   
International Terminals Liabilities Held for Sale (Note 4)
          386  
             
       
Total Current Liabilities
    2,979       3,317  
 
Casualty, Environmental and Other Reserves (Note 11)
    653       735  
 
Long-term Debt (Note 12)
    5,093       6,248  
 
Deferred Income Taxes
    6,082       5,979  
 
Other Long-term Liabilities (Note 21)
    1,471       1,515  
             
       
Total Liabilities
    16,278       17,794  
             
Shareholders’ Equity:
               
 
Common Stock, $1 Par Value (Note 14)
    218       216  
 
Other Capital
    1,751       1,605  
 
Retained Earnings
    6,262       5,210  
 
Accumulated Other Comprehensive Loss
    (277 )     (220 )
             
       
Total Shareholders’ Equity
    7,954       6,811  
             
       
Total Liabilities and Shareholders’ Equity
  $ 24,232     $ 24,605  
             
See accompanying Notes to Consolidated Financial Statements.

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CSX CORPORATION
CONSOLIDATED CASH FLOW STATEMENTS
                               
    Fiscal Years Ended
     
    December 30,   December 31,   December 26,
    2005   2004   2003
             
    (Dollars in millions)
Operating Activities
                       
Net Earnings
  $ 1,145     $ 339     $ 246  
Adjustments to Reconcile Net Earnings to Net Cash Provided:
                       
   
Depreciation
    833       730       643  
   
Deferred Income Taxes
    (46 )     240       119  
   
Gain on Sale of International Terminals — Net of Tax (Note 4)
    (428 )            
   
Provision for Casualty Reserves (Note 11)
    (38 )           232  
   
Additional Loss on Sale
                108  
   
Cumulative Effect of Accounting Change — Net of Tax
                (57 )
   
Insurance Proceeds (Note 6)
    29              
   
Restructuring Charge (Note 5)
          71       22  
   
Net Gain on Conrail spin-off — after tax (Note 2)
          (16 )      
   
Other Operating Activities
    (103 )     (91 )     (108 )
   
Changes in Operating Assets and Liabilities:
                       
     
Termination of Sale of Accounts Receivable (Note 9)
                (380 )
     
Accounts Receivable (Note 9)
    (44 )     (3 )     19  
     
Other Current Assets
    (29 )     29       40  
     
Accounts Payable
    54       (2 )     49  
     
Income and Other Taxes Payable
    (402 )     38       (23 )
     
Other Current Liabilities
    139       111       (106 )
                   
Net Cash Provided by Operating Activities
    1,110       1,446       804  
                   
Investing Activities
                       
Property Additions
    (1,136 )     (1,030 )     (1,059 )
Insurance Proceeds (Note 6)
    41              
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 (Note 3)
          55       226  
Purchases of Short-term Investments
    (2,601 )     (1,583 )     (2,128 )
Proceeds from Sale of Short-term Investments
    2,634       1,336       2,197  
Other Investing Activities
    28       (18 )     (43 )
                   
Net Cash Used in Investing Activities
    (36 )     (1,240 )     (807 )
                   
Financing Activities
                       
 
Short-term Debt — Net
    (99 )     99       (141 )
 
Long-term Debt Issued
    105       401       919  
 
Long-term Debt Repaid
    (1,283 )     (434 )     (500 )
 
Dividends Paid
    (93 )     (86 )     (86 )
 
Other Financing Activities
    83       40       (20 )
                   
Net Cash (Used In) Provided by Financing Activities
    (1,287 )     20       172  
                   
Net (Decrease) Increase in Cash and Cash Equivalents
    (213 )     226       169  
Cash and Cash Equivalents
                       
 
Cash and Cash Equivalents at Beginning of Period
    522       296       127  
                   
 
Cash and Cash Equivalents at End of Period
  $ 309     $ 522     $ 296  
                   
Supplemental Cash Flow Information
                       
Interest Paid — Net of Amounts Capitalized
  $ 440     $ 414     $ 406  
Income Taxes Paid
  $ 798     $ 35     $ 134  
                   
See accompanying Notes to Consolidated Financial Statements.

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CSX CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
                                                                   
                    Accumulated Other    
                    Comprehensive Income (Loss)    
    Common                    
    Shares               Minimum        
    Outstanding   Common   Other   Retained   Pension   Fuel        
    (Thousands)   Stock   Capital   Earnings   Liability(a)   Derivative(b)   Other   Total
                                 
    (Dollars in millions)
Balance December 27, 2002
    214,687     $ 215     $ 1,547     $ 4,797     $ (318 )   $     $     $ 6,241  
Comprehensive Earnings:
                                                               
 
Net Earnings
                      246                         246  
 
Other Comprehensive Income
                            8       6       1       15  
                                                 
 
Comprehensive Earnings
                                                            261  
                                                 
Dividends
                      (86 )                       (86 )
Stock Option Exercises and Other
    384             32                               32  
                                                 
Balance December 26, 2003
    215,071       215       1,579       4,957       (310 )     6       1       6,448  
Comprehensive Earnings:
                                                               
 
Net Earnings
                      339                         339  
 
Other Comprehensive Income (Loss)
                            18       66       (1 )     83  
                                                 
 
Comprehensive Earnings
                                                            422  
                                                 
Dividends
                      (86 )                       (86 )
Stock Option Exercises and Other
    458       1       26                               27  
                                                 
Balance December 31, 2004
    215,529       216       1,605       5,210       (292 )     72             6,811  
Comprehensive Earnings:
                                                               
 
Net Earnings
                      1,145                         1,145  
 
Other Comprehensive (Loss)
                            (15 )     (42 )           (57 )
                                                 
 
Comprehensive Earnings
                                                            1,088  
                                                 
Dividends
                      (93 )                       (93 )
Stock Option Exercises and Other
    2,674       2       146                               148  
                                                 
Balance December 30, 2005
    218,203     $ 218     $ 1,751     $ 6,262     $ (307 )   $ 30     $     $ 7,954  
                                                 
 
(a) Net of taxes of $146 million, $161 million, and $153 million for 2005, 2004, and 2003, respectively.
 
(b) Net of taxes of $20 million, $45 million, and $3 million for 2005, 2004, and 2003, respectively.
See accompanying Notes to Consolidated Financial Statements.

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CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Nature of Operations and Significant Accounting Policies
Nature of Operations
      CSX Corporation (“CSX” and, together with its subsidiaries, the “Company”), based in Jacksonville, FL, owns companies providing rail, intermodal and rail-to-truck transload services that combine to form one of the nation’s leading transportation companies, connecting more than 70 ocean, river and lake ports.
Surface Transportation
CSX Transportation Inc.
      CSX’s principal operating company, CSX Transportation Inc. (“CSXT”), operates the largest railroad in the eastern United States with approximately 21,000-mile rail network linking commercial markets in 23 states, the District of Columbia, and the Canadian provinces of Ontario and Quebec.
CSX Intermodal Inc.
      CSX Intermodal Inc. (“Intermodal”), one of the nation’s largest coast-to-coast intermodal transportation providers, is a stand-alone, integrated intermodal company serving customers from origin to destination with its own truck and terminal operations, plus a dedicated domestic container fleet. Containers and trailers are loaded and unloaded from trains, with trucks providing the link between intermodal terminals and the customer.
Surface Transportation Businesses
      The rail and intermodal companies are viewed by the Company on a combined basis as Surface Transportation businesses. Together, they serve four primary lines of business:
  •  Merchandise generated approximately 49% of the Company’s total revenue in 2005 with 2.9 million carloads. The Company’s merchandise business is made up of seven market segments: phosphates and fertilizers; metals; forest products; food and consumer; agricultural products; chemicals; and emerging markets. Emerging markets target high-growth business opportunities in specialized markets such as aggregates, processed materials (for example, cement), waste, military cargo, and machinery.
 
  •  Coal, which delivered more than 1.8 million carloads of coal, coke and iron ore to electric utilities and manufacturers in 2005, accounted for approximately 24% of the Company’s total 2005 revenue. The Company serves more than 130 coal mines in nine states, including three of the nation’s top four coal-producing states.
 
  •  Intermodal, as described above, offers a cost advantage over long-haul trucking by combining the better economics of longer hauls provided by rail with the short-haul flexibility of trucks through a network of dedicated terminals across North America. Intermodal accounted for approximately 2.2 million units and 16% of the Company’s total revenue in 2005.
 
  •  Automotive, which serves plants in eight states and delivers both finished vehicles and auto parts, transported 488,000 carloads generating 10% of the Company’s total revenue in 2005.
 
  •  Other revenue, such as demurrage, switching, and other incidental charges, accounted for 1% of the Company’s total 2005 revenue. Demurrage represents charges assessed by railroads for the retention of cars by shippers or receivers of freight beyond a specified period of time. Switching revenue is generated when CSX switches cars between trains for a customer or other railroad.
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 and its subsidiaries at December 30, 2005 and December 31, 2004, the Consolidated Income and Cash Flow Statements and Changes in Shareholders’ Equity for the fiscal years ended December 30, 2005, December 31,

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CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2004 and December 26, 2003, such adjustments being of a normal, recurring nature. Certain prior-year data have been reclassified to conform to the 2005 presentation.
Fiscal Year
      CSX follows a 52/53 week fiscal reporting calendar. This fiscal calendar allows every quarter to consistently end on a Friday and to be of equal duration (13 weeks). However, in order to maintain this type of reporting calendar, every sixth or seventh year (depending on the Gregorian calendar and when leap year falls), an extra week will be included in one quarter (a 14 week quarter) and, therefore, the full year will have 53 weeks.
  •  Fiscal year 2005 consisted of 52 weeks ending on December 30, 2005
 
  •  Fiscal year 2004 consisted of 53 weeks ending on December 31, 2004
 
  •  Fiscal year 2003 consisted of 52 weeks ending on December 26, 2003
Principles of Consolidation
      The consolidated financial statements include CSX and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Investments in companies that are not majority-owned are carried at cost (if less than 20% owned and the Company has no significant influence) or equity (if the Company has significant influence).
Cash, Cash Equivalents and Short-term Investments
      On a daily basis, cash in excess of current operating requirements is invested in various highly liquid investments having a typical maturity date of three months or less at the date of acquisition. These investments are carried at cost, which approximates market value, and are classified as Cash Equivalents. Investments in instruments with maturities less than one year are classified as Short-term Investments.
      CSX holds $268 million and $273 million of auction rate securities and classifies these investments as available for sale as of December 30, 2005, and December 31, 2004, respectively. 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 within investing activities.
Materials and Supplies
      Materials and supplies consist primarily of fuel and parts used in the repair and maintenance of CSXT’s freight car and locomotive fleets, equipment, and track structure, which are carried at average cost.
Properties
      All properties are stated at cost less an allowance for accumulated depreciation. Rail assets, including main-line track, locomotives and freight cars are depreciated using the group-life method, which pools similar assets by road and equipment type and then depreciates each group as a whole. The majority of non-rail property is depreciated using the straight-line method on a per asset basis. Amortization expense recorded under capital leases is included in depreciation expense on the Consolidated Income Statements.
      Regulations enforced by the Surface Transportation Board (“STB”) of the U.S. Department of Transportation require periodic formal studies of ultimate service lives for all railroad assets. Factors taken into account during the life study include:
  •  Statistical analysis of historical retirements for each group of property;
 
  •  Evaluation of current operations;
 
  •  Evaluation of technological advances and maintenance schedules;
 
  •  Previous assessment of the condition of the assets and outlook for their continued use;

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CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
  •  Expected net salvage expected to be received upon retirement; and
 
  •  Comparison of assets to the same asset groups with other companies.
      The results of the life study process determine the service lives for each asset group under the group-life method. These studies are conducted by a third party expert and analyzed by the Company’s management. Resulting service life estimates are subject to review and approval by the STB. Road assets, including main-line track, have estimated service lives ranging from 5 years for system roadway machinery to 80 years for grading. Equipment assets, including locomotives and freight cars, have estimated service lives ranging from 6 years for vehicles to 35 years for work equipment.
      Changes in asset lives due to the results of the life studies are applied at the completion of the life study and continue until the next required life study. The life studies may also indicate that the recorded amount of accumulated depreciation is deficient (or in excess) of the amount indicated by the study. Any such deficiency (or excess) amount is amortized as a component of depreciation expense over the remaining useful life of the asset group until the next required life study.
      For retirements or disposals of depreciable rail assets that occur in the ordinary course of business, the asset cost (net of salvage value or sales proceeds) is charged to accumulated depreciation and no gain or loss is recognized. For retirements or disposals of non-rail depreciable assets, infrequent disposal of rail assets outside the normal course of business and all dispositions of land, the resulting gains or losses are recognized at the time of disposal. Expenditures that significantly increase asset values or extend useful lives are capitalized. Repair and maintenance expenditures are charged to operating expense when the work is performed.
      Properties and other long-lived assets are reviewed for impairment whenever events or business conditions indicate the carrying amount of such assets may not be fully recoverable. Initial assessments of recoverability are based on estimates of undiscounted future net cash flows associated with an asset or a group of assets in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). Where impairment is indicated, the assets are evaluated, and their carrying amount is reduced to fair value based on undiscounted net cash flows or other estimates of fair value.
Revenue and Expense Recognition
      The Company recognizes freight revenue using Free-On-Board (“FOB”) Origin pursuant to Emerging Issues Task Force (“EITF”) 91-9, Revenue and Expense Recognition for Freight Services in Process. The Company uses method (5) in the EITF, which provides for the allocation of revenue between reporting periods based on relative transit time in each reporting period. Expenses are recognized as incurred.
      Certain key estimates are included in the recognition and measurement of revenue and related accounts receivable under the policies described above:
  •  unbilled revenue on shipments that have been delivered;
 
  •  revenue associated with shipments in transit;
 
  •  future adjustments to revenue or accounts receivable for billing corrections and bad debts;
 
  •  future adjustments to revenue for overcharge claims filed by customers; and
 
  •  incentive-based refunds to customers.
      The Company regularly updates the estimates described above based on historical experience.
      All other revenue, such as demurrage, switching and other incidental charges are recorded upon completion of the service. Demurrage represents charges assessed by railroads for the retention of cars by shippers or receivers of freight beyond a specified period of time. Switching revenue is generated when CSX switches cars between trains for a customer or other railroad.

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CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Share-Based Compensation
      As permitted under SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“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. No stock options were granted in 2004 or 2005. In addition to stock option expense, stock-based employee compensation expense included in 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:
                           
    December 30,   December 31,   December 26,
    2005   2004   2003
             
    (Dollars in millions, except per share amounts)
Net Earnings — As Reported
  $ 1,145     $ 339     $ 246  
Add: Stock-Based Employee Compensation Expense Included in Reported Net Income — Net of Tax
    25       13       3  
Deduct: Total Stock-Based Employee Compensation Expense Determined under the Fair Value Based Method for all Awards — Net of Tax
    (29 )     (29 )     (34 )
                   
Pro Forma Net Earnings
  $ 1,141     $ 323     $ 215  
Interest Expense on Convertible Debt — Net of Tax
    4       4       4  
                   
Pro Forma Net Earnings, If-Converted
  $ 1,145     $ 327     $ 219  
                   
Earnings Per Share:
                       
 
Basic — As Reported
  $ 5.29     $ 1.58     $ 1.14  
 
Basic — Pro Forma
  $ 5.27     $ 1.50     $ 1.00  
 
Diluted — As Reported
  $ 5.04     $ 1.52     $ 1.11  
 
Diluted — Pro Forma
  $ 5.02     $ 1.45     $ 0.98  
      As discussed in “New Accounting Pronouncements and Change in Accounting Policy” below, the Company will comply with SFAS 123(R), Share-Based Payment (“SFAS 123(R)”), effective January 1, 2006.
Comprehensive Earnings
      CSX reports comprehensive earnings (loss) in accordance with SFAS 130, Reporting Comprehensive Income (“SFAS 130”), in the Consolidated Statement of Changes in Shareholders’ Equity. Comprehensive earnings are defined as all changes in shareholders’ equity during a period, other than those resulting from investments by and distributions to shareholders (i.e. issuance of equity securities and dividends). Accumulated Other Comprehensive Loss at December 30, 2005 and December 31, 2004 consists primarily of minimum pension liabilities partially offset by the fair value of fuel hedging contracts.
Derivative Financial Instruments
      The Company recognizes all derivatives as either assets or liabilities in the Consolidated Balance Sheets and measures those instruments at fair value. (See Note 13. Derivative Financial Instruments.)

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CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
New Accounting Pronouncements and Change in Accounting Policy
      SFAS 148 was issued in December 2002. SFAS 148 amends SFAS 123, Accounting for Stock-Based Compensation (“SFAS 123”), to provide alternative methods of transition to SFAS 123’s fair value method of accounting for stock-based employee compensation and require disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation. Effective beginning with fiscal year 2003, CSX has voluntarily adopted the fair value recognition provisions of SFAS 123 and adopted the disclosure requirements of SFAS 148. In accordance with the prospective method of adoption permitted under SFAS 148, stock-based awards issued subsequent to fiscal year 2002 are accounted for under the fair value recognition provisions of SFAS 123 utilizing the Black-Scholes-Merton valuation method and, accordingly, are expensed. (See Note 16. Stock Plans.)
      In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123(R), which is a revision of SFAS 123. Currently, CSX uses the Black-Scholes-Merton formula to estimate the fair 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 above. 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 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), CSX will no longer allow automatic vesting when an employee becomes retirement eligible.
      In 2001, SFAS 143, Accounting for Asset Retirement Obligations (“SFAS 143”) was issued. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. In conjunction with the group-life method of accounting for asset costs, the Company historically accrued crosstie removal costs as a component of depreciation, which is not permitted under SFAS 143. With the adoption of SFAS 143 in fiscal year 2003, the Company recorded pretax income of $93 million, $57 million after tax, as a cumulative effect of an accounting change, representing the reversal of the accrued liability for crosstie removal costs. The adoption of SFAS 143 did not have a material effect on prior reporting periods, and the Company does not believe it will have a material effect on future earnings. On an ongoing basis, depreciation expense will be reduced, while labor and fringe and materials, supplies and other expense will be increased by approximately $12 million as a result of the adoption of SFAS 143.
      In 2002, the FASB issued Financial Accounting Standard Interpretation (“FASI”) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This statement requires that certain guarantees be recorded at fair value on the Consolidated Balance Sheets and additional disclosures be made about guarantees. CSX did not realize a financial statement impact with the adoption of the accounting provisions of this

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CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
statement in fiscal year 2003 and does not anticipate a future impact. (See Note 19. Commitments and Contingencies.)
      In 2002, SFAS 144 was issued. This statement requires that long-lived assets to be disposed of by sale are no longer measured on a net realizable value basis, and future operating losses are no longer recognized before they occur. In addition, this statement modifies the reporting requirements for discontinued operations. Long-lived assets, whether to be held for disposition or held and used, should be measured at the lower of its carrying amount or fair value less cost to dispose. CSX applied the provisions of this statement relating to the accounting for the conveyance of its wholly-owned subsidiary, CSX Lines, to a third party in 2003 (See Note 3. Divestitures.)
Use of Estimates
      The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of certain revenues and expenses during the reporting period. Actual results may differ from those estimates. Critical accounting estimates using management judgment are made for the following areas:
        1. Casualty, legal and environmental reserves (See Note 11. Casualty, Environmental and Other Reserves)
 
        2. Pension and postretirement medical plan accounting (See Note 18. Employee Benefit Plans)
 
        3. Depreciation policies for its assets under the group-life method (See Note 1. Nature of Operations and Significant Accounting Policies)
 
        4. Income taxes (See Note 8. Income Taxes)
NOTE 2. Investment In and Integrated Rail Operations with Conrail
      Through a limited liability company, CSX and Norfolk Southern Corporation (“NS”) jointly own Conrail Inc. (“Conrail”), whose primary subsidiary is Consolidated Rail Corporation (“CRC”). CSX has a 42% economic interest and 50% voting interest in the jointly owned entity, and NS has the remainder of the economic and voting interests. CSX applies the equity method of accounting to its investment in Conrail.
      In August 2004, CSX, NS and Conrail completed a reorganization of Conrail (“Conrail spin-off transaction”), which established direct ownership and control by CSXT and Norfolk Southern Railway (“NSR”) of two former CRC subsidiaries, New York Central Lines LLC (“NYC”) and Pennsylvania Lines LLC (“PRR”), respectively. Prior to the Conrail spin-off transaction, CSXT operated the routes and used the assets of NYC, and NSR operated the routes and used the assets of PRR, each in accordance with separate operating and lease agreements. Pursuant to the Conrail spin-off transaction, the operating and lease agreements were terminated and NYC and PRR were merged into CSXT and NSR, respectively.
      As a part of the Conrail spin-off transaction, the assets and liabilities of NYC and PRR were distributed to CSXT and NSR, respectively. In order to facilitate this distribution, Conrail restructured its existing unsecured and secured public indebtedness, with the consent of Conrail’s debt holders. As a result of the transaction, CSXT and NSR issued new unsecured debt securities in exchange for Conrail debentures and entered into leases and subleases with Conrail to support its secured debt obligations in proportion to their economic ownership percentages.
      In 2004, as a result of the transaction, the Company recognized a net gain of $16 million, after tax, which is included in Other Income. This net gain represents the fair value write-up of the assets and liabilities (“net assets”) received in excess of the book value of the net assets surrendered.

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CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      The Company concluded that it was appropriate to use the fair value of the net assets received as they were more clearly evident than the fair value of the assets surrendered in accordance with EITF 01-2, Interpretation of APB Opinion 29, paragraph 1. The fair value was based on an independent appraisal of the distribution.
      After the transaction, CSX’s investment in Conrail no longer includes the amounts related to NYC and PRR. Instead the assets and liabilities of NYC are reflected in their respective line items in CSX’s Consolidated Balance Sheet.
      The following table illustrates the pro forma effect on the Consolidated Income Statements as if the spin-off transaction had been completed as of the beginning of the periods.
                                                   
    Fiscal Years Ended
     
    December 31, 2004   December 26, 2003
         
        Effect of   Unaudited   As   Effect of   Unaudited
    As Reported   Spin-Off   Pro Forma   Reported   Spin-Off   Pro Forma
                         
    (Dollars in millions, except per share amounts)
Operating Revenue
  $ 8,040     $     $ 8,040     $ 7,573     $     $ 7,573  
Earnings from Continuing Operations
    418       21       439       137       24       161  
Discontinued Operations
    (79 )           (79 )     52             52  
Cumulative Effect of Accounting Change —
Net of Tax
                      57             57  
                                     
Net Earnings
    339       21       360       246       24       270  
                                     
Earnings Per Share, Assuming Dilution:
                                               
 
From Continuing Operations
    1.87       0.09       1.96       0.63       0.11       0.74  
 
Discontinued Operations
    (0.35 )           (0.35 )     0.23             0.23  
 
Cumulative Effect of Accounting Change
                      0.25             0.25  
                                     
 
Net Earnings
  $ 1.52     $ 0.09     $ 1.61     $ 1.11     $ 0.11     $ 1.22  
                                     
      The Company recorded this spin-off transaction at fair value based on the results of an independent appraisal. Since September 2004, the assets, liabilities, results of operations and cash flows of NYC have been included in CSX’s Consolidated Balance Sheets and Consolidated Income and Cash Flow Statements.
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 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, which 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. The amortization primarily represents the additional after tax depreciation expense related to the write up of Conrail’s fixed assets when the original purchase price, from the 1997 transaction, was allocated based on fair value.

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CSX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
  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 and NSR.
Detail of Conrail Rents, Fees and Services
                           
    Fiscal Years Ended
     
    December 30,   December 31,   December 26,
    2005   2004   2003
             
    (Dollars in millions)
Rents, Fees and Services
  $ 97     $ 280     $ 357  
Purchase Price Amortization and Other
    4       35       54  
Equity in Income of Conrail
    (36 )     (59 )     (69 )
                   
 
Total Conrail Rents, Fees and Services
  $ 65     $ 256     $ 342  
                   
Conrail Financial Information
      Summary financial information for Conrail is as follows:
                           
    Fiscal Years Ended
     
    December 31,   December 31,   December 31,
    2005   2004   2003
             
    (Dollars in millions)
Income Statement Information:
                       
 
Revenues
  $ 378     $ 352     $ 316  
 
Expenses
    346       370       352  
                   
 
Operating Income
  $ 32     $ (18 )   $ (36 )